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a February 24, 1925. Dear Mr. Morgan: It was ,A real pleeeure to have your letter of January 28, eritten in the style which I uneerstand, appra:ciete and enjoy as coming !rom the mind and heart of a good friend. Your luotation on the first page ie 4onderfully enlightening in ore reapecte than one, under and aeueing to all o° us here :4ao labor the thadoa of poeeible political attacks ane of er calamities, 99 p r cent. of which never happen. Ihether Dr. Schacht's auministretion of the bank ie c3ucce6s or not, I must say that he started by methods which aroused my admiration a.nu respect, because of the vigor and courage with which :.e dealt with that courageous kind of a situation which needed treatment more than anything else. chile I have never believed in the theory of rationing credit at times when e reasonable abundence of credit makes it capable of proper regailtion end control with regard to demand by price change, yet I suppose there does come a time of famine la credit just as there may arise famine in food supplies, when a eystem of rationing is more of an more just tin:. leak, calealtole in its results than can control by prices possibly be. I am ;pondering now, as I did when the Dawes program was first made out, ihsther the Agent General's payments on the one hand aed investments on the other hand, miaht not have just tie effect ,hich Frofeseor Caeeel you may have been present at some diecueaion lee en here. that refers to. I think question eas raised over The important thin;,; is that the Agent General should have such a .orking 2/24/25. Sheperd ilorean, Esq. ft2 unceretanding with the management of the bank that the combined influence of the bank' e crecit policy plus the Agent General' s policy as to investments and transfer payments (or payments in make it very difficult kind) may not together bring about a result which eould ultimately to resume free gold to maintain the mark payment. But I am a bit skeptical (so far) -e to your suspicions in regard to the relation of to the Germany's prices to American prices, and have always been ekeptical as arguments bout purchdeing power parity. from this country. Germany has been a large importer The things which Germany imports are those which are stable, standardized, quoted frtely, dealt in freely, and where questions of euelity, grade, esthetic taste, etc., hive no influence. of exchange is always at the so- called those goode. purchasing power parity with the pricers of The relation between domestic foreign purchasing erices offered it as of of consumers' purchasing power of currency end Te must be influenced by those prices in world power, it strikes markets where the consumers' products of would regard Therefore it secms to me that the rate more importance to countries compete. In other words, I ascertain the relation between the selling respectively in Germany 'mu America and being goods produced for sale in Batevie or Singapore, than I would the r, riceE of such standard commodities as cotton, meat, copper, wheat, etc., told by America to Germeny. This is just 3 hint of a view on this subject, which can he elaborated if you have time to rearinete on it. of that nova But I do agree of German goods to which you refer. tamer, which we the period of progressive with you that there is little dange In feet, the period of greatest depreciation of currency in Germany, it sense to rne is definitely pa,,aed. ote have bean much interested as we can follow it from this side. in watching the Reiohebank gold policy so far Any thing that you it will be interesting reaeing, and -valuable end can send me in regaru to instructive as well. I have ,written Dr. Schacht some time ago that wo hoped to be of service to him in any proper way. i5 aeepard Morgan, te:sq. 2/2e/25. The memorancum you refer to May hove been in Normente pocket Alen he was 1111 here, but he wae exceedingly busy, and if he intended to ehow it to m:, he must have overlooxea it. Now e iord about ehineu here. We have a curious situation, but I ouppoee no more curious then el; situations which cave developee einct the we r. There is a very laree volume of busineee being done, but the profits arising from the turnover are fairly slender compared with ivreina of eormer ye ere. The reasons are, first, that weges generally were stabilized at a much higher level proportionately than any other prices; and, second, that distributors of goods from all points beyond the door of the factory ere very chary of either forward buying or of stocking up with goods. the other. Hand to mouth buying is cherecteristic from one end of the country to This makes factory operation more expensive, jerky and uncertain. There is much complaint on that score, and the complaint is eo universal "18 to indi- cate that there is no of a runaway speculative development in goods. On the other hand, as you have eoubtleee observed, we Ilene had a tremendously active stoce market eith a huge speculative account, running in total volume of loans possibly 500 million dollars above any previous high record. The circumstances are such thet sere we to take any move to arrest the speculative development, we would be smiting both the just and the uhjust, because the consensus of opinion here seems to be now that anything from the Fecierel Reserve Bank indicating need for caution would be A chill upon the business community and extend beyon4 the stock nerket. Of course, we have had a year of unusual ease of money compares to anything Aele// we have had since the war started, with a vast amount of domeetio financing and huge foreign loans, and while up to a month a two ago this was a eerfectly eoend process, there :seems now to be some tidication of less desirable securities coming on to the market both from abroad and froe local sources. Some time ego Gilbert ent U6 a cable inquiring whether ett could receive an account In ceee certain payeentu wore made to him in New York, %hick we have erraneed to oo, as you hove doubtless been advised. It raised a question in my mind, how- Shepird ilort;en, !eq. #4 o How is it poreible under the Dawes plan that any ever, about which I em curious. arei, al currency paymenes can lapse of ts.o or three years? e received by the Agent Goner-el until after the I should a2preciate light on this you Lave tine and are free to erite me. All at the bane keep well. The organization ia new Reedjurstments and eaonomiee are aettliag dorm into the being gradually introduced and ee are looting forward withba good deal of setinfention to what this year v1.11 ehort. You may have observed from our reports that the Open Sex:let inveetment Committee hea lieuidated something over 00 million raflat security holdings. do:lare of the yste&a COVTIM- It h et.0 haci eome slight effect on money ratee, eupplementing, t,,s it dons, over 100 million dollars of net gold exports Intl e.ome 50 or 60 million Coliare earmarked, from al: of which you can gather that ac Pre gradually driving the banke to borrowing from us so that, if need arises, our rate can be mane urply effective. All the boys et the bank you d send you their beat were. I able tt the There in not much new outsPe of the bank in the moment to coneuht them in detail. wily of 2olttical or other news. The dying Congreee trs etrugTling with a calendar of lee;ialetion, withoet any hope cleening it up, and amusing th,:eafielves during Lheee last few weeks by a Eenerel eyetem cif ennovence to the Presieent in holding up arid cliestioning ht a appointments. The eountry is generally getting back on its feet after the recent shake-eown, vitt) the exception of quite a I erge area in the middle/fest, whore the failure of the corn crop neceeeitated heavy purchaeoe of feed for stock, enu ehere there are still Joee remnants of bane troublea trtd eorae growls free, the fermers. A11 of this les by wrg of gossip, personally, unofficially, and with the various reservRtione which you properly put in your letter, but, nevertheless, Nhich ids :ateparu 2/24/25. carries n world of good wished to you ,nn so much of it Is you can spare to Gilbert if you think to -ention to him that he is not out of our minde. Very Ancerely youre, Shepard kortian, keg., 111111114"The rranefer Committee, 33 Luistmetrasee, Berlin, Uermany. k. LB 0 March I), 1925. 1.)ear sr. Aoran: The news of the retirement of the old ramin;:i; nat. I ha-,o nover Reichsmark cpecimens of the lari4 denomination notes for the Vrinceton Library collection. As the years go by they sill be an interaatiag eihibit of 1.1,e loa-uator n,Ais. of -i:butsar finance. 1 ondtr if' it will be ?os_iible, witaout too much trouble, for you to re.-.11nablj coalploLe colitctioo of tho.:e interesting documents so that I aaa lodge them in the library, and let IA., cost ttof. You will knoA about ,:al..% I %ant without :urtner ucsoription. I hope you all keep well dau will Aritt me now ha1 teg. Elactlely yours, Shepard Morgan, Esq., The Transfer OoaciLtes, AA LuiR.n.atn,sigA, Serlias, Et3 Le. ipril 22, 1925. PERLONAL Deer Mr. Morgan: Your letter of April 2 gave me a great deal or pleasure indeed, and beionc that it geve mu a lot of ooet valuable informetion which I am glad to have. Of course, you h. Ve b mey of serving it out which ie not only paitteble and interesting, but welly v'. ry enlightening and useful. Many thanke for looking into t;A. epecimene of curiency for 101, t0 I will await further word with interest. Now about Dr. Schachtie intimation. I like the idea of hie coming over The first thing that oecure to me is that I em planning a trip to Europe very ,such. myeelf at ,Just about that time, feed had expected to go Lo Berlin to eett my i'rience there, including you and Gilb.rt and, of course, Dr. Schacht. The time of my visit, that is, about September, would conflict with his plea, and e..6 it now looke, I would be leevine here eome time in Al.k;uist and not come beck until tome time in October. There is anoteor thin; to corwider, and that ie jute hew Mr. Gilbert and Mr. McGarreh will feel about it. If they egret, theft it Lea ,00d thing for him to come over, and if the dates can be made convenient ao that I shell certainly be here, why don't you :_.end me e cable ant: I aould be very glad indeed to write the kind of letter which you iadicete would be eppropriate. His point about not coming over without word from us strikes me as well taken, and *hat is now in my mind ic to invite his to come over and visit me. I could put him up very comfortably at the hotel where I am living, The Marguery; and it might prove of some benefit to him to come to this country under the auspices of the bank. Poeeibly you will cable me on receipt of this. I shell not comment juEt now on tte rest o: your letter. It is most interest- 4/E2/25. Mr. Shepard Morgan r2 1110 ing end not greatly out of line sith 60,7'5 of My own eurmises, especially es to the *gold policy. Now rather confidentitlly, here pro a Pea things that will interest you from The attached article from the Sun by Schneider, will form the text. this side. Fiehteen months ago ee were getting ready for tnorough-eoing slump in this country, and at tnat time member bank borrowings were over $800,a)t ,000. out of delft by pleeing fundo le the market for purchtees o le shortly put them snort -time Governments, ant' (hie plug old Isparta eased the situation and hee aoaething to do to MOId normal conditions in ht,neinz, and I think, in business. itn the return Of course, we 'ere fortunate in having pretty good crops (barring corn) at m time ehen the world use in dire need of our foodatuffe. Our interest rates, however, got down below the London retee, end ha bornawieg eorld eee :onsequently forced to core Le) our merket, pertly beceuse of the rate edvantege end phrtie beeeuse they sere ehueeine doen ie London. The Large amount of forei,,n loene pleeod Li our market had ac imeediate effect upon the As aterling advanced, the gold ieremium le London declined, end tee heavy excheeees. gald exports of thin country ..ere not only elrerted l'rose our terket to Indie and elee- where, but 1113 elso exported 34=3 W0,000,000, ptrt being physically moved end e pert being only earmarked. There le no ,I6.!" that the eveu in woeey had lomething to do with the upecu- lation which developed the leket t of last year and early this year, but it wac elm* ltrgely the remelt or the fevoruble reection to Moroed (comie4red to recent yeere) end th ann the Republican amgreee. ;I:Je D&Aeb Flen, to political trenciuillity he decisive election of Preeident Coolidge But the boom got rather ectiva, te-a market got expended, the speculation degencreted in quality, and 1- think there zee Liao come degeneration in the quality of the eecuritiee being offered in this market. begineing in Decomeer and ending in February, cc told about one-helf or our holdings of Coy rn.ent securities, thus forcing the beat; to borrow from lie again, principally in New York, and then the advance 4A2/26. Mr. Shepard Moron diecount rate on February 27 to 50, ell combined, seem to have had some Life- dice in arresting epeculetion; et leeet, it he not bags in evii!enee since then. There heti been vome complaint about the System in thee° mettere, but I doubt if they make sufficient headway to prove to be more then an annoyance. Money rtee ere now roughly 1% above *het they wore last summer end fell and, of course, the rates in London ere :.bout 1% above ours. busineen react ion. There het. been Home telk of there is one, it ie not eo much in evicence es people think. lie do know, here:ever, thet the merginu of profits to manufacturers and traders twee been eomewhet reduced over former yeeru becauee of tte higher level et utinh eegee were stabilized t=. ;:riceu, end it mry be that compleints of bed bueineez have more origin in the profit account Esau in the total of proluctioe end consumption of .500d8. There i6 but little unemployment ie the oountry, end there heu been en imenee improvement in agricultural, benkin6 and busieeen cond;.tioae thneu0out the middle rest. Fleece tell Mr. Gilbert that I hope very leach to hoer from him from time to time, but nevertheleou Icaol hoe eeeeediegly busy he has boom, end Vett Dorreependence some times le a terrible burden. I want you to knot that I e?.ereciete your letteru imeensely ane.! ho,es you will keep the up. Dr. Schecht's elm) I hope you pill eo e little diplomatic visit, anc let ee !mot tale results. Vith beet renr-?c to all, Very eiecerely yours, Mr. Shtpere YorEen, The Transfer Committee, 55 Lufeeettraese, Berlin, Germany. Enc. M.LE or for me in reeer6 to COPY OF OUTGOING CABLEGRAL asy 23, 125 Shepard laorgan, Agent heparation Payments, Berlin. Your wireless received Am following suggestion Await receipt :Iv letter Strong kederal Reserve Bank Ly 28, l25. Dear Yr. %organr Your very interesting letter of Mky 18 ?vse ackmwroledged by cf-ble yeeterday, as or enclosed confirmation. obviouo rip.aorta. The a6blo :me rather cryptic for I find that my ,lisociatea here suite favor the ileo of en- covro.glicg Dr. bchaeht to :Eke a visit, et I wrote hie, lid you bk,ve wlready been adriseet. My Aftna hare been &tinging almoet ewary (14, but it mow Tooke ae though I would sail from New Tod( Vie latter i',art of Juno. fr. Stewart who, an you %'non, le the oconomtwt or the Pedtral Moerve Board, *ill :-ocoapiny me; and thaq, is order th ; it lefty not sae* to bs too oerious t pr,rty, .nd geoorally carrying out a long 2rouleed program, I r.ii1 plimning to tekt my dmIghLer Kathorlue, now Mro. Watte Humphrey, awl ter meld with ma, 40 talLt w t j aonbina a little So that the nleneure 'ith work. also take 'lee Bleecker. or will be ;elite the minimum, I think 1 ehail It looker like Tilt° a ilorty but -;.het cannot soil be evoidod. I shall 7robebly go first to T-srie, ran there aro a few estebliehmooto there like Chanel, Detain c,nd °there which, I uneeretand, my 6authter would like to invcatigate before etirting our trip. dirdctly to Brusbela it. ic hare to eay. prom there I go to London, anc: tlea proLably 711 Imsteram, rrr ao to Berlin. Just ahem I ehtll reech there, I doubt if it will Le much before kugutto and ill of this t.epende & little bit on Kr. Norman't plane, es I have half promised myself a little holiday with his somewhere. ThLa is e rather buoy day *ith a directors' meeting coming in a few minutes, bo I aht.Il Duet mend you thla word of my Aena, and let it two with that. But .noperd Morgan, Lay. 5A8/25. the prospoct of a vieit with you in dQr1tn is really deVghtful, P.nd T can aasure you thnt A is enhvaoed x good dsA. by my hhving Katharine with *e. 111. Sincerely yours, 611epa.m: VorgE.n, Laq., Colu4itLet:, 33 Luisenetrasse, Bell in, Geratuo. Luc. Db.LE June 1:5, 1d25. Dear Mr. Morgan: Only tbie liorming bsve I receive:.k the collection of German notes which you wrote me of on 23. They surely are a mfa,,,rful and 