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ci G

Norman legacy: Eddie George (left), Bank Governor, and William McDonough,
president of Federal Reserve Bank of New York, with bust of Montagu Norman,
at Bank Museum exhibition of Central Bank Co-operation


It's a nice tunnel, but where were the trains?
Sorry, guy, we couldn't get the parts
TBrunel or Stephenson, digging the

tion from Wembley. The company that

hole was the hard bit. Your navvies hacked

owns the ageing stadium is putting its hand

and blasted their way through the Box

out, like me, for some lottery money. It
changed its name from the Greyhound
Racing Association and survives by the

escarpment or the Kilsby ridge until at last
they saw daylight. Then you put rails down
and ran trains on them. That was the easy
bit. Since those heroic days it has become

grace of its bankers. If Wembley, why not

Aintree? It needs money spent and I am

more difficult, driving Sir Alastair Morton to
impotent fury. His navvies hacked and blast-

ed their way beneath the Channel and dug
him a beautiful hole, all ready for the trains
. .. Trains? What trains? You want them to
start right away? Be reasonable, guy, they
changed the specifications and we can't get
the parts. The first ones will be coming along

in the new year. Mark you, with this new
technology, they'll need to be run in and you
must expect teething troubles. Wossat?

What was wrong with the old technology?
You know how it is, guy, the boys must have

their toys. Besides, we get so held up with
Common Market regulations, you wouldn't
believe. Still, I suppose that's progress, innit?
Honest, if I was you, I wouldn't have told the
punters they could turn up and drive on. Not

Land-Rovers, anyhow. Look at those

geezers, haven't they heard of waiting their
turn? Tell them the service has been delayed
due to unforeseen circumstances. Tell 'em
there's fish on the line. They're your
bankers? Tough on them. By this time Sir

sure Sir Richard Rogers would oblige. Why

would make a serious dent in the overdraft.
(It would make a dent, too, in the proceeds
of privatisation.) Failing that, Sir Alastair has
to pray for a summer when everything, finally, works. He must have the revenues if he is
to stay in the race. Some of his troubles he
shares with Brunel. Box Tunnel in its time
brought out the health-and-safety experts -

wouldn't it be dark and dangerous inside,
shouldn't the Great Western be required to
light it? Brunel told them that for half the
year it would be just as dark outside the tunnel, owing to a natural phenomenon called
night. Inside, there would be fewer things to

go wrong. He had one advantage that Sir
Alastair must envy and might emulate. He
could rely on steam traction.

Where the money goes

Alastair's eyes are going round like pinwheels. Bankers do not wait before they
charge interest, and by the end of last year

I THOUGHT that the European Bank for
Reconstruction and Development had gone
into hibernation. I had not heard from it
Eurotunnel owed them £8 billion. His job is since the absurd Jacques Attali was exiled
to make its revenues run fast enough to from its marble halls. Now it has woken up
catch up with its interest bill. When Eurotun- to tell us that it still knows how to get
nel tapped its shareholders for money, a year through money and in two years' time will
ago, that crossover point was pencilled in for have none left to lend, so will the share1998, but the forecasts in that prospectus holders (like us) please ante up some
have been missed. The bankers have been more? With 24 costly directors to keep on
given a year's start, and their bill is com- the road, the shareholders get a return of
pounding and accelerating. We are not going 0.034 per cent on their investment, which
bust, says Sir Alastair.
will not encourage them to reinvest. International financial bureaucracies like this

not Epsom, or the Forth Bridge, or Barings? How lucky we are, as I say, to have
found this unlimited supply of cost-free
money. Unlimited demand will follow. Lim-

ited companies are joining in. We monuments must fall apart or stick together.

Norman's conquest
THE GOVERNOR of the Bank of England
writes to his opposite number at the Federal

Reserve Bank of New York: 'First of all,
you're a perfect old dear.' His letters are
headed 'Dear Ben' or 'Dear Strongy' and
signed 'Love from MN.' Not to be misconstrued: Montagu Norman and Benjamin
Strong built up a friendship and alliance
which first taught central bankers how to
work together (all except the French, of
course.) An exhibition at the Bank now tells
the story. Note the cartoon of Norman striding ashore, magnetic rays streaming from his
fingers, as Uncle Sam nails down his gold
reserves and the torch leaps from the Statue

of Liberty's hands. Governor Strong had
come under the wand of the magician.

THINGS HAVE gone too far when the
National Provident

suspends Institutio

brasserie just opposite the Gare du Nord
- but do not ask Sir Alastair to get you an
upgrade to first class on the Eurostar train.
'Upgrade?' he snorts: `I'm suing them.' He

liked, to good European causes such as

two members of its staff from duty, after
allegations that they shared their bed (or a
bed) with a Conservative MP. Of course
people with fiduciary responsibilities must
be careful of the company they keep, but
there is no suggestion that NPI's security
was compromised, or that anything interesting happened in its time or in its office.
As Andrew Large, chairman of the Securities and Investments Board, has put it:

reconstruction and development.

`There is a wide range of possible permuta-

certainly is. His claim against the railways is

More lottery winners

can easily outlive their usefulness, if indeed

I'm suing them

they ever reach it. If its owners were to
send the directors away and put the money

YOU CAN help his cause, as
lunching in

Paris - there


a good

going to arbitration, and an outright win
would be worth, on Eurotunnel's calculations, £2.3 billion. Paid into the banks, it

I did, by
in a building society, it would earn them
£500 million a year. This could go, if they

tions, and I don't intend to speculate on

MY PLAN for declaring this column a

which will be in demand and which won't.
The point for us as regulators is to recognise that these demands can now be satisfied in a way that was previously not possi-

national monument has run into competi-

ble.' It just takes flexibility.
THE SPECTATOR 15 April 1995 29


January 11, 1925.

The visit of Mr. Montagu Norman, Governor of the Bank of
England, and Sir Alan G. Anderson, who rill become Deputy Governor

in March, was made without any preliminary disclosure of the object
of their trip, except that personal correspondence which preceded
their arrival had indicated that they might be coming over to
discuss the British monetary position.

Then they arrived, on December 2J, 1924, they explained
that they were not commissioned either by the Government or by the
Bank of England to conduct definite negotiations which would result
in the resumption of specie payment and the establishment of a free
gold market in England, because their government had not yet, in
fact, made any decision on that subject.

So that no arrangement

looking to resumption could be more than tentative in any event.
Mr. Norman stated that the privary object of their visit

was to ascertain the views of two or three people (especially J.-,
and B.S.) as to whet'er the time had yet arrived for the return to
the gold standard, and, if he found that opinion favored doing so,


it vas his purpose to secure information, first, as to what was the
likely monetary and credit policy of the future in this country;

and, second, what facilities could likely be arranged to insure the
maintenance of gold payment once it was undertaken.
He explained that there had developed a decided improvement,

especially during the last year or eighteen months, in the general
stabilization of business, financial and monetary conditions abroad,

this being true practically of the entire of Eurore, with the
e_ception of 7.ussia, Turkey and the -eninsula;

that political con-

Jan. 11, 1925.


ditions were also more settled;

that the adoption of the Dawes plan

finally justified a more hopeful outlook as to the reparation disrutes;

and these, together with the definite funding of the 3ritish debt to
the United States, made the time appropriate for considering what
should be done about the gold standard.

That the existence of lower

interest rates in America than in London had made it Possible to
substantially close the London market to foreign borrowings except those
conducted under the auspices of the finance section of the League of
Nations and those roL,uired by the British dominions and colonies.


that, on the other hand, our markets have been freely opened to foreign
loans, thereby greatly relieving the burden upon London and facilitating a decision as to monetary polic:/.

He stated that others than

those in the F.R.B. (J.P.M.) whom he had consulted wore unhesitating
in expressing the view that the time for deciding upon a resumption of
gold payment by England had arrived, and, with assistance in this
country, it should be possible to resume and to maintain resumption
after the present Statute prohibiting the export of gold from England
expired on the 31 of December next.

This was the opinion which I expressed to him, with the
qualification, however, that there were three factors in the situation
which might operate at times so seriously to their disadvantage that
there was in fact a real hazard to be reckoned with before final
resumption was attempted:

that the volume of foreign loans placed in this

market last year (1924) was unusual, - much the largest ever known.
It wad due to relative conditions in their country and ours which
facilitated it beyond what might be possible hereafter, and that any
great reduction in the volume of foreign loans place

in this country


Jan. 11, 19g5.

ight result in a strain on the exchange for which they should be

that the gradual funding of foreign debts owing

to our government, together with other payments such as those for
war materials sold abroad, relief loans, costa of the army of occupation, etc., would likely require in the near future (a few years)

payments of possibly

250,000,000 a year in addition to the annual

service of existing foreign government loans of an unproductive nature,

probably amounting to 450,000,000 additional;

so that there was

likelihood that hereafter there would be not less than


or ,:600,000,000 of payments of an unusual character, not growing out

of current trade, to be provided for in some way, and that this amount'

would likely increase rather than decrease.

that there must be a plain recognition of



that in a new country such as ours, with an enthusiastic, energetic,

and optiAstic population, where enterprise at times was hifghly stimulated and the returns upon capital much greater than in other countries,

there would be times when speculative tendencies would make it necessary for the Federal Reserve Banks to w:ertise restraint 14- increased

discount rates, and possibly rather high money rates in the aarket.
Should such ti es arise, domestic considerations would likely VItmsIdeL

foreign sympathies, and t10 Trotection of our own economic situation,

forcing us to higher rates, might force them to maintain still higher
rates, with some resulting hardship to business, etc.
lin of these, and many collateral iliestions, were discussed
at great length.

But Llr. Norman's feelings, which, in fact, are

shared by me, indicated that the alternative -- failure of resumption
of gold payment -- being a confession by the British Government that


Jan. 11, 1925.

might result in a strain on the exchange for which they should be



Jan. 11, 1925.

it was i possible to resume, would be followed by a long period of
unsettled conditions too serious really to contemplate.


It would

mean violent fluctuations in the exchanges, with probably progressive
deterioration of the values of foreign currencies vis a vis the ('ollar;


it would prove an incentive to all of those who were advancing

novel ideas for nostrums and e.1:pedients other than the gold standard

to sell their wares;

and incentive to Governments at U.:al:Ha to

undertake various types of paper money e.kpeOients and inflation;


might, indeed, result in the United States draining the world of gold
with the effect that, after some attempt at some other mechanism for
the regulation of credit and prices, some kind of a monetary crisis
would finally result in ultiliate restoration of gold to its former

position, but only after a period of hardship and suffering, and
possibly some social and political disorder.

After exchanges of views on this and other matters, which
continued until the fifth instant (Monday), I reported to the

Executive Committee of the bank in a very general way that Governor
Norman was here for the purpose of discussing these matters, and that
I hoped to have something definite to submit to the Directors at
their meeting on Thursday, the eighth instant.

On that date a statement of substantially the above
character ras made 60 the Directors, all of whom attended the meeting,

and, in addition, the following statement was made to the Directors
on the auestion of policy of the Federal Reserve System for the
future, and as to the facilities to which Governor Norman had
referred as essential before resumption of gold payment could be

It uas explained that he had stated that the security of
gold payment by England depended upon a certain degree of stability


in this


January 11, 1925.

that is to s y, that we did not intend to embark

upon a deliberate policy of deflation, nor, on the other hand, permit
rthe development of any considerable inflation of prices.

He also

explained that he felt that it was important, if it could be accom-

olishe, that the London market remain closed to foreign loans, so
4, far as possible, and that our market should remain open, so far as
possible, which implies, of course, somewhat higher interest rates
in England than in this country.

He stoke, for instance, of the

danger which they would encounter if we should have a price decline
or a Trice advance of anything like 207c.

I explained to the Directors that I had rointed out to
Governor Norman that no engagements could be made or this subject;

that it was my belief, and I thought it was shared by all others in
the Fe'zieral Reserve System, that our whole policy in the future, as

in the past, would be directed towards stability of prices so far as
it was possible for us to influence prices, but that it was a matter
on which no engagements could be made, as we must be free at all times
to reduce or increase

iscount rates and to establish our open market

policy so as to adequately meet domestic developments.
In reply to questions as to what he felt was reasonable to
expect from us on that score, he stated to me, as he did to the
Directors at lunch, that he could simply 'express tie hope" (and
no more than the hope) that this would be the course of affairs

hereafter in the United States./

As to facilities:

The following plan had finally been

suggested, which seemed to meet the needs of the situation and the

reuirements of the Federal Reserve act.

That the Federal Reserve

Bank of New York, by e=hange of letters with the Bank of England,
would engage for a Period of two years after resumption of gold

Jan. 11, 1925.


payment to place at the disposal of the Bank of England a sum of
gold not to exceed at any one time 1200,000,000.

This would be

simply in the form of a gold credit to be used if needed.
could either be shipped to England;

The gold

earmarked and held in our vault;

or used to make payments in this country.

mo the extent that it was

used, the Bank of England would give us credit on their books fcr
the amount so used in account current.

For the security of that

account, they would deliver to us an obligation of the British Treasury, payable at the maturity of the credit in dollars.

As credit

balances arose, it would be arranged that so much as possible,

- in

a general way, say, one-half of the account, - would be invested by
the Bank of England for account of the Federal Reserve Banks in
Sterling Commercial Bills of the character eligible for discount at
the Bank of England and conforming to the provisions of the Federal
Reserve Act;

the repayment of those bills to be guaranteeC by the

Bank of England.

