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October 26th, 1915.

My dear Dr. Miller:

Lest misapprehension arise in regard to those

apples, I want to make sure that you do not cre4t me with
skill as Cultivator or director of cultivation on the farm.
am simnly an interested onlooker and the real credit for
this development belongs to Mr. Converse and the wonderful

organization of technical men who are operating the place.

hilethe crop is good till year, the weather
brought it in a little laterrthan usual. Awl I am afraid
the McIntosh apples partioularly are not going to be fit

for use for a week or two after being gathered.
We certainly cannot expect to compete with Cal-

ifornia in producing wine and l'am looking forward ,:dth

great pleasure to renewing my acquaintance with that de-

lightful production of a wonderful state.

7ith kindest regards,
Sincerely yours,

non. A. C. Miller,
Federal Reserve Board,
Washington, D. C.

BS Jr/Val


4100 Montview Boulevard.

Denver, Colorado,

October 26th, 1916.

Dear Mr. Miller:

I have enjoyed reading the advance
delivered in Indianapolis.

which you


o y of your address


say so, it struck

me as beiee the best of various speeches whichh ve made on the
of which

subject of the Federal eelserve Sy t

1 think I have


I am sure, however,



ing my feeling about the,ersIme, sou
in return, and here

effective i

the gold

thout expecting something


doctri1 e\underl

serves acquired

did not send it to me, know-


i g your argument is that gold ref meeber banks will be just as

ur nw.banking system for all purposes as will be

r s rves whi h might be acquired through issues of bank
frank if I did not express the opinion that

tnis ignores all banking experience

jr regard to its reserves and

perticularly the experience of thie country with its free banking

The pattern of the Bank of

England, to


you refer,

will 1 mn afraid not be a satisfactory pattern when the war is over
and, to use

your own expression, "I will bet you a little red ap-

ple" that the first banking legislation in ngland when they settle
down to clean house at the conclusion of the war will be to melte


Hon. A. C. Miller.

Oct. 26, 1916.

the Rank of Taigland note what it long should have been - an elas-

tic note, similar to that of the Rank of France or the Reiochbank.
It seems to me that your analysis of the situation in
the first twelve or fifteen pages is the best I have read from any
source and it is so free from hysterical alarm such as meny author-

ities are inclined to express these days, that I think it will
a great deal of good and make a streng
ever, comment on some of the points i1


May,I, howdetail an


you to send

me a "Roland" in reply!

On page 12, t'

by which Europe will seek t


all sound, but don't you

-threi-lothod_to which you refer

iA from us are, of course,

re teo ve y/important influences!


One is the eossible




The effect of such a pr,mNpon our own
greater moment than


will depend upon the


er they



premium in Eitrope.

gold holdings may be of

ze; whether a premium will develop

of the four great central banks of

co, Germany and Russia to redeem their notes, or wheth-

will bl-forto

continued susPension of domestic specie

An t er influence

of gold which
erent countries.

and a direct one

will be the loss

y be occasioned by our loans to other than belligIf we adopt a high tariff and, say, the Argentine

Republic does not, the letter mey be on enormous importer of cheap
goods and their checks on credits in this country drawn in favor of,
say, London, will move our gold to eondon just as fast no would direct loans to England.

Speaking geeerally, if we lend our surplus




Hon. A. G. Miller.

Oct. 26, 1916.

credit to countriee which are in good credit and do not lend a
dollar to the belligerents after the war, the effect upon our
oKchanges will be just the same as though belligerent nations
were buying our gold witn cheap goods.

The table on page 15 (a), it poems to me, in part

refutes your on argument about our ability t

meet the situation

without employing our note issue as the mean

f impounding gold.

About 1130,000,000 out of


point with justifiable pride, is
ed 111. issues of notes.

old to which you

of the g1Qa1roady impound-

th;4), (if your argument should


be applied 100 X), would le



and if 4600,000,000 is the amour


1,1/ over

$200,000,000 of gold,

free gold required, that would

leave, say, .1400,000 T-'175--b4\ btni

through the enlargement of

ating an crease of nearly $700,000,000 which
our deposits,
would take tooneces% um out f the bnnking reserves of the country.




Tp-jele also-maa ely considers that

t12,000 0


by the res"v'T

banks i



11,000,000 or

ertificatcs and United States notes now held
just es good as gold.

not justify that

The history of our

assumption. Three times in the

IhAlr:, spent vorking at a bmk desk I flays: seen the Subtreasury in New York unwilling or unable to redeem either greenbacks or silver centificates in gold. The reeve banks will always hold a modfew years

erate amount of this kind of money as long as it is in circulation
and when gold is in demand for export,

their holdings will





A. C. Miller, Esq.

Oct. 26, 1916.

naturally be larger than at


also ignores not only the

any other time.

The calculation

possibility, but the necessity for the

of possibly $70,000,000 or $B0,000,000 of gold by the re-

serve banks through building up

point where they


investment account to the

are earning dividends, both current and accrued,

and meeting an enlmgged expense account.

offset by enlarged reserve deposits this year

think it also ignores another very poseiHfi


will be partly



next year.


ment and that

is the shrinkage in our deposits an4.1--esequently *
when contraction takes place.

Ndd $60,000,000 of reserves


now required to be carried with us

our reserves

Bank of New York to


day probably holds between $5






member banks because of the


This will come

down fast when we def a e the pre trit inflation.

Pages 24


n positively your conviction

nd 25

that we canr/elliti4on rerv-eoluntarily contributed by member

banks and

14wn judgemeOt is that we will

of sand.

J, eountr


be relying upon a chain

a not like England where nearly 300 years


England a prestige and authority
London wnich, in fact, enables the

of tradition ha,---giArcn the Bank of

over ihe 16 clearing banks of

Bank of England to. dictate to London

serve balances

must be.


how lrrge

their re-

When Bolden bought the Gity Bank and got

his clearing privileges, he went to the Governor of the Bank of


I think it

City Bank must


was Lord Goshen

in its

and asked

reserve account.

what balance the

He was told 280,000.

The London City and Uidland Bank now carries £10,000,000 or 412,000,000






C. Miller.

Hon. A

Oct. 26, 1916.

in its reserve account, nor would it have the temerity to carry
less than what the Bank of angland considered to be a prudent
balance. Ws have no suc authority over the 7600 national
banks and no authority whatever over the 1B4O00 state banks of
the country, they looking upon us just now as an unavoidable and
necessary nuisance. Until experience ha e d onstrated the contrary I fear we must calculate thnt the Ame i an banker by and

large will do in future emergencies

t he has done

on similar occasions in the past. 7n4awill gathe
lar of reserve money thet he
hands on and lock it up
so tight that the reserve ba
ever get hold of it until
the crisis is past. 1 personal
thtt happen in the early
'90s, 1907 and 1914.
ranl ur ba kers are more or less or an
unorganized mob.
Unil they
educated by experience to the ad-




ventages ofcoadorati

hr' øe reserve system, i believe it is

unsafe to r/4

upon reserves contributed by their voluntary action,
and certa n y Oengres took tais view when it made the reserve deposits com,u
the extent that you p1 ce some reliance upon
tho acoeseion -State institutions and their reserve deposits, it

seems to me you are influenced by an optimism that our expevience

does not justify.

he argument on page 26 puts you at issue with such
a famous authority as 'alter Aagehot, whose influence was strongly

exerted in the direction of legislation requiring independent gold
reserves by the joint stock banks. In other words, you woulc leave
the maximum gold circulation ir.people's pockets and in cash drawers and assemble in reserve banks thc: gold reserves now held by


Hon. A. C. MILLER.

member banks.

Oct. 26, 1916.

I am in favor of just the re-v(11'11e and believe

that experience will demonstrate not its wisdom, but its absolute necessity. We have put too much gold in current circulation and too little in bank reserves, not only federal reserme
bank reserves, but all bank reserves. Were our whole currency

position different, that is to say, if we did at have
$1,600,000,000, or thereabouts, of fiat money i circulation,
with a trifling gold redemption 'fund hiket
would be very
different, but the currency of the
y is ulre
beyond th t of nny other nation i the
id, including all the
war currency already issued b b
er nt netions. The obligetion of redemption nominelly re
upon the government
tually rests upon the
government must obtain
gold for redemption, i it is do e)eded. eomparisor of bank reserves in thie countr
d in gX countries as Tnglend, ecotland,
France, Germ

tc., I btive is wieleeding because with their

sh reserves (by this I mean note' of the
central ban
are co ntratee to a degree which will never be
poseible in aNe:o-,Wee- with nerrly e0,000 barks.
branch ban



The proceee of discrimination mentioned on pege 28

you describe as a mewls which may be employed by the banks to con-

serve and enleree their gold retvrvee. IL practice, I think that
process is the one which denudes banks in this country of hold reserves end leaves a residuum of seiver and United States notes.
In a real emergency, such a one for instance as would justify the
use of the expression "a scramble for gold", it would result in


Oct. 26, 1916.

Hon, A. C. killer.

depositors in banks sorting currency as they did in the early
'90s end the banks would be thrown on the Treasury to redeem
To the extent

United States notes and silvoe certificates.

that this *ortins would convert reserve') of Federal reserve

banks into United States netee and


certificates, a real

They being the custodians (some day?) of

danger would arise.

the gereral fund could not get gold


as the Treaoury would eimply draw on


of currency

for 1:14old; in other

words, United States notes and silver certifioat s/presented

the ?ederel Reserve Bank of N


York rould be redeemed by c e k on the

reasury in I,ew


I deral Reserve Bank of

New York.


Fal Reserve bank discount

e on

rate mentioned on pages


problematical reredy

ani4v rse exchange rate.

London partly becaus
and 'hen





32, it seems to me, is as yet a

all over the


works in

world drew on London

ate is advanced, they reduce or discontinue drawing.

But the direc

nrluenQe of advance in the Bank of England rate

is toedtract


vestment in hi


capital te London, as you

stated, for in-

The first influence will he effective only to

the extent that we have built up a great system of commercial crede
its centering on New York, which we have not yet succeeded in doing.
The secod influence will net work until we have accumulated a

groat mass of bills ir Yew


which we have

not yet donee


will recall that ithere in one of his books drew attention to
the fact that in our 1907 crisis when England shipped usn$70,000,000
of gold, the advance in the bank rate to 6 call
Federal Reserve Bank of St. Louis


or 7

(I do not re-

which), drew gold to London from eeventeen different




Oct. 25, 1916.

Hon. A. C. Nillen.

That gold went to London to pay maturing bills which were n'ot
renewed at the higher rates, and to invest ,n bills.


of that character hes never flowed to New York in great volume
in the past for two reasons: Foreign money lenders hava;no.t
been willing to hazard large amounts in loans on the stock exchange upon security of little known collat r 1, but still more
important, foreign benkers have always doubt d the certainty. of
withdrawing credits from Neu Iork in/gor, w en 6 had o frequentay in gold
ly disgraced our financial histor
and when our banks are legally/de t ,y their debts in United


0,000 in circulation. An adTh1k\'ouldNba1ade directly effective to

and of which we have nearly $90

vanes in our rate i
a limited extent if


whitii/are un;'imited legal tender

'Antes notes Rnd silver do1i4

had el*

central banks of Fu o e such

e working arrangement', with the

s would enable us to convert etr


folio 11y-di-fact transactions wit: them but I fear

own limits

it will e meny yearr-before we anarely upon ouch

bank rate

able to
21 f England ietime yourexert in London. the
alized for some
die:approval of

influence a the,Ba

method we h ve employed to gather in gold by
ileve now reached the point as


issuing notes.

result of the recent



to the Federal Reserve Act where we are going to be able to test


soundnees of

disclosed by our


these tee theories.
exeerience in the

pare now, en you hey') so

think the test will be

'Ne need to prefuture.
in your address, for what


ably stnted

mny develop in the course of the next few montes or years, none
of us knowing when the clock will strike.

I believe

with the




Oct. 26, 1916.

Hen. A. C. Miller.

cooperation of the Treasury Department, the Federal Reserve Banks
could add $500,000,000 to their gold holAngs in less than twelve
months, but I do not believe thet we could add 10 of that sum
by the voluntary enlargement of the deposits of member banks


the minimum they are reauired to carry and that at the first sign

of trouble, their

Nor does

optional balances would van

this involve a very severe

arraignment of our \ b

because their policy of timidity has


criticism, aside from a

tined in

few ougg


f criticism. But the
bs about the calculation con-

the table,riideran'

of whether reserve b n a can rdl

upon them by

en the v.i\Cti,s rather than
the address is a good

a defective system cf which they

the authors. You may wonder w
one after writing seven or ei

nkera as a whole

this fundamental quest on

pon deposits for thier gold,

or must issue notes. Otarbu_igar ye so keen about the amendment au-depob-he member banks that at one time I
therizing e
going to scape me as a supporter of the note iosue
feared he
by me, as I hope he will, we must concen
plan. If sgill
'brake our effor wat-6 converting you, end that is really the excess


for this long rambling letter.
which is a judicial
temperate statement of the situation, and I hope it has a wide
I congratulate you upon the speech



I miss opportuniteo to discuss these matters with my
good Washington


so badly about it.

If you will write pes I won't feel


Hon. A. C. Miller.

Oct. 26, 1916.

you give my best regarth; to iA-e. Miller ard
the same to your good self.

Faithfully yours,

Hon. A. C. Miller,
lectern" ,,eserve Board,
Washington, D. C.

November 14th, 1916.

My dear Dr. Miller:
The memorandum mentioned in your litter, No. 854, has

I would not venture to e

just reached me.

have already stated in former lette


ar e upon what


not that I conle currency,

sider this question, which really Involves our
as the most i:leortant



Reserve Sy

In now


at ihe pcwer to issue notes
reserves held for note re-

Your memorandum
by a central bank, even thoup;

less certain roe

France, ha



ht be exe

danger un-

note iseuing

bank of issue,

nherently and necessarily a

ich might prove a menaee

I hold thi.
of the coun

would lie

that a central

consider to m

certaiower of in

e powers of the

aints surroun

bank, which I
such as t'

exit of grave


demption are adeq


there is no dnnger of inflation of



by reason of a ?ower of note issue
sed by reserve bake, - but that the danger

possibilities of an enlarged

extension ofcred-

it by reserve banks because of enlarged holdings of gold ac-

quired through the issues of notes.
the liberty of quoting


On this subject, I

Dunbar at some



"The question whether really convertible notes
can be issued in excess has been the subject of much
wearisome and futile discussion, tending to secure for


-2Hon. A. C. Miller.

Nov. 14, 1916.

'the notes far more than their proper snare of attenthe
tion. It has already been shown, however, that one
not, is
question whether notes shall be iesued or
which in modern banking is not settled affirmatively
by the bank, but is settled by Anna creditor, who determines for himself and with an eye to his own eonvenience, whether to hold his right, as agninst the bank,
in the form of a note Or of a deposit. If he and
creditors generally prefer the latter, the bank cannot
force its notes into circulation. The really serious
question would be wnether the ban on extend the use
by notes, in exof its credit, by deposits as well
ther the bank can
This is as much ae to ask
go too far in the purchase of scour lee, or in other
words, can unduly stimule e borrow s the making of
ank extends its
loans being the purpose f
wered without
credit. But this question cennot be
I ten years,
If we observe any peni
which banks ha found the
we shall find some ye
ea, to such a degree that,
public depressed an
rig their business, it has
with eveey motive
comneroial paper in sufbeen impossible
m being able to extend their
iicient amount.
o at 'men timee often reeuced
credit in excess, b
oyment for it could not be
their capital 'because
1 find in which the public
roue, and in which the banks
spirit wa
general tendency to speculahave fos ed and inc
which they have given tee use
tion, b, he facility
It i rue, then, that banks cannot exof thai credit
in response
r liabilities lc; it issort exceptthat in cerntend tn'
to a del Id from the pu
nis demand may be
ta'n sta of busines and that issues madeunduly stimuin reseonse
r acti
o an unhea_ T7F a are in excees of the proeer heeds
pf the comuni.ty. In any such expansion of bank importhowever, ban notes myst generally play the least
"Theory aGd History of Banking, pp. 62,64).
ant part."
ti; Profeseor Dunbar's viewe as suggested

k th

iou and I will then agree that the denger of

inflation, or more properly expressed, expaneion,which might result from unlimited note issues against gold would arise entirely
from the improper use of this gold by reserve banks to extend
either their open merket operntions on the one hand, or their
discounts to member tanks on the other hand.



Hon. A. C. Miller.


Nov. 14, 1916.

plan Wilich I have

in mind would not give

them op-

portunity to indulge to any great extent in this expansAon be-

cause 1 would make the gold

acquired by this method the basis

for the immediate retirement, if possible, of all greenbacks and
of a great part, if not all, of national b

ntes, ac rapidly


as that could be effected.
Federal reserve notes issued for a

purpose other

than to acquire gold must be isee


basis for exp
es; uny safeguard against
ur associatee would feel

That will offer
is easiest to control by adv
member banks:

dangerously low.rates whi

juotified in introcucirg in c
.ct, would to my mi

made for

ion wite weenUments to the

to pay for the benefit

1 p

whice the countr.

m a

oroueh-going reform

of our currency.



in your memorandum and a

the regioeel principle, and I
ant you to think that 1 failed to recognize the sig-

meet im, .
do no



ce of changes

non the rage


sound, thoroughly

ch 1 woull-like to sec
- 1 plen.

lde, and their

The principles of a central e

fro ie A regional


believe to be

practicable in this country and, in the long

run, a much more economical and effective method of dealing with

the reserve euestion than the one now in operation. On the
other hand, I do not believe a central bank could be kept alive
in the face of political attack to-day any more than it ceuld


Nov. 14, 1916.

Hon. A. C. Eiller.

But is it correct to assume that the reform of our
and the radical changes proposed in the quality of

in 1836.


notes would


the regional character of
Federal reserve

I do not think so.

the Reserve System!

obligation of all t elve banks as well

notes are, in fact, the

obligation of the
be prepared at all times

Every reserve bank must


as the

to redeem all the

tee of

n any language

That liability ca41-17711-pias

reserve bank.

desired, but the fact will rep.


every other

being is

the notes

obligations of all the re

Sued are really the joint
serve banks and the gove

The machinery

ng, issue, redemption and

for p

tail and a regulation

cancellation of t

ted to any extent desired by

of these detail

the Reserve

g the


the reserve bank

and without

would he the necessity for central control of discount


to be invoked

the Board, as


to control

expansion. The

well as its influence ir-

legal powers, is sufficient in my mind to


upon the principle of

d destroy regional autonomy, of


nate which would ha


present autonomy of



against unwise

sidered by the Board


to be sufficient,

If it is not con-

however, an


control could be effected by an amendment to theFederal
Act, wriich would require


reserve banks to



raise their discount rates to correspond with any progressive
Federal Reserve Bank of St. Louis

in the percentage of their reserves.

Hon. A. C. Willer.

Nov. 14, 1916.

It would be a great achievement if the influence of
the Board could be successfully exerted with Congress so that
advantage might be taken of the present favorable opportunity
to clean up our currency problems. I wish there wa:. something
I could do to urge the matter along.
With warmest regards, believe me,

Very truly yours

Hon. A. C. Hiller,

Federal Reserve Board,
Washington, D. C.

November 6th, 1916.

Dear Ur. Miller:
I enjoyed reading your letter of October 31st and am
gratified by many things you were good enough o say.
to the general

Of course, 1 attempted no arguments

theories of "deposit banking" and


hich have

only an indirect bearing upon the 6uect of your dress.
Frankly, your letter r sure e very decidedly as
to your attitude towards


sue with which I had fel:.!..._y_ou wer
very lerge part of th

oceedure in

our:0Te on

the note is-

n t at all in aympathy.

espone1,11 lit


that matter rests with

llrecall at we developed the practice
onicle), under iliy own direction
(pernicious, aecordint2 the
personally as you




the Fedee

policy of

sion at din

turned from


eserve Bank of New York in December, 1914,
e bank big the

one n



subject of quite a bit of discus-

t in Washington when Warburg and 1 re-

"vCitee- ulphur Springs.

So I feel a certain

responsibility in the matter and some anxiety that you parsonal
some of the other members of the lloard should not directly take
issue with us on what we have done to date. This I am glad to

note is not your attitude.
It seems to me that altogether too much importance has
been attached to criticism in this matter emanating from this
one financial periodical. The best bankers in the country agree


Hon... C. Miller.

Eov. 6, 1916.

that our policy is wise and sound and I am glad to say that some
economists with whom I have discussed the matter, among others
Professor Kemmerer of Princeton, feel that we are doing the right
thing and justified in doing it.
We must face


this question


to wnetner gold should

count es part of our reserves and the nct4s 1 s ad in payment as

pert of our liabilities; that is tho nub of iio1e question and
await your further letter with much


The memorandum

statement mentioned in your letter/w.ato ot inclooe .
I cannot lcavc this s u 4
wi hbut calling your atten

ton to ore very important mat
.currency which causes me some
We heve in ci c


UnG 2

o neotion with our whole

ited States nearly

tl 600,000,000 of so c lled "mon y in the form of national bank
notes, greenbacks, st r ard sil s dollans or silver certificates

Sine 4


the exhilin(a mng occon

unAl it has

socalled mono

Civil Tar we have been engaged in

or of inflating -nle currency of tnis
e ahed the above impoving figure.


arlous qualities eni legal tender and av bank

reserves, but in the last analysis, it is fiat mtney.

or. Horace

White describes the balk notes as" overnment bonds chopped up into
$10 bits".

I thin

it was Professor Taussig or at any rate some

wellknown economist, who very correctly stAted that the


of silver Oollars hehi:C. the silver certificates might just as well

be sunk to the bottom of the ocean so far as its value for redemption purposes asa.


Our greenbacks which have legal


Hon. A. C. Miller.

Nov. 6, 1916.

trnder and reserve qualities superior to any other kind of money
except gold are a sort of hybrid government bank note with a 45
gold reserve.

For the redemption of all this money or, accord-

ing to the Act of 1900, for its maintenance at parity with gold,

the government holds no more than q53,000,000 in the Trust Fund
and whatever free gold may be held from time

o time in the Gen-

4 Redemption

eral Fund, the latter, of course, including th
This country has inflated its




the past

fifty years to a greater extent tha,1i

any of thelelligernnt

nations of

0,000 of notee of the

Europe to date.


Bank of France have behind the

serve of very nearly

38 % and of course the immense liqd assets of the bank in ad-


Our $1,600,0


quate gold reserve wol


if based upon an ade-

e government to carry idle from

$400,000,000 to $500,49 000 in,/gpd in


to a working bal-



ance in the 44erni Fund.

tion exce


this inflat
kept it



our own could possibly have sustained
ccessfully during all these years and

*ta---61d (there have been three or four failures

to do so), and we have been able to avoid disaster simply because
our export trade balance has been so great and because our credit
has also been so good that we were able to export securities as

as goods

and have been steadily accumulating gold and avoid-

ed the dangers inherent in such a situation should we face a long
continued period of gold exports.
tory of the last twenty years,


Reading back over the hisisporfectly apparent that




Hon. A. C. Miller.

Nov. 6, 1915.

usfery time we have had heavy gold exports abroad as iE the
early '003 when accompanied by government deficits of revs

acs we have been fored Axiost, if not quite, into a suspenion of specie payment.

TA is time thic matter was lcaned up or WG arty find
ourselves facing another situation such as dc doled in 1695.
Another equally :1portant collateral : astion, growing

out of our loci tender notes, relate
our foreign banking business.


lars and greenbae:s are legal t
bills to 'dew York for disccun


lopment of




eign bankers sending
egol raouns of forcing

their How York correspondents t

tne.r. gold in case tl.e ex
chanz:es justified oour. r dito n tatang gold. You
know how frequently h objecti
S ;:;:,de by tminkers in tide
country and elsewhere a to bar
conditions in Fre.nce. They
sny thet ar
s theitft of Prance has the right to pay

silver, th

cannot do

that they c n
as the lank

usiness in ?ranee with the R41te security
Ts are in somewhat thc same position




the government has undertaken

to redeem United States notea are. to ki:ep silvercertificates
nt per.

The trouble is the ability of thc k;overnment to carry

out its pledge which depends upcn its having a surplus in the
General Fund and a surplus of revenues, and no governwent should
be in any such


We have about t2700,000,000 of grid in the country just

kiie ought to tike advantage of the situaticn to gather in


Hon. A. C. Miller.,

Nov. 6, 1916.

as much of it as eaeible by the Federal reserve note issues,
hasten the retirement of national bank notes, retire all the
greenbacks, take over the Gold Trust icund and then make these
nix hundred and odd millions of standard silver
dollars and

silver certificates the "large change" of our currency, as


scribed by iroiessor Taussig.

l'hether we have a Republican or Demo tic President
ehould make no difference in this progfam and 1 Atincerely hope
N\ N\
that you and your associates will consider
it on

your own

duties and responsibilities to,k7 the ressure on in
matter for J. doubt if any onece ac
lish what the
can, and ii you don't, nobody w
What you say/at


''ds of y

gress out here is mos(t consider a


letter about my proand is deeply appreciated.

If i had nothing to d , I doubt i I over would .get back to
I am p"liji not 'doing-too much, an improving right

along and w
than vigil

her i

to or not, Dr. Sewall, who is more

ha so

been able to keep me in good be-


If by any cnance you snould be making
a visit to the
Coast this Winter, I hope you can make
Denver a stopping place.

With warmest regards, believe


Very sincerely yours,

Hon. A. C. Miller,
iederal Reserve Board,
Washingtonv D. C.



April 22nd, 191P.

Dear Yr. Viller:
Your letter of tTie 19th was enjoyed very much,

Lo, Professor T,Tcholsonse letter -tti.fihI return rith

Please let me know before you make that trin

to New York and reserve time, if possible, to take dinner
with me some evening.

With best regards, believe me,



A. C. 'Mier, Esq.,

--MWAT"rt.vv.Frve Po frci,

Waehilvto4, D. C.


fl C

Lake George, N. Y.,
February 5, 1919.
Dear Dr. Miller:


reading matter brought to

Lake George with

ma were copies of addresses Which you made before the American Academy of Political
and Social Science and the American Economic Association.

I have just


reuding the former and would like to have an expression of your opinion on one
point which is just no' 0 bothering me quite a bit.

You estimate

that of

the ten or eleven billions of bank inflation' rhichfq6.

taken place in this country since the Suropeen war started, in the neighborhood of

onehalf should be attributed to our Government's financial operations during the
period of our own participation in the war.
I am not sure that this is a safe deduction from the figures because

it fails to take

into account that part of what might be regarded as

expansion resulting from imports of gold and increased

the legitime

productive porer


with it, end, further, I believe it fells to take into account a very important
item for which allowance should be made, namely, hoarding of currency.


however, that the figure is reasonably close to accuracy, are we justified ender
present conditions in taking affirmative action of some sort to brine about a
contraction and

reduction in

the erice level, which we all agrf4e will be ultimete'ie;-

There have been times When I have felt that the views of members of

the lloard and some of those influential in the management of the New Ylrk bank,
particularly the writer,

theory right along was

were not altogether in accord in

that expansion should be

these matters.


dealt with not in terms of

finance end interest rates and honk reserves, but in term of production and
consumption of goods;


that the direct

control by some

system of rationing, or by

taxes, or some such method, was sounder, more scientific and
more just

Dr. M:17111111111111111111!!!!!!!11111111111


than any method of control exercised through the bank rate.

Furthermore, it was

always in my mind, and I have seen no reason to change the vier, that the savings
fund available for Government loans was a fixed quantity;
to finance the Tar and that

that it as insufficient

the difference between the savings fund and the Govern-

ment's requirements must, necessarily, be

furnished by expansion;

of expansion Which had to be provided by the reserve banks could and Total& be re-

duced only to the extent that people were forced to economize in their expenditure,
and that we must complacently accept a program of expanaion to make up the deficienc

in the Bearings fund, and do it without the disorganizing consequences of high money
rates and credit disorders.

So long as progress seemed to be making in various

stns to enforce economy, we were justified in deducting

our finance at low


of interest and upon the basis of appeal to patriotism.
That I nom

see is a complete abandonment of all thought

of imposing

economy upon the country either by control of raw materials or transportation


of consumption taxes or, in fact, by any meant except possibly here Te are able to
the war sevings movement.

In vier of the abandonment of aggressive

meaeures toward economy, Iam wondering rhether weme part of the

program for which

have been rather tenaciously contending, name2y, moderate interest rates, must
not also be aBabdoned in favor of a program of higher rates, contracting bunk

credit, end possibly a repetition of the Jack and Gill performance in prices.

Up to this time I have had a feeling that if we could hold the situation at its
present level, nermitting no further expansion than at present, the natural process

of liquidation would start in after the next loan, but I am not at all sure that I
am right arid would like to knor


you and your colleagues feel about it.

net I see just now is something like this:
the past two years have

The reserve banks during

increased their credits in the neighborhood of two billion

dollars. The note issue can be ignored as that rill take care of itself.
two billion dollars is new reserve money for

because it filters through with



all banks, member and nonmember alike;

LotaneiblidaddrAoktz to the rhole banking


For every dollar of that loan account vhich we undertake to liquidate

by raising our rates, there will be at least from three to four dollars of the
loan and deposit accounts of the member and nonmember banks vhich must be liquidated.

How long Should ro take to bring about the liquidation!
necessary anyway?

Rev much of it is really

And how important is it that ye should get it it at once?

Way it not be better to wait until next summer, or, on the other hand, would it be
sounder finance should the Government Issue a high interest rate, short time,
wholly tsxable bond or note which would furnish the opportunity for the reserve bunks

to increese their rates on all typo S of paper exceet international bills!
You will, of course, agree with me that the consequences of Sharp in-

creeses in our benk rates at the present time roule be rerious for the ceuntry and,
probably, for the world.

On the other hand, the sooner we liquidate reserve bank

loans end deposits to some extent the sooner eill it be possible to start a free
movement of gold throughout the world, but then can 70 efford to run the risk of a
free gold movement so long as the terms of the various economic settlements to be
dealt eith by the Peace Conference are not knoen and agreements reached between the

Allied nations on these various matters.
I hope to goodness they don't make a hash of those understandings and

undo some of the good rork that re have really started and should see concluded

scientifically ant soundly.
As you *ill imegine in reading the foregoing, I am simply stating a lot
of the questions that are in my mind as I would discues Meem were we able to meet.

would you be good enough to hold this letter in private and write me as frankly as
you may be villing just what your viees ereI

One matter is giving me e good deal of concern -I don't like to sea those
fellows in Paris.dealing with the subject of an international gold settlement furef,
without having some certainty of a clear understanding beteeen the Bank of


and the Federal Reserve Bank of New York. In future years you will find,

that the crux of the whole gold situation lies in that under-Standing between





tiro institutions, which should not be disturbed or iscakened, and can not be without
serious consecuencee to both

gland and ourselves.

With ..armest regards, I am,

Sincerely yours,

A. C. Miller,

Federal Reserve Board,

reehington, D. C.



Lake George, o. Y.,
vehrocry 11, 1O19.

Door Ir. rillor:
it veeovery good of you to vrite mo so fully in renly to my letter of

vebruery ee

I ibell eloborate F little bit tho argument regording "legitimote" oxponelor, tnd, of courre, you will understand thot os tn mosteur economist, 1 em exoreosing my vierr -1th some diffidonco, tut vith confidence thot you rill deal oith
them cheritehly.

In peoce time, a notion ouch as ours, vith a grout export belonco of tro4e,
the voils of which ere not convertod into lone to fereign custmoro, gencrolly draws
to itsalf an occumulation of gold rocerve. This, of course, 1r purticolorly true
of our country, where the vclue of conithl iodeveloping untouched rosouroes mokoe
it MOTO profitable to employ ceoitol at home then abroad. As the result, therefore,

of the grovth of ex o t trede ynd the orooth of gold resarvos, and the incretse in
the veslth of the country, the booking position, neceeeorily, oxponds. This is o
normtl ond sound dovelopment ehrety productive cepocity io increosed, exports are
incre000d, bonk reservos are inoresood, oith the necosesry actomoonyment of hn in-

crosoe in benk loons ond depooits and cirouloting media.

Lov, thot ie exactly what

took oloco rith e rush during tho earlier deys of the *sr, und the stake, so to
snook, roe the outcome of tho ver itself, Vhich involvod the stability of liberhl
government throughout the vorld.

I, therefore, used the word "legitimato" oxoonsion

not in e strictly technics1 sonve, but because all the circomstsocos, - political,sociel,- economic, juutified this tremendous notional effort to incroess production
and exports.

If our productive c000cito oos voetly increased and our xports greot-


Dr. Miller



ly increased, end if the prospects indicated a permanency in increased productive
capacity end in volume of exports to the extent that it vas permanent, it seems to me
that the rhole pr-cess

as "legitimate."

that it "as "legitimate," namely,

And in another tenect it teems to me

that probably at no time has our position, both as

to the exPension of our bank credit

end the price level, been out of line rith the

rest of the world.

This, hovever, is only one point, and

there is

another moet important one:

Has not some part of the epperent expenrion taken the form of hoarded currency rhich
(Lees not have the effect upon prices

such as the rrench


that results from inflated issues of currency,

by direct borrovinee from

the Bunk of 'Tx-mace, the

Fnglieh by the irsue of currency notes, end, of course, in
Central Hovers and Russia in their
meat loans?.


enormous issues

that bank

to verkiegmen, rho have locked it up.

currency as rages and prices go dorn and

The process started in January,

banks of Nev

been converting goods

credit in the form of Federal Reserve notes and

of safety in our position, resulting, as it


of bank notes against direct govern,.

this country merchants and menufecturers have

Into bank credit, drawing
paying it

a more extreme degree,. the

Is not thatdevelopment

rill, in

these notes



again find

an element

their ray back to

during which month. I understand

York City increased their deposit


the savings

in the neighborhood of 1.100,000,00D,

and, as you knoe, during that same period ee had a. very sharp


in our out

standing notes.

My feeline ha s been that all the surrounding circumstances of the demand
upon the country's

productive capacity, the

trunsportetion, made it necessary to speed

that the

efforts of

lebor, and the facilities of

the machine to a tremendous erne, but

sneed could only be brought about by some


of prices red some ex-

nennion, and that considering the stake involved, it could be defended as
and, on the ehole, adding to the realth

As to the second eoint:


the nation.

You and I have elrays been in

curtailment of consumntion, if possible by


agreement that

educational methods, if not by absolute





control. 'as the best method

Let us assume, for inetEnce, that no


by Which our Government c)uld deal with this problem

/f expansion, and, failing that, I don't see
demands for goode and



and that we had


expansion could have been avoided.

was made et all to reduce the peace time
undertaken to


expansion and the

price level only by the retes of discount maintained by the Reserve Banks.

think it probable that

Do you

the Government would heve succeeded in raising anything like

the amount of money Which it has raised, even allowing

for such reduction

in the

amount reouired becruse of a some-ghat lorer level of cost for both rages and meterials?

Suppose the Government had


its borrowings by issuing a 4%

or a 41%wholly

taxable bonCeand the Reserve Benks, instead of establishing a differential in favor
of the members requiring to
think it possible that the

borrow, hod penalized them a smell

fraction of 1%, do you

bonds could have been sold to investors or

that investors

rho were willing to

anticipate their

loss in interest!

And, if failures of loans had resulted at the 4% or 4+x, level,

incomes would have been

do you think they would heve been more successful at 5%

willing to do so at a

or 67.?

rey belief on this point is summed up by figures Which only illustrate the

Point of vier, because they can

not be regarded as based upon accurate data.


feesor Kemmerer some time ago informed me, as I. recall, that the most recent estimates

of the nation's saving power under existing rer conditions placed the total per annum

at about q9,000,000,000 (I think your own estimate was in the neighborhiod of


Ilia figure considered that about 49,000,000,000

fund wee required for unkeep of

capacity, leaving,


properties and for enlargement of

say, $10,000,000,000 per annum of

tvsntyfour menthe, say,


of this savings


investable surplus, or, in

During the nest twentytwo months the

Government has reised -17,000,010,000 from long bonds, 1;4,700,000,000 from certifi-

cetes, t1,100,110,000 from Tar Savings and Thrift Stamps, and $3,610,000,000 has been
neid in taxes -- a total of over $26,000,000,000.

infletion, or without a tremendous

Ror could

increase in the

this have

investment fund, which

could only be brought about by imposing economy unon the people?

been raised

1 admit that in



an avoided ee a different rate policy, but the tvoidance or
inflation would have meant loan failures; a loan failure by popular subscription
eruid have meant bank borrowing, which, again, rould have teem inflation, end of a

nation could ieee

more dangerous kind than thrt ahich vs het/9 had.
Looking over the performances of the past two years,

est not etcape

the conclusion that our finance hes been sounder then that of any other netion, in-

cludiny 'rat *Yritsin; that our problem of readjustment to peuce conditions viii
be en easy one compered with theirs;

and Viet such expansion as we have had was

inevitable, and, in rart at leapt, Ter justified.
The future, hovevor, is becoming increasingly a matter of concern.


think our greatest danger oomes from the fact thnt we have expanded our position and
our prices, under conditions of generpl, and, to some extent, artificial prosperity,
Which haveresultad in unnecessorily large stocks of goods in the hands of menufnc-

tutors and merchants, - that re are going to $90 prics slide doen hill, .rid the
losses to there Who have been incautious in accumulating stocks rill, in some cases,
be rather severe.

A friend of mine yeeterdey told me thst ha had just visited.a

shirt menufacturer in New York Who ordinarily, at this season of the ynar, would
have stout 610 people at work in his rlent, hod orders on his books for 50,000 dozen
On Monday he had just 11 people at work and no orders coming in at all.
Of course, that looks rather bed from the stendeoint of that perticeler manufacturer


and ponsibly the produoer, Who hoo ree cotton to sell, or the cloth manufacturer, vho

hat a stock of cloth on hand, but the retail merchant is insuring himeeif by clean,
ing up hiF Shelves, and gredually this process of price reduction will ranch all
elong the lino, causing here and there hardship, some unemployment, maybe some disorders, and even labor end Facial disturbances, but I az confident that a year,

poraibly a little more, will see this rel,djetteent well under esy, if tot pretty
veil completed -- and then in 'het an invincible pos:tion will this country find
Ts that process of lieuidation proceding rapidly enough! Should it
be stimulated by a change in our rate policy, or should we pit until after the


Dr. Yiller

I dislike, with you, to see the rord

Government is through borrowing!

ngree with your

advertised at all, end believe I am inclined to


view that further

But What I have seecifical-

expansion is inevitable in connection with the next loan.

ly in mind is discussion of methode by ehich re can begin to get our feet on the
ground and begin to pull in Then the time


And When


the time arrive?

makes it a short note,

If Secretary Glees increases the rate on the next loan, and

say something not over five years, it will inevitably renuire a revision of our

Might it net be well

just before the next loan it
all the borrewing


to deal with this by agreement among the
offered, end by a

schedule or

required in order to float the


the same time

original subscribers on the

If, in the

repress any

Reserve Banks

rites Which rill permit

loan without penalty to the borrower,

tendency to

extend existing borrowings by

old loans!

letter pert

of arch, the

have a meeting with the Reserve Board end with

officers of the Reserve Banks could
Secretary Glass

I should runnose that we could arrive at en understanding

that would be of immense value at this

and Mr. Leffingrell,

about rates

and policies

important turning point in the country's


That troubles me more than anything else

just now is the possibility

that the Treasury rill be a very large borrower after the next loan is placed, and
that much of that borrowing rill be


with the banks.

Won't you be good enough to hold
the time .comes for that discussion,

this letter in confidence, and

I will try, if possible, to get


over to


ton a little in advance and talk it out with you.
With kindest regards, I am,



Honerahle A. C. Miller,
Federal Reserve Board,
Washington, D. C.


P. S.

Since dictating the above, I huve noticed
will be held in Washing-ten on

March ?oth.

that the meting

Lake George, N. Y.,
Parch 1, 1919.


Dear Dr. 71.11er:

I can not ref "ifIV
the tilrenty-eixth.

ditlik a

line in ans,Yer to yours of

That article quoted from theF., conoraist was certain-

ly written by Hartley withers, and was certainly addressed to an officer
of our Government Who now and then publishes * rather boastful statement

of our tremendous resources.- It reminds me of the story of the little

girls Who v'ere bragging about the magnificence of their fathers' houses,one describing the beautiful verendr her father had just built, and,

finally, one little girf said that her father had something on his house
that none of the others had ,- and that was a mortgage.

I will see you'in reshington about the eighteenth or twentieth.
Thank you for your interest in my progress. itIt is all right,

so far as I can tell: I have put on a lot of weight, and really feel
Sincerely yours,


'frice37;1- Reic,rve 9oard,

Washington, D. C.

Mardh 10, 1921

Dear Dr. Miller:

Tau will, I hope, understand my saying that your letter of March 9,
was a pleasant surprise.

I wish we mijit e::c4nge letters more often on

some of these subjects, although 1 have sometimes wondered in the past
whether I

have not burdened the members of the Board with too =Oh cor-

respondence of this Character.
The first

paragraph of your letter will

gation, and I shall


require a little investi-

a day or two to get as complete and accurate

figures as possible.

As to the

second paragraph, Governor

Harding and I discussed the pro-

c:isal which you are now considering for segregating

It is a rather vexatious problem.

the newly


my original thought in 1919,

when I was in Europe, was to impound the German gold, which totaled

England, and keep it out of our reserve,

$173,000,000, in the Bank of

until it was in
of the ruling

our vault.

which had been made, as 1 recall, as early as 1917, but, as

we now realize, that policy
ation which

This would have involved, however, a reversal

would have created a reserve percentage situ-

might have influenced our rates a few months earlier in 1919

than was the case, although I am


not sure of


your specific suggestion, I Shall ask you to look at the

of the gold reserve, and particularly the percentage of gold


reserve, from the standpoint of an operating official of a reserve bank.


the responsible officer of the reserve bank, Who has his eye daily on the

reserve percentage, and Who recommends rate changes, likely to receive the
impulses Which would lead to measures toward checking loan expansion from
An enlargement of the total loan and deposit account,
An enlargement of the circulation,
(o) A decline in the total of the gold reserve, or,

(d) A decline in the penentaee of reserve.
I list only four items, though many others must be considered in deter-

mining a

loan and rate policy.

Assuming that all of these considerations, and others, influence this
operating offioial, I still think that the greatest weight will be attached
to the reserve percentage.

This mey not be an enlightened vier; in fact, too

much sanctity may attach to this percentage because of tradition, habit of

mind, recognition of public opinion, or the point of view of critics, and,
therefore, be somewhat misleading.

But we must


things as they are,

and, that probably the most important factor in developing this

"impulse" to

restrict increasing loans is, in fact, the reserve percentage.

Let us suppose, therefore, that the reserve banks should as a whole, and

each reserve bank for its

awn proportion, decide that a fixed

Unit of gold

should constitute a working reserve, and that everything in excess of that
Should be placed in the "redemption fund" and deducted from the total "working
fund", so that the net total would

remain, for the

present, say, at 02,000,000,000.

I am trying to lead you to the point where your view will be that of the operating

He will, I fear, in such case say to himself; - "Notwithstanding that

"vie make up our figures so as to show a net of only $2,000,000,000 4gold,

we, nevertheless, have this farther reserve to fall back upon. Therwrore,
Why not postpone a change of polioy, that is, an increase of rates, se long
as this uttimate reserve furnishes a considerable margin against an impaired

You will recall Keynes' comments upon banking reserves, in/,

which, as I recall, he described them as performing no more service in the

world than to create a state of mind. I am tendering whether a bookkeeping
arrangement, such as you suggest, will, in fact, create the stc'.;e of mind. to

Which I have referred above; that is, give rise to the "irTulse". I do not
think it would.

I am also rather hesitant to adopt the idea, suggested fron various
quarters, that this irspulee should be stimulated by paying out gold certifi-

cates after our reserve percentage rises to a certain point. I cannot escape
the conclusion that some day this gold mast he restored to bank reserves in

other parts of the world, and that it is better that we should hold it together
in reserve banks against the day of adverse exchanges Which in the long ran,

I believe, will come.

The last sentence in your letter is certainly justified. The method you
propose is least likely to excite antagonism. On the other hand, I fear it is
less likely to produce the impulse to which 1 refer and, consequently, less

likely to be effective in protecting our credit situation.
This is a subject which I discussed at length with the officers of the
Dank of England, and particularly with Sir aeries Addis. I believe we were

in entire agreement, that all of the factors influencing the minds of those


responsible for the management of banks of issue, summed up together, did no

more than form a basis for determining whether rates should be changed, or not.

Every argument on this and allied subjects leads me around the circle and

back to the saue conclusion, that what we are really discussing is rates, and
rate policies, - and what we need is an influence which will be both more
automatic and more convincing than ones opinion. Otherwise we may find that


our new system is too elastic; - it Ita y stretch too willingly and contract too


Honorable A. C. Miller,
Federal Reserve Board,
Washington, D. C.

March 14, 1921.

Dear Dr. Miller:

Referring to our discussion a8 to the treatment of further importations
of gold from Europe, 1 understrInd that you are oreparing a memorandum respecting

the proposal that additions to our gold stock of thAt character be dealt with by

deposit of gold with the Federal reserve agent, in such fashion thist it will not
be directly added to our gold reserve and, consequently, not increase our reserve
percentage in such a way as to mislead. bath ourselves and the public as to the

credit sitution.

Your memorandum will possibly contain a suggestion as to the

method to be pursued in erranging this, both with regard to the accounts to be
set up and as to her such added gold shall be distinguished. from existing gold
held by Federal reserve agents.

I shall not refer specifically to thnt pro-

posal in this letter, nor until I have your memorandum.

But, 1 KM now writing

to explain my own proposal as an altern-tive to the one which you suggeFt.

We both agree, .1 take it, that it would be unwise at the present time

to arbitrarily set aside any portion of the gold now held for the purpose of
deliberately reducing, the reserve percentage.

With dollars at a premium in all parts of the world, it is inevitable
that from nor on there shall be a more or less constant flow of gold to this

The principal source will likely be South African production, and

possibly later Russian gold, both of which, I presume, will reach us through
the London market.

This addition to our gold stock will be inflationary in

its effect and is likely to deceive the country into the belief that a credit
liquidation is taking place, whereas the fact flay be that such additions to

Honorable A. C. Miller

March 14, 1921.

our gold bteck will verve merely to maintain and possibly increase the .resent
volume of credit.

In other words, the imprevement in our rererve percentaee


be almost wholly due to gold imports rather than to loan and deposit reductione.
To leoid this development, I have Fuggested that the gold coming to us
from should be impounded in the Bank of England, earmarked for our aceount,

and not counted as a part of our reserve until shipped to this country end in our
V aults.

The advantagea of such a plan appear to be the following:

(1) Under the present ruling of tne Board, it would not count q.e part

of our reserve, and it would reeuire no ruling by the Board to aceomplish the

(2') It would be less liable to influence the efficers of the reserve
banks ae being a peesible addition to our reserve than if it was actually in this
country and merely set acide fro the reeerve calculation

by bookkeeping entry.

() It leaves the ee14 in Europe where it may be Tired to meet demands

for possible exports without twice crawling the Atlantic.

it can, nevertheleee, be added to our reserve if later needed,
without requiring a reversal of


ruling of the Federal Reserve Eoard.

AE the gold ;wet actually be peid for in dollers before being added

to our reeerve, it will affect a reduction of our reserve percentege every
time an additional amount of gold ir paid for.
Of cource, the plan ili not be feasible unleFe our friondp on the other

side will cooperete, so I have cabled to the Bank of England ineuirirg if hereafter we re uested it, would they effect this sugeested arrangement with Rothschild.
Yours very truly,
Benj. Strong,

Honorable A. C. Miller,
cio Federal Reserve Board,
Washington, D. C.

arch 14, 1921.

Dear Dr. Miller:

Referring to the first paragraph of your favor of March 9, I am enclosing a statement showing the amount or certificates redeemed, beginning

with the issues maturing in September 1919, together with the totals of our
advances and bill holdings, both to member banks and to the government, and the

amount of reserve balances held for member banks, and of our ,,,rious reserve

The figures are rather illuminAing.

When I stated th-A repayments of certifictes in September amounted

to 400,000,000, I waa !Astaken in the total. What I had in mind wAs an estite
at one time made by Mr. Leffingwell, Ihich proved, however, to be high.
amount was about t450,000,000 in th,,t month.


fou will, however, nc*.ice 3 certain

coincidence in the figures contained in this statement ghich would ihdicate that
the credit released by these payments were not in fact ap;died permanently to a
reduction of borrowings from the reserve banks, but actually went into other
channels and possibly may in part explain the lri.rge increase in the stork exchange

loan account over tha.t period, az well the increase in bank loans for industrial
and commercial purposes.

YourE very truly,

Benj. Strong,

Honorable A. C. Willer,
c/o Federal Reserve Board,
Washington, D. C.
Federal Reserve Bank of St. Louis




D.4.5r Dr. Miller:

Fnclosed h the aemorandum which 1 undertook to prepare in

regard to the plan of disposing cf accetsions

t,o QUI: gold reserve

by doporiting an euivalont kariount tith the Federal res,arve agent,

under such terms that it eculd not count se teselve nor be available
to the depositinL reeerve bank for tithdraital without the asFent of
the Federal Eeaerve Board.

I hope the argument appeals to you as sound, particularly

that pert of it which imi.ressed all of us at the tank very strongly;
that it appears to be a rearranging of the figures published every
week ear an ulterior object, ana really aoald not present a true .picture
of the reserve position of the Systsai as contemplated by the ket.
Won't you give tte the benefit af your views?
Toure very truly,

Benj. Strong,

Honorable A. C. Miller,
c/o Federal :Reserve Board,
Washington, D. C.


"earch 18, 1921.

Treatmeet of New Gold Received by the Federal Reserve Eystom.

Deer Dr. Miller:

Your favor of the 15th instant was received thie eerning just before our
board meeting, and I have taken the liberty of reading it to our directere, who
have expressed much Interest in this diecussion and particularly in the views con-

tained in your letter.

I agree with you, without reservation, that the Federal Reserve System
should heve a gold policy, and that it should neve e currency policy.
As to the gold policy, we muet have in mind, it SOOMH to se, the object
which we Beek to accomplieh, and develop a penny which will e000mplish that object,

if *ithia human possibilities.
Stating the object firet; in breed terms, I believe it should be to avoid

prices, which would
the expansion of bank loans and currency, end the inflation
result from e temporary fortuiteus addition to our eold stock in WInk reserves, and
/ later when the COAIL0 is no longer oeeratieg, and we peeeibly lout the sold, to then
k avoid the ehrinkftge of credit and the decline in pricee Thiel) would result free
exeerte of the gold ehich had previously furnished the basic for expanelen and high

Briefly expreeeed, I believe we should now ?ut additiene to our gold steck
into "cold storage" and hold It there as long ee condition justify doing so; if
possible, until the world demand takes it away from us. To do this eucceeefully

,end without ateemeting fundementel, even revolutionary, changes in the whole

structure of the Federal Reserve System, in it not better for the present to let
this gold accumulate in London until the future appears a little less obscure?
We no hold in this country possibly 1100,000,000 of credits_ for Japan,
',40,000,00.0 are held by-this bank, thet some day may be celled for by
of *hick)
exporting. sold. We hold t20,000,000 for Java, several millions. for Holland, ted

it etees to ee not at all unreaeuneble thA we should offeet this by, say,
It will be available

f,.85,000,000 of gold impounded in London in the way I eugrett.

there for prompt "export," that is for sale "London delivery," meantime not
swell our reserves. This, in a nutshell, is ubat 1 would now recomeend, .pending
consideration of any fundamental ohmage in the structure of the Federal Reserve Act.

As to our currency policy, I have endeavored to eum it up briefly, and
with little argument, in a letter which I wrote to-day to Mr. Platt. ThA matter
clearly involves e very careful study statistically of the experience of the Federel
I cm etreeing
Reserve System in the demand for currency of vsrious denoeieetions.
that feature of the currency problem, beceuee all our experleace Owes thet currency
of large denomination floes back more rapidly than currency of seer denominations.
In making this etetement, I oliminete the return of currency simply because it has
becoee unfit for uee, which has no part ie the coneideretien of denoeinetioae,
inasmuch es currency thet ceeee back for thet reason is ieeediAely reiexued.

arch 1, IV ,
If, therefore, you agree with ne that a considerable influence in the
_nntrel of the curreuey, that ia, of the kind that reins in permanent circuletion,

is the adjustment of the denominatione of those various kinds of currency, !,e) that
the kind that we wish to flow beck rapidly is always furnished in the lnrger
dennminatione, I think the problem beceees clear as to what *o should do, and for

thet, I take the liberty of referring you to my letter to Mr. Platt.