40riklatral" collection, a.nd I am J.eligh4e.d to I am sendiac; them on to ht.ve them for the Princeton Library. Dr aerould ivith the trois,Jrt,ada yoq ,5ere kind enough to serad ree.rding them. Thank you sgain. I :ern lookin6 forward to secin;;; you soon, for my in Berlin e,,rly in July. The I oat prevent, plan 16 to tell you iihst, I as noil too pressed to write. My best to you, to McGarrtb, And to Gilbert. Sincerely, Mr. &e2srd Mori >n, L Lee, The Trh.n;:fer 53 Lui son et raese, Berlin, Germany. Grand Hotel Britannique Spa, Belgium July 23, 1925 My dear Morgan: It was a delight to have those visits with you in Berlin. And had we not been so busy there would have been more of them, and longer ones. There is still a chance, however, that we may be back there in case anything turns up of importance between now and the time when we sail for home, - some time in September. If by chance you should go wandering about in the direction either of Paris or London, please don't fail to wire me through the Bank of England, so that we can have another visit if it is possible. In some ways I envy you this fine experience. It is a wonderful job to have a hand in, and especially to be associated with such a fellow as Gilbert. Possibly one of my strongest impressions in Berlin was the very high chcaracter of the whole Dawes Organization, ao far as I had contact with it. And that speaks well for the future of the Plan. Please give my warmest regards to Mrs. Morgan. We were all so delighted that the boy got along so well. And Mrs. Humphrey joins me in these messages. My best to you, as always. Sincerely yours, Shepard Morgan, Esq., The Transfer Comolttee, 33 Luisenstrasee, Berlin, Germany. Hotel Majestic, Faris, France, August 15, 1925. Bear Mr. Morgans Many thanks fof your bully letter of July 27, which vas much delayed in reaching me. I am glad that you feel that our visit to Berlin was It certainly gave me an understanding of the situation be had in no other way, and I am especially grateful to wi you rule Gilbert for your ccatribution. Unfortunately I haven't seen the German reply to the French reply, nor, as yet, the last French reply to the German reply, But I suppoue that it will be which has only just been dispatched,. printed by the time I reach London. The weather on the whole a fine, stay at Biarritz. to vet SOne good bathing an well as a was beautiful, and we manarTed little golf. rfr, had I was very t;led to have a visit with Mrs. Morgan and get What you write about Mrs. Humphrey justifies my to know her better. My very expressing the same sentiments about your charming wife. best rev.Lrds to you both. Please won't forget me after I returnhunn, land send me a letter now and then. I ::112 cc the eerie se often as you can stand it. Very encerely yours, Mr. Sheoard A. Morgan, 33 Luisenstrasse, Berlin, Gorman. October 14, 1S25. My dear Morgan: Yesterday was one of the clays, when ze i4heu 3erlin 74ere a little nearer the Federal ReL.erve i3ank, for, after ion.; delay, I in to sce our new building ::.:n(1 have got she old Literty Loan luncheon. Anciereion, doubt,:, Clarke, Farwell, Ijarw.i, JOE1C:Sp liunroe, pope, Pritchard, ,,ykee, ood, .Myers and Fou 6ner were :al here, ac sell us 6,iler and J. w, Jonee,. Unfortunately Emerson is laic up in hospItal esc coals. $.18. All the boys wanted me to send their bent regards to you ana to him, and to 1-_t you know that lie muted you. They c;.me ill pretty promptly and. we cane a tour of the upper part of the tuilding before lunch; I gave them a little history of hog the pro?e,rty ,sr1,1 the tout of the buildin.,; then Sailer and Jones showed them the whole works; and they fin:_lly came in for a .. L:e Aor7..ly of ter three, apparently impressed by our mechanical devices, and a little aetounded at the volume of our transactions. ,L..1 k.1 qinston happened to to here, und All told it WILES wish you coule hz1ve Le()O jointsgs ut.. at. lunch. zinu BECMCCI liks the olc, uayz... AL the moment I am too pree:seu to ,..rite yot more. I only I ,.-111 looking forwa,r6. with keen anticipation to Dr. Schacht's visit, and of course :As hopeful th,i.t Gilbert A.11 be alor,.; 1.,ter in the year. My best to you, as al .yej Sincer,:ly yours, Mr. Shepard Mort;!..n, 53 Luisenstrasse, oerlin, Germany. November 25, 1925 Deer Ur. Morgua: I w s so glad to get your letter of November 8. In fact I in r.lways to h,ve any letter that you Nritt--. I want to senu you just ;1 o In a -.bout Dr. .lichacht1L- visit. w-1 :.e lockeci him up tight. My theory :vas that thic country he been the battle grounci of pro2tg-...nda by pretty much every nation; sick th-,L the pg,o11 :-.. t' it and are suspicious of all foreign visitors; ,!.nd th heartily it «ould Is. bett r for him to come wad trans0.ct his butine...3 euietly and then return home. He is the eorL of person to whom this car. ue frenkly explEned, not:.ithst,inuing thet he ae strongly urg,ud to aLtend functiont., the press and to give his pictui.t: L0 the auwepvert.. iipaecheb, et .Lt.-meats for de declined t.verythirg of that nature; «ent to a numbsr of private dinners and l'Inches; visits to a shingtoL., two brief one to Chicz4go; met most of the bankers at our offices; anu fin 11y, just before leavidg, hs.d onc interview tith the $triet men, to whom he gave e written statemtut that, s.as wisely published incidentelly, ass prer.areu by Burgess) hod then he hex; quite a ].on., ?rivate with them about all ports of things on *Lich hs was not to be ,noted. worked out perfectly, 9.nd I h%ve he .rd from lmost everyone expressions of It satisfaction o the way he h,.nciled him--elf. I mq L,iso b,:.y that my cou:luence in him remaine unehakon, netwithetanciin6 possibly, that. he rc_y not have malt vi6orously enough .pith these matters in connection with the iuvestuieuts of the .1.isich. think he is in .aa excodirk5ly I po6ition, t:;.11(.1 if you felloi.e :Juprort him Mr. ;iheperd Morgln una ivo him tim,, U! oon't 6et him wLci, 1 think y .0 .ill ,Jee the results Thio is Just 5. tiJfied with them. h,.vin6 not mi6hty 600c kno.41ect;e of uhA he it ucia, tut plenty ol courmze to do it. I hopf.; tht you -one: Mrs. Lorgtn k ad the eitildrun keep &ell. give her my ;_rio 1 ,on't you Lrmeet re2orcia, mad the stow to your goon eel?. 1 ovc.r, .11.%.: be expreenion of 2,:,ron%1 view, creed upon my impre5see me qa cont,.ct 4gith the only 11.24.25 am nelL,,hted to ho,..r tlmt there is ;-A prospect of 6ilbert'a cominvf, 'Al looking for.o11%; to t,nother trip to Europe .sincerely yours, Mr. Shepro A. Morg Nn , 53 LuisenstrLese, berlin, Oelmany. :.inner. :iovaahar 28, i92e. Deer Mr. Morgan: It web vuiy goon of you to write we urine' date of November lE in reqard to Mr. GilLeIt'a visit, and of coures, I at once adoptsd the buDi,,estion you merits atout bib of ice. We will, of course, be delighteo to have him huie, and I have There is lots of room, ab you know. cabled him to that effect. In f&ct, I would be a good del surprised if he made hie office anywhere else, because this would neem the natural place for Liar to light over here. I hbve a couple or letters from him, but unfortunately it is now too late for me to reach turn with a reply, as abbeuce ;row tit city in Chicago acid .;atininton has left me with an accumulation of mail, which I EDI L week late, IL answeiing. Fleaku accekt my wa-embat :sgarLa. ZAncerely yours, Mr. Shepard Morgan, The Trannfer Committee, ZS LuisenArteue, Berline, Germany. el Januery 7, l926. Deer Mr. Morgan: This is the time of the year when the various reports of the Reparetion orgenizetion aed of the; rases oreenizetion ere being issued. I am anxioue to Viet two or three complete pets for the bank. Mr. Gilbert hae given me E copies. In fret, copy of his report, but we need a few extra I think if you care to keep us Tell supplied with all a:aerial of this kind, ao that we can &newer incuiries for it, it might be of good service ell ercuhd. We are enjoying our visitors very much indeed. Governor Norman and I spent a few days at the e. ;d of tha year in raaAn,ton. He and Mr. Gilbert etoppeu with .lacrei.sry Mellon, and I with Uncereecretery Winston. Tomorrow I am expecting Mr. Gilbert over here, and wa will have some more talk feeta. I wish you could ee with ua. Everyone in ti:e bank would join in eending you greetings for .he New Year it they knew that I &b writing you, and those who do know send them most emphatically. edincerely yours, kr. :dhopard Morgan, The Irensfer Committee, a Luisenetrseee, berlin, Germany. BS. LS gk* Pe.biat rjr 20, 1g2.6. Dear Mr. Morgan: just to tnknowleclge the receipt of your letter This of Fetruery 4., early f.r. :ti hl nti r.c. 1 rcli, cud. Meg r1t1111::, S I1.2Ltj o.:, to Liovnrncr i mns. tie r.:.turna thou ..rite you 1.1121Lial I may that we have had direct norres;:ond(Inco with Dr. Schecht nonce:mine the at:Ater you rarer to in the Last para- graph on pee 4 of your ail of toe corrfponcience will be brought to the Gournor a e-.t.tention on 1114 return. Vt.ry truly your:), :-enrattily to the Governor. bhepsni Aoro,u, The Tr!nefer Cotirnit.ao, 35 Lui ait3L1A rE. t3 Liel..iieny. March 12, 1s26. Dear Mr. l'aergan: At last I have Leen -.colt to get around to you letters of JAiutry I' and V, and 431' Fseruary lou I. tea sever apologii:e for sencing oft; filleu wtitL interestin, rekdorts ane We 'rail Ue 61,,d to got the reg.ilar encourage the otn....rs in tno oitil(;11 : =re rtqlity 01 to me. dit1CO re-ad teem, cif course 1 c4-01..t..,. one so lor,g leteer, -.lid I to to so. I was sorry thlt licJarrah was subjecteu to some unpleAstintnees in con- nection with his speech. it 0.as veil received here; not trieuncier:,tood by nd no one could ch.ilenge licZarr....hia 600u 1.c4th nor .lueetion his timed I feel triat irce hest ie '..nyone; . little LAI, over eLliAt-eic in hie public statements, t..6 you know, lie ie n iut -.list 411(.: one of tat bi-._ who hf-,.s ul the enthusit..sa of a. cruesder. nut., tie it a 120 si trouble bcrore. 6.11d trouble ourselves. xi is newsvour aeCOUI1L8 01. _t, tre having never hap:tali-A, nor been thou,nt 01, espcciaily the misinterpretation o meeting eet-idoen the heads of the Carroll, rho ello,i Recently I his occasion to get efter centr,.1 b:::.nks. writes from Paris ','or the Evening ?oat anc, the Philadelphia Lce,r;c.r, for c ....lin.; over a lot of imaginary :aid miisleaoing stuff which does harm and makes bad blood ,hroad. The deplorsble thing ._bout it et 1 is that, working in their oivn way, without publicity, propagLnda, or self-acivertice.oeca,, - t,,,ere is a group of men in thiJ country (and I confidently believe. :similar groups earnestly engaged in an attempt to promote r.construction. Their work v,tiO are becomes infinitely more difficult when their motives are thui- cht.ilengea, or when misrepresentaor saying. Digitized for _appear FRASER tions in the pre-is 5.8 to "Ah,_.t they ts.rt; coin, or Yr. Shepard klorg%n No one abroad haa so intim.-..te a knowledge or ao f:...i 3.12.26 , judgment of the attitude of our b:.alk .6,6 oo you, youreelf, Ina I believe you c...n help us s. great, deal by diaabuein; the official and jnofficiU mine in Berlin of any thoujit, that these 411.11.' rioiculoue nesspaper ..rticiee represent facts or opini;n6 for ,ilaich *,e sre, any of ua in .any way, responsible. I 'sr) uo gl,..d to have your picture of the local color. Corsi enting on yours of January 15, I have no doubt that the lowering of the Reisohbank rate w.s in a. technical sense "orthodox ". market, Gown. It i6 even more then " orthodox"; They are folio .ing the it good foresight, uo far de I c n juu e from here, because the lowering of market rates indici.tee thJt the latter stages of a period of liquidation have been reached and the lo .erinb of the diecpuut rate unoor these conditions should anticipate a reestablishment of stability folio:,ing the liquidation. You will recall that one of the outetslnoing miec,,lculations (to use "", *ore) in our on policy, jude-1,ed in the lic,ht, of ,..fter developments, was probaely the f,:.ilure to !educe the discount rate in :sew York earlier thn we .,nu looking back no*, I think the reduction should have been made some time in 1920, inuteau of in 1921. There ib, ho*ever, a coneideration in Germany .,hich did not actuate us; that is to say, Germany has 1,2a.),o3o,000 marks to pay on reparation account out of her on resources priecipally, rather the out of : °reign and of course this me:.as that any orthoeox policy must have regard to the need for protectine, the eeconeary reserve of the Relecht:nk, .which .say later n ad to be hesvily drawn upon. I enould say that the Reiechb,lnk' e policy should, in :-art, be govern-A by sue regard to the domestic situation; that is, prices, the money m,.rktu, etc. etc. But very largely, also, it should be governed by regard to the eivisen positioo. later cousieeration of the rate need to ts.ke into account the extent to which the Rep :ration Agent, is makits6 use of ae.cumuleted and untrsnPferred b4ance13. All of this is assuming that the heiechbank is in iadepulcient control of funds for money rrc.rket, purpo ee, itl0.1 Cil is also a factor is the money as-rte.:. nd I still feel, es I ...in to 3 ohepard Morgan 3.12.25. 4 Mr. Sheperd Morgan x.12,.26 Mr. Sheperu Morgan 3.12.26 6 Mr. Sh,Jpard Morgan 3.12.26 r To go any further than this in favoring tee foreign correeponoonts would be unjustifi dr- and indefensible. The reason shy as are able to z;ive them the preference is tecauee se act es we no not oonduct this business solely for account of the iiew Yore Bank. agents not only for foreign banse, but for the Reserve Wanks as well. ele, diI t b of fore' e banks in behalf ity to our foreign nut ,.e act ac of the whole eyetea, aria we consider our oorreepondents as responsibi e. system responsibility, alio thet every bank oeil in fact, although not in appearance, an agent for the purchase of bills, they are all obligated to esacute their trust responeibility before buying for themselves. I hope sty letter straightens the thing out. Is Iodic not have the Relech bank harboring any suepicion ne to our good faith. I hope the German folks uont begin a speculeeion in &Lecke. devil and all to control, cud is certain to queer the pitch. it is the beet way to develop a foreign speculation in It it; the And I likewise feel th German stocks which might risu in an artificial flow of capi Lel to Germany whicn would be suddenly rec.11ed if a change Look place either in German economic affairs or in the American money murket, and be an embarradsment at the time when emberratement would leaet, be aebired. Ii you would care to eend me some epecific date on chili subject, I would be glad to take it up with Cly,,,rley Hayden or any others whom you might indicate, whom I am in contact. to him frankly. hive me uo In hie cese I know him intimately But I would want you to oe certain .ith enough to be able to talk that Or. 3criuntit would li.- to IL. To nave the reiechmerk fluctuate sore normijtly between ti-e gold, 2oin\te si be a goon thine;, out the extent of the fluctuation would be compar,:tively -11.i.ht 1 n h event, r.nd I am wondering whether it would be effective. tests of that character ehoule not be applied e bit transfer problems nas been more complete. In a I am A.uo sonderi,ng whet -he later, 6.fter the devel(rpment general way, I am till in ',Ivor of letting natural influences have their nat._:ral play and not attempting turii:licit.1 con- trols either by regulation or taxation or anything of that sort. Of 00u/nae it taxes l6r. 6.hep.rd Morgan 8 3.12.9E. Lion iu to be Npoli-d it would be most difficult to limit it to objectionable specula, dr ilke enterprises, without having it a_itomatically extend to legitimste investment funds. But if there is no speculation in Germany, nor ,ny great rise in stocks, I would not apprehend much th:nger from this country. This concludes the comments on your letters. Now a few wards about things at home. The collapse of the stac. of psychology, but I laarket may or incline to the view that it is a change of psychology and that the big bull. market ie over. Take this opinion and know little about 6d0CillatiOn. and progressive then by our may not be ,.:11 inuic tion of a change increase in increase on for wh:...t it is worth. Tho history of the I am simply ..-tn onlooker recent months is that the gradual the uiecount rates by the interior Reserve Hanks, followed January 8, supported as it wee by large Wiled the Reserve E.rAnke, iollo'.4ed in L..rn by a gener :11y hi ;her of securities by level of money r....tes, 1,..