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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.,

The rranefer Committee,
111111114"
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

The a6blo :me rather cryptic for
or enclosed confirmation.

yeeterday, as
obviouo rip.aorta.

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,

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.

ran there aro a few estebliehmo

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

minutes, bo I



rather buoy day *ith a directors' meeting coming in a few

aht.Il Duet mend you thla word of my Aena, and let it two But
with th

.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.
ts.rt; coin, or
Digitized for _appear in the pre-is 5.8 to "Ah,_.t they
tions FRASER


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, Germany.


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,







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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
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T EL le nAzzSIK 41141141.17

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`

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 A nnwor
Federal Reserve Bank of St. Louis

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

1_7 -Benjamin Strong.

April 2nd 1925.

fectiv right, and I gather that the is not too particular about
the occasion for the visit; he simple making of aquaintance
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 friend
I 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;

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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

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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
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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
http://fraser.stlouisfed.org/ nic,ht,
Federal Reserve Bank of St. Louis

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,

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THE TRANSFER COMMITTEE

LE COMYTE DES TRANSFERTS

BERLIN

PARIS

33 LUISENSTRASSE

IS RUE DE TILSITT

11.
TELE 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

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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
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TiLipRonts: WAGRAM 21.22-21.23
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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

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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 -P

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 f

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.

L

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 of such investment concerns as Hayden, Stone & Co; and third,
organization
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.

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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

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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.

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