The ierue of the Pittman Act noteF hke always struck no es neculierly
unfortunate eevelopment, necessit-ted by the war. In the firet place, it fa cheap
money for the Treasury. In the second niece, it is fundamentelly unsound, in that
it is a bond secured bank note. In the third place, it is expreeeed in the emailest deneminntion ,hieh Ae issue and therefnre remains in circulation the longest.
There is now over 2,200,000,0W of it in eirculntion, end to retire it involve, an
addition of a,000,000 or m:re t, the Guvernment's annual interest charne. Notwithstanding this, however, I think the freeeury should proceed, jtvt as rapidly ec the
le* nernits, to retire these one ,nd two dollar Pittman Act note', and get them out
of the %ay.

If you agree with those arguments, and with the general policy dieeueeed

in my letter to Mr. Platt, it striker me that there is little more that ee can do
in dealing with the currency, unlees we are nrenared to consider dealing with the
national bank note eirculation, and. I doubt if the time has yet arrived to undertake that.

In general, as to ths gold movement, I share your view that there la in
,ronnect a vary eoneidereble addition to our gold stack. As I mall the lest
figures, the South African production is noe running at the rate of a. little lees
tban t4n000,000 ner week, end nearly all of it is ooming to this country. It
might produce 4150,001,010 in this calendar year if the aevement continues. there
is some reason to believe thtt gold is leaking in from Russia. If it Is true
that the British Coverneeet hes concluded a trade agreement elth Rusnia, eome
Russian gold ie certain to be tendered to us, and If our Government enthori7ec ite
acceptance, I have generally understood that there is about ',;30,000,000 gold that
Is capable of being ehipped to us fro thet source. It is not impoesible thA some
gold nay come from France. Besides that, ee have Pur domcntic nroduction, end etch
gold as retches us from South guerica, Xexico and the Fast. The prosneet le not
unreasonable ttet t?,00,000,000 or MOTe may be added in this calendar year, nnd.thet
is one reecen why I hsve felt,eoxe concern, as you leve, leet we are not sufficiently
forehanded in with the matter.
I hope you will not mind my saying in concluding this letter that I deeply
appreciate the eynneLbetic sunyert ehich you and the ether nembers of the Beard have
given to our discussion of this matter. It Is meet helpful and eaceurages ee to
believe that ee are in u fair way to vprofit by the experience et the last fee years.
lou will find no hesitation on our next in eveumieg more then our share of
the burden by rediscounting, or otherwise, such as you indicate ie the second page of

your letter.

hunorable A. C. Miller,
c/u Federal Reserve board,
*ashington, D. C.
Federal Reserve R.4;211M St. Louis
Bank of

Yours very truly,
Benj. Strong,

March 21, 1921.

Dear Dr. Miller:

'You will recall in my former letter on the subject of currency the suggestion WkS made that we Should adopt

a policy, if pozeible for the entire system,

respecting the kind of money to be paid out in reepoese to demands

by the member


Approaching this subject from the standpoint of volume of currency of

v rious denominatione in circulation, rather than from the standpoint of the rate of
circulation, that is the length of time whine the various denominations remain in

oircollotion, I think the following suggestion may be considered and, if it is found
effective upon examination, might be adopted by the Bytem ao a whole:
ON.e,S and TWOS:

In all disbursements of ones and twos preforence
should be gives to -

Silver certificates


United States. hotos
Federal Reserve Bank notes as a

loot resort.

It should be the generel po cy to pay out fives
and higher in the following order rotionol Beni Motes
Federal Reserve Notes
United States Notes as & laLt
resort. They Should be accumulated and split into ones
and twos.

The retirement of all outetanding Federal Reserve Bank Notes means

that it is possible, although not probable because of the
tendency to*ard contraction, that other kinds of money *ill have
to be issued in the denominations of ones and twos to an amount\
approaching the ouastanding total of Federal Reserve Bank notes

which was, on December 31, 1920 Ones - $170,000,000
Twos 45.000.000

To accomplish this the Federal Reserve System has in its vaults
590,030A000 in Silver Certificates and nearly 00,000,000 in
United States Notes in denominations of $5. or higher, whioh,

Dr. Miller



added to the amount of silver eireedy eerchesd under
authority of tee rittmen Act, which wae on March 10


aperoximately 455,000,000, makes a total immediate source

ef supply, depeaaent only upon the ability of the Bureau
of Engravine and Printing to ;_rodue, of 475,000,000

The only practical difficulty to be confronted In tae re-

tirement or Federal ne,erve bank Not is the attitude of
Vue Treleery tuearu retirine tne Certific,tee of Indebtedne3s,
e., to aake
tha tee erotlem of denominational su,:ly,
uertain thet xe sheik alweyL heve eneueh or and to to
uu ely tae demands. AE it affects immediate conditionr,
the feregeine yrogram, by reason of tan pre ant noldiner of
the uyeten, aaa onaoubtedly De smoothly carriee through; and
ae to future ,14111W2G6 for emell bills, I think there need be no
concern provided the program be a continuing one.

The average outstandine of all kinds of paeer currency of the
email denomlnetione mentioned in circulation for the past six
(in millions)
years was as folio we Ones




,k' 62




The meximnm average for any one month "mien was outetanding wae,

in Cecember 1919, $514,549,000, and the total. of ultimate sup.
ply is probably elamewnet less then the following issues (Jen4ery 31, 194 figures)
United Statth, Aotee

Silver Certificetes

Pittman Act Federal Reserve Bank otee


Thie would leave u ivrgin for the future of e273,500,000, a
part of which, of course, has been loet or cannot be accounted

be effect of the above policy, you will observe, *ill be to erede.11y
put all Silver Certifieatee into circulation in oenominetiona of U. and 42, and.
probably 601416 part of the United StateL, Note, if not all of them, relying only upon
the Federal heeerve hank Metes issued under authority of the Pittman Act for small
denu inetion notes in exuev - of whet might be supplied by the other tuo iSLAISS.

One deArable feeture of the plan is that it sill, on the one hand, take

Dr. Miller


5- 1.21

poor quality of reserve money out of our possession, where it now counts as resorve, ano, on the other haad, will enable U8 to retire bond secured currency just as

r4idly 11,6 the Treasury is willing to pay off tue crtificAe. of indettedner
to secure Federal aseerve Bank Notes under authority of the Pittman Aot.
Very truly yours,

EENJ. sricsa,

Sonorabi.4 4, L.Miller,
Federal fteserve,

hashngton, L. C.

BS. lila


March 23, 1921.

Dear Dr. Millers

Your fnvor of the igth inttnnt hns juA reached me, nnd I hnoten to

reply, in part for ti e

Furoe of explaining about that memorandum,

, .no

with the further object of exireeoink! my or views in my on words.
The memorandum Lie, in fact, prepureo by Mr. Harrison for ae, sold not

ae a letter intended to cover the whoie ground of our disouesion.
I had unoerstood when wo were in etsaington that you expected to prepare
a memorandua covering

one method of dealing with imported solo; that 1 wf.


to pre-

pare u neworandum covering the :eroposel which I hud made of arresting it in London;
and than you would di sect my memorandum ano 1 would prepare a reily to yours.

The two prwidsnle raided questions es to 1.11,:, menning of the Aet Ina


of the Federal heserve banks upon which 1 wanted Ir. harrinon's opinion, hence the
memorandum which reached you in my desire to *void delay.

Your meaorandum in not yet before ae, out I 410 ikArit to exprees my on

views in anticiption of ite receiit and In my on Language.
To review wean ancient history, the policy adoi:teu Ly this bank, commencing in December 1914, of assembling gold by 1.5840U of Federal neeerve Aotee Weib,

in feet, h %Mr &ensure, poseibly of exceseive precaution, but one which 14011 an

examin%tion of the etatute I believe 416.6 agreed hoe aothorized by the Federal heserve Act.

It wae my theory at thnt time, Ina

have never felt justified in

atrniging it, th.t with the possibility of the whole world being drawn into the con-

filet than r4inn in Eurooe, it woe no aore Unai a justified act of irecaution to

the bank reservee in thin country.

It seems to me that subseueat

Dr. Miller


experienoe justifise that polioy. From December 1214 up be the _erviser of 1917,
after we had declare° war, Lille gold oontinued ea pour into Lae Feeeral Reserve teanks,

but it eee not eenerelly used as the basis of tank expeneion to the extent that it
would neve teen used had it found ite bey into the re ervee of member banie through-

out ehe country, or Oven remaineu in generel cirouletion.

fie not eniy aseembied

gold which hed long been in circulation, but we imeounued tne newly impertod gele

the Federal "eserve otee ibtAlliAl inexohenge, not being reeerve meney, did not

perfora the feV4tik6 function in expending our Lena loans that the gold *ea ceinile of

When es decieeee sta. upon Germany, the founeetice ICI' the enevitatle credit
expension wee alreedy well laid.

Eome may en(eIrtain the view teet hed we been

forehanden in aseembling the gold we aeuld have hae is

expeneion then oeveloped,

but I haye. in mind that the expaneion was amused more by emendaent tc the reeerve

provisions ee the Federal RetsbfVe AOL (not to aentioe the liberalieed reserve pre-

vision* of the original Act) thsn it Aab by roneon of our accumuletien of gold.


other words, our policy in eccumulating the gold had the effect of retraining a
certein emouni of expaneion *hien otherwise %would have been ineviteble and of greater

I hope very eucii thet you egree with vies, even if it te upon the


hypotnecit thet decielone of Owl ahareater in time of wtr ere generally e ohoice of

rether then a selection of en ideal policy.
Your plan of eccemulating the new gold isportatione in the Fyeeral Reeerve

kgent 's fund is, in ay opinion, entirely ithin the power of Lee Federei neeerve eenke;
the only legal question willed can bother as is whother, eiehout amendment Le the Act,
that gold clan be considered ea buying been put EO far ceyon the control of the Fed-

eral Reserve Flank that it cannot at any time be eithdrewn.

Cr, exereeeing it the

other itay round, in oruer to effect a complete and fiami witnuratal of the gold tram
reeerve oalculations, eiel it not be neceeeery to have the Act emended?

If that

couree should be pursuee, either by emendment or by an effective regulation, then in

Dr. Allier


later years, wbon we may, and I think certainly will be called upon to surrender the
gold to Europe, so would either have LO find mauls to rele,ee the golo or else face

a possible very serious depletion of t.lhat iortion of our gold reserve which is free,
I have also
vith Ill of the evil comse4uencee attendant upon such a deveioiment.
felt th.11, it ould not verve to moderate demande for low discount rates so effectively as it would to have tlAe goIC 60 segregAed loft in Eurole.
What impreseed me te the i,artiouler advantage in the iAin- of *Liam) ar."



thl.t it completely avoided thiL,, fortuitous expansion of our bank ref;erves

and, at the same time, left a fond of gol4 at our disios5,1 for "elr,ort." kittlout any
revision in our accounting meth Os, our st,iteent, or, in tot, culling for way
radical one in our funCts,;,ntal gold and reserve policy.
You sill not, I e;e, consider that I tua necessarily elosed to the adoption
of some such


te you tvtve suggested ullimmtely, when conditions tec,:me more settled.

Ag I formerly 'Trots you, I um not WithOta

fear tot the Remerve


ing a tendency to extend orodit too willingly and that the ret,:ult is too likely to be
a. rate policy *ion Termite credit 4O contr..ct to reluctantly.

If the time comas in

the futurt uten we are able to make the Federal Rocerve hote more woar4


gold note,

SO th,A txp,usion in t40 no ourroiIcy, t6 16011 ti.3 contrIction o*usod by gold exports,

will act more directly upon ovr reserve percentge than 4t. prent, I think you
find me advocatint; $01, sort af *change In that uirection.


Our pre,:set note issue,

however, SibeAtai to have become so large as to place that beyond' our hopes for Snit years
to come;

in fact, until the time

..xrivek.,, which I ho,p,

J day it will,


the total

of Federal heserve Lani earning assets will decline to t1,00,1:00,000 or thereabouts.
Ono person atty. call it a "Ibterfuo,"
Ny i4-esent thought ft to employ In exiediant.

another may call it °camouflage," but letee you and I call it an "axifedient" *hien can
te oonaiderv to Le temi,ovlsy to Gittot the irovent emergency, and then address ourEeives
eriou,ly to iudying & more permanent remedy for which you and


, I uope, is

Dr. Miller


possibly a serious defect in the Federal Reserve Syet5m.
'gist I have written, uf 0014t4D, Qxi,I;oesa6 4ity iiersonai views.

Faithfuliy you:ea,

Honorable k. C. Miller,
Federal Reserve Board,



April ?, 1921.
My dear Dr. Miller:

Thank you for your letter of Merch 31.

with close attention and much pleazure.
later, we are


I have read the enclosure

Save on three paints to which I refer

fully agreed down to the word "policy" on the third from the last

From there on, I must confess to a somewhat different view of the

questions of policy and of credit regulation dealt with on the lest three pages.
At the risk of repeating what ee have already discussed, and what I may have

written, and what to you will appear to be obvious, to the point of stupidity,

may I elaborate on this a little bit?
Your mrgument indicates that you differentiate between credit

regulation and credit control, assigning to the forwer the function of dealing
with tendencies or situations which might be anticipated by accurate knowledge

and a. shrewd insight; and that to credit control you &snip the reaction of

influencing the general credit situation by rates.
theories part company.

Here is where

our two

Tour plea of regulation, I understand to be based upon

the exercise of sowe direct 'restraint upon our fiduciary note iesue power, and

your view of control is that it is exercised through changes of discount
I hope I have not misunderstood the line of

your argument.


And here we come to

the modus 9rocedendi.

Uy belief is that an examination of the history of

currency issues


show, from the early days of deposit banking, that the ratio between note and

deposit currency has regularly end steadily altered, the note currency declining
in volume, and the deposit currency increasing in volume.

There ere, of course,

exceptions to this, and there are cases where the change of ratio has been much

more rapid than in other Cases; but convenience as well as habit regulateethis,

as it does

so many other mattere, and we must believe

that the same rules of

Dr. Miller

April 7, 1921.

convenience will operate in the future, and that while the band to hand currency

must continue to perform an important function in the conduct of retail transactions, an increasing proportion of business will be conducted hereafter by the

use of checks, and that, therefore, the law of convenience will constantly be

effecting a change in this ratio, so that a formula etich might have been suitable
twenty years ago would not be appropriate to-day, and one which sae satisfactory
tie-day might be most burdensome twenty years hence,

But, my wain argument is in support of the views, which I have con-

sistently held, that both regulation and control in the main, and in the long run,
is exercised by the discount rate.

I seem to be unable to distinguish as

completely as you du between the two functions ehich you separate as regulation
and control.
inlet happens under our present banking system seems to me something like

this: A demand arises for an amount of credit in addition to tbet in existence.

It protably hat its origin, to take a specific illustration, in



production of goods requiring a larger volume of credit in nnnen to finance it.

The first traneaction in credit is a bank lean wade at the office of a commercial
bank, whereby a. deposit liability is created, which increases the reserve required
by that bank, and which in turn borrows the amount of additional reeuired reserve

from its Federal reserve bank.

This new credit probably perforee its function in

the first instance by a check transaction, and with its withdrawal from the

original :ending bank, a readjustment of deposit liabilities and reserve requirements occure in every bank through which this deposit passes.

In other words,

the reserve requirements of the bunks affected are all increased in proportion to
the amount of the deposit gained as the reeu-ot of the original loan, and the
nercentege of reserve of the bank of issue is reduced.

But as this credit pacees

through its various stages and performs its various functions, it comes into the
coetrol of e manufacturer or a merchant, who needs nayroll, or currency for eowe
other purposes.

He then converts, and should be permitted freely to convert,

such portion of this beak deposit into bank notes, as his business requires.


April 7, 19?1.

Dr. Miller


eel of the credit business of the country is taken into consideration and the

entire volume of credit in all of its various forms is performing all of its
various functions, we find that the amount of deposit credit is about five or six.
times the amount of currency credit.

The law of convenience has regulated the

total amount of bank deposit currency, has regulated the total amount of bank note
currency, and has even regulated the denominations in which the bank note currency

is expressed.

This process, of course, takes on infinite variety., and one cannot

fairly generalize, except by looking at the completed picture of total bank credit
expressed in both forms.

What I have always felt is that the influence which

must be exercised to either regulate or control the volume of this creditemmet be

applied at the counter of the bank where that first credit transaction tack place.
Here develops the two schools of thought.

I place my reliance upon the rate

which that bank is forced to charge to its customer, which is determined principally
by demand and supply, and partly by the rate *bleb we charge.
credit regulation, you believe that some other

the rate; in other words,

As a function of

restraint should be applied than

than the cost of obtaining credit, and that it should

apply to the note credit.

an always ready to adeit that if the influence of variation of reserve
percentage which, under the present eystem, causes us to raise or lower our rates,
and 80 Cause an increese or reduction of the rate at the counter of the commercial

bank, is not sufficient, it can veil be fortified by some fundamental change in

the reeerve act, so as to sake our reserve percentage (whether note, deposit, or
combined) reflect more immediately demands upon the syttem.
leads to rate change ie the reserve position.

The reserve

The influence which

position is more

directly ef"ected,es you say, by having a greater degree of gold cover for the note
issue, because then when we furnish currency, we reduce our reserves even by so such
as 100% of the currency paid out if we have 100% gold cover.

in other words, as

you expressed it se well in the earlier part of the paper ne bank note currency

when it has little of the quality of the fiduciary note is more calculated to bring
alike to the bankers' and the community's attention the fact and the meaning of

Dr. Miller


April 7, 1921.

credit expansion thaa a tank note currency, which has much of the fiduciary


pursuing a little further the thought contained in this quotation,

the effect of paying out currency with no fiduciary quality in our cane would be
sharp immediate reductions of reserves when expansion took place.

But even that,

it seems to me, would accomplish nothing as to the volume of deposit currency or

bank note currency unless it resulted in a change of rate policy.

It would more

promptly force a change of rate policy, which, I admit, is not so imperative when
fiduciary notes can be printed mad issued.

There are certain specific etatements in the manuecript, where, I fear,

te differ.

On page three,you state; "The conditions upon which the community can

get additional supplies of currency are, therefore, an important factor in credit

That part of the statement I agree with.

The next sentence states;

"The regulation of currency becomes in fact a method of regulating the flow and
volume of credit."

There, I think, we disagree.

My own form of stating the

generalizatien would be that where the issuing of currency mere directly affects

the reserve percentage of the bank of issue, it necessitates more directly, and
immediately, a change of rate policy, which in turn regulates the flow and volume

of credit.
The interpretation of the intention of the Federal Reeerve Act, described
on page six, is difficult to comment upon without -nowing what was in the minde of

the authors of the Act.

If they had in mind that the volume and flow of credit

could be regulated by an absolute limitation upon the amount of Federal reserve
notes which the Board would from time to time issue to the Federal reserve banks

so as to force the Federal reserve beaks to pay out their reserves (that is, gold
because they could not get notes) when speculation end expansion demanded a check

upon credit extension, then I should say that the authors of the Act expressed their

purpose very indefinitely and clumsily, in fact, failed to express the purpose at
all, except by a most obscure implicetion, and with such indefiniteness that many
other purposes could be implied from the language used.

It is hard for me to

believe that the authors of the Act believed, or assumed, that the poeer to

Dr. Miller


April 7, 1921.

regulate the currency carries with it the indirect power to re.gulate credit,
unlese indeed the oscura:tion which I have mentioned is the one which actuated them
when they wrote the Act.

Is it not

more fair to assume that they had in mind that it was

necessary, and desirable, for some definite, or hazy, reason to place in some public

body the empress power to issue or decline to iesue obli,ationa of the United 'States
Government, and that nG such provision would Illve appeared in the Act at ,di uad
the notes been bank notes r6ther than government notee?

On page eight appe.,,rs a very broad. statement *ith regt.rd to theJ effective

functioning of the gold standar?! under prreat world conditions Aith which, 1 fear,
I am not in entire agreement.

It dose seem to ,ne that the functioning of the gold

standard is exhibited daily by our imports of gold.

If the gold ;covalent *sae

definitely arrested completely the world around, I think the statement would be true;
but, to a greater extent than ever before In history, gold BWIMS to De performing


function aa an internit1on%1 1116.1J46 of payment limited only by the fact that the

e.mount of tr ads balance at the moment exceeds the ability of debtor countries to pay

by the combination of crelit oi)erctioAA and gnld shipments.

ere the gold standard,

es appIled to internitional payment, wholly suspended, I suppose your statement would
he wholly true.

Looking at it from our own standpoint, can it be Rail that the gold

standard in not effective when the only reason why be are not exporting gold is

tecause the trade balance, both visiblo and invisible, the aorld around is in our
favor, and no real demand upon us for gold exits? I have a7.1urking notion that
the old gold dtandard is gradually becoming a greater influence than over before in
an international senPe.
In the plan which you have discussed with me at more length than is

mentioned in the article sent me, it to proposed that additions to our gold stock
shall be added to the note reserve as distinguished from the deposit roeerve or
combined reserve, snd shall only be released when the judgment of the Federal

Reserve Board considers its release justified.

In other oris, the Federal Reserve

Board sill regulato th.t! amount of re.-erve impcunded behind the notes, or the amount

Dr. Miller


April 7, 1921.

of reserve which is left free to eupport further credit eepansion.

if this plan

lb developed to its logieal oonclusion, it would operate eimilar to the "suspension

of the bank act" in the ease of the Benk of England, in that case by a letter of
indemnity of the Chancellor, end in the case of the Foderal Reserve System by act
of the Federel Reeerve board.

The influence suggesting this aceion could be either

eolitical or economic. Frenkneve compele me to say that I believe the Federal
Reeerve Board ia more eubject to political infleeacee than is the management of the
respective reserve banke.

Exemleing the bietory of the past few years, judicially

and impertially, muet we net edmit that to be the ca?

Tha protection of the

Feder./ Reserve System aeeinst political domination ;ehich might: go to the limit
of even being expressed by act of Conereee) rests more upon the influence of public
opinion than ueon aay other one factor.

It requires no great effort of the

imagination to picture a situation here the Federal Reserve Board would be completely
dominated by political concideratione that would be of much less influence upon the
renagemeee of the reepective banks.

litb regerd to the security of the system againet political control in the
long futurs I eelieve it eauld be unwiee be vest the etmer which you have in mind
in the Federel Reserve Board.

The eels reliance or the eyetex egeinet political

policies exerting dangerous influences mould reet in a beard eubject to change by

the term:: of the statute, by' death or resignation, or even by removal.

I am

convinced that the daager is much less were tbie p-er left with the reeerve bmcs

I hope you will not in my bilking

part of the peper.


very general comment upon the letter

It seeae to me that the erunt developed in the first


is coavincirg in support of the view thet eeme chenge is new, ar may in the future
be desirable in the fundamental princielee of the Federal hseerve Aut as reeerde

the fiduciary note issue, but in reading over the lest pages eerefully (sad 1 hive
react the article three or four times), I have a feeling that indefiniteness teweare
her you come to del with e piens or the erinciplee el* a elan, ea distineeieaed

fro e the conditions ',filch give rise to the neueiisity (or


Dr. killer


April 7, 19?1.

During the lest week, I have been tremendously abeorbed in an accumulation

of work, which has led to my writing this rether testily, and without the cereful
reflection and arrangement of ideas, which the subject deserves.
When in Washington next week, I wish very much you vould permit me to lay

out with you the general principle of a plan, which we could submit to Ve. Jacobson,

and azic him to reduce it to figures, taking the experience of the years, say, 1919
and 1920, to illuetrate what effect it would heve upon the reuerve banks.


those figures in front of un, I believe nomething constructive can be not only
But, I also believe without having had op:-.ertunity to

suggested but deaonstrated.

prepare the figures, that we will end by havin
into twelve parte, each with an insue end
together by the geld settlement fund.


.nother Bank of England, divided

banking depertment, and the whole linked

The danger if such exist in such a course

goes ler back of the Federal Reserve System into the bueiness prncticen of the

The Bank of England would never have functioned during the past



of development of Britieh trade, had it not depended Alr itn functioning upon the

// existence of a vest masa ef foreign credits extended by London to finance commerce
on the one bend, and a greht volume of foreign deposite carried with London bankers

on the other hend. In such cirounetencee the discount rate oeeretes directly upon

the international credit aarket, the discount rate being influenced towards higher

or lower levels, according to ,the reserve ratio, which in turn is influenced by the
extent to etich the London market is being used for credit purpoees and gold exported
or imported.

The Bank of England hen been essentially a regulator of international

credit transactions oonducted in the London merket, and a similar bank in thie
country, in my opinion, would not functior nuccessfully unlees the bank rate was on
the one hand influenced by, or exerted an influence upon gold shipments in or out,

and on the other hand unless foreign credits were influenced by bank rate.

In future years I


convinced that we will find ourselves in possession

of the largest volume of fluid bank credit of any of .the honking nations.


If that

time errives, as I hope it will, ye will then have a lower level of interest rates

for bank accommodation Ulna any ether nation. This will attract the finencing of

Dr. Miller


world commerce to our market just as rapidly as facilities ror that purpose are

In turn, this will place us in possession of that delicate instrument

upon -which the bunk rate will operate, sn instruneat the precision and successful
operation of which depends upon conditions which have not heretofore existed in the
United States.

nm very grateful to you for permitting me the opportunity cf
the manuscript.

Yours very truly,

BenJ. Strong,

Honom.ble t. C. killer,

c/o Federal Reserve board,
Wactington, D. C.

May 17, 1921.

My dear Dr. Miller:

There eeeme to be a growing sentiment developing that the policy of the
Federal Reserve System ha a been definitely determined, and tbet we are entering upon

an era of lowering rates of discount.

During our earlier discuesionn of Federal

reserve bank policy, immediately upon my return from Europe, I gained the impression

that you were considerably disturbed by the large imports of gold, and the possibility

teat it would lead to a development of just this sentiment, and that reeponse to
pressure for lower discount rtes would involve coasiderable daager of

a return

to an ere of expansion and inflation.
It was, therefore, something of a surprise to me when I was in Washington
last week, to gather from you that you had changed your views, and were rather in

favor of lowering discount rates, particularly in flew York.

We ere, of course, seeking ell light possible on this subject, and I
would greatly appreciate your giving me the benefit of your views on this subject,

especially how you feel regarding the effect of a lower discount policy upon the

sage situation, and generally upon costs of production and our ability to comete
with the other great producing nations, particularlyinmenufactured goods.
Yours very truly,

Honereble A. C. Miller,
c/a Federal Reserve Board,
Waehineten, D. C.


November 2, 1921.

Dear Mr. Elliott:

I acknowledge receipt of your letter of
October 31, addressed to Governor Strong; also copy

of the Chace Economic Bulletin for July, for which

please accept thanks.
Yours very truly

Secretary to Governor Strong.

D. C. Elliott, Esq.,

Secretary to Mr. Miller,

c/o Federal Reserve Board,

Washington, D. C.


April 28, 1.922.

My dear Dr. Miller:

Mr. Losry called today 4th your note f April 26, and

I had a very nice chat 4th him.

In fact, I had already had

the pleasure of meeting him sben he was attached tc, eur Embassy

in London during the var.
Thank you for giving him the note.
Yours sincerely,

Honorable A. C. Miller,

c/6 Federal RtiggfieBbriifd,
Iashington, D. C.



1ply 15, 1922.

Dear Dr. Miller:

When in Washington last week, I handed ylou
copy of a draft of letter which I had considered sending
to Secretary Hoover, which was dated April 22 and which
related to the foreign exchange situation, but which I
never sent.

It seemed to be a little too definite to suit me

and it struck ma that the last two para=zraphe commencing

on page 4, and most of page 5, as well as the first half
of page 6, might be recast and considerably improved, so

please consider this a_ most tentative and far from final
memorandum on that subject.
Very truly yours,

Honorable A. C. Miller,
Federal Reserve board,
Washington, D. C.

May 19, 1922.

Dear Dr. Miller:
Thank you for your nice note of May 18.

This busineps of dictating draft letters is a habit or mina, and
when they are not mailed it means that there seems

to be a screw loose some-

In the letter to Mr. Hoover the difficulty re,aly


is in pages four

and six, where the conclusions stated are not sudported by reel statittical


it is more or lees available to us

One of the obstacles in the way of a

in regard

to the current debt owing to this

The Bulletin has published

and, I think, convincing.

final opinion is this doubt

country by the -est of the

figures indicating

from three to three and one-half billions.

that tt aggregated

My personal belief is so con-

trary to thia that / hesitate to make any statement in regard to the other


debt until

as to say that I

question is dispatched.

doubt if

there is any

the character described.

In fact, I would go PO far now
material current balance of lett of
a few hundred millions, butbe more.
It might no

If this statement is well founded, - and I

hope shortly to show that it is, -

fhen I believe that ne could get somewhere in

an attempt

to show the capacity

of the debtor governments to pay us, and corresponding capacity of the

debtor governments to pay

each other

what they owe as the

result of war


In a word, my belief is that the debt is too greet just now

the payment

even of interest, but that a holiday of some

period would

it could be paid or to what extent it could be paid.

as things look now, I Pm

not in favor of

forgiveness of the

to permit

And certainly,

Dr. Miller


therefore, my thought has been to accommodete views

Britain atthat Great
aseume leest will

to public opinion a little bit;

required to pay;
the payment;



then find some means of ameliorating the ill effects of

and, as to the other debtors, I hove no fear of the oeseouencea

of attempted payment because I em perfectly satisfied that they cannot and


not pay anyway.

The letter does not really express quite this point of view, and
thereeore I


not satisfied to

let it go.

What you write in the last paragraph of your letter I cordially

We can't

have enough discussions of the charecter that we had

last eeek to suit me, and shcrtl
practicel lines se to what

I hope we can have a 'thorough chat along more

we ought

to do.

Thanking you very much for writing me, I am,
Sincerely yours,

Honorehle A. C. Miller,
Federal Reserve Board,
Washington, D. C.



June 7, 1922.

My dear Dr. Miller:

I am writing you about our rata policy from the standpoint of the System
because of having been advised by Governor

Harding - and directly by Governor Calkins -

that there is some possibility that the San Francisco reserve bank may reduce its
rate to 4 per cent. at its meeting next week.

If the San Francisco bank takes this action, the pressure
tanks to follow suit sill be very strong.

upon the other

Please let me exprese to you what is in

my mind on the subject of rates and to ask you to writs me just as frankly as 1 am
writing you on this important subject.

In the years 1919 - 1920, the people of this country - and I
ly of the whole world - became convinced that

world to supply the

facture of bank


credit the


believe Large-

were not enough goods in the

It was, of course, tha result of the wholesale manu-

world around which was

then taking place.

During that

period the officers of this bank made repeated statements and warnings to watch the

inventories of

the big manufacturing and trading concerns, as there was

danger of over-production of goods and a collapse of values.

the position is somewhat the reverse of that;


I believe to-day

that there is in many lines a distinct

shortage of gocde,and that in case a speculative spirit should develop in the
country (and


seems to have

pretty considerably developed already) we might

witness a sharp upturn of prices

subject us

to the possibility

steel products, copper,

that wound

of later

be most unsettling and dangerous

reaction, with the usual penalties.


sugar, cotton, wool, and many other commodities, so far

as I can gather, have been very much reduced in

this period of liquidation and the

prices of some of the important raw materials have already experienced a



Dr. Miller.


June 7, 1922.

Now the question is - shat influences might arise to develop a dangerous



One of them would be a further investment of the funds of the reserve banks

order simply to make


This I imagine is net now likely te take place.

It has been vary fully and frankly discussed by the Governors of the reserve banks
and with the members of the Federal Reserve reard end the officers o_ the Treasury.
Another might be un enlargement ef the volume of credit duo to toe low
rates by the reserve banks which would invite borrowing.

bear the following
the reserve banks

important consideration

in mind:

In that connection, please

Under eur banking system before

were established, a period of lieuidatien in this country was al-

ways accompanied by a great accumulation of eurplus bank reserves centered in the

reserve end central reserve cities.

These surplus reserves were one cf the disturb-

in 6 elements abich caused abnormally law interest rates Ned generally resulted in an
outburst of speculation.

Tnder our

present system there is ne groat surplus of

reserves in the bands of the banke uf the country.

Ar liquidation proceeded, free

funds in the hands of the banks were applied to paying off loans made by nonmember
banks with their reserve tgents, and by member banks with the reserve banks.

eur present system has the
the banking system.

In fact,

effect of practically eliminating surplus reserves from

It, therefore, seems obvioue to me that one of the effects of

the establishment of the Reserve Syftem is to stabilize interest rates at some level
so that we will not encounter the abmarmally high and panicky rates in times of expanding bank loans, nor on the contrary witness abnormally and dangerously lem interest
rates which formerly characterized

heriedeof lieuidation and nopreerion.


only thing that can put interest rates lower generally in the United States to-day is
some method of resort to the credit-making power of the reserve banks.

That can

be brought into play either by investments under section 14, or discounts under
section 13.

The regulating valve, in

other words, is our discount rate.

the question arises - that should our policy be as to our discount rates?



we invite borrowing, enlarge the credit volume, take the risk of security and

Dr. Miller


June 7, 1922.

-emmodity speculation, ultimately reaching reel eetete; or should re try and hold

the situation stable f

Ac throwing a little light upon this aspect of the matter,

please coneider the further cnne.--nee------confidential figures suhritted by the members of the
Stock eenchange.

Cn Leptember 9, 1921 the tete" stock exchange Inane reported by

the members of the exchange was t1,015 millions, which was tlel000,000 less than

the total of Mey 4, 1221 when se_.. made cur rate reduction.

Between September 9, 19'1

and June 5 or this year this loan encount hts increased to .t1,742,400,000, an increase
of n6O6 millieae froth etty 4, 1921, and 7?7 milliens from September 2, 1221.


is a most impreteive exhibition of the ebeerption of hank credit, due to the advance
in the prices of etecks and bonds.

I am net prepared to say that it is an un-

faaorable or unsatisfactory development.

Certainly it is either a reflection of

or in part a cause of a more optimistic and courageous frame of mind throughout the
country and has been eeme factor in the recovery of business generally.

In one fact, however, ve heve an important censideration in fixing rates.
If the world were on a gold basis and the exchanges eere back at normal gold parity,
too log rates by the reserve banks and the development ef speculation would doubtless

operatenes such conditions have operated in the :ast,to cause an eutflor of gold
and a reduction in our reserfes


the correotive would naturally be



in our rates. - Not only that, but with a heavy outflow of gold no argument as to
the necessity for an increase An rates 'would be needed by the public, - tbe situation
Under present conditions, no matter how low

would speak for anclexplain itself.

memizht put our rates, and nu matter how serious an orgy a

speculation might re-

sult, we could not lost gold - certainly net for a long period and until the development had reach most dangerous proportions - and we would be back Quite voluntarily
in the position 1.47-which 4e ware eemerhat forced in 1219 - 102C.
I am exceedingly anxious


see the reserve banks - and of course more

especially this bank - de exactly the right thing.

opinion is to

exchange views, and I an writing you something of my Vi84.8 about

our present situation, and asking if you will

,.)rie of the best ways to develop


write me with equal frankness.

June 7, 1922.


_a a nutshell if the exchanges ere normal, we might be able to take a greater risk
in reducing rat ae because le would b bound to lose gold. In other words, the
governor would vz,rk.


afford to do so now .7heii the 3:,vernur is not working?

Some discussil:n of this qatter over Sunday lo ould be most helpful.
Y- ure sincerely,

Honorable A. C. Miller,
c/o Fc:deral Res,--.yrve Eoard,

4ashingten, D. C.

0Cf course I except csla ii;purts.

June 7, 1922.


My dear Dr. Miller:

Now and then one finds the need for sort of a mental unburdening of

varioue matters, and when I indulge in that pastime

I ?refer, if pessible,

be do

it by Nerd of mouth rather than by letter, but as I shall not see you I fear in

time to deal vith a few things I


to talk to you about, I am going to burden

you with a letter and as if ycu lon't Itrit.-) me in reply as prrm?tly an you can.

Please consider this letter as


Governor Harding called

yentarday and in the cu-se of our talk be dis-

turbed me stemesbat by advieing me that he had recently learned that Secretary

Hoover had. been rather critical of the menagement of the

Federal Reserve System,

and, as I gather from 4hat Governor Harding said, had taken the pocition

that had

some more competent person been Governer of the Federal Reserve Board during 1P19,

or some more cometent person Governer f this tank during that psri:d, se sould

have escaped the coneequencee of shat he regards as a misteken policy that 4as
pursued at that time.

I alsy underetced that

Secretary Heover was shortly ex-

pecting to make a critical statement In read to the Federal Reserve System.

Of couree, this ie

most disturbing.

I have so high a, regard for

Mr. Hoover, for his ability, end I value my relations and friendship vith him so
highly that 1 4ould deplore having a personel friend and associate maxe a public
attack, especially at this time, ueon the System and those who have labored to make

it a success.

ihethr the statement, if it is made, is so personal as
anseer from rc or not remains to be seen.

to require an

ghat impressed as in regard to this

suggestion, which I hope proves to be less imminent than 1 gathered,

as the

June 7, 1922.

Dr. Miller


eossibility that Mr. Hoover might himself be uninformed of the real facts of the

situation in that year, and that he might himself be led into
ch would not be creditable to

error of conclusion

his own knowledge and judgment.

were I in lashington or able to be there, I would of course take it up with
elm personally.

You are one of his most

intimate friends and associates, you cer-

tainly are most familiar with all of the circumstances of the period which I am told

he criticizes, an d

the record is so clear as to my on views during that period, and

I think as to the viers ei'" meet of those f the Federal Reserve

ard, that I think

it weuld he most unfortunate to have a statement made from a superficial knowledge

of the .fact, which would really be a misrepresentation of the fecte due tcignerancea
The only

answer to en attack of that character is a counter-attack upon

adminietration of the Treasury during that peried.

Of course w e' differed.


This would Le Penally unfortunate.

how could differences of opinier have been avcided in a situa-

tion ohich vex so tilled with perplexities and

difficulties res was that period?


only did opinions differ from tt© to time, but we were all entitled to change our

opinions from time to time - and somettiees it takes more courage to change


than it does to stick to an opinion.

Possibly I take these matters a little too personally etnd a little too

The fact is I have not felt so much concerned personally, and very

little bitterness indeed, in regard to some of the criticism which has been directed
at the System ,and at no by _,reFt of our


.iould indeed feel very badly if one of my

associates end in the Dongreee;

personal. friends - who is

riend of yours - an a man for whose judgment,

but I

also an intimate

character and ability I have great

respect, should feel called upon to make anything in the

nature of an attack upon

the System at this time, when that person occupied so influential a

position as does

Secretary Hoover.

In unburdening my

mind, I think I must also refer to one or two

matters, and I am sure you will


understand that it is not in a spirit of complaint






June 7, 1922.


at all, but just because 1 am these days feeling a little anxious
There are certain matters which

and its future.


pressing for attention and

them is the work of the organization

where progress is essential.

One of

mo*e economy and efficiency,


Governor Harding I think was a

i think he

have felt - that my

last thing

on more rapidly than

feels - and possibly at times sone of his associatibs

activities in

part to run the System.

to pro-

little bit disposed to

resent my urging that the work of that organization be pressed
le being done.

the System


some of those matters indicates a desire on my

This has

been stated to me more than once.

that I want DO do, but 1 do want to help in matters

It is the

that so


affect the interests of this bank, and I am writing to ask you if you will not use
your influence in that organieation to
as it is

in the hands of a

matter, the responsibility
directly to deal with the

make the

dust fly a bit.

proceedings at the



committee of the board, and especially as it is a System

does not rest upon me, and that it is none of my business

affairs of

that committee; but I do want to see things

moving a little faster, and all of us in tale bank will
if the Board wishes us to.

I will

help in any vay in our power

The other matter has to do vitt

recent Conference of Governors.

the approval of the

instructions received

Under the

some months ago from the Board, it is contemplated that all of the actions taken at
those conferences Seidl be reviewed by the Board in one way or another before they become effective.

Board to

I surely realize that it is a big job for all of the members of the

read the entire record and all of the

tnem, and parse upon them.

actions taken,

form judgment about

So please consider that I an simpli now nagging you,

as I did Governor Harding yesterday, to push along the final disposition of that

Now to be altogether
tit put out at my urgency.

frank with you, I think Governor Harding was quite a


put it down to my enthusiasm and

not to any

desire to interfere in matters that the board should deal with.
You probably have no idea why I am lad to write you this letter.

It is

entirely due to a remark vhich you made to me when I left Nashington after my last


Juno 7, 1922.


trip, to the effect, as i remember it, thatout meetings and discussions during that
visit were of real value to you, as they had been to me, and I have gone so far as

to interpret that as an invitation to write you this letter, tell you frankly all
that is in my mind, apologize for bothering you about it, and to frankly ask you to
give me the benefit of your views.

I am writing you separately in regard to rates.

You may consider that

that letter is inspired by somewhat the same considerations which led me to write
you from Lake George in February of 1919.

If you feel like doing something that would please me very much indeed,
would ask you to pack a bag, come over here and spend this next Sunday with me.

Ne could go off somewhere in the country and spend all the time that you want in

a good discussion of a number of matters that are troubling me a g..ed deal just
now about the future of the System.

Again, please consider this letter as addressed to yourself quite
Sincerely ynure,

Honorable A. C. Miller,
e/o Federal Reserve Board,
Nashington, D. C.

June 12, 1922.

detr Dr. Miller:
You asked me to advise you in regard to the possible result of any

discuseion of diseount rates by our directors.

rhe meeting held to-nay eas

special Eeeting to eonsider 4bat attitude the tank anuuld assume in regard to
the proposed action of the 4ew lork Clearing House Associatien, to extend the
,A-esent regulatiuns governing interest paid upon deposit in the bunks which ure
members of the oleariog house.

Most of the meeting las devoted L0 a diucussion

of that subject, inaamuch as it gas decided to hold no meeting on Nednesday,

however, the question of diecount Fetes vas discusoed tu the eAtent Lnat tiiJe

permittea, and I till:1i( it as the unanimous sentiment of the directors tnat it
would be most imprudent and very greatly (e.)mplicate the diffioulties of the

clearing house matter were we to take any action upon rates at to-day s meeting.

This in itself exhibits the embarrassment which may result ty tying
of the deposits
of interest allowed 'on so large a proportionef the Mew York banks to

the rates of discount eaintalned at this banr.
Very truly yours,

Benj. Strong,

Honorable A. C. Miller,
c/a Federal Reserve roard,
4ashington, D. C.

June 12, 19?2.


Dear Dr. Miller:

My visit sith you gave me a great deal of pleasure and I

profited a good deal by it.

Interest in 3 ur discussion, hosever,

led e to completely forget tc, hand you the enclosed memorandum shich

I took to lashingt-tn for that purose.

It is simp/y a routine nispuse to an inquiry *hien I sent
to oUr committee) that is des.ling with this matter of economy and

efficiency, intended to throw light on 'that is being 1.-,ne.
Our directors are .3,Dut to meet, and possibly after our mee

Ing I can zirite you something about the matters that le discussed
..Yesterday and Saturday.

lith best regards, and again r9,any thanks to you and !re,..

for your hcrpita.lity.
You' sincerely,

Honorable A. C. Miller,
c/o Federal Reserve Board,
flashington, D. C.


June 12, 1927.

Dear Dr. Killer:

I must apo1ogi7e for the delay in sendLq you the enclosed


set of paper& 'elating to the proposed bank conference la London.
vae entirely due to my &LS Dee and the vreseure of ratter that nas

caused au tecumulsilnu of vork tnat I tave 6ot, yet cleaned uo.
Ac soun aE

;0;er,lor Normaa arrived in London he cabled in

,o the effect taut the meeting


but mithout any explanati)n.

This, homever, se you #I1/ recall,

forecast by 4ht be stdo *hen he


vrobably be postponed until September,,

Very truly yours,

Vanj. Strong,

lionur6118 A. C. killer,

c/o Federl Re ere Ward,
4a6hinGton, D. C.


en C.



June 20, 1922.

Dear Dr. Miller:

With grave concern I read the announcement in the Bulletin that
This calls for some
there "has been a marked falling off in underwear."
reflection and comment, but, first, I think, some inquiry.
The first
thought that occurs to me is whether the affair is singular or plural.

surmise there evil be no Joubt it is singular, but I

i wondering whether it may net

may not also be plural and the announcement refers not only to
some unfortunate individual, but to
whole cltes.


the plight of

curiosity exits in financial circles in New York as to the

Some have asked whether this applies to men's or women's wear.
One gertlemen at luncheon yesterday asked me if toe moveeent is to 17e3
attributed to the approach of warm weether.
Another has esked what the FedUral Reserve Berk proposes to do about it.
One friend of mine, to whom I
have frequently bragged about the high character of our employee, inquired
whether this movement wee oteerveele only within tee confines of the Federal
Reserve Banks, or had been observed elsewhere.
The fact is that this
announcement hes aroused more than curiosity, - I should say coneldereble concern, - anIfqk few have maae applications for positions in our research department, asking that they be assigned to the duties of obsereers of these


In fact this whole subject is shrouded in mystery and I think you
must do something to enlighten the public promptly.
I have answered
uniformly that it was a subject on which I do not feel particularly qualified
tc make comments or observations, but that I had a good friend on the Fadsral
Reserve Board, - a trained economist end observer; that I would refer the
whole subject to him end as for enlightenment.
won't you please advise me what we had better do about it?
What are discount
rates along side of this iesue?

So here it is!

Sincerely yours,

Honorable A,

C. Miller,
Federal Reserve Board,
Waehington, D. C.



June E7, 1922.

Dear Dr. Miller:

Your letter of June 24, it seems to me, contains many evidences
of a keen and experienced observer, notwithstanding your disclaimer of
human interest.
Such a complete analysis of
authority in
the situation contained in three short typewritten pages suggests, - as
a public epeaker once prefaced his address, - that your letter resembles
the modern flapper's skirt, Which he described as long enoudi to cover the
point but short enough to sustain interest in what he proposed to say.

this field of

I am reminded by one or two of your particular observations
that the Washington drawing room also affords opportunity for investigation in another important human activity, - and that is the curious
person which I believe is described as the "vamp".

This note is really sent to you merely as an acknowledgment
of a masterpiece of reflection and comment upon modern tendencies.
common ancestor, Eve, I gather, is coming into her own, but, according
to the biblical calendar, it has taken some 8,000 years for the modern
woman to realize that the mother of us all solved the problem of dress
with the least possible inconvenience to everyone.
I have always felt
that she must have been a pessimist, because, you know, a pessimist is
described as one who wears both a belt and suspenders.
am tempted, in concluding this acknowledgment, to introduce
an acrostic, but lacking in time to work it out, you will find concealed
in the last sentence a comment upon one paragraph in your letter, and I
challenge you to find the hidden meaning.
It is simply my observation that you are one who misses little;
In fact one who is able to marshal all the facts in this, or any other,
field of observation.
Please send me the answer.

Sincerely yours,

Honorable A. C. Miller,
Federal Reserve Board,

Washington, D. C.


July 14, 1922.


Dear Dr. Miller:

It gave me a great deal of pleasure to read your letter of July 6.
also enjoyed and profited by the discussion very much.


I wish we might have more

of them.

The question of examinations has puzzled lie a great deal, and the

indication which I gave you the other day of the half-formed idea that had been
running through my mind


for some time past was

really no

more than thinking aloud.

not, I am sure, attach too much significance to what was so far from a

well-thought out proposal.

In considerine! this matter and discussing it very privately and con-

fidentially with cne or two of our banking friends, I have referred to the provisions of section 11, ghich you cuote, as well as to the caption of the Act which
reads "To establish a more effective supervision of

banking in

The trouble tith the Act is that it expresses the intention to




accomplish something

in the direction of better supervision, but it real'y does not provide adequate

beans, it does not grant sufficient authority, and it &es not deal at all with the
!hole subject of duplication of

surervision, which would instantly arise if le

attempted anything in the nflture of an

invasion of the

duties and responsibilities

or the office of the Comptroller of the Currency or of the State Superintendent of

The real crux of the matter lies not in the knowledge which is gained

`lrom the examinations, but in the ability of the authorities - either the
Comptroller of the Currency or


Reserve Bank, as the case may be - to make its

conclusions effective in bringing about a change in the policy of a member bank.

Dr. Miller


July 14, 1922.

r'ght there is where we have had our difficulties in the past, and where we


again likely to have them in the future.

If we assumed, for instance, that complete


'mere made by the

Reserve Banks which gave them every scrap of information required to enable then
to fors, a sound judgment and to conclude that the management of a. given bank was

then the only

bad, even

practical procedure really open to

the heserve Bank to deal

with such a member ie either to invite action by the Comptroller or the Superintendent,


or to decline credit to that member.

credit I have always maintained

vas the worst type of discipline in case of mismanagement and especially of the
character referred to under (2) in your letter.

It goes without saying thvt hereafter, as in the past, whenever it

apeears that the lending policy of

a member bank oversteps the limits

of prudence -

?glen in fact it is borrowing too heavily from us - we can then take steps to in-

quire as



and restrain it.


and in a rather general way can admonish the tank

Usually this is effective and probably will be in the future,

hut the conditions which gave rise to those situations

are likely not to

having distinctly to

for a good while, and the matters to be dealt with are those
do with

bad management in a bank

be repeated

as distinguished from over-extension and over-

borrowing at the Reserve Bank.

I think we have always felt

tion and supervision is at times

here that

the present

situation as to examina-

I shall not recount the reasons as


they have been fully dealt with and you are surely as familiar yith them as we are.
Is it going to be safe with

powers of supervision not

the Federal Reserve

apparently spelled out in the Act for the purpose of

dealing with banks which may not be well
There does


Act as it is now for us to assume

this leave us

especially with the Comptroller of

managed, even though

they are not heavy

with the State Superintendent of Banks, and

the Currency?

Suppose se disagreed, as was so

notably the case with one or two institutions last year.
Ahile no one is more anxicus
tanking methods,

than I

am to see progress

especially in this city vhere it

made in improving

has been stated there is need

July 14, 192?..


r improvement, I am on the other hand just as fearful

of our

stepping out of one

difficulty only to land in another of greater extent.

Looking at the subject



I think the questions are resolved to these:

Is examination and supervision of banking to be continued by the


2 If no change is to be made in the lam, should anything be done to
render the examinations end supervision more effective?

effective, shall

If examinations are to be rendered more

it be done by

representations made to the authorities or shall it be done by the Reserve Banks
participating more generally in examinations and then relying upon the existing

authorities to give effect to recommendations which may result from these examinations?
Or, finally, shall joint examinations be generally made end
Banks attempt independently of existing authorities to

the Reserve

remedy conditions that

may be

complained of?

I agree with kr. Jay that a rather narrow score of supervision such as I


in our discussion is filled with danger, mould cause

might lose us some members in the

System, and


indeed might bring on a storm of

protest with the possibiatties of some unfortunate

procedure might



however carefully


be safeguarded.

Mr. Jay and I have

discussed this

matter from time to time.

him your letter to me and this reply, and he has now

which I enclose a

handed to

copy, which certainly throws more light upon




me a memorandum of


important matter

from the standpoint of the bank.
I hope to be in flashington by next Thursday when we may

for further discussion of



fours sincerely,

c/c.) Federal Reserve Board,
flashington, D. C.



ith kindest regards, and again thank you

for your letter, I am,

Honorable A. C.



July ?7,

My dear Dr.


I had a most delightful visit with you and profited very much by the
opportunity for quiet discussion.
Please be sure that I deeply 8.3 reciate
this opportunity for enjoying your generous hospitality.
.iince returning I have been thinking still further of the possibility
abroad and believe it would be a great convenience as well as economy
if I could get a reliable stenographer over there, such as you suggested you might

of my trip

be able to do.

Of course, my

correspondence and especially

cables gill be of a very

confidential character, and I will need some one laho is willing at times to work
well after business hours and rest during the day time.
My supposition is that

viii last say

the meetings
from ten to three or four every day, and that it will
not be until after that hour that I sill be able to handle any correspondence.
Nould it be possible for you to write abroad right away, ascertain what the
possibilities are of obtaining the person you had in mind, something of her
capacity both as a stenographer and typist, and further ascertain whether she has
a machine that goulci be available - as it has been rather
heretofore to
get American typewriters in London.


