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February PI, 1921.

My dear Professor Sprague:

In catching up my reading since my rotUrn from Europe, I have

just had the privilege of reading the

per which you read at the meeting

of the American Economic Aseociation, entitled "A Review of Federal Reserve

board Policy."

it is no exaggeration to say that I read it with satis-

faction and enthusi'mem, because it presents such a fair and judicial ex-

amination of the difficult subject that we are dealing with, and I may

also say that it is almost the firat report of that character which I have
read from any of the etudents of this subject in our universities, which
was not guilty of criticisms arising principally from lack of knowledge of

the facts.
It would please ma very much if I could have an opportunity to
talk over this article with you when you next come to New York. There are

certain matters in connection with our policy which naturally are not of
general knowledge, which I would be glad to explain confidentially.

I take this opportunity of expressing my deep appreciation for
the splendid presentation of this matter, which I wm sure has helped us
very much.

Yours very truly,
Professor U. M. W. Sprague,
Harvard University,
Cambridge, Mass.


January '30, 1922.

ky dear Professor Sprague:

You are most kind to write Me at any time such a letter as you did on

January 1f5, belated though it is; but ely should one complain of a friend and
correspondent mho asks really only a fe4 veaks in which to read such a dull dis-

sertation, as that of shich I :vas guilty before the Joint Commission of Agricultural

I should very much like to vrite you fully in reply to your letter, at

least to show my appreciation; but I have only recently been dischargel from the

hospital, after an operation, and only to-day am taking u- work again.

As to the policies of !910; you mill find the key to that discussion on
oages 502 and 503.

I had asked the Chairman of tho Comrission if it would not be

possible to have the Treasury's policy discussed by either Senator Glass or Mr.
some respects

of that time.

I was a subordinate, and the


Federal Reserve System as in

subordinate to the Treasury during that period, and in the policies
Senator Lenroot

as very anxious apparently to get an expression

from me, as his questions indicated, but I did not feel then, and I do net feel now,
that it as proper that anything by way of criticisr should have found a place in
the record from me vhan the former officers of the Treasury sere available.


vou/d -?ersenally have preferrod to see discount rates and the government borrowing

rate advanced coincident vith the decline in prices which took place in January,
February and March, 1019.

Nothing like an insistence on that course vas possible

at that time, nor vas anything like insistence attempted until later in the year.
Lut as I frankly stated "I shoul!cl say that an increase in discount rates at the
period when the decline sas suffered, from January to March of 1919, to which I
have referred



here interrupted) sould have been as close to an


Professor Sprague

ideal 100 per cent policy of perfection ae
belief at that time, as is disclosed in my

January 30, 1922.

could have been adopted. That 4E1.8

private end confidential correspondence

'ith the Treasury, and has been my belief ever since.
:rankly, and quite


I an writing this to you

confidentially, because I think it is necessary in order to make
That I am un4lling

my position clear in reply to that paragraph in your letter.

to do is to now turn upon my former associates, with whom at that time I shared

responsibilities to some extent, and publicly condemn

their policy, ao has

been dune by at least one other man who 4fte also associated with all of us during
that oeriode

They acted in good faith according to the best of their judgment

and with the most high minded purposes.

if, in the light of after events, it

appears that tstake was made, I am sorry that the onus of it has to be borne
by the Federal Reserve System, where I do not

I em uneilline to attempt a

In reGding over

think the

responsibility rests.


defense by a policy of accusation.

the steteaent which I

made on the

subject of the


of the disceunt policy of the reserve system to prices, I think I can well understand
your criticism and the ground of your disagreement.

I still feel that prices are

not directly our concern, and eoesitly must take refuge behind my willingnees, which
appears in an earlier part of the statement, to adapt as my own the views expressed
in the Junliffe report, which have always struck me as illtminating, of the policy

of the Bank of Enzland since 1873, This in fact I did employ ns a better statement

there is

of the case than I was capable of making extemeoraneously.

On the other hand,AHmuch

iP 4hat you eel as to my pereenel attitude of to-day, and the extent to which it is
goveraed bj
a tornado.

ieresent dme'


It is sometimes folly

to beat your hands against

The regulation of prices through the volume of our discounts, and in

consequence through the volume of bank deposits and currency, is unescapable.
argumaat cannot be refuted that it is an influence.
in this country,


sections, vith the

But I cannot help feeling that

the enormous variations in rates of interest in the different

enormous inequalities in free capital in the

with the great fluctuation in


sentiment caused no doubt by the



superabundant vitality

Proressor Sprague

January 30, 192?.

eptimism, ann speculative spirit of the American people, it would be unwholesome

fer the twelve reserve banks, operating inder twelve very different sets of conditions,

to govern their discount policy with a direct eye to prices.

ihat can be done in a

leeat banking country like England, no greater in area than &e* England, or in a
country like France or Germany, eannot, in my opinion, be done in this country.


would be like oieratin a iederal heserve System with one office in London, one in
Penis, one in Berlin, one in Petrograd, one in Gonetuntinople, one in Some, one in
Madrid, le.c.

I am not as reactionary as your reference to Lombard Street would indicate;
but I em endeavoring to recognize the difference between Lombard Street in England

and twelve Lombard Streets In the United States.

To anawer your reference to the implication in regard to the self-liquidating
character of commercial loans would require a long discussion of the experience of the

past seven years in the reserve batiks.

I must reserve that for some time then we

can have a good discussion of this over dinner.

As to the sequestration of geld in 1915-18; it is very difficult to say what
,ryt, that policy had, because of the possibility of pyramiding reserves which still
existed unc3er the reserve act at that time.

That I do feel confident of is that we

had no means at all at our command:, of minimizing the innationary effects of the

gold imports, and if our policy had any effect at all, it did serve to reduce the
inflation in price advances.

It struck me as well worth trying, and it was a

eoliny for which we in the New York bank were responsible for inaugurating.


that is relied upon was to reduce the ameunt of reserve money, which might be the
basis of pyramiding the loan and deposit account, of both member and nonmember banks.

Had the gold been left in circulation and paid out to meet the demand for hand to hand

currency, it might have resulted in earlier recourse to the reserve banks for discounts
than was the case.

It is a matter, hclever, of which we can only surmise.
Yours sincerely,

,?rofessor 0. M. f. Sprague,

Jacksonville, Ala.

August 4, 19?2.


My dear Professor Sprague:
Ever since our country entered the war this bank, as you know, has
been facing a series of problems of the first magnitude in the

its policies, especially that with

development of

At the time of the in-

respect to rates.

quiry conducted by the Joint Agricultural Commission last summer, it became

obvious that

this question of policy *as likely to be extensively

reviewed, and in anticipation of that, one of our men prepared m

examined and
resume of all

the correspondence and actions of the tank in respect of rates over a period

down to

I have had it in mind a good many times

the end of' the year 1919.

to ask some friends such as yourself *he have made a special study of our banking system to go over this
upon it.


and to give me a

real critical opinion

It did not seem fair that this should be done at a time when there

was so much controversy on the subject, as there *as last year, and I disliked
very much asking any one to undertake a task of that

character vhich must, of

course, be surrounded by every safeguard of confidence.
There are various
the opportunity for a

reasons which I Would gladly explain to you had I

chat, which *Quid lead me to wish to have this dune

within the next few eeeks or say within a couple of months.
the document comprises about 100

typewritten pages.

I may say that

I think I should also

say that even this statement is inadequate without some verbal explanation in
connection with


4ill you feel willing sometime to read the document quite in oonfidence and give me frankly your

comments upon the attitude of the bank so

far as it is exposed in this document?

It is so arranged that I think


ntAgubt, 4, 110-LI.


iill not take very much time, and your on knowledge of the subject I believe
will enable you to form an opinion. without it being necessary to consult anything beyond what is contained in the paper.
Please write me quite frankly bow you feel, and oblige me 14 holding

this letter in confidence.
Very sincerely yours,

Professor 0. M. N. Sprague,
0/6 Harvard University,
Cambridge, Mass.

August 11, 1922.

dear Professor Sprague:

Your note of the 0th has just reached me, and I am most grateful to

you.for your interest in the matter I wrote you about.

It seems distinctly unfair, however, to ak you to do this during
your holiday end especially when you are without etenegrephic help; so instead

or sending, you the-,tecument just not I shall take a little time to prepare the
figures you euggeet, and if you will be good ennegh to let me know the date of

your return to Cambridge, I will send you the papere then, and possibly arrange

to run up to see you about it.

Till it be sufficient if I have prepsred in tabular form two statemente; one for the Federal Reserve Syctemets a .bole, and the other for this
bank, giving the following information:

(1) Total reeervee
(S) F.eserve percentage

Note liability
(4) Deposit liability
;5) Total (sf 1.oane and discounts to membere

Total of all other earning assets.
This statement vould be for the entire years of 1919 - 1920 and the
first three or six months of 1921, and would be shown by weeks.
Yours sincerely,
Professor O. 4.
Greensboro, Vt.



September 30, 192?.

My dear Professor Scrague:

Referring to my letter of August 11, I am hoping that you

will tleer it in mind to let me know in case you have occasion to visit
New York, end if you do not eY.-pect to do so before very long, I

think I shall take the first opportunity to run up to Cambridt:e for
a visit with you sometime when you cal endure a visitation.
With kindest regards, believe me,
Yours sincerely,

Professor 0. M. W. Sprague,

c/o Harvard Universfri7"''

M388 .



October 18, 1922.

My dear FrofessorSpragulws

It waa very kind of you to write me RO fully on October 10, and I

should prefer, were it possible, at the earliest opportunity to discuss
this matter with you, rather than to attempt an exchange of views by correspondence, which is usually unsatisfactory.

It might be poesible for me

to run up to Cambridge the latter part of this week so as to speed, say,
Friday with You; but of course I realize how very busy you are and that this

is rather short notice.
If you feel able to seo me aid wire upon receipt of this letter,
I shall thea plan accordingly.
Commenting upon the matters touched upon in your letter, may I
make the following ooeervations:

As to Mr. Leffingwell's letter, and in general his comsants

in regard to these difficulties with the University men; I am sure you will
recognize that without that correspondence the picture would be incomplete,

but that I have sent it to you quite reluctantly and in strict confidence,
in order that when we meet we lay have an unreserved discussion of all of
these matters.

But as you say, they are now of historical interest.
Pe"borrow and buy" policy must be an invariable accompaniment

of a cheap rate or a cheap money policy.

The argument upon this point

is not made upon the memorandum, which is more designed to be a narrative

than a brief.
In general, I agree with you that during the war period the
Treasury Department controlled, and must have controlled, the financial

Oct. 16, 1922



The Federal Reserve System is not a, super-government, could not assume

to be, and had it

attempted to exercise powers and

to adopt policies contrary

to the policy of the government, Imould suppose that the provisions of


Overman Act might have been invoked to curb the exercise of these powers, which
might have been oonstrued as attempting a defeat of the

whole financial program.

(4) The hesitating attitude as to rates to which you refer is simply a

reflection in the record of the

result of innumerable conferences and discussions

which in some cases resulted in compromise; in other cases in the adoption of
the program put forward by the Treasury without !Nisch modification, as the result

of our recommendations.