The account in this form would be fle : :ible and

capable of use; that is to say, increased or decreased as conditions
required, and the effect would be to give us an obligation of the
Bank of England with an obligation of the British Government to
secure it;

and, to the extent invested in bills, we would have the

names of drawers, indorsers and acceptors of the bills purchased.
The transaction would, therefore, be a gold transaction as the account
would be repayable in gold, or its equivalent, at the and of two

No discussion of terms for the account had been concluded

when the report to the Directors was made.
In this connection, however, it was eLplained that in addition to a credit of .:200,000,000 of gold, the British Government

would likely find it necessary to arrange a somewhat larger credit,
possibly as much as ,;3C0,000,000 through their bankers in this


country and their associates.

Jan. 11, 1925.

kith that credit the Federal Re-

serve Bank would have nothing to do,

exce-2t that the Federal Re-

serve Bank would be consulted as to the amount of the respective
credits to be used from time to time, and which should be used, in
order that the effectiveness of the bank's interest in t''e money

market might not be impaired.

It was also explained that it was the intention of the Bank
of England to furnish gold to all Tarties, as before the war, on
demand, and it might result in some considerable gold shipments,

although the credits now being discussed were for the purpose of
moderating such shipments to the extent possible.
It was explained to the Directors that Governor Crissinger
and Dr. Stewart had been present during some of the discussions,

were thoroughly acquainted with the whole proposal and the conditions
surrourding it, and favored the transaction in case it should be

Also that Mr. Mellon had been consulted and had exrressed

hi self as in favor of it.

During the course of the meeting a

message was received from Vashington to the effect that Governor
Crissinger had consulted the members of the Board individually and
found them all favorable to the proposals being discussed, and
anticipated that when submitted for consideration their approval
vould be unanimous.

Inasmuch as the entire discussion with Governor Norman
was tentative and any decision to be made would have to be made
by the British Government, it was felt unnecessary to take any
formal action whatever;

but the Directors did, informally, indicate

their approval of the proposed procedure, and expressed entire
willingness to support the officers of the bank in making the
necessary arrangements in case we were asked to do so.

It was also



Jan. 11, 1925.

informally agreed that the Chairman would appoint a committee of

three members of the Board to confer with the officers of the bank
in preparing forms of letters to be exchanged at some future date
between the Federal Reserve Bank of New York and the Bank of England
in case the matter was proceeded with.


On the afternoon of Tuesday, January 13, Messrs.
LeGarrah, c;oolley and Young called at the bank and rent over a

preliminary draft of a letter which might be addressed to us by
the Bank: of 7Angland in the event of the decision to resume specie


There were two points in connection with the exchange of
letters which appeared to present the possibility of difficulty:
One was the terms of the credit, and the other the arrangement by
which re would have some control of which credit was used, and the
e:_tent to which each was user .

After considerable A.scussion, it was agreed that the
gen ral tenor of the letter was satisfactory, and that if we were
able to make an effective arrangement, which, nevertheless, might be
informal, by which we would e:..:ereise sufficient influence over the

we made of the two credits, we should make no commission charge
whatever on the total credit granted, simply charging a rate of
interest somewhat in excess of the discount rate for ninety-day
bills from ti e to ti

in effect, such, rate to be sufficient, how-

ever, to overcome any desire on the part of the British Govern:ient

to employ Federal Reserve funds in preference to bankers funds.


was explained that this understanding could probably not be made
in the letter, but would need to be the subject of discussions on
the other side.

And it was understood that if developments indicated

the imminence of a favorable decision by the British Government, I




y 4,

? -`'5

eser Nornh:
Your not:: of April 22 is, of c.7)urs, v!ost

$e Orve the, asaie objects to

collplieh, fme. the

Lrianzttent ncl :oncludc, both. et, to your moncy ms-ket Pnd

our own, owum


za..; to my vs6ociLtee to he. ae to rset our respective situations as such trrpnreuents ever ,aem Le, Ithen eo much tha,t is uncerthin in
t'utur. h!...; to he anticipate(1.

Plehs:, be assurecl of our appreciation.

elnorelr yours,

Right Honorable Montagu C. Norlasn,
Governor, Bank of England,


W. A.1110

May 11, 1926


Is it fundmertally an industrial or political
contest, and a show of power?

A shrewd and impartial economic observer, an American with
several years' residence in London and close hand contacts there, has

something of this view of the struggle now on in England:
That the labor leaders' primary object is not to force a maintenance
of the present wage scales or the continuance of a subsidy which will permit
this maintenance, but rather to force into view the question of the nationalization of the coal mines, as the first step in the program for a general
nationalization of British industry; that the strike has not been called in
consequence of a referendum, but rather by the labor leaders on their own

responsibility, and that at the present time the more radical party is in
control; that the more conservative labor leaders are being swept along by
the tide, which they have been unable to stem; that it was the belief of the

more extreme party that the government would be forced to accept some kind of
a compromise which would demonstrate the dominance of the labor unions, and

that if this were successful it would be simply the first of a series of similar movements directed towards the some ultimate goal.
There is much to support this point of view.

In the latest issue of

the London "Nation," a liberal organ with what are called advanced views,
there appeared a significant editorial entitled "What can labor hope to gain
by the strike?"

At most, on the surface it would seem to be some palliation

of the proposals of the Coal Commission's report, and especially those involving a reduction of coal miners' wages.

Some of the main facts in the

situation that stand out are these:

Much has been said about the extremely low wages prevailing in

the coal mining industry in Great Britain.

Little has been said of the fact


that the average wage cost, per ton mined, for the last two years has been
nearly 100 per cent above the immediate pre-war average; and that a great number
of other wages in Great Britain are little higher than those of the coal mining.

Coal production in England has been nearly stationary since 1913,

but the number of miners employed in the last year, under the subsidy, has been
10 per cent greater.

Normally nearly onu-third of British coal is exported, and the

price of this export coal broadly controls the price of the entire product; i. e.,

the British coal industry is largely dominated by international conditions.

Great Britain is suffering from the decline in international

or world trade, and especially from the international demand for coal, so that
its coal exports last year were nearly one-quarter less than in 1913.

Yet, in the face of this decline, England's share in the total

of world trade has increased considerably over 1913, and is no* back to about
the percentage of twenty years ago.

The industrial depression in England is

therefore not dominantly of domestic character, but rather the result of external conditions.

The crisis in the coal industry has, of course, been world

wide, and this includes the United States, where bituminous mining has been,
in the last few years, about our least prosperous industry.

Much the same

conditions hold for the United States as for Great Britain.

Taken as a whole, the actual loss ex-subsidy on the total of

all British coal mined under the subsidy appears to have been about a shilling
and a half per ton, which means that, at present prices, without the subsidy,
a large number of English mines would have had to close down.
Much has been made of the steadily declining output per man, and the
figures which have often been published are very striking:


Per ':,-orker

per year




281 tuns


But it is well to note that, first of all, something of the same decline of output has characterized the anthracite coal industry in this country,

which approaches more nearly to English conditions of extraction than does our
bituminous coal industry.

Secondly, that the output per in Great Britain

has been very considerably higher than in Germany or France, and nearly twice
that of Belgium.

Our bituminous coal industry works under much more advantageous

natural conditions - wide seams, much nearer the surface - which permit of a
much larger use of machine mining than appears to be possible in Great Britain,
where the seams are narrower and the older mines very deep.

The situation

there has been further aggravated by the fact that in the north new coal fields
have been developed, permitting much cheaper worl:ing and bringing serious com-

petition to the older mines.

This has brought to the fore the problem of relo-

cation and transfer of large numbers of mine workers, and as many villages are
little more than mining hamlets, this would involve the abandonment of a large
number of habitable houses.
A further fact is that, as is clearly set forth in the Coal Commission's

report, part of the present difficulty is due to the raise in miners' wages two
years or more ago, at the time that German coal production was badly disorganized
by the occupation of the Ruhr, the demand for British coal heavy, and mining
profits high.

The reopening of the Ruhr brought a coal surplus, of which the

present situation is the logical result.

In the meantime, there has been a protracted fall in commodity prices
in Great Britain, and same reduction in the average cost of living; so that


the protest of the miners' unions against any "reduction in the standard of
living" is actually an endeavor to maintain the rrther artificial conditions
produced by the Ruhr occupation.
But why a "general strike?"

Britain of any serious character.

It is the first ever attempted in Great

It is as yet very far from being really

It does not even include the larger part of the full-union strength

in Great Britain.

Very roughly, about one-third of British labor is now unionized, or

about 5 and a half millions of workers in all, and the present strike appears
not thus far to involve much less than half the total of union workers.

It is,

nevertheless, serious enough, and in the minds of some observers presents one
of the most momentous struggles of recent years.

There is little question that

the strike is largely due to the steady growth of "class feeling" in Britain,

and its success will depend largely upon how much support it is to gain from
the groat body of British workers.
One of the main arguments of the trade unionists is that the acceptance
of the Coal Commission's proposals would tend towards a lowering of the standards
cf living in all the chief nations of Europe, and is a concerted move in that

The success of the strike, on the other hand, would undoubtedly

strongly influence similar movements in France, Germany, and elsewhere, and might

readily lead to a general strike in Europe for the domination of the labor
parties and the general nationalization of industry.

The strike is therefore,

in a more pronounced form than almost any other, a real "class struggle."

It will therefore be of great interest, should the strike be prolonged
and become very bitter, to observe the effect outside of England, and especially
in the United States.

As is shown in the chart on a preceding page, there has

been in England since the war generally a decline of wages more or less corresponding to the decline in general prices and the average cost of living.



the United States there has been no such wage decline.

After a sharp fall

in 1921, the tendency of wages in this country has been upward, rather than

downward, and has now risen on the average to very near the peak reached in
1920, that is to say, to about 120 per cent above the pre-war level.

In the

meantime, the average urban and industrial cost of living appears not to have
risen much more than about 75 per cent, so that the present "spread" between
this and the average of wages in this country is unparalleled in half a century.

The effect of all this upon organized labor and workers generally
has been striking.

"Labor" has become conservative, "constructive," statistical,

and financially ambitious.
courage savings deposits;

It has established labor banks and sought to enit has opened its own bureaus of statistical re-

search, with competent and careful statisticians in charge.

And, in a very

broad way, its thoughts have changed from problems of division to those of
that is to say,


from dividing up

"the usufruct of capital" to

join in the movement for high wages through high production and greater efficiency.

There is no question of a very radical change in the sentiment

and thoughts of workers within t1-,e last 15 years.

And with the wide diffusion

among the workers of so-called luxuries, and especially motor cars, radio, and
the like, and the great increase in the ownership of their own homes, it would

be astonishing if this change in feelings and in aim among the workers had not
acquired a strong momentum.
It has been very different in Europe.

There it has been almost

continuous demoralization of trade and industry from almost every possible

the inflation of currencies and their consequent collapse; the

insane outburst of nationalistic feeling; and the raising of tariff barriers
by almost all the newly created

"succession states,"

and the patriotic

endeavor to promote "home industry" at whatever economic cost;

th6 splitting

up of large estates in some of the eastern countries, with a consequent decline
 of production

and therefor,) a decrease of buying power; the isolation of Russia;


the great burdens of increased taxation; and heavens knows what else.
All this has been deeply felt in Great Britain, which is essentially

a trading nation, and by her workers and most other classes as well.

labor should now call a "general strike" after four or five pretty gruelling
years is of deep interest as revealing what is really in the minds of labor's

It seems pretty clearly not what is coming to be known as "the

American idea," of wide-spread well-being through greater efficiency and increased product, but rather the division of the relatively meager product of
the present day.

The six pence per ton royalty enjoyed by 4,000 owners of

English coal lands seems to arouse deeper emotions than the possibility of
six shillings increase in the average of general wages through increased output.
But there are signs that this may not continue indefinitely.
Already a committee from the labor unions has quietly visited the United
States, studied conditions here, and gone home to make their report.


recently a little book has appeared in Groat Britain, called "The Secret of
High 'dages," which is making a considerable stir.

It is written by two

English engineers, who likewise came to this country to find the secrets of
our prosperity.

It has been greeted in England as "the new industrial gospel."

Everywhere the British worker is being told that the American coal miner receives something like three times the wages of a British coal miner because he

mines on the average nearly three times as much coal.

An American bricklayer

gets three times the wages of his British brethren because he lays three times
as many bricks.

This is the secret.

It will be interesting to observe how rapidly the leven may spread.

Federal Reserve Board Statement for the Press for Release in onday Morning Papers
June 1, 1925. The June 1925 Issue of the Federal Reserve TAalletin -Will Carry the :Aittsifiev4-46
Following Statement Concerning the Return of Great Britain to the Gold Standard017-e1V4

c-Rrt $1.
Restoration of gold standard.

Restoration of a free gold market in London after a period of ten years
has put Great Britain once more on the gold standard.

At the time of England's

return to a cold basis several other countries took similar action and this,

together with the fact that many other European currencies have been stabilized
with reference to gold for more than a year, removes from the major part of the

world's commerce and finance the uncertainties arising from wide and abrupt fluctuations of exchanges.

ree gold movements between countries that have reestablished the gold

ll not only limit fluctuations of exchange rates but will again relate

the gold holdings of central banks to credit conditions at home and

thus make changes in their reserve positions important factors in

With the principal money markets of the world once more

arkets and the exchanges between them stable, the flow of funds be-

markets will respond more freely to differences in money rates and


Credits in countries on the gold standard become interchangeable

at par with dollar credits, which have been continuously equivalent

d short-time funds will thus tend to be distributed more nearly in

current demands as reflected in higher rates.