I would probably want some one while in
but I doubt if I
need any one after that.


London and for a time in Paris,

As i shall need to make plans well in advance, it would be a great convenience if you could arrange to have a cable reply either addressed to you or to
"Strong care Fedreserve".

If I

aTTI unable to arrange for some one over there before going, I fear
it will be necessary to take sore, one with me, and I am wondering whether there is
any one now in the employ of the Federal Reserve Board that I
have no o!ie in this office.

could take, as I

Vith test regards, and again thanking you


gave me last 'week, I am,

fours sincerely,

Honorable A. C. Miller,

Federal Reserve

4aehington, D. O.


the very good


that you

July 31, 1922.
Dear Dr. Miller:

Thank you for your note of the 28th.

I would be very glad

indeed to use Miss Burling if she is available ghon I reach London, which

will probably be early October, although the date of the meeting, as I
explained to you, is still somewhat uncertain.

The last word is that

it will be called for the first week in October.
It is quite uncertain how long I will need her services, but the
work will be interesting and not too hard, and it till be both a convenience
and an economy to be ab'e to get some one over there rather than take some
.ne with me.

I enjoyed my visit with you very much indeed and hope to do it

again upon the first excuse arising/
Please do not forget to send me the address of that book store which

think you said f as in Holborn, as I would like to look over some good

prints, and we might make a few investments if they iere that you and I both

like to buy.
Nith Lay best to you, as always,
Yours sincerely,
Honorable A. C. Miller,
c/c Federal Reserve Board,
Nashington, D. C.

August `7.,

Dear Dr. Miller
Thank you very much for your letter of August 1,

giving m. the information that I need in regard to the etchings.

It's a rather risky thing to give an extravagant

chap like meAcarte blanche; but I sill have somebody with me

Sho inane about these matters, and at least in my own interest


if not in yours - I till undertake to E. ee that both of us don't
go busted in the j;Ant account.
Yours sincerely,


fionor',.ble A. C. ',filler,

c/o Federal Reserve Poard,
Vaehington, D. C.


August 10, 1922.

.ear Dr. Miller:

This is just to let you knew that I have a cable from
Mr. Burlind reading as follows:

"Reference Miller's letter my niece available
writing (signed) Eurling"

It vas very kind of you to give me a lift in this matter.
Just as soon as 1 have ;.1. Burling's 'etter, I ill be able to
communicate with him more definitely in regard to my plans.
Yours sincerely,

honorable A. C. 71.11er,
c/0 Federal Reserve Board,
Washington, D.


September 5, 19?2.

My dear Dr. Miller:

remember your admiring the little paper weight made of the
serpentine 4hich m as taken .lut of the excavation for the foundation of

our new building, and I am sending you one of these samples under
separate cover.

The curious thing about it is that it varies a good

deal in coloring; one piece that I have is streaked with red instead of
white, and still another has quite distinct blue markings .

From That

they tell me, these boulders were probably carried by an

ice-cap from

somewhere far north of here, possibly as far as the Laurentian range
in Canada.

Yours sincerely,

hc,nurable A. C.

c/o Federal Reserve
Nashiagton, D. C.


Septether 12, 1222.

Dear Doct.,:r

Thank you very much for your

te of September g in

reard to the little paperveight. I should have mentioned in my
letter that these really lere presented to us by Mr. Ctto
litz, the contractor, ytho, I believe, had them made at his
elm expense.

I am glad you liked it, as ,v e all did, and appreciate

the unique character of this little souvenir.
Sincerely yours,

II:Durable A. C. Miller,
Federal Reserve Eoard,
Nashington, D. C.

October 25, 1922.

Dear Dr. Miller:

Sometime age I had arranged to spend a day at Cambridge to visit the

Busineee College and to have a little talk with Professor Sprague about various

I think yon know that I place Lie about at the bop of the students


of banking in this country, n8 I believe yee do, nc I was especially anxious
to talk with him after the debate we bad in iieetingten 98 to Federal Reeerve
Bank policies.

Badertunately, I miseed going to CamUridge, but Professor

Sprague came downe011epent all of last Saturday with me when we had a most

illuminating divoussion.

I gather that he :laes not view the present situation with much concern,

although he thinks it requires close watching.

kfter discuseiag Nary fully

the genera/ line of policy which I had advocated in Washingtoe, I found that he
was almoet 100 r,er cent. in agreement with it.

I also found that he is

a pretty etout advocator of the effectiveness of rate control as to the great
eess of American banking credit ynd in its application to the total volume of


he sharePerrin's views - which are really my on - that individual

cases must be dealt with according to individual circumstances as a eupplement,

to a rate policy, but that the primary and general control of credit volume will
elways depend upon the relationship between cur discount rates and market rates

and the general trend of business and the general status of sentiment, whether

it is a buyers ur sellers market.

In fact, in going over the whole discussion,

both in Viashington and with Professor Sprague, I should suppose that if there

is any difference between Perrin's view and mine, it would be that he puts

discretionary control first and rate control second, and I put rate control

first and discretionary control second.

October 25, 1922


The government loan has brought about certain ease in the money

market which is artificial, and Mr. Gilbert is making every possible effort to
withdraw the government deposits as rapidly as possible, applying them of course

to debt retirement in one form or another, end I think tis policy will check
the otherwise unavoidable inflationary effect of eery loan under the system
of redeposit of the Proceeds; but we must bear in mind that the deposits of

the 300 roportia3 banks are at the high point in their history and that is not
an eepselally agreeable eituation.
I hope you have a most enjoyable trip.
Ycur e sincerelf,

Honorable A. C. idiler,
c/6 Federal Reserve 3ank of San Franeieoo,
San Francisco, Cal.

November 27, 1922.

My dear Dr. Miller:

I am glad that you are back end especially that you came back without any bad effects from your illness.

I was sfriid you were in'for a dose

of pneumonia.

Referring to our

telephone talk of this morning, I am enclosing

copy ef the regular monthly report of current rates in New

emphaeizes the disparity between market rates and

It should be borne in mind







the rate

for bankers accept-

ances, that rate is for bills Without the last endorsement of an aceeptable
banker, which we alwaye require before the bill

reaches us, and which therefore

has' the effect of slightly reducing the rate beceuee of the added obligatiom.
You 'hill be interested in the figures regarding gold which we keep
right up to



The net imports for

f 204,500,000:

System in that period


the period January to October,


The increase in the gold holdings of the Federal Reserve

totals P201,500,000, and tbis notwithdtanding the fact'

we have been paying out gold freely, and between

the various Reserve Banks,

principally New York, and the Treasury, ee have no doubt paid out t100,000,000
or more, but of

course it comespretty


Yours very


Benj. Strong,

Honorable A. C. killer,
c/o Federal Reserve Board,

Washington, D. C.

BS.MM Enc.
Federal Reserve Bank of St. Louis

December 11, 1922.

Dear Dr. Miller:

Professor Sprague and some of his associates in Harvard have been
so sympathetic and cooperative with us in discussing some of our pu7eling
problems that I

as lured, as I told you, into

Business College.

making an address before


While I wrote out some notes, I did not stick to them

very closely, and most of what I said had to do with the difficulties which
we now encounter and will encounter for some years

in administering a policy

as to rates and credit, so long as
interest rates in

There is such a tide disparity
the country;

There is such a considerable misunderstanding as to

what purposes of our policy are;
(c)So long as we have ih abnormal gold reserve;


(d) So long ai the foreign exchanges are out of balance
end we can not

rely upon the

normal gold movement to check

us up when we misbehave.

It all seemed to interest them, and possibly some of the instructors
more than the students.

At any rate, Professor Sprague has written me the

enclosed letter, the last paragraph of which contains a
should have been sent to you.
is right,


I am inclined to think. that Professor Sprague

that the first publicity to be undertaken should be brief and

rather academic discussions of these matters;

that they should be printed in

the bulletin and under some arrangement by which

suggestion which

they can

be reprinted

Honorable A. C. Miller


December 11, 1922.

simultaneously, and stated to be reprints, in all of the Business Reviees of all
of the Reserve Banks.

Hoe does this strike you?

p\s kr. Platt hns doubtless told you, I have also been lured into
going to Chicago to-day to eddreee the Convention of the American Federation of
Farm fiureaus.

Some way I feel that I am taking my life in ay hands, but

Professor Sprague snd his essociates in Harvard, especially Professor Bullock,
Sydney Anderson, David Friday, and Mr. Mackenzie, one of the officere or the

organization in Massachusetts, and a

number of others,

have urged me very

strongly to go, and I tieve been weak enough to agree to.

I hope it turns eut
all right, but as you know, I am not a speech-maker, and all thst I can do
is just give them en ordinary talk, such as I did up in Cambridge.


will let

you know whether anything is thrown at me and ehether it hits.

elen I get back, / will try and run over to Washington for e visit.
It's time ee had a good chin.

end certificates

The way the present issue of Treasury notes

le hanging makes me feel e little concerned as to ehetber our

rate should be moved sooner than I thought to be necessary.

I hope you are all eel) again, vigorous in mind and body, and reedy

for a battle.
Yours sincerely,

Honorable A. C. Miller,
c/o Federal Reserve Board,
Washington, D. C.

Deceuber 1q, 1922.

Dear Dr. Miller:

In some ways I find myselfin a state of mind considerably resembling
s to

that which inspired me to write you from Lake George nearly four yeers ago
the policy of the Federal Reserve System.

It: seems to me that the

factors which

we must now consider in connection with our rate policy are eomewtpA as follows:
Ye are still gaining additions to 311r gold which lay the foundation for a further credit expansion.

We hold over $1,500 millions of gold in exceas of our minimum
reserve requirements.

We have concluded the year with all

Reserve Banks earning substantial

sums in excess of their definite requirements.
sve reduced our investment account over $200 millions.
Our discount f;

are increasing and

the total of the note issue is

(3) In


twelve mnths period the deposits of the banks of the country

as a whole have ino!'eased probably $2,500 millions or thereabouts.

Prices are rising in many directions and at a rate which in
ordinary times would be unprecedented.
hages are again beginning to rise.
There is practically no unemployment in the country whatever.
The volume of business is taxing transpcirtation facilities beyond

 above the

Rates of interest generally throughout the country are substantially
discount rates of the Feserve Banks.

_ 2_

December 19




general level of interest rate9//baus1ng an outflow of gold

reserves to a


-i:hich would reduce

requiring rate advances.

These circumstances must force upon us some consieerstion of our
rste policy either at the present time or in the near future.

In the absence of action being forced upon us by our reserve
position, we

must rely upon other indications as a guide to rate action, and

those it seems to me are principally the

I hesitate to

aek our directors to take any action as to rates without

first having some indication


ones touched upon _shove.

RS to the probable

1...Vitude c

the Federal Reserve

But such action as we do take should not be deferred until the country

becomes involved in marking

up prices yithout any real increase in the volume of

Won't you write ne about this preliminary to my going to Tashington.

Yours very truly,

Benj. Strong,


Miller, c/0 Federal Reserve Board,
sshington, D. C.

-Honorable A. C.

December 21, 1922.


My deer Dr. Miller:

From tieie to tie we have been looking into the various bank reports

in order to gain save indication of the cause of the very large increase in the
total of depoeite In Nationel end State banks i thou t a oompensating change in

the total of the loan and investeent account.

It is diffioult to unravel the

tangle, but we are led to believe that a part of the increase is ipermitted becue of the reduced. reserve reeuirerents which recult fro e the conversion of
demand deposits into time depoeits.
Inasmuch !lb t.6.#3- totai. eerning esecte cr7 the heserve Tlanks have not

materially increeseti this year; in fact the range or fluctuation has not been
much beyond l'10r, eillione, it is eele to atititilE0 that thf) ellene in the total
deposit figures of the banks of the country arises from three princiretl. causes:
Iee the consumption of goods which reduced in vento ri 9:fi and

enabled traders end others to reduce bank loane.

This eculd reduce the

proportion of loans to deposits, but would riot neceasarily canes an increase

in the toesta of devesite;
Gold imports;

The change which we have referred to between the classification

of deposits.
PeT. not sure whether this subject. has been studied by the Board,

and az wondering whether it would not be profitable to have such a study made.
Hew does it strike you? lionora'ele
Federal Reserve Bank of St. Louis

C. Miller,
c/o Federal Reserve Board,

Yours very truly,
Benj. Strone,

1 IN


° 1922

WRAL 444


December 22, 1922.

Dear Dr. Miller:

Your fine letter of December 20 has just arrived. All
things considered, it seems better that I should go to Nashington
This is
next week rather than wait until after January first.
especially so as I have no pressing engagements next week which
would interfere; so I think I will take the train probably Tuesday
night and telephone you or. arrival to see whether you are expecting

to be at the office or are still at home.

3111 sorry that you are still under par. As for myFelf,
a week in bed is about as irksome as anything that I ever experienced,

but in the long, run it is better to do that than run the risk of a

much longer stay in bed or even worse.

Thank you for your good wishes.
I reciprocate them most
heartily and will convey them also to thet lovely daughter, whom I
ho pe you will see in Washington sometiee early next rear. Please
give my warmest greetings to Mrs. Miller.

41th best wishes, I am,

tours sincerely,

Honorable A. C. Miller,

2320 s Street', Itir;
hashington, D. C.

January 24, 192,5

Dear Dr. Miller:

I was distressed to learn
were laid up in bed,

yesterday from Mitchell that you

had some temperature, probably something of a pain

in your middle, and I have no doubt a good deal of discontent in your

This is all very bad, and I am writing to let you know that I

am not only sorry and symrathetic but appreciative of your state of
mind because I am still a bit out of the running myself, and after

talking with


3octor, have decided to go South to-morrow for two weeks

and :give this throat of mine a

chance to clear up.

There ie no need for me to charge you
care of yourself as long

with the duty of taking

as Mrs. Miller is in the neighborhood.


can do it better than anybody else if you only give her a show.. Please
be good enough to hand her


re recognized, and it may be

letter and tell her

that on my



way back from the

stop in and see how effectively they have been discharged.
Yours sincerely,

Honorable A. C.. kill
2520 S Street, II-W.,

Washington, D. C.


South I will



7:.-A4?1) A3

February 19, 1923..

My dear Dr. Millert

This letter-is quite personal and private and I shall ask you
to say nothing of its contents until I am able to write-you with more
Since returning, I have had my tLreat thorogibly exP,mined by

Dr. James A. Miller, and today by Dr. Coakley.

The former suspected a

tubercular coxplicPtion; the latter, - whom I have just left and who is
the leadinj New York man77 says the followIng:


The back of the left

vocal cord contains a non-ulcerous lesion for it entire length which
Eax be caused by the rupture of a smell blood vessel while coughing but
more probably Is due to

infiltration as a.result of the inflam-..

-. nation and infection. whibh I recently had.

I must not tslk, - not even whisper.

Beth ay that for two weeks

Then they can tell more as to

the. treatment.

Was anyone ever so iiureued by tha devills bugs as I!

Ey first thought is that I should throw up my job and quit.
- Dr. Coakley, however, recolitmends work. such as cam be done by


(like the dog's flea, I suppose) and I am. proposinz to spend these

to weeks in good stiff work on such zatters te are both interested in,
tad then see whale what.

geantioa, ite the irony of such xi,cationF that Dr. Miller
reports my lungs in better ehape than at any time since he has been


Dr. Miller

look;ne, ettor mf.),

six yeara.

tftor to vests I shall write you again and mey impoe upon you

to the otent c asking you to tun over and sop- me
I'm not dead yet!
Sincarely yo,Ara,

Dr. A. C. Miller,
1226 S Street,
Washinton, D. C.

copied from pencil nanuscript.

least see mo



March 1, 1923.


Dr. Dr. Miller:

Your letter hns just come, and has given me a great deal of pleasure, as
you may gather from the follo,Fling narrative.
Dr. Coakley on !sonday gtve me his finsl v=ord after a thorough examination

of my throat, that it was a tubercular lesion, but not ulcerated. Yerterday, Dr.
with some reservation still, accepted this conclusion..

It seems to have been

a fortuitous affair, arising fro: the January attaci< and the inflaz2isstion thAt accomanied it, - which opened the door, so to speak.
Now as to shat shall be done.

1.shcll proceed to unburden my mind and if.

you feel e:lual to a trip to New /ork, and can enciure looking at a poor fish who can
only talk with pencil and paper, it would do me good to have s visit pith you whenever

It suits you. I'm very fit save for the voice; but am forbidden to spetk a word.
First te to the Doctors. Coakley, who is the best man for the larynx in
. the country, I hear, says I have every chance to absorb this, but it msy take six
months in Colorado to make it absolutely safe before settling down to rull work., Dr.

Miller is rather more optimistict and while still willing to say there is a chance


that it is not tubercular, it likely is that, and if co the program eh:slid be to ork
on it In Colorado, planning to return in the fall, fully recovered.

Tie is most en-

couraging And of coUrse our best man.
Second as to the Banks-

Our directors heard a -iritten report I sent

them, on V:ednesdny, and Drs. Millar and Conkley Till have a written resti-t in a. day

or to.

The directors propose tt I shall trka a six months' leave,

generous enough to esy that I Should receive my salary.


They are pos.iftly a bit

uoversold" on the o/d man, - but one enjoys that no and then.

Third as to tte victim.

fire's thou

ahen this glad nvs re4..Le,

Dr. P. C. Miller.

-me, was that

should quit, finally and forever, and become. a professional inv?lid.

Further reflection and the rather optimistic reports from the to factors, and some
ot'oor consVer9tions which we c,.n dissect when you came over (as I hops you will,

eon) let-,d me to think that I'm not through yet

7ith my job, and so Lm proposing,


if the FeJeral Reserve Bord, assents, to take the leave of absence, but not the

There will probably ho no time when you and some others of Us will be taxed
quite so heovily in our work, as the next eighteen months or.

need for elaborating this point with you.
lith a bit of pig headedness,


to years. There is no

a combination of pride, or ego, or

and possibly a dash of public spirit,

makes ma very reluctant to leave this job, after spending eight years in helping put
are either to have a real banking and currency system, or we

it along this fsr.
are not;

end it

part of the



largely be decided in the next two years.

Another relates to

the bank.

This sommari?es one

It will take a period, after our

building is occupied, to make sure of our organization.


That job T vent to finish

myself, and I an not ashamed to cl-im that it will be done wall,

and possibly a

bit better than if left to come others.
Finally as to the Board.

You and your associates have been most forebearing


.regarding my health. -

It has looked recently, until this slip, as though I *ere

better than in many years.

In.fact, that is exactly what Dr_ Miller says.

So I had-


been hoping that the results would have FUlliy justified the patience, and made you all
feel comfortable about it.

Don't for goodness sake let me get on your nerves,


fear has been that you, yourself, may not realize the greater extent to which you are

'carrying the load, just now, than fomerly, and gat in the humor to quit, or lose
patience with the 'whole situation.

with political affairs as they are, and appoint-

tents held up, I can fully realize what an uncomfortable time you must have been

Ifl hang on, and get well, as I shall very .promptly, you may expect Some
literature from Colorado in due course, and some for publication, I hope, regarding

Dr. A. C. Miller

some of our affairs.

f;ork within the routine elloesa will keep mo going-

Now this ie just a catty letter,
you one" about thoe puppies.


. -ore it not to be copied I'd "hand

Think of being compared to a "lady dog," hnd at such

job as you dooribe!

I i.ant to get this letter off today and shall send another possibly tomorrow
about the more bucdnees part of your letter.


I'm counting on seeing you

soon, - end any day suits Me. I'm not under such severe restr,int!

Many thanks for your letter.
Sincerely yours,

Dr. A. C. Miller,
1226 5 Street, N.
Vashington, D. C.



copied from manuscript..


SP Nstr Tau


March 3, 1923.


-)r. Miller:

It made my blood boil to rend the article in the Februnry 22
issue of the Mmnufacturere Pecord.

That en unfair, misleading, and


How is it that these records



seem to get spread about?

And how shocking that 7allisms' on statement

should be so cleverly euppressed as to put him in just the reveres of
the i.osition he actually took.

None the lose, Is still of the opinion thst these outbursts
should have the same tremtment that is

prescribed for my

had to lot off this much steam.

Very truly yours,



Federal Reserve josrd,
Washington, D. C.



March 27, 1925.

Deer Mr. Miller:

I did not an opArtunity in fiashingt)n of putting down the
thoughts I n the plan for re3t4Iting the ret,erve.1 whion you are exdect-

ing to submit to the conference for discussion, and


therefore, taking

the liberty of ,;ending you herewith some thoughts which have occurred to

in regard to it.


I regret extremely that they are negative, fbr I am as

keen as you are to provide

some means by %hint.. the ?ublic rnind may not

continue to be focused on our 75 per cent. reserves.


'on also no much in

sysvethy with your general attitude n the responsibility of the System for

credit conditions that it is very unpleasant to me to find my,self not in
symimthy with the particular 'neasure which you bring forward in au i

as a eerie of accomplisaing the resuit ve both want.


If I were the oniy one

eh* felt as I do about it, I might very s11 conclude, Wet I had a wrong point

of view, but I have taken the liberty of talking it over very confidentially
with Mr. Harrison, Mr. Warburg, and Mr. Alexander, and have also communicaled

an outline of it to Stronp,, endeavoring to the best oi ray ability to oxplain
to each exactly that you have in mind; and I find all of them feeling as I

do, that it is ttn unde:Arable
In addition to feeling that this is not a wise oherige in the method

of reporting rooerves, ,iarticularly at this time, even though it be 0. reversion
to a lan formerly used, I havT. V,is other feeling that we should educate the

ublic that our rates ure determine.' not only by reserves but by othar factors
well, ani that your *den merely k;erv =te to fam,)hasize the view wrich so


hold that resrves, if not the sole, I3 re the predominating factor in fixing

Hon. A. C. Miller,


Inasmuch as you told me that you had talked the plan over with Mr.

Criasinger tald that he fslt that mt the proper time it might be well for the
board to put it into effect, :7-erhas you would be willing to show him (or tny
other of your eolles.gues who might be interested) h copy of this letter.
Respectfully yours,


Honorable A. C. Miitar,
Mederal Reserve Board,

taeiniwton, D. C.

Aemorenduar.?biller's Prof;loael Concerning "New len
for ..te.tinc tto Ret43rve Poeltion of releritl Ettatia3:'

treoorde of the retiow f the reAltretos ,on n,:zitee and on

1116 iobrd hes

einee july, n:7.

deo:mita, fleured in the ne.tirker proposed to the of these

tor- the pt et .tive .14w:be that elms:pt.

for th brot4 tendeney of the n:Jte Pktio to Ineroo re?idly etoen
flowed th. tlnd to decreiser 14i7-*hen m.,ec were: beinstwe.i rtql,41r,
both levale &re fortulums, arid having boon fwub -ot to entetenti4.1 chAnge
A t VIII by the brmk.e, hAire not bad e,ny apeeia.1 eignifieence.




t ti e time by the Boerd Atoul.4 net be of eny reel

eignifichnce to the publis.
A further ea:.vey of thele two reti:;,.0 wince July, 11011, above thet the
p4$i t r6tio ttilten by it-4tair --ould not .ie,e glean eny eati.erNetory bed.*

did actually

fer tho credit i4oliey Allah the ey-ztea during the

Th. Ann 54

'Itto bo cleo.rly witqn tbo 'accretion

the redere, !ere

Doerd, tterefore, t detereints frills tine to time egintin,A teIto,t,
it 411 z,utherizt.e the Iseue, of roderal re-;erre notet,-, end ttos,th its
ereAlon, ,shen cowtitione teen Lo the Eo5Ard to requi:ce it, to 1,:#ece

'cob notesiy tqadleA gold eollrAterfAl.
win thor ,-ords, it le within the 1,oKer of the ited,u61 ft.everic Soard tc
detzreane t}


tht,,50,14 re erire tb0. 7.114.11

2qrled Alie,41net

Toderel reser be no it . . "

'rho deterzinttion y the Beard trtmt kiwz

gold w1i

b bid the

and their utility to change tht notertl t will bill ?emit the
De ;Ailey
meniptaut the twte rttio IfiWo in RA ort
tort r,-inetber.


In fiminz rbtee.

The t3o.ird

4uthorive3 to ta,,e 11iir discrett4m

The ability under thti1441 Aleo ttief

the brreve eaten t 41%d ?rnttin f the faet,.--,


incle I

nId te


i cb yrenuavA:tly thetr

id * tO0 4 Oita4tiOn %bleb in sy

sible and igew.1.1 leqi t.




it cannot Le ascertained definitely Jost etztA

d shtt is riterorvece depoit

13 1,'"0 470.k rir It C43 n:,t.e-4,4

icø SeC ti.:43

If przvides that the

asttlement fund say be reoervo on either notes or de, °sits kt
the 3,Aien of tne FeJoku*al Ree4rvt buiks.

wtoi..:tegi it would hve to apply to ,;-ll rtemorve f:i14.1)1(

aijje..'..)1ne or tx) f the smaller bAni:a. si.ght find ctiffioulty in' cois--:.,117fIng mitt a rue

wo414 flt the


The ,,lan Noula give tiRQ or rerq.e r-.:Liox for ,:**01a to diacuae.


rouid furthbr 5,4.0 t* Alt all the esAftais 411 tha reeervl, mtio *$ the

t rut in lug ratet:.).r in rate 4ction, Abe res

trier fmbtoro often ,letersins

rate setion. 'Into is tt,, thing I Lolieve tfe should ersOlasiz&s.

A study of the eank ar a;ngl,sul reeerve ratios
frAit guy

14;)0,tc Jtu ry 28,

Cho d1,1-0 of rftte ehemges,

is atdohrt,t, t-nether Ath 414

Imalysis 'r- these chiinors and ratios, et-Acb shvws ulte clekrly thst

the level of the retie* exeept in the e

td little t io with it,

of the extremely high rtee,

,szed gives no ba,eis for ,,ny rational

Ifl other eords sachrete °bangs ought to be dste,reke by vs.riQuss condi-

includini, of eourse, the reserve ratio,
was rxAs.

the do, y the

I ea inclined ta believe that erten strktA rstee ;dayo4 s

losre ,,art in the deterazinatt,:,n of thoot rates.
&.1121e of tho ;o0ible transfer f g id bet.peen the note reserve FAnd

the xo-oalied do;;-.e)sit roaarve, I us advied tht of the 445000,000 Ca

heid in our note restore -0, 15.1,4,3001,00() °Quid to-day ht tronlfered to the
60.14A.1 :Lod <Waait rot4erve sal stil: iekve DO per cent. of gold rind paper

behind tbe thitee.


bin td













65 '

























0 eta be r

No veer

























July 2
August 6

..-3e-pteleber 5 1920

October 1 1920









June 1

July 5
August 3


Se2 to:mbar 7 . 921
October 5 1921


November 2 1921
December 7 1921


..F dnuary 4




Febru4ry 1 1922
:.'arch. 1

Aril 5
Mfty 3

June 7

July 5
August 2



September 6 1922



October 4 1922


liovember 1 1922
Deceuber 8 1922


January 3 1923
February 7 1925
garch. 7

Federal Reserve Bank of St. Louis





January 7

May 4








Vara 4
A;ril 1












ovember 5 1920
December 5 1920

February 4 1921
































Date of 0hapize


'Akar OF V1LA811



Lay 22
June 12

5 1/2

July 18








4 1/2



3 1/2




Oct. 50











J. 22

a 1/2





a 1/2





Aug. 17

Oril 5
kri1 4



June 17
5-n&A. 2


91e/rve Rkttio

e 1/E

3 1A


Juno 20
:Sept 12
04.A. 10




Jan. 12A.0.. 10

Aug. 14

Oct. 30



4 1/2
5 1/2



4 1/2



Jan. 15










3 1/2



Jan. 15







3 1/2






Yhtr. 31







Mar. It


4 1/2






Ott. 19



Nov. 30









Nit* of Chan_ge


Jan. 25
704. 15














a 1/2


Aug. 28




4 1/2


4*n. 21






Jul7 30


Air. 16
CA. 1


Analysis of Reserve Ratios of Bank of England on Dates or Rate Changes
May 22, 1901


Jan. 28, 1.914.




4% Rate

4% Rate




Do vni










3% Rate















40 38--






















































7% Rate




6% Rate








5.- Rate

wn, Dp



5% Rate







ll il






















-- -;-




During the semi-niu:'1 Conference of Governors which closed to-day,

the Federal Reserve Board as usual discussed with the Covarnors rEmy matters of
operation including the amendments to the Federal Reserve Act contained in the

Agricultural Credits Act, changes in the Ford's regulations made necessary by
these amendments, the open m.,_.rket operations of the System, and many matters of

routine operation.

As usual the Board also discussed with the Governors the

various factors which enter into the consideration of the credit policy of the
System, such as general economic and financial conditions, the condition of the
reserves, or)en market rates for various classes of paper, the demand for credit,
the volume of credit in



and gold movements, present and prospective.

In view of the inflow of over $1,000,000,000 of


since January 1,

1921, which has formed the basis for the recent great increase in bank deposits
and loans and has kept the reserves of/Rs:Serve Banks for over a year at their
present high level, the Conference has a:sked the Board to call attention to the
fact that this gold ,has come mainly from countries which before the war were on
a gold basis.

Boa- much of it will be required and will remain here as a permanent

addition to the credit base of the country cannot now be estimated, but as experience shows that gold in excess of the requirements of a country usually flows
out to other countries needing it more, some part of the Systemts present gold
holdings is liable to flow back to the countries from which it came, stabilizing
their commercial and financial conditions to the advantage of our trade and commerce.
Such an outflow- of gold would reduce the reserves from their present level and

this should be borne in mind in reading the statement of the Federal Reserve

In order to call attention to this element in the reserves, the Conference

asked the Beard to refer to it for a number of weeks in making the reekly

statement of condition of the Federal Reserve Banks.





3i-U.6 January 1, 11, the go 0 be1t! by
th6 fenoral reservo, barite has inoreksod
more tnan 41,100,0.W,00. Tbie
golei nee come mainly free

countries not nos an a gold b,v:is.


thuy return to u gold tilais ulot et it
La liable to flow back

ain, thmrelax

tiiiigtiosir oandis,ions, sind bens-

ittln4 our L.griciture._In4uttrv r.43(.!
an outflow would of °our e
redoes to more modoratok levels the prulpot

tash roserne ratio, which should, therefore,
not Le refkrded

1De3ure ol tbe vcipro

3f ortat nalf orillable Der ordinnxy







April 16, 1923.


Dear Dr. Miller:

Here I am, safely tucked away in bed, and really doing well, though my
cold and some tooth trouble set me down a bit!

I'm not yet working but look out,

once I start!

Of course the boys keep me in touch with what is going on, and I have
much time for sober reflection, which inspires these lines.
to my other good pals about your board.

Please show them

If they sound dogmatic its because my

hand makes a poor substitute for a stenographer.

My best opinion is that any change in the form, substance or

meaning of our statement will do harm, - and possibly considerable.

It will re-

quire just as elaborate and paiataking explanation of our policy,

when we agree

upon one, as though no change had been made; will not altar the facts one iota, -

and will confuse those who are uninformed.

If reliance is plac

new form of statement, without explanation, then indeed no one will understand
what it is all about.

If any western Reserve Bank raises discount rates above ours

or before we raise ours, I would say, - (and one must be frank!) that cold poison
would be less painful in the long run.

Such a change is not now required, and

will place New York in the position of favoring the speculator, etc.

That spells



Dr. Miller


April 16, 1923.

When New York can put its rate up, and have it effective, there

will be no need for any other Reserve Bank to increase rates until discounts
actually make it desirable;

and that development will be easy to watch.

A rate

increase before borrowing pressure develops is simply a move to force contraction,
of which there is no need.

Prior to an increase in New York, the policy of the System should

be fairly,firmly and courageously stated by the new Governor (strength to his right
arm!) and broadcast by every agency we can command.
the country and stand or fall on it.
secure afterwards.

Let's put

The "standing" will be better and more

If rates are first advanced again in New York, and then a state-

ment is forced, as it surely will be, the whole System is on the defensive, - if we
can get the people to understand something about it first, and then change our rates,
we are on safe ground.

The prior change to 4 1/2 and the conference arousedsuch interest

that a further change to 5 per cent. (which,I do not favor at the moment), made
without a prior explanation of our policy and the reasons, - will cause a real

The time has oome to take the country frankly into camp, and that

can be done by Mr. Crissinger perfectly.

It's a chance we'll not have soon again.

My best to you all, and a very strong hope and wish that you will agree
with the above.

Yours characteristically,

Honorable A. C. Miller,
c/a Federal Reserve Board,
Washington, D. C.

June 20, 1923.


Dear Dr. Miller:

You owe me a letter, but of course I owe you various things also.

Maybe the account is not so badly out of balance, - but I'd like to hear how
you are.

Sometime get your secretary to get out my letters to you of February
5 and 21, 1919 and yours to me of February 15 and 26, 1919.

They will bear

reading over.

Also a word on another matter.

I have read Governor Crissingerfe

letter to Mr. Case about selling Governents, and just want fp say Look out".
If the Board enforces such a policy now, it may bring some slates rattling
about some ears,- certainly if the sales are at a rate exceeding gold imports.
For over a year the importance of the way this account is handled, has been
urged by some of us in New York, and surely by Gilbert, and I am concerned lest
it became an instrument now for converting a fairly sound business situation
into one of uncertainty and uneasiness.

It can easily be done!

Things move along out here very well.

I have done little work, but

keep up with what is going on - after a fashion - and sometimes groan a bit too!
The Doctors are well pleased with my progress.

It has even exceeded their

expectations - hut they take no chances with me.

It has interested me to hear about Cuba 9nd I am wondering whether the
Board is proposing to present Cuba with new currency and pay the shipping costs
with one hand while with the other making our own members pay collection fees

and possibly express charges on currency.

It recalls Lewis Carroll "and the


moral of that is - 'The more there is of mine the less there is of yours".
One good thing about tuberculosis is that it teaches one a certain
philosophy that only T.B. folks can achieve and enjoy - but also there are
times when the toxemia gets you!

But as I have often told you, good friend,

it's a sense of humor that i bank on
These days I spend looking at the "everlasting hills" which change
almost as rapidly as does our discount rate, and in dark moments recall the
only words appropriate to this place - "I will lift up mine eyes unto the hills
from whence cometh my help".

For after all, Dr. Miller, now that I see the

dance from a distance once more, there is only one thought that enters my head.
There is always a choice

of courses, wisdom or folly - right or wrong - yes or

now - and whether it be Cuba, or what not, you and your associates in the next
eighteen months or so are to decide the fate of the F. R. System, and incidentally
what shall be the worth of some eight or mine years hard work of a few of us.
Enough of this and a word again about myself.

here is my routine -

Rise at 6:30 or 7. - the former when I have a letter or two to write.
at 8.

Have my throat treated at 9.

From 9:30 to 11 or 11:30 am in the sun on

the roof, tout ensemble, pigmenting my skin and dosing my throat.
down for an hour on sleeping porch.

one o'clock dinner.

Have half hour to do as I please until

Then about an hour of "liesure" (but no exercise, not

then supper in my room at 5:45.

Read until about 6:30 to 7,

depending uson when my tray arrives, then bed for the night.

Then lie

Then from two until at least four - in bed - usually 4:30

or even 5 as I read.
even walking)


But it's not so

There are always the hills, its delightfully cool - and a few pleasant


Sorry to say two throat cases have "passed on" - but I shall get well.
Enclosed is a picture or two.

My best to Mrs. Miller and to you.

Write me!

copied from


Benj. Strong

original MS



June 30, 1923.

Dear Dr. Miller:

Your letter was a bit short, (by that I refer to its size and not its
tone), but you are forgiven upon your pledge to do better next time and soon.
Hand written letters are often a bit dogmatic, and I'll ask you to forgive that
in what follows - which are reflections intended to suggest further reflection:

We should not pay the cost of the new currency for cuba.


excuse that she is a "ward" is not tenable, under the Platt amendment or on any
other theory:

And the excuse I have so often heard that we get the gold

0 $ for $ and increase our lending power 2 1/2 times (that, being the Georgia
swan song) - amuses me also.

That do we want more gold and lending power for?

We are cursed with too much of both now:

Then to go into Cuba and drive our

own members out of the exchange business is a cruel procedure.

By advice and

legislation and urging "from highest quarters" these American bankers were
brought to open branches abroad, they have now taken big loses, but not yet
recouped - and here we go and camp along side of them an

use their own reserves

on which we pay no interest, to enter upon a competition with them that they can
not possibly meet.

And for Cubans!

Damn it, I'm an American, not a dago,

and I'm for the American banker and not for that gang of pickpockets that we are

wet nursing in Havana.

Gosh: who is running the heserve System anyway, old man?

Hughes and Crowder and those pussy foots in the Latin American Divisions of the
State Dept.

I'll lay you odds of 2 to 1 now you all regret the Cuban decision

and the more worry and anxiety it causes you, the more determined I'll be to
have no part in it

The policy of making our foreign alliances now

well in advance of the day when they will become a large factor in our foreign


business, has been discussed for years, at almost all of our meetings and with
various Government and banking officials from abroad.

To see far enough ahead

and to go ahead, is rarely the characteristic of Government bodies in such
affairs, but I had hoped that in our F. R. Board was the one exception.


having encouraged and promoted and concluded a program, - why change now?
Are the profits too small?

Do we need profits to justify a public service?

Why these provisions in the Reserve Act, save for this very purpose!
Board ever justify re.luiring us to withdraw from the one


Can the


contemplated by the Act, for public service purposes, at the same time that
every principle governing our foreign business, or which should govern it, is
violated in this Cuban Agency for the sake of profit!'?

Have we any policies

that will stick through the changing personnel of the F. R. Board?
Par Collections.

I have read the opinions, - the Richmond case is

bad, - but they are far from a death blow - even if no rehearing is granted.
I'll not attempt the argument - my advice is just to go ahead and collect
checks, and not be disturbed as yet.

From the beginning I have opposed free services to

any one, even to the extent ot being the only one to oppose giving up the charge
on cash items.

But here again, encouraged, - and certainly as to checks,

directed by the Board, the Reserve Banks have adopted and perfected a service
machine - and simply because of a few selfish complaints, anc,ther volte face!
Don't let the expenses and earnings worry you.

For every dollar spent on

these services, I am sure the banking system alone is saved from three to five
dollars which the member banks would spend did we abandon our organization.
The economy to the country is huge.
and more.

Five, ten, or twenty times all it costs

Let's stand by our guns, and make the Reserve System what it should

be, and what we hoped it would be before we became terrorized by a lot of
politicians and blatherskites up on the hill:

Why, Dr. Miller, the Board is

en record before Congress, in seeking amendments to the Act, and recommending


them, so as to enable us to do the very things now under discussion as
Why this change?

possibly too expensive or not profitable enough:

wisdom been added to our Board, where there is so far no
of this blast for now.




Were I in your shoes I would lay all these things one

side and at once call into consultation, the members of the Farm Loan Board, the War Finance Corporation, - the Reserve Bank officers, - and see that the
whole credit machine is hooked up to meet the blast from the wheat farmers - (and
some others) which will come along soon:

Beat them: to it.

Consult with their

organivations, see what is wanted - and get into a helpful attitude publicly:
The time taken up on Cuba, collections, foreign a/cs, etc., means time
Also I'd like to be heard

diverted from some more pressing things, I fear.

on the foreign business before anything is done - and its due me to wait too:
Well, that's off my mind a bit.
a black berry is red when it's green.

bathing, tout ensemble, 2
old pipe:

You know

Now a. word about myself.

Just now I'm

red when I'm brown.


/2 hours a day is giving me a color to match Platt's

I'm doing famously, looks as though I'd surely be back in the fall

as planned, in good shape, - and if you fellows


only hold your hosses a

bit, - I want to set in on so,e.of these matters.

October, and then I can be prepared a bit:

Have th

Thank heavens it's boo hot for any

one to be up to much mischief - I mean in New fork and Washington.
Now just give some tender message to Mrs. Miller.

Here it's fine.

M4 best to you.

Cultivate your sense of humor - and remember that mine is my guiding star.

B. S.

(copied from
original MSS
July 5/MoCI


0ragmor, July 4, 1923.

Dear Dr.

Dye been thinking a lot about you lately, - for various reasons hence my letters.

This one is a before

breakfast one - in

mail is written then, as much of the day is spent disporting
the sun on the roof.

fact most


of my


The thought most in my mind about you is that you have

a very considerable responsibility passed to your shoulders with the changes
which have taken place-and incidentally - everyone in the F. R. System realizes
it - but none so much as your friend B. S.

A letter has just come from one of my correspondents mentioning that
orders for the New England textile mills have faded away.

It arrived just

as I happened to be pondering a letter of Go'vernor Crissinger's to Case taking

all responsibility for directing the sale of some t130,000,000 of Governments
we still hold in the System.

If the securities are sold, the banks must

borrow the 030,000,000 - if they do, it simply taxes bank profits and
increases the pressure to liquidate banks loans.
hesitation in business, it will add to it.

If there is a growing

This is no time to sell our

holdings and frankly had I been home recently when those failures were
popping, I would have bought 25 to 50

expecting to sell them later.

From now on our policy should be to keep our earning assets about where they
are, barring only the event that gold imports start the pot boiling.


gold imports do continue to be heavy, they will make themselves felt gradually;
and we can be guided in our Investment policy accordingly.

But to take this

moment to increase pressure is a mistaker/policy applying to six months ago. now let's wait a bit.

I have read the opinions and now the Board's announcement in the
par cases, and a letter from Jay explains his views.

Let the other chap do the "leading".

not as popular politically as formerly.
coming along too clearly.

They are mine to a

The small country ban]


The facts of 1920 and 1921 are

I'd be willing to do nothing but collect the

checks as formerly- and see what Mr. Country banker does.

Unless I'm

mistaken, he would have as much chance now before Congress as the proverbial
snow ball:

Of one thing Governor Criseinger and all the others may be sure.
I'm itching to be back and help in these matters and if I disagree with some
things done, I'm not peevish - you can count upon my desire to be helpful Out to tell you how I dc feel without disguise.

I've always done that and

gotten well disliked for it.
My last letter spoke of the wheat farmer.

Add the meat farmer!

They are facing some further troubles and with a reorganized Board, and all
the Farmers looking to it for leadership, you cannot act too
lines of my last letter.

And do let it be known.

soon along the

The Board gets too little

notice of the right kind out here,
Now I'm busy again telling you all what to do and when and how.
it's true!

My best to all of you.

Should any of you come out this way

I count upon hearing of it, and seeing you.

co pied from

original MSS.

Benj. Strong.


Colorado Springs, Colorado.
August 26, 1923.

My dear Dr. Millers

Thank you for your fine letter of August 14.

It has given Pie a great deal

of satisfaction and pleasure, and I shall shortly send this part of my rether long
reply to the office for copying so as to relieve you of deciphering a hand picked
letter, and write separately. ae. to T.ersonal matters.
lot first about Gilbert's letter.
rather dif"icult matter but still 10



lie ha e written at

leleith upon a

uite rreke °leer to me extotly IV1iat is

in his own mind as to our eoney market, how he understands it comieeres with London
end the leeedon 'mink rate nor how he recommends that we ce crate.

appears to he this:

our ifier0er (3

Our situation

s reach the market through two evenues:

Under l:ection 13, by eisocuntine, any sort of eliaible ;e.per for

at the present time at a uniform rate of 4 IA' eer cent.

charged by our eember to its customer, or borne by the paper,

our transaction whatever.

lie are lending to a

The rate

?lb.& no relation to

member - on the e,aLbar' s onligetion -

and its credit eust actually in our eractice (although not so theoretically) 'es as
good as that of any other member-, Such in democracy:

it is not the value of the

member's customer' e credit or promise to -pay .}.11ch should be measured by our rate it is the general condition of credit at that 4iortent, which should determine the

unifore rate to charge to all members, irrespective cf

use as the vehicle to :::ecure the needed

credit, and

whet particular paper they

irrespective of the size or

goodness or location (intraelistrict) of the borrowing .ember.

3ut the principle

of a uniform rte for all lone to members of the same maturity is sound, under
our System, and unescapable I believe.

The only juetific Lion for differeot
discount rates to f:.einbers is different maturities. This you know I have eLays




Dr. Miller

Sugust 26, 1925.

The other avenue is under Section 14, where we buy paper at the

To be sure we are at titres eo large buyers (or eellers) as to influence

market rate.

what The market rate is.

But we now ,always buy at the market.

functions of the two operations are clear.

Naw the respective

Under Section 15 we of.fer nredit to all

applicants (if members) at our uniform discount rate, within the bounds of reason

sad prudence - and if they eollectively take too much our,..rctection is to advance

our rate.

These we may consider our involuntary loans tc the ea.rket which are under

rate control.
Under Section 14 we only buy or sell as we are moved to do so by the various

considerations affeeting our eolicy.

Those are the voluntary loans to the market,

controlled by our policy. The differences in rates to which Silbert should refer
but, does not, are and only should be those between the uniform discount rate, on the

one hand (Sec. 45), and the various voluntary buying rates, on the other hand (Sec. 14).
The correapondence between the London market - (the 3ank of

- and

our market (the Fajeral Reserve Eyetem) only exists in New YC r City, in the purchase
and revels transactions, ire now reeula.rly conduct eith dealere in b1il nd in
ereaeury obtlezations.

They bovroe 4.:'rom us somewhat the bill houses borrow frog:

the Bank of Englend, but he volume is unievortant and beyond that the .s.orreepondenoe

W a cannot rely for oer wntrol won .uoh a slender eontact with the money

earket as this affords end from 'now on must increasingly depend upon our voluntary

general operations, under Section 14, as I bode to ehee convincingly later in this
letter. - And an we have in resaity been (kirid increaeingly ever since the Investment
Committee first functioned.

Now see where the present treuble arieee.

if alber wants a wider

differential than our r./f'33eint, diseoLeat .rate (4 1/2%) and our buying ratee under

Section 14 (say 4 to 4 112%) it must .1.3 created by one of two courses - erivrtnee the

diecount rate -.ore neerly to the 1evel 0r the line of credit market, any to 5% or
5 1/2%, or create a wholly unsound and artificial market rate under 6ection 14 by
buying bolo

the market rate.

To both of theae proposals I wou


F -09










Dr. Miller

August ze, 1923.




ipsed at preeent.

To advance our discount rate upon any class of paper

to me unnecessary and certain to cause alarm and trouble - to reduce our buys*

ing rates would be unsound and inflationary.
This f.';arde will-o-the-wisp of reducing buying rates and of preferential dis-

count rates was pursued vigprously and with diesstrous results during 1919 by
Leffinfewell and you have his own written reoommendations of thet time in your files -

as I have in sine - urging that we reduce rates on bills aret Treasury certificates,
as an alternative to our own recoeeendations thet both our discount rates and the
Treasury borroring rates should be advanced.
There are, however, some eoints regarding our open merket operetions whieh

I am hoping that you and your colleagues will consider very seriously and then be

willing to procrastinate a bit in deciding as to Gilbert's proposals until I am
back in New 'fore and Aashington with a copper lined throat and leather lungs;


e just sketch cut the points.
1st. There is an earnest demand that our policy should be addreseed to
price regulation. My views have not changed, even after much reflection, that such
an openly published and P4ccleptect policy would court disaster.

people can grasp

the differenoe between the "general price level" and "erices", that is individual
commodity prices.

Had we been the "price fixere" how earnestly would we have -teen

importuned this year to "put down sugar" and "put up wheat".

The heserve Systeel

would be the target for every attack not only as to coneedity - but as to labor,
prices, rents, etc. - and in time would be ea much abused in use, es it has been in

Let us stick to credit regulation, use price Studi 9E; as one of our guides

until gold cones into its own - and admit thet -ricee must respond to all, the various
influences which always have caused them to re)ve one way or the other - but 43ndeavcr

to control credit no that it is not an important nor disturbing cause of price

You will naturally esk how this shall be done. My own recommendations-

urged at all recent conferencee - hal in feet been adopted in the main - but °core

tions by.the Committee still need further study and refinement - and before exprereing



Dr. Miller



Auguat 28, 1923.

* ideas of how - let me first write something of mho - they need careful thought.

henomena of credit soeewhat reeemble sows of the phenomena of

tuberculosis, concerning which I can seeak with some certainty.

Any imprudence or

excess by a T.3. sufferer will not show ill results often or mewls or It onths.
unusual mental or ehysioal effort starts a slight inflammation which eradually

develops, Causes a lesion, then later comes the temperature, eulee, cough, etc. In
our oeerations, suppose the imprudence consists in selling 50 or 100 millions of our
Section 1.4 investments to the New York market.

When we are paid for thew the New

York banks as e group, at first finance the entire elyment to us,

that Is the

reduction in their reserves - by borrowing the funds back fro- us. Our invesement,
which paid us say 4 per cent out, of the Treasury taz revenues, becomes a 4 1/2 per

cent. loan or discount - and the borrowing banks r.ay directly the interest or discount

Seeking as they will to escape this tax on their pro fits, the borrowing banks

here and there ask their customers to repay maturing loans - the total amount of loans

to be repaid les a larger amount - possibly four or five times as large as the amount
of securities we have sold - the amount is in feet equal to or greater than whatever
pyramid of credit may have been erected originally upon the reserves created when the
investmeets were purchased.

This is a very uncertain amount-because some part,

possibly the major part, of the credit furnished the market by our original purchate,
was used at that time by borrowing member banks to repay existing borrowings from us -

as was the caes in the early part of 1922.

ut the fundamental fact is - that when

we bola and increase our investment holdings - so much of the funds es are not spelled
by member ban s to repaying loans then owing us - forms the basic of a credit pyramid

in some ratio - say 4 or 5 to 1. ,Persons cla,i4 about double that ratio. And contra,
when we sell - it at once increases borrowings from us and sets up a series of efforts
to liquidate or reduce loans by many banks, spreading to all sections, for an amount
in total sews], to what we have sold to the market, multiplied by the pyramid factor

or coefficient.

So we can if we are ignorant or cerelees pull down the credit

structure at a rapid and dangerous rate, by a sale of investments, which shortly causes

pressure to liquidate a much greater volume of bank loans.

That erocese is at its

Dr. Miller


kuguet 28, 1923.

el "rive

;ideas of how - let me first write something of yety. - they need careful thought.
The ehenomena of credit somewhat recemble some of the phenomena of

tuberculosis, concerning which I can seeak withb some certainty.

Any imprudence or

excess by a 1.3. sufferer will not show ill results often for weeks or months.


unusual mental or physical effort starts a. slight inflammation which era.dually
develops, causes a. lesion, then later comes the temperature), ..ulee, cough, etc. In

our oeeratione, suppose the imprudence consists in selling 50 or 100 millions of our
Section 14 investments to the New York market.

When we are paid for thew the New

York banks as a group, at fire, finance the entire :ayment to us, _ that is the
reduction in their reserves - by borrowing the funds back fro- us. Our invesement,
which paid ue say 4 per cent out of the Treasury tax revenues, becomes a 4 1/2 per

cent. loan or discount - and the borrowing banks eay directly the interest or discount

Seeking as they will to escape this tea on their profits,the borrowing banks

here and there ask their customers to repay maturing loans - the total amount of loans

to be repaid is a larger amount - possibly four or five times as large as the amount

of securities we have sold - the amount is in fact equal to or greater than whatever
pyramid of credit may have been erected originally upon the reserves credted when the
inveetmeets were purchased.

This is a very uncertain amounte-because some eart,

eoseibly the major ?art, of the credit furnished the market by our original purchase,
was used at that time by borrowing member banks to repay existing borrowings ?roe us -

as was the cave in the early part of 1922.

But the fundemente:t fact is - that when

and increese our investment holdings - so much of the funds a are not are-lied

by member banks to repaying loans then owing us - forms the basis of a credit pyramid

in some ratio - say 4 or 5 to 1.


Persons clairee- about double that ratio.

And contra,

when we sell - it at once increases eorrowings from us and cets up a series of efforts
to liquidate or reduce loans by many banks, spreading to all sections, for an amount

in total equal to what we have sold to the market, multiplied by the pyramid factor

or coefficient.

So we can if we are ignorant or cerelees pull down the credit

structure at a rapid and dangerous rate, by a sale of investments, which shortly causes

pressure to liquidate a such greater volume of bank loans.

That erocees is at. its

f- co







Dr. Miller


August 2% 1923.



(with rapid pulse and high teseperature) - at some indefinite period follow-

//ing our sale, and we may fail to detect the cause on account of the lag I rention.
This torn of liquidation under Section 14 is the equivalent of a rate increase under
Section 13, but is more gently effective, in actual operation, and not nearly ae
dangerous as to public sentiment.

