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International Labour Office,
GITEVA
Ir.7.z3.

I am taking the liberty of writing to you to ask
your assistance in a matter on which any suggestions you
might give me would be particularly valuable.

It is in

connection with a study I am making for the International
Labour Office on "The regulation of credit and currency as

a means of sIbilising production and employment."
been appointed to make a report on this question,

Having
I am very

anxious to gain as complete an understanding as possible
of informed economic opinion on the business cycle and of
the latest ideas for monetary reform. and any assistance
which you might be willing to give me would therefore be
most appreciated.

In examining the recent literature on the relation
of money to unemployment,
agreement;

I find one point of almost general

the need for restricting the rate of rise or

fall of the price level.

A further generally agreed point

is that the most efficient means for controlling price movements is provided by the /ate of discount.

Assuming these

hypotheses, there are various practical issues which arise.

Perhaps the most important for the United States is that of
determining the most suitable means by which the discount
policy of the Federal Reserve 13oard can be made effective

in controlling the market rate of discount.
events,

?his, at all

is the point on which I should like most to solicit

your assistance.

Various ideas have been suggested for enabling the
-Federal Reserve 3oard to secure complete control.
stance,

it might be effected by raising the




For inreserve

requirements of banks.

A suggestion is also made that

II State and country banks might be compelled by law to make
their discount rates conform within certain limits to
movements in the federal reserve bank rate.

Another pro-

posal is that the federal reserve banks should themselves
borrow in the market after the manner of the Bank of England
when they wish to make money scarce, and that they ought not
to discount bills for clients other than member banks except
at times when they wish to make money very cheap.

(A

suggestion which Mr. Leynes tells me he intends to develop).
It is shown also as a further possible solution that if
prices are allowed from now onwards to rise slowly to a point
at which the legal reserve limit is almost reached and then a
serious attempt is made to stabilise or at least to prevent
serious deflation from that point, the country and State
banks would at all times require to keep strong reserves
at the feueral banks, which would thus be permanently in
command of the situation.

Then there are methods suiested either for creating
an artificial scarcity of gold, or for ensuring that a rise
in prices is more rapidly reflected in the reserve situation.
With regard to the former,

I am thinking more particularly

of the proposal of Messrs. Foster and :;atchins that a
certain reserve of gold should be set aside for possible
future export.

Mr. Miller's sugestion for assimilating the

federal reserve system and policy to that of the Bank of
England would seem of interest in the latter connection.
Again, there are methods which would entail the
alteration of the gold content of the monetary unit:

the

fisher scheme, or modified forms of it, which by artificially
affecting the volume of bank reserves would oblige banks to



use the discount rate in the required manner.

it

Other

suggestions of a similar character would entail the modification of the gold content as prices rise or fall according
to a progressive or degressive scale, to make the scheme
either more or less immediate in its effect.

Finally, the

gold content of the unit might be modified according to the
requirements of the moment rather than according to a fixed
plan or system.

Phis would presumably be done by the

Federal Reserve Board on its own initiative whenever it became necessary to make money cheap or dear;

and since loss

would be incurred in the process it would be necessary for
the State to indemnify the federal reserve banks.

I feel considerably out of my depth in discussing
these methods, since my knowledge of the working of the
federal reserve system is somewhat elementary;

bnt most of

the ideas contained have been pas:2ed on from persons who

should understand the question.

?here seems every reason

to think that if all the alternative methods proposed for
enabling the Federal Reserve Board to secure permanent control
were thoroughly thrashed rut, there would surely be one which
might prove acceptable.

It would be of the greatest assistance

to me to know whether you yourself are of the opinion that any
of the above methods would be practicable.
In addition to learning in what ways the entire
banking system of the United :states of America might be
compelled to follow a com:..on discount policy, it would be of

the greatest value to know if there is any movement towards
voluntary co-operation.

If, as seems probable, the control

of the trade cycle will entail, amongst other things, the
adoption of a credit policy which would aim at discriminating
between or "rationing" different classes of the producing



community at different stages of the cycle, such a policy
could only be made effective through voluntary co-operation
between banks on a national scale.

\ny "credit" policy,

as opposed to a mere "discount" policy, would seem impossible
without definite mutual agreement between banking institutions.
One of the most important questiom:, therefore, seems to be
whether there is any movement in America for closer collaboration between banks and whether complete co-operation is an
unattainable ideal in the future.

I should be most inter-

ested to learn whether you consider any tendency in this
direction is indicated in current banking methods and practice
in America.

It was Professor Seligman who, when in Geneva, suggested
that if I found myself in difficulties in appreciating the
situation in -America, I should be well advised to appeal to

yourself for an opinion and assistance.

knowledge of

economics is only such as I could gather together in a hurried

post war course, and I am conseouently having to educate myself to the problem as I go along.

One method 1 have adopted

in order to secure a more complete appreciation of international
Opinion with regard to the monetary solution, has been to write
a short essay on trade cycles and circulate it for criticism,

l am taking the liberty of sending you a copy under separate
cover.

This essay has of course no connection with the official

work of the Uffice; and I hope, when you read it, you will
not imagine that I myself am of the opinion that the methods
proposed for the application of the 'remedy" are of more than
theoretical value in present times.

if I were to venture an

opinion as far as practical policy in 4merica is concerned, I
should be inclined to recommend the adoption of a combination

of the two methods i have marked on page 2, the second as an
immediate measure



until the first, the final aim, were reached.




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