With the removal of

ising from the risks of exchange, borrowing particularly for purposes

g international trade will be drawn to the markets whore money is

hus the resumption of gold payments by the chief trading countries

d furnishes a lasis for the functioning of those forces which before

ated to maintain a close contact between the money markets of the

n's gold standard act.

e decision of the 'British Government to remove the embargo on the


exportat'on of gold -me announced by the Chancellor of the Exchequer on April 28
when he stated that the law of 1920 prohibiting gold exports for a period of
five years, except under special license, would be permitted to lapse on December
31, r23, and that for the reniainder of this year the Bank of England world be
given a general license to export gold.

Control of gold exports in Great Britain,

which from the outbreak of the war until the legal prohibition in 1920, was by
informal methods, has applied since that time to all gold except to newly mined
gold produced in the Eritish Dominions and imported into England,
in removing restrictions upon gold exports the British Government adopted
certain safegunrds against the dissipation of the gold reserves through the reintroduction of gold coins into circulation and against the speculative hazards

to which the pound sterling might be exposed in the period immediately following

These safeguards were incorporated in a bill "tc facilitate the

return to a gold standard and for purposes connected therewith" to be known as
the Gold Standard Act, 1925, which became law on May 13.

It was recognized that

a return to the use of gold currency in domestic circulation was not necessary for

the purpose of the operation of the international gold standard and the Chancellor
of the Exchequer said that this use of gold would be an unwarrantable extravagance
which the nresent financial stringency does not permit England to indulge in.


order to prevent the loss of gold into circulation the bill relieves the Bank of
England of the obligation to redeem ita own notes and currency notes in gold coin
and relieves the Mint of the obligation to coin gold bullion presented to it by
anyone except the Bark of England.

The Dank, however, is required to sell gold in

bars containing approximately 400 ounces to any person at the price of b3 17s 10 1/2d

per ounce gold of standard fineness, that is, in units of about b 1,700.


while the Bank is protected against a demand for gold coin for domestic circulation,
it stands ready to meet all demands for gold bullion for export purposes.


provision of the Bank Act of 1844, under which the Bank of England is obliged to


purchase at a fixed price

all gold offered, remains in force.

As a means of supporting sterling exchange in case of speculative
pressure the gold standard bill furthermore authorizes the Treasury to "issue,

either within or without the United Kingdom and either in British or in any other
currency such securities bearing such rate of interest and subject to such condi-

tions as to repayment, redemption, or otherwise as they think fit," and to
"guarantee in such manner and on such terms and conditions as they think proper
the payment of interest and principal of any loan which may be raised for such
All loans raised under this provision must be repaid within two years


and guarantees given by the Treasury will also expire in two years from the date
upon which they are given.

In furtherance of the objects of these provisions

American credits aggregating 3300,000,000 have been established, the details of
which are discussed later in this review.
Report of Committee of Experts.
In reaching a decision to return to the gold standard at this time the

British Government was guided by the recommendations of a committee which, in
addition to considering whether the time had come to amalgamate the Treasury
note issue with the bank of England note issue, also entered into the question
whether a return to the gold standard on the basis of the pre-war sovereign was
desirable and if so how and when the steps required to achieve it should be taken.
In its report the committee expresses its agreement with the principles
laid down in 1918 by the Cunliffe committee and after considering various alternatives reaches the conclusion that the gold standard must bo reestablished in
England on the basis of the pro -war gold content of tho sovereign.

Neither de-

valuation nor the substitution of the commodity price level for gold as the regulating principle of the currency appeared to the committee to be desirable.


committee's analysis of England's position in foreign trade indicated that the
existing volume of exports, visible and invisible, together with the income derived


from foreign investments, was undoubtedly sufficient to meet England's foreign debts,
to pay for necessary imports, leaving a moderate balance for foreign investments.

"In these circumstances," the committee continues, "a free gold market could readily
1,e established and maintained at the pre-war parity, provided that by control of

credit we adjusted the internal purchasing power of the pound to its exchange parity,
and restricted our foreign investments to our normal export surplus."

While the

committee believed that the price level in England was still too high relative to
the level in the United States, it was its opinion that the adjustment could be
accomplished without serious disturbance, particularly in view of the fact that
sterling exchange at the time of the report in February was only 1 1/2 per cent
below parity.

On the su'.-ject of the amalgamation of the two kinds of note issue, the

Bank of England note, issued only in exchange for gold, and the currency note,
issued by the Treasury and secured largely by Government obligations, the com-

mittee recommended that no action be taken for the present, that the limit of the
currency issue, by %thich the actual maximum for one year becomes the legal maximum

for the next year, he maintained and that the Bank of England take over the currency

notes at such a time in the future when experience will have demonstrated what
amount can be kept in circulation without resulting in a drain on the Bank's gold

As an immediate step the committee reconiended that the i, 27,000,000

of gold held against currency notes be transferred to the Bank and an equal amount
of Tank notes be substituted in the currency note account.

This recommendation

has been adopted and carried out.
Financial policy prior to resumption.
Important factors placing Great Britain in a position to reestablish the

gold standard have been the balancing of the budget, reduction in the floating debt,
funding of the indebtedness to the United States, rigid adherence to the limitation

upon note issue, and a policy of credit control.

The budget not only has been



but there has been a surplus which enabled the Government to reduce the

floating debt held in large part by the banks.

Between the end of 1920 and the

end of 1924 this debt was reduced by nearly 40 per cent, or I. 560,000,000, and the
reduction was accompanied by substantial declines, especially during 1921 and the
early part of 1922, in the investments, bill holdings, and deposits of the joint
stock banks.

With the decline in their holdings of Treasury bills, the banks wore

in a position to meet the increased credit demands of commerce and industry without
increasing the total volume bank credit in use.

The policy of maintaining re-

latively high money rates, especially during the past year, and of discouraging
excessive foreign lending contributed to the advance of sterling exchange toward

As a consequence of these developments the extent of further necessary

adjustment in the exchange rate and in financial conditions following the announce-

ment of the removal of the gold embargo was greatly diminished, and the ability of
Great Britain to maintain an effective gold standard greatly increased.
Course of sterling exchange.
Sterling exchange in the New York market since 1919, when the pegging
of the exchanges was discontinued, has undergone wide fluctuations.

The most

rapid and continuous advance in sterling occurred between the middle of 1921 and
the spring of 1923, when owing partly to the operation of the factors already
mentioned and to trade conditions prices in Great Britain declined considerably,
while prices in the United States advanced.

From less than 4 per cent below par

sterling exchange declined during the remainder of 1923 to a low point in January,


than 12 per cent below par.

in almost uninterrupted rise during

1924 and the early part of l925 brought sterling to within 1 per cent of parity
at the time of the announcement of the resumption of gold payments.


In order to relieve the exchange market during the remainder of this
year from demands for dollar exchange by the Treasury, particularly in the autumn
when Great

Britain's purchases of agricultural products abroad are heaviest, the


Chancellor of the Exchequer announced that a sufficient amount of dollar exchange
had been acquired to meet all payments on the American debt not only in June but
also in December.

Provisions for supporting exchange,
It was recognized by the committee advising the Government on the
problem connected with resumption that the advance of the pound sterling since
last summer may have been partly due to speculative buying and that when parity
was reached profit taking by speculators might throw a strain on the exchange.
Against this danger the committee regarded as a proper safeguard the existence
of adequate gold reserves and a resolute use of those reserves for the purpose for
which they had been accumulated.

The available reserves were in the committee's

opinion amply sufficient, but if it were deemed wise to aaquire also a foreign
credit, the credit should be used only after a considerable amount of gold had
actually been exported and the use of this credit should be considered from the
point of view of the Bank of England's monetary policy as equivalent to a corresponding loss from its ovn reserves.

"Unless these precautions are taken, borrow-

ing abroad will, as has again and again happened, when it has been resorted to as

a remedy for exchange difficulties, merely aggravate the mischief which it has
been applied to cure."

In announcing the establishment of the credits in

America the Chancellor of the Exchequer said:

"These great credits across the

Atlantic Ocean have been obtained and built up as a solemn warning to speculators
of every kind and of every hue and in every country, of the resistance which they
will encounter and of the reserves with which they will be confronted, if they
attempt to disturb thu Told parity which Groat 'Lritain has now established."
American credits.

Two separate credits have been established in the United States, one by
the British Government and one by the Bank of England.

A credit of q00,000,000

was arranged by the British Government with J. P. Morgan and Company and a credit


of 1200,000,000 arranged by the Bank of England with the Federal Reserve Bank of
New York in participation with other Federal reserve banks and with the approval
of the Federal Reserve Board.

Under its arrangement with the Bank of England the Federal Reserve Bank
of New York undertakes to sell gold on credit to the Bank of England from time to

time during the next two years, but not to exceed $200,000,000 outstanding at any
one time.

The credit is to bear interest to the extent that it is actually used

at a rate 1 per cent above the New York reserve bankls discount rate, with a minimum
.of 4 per cent and a maximum of 6 per cent, or, if the Federal reserve discount rate
exceeds 6 per cent, than at the rediscount rate of the bank.

The rate of interest

paid by the British Government on the credit which it has established is to

be determined in a similar manner.

Upon the purchase of gold the Bank of England

will place on its boobs to the credit of the Federal Reserve Bank of New York an
equivalent deposit in pounds sterling.

This deposit may be used from time to time

by arrangement with the Bank of England in the purchase of eligible sterling commercial bills which shall be guaranteed by the Bank of England, and in that case die.
count earned on the bills will be applied to the payment of interest.
If occasion arises for the use of this credit, support can be given to

sterling exchange either through the purchase of sterling bills in New York or
abroad, or gold can be shipped to other countries on British account.

Thus the

Dank of England could meet a foreign demand for gold without reducing its oval

reserves, or it could replenish its reserves by withdrawing gold from this country
or by earmarking it in New York.

The form in which the credit would be used would

depend upon the circumstances at the time.
In making these arrangements with the Bank of England, the Federal
Reserve Bank of New Ycrk proceeded under authority of the Federal Reserve Act,
which in addition to granting the reserve banks power to make contracts, authorizes
them under rules and regulations prescribed by the Federal Reserve Board to deal in

gold coin or bullion at home or abroad, to purchase and sell in the open market,
at home or abroad, cable transfers or ban%erel acceptances and bills of exchange
of the kinds and maturities eligible for rediscount; and with the consent, or

upon the order and direction of the Federal Reserve Board, to open and maintain
accounts in foreign countries, appoint correspondents and establish agencies in
such countries wheresoever it may be deemed best for the purpose of purchasing,
selling, and collecting bills of exchange, and with the consent of the Federal
Reserve Foard to open and maintain banking accounts for such foreign correspond.
ents or agencies.

In January of this year the Federal Reserve Bank of New York was
authorized by the Federal deserve Board to make the arrangements with the Bank
of England which have been described earlier in this review.

After the passage

of trio Gold Standard Act by the 2ritish Parliament in May, the Federal Reserve
1-loard approved in detail the arrangements made by the New York Federal Reserve

In giving approval the ::,oard believed that the arrangement would be an

effective aid toward general resumption of gold payments.
Comments of Advisory Council.

Commenting upon the participation of the Federal reserve system in the

arrangements made to facilitate the return of Great Dritain to the gold standard
the Federal Advisory Council, which held a regular meeting in Washington on
May 22, said in parts

It is with the deepest satisfaction that the Council has

noted the arrangements now made, with the approval of the Federal Reserve Board,
between the Bank of England, on the one hand, and the several Federal reserve
banks under the auspices of the Federal Reserve Bank of New York on the other.
These arrangements in the view of the Council will benefit not only the two
countries directly involved, but they will enure to the advantage of the entire

The Council feels confident that in the annals of the Federal Reserve

System these arrangements will be written down as one of its proudest and most


constructive achievements.

It is an impressive demonstration of the efficiency

of the Federal Reserve Act, as at present constituted, that We are able to render
assistance on a liberal scale without fear of adverse effect upon our own financial conditions,"
International trade and the gold standard.

Restoration of the gold standard in Great Britain was accompanied by
similar'action by Australia, New Zealand, the Netherlands, and the Dutch East

Gold payments had been resumed in Sweden a year earlier and on June 1

South Africa removed restrictions on gold exports.

The return to a gold basis over

so wide an area was preceded by a continuous advance toward gold parity for about
a year in most of the principal exchanges and by a narrowing of fluctuations


tho value of other currencies.


Furthermore, a number of European countries,

not in a position to restore freedom of gold movements, have maintained the foreign
value of their currencies at a fixed relationship to gold and consequently have
conducted their foreign trade on a gold value basis.

This growth in the area

though still not world wide in which gold has once more been restored to its role
as a standard provides a broader and more stable basis for international trade than

has prevailed at any time since the disorganization of the world's currencies
Which set in with ,the war.

Reestablishment of the gold standard removes from

commerce between nations that element of risk which arose from the uncertainties
of fluctuating exchange rates and free gold movement will effect an influence
towards closer adjustment between price levels in different countries.


significance of the restoration of the international gold standard should be measured not only by the benefits that will result from greater stability; but also
by contrast with the declines and fluctuations in exchange that would have
further postponement of the decisions to resume gold payments.


These decisions

give assurance that the exchanges of those countries Which have returned to the
geld basis will not be subject

to sharp advances and declines and that trade


with these countries, which include the largest purchasers of our agricultural

products, can be conducted and financed with greater confidence and on a more
secure basis.

Restoration of an effective international geld standard from the
viewpoint of the banking situation in the United States is of particular importance because for the first time since the Federal reserve system was established
gold movements, Which for a decade have exerted an abnormal influence upon the

position of the reserve banks, will be more largely controlled by the traditional influences which regulated the flow of gold under normal conditions.














19 20





Sterling Exchange in New York
Monthly Average Rates.







Monday, July 9, 1923.