Argueent in support of this dcgma is hardly


3rd. Intimately beering upon the foregoing is the gold eovemont - in a word,

our policy as to the volute of credit may be made to mitigate the infleencee of gold
imports or by ignoring them, 111 Fty exaggerate the harm. This I have consistently urged

but not with the enthusiastic support that I had hoped for

The operations of the

New York bank, in excess of its System proportion, have - however - been sufficient

so far to mitigate the /sold influence - as I shall show - but oennot be expected to

so any longer as

a I ".

of our Section 14 investments

have now been sold.


figures are as follows:
December 30, 1921

System Earning Assets

August 1, 1923


Reduction of Earning Assets





. .

. .. .


'iotal Gross Gold Imeorte December 30, 1921 to August I, 1923


otal Gold Exports, same s:!eriod


Net Gold Increase



..elout any figures available here, I shall assume that domeetic gold
production in this period of 19 months has exceeded coneumption by .,anufecture, by

say 50 eillions, (which is probably too high).

Ignoring therefore such ether factors

as nvelooityn, etc., and ,esneidering only monetary 17;0 ld and volume of credit - we have
during 1922 and 1923 somewhat more than offset the malign influence of gold imports,

by our liquidation of some 440 millions of disoounte and investments.

period tuotoe%Doo of sold tins been added to our reserve,

During this

d such excess of importe

and production over this amount, as reached us, has been put into ciroulation.




Dr. Miller

August 2e, J923.


eiwaiag out gold merely affects our reserve percentage and Ci0 8 not alter the results

as to volume of credit.
4th. The next factor in importance, but without direct bearing, is the

conversion of demand into time deposits - enabling the same amount of reserve to

support a. greater total of lonns and deposits, - which has been eoing on at a merry

pace the last few years.
5th. From the above you will gather that I am asking you to consider a

suggestion as to our policy (not a new one) which is arrived at along a wholly different line of argument than that employed by Gilbert;

but which should neet the

situation so long as he does not gain support for proposals (a) to increase discount

rates or (b) to buy bills or Treasury certificates at .,n artificial differential or
(c) to establish special discount (Section 13) rates for bills or certificates,
lower than thoee for commercial paper.

(The preparation of this letter was interrupted at this point for a few
days - pad weather and a little bronchial epidemic that accompanied it.


yours of the 18th has arrived, since writing the above, and please note our oomelete
accord as to the role of the Federal Reserve System as a


rice fixer": I sketched

a little paper oe this subject three monthe ago but was afraid to use it, being
really a Systen: matter.

This letter will combine reply to yours or the 14th and 18th.)

6th. In all consideration of special discount rates under Section 13 for

special collateral, like Treasury certificates end bills, it eust always be borne in
mind that such a rate simply induces our embers to use the kind of aper for which the

(-> lowest rate is charged.

Line of credit eeeer would disapeear from our eortfolios in

favor of Treasury obligations if' the rate for the latter "i a e cheaper, and the reverse
would happen if the rate was dearer. Nothing whatever neyond that would be accomeliehed,
excepting possibly to put some small premium in value upon the paper to which we extend-

ed the preferential rate.

Our effective rate, - that is the one which the members

would use - would always be the lowest one.

i:ting the war or later, at one time

over 80 per cent. of our earning assets 9i a s ear i:e.per - solely because of the rate

when timt nreferenoe was ended - the other kinds of paper reached tr,







Dr. Mier

August, 2e, 1923.

24tee.uee of the convenience end amal ler risk tind expense of handling by mail, etc.

Specific coneent on certain points in Mr. Gilbert's .etter, which I have
marked - eight well be as follows:
!,"oest, of this ia answered ebove.

There la nomething &Jeered in a

unifore rate, however, heoause it :lace e our rescurces e.t the :eemmand of all of our
.eembere, at the came rate to each, whether the member offere a Treasury obligation, or

a banker's bill, or

erchant's note.

That ie ea it should :le under Section 1.3,

ehere cc lend to a. Member, on the memberle obligation and credit.

Mr. 311bert is a bit oar:fees:1 as to the Landon market,. The 3ank of

England talee "floaters", thet iseligible ea,eer, like ills - Treasury obligatIone
etc., from the "merket" (i.e. dealers) a t. not leee than ite unifore minimum oublisted
discount rate. Our rete is 4. uniform rate, under 1.5, but not a minimum rate.


Bank of England,on the other hand, loans private cuetomers of certain types at lower

rates than the fililAPUID diecount rate, end to others at higher rte. The eolleterel
may be anythina, securitiee (Leembard loens) comeoditiee, .foreigo government bonds, etc.

Our 5ection 14 carryiing rate oorreeponds to Benk rate, and the sank of' England has


rate whatever which eoraeares with our Section 13 discount rate.

While I e,gree that earning'? should not be the erime coneideration or

even an Irsportent one in our credit policy, - I also believe that a policy which reeulted in no earnings would be 'dieaetrous. We would have no ,eontact whatever with
the ie?..rkest.

A eound credit policy, in other words, le in my orinion certain to ,71ve

the Syetee as a whole e..denuato earnings for ex.rensee and dividends. If the time
=roe when ee do not earn ,,1(20321.808, it will wean that something, possibly our own

mistaken policy, ha f3 forced an uneeceseary lie,uidation, such ae would pay off meny

hunLrede of trillione of our eerning ascots.
Thoeo times in the pest when we have eeen buying billa under a normal

g,arkat rate, hive as Fi. rule been when it has been forced upon us because cf
or unwillingeess to advance our discount rate cuerelciently torres..i,:one! with the
nernal merket


Dr. Miller



August 21, 1923

This suggestion is wholly imprecticeeele, fbr the following principal

a - Nete York

is the only market" which at all compares with London -

Other Reserve Banks could not operate.

b - It assumes that our membere will come to deal with us under Section 14
bill houses deel with the Bane of England in London.

To a small extent they may

in New York - but the elan proeosed would not suit any other part of our district,

nor any other Federel iteeerve district.
c - A few New York City bans, especially those in Wa1l. ftreet mould short-

ly have a wholly different type of relationship with the Federal Reserve 3an1 than

would be the case anywhere else, and they vould an ear to enjoy eeecial facilitiee

eeecially favorable rats.
All of the procedures indicated would Bitaply center in New York more
even than they now do. Our efficrt is to distribute these transaotions.

I think the member bank should eay the same rate, ehen borrowing froe

us, whether the eollateral be (?.overnment bonds or customers' notes.

The lower

market rates for these seeciel eeouritiee will be those at whIch we deal with the
dealers under Section 1.4.

True enough, and on the surface it would apeeer that the trouble 1

not with our rates for bills and certifieates, but that our asoount rates are too
much below the ,general money market. That may later aar to he the case, but I
am opposed to any inerease just now.

The reason will a.c., ear in my reply to yours

of the 18th.
riere aeweere the reel point.

It boils on to a suggestion to advance

discount rates only on business paper - and let c.:resent, or lower rates apply to
Treasury certificates and bills.


should not consider such a °curve for one

whatever the argument may now be - the result is the same - 1919 all over

again - the Reserve Banks carrying all the Treasury certificates at. erofitable rates
for member banks.

We had our lesson once end I am Sril &zed that the 7,roposal eb.ould

be slriously advalced again.

We would lift the whole com,meroial money .elarket a

Dr. Miller


August, ?8, 192S.

ceetain eleount - put a premium on the Treaeury certificate - and haw," mother scramble
for Government deposits.


(10).7.1e know from past experienoe tht once theca ereferentiel retes are
eetablished, the large City (,specially Nee York City) beaks, are the only ones which
can promptly and ful:y svail of them.

The country ban% in neither e holder nor

deeler in those luxuries that pay only 4 percent. or oven 1.ess.

- Our safe ccur se wir. be to oeserve the real intent 5ned spirit


of the act, and furnish credit to 611 our meebers at the eame rete in our res,?ective
districts, no matter whfi.t. t7-2e oollaterel, nor the sits, strength or location of the
bank, - eo lone, ar the. member simply borrow& for a fired term under Section :15.

Now let me here &newer yours of the 18th regarding the function of our rate.

I not eel:, still believe it is the effective control (as to volume of members' discounts)
ere but that if anything it is just now to

effective. It 6or:Atimes t36017se to me that in

such periods as 191f - 102C!, :meine less eegree early this yepr, - we ere unable to

epily tlae brake (by rata advtriee) eently enough to slow down the machine, - sharp

rate edvences ot sa

sre toc lie.b'e to belt, the

ohire or start it rovinz backwards.

If this is true, (and the be.sie of my statement Is eeeeirice.,1, to borrow a. fevorite word
of yours) then it KI0a4F3 that the oo-elffinient is toe strong e factor favoring liquida-

tion, juet

fi,trey once lointed Tut, end that the multiple effent 0r rete increase

the general moral end psyCholoei:::al effect - ere together too stronT.

This is ore

imeortant reason why I have been o p(jFac'. to any furV-ear increase Ro fsr this year.

Hers therefore ir the why our polley outlines. to me fro

regard to

should ai



to maintain a stable volume of credit - elth due

Inereeees and decreeees in monetary sold -

Annual or longer period requirements for increases in credit volueie

in oorrespondeeoe with increasce in population end ;7:roctuction and eonsuse:tion.

(0) geaeonal variations -

(d) çeia1 world reaonetruction coneiderations ns 6 eetional policy.



Dr. Miller


Auguet 28, 1923.



Second - We should control the volume of member bank borrowings - keeping

them reasonably at the needs of tne country/a seasons/ requirements - but preventing
excesses of borrowings by a uniform rate for credit extended under Section 16, which
does not encourage our borrowing.

Third - We should enlarge in 'volume and activity and importance, our market
operations under Section 14 - making:, that the means of enomptly supplying eleficienciee

and withdrawing, surpluses of eredit, over and beyond what is done under Section 11.

- We should consider this generel program as but teepeerery and tenta-

tive, - fitting ratter to a situation where all the world but ourselves has eusoended
gold payment, and intending to recast our point of view whenever the aperoach



sooption of speeie payment by important netione apeeare possible.
fifth - Tee ehould prom-tly seek ,,iore aceurate and. effective matins of determining how much and when to buy or to sell under Section 14 through the Comeittee.

If the federal. Ileeerve 3oard and the 79vernore of the fiecerve qanks evil,

consider this policy solely, es onf.-; designed to manage or eontrol the total voluee of
efective banking (credit

and brush aside every local, or district, ox special

consideration - as of secondary importanee

I believe es can find the solution of

some of our ?tizzies and difficulties.
With no opportunity to consult my colleagues in New York, I in unable to

say whether they will agree with all. of the ebove, so pleaue consider it en expreeeion
of sly own views su/y.

first draft only.


I have no facilities hero for polishing;

you and to your eesociatee.

Honorable A. C. Miller,

co Federal Reserve aoard,
Washington, D. C.

Warm regale to

November 5, 1923.

iear Dr. Miller:

'tes - I

tack, and rejoice to have your warm welcome.

Now I shall really try to be good - tmkethingseEsy - and
ecially to follow your advice - which lc sound hnd to the point.

Details of my recovery I'll give you later this week as I ,m plt,nninr
to go over not later than FridPy.

It will indeed be fine to see you.

There it, much ahead of us that is interesting, - some th,it will prove

to be most difficult, but on the ,hole I think we have seen our worst
days for a time and may worry less and enjoy more of our taak than ever

io small part of my satisfaction, just now, is found in your

letter and th kindness which led you to *rite it.
My best to you, as always,
Very sincerely,

Hon. A. C. Miller,
c/a-Federkl-temerve Board
Washington, D. C.
133. MV

Novemher 19, 1923

Dear Dr. Miller:

It was disappointing to leave Washington without a satisfactory oppor-

tunity for a visit with you, but I an learning, after long experience, that
exercise of the mind, even of a feeble one, is as tiring as exercise of the

Now I an planning to spend the first week of December there, when

the Investment Coeeittee is to meet if convenient all around, and we cun continue
our diecuesion.
Meantime, I am sure we must all consider the need for a policy which

all understand and if possible all are,rove.

It will be the duty of the 30ard,

with the Committee as the operating arm of the System, to accept or reject the
proposals which will undoubtedly be made, and to that end I shall send the data
to Governor Criesinger, when it is completed.

Honorable A. C. Miller,
c/o Federal Reserve 3oard,
Washington, D. C.

Please give it your best thought.

January 11, 1924.


My dear Dr.

When I was last in

Wagtington you

expreet,ed considerable diesati.i.f&ction

in regtrd to the way in which the C-_rmalt matter had been handled by the men in our

law department, and indicated that

it was ground for disallowing the recommended

increases in the salaries for two of our men, which were Aibmitted with the recom-

mendation of the officers and directors of this bunk.
Since then kr. Jay has received a letter adviAng that these proposed
salary increases which had been referred to the law committee for consideration
had been disallowed.

I naturally aseociNte the action of the Board with your

reew,rke in regard to this particular instance.

Knowing that you wish only a jut determination of such setters as this,

I have had

the whole history of the Carmalt matter thoroughly investigated and a

memorandum prepared which tells the full story, copy of *hick is enclosed with

t4'ter reading this memorandum and some of the correspondence and discussing the matter with the men involved, my own coaclusioni.; are frankly as follcovs:


Had we gone right ,,head with our own procedure in behalf of thi-

bank alone to deal with this ....dostion of rates before the Interstate Commerce Com-

mission, a great deal of dei', would have been saved, we might 11, had a decirion
at a much earlier date, and had

the decision

been favorable we would have saved

as much - or more - money to the bank than what

paid to counsel, , no question would
of thie

bank to endeavor to secure such


now involved in the fee, to be

ever h,ve been raised

revision of rates.

s to the t

Dr. Miller


The subject being one in which ell the Reerve Bsiak hive nn Interest,

4t whe entirely naturel to have it considered by the Committee on Economy and Efficiency,

,nd of course it was necessary to tecure the useent of the otherReL-erve Banks to the
employment of counsel and to the institution of fennel proceedings before our doing
so, which resulted in eome delay.

You will notice that it is no fifteen monthf, eince

we first sterted to investigate this oabject in New York.
ilthough Mr. Philtinle letter Iv) 11,,ve contained one phrase ehich wbr

iebeeding as to the inetructione which he had received, neverthelese the facts were
thoroughly understood by him end by kr. hounds,

1(1 the method vhich

A,-E employed WaP

th2t bicb lied been authorized by the oomittee End ,pproved by you, and Mr. Meton

and Mr. Philbin did not finally conclude negotieetionf with Mr. Cartvit until after
all the Reserve Banks hed approved of our coilv o, ;nd until the eouneel of the
Federal Reserve Board hod been perFonelly informed in Weshingtou of whet W43 being

In gonerel I feel that in such hOmini.trstive m tters as this, the
officers of the neeerve RFeeke are men of meture experience, ,na, fr.nkly, that teeny

of them ere, and should be, of much more experiew in technical matter of this kind
then sre the memnera of the Federal Reserve doerd. Of course le are glad to


through e committee in matters concerning all of the Reserve Beaks, as Ae have done
in this case, but wo feel that it is unfortunate that as an Incident to such cooperation
there should he ea much delay and hesitation in arriving


final decieion?.


delay that has resulted in the cei'e in filing the formal petition before the Interstate
Commerce Commission In behalf of the ecver-1 Reeerve Bank e is in itself pretty good
proof of the ob:ervence by our men ef the oondition::' imposed by tour committee:


the approval of the other Federal Reeerve aenko; end, eeoond, the eettlement of the

difference of opinion concerning the emount of the fee to be paid to Cermalt.

I cennot but feel also that these two gentlemen are the victim z of our
cnmbereome way of doing thins an that some injustice ha been done them if Le fecte

in this particular matter have been the basis of e disapproval of the salary recom-

Dr. Uiller



You and your eseociotes, I am aura, do not realize the very large Dmount
of investigation, work and advice thet ie thrown upon our law department, not limply.

because of the businese conducted by thi$ bunk, but because of the very ltrge amount,
of businese whion we neceusarily and unavoidbbly conduct for the Treasury Of the United

States, for the other here Banks, for foreign bbuks, and beoauoe of the extent to
which many of these matters originate in Now York, and are investig&ted and deolt with

not in beheif of this bank alone, but of the ,,ystem ae 5. whole.
lou will . Jigree with me that it io al*ays well for J6 to be frank with onch
other about theee matters.
the other Reserve Banks, are

The executive officers of this bank, and doubtlese of
in the hsbit of making prompt deci.:71on

effort ie ell towards getting reeulte.


The ,..ttitude of any 000rd - like the federal

Reserve Board - is always, and unavoidably, One or extreme caution in moking any

I think my impreosion of the past fe* years is that where theee administra-

tive matters require review by the eeder61 Reerve Board, it invariably involve* a of delay aad correepondence and frequeotly diocuoolon, which would never

ari6e if *e were deciding them and dealing ith them oureelves just aa on ordintry bank

Why cannot our procedure ia thi matter be amewaat improved?

&la writing you this personally '6%m-use I do not want to o ;ear to oe
complaining to the Reeerve Board on the ground of the ruling which they have made on

ealsries. They h4ve indeed beeo exceedingly generoue in accepting our rocomqtencLLions
of past years in most oes, &nd ao one in this bani: appreciatb73 it more than I do.
On the other htoid, I think you realize that he hiotary of the at nine

years - at any rate oo far as this bank is concerned - is aot reve,i1 a series of
mistakes, entanglemente, litigation aad trouble attributable to cure1esoneo,3 or haste

Dr. Miller



In the ivtly the buelnese 16 conducted. We have been singularly free from that eort

of thing, tuld X would like to have you and your t.esociateu .tdopt the view that the
bfink i6 being run by men of experience who t,re careful and who can be trusted to get

re6u1ts and keep out or trouble.
Please write me your OWG view

with the utmoct franknese.

Very truly youre,
Honorable A. C. miller,
Federel he6erve bo5rd,
Washington, D. C.

January 19, 1924.
Dear Doctor Miller:

I am in receipt of your letter of yesterday replying to

my communi-

ostion of the 17th 'natant, both in reference to the transactions of the open
market investment committee of the Federal Reaerve Syetem.

I am very glad to have you reiterate the views exeresced by you at
the meeting on Monday; namely, that under existing conditions we should move

slowly in the matter of making further purchases, and that we should not alter
our buying prices to meet the changing conditions in the market. As you know,

I am quite in sympathy with this oolicy, and believe that the reeolution adopted
at our meeting Monday dealing with the policy of further purchases of govern-

ment securities, clearly indicetes that all of the members of the open ivrket
investment committee are unanimously in sysyathy with this viewpoint.
AC you recall, on Monday money conditions were very easy; call money

ruling at 5 3/4% and 4%, and the ,)rice limits fixed by us for the purchase of
short term governments were quite above the then existing market. On Tuesday,
however, the situation changed.

The 4f call rate of looday had the effect of

driving a considerable supply of funds away from this market; that is, member

bank.: in other districts called their money back home, thereby creating a
temporary scarcity in the call money iverket, so that on Tuesday there ,as a
shortage of some 20,000,000 in moeey to meet the demend for call loans, with

the result that the rete advanced to 5%. At that point ice here offered some

6,000,-00 or so of March, 1925, treasury notes at the old price limit fixed


Honorable A. C. Miller

by the committee; namely, a 4 1/4% basis.


This, to my mind, furnishes a spleddid

illustnAion of the effectiveness of our pre,3ent policy.

Since then our pur-

chases been negligible, although we have arranged to buy for delivery next
week some t4,530,000 additional paper mAuring this year.

I appreciate very much your writing me in this matter.
Very cordially yours,

j. 14i. Cate

Honor5ble A. 0. Miller,
Federal Reserve Board,
hashington, r. C.


January $1, 1924.

Dear Dr. Miller:

Thie is a belted reply to yours of the i2th. I sw glad to have your letter
and to read what you write about the salary of counsel. Nite every desire to look at
the Garealt matter judicially and fairly free. your eoint of view, as well as that of
the men in our bank, I am absolutely satisfied that %hat they did was justified and
that they were the viotime of a rather cumbereome nethod which groes oet of the inherent defects in our many-headed organization.
As to "pegging" salaries, of course, you don't wish to be guilty of in-

justice euy more than we do.

Fier the head of one of the Reeerve Banes Lo bey no

that the salary of a given officer should not be raised at SOttIO indefinite time in
the future, might be the cause of grave injustice. Good ground for iecroasine the
salary of tint individual might arise, and in our case, I might have placed in the

heeds of the Federal Reserve Board an exereeelon of 'ies in the leght
circumstances which the Board might feel justification for declining a salary increase
at gone oate in the future when the circumstances had eaterially changed and such a

salary increase be in fact fully justified.

Ne ere at wort upon a careful review of this whole eatter. I expect short-

to have he recoeeendations of the senior officers of the bank, eed after I have

gone over them myself will take them up with our directors and then send them to the
Board as the bast view that can now be exeressed of future elessibilities. This I
believe is what you wtat, but I am sure that eo member of the Board would ask me at
this time to make a eefinite meeitmeet for ale tine es to the future of saleries of
individuals of the beak and thereby open the door to possible injustice. I know
that your own mind is oeen in this natter and that ehee the time coees for reviewing
salaries you will deal with them en their merits. That is really what ought to be done.
My trip to Palm Beach really did ne a lot oi good. I was badly in need of
exercise no as to get out of the habit of puffing every time I went up a few steps.
I get around a good deal easier now and on't get as tired. As soon as my desk is
clear of the accumulated work of the pest few weeks, I at eroeceing to run over to
Wathington on a visit on a lot of matters which seem to justify discussion, and will
stay as long as you want me to.

With best regards end many thenks eor your nice letter, believe
cordially yours,
Honoranle A. 0. Miller
c/O Federel Reserve Board,
Waehineton, D. D.


February 14, 1924.

Dear Dr. miller:

A. you know, the 3ank of neland sent tioef their men, Yr. Osborne and Mr.
to visit the Federal Reserve Sank of New York last year. I an advised that

the result of their visit was in every way beneficial.
I think it had a favorable
reaction upon our own organization to have a visit of that character. Once or twice

In the past, Governor Norman has expreseed to me a desire that we should send two of
our men to make e similar visit to the Bank of &eland, and I am strongly in favor of

doing so at an early date.
Following my talk with you and Mr. Stewart last December,
I wrote a letter to Governor Norman sounding him as to a possible visit by Mr. Stewart,
accomesnyied by a representative from our bank, and I now have a letter from Cecil

Lubbock, the Deputy Governor, referring to my letter, and indicating the eleaeure they

will feel if &r.

Stewart and one of our men can


letter, and he inquiries as to when they might go.

No time was suggested in my

He wishes advice in advance.

It was Mr. Stewart's thought that he would prefer to snend
York studying the New York money market and proceed then to London.

sometime in New

ThIs Will be

in every way desirable, but I believe not essential to the success of his visit.
Poseibly a few days, or even a week, spent in New York would give him a sufficient
familiarity with our methods to serve the pureose of his visit to London.

If this plan is carried opt, I would much erefer to arrange it in such a way
that I could myself be there during the early part of Mr. Stewart'e stay. '.eeet of the
leading Loedon bankers are -personal friends of mine, and I would not only enjoy the
erivilee,e of starting Mr. Stewart, and his companion in their inquiry, but believe that
it would facilitate it were I able to be there.for a short time. It just hapeens that
Governor Norman has been writing me from time to

time urging me to go over this leering

of mutual interest, and I now have a letter asking
that I arrange to do ea, if possible, in the near future. But 1t it ale:ears to be
absolutely impossible, he tells ff'e very confidentially that he will erobably plan to
run over here for a visit of about a week during theaster holidays.
for a general discussion of matters

For various reasons, I would prefer to have

the meeting in London, and am

writing at once to adviee you the whole situation and to ask if you will be Leeod
enough to discuss it confidentially with the Board and let me know about the eroepect
You will apereciate the need for confidence,
of Mr. Stewart being able to get away.
as there would certainly be a wrong interpretAion placed upon such a visit if it
Acame known, especially at the eresent time.

Yours very truly,
Honorable A. C. Miller
c/o Federal Reserve Board,
4ashington, D. C.


"throaty 204 IVA


gy deat Pr.

Tble le t'ao ItWAsr whieh I st


14.40,4044 to vrit4 to ±,o1A 10 rogor4

t!kil ,IreptiA/ If tA rodor40 00$6rw4 NImr4 to OitrIpl th yretoot ,!, of ImIoul'tlug 410.11

u.,,',10,4ag IN* reeer/4 -etaievt4:11 1, tba twc,00ll4atod atateer,t of ttte

"eo.ore: kocorvo

t *A*0


a=ft440 Oaaies

tolAt It mulles ,eu lo time to lee o0,4aldore4 hi yeti


re ra u. .n6410,


AP.T4ila 14/60 rt




vo*0 iterlet or the :at.tor aro taaleosal te ftaiiit*tia it.e 4c1-

Ate 1 vwderatand

tte eaderc

#21,1), It iv iten4,041

in ,ravtls p.440 ea moll of their 004 rerarvaa
oat* tvw,A,* 4.16 oadet :trettitat colditianit wt



,Alch or al.vAsaLora rt.** OS Nh,10014

ab 11






,4t4w LAtiv,404

that tt:e IlleAuwaoe

reserve WW1 be coNaldorad aeol Tcorted aft

rokerve 44tst

vIIAtar,41 i40-earityør

1*Lt, ift the 5.

rve or wile,,tors1




tte 0a14 ta4

that ti4e aettwo




9 altregato mp-iatitqtlaA


reottles tOe relterTe

tki- texeUciAtee atotel,00t *f AtAittaril

r4oaree iereietokee ,9r


mid tat,

4#tim, *4,414 ttvreafter ovAkt to tlo

T2r*ae4t eeqditle4e, Af aveta4A6 at tut,atautlell NO% gold oellat*rat

drset netea 6,A4 rye* $0 to eol repervo tgatioet 4.4743iti4.

rharis *ow., bo 1.43- *write* forlorn'. oti.4,otie4o4


lionorOlo A. e.

,r tte IAA itself.

IIIPor4ori 1



tro,Aora of 00 rsidora'1


,corvo hot into:014,d, tmd tam or*try xmotto4 ttat OA moo lqeogA 4q" 4.6414114 oloold


otio 41orrons;", 46 Atstoi in T.SA tctioe.t



e Foetore i4IPItiYWO

of tursiohiaf soot on lastia ourresog itot 9kAj

0 tiO 16 ,:rovidos that

ftrty Foitsral NoworTo Ihva prat apply for an4 tyrosine Fodert! Psorvo UPP44 fro* *
?odoral 101. rye tont hos toP,,dor as aollstora1 looarItt of "ootos, frorto, ars ot

AlAbaz.,*e", 04. or woOd or ge!* eortifitatos*; eed that * ry

roxorvos of ;,kat lo4,v

it notosiIaotos


It Asioo o m ids t' t4o ;Astaa

idortk.! qemvo " syl

(,..04YoUl by 4.0.A ln stx .,orvoatole ohotover.

This letztion Oeu providos that ao.1

Nay 4old to bold hy to 4gorAt It wool want as

a ;!art of m.hs rogorvo fxigolat lotoo;

%tat any Wodorai 1400(lo l&a* sty ro4ws its

liability W *visiting go:;.d or Lieu! mo60/

rodera 'veorlro 400ti


thAt AA, moot'ot okall No told ohtluoilosty t'or o'44shano for oAmta,i- -'04orol


ontlro fre041, to* los0$1*,1, koolover,

io7vAlit Or' gold At all, or vf asz Amount no' ;Told as

4,4 v,

004 licituei



Potooroo motoo.

4140 II L4 the wiT.11Jraial se4 subetitAtio;4 01 witet, 4ratts, Ni:'s

vqoo to tt now,o,

rhr isages 4P rodoral osorito

grart,t or ro:iovt

a ;given t:r4 :41Akr

4 sarkof'41 roadinit

,lootion 1/ in tow-ection Alth

,.,.2-rctx4rlo of 4 . 1t, 0:4 W410014,;lt Of Vt.
tot44 60 wipOlif,

tVat t


to 000 g',ct, 04N 41)1

rtyrt.o4ovoi Sntouded kir iMii4S t'NOtort! koservo *sit

ia 4.goiAat th, oollatoral

4.60010e1,44 .,. sr,

holoral foxierv.o .gotoo Olwold

.l4 rocoripo *4414 belhei4 tsj
IOW vans



oxohon4o, snoojantog, Ato., lsolotieg gold.

frnr Ute

that UP). A4t etd oot tatod ttot

iv :raotios, No rtrI

t that Ins

r*sorvo *AA Tmt as oollatorall

--ast tip Numtoit 4$rt. 40.1" tho

LW 44* Otoado4 cia;ty W resulartm,

to rol-oroo;

that any

tbat OA &moo*.

gra4;tioo aroady atteTtodi


tbst JArtioa f tootiou If ks steA4ed *.4101 rovi4ok that old, 4o,14;;: .!:Artiricatoo,
mkuoi r-4461, '0, hold by tbm Fie:torsi tagorte Aorat Tglvvivslz nor oto4sa4* jlor
414tetea4ioAi notst4 ig 3oltbor a ono4ari4


4wern$Ai -*I, any 4*,sytiato

rrao the senora" **two of tilt* Aot 6t (4 *hat shall la gorrot,




goloweiWA t.

uso,,,rity *4'i. boo or wbfire geld sks71iahele
rpoorvit oelowietio4 04411 be Imle.

444 t.;,44t

perfeTAI freo

otbost *lc ?an)

It* 7:.orAel eb*r*storletiek or the

th*1 the Reserve geoS oheil vIllAteit., in It

the 0,10At) ?Aot

for Forter40 hes

thet thor sh*It ho tlesttn) th*t thei 0*tt ha tetrow,1

Feder*I, *oast,* ,,,17.ts 10c:4

by ditoeuntee lowor;


le, 10t4


4 V71 41414 recerve 46Atatt, tUon;

pteks ,aitLer dl000+Juts-4 peyer ot

,ret sith


t,1*t *4.0 F4oterito

ga14 .Aa4

tout tittt *or 401d 0-014t t4 0.4.4 eihel

F4*;1::t, obeli

to iriltottit4titt one Itr




iotervret*tioto thNt tte wor44 tF tte otetut ,44,*41khito A4f,quAl-koly ror osoh.00.4tv oor..
,to * fortd*eo4tel 4h*rigo in the Atet40.4* of settirl Up th4 t*V0r,410 Ite tbileOevervet

AO**, or of slUbitinf thwo Ot InterrotiA


to the *whale, ***M4 t

ontrcry t* 00 spirit, *44 letivt of .tle Aat, tott Qt f4


*164tlo leifuo mIA

i*G* 40% reoerve.

!nor* 4:

otter features of 00


t*n4t jt4tv0OF

it U, Aett

teil without, 4 i/areli




et eIr,stet 014 IA getter,* N:1,14ztt tlotot c-10 shot 4s4AmtOitiiresixono
c4otiot 14 ,t01,4,40 ontx


13r, the 4e/4 $ettleoest flood

Vt:o 44,ort:t 'R***Aior-vo 4^4k, 01* 014 ntli,A Iv

rottidered $s* rtcht'.. eg*.l&et either motor, sr

tuab ref:parr* ,,er:semtege for the ateeeIl4zted st,otoo&t WI 04,0ent


ox,rfulo4v or * Aoto 10440 47 0:4 ZlotA* Ar * whoOtt whinb tv ,No117 sliwur464 'N.7-

Th14 041 4aly !los litto by movls,illorigUteeld hoo.d

004god tAphin4 Nati401 ",u,rd

rehehly 4$7111 *T




*t some

oFle, %mei( 1

the ,,:mr4,41 -tivre Pet AtA

gpoldtLG.J*0.4/2 ije stIstetcl :,orcewt*ge of re6erve

*gAinet 'Auto*, ta4 bo*vo Jrrittiont ork4 ft* resmr/e egelitt do:pavan.
non4Litt4cm th. gwri.4 tn


ander Alwort

*atunl ntroulittiar. held by t).'le re6trel

?4,41-re Nma, or Re* 1.000 :,,,ros/des tbo :r*Jor :Art or the geld tO V4k0 up titio


ntl tben,0 1lAnit* 486401. krop Oblort.

to f4at


c;aorable A.





twory itowarre

As wit

t31.4 .c46ttie!.'4.


*alo4tatiot: of rtilorwo

aoh4ition. tho wirhitrary totovhalot,ii; of


reeerve arodp.two tis thio CorN wi7C. wichihit



coaditlien for tho tyatop whiah

tto ituRotorwe Boolo, titot It sti' 1

trs to olattorato .4%:',:anatiot. for tho 7ohilo itanora11y to u:od5rwtavt4 Via 4ocuitag.
44.14.rati Cho ffoct

3*At, .0,4110.4

tttitt414r to***I41 the 51114,4**

hit letikoro4

* r000lt

leati it* itefttition tog



oihlhita thu,t; the ftlirekt; e1k* the

thrit t2.oro i*


*teen a



tkis woy


tim fart of tho ttatagoat

tAw Itkoogor whkolt taw *to*

Arr. otTatioatioa


tho pro.ceo41 oAtuto 40011


.po' or ow.4 4tottlik

root ro43tIorkt

ionorlai MieurAeoorsttodi3i or 1.0

it torooho.ctoo* to.* ittrondi





rhot it bac wsagoot vmoro. oqrteatty so to wat

That to ow:tit ehalt30 whou16k

4: aLthottt 2ogislatIou

0- 1,44


Ilitot i Jo itiftreiy etvittiedinie.1

?tat v. sowt latar It4:AV;t tO sa,ort 4 largo

rut it

tv,:war to rs togroplitg.

sA.,,,,14, toe- tho ira4orai

Bant of Ifticomd.


That * ele.ttplii


rt r tto ApOt







o?' 11,44ot:it:At will aet Otter the :'-toto

te OUT' eMPeite 014 .holdIrviis.

T4at tho rot or-100411y 1,t,towlo4 that ao1çe,7 tloot141 ool
aestAst flowo.,,tod ?*);:or. azol ttat wo
la Not
I*1,0.41 %sty


tuototT4wt 014 oil oollotoral.

not tho rodoral. i--4sorir5


tha el.g4rot.

TtAt V,* ota4go way tio7;17 kali* tho effeot of .goesel,vior %boo


2-ro *ww

rt3.,74041.4 to "fearzw.r7to Use hkei,., of' oqr

asitteot witS tto 'wow.

rJitit th* whaaeoi

.0setro1, owe to to, retwoft with the fant that ,,www;,,A
owtiforaly a4vipre vs VAPA



114i th It 64

ttvgit "it

,m,,,-ont vas
.* tAlhen ,vreatiy



reb' e A. 0.

that there iF already e general lack of underetaeding of the figures

and of the reeerve calculatioas and whet they 74114A;

that there is likelihood of

greater confusion and lack of uederetanding if way further eleere,es are made;


thet a ohanee of policy le foreshadowed.

In the writer's visa, the real danger in eiblishing a reserve Heroentage
egaiaet ele;ossits which will be much lower than the reeerve perceeteee te which the

public is now aocuetomed, may not iedeed eriee imeediateiy, although. that is h

It will, however, trice leter after the etteutioo of the oentry
eeeceee ?lead upon and. aocuetomed to a eold eecured eureeney (in aepserence) and to

a reeerve percentage ueainet depoeits te small es it ay well be by this method of

It will be wheel the time errivee that

:sues &nVf. deposite or



ooneiderab7e, expansion of note

eoneidereele leee of gold through gold eeeorte 04Utet the

ercentage to be eherply reduced.

The habit of niad creeted by this ercentage eay

elve groued for distrust end alert, over the bankiag eoeition as won aa the reserve
eperceotege bacomts redeced, whereas alarm or uaoertainty eight not then tw juetified
by the actual facts or the reserve calculatiooe to coatinue ee they are eow esee.

The 3oerd would then be faced with the need for either ebandonieg whet the euhlic will
eoneider a egregatioe of eold or changing the :late erontege, which in iteelt might
accentuate alarm.

Purthereoree the Fieard Ur/elf might eell come to ehare the general view
created by this change, which would in time react upon the judgeent of the Boerd and

the 3anks themeelvee, and give rice to changes of policy or rates *hiob would be

edicated ueon ee incorrect judgeent of the eituatione
Jut even the immediate conditioes, it seems to me, lake the present a eest
inoppertune time for maitag way ceang at ell.
eed Addle



Pe have throeghout the Nerthweet

even extendieg Kest et far as Ohio and euth end i;erst at. tar ?It

Teess, a feeling of very grays apereeension in regard to reselling ceeditione.



ieneeratively ehort time eons 00 benke have tee* Pbroed to elates or ere in the heeds

. U. tt ler


of tt,* : )**&ing eutheritioa.

0' the OT:i xember o



the Sinveeplie die riot,


aboot /4* hey* **Aber oleeed cr tro iN the betle of bonelog &utter.


tottralordlaery *eeeore5

'tie* 6r kre seri:woolly enberresee.

imxtted hy the Pr tioent, wi 4re in ;=rtoese.
No t!zle eiftmoi fIvr ge.4*re, e4ers.


tee, de*,eteb ti,ght


OM* 144

er141* tr

Ater* ov,1;4

.:jr.1!-$ neve ',Aeo

/%7,1.% l,,ter:rotod


orities.t artlale

reetrIltiom tc-pen cor * oo4trowotto4 of ere4it.



hAe *treat beep ale.4,. .,ece4 in Cougrene en4 priAlod

"knees"' th"-v.

ilre4t1,4 f

foic 'Fredlttleg A rtetge of yeA.oy ny Vbe tyetur 1- tt

the aloardta .44



the pmet ter reooklog, refuletleti thet the fe,lorei Aetorye

It effeote k rvmdetwItel okatqo


A/beery* 6ystex to U , oblit it le lz feot

tlf4o :1,_.*#.rpoofe af the Fodor**


t4o leeetien tat o7.1oe 4.rigts 4* t=4 'bother ttle 210eeeei


!II ell of ttose 0,*** reeenAibility b tho Vleten


i-,.tore$1, ix to loportamt 4 ohwve.

ettleer4 tkt avihjett




To ho our*, ot the POqw*Ut Of eiFet04* neak

til.etcoto40, bet eithvit 7.r.:24retian or ixpertuftity for

oeuelderetieni 4414 Um" ottereoee of 4iamst 044
te1.4 in ',Ieeni&


leet Atvettper.


Tke it*Wr**61044




'0VMO 7411:44.

It th4 elude *r tJw'


wee. 1 fettered, thut the diev4stio* vet aneAorl,e ue4 the% netting istediete loo,*

fftr 4f

41r4r* it b4* Tlot 444ok 4144,4***4zwith

ipt the Troontry, or foged oveft tol th* Pederel, AOteory :4mtell.
*ppoco4 by tho Goilmart of 00 ?eklerel
boa re4icel *LeAve

It 10144 *MA4i0eVOl1


thio oen f:ax eanytoil by the liard *11A p*Witob*4

00uotry oittiout regoAllig In inowerWe
to the ',peenttr,at
4e4s et t.* offltteeend .tIren0'4* or the re:vel aeoorve Renle
)1,0*444mot tkr*ogwilt


th teno.

,1)*t *T the ;:novrnere -0e the hecervo

toney wholly uoy.rsierei to


it the Po,,larre,i 7,;***rw

eviece or to dltoot the

t7. ItiVet


FebnAryr !M,

utel So 4. gide avergeao, of view* **tertaiA 4 Of the *:fitlere of the gy*tef: itoeif oe to tOe ,414o*Ate4 of the oh

So no'


le great Yeriety of viewe atf :t10 ex;:reoe.4.

dieaofit it,

!hei qkre

wigtitt it n*t '2ye 4firstruble to **14

tderea beocre0 Satx * tun stotc-o4t mad IMIP',14V40.04 Oft,tteAtra Ptaol
#1,00 Lrvem
epOrtonity t ta4y it sir,,?, tsxreat their 0.W.e to



Prior to 4eitt pe$

tLe 14ter.**Aiev4

kheo* eff"trero wndi or VI. 204r4

itceitt imit it at 4146 be well to review the reewrye ottrosAtsgos tit as to% row
lour* 4144 tt104 hnlietteaio that Uzi* pleata4 :1**4 in osrktisA, 4114 se* how is tuft

prosoststion e the reoervee wiett 4wwe ic,r:Itooed tAo pelley of

Alec, ttirettetien14,

*.ity onvAnt be iO41oAted Attr tit.* Sretwii, nn4lor tb* 00,64-

tiwino oo exhibitoeif it 4,44* 4 'taro **port Aeretlefit tf


uzAer tjoe* 104.tioow 4,* veld *0014 441 toiom tre tti
Wen frowAlle :lots ro4porvook


vtriposrit., cr oethl

4* Anna* of polity ut,tem;,%*4.

rowervotw *t nuot
wpou Oko *tateadeat or re-

atreot nievAd

A#4 ton 444(0 6*it of ~LIT




would hew* oeen tor**4 upon tke 4tstes rot 4*De votrenewer It *** **

t4weiderotiou *oat n000ggariI7 ogivee4 to the otroot

101$41 eloptideloe et' ermo

4914erwb,1* reduvtione IA Oa osoust pr ,004 whisL tf,t? aro

ozttoot FO4orol 400orvo wet**.

to MFIAlivo 1


g1P it 00t to =,,oi../t **siy' to oliotObi

wo4 tt:* tAtte ietio*

e*I4 &yeti* elos* out tt A

oworal pool or rocerve i,ritot of * ceireote4 repoqr**,
AA0a4.r ooneest *Wet i* tertait to or4o* aeeng WIlorated oritlet ee
-eller or tbo 6/oto4, 444 otaa 000mo to he irolito4 141, tb* 4 toed Atetel ,o

It sa, to tether *Ity, reiN,ry* ratio "og t *are *044 *atioNetor .i=uldlo either


i4 its* Intro *t etottewont NOMA WV* hat

rtssor* or A 014 010Ort.00TInf, 44d tbey

'4ogf1,44spoNs in Us 014 reter


Aar *Aptrt free ettner tte der;Jeelt ro**elel

whieL woulA halm 40,1 04,141;*A (t4 fh$



Rett tbe *Moat oould .0°.th*bly '!** wolou tte rate ,11*Ziey ef the %Totes/

oight be the leittelora tf.o t5 d491?ing

or t



A. 1% 0111or



or tho Fe=terft! teteres ,4wiev or ter the reh.lio iw thoir 1.,,twGretattea of

'Soesiag eesditions.


.i.eardt* rr&at ototonot im Ito peopcipxfed temeat ao

roomy,* ratios *re AO Wkter 4ft pideo to oretlit relief ocso* to to eskatroditot

by Ihoo ?rovo4o,! tbAogo ill the lyoths4

teas stiot cerrow te 44..-


,1,41(0r4t4 rether V>4.14 41*Itrtigv their ist,ortetue ,o iwitel,t&rs of tvA,F,;,!,,,vg 0041tiliimo to


*bieL fors44

#t t.


luitoatios, *hen the oh;t54. steuaord *to in, i4omOste 0:,ero,,tifen

hsokiaa satioA


rederel /106erve ZSysto

1A t1410


if tLats

w credit,


LiVIOr Is4f* ant entiersotory, thee tho ,7ot4oy of` te 1,14

of los,lo, so soli A*.F ths judrewt of IA.

No:d ef ell the

.4415.0 tosto Oer the tixs tubing,


WI es0o,1

wile& tuot wo tto orsont*ge of tt4

fsstors ratter thso *goon 4 e'44

reavrso t' tbe !,,za of Sort's.

fro4t seristy of

214.0?,114 the

nb:ist d atetvAlat of the ,,,yotoo. invito

th w.teetiom of tho publio te a eis'eadiat swite

The Koot isperteni thisi it tho

statolwit is the *ovelont or the gorwileg sweets; yet tho sfoat of tti* obseg
roserls oroesteve to

to eeneestreto ettsatiel esoAk4oiseily upon two othor

(o) the f4et that there io Iejc% of 44old boh,ir,d tto vot6s, 11,04 (h) tte

.4rolivntA4* e a614 ghost as r000rwo stsibst 44tioelts ss ,aeaptra tath the ;:ereertate

t ;.letslie4e4 sin4 sotutaly hold okstast mat 'Isellitioa.
in 4 *cattier of ti 'gird, the ,akttlia doss not islwxy* re? 0-401.:Aod :5",%T.4
tt004, %Wittig' rOpOrt4t .0144 Color to dt*v4volow*.



oo',..roo or tioso tt wtli

If St tlose ros Lhols tt florste

tilowAt* ts*bitwA*4 tp


0-4 ison4itiO4

e ta tbo ilottod Stt4to* lo oolorstely se,:reese4 t.thic ,w4 recifrve >poripttikds,
Otaa4o 1.440%htedly rsei4ite in seAdnA & de;

'bo vibrit msmittiTs

stiat, 0,6414 mspoas t,or diosatly

gTo4lt beta$ seeleyed by the varoitry.

Out Ostitd or *

raeotios *blob tto 1104rd4fit

rforf, with esoursoy ant sttfility,


*Ars to

4h/saps* lo the vo1ume sr

tpet iteinegovi or

VA. Aso rrivItes ftr the rogervo

te?',st ets14 !Passe f,:rested A esa* ot Ousleat.

t fessAVY4 v4itt

ropert Staler .4401too it 440; AO longer

oa;]4#41*Ity tr*,* 4' ths


U. gittor




evorro *let** woottoe 40 aegrgotio4 of 4014 14 fi4 4 tly *t*tet4# t.* im tte 1.'44* of

4hottor the roger,* *golgat atrAwitg to $roeto: or lett from

the ago4 (of gzel*A4.


tkrot1A 41r-.444 tAti tte.o*


414102 Of tbo eodor*/ liegorvo 'Aegrd 44 '0,4

ttro to te, or *11 tt tLo

re4ii - eat alro 4p04 tbo


thothor it eit or wilt tot Itottuto frog
# *r 441 otAor orew4to4o

. note roger,' er 041

'eat AA f4ot taAor tho 4totA4 old the ,,.rovgilia4 prottiveo, It wilt 4*.**4 'coop t**
,4r414 fOriOtta4e :7144101aA0, froo, 4wy to do'', of the ofrigora of th* teorow Book& 10
to tof rNott, diovoqgtod pito', or "Poo woah gold thwqik
gewi*gt note 1-mei_mo.

'nor. tw

too4er to V.* redero,'

rattrt.Atot ig. the Agtogo whielfor 04 tg

*hot *hell to twEtere4 A4 Ote, wellatorol# or

ovorio4 tto

lit to tt rtt tit**, 44,-,447,04A44 4-ge

'Utto Ng 00440.


tg *tot 1400iittMaaw W4*11


14 ft.vt, VI* deoloiot 411 444401y NO f4A44 Up04 ne otter oeued the*


vo1ooe tto Outgo/
Ity ovo rodor-b.

40$0410 ,e

Aouorvo SAO*,



teoorre r%tio ig

ivory isrArtoot

dooloito to -ploriAOtt too'

IA 1,4 A ao4,,rogotod rogorro 4coitwi **toe.

givot p4ro0rot4gt

to tItuatrako VI* poggitalitif or thi* rlo* *1010*4144



ooNaior thwt U. 4g1,r44 dosiri4g to -roront 40 ihcr94,0 i4 tbe dop**It roil* or
t* -40,wts a re140344, 0*.a mkt

7,-tio* cittitolet i44v4.0 ore Podorort'i. a000rto qoto to t4i.o.

ro4oroJ Nokr.4rvo ilooto either oioinot At000rttod

ta 04 old thir re**ryea.
farce 04 $444


oUpor toaorve ioA;44,

rot. 0

Or OfA17,0t 4414 %AA tt,prel

Tho 'loot*, might iadoed

oneavor to

diowont woo of it .ortfa',140 '404

0% ttio otter t4p44 if tito 10pa0iA ro4vrv00 vor4 fallin$ tO4

ra.044 or bud follow tet, for, ttlo %ere! oeuld ,40,10 mgreit ttke lowqe of ve<letel
tsrlo 10.toratiem PA 104
astormi *ate* q4aMmitt 41114mcozio1 wq4or ood ageto 4troot
roger,* wroonte4o.

Poroly thit monnai t.te 40Are,od go A 00hOlt140 regArre 'Ort,45t-

64. vtiot ik 4amuratOir or owtowatigieolay reovaltel,, tto*L4eao



be * reO,Vrre Ar000toio ehiob maid We i',gwro***101 or depred&aod *rlettrerC,T bl t40

VbditroAtvo"*54,4,4, rooToosito fACt At All tO

meodi,t1440, ts,Ot 44141! te Ore

atmOrAtit A.



it wtt*

4' tire fle4rd, fro*. (qv*tt tte -et to h4e- wonN remelt


te tke rehlit Jo, tA indow to aie Iyetem,* ere4it potter
trevitt petite, ef the t4totr4 Pre* time



Of tb*


pfwtriet laeqeo





titt rtauit oe tte 4eakwien

ktotr retleetive4Vttre,b ti44 te ti*e I
tte tlio*.r4 *weld tweet:relit* eue44


mtle A*

'. .ereetmttiie

4tore4,4* the,


-1,reit ,,,,,e,,a4-

t* 5tat4 400e, t*I.,,efere,


reetrietin4 iweAlee

ereiNt wiqtroi
v:ittwgt 40,0t.



ttteat -5.,t

te wecipaste,

ttove, It to tAthie the IVVIr Of 'AO leer4

14 **lel otIt


Lt * word, !elite the' der;peett-110,141*TV

sirifoet 4oppa*Its.





ovot, or ;Ail

,;A:lertiihri v57: M,,00Oeteif
Tkly 044 ,w4k.i

z;-14.44.,;e4 tto tpelle,t4r11.

roltulteue *04Awellit 011,r r4-ee,erre Irttiat Avold

*Ad wale title Joe,e14 iedet4 erre4t *

st riCterY10f$

it wcf.:',A he slit* 4 rundftte*ntat obe4.40 of obtivi,
It eo,,rdly

eutr tkee



thei the

.114,041,t1e *IlL iLAter;re

areete ,

de0tro by tto 301,4-1,



4eet4o4leud wiiel 04r 14ce 4iott 44t

Iv. it *oet rety ter ite ettel'

oteorvel 'o4eltzeo4o4 througho4t the peer*.



tb,* 4t444.

*MO** ittAA t



0,400 41,4*

444 0 it t: -erreril ler A,


tit ea thet the 'peelke eleee t0 rely UpiA tit 44itheageettlitl, tet
aeee tlge Nver4 to Ilerolo to rseri4e* the lei4 TO*41t10 eietatt ',otee in, crer to iP.oreve

tbe reer,fie oottaetdor.(eeite, .4, t:-ect ore* t
to t.tfitt, Aritt,-,74 flier* *4*.enlieel et tile '-4A,',5

If tile oebiia it ve,,Aro,..'



%OA AO Aws,..eoiii.

ttet Hervelotto cheo14 *eve

:ellreptege by wbtoti


:eta* ie lek,40ted ttexivo It

but t tbe etll ef t1140 .31041, freb tie* te




The ehief Jed** ked 44/40 to

eubeeted to kwreetriete4 ,,,,entyelettte, et *Ail ty the .4eare.

Kr......,*44 the ativAtiteeorwe r*tie


*et f /dle reker,*

thez: the pe44*esit of VA p,01.i.e win

;le *i*/*4 firtery tie* tbe !soord obeit.te. ite polity.

ttie 04lic

44k44,it r4eer1'e

gt41;* it* 414*1441 41


vi,44,0e'lute ead '4444 '104-A t,


the trAli8.1 4 r01 Abl*

his-411010 4. 0.


giltD -1JOt



0404. rtitie


Pinolly, tNe



tt IMO :i,ttetAte4


i;too* ft e eirou'iotleet

ems rvis in its


1, mt.

the reserve opsiet,
1t rutt,



tiiiiuo0 ty





to %Lau.


:policy AA to





ted '101241 p,t the .Ko
t4,ver ftr

obd Amy oat

111Kt.j. Are-134.







lag .414


roll*stal41, X res;ek'strui ly carte ttlot

YQ,ro f*I7

,,44,r41:;141 A.

orvAsAtsge spail.01

eFfmr4 otx1,11d thea hgoo 0;:lout

;ot too; tett.

