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TELEGRAM
FEDERAL RESERVE BOARD
WASHINGTON

December 10, 1919.

Morss, Boston
Passmore , Philadelphia
Wellborn, Atlanta
M i l l e r , Kansas City.
McDougal, Chicago
Board believes that in order to discourage speculation and check loan
expansion i t i s necessary to use discriminating judgment i n making discounts
and advancements as provided in Section Four, and to havememberbanks
understand that resources of system are not unlimited. Board realizes,
however, that advances in rates constitute an important element in making
member banks and their customers understand need for such discrimination
and limitation. Treasury position at present is sufficiently favorable as
to warrant abolition of preferential rates in favor of paper secured by
Liberty Bonds and Victory Notes. Maintenance of four and one-half percent
rate on Treasury certificates seems necessary to insure success of future
certificate issues, but maintenance of this rate involves no great danger
of expansion as that rate affords no profit to banks carrying certificates
but on the contrary offers inducement to distribute certificates among
taxpayers and other private investors. Treasury does not ask continuance
of four and one-quarter percent rate on four and one-quarter percent certificates.
In bringing these facts to your attention Board desires to say that if
conditions i n your district are such as to render desirable four and
one-half percent rate on a l l certificates and abolition of the one-quarter
percent differential in favor of rediscounts and advances secured by liberty
Bonds and Victory Notes, Board is prepared to approve such changes.

HARDING
OFFICIAL BUSINESS
GOVERNMENT
RATES


CHARGE FEDERAL RESERVE BOARD



TREASURY DEPARTMENT:
Washington,

December 10, 1919.

Dear Governor Harding:
Since my l e t t e r of November 29th was written the situation
has changed

materially.

The offering of 41/4%certificates of an

average maturity of three months was conspicuously successful and
this relieved the Treasury of risk of immediate embarrassment as t o
i t s cash position. The Treasury has offered a new series of 4 1/2%
six-months certificates with the privilege t o the holders of outstanding certificates of earlier maturity to make payment for the
new certificates in the old, and the Treasury looks forward confidently to the success of this offering*

Apprehension concerning

the coal strike and the Mexican situation i s allayed and there have
been some indications of renewed speculative activity and of expansion of credit for speculative

purposes.

Under these altered c i r -

cumstances, while I would not be understood as proposing any specific
action by the Federal Reserve Board at this time, whether as to rates
or otherwise, I should not wish the views expressed in my letter of
November 29th t o stand in the way of any action which the Federal
Reserve Board might now desire to take.
You will, of course, have in mind that on December 15th
some $850,000,000 of income and profits taxes are payable, while the
Certificates due on that date amount only to $640,000,000, and that
payment for the new issue of 41/2%six-months Certificates will be




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made on and after December 15th. These things will involve a veryheavy strain upon the money market and the possibility of grave
financial stringency*

The Treasury is taking steps to relieve the

situation by offering to redeem on and after December 15th the Certificates due on January 2nd. Danger signals have already been
thrown up in the form of high call money rates this week. The s i t uation at the moment i s , therefore, one which t o my mind suggests
the importance of extreme caution on general grounds rather than
because of the Treasury's position.
Very t r u l y yours,

Hon. W. P. G. Harding,
Governor, Federal Reserve Board,
Washington, D. C.