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fe,;(/ 11q.)i) --71/f23) / 7o 4, AC ACV Vor JAW 30 1922 a, S. , 0-- azt a-v4A---- L,0 j - 00 //_2_ Z/el I\ n `L V 192 GED S 2_ 7ttfrItL- AIL / a y /( -7/-L / f4_ 7 /y/i7/ /7 / /Y o7 ZAA ) t Ttr-7,9 , °&-N3 le17.--- 7-- 7(Le/ LA,-6 7t / ---lf-X cL- I ,i_.e V, I 0-- 7-,--,-, t,.3 ti, 7 7 ) -L_ ---e.-- -, .-- cO, ,6 ,-(_, ----,( -- z- '-- ---J ,4 _ t-- , (17- -pt , ( s- 0-0 ) L d?, 0 2 8-0-b 9 ot, ir SI) ;-Z6-0 Cto 62, ) S " Te-a- " C71/k- r - 9 ,,, , c A -2C-7= /e,-- 76 2 -Zt-e Za--- ,/( --72t Z,,, j/k. ri-\, 7H-e LrLy / r( t 4-,L, -t-,< tr/L___ei,( , ---tZ0Z-- - Z / J o(L,_ -, ,---__ %,__,_ _t-- -Z 7-7/ , /----- fl--- frI., 4-ir-e.4 ,,---,,.-7/6- i,-;6 .,-,-1, ?,,--6z- L----/----- /(,-, 1 jeei_e t) . a 0-/ )I-rt_ C9 a- --,,- --a- -,-, r ;1,:4 -'7ZcZ- .?-n--' 2 ) a_-- , c- ,tr-/ d ..7 , c;12. eA.ALV ) (47 ) e7 1. d. AZ; -_- Y./ FEDERAL RESERVE BANK OF NEW YORK November 17, 1921. My dear Professor King: When I received and read youp-IOng letter of November 13, frankly, my ealizing that I had imposed upon you a task of writing conscience emote me hard in It was indeed most kind of you not only to read the such a long letter by han \your letter certainly deserves an statement, but to commelt upon it so full extended reply, but iyorder that it may be r receive and hold it ably complete /I must ask you to contehte in confidence. First, p ease bear in mind that the scalp* was a very long 4ie, was limited by the time allow necessity for de ling specifically with nit trolling at that timeiil but hich 1 inqui so important. in the Treasur especially the post-war per*od. with the utmos ecessity for loyaL other was naturally impoeed upon me b policies of that year, with se in New York, which m for me to deal with cer ain parts whom I had been associate by the Commission and the considerations ow wo ld not dangeroue financ a very my statement, which necessarily rs whiCh had been critici ed by Mr. two',1PP Williams and others, an4 also of hich were cone of them was e it necessary caution. The to those with artment during ..he war period, and I refer specifically to tI year 1919. and the hich I was very much out of sy,Mpathy during the greater part of the time. It seemed to me that n argument as to the Tre Bury's policies of the year 1919 was permitted by me so long as Secretary Glast and Mr. Leffingwell were available to the Commission, and especially, as I explained to the Commission, when I had occupied the position specified of the Treasury rather than a in principal. the Federal Reserve Act of being the agent Professor King November 17, 1921. With this preliminary comment, which is necessary to an understanding of Omy personal position, let me add that almost every question raised by your letter, 4, in order to be accurately answered, requires consideration of the circumstances and of public opinion at the time, and of what is practicably possible contrasted with what is theoretically perfect. Should the government have taxed more and borrowed less? that is Yes, had it been possible. The answer to My thoughts in regard to the policy of taxs- tion during the war were, I may say, almost entirely controlled by the influence of Professor Adams' book "Public Debts," and his admirable chapter upon Secretary Chase's policy in financing the Civil War. memory as If you will, however, refresh your to the state of mind of the public, the temper of Congress, the difficulty of getting legislation of the character required through Congress, I think you will agree that while more might have been done, what was done was extraordinary when one oc,ntracts the failurelof the Civil War period, and the equally disastrous -failures of the European belligerent nations. Over and over again the policy of high taxes was urged upon Congress by Secretary McAdoo, and was energetically supported by the managers of the Federal Reserve System. the year The program for taxation recommended for 1918-1919 contemplated revenues of $8 billions from taxes. The approach- ing conclusion of the war resulted in a modification of the program to $6 billions, as was finally adopted. My own view as to whether the people did save all the expense of the war while the war was going on is slightly different from what is implied by your question. did furnish all of the services and they did produce They all of the materials required for the war during the war period. That is certainly true; but what they did not do was AaA0 041E-1) to reduce their own consumption so that what was consumed by the war was not-treated- ft , future payments, as would have been the case had taxation covered exA penditures; A, but after all, could taxation have covered the entire expendPiure? Theoretically, I admit that it could, and cited the example of warfare in feudal Professor King #3 days to illustrate the point. a November 17, 1921. But on the other hand, what is theoretically possible and what is practicably possible are two very different things, and I doubt whether 0 taxation to the extent required would have been politically and socially possible. This can be only a bare expression of opinion. This, in a measure, answers your next question as to the limitation of the supply of circulating medium. Leaving out the influence of additions to our gold and the inflationary effect of gold imports, I