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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 2 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.