Attached hereto are copies of the formal Proposal of
the British Government for the funding of the British debt to
the United States, as executed on the 18th of Juno, 1923, by
the British Ambassador, and the Acceptance thereof dated June
19, 1923, executed in behalf of the United States by the Secretary of the Treasury, as Chairman of the World War Foreign Debt
Commission, with the approval of the President, together rith
the form of bond actually executed and delivered on July 5,
1923, by the Counsellor, of the British Embassy at Washington.




JUL 1212211-




otw voK

Inks sly

H R 14254

FEBRUARY 17, 1923.

printed with the amendments of the Senate numbered.


Act entitled "An Act to create a commission
under certain conditions to refund or convert

of foreign governments held by the United States

a, and for other purposes," approved February

enacted by the Senate and House of Representa-

United States of America in Congress assembled,

rst proviso of section



the Act entitled

create a commission authorized under certain


States, (1)recommended by- the etlimnission and approved by


the President7 es set forth by him inn message presented to


Congress of February -7; 1923, as eontained in 14olise Poen-


meet Numbered 4647 Sixty seventh Congress, fourth session;


as follows:
$4, 074, 818. 358. 44

Principal of notes to be refunded

Interest accrued and unpaid up to December 15,
629, 836, 106. 99

1922, at the rate of 41 per cent

4, 704, 654, 465.43

Deduct payments made October 16. 1922, and Novem-

ber 15, 1922, with interest at 41 per cent thereon
100, 526, 379. 69

to December 15, 1922

4. 604, 128, 085.74
4, 128, 085. 74

To be paid in cash
Total principal of indebtedness as of December 15, 1922, for which British Government
bonds are to be issued to the United States
Government at par 4, 600,

"(2}The principal of the bonds shall be paid in annual

nstallments on a fixed schedule, subject to the right of the

British Government to make these payments in three-year


The amount of the first year's installment will be

$23,000,000 and these annual installments will increase with

due regularity during the life of the bonds until, in the sixty-

second year,

the amount of the installment will


$175,000,000, the aggregate installments being equal to

he total principal of the debt.

"(2)± The British Government shall have the right to

pay off additional amounts of the principal of the bonds on

any interest date upon ninety days' previous notice.



"(2Y- Interest is to be payable upon the. unpaid bal-



antes at the following rates, on December 15 and June 15


of each year: At the rate. of .3 per centum per annum pay-


able semiannually from December 15, 1922, to December 15,


1932, therafter at the rate of 34- per centum per annum


payable semiannually until final payment..

"CY For the first five years one-half the interest may

Federal Reserve Bank of St. Louis

be deferred and added to the principal, bonds to be issued


poses," approved February 9, 1922, is amended to read as




"That a World War Foreign Debt Commission is hereby


created consisting of eight members, one of whom shall be the


Secretary of the Treasury, who shall serve as chairman, and


seven of whom shall be appointed by the President, by and


with the advice and consent of the Senate.


four members so appointed shall be from the same political



Not more than


SEC. 3. That the provisions of section 2 of this Act


shall not affect the tenure of office of any person who is a


member of the World War Foreign Debt Commission at the


time this Act takes effect.

Passed the House of Representatives February 9, 1923.



Passed the Senate with amendments February 13
(calendar day, February 16) , 1923.




To amend the Act entitled "An Act to create
a commission authorized under certain conditions to refund or convert obligations of

foreign governments held by the United
States of America, and for other purposes,"
approved February 9, 1922.

17, 1923.-Ordered to be printed with the

amendments of the Senate numbered.

R 1424



EggRtirita2RVE BANK
ki. Y.

Dated the eighteenth day of June, 1923, by His Britannic
Majesty's Government (hereinafter called GREAT

BRITAIN) to the Government of the United States
of America (hereinafter called the UNITED STATES)

regarding the funding of the debt of Great Britain to
the United States.
Whereas Great Britain is indebted to the United States
as of 15th December, 1922, upon demand obligations in the
principal amount of $4,074,818,358.44, not including obligations in the principal amount of $61,000,000, representing
advances deemed to have been made to cover purchases of
silver under the Act of Congress approved 23rd April, 1918,

of which $30,500,000 has been repaid in April and May,
1923, and the balance is to be repaid in 1924, pursuant to
an agreement already made between the parties, and Great
Britain is further indebted to the United States, as of 15th
December, 1922, on account of interest accrued from 15th
Federal Reserve Bank of St. Louis



of the statements, conditions, premises and mutual covenants
herein contained, to issue to the United States, in exchange

for the demand obligations now held by the United States
Treasury, securities which shall be in their terms and conditions in accordance with the following provisions:
1. Amount of Indebtedness.

The total amount of indebtedness to be funded


$4,600,000,000, which has been computed as follows:
Principal amount of demand obligations to be funded
Interest accrued thereon from 15th April

$4, 074, 818, 358.44

and 15th May, 1919, respectively, to
15th December, 1922, at the rate of 41
$629, 836, 106. 99
per cent per annum
Less-Payments made by Great

Britain on 16th October and 15th
November, 1922, on account of inter-

est, with interest thereon at 41 per
cent per annum from said dates, respectively, to 15th December, 1922.

100, 526, 379.69
529, 309,

727. 30

Total principal and interest, accrued and unpaid,
as of 15th December, 1922

Paid in cash by Great Britain, 15th March, 1923

4, 604, 128, 085.74

4,128, 085.74

Total indebtedness to be funded into bonds of Great Britain. 4, 600, 000, 000.00

2. Issue of Long-Time Obligations.

The securities, which it is proposed to issue at par as
promptly as possible, shall be obligations in the principal
amount of $4,600,000,000, in the form of bonds to be dated
15th December, 1922, maturing 15th December, 1984, with

interest payable semi-annually on 15th June and 15th
December in each year at the rate of 3 per cent per annum
from 15th December, 1922, to 15th December, 1932, and

thereafter at the rate of 3i per cent per annum until the
principal thereof shall have been repaid.
3. Method of Payment.

The bonds shall be payable as to both principal and
interest in United States gold coin of the present standard
of weight and fineness, or its equivalent in gold bullion, or,




4. Exemption from Taxation.

The principal and interest of all bonds issued or to be
issued hereunder shall be exempt from all British taxation,
present or future, so long as they are in the beneficial ownership of the United States or of a person, firm, association,
or corporation neither domiciled nor ordinarily resident in
the United Kingdom.
5. Form of Bonds.
All bonds proposed to be issued hereunder to the United
States shall be payable to the United States of America, or
order, shall be issued, so far as possible, in denominations
of $4,600,000 each, and shall be substantially in the form set
forth in the exhibit annexed hereto, and marked "Exhibit

The bonds shall be signed for Great Britain by the
Counsellor of His Britannic Majesty's Embassy at WashA."

6. Repayment of Principal.

To provide for the repayment of the total principal of the
debt before maturity of the $4,600,000,000 principal amount
of bonds to be issued, it is proposed that the bonds shall contain provisions the effect of which shall be that Great Britain
shall make to the United States payments, on account of the
original principal amount of the bonds to be issued, in the
amounts and on the dates named in the following table:
Annual instalDate,

15th December:







ments to be paid
on account of
15th December-Contd.
$23, 000, 000
24, 000, 000
27, 000, 000
32, 000, 000
32, 000, 000

Annual instal-

ments to be paid
on account of
$32, 000, 000
37, 000, 000
37, 000, 000
37, 000, 000
42, 000,
46, 000, 000
46, 000, 000
46, 000,
51, 000,
51, 000, 000



Annual instalDate.

15th December-Contd.
. 1951

ments to be paid
on account of
$51, 000, 000
53, 000, 000
55, 000, 000
57, 000, 000
60, 000, 000
64, 000, 000
64, 000, 000

64, 000, 000
67, 000,
70, 000, 000
72, 000, 000
74, 000,
78, 000, 000
78, 000, 000
83, 000, 000
85, 000, 000
89, 000, 000
94, 000, 000
96, 000, 000

Annual InstalDate.

15th December-Contd.
000 1976
000 1979


ments to be paid
on account of
$100, 000, 000
105, 000, 000
110, 000, 000
114, 000, 000
119, 000,
123, 000,
127, 000, 000
132, 000,
136, 000,
141, 000, 000
146, 000, 000
151, 000, 000
156, 000,
162, 000, 000
167, 000, 000
175, 000, 000
175, 000, 000

4, 600, 000, 000

Provided, however, that Great Britain may at its option,
upon not less than ninety days' advance notice, postpone
any payment of principal falling due as hereinabove provided to any subsequent 15th June or 15th December, not
more than two years distant from its due date, but only on
condition that, if Great Britain shall at any time exercise
this option as to any payment of principal, the payment
falling due in the next succeeding year cannot be postponed
to any date more than one year distant from the date when
it becomes due, unless and until the payment previously
postponed shall actually have been made, and the payment
falling due in the second succeeding year cannot be postponed at all unless and until the payment of principal due
two years previous thereto shall actually have been made.
In the event of Great Britain issuing bonds to the United
States in payment of interest accruing between 15th December, 1922, and 15th December, 1927, as proposed in
paragraph 3 above, the bonds so issued shall contain provision for the payment of their principal before maturity
through annual instalments on account of principal corre-



sponding substantially to the schedule of payments on account of principal appearing in the table hereinabove set
7. Payments before Maturity.

Great Britain may at its option, on any interest date or
dates upon not less than ninety days' advance notice, make
advance payments of principal, in addition to the payments
required to be made by the provisions of the bonds in accordance with paragraph 6 of this proposal. Any such
additional payments shall first be applied to the principal
of any bonds which shall have been issued hereunder on
account of interest accruing between 15th December, 1922,
and 15th December, 1927, and then to the principal of any
other bonds which shall have been issued hereunder. Any

payments made to the United States under this provision shall be in amounts of $1,000,000 or multiples

8. Calculation of Interest.

Notwithstanding anything herein contained, the interest

payable from time to time on the bonds proposed to be
issued shall be computed on the amount of the principal outstanding on the previous interest date, with adjustments in
respect of any payment on account of principal which may
have been made since the previous interest date.
9. Exchange for Marketable Obligations.

Great Britain will issue to the United States at any time
or from time to time, at the request of the Secretary of the
Treasury of the United States, in exchange for any or all
of the bonds proposed to be issued hereunder and held by

the United States, definitive engraved bonds in form
suitable for sale to the public, in such amounts and denomi-

nations as the Secretary of the Treasury of the United
States may request, in bearer form, with provision for



registration as to principal, and/or in fully registered form,

and otherwise on the same terms and conditions, as to
dates of issue and maturity, rate or rates of interest, exemption from taxation, payment in bonds of the United States
issued or to be issued after 6th April, 1917, payment before

maturity, and the like, as the bonds surrendered on such
exchange, except that the bonds shall carry such provision
for repayment of principal as shall be agreed upon; provided that, if no agreement to the contrary is arrived at,
any such bonds shall contain separate provision for payments before maturity, conforming substantially to the
table of repayments of principal prescribed by paragraph 6
of this proposal and in form satisfactory to the Secretary
of the Treasury of the United States, such payments to be
computed on a basis to accomplish the retirement of any
such bonds by 15th December, 1984, and to be made through
annual drawings for redemption at par and accrued interest.

Any payments of principal thus made before maturity on
any such bonds shall be deducted from the payments required to be made by Great Britain to the United States in
the corresponding years under the terms of the table of repayments of principal prescribed in paragraph 6 of this

Great Britain will deliver definitive engraved bonds to the
United States in accordance herewith within six months of
receiving notice of any such request from the Secretary of
the Treasury of the United States, and pending the delivery
of the definitive engraved bonds will, at the request of the

Secretary of the Treasury of the United States, deliver
temporary bonds or interim receipts in a form to be agreed
upon within three months of the receipt of such request.
The United States, before offering any such bonds or interim
receipts for sale in Great Britain, will first offer them to Great

Britain for purchase at par and accrued interest and Great



Britain shall likewise have the option, in lieu of issuing to

the United States any such bonds or interim receipts, to
make advance redemption, at
and accrued interest, of a
corresponding amount of bonds issued hereunder and held

by the United States.
10. Cancellation and Surrender of Demand Obligations.
Upon the delivery to the United States of the $4,600,000,000
principal amount of bonds proposed to be issued hereunder,
the United States will cancel and surrender to Great Britain,
through the British Ambassador at Washington, or his representative, at the Treasury of the United States in Washington, the demand obligations of Great Britain in the principal
amount of $4,074,818,358.44 described in the preamble to
this proposal.
11. Notices.

Any notice, request or consent under the hand of the
Secretary of the Treasury of the United States shall be
deemed and taken as the notice, request, or consent of the

United States, and shall be sufficient if delivered at the
British Embassy at Washington or at the office of the Permanent Secretary of the British Treasury in London; and
any notice, request, or election from or by Great Britain
shall be sufficient if delivered to the American Embassy in
London or to the Secretary of the Treasury of the United
States at the Treasury of the United States in Washington.
The United States in its discretion may waive any notice
required hereunder, but any such waiver shall be in writing
and shall not extend to or affect any subsequent notice or

impair any right of the United States to require notice

Signed on behalf of the Lords Commissioners of His
Majesty's Treasury, this eighteenth day of June, 1923.


His Brittanic Majesty's Ambassador
Extraordinary and Plenipotentiary.




(Form of Bond.)

Sixty-two year 3-3i per cent Gold Bond
Dated 15th December, 1922. Maturing 15th December, 1984.