I wish you would particularly observe, however, that the


a change of policy after the end of the war, was really my letter of February

6, 1919, written after considerable discussion of a change of policy, and that

it was not until the end of the year 1919 that

fact insistent, as to rates.

representations became

urgent, in

In fact, the imminence of a loan of possibly six

billion dinners made any change in

the Treasury's rate program one of considerable

difficulty to them as well as to us.

What you observe in

regard to the rate

making power has been the subject of discussion in the System

ever since it


was organized, and I am frank to sa3i A considerable difference of view.


of this we can discuss when I have the pleasure of seeing you.
Your remarks in regard to bank acceptance rates are decidedly pertinent

to the present

situation; but after all, do they

national transactions so long as free

not apply equally to all inter-

gold shipments have been suspended?

Flehee regard this letter as quite confidential.
it a little later; and


the meantime, may I ask you to

I shall elaborate upon


the papers

you until we have opportunity to meet.
With kindest regards, and many thanks for
Professor O. M. W. Sprague,
Harvard University,
Cambridge, Mass.

your letter, I an,

Yours sincerely,

sent to




October 20, 1922.

Dear ProfeRsor Sprague:

Thank you for your note just received.

I shall

Hxpect you at thespartment which is on the 11th floor, 470

Park Avenue (corner of 58th Street) at any time tomorrow
Saturday morning that meets your entire convenience, and
am most delighted that you are able to come.
Ybure sincere:1.Y,

Professor O. M. 4. Sprague,
c/o Harvard Club,
27 4eet 44th St.,
New York City.

October 23, 1922.
Dear Professor Sprague:

You gave me a great deal of pleasure by coming to New York for a visit

of a kind that is most helpful to me and really the only kind which is capable
of producing the understanding that I think one need's.

I am most grateful to

you for doing so and if I could only reciprocate by advising you at once that I
could go to Cambridge early in November and talk to the students of the Business
Conacos, I ri ould feel .ths.t I we doing only wt your own courtesy renuires of

Unfortunately, I have to be in Washinvton the last half of this week and

I must be in Cleveland next week for one day; and these absences result in an

accumulation of work: that I find it very difficult indeed to keep up with.
Would it suit Mr. Donhamis convenience just as well were my visit to
be deferred to say sometime in December?

If that cannot be done very well.

then possibly the last part of November?

I have engagements for the 14th


and 16th of November, but nothing in the last two weeks of that month that
would interfere.
I as sending a copy of this letter to Mr. Donham who was good enough

to write me.
Yours sincerely,

i'rofessor 0. N. L Spraee
c/o Harvard UniveiirtY,

Cambridge, fines.

October 30, 1922.

Dear Professor Sk.av
On wy return from a few days absence I find your letter of
October 25 and one fro r Ar. Denham dated ths,

November 20 will suit me about as well as any other date
unless you would prefer to have me address the etudnnts a few days

later in that same week.

It is not very material to me except that

I am obliged to travel on Monday and should come back the same night,

whereas if I went later in the week I (would take the night train up,
spend one day in Cambridge and morre back the followine night.


I leave it entirely to you and to fr. ponham to say finally when it
shall be.
You could help as very much in deciding what to ssy if you

could give we a little idea of what aspect of the Federal Reserve System

be 'oat illuminating to the students, as I presume that they would
want to hear about the System.

Also whether they would prerer to hear

something of the theoretical or the -ractical side of the subject.
Yours sincerely,

_rofessor O. M. T.. Sprague,
c/o Harvard University,
Cambridge, Mass.


October 17., 1922.

gy dear Sir:

Your letter of October5 has just 5een received. kr.
Strong vcent to V:-.:shington on rednesday and J not return
bank until Ionde.y then I will band him your letter.

Yours lery truly,

FecretE,ry to
Mr. Benj. Strong.

Pr.;fcbsor C. .P. lauty,.?
c/o Harvard Un1verefT3,
Oahabridge, L;k;ass,



November 3, 1922.

Dear Professor Sprague:
- - eeeeetwe

Noverber 28 will suit re fine for a trip to Cambridge. I would plan
to go up Monday night spend Tuesday in Cambridge, and if possible come back

on the Tuesday night train from Boston.

I think I would like to outline to you a little it of what I had in
mind to say to hhe class, but just how far I should go will depend. upon the

extent to which these talks are printed and circulated.

If I have sufficient

freedom in that respect I would propose to explain that the literature regarding the Federal Reserve System has now become so voluminous and the reports of

their transactione so ample that students of banking and finance have every-

thing before them that is needed not only to judge of the System's actual
business transactions an! operations, but to a large extent to gain some knowledge

of its policies and of why those i)oliclee re adopted, and how they operate.

On the other hand, there is yore little discussion, and I think - as you realize very little general understandiee of just how the Federel ileeerve Syetem fits
into the great economic structure of the country as a new influence.
Then I would propose to lay the foundation for describing that

influence by a reference in a very general and broad way to the quantity theory,
and point out that since the Federal Reserve System had found its position as
a large lender it becomes one of the most important factors in the economic

machine because it must, whether it wishes to or not, exercise control over the
volume or

credit which in turn has such a far reaching effect upon prices,

wages, etc.

That prior to the war, the development of' speculation and

extravagance in a period of expansion would normally have been checked - so

to speak - by advancing prices, adverse trade balance, and loss of' gold.



Professor 0. M. W. Sprague

Nov. 3, 1922.

'he world no longer shipping gold,andthe Alerican exchanges at such a premium,
and with such an enormoue gold reserve in our hands - as we now have - no such

check upon speculation and advancing prices can be expected to operate - at
least not until such a development had reached an extreme stage.

Therefore, the Federal Reserve System, as the central ractor in the
control of credit, must rely upon the application of wisdom and intelligence of

the first order.

TI:ere are no Automatic penalties which would apply ae in

ordinary times to an orgy.

In view of tbat, students of the System should

watch it, criticise its afrairs, protect it against invasion from political or
other sources, as the protection of the Systee hereafter will depend upon the
interest of the member beaks in insuring thret it has good eanageoent, and in

sound public opinion to protect it egeinst reisuse.

There will be o;cortunity, I think, without making the talk too long,
to bring in something about the operation


How does this all strike you?

or the London market in coetraet with

Is .it too theoretical an abstruse?

It is an aspect or the &Mire of the Syetem which ha s been little discussed
and I fear has been less understood.

?lease write me frankly and critically,

and again accept iny warm thanks ner the courtesy you have shown me.

Yours sincerely,

Profeeeor 0. M. W. Sprague,
o/o Harvard University,
Cambridge, AILBS.
3S. VW

November 16, 1922.

Dear Professor Sprague:

Thank you for your letter of November 13 which is exactly what
I needed as a guide to what I should say to the Graduate students.

Possibly I can take the lid of a little bit and do what you say abouia
the character of the meeting.

There are only two things that I
all the time at my

should do other than giving

disposal to seeing something of Cambridge

of my friends there. I would like if possilile to call
to see Professor Hughes.

for a few minutes

he is the head I believe of the

course and his family are old Woods Hole friends.

or at least


I would also like to

take a few irinutee to see one of the sophomore students who is the son
of some warm friends of mine.

Other than that I am entirely

disposal for all day and the evening as well.
Yours sincerely,

Professor 6. M.
c/fo Harvard University,
Cambridge, Mass.

at your


November 22, 1g22.

Dear ro_eeeorwpraeue
Thank you eary atuc.:h for your note o

It will no

the 21et.

fine for you to meet ale at the Toderal Reserve 3ank o!! 30EtOil sometime

Tuesday wicArning, as tie °our-21 then have a little chat at the bank with

;ores and Curtis.

21-10 undergraduate is John Bra-Lt.

I just wanted

tc see him for a minute or two at any time that is convenient.


than that I have netiOng to do, outside of the en6azement which you
have already been good enough to make for me; so I shall exp,ect to be
with yo u at lunch aria ei;end $018 part of the eerternow,if agreeable to
you, svith the people connected with the Harvard Bureau of Economic

Statistics, which would. interest me vary mush, and later in the afternoon to stop withA ughes, if that is altogether convenient.
The .-2ost card announcement was not enclosed with your letter,

but the irenortant information about dressing is contained in your letter.
I much appreciate your courtesy and all the trouble you have

taken in enneection with my visit, which I fear is not justified by what.
I an able to do in the way of making a talk.
Yours sincerely,

Professor 0. M. 74. Sprague,
c/o Harvard University,
Cambridge, Mass.

November 29, 1922.

Dear Professor Sprague:

This is to thank you frost warmly and cordially for my

delightfnl entertainment yesterday.

The pleasure wac in meeting

-friends with whom I .eem to feel a wan:. and sympaihetic accord.

aut it is too bad not to rsward your very successful efforts to
give me a good tine by :iving those beye a little more pleasure

than it tiftxs nossible for me to do


talking about such dry

matters as I did.
With kindest regards, I


Yours sincerely,

Profersor 0. M. W. Sprague,

c/o Harvard'IWitirereitrre,
Cambridge, Mass.

December 12, 1924

My dear Professor. Sprague:

Governor Strong he just received a letter from Mr. I. A.
Bellerby, eaying, that he is in New Yerk

s the envoy of the International

Labor Office, and asking for an appointment to discuss monetary qu stions
with Governor Strong.

In his letter he has used both your mime and

that of Profeseor Seliowan, to whom I m also writing a similar letter..
Ineemuch as the Governor klIOe nothing of Mr. Bellerby

or his work, he has eekeU if you would not be good enough to advise

If he is a responsible and reliable

Lim of anything you may know of him.

person, Covernor Strong would like to be of eervice in s.ny way possible,

but at the present time his is SO very preeseei for time that. he feels
obliged to ascertain in advance something of the importance and nature
of the work Mr. Belierby is unotertekine;.

Anything that you mey feel willing to send Governor Strong

in this connection will be very such appreciatee by him ead will be
considered entirely confidential.
Very truly yours,

I s.


Seeretary to the Governor.
Professor O. M. Va. Sprague,
riarvard University,
Cambridge, Mats.


June b, 192b.
My dear Sprague:

Following are some informal comments in regard to the memoranda

relating to the two McFadden bills.

First, es to the one repetling emendmente to the Federal freeerve Act:

I rather agree lith that you verbally eteted to me, that it should not
be difficult to deal 'with this propoeel and expoee its ineevieability.

But one

point impreeeee le which is tot dealt wite in your memovandum.

Either by law, or by uaaga, banes of issue heve become, t.8 they should


"merkete for gold. Such a merket for gold, in a monetary eense, implies

beak muet etend ready to redeem Its note in gold coin or eold tare at

a fixed value et any time and in unlimited mounts.

It also implies uhet the bank

must stand ready at ell times to buy gold or to receive it on .=:eeoeit in any amount

also at fixed prices.
Leeving out all technical queetione in regard to free coinage and the
extert to whieh Federal Reserve Banks should intervene oetween tee miat end the

public, ie it net 6 fact teet


sound wenetery end benking eystem necessarily impliee

that the bank of issue muet always be prepared to receive dold on deposit from its
depositors 7

If, teeeefore, kt stands ready to receive gold on depoeit for credit

to reeerve accounts, ehet rules, either of law or of prudence or of judgment should
govern a bone in paying out olc?