personally believe that more could have been done after the war ended toward limiting expansion and inflation than was done. Very little,if anything, more could have been done during the period of our belligerency, and under the existing state entry we were really powerless to do anything. of the law prior to our The figures prepared at the bank indicate that the greatest expansion took place before we declared war; the least expansion during our participation in the war; and a considerably greater expansion ibuk kuttuter, 4107 '1411.17 subsequent to the conclusion of the warI\ The first two periods were the most difficult to deal with. The last period could have been dealt with in my opinion by a different policy had the Treasury and Congress been willing to adopt it. My belief is (and of course I am expressing but my personal opinion) that the risk should have been assumed of a high rate policy commencing in March of 1919. What the consequences would h9-ve---been can only be surmise. We would have prevented a considerable part of the advance in prices, which in fact had considerably declined between January and April in 1919. The arguments of the Treasury against that policy were principally two: One was that the declimin the values of Liberty bonds, as the result of t higher interest level, would cause a demand in Congress for refunding the entire war debt, which was regarded as an impossible operation and one necessitating gross injustice to those who subscribed at par and sold at a discount, and an unwarranted profit to those who had not subscribed at par but who had purchased at a discount. You will recall that the Treasury was borrowing constantly increasing amounts until September 1919. The second argument was that Professor King November 17, -1921. ,v /we were faced with an imminent and sudden reduction in our export trade, with the iv 0poseibility of goods piling up at home and causing heavy price declines anyway. 9 Possibly, writing with more frankness than I should, I might say that neither of these arguments h( impressed me. I did not expect our export trade to decline, but rather to continue for a considerable period, and I was always willing to take the risk of Congress running away with the situation by passing some big refunding act. I do not think that they would have done it; but again that is just personal opinion. Commenting upon your question in regard to control of prices. That is, I believe, one of the most difficult and puzzling matters of policy with which the Federal Reserve System deals. ment on that point, but will I realize not only the imperfections of my statego further and say that I realize my limitations in dealing with so important a subject; but shall try and express to you just how I feel the attitude of the Federal reserve banks should be toward prices in general. There are a great variety of considerations which enter into the rate policy of the Federal reserve banks; The state of reserves, whether gold is being imported or exported; whether the country is in a speculative or in an apathetic state of mind; whether prices are advancing or declining; whether there appears to be over-production or under-production; whether the general level of interest rates is much above or much below the discount rates at the reserve banks; &c. &c. When it comes to the question of prices, it seems to me that we should consider movements of prices in their relation to our discount rates, to our volume of discounts, to market rates for credit, c., as being a reflection of our policy, rather than a primary cause of action. It is difficult to express by dictation, but what I have in mind is that it is the movement or trend rather than the absolute figures of the moment, which should determine our policies. If our discounts are expanding, if our rates are getting below- the market, if prices are advancing, if the speculative temper has developed, then rates should be advanced. Not only all of these considerations together, but possibly only one or two would be justification Professor King #5 .or advancing rates. November 17, 1921. The converse of that is true to some extent as to possibly /all of the factors that I have named, excepting declining prices. 4, It should not necessarily be our policy to promptly reduce discount rates just because prices decline; in fact, a declining of prices is likely to reach considerable proportions before actual liquidation of the volume of credit takes place, assuming, of course, that we escape, as we should, a panicky, perpendicular liquidation with a large volume of distress sales of securities and goods. On the whole, I think the policy of the Federal Reserve System will be safer and less liable to political attack if the attention of the country is focused more upon the state of our reserves, the volume of our loans, and the cost of credit, than it will be if we frankly assume to direct our policy toward regulating prices. This is a country of a great variety of economic interests; when cotton is prosperous, cattle may be prostrated; when manufacturing is prosperous, agriculture may be in difficulties. There would always be one class or another to demand that we regulate their prices. In fact, this has been frankly stated to me at the Capitol by those who are thinking sectionally rather than nationally. So, admitting, if