.4 ?seams). &seism!! %lord,


shout M.

doiesitirf tvet.04 50

7444 loomot 15.

ivor,ed to ilia

A* coats* emti soimrs the retunt

Per ttm Yltr ICAtO reamonis ivhleb Ih,*ve..


t so%

if, torsvoro the Pv!str§,;

Psi* (ISO j
g La*



14. the ro0ers.1 tisoyerve kidsot,

,k4 Or al0 *en-11044 of PrortJotry f!, the rseervt,



the ft4st ths.A,


of Xeis ?et* tse?roo4eir Rotas st.10 tave 00AS

oilAut AI end ustihst
gol4 St

Is, lot


fott by *ore thou 100% *C geld,

trflorto omsewto trot, return elf the gol4
:a LOIN*.



Os plot is o4sibited

s tiOt





February 21, 1924.

Dear Dr. Miller:

Thank you for your note of the 20th.

I was sorry to inflict you

with such a long letter, but that is one of the results of not having sufficient
time to boil it down.

In considering the matter later, I am inclined to believe that one
point was not sufficiently brought out.

In order to state the reserve Dercentages as 'proposed, it will of
course be necessary to adopt some program for maintaining some definite amount

of gold behind our note issues.

Right there enters the question of nolicy as

distinguished from bookkeeping.

I shall be in Washington in a few days to attend the committee meeting
called for Yonday and possibly' we can have another word about it.

I am planning

to go over tomorrow afternoon as a friend of mine from Lonckqd, Mr. Wallace who

is one of the directors of the Bank: of -England, wants to see something of

Yours very truly,

Honorable A. C. Miller,
0/0 Federal Reserve 3oard,
Washington, D. C.


February 27, 1924.

My dear Friend and Associate:
This letter is addressed to you in these affectionate terms because
it comee over me now and then that you are long-suffering, and I know that the
characteristics of those who are long-suffering are unescepably those which
are associated with a keen sense of humor.


That Vat, a. fine: article in the Index, and it was inevitable that
would attract your attention, and inevitable that you would write me as you
do nI am encouraged by this article to believe thet we need fear little in
the way of confusion or eieturbarce of mina in connection Aith the chsnees In
the statement of the reserve retioe which ire in contemplation, after the
matter hes been given a little thought by the financial eritere."

But, my deer friend, referring to that article let me Quote "thereby
hangs the tale."
Sometime ago a very nice young gentlemen from the New York Trust
our Dr. Burgess and said that be had noticed a change in
thi form of statement of the Federal Reserve System and wished to comment on it
in the Index; that he did not know what it was all about and wished enlightenment.
Dr. Burgess explained that it was based upon the provisions of the
Federal Reserve Act, which the gentlemen wee good enough to explain that he
had never read. (These bank economists are a well posted lot) Thereupon Dr.
Act and spent an hour of his valuable time in explaining it
all to this gentleman, who promised to write an article and submit it to Dr.
Burgess for his comment.
He was good enough to send the galley sometime ago,
with a polite invitation to Dr. Burgess to change it
Dr. Burgess found
that the article was such a mixed up affair that anyone who reed it would probably
be more confused than ever, so he took the
rewriting it, but when he
telephoned to the author to explain what he tied done he found that the gentleman
of feet it was sent to the Trust Company and published
without the author ever having read it.

Company called to see

ot out the

at vill.

liberty of

was ill, eo as a matter

This, my dear good Dr. Miller, is the one apple which has appeared
without worms.
It was written in the bank here with the best intentions in the
world, and I sincerely hope that it has done no harm in throwing some light
upon this very puzzling bookkeeping matter. Certainly
exhibits the fact


Pebruary 27/24.

that we are trying to do our best in a bad cause.

If you should by chance show
this communication to Governor Crissinger, who was good enough also to call my

attention to the article, would you not send one of those little slips along with
it explaining that it is personal,unofficial, extralegal, and somewhat by way of
a joke. But I really could not afford to let the chance go by.
Yours sincerely,

Honorable A. C. Miller,
0/0 Federal Reserve Board,
Washington, D. 0.

marc n 3, 1924.


Dear Dr. Hiller:
You were
Thank you and thank you again for eoure of leexch first.
right that much trouble and tribulation would have been spared to ue and to

the Board and some misunderstanding Would have been avoided generally had

the Federal Reserve Board made a statement in regard to the change in the
figures last Junuary. The change was made without opportenite arisine
for discussion, and rr. Jay, as you may not be aware, endeavored by telephone to arrange to have the statement made here, but was finally instructed by Governor Crissinger to make no statement to the press whatever beyond explaining that it was to make the figarea eouform more exactly to the
I happened not to be at the office at the time, but learned afterward, that every effort had eeen made tu secure the release of an adequate



This is all preIiminary_to drawing our attentioa to the parathe subject of the further change contemplated
by the Board. I am very certain that even with the explanation which will
appear in the Board's Annual Report there will be misunderstanding of the
graph in my recent letter on

change unless the Board deals not only with the figures involved but with
the implications of change of police- which are inevitable.
After all, it is an interesting eame, tied whether one is hammer
or anvil, or now and then - as is unfortunately the case - the horseshoe

that lies betweee the two', let's keep the sparks flying because that's

the way progress is made.


Yours sincerely,

Honorable A. C. Miller,
Federal teserve Board,
washington, D. C.
B3 .Ina

Msrch 7, 1924.


Dear Dr. 7illert

then I told qr. Jay of your letter about the enusry change
in the statement he told me what I had not !:leard from him before, ntlaely,

that he hsd even Fame so f;-,2- as to pre7,sre the first drhft of


meirxrandum to be used by the newspaper men in connection Nith the chnnge,

e hhs just sent it to me.

It is n very rough first dr.ft which

he had intended to olish u.-7 end I.Nat in 1 little better form before

talking with thcr, but tt levet it is an indiction of good intentions
1L1ch fs11d to beAr fruit:
Yours very truly,

Honorable A. C. Miller,
Fecem,1 heserv


Wshinpton, D. C.



Merch 4, 1024.

Dear Dr. Miller:

The habit of inflicting you with oommunicetione of this char/ apologize for doing it again.

acter eeeme to grow.

It seems to me too bed that Gidney le still without a good
I have wide various efforts to have him placed a
eave others,
but it just hanpene that the coincidence of effaire seems to heve left him
for the moment in the dr. Also it eeen a ehame thet he should be lost
to the Federel Reserve ystem. His knerledge tnd eapaoity ie exceptionel.
I am now writing to inquire whether through you or your associates eomething cannot be found for him which will give him a good outlook. I have
thought of posoibilitiez which might exist in Atienta, Dell, Minneapolis,
and possibly even in California in some of the branchee in oese any changes
ere made.
Mile he ees in buffelo we peid him, yeu know, *10,000 or

thereabouts, but I think he might be oilling or e'en obliged to start at
lesc then that if just the right thieg ceme aping.

One thing that has occurred to me might be poesible. But to
explain it would seem to make me critical of the Federal Reserve Boerd,
which I heeitete always to be . You may not realize it, but the impression
is growing among officers of some of the heserve Banks that there is very
great and sometimes most inconvenient delv in the henelling of matters by
the Federal Feserve Boerd.
I shall not go into deteile but would rather
give my en impressions ond take all the responsibility for them.
It has eeemed to me in observing the way things go in riashingtoe

that the administrative organization of the Board is defective, that the
members of the Board do not heie enough of the work digested when it reached

them, that there ehouid be in the organization e number of men who are
capable of working out the bulk of the problems that come before the Board

(oe' e

end preparing lettere thet have to be signed, that there should be some
better arrangement by which the business of the Board flows through the
orgenizetion end out again to the benke.
I euepect that the filing
system is defective and that the members of the Board get in the habit
of accumuleting work on their desks which is not given attention because
other things interfere.
Frankly, this sets a bed example to the banks
end a wretched example to the employees of the Board, who
be discouraeed end indifferent.
T know thet Eddy end Hereon end the other men


No. 2.

March 4, 1924.

who do so much of the routine work

hare to work pretty hard, and what I
write involves no criticism of them whatever.
Why would not Gidney be
good man as sort of an assistant governor or some more or less executive
position, and the job would be to work through the mass of detail that
oomes before the Board in an orderly, systematic way so that the delays

are avoided.

This is just a suggestion and is really inspired by my

feeling in regard to the Board's work on the one hand, .!).nd on the other
hand by my conviction that Gidney is admirably suited to just such a job.

Honorable A. C. Miller,
2320 S Street, N. W.,
Wechington, P. C.


March II, 1924.

Jy dear Dr. Miller:

irom time to time both in connection with the preparttion of our
Annual .Budget end the exeminetion of the departmentel expense report of our bank,,

I become impreesed with the feet that the cooperative expense report of the
Committee on Economy and Efficiency - known ee Schedule E - exhibits situations

which ar inconeiatent and result either from defective method of compiling


parative expenses or defective procedures in some of the Federal eeserve bhnks.

I shall not go into detail as that would necessitate e persona examination of
the Sceedule with you.

Peeling that ae were not getting all the benefit which we might from
the studies now being niece, I have amkod &r. hounds to make s report to me and

give me his own suggestions es to an improved procedure in our bank so that

ereater edventage might be taken from tne work of the committee. He advises

me just whet I expected, that the figures can never be an absolute guide unless
each Reeerve bank should establish an emirate cost eyetem upon an iaentical


Such e cost syetem as would produce these results would he exceeainely

expensive and not justified.

He further reports that direct results could be

obtained through an actual survey of every department of every Reserve Bank
by comeetent and independent workers covering one function et a time to rake

an analysis of organization and methods of operation.
very expensive procedure and would tske a long time.

This method woulo be a

March 11, 1924.


While I am not yet

prepared to recommend any radical change or aband-

onment of the present system of review of expenees, it does seem to me that we
need to ibViOW

this ehole subject and either change the present procedure


supplement it by some method of executive action which 111/ me the work more
worth while.

Please do not understand that I am minimizing in any way the results

already attained.

Theae reports have stimulated e good deal of investigation

and study whice might not othorwice nave been done or possibly not done as

this letter is simply to suggest that It might be a good plan to ask

Mr. Bounds and owe of his fellow members who are of easy eccees to prepare for
consideration by the

methods for furtner

Sonference next Mey a supplementary set of suggestions of
improving both our orFenteetion and economy of operation and

for further reducing expenses.

If eomething specific can be submitted to the

Conference, I think you can count upon the fullest

possible cooperation from

executives of 611 the Peserve Banks, for a number of them at

spoken to ma about it and indicated their desire to make
you will understand

that I

different times have


Of course,

av writing simply wtth the desire to help the work

of the committee, ad Mr. iiounde is the beet men that I cow of to accomplish
just what you are After.

very truly,

Benj. Strons,


Honrthle A C. Miller,
Federel Leeerve Loard,
leshington, D. C.


SUBJECT: Committee on Economy and Efficiency

The work of the Committee on Economy and Efficiency thus far
has had to do largely with the devising of functional expense reports and the
preparation in comparative form of the figures reported by the several banks.
;his work has been carried on under considerable difficulties, for while the
banks are all performing essentially the same operations, the methods vary
greatly as between banks.

The differences in the organizations of the banks, in the allocation of work, local customs and operating conditions, including the order in
which various operations are performed, make it practically impossible to secure
accurate cost figures with respect to a large number of the important operations
of the banks without the introduction of a very elaborate and expensive cost
finding system. The introduction of any such system has not been considered desirable as it would not produce results commensurate with its cost. An accurate
cost system would undoubtedly furnish a great amount of information, but it would
be largely a substantiation of what is already well known by those officers of
the banks who are in intimate touch with the operating details.
be much easier to explain discrepancies in figures with the aid of such a system,
the discrepancies would continue to exist and costs would remain substantially
as at present.


The exhibit of functional expenses has served a useful purpose
in focusing the attention of operating officers on the question of expenses and
causing them to dig into the expenses of their own departments and in many cases
into the methods of conducting similar work in other banks, all of which has been
helpful in the program of economy.
The functional exhibit is, howeve
ous statement in the hands of those who do not appreciate its distinct limitations.
It is not and cannot be an accurate cost statement.
Another important work of the Committee has been the bringing
together of the officers in charge of the principal operating departments of the
banks for the purpose of making a first-hand study and comparison of the methods
of their departments in the several banks. This was accomplished by a series of
group conferences followed by conferences of the chairmen of the several groups.
These conferences accomplished much in affording the men who attended them an
opportunity to compare their own methods with those of the other banks and it is
known that there were in many instances quite tangible results.
It may be doubted whether the work of the Committee, if continued along present lines, would in all respects be as satisfactory in the future
The reason for this is fairly obvious in the
as it has been up to this time.
light of what has already been said, for it is not reasonable to assume that the
expense exhibits will in the Lure have quite the same effect they have had in
the past.
It seems necessary, therefore, to consider possible new methods.
So far as action lying within the power of the Committee on Economy and Efficiency
is concerned, there would appear to be but two possibilities:

a - The introduction of an accurate cost finding system in all of the
b - The making of an actual survey of every department of every bank
by competent and independent workers.


The first of these has already been referred to; it is at most
but a means to an end and the expense would be entirely out of proportion to any
results that could be obtained.
As to the second method, that would also be very expensive. It
might be done with men selected from the present personnel of the banks, although
there are obvious difficulties in the way of this, or it might be accomplished by
turning the job over to an outside agency. In either case it would be a long and
tedious job without any guarantee as to results. It would be a very difficult
thing, if not quite impossible, for the Federal Reserve Board to carry out such a
program with respect to the several reserve banks without seriously affecting the
morale of the institutions and relieving the directors of their responsibility.
Operations of this kind in other organizations have not been uniformly successful
and they are rather less likely to succeed in the case of a reserve bank than elsewhere, for the reason that it would be more difficult to get decisions with respect
to any recommendations made.

The whole question of economy and efficiency is an executive
problem and very largely an individual problem for each bank. The effort of the
Federal Reserve Board to effect an economical and efficient administration of the
several banks by working through a committee which is without definite responsibilities and powers is going about the job from the wrong end.
The Board cannot place itself in the position of accepting the
responsibility for the details of the expenses of the several banks without at
the same time relieving the directors and officers of a part of their responsibility for the successful operation of the banks. If the Board is to say that the
expenses of a given bank for a given operation are too high and must be reduced,
it must inevitably accept the consequences and the Board is not sufficiently informed as to the detailed operations of the banks to warrant it in accepting this
The logical and orderly way for the Federal Reserve Board to
inform itself concerning conditions in the banks and to correct any that may need
it, is not through the work of a committee such as has been established, but
through direct executive action.
The Federal Reserve Board names three directors
including the chairman at each bank. Through these appointees it exerts a very
strong influence in the selection of the governor and the other executive officers.
Under the Act the Board also has as a part of its organization a Division of Examination which is charged With the duty of examining for the Board each bank as
often as it may consider advisable.
The Board should hold its direct and indirect appointees solely
responsible for the efficient conduct of each bank. Its information with respect
to the conduct of the banks should be obtained through such standardized reports
as it may be reasonable to require, supplemented by the special reports of its
chief examiner. This, together with such personal contact as the Board has with
the principal officers of the banks, should enable it to sufficiently inform itself with respect to the conduct of any bank. If the Board faces squarely its
real responsibility for securing a competent executive management at each bank,
On the other
it will then not need to worry itself as to the details of expenses.
hand, if it does not face its very evident responsibility in this respect, it cannot accomplish results through the work of a committee. If the Board should then
find any bank was not being conducted in a manner satisfactory to it, the executives of that bank should be taken to task and held responsible for conditions.
There is no other way in which the Board can hold the executives of the bankeresponsible.


While the question of economy and efficiency is essentially
an individual bank problem, there are certain ways in which a committee can
serve a useful purpose in connection with such a program.
This would
the way of investigating specific items of expense at the source, such as telegraphand telephone expense, methods of purchasing, quality of supplies, cost
of currency, insurance, etc. and any items where collective bargaining would
be g factor, and also as a clearing house for information.
Such a committee should be responsible to the Governors'
Conference and should not be concerned in any way with the organize.tion or
functional operations of the banks. There might be some advantage in having
a representative of the Board on such a committee, which should have rather
wide powers for investigation and the collection of information. Its recommendations should be made to the Governors' Conference and also directly to
the banks between conferences. Such a committee would, of course, be without
power to enforce its recommendations, but there should be little difficulty
in securing the adoption of such recommendations as it might make if they
were restricted to items of expense with respect to which a saving could be



July 14, 1924.

Dear Dr. Millen
I have a letter from Joe Otte of Chicego, mekt.D.F.
me to be one, of a perty of twenty men, f,,ech of whom ie tteked

to lend John Vitt:hell tf.,000 in order to rut him on hie
feet. I very much doubt whether it le r)ossible for me to

do auything, but 9211

oncierine whether you lqtve been ap-

proached, !lio whethr the poseibility of his appointment
in the Minneapolis bank would hvve say beetfinte,;. on the


Very truly yours,

Ponorarle 4. C. Will et,
Fec;ere,1 Reserve rod,
Weahirli3ton, C.


MISC. 34, 1 40M 1-24


Fecters,1 Reserve Bank

15 Nassau St.




July 21,


C. Miller

cjo Frank B. Noyes
Winter Harbor, Maine

Shall be in Washington early part of next week

ieplies to cables indicate decirs.bility of delaying action we contemplated

until after my return


August 5, 1924.

My dear Dr. Miller:
This letter is a preliminary personal letter, but of course I will be
very glad indeed to have you seow it to your associates, if you wish to do so.
My understanding of the statement which you made by telephone this morn-

ing in regard to a transaction in United States 4ds of 1925 is substantially as


An unnamed firm of bond dealers made the charge to some one in the Treasury Building, either a Treasury Department official or a member of the Federal Reserve Board, that thie bank showed favoritism in handling orders or transactions
in Government securities. The particular case cited was an instance where this
firm of unnamed brokers had offered a million dollars of United States 4's of 1925
to the Federal Reserve Bank of Boston at a favorable rice. The Federal Reserve
Bank of Boston had thereupon offered the bonds to us by telephone and we had declined to buy them. Thereafter, this firm of brokers had sold them to some other

deaMrs, who, in turn, teid sold them at an advanced price over the original offerleg, either to the Federal Reserve Bank of Boston or the Federal Reserve Bank of
New loft. The implication or charge was substantially that we had discriminated
against one firm of dealers ane bought at a higher price from another firm.

partner in

1 am now writing to ask the name of the firm of brokers, the lame of the
that firm or individual who meee this charge. My purpose is to con-

front the author of the charge ith it and to require that it be made good or retracted. If it proves to be a Pere reckless statement without foundation, as I am
sure it is
I intend
take measures to torotect the bank egainst a like attack in
the future.


the complaint appears to have been comunicated to the Federal Re-

serve Board at leeet unofficially, i shall submit the

facts developed by the inquiry which it is our puraose to make here, to the Board. It is certain that the
interests of this bank, and indeed of the Federal Rese ve system, demand that
charges of this sort be traced to their source and finally disposed of. I an determined to take that course in this instance.
Now the facts of the matter referred to are these. At the nesting of the
investment committee, which you attended, at Boston, inquiry was made as to whether
the investment committee should purchase the 4'e of 1925, and reference was made to
a special lot owned by the Federal Reserve Bank of Dallas, which that bank desired
to sell.
I explained that we had had offered to .us a lot of $5,700,000 of that issue which we had declined to buy (1) because they were offered on a 1 per cent basis
which was a ridiculous price to ay for the bonds, (2) because the bank offering
them would only sell them in case we could give definite assurance that they were
to be called for redemption February 1,1925, and upon consulting Mr. Winston I found
that no such definite assurance could. be given, and (5) because were 7.e to buy these
bonds generally from the banks and the public, who could sell teem under the im-

pression that the Secretary's announcement was a definite call of the bonds and
then they should not he called, quite likely the charge could be made against us

Aeetust 5, 1924

Honorable A. C. Miller


that we had in some way been guilty of a misrepresentation.

The action of the com-

mittee, you will recell, was to decide not to buy he Dallas bonds or any other
offerings of the 4's of 1925.

Early last week, the Federal Reserve Bank of Boston oellea us on the telephone enc said that they had been offered e million dollars of the 4's of 1925 at a

price which woula return in the neighborhood of 2
they might buy them for the committee's account.

1/2 per cent., and inquired whether

Mr. Case

rererred the matter to me

and I steted that the comeittee had gieen us no authority to purchase that issue and
that certainly I Could not authorize their ,urchase without setting authority from
the committee, and in any event I Was personally not particuLarly favorable to buy-

I certainly would not recomeend our buying them for this benk, and therefore word might be sent back to Boston that as the committee could not buy them, the
Boston Reserve Bank was at liberty to ao as they pleased in buying them for their own
account, so far as the committee was concerned. We gained the impression from the
ing them.

telephone conversations that


Federal Reserve Bank of Boston uecided not to buy

teem, although they nay have done so,
ee were interested at the time to learn
through whom this offering wae made, and inquiry disclosed the fact that it was the
firm of C. F. Childs te Company.
That inquiry, however, was made subsequent to our
having answered the


inquiry declining the offer

did not even know by wham the bonds had been


the bonds, at which time we

It is my definite purpoee to have Child& k Company understand, if it ie

discovered that the statement was in fact made by that firm or its authority, that
they cannot m%ke such statements about this bank without being called to account for
The impression you gave me over the telephone that some of your associates
were considerably concerned over the representations which had been made, emphasizes
the need for such action.

We hope the members of the Board realize, as certainly the officers of the
Treesury do, that the transactions in Government securities conducted by this bank
for the various accounts, especially for the Treasury and for the other Federal
Reserve banks, are of such enormous volume as to give the men in our organization
special khowledge of nos dealings are conaucted, which erokers and dealers are
reliable end which are not reliable, that are fair market prices, etc., etc. In
the year 1925 our total transactions in Government securities, including new issues,
and in the year 1924, to date, aggregate $1,458,000,000
aggregated 42,075,000,000

ee tank it

is only reasonable to as

that when eny complaint is made as to the way

in which this business is conducted it should be at once referred to the bank with
all particulars, including the nemes of the parties making the complaint, and that
as a matter of practice the assumption should be that the business has been properly
conducted unless indeed the evidence to the contrary is incontrovertible.

It is for these

reaeonettat we now respectfully ask that we be advised

of the names of the parties including those to whom the complaint was made.
Yours very


Honorable A. C. Miller,
Federal Reserve Board,

Weshington, D. C.

August 6, 1924.

Since dictating the above, you have advised me by telephone of one fact which
P. 8.
you state you did not quite appreciate at the time of our yesterday's telephone talk;

.eeaoreele A. O. Killer

August 8, 1924.

namely, that this firm of brokers had complained that within ten minutes of having
the offer of the bonds declined by the Federal Reserve Bank of Boston, Messrs.
Salamon Brothers * Hutzler heck approached them with an offer to buy them.


faces in regard to that matter are these:

Mr. Case's understanding when the offering was made by the Boston Reserve
Bank was Lilac. the Uonue were owned by a Boston dank, end ar, the time he stated to
Governor Harding that we could not use them ourselves he offered as a matter of
courtesy to awake inquiry di to the market in New York and if the Boston Reeerve
Lank desired Us to do so, we would be very glad to get an offer for the ponds nere.
The only inquiry that was made in regard to the bonds was to ,ek 5sIaison Brothers &

Hutzler GO mime a price for a block of the 4's. At that time - nor in face until
yesterday - did Mr. Ceee have the slightest knowledge that G. F. Childs & Company
were concerned with the transaction at all. The only party with wnom he had any
writes:A or eith whom he had any aeelinge as &lc Yederel Reeerve Beni: of Boston,

and quite obviously it was impossible for him to advise Sala:son Brothers & Hutzler

that C. T. Chiles * k:omeeny had offered thL bonds OCC'1,18t2 nc did not, know that they
had offered them. The way I happened to learntellalthe offering was in fact made by
Childs & Company was through Mr. Matteson, who made the inquiry of Boston by

telephone in the usual course, but did not comeunicate the result of his inquiry
to Mr. Case or to anyone in the bank until I asked him for the information yesterday.

Governor Harding has just called and confirms my impression that the
Boston Reserve Bank declined to buy the bonds in question.






My dear Dr. Miller:
In conne Ion with a discussion of the pr

ram reg.

efficiency and

tioned to me his belief that -here was bme need for inquiry
being made respectin dertain questionsof policy an proced e by Reserve banks
which might be roughl Iel.cribed by the word "ethic ". H asked me if I could
prepare a list of sue tope and suggested that itmight e a good plan to put
economy, Mr. James

them on the program f

and stu

the ext Governors' ConferInce.

I told him tiat it waa

matter which had re ived a good deal of thought
s bany as we stronO*Lfelt theyfteed f safeguarding the institubility of even ati-Appetrance o unethical procedure in any
nally asked me to prepare a st of such to)ics which I
talk, however, I have be wondering whether it will
o appro h the matter by any sua method.
Obviously, it is a
ject where susc tibilities may be a used and bad feeling developed.

ti on
of ou

not be


r discussing the atter with one r two of my associates, I have

come to the no on that the best irocedure wo d be not to have any reference to
thes4 matters o the program for he confere e, but to have them taken up by the
Fede al Reserve N4 rd uponitsown esponsir ity at the Joint Conference of

Govetncrs and Fedel Reserve Agent , and

to rnimize the posAlidlity of fric

on bu

at it should be done in such a way as
at the same time so as to lay the

foufidation for bringintruout all fact for examination.

As a first attempt74A,6 te atively made up a list of points which
w,ght be considered under this general opic, which is enclosed with this, and I
am Wi44ing you quite privately and per onal4 to get an expression of your views
as to t wisdom of my having anythin to do with the matter at all. I would like
to have t1 list returned to me, if u please, with such views as you care to
give me as t the attitudewhich I sl uld assume in regard to Mr. James' request.
I know nothing bout the principles which govern the officer q of the other Reserve
ks in these m ters, but I do kv.w those which prevail here and believe that

re of the vey best.

;Yours very truly,

Honorable A. C. Miller
Federal Reserve Board
Washington, D. C.


August 13, 1924.

My dear Dr. Miller:

to awaiting t reply to my letter in regard to the cupoosed
tranLaction in United El'ites 41e of 192.


think you advise(tme by

telaphore that you were writins me just- whtt the fetts rere, and
gould of couree like to have your letter before doing anything further.
Yours very truly,

Honorable A. C. Miller
Fedbral Reserve Board
WashiEgton, D. C.


September 11, 1924.

Dear Dr. Willem

I was to write you shortly before leaving for Colorado, giving you sume

of the up-to-date news, end thie is the letter.

The meeting of the investment committee is
in Chicago on the 24th of October, and I am planning
tack from Colorado


.lready arranged to be held
to stop there on my way
In order to do all that I have in mind, it will be

neceseary for me to leave here on the lath because I shall amke this trip West
the opportunity for stopeing off in Minnesota to visit my daughter, and that again
the excuse for spending a day or two in Minneapolis with Young. I as anxious
to tet a little idea on the ground of how things are going up in that country,
and especially to make some inquiries in regted to operations of the Grain


Corporetiun, whose

paper is now coming into the Neu York market rather

This concern, you will recall, is the outgrowth of the pending sale of

the elevator Jropertiee of the Areour Grain Corporation and of the Rosenbaume to
the Farmers' Co-Operative Marketing Organization, of whicn GrelSilver is President.
I suppoee I will reach Minneapolis sometiee around the 18th of October, possibly
a day or two earlier, end go from there to Hibbing end from Hibbing via Duluth to

Chicago, so as to reach Chicago sometime on the 23rd of October.
the Blackstone Hotel.

I will be at

Since I last wrote you; Mr. newton D. Baker has been absorbed in studying the whole per collection problec both here and in eashineton and Cleveland.
Mr. Harrison was able to spend half a day with him and the men in the bank here
who are familiar with the problem have also discussed it with him at length, and
we have filled him with inspiratibn and loaded him with documents until I should
think his head would be buzzing. When he was here this week, however, he told
me that the first anxiety which he felt very strongly in regard to getting a full
comprehension of this very complex matter had entirely disappeared. He felt that
he was already pretty well schooled to handle the case and was going into it
enthusiastically. I must say he has exactly the conception of how to handle
it that we all have here in the bank. The suit will be won in my opinion by
presenting it to the Court in its broadest aspects ane disclosing the effect upon
the general welfare of the country should the prayers in the bill be granted.
The conference to be held in Washington on the lOth of November will

require a good cleal of ereperetion, end I understand that Perrin is in touch with
: teve gent out the
Wills and they are tel work up a program for the Agents.
invitation for topics in anticipation of Mr. Harrison's return and he will be
back on the 15th to pick up that work and see the program concluded In good
e hope Lhey will reach us
shape. As yet we have no topics from the Board. -

in ample time to be distributed to ell the Reserve Banks so that the necessary
preliminary studies can be made, otherwise the discussion is not always helpful.


Dr. A. C. Miller

September 11, 1924

The Advisory Council meeting scheduled for the 25th and 26th of Septemter
will else need some preparation and as Warburg doee not get back until a few days
before the 25th, I am wondering wbeteer everything necessary will be done % I suggested to the Secretary who is one of our men, te get in toech with the Deputy
chairman of the Council so that the meeting may not lose fire through lack of attentiou at this ena. I believe the Boardlee asked the members of the Council to be
prepared to make a. report on local business and credit conditions in the respective
districts. Beyond that I an not sure just what the Board has in mind for the meetil
Mr. Owen Young has urged that Jay be permitted to remain abroad to give
him some unoffocial advice and assistance in connection with the banking matters
growing out of the adoption of the Dawes plan. He wants him to stay until Gilbert

arrives end as Gilbert does not sail until about October first, I suppose Jay will

They are making rather heavy
not be Lack until eeproaching the middle of October.
drafts on our organization es Gates ecGarrah has eccepted the position of American
director of the reorganized Reichsbank, Clarence Woolley has accepted appointment
as one of the arbitrators in connection with the plan, and Young and J.ay are working
away on it now. McGarreh inquired as to whether he should at once resign from our
board. After some tale with Ir. kellon, who happened to be in New York just at that
moment, I have told kcGarreh, and in feet have urged himpnot to consider resigning
There is always the likelihood that we may need reliable information
at present.
in regard to matters with which he is dealing in rerlin, becauee indeed we may be
called upon to give some credit assistance before they get through. ecearreh is
one of the men whoee opinion I would value highest in such e situation end I think
it would be of great advantage to us to tave him continue for the present as a
director. Mr. Mellon sif4s1 no objection to it, and later when I am in Washington
I can talk it over with the Federel Reserve Eeurd.

The Treasury has just :doted its offering ofSkiillion 2 e/4% lotes with
very satisfactory subscriptions. Our allotment was $119 million and we had about
$240 million subecribed.

The money market showed a tendency to stiffen up during tee last week or
ten days, all of which is explaieed by the movement of our reserve. On July 24
we had just *1 billion in our golc account, and as late as August 14 it tad only
been reauced to $2e7 millioh, but to-day - lese than a month later - it is $e04
million. In other wores, we have lost about $23 million net to the rest of the
This movement West and South lapped up the entire surplus reserve of
the New York member banes and for a time they were borrowing from us; but our
purchaeee of bills and the completion of our purchases of short governments up to
the total of $500 million has put enough money into the market to quiet any un-

easiness lest es might slip into a period of higher rates this fall and be forced
to put our rate up. I could sense a little feeling that the market had mis-

calculated the outlook as to rates and was very glad indeed that we hed 8016 buying power to fall back upon. I am equally glad that we have another $100 million
conditionally authorized, as I wrote you, although we none of us see any need for
using it now so long ab our buying rate for bills keeps them coming in fairly
steadily. ee are up close to e50 million here and ere distributing a few million
every day to the other Reserve Banks.
A few weeks now will see the last of the workmen out of our new building.
By the time you get back it eill be spick and span end everything in operation
under one roof. The interesting thing to me is that we have taken the cost of
operating the building into our reguiar expense account during the past two morthe


Dr. A. C. Miller

September 11, 1924.

anu notwithstanding this our expenses have not only failed to exceed our budget,
*e are going to surprise you all with the outbut have been somewhat reduced.
come, especially when you consider that we are setting no benefit in the way of
rent as yet from the new building, that we are still paying something like

$150,000 a year rent in this building, end that we are not yet reilizing the
profit which *e will make on the subletting of the 24th and 25th floors. There
are still some parts of the Annex building to be rented from which we expect to
increase our revenue by about $50,000 a year.

Of course, our earnings this year will be pretty poor. We are anout
$660,000 behind to date, and I would not be surprised if by the end of the year
this got up close to a million, certainly to three quarters of a million, and we

still have our regular appropriation to me for reserves and charge-offs. k

guess is that the System as a whole will show a deficit of from six to seven and
a half million after paying dividends and after meking the necessary reservee end
charge-of re. On the whole, I think it would be a good thing for the country to
get used to the ieea that eometimes se will not earn our dividends.

learn that the tax

on Normen's rather slender strength during the
He keeled over at one of tho meetings
and had to be taken home and put to bed, but after a day or two got back to eork
and when the conference adjourned he went to Savoie, here ho is now resting until
There are some reasons for urging him to come over here
the end of the month.
later in the year. I don't see how they can escape Peeing the gold problem
pretty soon. Within a few months the Gormen note issue rill consist solely or
the new notes of the reorganized Reichsbank which will be squarely eaintained at
gold parity, although they will not be shipping gold but 'AM be using exchange
credits to stabilize the exchange. This will leave the pound floating in mid-eid.
The fiduciary portion of the currency note issue le expected later in tee year to
exceed the maximum of last year which will force consideration upon them of some
readjustment of the terms of the note issue. The statutory embargo upon exports
of gold expires December 31, 1925. I am beginning to think that whether they
want to or not, they have to decide Whether they are going back to e gold nesis
noncon conference proved too much for him.

sometime between now end the middle of next year.

1 forgot to include in the dictation about my trip.a repetition of my
former suggestion that if possible you certainly should curry out our plan of
meeting MA in Minneapolis if you can do so. I will certainly arrange to meet
you there sometime arounu the middle of the third week in October. My address in
Colorado Serings until the first of October will be care of Spencer Penrose,
Broadmoor, Colorado Springs, Colorado., After that it will be Broedmoor Hotei,
Colorado Springe, Colorado.

This is all the news. I hope you end Mrs. Miller keep well and have
had a fine trip. While it has been rather dull here, I have been very busy all
summer on account of the vacation season and trying to stop the gaps in the

Honorable A. C. Miller
cio Federal Reserve Bank
San Francisco, Cal.


Yours sincerely,

34, I 40t4 1-24






was 1624

i1ier - care Federal Reserve Bank of San Francisco
Thanke for wire.

Conveyed your meseage to Sproule.


Mailed you the

last news on eleventh to San Francisco. flamt you observe in Great Northern

territory confirms what I learn from friends in that district am what Toting

There is no news since my Letter.

Last sale of certificates wholly

successful but quite =.1. few now offering in market which we are protecting.

Shall be in Chicago nineteenth, Colorado Springs twenty first care Spencer

Best regards to you anci Ars. Miller

Benj. Strogg



Noverlber 1,

Dear Dr. Miller:
Many tt,enks for your note of October 31.

In view of the imi,ortance of the conference, ano of a

ntrIber of tqines in connection ,ith it which we s'iould discuss in

aovance, I tink / shell go to Washington lcL ediately after our
directors meeting on Wednesday, and, therefore. see you on
T-ursuay morning.

It 1l1 be g -d to lave such a meeting. I need t' e
three days et least to renew our contacts isnie) I :eel .ere tadly
broken by cur Tes,eotive absences.

It is a deligl-A to lear that you are so mt,ch better.
Sincerely yours,

Honorable A. C. Miller,
Federal Reserve Board
?lashington, D. O.




I shallreport to you further.


Believe me, with many thanks,



October 25, 1915.


Sincerely yours,

Dear Ur, Strong:

The box of red McIntosh apples is at


You certainly raise some excellent apples: whether

the soil and climate of
to your skill as a cultivator, I can

Connecticut or

it is due to

Governor Benjamin Strong, Jr.,
Federal Reserve Bank of New York,
New York.

better determine

when I have seen you on your apple farm in your jeans
and boots.

I have certainly


been able to raise

such apples on my California ranch; but T am sure
California can beat Connecticut on the wine

and before long I hope to send you a
California wine made on my place.


sample of some

Whether it will be

up to the brag will be for you to say.

I am following carefully the instructions regarding the storage and care of the red


feasted my eyes on them this morning, but am postponing
tasting them until they have had a chance to "mellow"
for a day or two.

If T find them deficient in any way

1\11,-LeR._ 4 C
ic 4,00(


The proposition to meet the gold export problem by changing
the character of the Federal reserve note has been made with such fre-


quency and with such earnestness of conviction in high quarters recently,
that it can not be ignored.

Complaint is made by those who criticize

the system of note-issue established by the Federal Reserve Act, that
the Federal reserve notes are subiect to unnecessary and burdensome
restrictions with respect to their issue.

Mat, then, is the existing

method of issue, and how is it proposed to alter it?
Following the analogy of the Bank of England) which separates

the Issue Department from the Banking Department, the issue of Federal
reserve notes is made by the Federal Reserve Agent, representing the
Government, to his Federal Reserve Bank, the bank desiring the issue

pledging satisfactory commercial collateral as an evidence that the
issue is needed.and as security for it.

The further provision restrict-

ing note issues is the familiar one that a minimum reserve of 40% in
gold or lawful money must be maintained by the banklagainst all issues

outstanding from it, the purpose of the latter being to insure the
prompt convertibility of the note under all probable circumstances and
to insure that the issues of Federal Reserve Banks shall always be in
some reasonable proportion to the gold assets of the banks.


tibility and requisite character of security - as evidencing the need
of the issue, - are the two first essentials in any elastic bank note




currency, the third essential being adequate inducements to redemption.

This last, the Reserve Act undertakes to secure, first by the

provision that no Federal Reserve Bank shall pay out notaaAf another
Federal Reserve Bank, but promptly return them to the issuing bank for
redemption, and second, by not permitting Federal reserve notes to be
used in the reserves of member banks.

This last named restriction

has sometimes been criticized as a serious limitation upon the usefulness of the Federal reserve note, but it was manifestly conceived
in the interests of elasticity.

What our American system of credit currency lacked was an
.elastic element.

To contribute this element, the Reserve Act provides

not only a natural and almost automatic method of issuing the notes,
but also an almost equally automatic method of their retirement.


mere fact that the reserve note has no use except as a medium of exchange is the best guarantee that when such notes begin to accumulate
in the hands of the banks, they will be returned by the banks to the

Reserve Banks for redemption, and thus there will be an automatic ebb
and flow of the reserve note issues to and from the banks in response
to the seasonal variations in the country's currency requirements,
such as could not have been expected or attained if the reserve notes

had been clothed with the full character of money and been permitted to
count as money in the reserves of member banks.

An elastic credit currency always involves the danger of



The problem of legislative regUlation is, therefore, while

giving every possible facility fOr iAsue in response to actual commercial needs, to restrict the temptation

to make

current conveniende Of the comMtinityj that is

isSues not needed by the
to provide against over-

issue by not allowing too Wide a margin for the exercise of discretion
by the issuing bank.

Barring certain cumbersome features in the.machinery

of the Federal reserve note issues (for which, however, experience
has found or is finding a solution apart from any considerable changes
in the law) the unique excellence of the note provisions of the Federal
Reserve Act is to be commended as providing a maximum of elasticity
with a minimum of danger of overissue.

But however important an elastic

element in the note currency of a country is, and however appropriate
an agency for the issue of such currency the Federal Reserve Banks are,
it should nevertheless be emphasized that in a country where the vast
mass of business transactions is effected not by means of note currency
but by means of check or deposit currency, note issue is a mere incident in reserve baniing.

In continental Europe, the account current

and the bank check are not much used, the habits of their business

communities marking the bank note as the form in which they prefer
to use banking credit.

Unlike the great central banks of continental

Europe, our Reserve Banks are not primarily note-issuing banks.


primary function is to provide credit in the typical form customary
not only among banks but in the business community at large, namely the
form of deposit credit.

Restrictions, therefore, imposed by the Fed-

eral Reserve Act upon note issues in the interest at once of safety

- 4 -

and elasticity, which might prove burdensome in countries where the
principal business of the banks is to issue bank notes because of the
small volume of their credit which the community will use in the
familiar form of the checking account, are of little or no inconvenience with us.

On the other hand, the danger of ill-controlled issues - not
to say overissues - is far from being an illusive one.

Over-issue - or

let us frankly use the less agreeable word "inflation" - has at one
time or another always overtaken the credit currency of countries that
have been restive under restrictions upon bank note issues.

Such in-

flation has been going on during the last two years at a breakneck
pace in the two countries of Europe which have the monumental central
banks of issue, namely, France and Germany, and there is food for
reflection in the energetic efforts that they have both latterly been
making to counteract some of the effects of their policy of note issues
by undertaking a systematic campaign of education for the purpose of

inducing, in measure, the substitution of the checking account for the
bank note.

(Note the recent brochure of the Bank of/France on this


In flush times when all goes well, we are apt to minimize
the possibilities of inflation, and it is easily said that, of course,

under any change in the status of the Federal reserve note by which
it will be given the more definite character of a note issued against



the general credit of the Federal Reserve Banks, the banks will be
expected to, and in fact will, carry reserves not of the minimum of
40% established in the law, but of 70% or more:

It is easier, how-

ever, to formulate a counsel of perfection than it is to insure its
observance, and so it would probably be with this one.
long been a country of fixed reserve requirements:

Ours has

The banker's mind

and habits in America have been developed under the so-called legal
or minimum reserve requirement, and bankers of nearly every degree,
inevitably and in spite of themselves, or of any resolve that they

may make to the contrary in times of piping peace, or that anyone
may undertake to impose upon them; will work to the legal minimum as
a boundary of legitimacy in determining the range of their credit
operations.- We may expect that the managers of the Federal Reserve
Banks will be iranune to many of the temptations that beset the path

of the oradnary banker, responsible, as he thinks, to himself alone;
but it is also well to recall that when the Federal Reserve Act was
on its passage in Congress, the fear was not infrequently expressed
that the Federal reserve note, even carefully guarded and restricted
as it was against abuse in the Federal Reserve Act, was nevertheless
exposed to the danger of too easy issue.

As a matter of fact, we have had no inflation of Federal
reserve notes, rather the reverse has been true;

but that is no reason

why we ehould be willing to consider relaxing the reasonable safe-




guards of the Act. and, simply for the sake of making the reserve note

a more pliable instrument for drawing gold into the Reserve Banks, expose it to the risk of deterioration,

That such a method of note is-

sue would provide an easy way of obtaining the communityts floating
gold to the extent that the community would be willing to accept the
note in exchange for gold, may be admitted;

but it is also clear that

such a method of issue would constantly carry with it the possibility
of inflation - a possibility not to be taken too lightly in a country
whose business temper is most frequently apt to be either one of high
optimism, seeking nutriment and support in the way of abundant credit,
or else one of severe pessimism and despair, seeking sympathy and comfort in the way of easy credit.

-Then we observe the rapidity with

which this country has absorbed the enormous volume of credit created
by the release of banking reserves under the organization of the Federal Reserve System, and the added volume created by the accession
of large supplies of foireign gold (since August 1, 1914, to date, we

have received $631,097,000 more than we have exported), we get some
idea of the capacity of the American appetite for credit.

The fact

is that an American business community can always be counted upon to
live up to the possibilities of its credit, and it is no exaggeration
to say that we are at this moment in the midst of a career of credit

On the other hand, a review qi American banking and currency history shows that hard times have seldom failed to produce


the suggestion of cheap and easy money as the remedy.

When I recall

the insistence with which, during the sombre first months following
the beginning of the European war and the temporary breakdown of trade

with Europe, the Federal Reserve Board was urged to join in supporting
a proposition for an issue of $500,000,000 of Government currency for
the purpose of


the nominal value of staple crops, and of

making National bank notes legal reserve money, I can not lightly brush
aside the danger of note inflation as one not seriously to be reckoned
with any longer in the operation of American banking.

There are some

forms of temptation and illusion that beset poor weak human nature
even in so enlightened a business country as ours, when the opportunity
seems sufficiently alluring or the emergency sufficiently overmhelming.
At any rate, the menace of overexpansion which would constantly lurk

among the possibilities of the Federal Reserve System under a system
of freer note issue than the present one, would, in order to be effectively controlled, involve the necessity of such close and highly
centralized control of the Reserve Banks, as would, in my opinion,

mean practically the destruction of much of their present healthy
regional character and initiative;

in brief, would mean the first

step toward the process of substituting the principle of centralism
in our new banking system for the principle of regionalism.

I value

the principle of regionalism so highly that I should look with scepticism on any proposal which would have a tendency to weaken or destroy it.

When it is noted that those who wish to widen the base of

the reserve note by changing it from a note specifically secured by
an equivalent amount of commercial paper to one issued upon the gen


eral credit of the Reserve Banks, either have proposed or have in
mind as the next step in the development of the new note system, the
making of reserve notes legal reserve money for member banks, just
as the notes of the Bank of France and the Bank of Germany are reserve money for the banks of those countries, it is clear that the
change would be of such far-reaching portent as almost to be subversive.
A freely issued bank-credit note, having the character of
legal reserve money for member banks, would involve so considerable
a step in the transformation of our new banking system, that I could
regard it as nothing less than the disintegration of the system as
originally conceived and set into operation.

The moment that the note

of a Federal Reserve Bank, with the requirement of the minimum gold
reserve as the only serious restriction upon its issue, can be counted
as reserve by member banks - in other words, from- the moment that
the. constitution of the Federal reserve note" is changed from that

of a note issued in res.ponse to a definite commercial need, evidenced

by the fact that the note issued is covered by an equivalent amount
of pledged commercial ciillateral, or in other words, from the moment

that a considerable element of discretion and judgment as to the mode
of issue enters into the determination of the quantity and therefore

of the value of the Federal reserve notes - those notes, if allowed
to be counted as reserve money by member banks, must be subject, in
the interests of the coml:anity's safety, to a degree of centralized

control such as would be inconsistent with the spirit and method of


the regional banking plan.

in a

It is unthinkable that twelve banks should

position to issue notes which would be available as reserve

money - in other words, that there might be twelve varieties of bank
reserve money, similar in nothing but app earance and the fact that
they bore the indorse72ent of the United States Government.

I am forced

to the conclusion, therefore, that the moment that the notes of the
Federal Reserve Banks are clothed with the potentiality of bank reserve
money, the Reserve System will either be metamorphosed into a central
banking system, or something akin to the process of metamorphosis will
take place under one form of disguise or another, by the gradual sterilization of the separate Reserve Banks.
The injection into the gold supply question at this time,

therefore, of the proposition to change the character of the Federal
reserve note implies so much more than it appears to, that it is either
to be regarded as academic and gratuitous, or as tending toward a
gradual and ultimately a' radical reconstruction of the Federal Reserve

System, and a perversion of its most fundamental principle.
I can not but view it with the most serious apprehension.

principle is the vital principle in our new banking sysem.

As such,

The regional
It is

America's specific contribution to the business of ressrve banking.

A banking system is a growth and development, awl the regional prin-

ciple, whichAzthe life-giving force of the Federal Reorve System,
grew out of the clearly perceived necessity of adaptina the structure
of any system of reserve 'canking which would Zit Am3rican conditons



to the analogies of our political and economic life and the genius
of our people.

Two years of close and constant contact with the ad-

ministration of the Federal Reserve Syatem have convinced me of the
supreme value and the entire practicability of the regional principle.
The wisdom of this foundational feature of the Reserve Act has already been abundantly vindicated.

I am sure that we shall prize it

the more as we understand it the better, and that we will not, there-

lore, admit anything that is inconsistent with it or that threatens




Our country is in a fair way, because of fortune and circumstance, to become an international banker, and either to share the

responsibility of international finance with England or possibly
to replace England.

This circumstance gives an added and more vital

importance to the question of the policy that we shall pursue in
the matter of our bank note issues.

A country that expects or desires

to hold a position of prominence in the field of international finance
and banking, can not afford tc publish to the world or even admit to
itself that it is willing to treat as money


its banking reserves

anything except what is universally recognized among the trading
nations of the world as incontestably money of account.

Such has

been the policy of England, the only country in the history of modern
commerce or since banking has entered upon its modern development
that has successfully ov,upied the position of a world banker.


land's financial prestige has long owed much to the unalterable and
unassailable determination of her banking leaders to maintain the
pound sterling in an impregnable position.

The pound sterling in

England has always meant a pound sterling in gold.
therefore, always meant gold credits.

Sterling credits,

That is why the English finan-

cial community is struggling so hard at the present time to prevent

the pound sterling from going the aay of the mark and the franc, by
maintaining at whatever cost specie payment.

The Bank of England note, issued, as is well known, under


restrictions which make it so nearly a bullion certificate

s to

be practically the equivalent of bullion, is, for this very reason,

held principally in the vault reserves of the Englih banks.


fiduciary note, however carefully supervised, would be acceptable
in the reserves of the British banker, and it is noteworthy in this
connection that

notwithstanding the desperate struggle for national

existence in which England is engaged and the necessity under which,

in consequenie, she finds herself of making her aVailable banking
resources reach as far as possible in support of pUblic and private
credit, nb Change has taken place in the status of the Bank of Eng-

land note nor is such a change in contemplation, because British
banking opinion is too alive to the importance of maintaining the
structure Of commercial and banking credit on a specie basis.
The time was, about 1830, when the restriction upon the
Bank of England notes Was open to some criticism, as impeding the
supply of the country with an elastic currency; but bank notes have
long since ceased to sUpply the currency requirements for business
circulation in England as in the United States.

Hartley withers,

writing since the beginning of the great war, and reflecting the
point of view of the English bankingscommunity, says "Nam that it
is more clearly perceived that the money of England is the check
and that the Bank of England note is chiefly used as part
of the bankts cash reserves, the opinion is commonly. held in the City

that the restrictions on the issue of Bank of England notes should
be carried still further, and that that part of the issue which is



fiduciary or based upon securities should gradually be abolished,
the securities behind it being replaced by gold.


a matter of theory, it is safe to say that a majority of wellinformed City opinion is now in favor of making the Bank of England
note a pure and simple bullion certificate, and this change of opinion concerning the only law which seriously restricted the banker in
the conduct of his business is characteristic of the extent to which
English banking has been modified by the development of the use of the

It has been revolutionized rather than modified,- for the

check has freed banking.


...... and at the same time given

the commercial community the most perfectly safe, elastic and adaptable form of currency that the world has yet seen".

From Bagehotls

"Lombard Street". (Introduction by Hartley Withers, pages ix,x, and xi)


October 31, 1916.

Dear Mr. Strong:

Many thanks for your good note of the 26th inst.

I want

to thank you for taking the trouble to read my Indianapolis address
so carefully and to give me the benefit of your criticisms and comments.

I know, of course, that on the fundamental doctrine underlying

my whole discussion, but only hinted at once or twice in the course
of this address, you and I were not in agreement.

I refer, of course,

to the question of changing the character of the Federal reserve note
so as to make it more nearly
tral banks,



the notes of the great European cen-

on the credit of the bank and used as an effective

method of building up the gold reserves of the banks wherever opportunity to substitute the note for gold in circulation might offer.

As I have

opportunity I want to consider the details of your

kind and penetrating criticism very carefully and I will let you know to

what extent I have modified my position or reasoning in consequence and
to what extent I think you are wrong in your inferences.

In one impor-

tant point, perhaps the most important, I want to set you clear at once
as to my attitude.

I am not opposed to the issue by the Federal Reserve

Agents of notes in direct exchange for gold.
upon in


This matter was not touched

address because it was not immediately germane to the point

of view that I was there undertaking to develop.

I would like to see an

amendment, and have so told Ir. Glass, under which the practice which has
grown up among the Reserve Banks of giving their gold to the Federal Re-




Mr. S trong,

Oct. 31, 1916.

serve Agents in exchange for notes should be simplified and regularized.
In other words, I feel that what we have been doing in this way, when
considered in connection with the extraordinary circumstances of the times,
has been good banking and financial policy, but I nevertheless dislike to
see it done by what has been criticized by too many people as an evasion
of the law.

In an address which I made at St. Louis last spring, I took
occasion to explain and to defend this policy as one of the unexpected
ways in which the Federal Reserve System has helped to impound some of the
redundant gold of the country and check inflationary tendencies.
this point, therefore, we are together,

So on

Where I differ is as to the sub-

sequent use of the gold impounded by the Federal Reserve Agent in exchange
for notes.

Your position I understand to be substantially identical with

Warburg's, who would virtually treat this gold as a part of the bank's free
working assets.

This I object to.