And, in fact, is it necessary to have any law

which would at any point require the Reserve Bank to pty out gold whether in the
judgment of its management it was desirable to do 80 or not?

It seems to me that

the crux of the 2roblem presented by the second McFadden bill (as to gold) lies

right at this point.

Shall the Federal Reeerve Benke be requiredto pay out gold

when a demand for currency arises instead of paying out Federal reserve notes?




y belief ie that it ie on unneceaeery frid en unei e reetrietion, hoetile to the
real purpooes of the Federel Recerve Act end to sound principite of our type.of
centrel banking;

and that it ie perticalerly unfortunate that the propoeal should

be advanced ,t the precent time when there le a poeaihility, in fact n likelihood,
that we ara eerolching z period when the Reserve Banks mey euPier a large lose of

gold bB the reault of reconstruetion eed increesing mouetary stability abroad.
Some light might be thrown upon teleb problem by e study of the con(Ftions
which erase in 1919 - 1920 when our reeervee were low and then we were celled upon to

export about $400,000,000 gross oet e our renerve;

end likewiee by tudy of the

situation of tne Federal ile,erve Beni: of Atlenta, where soil hi A been Fe-umulated

through issues of Feeere,1 reeerve notes in r%lbe end where it is Ate likely that de-

mend for eeeee,,tIon of rte eiroul, :rig in Cub:, miht evke itneceeeary for them to
. turn to other I.'edeeel Reeeeve Benkc for aseistnel.

ee to tee proeieion of thin bill thet 'Iankere

ptenoes should not be

used es eol7eterel to note ifa10, tITT. folloAng comeents ero justified:
Theee ie no type o. Tepor in this country 'ellich


o deeirble end

approriate for use ee security or note iseuee ee the b0-e-e aCC4r/V/IGE:, Lich
repreeenta en ectuel moeement of commodi.tiee ehch


ehert maturity, end which

bears the obligetion of the drawer, acceptor, end one or mere good bank indorsers.


ro:oeal cone:s a

for a. large derelonment cf

time 7:h,F:r

t)le filet favoreble opportunity arises

the use of acceptance creelte for financing

trade, especielly our imports.

our on foreign

The program of resumption. of golE payment in various

parts of Europe mv7 nereseitvte for a period, possibly for years, higher (honey rates
In those markets than in ours.

Bankers financing exports of goods to us from all

parts of the world will be tempted to take advantage of lower discount rates in
New York than

those in London or on

the Continent.

While our own banking institutions

are not organized in foreign countries to handle the volume of business which may


Prof. 0.M.. Sprague



develop, it seeme to me quite likely that foreign institutions will themselves develop the business for us, either by


their own establishments in this country,

or by making close alliencee with American benke.


If the Federal Reserve Act should

be amended so ee to discriminate against


the use of

peper ale security for our

note issue, it would discourage the development of this business at the most op- ortune

time which has yet arisen for its sound encouragement, eepecielly for its employment
in financing our own imports.



The proposal is based upon a. misapprehension of the way in which the

Reeerve Banks operate, and upon the

voluntary one with

aseumetion that the act of buying bills is purely

the initiative entieely in the Reserve Banks;

That is not the case. Moat of the bills

act of purchasing Government securities.
are purchased for the System by the

us in greater or smeller

Bills come to

Federal Reserve Beak of hew York.

volume according to the adjustment with market rates of the

rates at which we buy them, and there is e certain compensation
decreases in our holdings of acceptances and increases
discounte by our members.

eimile,r to the


increeeea or

decreeees in the amount of


With certain exceptions, when

special purchases of bills

are made, principally for foreign account, almost all of the bills bought in hew York
are sold. to us by member banks, juet as though they were discounted, the banks taking
advantage of a lower rate for bills than for discounts.
discounting which

hope is that

is more conerolled by

with the growth of

It is, in fact, a species of

the rate than is realized.

Of course, our

a larger amount of bills in the market, it will ulti-

mately be the bill rate which will function, and the discount rate for comeercial paper
will be more in the nature of an emergency
do not like to owe borrowed money.


They cannot

One reason for this is that banks
afford to borrow money at our usual

discount rate, any more than they can afford to pay euch

a. high rate upon deposits.

Whether the influence is actual, as to cost, or sentimental, as

to owing money, it is

true, neverthelees, that changes in our .'icount rates have a pronounced and widespread

effect. Advances made when banks are borrowing from 1.18

have an immediate effect upon


Prof. 0.M.. Sprague



money market, which at times is greater than is desirable.

the rates at which we buy bills have


Whereas changes in

more indirect ef set and do not so immediately

result in such urgency to repay as to force a sharp contraction of loans and deposits

46._ such as results from advences in discount rates.

," ment of the Reserve System, I

Intthe course of some years developmajor contact between the Reserve

should hope that the

Bank and the Money Market would he through our operations in bills (both carrying and

discounting them) and that discounting of commercial paper will be more seasonal and of
reduced importance.

The discrimination against the use of these bills as collateral

for the note issue will operate as some restraint upon

development cf the kind of

money market we need, and of policies for the Federal Reserve System which are along
sound lines and which should be encouraged rather

As to the Netional Bank
May 14 reached me

then discouraged.

amendment bill, I

regret that your memorandum of

so recently that I heve been unable

quires. But I will venture

to give it the study

that it re-

the following preliminary comeients:

In general, I think all legislation dealing with the subject of branch banking
should be embodied in e separate bill, and that h ghly controversial question be eliminated from the

consideration of

general amendments to tne National Bank Act.

As to legislation looking either to restriction or encouragement of branch
banking, the experiences of the

last fe

yeers afford much


evidence that the

time has arrived when branch banking is inevitable and will be developed by the State
institutions, even though the

National Bank Ant imposes

establishment of branches by national banks.

severe restrictions

In fact, if

national banks, it seems to me likely, after what we heve
there will be a gredual withdrewel

upon the

restrictions are imposed upon

witnessed in hew York, that

from the fietional Banking Syetem by banks which feel

the necessity for meeting State bank competition.

Netionel banks in this city

senting grose assets of about 400,000,000 have, in fact,




charters in


nection with various mergers and consolidations in the past two and one-half years,

largely for the

purpose of developing e system of branches within the City of New York.

The same thing has developed in other cities, notably in Cleveland.


It would also appear that the small

up to the

requirements of

conditions to a



Prof. 0.-


the situation

independent bank has failed to

five years of

during the past

degree that is startling


and exhibits a

unusual bank-

weakness which requires

the United States

In the year 1924 there were 613 bank failures in

irmsediate remedy.


and during the past five years the mortality has been 1,991.
small banks which lacked the support of the larger cepital
control and

supervision which would

exist under some



system of


and better



failures have been principally among State institutions not members of the Federal
Reserve System.

It is

too often customary to


rates of interest


borrowers, without

make those charges inevitable.

They are

these small banks


largely in small

local funds from depositors.

rule, pay


If they





exceed the ac-

These small banks offer very high rates

demands of their borroUng

of interest in order to attract deposits and to meet the

extortion in

circumstances which seem to

where credit requirements, seasonally, and in some cases

cumulation of


get deposits in that way, they borrow heavily and, as a

high rates, 5% and

even 6%.

The overhead and


are large in proportion

resources and make a heavy interest charge to customers inevitable, where Etch

rates are paid for deposits.

And the loan business in such communities has


extra hazard of crop failure and of other vicissitudes of agricultural sections.

bad times come

their best assets,

the margin is not sufficient to save the bank.

deposits decline sharply,

They borrow on

and the result is a wreckage comprised

principally of poor assets wholly insufficient to met liabilitiee to depositors.
Small banks are unable to pay the salaries necessary

to secure the

services of competent managers and the result is bad loans.


too frequently the case that lack

of supervision results in the

abuse of the bank by officers and directors 9 who borrow for

their on




lt require little ergneent to ehoe to whtt t considereble extent theee
difficulties in our present system would be remedied by the esteblishment of some

cystem of brench banking etrictly limited and under proper cupervision, so es to
strengthen the rhole banking structure.

A etudy of bank feiluree for the pest rive

yetre would, I believe, confirm whet T htve written shove.
tnd now, as to generel emendmente to the rietional Benk tett I meke the
fol/owinF commente directly addreeeed to your memorandum:

Violatione of the National Bank Act.

Deficlent heserves - more or less pereietent, eee ono of the moet

frequent violetions of whieh ee know.

Meny of them are the reeult w eonditione over

which the individual benker hte little or no control.


elieve that some chnnge

should be affeeted as to reserve calculations in order to obviate the difficulties
under which the banks nee labor; and, that having been accompliehed, penalties for

wilful eiolations ehould he heevier.

It seeme F.,..6

though this could be eprropriately

studied by the committee of which Mr. Ourties is chairmen.

Exceesive Loans.

These are frequent end. persistent according to

eur own informetion, largely drawn from reports of examination ot member banks.


are not only direct, but, to e considerable extent, indireet, where loans are of
conside,A)le variety as to obligors but really relate to the same enterprises.


revision of Seetions5200 ie discussed later in this eemorandum and the subject should

be dealt with in connection with that section of the lationel Bank Act.

Imeaireent in the goodness of loens.

One of the most frequent

,causes of bank disasters is the failure to realize in time thet impairment nee oc-

116 curred in the goodness of loans or in the velue of investments. In other. words,
overvaluation of tbe bank's assets.

This might be dealt with by giving the Comptroller

more power to enforce increases of cepital.

Prof. O. It..


Fe lee or misleading reporte.



le is itepoesible to diatinguieh

eetween honeet &ea diehoneet misleading reporte beceluee of be impoesieility of ?rov-

ing intent. On this subject, as weld ae a, b, finb c, I believe that a greater des ree
of reaponsibility should be pieced upon eireotore or beake than io no the ceee.
biew bank.

study of' the eituetion In the io4neeepolis dietrict eill, 1 eelieve,
produce convincing evidence) that the exceseive orgerdizatioa of emell eaake in that

eectioa, .ee ie probably the C6,60 in other 6 ectloa6, Cts betel one of the principal

couees or the bank dieastere of the last three years.

A certificate of public

neceseity, with eupportieg evidenee, might well be required Lefere any ace teak is
permitted to be eetebliehed.

If eueh a policy were adopted it zlight be mieunaer-

et00a, and couetrued dba reetraint upon heelthy cempeation.

state Danke eold

no doubt organize to aetisfy the demena which la no* being eetiefied by the organizaeion of email national beaks.

But if national beake Lail the power to on brenchee

in theee medlar communitiee wh e re demene for banking facilieies arise, it eocld

likely operate to restriot the org- Aeation of :ie,ete bake of email reepousibiliey
encl pooe menegement.

The capital reuirement.
ehila1.egree with yeu that the minimum capital rwiuieemene should

oe iaoreeeed as you e5ggeet, Iul not- cure ehat the requirement to maintain e ratio

of 15* of depoeit liebilitiee would peeve praotioeble or eiea fair. It aaaumee
- a certain corietancy in bank depeelts whioh we kil0 4 does not exist, aad oule aet
give regera to the proteutioa afforded by varying proportieee of edrplue.