you please, the effect of our policy, its reflection in the price level, will it not be safer in the long run to direct our policy toward regulating the volume of credit (certainly in public discussions of the question) rather than to direct our policy to the direct regulation of prices. V This argument may seem to you a bit specious, but I can assure you that it is practicable, with my experience 4141"-the temper of Congress during the past ten months. As to the world reaching a state of production beyond the power of consumption. I should say that the answer to that is more psychological than actual. We do know that people influenced by fear, propaganda, or for some one or another reason, at times are driven to practice unusual economies, tinuespand a great surplus of goods accumulates. of mind rather than an economic condition. while production con- It is a reflection of a state I believe, generally, that the world Professor King just about capable of consuming all that it is November 17, 1921. capable of producing, so long as one admite that the state of society is such as to support itconstantly elevating standard of living. In fact, as to that whole line of inquiry in your letter, I attach much more importance to the influence of the state of mind of the people, than I do to the theoretical possibilities in a theoretically perectly organized state, where the influence of fear, or the influence of the anticipation of future events, so strongly controls what people du. 77,1 Expressing it differently, I think,aal of the losses and suffering in the past two years could have been escaped if two things tee)-4et, W19-re possible of accomplishment: tfeAff One, if the volume of credit and the level of prices could xe reasonably maintained at that established in the spring of 1919; and second, if the minds of the people of the country could have escaped the influence of what was happening in other countries, where less fortunate conditions led to the breakdown in Japan in the East, and somewhat later in Europe. I have answered your inquiry as to the rate policy of 1919, excepting as to the suggestion that rates might have been raised to any heights necessary on all forms of borrowing, excepting those secured by government collateral. There, I think practical experience has completely demonstrated not only to us in New York, but to the managers of the other reserve banks, that these differential rates are wholly wrong and ineffective. Had we established a 7% rate on commercial borrowings, and maintained a 4% rate upon loans secured by government bonds and notes, in the spring of 1919, within two or three months all of our loans would have been secured by government bonds at the 4% rate; and the converse would have been true bad we made a 7% rate on government loans and a 4% rate on commercial loans. simply borrow in the cheapest form in which they can. The banks The only differential in coGet rate, which our experience indicates is justified, is that applyircfof the period. for which the loan is granted. A The enormous volume of the government's borrowings would have afforded ample means to all that they wished at the low rate. all of the banks of the country to have borrowed To escape the 1919 expansion, it would have 6 Professor King Jen necessary to have advanced all rates. November 17, 1921. That is a matter which I believe the tAN 410Treasury never understood until the spring or fall of 1920. The object of my statement in differentiating speculation from business enterprise was to remove from the minds of the members of the Commission what I believe was a very erroneous impression of the policy of the bank in New York. Please bear in mind that having been deprived of the opportunity of controlling the expansion of credit by the employment of higher discount rates, it was necessary ' to do the best that we could do by direct control. The best example that I could give to the Commission was the control which we exercised over the stock market speculation. Of course, I admit that all business contains in a greater or leaser degree some element of spSculation, but having found ourselves unable to effect a complete, democratic and universal control by interest rates, we had to take hold of each department of enterprise by the best means we could devise, and in the case of the stock exchange we did it in the way described in my statement. It was a poor plan at best, and I hope never to be called upon to attempt it Again. I Agree with you that if expansion could have been prevented in 1219, our policy in 1920 could have been reversed, probably with salutury effects. It is difficult in a letter of reasonable length to answer your inquiry about my optimism as to prices being brought to a new stabilized level. Some time CD t51-- 01P I hope we can discuss this -y' attempt to describe _tbsit. Xa very spotty development. What I think you may safely imply from my statement is that with the policies of the Treasury no longer controlling, it is at last possible for us to be a greater influence in stabilizing prices and promoting, generally, more stable business and price conditions, than was possible during any of the periods that I described in my statement. Without going too far in the implication, your question might have been framed that I was unduly optimistic in