-et month, the public -Lion of the etock exchange loan figure:- all to set people thinking. At one time, -4hen .he amrkot ,:nd, combined Were running all the way from 2,000,000 to 3,(KA.),000 shares a dcy; latterly salo.:, declined to 1,250,000 to 1,500,000 sh:rasa o!.). Bool operators anti large speculi.tors discovered that the ,ublic enthusiasm .4hich is 0852riti t...1 to m,,rcotine; titockb in C. rising market, was abating; then ca 1e t.lont, the ot.ci:..ion of tLc9 'Inter-I:LI:1e Commerce Commi,;.sion disapproving the V,..n Sweringen railroad merger on finalci,-,1 grounce, and a good tritAly people decideu all -3t the same time to lieuidate specultive holdings. that the reduction or taxes impendine, 1..ct profits until tax yos.r, cc I also think ye?:r led many people to delay reali4ing r. 60od deal of selling came from that narter. At any rate, the bloom ie off the peach, and it looks at: though the same thinE, were h 1pp en i in re'd est,te epecuL,tion, - not' bly in Florida. If I have written, which is ht..rdly more tht.n accur te, I think ye myLy look foreff..rd now to .; e;uett1, prove:, to r.e more orderly eitwition in fint..m.:e in this country, and to a. general liter eaeine- of money rates. borrowing eomethine, over $500,0)-2 0O0 from the ht--;;.;erve e, Th..: member bmika are now .:na our bill dor-troll° Y 3.12.28 It. Rteeerci Morgen 9 et isabout $590,000,000, with Governeent eecuritiee a. little over 4'7;0'2,04a:0000. other words, we ere fernishing about, 4111.70,0301,000 of creciit. may reteult in the repeyatent of a few huricred millicne. benee will be out of cent to LI b. In :'hi 8 li ' L IC '_ ti on If it doeu, the bee iork adapt:levee the ti cw Yore banks ere out of debt., stock leie geadeelly affeeee the rete for comeercia.1 exchange cell money rates decline. paper end bills, which in turn affects the market for 'snort time eecteritiee, which a.sein extends into the open taerket, :lad, kith e couLineenoe of e gooct inveettreset caer we will. see a continuance of foreign loans being plecee here, 'which, in turn, suppor our export trade ene keeps business good; lib: ;:arise contributing to Luropean rectl- etruction. So I don't *ant you to conclude that becauee etocke hve void of: five or ten or even fifteen points that there ie any need for feel-tag a celemity. ;ley indeed slow up a bit this eterteier. 2usLb But 1 here just trtvc.led over -.iuite t hit or the West and the situation looks eneouragicle;. Leve had a splendid blenket of see end a normal, or even an ebnoratel ,ettot.tne of moiet.urs in ell eectIone of tne country, excepting, the far nortnweet. ilaiiforni e. suffered for teo or three ye ere from drou-j but this year the rain and snow fall hove been act:mei. with snow, un d it looes xis tnough the dfou a little evidence of slackening in buslns weee breken. mountain peeks ere covered The :steel induetry ebo there le elso a feeling of eeeeervet growing among automobile menufeeeurere arlu C.;,ome price is nothing like unemployment, ann I cope it Gee Le evoideci. going at such a pitch thLt C But no far there But tucinese hey been 01, expect it to continue eApancting, and s little dull period mey, indeed, be a goon I started to write e letter, it expended ieto en essay, nue: I think that I have ,strung it oue to I have finally written ft 000k. 'weep:. my epulogiee. this length because I want. Uilbert to reed it., In.; I went to enecerage him write me fully whenever you have the time. My beet to you, as always. Sincerely yours, Mr. Shapero. Morgan. d ou to Ilotel de 111;urope, Amsterdam, August 11, 1926. Dear Mr. Morgan: Many thanks for your illuetratod letter of August 5th. There is something remotely familiar about the illustration, which doubtless came out of none colloetion of antiquities. I am planning to visit Berlin, and will give you good notice. It would suit me a little better to be there whon Cilbort returnn, and possibly by that time you will no longer be in the country. At any rate, we will have a visit one place or another, and I need not toll you that I am looking forward to it. With beat regards to you and Mrs. Morgan, and many thanks for having me in mind, as you always do, I em Very sincerely yours, Mr. Shepard Morgan, c/o Harzburger Hof, Bad Harzburg, Corm any. DS:M Princess Hotel, PEtris, August 27, 1920. Dear ' . Morgan: It begins to look as though I could not get to Berlin after all. I am very disappointed indeed, but my illness when I was first here took about a month of time that I expected to bs devoting to work, and now the busy season is approaching in the Bank. If there is any possibility of your being in either Puris or London before the middle of next month, won't you be sum and let me know, so that we can have a visit. Also, would you mind explaining to Dr. Bruins my disap- pointment at not seeing hin, which I had counted upon doing either in 3witzorland or Berlin. Please give my best regards to Mrs. Morgan and accept my boot for yourself an well. I am much disappointed about the visit. Sincerely yours, Mepard Morgan, c/o Office for Reparation Payments, 33 Luisenstrasse, BERLIN. BS:?. S Paehington, D. C. March 26, 1928. EfilVil3 A.011 Dear Mr. Morgan: It is high time that I apologized to you and to a number of your eases ciates in Berlin for the shabby way in which I appear to have treated recent letters. Most of them came after I had sailed for London on December s, or just before my sailing and, unfortunately, on the day of my return, December 27, I was taken ill and had to spend a good many weekti either in bed or away convalescing from a rather disturbing illness. up. I sm much better now and am gradually catching This is to thank you for your letter of November 16. On the whole, I think I agree with most of the argumente and conclusions in your letter in regard to the policy of buying devisen, but like all questions of this sort it is necessary to consider them, not as isolated questions, but with regard to their setting and other reactions related to that isolated question. I have been so long out of touch and unable to keen un with current read- ing that you may regard the following simply ae academic reflections having little relation to what is currently happening. On the whole, it seems to me that n policy of acquiring reserve or the equivalent in devisen is the right one for the Reichsbank under any and all ciroumstenoee, if it can be done without too serious consequences to the German economy. The bank, at the time of the purchasee we are aiscussing, vas fecing what it felt to be an urgent need of curbing specalation. Accordinx to our experience, the curb to speculation must be applied by interest rates, even where advances affect both "the just and the unjust." Obviously, large nurchnses of devisen by the Reichsbank would make a high interest policy quite impossible unless, coupled with that, the Reichsbank had the means of shrinking its portfolio in other directions not only sufficient to offset funds put in the market for devisen purchases, but even to con- tract the sum total of funde furnished to the Reichebank through all classes of -?- s Mr. Shepard Morgan 3/26/2a. operations. Of course, It is a fact that when the ieichobank declined to purchase the deviser, tne foreir;u currencies fail in value and foreign borroA-ing was thereby slightly pennlizeci. &Joh a policy, carried to an extreme, would, of couree, re- eult in a natural influx of gold, (marks s_t. a premium, and foreign currencies ht But Lhie ieede to another important qUeflti01:1 which I raised with a di ecount) . both Gilbert anti, e+a I recall, eey, Tn connection with the section of the ttnnusl report which diecueeed the effects of large foreign borrowings upon credit expansion or inflation in Germany. lee report is not before me but, as I reoall it, the words used could be interproted as indicatins that Gilbert believed that foreign loans could be made Lhe. oesie or exraneion of the currency and credit in Germany just e,.a much Fs 00111 d "1.1 inflation occur by exceesive issues of notes of the Reichsbank. That c.oncluelon, 1 believe, is erroneous. It is a little difficult go set up the reeeene to writini; ts!'erc hypothetiosl fii:zurse must De employed, but I will illustrate the point in thi a way. Suppose the Reichsbank, at a. given moment, through its loans, discounts and investments, In otter words through Its entire portfolio both domestic end foreign, use furnishing the Germac economy with 5,000,000,00() marks of currency and credit; that the efteh reserves, that le, balenoes at the Reichatank and notes in the tills of ssli the oenke in Germany, were nt n norweel fl.;:ure of, say 10 per cent of their liabilities, (of course, these figures tre eimPly hypothetical for illustration;) if German rolitioal and private borrowers ne.,,otiated loans for the equivalent of et billion marks in foreign markets there would be abrolutely no pos- eibility, in my opinion, of an expansion resulting therefrom except growing out of those loans one of two things hapren or both; namely, that the Reichebank purchase the devieLn unci thereby increase its portfolio and consequently the volume of currency or credit, or German bankers inetend of eellinF, the demi son import gold into Germany. The only poiseiole exoeption to this might be in the fact that a German bank acquiring a Sheperd Morgan to run down and devieen in the market would be willing to allow ite domestic reserve iplikireby convert the 10 per cent of domestic A, ety, 5 per cent domestic reeervt into reserve, and coneider that it was imply secured by an sdditionel 5 per cent in its will see, the effect will be simdevisen holdings. Under those circumstances, se you requirement? for our member banks. Nor, it may be ilar to a reduction of the reserve. eoseibility, but you will note that under the that your report referred to this laet declining to purcheee the defirst two possibilities the policy of the Ref chebenk in vixen did heve eorre effect in checkine the exprneion unless gold flowed into Germany. that struck mo about the language of the reeort wA.!? not eo ;Ruch was 100 per cent ineccerete, but that !ailing_ some little ment, it was co exoresseci ciated was inaccurate. that it elaboration of the state- es to open the door to the citire that the -,rinciele enun- 04' course, this may be because the above argument relates only to the policy of the Reichsbank as to devieen and to foreign loans are a wholly different. brain And reserve. The other objections may Leve juetlfi ed all sorte of course, egree with As to stimuletion of 4mrorte, you =ill, extent of the damage in that rennect caused by foreign loans crn only be methods to curb them. me that the determined by some enelysie of what the ive.)orts were. If they are raw meteriel for manufaoture end re- export there, of course, is some juetifictioe. Schacht's policy was influenced by regard for the reserve tngland ie snotNer question. 1 see no justification on that I am not informed. To what extent position of the. Put sterling is C.;enk of now eo strong that score for the policy of a few months ago And, of course, foreign loens by German borrowers have now eIrsost ceased. The interestine point ref wed on the fifth page of your letter as to our exporting gold bar been pretty well enswered by events. Nei seen Co have exported treneeetien. gold to ninny countries, but not in every Inathnos simply se an exchange Brazil and Argentine took ;rot d when the exchenge vas running strongly in their favor, but the gold was lareely the nroceede of loans pltced in New T.ork, although, I believe Argentina did te.'ce sore out of the mer1,-et beesuse of' exehenge profit. Ehipmente to 3/26/28 - 4 - enepare Morgan Canada have been the usual seasonal ones. To have made two shipments to Germany hich cre not mode by the Federal Reserve Bank and which, I gather, were strictly on an exchange basis. A small amount of gold rent to Italy and the Italian ex- change has been at a point from time to time where it would seem that gold could be shipped profitably since stabilization. Shipments to France, of course, can- not be an exChenee operation tntil they le ally stabilize., The shipment of $1,000,000 to London ray h :ve been more for advertising purpoces than for profit. '7e could figure no profit on it unless special facilities eere offered in London, and I hardly see how agy,seecial facilities can be offered in London unless by the Bank of Thelond, and they seem to be in no need of do,n so ns they have added about ;312,000,000 sterling; to their reserve, as I recall, in the past year. 'laving now the advantage of looking back rather than forward, as when you wrote me, I think the explanation of our ioid shipmeate Which have been in very large vol Mme during the pact LUX months is fairly sieple, Notwithstanding that the world in last year's trade did pay us but .4X)00,000,000 for goods exported in excess of the ells 'n4; imported, the borrowings in our market, both short and long time, have been large enough to finance all of these eaymente, payments on old indebtedness, and leave enough over to put the dollar at a discount in some eechanee markets, on in any event to male it lees expensive for other markets to build up gold. eeserves by c-nvorting American balances into gold. This conclusion seems to be further supported by the fact that in the last few months our interest rates have somewhat hardened and ee have advanced our discount rate one half of o@ percent. 7ince dictating the above I find a lettet which I dictated to Jay on the steaner on my way home. If you think it worth While please hand it to him, but it covert much the !nee eround covered above. Please give my best to all in the office. Mr. Shepard More n, 33 Luisenotreeso, Berlin, http://fraser.stlouisfed.org/ Germany. Federal Reserve Bank of St. Louis Sincerely yours, Mr. Shepnrd Morgan - 5 - 3/27/28 4111r P. S. T just find a c;p of the report with mo, and the pes sage the last paragraph on illieeferrod to in rly letf.,..r. is emtainal ia the next to Pa4:13 101, 19 BOARD -4.a Id-04 6,0L,ax _ia.L<A_saL rmi2 06.4_,L, 6,8_0 4/Aii littLCAAIL 1110-i-ot (Ai . a...7)- *4,24_5. /4 46,1- ,itiLt4 a-4_4,4 Atte-LAI et ViLart._ a, it i.ur 4-(1-0-J . ,44 A._ea a_ otat.*,--tii.tx 44--444. ei au drAt.;.- cattiu_dt oh As-or se, JL ett4) t As-to -474- e1 14t-A-CAI al.U4. . P-(44A-r"-G-4_, 44u- 4.1-E-AA auk- t4A-0 a1 ., 411- dmi mod. a-1-441-1/43. et-ta kA-e) .4. . tibt 4,tar eaLiArf..A_e awl At 44tAkfa, co.i_tx 4004.1, ittA, t.) ti htto-C.,ukr 41-01,,& tv ge6e-f- 474-4__Alk. 6-1-4- act/4.; re,_cfrtx tot 111-01 ; 6t4.7 fs-4. tuts,;f) Jelri,ceA e-e-4 4A-g-eut, Awut to-cua acid- 44_ #6.fifkk rut-e_4__QA THE TRANSFER COMMITTEE SS a BERLIN PARIS 18 RUE DE TILSITT ENST HANS E TELEPHONE: NORM: NA1011-1VOCIED TELE rsioN E : WAG RANI 2122 -2125 TELEGRAMS: REPAGENT, PAIRS T EL le nAzzSIK 41141141.17 Fa ` 1925 Berlin, 28th January 1925 Mr. Benjamin Strong, Governor, Federal Reserve Bank of Mew York,. Mew York, N. Y. Dear Mr. Strong: Dr. Schacht said something the other day which reminded me, by contrast, forcibly of you. Not that I needed any reminder; I think of the Bank and of you and my other friends there many times a day. I do not yet realize that there is any other disconnection than thrt of distance; indeed I do not want to realize it. Dr. Schshet was telling about a speech that he had made a few days previously in the Rhineland. A free rendering of it would be this: "Last year there were only 5,000 commercial failures in Germany. The normal number of commercial failures in Germany is 9,000. Any country which does not have a normal number of commercial failures is not in a healthy financial condition. It is the business of the Reichsbank to shake the other 4,000 bad apples out of the tree." Can you imagine any more violent contrast with our style of utterance? There came immediately to my mind the picture of you and Governor Harding talking to the Commission of Agricultural Inquiry about the causes of the 1920 and 1921 deflation. ber the I remem- pages of testimony that were taken on Governor Harding's C-J 02,1111.4-G IV 1VCail modest utterance about essential and less essential credits, and how some members of the committee tried to pick on that as the real cause of the decline. Suppose. they had had something to work on like this statement of Schacht's! These Germans seem to have strong constitutions; their ears are not as sensitive as ours. Mr. McGarrah has no doubt told you at length of Schacht's banking policy, and probably I can add nothing to it except as one steeped up to the ears in Reserve Bank tradition. As you know, Schacht has no faith in being able to control the situation here by discount rate alone. On April 7th last, when the Reichsbank took its firm resolution to control credit, it announced publicly that it would lend no more than it was actually lending on that date. This put a mathematical limit on Reichsbank credit. Subsequently, when the German money had been largely returned from abroad and the situation had become easier, the Reichsbank announced that it was prepared to increase its limit by 10%; and now Dr. Schacht tells me that they have an un-announced policy of permitting it to increase to a point