I am sending you a brief memorandum of some notes that I prepared
on this subject when-I was assembling ideas for my Indianapolis address.

Mr. Warburg had taken such emphatic and unequivocal position on the question
of Federal reserve notes in his Kansas City address that I felt that I could
hardly speak so soon after him without touching on this subject lest my
silence should be construed es implying either


or indifference to

the views he had expressed, but on subsequent reflection it seemed to me
that the present was not a suitable moment for this purpose.


friendly our differences amongst ourselves may be, they will easily lend
themselves to misconstruction if made matters of open controversy in times
when the atmosphere is not conducive to such discussions.


Mr. Strong,

Oct. 21,1916.

Let me say while writing on this subject, that I think the matter
of Federal reserve note issues has never been thoroughly thrashed out in
Federal Reserve circles.

This ought to be done and ought to be done in the

very near future, both in the Board and among the Governors and Federal
Reserve Agents, in order that we may have a Federal Reserve policy on this

As you will see from the memorandum statement, I em sending with

this, my convictions are pretty deeply rooted, but I feel such a degree of
loyalty to my colleagues and the Federal Reserve System as a whole, that
I am willing to go along and do my utmost to make effective any policy that
I feel is agreed upon after a thoroughgoing discussion and comprehension
of all that is involved.

A house divided against itself cannot, of course,

That must be axiomatic in Reserve banking, but for all that coopera-

tion must rest upon a real understanding.

Choice of policies must be made

intelligently and in view of all the circumstances and probabilities.

You will be good enough to regard the memorandum on Federal reserve notes as confidential.

It has thus far not gone outside of the Board.

Now a word es to yourself.

I feel like a sinner to have written

a. speech that has kept you at your desk long enough
and thoughtful pages.


dictate nine solid

While I am selfish enough to want to know all that

is in your mind, I am also selfish enough to want to see you restored in
health and back amongst us.

The Federal Reserve System does not seem the

same to me with you two thousand miles away, and I want to be assured that
you are buckling down to the business of getting back your health and
strength with the same devotion and tenacity with which you buckled down
to the job of getting the Reserve System started in the right way.

I am

Mr. Strong,


Oct. 31, 1916.

etraid from what Warburg tells me of your method of life and the evidences
that come to me in other ways, that you are not treating yourself with
sufficient indulgence.

Take it from a man who has seen a great deal in

his family and among his friends in California, of your trouble.

I have

seen some wonderful results produced among men who were willing to give up
and for a year or so live a lazy and relaxed life in which all the energies
of nature went to the conquering of the enemy.

That means fresh air and

sunshine with a modicum of muscular and nervous effort and plenty of good
rich food.

Of course to follow such a regime easily and naturally you want

a pretty soft climate and I have wondered whether the Rocky Mountain climate
for a man of your temperament and endless energy was not too stimulating,
But here I am, violating my own precept by writing you a lengthy
letter that will set your mind agoing when what it needs is rest and freedom
from stimulus.

Mrs. Miller wants me to give you her warmest regards and

best wishes for your stpady improvement.

She recalled to me, when I told

her about your letter, how just twenty years ago this month she went to
Denver to see her father who was in very much worse condition than you and
on his way rest to California was halted at Denver and his life almost
despaired of.

He picked up enough to get on to California and submitted to

a regular regime, recovered much of his lost strength, and had many of the
beet and most useful years of his life.
Believe me,

Always faithfully yours,

Mr. Benjamin Strong,
4100 Montview Boulevard,
Denver, Colorado.






Dear Mr. strong:


19, 1918.


The story of the little girl, which you

apropos of

sources, is all

the brag about the increase


in banking re-

It reminds me of another little

girl, who, when the Doctor's little daughter was bragging
that all


her father's mail came addressed 'M.D.', said:

*That is nothing; everything that comes to our



doesn't matter whether to Lama or Papa, comes marked

'C.O.D."' I sometimes wonder how much inflation the warring
world will stand before the people insist that they deliver
things only C.O.D.

It occurs to me that it might be well

for you, in your leisure time, to write a banking comedy
entitled: "When is a resource not a resource?"

Let me take this opportunity to tell
you how delighted I have been from time to time to read of
the forthright and outspoken attitude you have taken in

behalf of the need of thorough-going economy on everybody's
part, if we are to go through with the financing of our max

In these days the banker,who is only a banker,

is no more than a Dawn-broker; the banker, who, besides being
a banker, is also an economist, rises to the dignity of statesmanship.

Such was the case with our good friend, Cunliffe.

Just about a year age he was here and I recall freauently
incidents in connection with his visit.

On one occasion, I

think it was perhaps the last conference he had with the Board,

we were discussing the Spanish exchange situation (Musher was
already then, you may recall, trying to make a goat of the
Board), and Clualiffewas not familiar with the details of the

peseta situation and felt his way along, thinking
it were.

aloud, as

When he was finished, I said to him: "You must have

been a close reader of Mill and Goschen?" Looking quite un-

perturbed, he turned his head and raised hit

eyes quizzi-

cally saying: "Can anyone know anything about foreign exchange

who hasn't read Goschen?"
I am enclosing a letter which contains some

matter which I think will interest you, more especially the
reference to Sir R. H. Inglis Palgrave, whom you doubtless know
of and possibly may have met in some of your London visits.


Mr. Benjamin Strong - 2.

The letter is from J. Shield Nicholson, Professor of Economics
in the University of Edinburgh.

I have never had the pleasure

of meeting him but he is a man of very distinguished repute
and I was gratified to get his letter.

The sentence:"* * if

we do not stop the waste, the waste will stop the war" is
epigrammatic and worthy of wide dissemination.

Will you be

good enough to return Nicholson's letter when you have read it?
I hope to be in New York before long and

perhaps we will have a chance to swan ideas on a good many
things of current interest.
Faithfully yours,

Mr. Benjamin Strong,
Federal Reserve Bank,
New York City.

(Copyright, 1919, by A. C. Lake, No. 28 North
Front St., Memphis, Tenn.)

The Federal Reserve
Banks Detrimental
Memphis, Tenn., Dec. 31, 1918.

To the Congress of the United States,
Washington, D. C.
Dear Sirs:
I have seen in an Arizona newsp
that because of the high cost of mining (caused

mainly by the inflation of our currency by the
Federal Reserve Banks), gold mines are closing
down and their owners have sent a delegation to
Washington to get the Government to pay them a
bonus of $10.00 an ounce for digging gold. This
is an absurdity. They would be much more usefully employed digging potatoes. There is already

enough gold money in the world for all practical purposes. Gold is about as non-essential
as are diamonds, pearls, etc. Neither of them
Is as important to mankind as are iron, copper, lead, zinc, tin, etc. The only thing that
makes an ounce Troy (480 grains) of fine (24

carats) gold worth $20.67 is that the Government
pays that for it at the mints, less an infinitesimal
charge for treatment and for the 1/10 copper alloy
to harden it for coinage into money.

reasonable request were granted, paying them
$30.67 per ounce for it, gold money would go to a
premium of $1.48. The holders of the Federal Reserve Bank notes and of the $346,681,016.00 of legal tender greenback notes might demand gold for
them, and as it might not be forthcoming, an unprecedented panic might ensue. In this letter I
use United States Government statistics.


If th


According to the December 1, 1918, Circulation

Statement, we have

Gold coin


bullion in the Treas-

Standard silver dollars
414,514 930
Subsidiary silver

United States notes...
National Bank notes...
Federal re-




notes ... $2,776,625,220

Fe deral

Reser v e



96,954,730 2,873,579,950 3,937,114,121


As the;-paper money exceeds the specie money,
only $204,651,662 (which is a small amount now-a-

days) for the sake of easy calculation, I assume
they are exactly equal. The proper relief for the
gold miners would be to get the use of all paper
money abolished, except gold and silver certificates, thus coming to a strictly specie basis. This
reducing the currency one-half would double the
purchasing power of the remaining one-half. So
that the cost of operating the mines would be only
one-half of what it is now. If the free coinage
of gold is continued (which it ought to be, if all
paper money is eliminated), the free coinage of
silver at 16 to 1 should be resumed, so as to encourage silver mining, in order that our supply of
copper and lead, which are valuable by-products
of silver ores, might be increased. Zinc, arsenic
and iron are also sometimes by-products. These
by-products are more abundant in silver than in,
gold ores. Gold, too, is a by-product of silver ores;

but I regard gold as of but little intrinsic value.
As the total amount of silver coined by our Government from 1793 to 1917, inclusive, 125 years, is

only $1,019,871,953.80, and, as we have left of it in
circulation Dec. 1, 1918, only $652,419,136, it is

ridiculous that its free coinage should have been
stopped in 1873. The infliction, No. 16, 1914, of the

Federal Reserve Banks on the country was a stupendous blunder. I have seen it stated that the
world is governed by cupidity and stupidity.

Those responsible for the existence of these banks
may decide for themselves to which class they belong. These banks opened for business Nov. 16,
1914, and had outstanding Dec. 1. 1918, $2,873,579,-

950 (about 3/8 of our total stock of money) in

paper money, issued by them in a little over four

It is an incontestable fact, though not
generally known, that every increase in the

amount of the currency increases prices in exact'y
the same proportion. So that it invalidates itself.
Therefore, after adding this $2,873,579 950 to our
other currency, $4,795,996,630, making our total
This $7,669,576,580 will

currency $7,669,576,580.

only buy as much as the $4,795 996,630, before it
war added; therefore, as our Government is spending this year about two and one-half times $7,669 576,580, these banks are costing the Government
this year alone about two and one-half times $2,873,579,950, which equals $7,183,949,875 loss.


is an app2Iling price to pay for the doubtful ben
fit derived from these banks.
Retiring from the wholesale clothing business
Dec. 1, 1895, I invested in United States Government registered bonds. They are now worth less
than 40 cents on the dollar in purchasing power,
as compared to the 100 cents they were worth
when I bought them. Nevertheless, I expect to
keep these good, gilt-edge, tax-free, payable-in-gold

bonds as long as I live, which can't be long now,
as I will be 70 years old Feb. 21, 1919. But for the
inflation of our currency I would be worth over
two and one-half. times as much as I am worth,
having lost considerably over $100,000one hundred thousand dollars of my hard-earned by bookkeeping money. I have, during the last eleven
years, given this currency question much study,
and I do not think any one knows more about it


than I do. With me this question has been a spe-

cialty, almost an obsession, while with others it

is only a side issue. I know of no one besides myself who treats it not only nationally, but also in-

ternationally, as I do in my pamphlet, "Currency
Reform the Paramount Issue," and subsequent

This letter as originally written was of many
pages, but it was so discursive that I have curtailed it. My heavy losses of over 60% of what I

would now be worth but for the foolish inflation
of our currency incites me to denounce the Federal Reserve Banks as a curse to the country.
Won't you please stop them from manufacturing
so much money? I do not use tobacco nor any
other kind of "dope," except coffee. Never took a
drink in my life; use strong language only when
I lose my temper, which is seldom. It would take
a much harder "cusser" than I am to do full justice
Very respectfully,
No. 28 N. Front St., Memphis, Tenn.

On Dec. 1, 1917, our stock of money was $6,026,127,909.

On Dec. 1, 1918, our stock of money was $7669,576,580.

This is an increase of .2727%, and weakens the
purchasing power of our money .2727%; so that in

one year alone the inflation of our currency
cheated the holders of the 414% Liberty Loan
out of about 6 4/10 years' interest on their
bonds, unless the currency is deflated. It just
simply is not honest for our benevolent Government to do this. Or is it ignorance? If our currency were reduced one-half, thereby doubling the

purchasing power of the remaining one-half, no injustice would be done to the holders of the Liberty
Loan by scaling down their claims one-half. This
Liberty Loan is so widely distributed among our-

selves and the money was spent in such a just

cause, I do not think there will ever be any senti4

ment or propaganda for its repudiation. On July
1, 1896, one dollar would buy as much as $3.14
would buy Sept. 1, 1918. This is an increase in

1896 prices of 214%. From July 1, 1896, to Sept. 1,

1918, our per capita of money increased 147%.

Therefore, 147% of this 214% is owing to increase

in currency and only 67% owing to war prices.
From July 1, 1914. to Sept. 1, 1918, commodity
prices increased 107%. During the same per od
per capita of money increased 64%. So 51% of
this 107% is owing to increase in currency and
only 53% is attributable to war prices.
Measured by the inflation in our currency, our
dollars ought to be worth about 38 cents. Owing
to war prices, they are worth only about 32 cents
in purchasing power, as compared to the 100 cents

they were worth July 1, 1896. As the war is over
now, war prices may soon come off. But if there
is a continuance of the inflation of the currency
money will continue to depreciate, so that prices
may go even higher than they are now, unless parhaps our prices may be so high we cannot export
anything so that there may be a glut in our markets.

If we wish to do an export business, we

must have less money so as to have lower prices
to compete with the low prices of nations with less
money than we have.
The Federal Reserve Banks have manufactured
in a little over four years $2,873 5"i9,950 of paper
money while our total coinage of gold from 1793
to 1917, inclusive, 125 years, is only $3,411,627,595.50. Just think of that! People say to me we
need more money to do business. I answer, if we
had twice as much money as we have now, prices
would be twice as high, so that we would need
money as much then as now; and if we had half
as much, prices would be only one-half, so that we
would not need money any worse than we do now.
The reported plan of Edward N. Hurley, Chairman of the Government Shipping Board, to standardize seamen's wages throughout the world, so
that they will all get the same pay may work very
nicely IF he first standardizes the per capita of
money throughout the world, so that money will



be worth the same everywhere. Take half a glass
of whiskey; add water till the glass is full. You
will have twice as much fluid, but not one single
drop more of whiskey. Quantity gained; quality
lost at exactly the same ratio. The same principle holds good in regard to money. Up to Dec. 12,
1918, we have lent our allies $8,223,540 702. We
had better make them a present of th.s money. If
we were to collect it now and put it into circula-

tion, our dollars, now worth about 32 cents in

purchasing power, would be worth only about 15
cents. If we owed foreign debts (which we do not),

so we could get rid of this money, it would be

advisable to collect it. Several months ago I said
it would not be advisable for Belgium and France
to accept a cash indemnity for the destruction of
their property, but that the German artisans ought
to be required to come and reconstruct the property destroyed. I see in the Commercial Appeal oE
Dec. 19, 1918, that this plan is now proposed. We

had better beware of accepting any cash war indemnity from Germany. I don't see how she can
pay us, anyway. She has less than $1,000,000,000
of the about $10,000,000.000 of gold money of the
whole world. We have $3,080,043,323 of it. I don't
see that we can get anything whatever out of this

war, except the satisfaction of having done our
duty. The interned ships we seized are of so little
value, as compared to our enormous losses we

might as well restore them to their private owners
and wipe our slate clean.
Then we
without money and without price, saved rrom enslavement the whole world, including the German
people themselves, who were driven to the shambles by their fantastic, spectacular, crack-brainerl
Kaiser and his swashbuckling entourage of diabolical, rapacious, predatory fellow monstrosities. II
he does not feel like a blank idiot now, he does not
feel natural.

If the same amount of gold money had been
added to our currency it would have affected
prices just the same as this paper money has
Money used as money has no intrinsic value. The
substance it is made of does not affect its value

Paper dollars buy as much as gold dollars; the

amount in circulation is what establishes the value
of even gold dollars. Before our currency is contracted (which I think it will have to be), in order

to avert a panic, fair relative basic prices should

be fixed on all commodities and labor. Why
should not prices of labor and cotton he fixed at
their relative values? It is decidedly unfair to
fix prices on some things, as is now done, and not
on all things. But we don't want a price fixed on

cotton and a premium on wheat; nor anything
else. I have seen it stated that a pound of middling cotton is worth a pound of fat middling

pork. If this is their relative value, let their prices
be so fixed. And let the prices of labor and all
commodities be fixed at their relative values. If
prices were fixed at what they averaged, say, July
1, 1903, I think people would find they have more
money than they need to carry on business, and
would voluntarily liquidate what they owe the Federal Reserve Banks. In this way our currency
might be automaticaly deflated without causing a
panic. We had July 1, 1903, a per capita of money
of $39.42, a little more than one-half of what we
have now. Prices at that time were about 30%

higher than they were July 1, 1896, when they
were too low. Inflating currency suits debtors all
right, but it surely is tough on creditors. Losing

one's money by inflation is an insidious way of
being robbed. The average man does not realize
he has been cheated. He thinks his money is
worth as much as it ever was, which it is not; but
that things are worth more.
I am asked how without these Federal Reserve
Banks the Government could have raised the vast
sums required for the war. I answer, but for the
inflation of our currency by these banks, thereby

inflating prices, such colossal sums would not have
been needed. If it had been desirable to inflate the
currency, which most emphatically it was not, the
Government could have issued legal tender paper

fiat money, just as it did both belligerents during
our Civil War. This war should have been financed
entirely by levying taxes and selling bonds. I have


heard it suggested that our Government should

make all these Liberty loans legal tender currency.
If any such silly thing were done, dollars would be
worth but a few cents. Entirely too much of this
Liberty loan is already being used as currency.
Money is like everything else, "W'en hit gits too
plentiful, hit ain't wuth much" (Hambone's Meditations).
Having, in 1896, operated a steam sampler, i. e.,
ore crusher, at Kingman, Ariz.; buying ores from
the mines and shipping, 931 miles, in carload lots,
to a smelter at Pueblo, Colo., I have a smattering
knowledge of ores. Nearly all ores are composite;
that is, have two or more metals in the same ore.
Grains are the units of weight. All grains are of
the same weight; all ounces and pounds are not.
By the way, calories are the units of heat and also
of energy. Every normal person should eat enough
food to produce about 3,000 calories' per diem.
Owning two patented, i. e., deeded from the Government, silver-lead-gold mining claims in Arizona,
it is to my interest that the free coinage of silver
at 16 to 1 should be resumedthat is, 16 times as
much silver in a silver dollar as of gold in a gold
dollar. A gold dollar has 23.22 grains of gold 24

carats fine, and a silver dollar has 16 times as

many grains, approximately 3711/4 grains Troy.
A gold dollar, including the 1/10 copper alloy,
weighs 25.80 grains.
A silver dollar, including the 1/10 copper alloy,
weighs 412.5 grains.
All grains are of the same weight; there are

5,760 grains in a Troy pound, and same ifi an
apothecaries' pound; there are 7,000 grains in a
pound avo irdupois. Prescriptions are filled by
apothecaries' weight, but medicines are bought
and sold by avoirdupois weight. A full size mining claim is 600x1,500 ft.-20.66+ acres. An ounce
of pure (24 carats) gold is worth $20.67+. Note
the nearness of these two figures. I am more interested in injecting back into my depreciated by
inflation dollars their lost value than I am in the
proposed compensated stabilized gold dollar. I do
not see how it can be stabilized unless a strictly



gold currency is adopted. I think the best, simplest way to stabilize the purchasing power of our
money would be to keep the amount in circulation
at or near a fixed per capita, or keep our stock of
money at a fixed amount. Ray's Higher Arithmetic says money is the standard of value. Most
people blindly accept this fallacy.
worth of commodities and labor are the correct
standard of value. The value of even gold money
depends entirely on the amount of it in circulation.
If, instead of issuing new money, the Federal Reserve Banks would raise money by gelling bonds,
as do the Land Loan Banks, they might possibly
be of some benefit. But I doubt it. I do not believe
in making it too easy for people to borrow money.
Some people won't half work as long as they can
borrow. Appetite comes with eating ana arinking; e. g., peanuts and alcoholics. Also, increasing
currency increases prices, dollar for dollar. So
that another increase is demanded to do business,

and so on indefinitelyan endless chain of increases.

Secretary of the Navy Daniels is said to want
to continue increasing our navy. Why should we,
when the whole world is just going to, or at least
ought to, disarm? All nations should cease
war preparations'. Right now, as between Prusit is pa
sian militarism and Chinese

easy to see which is the better part. "He that

lives by the sword shall die by the sword." If it
can be done, the back numbers of our navy should
be converted into merchant ships, and no new war
'ships should be built by any nation. Perhaps,
Secretary Daniels is only camouflaging. Most people are afraid our allies will not be able to repay
us the huge sums we have lent them, while I am
afraid they will pay us. My views on this currency
question are so contrary to most other people's I
am reminded I was once complimented by being
told if ever I were drowned in the Mississippi river
my body would float up-stream; and yet it is as
clear as daylight to me my views on currency are
correct. Our Government seems to be trying to
play Lady Bountiful to the whole world and every9


body at home. We are becoming so paternalistic,
socialistic, I am afraid individualistic effort will
cease. Everybody will lazily sit down and wait for
an appropriation instead of manfully working out
his own salvation. Those who have ambition, enterprise and self-denial enough to accumulate anything may have to emigrate to escape having what
they have got taken away from them and handed
over to the no-accounts. Lots of trifling people
sitting around waiting for some one to give them
something for nothing, thereby contributing to
their inefficiency. England has never seriously
interfered with the freedom of the seas since we
went to war with her about it in 1812. She benefits every people she annexes. She should be
allowed to keep all the territory she has captured
during this war. To keep Japan in a good humor,
she should be allowed to keep what she captured
except Kiao-Chow, which should be returned to

I see in the Commercial Appeal of Dec. 20 1918,
Mr. W. P. G. Harding, Governor of the Federal Re-

serve Banks, says these banks are very prosperous. After paying G% annual dividends they will

all, July 1, 1919, have surpluses of 100%accumulated in less than five years. The insiders have

profited, but these banks have been very disas-

trous to me, causing me to lose about threeeights of what I would be worth but for their watering, and thereby weakening the purchasing

power of our currency. 'This three-eights is over
half Of my total loss by the inflation of our cur-

rency; also, these banks have caused our Government a loss of three-eights of the total cost of
this war by debasing the currency by inflation,
causing prices to rise one dollar for every dollar
they issued. The reason we now have no revenue
stamps or bank checks is that some one suggested
it might discourage thrift. And yet these Federal
Reserve Banks are allowed to debase our currency,
issuing, during one week alone ending Dec. 21,

1918, $68,828,000 of new money, which is an addition of nearly 1% to our currency and depreciates
its purchasing power nearly 1%. So that a 3%

savings bank deposit is robbed of nearly four
months' interest in one week (sic). The common

run of people, if they only had sense enough

(which they have not got) to know what is being
done to them, instead of putting their money into
bank, would hasten to spend it before it becomes
utterly worthless.
During the whole year ending Dec. 1, 1918, our
stock of gold increased only $39,571,283, which is
only slightly over one-half as much as these banks
issued in paper money in six days (sic). The idea
of establishing these banks is so imbecilic that it
looks like it may have originated in a lunatic asylum. Their existence is a reflection on the inteligence of our Government. If the Democratic
party does not speedily abolish them I do not
think the Republican party will need any better
issue to win the 1920 election. However, these
banks are only an enlargement of the iniquitous
Aldrich $500,000,000 emergency currency bill,
which was a Republican measure.
And now, Gentlemen, since I have pointed out
to you as plainly as the English language and fig-

ures can demonstrate the crying evils of these

banks, will you not help me to get them abolished,
or at least deprived of the power of debasing our
currency by inflating it? We have twice as much
money as is good for us.
Very respectfully,

28 N. Front St., Memphis, Tenn.
January 1, 1919.

Mir A few years ago, Congressmen alleging

the high cost of living, raised their pay from $5000
to $7500 per annum. I see now, Jan. 16, 1919,

some of you Congressmen want another raise to
$10,000; claiming you cannot live on $7500.

If you will compel those Federal Reserve Banks

to withdraw frorn circulation their outstanding
notes and not allow them to issue any new money,
it will so increase the purchasing power of our
money that you can live on your present salaries
and not be suspected of being greedy.









Doing things backwards.
Does not know what he is doing.
Situation running away with him.

Do not destroyfttcnd this twoome other citizen

and enlist his hel4nila figh973






Prepared by

FrmraPnYslation TELEGRAM




Checked by
Code used

TEL. I/ 1




76f mq xascity 3rd 335p
Strong PRB

If not inconsistent would you or mr. Treman write K,s, what
significance should

be attached to the resignation of mr. vanderlip





February 15, 1919

Dear Mr. Strong:

I am much interested in
your letter from lake George of February 5th.
It raises many interesting questions and presents some propositions which could be better
discussed if we had an evening to sit down together for an exchange of views. I think it
safe, however, to predict that the questions
you raise will still be live questions after
you have completed your vacation at Lake George
and that there will still be much left to discuss when we next have an opportunity for an
extended talk.
In the meantime, there are two
or three points on which I would like to restate my views so as to make my meaning and
position clearer.
You doubt the propriety of the
method by 'whichI estimate, in my Philadelphia address, the amount of our credit
inflation properly chargeable to the Government's loan operations. You say that my
estimate 'fails to take into account that
part of what might be regarded as the legitimate expansion resulting from imports of
gold and increased productive power coincident with it'.

You do not explain what you mean
by 'legitimate expansion resulting from imports of gold'.
Your language, however,
would seem to imply that credit expansion
is 'legitimate' when it is based upon an



Benj. Strong -


adequate gold reserve. This is the view that is
widely and conventionally entertained by many
bankers in our own and other countries. Under
normal conditions, I should have no quarrel to
By 'normal
pick with those who take this view.
conditions' I mean when trade is normal between
countries and gold is allowed to flow freely in
settlement of balances. For in those circumstances
a country, whose credit structure was getting unduly expanded, would experience a rise of prices,
i-Iports into it would be stimulated and, in due
course, it would lose gold in settlement of the
resulting adverse balance, and thus restriction
or contraction of credit be forced by the resulting
reduction of reserves. (All of this is admirably
explained in the recent report of Lord Cunliffe's
But in times such as we have had
during the past four years, the corrective of an
undue credit expansion by an outflow of gold has
been lacking.
The result is that our own and
other countries, which have had enormous accessions
of gold to their customary supplies, have been in
a position to indulge in a great expansion of
credit and currency without endangering their gold
reserves or the security of the gold standard.

Is such expansion properly to be
adjudged to be 'legitimate' simply because based
on an unassailable foundation of gold?

Much, of course, depends upon what is
meant by the term 'legitimate'.
more than what I described in my address as
'technical safety'. The test of legitimacy is
to be found in economic, rather than in technical
banking, factors.
This is particularly true in
a time of suah universal economic and financial
disturbance as there has been since 1914. Credit
and currency expansion are not, therefore, in
my opinion, to be regarded as necessarily legitimate because based on an adequate gold reserve.
Creait expansion is not legitimate when it reaches
the point of inflation, and 'Credit expansion
becomes inflation when the increase of prices
it produces brings no commensurate or offsetting
increase of production'.
(This is my doctrine
and was set forth in the Federal Reserve Bulletin
for November 1, 1918, page 1049, in the paragraph
'Prices and Credit Sxpansion' where this viewpoint is developed at some length.) The whole

I mean so


Mr. Benj. Strong



question of preserving a healthy condition of credit
and currency is one of maintaining the proper
quantitative relation between the volume of credit
and the volume of physical production.

There are many conditions in which high
prices stimulate an increase of production. Such
was the situation recently in the United States,
particularly in the years 1915-16.
This was in
my mind when I wrote the Philadelphia address.
Indeed, I quoted the most optimistic estimate I
have seen of the increase in the physical productiveness of the country since the begimiing of the
European War in 1914 - that of B. M. Anderson, Jr.,
now of the National Bank of Commerce of New York.
In making my calculation of the extent to which
the expansion of our banking credit since 1914
might possibly be regarded as offset by increased
productive power, I took a percentage of 25 and
thus reached the tentative conclusion that an
addition of one-fourth to the outstanding volume of
circulating bank credit in the United States just
before the beginning of the war in 1914, or, in
other words, some five billions of dollars, might
possibly be satisfactorily accounted for by the
increased productive power experienced at that
To that extent, I should say, using your
term, that our credit and currency expansion could
be defended as 'legitimate'.
The excess a
this, however, is in a different case. This excess
was credit expansion, pure and simple, induced by
the borrowing operations of the Government.
I do not know whether it is anything
more than a 'coincidence but, if so, it is certainly
a very striking coincidence, that the estimates
made of the volume of Government securities
financed by credit expansion on the one hand, and
of the volume of credit and currency expansion,
in excess of the legitimate industrial requirements of the country (as computed in my address),
on the other hand, are substantially identical,
to-wit: about six billions of dollars. This sum,
to my mind, represented the proximate amount of
inflation that had been occasioned up to the end
of 1918, when my estimate was made.
expansion should
terms of finance
reserves, but in

respect to the view that
have been dealt with 'not in
and interest rates and bank
terms of production and con-

4 °;',4



Mr. Benj. Strong



sumption of goods; that the direct control by
some system of rationing, or by consumption taxes,
or some such method, was sounder, more scientific
and more just than any method of control exercised
through the bank rate', I am pretty much in agreement. The point where I should be inclined to
differ with you is as to the appropriate discount
policy for the Federal Reserve Banks to have pursued in the assumed circumstances.
You say 'So
long as progress seemed to be making in various
steps to enforce econo-y, we were justified in
conducting our finance at low rates of interest
and upon the basis of appeal to patriotism.' My
view is that progress toward a program of real
economy would have been made very much more rapidly
if we had not maintained at the Federal
Reserve Banks such low discount rates, especially
on war-loan paper.
If the Reserve Banks had raised
their rates of discount and accompanied the raise
with a suitable explanation of their views and
policy, it would have helped to draw attention
much earlier, than in fact occurred, to the
essential principles of sound war finance. As
It was, there were many people right here in
Washington, high in the councils of the Government, who were indulging the illusion during the
first year of the war that, somehow or other, the
huge resources of the Federal Reserve System could
If we of the Federal
and would finance the war.
Reserve System, by raising our discount rates,
had said "no, this isn't the method by which the
war can be successfully financed", we might have
exercised a very strong and salutary influence in
developing official thought and policy along lines
that, in the last months of the war, were gradually
coming to be recognized as necessary.
The time for
U3 to have taken a definite stand, I think, was on
the eve of tne Second Liberty Loan. The gravity
and the financial magnitude of the war were then
getting to be pretty clear an' it could have been
Impressed upon people bd the Reserve Banks' taking
a serious and strenuous attitude by an appropriate
discount policy, that the war could not be financed
without a dangerous expansion of credit unless
the alternative course was adopted, either of
rationing or of consumption taxes or a combination
of both.
It has long been my opinion that the


Mx. Benj. Strong



Federal Reserve System missed a great opportunity for
national and constructive leadership by its attitude
of passive acquiescence and the uncritical adoption
of a conciliatory discount policy.
It might not have
been successful in impressing its views but, at least,
it would have had the satisfaction of knowing that it
had tried, and, failing of success, we, at least,
would have been absolved by posterity of the responsibility of having made easy the road to inflationist

However, fortunately for us, the war came
to a close before the evils of inflation had a chance
to develop to a very dangerous extent and I have little
doubt that, if the war had gone on, the country would
have put into effect a very thorough-going system of
economic control or rationing with the view of enforcing economy through restricted production of dispensable goods.
So much for past policies.
As to the future, concerning which you ask
a frank statement of my views, I can only tell you what
is in my mind at the moment, because I feel that circumstances, which none of us can definitely foresee at the
moment, must have very large weight in determining
actual policies when the time for action comes. We
are in the midst of an acutely transitional period,
which may take a year or more to run its course. Our
policies must, therefore, be governed largely by circumstances, whatever may be our predilections as to
general principles.

As'to the immediate future, I am of the
opinion that there should be no considerable modification
of our discount policy until after the next loan has been
brought out, or, perhaps, say, not until 1june or July,
and not even then if business and financial conditions
should seem at the time to be adverse to an increase
of rates. My main reason for thinking that rates should
not be increased in the near future is my belief that
the next loan can not possibly be financed except by
an expansion of banking credit greater than we have
experienced in connection with any of the preceding
loans. With six billions of tax revenues to be paid
and six billions, or thereabouts, to be provided by
the Victory loan,
ith the definite prospect of heavy
borrowings to follow in the second half of the calendar
year, candidly I don't see where the stuff is coming



4 b,





Q., 0 0 40.


Benj. Strong



Even with a high interest rate, or what is called
an attractive investment rate, I don't believe the
Treasury could raise ,)6,000,000,000 without a very considerable expansion of the loan and deposit accounts
of the banks, because there is no adequate investment
or savings fund to take up such an amount. From my
point of view, such expansion would be pure inflation,
but I am at a loss to see how it can be avoided. Holding this view of the necessities of the situation, I
am of the opinion that the Reserve System should do
nothing to embarrass solution of the difficult financial
problem of the Treasury by an advance of rates. The
placing of the next loan, I believe, will have to be
nursed and nelped by 'easy money".

After the next loan is out of the way,
a very careful survey of the whole situation should
be made and a fundamental policy for the future be
laid down by the Reserve System, to which it should
endeavor to work as rapidly as circumstances will
The time for drifting and temporizing will,
I hope, then be coming to an end. We should no longer
be expected to make our policy subservient to the
assumed needs or interests of the Treasury. We must
take a bold and comprehensive view of the whole national
situation and develop a discount policy in accordance
with the requirements of our national interest, as
viewed from a wider standpoint than that of the
Government alone.
You ask, specifically, whether the time is
not coming when our policy of 'moderate interest rates
must not be abandoned in favor of a program of higher
rates and contracting bank credit'.
In answer, I
may say that I think it probable that, after the next
loan is out of the way, we must let the country understand that rates will have to be fixed upon a more
natural basis than was the case during the war period
and that an gdvance may be advisable in order to help
on tne liquidation of the war-loan accounts of the
Personally, I dislike to use the word
"contraction" in connection with the discussion of
Reserve Bank policies. The word has a very sinister
connotation in the financial vocabulary of the American
To some, it suggests arbitrary pressure; to
others, strangulation of the little fellow in the
interest of the so-called "money power".
Nothing, I
think, would get the Reserve System into a more unenviable position with great numbers of people of
the country than to announce a policy of contraction.


0 4.0



AP 4,-





Mr. Benj. Strong


I am inclined to think, at any rate this
is my hope at the moment, that there is going to be a
good deal of natural liquidation during the rest of
this year and that we shall need to do little in the
Reserve system to force matters along necessary and
healthful lines.
We might, I think, with perfect
propriety, try to stimulate liquidation of v,ar
borrowings by removing the present differential in
favor of war-loan paper by putting it either on the
same bas's as commercial paper, or even in time
establishing a differential against it.
The condition of the Reserve System will never be as sound
as it ought to be as long as a heavy proportion of
its investments consists of bond- or certificatesecured bills payable.
I should, therefore, be
inclined to favor the course suggested above if
business picks up during the year and there are
earnings out of which savings can be made to take
up war loans, and I believe it would be good policy
for us to raise rates on this class of paper soon
after the next loan. If, nowever, the country is
then in a condition of "hesitancy" or industrial
stagnation with much unemployment, such a policy
might be inadvisable and have to be postponed.

All of this is a cumbersome and roundabout
way of saying that, so far as I can now look ahead,
it seems to me advisable that we should sit still
for the present and pursue a policy of "watchful
waiting" until the next loan is out of the way.
Your letter raised other questions and
propositions which I will leave for a reply later
on as I have time to reflect upon them. Will you
be good enough to treat this letter as an expression
of my views intended for your personal use? My
views upon questions of future policy are still in
the forming and it is not at all improbable that
they might undergo considerablec change in the light
of changing circumstances, which no one can predict
at the moment.
I hope you are getting some much-needed
rest and recreation at Lake George. I have never been
there but I undetstand that it has a very dry and
bracing winter climate.
It is probable that I shall
be in New York for a few days week after next. but
I suppose you will still be away. If, however, you
chance to be there, I hope we can talk over the

/////::/.)Brenj. Strong



subject of our correspondence more fully than it
is practicable to write.

With all good wishes, believe me,
Very sincerely yours,


Mr. Benjamin Strong, Jr.,
Lake George, N. Y.







February 26,

Dear Mr. Strong:






As I am getting ready to leave for
New York tomorrow morning, I have time for only
a brief reply to your further favor of the 21st.
I shall hope that you can come down to Washington
a day or two in advance of the Governors' Conference fixed for March 20th and that we can then
find an opportunity to discuss the questions of
our recent correspondence more thoroughly.

I agree with you, looking over the
performances of the past two years, that our finance
has been sounder than that of any other nation,
including Great Britian; that our problem of readjustment to peace conditions will be an easy one
compare' with theirs.
I can also agree with you
in your statement that such expansion as we have
had, in part at least, was justified. Indeed, I
can even agree that it was 'inevitable', if by
that is meant not inevitable in an economic sense,
but in a practical, political sense.

You ask "how could the total of
26 billions of dollars - say 6 billionsyin excess
of the nation's saving power, as estimated by
Kemmerer - have been raised without inflation or
without a tremendous increase in the investment
fund, which could only be brought about by imposing
economy upon the people?" My answer, using your own
term, is that it could have been done only by
"imposing economy upon the people".
This could have
been done, as you fully appreciate, by a well-devised
system of consumption taxes, or by a system of
rationing industry, and tnereby contracting the volume
of consumable goods, or by a combination of both

Mr. Benj. Strong - 2.

No doubtiit is not a simple and easy
these methods.
matter to devise a productive system of consumption
taxes, much less is this a politically popular expedient of finance, nor is a scheme of rationing
industry one that would strike the average politician
as advisable upon political grounds, and, no doubt,
there are grave objections to it from the economic
side, but none, I think, as grave as those that lie
against inflation as an expedient of finance. After
all, inflation is merely a financial expedient, not
it produces no new wealth,
an economic expedient;
it simply enables the Government to get hold of wealth,
otherwise produced, by going into the market and bidding
against the private purchaser. Thereby, prices are
run up and economy enforced upon the average consumer.
Economically speaking, there is nothing that you can
get by inflation that you can't get by other more
direct methods, always providing that there is courage
and decision on the part of the Government in devising
its financial program.
The most serious part of inflation is,
after all, the aftermath. We sow the wind to reap
Somehow or other we have got to come
the whirlwind.
off the perch. But this is an uncomfortable
process for nearly everybody and, for some, a very
///down and ruinous one. We shall be fortunate in this
country if we get off without some very serious financial
troubles and some very serious political troubles
growing out of the currency and credit disorders. That
has always been true in the past and I am terribly
afraid will be true in the present instance. I enclose
a circular from the so-called 'Research Institute' of
Washington, which, so far as I can make out, is a
bureau organized for propaganda against contraction.
We are likely to hear a good deal of this sort of thing
I also enclose
in the coming months and, perhaps, years.
a little leaflet, which has come from Memphis. These
things indicate that the Federal Reserve 3ystem and its
policy are to be forced into the limelight and that low
rates, easy credit and abundance of Reserve notes are,
by one school of financial thought, to bu regarded as the
solvent of our financial and economic difficulties, and,
by the other, as having caused the present plight in
which we are now said to find ourselves.
We are reprinting in the March Bulletin an artiole taken from
the London Economist on "Bank Credits in War", from which

I vote:
n*It is amusing now to remember that in the early
"years of the war the rapid growth of bank deposits


Yr. Benj. 3trong



"was hailed as an astonishing proof of the growth
"of the nation's wealth during a time when an ever"increasing portion of its energy was being devoted
This hallucination is now not
"to destruction.
"nearly so common, though it is still cherished
"by some earnest believers. Actually the growth
"of bank deposits is largely a measure of the extent
"to which the facilities offered by an almost
perfct banking system have been abused by our
Because they had
"financial rulers during the war.
"not the pluck to tax as they ought to have taxed,
"or the wit to induce or compel us to meet the war
"cost by subscription of saved money to loans, they
"were obliged to meet the gap between receipts and
"expenditure by the creation of banking credits
"and paper money. * * * * It has been a silly
"business, for which the bankers were in no way
"responsible. They were bound in war-time to
"support the financial measures taken by the Govern"ment, and the figures given are at once a measure of
"the efficiency of the bankers and of the ineptitude
"of the Governments".

This sounds as though it came from the pen of Hartley
Withers. What he says about the &nglish situation is
pertinent to our own.
Your explanation of the sense in which you use
the term 'legitimate' clears up our difference a good
I should certainly take no exception to the
doctrine that an expanson of credit and currency is
legitimate, when it induces a commensurate increase in
Moreover, I think it probable that
productive capacity.
mach of the expansion that occurred up to the time of
our entry into the war, and probably some nonths later,
induced a compensating increase in our productive resources.
At my suggestion, an informal investigation was made by the
Central Bureau of Planning and statistics recently, which
shows that, at the peak of our industrial expansion in
1917, we attained an increase of 18 % over 1913, measuring
the growth by physical volume of production. My own previous rough estimate was 20 %; that of the Committee on
War Finance of the American Economic A,Isociation was 12 %.
The question is as to the subsequent expansion of
credit and currency, notably that which went on during the
I agree with you that we Should have to deduct
year 1918.
from the total of our Federal Reserve note issues a
considerable amount, possibly as much as $250,000,000300,000,000 of hoarded currency to get closer to
the true situation. We have also exported some 375,000,000.


Mr. Benj. 3trong



It is true that our price level has not been out of line
with the rest of the world, but it is also none the less
true that with their experience as a warning we might
well have striven more energeticaily to get our pace
earlier in the war and thus have kept our inflation
within more manageable limits. I am satisfied that the
expansion that has gone on throughout the year 1918 and that
we shall undoubtedly have during the year 1919, is pretty
On every side the evidence
nearly all pure inflation.
the demoralization and the serious disturbance of
established relationships that this unsettling of prices
has brought, is at hand. Public utilities that two or
three years ago were r,oarded as solid investments now
find themselves in many parts of the country where their
ope,'ating income hardly matches their operating expenses.
Mr. Forgan, when here a week ago at the meeting of the
Federal Advisory Council, said that the Chicago Railways
Company would, unless given relief by an increase of rates,
default on its April coupons. Two years ago the first
mortgage bonds of that company, and many others like it,
were being bought by such solid and conservative institutions
as the Northern Trust Company for the investment of trust
This is symptomatic of the financial disorganization
worked by inflation and I fear that this is merely the
beginning,for the signs unmistakably point to a recrudescence of the old currency and financial heresies
of Greenback days and the early '70s, with the everimminent possibility that the Federal Reserve System may
become a football of party politics.


The question of discount policy should have
the foremost attention at the next Conference of Governors.
We must all give, our very best thought to it. There has
got to be liquidation, there can be no question of that.
My belief is that it will proceed rapidly enough left
to itself, with this proviso; that differential rates on
all earlier loans should be withdrawn by the Reserve Banks
as soon as subscriptions to the Fifth Loan have closed.
The differential on the new loan should, in my judgment,
be just enough to let the banks out even with a modicum

of profit, say, not in excess of%. But we can discuss
this matter further when you come down to Washington.

You say nothing about your health and personal
condition, but i assume, however, that your silence means
that you are well.
With all good wishes, believe me,
Very sincerely yours,
Mr. Benj. Strong,
Lake George, N.Y.

Released for publication Monday, February 24, 1919.

Special to the

Tashington, D.C, Feb.23.


The existing industrial condi-

tions will be remedied, says Senator John F.Shafroth, of Colorado, Member of the Banking and Ctrrency Committee of the Senate,
if the Federal Reserve Board will announce that it


so con-

the discount rate and volume of currency as to maintain a

ractically stable price level after the needed drop in the present price level shall have taken place.

Senator Shafroth proposes

that the

drop in the price level

shall be from 207, the high point last September, to 150 per

cent of the average for the year 1913, and that then stability
in the average of prices be maintained.

"Such a policy", he

said, "would. result in stupendous industrial activity, giving

full employment to all and at good wages.
men would have


This because business

basis upon which to make their calculations for

years ahead, and they would plan on supplying the world's great
and pressing need for raw materials and then manufacture into
finished products."

"The price level that existed before the war will not be
reestablished, as it would impose too great a fall in prices.
The existing price level is about 200, as compared with 99 fcr

July 1914, and to attempt to force the average of prices don
to 99 would be ruinous.

The contraction in the volume of money

and falling prices would be extended through several years and
business could not stand it. '"hile very high prices are depler-

able, continued falling prices are much worse."

Cornplirn3nts of
\ Washington D,

"As the situation now stands" continued the Senator,

a change of attitude

industry is stagnant and unless there is

by the Federal Peserve Board this condition will steadily grow
worse. The volume of money in use is rapidly being contracted,
and this tendency will increase


long as the business world

is told that contraction is the established policy.


January the contraction in currency was :225,000,000, or nearly

4 percent in a single month. Business is halting and this
volume of money went out of use.

On February 1st Bradstreet's


Mholesale and jobbing trade i& stil at a waiting
stage, retail trade is less active, and the industrial
pace, particularly in textile and iron and steel lines,
is slower. Even collections are rather more tardy, and
the number of unemployed reported larger."
"One week later Dun's Petiew said: 'The anticipated general
business recovery is still deferred'."

Of course it was deferred, says the Senator, and he added:
"The London Economist of January 25th says: 'Then the
fabric of societyis still quaking from the shock of the
greatest war that ever happened, it is clearly desirable
that everything should be done to encourage industry to go
ahead on its task as fast as circumstances will allow, and
with as little anxiety as possible concerning its ability
to earn profits."

Continuing, Senator Shafroth said: "Owing to the large
volume of gold in the

orld the price level can be maintained

at the 150 per cent level, and the Federal Peserve system, in
vqhieh there is a direct control of the discount rate and volume

of currency by the Government Board, is the mechanism through
which the needed stability in the price level can be maintained.

/The figure 150 is taken because business can adjust itself quickly to that lower level but probably cannot successfully go lo:er,'

"The more quickly that a

In conclusion the Senator

basic price level shall be reached the more quickly

can busi-

hat lies is uncertainty
It ahead of them.

ness men know just

as to the future of the price level that is largely resronsible
for the waiting attitude


all lines of industry."







( Following is a separate article explaining more
fully the subject matter in the preceding interview.)




By Jol-InT.Shafroth,
.iber of the United States Senate Committee
on Eankin and Currendy.


the hard-fought -orld 17ar there was wide-spread

inflation in the volume of cuirency and other for

of credit,


and now vvithethe ending of the war there are falling

a lessening of the volume of money in circulation.


The question

arises, Eow can the dxisting situation beat be met°
In support of the proposal in my recent interview permit
me to present to vour readers some additional


I have spoken of "the price level" meaning the average of
prices fn r commodities

at -Iholesale.

This avere cf rrices

is measured each month by Dun's, by Eradstreet's, by the United
States Labor Department, and by other




ment is represented by an index number, which goes up or down
as the rrice level rises or falls.

The causes of the rising rrice level durin

the recent

have been two-fold principally: the tremendous increase in the
demand for certain commodities, and

an increase in the volume


of currency and other forms of credit. In the United States the
increase in the volume of these credits was tremendous, resulting in higher and higher prices for materials and wages. This
increase in the volume of credits amounted in this country to
65 per cent more currency, plus a large increase in bank credits.

The price level rose from 99 for July 1914, to 207 for September
1918, or a rise of 109 per cent, most of which was during three
years, 1916-1918:

Yor the reverse

process is in oper4tion and the c

ion in the volume of currency in use up to February 1,1919, was
nearly 5 per cent,


a shrinkage in bank credits, and the fall

in the average of prices for immediate deliveries was about 5
per cent, according to Dun's index numbers.

The U.S.-Labor

Department has not yet issued its figures for February 1.
Such in outline is the business situation and the business
men are in the dark as to the policy of the Government's agency,
the Federal Reserve Board.

.7atura1ly business is halting and the.


number of unemploydd is increasing.

That is needed is an author-

itative statement by the Federal Reserve Lcard setting forth what
is to be the extent of the fall in the trice level, and there is

needed a further declaration that after this drop in the price
level shall have taken place, accompanied by sufficient contract
ion in the volume of money to insure the drop in prices, that then
the discount rate at the Federal Reserve Banks and the volume of
currency in circulation


be such as will maintain a practi-

cally stable price level..
This is


practical, for the contrcl of the dis-

count rate can be employed to result in an output of currency.

that shall maintain a practically stable price level.
culty whatever will be encountered,



Ire are all familiar with

the way the Ban': of England protects its volume of gold in
normal times by raising or lowerinv, the interest rate as

occasion requires; and now in the United

States we have erected

an instrumentality for regulating the price level, and our ideal
is to be the maintenance of a practically stable price level as
soon as the required. drop in the price level c n be brought

If such a program shall be announced by the Federal
Reserve Board the result will be a basis on which calculations
can be made by prospective buyers anL sellers. They at once
comparative accuracy.
For example, if the drop in the psice level is to be to 150
fro:s 200, then a survey of the different commodities comparing
thesr pre-war prices will give something of an idea
relative standing in the future, added to which must be an
agreement with the organized wage-earners as to the 'sage rate.
Than there Can be forecast with comparative accurac; the prices
for coal, iron, lUmber, bricks, lime and so forth. Zuildsrs
will soon be in a position to let oontracts, settinFe in oreration the industrial forces.
turope, too, will then be ie
position to offer us contracts -for rc.
In a short
time after the proposed announcement oiosl be given to the

sill be able to forecast prices areI -ith their

business 7orld it -voua.d take on .0. lively aspect and soon the
Idle hands would beat sork.
The ex-isting uncertainV would
quickly vanish.

But until the Tinited States erected the Federal Peserve
System there was no mechanism in America for intelligently
controlling the volume of money and credits. A cyble of rising
prices would set in to continue until a bursting print had been
reached, accompanied by Aar:. times for a protracted reriod.
Yow a now situation exists: for the
of the world the United States, the Colossus of the v'est, ha$
established direct Gevernont Regulation of the Price Level.
- cognize it and make the needed announcements, 15 m;:s advice,.

first time in the

Ze-:4 41-u; 1A,,c,

024 J4A7.



/6/2, 7/4,,

4.4 -.
MISC. 136.1-60M.6.43



6iitAA.L.,-,- I








4 11-


After - War Readjustment: Rectifyin J1cG


Price Situation

re, I



.---ffeniber Federal Reserve Board

Washington, D. C.


o the
This article will appear in Volume LXXXII of The Annalsdirrch,

ch is
s, if

1919of the

American Academy of Political and Social Scii-nce,

"Industries in Readjustment."


Sent out with the compliments of George H. Paine, Philadelphia, Pa.





Member Federal Reserve Board, Washington, D. C.

Now that the war has been fought and won, "what next" is
the question everybody is asking and for lack of some other
sounding word or phrase, nearly everybody is answering "reconstruction." It is our national habit when we have to move on
from one position to another to help ourselves along with a word

or a phrase; so it was during the war, when we heard much of
"unification," "coordination," and "conservation." Now that
we have left the war behind and are looking forward to after-war
problems, we hear much of "reconstruction." We have borrowed
the word from Europe where the war has left conditions very
different from those obtaining here. It is just as well that we
should recognize the differences. The war has left us with some
difficult financial and economic problems but it has not left us
with any such problems of reconstruction as it has Europe, unless
we are going to embark upon the venture of trying to "make the

world over." It will help much, I believe, to put us in the right
frame of mine toward our after-war problems if we substitute for
the word "reconstruction" the less ambitious but nevertheless
suggestive phrase used by the President the other day in his address to Congress, of "economic and industrial readjustment."


Contrast for a moment our situation with that of the
European belligerents which have had four years of war. Sixty
millions of men at one time or another have been drawn to the
front. Two or three times that number have been drawn into
work so closely related to operations on the front that they were
virtually in the line of battle, so far as the normal processes of
economic and industrial life were concerned. Ten millions have
been killed, fifteen or more millions are left so maimed and diseased that they will be of doubtful industrial value, unless or until they are "reconstructed." These killed and maimed and diseased represented much of the flower of the industrial population
of Europe. They represent a heavy and grievous loss to their
countries' industries. Their loss must somehow or other be

made good through finding and training others to take their
places. Until this is accomplished, the industries which depended upon their skill will limp. Here is a problem of reconstruction.

The lands in many of the choicest and most fertile districts
of Europe were laid waste by the war; farmsteads were burned,
tools and live-stock are gone; the very soil itself is destroyed.
Here is work of veritable reconstruction. Factories, mills and
foundries in France's busiest workshop district have been de-

stroyed or so badly injured or dismantled that much must be
done before they can again take their place in the industry of
the world. Here again is reconstruction. It is clear, also, that
much work must be done not only in the fought-over and devastated districts of Europe to repair the work of ravage and
destruction, but also even in those where the sound of a gun
was never heard. There has everywhere in Europe been such
deterioration of industrial equipment through enforced neglect
of upkeep that much must be done before factories and mills are

brought back into good working order and able to turn out
products which can be used by their own people or sent into the
markets of the world in payment of needed supplies and materials. This also means reconstruction.