The Government of the United Kingdom, hereinafter
called Great Britain, for value received, promises to pay
to the United States of America, hereinafter called the
United States, or order, on the 15th day of December, 1984,

the sum of Four Million Six Hundred Thousand Dollars
($4,600,000), less any amount which may have been paid
upon the principal hereof as endorsed upon the back hereof,

and to pay interest upon said principal sum semiannually
on the fifteenth day of June and December in each year at
the rate of three per cent per annum from 15th December, 1922, to 15th December, 1932, and at the rate of three
and one-half per cent per annum thereafter until the principal hereof shall have been paid. All payments on account

of principal and/or interest shall be made at the Treasury
of the United States in Washington, or, at the option of
the Secretary of the Treasury of the United States, at the
Federal Reserve Bank of New York. This bond is payable
as to both principal and interest in gold coin of the United

States of America of the present standard of weight and
fineness or in its equivalent in gold bullion, or, at the option

of Great Britain, upon not less than thirty days' notice
indicating the minimum amount which it is contemplated
to pay at next due date in gold, cash or available funds,
in any bonds of the United States issued or to be issued
after 6th April, 1917, to be taken at.par and accrued interest
to the date of payment hereunder; provided, however, that



Great Britain may at its option, upon not less than ninety
days' advance notice, pay up to one-half of any interest
accruing hereon between 15th December, 1922, and 15th
December, 1927, in bonds of Great Britain dated and bearing interest from the respective dates when the interest to
be paid thereby becomes due, and substantially similar in
maturity and other respects to this bond.
The principal and interest of this bond shall be exempt
from all British taxation, present or future, so long as it is in
the beneficial ownership of the United States, or of a person,
firm, association or corporation neither domiciled nor ordinarily resident in the United Kingdom.

In order to provide for the repayment of the principal
of this bond before maturity, Great Britain will make to
the United States payments of principal in the amounts,
and on the dates shown in the following table:
Annual instalDate.

15th December:







merits to be paid
on account of

Annual instalDate.

15th December-Contd.



24, 000
25, 000
25, 000




27, 000





32, 000




37, 000




42, 000
42, 000




ments to be paid
on account of

55, 000

78, 000

94, 000
96, 000




15th December-Contd.

Annual instal-

meats to be paid
on account of


15th December--Contd.

Annual instal-

ments to be paid
on account of




114, 000





123, 000





1975 :.


136, 000
141, 000




$146, 000
151, 000
162, 000

4;600, 000

Provided, however, that Great Britain may, at its option,
upon not less than ninety days' advance notice, postpone
any payment of principal falling due, as hereinabove provided, to any subsequent 15th June or 15th December, not
more than two years distant from its due date, but only on
condition that if Great Britain shall at any time exercise

this option as to any payment of principal, the payment
falling due in the next succeeding year cannot be postponed
to any date more than one year distant from the date when

it becomes due unless and until the payment previously
postponed shall actually have been made, and the payment
falling due in the second succeeding year cannot be postponed at all unless and until the payment of principal due
two years previous thereto shall actually have been made.

This bond may be paid on any interest date before maturity in whole or in part, in amounts of $1,000,000, or
multiples thereof, at the option of Great Britain, on not
less than ninety days' advance notice.

This bond is issued by Great Britain pursuant to the
proposal, dated the 18th day of June, 1923, and to the
Acceptance of proposal, dated the 19th day of June, 1923.



In Witness Whereof, Great Britain has caused this bond
to be executed in its behalf by the Counsellor of His Britan-

nic Majesty's Embassy at Washington, thereunto duly
For the United Kingdom:

Dated 15th December, 1922.

The following amounts have been paid upon the principal
amount of this bond:

Amount paid.


JUNE 19, 1923.

The Right Honorable,


Ambassador Extraordinary and Plenipotentiary,
The British Embassy,
Washington, D. C.
MY DEAR MR. AMBASSADOR: I have the honor to acknowl-

edge the receipt of your note of June 18, 1923, transmitting

the proposal dated the 18th day of June, 1923, by His
Britannic Majesty's Government to the Government of the

United States of America regarding the funding of the
debt of Great Britain to the United States. This proposal is
agreeable to the World War Foreign Debt Commission, and

I am writing for the Commission and by its authority to
advise you that the proposal is hereby accepted on behalf of

United States of America, pursuant

the authority

conferred by the Act of Congress approved February 9, 1922,

as amended by the Act of Congress approved February 28,
1923. In accordance therewith I am writing to ask that the
bonds as contemplated thereby may be delivered as soon as

possible to the Secretary of the Treasury of the United
States in exchange for the demand obligations amounting
to $4,074,818,358.44 now held by him which are otherwise
now payable.
Very truly yours,

Secretary of the Treasury, and Chairman of
the World War Foreign Debt Commission.
Approved :

JUNE 19, 1923.











whose name is subscribed to the paper hereto annexed, is duly accredited to this
Government as Ambassador Extraordinary and Plenipotentiary from Great Sritain.



Secretary of State, have hereunto caused the Seal of the De(Seal)

partment of State to be affixed and my name subscribed by
the Chief Clerk of the said Department, at the City of Washington, this 1st day of :lay, 1917.

* For the contents of
(the annexed document the
(Department assumes no re-)

Secretary of State.





Chief Clerk.

0.k He3erve 44*
District No,2


FILE s0014

Spring-Rice, Ambassador Extraordinary and Plenipotentiary of the

Government.of the United Kingdom of Great Britain and Ireland, having
deposited in the Federal Reserve Bank of New York, the sum of Two
Hundred Million Dollars (t;200,000,000,00) to the credit of the Govern-

ment of Great Britain and Ireland, do by these nresents and under
authority and by direction of my said Government, nominate, authorize
and empower Sir S. Hardman Lever, N. C. B., Financial Secretary to
the Treasury, whose signature is hereto attached and made a part of
this instrument, to withdraw any and all deposits made by me in said
Bank by check, draft or order on said Federal Reserve Bank of New
York, and I do hereby authorize the said Federal Reserve Bank of New
York to honor and pay any and all checks, drafts or orders drawn by
the said Sir S. Hardman Lever, K. C. B., Financial Secretary to the

Treasury, against any finds standing to the credit of tne said Government of Great Britain and Ireland.
IN WITNESS WHEREOF I HAVE HEREUNTO affixed my signature and

my seal of office on this the 24th day of April, 1917.

Cecil Arthur Spring-Rice,
H. B. M. Ambassador

Sam, H. Lever. (Signed)

The foregoing is the true and official signature of the
said Sir S. Hardman Lever, R. C. B., Financial Secretary to the
Treasury, whose name appears in this instrument.

Cecil Arthur Spring Rice,
H. B. M. Ambassador.

Witness my hand and seal Jf office
this 24th day of April, 1917.

( Seal )




KNX ALL :4 BY T: !4-24 PRESENTU, That I,

_spring -:ice, Ambassador ixtraordinary and Plenipotentiary of tne
Government of the United Eingdoal of C,reat Britain and Ireland, having
deposited in the Federal =reserve :':unk of New fork, the sam of Two

7undrcd :Anion -*liars ( `2,...Y.J,4Olookiu) to the credit of the Government of Great Britain and Ireland, do by these jresents and under
authority and by direction of ly said

overnment, nominate, authorize

and empewer Sir S. 'laraman Lever, ;. C. B., 7inancial ',;ecrtary to
the Treasury,

rnose: signature Is hereto attached and made a part of

this instrument, to withdraw any and all deposits made by me in said
Bank by check, draft or order on said Federal Reserve Bank of New
York, and I uo hereby authorize the said Federal Reserve Bank of New
York to honor and pay any and all enecks, drafts or orders drawn by
tne said Sir

C. B., ?inancial 3eoretary to the

4aralan Lever,

Treasary, twLdnat any fans standing to the credit. of the said Government of Great Britain and Ireland.


'{AL' F.

L1111:20 affixed my signa.tare and

my seal of office on this the 24th day of april, 1917.

Cecil Arthur spring -Rice,
H. B. 1. Lmhassador

3a=. El. Lever. (..i. -shed;

The foregoing is the true and official sit_,natare of the
C. B., Anancial '..iecretary to the
qardman Lever,
said Sir
Treasury, whose name appears in this instrument.

Local ::rthur

7. B.



'fitness my hand and seal .)f office

this 24th day of April, 1917.


0 a 1



Chapter 18



Currency and Gold Problems

,SPreo0.16Testimony before the Royal Commission on Indian
Currency and Finance, London, May, 1926.

Governor Strong.

At the outset, Mr. Chairman, permit me, on behalf

of myself and my associates to express our appreciation of your invitation to
appear before the Royal Commission for the purpose of discussing questions which
are now being urged upon the attention of all nations.

We are gratified by this

evidence of your interest in the solution of problems to which possibly we can
address ourselves with a common purpose.

Nevertheless, when it was first intim-

ated to me that an invitation would be sent, I hesitated to accept it, for two
One was lest appearance before your Commission might be interpreted as


an intrusion by an American banter in problems which may popularly be regarded
as of concern primarily within the British Empire.

The second reason was that

not appear before the Commission without making reference to the adverse
effects, indeed possibly the disastrous effects, of the proposals under discussion upon the American mining industry, and so give rise to the impression that
the purpose

the appearance was to advance arguments in behalf of these in-

terests, rather than to make a contribution to your work.

In this light, my

statements to you might indeed be regarded as special pleading and unduly coloured
by the particular interests of our own industry.

Our examination of the suggested plan for a gold standard, which has been
the subject of considerable study and deliberation, leads to the unescapable conclusion that the Indian monetary programme is a matter of vital concern to America,

This Royal Commission on Indian Currency and Finance
was appointed to consider proposals for the reorganization of
the Indian currency system. Governor Strong was requested to
appear before the Commission, and accompanied by Professor Oliver
M. W. Sprague, Professor of Banking and Finance, Harvard University,
and Professor Jacob H. Hollander, Professor of Political Economy,
Johns Hopkins University. Governor Strong's testimony was in part
concerned with a somewhat technical discussion of the particular
proposals before the commission, and only those parts having a more
general signifiaance are reproduced here.

- 2 -

not alone nor primarily as to domestic interests direc!dy affected, but even more
in the extent to which it involves international monetary relations of the United
States, and especially as to our part in the world programme now gradually developing for monetary reconstruction.

We have not then fore interpreted this invita-

tion in a narrow sense, but rather have to klen the liberty of construing it to be

an expression of desire for cooperation in the solution of a great world problem.

It is in fact our interest in this wider aspect of monetary reorganization which
our appearance before the Commission.


You will understand my explaining that I am not h3r© as a representative,
official or unofficial, of the American Government, nor in fact bf the Federal
Reserve System as a system of banks of issue, but rather in my more personal cepaof that ;3articular Eederal reserve bank wain. is
city as an officer/charged with the duty of maintaining relations with foreign
banks of issue, an institution which has already undertaken large commitments and
responsibilities in connection with this general subject.

It is this programme,

looking forward to further cooperative effort sack as India and the other nations
may give, upon which we must rely for the bettering of monetary conditions throughoutthe world, a matter which is just now so much the concern of mankind.
We shall all admit that the deject of perfecting monetary systems is the

echievement of a stable domestic and international purchasing power for the currency -

a goal unattainable by any me party acting alone, and only possible through
cooperative effort.

Because a gold current,- is that one which has had in the past

the most stable buying power both at home and abroad, it is naturally the one we
all now seek to secure.

We must also agree that a great nation like India is en-

titled to any currency system which it can afford and maintain in stable relation
with other currencies, and it is axiomatic that a nation which over the years has
a favorable balance of payments can have any kind of a eurr-nc:, system it wants.

But it is to be presumed that such a iltion will desire a fisezll and banking organ-

ization and policy capable of enabling it to operate effectively and smoothly in
botn th..: domestic and international markets.


The essential elements of a full gold standard are complete convertibility of the note issue into gold, an absolutely free gold market, an unfettered
foreign exchanee market, and a banIcing system which effectively assimilates gold
imports and regulates the consequences of gold exports. Actual circulation of gold

coin or its equivalent has been a usual feature of a complete gold standard, but
is in no sense essential thereto, and as a constituent of the circulating medium
gold coin was becoming steadily less significant in the years preceding the world

Any material departure from these essentials is in the direction of a gold

exchange standard, which passes througiL various stages such as a limited convert-

ibility of the note issue into the so-called Ricardo bars, then to convertibility
of the note issue by the use of checks on gold standard countries generally, and
finally to the more restricted gold exchange standard where one currency is limited
to convertibility by check on but one other country having a gold or gold excheige

May I interject to say that there is always the damger of our attribut-

ing rather conventional or pro forma meanings to these words 'gold standard' and
'gold exchange standard!' and 'sterling e.change standard,' and to express my belief

that the so-called pure gold standard with a gold coin circulation in time is likely
to give way, under the influence of the cooperation of banks of issue, in favor of
what we now more generally describe as the gold exchange standard - a necessary
consequence of the economy in the use of gold and gold coin.
The only great nation vihich has a complete gold standard in every. partic-

ular to-day is the United States.

European countries in varying degree are now

ptactieing the gold exchange standard.

The object of this statement preliminary

to a discussion of the questionnaire is to express the basis of my belief that the
moment is inopportune for India to adopt the full gold standard system, with circulation of gold coin or its equivalent, partly because the world is not yet capable, in my opinion, of sustaining the burden which would thus be thrown upon central
bank reserves, and that therefore the attempt would fail.

But this does not imply

that the essential objects sought by India, especially a flexible monetary system

with stable purchasing per at home and abroad, are not within her reach by
methods such as are now in general operation in Lurope, if made to conform to
Indian customs and usages.

Holding this view, it might appear from the later

discussion of the questionnaire that our appearance is for no other purpose than
to discourage the adoption of the specific plan submitted.

Thin view would be

quite contrary to our feelings and convictions, Abich dispose us rather to participate in th

discussion of proposals with which we and others can heartily cooperate.