some 17% above the April 7th level. He has given some public intimations that the Reichsbank may consider a reduction in rate, but he made it definitely contin gent upon the reestablishment of an open discount market in which the private rate would give some guide, external to the Reichsbank, to money conditions. ais efforts to reestablish the open market thus far have not been successful, and the reason for this,is explaine by Herr Von Gwinner of the Deutsche Bank, is that the big banks cannot increase their portfolios to the extent implied by an open discount market unless the Reichsbank stands definitely ready to take the argument seems to be travelling in a circle from the Reichsbank 0 to the four "D" banks and back again. A temporary consequence seems to be that stock exchange money at day to day and one month is offered freely at relatively low rates, whereas commercial money at three months still commands 15%. There are also a limited number of bills on the market here at rates intermediate between bank loans to commerce and stock exchange loans. Schacht's currency policy is necessarily associated with his credit policy, though as to currency he has no mathematical limit Over the year-end the currency and other accounts of the Reichsbank acted normally. For example, the Reichsbank circulation in the first two weeks of the new year went down 15%, which compares with the 12% reduction during a slightly longer period for the Reserve Banks. Professor Cassel of Stockholm, who was here last week, is mildly con cerned about the inflationary tendencies of the Agent General's payments out of the proceeds of the loan. He argues that these disburse ments might, if their effects were not otherwise controlled, result in a currency expansion of 800 million marks, and so cause a rise of commodity prices. As a matter of fact the joint circulation of the Reichsbank and the Rentenbank did go up after September 1st in rough correspondence with the disbursements of the Agent General. But no one can say that this increase was not in accordance with the normal seasonal movement; indeed that assumption is measurably confirmed by the seasonal decline in circulation after the first of the year. own suspicion is, though we haven't the figures to prove it, that German prices are relating themselves to American prices quite independently of any movement that has taken place thus far in currency. lnere is a ce - anuary 1925 because the market is held artificially at narity with the dollar. In any case the official index of basic commodities has been moving week by week in very close correspondence with Snyder's index of 20 basic commodities in the United States. Surely the impression one gets in shopping around is that retail prices in 3erlin are very much the same as in New York. I remember a good deal of talk around election time about the protective tariff on aluminum ware, and how it prevented cheap German goods from flowing in. The fact is that the cost of outfitting our kitchen here in December was practically identic with the cost of fitting out our kitchen in hew York last October. This is a small matter, but it is fairly typical. As things stand there is very little danger to American industry from a flood of cheap German goods, - unless of course German manufacturers undertake to sell abroad for less than they sell at home. Schacht feels this keenly and accordingly keeps a strong hand on his circulation; but in default of a very large increase in the circulation I suspect the impress of American prices on German Prices is unescapable as long as the exchange is kept firm. Schacht goes along with this to the extent that he is concerned whenever American prices move upward. A third interesting point in Schacht's policy is to keep a very ample stock of foreign devisen. He says that he has not used any o his sterling balances to speak of,and hence he has already made quite something of a profit on that score since the making of the loan. As f American devisen, he is trying to protect himself against a possible ris in interest rates in the American market, which would result in the repayment by Germans of short time loans in New York. to know, his devisen run foreign devisen http://fraser.stlouisfed.org/ 'him nnwor Federal Reserve Bank of St.ALouis As you have reason to a considerable figure. His total gold and convertible into gold directly or indirectly would give .4_1_ _._ Mr. iienj . 23 January 1925 -b- a-r-rorig of about 120-r); and if he should expand upon it to the legal limit Germany would have a circulation considerably in excess of what it had before the war. But at this date he clearly has no intention of letting any such thing happen. I em not so sure about where his That is one of the interesting policy will lead him 20 months hence. things to watch in view of the obligations of the Transfer Committee. It seems as though it would be within his power effectually to prevent any substantial transfers. I let myself go in for some speculation on that point in a memorandum I made for the Transfer Committee dealing with accounts in foreign banks. I am under the impression that Mr. Norman had that memorandum with him when he went to New York and possibly you have seen it. In any case the account in the Reserve Bank has since been arranged for; and if you have not seen the memorandum I should be glad to send it to you, especially as I would like to have your thouEht on it. There is absolutely no point in this letter except the pleasure I am taking in writing to you. personal views and hence \ )\ The things I have said are of course my any and all correction!I wishI other friends talking might at the Bank. If any of you are coming abroad this Spring I would travel a long way for the pleasure of seeing you. I send you my very best regards, which you always have. Yours sincerely, 11411..a.,t( THE TRANSFER COMMITTEE nErtu I N FMORLIS 375. 1.1ITIS1 NSTIZASSE 19 7FLUE 1DE 11101ASITT TEL1:IIn11®N[ :01ornaGRANI F1.22 - P:1.25 TELEGIZA1.419.111EPAIiIIENT. PARINS TTI 1.117.11^IIIII70711F1 s N01,113EN 11900-11910 r. TE1, ,is. ACJENTR.E1., HER ILAIN (Personal.) Yr. Benjamin Strang, Governor of the Federal Reserve Bank of New York, New York City. April 2nd 1925. ACkNOW1,E.04hili APR 2 2 1925 Et Dear Mr. Strong, You have no idea how much pleasure your letter of February 24th gave me. Your vivid com.:-ents made me feel that you were here, where indeed I hope you may before long find yourself. Before I go alon.~ with some more or less desultory comments on the situatioh here, I want to refer to your note of ::arch 9th in which you spoke of obtaining specimens of the inflated currency. I spoke one evening with Dr. Schacht about it and he suggested a set of specimen notes which I understand is fairly complete but was never definitive currency. While this would serve the purpose for study yet I conceive it to be much less interesting than as if the notes had actually been in circulation. I am finding out how a complete set of definitive notes is now obtainable, and will let you know the results as soon as I have them at hand. The other thing I have in mind is this: Some days ago Dr. Schacht gave me rather more than an intimation that he would like to receive a suggestion from you that he go to New York in the Autumn. It appears that he has had invitations to go over from the City Bank an0 obncrs, but feels that he cannot accept without having an invitation from the Federal Reserve Bank. In this, of course, he is per- 1_7 -Benjamin Strong. April 2nd 1925. fectiv the right, occasion andfor I gather the visit; that the he is simple not too making particular of aquaintance about woul be adequate. :71-. Jay's judgement as to whether it is de- sirable from the Bank's point of view for Dr. Schacht to make an informal visit would, of course, be excellent. For my part, looking at it from this end, I think it would do good. Dr. Schacht is very friendly to all of us in his personal relations, though he never commits himself in writing. mented by a day or so at the bank. This friendliness would be ceI have spoken to 17.r. Gilbert about it, and he agrees with the point of view I have just expressed. The time that Dr. Schacht has in mind is September, but as to that I have no doubt you could fix a time entirely convenient to yourself. I think you will find Dr. Schacht a very interesting character. Last Autumn, before I thought of coming over here, I expressed to :r. Jay an opinion which he thought a little severe. It was to the effect that his sword knows no brother. Though I have had many chances of seeing him familiarly and have acquired a great liking for him, yet I have had no reason to change that opinion. He would be a hard man in a fight, and if I were on the other side from him I would find it necessary to look out for my vulnerable points because he would know them and take advantage of them. As you suggest in your letter, his has been a courageous policy and he has carried it out with a firmness impossible in a country less accustomed to autocracy. If, as has been said, the Rentenmark saved the Rhineland to Ger any, the Reichsmark has saved Germany to herself, and for this Dr. Schacht among the Germans is mainly responsible. Irx. Benjamin Strong. April 2nd 1925. - 3 - You will be interested in one or two further developments of his policy here. As I think I remarked in my last letter, he has had great difficulty in getting the open discount market reIn this there is a direct division of opinion between established. the Reichsbank and the big com ercial banks, particularly the Deutsche Bank. The Reichsbank had its credit limitation policy, and the commercial banks refused to create accept-nces until such time as they knew they cold get rid of them to the Reichsbank in a squeeze. Dr. Schacht hoped that he would be able to keep his credit limitation policy unmodified and tried to maintain the open discount market with Government funds which, as you know, have been very plentiful owing to the unexpectedly satisfactory budget position. But it soon developed that there was no health in the market, partly because not enough acceptances were being created;so, about a month ago, the Reichsbank modified its credit limitation policy to the extent that it agreed with the twelve principal banks and banking houses of Berlin to rediscount prime bankers' acceptances for their account, without retard to the lines of credit available under the restriction policy. On their part, the twelve banks and banking houses agreed to create acceptances their cripital. only up to half the amount of The results are already apparent. In the first two months of the year the acceptance liabilities of the four "D" banks increased from about 16 millions to about 57 millions. This is pro- gress,but after all there is a long way to go,because before the war the acceptnce liabilities of these four banks ran to about a milliard marks. The recent statements of the Reichsbank are striking for Benjamin Strong. April 2nd 1925. -k one principal thing, - that they do not present any striking changes, but,on the contrary,seem to reflect in a normal way the current commercial and financial developments of the country. in itself. This is progress The circulation seems to be tending toward a generally higher level, but one finds no reflection in commodity prices. is room, There I think, for a little growth in circulation without endanger- ing the price-level. Up to the present the velocity, if one may judge from observation only, has been very high. Storekeepers have seemed to have little cash on hand with which to make change, and artisans have requested payment as work ,:roceeded. This, of course, bears upon the general shortage of credit quite as much as on the shortage of currency, but I quite expect that a moderate increase in circulation would be taken up in a diminished velocity. You spoke in your letter of the Reichsbank's gold policy. This is the explanation of it as I f-et it from Schacht. have already fathomed it. No doubt you Dr. Schacht believes that by converting his devisen into gold and by bringing it to Berlin, he will put a light on the hill for the borrowers of foreign currency to see. He is preparing for the time when there may be heavy demands upon the Reichs- bank for foreign funds with which to repay short-time borrowing or to meet other foreign requirements. If these requirements are net out of the Reichsbank's stock of devisen, which are reported in three places in the weekly statements and wholly lost to view among other assets, then the Reichsbank will have great difficulty in putting on the brakes. If, however, the demand for foreign payments is to be met by exporting gold, then a rigorous policy has planation. palpable ex- That is as far as he went in his explanation to me, but he has his eye no doubt on the Transfer Committee quite as much as on lienjamin strong. his own countrymen. April Ana The position is on all fours, it seems to dpme, with the sound view about the mechanism for the return of sterling to the Fold basis. If the gold standard in England is to be re-established on the strength of A:erican credit, it will be much more difficult to enforce a strong policy than as if the British gold stock was itself in danger. The foreign trade balance gives everybody a good deal of concern, particularly because of its bearing upon the payment of Still, what would one expect? reparations. In the last six months, almost for the only time in more than ten years, the German people have been able not only to fill up their shelves out of credit, but to satisfy their private wants out of wa::'es. Some of the Ger- mans tell us that the hardest thing to bear in the lastlBn years was isolation. Suddenly, through economic means, this isolation has in part been broken dovm, and wcylld be more than human that it should not be reflected at least temporarily in a large purchase of goods abroad. There are, of course, other contributary factors such, for example, as the terms of the Treaty of Versailles which permitted roods of certain classifications and from certain sources to flow into Germany tax-free up to January 10th last. Also, it was only in November that foreign trade from the Ruhr first made its appearance in the trade balance figures, and then only in the form of imports. The figures for December, January and February are the first to give a reasonable basis for comparison,and of these only the February fic-ures were exempted flipm the operation of the Treaty. In the next place, the German figures do not regard deliveries in kind as exports. Yet it seems to me that they should be so con- sidered on every economic ground., - particularly as up to the present Yr. Benjamin Strong. ..e11111. April 2nd 1925. they have been paid for largely by the United States. a The political situation you have, of course, been able to follow in the newspapers, though perhaps the picture seems a little darker abroad than it is close at hand. There are - or When were yesterday - thirty-three political parties in Germany. one speaks to the Germans about these thirty-three parties they throw up their hands and say "Tt is German. that way." We always do things But it seems to me that the explanation is not to be found solely in German character, but is to be accounted for, in part at least, by their infernal electoral system. Elections to the Reichstag are conducted on the principle of minority reprsentation. The result is that the La Follettes and the Brookharts who are at outs with their party walk out and organize other parties and obtain places for them on the ballot. By doing so they do not run the risk of political extinction, but on the other hand assure themselves of places in the Reichstag. This comes as a result of the election machinery which gives a party receiving a certain number of votes a proportionate number of seats iu the Reichstag. So, if Herr I. finds himself half way down on the list of candidates of the Democratic Party, he walks out and forms a People's Party, and as its leader,is entitled to a place at the top of the ballot. As long as he stays in the Democratic Party he has no seat in the Reichstag, but as soon as he strands at the head of another though smaller party, he is sure of a seat in the Reichstag. This disintegrating process carries over into the presidential election even though one is en/W. titled to vote for a name rather than for a rarty. There is a good deal of election talk about a line-up between the monarchists and the non-monarchists, but as nearly as I can judge there is little conditions of a monarchy. *danger under Present Gilbert tells me that he is on the verge of writing you a letter, and will no doubt cover some of the questions you have in mind about the deposit in the Reserve Bank. What you had to tell me about the situation at home was fascinating and I have read it over and over again. The advance in the rate caused great interest on this side, and on the Whole was represented fairly. I was irritated, as you may imagine, at one interpretation which I read in two or three London papers, that the Bank had raised its rate in order to provide earnings. I presume you had enough of that at home; but it is hard to understand how such ignorance can be put in print. When you have a moment, I shall be more than happy if I may hear from you again. The Bank, all its Clings and all its people have a place in the front of my mind and all my very best regards to you, and my hopes that you 1.1ay be coming this way. Yours sincerely, VLA10-,, SHEPARD 4; a &15-..