If the

capital requiremeut for national benke io ilicreeeed to a inium of $50,003, should

it not be done in wee a ,ay ,t,t5 not to inLeefere vita conversion into National benke
by state beaks with seller eupitel Latien, nor 4th their r auall esion to MdMbrhip
in the Federal Reeerve

Thie 1

d 6ubjeck, eeich Ir. Jay and I heve diecueeed

at some length, and I believe we are boil agreed that the protection of the 3yetem
' in the lo ag future will be best served by heLving as democratic and widespread a


P-fo1.7. 0. M.

4. Sprague


Jniberohip as poosible, notwithstanding, the reepoosibilities resulting from that
type of membership,.

Segrego.tion of Savings Department Asests.

The present situation may be briefly outlined as. folloo&s:

Most stete banks and irust companies have the right to take savings accounts. National banks are widely advertising and developing interest departments where depositors

accept passbooks containing a contract under which the bank retains the right to

require a thirty or sixty thy notice before .6ithdrawa1.

'!ie have estimated that

40% in the growth of commercial bank deposits in toe last twelve years consists of

accounts of the charaoter, - a total of possibly $9,400,000,000.

4 hen the bank

gets into difficulty it usu6lly requires the notice of thifty or sixty days, and
then converts or pledges its best assets in order to meet withdrawals of ciemand

If the bank finally fails, the savings depositors are left with the

poorest assets to li:Nidate their claims when, as a matter of fact, they are the
depositors -- generally poor people with small kiallink; -- vtho dhould be afforded the
me, Xi MUM of protection.

The following' list of dividends paid thus far in the case or

four closed trust companies in Boston illustrates the ;rotection fforded to these
depositors where there is a segregation law:
1:1s of April 16, 1924


Hanover Trust Company


Prudential Trust Co.


Toemont Trust Com,aoy


Cosmopolitan Trust Co.




..flo it is not unlikely that the reverse of this result *auld he teen the ease
with these ooncerne had there osen no eb&regatdon law.

I am told -that a proposal

for tale segregation of sseets for he benefit of saving depositors would meet
'edth strenuous opposition from bankers generally.

This migoot be overcome if re-

quirements as to the investment of savings eposits were geneIous, but such ro-

quilements should, oevertheless, contain definite prohibition e.i.,oinst the invest-

lent of any such deposits in iodils or lovestments in


. 4.,ich

,aly officers or directors

Prof'. 0.






the bank are directly or indirectly intereeted; Itnd it should be f3afegub.rded
to operations which 4oulo eli'ect, indirectly, eAchangee of


ea the VAC

has it occurred td you that some added proteeion nignt be afforded

depositors by giving them a prior ci,im upon tiiUilGailed liatiiiity of stock


Lotaiti it) Officers and hirecters.

Statistics have been made as to cauoed of nank failUrd6 1i this
country which I think quit uniformly dieciose the fect that t:-;e groat majority
boma form oi abuse if the bank tv directors and officers,. It ha

generally considered thsit this is particularly true of banks in the 14,rger cities,
but I douot, if that i the case. In our ez.perisnee, ematl ban.e
Elwii communiUes
generally have

officer- and diract,.)rs the a3tiVit

who are the bank's largest csatomurs, both deposit,Ont
that, conditions or this eharscter ouusing 6Z.tak-

mailer than in larger banks.


of ,i1c..conuttneity

borrewers, ',.nd I bolizve
are muOr, more prevalent, in

The data on this subject could be obtains:i from the

Pederal itesdrve ink6 Elk, it iS LIOW all in their files (sc.) far as it relates to

bers) and I believe the results would show 5.. startling and atriking exhibition of
bad, if not dishonest, management. NOW dateg4 arida are certainly roquiret.4.

Section Z, 20O.

This entire section should be reonitteT, to Iiike dofinitions cle!'rsr.


Ana much light eould b 4,..,hrovn upon the subject ty the invetition of tack ftilut es
ditICIA6aed under á5.

I believe that thi. shoulebe (,C1A4,, and that t.he opertting

OfriCitde i14 the FGOe,i L0CerITC

mkeLo pass upon tto pepor oftorec, for diecount,

and -7,110 are far.iliar witb the variens eifficult,iee chtised by 2cctior. 5200 shouLl be

,ALLUdt, their vier,...e.

but, in a.eki Lk, their views they..3hou1d. it,tzze before them h

quds-kdounairo covoring all ack.,ects of this secti.n, so r


ity of
CU ceci


not think tt4a-z, liuitatn hnulo an?

Lni.',,ed States c:::lige.tions, and am very dwibtrul of th

to cover


i V 613 lo settlement o

to oecur,s uniform-

?ant du

to 1,:ylne L1A:-

Iiom of ?:,ttmyting

The difficvdty of ,lefinftion
and of proof a4 to past du s accounts ,auld seem to :ne to be oonsider.,,ble.










3orrowing by Benke.

A careful leveetigation of ell casee where additiorrl collaterel

ia taken from member b,nke will throw 40NO light oe this subject.

;Mile I am oppoeed

to the prectice as developed ia some veee, T think you rill agree with ma thet the
Reeerve Behke have some responeibility to eee teet the Joann xhich they meke are
And many beaks have beaa eaved from feilurt by Reoerve Banks taking doubtful paper

with adeitionel oolitteral.

Bat there is e point where diecretion muet be axeecised

in the tekieg of additional collateral in order to evoid the charge that the Reserve
&take are doing injury to lepoeitore.

Is net this really

question of policy whieb

could be deelt with by more definite underetandinge within the System refher than

queetion to be dealt with by amendeent to the lee?


If the reetreint is to be applied

to the borrowing bank, it would very much hemper the Reserve Benk in exercieing dis-

cretien;_and that le rally needed. ie sound diecretion rather then statutory restriction.
I have not yat bad. opportunity to make even p prclieinery study of the provisions of the McFadden bill mentioned on pegee 4 and 5 of your lemorandum following

17, but will hope to cover them in s second letter.
In general, I thiek .9ny eobeme for emendinE the Netionel Eenk Act should be

directed towarde simplifieation rather then elaboretion. Our banking lewe, with the
addition of the Federal Reeerve Act and VE/A0U6 other Acts beering apot tee opereticne

of the Federal &et:rye Bunke, htve now become eo oomplicated as to he e ctuee of con-

A conscientioae officer of b. netioncl benk euet femilierize

fusion and compleiret.

himself with the provieione of the Nationel Berk Act, of the Feeertl Reeerve Act, of
the Reguletions of the Federel Elect:rye Board, of the verioub circulars Of the Federal

Reeerve Berke (which are legion in aumber), of the Cleyton Act, trd of the other Acts
of lees iwportencee

Benking in this country is largely conducted in ignorence of the

lew rather then with due regard to the law. In feet, T think much of the lew on the
culeject 1e unneceseary.

The best illuetretion of thrt is afforded by the Federel Reeerve

Prof. 0.MJ. oprbgue



Act iteelf.

gb I recall, the origiml bill OCCUiAtd thout rixty-five pngou In the

tailed type in which bille ,re prilitec by Coacrese. ,The Lot le badly draw.n, confutAng and
mielt.ading in WriGU6 of it provieions, sltei it ie EITO8t hopeleso to intorTret Ferte


of it.

On the other hand, tte role 2rov1eior of that Act thich ruthorlYer the FfAerel


heserve Lerle to conduct the \mot tmcst.ctionb thich they nov do for the United
c.oveln,ent ocoupiee only lour or rive linee, Wnr! ytt there h

beer no dif ioulty, no

confueion, tir iv boon no loesen, no norncltle in noneuctini the greet bueinese for
There h!e, hoever7 been undlo,:s confuoier, and diffinuity vve compltint


oonaunting the othr ueine. of the Fedonl Revervo a.nko. If r,e
more intEdligenob and in'..,agrity in the mangement of beaks, 4-it

oettur off.
Very truly youro,

-ofassor 0.



tiarvrd University,
Caftbridge, Meas.




uld be

October 24, 1925.

My dear Profe.6sor Sprague:

Mr. Jay has aeked me to acknowledge your letter of October 20 to him,

enclosing 5 copy of the investment banking proposal co amended as to be insert-

ed at the and of section 52C4), as you have rearranged that section tor your report to the Adviaory Committee.

'kuile I have not got a copy of your rearranged draft, nevertheless
there are one or two comments concerning the investment banking proposal which

Mr. Jay suggested that I might make to you in acknowledging your letter.
As I understand it, 4.hat you are trying to accomplish in Nmending

section 5200 is to place b. maximum limit of 25 per cent. not merely on the in-

vestment securities issued by one borrower, tut rather upon the aggregate of
investment securities and other obligations which would come normally within

the 10 per cent. limitation of section 5k00.

If 'Mitt is cc, I me wondering

whether it might not be clearer to reword the restrictive phrase in your nroposed section so as to reed somewhat as follows:

"Shall at no time exceed 25 per centum of such capital and surplus,
less the nmount for which such borrower ie directly littble to such national
bank under the original 10 per cent. limitation of this section."
This may not be precisely in the form that you would want, but it conveys the

idea that is in my mind.

I am !leo a little doubtful whether your proposed draft covers the
question of foreign government obli tions.

At the present time, section 5200

has been ruled not to apply to such obligations since a government is not a

Profeeeor Sprague

f'inm, or a cnr ration.

person, a cnmpany,

October 24, 1225

Tnur draft of limitation on in-

vestment eecuritien *fluid clearly subject n foreign government obligation to

the 15 per cent limit nince it would be an obligntion of
form of bands."

borrower in the

But xhnt would be the significanoe of the further phrnne

"in addition to such 10 per centum

much osnital and eurplue," if, as has

plready been ruled, ouch 10 per cent. does not apply to the obligations cf h
foreign governmentl

There may not te nnything, in this thcnnht, but it does

seem to me thee it in sufficiently emboun tn le another tenson for reenefting your restrictive phreee in the manner I bnve suggested.

rf th!.t iE done,

then there le nn doubt taftt a nationni bnalt might purchnse up to E5 per cent,

e nell ee in tny
other form of inveetment escuritiesv provided there ! na other direct linbilit;
using up a pnrt of thn tetsl authnrnled.
of its ennitn1 and Air21'..:0 in foreign government obligation

Your proposed drnft provides tnnt %ay cnntingent nblinationn incurred

in connection with the Endo of inventment eecuritive ohell be Included nE.

liebilities under section 52.

It seemn tn me to be doubtful whether this

cieuse would be neccenary nnt that your inventment security nmendment in nnt

a grnnt of further rower to nationsl bialk,T, but le merely a limitntinn upon
exinting power.

Any linbilities Incurred under existinn enwer, tnerefore,

would autemnticnny come within oection 5202 uniens expressly exemnten.


I remember our dincuselen, our only fear tbnt contingent liabilities of the
kind to which you ref or minht be excepted vs!: the pre2ent provision In section

520? "excepting liabilities incurred under the provisions of the Federal Reserve

Since_ your proposed nmendment does not nurnort to emend the Federal

Reserve Act, nnd particularly since it in not a grant of new power in any event,
it neems to ron thore le nothine to be geined by mnking any reference rhntcoever

to section 5202.
There in only ane other thought which we hPd in mind. That relates

to the last proviso of your proposed draft concerning the applicability of


Professor Sprsgue

rim, or a oerporation.