Indeed, it may be that before the-hearings are ended the discussion will take the
more agreeable turn in the direction of a programme which, instead of inviting
our criticism, will enable us to consider plans of cooperation.


Governor Strane, we are looking fort and to-day to the benefit

of your assistance on some of the rider aspects of the scheme, first of all in
regard to some which relate more particularly to the col' market.

Is this a cdh-

venient point at which to resume your consileration of the gubject?
Governor Strong. Yes, Mr. Chairman.

Reviewleg, the questionnaire after

yesterday's session it became apparent that there eas very little ehich I might
discuss without repetition, and, if agreeable to you, what I shall say to-do y will

be specifically directed to the question of, and will relate entirely to, the gold
position in the United btates.

The circulation of gold - that iss of gold coin -

in the United States is really controlled to-day by considerations of habit and
convenience which have not been eharaceeristic of the gold coin circulation in
countries which had such a circulation oefore the war.

In Eaeland, for instance,

the smallest denomination of note issue by the Bank of England was L5, and the
intermediate circulation was sovereigns and half-sovereigns.

The determination

of the relative amount of circulation of these two kinds of money was really fixed
automatically by th

requirements of the country'


If smaller denomination

money were required below the 1.5 Bank note, it took tho form of a coin.

In the

United States we have not had a situation where *hat I might describe as the

- 5 -

saturation point of those two kinds of currency has ever br:en reached, for the

reason that with the great variety of paper money in circulation, issued in all
denominations, there was no true economic demand for gold coin of, say $5, $10
and $20 denominations in order to conduct the country's trade.

National Bank

Notes, for instance, were issued in denominations of $5, $10 and $20, and higher.
Th, same was true of the silver certificates which you saw yesterday, which are
issued in $1, $5, $10 and $20 denominations and higher;
true of the so-called Greenbacks.

and the same in fact was

The situation prior to the war and since the

war has really been this - that in order to induce the circulation of gold coin
it would be necessary to discontinue the printing of all kinds of paper money of
those three denominations;

and the introduction of a gold coin currency into

circulation would have been a cause of great inconvenience and complaint by the

That may be illustrated by my telling you that the chief paper money cir-

culation in the country consists of $5 notes of the various kinds which we issue,
and the next in order are $10 and $20.

At the Federal Reserve Bank of New York we recdve on deposit every day
from the banks something like 20 million of this paper money, and we pay out in
round figures about 20 million dollars of this paper money - a very lar:_;e part of

it consisting of note

of $5, $10 and $20 denomination.

We also receive every day,

through the mail and by express from out of town banks in our district on the
average about 500 shipments of paper money, kkexxxemw4exalg and we ship out to our

Member banks about 500 shipments of paper moneyllargely consisting of these

If those shipments and those deposits and withdrawals all had to

be made in gold coin, the expense and inconvenience of handling it would be
tbemendous. So, as I say, the circulation of gold coin in the United States is
very larL;ely deteamined by habit - that is the habit of using paper money - and

convenience in handling a form of money which is very much more economical to
transport and carry about than is gold coin.


should like at this point to refer to something which I observed myself


when in India in 1923, which may have some bearing.

We have a large problem of

internal payments to make in the United States between the different districts,
just as exists in India, and I recall being told rrhen in India, when the rupee

note was gaining its popularity in 1920, that the very large denomination notes
actually brought a premium becaued
effecting transfers.

the convenience that they afforded in

There being no demand for gold coin eireplation, weeder

is sometimes expressed at the very large circulation of paper money representing gold coin;

that is, the gold certificates, and I should like to describe

the policy which has applied to that since the outbreak of the wer.

When the

reserves of member banks were eseeMbled in the Federal reserve banks, a large
part was paid in in gold - that is, in these gold certificates; and some small
amount in gold coin.

There was left in circulation, however, as hand-to-hand

money a large amount of gold certificates, and there N-,

in the reserves

of non-member banks (that is, the state banks which did not join the Federal
Reserve System) a considerable further amount.

The total of goldcertificates

in circulation before the war was, in round figures, about $900 million, other
forms of money constituting the rest of the cicuulating medium.

We thought it

was wise in order to lay a foundation for peavibly extensive operations in financing the war, to assemble an much of this gold as possible in the reserve banks,
and without describing the details

the operation, we issued Federal reserve

notes in exchange for gold, and thereby further reduced the outstanding amount of
gold certificates in circulation and in the hands of banks to about 1200 million.
That helped to build up the reserves of the Reserve banks.

Then we had this great

accession to our gold stock, largely represented by issues of gold certificates by
the Treasury.

When the war ended and matters returned more nearly to normal, we had
to decide upon a policy as to the circulation of this gold, practically all of it
at that time being out of circulation and in the reserves of the Reserve banks in


the form of gold certificates.

So we have now restored to circulation substan-

tially the total which was in circulation before the war;

in fact, the circu-

lation of gold certificates to-day is roughly one billion dollars.
to describe the reasons which led us to do so.

I would like

The first was that the almost

complete disappearance of gold certificates - which are readily distinguished

from other forms of paper money because they are printed with yellow backs - led
us to fear that there might grow up a feeling of discrimination or preference in
the minds of the public between the different kinds of money in circulation an unsatisfactory feeling to develop about the currency.

The way to overcome

that was to put gold certificates freely into circulation, which was done.
was the first reason.


The second reason was the idea conveyed in regard to the

very large gold reserves of the Reserve banks and the very high percentage of
reserve at a time when there was prevalent, especially in the agricultural sections, a feeling that possibly it would he a good thing for the country to have
some expansion of credit;
culties of that period.

that in some ray it would life us out of the diffi-

It did not seem cell that the Reserve banks should show

so large a bulk of golds nor in fact so high a percentage of reserve;

and the

effect of paying out some 700 million or 800 million of our gold reservewas to
reduce it to a less spectacular figure, if you please.

The third reason was rather more important than either of the other two.
In a country which has, say, a saturation point in

circulation of gold, any

movement of gold into the country or out of the con try in a well-organized
central banking system is instantly reflected in the reserve of the central bank.

With no point of saturation in the circulation of gold (because of the existence
or this large volume of other kinds of money of similar denomination) unless the
amount of gold certificates in circulation was carefully fixed at a definite
figure and maintained there, we would have two fluctuating funds of gold - one,
the amount in circulation, and the other in the reserves of the Reserve banks.

The reserve percentage of the Reserve banks would therefore be no indication of

the gold movement whatever.

In fact, it mis-ht be possible, by a careful ad,jast-

ment of payments by the Reserve banks in meeting the demands of the circulation,
to maintain the percentage of the Reserve bank at almost an a.eolutely fixed
figure and have the: fluctuation in the country's gold supply occur entirely in

the gold certificates in circulation. So as a matter of policy we determined
to endeavor to fix the amount in circulation at a dsfinite non- fluctuating

and as gold imports or gold exports occurred, they would show at once in the
reserves of the Reserve bank.
The fourth reason was of this character.

A long continued period of

a high reserve in the Federal reserve banks, say, at 80 or even 35 per cant,

might induce a state of mind in the public which I might describe as raising
the apprehension point;

in other words, a sudden loss of gold by export which

would reduce the reserves of the Reserve banks by, sly, 20 per cent - from 85
per cent to 65 per cent. - might bring about the same reaction in the minds of
the public as would a sudden reduction cf rosesve from 65 per cent to 45 per

Recognising thst tile percentage of reserves of the Reserve banks, as I

described the other d; y, were necessarily lar : :e and poLsibly unduly large, we

wished to be in a position first that we were not operating on an unduly large
reserve, and second, that if any sudden decline in the reserve did occur, it
could be comoensated by gradually taking the gold out of circulation.
rather unlikely occurrence.

It is a

It is hardly possible to conceive of a loss of

gold which would reduce the reserves of the Reserve banks suds?enly by as much as
20 per cent.., but with this great mass of gold in tns hands of the Reserve banks,

and with a large mass in circulation, it certainly would appear to be a mars
conservative oolicy to have this campensatina fund in circulation upon which we
could draw in case of need to build up our reserve and soften the shock of a
very large loss of gold.

That, if you please, explains somewhat the policy of

the Reserve banks in maintaining a large circulation of goIsd certificates and a

lower percentage of reserve than they otherwise might have done.


Now, as to the question of the redundancy of this gold.

It is a fact

that, notwithstanding the very large increase in the amount of gold held in the
cottitry, there has been no considerable increase in the total percentage of

monetary gold to the total deposit liabilities of all the commercial banks of
the cou:try.
gold stock.

The expansion of credit has kept pace with the accession to our
The reason why it is possible to say that we now have an amount of

free gold (not sedusdan'e, it is all functioning in our system), but Which, under

favorable circumstances, might be spared from our system - is due se the fact
that the reserves of the banking system prior to the organization of the Federal
Reserve System were scattered among some 28,000 or 70,00e different banks while
now they are largely coneentrated in the Reserve banks.

There was no economy ie

the use of reserve money, and the organization of the Federal reserve banks in
assembling it in one great body of course creates a very much more secure banking
position than existed under the system of isolated separate reserves by each
separate commercial bank, state and national.

The reserve position was somewhat

weakened before the war by the fact tilos, many banks carried a portion of their re-

serves on deposit with other commercial banks, so that there was a pyramid of
deposit liabilities on the individual reserves of the different commercial banks.
In fact, when the Reserve Act was passed it was felt that the economy in the use
of gold brought about by its organization in the hands of the Reserve banks justified a very considerable lowerine of the amount of reserves required to be kept
by the state avid national banks which became members of the Federal Reserve System.

That is, the national_ banks, all of which are members, and the state banks, some
of which became members.

A question appe red in the Questionnaire relating to the probable rate
of increase in the demand for monetary gold with the growth of business and bank
deposit liabilities.

I do not think it is possible to apply any rule by mathe-

matical computation.

One computation has been made, I believe, which indicates

that the probable

increased demand will

about 2.8 per cent.

To show how

- 10 -

illusive any such calculation is liable to be, one should consider the enormous
changes that ha.° taken place in the reserve position in the United States. Prior
to the adoption of the Federal Reserve Act, commercial b mks in the cities of New
York, Chicago ea: St. Louis (the largest banking centers in the country) were
required to keep 25 per cent reserve in cash in their own vaults.

Banks in New

York and Chicago are now required to keep but 1:7 per cent on deposit in the Federal
reserve banes, and those in St. Louis but 10 par cent.
requirement of any member bank.

That is the highest reserve

The benkalecated in some 75 or 100 reserve

cities, so called (that is the next smaller cities) are required to keep but 10
per cent reserve on deposit in the Reserve banks as against 2L per cent. before
the Reserve Act was adopted, of which 25 per cent 15 per cent might be on deposit

The banks in all other towns and cities are now reeulred to

with other banks.

keep but 7 per cent as against 15 per cent before the Reserve Act was adopted.
Such a reduction in reserve requirements would verve to'offset an annual increased
demand for reserve money for our banking system for a considerable period.


I might illustrate it Ly refer-

is true also as to other possible developments.


ring to our present practice at home in dealing with the collection of checks.

suit was recently brought by a bank, or a group of banks, to require the Federal
reserve banks to give immediate credit uponchecke depositPd with the Reserve bank

by member bank..

that suit been successful it would have had the effect of

adding about ;8e0,00O,C00 to the reserves of our member banks without any change

Thar, lgAn, would have been

in the quanti...y of gold in the country at all.

equivalent to a number of years additionLi reserve requirements for gold by the
b3ekiag system.

Perhaps some questions might be asked now with regard to this

particular matter.
Sir eegiaald Mant.

Mr. Strong, you told us that the Federal reserve

banks withdrew a large number of gold certificates.
banks can get teem in and give them out at will?
th: public went gold certificates C2 not?

Will you tell us how the

Does it not depend on whether

Governor Strong.

You mean the Federal reserve beeke?




How do thee increase or decrease the circula-

tion of sold certificates.
If any peculiar value, sentimental or otherwise,

Governor Strong.

attached in the minds of the people to a gold certificate as distinguished from
any other tiepe of paper money, then some difficulty might be encountered. People
would sort them out end keep thegold certificates and prey out other kinds of money.

- which led us to put

That rrs one of the reasons - to prevent any such development

Now people do net distinguish, and there is no habit

into circulation..


of sorting.

So that as money 1..ecomes either redundant - more than is required

for the circulation - or as it wears out, it is returned to the Federal reserve
banks, and there we have tee task of sortie:: out that which is uefit for further
circulation and sorting it both as to kinds and as to denominations.

Then if we

:Amply discontinue paying out the gold certificates and satisfy the demand for
fresh money with other forms of paper money, we very rapidly accumulate the gold
in the Reserve banks again.

It is* au automatic operation.

Sir Henry Strakosch.

You referred to the reduced reserve needs since

ehe introduction of the Federal Reserve System, and you mentioned that before the
Federal Reserve System was introduced the National banks, had to hold 25 per cent
of their liabilities in reserve.
Governor Strong.

In the three central reserve cities of Chicago, New

York and St. Louis.

Sir Henry Strakosch. With this smaller ratio of reserves do you reeard
the situation as eetisfactory as it was before the introduction

the Federal

Reserve System?

Governor Strong.

Yes, I reeard it quite as satisfactory, and even more

so, fcr the reason, first, that the reserve is mobilized with the reserve banks,

and saeond,

bscause the reserve banks are now capable of meeting a sudden

-12increased demand for currency by issues of Federal Reserve notes against discui.te
of member benks.

The difficulty prior to the establishment of the Federal Reserve

3ystLm was that without. any capacity for e,:panaion of the note issue the only way

member bank could meat a demand was by paying out its reserve and, wnen anything
like panicky conditions arose, such as occurred in 1893 and 1907, the banks hoarded
their reserves;, they would not pay them out.
premium on currency.