expressing an intention to endeavor to accomplish a better stabilization of prices and conditions. It is not an attitude, however, which I would care to emphasize publicly, as I believe it is filled with possibilities of danger to the Federal Reserve System. . Professor King November 17, 1921. This I fear is a very inadequate reply to your rather searching questions, hich I hope some day to answer verbally. In conclusion; as to the future, I be- . lieve that you and the good men of your profession live in an atmosphere which deprives you of the opportunity of forming judgment on two important aspects of our work: One is what I might describe as the practical manipulation of rates, and the effect of it. We have started a vast and complicated organization, with mixed powers and influences, with very little experience to go by and that of an unusual and extraordinary character, and now that we have achieved a position of greater freedom we must cautiously feel our way along and see what are the practical results of the policies adopted from time to time. They are the problems which I would describe as the operating problems as distinguished from the theories. But another and more important influence is that which relates to the protection and permanence of the System. There is the densest ignorance in Congress, and generally throughout the country, as to what the Federal Reserve System can do and what it can not do, of its purposes and its policies. Selfishness, ignorance andintolerance,prejudiced criticism, with attacks of demagogs, political ambitions, and all sorts of influences, )24-70 awitirtrarealply-s-v- and Orill\al.11..".y9 be in the background of our affairs until the Federal Reserve System has a great tradition behind it and is held in public esteem as being sacred from attack. We must always have in mind that Congress has the power to sweep us out of existence or to change us from what we now are to something that would be monstrous and dangerous. From this you must not gather that I am influenced in the slightest degree by political considerations; they have no part in our policies. But I am, and always will be, influenced by the possibilities of real dangers to the System, and those I can assure you during the past twelve months have been greater than any of our University men have realized. My attitude to the Commission before which I appeared was to leave our critics alone, and to endeavor to lay before the Commission as sound and well supported information as we had at our command on the subjects in which they were interested, and endeavor to get as favorable report as possible. This explains much that is missing from the Professor King #9 November 17, 1921. statement, anti in general much of my attitude in dealing with the question of the <2 relations between the Treasury and the Federal Reserve System. One influence which has been strongly in my own mind during the past few months in adopting a policy of lower rates, has been the need for opening our markets to foreign credits. I cannot go into the detail of this situation in thi letter, but I think I should say to you frankly that there is gradually looming up ahead of us a new danger, and one with which we must reckon. This country cannot afford to absorb the world's entire gold production, to gather in most of the gold which now serves as bank reserves in Europe, and lock it away withoutAperforming any function. If the Government of the United States determines to start the collection of interest upon loans made to the Allied governments, we will undoubte dgold stock. le mill see increasing pressure for ly see further great additions to our bank's international currencies, and all sor ts /\ of batten schemes. Such men as Professor Cassel, Senator -Hitchcock, Mr. F. A. Vanderlip, and many others that I could name, are coming forward with the restoration of stable conditions; in other words, for the accomplishment of th impossible. I am only suggesting to your mind What I fear will be the next form of attack upon the Federal Reserve System. There is no danger of abuse of our facilities at the present level of discount rates, and there is the possibility of our facilitating the world's recovery in a sound way, and we have the power and intention, when the need arises, to advance our rates. Please overlook this very hastily dictated letter, and give me the pleasure of a call at the bank some day when we may have lunch and discuss these matters more intimately. Yours sincerely, Professor Willford I. King, 7 S. 23rd St., Flushing, N. Y. ZERS.0:-NAL January 30, My dear Professor King: You must have wondered why you have you were kind enough to write me on received no and only to-day have returned to I did dictate a reply on November November 13. 