Ilerson, a company,

October 24, 1225

Tour draft of limitation on in-

tent securities *01.27(1 clearly subject N foreign government obliFation to

the 15 per cent. limit ilioe it would be an obligation of us borrower in the
form of bonds."

But ahnt would be thP significance of the further phrase

"in addition to such 10 per centum of mach ca;ital and eurp/us," if, as hes

already beet ruled, such 10 per cent. does not apply to the obligations cf a
foreigr. government?

There may not he anythint in this thought, but it doss

teem to me that it is tuffici ntly ambiguout, to be another reason for redrafting your restrictive phraee in the manner I suggested.

If t.A iE done,

than there ie n, doubt that a amtlorod tmak might purchase up to Z5 per cent.

of its capital and rurpl...1., in foreign government obligations ae meil ce in any

other form of investment securitisas, Prov ided there .sie no other direct liabilitieL
using up a part of thE tot s:1 authnrieed.
Your proposed draft providee that any cnntingent oblizations incurred
In connection with the sale of Investment securities shall be included ts

liabilitiee under section 5ro2.

It seems tz me to te doubtful whether this

clause would be necessary no that ynur investment security nmenziment is rert

a grant of further rower to national bunkt, but le merely s limitfrtion upon
existing power.

Any liabflities ineurrfd under existing :over, therefore,

would autopprticnily come rithin section 5202 unless expressly eYemrtee.

I renamher our discussion, our only fear tht-t contingent liabilities of the
kind to which you ref or might be excepted war the preuent provision in section

5202 "excepting liabilities incurred under the provisions of the Federal Reserve

Fince your ?ropcsed amendment doss not :urrort to emend the Federal

Reserve Act, and particularly since it in not a grant of new power in any event,
it seems to me there is nothing to be gined by making any reference whatcoever
to section 5202.
There la only one other thought which we had in mind. That relates

to the last proviso of your proposed draft concerning the apnl1.c.abilty of

October 24, 1925


State lans.

thil I 51 not certt,in of your Nrpoee in including this provision

in your proposed draft, it wf2e wy impression that when tc dit:cucsed the question

at our first meeting in Nev York, we tere all inclined to the belief that it
would be better to eliminate th t ptrtioular clause.

further resons mAing it adviesbie to include it.

It m3y be that you have
I mention the matter merely

because te thought you might possibly have included it only by inenvertence.
1 know th t yo L will consider these algirestions merely 't/14 1 result

of our ex-parte ovneiceration of y,,ur dreft. !fr. Jay &ad : will both 'se in

Rashington the latter tz,rt Jf next weA, aaI resume yoy will be, flci we hall
be ei-d to talk to you then fjouli,vo any further thoughts that you 'uid
lite to disaw,s witb ue.
Very truly yours,


Leputy Governor.

Prefesecr 0. M.
Ht,rvard University,

April 17, 1926

My derAr Proteoeor aprague:

4th tbia


116 COPY of IribriKer,


Letter of Credo. #589 V), I
4,141 of 4,2000. tother tvitn tuo
epilciulcu bie,nature i'orrxt, to accorkpftny the letter of credit.

A11 you 1) good enot4h to ei6ra the letter of creoit on

the r(Areroe aide, Ae indion.tW
ponell, And place a spucizen of
your eii,nature on of tht;, form, riturnr d1 thrLe direct to

the 21.nitere Trk.i6t Coa-tpAny in tic erialobed

Thc oric;in,.1 .let,t()r of czedi-t, to6.. ther it the naceevary identific!tion, v411 be Lole hero aritLitin& your arriv.-.1 next

week, Alen,

Nitia your pJort IL 411 b,- ra-ady for you.
Very tro.',.y Oura,

Secretary to
kr. banj. btrol%.

prof etiaor O. k.
11,13171 Ur V e r




Stuyvesant Road,

Biltmoro Forest,
Diltmors, N.C., February 14, 1927.
Dear Profeseer Sprague:

I know you understand thst this very belated note of thanks for
the books you kindly sent mo would have gone long ugo, had it not been for my


It WUki most thoughtful of you to send them, and I have enjoyed

them both.

I shall long remember our trip abroad with the keenest pleasure
and wish we mibhi, do it again. I shall in fact be going to Europe this year

win, if health permits, and If thore Is any chance of your being over there,
do let me Lnct se that we can have a meeting.
krobably you have heard that the Indian Government hes adopted the
plan of the Currency Commission "14 tote". I hope it proves to be a success.

The only ilortant point ea thich T dissent, as T bolicve you do, Is ir making
the 1-rupee pap* 4 note unconvertible into silver rupees, end I hazard the guess
that, either before the plan is put into effect or after experience shows the
nes,, for it, the plan in that respect will be changed.
I shall not be back at the office until April, and hope then to have
the pleasure of seeing you,
with warmest rogJrde and many thanks for many things, I

Sincerely yours,
Dr. 0. M. W. Sprague,
narvard University,
Cambridge, Mans.


Stuyvesant aoad,
Biltmore 2orest,

Biltmore, N.C., rebruary 27, 1927.

Dear Professor Sprague:

The two articles from the "Annalist" have just reached me and
been road.

In reading over the testimony given before the Young Canmission

and the Commionion's report, I was again impreeeed, as I always have been,

by the apparent complication of the Indian monetary situation and the almost
complete lack of knowledge of the Indian difficulties by American bankers and



Your article in the "Annalist" will help to give the folks who read

it come idea of the situation, but I am glad you wrote it anyway, for the
further important reason that it should serve as some assurance to people
who have been making all sorts of dire prophecies as to the outlook for
By the plan which Blackett proposed, there would have been a delib-

eiete purpose to liquidate a vast amount of nilver, which T. believe would

have spelled disaster as we all agreed.

By the plan now recommended and, as

I understand, adopted by the Indian Cavornment, the agencies of the


and the now reserve bank are both committed by declaration and will be induced

by motives of policy to do whet they can to maintain the price of silver.

It is in fact upon thie particular point that I think you and Hollander and I
may take some credit for having influenced the attitude of the Commission.

But I wanted particularly to write you about your other article as
to discount rates, and you will, I know, regard what I write as quite for
your awn information only.

Speaking very broadly, the policy of the Reserve

Prof. Sprague.



System of the past three and one-half to four years, so far as ! understood
or had any influence in forming it, was designed to accomplish three major


One was to take

the pressure off the money markets and both

and directly .bring relief to

the embarrassed banking situation

throughout the West.

The secOnd was to endeavor, through lower rates and a freer
use of credit, to afford some stinuluo to business and to overcome the tendency Which developed so strongly in 1923 towards a period of real liquidation
and nrice decline.

The third was to open up our markets to foreign borrowing and

so to lay the foundation for monetary reorganization abroad.
You probably heard me outline 'something of this before the House

Banking and Currency Committee.

Now, the question arises as to whether circumstances of the present
day suggest or justify again a lower level

of interest rates.

T would like

to have your views about it in more detail than iwpressed in the article.

My awn thought has been that the polity of

the past few years has accomplished

Its main purposes, that is to say, the banking pressure

has been relieved.

So far as the use of credit could accomplish it, the danger of a business
liquidation has been avrided, and certainly our contribution toward the restoration of monetary order in Europe has gone a long way towards complete

Viewing the consequences of this policy, however, we must bear in

mind that the total amount of Federal Reserve credit of all of our markets

Prof. Sprague.



is in the neighborhood of $200,000,000. above what it was a couple of years

ago, and that during the last year we have in addition received about
4100,000,000. of foreign gold, net. The accumulation of foreign loans in
the /lends of American investors has now imposed upon Europe a burden of

paying interect and amortizetion to this country (including the debts
funded to our Government) of about a billion dollars. The ability of borrowers abroad to meet Clic heavy Charge has, in my opinion, been furnished

as the result of three developments:
Shipments of gold;

The return of fugitive capital to Ouroee;
The repurchase by Europe of large omounts of these foreign

loans placed in our market.

I think our judgment about a rate policy should largely turn on a
determination, if that can be made, as to whether the oreeent volume of

credit is adequate for our own trade and whether, on the ether hand, if that
is the case any increase in facilities to borrow money from the Reserve Beelks

or any reduction in interest rates due to open market vurchases may not stimulate excessive and unnecessary borrowings from abroad in our market, and at

the same time stimulate speculation of one or another kind, principally in

A period of Cheap money which Invites this sort of a development is

tamest invariably aceomprnied by largo investments by banks or deposit in se-


Their investment account is now already very large.

On the whole, I have Itst felt that, with business well euetained in
this country, with our banking difficulties pretty well behind us, and with
the progress made abroad in monetary matters, we could now well afford to

Prof. Sprague.



maintain our discount rate and our rate for eurchasing bills at about

the present level.

By so doing, as

money rates during the dull zsurtzaer

period sag below our rates, we would naturally absorb the surplus of credit
in the market and so reduce the total volume of our own earning aesets.

If we lost control of the market, that is to say, if money rates eased so
appreciably, due to the accumulation of surplus balances in New York, these
could be mopped up by gradual liquidation of our

security holdings.

the other hand, at some point, I recognize that a real





which would have some. effect upon general business and the minute

evidences of it appeared it would then be desirable for us to

purchase se-

curities and so lay the foundation, if necessary, for a lower discount
This whole question is involved in the problem of gold.

maintain our rates at too


If we

high a level, w6 prevent the foreign banks of

issue from reducing their rates and we


further gold shipments.

Meet of the banks abroad have themselves already lost control


their own

money markets, but if we reduce our rates and if money is sensibly easier

in this country, we thea certainly invite speculation and overlending.
The fact is we are laboring at present under the disadvantage of having too
much gold and rather too
we could only induce

slender a hold on our own credit situation.


Congress to permit us to convert all of the Natioaal

Bank notes, giving us a new form of Government security which would really
be marketable, we would be in a

much more comfortable position.

I have written you quite frankly what is going through

the hope that you can find time to write me yourself.
and your disinterested point of view.
With beet regards, believe me
Dr. 0. M. W. Sprague,
Cambridge, Mass.

Sincerely yours,

my mind, in

I value your views

Stuyvesant Road,
Biltmore Forest,
Biltmore, N. C., March 7, 1927.

oar Professor Sprague:

I liked your letter, both for the substance and the form.

lith most of it I think I can agree.

My own letter to you was defective

in that I did not give you two points of view which T believe are essential to n meeting of our minds.

It involves a long and complicated dis-

cussion of our relations with European banks

of issue and with the general

trend of development abroad, as well as at home.

To put it in a nutshell, I think the opportunity is now approaching for us to undertake some new developmente in the Federal Reserve System

which are in every way desirable and which will meet some of the requirements of a plan along the

line of your analysis.

The other emission from

my letter has to do with the possible termination of the period of active
and constructive cooperation towards monetary reorganization

lowed (for

abroad, fol-

the memory of favors conferred is always short) by the develop-

ment of nation-wide, organized end possibly international competition


the United States.
The outlook now is for my return to New York some time in April,

always barring accident.

There is also a possibility of my leaving for

Europe say in June, again barring accident.

In thst interval, I Would

enjoy opportunity for a talk with you about the subject of our correspond-

ence end other matterc of equal or greater importance.
eelf some day for a telephone message or a

York to spend a day
quate to


ire asking you to

or two with me for this purpose.

the ground.