On both of those occasions we had a

Now that we have a central reserve fund and a capacity tc meet

any demand for curreacy, that situation does not arise.

IL eelteiniy would have

arisen Curing the wer if there had been no Federal Reserve System with capacity
to meet almost unlimited r=erled.

Sir henry Strakosch.

2hat, you would say, is one of the great benefits

of a central banking syetem in a couat,iy?

Governor Strong.

I should 2ay it is essential to any modern Lankiag

Sir Henry Strakosch.

To have the bankieg and currency reserve central-

ized within one institution?
Governor Strong.


Si x Mneckji Dadabhoy.
of information.

I want to auk you one or two questions by way

I understand the United States star-ed on a gol0 standard in


dovernor Strong.

I am not Lure of the y ear, but; I think tae Act to

which reference w:s ma He the other day, re,juiring the Secretary of tae Treasury

to maintain all forms of money in circulation at par, tee pateed in 1898 and I
think it may be g morally etated, overlooking the peculiarities of our system

as to details, that the gold standard became area: established with the adoption of that Act.
Sir Maneckji Dadabhoy.

When you started a gold

did you have

sor=e fcrm of gold currency at the initial stage?

Governor Strong.

As had a circulation of gold on the Pacific Coast

only, of area consequence.


All the other gold circulation in the country Tas in

form of gold eertificates.
31- Maneckji Dadabhoy.

How do you distinguish the term "saturation

point" from "redundancy"?
Governor Strong.

I would like to adopt Dr. ,apraguels definition whicn

he made to my entire satisfaction the other defy.

I should say that free gold is,

as I have described, expressed by an unduly large reserve percentaee in the cent el
bank, and that a redundancy is an excess over the requirements of the nation for
conducting a given amount of business at a given price level.

Governor Strong.

I have been asked to elaborate a little one part of

my stetem.nt in regard to gold coin circulation.

I referred to the fact that gold

coin had circulated on the Pacific Coast as distanguiehed from gold certificates.
This was the outgrowth of the gold discoveries on the Pacific Coast in about 1849.
The immenee unoccupied territory between the Eastern sources of supply of gold
coin and paper money made it, of course, difficult to introduce a circulating
medium in a part of the country which was growing very ripidly under the impulse
of the gold discoveries, and in the early days of the mining camp period of the
Far West the currency was in the form of small nuggets of Gold taken from placer

'Every store had scales where the gold was weighed, and people actually

made their payments with the gold as it was taken from the placers.

The next

development war' a rather irregular coinage of this gold by privl,e persons on the
Pacific Coast.

Some of the coins, although rather crude, had quite a wide circu-

Come of them were of eood workmanship, and are still treasured as souvenir

of the early days of the development of the West.

This habit of gold coin

lation grew, and later a Mint was established in Denver, and gold coin came tobe

put quite 1rgelp into circulltion.

The habit of the use of gold coin onthe

Pacific Coast did not finally disappear until the Federal Reserve Bank in San
Francisco furniehed

adequate supplies of gold certificates and other forms of money.

Ti,en gold coin was largely withdrawn from circulation and paper money substituted,

although it was a task of some difficulty, because that coin had been in circulation for so many years that almost all of it was abraded below the limit of

tolerance. The holders of the coins did not like to Win them in and assume their
abrasion loss, so the Federal Reserve Bank of San Francisco assumed that loss.

The gold coin came in, and is now practically out of circulation even in California.

Sir Henry Strakosch.

I asked a question yesterday regarding-the legal

obligation to compel the member banks to hold a certain oercentage of their

liabilities with the Federal reserve bans, and I asked you why it was that the
percentage to be


different localities.


the Federal reserve lank was different in the

You suggested that you would late: on mention what the

re son was, bu: you did not.
Governor Strong.

I cannot say that I can deinnd that particular 57 tem,

because logically it might appear under a benking system which had developed
along different line

from ours, that co-Ontry banks, being more remote from the

Central Bank, should have a higher reserve.

The razt.lon for the difference of

reserve requirements between tne central reserve cities, the reserve cities and
the country banks, was due to certain caaracteristics of our old system, where
the country- bans cerried their reserves in the reserve cities and the central
reserve city banks, aaC all of the banks of the couetry, including the reserve
City banks, might carry 'eneir reserve in the central reserve city banks, 90 that

the develooment of the different size of reserves grew out of the feeling that a
greater responsibility rested upon the banks in reserve centers which were carrying a proportion of reserves for banks located in country sections.
Sir Henry Strakesche

If a new system were set up, you would, I take

it, not advocate any such distinction being made as has been made under the
Federal Reserve Act?


I think the proportion of reserve would have to be

- 15 -

based upon very different considerations than those which existed in America,
when this particular practice was incorporated in law.

You understand that

before the establishment of the Federal Reserve Act country banks were required
Jortion had to be in c-1:-h, in their vault r, and a

to carry a certain percentage of reserve, of which apportion might be carried
with a correspondent bank in a money center.

That is what led to requiri

higher percentage of reserve to be carried by the commercial banks located
in the money centers.
Ldr Henry Strakosch.

Yesterday you told us there are two ways of

dealing with the relationship of the commercial banks and the central bank.

One would be the one in practice in Ameri a, to let the commercial banks hold
a certain given percentage of their liabilities with reserve banks, and the
other would be the system adopted in this country, where no such provision
exists, but where the central bank carefully discriminates for whom it opens
accounts and rediscounts.

In a country with an undeveloped banking system, and

with what may be called a lack of banking discipline, would you not regard the
system undsr which the commercial banks are compelled to deposit some of their
reserves with the central bank a preferable one to the one that has grown up in
this country?

What I have in mind is this.

If you were to enact that any bank

trading as bankers, that is to sv, taking money on deposit which can be withdrawn by check, were held to deposit some of their reserves with the central
bask, and at the same time to disclose its own status, as is the case in some of
the central banking countries, that would conduce to educatins the public to
the duties

of bankers better than if there were no such well-defined system?
Governor Strong.


The development should be considered rather histor-

In the United States we had long periods of wild and reckless banking

practices, whice imposed great hardships upon the people of the country, and ver
severe losses at times.

lick only have we the habit in the United States of doing

- 16 -

a great deal by legislative enactment, expressed with great particularity, but
in the case of banking our experience had been so unfortunate in former years
that Congress and the legislatures were ready to impose very cireful and precise
rest-Actions upon, banking, and not only that, but to introduce a very extensively
organized system of reports and examinations.

We do banking now too much by law

in America, I think, end not enough by good judgment; but Chet is the way a
system in liable to develop in a nee country which is growing.

Whether it would

be wise in India to impose the same type of particular legal restrictions and
requirements upon banking that we have in the United States, would depend upon a
pretty taorough understanding of banking methods in India, how secure they are,
and how certainly and cerefUlly the business is conducted.

In England it has

been the development of centuries, but the growth in the United States had
sprung up relatively almost overnight.

The need for thin type of regulation and

supervision seemed to be apparent to every:,ody, at any rate th.t is the way we

have grown. are tho,e who say that it makes very bad bankers.

and do ev rything by law instead of by good judgment.

They try

The probability is that

under such a system as we have had, banking has not developed quite as successfully as it might have done with some greater sense of responsibility.

On the

other hand, we may have been protected from banking disasters which would be very
seriouw, and constant flilures of banks that otherwise would have occurred.


you introduce such a system of careful scrutiny and examination, such as we have,
it is quite natural that Boards of. Directors come to rely upon the examination

by the Controller, or the State Superintendent, as partly relieving them of some
of their responsibility to see that the bank is always in a good condition. When
you are dealing with a private banker, subject to no supervision whatever, you
have wholly different conditions.

My remarks yesterday were intended to sug:est,

as they probably have to your mind, the need for special study of that kind, and
the desirability of not astemptin_ to do what we did inthe case of our Federal

Considering that the Federal Reserve System has worked pretty well in

- 17 -

Ameeica, it might be thought it would also work pretty well inlndia, but I am
not willing to say that it would work well in India.
Sir Henry Strakosch.

What =gas been suggested is this, that in a

country unaccustomed to the central banking system the functions of the central
bank are usually not well understood.

In particular, it is not well u

th t the central bank is there to hold the cash reserves of th

commercial banks.

I have heard of instances w_lere, owing to the absence of such statutory provisions, somecommercial banks have refrained
cash reserves with the Central bank.
functioning o' th

eliberately from depositi

Such action largely impedes the proper

central bank.

Mr. Strong.

We have had considrable e.-perien,:e in that very matter, when

you consid r tilt out of possibly 18,000 or 20,000 banks which can qualify to he
members of the Federal Reserve System in America

we have only about half that

number, principally, the national banks, of which there are a little under 10,000,
who were required to be members.

The state banks are permitted to become members,

on conforming tocertain standards.

The membership of the state banks has been

largely confined to the banks in the large money centers, which not only became
better acquainted with the meaning of the system and the security afforded by
membership, but really had greater need of membership - at least they thought they
had, especially during the war - when the same conditions prevailed that youreferred to.

There are many good banks in the United States which might be members

of the system, an

probably would profit by being members, but they still do not

understand well enough what the central bank means to feel the urge to join the

Sir Henry Strakosch.

It has been suggested that it would be proper for

a central bank to undertake the savings bank business, that is, to allow interest

on savings deposits.
Governor Strong.

United States.

Would you favor that, or do you see any

It certainly would not be a desirable thing in the

It might apply in India;

but one of the outstanding objections

- 18 -

lies in this fact:

that the accumulation of a large volume of savings in the

central bank, upon which liabilities for interest arise, makes it necessary for
the central bank to lend money and earn money.

Certainly we have learned in

receet years that eo inject into the operat on of the central bank the regular
practice of lending money for profit can sometimes do great damage.

If the oblige,

tion to earn money was imposed upon the bank, by taking a type of deposit which
required payment of interest, it might interfere with a normal credit policy.

May I illustrate it by this very simple analogy fromthe United Uates?
about 2 1/4 billion dollars of reserve deposits of our medhere.
serve account of the nation.

We hold

That is rue re-

There has been a very strong desire at times ex.-

preesed by the member banks that they should get interest an their balances jus t

as they formerly did ehen they carried a part of their reserves with commercial
banks, - say, 2 per cent interest.

In order to pa 2 per cent interest on those
In order to earn 4b million dollars a year
balances we would have to be able to earn 45 million dollars a year/to pay that
interestpit would be necessary for us to eepand our credit, Lt present discount
rates, by 1,100 to 1,200 million dollars.
tion upon the country.

In other words, it :would force an infla-

Conditions in India may be different, and you may be able

effectively to separate savings accounts and their inveeements from the credit

operations of the bank of issu;

but if it did have the effect of requiring the

bank to ern money by investments at a time when it was net desirable, I should
think it would be a very undesirable thine; for the central bank to do.
Sir Henry Strakosch.

You referred yesterday to the necessity that to

have a properly functioning central bank there must be a money merket.

Would you

agree that the establishment of a central bank is the best means of eat blishing
such a money market, and that without a central bank a money market cannot be
properly develoeed?
Governor Strang.

of the money market.

tically the


and it results in developments ti:iat are distortions

Prior to the eetablishment of the Federal reserve bank preo-

entire readjustment of the money position of the banks of New York, and

- 19 -

largely of the whole country, was effected through the Stock E-echange loan account a most undesirable situation.

When reserve became impaired the bank-, called

loans on the Stock Exchange for payments and we had a crash in stock prices,

money rates climbed, and there were all the difficulties of an unorganized money
That is all avoided now.


We do not have these occurrences because we got a better organized money market, with the Reserve bank to take care of
these peaks and troughs of demand.

They are very considerable in the United

States. The Christmas demand alone for currency to do the shopping for Christmas
presents imposes upon us an expansion of our loans of about 400 million collars.

Before we close the evidence, is there any other matter

so which you wish to refer by wad- of correction or explanation.

Governor Strong.

I have nothing further to suggest as to our evidence.

But I do not think that my ccllkagues and I would be satisfied to conclude this
hearing without expressing our very great appreciation of the opportunity to
appear before the Cemm'ssion, and for the privilege of being able to make possibly
some small contribution to its work.

I think personally I should say frost my own

experience at home that no greater service can be perfoltned to India than what
has been und3rtaken by this Commission.

The first 20 years of my banking life

in New York stand out to-day as the experience of passing through recurrent years
of strain, of anxiety and of disaster which the accomplishment of our reforms
seems finally to have enlbled us to escape, notwithstanding the cornrrance of
the worst war in history.

So may I conclude by saying that we all feel great

admiration and resonct for the eminent men who are willing to lay aside important
business and other obligations and devote themselves, as you gentleeen are doing,
to a great service to the ;00 million people of India.

We are very much obliged to you and your colleagues for your

assistance, and for taking so long a journey to put that assistance at our disposal, and for the very generous measure with which you have put your time at
our dispose1 in the course of the last four days.

I am sure I speak on behalf of

all my oolleagues when I say that I feel most profoundly that you have been of the
greatest pof.c.ible assistance to our _31iberation3.







My dear Strong,

I send you a c -py of

Financial Co.maission of the Gen

sent another to Governor Hardin

I must call your at

35 of which I was not aware whe

these questions and as to which
hear your views.

But I do not

in the Resolution need embarras

enjoy an ad eo uat e Exchange marke

With kindest regard

Yours most sin

Benjainin Strong, 7.4sq.

before my departure.

I am looking forward to our


meeting and to the opportunities that we shall have to
discuss many subjects of mutual interest.
Until then with warmest regards,
Believe me,


t sincerely,






4a. µ



y60.4, AA,

4u ?Lip k64d. ci&A'at,


cu. kutit



ctrAV A.t.4414;^

(a me,
st9-otk .