- rtilz c°44"-.V-12"1 MORGI-J:. TILE TRANSFER COMMITTEE BERLIN PARIS 330 11.117ISENSTRASSE 18 RUE 1.111-: TILa S ITT fikTELEPROVE a NORDEN 11000-11910 TELEGRAMS a A0ENTIIGEP 11E0 IL IN TE LEVI onn5twAGRA.NI eL 22- 111.226 TELEG0A:101 FIEF...#.8E7%17', PARIS u0N7i \-." Mr. Benjamin Strong, April 23rd 1925. \\\c-.-D. Governor of the Federal Reserve Bank of New York. Dear Mr. Strong, I have on my desk a collection of ninety-five German notes. Their nominal value is astronomical. They came to me from Dr. Schacht with his best compliments to you. Only five out of the ninety-five had I seen up to the time Dr. Schacht sent me this collection. They are all definitive notes, nd in some cases have been in circulation, but they are all st,Imped with the word "Muster" which means "specimen". While this does not detract from their interest, it does detract from their value, and I am sorry that it appears. But I am confident that no similar collection of notes without the ":uster" stamp can be trot together at this time. However, if after se.ing the notes, you think it desirable to have as many notes as possible without the "specimen" mark, I shall be glad to get as many as possible. I enclose a memorandum from the Reichsbank Filling a list of the notes in the collection. They never cease to appal one. picked up a note What amazing figures! The other day in the Tiergarten I that had been thrown away as worthless which, however, had a nominal value equal to the whole public debt of the United States. In order to make sure that the notes reach you without loss, I am sending them in the Embassy pouch to Leland Harrison who will either hold them for you in Washington or send them over by registered post. Mr. Benjamin Strong. April 23rd 1925. - 2 I -m enclosing also with this a memorandum prepared here which describes the Darlehenskassenscheine and the Reichskassenscheine. The Reichsbank notes carry their own dramatic story. With best regards to you, as always, Yours sincerely, SHEPARD MORGAN. THE TRANSFER COMMITTEE BERL IN 13A-1,11,S 3.11 ILITISENSTRAS SE ILTri.r.mwcome, NOMMEN 11900-11910 ACKNOwlzuteof:- IrE/L1P.OltAPLISI AGENT1IER,111.?12)LIPI 18 BALM IE TILB ITT TELEI IIO.NE2%AOI. AM P1.22 - 91.25 7131.EXVRAMSIALERAGENT, RAMS MAY as 1925 Benjamin Strong, Governor of the Federal Reserve Bank of New York, New York City. May 16th 1925. Dear Mr. Strong, I sent to-day a cable to you to the effect that both :r. Gilbert and LT. McGarrah heartily approved the proposal that Dr. Schacht make a trip to rew York. I also indicated that I thought the late autumn would be the best time, and that Dr. Schacht knew something of your plans to come over in the latter part of the summer. It was because I wanted to find out from Dr. Schacht what his preference was as to time that I did not respond immediately to your letter which I received early in the week. Dr. Schacht was then on holiday and only this morning was I able to reach him. His other con- versations on this thing permitted me to talk rather frankly with him though I did not indicate that I had received a letter from you. He said that he had learnt "from a source which I could imagine" that you were planning to come to Europe in August and September, and that he would prefer to go to New York after you return or at about the same time. He is not perfectly certain, however, that he can get away at all because he does not know what the political developments may be in the course of the summer. But as far as his personal arrangements go he is very much for it. I said in my cable that Mr. McGarrah endorsed the idea. I have not had a chance to talk with him because he only returned to Berlin last nic,ht, and.he has not yet been in to the office to-day, but Mr. Gilbert has talked it over with him and told me that he approved the ltk idea decidedly. As for Y.r. Gilbert himself he fully agrees. The political developments that Dr. Schacht has in mind are those which might arise over the Cologne matter which is a source of profound irritation. He remarked over the telephone that unless a ready settle- ment is arrived at, it will be necessary for everybody having any influence to do his best to keep the situation straight; but that he hoped his "British friends would moderate the disposition of the others." For my own part I am not too optimistic. French nerves are raw; the French are suffering from inferiority complex and invariably look outside of themselves not only for help but for someone to blame; for example "Le Temps", commenting on Yr. Houghton's speech in London, said that the blame for the disorder in Europe was with the United States and England, because the former had not adhered to the Treaty of Versailles and the latter had followed too conciliatory a policy. When people are in that frame of mind they are disinclined to make a trade that is fair all around. As I have remarked to you before, and again in a letter to :Ir. Jay which I wrote after the election, I think the future political situation of Germany, certainly as far as the monarchy and military matters go, depends much on the way the foreign powers, particularly France and England, behave. Compared with that the election of Hindenburg is hardly more than an incadent. As Dr. Schacht remarked at the moment when the retention of Cologne was announced, "You are doing everything to make it hard for us. How can you expect that moderate opinion can keep control in Germany when you do things like that?" You may imagine that I do not go the whole road with that point of view which was uttered in irritation and on impulse, but it is indicative how far foreign relations will go toward determining the course of future political developments in Germany. While I was writing this note 1:r. McGarrah came in, and he confirms what I have said. He even woes to the point that it would be a good thing if the fact of the invitation, when and if it is made, should be announced publicly. He thinks it would have a good effect. I am going to-night on a spent last year. week's trip down to Grenoble where we Otherwise I would not be able to restrain myself from replying to your altogether delightful letter of April 22nd. You cannot imagine all the pleasure your letters give me. ing I got a letter from Mr. Jay an my day is made. The prospect of seeing you is thrilling. My very best regards to you, This morn- Yours sincerely, RADIOGRAM WORLD WIDE WIRELESS NTINENT TO 41/ CONTIN ENT SHORE TO SHIP 14, AND 42, RADIO CORPORATION OF AMERICA IP IN CONNECTION WITH "Tia "'Via "TR AN SRAD I 0" A.G.FUER DRAHTLOSEN UEBERSEE VERKEHR, BERLIN E ONLY DIRECT TELEGRAPHIC NNECTION, AMERICA- GERMANY RM NO. 112 G ECEIVW AT 64 BROAD STREET. NEW YORK, AT SHIP TO SHIP M. DATF EINZIGE DIREKTE TELEGRAPHISCHE VERBINDUNG DEUTSCHLAND-AMERIKA AV 8 59 192- 556 HYAGS PR 3885 BERLIN 2a 16 1230 P STRONG FEDRESERVE NDJUY0c1K AG 302 STOP GILBERT MCGARRAH HEARTILY ENDORSE PROPOSED INVITATION SUGGEST LATE AUTUMN BEST TIME HE KNOS FROM ABROAD YOUR PLANS BROAD TELEPHONE: MORGAN 5 1 00 To secure prompt action on inquiries;this original RADIOGRAM should be presented artie office of the Radio Corporation. In telephone inquiries quote the number Pieceding the plade of origin l'IMR OR S: ..VOE ATTItlEiR ERLIN TELE PRONE: NORDEN 11900 THE TRANSFER COMMITTEE LuiSENSTE. BERLIN 71Alia, S 2., " lb- °a- 4141"'""? ciLe, ,a-e-oi.. 4-0 A11-4,13 A I 41--1 c.h eajlAi "7. "--1 61.. 14.411- t; Traca. A.14.4 ar id- 6- tr _ 3 . Ire---Ig-ArkA. 0 6.4.,".4., `6.` oun....E.14, ) fieag All MPLZ ,fg44. AA-0 4Ldtly1,44 El--eroLu itiCe - ct -6-glid-Zio 6*-12. 4.44._ecti 6..vup_o 41-el-n1 C4' 12 q ea axe 4544-1 Ght- le AL 4; tar.cpTLQ, 45-k_a4A Aux filks-uLr 7rAdtx. Ira/ L'1444-1 fr,t- ro-is 44-44&e. ,t,t. 4.441)--ta-&..... 4-41.11 4,1 it& . _ ! At 14-17)t.r 6-4 0-0-a 41- g 40-ert/u...-4pt /1.6 to-tiAr 444,44 a(42-zsti OlAs' (1/6-4.1 0-0 Mr. Case: You may be interested And then it can go into my in this B. S. own files. Berlin, W. Sigismundstr. 4 A Telefon: Lutzow 5579 S "A-4-444-214-AAICIAL, C9A/Q441/4-44 poi 17, 172_4dtk.x9, o9--au. LLM dt, /14.; AJ7_ A'44-SA-41AZT Ate-. eu..1 zt 4Uc.s-6-14-0 AgLet 64-111k C.1145.-4A-ch, 41P4ItbALir VL.6e cur J 1GAL tile 4..,) 4.1,14A02./.7 oa-az 02--ALut. at* . 4 04..0- dr a. 4-g,3 Sailk-12 Laic 61ELAAPt-e)17 411,4-4,;.t. 0-6a11.4Art .119 eZ_ a_r 4.11.1,42_4:Ar" 714 (1-4,t, 4-6-0-41 91114-1424 aZ a /1-14k 4t4443 14, Ace, v , / a,ert..t/ Paris, rrance, 8.15.25 e-A-111-4- 4-insas. -L,,m4, 4 (a. 74, Aiicts Q 406-. 1G6- .; cie-0-0t Ca. es-e_wt. er.G. 17 40 iti-A-4-04-, 0,, 16ut..., 10-1./..11 4Z. A, it, 4at.4) . CaL ik-g-uritf--ttAA, 40tA7 acce itaArw, gdus (Ca_ 44VB, Federal Reserve Bank of St. Louis 6-ltAuks. ap w-t cc eauti42- LeAA-nti.. ouLa 's 11,4L1' eu, http://fraser.stlouisfed.org/ (r, 4 1.-7 a.A_ L daft (&, AA. toLis - gitAit AL-e-mi 4- 01-gyUCQA. 14 (4.40. ofLe 011, L acct a.. hi64u. chtrA alp -sw.C. kg 0-a4.v-t,e4,,. c.0 aka Rta_r a- of Ar4, 4.-4 ...._e.,_ at.4) 441--tm-L4 1 A Al,._., kar- 40--e- k4.se4u--4A_ at V 141A. r-e-(' r- 1z . lu 144Liiiteul a.n rr A4t.A f1a-8--- e c .d---- - (AL (' 0.c4) AA/ khl" 8-6-0,,r A44 4-g "LA ft4-444, 44- t"-- 4-0-44,v 4)0. et-4-6.AL_r 12 k CLCA---AC - lb- es-Ir g;(41 = - tt-.1.AL 741 dues, AA/A.4.4, igt,z oh_____--11-"s-cl_ 6 ,..4-- a --SnA.A.. of _ C-44,3 -g e r L.), h Zkii., Ar,i,geut - C-c Zi,..faLu 0/1- 6,g - u k 44A-v 6.-g.../ J . 7-4* 41,-fthiLAAL__ twksi = y 6e0.1.... 14-4-44i °'`. dit"` 41.La__te..b-t, ct 1.4--- 61/4 40-49-wi 9 -11-1- tliz -6-t. tk-.: 60-...A. cA( Ct-terv-.1.-. t-...., /2-4 1')\ 1, c- a-b-e-a._a- . "AVA-k-c02-t 44?vir I) I ;r 01,-,,-t-......../.1.4,04_ Ctt9.4% 11(1-4i -1 4-6L aL_a_k____ Am-12 c v(.4.. c-ciA di- THE TRANSFER COMMITTEE LE COMYTE DES TRANSFERTS BERLIN PARIS 33 LUISENSTRASSE IS RUE DE TILSITT TELE11. HONE: NORDEN 11900-11910 Ttl./PHONE: WAGRAM 21.22-21.23 TELEGRADeriss: REPAGENT, PARIS TELEGRAMS: AGENTREP, BERLIN Benjamin Strong, Esq., governor of the Federal Reserve Bank of New York, New York city, U.S.A. BERLIN, November 6, 19_:5. ACKNOWLEDGED NOV 9, 21 V25 Dear : r. Strong, Et S. Your note of October 14 bringing a message from the Liberty Loan gang made me happy for two days. and what a great job they did! That a fine lot they are I have hoped for seven years that somebody in Congress - say from Alabama - would stand up and scorn them. That woulob7ive us a chance to prove, aside from the actial performance, what a superb piece of work it was. I an distressed to know that Emerson is in a hospital. I gather from the way you speak of it that his affair,whatever it is, is troublesome rather than serious, and I hope that by now he is entirely recovered. I have a great liking for him. If you re:aember, he and I started off our work together in 1918 with a It was carried on according to the best rules and, as is row. often the case, wound up with some degree of mutual regard developing into friendship. Human beings, like dogs, often start off a lifelong friendship with a row. In that affair I have always thought I had an unfair advantage because of the support you gave me,- .a.A.43 go mm.,4466 ckAgiAi a4 4KmA 4- I should have enjoyed being with Dr. Schacht when you showed him around the Bank. I should imagine that the impressions - 2 - were so numerous and so strong that even for one of his active mind the effect was numbing. I have learnt from Sterrett some of the paces you put him through by way of entertainment and I know by anticipation the substance of some of the discussions, say, on public funds. The issues involved in that question have proved quite the most entertaining work we _lave ad since I came over a year ago. There is much on that subject,as well as on the matter of German loans in the United States, that I would like to put in this letter but at the moment it canTt be done, and possibly you have had enough of these subject:.; to last you for a while anyway. You will be interested in this clipping from last TuesdayTs London TrTimes", particularly the paragraph which I have outlined Possibly you have already seen references to the arti.cie in red. in IIITEurope Uouvelle'T. One of the Frenchmen here tells me that it was written anonymously by Jacques Sedoux whom you probably know. He is, of course, assistant director of the political and financial affairs section of the French foreign office with particular obligations towards reparations matters. In physique he is worn and bent with rheumatism but writes like John the Baptist. I fear his voice is crying in the wilderness. My best to you, as always. Sincerely yours, SHEPARD :.=ORGAN LE COMITE DES TRANSFERTS TIM TRANSFER COMMITTEE 4 1 PARIS BERLIN 18 RUE DE TILSKTT 13 LUISENSTRANSE TELEPHONE: WAGRAM 21.22-21.23 TELEGRitraptes: REPAGENT, PARIS .3:4E: NORDEN 11900-11910 TELEGRAMS: AGENTREP, BERLIN -9 Benjamin Strong Esq., arlOk Governor of the Federal Reserve B of Eew York, few York City. BERLIN , Hovember 12, 1925. 7Z -& Dear . r. Strong, As you know Gilbert is leaving this side for Tiew York somewhere around the middle of December, by what ship he is not yet certain. It occurs to me that a suggestion from you that he would find a room available for his use in the Bank would be very welcome. He will only be in New York for a day or two around the 21st and 22nd of Deceber and again for possibly a week after New Year's. It would be an enormous convenience to us here to have an address to which we could cable or write him, and I know he would rather be at the Bank than anywhere else. I am perfectly sure also that your personal desires would be to have him there; and on technical grounds, if ally such were raised, it would seem also to be in order inasmuch as at the request of the Secretary of the Treasury the Bank is doing business for the Agent General. I suggest the obvious merely because I an still sensitive about what the uninformed allege with respect to the Bank. If complying with this suggestion of mine is in any way embarrassing to you please do not hesitate to say so. other hand, you fall in with the suggestion, I am sure would immensely appreciate word from you by cable. rcely has time to get here. If,on the Gilbert A letter 1 LE COMITE DES TRANSFERTS `HE TRANSFER COMMITTEE PARIS BERLIN 88 LUESENSTRASSE 18 RUE DE TILSITT ELL.I.GONE: NORDEN 11900-11910 TELEGRAMS: AGENTREP, BERLIN TELEpwions : DIAGRAM 21.22-21.23 TELEonAatrizs: REPAGENT, PARIS N40 Benjamin Strong Esq., Governor of the Federal Reserve Bank of New York, New York City. Dear 1.:r. December 14, 1925. Strong, I received this morning your letter of November 30 enclosing an envelope which enclosed :7r. Gilbert's letter to you of November 5. It is extraordinary that a second letter from him to you should have been broken open, particularly as the two cases appear to have been different. In the first case the letter was sent from here in the pouch to Paris and assimilated there in the ordinary mail. The explanation we got was that the French Post Office seeing a bulky letter addressed to a bank had opened it to find out whether capital was being exported, and then sealed it up again and sent it along. In the second case the letter was sent in the pouch to Paris with the instruction to the Paris office to send it in the Embassy pouch through the State Department. This appears to have been done not only because of the HXYZI, designation under the stamp in the upper right-hand corner, but because it was transmitted with a .r."ashington post-mark and American postage to you. The mystery remains as to where and by whom the letter was broken open. It is possible, of course, that the stiff paper was too much both for the adhesive and for the sealing-wax, and that normal processes of carriage cracked both. 44 If the letter was in fact opened in the State Department, judging from the contents the result is to say the least amusing. I am sending the envelope along to Fraser in Paris to see if he can shed any light on it. put on there. Perhaps I notice the sealing wax was Gilbert will want to drop a word about it during a conversation he expects to have with :r. With best regards, Yours sincerely, SHEPARD 7:ORGAN. tWALL,Lp LE COMTE. DES TRANSFERTS THE TRANSFER COMMITTEE BERLIN PARIS 88 LUISENSTHASSE 18 HUE DE TILSITT TELEPHONE: NORDEN 11000-11010 