So prepare yourcome to New

A letter is inade-

hit just the same, I enjoyed your


Prof. Sprague.



and if you fool inspirod to write me again, please do so.
It was very good of you to suggest to Allyn Young that he send

me a copy of his letter to


I read it with much interact - in

fact with some amusement - and wondered whether you had been preaChing to

But it is not the kind of letter which I could comment upon very

Nothing is going to happen between the date of this letter and
when I hope to see you, except peas:1.1)1y that we may be formulatinc views

more definitely than just now, at a season when changes aro rather rapid.

Did you see that bills to give offoct to the recommendations of
the Indian Currency Commission have been introduced in India;

though the program were marching ahead pretty rapidly.

My best regards to you as always.
Sincerely yours,

Dr. O. M. I% Sprague,
Graduate School of Business Administration,
Harvard University,
Cambridge, Mass.

it looks as

A t-r-46#





Stuyveeant Road,
Biltmore Forest,

Biltmore, N. C.,

March 16, 1927e

Dear Professor Sprague:
During the last few weeks I have had some correspondence
with Congressman fArong in regard to his bill which we discussed at
hearings in 7ashington.

T want your advice about the matter.

He ie very earnestly seeking to accomplish what appears to
him to be a very simple thing, and what impresses us to be
ous thing.



He is conscientious and not in any senee making an

attack upon the lyetem and its management, but rather the reverse.
Be writes me that he believes the Federal Reeerve Tystem has had a
remarkablg brilliant management during the last few years.
no complaint

en that


He has

He fears changes in personnel and the

influenee of time upon the management under the terms of the Act as
now written which contains no direction or mandate or even suggestion as to stabilization policy.

He thieka that if something could

be written in the Act it would afford all the protection to the
country against some drastic


if inflation or deflation, and

that without some such amendment to the Act Congress will be derelict
in its duty, and the System may drift into hands which will be careless or unintelligent or even actuated by improper motives, Political
or otherwise.

Under thee circumstances my inclination is to endeavor,

If possible, to be of some assistance to him in finding a formula
which will meet his views and avoid our objections. He has prepared
a third revision of his proposal, of which I presume you have received a copy. A difficulty has arisen by the fact that he submitted


his proposal to the Federal Reserve Board and they submitted it to
the Federal Advisory Council, and I believe both the Board and the
Advisory Council turned down his proposal or raised eome objection
to it. This rather cramps my style. I aeer however, ooneidering
whether it may not be feasible to have some informal diecuusien at
the next conference of the Governors of the Reeerve banks, to be
held early in May, which I shall be able to attend, and see if a
friendlier and more constructive spirit and attitude cannot be

Withoutattemeting language, my own thought has been to


endeavor to introduce language in the preamble to the Act so that it
will indicate intention by Copgreea that the aeeerve banks shall
have some responsibility for -Wee establishment and maintenance of

the gold standard, and then, somewhere else in the Act, introduce
some language which will indicate that Concreee intended that the
Reserve bank should serve as a stabilizing influence on bueinees,
and not necessarily as an instrument for making earnintee for the
Treasury or for financins the Treasury's loan erations.
shall not

This, of course, is very difficult to frame, so that it
by iMplication so too far. It has odourred to me to

couple it with a general declaration that the Reserve banks are
really public service organizations to perform certain banking services for the banking community and for the public.

An amendment

of that character would go some distance in relieving us from the
constant criticism by member banks and others
their functiote.

that we are invading

I uhould hope it could be so worded as to get

away from the idea which he has so strongly in mind that we can at
all times and under any conditions serve the purpose of the price


rroIebwuK v. A. W.


hope you are not too buey t..7 give this natter a little
thought, and 6ive me the benefit of your views.
With kindest regards,
Sincerely yours,

Professor 0. M. W. Sprague,
Parvard UniveruitY,
Cambridge, Massachusetts.

rroleutaux- u.



givt this matter a little
hope you are not too busy
thought, and give me the benefit of your views.
With kindest regards,
Sincerely yours,

Professor 0. 1. W. Sprague,
Parvard University,
Cambridge, Massachusetts.

Stuyvesant Road,

Biltmore Forest,
Biltmore, F. C.,
.arch 24, 1927.
Dear Professor Sprague:
An old friend of mine, Mrs. Poste' Thwaite Cobb, has a son

in Harvard who has become interested in the courses in economics.
She is anxious to get some good advice about his work at Harvard,
and I have taken the liberty of recommending that she try to see you.
She will be in Boston probably on the 12th of April and will communicate with you. If you can give her some indication of what you thini
will be a good programme for the boy I am sure it will please her
very much and be very helpful as she has no one to advise her.
You may know something of him.

Hi fi

name is Henry Cobb,

and it may indeed be that he is in one of your classes.
I have taken the liberty of singing my old swan song to her
and expressing the view that school and college courees should be to
train the mind and not stuff it full of information. If he is going
into a profession his mental training should be well advanced before
he enters medical school, lew school, or technical school of any kind,
and the selection of his courses prior to undertaking his technical
education should be with a view to his avtitudee and for the furtherance of his later preparation for a profession.
She thinks that he will not take up a profession, but will
go into some business, in which case I rather encouraged the idea
that if it interested him he might concentrate on economics and build
up his courses around that subject.
If you disagree with this I hope you wont hesitate to tell
her so.


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give her.
Sincerely yours,

Professor 0. M. W. Sprague,
Harvard University,


Cambridge, Mass.


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Hotel ;3right on,

-tlantic city, N.J.
April 12, 1927.

My dear Sprague;

My address here indicates that I am eradually marching
back towards the bank. The delay in answering yours of the 31st is
occasioned by my having no essietanee for mail, which has now arrived.
I am most grateful to you for your assistance to Mts. Cobb.
You have doubtless seen her by now.
es to the problem you propounded, I dm a bit puzzled. My

own experience with a period of declining interest rates is in the
late nineties, and it was not a pleasant experience but , of course
It wes when our banking machinery was unregulated. I remember the
City of New York borrowing money at 2 1/2 per cent. on tex exempt

the Northern Pacific putting out
a 3 ner cent, bond issue. The ease of money was the result of the
immense liquidation in the lest decede of the last century. It culminated in what we knew in eall etreot in those days as the "Poor -47reenough" period. That firm, you may reell, put out a Prosepectfts
for some new coneolidetion of industrial or other ooncerns almost
every day. We had a Dooming stock market and, as I recall, a very
nretty collapse afterwards. Sank were making bad loans pretty
oner hlly , and the final calmirTation was undoubtedly tho panic of
bonds when Meyer was comptroller;


ees to No. 2, the
rigid rate of interest on deposits has been somewhat modified by the
verious °leering house arrangements for reducing interest rates when
conditions such as changes in the Federel reserve bank discount rate

This comments on your paragraph No. 1.

Professor O. M. N. 6prague



7)1ndicate the need for it. :11.ola arrangements may apply indeed only
to deposits in a dozen or so of the more important banking centers,
but it is really only there that these changes Jf rates on depdmits
areimportant because most of our country banks, as you know, main-

tain fixed rates at around 6 per cent, for most of their,business.
I think 8 long step has been taken towards introducing an element
of flexibility in the cost of deposits to offset changes in rates
realized on earning assets.
Here I agree with you that ,e have been in
No. 3.
p-riod for mome time new where capital funds have been replacing
bank funds due to the ease of placing security issues. But after

all, this period of financing our great industries, and especially
the railroads and public utilities, has been lJng deferred. It is
a dozen years or more since they could get eaeital on reasonable
terms, and it may be that they have leaned too heavily upon the banks
nending this onnortunity to do some real capital borrowing.
AS to the suggested conclusion, I am not as much
No. 4.
Efreid of the consequences of a enecalation as are many of my colleagues, but I am perfectly satisfied that the introduction of more
Federal reserve credit just now either through security purchases or
lower discount rates, would invite a sneculation which might become

Whet I am more inclined to fear would be the invitation of
easy money to an even greater amount of foreign financing than is now
being done, and of a Character which on the whole would not be as good,4

To my mind the most significant decline in intereet rates whit has
taken place is that occurring in foreign markets. I should like to
see that progress further and invite to a larger degree domestic

Professor j. M. W. Spaague



fieancinrr of their industries rather than too great a reliance upon
our markets.

The two outstanding developments of the last three or

four years have undoubtedly been the enormous foreign loans made by

our markets and et

the same time the development

of a greater reliance

upon our banking establishment through the operation of a- so-called
:gold exchange standard.

It makes the world financ&el position one of

great sensitiveness just now to any important change in the cost of

credit in this country. Just how it is tj 1

1goin..7 to turn out is as

yet to me a mystery, but we are doint.t- quite a little study1n.-7 on this

subject at the bank, and in the


witime I am rather inclined to leeve

the situation just about as it is upon the general theory of letting

3ut I am open to cenviution, and shortly after my
20th I want very much to get you and talen Young and

/7/*el1 enough alone.

about the


and Hollander and one or two others to come down to

dinner and talk over some of these things.

I have already sent a warn-

ing to Mitchell and ei.ollander, and as soon as my olans are a little

more certain, will indicate a date.

H.iw does. it strike you?

Sincerely yours,

Professor e. 1. N. &Drogue,
Harvard University,
:;ambridge , Massachuset ts.

Hotel Brighton,

Atlantic City, N. J.
epril 16, 1927.

My dear Sprague:

This is just one parting shot in reply to yours of the 14th,
as I um leaving here for New York on the 21st and shortly thereafter
I hope we can have, not one, but many meetings.
What reflections are stirred in my mind by the last line of
your letter in ehich you refer to "those other economic balellers."
One word sometimes starts a teend of thought as in this case does the
word "other." Surely you do not class :ourself as an economic bubbler?
I don't want you to ehake my confidence in your advice which I so often
seek and find so good.
um in hearty ag.reement with what you write about the dangers
of this growth of time or savings deposits. ;:ight years ego we started
to take this up with the Federal Reservt 3oard and have repeatedly
brought the question up. I can see no possibility of any modification
of reserve requirements, and would hardly dare adeocate it myself anyway.
It was for that reason, us much as any other, that I had the temerity
to suggest over a year ago vOhen we were in 4ashington toeether that a
segregation of assets should be imposed upon banks doing this class of
business. Unless I am mistaken substantially one half or more of the
entire growth of bank deposits in the United States in the last eight
or ten years has comprised these particular accounts, carrying but 3%
reserve, and in most oases without any restriction or limitation upon
how the funds sheuld be employed except those applying to real estate
mortgage loans.

It seems to me the development is weakeningebanking in

this country, both in its foundations and in its superstructure.
Ile to the lust and more ieeediately pressing question in your

Crrof. O. M. q. Sprague



letter I had not heard that any serious move had been made towards
liquidating our investment account. Of course, I am only one of many

voices in the councils on these matters, but I can tell you frankly
for myself that such a proceeding would only take place over my dead
body. I em satisfied that every oireetor in our bunk in New York eould

feel as I do. As for increasing the amount, I think the possibility of
doing so depends upon certain specific developments of which we have

fair knowledge, and just how they turn, but partly upon a more definite
discl)sure of the teen of business than we yet have. The only question in my mind is whether there should be an increase, whether it should
be simpler to deal wit e certain specific developments which may shortly
arise, or whether it hould be extended to a more general policy. I
have been too long out of the atmosphere of the bank to have a definite
oeinion, nd my correspondence with you and Mitchell and others has been
with a view to getting outside opinions which are detached from the day
to day problems of the bank*.