(n4s4 iNesoL4



Mr. Monta6u C. Mori


One is the threat of occupation of

subordinate to this threet.

Do you seriously ;relieve

backed by all of the authority that may be ex rted by the


accomplish what is desired simply by the appointment of a

neutral or otherwise, whose duty it will be to see that t
in its operations?

I frankly can't see it

end the pro

being subsidiary to the mein issue, which is whether the

Governments will be sufficient to induce the Gamer) Gover

taxes and to float sufficient permanent loans to meet reas

obligations, or whether, failing to do so, France is to b

Sympathizing without reservetion with the prin

in reg.rd to the iltichsbank,

I cannot help feeling that p

will not be effective however it may be attempted.

some reference to this in so far as it a'fected my reply t

the gold credit.

It has undoubtedly occurred to you thet the ulti

reparatior payments by Cerny is the ability not of Germa

sense, but the willingnees of the Gorman *eotac to maintain

Government in office which is willing to carry out a repar
sound, and that pressure for the imposition of

. istrogrem

that point of willingness will result in a government whic

It has struck me l
making any payment of consequence. with this, and otherre
vy diseLtisfection

despatches from Germany that fact factor of safety essential
today, arias from the the that they cover in this

auletly discuss and for which letters are h very in

express ones views in detail.

Yours v
Mr. lontaju C. Borman.

Mareh 21, 1921.
Montagu C. N,rman, Esc.

In other words, they must be sufficiently
upon the banks and cannot be resold.
ikenprofitable to restrain the banks from holding them but sufficiently profitable
111114e induce the public to buy them; end, that is exactly what happened with this
It will give you a line upon our market eentilent and cc editions, because
400-commercial paper is selling at 7 1/2%, the rate for stock exchange call leaes is
The general feeling
from 6 to 7%, and the rate for prime bankers bills about 6%.
of uncertainty about the goodness of commercial loans and credits induces many
individuals and corporations to buy Treasury Certificates, *Rich is also indicated
by the fact that the year certificates Fold in larger volume than did the six months
I want to give you a little view of gonerel business conditions.
The steel business is literally going
but few exceptions, prices are etill falling.
to pieces, the United States Steel Cerporetion now operating considerably under 50%
of capacity, and the independent steel mille somewhere from 20 to 25%.
business as is being taken I believe represents considerable cute from quoted prices,
but steel prices cannot gc very much lower so long as labor rates are maintained,
and that wage policy ceeee to be the policy of the Steel Carporation to the "last
Vie are undertaking
Cemmcn labor in Mew York has no* been much reduced.
to get figures on wage reductions and until they are eeeezbled I 611811 only say
generally that the cot of labor is coming down, but the reel crisis in the rage
adjuetment will probably not arrive until the railroad labor problem has been dealt
The earnings of a very large
Railroad traffic has literally welted away.
percentage of the mileage represent little, if any, margin over operating ceets, and
the railroad companies, in despair, are making an earnest drive not only to reduce
labor costs, but to rake it eere efficient, and also to get rid of the useless working men who ere forced upon thew :luring the period of Government operation, who do
little mere than stand around and draw a day's wage for a very few hours work.

The greet price reductions of which we have kept you advised are now being
reflected in the annual statements of condition of the large borroting firms and
They show losses on inventories of much extent as to rake it
difficult for the commercial paper houses to sell the usual volume of commercial
paper which there concerns generally float in the market; end, of course, the pressure
on the larger banks where these borrowers keep their bank accounts is by so much the
All of thet we feel in New York more than in any other part of the country.
The decline in cotton, wool, eeat, copper, etc., has been extremely severe, and,
probably, in these and some ether important commodities quoted prices are below cost
of production.
or.e of them is in the reThere are bright spots here and there.
tail trade which keeps going astonishingly well, conviderieg that prices have net
yet been very much reduced.
But, it is a fact that new goods are coming along at
very much lower prices, due to the reduced cost of raw material, end these goods,
in competition with old stocks, are having a competitive effect upon retail prices,
which ere, and will continue, declining.
If there had been no Federal Reserve System in this country, bankers would
now be insisting that borrewers pay their loans, and, were this to force sacrifice
sales of inventories at present suoted prices, we would have a long list of inThe assurance given to bankers
solvenoies, closing mills, unemployment, etc.
generally by reason of the existence of the reserve Eystem has resulted in a much
more temperate and courageous treatment of this whole credit situ tion than in pest
times of crises, and makes one hcpeful that we may escape the worst effects or this
period of price reduction.
Temporarily, our reserves allow improvement due to the last certificate
I shall not explain the technical reasons
sale, collection of incoee taxes, etc.
which cause this, but it is usually the case on our quarter days, and we are taking

advantage of thin occasion, when our reserve percentege is artificially enlarged, to



Montagu C. Norman, Epp.

March 21, 1921.

ch.e the method of calculating reserves, to one much sounder in principle than
Aihe method formerly employed, which has the, effect of reducing the reserve percentage
nit will bow when the effect of the Geverament' borrowing end tax
trout 1 1/2%.
collection wears off.
There are certain special matters mentionee in your letter that 1 must
refer to.

As to Soviet Russia; oe get intieetiene that gold from Russia ie creeping
They say sole is coring through Mexico,
into us through various roundabout channels.
It is a difficult mstter for us
that some is coming from Sweden, and even France.
to deal with and we have put the responsibility squere:y up to our Governeent.
the gold is welted, say, in Sweden or in France, or in Mexico, or even if they receive Soviet sold, but keep it end ship us their own. sold in place of it, hew can we
They might even chip ue their own coin for an count
very tell check the movement?
Thic whole gold matter is
equivalent to the amount of Russian gold received.
re heve received from the preeent movement over
giving us a geed deal of concern.
the past twelve menthe, or sc, 4-155 millions in excess of *hat we have exported, and
ience ey cable to you, the reply to which hes just
it still continues to come.
reached me.
I shall write separately ee this subject, as we shall likely as you
te help us deal with the !Letter.


it does Get look as though the trade egreement which you heve entered into
Certainly, from a distance, it
with Soviet Russia will be very popular over here.
has more of the appearance of a political move than a sound business venture, '18
our people teem skeptical of the poesdbility of any oeeireble business resulting,
with the peceible exception of such limited sales of goods as may be paid for with
"tainted" sold.
The flood of security issues here seems, temporerily, to heve been arrested.
1 guess our markets were getting a little congested.
We had euite a cumber of
foreign loans, and eoee domestic leaes, all of which were going pretty eell until &.
few seeks ago, when one or two failures, or at least only partial successes, eleeed
up the offeringe.
1 arf interested in what you erete ebeut the Imperial Bank.
Possibly you
have talked with the Secretary of State for India, and ha -c,ay have told you whet 1
said to hie after you left Lendon.
I have gone over the zemoraadum entitled
"Central Bunks," numbering the paregraphr fro one Lo twelve, and enclose a memorandum in reply, to which I have added paragraphs 13, :4, and 15, which I hope will be
of some aid.
Your own memorandum covered the ground pretty thoroughly.
While I
was in India, altheugh nut attempting to rake any -special study of the subject, I
AiLS struck by the absence of a well organized method of dealing with the domestic
exchanges, collections, etc.
The Imperial Bank with its system of branches, and
with its expert knowledge of native credits, and of the inland bill, should be in a
position to deal with domestic collections and exchanges better than any other.
Such a scheme could be made to synchronize with currency and redemption operations,
and, I should think, eould very much stabilize banking operations.
I was told
that large denominatiea Rupee notes are so: °times sold tt a preeium in various
sections ef India, because of their eeevenience in effecting interior settlements.
eeesibly the Imperial Bank might take a leaf out of our book in this matter, but
the important thing is to persuade them, or roeuire thee, to conduct their operations
in London with you, in harmony with your policy, and so as to avoid such a eituetien
as has developed in Australia.


Montagu C. Norman, FE,;.

March 21, 1921.

As to the latter, we were having such difficulty in getting settlepent of
allections and accounts, that permieeion was granted to our banes to accept finance
Tills, that is, bills drawn in eettlenent of collections, and our banks, generelly,
there facilities to their Australian curreeeondente, but Eo far es I can
It might be in the interest of
learn the cffer has not been generally availed of.
the Commonwealth if the Commonwealth Beak used some sterling balances for the purpose
Fxchenge on New York has been euoted in
of making settlements in this country.
Sydney and Melbourne at a considerable premium.

Cuba, as you know, has been struggling with a bad banking situation, largely
brought on, I fear, by improvident management, of the local banks, but to a great extent by the sharp decline in sugar.
Their election having been succeenfully concluded, with Genero.l Crowder there representing thin Government in a general advisory
capacity, I look for improvement.
A come iseion ha:. been appointed, conristing of
a few experienced men, to advice the ?resident
f Cuba, in regard
financial natters, and the general economic situation, one eember of the ooweieeien
being, an old associete of mine, Mr. .:scar Mello, formerly Governor of the Federal
Reserve Bank of Caller, -nd now ?resident of the First National Bank of Birmingham.
He happens to
be in Now York ,iuet now and tells re that conditions are rea
up, although slowly.
A new sugar crop will be needed to help then out 3r their
You knee
difficulties, and I have no doubt that it will be successful7y financed.
they have no currency cf their own, kmericen currency circulating very freely, particularly notes of our Federeq reeerve banks.
Their favorable trade balance has
given them command to cur paper money, and not they have put en embargo upon its
There can, of course,
export re tle-t they probably have a redundance in circulation.
be no depreciation in this currency, although during the meretorium period checke
drawn by depoeitore upon their local banks have sole at tremendous discounts, sone
below 50% of their face value, and the effect of this has been to lieuidate deposits
and loans to such an extent th-t the condition: of scale of the banks has been much
Unfortunately, we have a situation in the Philippines which requires drastic
I fear it is due to mismanagement, rather than to inherent unsound conditions.
You probably have heard stories of the difficulties of the Philieeine
Motional Bank.
We are urging our Government to step, in and teke authoritative control and give necessary assurance to the bank's creditors that their interests will
be taken care ef.
Their difficulties largely grew out of speculation in exchange
by the manueer of their Shanghai branch, as well as making sor4le slow loans in Maaila.
If our Government taker vigorous steps to clean up the situation, I have no doubt
it will be handled without loss to anyone, except possibly the Philippine Government;
Mint is, the stockholders, of which the Government is the largest.
What you say of Yr. Kiddy's correspondence I really understood without
heariue from you.
it would, as you say, be a thousand pities if our two institutions
were accused of getting up a "money trust."
I have always taken the position that
both you and we had three possible courses in our relations with each other: one
was to deal wholly independently with our respective problems, without any relatione, 4'
and in comelete ignorance of what the other was doing, in other words, to ignore each
other; another might be tc pursue a wholly selfish policy, each dieregerding ccepletely the interests of the other, and possibly pursuing a policy entegonietic tc the
etner; and the third eight be to adopt a policy of complete understanding, and
of information and views, and to cooperate where our respective interests made it
How can there be any choice between these three, nor any ground of complaint, so long as we are right and not afraid fif our critics? As I
Federal Reserve Bank of St. Louis

Montagu C. Norman, Es-.



explained to you in London, vie keep no register by numbers of our
The only exception being gold certificates of large denomination,



Montagu C. Merman, Esq.

Yarch 21, 1921.

Replying, now specifically, to yours of March let, the Prime )iinteter
have encountered the same difficulty vhich of have all encountered.
eems unsilling to deal with things as they are in this wetter ef export credits,
and prefers to emphasize a hypetheticel condition hich be would like to create
but cannot well create eo long se the riek[
f exchange and political uncertainty
Are as grave as at present.
I cannot for the life of me see what ebject is gained by asking the bankers to make bed loans and thee blemini they and abuoine them
if they do not make them.
1 wes particularly pieased to get your explanation of
the incident, which makes the situation clear enough.

411 ems


It would be a pleseure to see Lord Challers ehee he arrives if
the opportunity af doing no.
The President hos appointed, inl the Senate confirmed Ir. Eliot Wadsworth ae Asrietant Secretary of the Treecury, to teiceeed
Nichoies Kelley, who in turn succeeded Jr. Rathbone, in charge of Fereijn Loans.
tadewurte is a very old and intimate friend ef nine; a eplendli i!elloe end eith
ceeidereole knowledge ef Euro peen conditiees, an he war the operating head ef
the eeericee -Red Cross under Davison luring ilmeet the entire war period.
was formerly ss partner ef the fire of Stone * Webster; you will rectal meeting
Mr. Stone recently in London.
he is still .one of our directors.
shat you say about Ben Guinness wee net surprising es meet Aeericaac
who visit Europe, 1 fear, eseume to knor es good deal rere about our policy, and
about such natters es cradle: conditions here than is always jurtifiee.
I have written you un this subject. is absolutely the fundamental and controlling.
factor, that ie, the debt of member banks to the
much reduced, or until we reduce our rates, I hardly roe how noney conditions
can ease.
it has been ertirated thet to reduce the lean and inveetrept ,:CCOUnt
of the reserve banks from three tillione to one billion v.ould in turn involve









If there had been no Federal Reserve System in this country, bankers would
now be insisting thAt borrowers pay their loans, and, were this to force sacrifice
sales of inventories at prevent quoted prices, we would have a long list of insolvenoies, closing mills, unemployment, etc.
Tho assurance given to bankers
generally by reason of the existence of the reserve system has resulted in a much
more temperate and courageous treatment of this whole credit eitu-'tion than in past
times of crises, and makes one hopeful that we may escape the worst effects of this
period of price reduction.

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102