TELEGRAMS: AGENTREP, BERLIN TELEPHONE: WAGRAM 21.22-21.23 TELEORAMMES: REPAGENT, PARIS BERLIN December 19, 1925. Benjamin Strong Governor of the re(eral Reserve Sank of New York, New York. Dear Li'. Strong, I received this morning a letter from Fraser in response to my inquiry about the envelope containing Z.r. Gilbert's letter of November 5, which reached you with the flap open and the seals broken. Fraser says that the letter was received in the pouch from Berlin on November 9 and turned over to the ambassy on the same day to be sent forNvard by their pouch. United States postage and the six seals were affixed in Fraser's office to reinforce the resistance of the gum. He then makes a pretty convincing statement that the fault is mainly with this office here, saying that about half of the envelopes that arrive from 3erlin sealed reach him with the seals broken and the flaps loose. He thinks the reinforced envelopes are too stiff to stand the transit. I accordingly am undertaking to persuade the responsible people in this organization to furnish us with more suitable envelopes and I hope the trouble will not recur. In any case, I think it unwise for make any comments on this incident to Kellogg. Gilbert to The implication is a serious one, and if there is any possibility that the responsibility is ours we should be doubly careful. ith best regards, Yours sincerely, January 4, 1926. Telegram to Gilbert sent in code. Fedreserve llevffork. For Gilbert Sa it-r*Amt stop R.e441,em.e4 credit apportionment suspended stop Expects to lower discount rate about Ji_nuary 11 stop Confidential figures which I saw show marked decline since Yovember in German bill holdings with approximately corresponding rise of foreign exchange stop Latter now nearly ..t highest point, mainly owing to foreign loans but in negative sense to Yovember foreign trade results also stop Decline German bills attributed to scarcity good names stop /0..1.c4t,tA,Not, mid'le December credit allotments R44-4414144 and branches not fully /Q4.4n.rA.Ar used, Thich supports decision to suspend apportionment stop 46140- thinks eligibility test sufficient for present at least to control /C.r..44i. fut.. it, volume 1.144.4ause credit stop Says this is what he has worked for and while situation still delicate regards bottom passed stop .e see no reason to dispute conclusions stop Unemployed much increased owing pLrtly to seasonal c.J.uses and failures and partly to dismissals for purposes cheaper production stop Lower discount rates should offer needed stimulus probably without inflation tendencies stop Please convey above confidentially to Governor stop Zoa has written it 4,4, 3ri44,fth stop Llorgan i, TRANSFER COMMITTEE BERLIN 88 LUISEN8TRAMSE LE COMITE DES TRANSFERTS PARIS 18 RUE DE TILSITT TiLipRonts: WAGRAM 21.22-21.23 TEL*GRAmszs: REPAGENT, PARIS ONE: NORDEN 11900..11910 xms: AGENTREP, BERLIN BERLIN January 7, l94:6. 1(1(0/1,6 Benjamin Strong Esq., Governor of the Federal Reserve Bank of New York, New York City, --70117 .5 ,A Dear 1:r. Strong, On January 4 I sent a long cable to Gilbert giving the sub- stance of a conversation I had had with Dr. Schacht. This letter may reach you after he has left; if indeed he is still in New York, perhaps you will show it to him. You no doubt have alreadysemg4 from the cable the meaning of the developments here, but at the risk of confirming what you already know I will venture to exyand. the cable somewhat. It was clear as far back as last November that the volume of good bills eligible for purchase by the Reichsbank vas diminishing. Coupled with it was a large and steady demand for such bills, stimulated in part by the of bills large volume of public funds placed with the Reichsbank for purchase/nr oth wise available for short-time investment. This was reflected in a steady lowering of the open market rate which, by the way, has now fallen to 6 3/ per cent. The so-called open market is in fact much under the control Reichsbank, but the Stock Exchange call money rate has been following it fair fidelity. In consequence it looked as long as two months ago, tha time might be coming when the 7eichsbank would lower its rate. 3ut as dition precedent to rate action it vas obvious that the credit-r_tionin would have to come to an end. It now looks as though nature had taken - 2 - the credit-rationing policy in the sense that the lines of credit established by the Reichsbank are in excess of the demands, insofar as the latter can take the form of sound eligible bills. When Dr. Schacht told me that he expected to reduce the rate on January 11, I at once asked him what he was doing about the credit rationing policy. He replied tat credit rationing was at an end and proceeded to show me his confidential sheets which give a far clearer picture of the present situation than one could get from the bank-statement. The latter, as you know, reports the bill holdings of the Reichsbank without distinguishing the domestic bills from the foreign bills, and at the moment the key to the situation is exactly there, - that is, in the distribution between domestic and foreign bills. The decline in domestic bill holdings, as it appeared in the confidential sheets. was impressive. It could not be accounted for on any seasonal ground; that is, the mark on December 26 was much below the .mark on Also it appeared November 23 and on corresponding dates of previous months. from the statement that the holdings of foreign bills were much increased, and these were supplemented with increased deposits in foreign banks. Dr. Schacht said that his devisen came up to about 2,400 million reichsmarks, including the devisen in the possession of the Gold Discount Bank. I am not perfectly certain whether his previous high figure of about 2,200 million reichsmarks, reached early in January 1925, included the Gold Discount Bank devisen or not. But if the Gold Discount rank figures were in fact excluded the comparison would not be much disturbed, because at that time the Gold Discount Bank vas only beginning to renew its activities. It is noteworthy that a year ago deposits abroad amounted to over 1,000 million reichsmarks, and that the bill holdings were only 320 millions. The equivalent of these deposits have now been converted for the most part into gold. Foreign - 3 - deposits are comparatively small, ,rhereas the bill holdings, including those eligible for cover, are, say, three times larger than they were then. Dr. Schacht also showed me his confidential sheets summarizing the condition of his branches. "contingent". Each branch has a credit ration called a While in a few cases these "contingents" were fully used, on the average they were some per rent. unused. This he took to be the final argument that credit rationing was finished, and that the eligibility test was all that was required to control expansion. Of course, he may have to restore credit rationing, but he does not expect it, and in the meantime intends to lower the rate for the sake of stimulating trade, and also to put his rate in line with other short rates. The fall in good domestic bills, which is confirmed from other sources, and the rise in foreign bills may be ascribed to pretty bad domestic trade and pretty goo- foreign trade. As for the domestic trade, I suspect it is what the com2ercial paper people call "spotty". It is surely bad in the case of the 1,600 concerns that failed in December, but I do not hear serious complaints from the concerns that continue on their feet. long overdue and the result should be healthy. These failures are The foreign trade is, of course, better than anybody had any reason to hope, and it is amusing to see what small satisfaction the Nationalist papers take in this achievement of the impossible. Somebody in one of these papers vas lamenting the other day that in December the trade-balance would probably be favorable! ';;hen one considers that practically all of the reparation deliveries are over and above the reported exported figures the result is extraordinary. Of course, the effect upon the aeichsbank's de,isen of better conditions in foreign trade is direct and important because at the moment foreign loans are not required to pay for imports, but flow directly and almost completely into the German capital aurket. PS. -4- Ole It is a bit soon, of course, to draw any very optimistic conclusions as to the future. Adverse domestic credit conditions may have operated to stimulate selling of goods abroad, much as they did in August 1924, when, as you remember, a favorable balance was reported. 3ut there is this very important difference between conditions now and then. The exports in August 1924 were only about two-thirds of :ghat they were in November 1925 and the imports in august 1924 were less than one-half of what they were in November 1925. The difference seems to me to be the difference between acute illness and convalescence. Later in the year 7;g3 may run again into comparatively heavy adverse balances, particularly if German industry becomes markedly more active and requires additional raw materials from abroad. But this in turn ought to be a sign of health, and I should hope the excess of imports would be temporary as the goods made from them flow back into foreign trade. Our friend Julius Firsch tells me that he is against any lowering of the discount rate. There have been some rumors bf it in the newspapers which have excited him. He says, and with justice from one point of view, that it is a mistake for a country .ith too little capital to lower the rates that capital earns. This is sound enough as far as it goes, but in any question involving Reichsbank policy I am suspicious of Hirsch's comments. He has been acting as intermediary for a good many municipdlities and industries seeking American credits. I heard the ether day that he had twenty-six applications up his sleeve, with what truth I do not know. 3ut Dr. Schacht's policy of checking municipal loans has been bad for Firsch's pocket. In justice to him I think that his interest has led him into a little self-delusion; but he has been very critical of Dr. Schacht all along. From the practical stsndpoint, I should imagine that a lowering of the Feichsbank rate, if, as is - 5 - *1. likely to be so, the reduction is only one-half or one per cent., will not have much effect upon the foreign flow of funds for long-term investment irto Germany. The rates which are likely to be affected are the lending rates of the principal German banks which will automatically reouce their lending rates by the amount that the Reichsbank reduces its n.,t . These are now about three and a half points higher than the cost of foreign money at short or long term. rurt'er, I should hope that as the interest carried on short deposits diminishes, there should be some encouragement towards investment in longer term obligations, which is just the thing Germany needs at the moment. There may be a nigger in this wood-pile and, if so, I hope you -ill point it out to me. I must close this letter so that it will catch the next steamer. I send you, as always, my best reg rds, and at this season I add special wishes for'your happiness during the year. Yours sincerely, SHEPARD MORGAN. Pibm LE COMITE DES TRANSFERTS tHE TRANSFER COMMITTEE PARIS BERLIN 088 LUISENSTRASSE 18 RUE DE TELSIETT OtTELEPHONE: NORDEN 11900-11910 TELEPHONE: WAGRAM 21.22-21.23 TELicGRApimEs: REPAGENT, PARIS TELEGRA.1119: AOENTREP, BERLIN BERLIN January 15, 1926. Benjamin strong Esq., Governor of the Federal Reserve '3ank of Yew York,. New York. Dear -r. Strong: Since my letter to you of January 7 there have been some further developments in the money situation here :which I think will interest you. As you know, the Reichsbank lowered its rate according to schedule and the explanations given were those which Dr. Schacht had previously given to me in somewhat greater detail and hich I passed on to you I saw him the morning after the announcement and he was not altogether happy about the reception which the German papers give to it. The most intelligent of the criticisms were directed at the reduction taking place at a time when money is already cheap. I cannot follow that argument because it seems to me that he has got to keep his rate in line with the market rate if it is to be effective. Indeed, according to our own precedents, it seems to me that the re- duction was justified on the ground of market rates alone, if for nothing else. The 3erliner Tageblatt, ordinarily a moderate and sensible commenter on financial conditions, spoke the other day of a "money calamity", meaning that there has developed a surfeit of short money in the market. I heard yesterday that call money was placed late one afternoon at 3 per cent., which is about half the going rate on the Bourse. Of course, this was exceptional and probably indicates a purely market condition such as we sometimes have at home. Jut money at one - 2 I 410 month is easier than it has been at any time since I cane here and ranges between 7 1/2 and 8 1/2 per cent. This is one of the best signs that I have seen by way of indicating a drift toward long credits. no bank-statement since the rate There has been changed and it is impossible to tell yet what effect it will ,ave on the aeichsbank's earning assets. Dr. Schacht has tackled one of the legs of the public funds problem. and has laid the groundwork for the employment of some part of them in longer term investments. The Gold Discount Sank has made an agreement with the aenten- bark-Kredit-Anstalt (this is the agricultural credit institution which borrowed $25,000,000 with the National Jity Company) by which some of the facilities the Gold Discount Bank will be made available to agriculture. of The Kredit-Anstalt will issue mortgage bonds and turn them over to the Gold Discount 3ank. The funds received in return therefor will be loaned to agriculture through the medium of the numerous agricultural lending institutions and co-operatives with which the Kredit-Anstalt is permitted by law to do business. Thus the obligations will have a triple liaility: first, that of the borrowing farmer who can borrow only to the extent of one-third of the assessed valuation of the land mortgaged.; second, the distributing bank or co-operative; and third, the Rentonbank KreditAnstalt. The rate will be 7 per cent. and the maturity five years with throe amortization pa: ments at the end of the third, fourth and fifth years. The Gold Discount Sark intends to increase its funds in three ways as occasion may require: first, it will call in the unpaid instalments on its capital, . ich means that the Heichsbank will pay three to four million pounds sterling, thereby increasing the paid-up capital to ten million pounds sterling; second, it may call upon its foreign credits not now in use but for which the Gold Discount 3ank is paying certain fees, and will use the funds so obtained to carry its bill portfolio thereby releasing funds now employed; and third, Dr. Schacht - 3 -- p 41/ hopes that some portion of the public funds will be made available to purchase these mortgage obligations from the Gold Discount Bank or else to carry bills now in the portfolio of the Gold Discount Bank. This, for us, is, of course, the interesting point and may serve to put a safe fraction of the public funds back into channels for long-term investment. Dr. Schacht naturally You -All be amused at one phase of the thing. had to discuss the plan with the Central Committee composed of German bankers. They interpreted it as a good market factor in the are already available for investment. farm mortgage bonds that The quotations of these bonds had been steadily working downwards for some months. But within a period of to days, and about a week before the project was made rublic,sane issues of farm bonds in the market rose about ten points. Apparently 6 per cent. obligations at 75 suddenly looked very good to those who knew what was coming. This is the kind of thing that I save alwas been led to suppose was not ,3one in the best circles! I must say that Dr. Schacht did not like it but was rather powerless in the circumstances. Kemmerer was here the other day for about two hours on his way home from iarsaw. I saw him for a few minutes with Dr. Schacht but had little opportunity to find out what his conclusions were about Poland. will hear from him on that score. You, no doubt, There are a number of plans in the wind here which I have heard of in several different ways for utilizing the financial difficulties in France and Poland for straightening out the eastern frontier and for relieving the western frontier of the occupation. It is a most interesting field for conjecture, and yet I question whether the time is ripe for a settlement. As you gathered when you were here, the Germans are entirely content to forget -I- Alsace-Lorraine, but they regard the loss of the Polish corridor and "Lyter Silesia as purely temporary and as a matter which will threaten European peace as long as it remains. Also, while the occupation of the Rhineland. is some- thing that time will mend, they regard it as a badge of inferiority as long as it continues. The currency difficulties of Poland and -Prance they regard as affording an opportunity of re-establishing themselves on the East as ti.ell as the 7,est. They suppose that french currency is not likely to be cured without their help, and they are certain that the Polish currency cannot be stabilized unless relations between Germany and Poland are altogether friendly; indeed, they go even further and say that Poland as a nation cannot continue to exist without German friendship. Though I have not been to arsaw,I cannot help feeling that they are going a bit strong on all of these assumptions, with the possible exception that the zloty cannot remain a good currency unless proper trade relations obtain between Poland and Germany. Also, the Polish corridor must be a heavy liability on the Polish budget; I have heard that with its twists and turns it adds Something like 2,000 miles to the frontier, which implies a good deal of expense for military and customs administration. I sincerely wish that some means could be found for eliminating the Polish difficulties not merely through the technical correction of the Polish currency, but by solving the question of the corridor and Upper The corridor especially the Germans regard as an intolerable wrong, splitting their country, as it does, into two parts; and Upper nlesia they regard as having been lost through a prejudiced decision of the League of nations Oommis'ion. It would be a good thing all There is plenty of dynamite in both of them. around if a trade could he arranged either for the sake of currency stabiliza- 4'" tion or otherwise, which would cure this particular disease. 