I hope you have decided to take mart in the inquest. I am

afraid of that sort of thing. It is just now utterly uncalled for, but
E few wise counsels there will be very helpful. Dr. Stewart who was
down here has been in touch with Chellis eustin of the Seaboard Bank
who is chairman of the committee, and if you iret in touch with Dr. Stewart

he can tell you a lot ebout it.
My best to you, as always,
Sincerely yours,

Prof. O. M. W. Sprague,
Harverd University,
Cambridge, Mass.



April 25, 1928.
My dear Professor:
I stop:led by the Marguery this morning to see

Mr. Stron, told him of your telephone conversation, and
asked him whether he had as yet received a transcrint of
his testimony before the Banking and Currency Committee

on Congressman Strongis stabilization bill. He said that

had received it the first of this month but that his
doctors would not lot him tax his eyes to tho extent
necessary to rod or edit it.
suggested thLt I sand the record directly to
you today so that you might road it before your visit to
To this he agreed and added that he would
appreciate your making pencil chanv!es or suggestions anywhere you think fit. I know it would be a re at help to

him if you would tzlcc that trouble as he is suvosed to
send it to Washington sometime this week.

?lease do

not burden yourself with the details of editing, but c.s
much as you c8n do he would appreciate.
If you will send the record back to me when you

have finished with it, I shall turn it over to Mr. Strang


Professor Sprague


or else ship it along to Washington.
It is not yet certain whether he will go to
Washington next week.

I think, myself, thc:t it is un-


That being so, he will probably be here in town
on Sunday, but I shall let you know more definitely to-

morrow or Friday.

Ey best to you, as always,

Faithfully yours,

Professor 0. M. W. Lprague,
Harvard University,
Cambridge, Mass.

May 7, 1928.




Dear Sprague:



It is one of 'the few that I

I was glad to have your letter of May S.

shall attempt to answer before sailing for Europe on Friday.

The question of di reef action or rate notion is entirely one of opinion,
and my opinion is largely based upon experience.

I cannot give you e. fair expres-

sion of my opinion without writing very frankly, end to do thee. I muet write very

confidentially, so please hold this letter as between you end me alone.
Direct action turns upon the phrase on the second rtige of your letter,

"In a careful and elastic faehion.n Is there any such feshion eoesible?

The way

things work is about as follows:
Bank No. 1 borrows A considereble sum of money from us at the same time

that it Is lending on the Exchenge (or even for the purcove of /ending on the


change) at a time when retee advance and become erofiteble, although the letter
Is now almost eliminated.

Observing your phrase "careful end elastic" we any to

the president of the bank, "Please do not borrow from ue wheel you can adjust your

reserve position by calling loans on the Exchange,"

The beak takes our word for

it end they are thereupon in a frame of mind where they won't lend e cent on the
btook Exchange to adjust their reserve position when they have any loans that

they can call, with the minor exception of loans to brokere who are really

Then we do the same thin ; with 3e.nk No. 2 and Bank No. 3, etc.,

all of whom are only occasional borrowers from us and all of whom

lenders on the exchange.

In other words,

are constant

they arc always lending on theF.xe

change and they occasionally borrow temporarily from us to adjust their post-

ti on until maturities, sale of inveetments,

increase of deposits, or the

calling of Stock Exchange loans restores their Reeerve.
place in e. very few days.

This usually takes

If -e should pursue this policy with so few as twenty d'f

the largest banks in New York and they observec our edmonition, there would come a

day when, due to the movement of funds out of New York or due to the coincidence of

a number of these banks having reeerves impaired at the same time, or due to g.;old

exports, or due to any of the various caueee of reserve deficiencies, there would be
absolutely no money to lend on the Stock Exchange at en. Money could go to almost

any figure. The result would be an immediate alteration of the rate structure of the
whole money market.

It rould, o1 course, have the inevitable coneequence of invit-

ing a large amount of out-of-town funds to New York.

Now let us go a step farther and show that, applying the rule of doing all
of this in a careful and elastic fashion, we say to each of these hanks, "We want
you to uz:,e good judgment about your stock exchange loans.

Do not come to us unless

circumstances really justify youzadoing so. I will esk you to try and describe those

ltto is to instruct each of these twenty banks bout the circumstances

and when the coincieence of need arises?

The fact is, there is no middle ground

between almost complete freedom of lending on 'the Exchange and rationing credit.
iVe have too many banks, and loans are made from too many quarters other than banks.

If e say to the member beaks that they should purEue a certain policy about their
loans, they at once say, "This is ell well enough for us, but we have many industrial or other cuetomers for whom we lens on instructions, to whom we cannot (=teed
the rule of conduct that you endavor to impose upon us."

As to the out-of-town banks, I would regard any rule of conduct as unneoa
misery and superfluous if we could control the New York banks by direct action.
But assuming that we did endeavor to control the out-of-town banks through the

interior reserve banks, I think I can prophesy, with reasonable certainty, that the
remelts would be about as follows:

A certain number of them would tell their reserve bank to mind eheir own business. A certain number of them eould observe the
rule just as the New York banks would, and make rto loans at all., A certaie
number of them would raise such a howl that

would be in hot water at once.

My 7, line.
Noe there in a method of dealing with this matter which I believe would

be effective, end there is really only one reeeon why it cannot be employed


all the large reeerve benks except New York raised their dissount rte s by one rer
cent, say to 5%, the drag ueon New York would be such as to throw the burden of
Corrowive from the Reserve banks entirely upon the New York member banks.

astonishing how promptly snd effectively this works

It is

It is due pertly to t?el

withdrawal of funds from New 'fork which resulte from that action, and largely to

the fact that large borroeere hexing borrowing facilitiee in varioue market, under
those conditions borrow in New York.

The minute we have a very largo loan account

at the Reserve see* of New York, the large member banks are coctinuelly culling

their stock exchange lotne.

This calling of loans i.e P proceee of selection or

Each bank picks out the weak house or the house which has loans

with pooled stocks or stocks which have advanced rapidly In price, or those which

are less well-regerded. Every day this churning process tekee place.

The less

sirable borrowers are harassed to death by the need for borrowing money.


better borrowers are harassed by the discrimination against certain types of col-

lateral. They in turn go to their ouetomers for more margin or to take up the stocks
tLat are complained of, and it is not very long before the whole psychology changes.

I admit that this very procees does itself inevitably effect an alteration in the
general level of the money market but it involves much less danger than suck ae first

described by direct action.

Now the reason why a policy of thin sort cannot be adopted

in the Federal /eserve System is because there is not courage enough in the System

to do so. The outcry against advancing discount rates in the agricultural aeotion,
the outcry size-hest cheap money in the sreoulative market, and all of these various
unsound objections are harped upon and rehearsed in the press and dinned into the
ears of Congreeemen, and then everybody says, "Look out, we shell heve eome legis-

lation which will destroy us."


Professor 0. N. W. Sprague


Had I not been ill and had been able to oppear before either the Senate
GonsitteeJor the House Committee, or both, I would have add exactly what I have

written to you, but possibly in more discreet language. There axe, of course,
always two dangers confronting us. One is a serious, violent end calamitous col-

lapse of stocks

I regard that as rather slight so long as there is always a supply

of funds at some price. The other is that either advEnciag rates for money or a
combination of advalcing rates for money and a collapse of stock prices 411 have
an adverse effect upon business. That ie where discretion must be shown as to the

extent to .Nhich aggressive action is taken. There is, of course, another more remote danger, but one of hich I have little fear just now, namely, that high money

rates would so restrict our loan m?..rket as to have a definitely adverse effect upon

our foreign trade at the same time that large balances were returning to this country from Europe. That danger is much less than it was, and is one that can be promptly

remedied after a wholesome dose of medicine has been adminiet red in curing the

domestic situation.

The really fundamental difficulty in a number of these matters is lack of

courage to act effectively or sufficiently effectively and 4th sufficient prAuptnese so that the remedy is accomplished without ciaftm,eing consequIces.

I hope you will pardon the vigorous language used in this dictation.


you have ever had the shingles you will understand that it affects oasts nervous
sys-k;em to

4, point where little short of profanity appears to be an adequate

don of one's opinions or views. But ny way, dear zprague, I send this with my
blessing and good wishes, and I am glad you gave the committee a good dose of your

views, whether I agree with them or not.
Sincerely yours,

Professor 0. M. 4. Sprague,
Harvard University,
Cult rid6e, Massachusetts.



JAN 30 0 1922




Jacksonville, Alabama,
Jan. 15,

My dear


Mr. Strong:

Pray, accept this belated acknowledgement and appreciation of your courtesy in sending me
a copy of the hearings before the Committee on Agricultural
Inquiry relating to the reserve system.

I have finally

read the volume with very great interest and profit, here
in the rather retired spot where I am spending a part of a
year's leave of absence from Harvard, working on a book
about means of lessining cyclical



While I find myself in hearty agreement with most of
your analysis of the operations of the reserve banks, I

could wish that you had

placed responsibility #squarely

upon the Treasury Department for the policies that permitted the excessive


expansion of the twelve months

period ### from the late spring of 1919. It is moot unfortunate that the reserve system, especially in these its
first years, should be obliged to bear burdens which are
mainly the outcome of the short-sighted policies of
Government officials.

Altho I am a more or less


partisan Democrat, I should prefer to see the guns-of

Heflin et al, trained upon

Messrs McAdoo, Glass, an

With the view, you express, that the course of prices




agyshould not be a factor in the determination of

discount policy, I am in violemt disagreement, unless
it is based upon the present unreadiness of the public
for action with that end in view.

In periods of active

business, the reserve banks are the most potent single
factor in th

letermination of prices.I hope you will

pardon me if I say that your attitude reminds me of
that taken by the directors of the Bank of England
before the publication of Lombard Street.
One further matter of general import! It seemsto
me that you exaggerate somewhat the self.;.: liquidating
character of commercial loans,e. g. p.794;with the implication that the limitation of discounts to commercial
loans is very nearly a sufficient and almost automatic
safeguard against undue expansion.

volume of commercial

But as prices rise, an

paper is created in

connection with a Liven physical volume of transactions,
and for such price advance expanding credit is largely

id4matter of no g reat

significance, but I doubt-

*LI ether the sequestration of gold in 1915-16 had an

appreciable effedt in restraining credit expansion.
More pocket

currency was required, and

if Federal Reserve

notes had not been available, banks would have been



obliged to pay out money of the kinds that could be
counted at that time in meeting reserve requirements.
What you said about the significance of the presence
or absence of branch banking, and the comparison between tie
New York and the London money markets seemed to me part-

icularly good in a discus31on which abounds in good thing's,
Very trilly yours,

ell,t to xeri.txt









Vt S.


Aug, 8,/922.

My dear Mr. Strong:

shall be mush interestet in

looking over the tegument on diseount

rates, ani will

gladly set town my theughts en the subjeet.