No such fundamental economic and physical problems as
these are left to us as a heritage of war. Our situation has been
one of comparative immunity and safety. Our losses of life
have fortunately been few and our losses of property negligible.
The main cost of the war to us, apart from the pecuniary cost
which is reckoned in the amount of our national war debt and
taxes, is to be found in the disorganization of industry through
the necessary shift from a peace basis to a war basis. It has
been estimated that, including the men who went into the armed
service, some eighteen million persons have been involved in
war work of one kind or another, mainly in industries producing
for the support of our armies and the supply of our European
associates. Some of these and in some cases many will have to
be shifted from their present employments.
Places will also have to be found for the returning soldiers.
But it would be a mistake to exaggerate the extent of the redistribution of the labor force of the country that will be thus occasioned. It must not be overlooked that many of the basic industries, such as steel, copper and the metal trades generally,

which were speeded up or enlarged for the purposes of war
production, are normally very large industries and it is altogether probable that they will remain permanently enlarged to
meet the heavy after-war demands for their products and that
consequently many of those who first found employment in these
industries, as a result of the war, will remain with them. At the
most, taking the situation by and large, our after-war condition
will present a problem of reemployment, or, reorganization,
rather than a problem of reconstruction. It is a problem that we
may well believe will find its own solution in due courseindeed
is already finding its solutionif the process of economic and industrial readjustment is kept measurably free from unnecessary
interference on the part of the government, and if good temper,
forbearance, and a spirit of accommodation are shown by all interests during the period of transition. Government help there
may have to be in stabilizing industrial conditions from time to
time through employment on public works, but the intervention


of the government should be by way of supplement to, rather
than substitute for, normal business agencies. The problem is
mainly a business problem to be handled by business men.

It is even likely that in Europe the process of reconstruction
and recuperation will be speedier and more complete than many
now imagine. The parts of Europe that have borne the brunt
of the war are those whose people are possessed of the greatest
economic capacityenergy, ambition, inventiveness and determi-

They are impatient to wipe out the traces of war and
get themselves back into working order. Much assistance will
be needed by them from the outside world in the first steps of
the process and that means chiefly from us. But with that assistance, the repair of waste and the accumulation of new capital

may be expected to go forward rapidly in Europe in the next
few years. Indeed the rapidity of Europe's industrial recovery
is likely to be one of the economic marvels of all time.

Europe will need goods and credit from us if she can get
them on a reasonable basis. The goods she will need are mainly
foodstuffs, raw materials of industry and the basic materials of
construction. Provided she can get these at reasonable prices,
she will take them in large amounts, and trade and industry may
be expected to be active in the United States for a few years and
our problem of economic and industrial readjustment may be expected to find much of its solution in this way.

The credits Europe will need will be both short-term or
commercial and long-term or investment. The former we can
easily provide through the further development of acceptance
credits and the aid of the federal reserve banks. Long-term or
investment credits present a different problem; they call for capital, and capital must first be accumulated or saved before it can
be loaned or invested. It may confidently be expected, however,
that if Europe finds in the American market the goods it needs
at reasonable prices, ways will be found of financing the pur-

chases and investments with the aid of our bankers and the
investing public. The main pivot of the after-war economic





situation, particularly in its international aspects, is prices.
Europe cannot afford to buy much from us on the basis of present
war prices without endangering her economic solvency and it may

well be doubted whether it will be to our permanent interest, if
we undertake to finance her reconstruction, to encourage her to
buy much at war prices if her solvency is thereby threatened.
Much will, therefore, depend, both for us and Europe, on the
course that prices take during the coming months and years as

to whether the period of transition, readjustment or reconstruction, whichever it may be, is to be a short and satisfactory
one or a long and wearing one.

Of all the financial difficulties confronting the country at
the close of the war the price situation is, in a business way,
the most serious and the one calling for the most immediate
correction. Fortunately for the United States, this situation
is not confined to us. The whole commercial world has been
involved in a series of extraordinary price disturbances growing
out of the war. While the situation is worse in some countries
than in others, it is serious in all. The general dimensions and
the gravity of it are sufficiently disclosed in the broad statement
that, in the course of the four years of war, the world level of
prices has risen by one hundred per cent. In some countries
prices mean depreciated paper prices, in others gold prices, but
in all an increase has been experienced that makes the problem
of price rectification one of urgency everywhere.
It cannot be emphasized too insistently that economic life
can never be normal and that business conditions can never be
safe until prices in leading world markets work their way back
to some sort of a stable or normal level adjusted to conditions
of national and international demand and supply, as these will
be when industry and trade among the nations have recovered
from the shattering effects of the war and have resumed something that can be called a normal 'course. How quickly this proc-

ess will be worked out will determine how long the world


will be in the uncertainties and difficulties of a period of transi-

Periods of transition are always periods of strain. To
shorten them by such means as can be foreseen to have a desirable effect is the part of good economic and financial policy,
both for the individual business man and for the nation and for

the commercial world at large..

There is already much welcome indication that the more
foresighted of the American business communities are looking
ahead to the falling of prices as something that is inevitable in
the normal course and, instead of waiting, are anticipating and
assisting the process of readjustment by voluntary price reductions. Such was the action recently taken by the steel trade, the
greatest of the country's barometers of industry, an action that
is bound to have a decisive effect in many related fields. Many
merchandising establishments, also, are looking ahead and taking
such precautionary measures as they can to prevent being involved in avoidable loss in the transitional period of price readjustment. Bankers are scrutinizing credit statements and are
advising clients to be careful not to be caught with large inventories on a falling market, and the advice meets many prepared
minds and much ready acceptance.
Such mental preparation paves the way and thereby hastens
and makes safe the process of price readjustment. But when all
is done in this way that can reasonably be expected of the business man, it will still remain true that much of the readjustment
of prices must come about through other action in which the community at large must have a principal part.

What is it that has driven prices to the dizzy heights that
have prevailed during the past four years? In general, the an-

swer of course must be warthe economic and financial disturbances the war has produced. It is difficult enough, even
under normal conditions, to specify the factors which determine
the level of prices. The price situation, as we find it in any given
country at any given time, is the result of a complex of forces
in which the production and costs of goods, market demands, the

saving and investment of capital, the state of credit, and the




volume of money and currency', all have their measure of influence. These have all been at work during the war, but they
have been so complicated in their action by the war that no
simple explanation of the movement of prices in our own or other
countries is adequate fully to explain the causes of what has been
taking place.

From the very beginning, the war caused a great intensification of the demand for a great variety of materials and supplies

needed in modern warfare. With all the efforts that have been
made to adjust the productive organization of the different
countries to the supply of these much-needed things, there has,
until quite recently, been a relative shortage of many of the
primary materials and basic commodities of war. To that extent,
they have commanded "scarcity values" and their prices would
have ruled high even had there been no alteration in general
monetary conditions. Much patient and methodical statistical
investigation will be needed to determine the exact extent to
which high prices during the past four years can properly be
regarded as "scarcity values."
To the extent that the prevailing high prices have been
"scarcity values" we may expect the situation to right itself in
due time as industry. shifts from war production to peace pro&fiction and the vast numbers of able-bodied workers, who have

been withdrawn from productive industry to military service,
are reinstated in the industrial army. The production of many
basic materials and commodities, which have been in short
supply, will gradually catch up with the demand, and values be
brought back more nearly to normal. This movement has already

Looked at from this _point of view, the problem of reestablishing a normal price level is a problem in production, one to be
worked out in factory, farm and workshop. Prices will move toward normal and goods will become cheaper as they become more
abundant. They will become more abundant as the wasteful



processes of war consumption come to an end and production
resumes its normal ways.

But "scarcity" is a relative term and there is so much evidence of an artificial abundance of money in comparison with

the things that are purchasable by it that the abundance of
money must be credited with at least an equal influence in explaining the high prices which have prevailed. Special attention
will, therefore, have to be directed in the process of a return to
a normal basis of prices to the condition of banking credit and
currency, which has promoted or sustained the upward flight
of prices.
The balance sheet of the belligerent world has been swollen

by the addition of about two hundred billions of public debt on
the liabilities side of the account with only partial offsets in the
way of newly created wealth on the assets side of the statement
to insure economic solvency among the European belligerents
and especially the Central Powers. Not the least of the wonders
worked by the war has been the ease with which vast public debts
have been contracted on what must be considered a relatively
favorable basis so far as concerns interest rate and other terms.
The fact that the war was not merely or mainly a war of
armies but a war of nations in which everybody has his part to
play does much to explain the unprecedented financial achievement of all the belligerent nations. Patriotism may have run as
high in other wars but never before (lid it so nearly embrace
whole communities to the last individual in its magnificent
sweep. It has become a matter of commonplace observation in
the United States that our people of many different races, creeds
and conditions have never before been so nearly one in thought,
feeling, spirit, purpose and action, as during the war. All of the
four great liberty loans have given the evidence and measure of
the people's devotion to the nation's cause. Twenty-one million
subscribers to the fourth liberty loan tells much of the story of

our financial achievementmuch, but not quite all. For the
achievement is not quite all that it appears to be and must become. The rest of the story will be found in the expanded condition of the banks.




Of the eighteen and a half billions of loans thus far put out
by the government, it may be estimated that six billions are being

carried by or in the banks. To the extent that subscriptions to
government borrowings are paid, not out of cash which the subscriber has actually saved out of his income, but by credit borrowed from his bank, the payment of the subscription must be
regarded as having given rise to an expansion of bank credit to
approximately an identical amount. Such expansion of credit,
unless it sets in motion new forces of saving, results in inflation,
first of credit, then of currency, and, as a consequence of both,
inflation of prices. A bank's deposits and currency are the chil-

dren of its loans and investments. When the loans and investments, therefore, which occasion an increase of deposits and currency, are not definitely tied to the production or saving of goods,
they must cause a rise of prices. When the rise of prices resulting from an expansion of credit and currency is not able, or until
it is able, to induce a commensurate increase of productive industry to match the increased buying power of the community, the
resulting condition is one of inflation, that is, one in which there
is more purchasing power, in terms of money, afloat in the community than is called for.

This condition has not been peculiar to the United States.
Credit expansion and currency expansioninflation, for short
have everywhere played their part in the financing of the war,
-fortunately not as much in the United States as in other countries,

but yet enough to cause concern; not disastrously as in former
wars, but not without producing some serious consequences and
leaving in some of the belligerent countries grave dangers and in
all of them, ourselves included, a troublesome after-war situation.

The great central note-issuing banks of the modern worldsuch
are also our federal reserve bankshave made inflation easy.
In the estimation of many they have also made it safe. They
certainly have done much to make it technically safe. The theory
upon which the great note-issuing banks pretty generally have
proceeded is that the test of banking safety is to be found in the
The more gold, the more credit and currency.
reserve ratio.


Such appears to have been their monetary logic. Acting upon
this theory, they have scoured their respective countries of most
of the scattered gold.

So long, therefore, as the great central banks could gather in
gold enough to maintain a suitable mixture of gold in their resources and thus clothe their liabilities with a suitable covering of
gold, their position was one of technical safety, and appearances
were good. It may be admitted that appearances count for much
in the psychology of credit and banking. But more than appearances and more than technical safety and, therefore, more than
gold, are necessary to the good functioning of reserve and noteissuing institutions. The character of their general assets as
well as the adequacy of their reserves determines their real condition.

There must be wisdomgreat wisdom, and, at times,

courage as well as wisdom in the administration of note-issuing
and reserve credit banks if more than a condition of technical
banking strength is to be maintained and the world made safe
against the costly evils of inflation. That lesson the world is
about to learn as a result of the experiences of the past four years.
Until it is learned and the credit arA._ currency situations in the
leading countries rectified_according-ly, the business of the world
will be in a state of maladjustment with the industrial unrest and
strife that are usually bred of maladjustment and financial confusion.

The fact that inflation in the United States has not been
caused or attended by suspension of gold payments or a discount
on paper currency, such as was experienced during the Civil War,
should not blind us to the realities of the situation. Suspension
of specie payments may take place without producing a state of

(Such was the case in France during the Franco-

German War of 1870-71, when the Bank of France suspended
specie payments, but managed its note issues with such care that
they were never at any time over-issued and never went to anything more than a nominal discount as compared with gold.)



Recent events, particularly in the United States and among

the northern neutrals of Europe,which like the United States
have experienced enormous accessions to their supplies of gold
during the period of the war,show that inflation may take place
without a suspension of specie payments or the occurrence of a
discount on paper. It was the very abundance of gold that helped 0
to advance prices in the United States before our entry into the
war. The currency of the United States now, as then, is a gold
currency. Prices in the United States are, therefore, gold prices.
This fact is incontestable. There is gold enough and more than
enough to assure the absolute convertibility of our paper currency
in gold. The trouble with our situation is not that the paper
dollar is not as good as the gold dollar ; just the reverse is true :
it is. The trouble with our situation is that neither the paper
dollar nor the gold dollar will buy as much as they did before
inflation of prices began. At prices as they are, the paper dollar
buys as much as the gold dollar. The gold dollar is not better
than the paper dollar. The two are interchangeable. Our trouble,
therefore, is with dollars, irrespective of their kind. It is rine of

quantity, notof_q_ualityany rate, not of quality in terms of
Our elastic note issue system has enabled us to place the
production of paper dollars on a "quantity basis" _without endangold.

gering the integrity of their gold value. The trouble is with the
goods value, not with the gold value of the American dollar. Our

.difficulty is,and therein consists our inflation,that dollars
good financial dollars, "safe" dollars, gold dollarshave been
created in such abundance in comparison with the amount of
goods purchasable by them that they have, as a necessary result,

lost in their purchasing powerin other words, the supply of
money has become disproportionate to the supply of go6ds-with
rising prices as the inevitable result.

Since the beginning of the European War or between the
dates of July 1, 1914, and September I, 1918, the total money in
circulation in the United States, as shown by the Treasury state-

ment, increased from $3,402,015,000 to $5,621,311,000, an
increase of $2,219,296,000 or 65 per cent. Total deposits of all
banks,1 between the dates of June 30, 1914, and June 29, 1918,




the latest date for which complete figures are available, increased
from $21,279,000,000 to $32,589,000,000, an increase of $11,310,000,000 or 53 per cent. Loans and discounts for the same dates
show an increase from $15,340,000,000 to $22,059,000,000, or
$6,719000,000, an increase of 44 per cent. Total investments

for the same dates show an increase from $20,294,000,000 to
$31,982,000,000, or $11,058,000,000, an increase of 53 per cent.
Since our entry into the war, or between the dates of July 1,

1917, and July I, 1918, the total money in circulation in the
United States, as shown by the Treasury statement, increased
from $4,850,360,000 to $5,621,311,000, an increase of $770,951,-

000 or 16 per cent. Total deposits of all banks,' between the
dates of June zo, 1917, and June 29, 1918, the latest date for
which complete figures are available, increased from $30,443;000,000 to $32,589,000,000, an increase of $2,146,000,000 or 7
per cent. Loans and discounts for the same dates show an increase
from $20,502,000,000 to $22,059,000,000 or $1,557,000,000, an

increase of 8 per cent. Total investments for the same dates
show an increase from $28,611,000,000 to $31,982,000,000, or
$3,371,000,000, an increase of 12 per cent.
The index number of wholesale prices in the United States
computed by the Bureau of Labor Statistics shows a rise from 98
in June, 1914, to 202 in August, 1918, a rise of over IOU per cent.

The index number for retail prices for the same dates moved
from 99 to 171, an increase of about 73 per cent. Since the entry
of the United States into the war, the index number of wholesale
prices has risen from 171 in April, 1917, to 202 in August, 1918,
an increase of 18 per cent., the index number for retail prices for

the same dates having moved from 145 to 171, an increase of
18 per cent.
These figures certainly reveal a very considerable increase in

the volume of banking operations in the United States since the
beginning of the European War in 1914. An aggregate of probably over ten billions (an increase of about 50 per cent.) of new

purchasing power since the beginning of the European War,
mainly in the form of bank deposit-currency, has come into exist-

411 0 "


ence during this period. The portion of this increase, which is
to be charged to the period beginning with our entry into the war,
cannot be accurately determined for lack of adequate data. But
an indication is supplied by the increase between the dates of
June 20, 1917, and June 29, 1918, noted above, in the figures for
total deposits and money in circulation, an increase of the two
together of 8 per cent. It seems within the probabilities that,
of the ten billions of new purchasing power which there is good
ground for believing have been created in the United States since
July, 1914, a fourth may conservatively be regarded as chargeable to the period since our entry into the war.
To the extent that this increase in the supply of purchasing
media of the country has not been offset by a like increase in the

production of goods, it must be regarded as unnecessary and
superfluous from the economic point of view, whatever may be
said in justification of it from the point of viewofpolitical and
general financial expediency,. To the extent that it has been offset

by increased production, it presents no difficulty. That there
has been an enormous increase in the physical output of goods
in the United States during the past four years cannot be questioned. Never before has the country come so near to realizing
its full productive capacity; never before has there been so little
unemployment or idleness. Some estimates place the increase
in the physical product of the country during the past four years
ashigh as 25 per cent. If we take a more conservative figure, of
20 per cent., it would suggest the inference that a commensurate

proportion of the volume of credit and currency existing in
1914, or some four billions of dollars in the aggregate, was prob-

ably legitimately called for by the growth of production in the
past four years.
In estimating the amount of credit and currency contraction
that will have to take place before our price situation can be
regarded as in a fair way to become normal, these four billions
should properly be deducted from the statement of the present


volume of these items. It would appear probable, therefore, that
some six billions of credit and currency in the aggregate have been
created in the past four and one-half years that cannot be regarded

as having been occasioned by the requirements of industrial
growth, as measured in terms of physical units. This is also
approximately the amount of war securities and war loan paper,
as has already been stated, that the banking system of the United
States is today carrying. To this extent the expansion of banking
credit and currency would appear to have been occasioned by the
banks having assumed the burden of assisting the placement of
Treasury borrowings by the extension, use and lending of their
credit. Such use of credit is almost of necessity inflationary in
its immediate effects and in its continuing tendencies until corrected.

There can be little question of what form the correction
should take. Where there has been inflation, there must follow
deflation, as a necessary condition to the restoration of economic
health. Contraction of bank deposits and currency, through the
liquidation of war loan accounts, is clearly indicated as the next
and necessary step in the process of bringing the credit currency

and price situation back to normal. Those who in our liberty
loan campaigns were persuaded to borrow and buy must now be
made to save and pay. "Save and pay up" should henceforth be
our slogan. The problem of correcting a state of banking inflation is mainly a problem in saving. We must either put more
goods behind the outstanding volume of credit and currency
that means productionor we must reduce the volume of credit
and currency to suitable proportionsthat means saving.
Expenses and spending must be kept down; money must be
saved. As it is saved, it must be paid to the banks in liquidation
of war loans and other non-productive borrowings. If the money
saved is in the form of deposit or checking credits, then the total
volume of these in existence and in use will be diminished as they
are used to cancel an equivalent amount of loans and thus will the




banking structure be contracted and prices be rectified. If in the
form of bank notes, the cash holdings of the banks will be built
up and they will be enabled to reduce their borrowings from their
reserve banks and in this wise the notes will find their way back

to the reserve banks, reducing at once the volume of their outstanding note liabilities on the one side and their holdings of bills
d'scounted on the other. Thus will saving effect the reduction
in the volume of outstanding currency and credit. There is no
escape from this necessity. So long as inflation exists, the nation

must continue to practice thrift.

Only thus can the capital be

created and supplied which will wipe out the inflation that already
exists and avoid or minimize such new inflation as may threaten
in connection with the great borrowings that must still be made

for the use of our government and the governments associated
with it, to say nothing of the large demands for capital that will
be made on the American investment market by Europe in the
process of reestablishing her industries.

The government's requirements for the remainder of the
fiscal year have been stated as likely to be not less than seven
billions. This amount, added to the six billions of outstanding
war securities which, it is estimated above, have not yet been permanently absorbed, gives us a total of thirteen billions of public
securities which must be taken up out of genuine savings if our
financial and credit system is to be sterilized of the taint of inflation which at present is upon it. When this is accomplished,

prices are likely to be at something that can be regarded as a
normal level. Until it is accomplished, there will be an unstable
price situation. As it is gradually accomplished, prices will go

back to a normal basis in an orderly manner. But if a considerable part of the new borrowings, which the government must
make during the fiscal year and until war accounts are finally
closed up, are financed by any considerable expansion of banking
credit, we are likely to have more inflation and an aggravation
of a price situation which is already sufficiently serious and




Europe's post-war financial and industrial requirements cannot even be conjectured. But they are likely to be very considerable if, as has already been suggested, goods can be bought in the

American market at reasonable prices and capital obtained on
reasonable terms. The destruction, waste and deterioration of
plant facilities and other industrial equipment must amount to
an aggregate, taking all of the European belligerents togetner,
that it will take some billions of dollars worth of materials and
supplies to replace or repair. The amount which Europe is
indebted to the United States on the financial account because
of the heavy borrowings that have been made in the American
market the past three years, will probably be not far from five
hundred millions of dollars for interest alone when peace is established.


Europe could probably use to good advantage two or

three times this amount in the process of replenishing her capital
during the next two or three years if conditions generally were
favorable. It may be expected, therefore, that capital will be in
strong demand in the post-war period and that much financing
of an investment character will have to be undertaken by America in the process of helping the reconstruction of Europe and
the reestablishment of normal conditions throughout the world.
The situation presents a duty to be undertaken by the people
of the United States, as well as an opportunity to be embraced.
Investment rates of interest are likely to rule high for some years
and to make saving ayemunerative sac--rifice. There is no method
_ .
extrpt by savingby saving proby which capitaTan
ductive power from the production of goods destined for immediate consumption to the production of goods destined for capital

It is essential from every point of view that the

depleted capital of the belligerent countries shall be restored and
the terrible gap torn in the industrial structure of Europe by four
years of war filled up. Just as the war taught us to draw with
closer approximation and finer appreciation a line between industries and goods according to their bearing on the prosecution of
the warthe "essentials" being those that helped, the "non-essen-





tials" those that delayed or hinderedso the same principle, in

n of
it to

)e is

stabo Or
be in




n of

view of the urgent economic condition with which the war has left

the belligerent countries, suggests an analogous application of

the same principleafter-war essentials being those that help
industrial recuperation, the non-essentials those that hinder or
delay. The consumption and, therefore, the production of nonessentials must be kept down in order that the production of the
new essentials may go forward at prices that will attract demand.
Europe cannot afford totAty great quantities of goods in the
American market, urgent as is the need for materials of post-war
industrial reconstruction, unless our prices fall, no matter how
ready we stand to finance them, because Europe cannot afford
to handicap her reconstructed industries with a capitalization that
will not be warranted by earnings when post-war prices get back

to normal, as sooner or later they will. For her industries to
do otherwise would be to invite serious losses and possible bankruptcies.

Indeed, much the same may be said of our own domestic
business situation. Increase of the capital account will, in general, be a perilous proceeding for any undertaking involving large
permanent investment and heavy fixed charges, so long as prices
of materials of construction are on an inflated basis. Thus
does an inflated state of prices tend to check industrial enterprise

and, therefore, to retard industrial recovery. More than that, an
inflated state of prices always adds to the uncertainties and, therefore, to the hazards of business, when once the crest of the movement has been passed. Thus is a speculative tinge given to even

ordinary business in periods following inflation of prices and
credit. Such periods, it has frequently been observed, tend to
promote speculative activities and to breed business crises. For
whatever adds to the uncertainties and hazards of business not
only tends to induce speculation, but also, for that very reason,
to add to the chances of business miscalculation and, therefore,
to the percentage of business misadventure. And it is business
misadventure, when the percentage runs high enough, that makes
for crisis. For the business crisis is merely to be regarded as a

rough and wholesale method of adjusting the capitalization of



business to the indubitable facts of the marketthrough earnings

to priceswhen capitalization has gotten out of line with the
price trend, the business crisis being little other than a swift and
violent method of correcting errors of business miscalculation,
when such errors have been extensively committed.

The more the matter is pondered, therefore, the more, I
believe, the heart of our national after-war business and financial
problem will be found in the price situation. There are many

other factorssuch as wages, taxes, interest ratesbut none that
is comparable in its importance to the price situation nor unaffected by it. If our price situation is quickly cleared up by deflation, wages and taxes may be expected to adjust themselves to the
altered conditions. Industrial enterprise can then make its calcu-

lations on something like a stable or normal basis and the period
of post-war readjustment need have little terror for us. The
whole world is inflated.
A great opportunity, therefore, awaits the country, which is
the first to be able to begin marking down its prices toward peace
levels. The world needs us and what we can produce. It needs
copper, cotton, steel, machinery and many other things. Some

of these it will take at any prices, but it will take much if our
prices are such as to invite foreign demand, and we need give
little attention to artificial methods of taking up the slack in the
labor market and otherwise stabilizing industrial conditions, if
we take up promptly and proceed vigorously with the solution of
the price situation.



March 7, 1919

Dear Mr. Strong:

I am leaving


for a

holiday at Camden, S. C. I plan' to be back in
Washington the morning of the/17th and will
i you carry out your
be glad to see you,
plan of coming down in ad ance of

Conference called

for t




Sincerely yours,



3trong, Jr.,
Lake George, N. Y.



MAR 1 4 1921

March 9, 1921.

Mr. Benjamin Strong, Jr., Governor,
Federal Reserve Bank,
New York, N. Y.
Dear Mr. Strong:

When you were hare last week, we were discussing the
situation in September, 1919, when we both agreed the opportunity had becoma favorable to the initiation of a definite
policy of credit control. You expressed the opinion at
that time that the release of credit incident to the reduction of the Govermaent's floating debt amounted to about
700 millions of dollars. I am anxious to get as approximate
a figure as possible in this connection, and am writing to
ask you to indicate the basis upon which your estimate was
I trust, in making this request, I am not putting you
to any trouble.
I hope Mr. Harding presented my idea with reference to
the new gold,which we are receiving from
Europe, in the Federal Reserve Agent's Department, where it
will be "out of harm's way", at any rate until solta situation
arises which makes it desirable to mobilize it for bunk use,
in a way which will make an appeal to you.
of the year our reserve ratio has risen considerably on account
of accessions of new gold. The rise is therefore in part misleading with reference to the efficacy of our policy of credit
control. With the prospect of the continuation of these
accessions of gold, something should be done. I suggested as
a basis for discussion, and .4 possibly for action, the
establishment of a limit of 2000 millions of gold as the System's working reserves, anything in excess to be lodged with
the Agent and technically accounted for as gold deposited to
reduce liability on account of Federal Reserve Wotes issued.
My own view is that this is merely a beginning, and that there
should be very much more discussion on the subject cf our
whole treatment of gold in ..elation to the matter of credit
control. But the suggestion I hr-ive outlined above seamed to
me the one least likely to excite antagonism, and therefore
to pave the way for a real enlightening discussion of the
larger problem.

impounding of

Believe me,

Since the beginn


0 4...c)





MAR 16 1921


March 15, 1921.
Subject: Treatment of New Gold received by the Federal Reserve System.

Mr. Benjamin Strong, Governor,

Federal Reserw
New York, N. Y.

Dear Mr. Strong:
I shall shortly
Yours of the 14th instant is at hand.
send you a memorandum showing how our Federal Reserve accounts
would be setup in the event that such new gold as the System
received was impounded in the Federal Reserve lant's Department, either: (a) as collateral security against Federal Reserve notes (an equivalent amount of commercial paper being
withdrawn) or (b) as gold deposited to reduce the liability
of Federal Reserve banks for Federal Reserve notes issued to

I have given a great deal of thought, not only in recent
weeks but during the past year, to questions of,tMpld policy
and currency policy of the Federal Reserve System in connection
with the larger subject of credit policy. My thought has always
broaght me to the conclusion that we can never develop an
adequate credit policy, especially in view of the extraordinary
character of American-European commercial and financial relationships, unless it is well buttressed by an adequate gold
The two latter I think
policy and an ,adequate currency policy.
must be regardedjis complementary parts of any adequate and
I am aware, however, that it will
compre7aensi as credit policy.
take some time to win over the authorities of the Federal Reserve
System to any plan of operation with respect to gold and currency
that seems so much of an innovation upon Federal Reserve practice
in the past, and that it would be unwise and very prejudicial to
the best interests of the System and the country to delay action
until such agreement could be reached, if it were ever reached
within a reasonable time. In the meantime, we are confronted not
merely 1)f-theory, but by a condition--a condition that is already
of considerable proportions and. is likely to grow, and therefore
calls for quick action if we are not to drift and again became the
victim of whatever gold the tides may bring us. It is too early
to speak positively on the matter, but I am inclined to the view


- 2 -

that we are likely to see a new gold movement of very large proportions. The United States is for the present and for some considerable time in tae future, as I view it, the best market for
the sale of the new gold. We may reasonably expect, therefore,
considerable accessions to our already huge stock of gold, and
must act quickly to put some of it out of harm's way.
With this thought in mind, I moved at this morning's meeting of the Board that arrangements should be made that gold purchased in the London market and destined for American shipment
should not be exported to the United Stites, but should be retained in London in an ear-marked account with the Bank of England for the Federal Reserve Bank of New York--the American
purchaser to be paid an equivalent amount of gold on this side,
that is, after the deduction of the expenses of shipment and insurance, etc. (the question of whether an interest charge should
be added for immediate credit upon the London gold passing into
the account of the Federal Reserve Bank of New York with the Bank
of England was not discussed).

I hope that the proposition to have all of the ear-marked
gold with the Bank of England thus acauired carried with the
Federal Reserve Bank of New York will meet with your approval.
Looking at the situation from a national point of view, this
treatment seems to ire to have obvious advantages over a pro-rating
of gold among the Federal Reserve banks, when it is recalled that
our objective in this whole matter is to keep our reserves from
swelling, and car reserve percentage from rising, because of these
more or less accidental and adventitious additions to the System's
gold ownership.
The Board elthe Reserve Bank of New York can act
in close cooperation in developing and applying their gold policy,
particularly during its formative stages, better, I think, than if
all of the Reserve banks were tneolved. I au aware, of couree,
that under these arreneements the New York- hank would be a heavier
loser of gold through the gold settlement fund than if it merely
had a pro-rated interest in the London-held gold. The disadvantage
you would be under in this respect, however, could easily be offset
throueh rediscounts with other Peden]. Reserve banks.
Indeed, this
seems to we one of the momentary advantages of the feature I have
proposed, namely, that it would tend to hold down or bring down the
reserve ratio of the System as a whole and thus give a better picture
of the credit situation.
I hope, therefore, that you will :Ave particular thought to
this feature of the proposal, and take a favorable view of it,
at any rate daring the first stages of the experiment.
Should the
accumuletion of gold in your Banh. of England account grow to very


-3it would be necessary to reconsider the plan
and probably modify it either by pro-rating the gold among the
Federal Reserve banks, or, as seems to me more likely (in the
event that we should accumulate 100 or 200 millions of gold in
the Bank of England), bring a considerable proportion of the
gold to the United States, and there impound it in the Federal
Reserve Agent's Department--unless in the meantime a situation
should arise that would make it advisa le to add it to reserves.
There is much more in my mind in connection with this whole
sUbject than I have time to write now.
It is very important, I
repeat, that we should get started in this matter.
I estimate
that we have received, since the present movement started,
approximately 200 millions of gold. Some immediate policy for
dealing with this new gold should not await the development of a
policy for permanently dealing with it, and I am glad that your
suggestion offers a feasible method of dealing with the immediate
situation, on which we can all agree.

Very truly yours,





March 19, 1921.

Mr. Benjamin Strong, Governor,
Federal Reserve Bank,
New York, N. Y.
Dear Mr. strong:

Yours of the 15th instant is at hand with the accompanying
I have read the memorandum carefully, and I think
I understand and appreciate the line of reasoning which has led
to the position taken in the memorandum against the proposal to
treat our surplus new gold as aold deposited with the Federal
Reserve Agent to reduce liabilities on Federal Reserve notes outPermit me to remark in passing that the memorandum
does not read like a product of your mind, and I wn not deeply
Certainly it makes no constructive contribution
impressed by it.
to the economic situation for which we are seeking a remedy. Our
findproblem is an economic problem, and only incidentally one
ing statutory justification for whatever technical or acco
expedient we deem it best to adopt in the process of finding a
solution for the problem. The memorandum is conclusive, if conI believe
clusive at all, only in a limited and negative sense.
that if the writer of it had considered the alternative methods
of procedure in connection with the treatment of our new gold,
he mon'', have found that most of them were open to the same sort
of objection he made against the expedient I suggested, and possibly he would Shave concluded, therefore, that nothing at all
should be done because there were legalistic objections to any
There is no doubt that the plan of lodging gold with the
Federal Reserve Agent as gold deposited to reduce the Federal
Reserve Bank's liability on account of Federal Reserve notes
issued might lend itself, particularly in the hands of an unfriendly critic, to the construction of being u"subterfuge" to
conceal the true reserve position of the Federal Reserve System.
May I recall, however, that the same device which is now
characterized as a "subterfuge" Was employed in the first years
of the Federal Reserve System--I think under the guiding inspiration of the Federal Reserve Baek of New York--to get notes
out of the Federal Reserve Agent's Department in exchange for
time when coamercial paper was scarce. -44-4.-s true
gold at



- 2It is true that the operations and methods of the Federal Reserve
Banks were then less carefully scrutinized than they are at the
present time, but I thiak the public at large has sufficient confidence in the integrity of our purposes and the solidity of our
financial judgment to make it safe for us to assume that we could
stand whatever criticism might be directed against us on the score
of adopting a"subterfuge", in order to get the threatened redundanc
of gold out of harm's way. But in any event, the argument of "subterfage" is, in gv opinion, as valid, if not more Valid, against the
proposal to carry all new gold in a special foreign account where
it would not be included in the gold reserves of the System. Aside
from the suspicion of our purpose that the accumulation of heavy
gold balances abroad would excite, such gold would be out of use,
and critics would say it was intentionally kept abroad in order to
keep it out of banking use in the United States; while with respect
to gold accumulated behied the Federal Reserve note
in the Agent's
Department, the argument of non-use could properly be urged only by
a soft money inflationist. Our position would be that we were not
putting new gold out of use, but that we were usinP it in order to
improve the gold cover of the Federal Reeerve note; in brief, to
gradually restore to the Federal Reserve note the quality which it
had before the war.
The fact, however, that either one of the two proceedings we
have had under consideration in our recent correspondence may be
viewed as having somethieg of the character of eaUbterfuge1; should
not, to my mind, be taken as conclusive against thew, for the object
aimed at can be justified by substantial considerations. Furthermore, the particular "slihterfage" that I proposed is one authorized
by the law, Whether the law is logical in having left the provision
described as a "subterfuge" in itafter the amendments of 1917,is
beside the present purpose.
It is there, and,being there, we are
abundantly justified in using it as a device to accomplish a good
purpose, if no better method is available. Anyone who is familiar
with the history of the development and growth of banking practices
in any of the leading modern countries knows that many of the best
established banking practices originated in ways that could have
been characterized as "subterfuges" 'because of the necessity under
which the banks found themselves of doing the best they could,
operating within legal restrictions, to meet new conditions and
situations which had not been in contemplation at the time of their
Such has only too conspicuously been the case with the
I fancy
Bunk of England, as Hartley Withers has often pointed out.
that in the next ten years we shall have to deal with a great many
situations in which it will be necessary for us to resort to devices
and practices not perhaps contemplated by the framers of the Federal
Reserve Act, because the situations which will present themselves
could not have been forseen. We are confronted with a situation
which, at the present time, calls for action. Viewing our problem


- 3 -


practically and not academically, wh.4911 is to find the best methodist
under the limitations of the Federal ,Reserve Act for handling 14, as
expeditiously and wisely as we can.iire should not be deterred by'e.7
characterization of any prorosed method as being a "subterfuge" or
"camouflage", providing we are satisfied that is the best practical
YOUTS of the 16th instant, with further reference to the question

of new gold, has just come to hand, and I shall write you further in
the course of a day or two.
Believe me,
Very truly yaurs,





.1'1474, ,.4^.44.,,C,



APR 7.1921
March 31, 1921.

Mr. Benjamin Strong, Governor,
Fedeal Reserve Bank,
New York, N.Y.
Dear Mr. Strong:
I aka enclosing a part of a draft of some matter upon the

subject of Federal Reserve policy which I am preparing for

The portion I am sending you deals with the questions

of gold policy and currency policy, which have recently been the
subject of our correspondence.

I think you may, therefore, be

interested in looking over the enclosure.

I will greatly appreciate

your criticisms, no matter how frank and searching they may be.

We are both animated by the same desire, namely, to improve Federal
Reserve bank practice in the light of past experience and the provisions of the Federal Reserve Act.
I will be greatly obliged if you will return the memorandum


you have finished with it.

Very sincerely yours,






Yay 19, 1921.
Mr. Benjamin Strong, Governor,
Federal Reserve Bank,
New York, N. Y.
Dear Mr. Strong:
I have yo,:r note of the 17th.with respect to

the future discount poliby of the Federal Reserve

As I expect to be in New York on Friday,

May 27th, and Monday, May 30th, I would perhaps
better leave the matter for a discussion with you

In the meantime, I would be very glad if you

would let me know what is in your mind, and, particularly,. considerations that are weighing with

you in reaching your views or conclusions as to
future policy.
Believe me,

Always very truly yours,

.!9 1921

C3. L.



'" 0









at the

of the

October 25-25, 1921.



There are one or two words, Governor, which I think I might

I have been very much impressed by what the Comptroller

has said.

I think all of us must be very much impressed with

the clearer appreciation of our problems which this discussion of
rate policy has evidenced.
ceding conference.

In that regard it surpasses any pre-

I was particularly delighted at the frank

avowal of 10±. Strong that the British discount principle of always

maintaining reserve bank rates above going market rates was not
applicable to American conditions.

The whole tenor of the

discussion here this morning indicates above all that there is
increasing appreciation on the part of the managers of the Federal

Reserve System that the Federal Reserve Banks are partners in
American industry and enterprise and that the touchstone of the
successful operation of the Federal Reserve Banks is to be found
in what those banks do to assist the production and distribution
of goods.

They, therefore, function best when they help to pro-

mote and maintain a good state of industry and, as an essential to
that, a healthy condition of mind on the part of the business and
producing community.

I am sure that we would err egregiously in the administration of the Federal Reserve Banks if we overlooked the fact that

the Federal Reserve System in our country occupies a much more intimate relationship to industry than the Bank of England does, for
instance, to business and industry in that country.

Our judgments


- 2 -

are of very much more concern and are of very much more effect in
their economic incidence than the judgments of any other reserve
institution anywhere in the world.

A good deal has been said

in the discussions yesterday and this morning concerning the
principles governing discount rates.

Let re say frankly that I

am very skeptical of the value of so-called principles in a matter

that is so much a matter of judgment based as it must be upon
conditions and circumstances.

I, myself, would, therefore, be very

hesitant in laying down a principle in the matter of discount policy.
I may, however, say in contradistinction to the oft repeated state-

ment that Reserve Bank rates should be above market rates that I
believe our constant study should be not to see how high we can maintain rates but how low we can safely go in establishing rates without
inviting dangers of unhealthful aevelopments in business and industry.
This is not inflationist doctrine; this is the economic view.
The cost of credit is an element of cost of production.


viding business and credit are in a healthy condition, there is no
reason for the Reserve Banks doing anything that adds to the costs
of credit.

When industry disclosss tendencies toward specula-

tive expansion, then is the time to add to the cost of


I believe that it is the part of wisdom to recognize that in the

formulation of a discount policy and in the adjustment of discount
rates we should seek just as earnestly to avoid deflation as we


- 3 -


to avoid inflation.

By inflation I mean an expansion

of credit that eventuates in a rise of general prices.
flation I mean a restraint of credit that eventuates
of prices.


in a


Good economic and credit policy will endeavor to

steer a middle course between these two dangerous shoals.

A year ot fifteen months ago the business and industry of
the country began their descent from the apex of speculative

expansion into the trough of depression by way of the most
violent reaction of prices that we have ever experienced in
this country.

Now, where are we at the present time?


are still in the trough of depression, but we are beginning to
see here and there little symptoms of animation and recovery.

It would not surprise me to sea a condition of monetary ease
develop in the United States where commercial rates would go
as low as 41 per cent.

I mean market rates, not discount rates

at the Reserve Banks.

I hope no condition of extreme ease

comas to pass.

Te have, however, in former perioas of extreme

business depression seen a great accumulation of idle funds at
the great centers, so great that no rata could be made low enough
to induce borrowing, because the outlook for
of borrowed funds was too unpromising.
the crisis of



profitable use

That was true after

again after 1.893, and it may prove true in




1921 or 1922, though I believe and I certainly hope that before
long there will be a business revival of healthy character and
considerable proportions such as will make a demand for credit

and keep rates from sliding simply because nobody wants to

I think the probability is that for a good many years to

come, certainly I believe for five years and possibly it may
be for a period as long as ten years, we shall have to deal
with very rapidly Shifting scenes in the business world.


look for very frequent alternations of periods of short lived
and feverish activity in business and industry followed by
periods of acute, short-lived depression.

In other words,

industry will have to travel an uneven sea.

Such has usually

been the case after all great economic crises induced by great

That vas true after the Napoleonic war, which supplies

the nearest analogy to the present situation.

It was also

true after 1E73.when.readjustment followed a badly disturbed
course lasting at least five years,

and on no one of tnese

occasions was the whole structure of industry and commerce of


leading producing countries so badly dislocated as at the

present time.

We have got to be prepared, therefore, to deal with conditions and circumstances as they develop and not according to


-5fixed principles.

This means that we must always strive to main-

tain in the Federal Reserve System great flexibility of mind.


principal Pre-occupation, I repeat, should be to deal with conditions

and circumstances rather than with principles.

We have got to do

just what a wise physician does ,when he at times hesitates to give

a patient a small dose of some powerful medicine and at other times
does not hesitate to give him a very heavy dose.

We have got to

base our judgments and bottom our policies upon facts rather than
upon preconceptions,

Now, at the moment, what is the outstanding fact in the
industrial situation?

It is that industry is still pretty far

down in the trough of depression.

What does this suggest as to

a proper rate policy adjustd to circumstances?
opinion that at the present time no rate at

I am of the

h Federal Reserve

Bank could be made so low that it would induce borrowing for
the sake of what would be called illegitimate uses.

Banks do

not borrow from the Federal Reserve Bank for fun or siuply because money is cheap.

Nor do merchants and manufacturers

borrow from their banks simply because money is cheap.
lead a horse to water but you cannot make him drink.

You can
When he will

not drink you cannot regulate the amount of his drink, but when
he wants to drink you can regulate the amount he may drink by reg-


the amount in the trough.

And so it is pretty much with




respect to the relation of money rates at Federal Reserve Banks.

It is when things are on the upward move that the Federal Reserve
Bank can become a very real influence in restraining what in its
judgment is an unhealthful and undesirable tendency, by advancing
its rates.

It can, in other words, through a wise and timely

application of increased rates do much to restrain, if not altogether to prevent inflation.

At the present time, however, there

are no undesirable tendencies of this kind in the business situation.

Business is sick and it needs Whatever modicum of comfort

and support it can get from a cheapening of the cost of credit.

There has been some discussion here of the influence actually
exerted by Reserve Banks' rates upon the rates charged customers of
member banks.

There is some difference of opinion as to how exten-

sive is the influence exerted by changes of Reserve Bank rates.


think it is a fair reading of the mind of the conference to say that
in one way or another the actual cost of credit to borrowers at this
time is influenced by Reserve Bank rates to a sufficient degree to

make it necessary for us to recognize the bearing that Reserve Bank
rate changes have in the immediate economic and industrial situation.

We have got to recognize the fact that :Len business is being done
as it is at the present time on very narrow margins, an addition
or subtraction of 1/2 or 1 per cent in the cost of borrowed funds
is a matter of a great deal of moment.

A reduction of Reserve


Bank rates in such circumstances may have a considerable effect
in quickening the pace of industry and in accelerating its revival.

On the other hand, I think it not at all unreasonable to anticipate
that within a period of a year, or even possibly six months, we

may have a spurt of activity in certain portions of the country
at least that will make it very desirable to take a firmer grip on
the reins.

We may even see speculative and inflationist tendencies

develop to a point where it will be advisable to press on the curb.
That is not, however, the situation at the moment.

The runaway

horse has been brought to a standstill, let us relax our grip, giving
him a little rein, if we think by doing so he will show some disposition to move along.

I am disturbed but not surprised by what the Comptroller has reported of a recent conversation with a gentleman whom he regards
as a competent interpretor of public and congressional opinion.

have recalled a great many times to myself in connection with the
perils through which the Federal Reserve System has been passing in
recent months, what it was that really brought the Second Bank of the
United States to the brink of dissolution.

Aside from the mass of

rather secondary political and factional charges, it was the great expansion of credit supported by that institution in the year 1332 followed by the violent contraction of credit in the winter of



begot in the minds of people, not all of whome were sympathetic with
Andrew Jackson in his attack against the Bank, the conviction that


the Bank had too much power, that it was an arbiter of economic destiny,

that it could make or mar the prosperity of the country by assuming
a liberal or illiberal attitude in the matter of credits.

I think

there are symptoms that not a few people in the United States at the
present time are of a similar opinion with reference to the Federal
Reserve System.

I think the influence of the Federal Reserve Sys-

tem is in danger of being over-emphasized both by its enemies and by
its ffiends.

It is important, therefore, that our policies should

be carefully and quickly adjusted to the trend of conditions in order
to minimize the baneful effect of either exaggerated criticisms or unwarranted expectations.

The people are in a certain sense partners -

sometimes silent, sometimes active - in the Federal Reserve System, and
what they think or what they believe, what they hope or what they fear
is a factor not to be overlooked by us.

I have stated a good many tines in Federal Reserve discussions
that in my judgment the

word contraction had no place in the

vocabulary of Federal Reserve banking.


is surer



the American people will never stand contraction if they know that

it can be


Least of


will they stand contraction if they

think it is contraction at the instance, or with the consent of an
institution like the Federal Reserve System, set up under public
statute and public in its responsibility and character.

I am glad,

therefore, that the Comptroller has brought into this discussion
the fact that the people are partners with us.

But let ma add

by way of caution that I do not mean by this that we must let



"politics" into the Federal Reserve System.

There is a great difference between "politics" and public

The less we have of "politics" in the Federal Reserve

System the better for the Reserve Banks and for the people.


the long run, however, the Federal Reserve System will not succeed
and in my judgment will have no right to think it is succeeding
unless it has the substantial approval of average public opinion; 7
and for this reason principally;

that public sentiment and public

opinion in economic and financial matters in our country reflect the
experiences, the conditions and the difficulties the producing elements

of the population are going through.

The thought on public matters of

an economic character of the average American is formed by his daily
experiences as a bread winner more than by any other single factor or
circumstance of his life.

We cannot ignore the fact that the Federal

Reserve Banks are a factor in industry, in agriculture, and in commerce.
Still less can Are ignore the fact that this is believed and understood

by the average man:

We cannot ignore the fact that states of trade and

industry are very largely influenced by states of mind.

Least of all can

we ignore the fact that at certain times the policies, particularly
the discount policy, of the Federal Reserve Banks can influence and
induce states of mind.

Timeliness of action is of the essence of

successful Federal Reserve action.
timely action.

Right action, above all, means

Herein I think the Federal Reserve System has need of
I want to do all that I can to emphasize what the Gover-

nor said in his opening remarks, if I got his meaning, - that our action




in the matter of discount changes has frequently been too slow.

As I would put it, we have too frequently followed where we should

Action on the part of a Federal Reserve Bank is valuable in

just the degree in which it correctly anticipates either an upward
or downward swing in the movement of business and credit.

It is a

dangerous proceeding to wait till you are on a downgrade and then
jam the brake on suddenly.
is going to happen.

Begin to tat your brakes when you sea what

No Reserve Bank can develop a successful discount

policy except on the basis of foresight.

I repeat, we should lead.

We should lead upwards in the matter of rates and we should lead upwards
to prevent or mitigate inflation; we should lead downwards to prevent
liquidation from becoming a straight-jacket of deflation.

We should

not hesitate for a moment to reduce rates when we believe that conditions are weakening, liquidation proceeding, and business slackening, just as we should not hesitate when we see that business is

swelling unhealthily and its momentum is being accelerated by unhealthy market conditions, to anticipate and by anticipating to
prevent their consummation in disaster by applying the brakes soon
enough to prevent that extreme being reached.

The Reserve System

cannotumakenthe business situation but it can do an ilunense deal to
make its extreme t less pronounced and violent.


It has been very interesting to me, as one who has devoted
most of his time to the study of economics and economic history to
note with what unerring certainty what are called business cycles
I have often wondered how long it would take the business


man and the banker to appreciate the bearing of the business cycle
upon him.

It has long been recognized by economists that modern

business moves through cycles; that one extreme of the cycle is the
phase of violent speculation giving rise to extreme business tension
and collapse of prices, that the other extreme is the trough of depression, such &s we are in at the present time.

If I were to make

one general observation, call it a principle, if you prefer - that
makes it sound a little more impressive - it would be that the discount policy of the Federal Reserve Banks should always address itself
to the phase of the business cycle through which the country happens
to be passing.

In the degree in which it is successful in correctly

interpreting the trend of affairs and anticipating the approach of the

next phase of the business cycle and translating this into its equivalent
in terms of discount policy, the Reserve System will be a great and
useful institution - in brief, a success.

I see the Federal Reserve Banks in their larger economic relations as moderators.

It is the business of a Federal Reserve Bank

to moderate the pace of business when business is very good, because
experience has demonstrated over and over again that when everybody
thinks and feels that business is very good, it is seldom as good as

On the other hand, it is the business of the Federal Reserve



Banks to moderate the retreat of business when business is getting
bad, because experience has demonstrated time and again that business
need never get as bad as it will if it is allowed to go its downward
course unassisted.

If I correctly interpret the temper of this con-

ference, much has been said that is extremely reassuring that we are
looking in the right direction in the Federal Reserve System. I believe
we understand our opportunities and our responsibilities.

Above all

should we understand that we must ourselves develop independently out
of our own experience a discount policy suited to American conditions.

We must recognize that the conditions which obtain in the United
States are different from thosewhich obtain anywhere else in the world;

different from those which obtain in an old and conservative bank
center like England or in a new and untamed country like, let us say,

We in the United States need to take an economic view of

the discount function of the Federal Reserve Bank and we need to do
it in a large and comprehending sense.
of the Federal Reserve Act itself.

7e need to do it in the spirit

It is well to recall the words of

that Act (I have often wondered whip was responsible for their authorship).

They occur in Section 14, where, in describing the powers of the Reserve
Banks and Reserve Board with respect to rates it says rates shall be

fixed with a view of accommodating commerce and business".
That does "Accomr.odatinLs comr.arce

nd business" mean?

I will

not undertake to explain what I understand these words to mean further

than has already been suested in what I have said.

I will, however,

add that to understand what "accemmodatine comerce and business is
we have to understand what comrerce and business require.

By way of



illustration I will add that you do not accommodate commerce and
business by high rates when four million man are out of employment
and business is sick for lack of markets and markets are lacking because the world is more or less in commercial chaos.

On the other

hand, you are not accommodating commerce and business in an economic
sense and in that large public sense Which should control the deci-

sions of the Federal Reserve System When you allow a rate to drag on
at an artificially low level at a time when business is speeding on
the upgrade so rapidly that it can only be a question of time when it

will take a headlong plunge into a sea of depression which will involve the whole community.

That was the situation after


Speaking specifically about the rate schedule suggested by the
Governor this morning, I want to call attention to one fact.

For my

personal information I have had a percentage computed for the Federal
Reserve System which shows what the reserve percentage would be if the
System were still operating on the same gold reserve as a year ago.

In other words, so as to Show the degree of improvement in the reserve
position of the System, due to liquidation of the loan account.

does this computation Show?


If we compute the percentage on

of what it would be had there been no increase in gold holdings and
the reserve position consequently had been affected only by the
diminution of the loan account, the System would show a reserve percentage today of approximately 52 per cent as against 70.

In other

words by far the greatest part of the improvement of the reserve
position of the System has come not from liquidation of the loan account but from importation of gold.

This is particularly true of the

- 14 -

Reserve Bank of New York.