4"eki rt.a- Ako o -. ti 7 Mk. e-e-ftr,a.oCob - O's ' A - 5 - I talked to Yemmerer about the intent the authors of the bark la-;: had in giving the 7eichsbank the power to lend to banks on the security of government obligations. This is a clause of the law which it seems to me has been largely overlooked in the discussions an amendment of the "ank la.. endorsed a proposal of .1lich have taken place looking toard As :-(-)11 1711%.. l.e General Council last rovember r. Schacht that the bank law be amended so as to remit the Ileithsbank to buy from the market up to 500 millions of short-time government obligations. M conjecture was that the limitation of 100 millions yhich now stands in the law was -of intended to express the final power of the Reichsbank to stand back of the market in Governments. 11157 cuess was that the authors of the bank law, being largely American, had in mind the American practice of lending to banks on the security of government obligations. This clause of the law has seldom, if ever, been taken advantage of in Germany and various technical points have been made against its use. But these seem to me to be insubstantial and the advantage of using Rcichsbank credit through the intermediary of banks which themselves must carry 25 per cent. of the load is clear. may have discussed with you. This Lr. Gilbert The Bank :,card is going to discuss the matter again at its meeting at the end of tLis month, and I shall be much interested to see whether it has a -range of mind. In any case, an amendment of the law ought to be avlided if possible; for it would be hard to hold down the changes merely to this one. Almost everyone I speak to, including the Germans, seems to think that the worst of the crisis is past. The unemployment figures still continue to rise, which is the worst sign that remains. To some extent I hear that this is owing to the cutting of Payrolls for the sake of cheaper production. AS krow, there is plenty of room for it, and"Amerikanismus" seems to have caught I - 6 - ;tot only the imagination of Gernan industry, but of the whole German people, ;hen I hear of their discharging employees and the installing of labor-saving machinery I think of your story about the water-carriers on the banks of the rile. There must be sane answer to that, but I fear it may take Germany some time to find it. th my best regards to you, as alvays, Yours sincerely, :.;ORGAN LE COMITi DES TRANSFERTS THE TRANSFER COMMITTEE PARIS BERLIN f8 RUE DE TILSITT LUISENSTRASSE Titi.tpuoNE: WAGRAM 21.22-21.23 110 TELEPHONE: NORDEN 11900-11910 TELEGRAMS: AGENTREP, BERLIN TELEGRAmmss: REPAGENT, PARIS BERLIN January 22, 1926. Benjamin Strong Esq., Governor of the Federal Reserve Sank of New York, New York City. ACKNOWLEDGED 1020 Dear Mr. Strong: B. S. I have your letter of January 7 suggesting that the Bank could make use of a number of copies of the report. Several of the officers are already on the mailing-list, but I am sending twenty-five copies to Dr. 3urgess for use in any way that you may think proper. I have thought all along that the Bank is a natural place to have extra copies of our reports, but I hesitated a little to suggest it. If in the natural course enquirers for this material find they can get it through the Bank it would do a lot of good./:, Since my long letter to you the other day the newspapers of the "fight have been busy perverting Mr. McGarrah's sneech. After a long and, for a time, rather intensive relation with newspapers this seemed the roughest yet. The "Manufacturer's Record" was good at perverting the facts, but in this case there was a total inversion. It is ironical that of all men Mr. McGarrah should have been the object of this thing. Not only is his feeling genuinely friendly and full of admiration for industrious people, but this is exactly the kind of thing that up to now he has successfully avoided. Faithfully, but under compulsion, I went to public dinners in New York for fifteen years, and in all that time I never heard him make a speech but once. That is about a record. Fred Kent's speech came along when the - 2 - comments on the other were beginning to die down and the same newspapers presumed it to be a confirmation of all that they had said. The Germans are not familiar with the convention habit and take every Rotary Club speech as a measured utterance. As long as the New York correspondents of these newspapers know that there is a market here for half-truths and perverted statements they will send them along. Perhaps the best thing to do is to lie low for a while, like Bre'r Rabbit, and say nuffin'. The fact is that even the most generous statement is bound to be interpreted at the moment either as bond-salesmen's advertizing or as the satisfaction of the boss at the hard work of his servant, - or worse. This, of course, is a confidential expression to you for use in cracking any speeches you happen to find in process of incubation. Nobody here in any responsible position, German or otherwise has even a breath of criticism of .7.cGarrah. His attitude was perfectly understood and his speech was accepted in exactly the way he meant it to be. I wrote him accordingly. There is no doubt that the newspaper campaign is having some effect which I am sure is transitory. I an not at all concerned about its influence on the effective working of the Plan, but there seems to be a momentary change in the attitude toward America. The United States cannot retain its extraordinary favor over here if people as influential as i'red "Vent are represented as preaching to the Germans on how to manage their own affairs. "pith these commercial failures and this unemployment the Germans seem to me to be like people that have had the wind knocked out of them, and it hardly does at this time to pick on them. Last night, for example, for the first time since I have been in 9erlin, a man on the stage in the theatre made - 3 - S some cracks about the Americans, and I was interested to see that he was applauded. I had an earnest telephone conversation with one of the official Germans the other day who called me up to say that the government was doing all in its power to tone down the rough things in the newspapers and he hoped they were making headway; but up to now I have seen no results. It's a case of Hearst journalism gone crazy. 7:e do not take these things as showing a serious or permanent change, but merely as a casual wave -hich should be given the least possible material to roll about. Sincerely yours, SHEPARD kORGAN )-1-f-ty\___,44..., A.; (;- ItLAAAir. LE COMITE DES TRANSFERTS THE TRANSFER COMMITTEE PARIS BERLIN 18 RUE DE TILSITT 82 LUISENSTRA.SSE Te TELEG Titx.ikPaoNE: WAGRAM 21.22-21.23 vac: NORDEN 11900-11910 AGENTREP, BERLIN TELEIRAPIMES: REPAGENT, PARIS February 5, 1926. BERLE Benjamin Strong Esq., Governor of the Federal Reserve Bank of New York, New York City. 1 /41 7r1 6 A CkNowLEDuED :'/An 1`1626 Dear Y.T. Strong: a 8 I conjecture that about this moment Lr. Gilbert is arriving in Paris on the last leg of his trip. We expect him in Berlin the middle of next week, and I shall be most interested to find out what he has to say about you and my friends at the bank. Things are developing here in normal fashion, but it is hard for the Germans to realize that they are going through an essential stage in the recovery from inflation and that this is indeed not the end of their unhappy lives. The newspapers of a certain breed are behaving abominably and are attempting to lay against the Dawes Plan all the troubles of a difficult winter. The Government, however, is keeping its head and has exerted such influence as it can over the newspapers attached to the parties representing the present coalition. They are wise in not undertaking any counter-attacks or any counter-defence. Our friend Keynes let himself be used for some of this propaganda and wrote ar article in the "Tag" of this morning which to my mind is about as far ,ram facts as possible, and in this respect his present performance is not unique. I sometimes wonder if we had not cheered years ago when Keynes first wrote the phrase about "Bamboozling the old Presbyterian", if he would not be better behaved now. It is a dangerous business to get a reputation as a phrase-maker. - 3 - 0 forerl.nner of an improvement in other directions. The head of the Reich Statistical Office had the courage to say this the other day but utterances of that sort are not popular. Apparently they are doing all they can in the newspapers of the Right and in the Nationalists' speeches in the Reichstag to make capital out of the present emergency while it lasts. If anyone ventures to say that similar experiences were undergone in the United States in 1921, it is received with an incredulous smile, as though the United States never had anything but happiness and prosperity. The unemployment offers some interesting parallels to our own experience at home, although the previous condition was far more extreme than aurs. I was talking last night with one of the principal operating men in one of the big electrical concerns. He told me that they had reduced their staff from 60,000 to 40,000 men. of cutting off useless workmen. This was in the interest He said that for a number of years they had had to employ an excessive staff; that during these years they could not discharge the men for idleness or incapacity without getting a vote from the Works' Council, and ti-at this was usually not to be had. Now, however, these agreements and regulations had run off and they were able to adapt the staff to requirements. In some cases, like the famous case of the Goodyear Company in 1921, production actually increased as the staff diminished; in any case, the unit output per man was greater now, and consequently production was cheaper, and this without lowering wages. whom Dr. Kastl, Jay will remember, told me that from his observation in the Union of German Industrialists, this kind of staff reduction accounted for from LO to 5 per cent. of the total unemployment at this time. In the long run this will mean cheaper production and better markets, but on the principle of your Nile water-carriers, who still haunt me, it means a fairly long period of excess labor in Germany, which may last, say, until 1929, when the lower birth-rate during the war years will begin to show its effects. A woman member of the Reichstag tolJ me with some bitterness the other evening that Clemenceau's harsh words were probably right that there were 20 million too many Germans. Dr. Schacht told me the other day that the National City Company had made a bid for another tranche of the Rentenbank loan at 94 for a 6 1/2 per cent. bond. This compares with a 7 per cent. bond at 89 when the first tranche was sold last sumner. Dr. Schacht was delighted at this change and thought it was owing to his program for financing the Rentenbank Agricultural Credit Institution through the Gold Discount Bank. cost the borrower about 7 1/4. Loans under that plan will I recalled to him that the New York bond market had changed somewhat in the interval and that the External Loan was now selling at nearly 103 as against 93-4 last manor. The foregoing was not inspired, but this paragraph is. Dr. Schacht told me that on December 28 he had received a cable from the Bank asking whether he wished the Bank to invest in bills the funds which it had on deposit for his account. He asked me what I would do under these circum- stances, and then remarked that he had interpreted this cablegram as an expression of desire and had promptly cabled back asking that the investment be made. He then was bothered when he read of the change in rate and had written a note about it to the Bank saying that in future he would appreciate it if such inquiries could wait until after the rate was raised. I ventured to say to him that very possibly the author of the cablegram did not know that a change of rate was impending; further, that the Reserve Bank's discount rate was not the same as his rediscount rate but corresponded rather to his Lombard rate, and that while the rate for bills might be expected to rise slightly, it need not necessarily follow that it would rise as much as the change in discount rate might imply, and that may recollection was that the rise was only 1/8 to 3 5/8. however. I think he was not fully persuaded No doubt a response to his letter has already gone forward, but perhaps a personal word from you would be in order, and if there is any way of giving him the benefit of the change in the bill rate I am sure it would smooth out the only ripple I have observed so far in his relations with the Bank. I think the main trouble was a common one, namely, the confusion between his published rate and ours. I must control myself and reduce the size of these long letters, but there is one other point upon which your thought would be very useful. This concerns the stock market here. Since the first of the year stock averages have risen about 14 points. It seemed to me Last fall that condi- tions were ripening in the money market for a movement in stocks. It came suddenly and seemed to arise from three general causes: first, the general easing of money; second, the signs of foreign participation which included Mei the organization organization of such investment concerns as Hayden, Stone & Co; and third, A speculation on the chances that German property in the United States would be returned to the owners. Of course, the fact is that German stocks are very low and offer a good gamble; also, that the aggregate par value of stocks listed is comparatively small and so perhaps would respond quickly to any substantial renewal of speculative interest. It may be that the restrictions on municipal borrowing have left our investors unsatisfied, and that short of good industrial issues, especially those giving a participation in the business, our investors will go either directly or indirectly into the stock market. In moderation this would be a good thing and would give new courage to bUsiness. But if our people come in merely for the sake of making 50 points and then selling out again to the Germans (who then presumably will have had their appetites quickened) the results would be very serious. As you know, this is what hapiened in Austria in the autumn of 1923 and complete recovery has not been effected yet. The adverse effects on reparation payments are obvious. I have tried to think the thing out and I am not clear on the Among other things means of prevention in case the event should happen. it seems that the fixed rate between the reichsmark and the dollar is an invitation to foreign participation in the stock market and that perhaps the time is nearly here when it would pay to let the reichsmark stand on its own footing. Rate action on the part of the Reichsbank would seem to have rather contradictory effects; that is, an increase in the rate, while presumably depressing stocks as a direct effect, would tend to attract money to this country on account at the higher market rates then obtainable here, which I should imagine would have an indirect stimulating effect on the stock marketjand so perhaps cancel out. Extreme measures, such as special taxation directed against foreigners or controlling the exchanges to prevent the withdrawal of capital, would seem highly undesirable from many points of view. There may be some other means of accomplishing the purpose and that is where your thought would be very valuable. Of course, this is looking ahead some distance, but it is better to lay plans for something that does not happen than to have it happen with no plans made. Perhaps all that is necessary is that foreign investors who come into this market ought to understand that they should stay with it for a while. 