17, but a few days afterwards I was obliged to go the office. reply to the letter which to the hospital In the for an operation, meantime, having been prohibit- ed from all work I was unable to read over the letter which I had dictated and send it to you, and now it ie somewhat out of It will be so length to date. much more satisfactory if we could have a talk of sufficient cover all the ground dealt with in your letter. I feel so pleased that you should have taken the trouble to write me so fully, and in longhand, that I not want you feel that your kindness is not to One point only I every do appreciated. must refer to in this letter. It bears upon practically question which your letter raises. Supposing during the war, or the period immediately subsequent to the Armistice, the managers of itself, should have found what they believed to be just ground for disagreement with the Federal reserve banks, or the Federal Reserve Board the policy of the Secretary of the Treasury, and should have positively declined to develop a policy reasonably happened to the Federal synchronizing Reserve System? Would the Federal Reserve Act have been the provisions of the Overman act have with the Treasury's policy; what would have Would we have remained in existence? materially modified by legislation? beenb4voked? lould Nould the direction of the Federal reserve banks be under the direct control of the Secretary of the Treasury? dould the members of the Federal Reserve Board have new members appointed? been removed from office and In fact, /hat would have happened no one can say. But I 12 Professor King January 30, 1922. maintained at that time, and since have no reason to change my view, that the policy of the Federal Reserve System could not be made practicably and effectively to dominate the policy of the Secretary of the years long gone by, S. I eau Treasury. recall reading in reference either by Palgrave or Bagehot to exactly similar conditions as those Wech prevailed in the period dealt *ith, and in language which 1 cannot exactly recall, but somewhat as follows: "Nhen war ariees, the sineter hand of the Finance Minister reaches out to the central bank." So it may seem to be the case pith us. this creature of Congress to do? But even were it a sinEter hand, that was Engage in propaganda to defeat Policies not only sanctioned but made mandatory by Congress and by the various bond bills. Frankly, I cannot see the force of the argument that "the possibly wag the dog." tail could I recall bearding such a description as this applied to the lelation of Austria to Germany by Dr. Henry Van Dyke, vho very aptly said that "while the tail cannot gag the dog, this did not necessarily give ground for a feeling of contempt for the tail." It must be recalled that eld during the year during the period of our participation in the war, 1919, Treasury affairs aed personality, and who I have were run by two men of strong character always believed exercised discretion, so far as Congress permitted, with the highest minded purposes of doing the best that could be done. Then ve disagreed vith them, is said so frankly. ments, which naturally arose one time or Nhen these dieagree- another, came to an issue, the choices were assent, compromise, or resiEtenoe. My on belief *as, and still Is, that of the three courses resietence 46.6 the most dangerous and would have been the most futile., But in point of fact, no serious differences arose between the Secretary of the Treasury and the reserve system management until the year 1919, and then they were of a character most difficult to deal vith; and they vere in fact dealt with more by lay of compromise than by either of the other courses. my statement to the Commission, and I of viem should have been as most anxious exposed to the Commission by Thie was suggested in theft the Treasury's point either Senator Glass or Mr. Professcr King #3 January 30, lin?. Time not permitting that, I oauld only introduce Mr. Leffingmell's 1.effingwell. public statement, Dr. Miller's address, and Professor Snrague's admirable paper. Cat I was unwilling to do, and am &till unwilling to do, is to turn upon my associates of that most difficult and trying time, and charge them with responsibility for decisions which wa all should share together, and especially, as in the case of one of our prinoipal critics, make charges of bad faith. I have erittan you with somewhat more frankness than I have ever written to anybody on this subject, and am led to do so by the cordial and frank character of your letter, which you took so much paths to write me. please consider this letter as You will' however, quite confidential and persona]. for yourself. would rather resign my position than start /104 to blame those with whom I was associated during the war, even though I disagreed with them at that time and said so. lilt you not at some early opportunity telephone and then make anappointment to lunch with me there, in taking you through the institution and I will find so much pleasure and giving you in that way some idea of the immense affair it has become. with cordial regards, believe me, Yours sincerely, Professor 4illford 78 S. ?3rd St., Flushing, Pi. Y. I. King, or write me at the bank, February 14, 1922. My dear Professor King: Thank you for your note of the 12th shall ask my secretary just received. to mnke an appointment with you for some day next week, as this week seems to be rather crowded with engagements. My thought was to arrange, if poshible, for you to reach the bank not departments at later than 11 o'clock, as certain of our about that time are the day's business. at the peak of the load of After going through a few or the de- partments of the bank we can have lunch in the building and have a little discussion of the subject of our recent corres- pondence. Yours Professor Wilrford I. King, 76 S. 23rd St., Flushing, M. Y. BS.MM sincerely, I