That Bank Shows a reserve percentage of

On the basis of the liquidation of the loan account alone, its

keserve percentage would be computed at something like 46 or 47 per

A computation of this kind made for each one of the twelve

Reserve Banks will show which banks have in the vernacular of banking
improved their reserve position by "cleaning up" and which appear to
be strong largely because of heavy additions tb their gold holdings.
I would be inclined to suggest in connection with the Governor's

proposal, the consideration of this thought: that in making a general
revision of Reserve Bank rates, those banks, I think they are four or
five in number, that Show the greatest amount of cleaning up during
the past year, that show the greatest improvement in their reserve
position through liquidation rather than through increased gold holdings,
should be the leaders in any downward revision of rates.

While on the subject of reserve ratios let me express my
opinion in passin,g,in answer to a question asked in yesterday's con-

ference, that I regard the reserve percentage of the Federal Reserve
Banks at the present time as a pretty worthless indicator of discount

I regard it as almost worse than useless as a guide to changes

in discount rates.

It is utterly misleading and will be until some

considerable number of leading commercial countries are operating upon
something like a gold basis.

I think we are likely to experience a good

deal of embarrassment over the Reserve Banks showing a high reserve ratio
simply because they are the dumping ground of the world's gold.


will occur when we get up against a situation where it will be good
banking and economic policy to undertake to control the e::pansion of



credit by a rise of rates.

Sooner or later, and I think sooner

rather than later, we shall find ourselves confronted with just such
a situation, a situation which unless controlled will develop ini-o a

secondary inflation and culminate in a secondary crisis- Unless we
are forehanded and resolute enough to apply rate pressure before
business and credit expansion gets too much headway, and this quite
irrespective of how high our reserves may happen to be, there will be

With regard to the matter of gold policy touched on in the
discussions this morning, I may say that I do not feel very much enthusiasm for the suggestion that gold or gold certificates shall be

put into circulation to an amount of a hundred or perhaps only fifty

If we are going to restore gold to circulation, let's do

it boldly, not hesitatingly.

The Federal Reserve System has reached

a position, I think, where when it moves it should move on strategic
lines, not on merely tactical lines.

With respect to gold, as with

respect to discount rates, let us take a big and broad position and not
maneuver timidly.

It is my belief and certainly my hope that the gold

Which we have received in unprecedented volume in the last year we hold
essentially as economic trustees.

The poorest use to make of this

gold is to put it into circulation in this country.

The best use we

can make of it is, when the situation is right for such intervention,

to use it to help the restoration of the currency in Europe and the restoration of the gold standard, there in at least some qualified form.
We shall ultimately have to take a very positive part in the financial
and economic reconstruction of Europe.

Part of our assistance will, I



believe, take the form,through specified gold loans, of sending
some of the gold which we have received during the current year in
such huge amounts, back to Europe to be used in effecting currency
reorganizations there.

The movement of gold into the United States

in 1921 is absolutely without parallel or precedent.

The countries

which have sent us this gold have sent it not because they are rich,

not because they can afford to dispense with it in their currency
and credit organization, but because a crisis has been reached in
their financial relations with us as a result of which an increasing
proportion of business has got to be conducted on a cash basis.

Practically one-third, perhaps more, of the excess of the exports we
have sent to Europe during the current year have been paid for with

This is a very serious situation.

Cash payments seriously

restrict business. Nor can trade go on in considerable volume if the
existing rapidly and violently fluctuating exchanges do not find

But there can be no correction except as some gold is

put into the foundations of the currency structures of the now distressed countries of Europe.

My view has long been that the function of the Federal Reserve
System is to continue to hold this gold in its vaults where it now
is mobilized and whence it can be readily mobilized for. use elsewhere

when the moment arrives, and not to demobilize it.

I should be very

sorry to see the Reserve System pursue a policy which indicated lack
of comprehension of the situation in Europe, lack of appreciation of
our relation to it, lack of appreciation of the obligation which we must
sooner or later assume, lack of appreciation of the stark fact that we



are going to assume that obligation Whether we now intend to or not.
I repeat we are going to do it because we must in our own interest
as well as in the interest of Europe.

The proposal, therefore, to

take this gold out of the vaults of the Reserve Banks and to dissipate
it by putting it into circulation to my mind means either that we
lack confidence in our ability to restrain an expansion of credit
when we Show a high reserve (should such restraint become desirable)
or because we are proceeding as theorists in the matter of our gold

policy and slavishly adopting the principle that there can be no gold
standard in a country unless it is buttressed by a considerable dispersion of gold in the pockets of the people.
It is my opinion that there will be no gold standard in any
useful sense for us unless there is at least a qualified restoration
of the gold standard in the countries of Europe.

So long as gold

moves as it now does, not as a normal instrumentality of commerce but
as the instrumentality of the pawnbroker, there is going to be no gold
standard in a regulatory sense.

While it does not pertain to the present discussion, I am, nevertheless, tempted to indulge myself in this connection to express the


that the Federal Reserve Conference having clarified the atmos-

phere with regard to credit conditions and discount policies, could not
devote its thought more usefully than to investigate and study what
there is that we can usefully do to help the restoration of a bet'Ger

currency and exchange condition in Europe and to devise some f1an for
intervention when the moment is ripe for intervention.


rJr1 inclined

- 16 -


to think that the time is not far off when something can and should
be done.

If a general clarification and improvement of the general

international situation follows the conference to be held in this city
next month, if something is done to alter the practices and policies
which have given rise to the need or the supposed need of extravagant
expenditures for armaments, and furthermore if something is done to
show the mischievous and obstructive effect of economic and financial
barriers between countries, the time will be near when something can
be undertaken to initiate a constructive program of currency and exchange restoration.

As the strongest nation in the world and as the

custodian of the greatest gold hoard that has ever been massed in any
single control in the history of Christendom, the obligation to blaze
the way - to do the thinking - to do the planning, rests with the
group of men who are assembled in this room.



NOV 2.- 1921

October 31, 1921.
Mr. Benjamin Strong, Governor,
Federal Reserve Bark,
New York, N. Y.

Dear Sir:

On behalf of Mr. Miller I am enclosing
a copy of the Chase Economic Bulletin for July.
Copies of this pamphlet were forwarded to Mr.

Miller by Mr. B. M. Anderson with the request

that they be distributed to the Governors of
the various Federal Reserve Banks.

Very truly yours,









APR 28 1922


Lpril 26, 1922.

Benjamin Strong, Governor,
Federal Reserve Bank,
New York, N. Y.

My dear Mr. Strong:
I am taking pleasure in giving this note of
introduction to you to my friend Mr. Edward G. Lowry,

formerly Editor of the New York Evening Post and now
a writer on current morld events,making his headquarters in Washington.

He and I have, at different

tines, talked over financial and economic questions
in their international aspects, and I know it would
be mutually profitable if you and he could know one

I hope you and he can arrange a meeting in

the near i'ature, and anything that you can do to help

Mr. Lowry in his inquiries will be greatly appreciated
by me.

Believe me,

Very sincerely yours,



MAY 19


R 8.
May 18, 1922.

Mr. Benjamin Stron, Governor,
Federal Reserve Bank:,
New York, N. Y.

Dear Mr. Strong:

I am noting that .you say in yours of the 15th regarding
the tentative character of the draft of your contemnlated
letter to Secretary Hoover on the foreign exchange situation,
CODy of which letter you were kind mough to leave with me.

I have reread the draft of the letter with renewed
appreciation of its value as a conspectus of the situation
with which it deals, the elements involved, and their relationship to one another. The difficult problem upon thich
your memorandum does not seem to me to throw adequate light
is the evaluation of the elements dealt with on pages 4 and
Action and policy, in the last analysis, are mostly
governed by quantitative judgments of the factors involved,
and I am still in a good deal of doubt with respect to the
approximate- degree of importance to be allowed to the reparations and the inter-government debt angles of the existing
or impending foreign exchange situation. I would greatly
appreciate it if you would send me any subsequent drafts of
your memorandum.
I enjoyed last week with yourself and our visitor more
It is seldom that time is at once so
than I can say.
I with that we might have
pleasantly and profitably spent.
conferences of this sprt more frequently and stay with the
subject until we had plowed it all the way through.
Believe me,

Very sincerely yours,


1A08 3V5:13a).391
1.-10T,i' EH eMAI


!A46...::: ....,)ii,











June 8, 1922.

Mr. Benjamin Strong,
Governor, 2ederal Reserve Bank,
New York City.
Dear :Er. Strong:

I am writing to say that we shall expect
you for breakfast Saturday morning. The hour is
adjustable, and there will be plenty of time after
your arrival to have a bath and shave before breakfast.

Your coming will give a fine opportunity
to talk over a reat many questions which ought to
be clarified as we move into the next crop-moving
I am very thankful that you are good
enough to make arrangements to run down at thiss time.
In the meantime forget about those particular matters which were giving you so Much personal concern.
Very sincerely yours,

P. S.

I am enclosing a copy of the running cornments I made upon discount policy questions
at our joint conference last October.
indicates my attitude toward questions similar to those raised in your letter of June
seventh with respect to rate Policies.
recognize, of course, that conditions have
changed in the last six months.

rstt, (41-





:June 13, 1922.

Mr. Benjamin Strong,
Governor, Federal Reserve Bank,
New York City.
My dear Mr. Strong:
I have your three letters of 'June twelfth.
I am very happy to hear that your visit repaid your
It was certainly very worth while and very
I only wish the
pleasurable from my point of view.
cool weather we have had during the last two days
had been here at the time of your visit.

Yesterday was so fully occupied with Board
meetings and today has been occupied with the Reporting conference that I have not been able to find a
quiet half hour to put in shape furthr ideas on the
subject of rate policy which I want to send you. I
In the
hope to do that some time during the week.
meantime I note that delay will do no harm because of
the complications in the situation with which you are
confronted in New York by reason of the proposed action by the Clearing House Association in the matter
of interest allowances on individual deposits.
Believe me,

Yours sincerely,





JUL 7 1922



Mr. Benjamin Strong,
Governor, Federal Reserve Bank,
New York City..
Dear Mr. Strong:

I am back again at my desk here and one of my first
duties is to write you and tell you how satisfactory my visit
The opportuyesterday with you and Mr.. Jay at the bank was.
nity it gave for extended and uninterrupted discussion and
consideration of some very important problems in the further
development of Federal Reserve policy and operation was excepOur discussions, I believe, cleared the field for
some important forward movements.
In order that the results of our discussion shall not
be lost, I am writing to ask you if you won't be good enough to
send a menorandum statement of your views (or perhaps I had better say your impressions) on two of the principal subjects Which
(1) the way in which credit examination
were discussed, to wit:
of member banks can be made a supplement to the discount rate in
giving effect to credit and discount policy; and (2) methods
by which the abuse by bank officers of their relationship with
banks can be checked, either by legislation in the way of amendment perhaps to the Clayton Act or by influence, pressure and
attitude on the part of the Federal Reserve System.
In connection with the first of these two subjects I
want to ask you to refresh your mind by reference to the text of
the Federal Reserve Act, section 21, where it is stated that
"Every Federal Reserve Bank may, with the approval of the Federal
Reserve Agent or the Federal Reserve Board, provide for special
examination of member banks within its district. * * * * * Such
examination shall be so conducted as to inform the Federal Reserve Bank as to the condition of its member banks and of the
This provision
lines of credit which are being extended j2y them."
of the Federal Reserve Act and the words which I have underscored
I think clearly indicate that the Act intends that the Federal
Reserve Banks are expected to keep. themselves informed of the
In other words, the loan policy
policy of member banks.



- 2 -

of the member banks is viewed by the Act as being of concern to
the Federal Reserve Banks and is not the exclusive business of
As I would put it, the loan policy of the
the member banks.
member bank is of necessary concern to the Federal Reserve Bank
because sooner or later Federal Reserve credit and discount polThis provision of the Act gives
icy may be iafluenced by it.
ample warrant for all that I have haclin mind La using credit
ilot only is
examination as a supplement to discount policy.
there justification in the language of the Act for such a line
of action on the part of the Federal Reserve Banks, but, more
than that, the Act appears clearly to indicate the expectation
that such examination is a necessary and appropriate instrument
of credit administration under the Federal Reserve System. It
might even be held by a not over-captious critic that the Federal
Reserve System has been remiss in not having explored the possibilities of this instrument in the past.
I am aware that your views on either one of these subjects may not be fully developed, and anything you write me, of
course, will be reZfarded'as in the nature of thinking aloud.

Sincerely yours,






June 24, 1922.


Dear Mr. Strong:

Your letter of June twentieth calling my attention to the
statement contained in current issue of the Bulletin to the effect
that "there has been a marked falling off in underwear" has given -me
something to think about. Let me, however, begin by saying that I
am highly delighted to get this bit of evidence of the care with which
the Bulletin's business review is the ever vigilant eyes
of your New York constituency. 'Let me also express my pleasure at the
suggestion of your letter that I could be regarded as an authority on
anything. Above all am T flattered that I should be applied to as an
authority upon the accuracy of the observation made in the bulletin
falling off in underwear."
that "there has been


As a matter of fact I cam claim no authority in this field
I can hardly confess to the ordinary measure of
of human interest.
curiosity which you report "exist in financial circles in New York"
as to these matters. You know how humdrum my life and how monotonously regular my habits are. My radius of action in Washington extends
from my home to my office and vice versa, with an occasional deflection
of the course of my perambulations to the Metropolitan ilub where I
have never yet discovered that useful observations of any character
in the field of social interests can be made.
Outside of Washington my radius of action extends on the east
and north to NewYork without, however, any opportunity in between for
social and economic observations other than are afforded by travel in
:ullman trains; and traveling of preference by day you will agree that
little or no opportunity is given to make observations with respect to
On the West my travels extend to the crest of the Sierra
Mountains and the shores of the Pacific.
I am obliged to admit that my peregrinations, infrequent as
they are, do give opportunities for observation and in fact enforce
observation of the changing manners of the time. For example, ,::ithout
pretending to know anything about underwear habits in general, I have
observed, as anyone in similar circumstances would, that many women in
California, especially when in the high mountains and at the shore,

-2 -

wear pants*.


However, the richest field of observation that I ever
is the drawing-rooms of Washington. Not that I would suggest them as
a great field for observations of underwear; but the radiant electric
bulbs do shed much light 'upon the falling off in outer garments.
I am right in my assumption that the parallels of latitude and longitude of the undergarment dannot exceed those of the outer garment, the
inference is unavoidable that there has been a "marked falling off in
underwear" from above and a marked recession of underwear from below.
In fact I believe that the conservative financiers of New York would
agree with me that in this matter we have reached the "apprehension
I am told that this is also the verdict of the Paris modistes.
In solemn conclave I read they have recently concluded that "contraction" having gone as far as it safely could, the time has now come for
"expansion" in the sartorial cycle. Hence the lengthening of skirts.
t an exhilarating thought that these magic symbols of the ebb and
to describe the ebb and flow of useb
-Low of credit should also be
well, I leave you and the wise pundits of Wall Street to write out the
And what a splendid travesty upon the
missing terms of. this equation.
movement of the tides and the so-called inexorable lam of, nature that
the modern drawing-room should afford us the example of a simultaneous
ebb and flow with respect to the movements of women's apparel - continued ebb at the top and flow at the bottom.
By way of giving you an idea of the kind of impression occasionally made upon me by drawing-room observation, I may recount that I
was recently a a perfectly-staged reception where our portly
and caPacious hostess, full ten stone weight, was tightly encased in
above the top of
scanty attire with a Manifest overflow of cuticle
I had all-my life been looking for something that visibly
her corsage.
Is this also
defined a "coming out" party. Here at last I founditl
What a splendid drama
what is meant by the "emergence" of woman?
Molliere might write on this subject, if he were ':ith us today. All
these years we have heard of the "emancipation" and. approaching "emergence"
of woman. At last we see it an accomplished, or perhaps "financial circles
in New York" would think it a truer description to say an almost accomplished fact.

*please observe that I say pants -, I am utterly incompetent to say
whether or not they also wear panties; I haven't even tried to ascertain whether they do, though I am told that anyone who desired could
I rewithout difficulty make accidental discoveries on this score.
I have sought to make none, but I am obliged to state in
peat again:
the same breath that I have had to exercise some Skill to avoid making


Lest my social interpretations may be misunderstood, however, I hasten to remark that I muld be the last in the world to
conclude that becalse underwear was "falling" its wearers were "falling."
I am terribly fearful that the reference in the Bulletin to whlch you
call my attention may have suggested this to some of its readers who
have spoken with you. Please disabuse them of any idea that such a
thought is in the minds of the august Board, of thich I have the honor
of being a member,- perhaps the least informed member, but not the
least hopeful .either of the race or of the Federal Reserve System.
I am one of those who agree with the fine observation of that ripe old
sage, Charles William Elliott, made to the New England Schoolmasters
Association last summer, when he said in effect that we must distinguish between manners and morals and added that though the manners of
the present generation may not be equal to those of earlier generations,
it would be a mistake to conclude from this that the morals were not as
good or might not even be better.;
It was another wise American guy who said:

"Clothes do not make the man."
If he were


today he might .pertinently observe:

"Lack Of clothes do oft disclose-the
woman aid sometimes, too, the lack
of the lady.4t,

Having unburdened myself thus fully and frankly on the query
you have propounded to me,- and I hope with some show of competence as
well as sympathy,- may I not bespeak your kind indulgence in the future when I speak my views with equal frankness on the rise and fall of
the rate,- the fall in times of depression when We want to assist
"emergence" and the rise to prevent too near an IpProach to the "apprehension" line and a crop of "indecent ermosure&2."
Sincerely yours,

Please note the pun.
Sometimes written disclosure.

Yr. Benjamin Strong,
Federal Reserve
New york city.





JUL 3 11922

July 29, 1922.
Mr. Benjamin Strong, Governor,
Federal Reserve Bank,
New York, N. Y.

Dear Mr. Strong:

Replying to yours of the 27th instant, I am writing to say that

Miss Helen Burling is the name of the young woman I was talking to you
about in connection with your requirement for a stenographer in London
and Paris during October.

I have made inquiries concerning her pro-

ficiencies, and have gotten a very satisfactory report.

She is now, I

am informed, at The Hague with Mr. Edward Burling, Who is Counsel to the
Norwegian Government in presenting certain shipping claims against the
United States before an arbitration commission at The Hague.

is Mr. Burling's
a very good



Miss Burling

Besides being a stenographer, I am informed she is

She has just recently taken up secretarial work.


is a very finely-bred and attractive young woman, and I think you will be
very fortunate if she proves to be available for your work.

I have just

written Mr. Burling, asking him to cable you her decision, addressing the
cable to "Strong care Fedreserve," New York.

Our days together last week were most


Cone again.

Very sincerely yours,





AUG 2_



August 1, 1922.

Mr. Benjamin Strong, Governor,
Federal Reserve Bank,
New York, N. Y.
My dear Mr. Strong:
I have your note of July 31st.
you should hear from him Shortly.

I wrote Mr. Burling on July 28th, and

With regard to the London book dealer tho has the fine collection of
old Piranesi etchings, I find that his name and address are as follows:
Walter T. Spencer, Esquire,
27, New Oxford Street, W. C. 1,
London, England.
The last letter I had from him was under date of February 23, 1921. A
copy of it is attached. The Piranesis named by me to thich Spencer referred
in his letter were by way of indicating the type of Piranesi etching that
particularly appeals to me. In my letter to Spencer of February 7, 1921, I
gave the following list:
Temple of Minerva Medici.
Temple of Glana.
Temple of Apollo.
Temple of Sib illa.

Arch of Constantine.
Arch of Titus.
The Pantheon.
The Series of Paestum Temples.

There are many more of this same type that are very beautiful.

The prices named by Spencer are very reasonable, and I should be very
happy to join with you in getting a couple of hundred of fine old Piranesis
at the price he quotes - 10 shillings apiece for the large ones - providing
they are the more interesting, picturesque and beautiful ones. I paid as
high as $50.00 and over for some of the Piranesis I bought in New York
during the last year or two.
There is a good deal of difference in Piranesi prints. With the recent
revival of interest in them, the Italian Government has permitted prints to
be struck off from the old plates. These are very inferior prints, the plates

-2 being much morn. To distinguish them from the original prints made in
Piranesits lifetime, these later inferior prints bear a little stamp, and
they are printed on pretty heavy paper. From my point of view these later
prints are not worth the paper they are printed on in making up a collection.
But in an earlier letter from him on the subject, Spencer wrote that his
His collection should therefore be
Piranesis were all first impressions.
a great mine if it is still intact, as I hope you will find it to be.

As I said yesterday on the telephone, I expect to be in New York
Thursday of this week, and will call you up at the bank and arrange a time
of meeting.

Very sincerely yours,


Walter T. Spencer
Second-hand Bookseller, Plature Dealer, and Exporter,
27, New Oxford Street, W. C. 1, London, England.

London, Feb. 23, 1921.
To Adolph C. Miller, Esq.
Dear Mr. Miller:

I am very glad to hear from you again. Yes, I remember you and the
two ladies quite well. As regards the Piranesi etchings, those I have
are at the top of the house here and have never been looked over by any
one, for the simple reason that no one would think we had any, so they
ought to be a very interesting lot. I have asked one of my assistants
to count them and in doing so, she notices some of those you especially

name; the are about 310 large ones and 58 small ones; I am quite willing
to send you the whole lot on the following conditions - that you cable me
on receipt of this letter one hundred pourvis, which anount you will have
to spend with me sooner or later, I mean by that should you not care to
btr Piranesis to that anaunt you will ask for something else to be sent
from time to time, until you have selected what you want, but I expect
you will purchase that amount in Piranesi; now as regards the prices, the
large ones are 15/ each if you only take 20, and 12/ if you take 100, and
10/ if you take 200 or more. The small ones you may have at 6/ each, no
matter haw many you may take.
Please do not think I am asking you to cable the money because I am
afraid to trust you with them. That is quite out of the question; of
course I would trust you to any anaunt. The reason is, I do not care to
send than unless I know you will spend a hundred pounds with me sooner
or later, because I know they are very cheap and I expect there are a good
many dealers Who would'be very glad to purchase such a collection.

Believe me,

Yours very truly,




we 2919ft



:sw Yon

August 25, 1922.
Mr. Benjamin Str021g,GOvernor,
Federal Reserve Bank,
New York, N. Y.
Dear Mr. Strong:

I have just received your letter to Mr. Miller of the

24th, with note attached requesting me to forward it to him.
I am writing to say that Mr. Miller plans to be back here

next Tuesday, and will spend all day Monday at the Federal
Reserve Bank of New York, where there is to be a meeting of
the committee on revising the form of monthly reports of reserve banks, to be held in the directors' room at 10.30 o'clock.
Possibly you could get into touch with Mr. Miller while he is
in New York.

I will hold your letter here until his return,

as it mould be too late now to forward it to him.

Very truly yours,

Secretary to Mr. Miller.


















September 9, 1922.

Mr. Benjamin Strong, Governor,
Federal Reserve Bank,
New York, N. Y.

Dear Mr Strong:
Thank you very much for the paperweight made from a
boulder taken out of the excavation for the foundation of
your new building.

My attainments in natural science are

not such that I can claim to be able to appreciate the
geological pedigree and migrations of the stone out of


the paperweight was'inade; but like other fallible

mortals, I arrogate to myself infallibility in matters of
taste and human interest.

The color, markings and texture

of the paperweight make it beautiful.

The fact that the

stone was hidden deep down in a pocket in the earth in lover

Manhattan and came to see the



day through

the inter-

mediation of the Federal Reserve Bank makes it of very unique
interest to me.

I am very glad to have it.

Thank you again.

Sincerely yours,


40 400,





December 20, 1922.

Mr. Benjamin Strong, Governor,
Federal Reserve Bank,
New York, N. Y.
Dear Mr. Strong:
Your two good letters of the 19th instant .are at hand, but
find me in bed where I have been ordered to stay by the doctor.
He finds that as a result of my attack of grippe in California,
I am below par in every way and am not a fit subject to be going
about. But I have gained greatly from the three days I have been
in the house, and I think by next week I will again be up to things.

In the meantime let me tell you how much gratified I was
that you were so favorably impressed with the vaprk of the economy
and efficiency conference in Chicago and the program which has
been laid out for the furtherance of the 'eork.

Your letter on the general credit situation is a most admirable summary of factors to be considered. I feel very much
the same concern as you express, and I felt it in California when
I was convalescing and had plenty of time to think about the
larger issues confronting the Federal reserve system.
One of the
incidental things about our present rate structure that has been
troubling me is the fact that the rediscount rate is below the
rate at vhich open market purchases are being made.
will agree that this is wrong in principle, and,perhaps more serious
than that, it looks bad. and leaves people to guess just that our
policy is.
Supposing that I am equal to it next week, would it be convenient to you to come down here then, or would you rather wait
until after the first of the year? I feel that no time should be
lost in making a thorough canvass of the situation, and I feel that
if you and. I could do this for a day, we would probably reach the
same conclusions, and we could. then determine upon a program of
action, to be taken in New York and here.
It was very good to have had. a glimpse of you the other day,
and particularly to see you looking so fine.

With the best of the season's greetings to you and, if she
remembers me, to your lovely daughter, believe me,
Always sincerely yours,

I t














February 27, 1923.

Yr. Benjanin Strong, Governor,
Federal Reserve Bank,
Kew York, N. Y.

My dear Mr. Strong:
I want you to know that I deeT)ly end s Inca rely aopreciate your
confidence in writing me so frankly and fully as you have in your note
I shall say nothing about that you have written
of the'19th instant.
to me until you say so.

Both Mrs. Miller and I are very much distressed by what you report concerning your condition. We have both felt since your visit
here after Christmas that you were taking chances with your health,
I an
When you ought to have been under careful medical suoervision.
greatly relieved, therefore, to hear that you have Put yourself under
the care of the doctors, and are submitting to a strict regime of
Phealth f irst" even though it involves that most irksome of all o ccurat ions, namely, lying in bed. The general appearance of good health
mhich you gave -;then you passed through Washington from the South makes
me very hopeful that you are in good fighting form, and will in due.
course shake off or get under control your local complication. But in
any case, be patient and be content to make haste slowly. You are in
the hands of two of the best doctors in the country, and you will do
well to scrupulously follow their advice, .even though you frequently
feel,as I did during' my recent illness, like telling -than to go to the


I am in a better position just now to advise, because I have recently paid the penalty for not having done as my doctor in California
told re to do after I got up there from my attack of flu. He told me
then that I should take not less than three weeks for a thorough convalescence, on certain penalty of having:- a relapse, if I did' not, shortly
after my return to 7ashington. His Prognosis proved absolutely correct,
as you know, and I am just now getting to mThere I doubtless would have
been two months ago if I had been less impatient to get back to work
But I think I have learned
out of my sick bed in California.
when I
it sooner than the darky did mho,
my lesson, and I thank God I learned
when asked by the sheriff as he was standing on the gallows ready to
be executed whether he had anything to say, first replied "No". When
the sheriff, looking at him, said "="risoner, have you nothing at all
to say?", the darky, looking at the crowd gathered around, ans-::ered
"Nothing, except this, Sheriff: I guess I've learned my lesson!"

-2If you don't already know it from your own Previous ex-periences,

let me\ tell you that I have learned from my recent experience tirt

a man can do a mi;-::hty lot of useful thinicin: -;,.. when he is lying flat on
his bac_-. Somehow, the constructive imagination seems to work to larger

result s when removed from the environment of off ice interrupt ions and
administrative routine.. I e.:::;ect your im--lina.tion. to brIn:!7: forth a



great. litter of Federal reserve puppies, and if you will let me lmow
when your cbctors, as well as yourself, think tiRt you are ready for the
delivery, I will .come up to the party.
Turning from ratters of. personal health to the health of the body

economic, I sui)Dose that you have been kcyL)t informed of the reaction of
the country to the recent rate advance in New York and Boston. Nothing

has yet come into, off ice from the agricultural districts, hit
that comes in from the larger financial and' industrial centers shows'
that the action taken by the reserve banks is being well received. There
is some difference of opinion as to just what the action means, and. Why

it was taken; but the gratifying thing is that in practically all of the
comments, there is either a direct or implied note to about this effect:
"This thing is all right, because. the Federal reserve sy stem is do in it",

sometimes with the added observation that the Federal reserve system is
doing it because they don't want to see the corntry so through another
1919-20 passage. In brief, what is most gratifying is the acceotance
of the Federal. Reserve's leadership in matters of larger credit administration.
I have just had. a conversation with your Mr. Shepard Morgan with respect to the c'ceacluding paragraph in the monthly Bulletin of your bank.
He seemed to feel that it should contain something with reference to the

trend of affairs which led to the advance of your discount rate, and I

gave him the following, which is a revision of 'what he had submitted:

"As is seen from the foregoing, both in this district and elsewhere
in the country, industry and trade are at or near the maximum productivity
of 1919 and. 1920. Thus far the increased volume, of credit reouired. by the
increased volume of product ion, along with the generally higher Prices at
Which goods are being distributed, has been supplied by the banks without
much borrowing from the .Federal reserve banks.

."It is, however, to be noted in connection with the present situation

that when industry and trade are apProachin7 ma:limum Productivity, the

stilyralus of rising -or ices and the effectiveness of further aCditions to
the volume of credit in promoting the production and distribution of goods
are of diminishing importance."
I enclose cony of the Federal Reserve Board's Press Statement on
February business conditions.

- 3 -I will let you -IMO VT of any 52_.~,Portant happenings at this end,

and will a"):pr ec ia t e an occasional line from you, if it does not tax you,
as to how you are gettin,-; along. I believe that your improvement will
be steady, and. I hope that it will be rapid. But the main thing is that
you get well, and do whatever the doctors thilk necessary for that purpose, ,always remember in;:", that impatience and. the irritability of mind
that goes with impatience is an added obstacle to good Progress. And
when the doctors thinl,: it is good. for you to see me, I will run up. I

am not yet a sort lag proposition, but I Cil2 well out of the woods and
"growing better day by day."

Always sincerely yours,


March 8, 1923.

Mr. Benjamin Strong, Governor,
Federal Reserve Bank,
New York, N. Y. , 470 Park Avenue.
Dear Mr. Strong:

I want you to know that it was a very Treat satisfaction to me to
have such a good visit with you yesterday. You showed all your old-time
mental vigor and punch, and. your general health and appearance were those
of a robust man in good physical trim. My own impressions were confirmed
at your brother said, and I do not doubt that a few months in the
dry and bracing climate of Colorado Springs will see your local trouble
pretty much scotched.
I forgot to tell you yesterday, apropos of your letter to me of the
3rd instant with regard to the article in the Manufacturers Record, that
the Senate on motion of Senator Glass ordered. the proceedings of the Federal Reserve Board's May 18th, 1920, conference on credit conditions
printed as a public document. They are therefore available for distribution if anyone on the outside of the Federal reserve system cares enough
I am informed that the docuto have this document, or to distribute it.
ment is known as Document 310, and. consists of 62 pages; also that the
Suyerint.endent of Documents, Gov ernment Printing Office, has none of
these documents for sale, but if he were advised that there may be a considerable number of calls for the document, he will stock it and the sale
price will probably be 10 cents per copy.
Lest you may lborget, in the accumulation of "last things", let me remind. you of the note you were going to write to Rounds with reference to
his taking an active part in our economy and efficiency work.

As I am just called to a meeting, I will defer for a later letter other
things I wanted. to say in this letter. With this go es, of course, my best
and. warmest wishes for your solid recovery; but more than that I want to
tell you of my confidence, after a visit with you, that with a little
reasonable prudence to health considerations you stand a mighty good chance
of outworking and outwearing most of the rest of us. Remember, there is a
lot of the most important kind of work ahead for you in the Federal reserve
Just banish from your mind any thought to the contrary whenever it
makes its appearance.

Believe me,
Always s incerely yours,


whereas the Federal Reserve 3oard, under the powers given it in
Sections 13 and. 14 of thp Federal Reserve



Act, ha e authority to

limit and

the securities and investments purchased by Federal

reserve banks;


the Federal Reserve Board has never prescribed any limita-

tion upon open market purchases by Federa7 reserve banks;
Whereas, the amount

time, character, and manner of such purchases

may exercise an important influence upon the money market;
whereas an open mar)<et investment policy for the twelve banks com-

posing the Federal reserve system is necessary in the interest of the maintenance of a good relationship between the discount and purchase operations
of the federal reserve banks and the general money market;
qhereas heavy investments in United States securities,
:::.articularly short-dated certificate icsues, have occasioned embarrass-

ment to the Treasury in ascertaining the true condition of the money and
investment markets from time to time,

THF,REFORE, Be It Resolved, 'That the

Federal Reserve Board, in the

<.ercise of its powers under the Federal Reserve Act, lay down and

the following principles with respect to open
of the Federal. reserve banks

(I) That


arket investment o:erations


the time, manner, character, and

volume of open L...arket

investments purchased by Federal reserve banks be .g.overned with pri ary



the accommodFtion of commerce and business and to the effect of

such purchases or sales on the general credit situation.
(2) That in making the selection of. open marleat ;-urchases, careful

regard be always given to the bearing of nurchases of United Stetes Government

ecurities, especially

the short_dated issues, upon

the market for such

securities, and that open market purchaees be
eecept th,et Treasury certifieetee be

dealt in,

mainly commercial


as at present, under so-called


Be it Further


That on and after kern 1, 1023, the

present Committee of Governors on Centralized Execution

".'urchases and Sales

of Government Securities be discontinued, and be superseded by a. new committee

known ae the Open Yiarket investment
said Committee

Committee for the Federal fiecerve System,

to consist of five representatives from the reserve hanike and

be under the supervieion of the Federal Reeerve Board;
duty of

this Committee to arrange for the

and that it he the

.purchase and sale and distribution

of the open market purchases of the federal reeerve ',mike in accordance with
the above principles.

A. C. M.

March 21, 1923.



June 26, 1923.

Dear Mr. Strong:

This is not a letter; it is an acknowledgment of
a letter. Yours of the 20th came to hand at breakfast this
morning and for which both I:1*s. Liller and I want to say
I cannot tell you how delighted we are to
"Thank you."
have so encouraging a report of your progress, and find it
corroborated by the good humor and high spirit in which your
letter is written.

Committees of the Governors are here considering
the status of our Federal Reserve par clearance system, in
view of the recent decisions of the Supreme Court, questions
of open market policy, foreign bank accounts, and numerous
odds and ends.
As Yrs. Miller and I plan to leave Thursday afternoon for a five day motor trip to Sorrento at 1:t. Desert, Me.,
you will see that I have much to do and little time for doing.
When I return from Sorrento July 9th I shall then expect to
have more time and shall write you a letter with respect to
many of the interesting observations contained in yours of the
20th, though it-would be very much more satisfactory if I could
sit down with you for a day or two and talk to you. T:riting
is at best a poor contrivance for unloading a cargo of the
unconscious mind, and that mind is the thing that counts in
trying to get some line on what a fellow is up to.
Good-by, old man, take the best of care of yourself
and salt down a lot of health and strength in preparation for
the things that are ahead in the next year.
Ever sincerely yours,


Mr. Benjamin Strong, Jr.,
Cragmore,. Colorado springs,


August 14, 1923.

Ir. Benjamin Strong, Jr.,
Cragmore, Colorado Springs,
My dear Er. Strong:
In lieu of a letter and discussion from myself on the
many subjects raised in your recent correspondence, I am sending
you copy of a letter addressed to the Governor of the Federal
Reserve Board by the Under Secretary of the Treasury on the subject of open market buying rates and discount rates at Federal
I am sure that this
Reserve Banks and their proper relationship.
will provoke some reactions from you, which I hope you will shAre
with me. I would also greatly appreciate it if you will give me
any thoughts you may be forming with respect to matter of discount
policy and discount rates in the coming autumn. This topic will,
of course, be discussed by the Federal Advisory Council at its
next meeting some time about the middle of September.
I am going up to Cornell University tomorrow night to
speak before their summer class in Agricultural Economics on "The
Economics of the Federal Reserve." At this writing I have only a
nebulous idea of what I am likely to talk about up there, but should
anything float into my consciousuess while ilL)on the platform that
would lead to seme worth while remarks I will send them on to you
after I get back and have time to digest them. I find in talking
about Federal Reserve economics that there is no difficulty in
the difficulty is to find somefinding something to talk about;
thing important to say which is the reflection of a well balanced
and mature judgment.
I am sending copies of Mr. Gilbert's letter to the members of the Open Market Investment Policy Committee in the expectation that it will have some consideration at the next meeting
of the Committee.
Now as to more important matters. How are you, really?
Mr. Jay has just been in my office and tells me that he understands
that you are getting into very good condition, that your voice is
all right but that you are not yet allowed to use it, and that the
only thing that is bothering you is a slight irritation of the
It is mighty good to know that you are getting on so well
and you have certainly shown extraordinary patience in being able


- 2 -

to get along so well without the use of the speaking member.
I hope you will go on to a complete convalescence and not snoil
the results of your many months of patience by any impatience at
With this AL,mind and rememthe end to get back to New York.
bering your desire to be present at the autumn meeting of the
Joint Conference, I this morning had the date of the conference
fixed for November 11th. That is a little later than we have had
it in the past few years, but it is all right.

If you prolong your stay at Colorado Springs long
enough, I may possibly drop in on you and pick you up When I re.4e Pacific Coast, which I am planning to
turn from a trip to
But whether it
the middle of September.
start on some tim
York or here, I want you to know that
is in Colorado Springs, New
I will be mighty glad to see you again. Frankly, I have missed
you very much these past six months. The burden of work that has
fallen on me individually has been tremendous and I have felt in
the last few weeks at times that my strength was not equal to
tell you the opportunity to sit
I have missed more than I can
down quietly, as we have so many times in the course of the past
few years, and discuss at length some of the really weighty and
vital problems before the Federal Reserve System. It is seldom
in formal meetings that the things that are really worth-while
get the clarification that they should through discussion.
usually a
are always put off; put off in part because there is
considerable accumulation of routine business and also I find
it more so because of shrinking from what is really difficult.
An old philosopher, Sp,moza by name, once remarked what is
world the things that are excelwhile repeating, that "In this
lent and worth while are usually as difficult as they are
when they are being
while.". But it still remains true that
avoided, the problems are knocking for solution, and solution
in an organization as complex as the Federal Reserve System
that at least a few men at different points in the
must lay their minds on the table and through discussion arrive
at a judgment which may serve as the basis of action and policy.
But I want you to know that I miss
So you see Why I miss you.
you not only as a Federal Reserve Governor but as a very stimu-

lating and whole-hearted friend.
The middle of next week I expect to go for a two weeks
holiday in Maine and lay in some pep, of which I am sadly in
need at this writingafor one or two unpleasant, not to say angry,
situations that have got to be disposed- of by Board action.
Strength to your body and mind and spirit.
Ever yours,


August 18, 1923.

My dear Yr. Strong:

Just as I was leaving for my day at Cornell, concerning
which I wrote you in my note of August 15th, I received an interesting letter of inquiry from Er. J. R. Bellerby, an economist in
the International Labour Office at Geneva.
The questions he
raises are pertinent, you and I have often discussed them, and they
got considerable ventilation at the Joint Conference a year ago.
I do not recall that we have ever discussed the subject since that
I do not, therefore, knowthether your attitude on the
question of the degree and the why of the effectiveness of the reserve bank rate has changed any in the course of the last year.
This letter of Yr. Bellerby and the questions he raises will, I
hope, induce you in an idle moment when you may feel disposed to
ponder questions of principle, to consider again this matter of the
effectiveness of crecit control through the discount rate and let
me have the benefit of your views when I reply to Yr. Bellerby.
imagine some considerable importance may attach to the reply I send
him, and I would be very happy to quote in my reply from any portion
As I am leaving in a few
of your letter that you might indicate.
days for a two weeks' holiday on the Maine coast, I shall not send
anything more than an acknowledgment to Er. Bellerby before leaving.


Bellerby's letter and his brochure entitled "The Controlling factor in Trade Cycles" (which I am taking with me to read during my holiday)-is ,another one among many pieces of evidence that
have come to my attention in the course of the last two years that
the critical point in the "money question". in our day and especially
in our country is going to be that of the matter of policy, methods, etc.
There will be, of
of the central or reserve holding institutions.
course, many other angles to the money question, especially if and
as it becomes a political question, but the outstanding feature of
new monetary discussions will be the qUeAtion of credit and currency
The recent prominenceof
regulation by reserve holding institutions.
the"business cycles" theory and the Parallelism between the business
cycle and the creditaudcurrency cycle have given much emphasis to
the importance of the new form of the money Question.
In my two
lectures at Cornell the other day I went into this aspect of the
matter pretty fully. When I have time to arrange the notes that
were made on my talks I may have something I will think worth while
sending to you.


-2 -

There were several Professors of Economics in my audience and they seemed to be much impressed with a remark I made
in the course of my discussion of the Irving Fisher proposition
and the many variants of his proposal that are going the round in ec.a-_
nomic circles for regulating the value of money or the volume of
credit and currency by the price level.
I, therefore, pass it
on to you for whatever you may think it worth. Here it is:
"The economic proposal to regulate or adjust the
volume of cre,,it and currency issuing from the reserve banks according to the movement of the general price level (that is, the so-called general
price index), if adopted, would with almost fatal
certainty work out in Practice as a political
meastne to manipulate prices through the agency of and currency;
in brief, would transform
the Federal Reserve System into a price fixing
Good health and best wishes,
Ever sincerely yours,

Yr. Benjamin Strong, Jr.,
Cragmore, Colorado Springs,

o p y.

International Labour Office

31 July,


Dear Mr. Miller:

I am taking the liberty of writing to you to ask your assistance
in a matter on which any suggestions you might give me would be particularly valuable. It is in connection with a study I am making for the International Labour Office on "The regulation of credit and currency as a means
of stabilising production and employment." Having been appointed to make a
report on this question, I am very anxious to gain as complete an understanding as possible of informed economic opinion on the business cycle and
of the latest ideas for monetary reform, and any assistance which you might
be willing to give me would be most appreciated.
In examining the recent literature on the relation of money to
unemployment, I find one point of almost general agreement; the need for
restricting the rate of rise or fall of the price level. A further generally agreed point appears to be that the most efficient means for controlling
price movements is provided by the rate of discount. Assuming these hypotheses there are various practical issues which arise. Perhaps the most important for the United States is that of determining the most suitable means
by which the policy of the Federal Reserve Board can be made effective in
controlling the market rate of discount.
It seems to be the general impression that the rediscount rate
the federal reserve banks can only be made fully effective in controlling
the rate demanded by the other banks when the gold reserve ratio is reaching
its legal minimum. It-is argued that, when their reserves are running low,
the member banks find themselves more and more under the necessity of rediscounting bills at the federal reserve banks in order to strengthen their
balances there or to withdraw gold. Under these circumstances the federal
reserve rediscount rate becomes increasingly effective.


The difficulty I find is to appreciate how, even under these circumstances, the federal reserve rate can absolutely control the market rate
of discount. Were the former rate to be raised, say, by 1 per cent., the
extra cost to the dependent banks would be offset by the addition of about
one-fifth per cent. to the rate they demand of their own customers - in view
of the ratio which loans to customers bear to the amount of indebtedness at
the federal reserve bank. 'Why, them, should the rate of member banks move
so much in harmony with the rediscount rate of the federal reserve banks at
any period? Is it because the member banks realise the actual reserve situation and therefore consider it politic to follow the lead of the federal
reserve banks, or are they really obliged to do so through immediate considerations of profit and loss?

Is there any element of custom in the question?


- 2 -

I have spared no pains to find the solution in economic
writings and have read thirty or forty publications treating of this
and associated subjects; but I have found no clear explanation as
I hope you will therefore excuse this direct appeal for help.
It would be of the greatest assistance to me if you could point out
the manner in which control is considered to be effected; or, if
this may be asking too much, could you possibly refer me to some clear
account of the question in current literature?
Perhaps you will wonder wiz, an unknown individual should address you on the subject in this manner. The reason is that I read
your article in the American Economic Review of June 1921, which helped
me considerably to appreciate the working of the federal reserve system;
also Professor Seligman, when in Geneva, said he thought you would
probably be pleased to help nm to understand the :imerican situation if
I found myself in difficulties.

My knowledge of economics is limited almost entirely to what
I could gather together in a hurried post war course before coming out
here, and consequently I hardly feel myself equipped for the intricate
task which has been entrusted to me.
If this question w
put to you is really very simple in its solution I hope you will excuse
this ignorance of the subject on my part. I am very desirous indeed of
making myself fully acquainted with all sides of the question, for it
seems truly a most important one, not to be taken lightly by anyone who
should attempt to touch it.

Smother method I have adopted for educating myself on the
problem has been to write an essay on the monetary aspects of the trade
cycle and to circulate it for criticism.
I am taking th
sending you a copy under separate cover.
The essay is of course quite
unconnected with the official work of the office; and I hope that in
reading it, you will not imagine that I myself consider the methods
proposed for giving effect to the "remedy" are of more than theoretical
value in present times.

Whatever assistance you may be willing to give me will be
most highly valued. It will of course be of real practical utility for
my official work at the office. But in saying that I hope I may not
detract in any way from the personal gratitude I should feel for any
help you might be kind enough to give me.
I remain,

Yours very sincerely,





- 1923


November- 2, 1923.1

Dear Mr. Strong:

Welcome backl It is great news to hear from
Mr. Jay that you were back and to have Mr. Case, who
has just been here, confirm Mr. Jay's report that you
have returned in prime condition - fit, portly, and keen.
I long to see you.
keep fits
Let me give you a bit of advice:
Keep a check on yourself and be content to go slowly,
and always remembering that it is not the speed at which
a fellow travels nor the size of the load that he packs
that tells how much he is accomplishing, but rather the
character and quality of his work when he gets to the
age of wisdom, at Which some of us have now arrived.
There are plenty of big problems in the Reserve System
that require steady nerves and clear, patient thinking
rather than long hours of hectic and interrupted activYou know full well
ities near the customers' counter.
what I mean, for I have often heard you give this advice
and it is up to you to show you can profit by your own
So I say, sot an example of moderation and
the calm poise that is the uutstanding characteristic of

My warm embraces to you, old man, and let me
It will be a happy moment.
know when I may see you.
Always sincerely yours,

Mr. Benjamin Strong, Jr.,
Federal Reserve Bank,
New York City.








_. .ear

T1 S.
January 12, 1924.

1,1r. Strong:

Your letter of the 11th inst. is just at hand, and I
straight upon the main point
hasten my reply in order to set you
in your letter that concerns me personally, namely, your inference that the action recently taken by the Board in disallowing
the salary increases recommended :for your counsel and assistant
counsel was due to the comments I had made upon the way in thich
Your inference, I think,
the Carmalt matter had been handled.
It is to set you right
was natural but nevertheless is in error.
in this particular that I am now
You may have noticed a disposition on the part of SOMB
members of the Board's Salaries Committee to "peg" salaries at
Reserve banks. Subsequent discussion in the Committee showed an
especially strong disposition to pg salaries of counsels at ReThe Committee was unable to reach an agreement on
serve banks.
this point and finally referred the whole matter to the Board
with recommendation that counsels' salaries and allowances at all
the Reserve banks be made the subject of study by a special comThis study was made; some of the recolum endations of
the Committee were approved by the Board, others turned down.
The action with respect to counsel's salaries in New. York, as nearly as I am able to state the position of the Board after considerable discussion (in which no reference was made by me or anybody
else to the Carmalt. matter) was that $10,00Q was about the proper
limit to set for counsel's salary in a Reserve bank.
I trust that this brief statement will disabuse you of
the impression that the Board's recent action was in some may conAs soon as I have time I
nected with the Carmalt matter.
of course, read carefully the memorandum on the Carmalt matter
which was prepared for your information.


with much, if not with all, of what you write in connection with the cumbersome procedure of the Federal Reserve Board
in matters where Prompt action is highly desirable,' may say that
I fully agree.

Let me in conclusion thank you for having written me so
frankly md fully, and believe me,
Always sincerely yours,
Er. Benjamin Strong,
Governor,Federal Reserve Bank, 4.E,4.1+0,17/71
New york city.



Ea ;

non', ItutratriJK

January 18, 1924.

Itiv You

Dear Mr. Case:

Replying to yours of the 17th inst. I am writing to thank you for
sending me a copy of the minutes of the Open Market Committee meeting held at
your bank lest Monday.

The day at the bank was a very interesting and satisfactory one
and I was glad I was able to be present.
Let me take this occasion to express again what I stated at the meeting,
and which further reflection has led me to believe is a very important consideration for Us not to lose sight of in our open market operations plans, to wit, that
there are indications of a disposition upon the part of those who are watching the
workings of the Federal Reserve banks to be critical of what they regard as an
assumption of paternalism on the part of the Aeserve banks for general conditions.
We should not give any encouragement to the development of that suspicion by any
unnecessary open market operations on our part.
Just because open market operations exercise a considerable influence at certain times, they should be conducted
with the greatest discretion.
I hope the "waiting policy" generally agreed upon
at the conference will be pretty strictly adhered to until conditions indicate more
clearly than they do now that a departure from that policy is advisable.
I am
convinced that patience is a necessary virtue in good Federal Reserve administration.
Let us not at the present time feel that we are doing nothing if we are not
Reserve bank inaction is not infrequently a very effective form of
What I have just said may sound somewhat dogmatic and preachy, but you
will forgive me as I am,writing in a hurry.
Very sincerely yours,
(signed) A. C. MILLER

Mr. J. H. Case,
Deputy Governor,
Federal Reserve Bunk,
New York City.




Fr13 2 7 1924



February 21, 1924.

Dear Mr. 3trong:


If you have not already seen it, I call your

attention to the current issue of "The Index," which is
the monthly publication of The New York Trust Company.
It contains an article on recent changes in
the Federal Reserve Board's statement which have given
rise to misunderstanding and some adverse comment.


writer for "The Index" shows intelligence and has either
taken the pains to consult the terms of the Federal Reserve Act or to advise with someone familiar with the
I am encouraged by this article

nrovisions of the Act.

to believe that we need fear little in the way of confusion
or disturbance of mind in connection with the changes in

the statement of the reserve ratios which are in contempla,
tion, after the matter has been given a little thought by
the financial writers.


Very sincerely yours,

Mr. Benjamin Strong,
Governor, Federal Reserve Bank,
New York City.






March 1, 1924.

Eon cher Confrere:
I beThanks for your bully note of February 27th.
lieve it has given me even more satisfaction to read it than it
did you to write it. The information it contains regarding the
origin of the article in "The Index" is gratifying and reassuring in the extreme.. It seems almost too good to be true.
feel like crying "A Daniel has come to judgment."

How much trouble and tribulation you older fellows up
there in New York might have spared yourselvesand us down here,
It is very comfortif you had gotten Burgess on the job sooner.
ing to know you have a man of that kind on the premises in New
The next thing I should say is to devise some way of findYork.
If only Mr. Jay, at the time
ing out when and how to use him.
he vas called upon by the curb reporters to explain the meaning
of the changes made in the weekly statement of the Reserve banks
-early in January, had turned to Mr. Burgess for leading and light,
Burgess could have told him in his Fsentle way that all the fuss
One of the rarest things
and fuming was "Much ado about nothing."
in the world, my good friend, is a dispassionate, objective mind free from prejudice, suspicion or other subconscious bugaboo.
If I am not mistaken, Burgess has many of the qualifications necessary in a mentor to you old heads when you get excited about the
mischievous machinations of some of us fellows down here.
And, by the way, this leads me to suggest that you
Burgess a copy of your letter to me of February 16th and ask
If he
to draft a reply to it, "Like a gentleman unafraid."
do as good a job as the article in "The Index", I would find
little, I think, to change in it.


All of this is by way of a retort courteous and for the
sake of the game.
Always sincerely yours,

Lr. Benjamin Strong,
Governor, Federal Reserve Bank,
New York City.




?A08 ii3 JAS





T.11. 1 16 M 5-24











CI< \if

JUL2 1924







WT. 16 2M 1-24







36F MQ



27TH. Ic0-4

























,SEP 13



WT. 16 2M 1-24









































1SEP 13 ;Y24



October 31, 1924.

Dear Mr. Strong:

I am very glad to learn from yours of October
28th that you are coming over next week. There is very
much that I want to talk with you about prior to the
conference of November 10th.
I expect to be pretty well recovered from the
effects of the attack of flu I have had by next week.
I note what you say with respect to certain
transactions of a confidential character that are now
going on in connection with gold, and I think it is understood here that care must be exercised at this end in
giving effect to the wishes of governments and institutions for whose account these transactions are taking

It will be mighty good to see you again.

With my best wishes, believe me, as ever,
Sincerely yours,

a e'
Mr. Benjamin Strong,
Governor, 2ederal Reserve Bank,
New York City.




Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102