7 Please excuse this endless letter. I send it, as always, with my affectionate regards to you and my friends at the Bank. Yours sincerely, (L4S-A-"0"%lftrl SHEPARD ALORGAN. )0, OFFICE DES PAIEMENTS DE REPARATIONS OFFICE FOR 111 REPARATION PAYMENTS fi PARIS BERLIN 38 LUISENSTRASSE 18 RUE DE T1LSITT TELEPHONE: NORDEN 119(0-11910 TELEGRAMS: AOENTREP, BERLIN TtckPiaorm: WAGRAM 21.22-21.23 TELEGRAMME9: REPAGENT, PARIS BERLIN August 5, 1926. Benjamin Strong Esq., c/o Dr. Vissering, De Nederlandsche Bank, Amsterdam. Dear Kr. Strong: I have been moved to pursue you more or less across Europe, but the newspapers have reported you in so many places at once that I did not know which train to take. I had a telegram from Fraser in Paris (which by the may was telephoned to me when I was spending a week-end with Dr. Schacht) saying that you were coming to Berlin late in August. I hope teat is so, for I am not prepared to have you go back to Yew York without having seen you. This letter, also on the authority of Fraser in Paris, is in order to find out if you are still firm in your intention of coming here. I am going ostensibly on a short holiday next week, but we are staying this summer so near Berlin that I expect to come back here off and on and most decidedly will be here if and when you come. If you get a chance I would be grateful to you if you would send a line to the Harzburger Hof, Bad Harzburg, telling me something about your plans. It would not surprise me if you should not be coming this way at all, particularly as I gather that you saw Dr. Schacht Factor in Franc Proble -2 - I P. Benjamin Strong & A. last Tuesday in Holland. In case you don't co somewhere to find you. I am illustrating this letter with a &Bei. 1 in W. 10, S i ismundstr. 4a g Le 41, Alk.sea.a.f -- _, C46.0 ; y/e ; 4..nor 60-al illi t . "'Lea- 44-c.:6 6,... ii...-...) L-4,r-J 4.... 44...G. #,A. .t L& 0.43.., 16-s- &A... vi )1.-. aa49 0.6- ic.,r 64) . , 741.0-4:.-4,-, 4.14,,,, Ai--..9 5°' co-v....L.1e_, m...1- g is ._t,_ 4,14 kr g--"ELAAA..,-,,Aia 4h- 1-4a so fut.;., 21 opt- %our ,i4.4.2 4..t; it -'sou. *1/4/14. 4.42-T 6-t..Z.c .4s kciA. 14Lgt-te--3, a. e s.a. e-e-4--6-1- 4...."._ 4, t..... 67 21.ea v-c-ct 0 Cs, 1,"___- -1.-a rt.. &,- Ica...¢Zotti 4..e -6 ..(.c .-.;..6. 444L4t ti.c..... li Ca c..i5 raL-Lic. &12, it 16t4.14.15. ,Li ti . h_ a. ci. a pea" Ilk elm A.4.1. 4e4_...vOIL; %At ( 4 its' 4-...... Alt _. 014. kca_44x,i 1-ler64' .CL-4.;./ (41-44-.4.-4- 4./-4,4_44 6w- 4°d ci 61( (0,. la-Au-0 efAAA..."- 4,4 e.4-44,4-4LAL. 41.1LAAAA-g 1-64LA. iit arfft.... AA, r-1-0_4_,_ ( 21%4.0 ) 6-%-a C;.+ 40ja4.4:1 a.442. aes.. 0-4,40 ca. c 46-424-;-a-1.1 (1-1-411 6 aim rg, igt.. Ak-4 44-4-t- ate 11,-; /337 ~-15 ' "Ace 1.444a. neat el-c"...ezis LA-arc . a-4.41-7 i 0444 AexAry_ .4.ze teat, OFFICE FOR 4EPARATION PAYMENTS I E. OFFICE DES AIEMENTS DE REPARATIONS BERLIN PARIS 88 LUISENSTRASSE 18 RUE DE TILSITT TELEPHONE NORDEN 11900-11910 TELEGRAMS : A.GENTREP, BERLIN TELEPHONE: WAGRAPI 21.22-21.23 TkLiaGRAnnEs: REPAGENT, PARIS BERLIN November 16, 1927, Benjamin Strong Esq., Federal Reserve Bank of New York, New York City. Dear Mr, Strong: Parker Gilbert handed me your letter of October 24, in which you said you would be interested if I should write you something of the facts and of my views about the change in the price now being offered for gold by the Reichsbank. You know I always like to write letters to you, but latterly I have controlled the impulse because so many members of the Federal Reserve Club are attacled to this organization either at part or full time. The exchange position of Germany this autumn has interested me enormously, and, while the Reichsbank's action in reducing its buying price for gold has had little practical importance thus far, there are other parts of its exchange policy that have had a considerable influence heretofore and may have set up some trouble for the future. As you know, the Reichsbank has consistently declined this year to buy for its own account the devisen resulting from the sale abroad of communal or State loans. The policy was undert ken as a deterrent against the placing of such loans, on the theory that if the value of the dollar in the foreign exchanges declined, the public authorities would be less inclined to borrow. The policy has apparently had no deterrent effect whatever, because as Dr, Schacht himself - 2 - a explains, a BUrgermeister does not care how much he pays for dollars as long as he gets them; his successors have to pay them back. The Reichsbank's passive attitude toward the exchange market had a prompt effect. Between the 10th and the 20th of July the dollar declined from 4.2185 to 4.204, and in succeeding weeks, with some fluctuations, the dollar fell until on October 19 it stood at This was on the day after the Reichsbank lowered its buying rate for 4.183. gold from 2790 RM per kilo fine (the equivalent specified in the Coinage Law without deduction of minting charges) to 2784 Rd'i per kilo fine. By this action the Reichsbank lowered the gold import point under then existing conditions to something like 4.176, and in the case of sterling to about 20.36. The Reichs- bank is not empowered to reduce its buying rate further. As a 'natter of fact, the gold import point has not been reached, mainly because the Prussian Loan incident and later the discussion connected with our memorandum to the Finance Minister intervened to check the interest of the American market in German State and communal loans, which furnished the largest share during the miner and autumn in Germany's foreign loans. At this moment, even with the cessation of long-term borrowing, the reichemark stands a pfennig above parity at about 4.19, and at parity or slightly above it with sterling. The temporary shutting-off of State and communal loans has made it easy for Dr. Schacht to change his devisen policy without giving in to the public authorities on what he has thought to be a matter of principle. He bought most or all of the proceeds of the Rentenbank Credit Institution's loan which was brought over in the first week of November, and I understand also that he has bought or will buy the proceeds of the North German Lloyd loan. he has as a matter of fact modified his policy. I am glad if I have doubted the wisdom of it almost from the beginning, and have had many conversations with him on the subject. The only good purpose that it may have served was that it probably induced - 3 - - 4 - - 5 - I ft in terms of the dollar, the weakness of the dollar in Berlin made it likely that gold would flow here from London on a three-cornered transaction. If State and communal loans had continued this might well have taken place, even at the lower gold import point to which I have referred. I doubt, of course, whether Dr. Schacht would have let matters go to that point; he doubtless would have started buying devisen first. A flow of gold to Germany from England, for example, would naturally have been unfair to the Bank of England, as to any other European bank whose geographical proximity to Germany made it vulnerable. The obligation to ship gold under such conditions as we have had of late is primarily on the country which is doing the lending, and I know that you are in accord with that principle. That raises an extremely interesting point: Is there any ground for thinking that gold will flow out of the United States in natural course to any free- gold country in Europe until the exchange of the weakest free-gold country in Europe reaches the import pointT I am riling out of consideration, of course, such transactions as the Reichsbank did in New York up to August of last year, when it was buying gold substantially as a commodity. I know you have done some powerful thinking on this point, and I should be glad to know the results. In the meantime it seems probable that the United States can lose gold to Canada, Brazil and Argentina, relieving Europe to that extent, but that it is not likely to ship any important amount of gold to Europe until the whole list of exchanges takes on a very different complexion, and also until after there has been a further shuffling of gold among the European countries themselves. This furnishes a fourth reason for regretting that Dr. Schacht followed so long his passive policy toward the exchange market. He had a chance, which may now possibly have passed, to buy devisen at a favorable rate, to convert into gold, and to leave it under earmark with you until such time as he chose to bring it over here or until he - 6 - S had occasion to use it in protection of his own position. To the extent that he might in future have had to use any part of it for the latter purpose, he would have been able tc sell it at a rate amply sufficient to compensate him for bringing the rest of it over here. I have talked these things over from time to time with Dr. Schacht, particularly the first three points outlined above. I should say that he accepts them all, and yet stands by his purpose to make the States and communes pay dearly fcr their loans. You know how much I like him, but his habit of cracking a head when he sees it is a fundamental flaw in his administration of the Reichsbank, and accounts for most of the mistakes which can be charged against it. Now that the personal element is temporarily retired, because the States and communes cannot borrow if they would, perhaps this phase of his policy is over. Please give my affectionate regards to 2.1r. McGarrah, who already knows some of my thoughts on this subject and may have expressed them to you. remembrances too, if you please, to my other friends at the Bank. Korman in London two weeks ago and found him as stimulating as ever. as we always do, of you. Excuse this long letter. Tith best regards, Yours sincerely, SHEPARD MORGAN. lily I saw Mr. We spoke, (chri0A..74:4,*1-J OFFICE DES FFICE FOR PARATION PAYMENTS PAXEMENTS DE RAPAR.ATI PARIS BERLIN 88 LUISENSTRASSE 18 RUE DE T1LSITT TELEPHONE NORDESIf900 -11910 GENTREP, BERLIN TEI.111'11011E: WAGRA)I 21.22-21.23 TELISGICAMMES: REPAGENT, PARIS 11111/ TELEGRPOIS IBERIAN February 9, 1928. Benjamin Strong Esq., Governor of the Federal 'deserve Bank of New York, New York City. Dear Mr. Strong: Mr. Jay showed me yesterday a cable from you saying that you are on the mend and are planning for a little holiday at Atlantic City. letter will find you having a good time and fully restored. I hope that this We are still in doubt, as perhaps you are, with respect to the time when you will be coming to My personal hope is that I shall see you either in Berlin or Paris, but Europe. I realize that the chances of finding you anywhere on the banking circuit are uncertain. Parker Gilbert tells me that you found a hole in one of my chapters in the last Report. The particular hole which I understood you had found was on page 103 in a paragraph which I will quote for your convenience: "As the foreign exchange rate itself indicates, this disparity of interest rates has exerted a powerful influence in drawing foreign funds to the German market. The import of credit is temporarily the equivalent of an import of gold, upon which a further structure of domestic credit is erected. In fact, one of the deceptive aspects of the import of credit is that it provides the lawful basis upon which further internal credit expansion can be carried aut. In a country adhering to the gold standard, domestic credit expansion based upon domestic resources comes to a natural - 2 - - 3 - O but the fact remains that the position of the reserves now as compared with 1224 is due essentially to the inflow of credit. 2. The import of credit finds its way more quickly into the ieichsbank's reserves than is the case at home. Germany is still in part on a gold exchange standard; that is, within the limits prescribed under the law, devisen are to be counted equally with gold as the reserve against currency. This is one of the bad things about the gold exchange standard, which I have never liked in practice. The proceeds of long-term loans or of short credits, if bought by the Reichsbank, are eligible within the limits prescribed by the law to pass immediately into the reserves, thereby affording a basis for expansion of the currency and in fact directly stimulating such expansion. The acquisition of gold itself has come about for the most part through the deliberate sale of devisen thus acquired, for gold. There have been very few instances since we have been in Germany when gold has flowed here in natural course; there 'sere one or two shipments from Russia and a few from England. As I indicated in a long letter to :ou last November, we narrowly escaped receiving gold from England in virtue of the three-cornered position of the exchanges as between Berlin, New York and London. But for the most part gold has been bought as a commodity and has been brought here as the result of deliberate policy, derived in many cases, physically speaking, out of the proceeds of loans, and, generally speaking, almost exclusively so. 3. Whenever the Reichsbank declines to buy devisen, as was true during a part of 1927, the inflow of foreign credit still leads to an expansion of domestic credit, even though the reserves of the Reichsbank do not increase. The process here is not unlike that which you showed me one warm day in the committee room at the Capitol in Washington during the Agricultural Inquiry. The Deutsche - 4 - S 0 Batik, for example, gets a deposit from the National City Bank and proceeds to make a corresponding loan in reichsmarks. The proceeds of the loan are in part withdrawn and find their way to the Disc onto Gesellschaft as a deposit, and so on. In this country the rate of expansion is not limited by statutory reserve requirements but by the consciences of the bankers, which in some cases are flexible. The effect upon the currency is to expand it within the limits of the reserves already existing, and if carried to an extreme, to force the Reichsbank either to acquire further reserves or to exercise a severe restriction of credit. The extreme case has not happened thus far, but before it happened it would be entirely possible that the exchanges would rise to such a point that gold would flow to Germany and be bought by the Reichsbank whether it wanted to or not. So much for that. I shall be much interested to plugged, or whether you think I have opened it still wider. Dr. Schacht has gone down to Sicily for a month's holiday, and the Reichsbank recedes correspondingly. his absence. I hope no one is inspired to lower the rate in It has been effective now for a longer period than at any time since we have been in Germany, but there is still plenty of largin for it to work upon before a reduction comes into question. It has been difficult to reconcile all the forces which have tended heretofore to make the rate effective, and even now the inflow of short credit is working somewhat against it. But that, for the present at any rate, is a reason for keeping the rate where it is rather than for lowering it. The increase in the Reserve Bank's rate up to the present has not affected the reichsmark, but strangely enough the reichsmark rate against dollars has strengthened. There is said to be a good deal of French - 5 - apparently been sufficient to offset money flowing into this market, which has any tendency to withdraw American balances here. I have never seen Lr. Jay looking so well. well-known tonic qualities of Rheinwein. I wish I could give you some. Tith best regards, as always, Maybe it is because of the Yours sincerely, SHEARD MORGAN. bn he e- in RADIO Number N.. of I !oil+ /2 1 HAMBURG DDX SS 1 "ritnelended in Date handed in ;) Date Reel. 311. tirrlctu Time Reed. -r Ree'd. irem By To O BENJAM I N d STRONG ,/,.("1.-^"Ne-.1 SS OLY1'1P I C L in P--_RY SORRY 1(19E0 YNi AT HME AFFECTIONATE ate en th R- r. nd ..E- at all )bat on This messas, Is only received for delivery subject to the condihons {milted on the back hereof. I ORM .111hS SHOLLI) ACCOMPANY ANY l NQI IRV RI_SPLICTING TIIIS MARCONIGRAM