As I am my

own typist, here in the woois, I shall prebably eentent

myself with a rathmr brief statement of my impressions.
If the document is pecomppfltet with iota on the
volume of the various kings ef loans, it might be helpful.

I may also atd that thd pen market investments

of the bank are te me the subject requiring the most

Very sincerely yours,


AUG 10 --

EC' 1'




October 3, 1922.

My dear Mr. Strong:
Returning to Cambridge after an absence of more than a
year there have been many loose ends
,;atch up, but
I am now in position to gi
a n iirtiscourit policy
of the Reserve Bank.
The statistical material listed in your letter of August 11
will be quite ample.
I go to New York from time to time, but the possibility that
you might come here would incline me to stay away. Both
Dean Donham and myself want very much to have you talk to
the students of the Harvard Business School on some banking
or business subject. There are nearly five hundred students
in the School, all of whom I am sure would greatly benefit
from such a talk, or address, if you prefer the more dignified expression.
I should think that I would be able to put together my comments on the discount policy of the reserve bank within the
week after receiving the material. If, then, you could plan
to come over here at the end of that time we could talk over
the subject in detail and, as I very much hope, be favored
with an address by you to the students.
Yours very sincerely,

0. M. W. Spragm

Governor Benjamin Strong
Federal Reserve Bank
New York, N. Y.
















Oct. 10, 1922.

My dear Mr. Strong:

The memorandum on the rate action of the Reserve Bank of
New York in 1919 is a most interesting document, suggesting comments along a number of different lines. I am not
certain that the aspect of the subject that seems to me of
most importance, the significance of the experience of the
last few years in its bearing on the future policies of
the Bank, is the one that happens to be of most interest
at the present time. Before tackling that rather alusive
problem I will venture to free my mind briefly of some few
observations on matters which have merely an historical
interest, at least until we become engaged in another great

I find myself in hearty agreement with most of your analysis
of the situation contained in your long letter to Mr. Leffingwell of February, 1918. Our war finance experience points
clearly to the desirability of imposing drastic consumption
taxes at the beginning of a war, and also to the ability of
the country to meet heavy direct taxation from the outset.
It was because consumption taxes were not imposed that I suggested tentatively the plan which Mr. Leffingwell entirely
misconceived, in styling it a "proposal for compulsory bondbuying." I suggested consideration of an issue of bonds to
be excluded from reserve bank loans, registered and nontransferable until after the close of the war, these bonds to
be offered in lieu of payment of some portion of income taxes,
such taxes to be materially increased on moderate incomes to
something approaching the British level. For some part of
these taxes the taxpayer was to be offered the option of taking, say, twice the amount in this special class of bond.
Even in the actual circumstances during the course of
our experience seems to me to indicate clearly that a
higher interest rate on the successive bond issue, and
the way of stimulation of the "borrow and buy" policy
have been both desirable and feasible.

the war,
less in

Coming out of the course of events in 1919 it would seem that
the reserve banks, together with the Reserve Board, possessed
sufficient power to have put pressure on the Treasury. Of course
I recognize that the Reserve Board as constituted was completely
controlled by the Treasury Department. Whatever the composition
of the Board, the policy determined upon by the Treasury necessarily had to be furthered in every possible way by the Board and
the reserve banks during the war, and perhaps indeed until after


Governor Benjamin Strong




the flotation of the Victory Loan.
After that time there
was no imperative necessity.
A Board on which the Treasury
was less largely represented,- and I do not here refer
merely to ex-officio members,- might have felt free to take
a position which would have enforced the adoption of a different policy by the Treasury Department. Whether this would,
in fact, have happened, one may very y 11 doubt, partly because
the Reserve System is new and in part
a certain controlling momentum gained by the Treasury during the course of
the war. However this may be, definite responsibility for the
rata policies adopted in the latter half of 1919 clearly rests
primarily if not exclusively upon the Treasury Department.

Even without Treasury influence seconded by the Reserve Board,
the record indicates an hesitating attitude on the part of the
directors of the Reserve Bank in proposing rate advances,- an
hesitating attit4de which, though excusable in the first years
of the workinitOtem, it is to be hoped that the experience
of 1919 will iffectually remove. That experience emphasizes
the wisdom of marking up rates by a succession of decided steps
at short intervals when the object is to influence a runaway
market. The advances in rates in November and December, 1919,
were inadequate, and while the advances made in January and in
May, 1920, were considerable enough, both, and especially the
last advance, should have come earlier.
One is rather
with the cumberousness of the system, when it comes to a question
of the determination of rates. I am also disconcerted at the
discovery that the Federal Reserve Board is held to have power
to establish rates even in opposition to the views of the directors of the reserve banks, and this, though I rather approve the
more considerable advance,at the behest of the Board which was
made in January, 1920.

The memorandum contains not a little discussion upon bank acceptance rates, upon which for the present I content myself with the
observation 0 that rates decidedly below other rates tend to induce
borrowing by that method for transactions which are not of the
specially liquid character for Which the power of acceptance was
I may also express doubt as to Whether in the existauthorized.
ing state of world commerce foreign trade bills as a class possess
0.7.the average ea the quality which characterized them in pre-war

I am taking the liberty of retaining the memorandum until I hear
from you,on the chance that there may be particular matters covered
in the report on which you may wish me to express an opinion.
Very sincerely yours,

0. M. W. Sprague

Gov. Benjamin Strong
Bank of
New York, N. Y.

Notes On Discount Rate Memo. Of Reserve Bank .

Tendency to attach over-much importance to international
factors. Far less important than in case of London market.

This appears in long letter to Leffingwell. Also in letter of
Glass, pp. 35-36.

While sale of certificates to Reserve Banks might permit
mor e inflation than sale to other banks,


an offserr to be

noted that it would permit an advance in discount rates.

The retention of discount rates without change in the Spring f
of # 1919 not in accord with letter to Leffingwell.

Why would it not have been good policy to advance commercial
paper rates in Sept. 1919 as an indication of what might be
expected in regard to all rates after October.

P. 29. Contains expression of unsound views which pervades
the business community.

The notion that credit will always

induce enlarged proeotction also appears in the Glass letter,n
Why the radical

change in attitude of the Reserve Board

between Dec. 2, and Dec.10?
PP. 50-51.
P. 52. Too optimistic as to effectiveness of bank rate?


PP. 58-9. Is not the acceptance rate proposed and the

one adopted reversed in the memo?




Day Letter

Dan letter

Night Message

ht Letter

Night Letter
If none of these three symbols

If none of these itrite
appears after the check number of
words) this is a telegram. Otherwise ilet
,racter is indicated by the

:caring after the cheek.


appears after the check (number of

words) this is a telegram.

Otherwise i ts character is indicated by the
symbol appearing after the check.



BA 876 6







0 L W. 3)RAGUE





11 Francis Avenue
Oct. 17. 1922.

My dear Mr. strong:

Since I wired you late this afternoon
that Friday would be quite convenient, another arrangement has
occurred to me.

I believe Dean Donham wrote to-day ,asking

you to talk to uor banking students at such time as might be
agreeable to you.

In order not to place any pbstacle in the

way of that much desired event,j/will run down to New York
Friday night for

the purpose of our discussion. Quite pos-

sibly, you have other objedts in view in coming to Boe4007
I merely suggest the other arrangement on the chance that it
may be more satisfactory to you.

If you do come on Friday, please let me know where I may
reach you.

With kindest regards, I am

Sincerely yours,

Tel. No. 1539-WCNot in book)


4.0CT 19 1922

91 4







October 79.1922.

Dear Mr, Strong:

I appreciate your cordial invitation


breakfast. I shall plan to reach your house
shortly "Ammo(
eight, after a plunge at the Harvard Club. If
the time is
not right, a message there will reach me.

Sincerely yours,








Oct. 25, 1922.

Dear Mr. Strong:

Such a talk as we had on Saturday is of immense advantage to a teacher of business subjects. Recognizing
the need of contacts between the Staff and the business
world; this department of the University has established
a fund for traveling purposes. Consequently, you need
not feel that going to New York subjected me to any financial burden.

I find that arrangement's have ast4y,gheade for an
address by Mr. Fosdick to the students in the-bbl sometime in December. As one evening a month seems to be about.
all that the students care to use in this way, it will
apparently be better to place you sometime in November.
I have talked over the matter with the officers of the
students' organiiation and have fixed tentatively upon
November 20 as the date for your address. This seems to
fall within the Units which you indicate in your letter,
and I very much hope that it will prove satisfactory.
Yours sincerely,

O. M. W. Sprague

Gov. Benjamin Strong
Federal Reserve Bank of New York
New York, N. Y.










November 2, 1922

Dear Mr.


I find that it would be posSible fb s_i t t e
date of your address from November 20th to
November 28th. I very much hope that you will
find this a possible arrangement so that we may
3ee something of you over here.
At regards a subject, I hesitate to make any
suggestion. One possible topic has, however,
occurred to me, - a comparison between the London
and the New York money markets. It is a subject
which you could enliven with yourhank of England
telephone story, not omitting the thumb tacks.
More seriously, it would appear to be a subject
so broad in scope that you could find matters
for discussion regarding which you would not be
hampered in sneaking by the limitations imposed
by your position as Governor of the Reserve Bank
Please remember that this is a mere
of New York.
suggestion which I make only because you invited

Yours very sincerely,

O. M. W. Sprague

Gov. Benjamin Strong
Federal Reserve Bank of New York
New York, N. Y.







Nov. 13, 1922.

Dear Mr. Strong:

We are all looking forward with great anticilWten to your
visit in Cambridge on the 28th of this month. We have assumed
that we should have the bulk of your time at our disposal, and
have arranged accordingly. There will be a luncheon to which
we shr1l invite various bankers from Boston and a gwip of stuwish you to join them at dinner in the evening.
The subject of your address as outlined in your letters
seems to me most satisfactory. No reporters will be present
and it is the understanding of all of the students that whatever is said by business men who address them shall not be made
I think, therefore, you cpn speak with a fair degree
of freedom.
There is one suggestion which I will venture to make. It
is this: our experience is that business men are ant to devote
so much time to preliminary general considerations that they
are cramped when they come to the latter part of their disI think you may assume, for example, that our stucussion.
dents here are familiar with the quantity theory of money and

that it will only be necessary to indicate your-way of
looking at that fundamental monetary conception.
Very sincerely yours,

0. M. W. Sprague

Governor Benjamin Strong
Federal Reserve Bank
New York, N. Y.






November 21, 1922

ag between
Rescrve Bank
waw-iorm or- av any (Tuner plat, wnIun may De more convenient
for you.
If you will let me know the name of the undergraduate
who you wish to see I will make arrangements with him. Going
about the University an undergraduate is always to be preferred
to a Professor.

After lunch it has occurred to me that you
might be interested to see the people connected with the Harvard
Bureau of Economic Statistics. Professor Bullock tells me that
he recently had a talk with you about the work of that Bureau.
In the latter part of the afternoon I shall turn you over to
Professor Hughes who plans to take you to his house, for tea I

I enclose the post card announcement of your
address, from which you will observe that you will not have to
bother to dress for the occasion.
Very truly yours,
0. M. W. Sprague

Governor Benjamin Strong,
Federal Reserve Bank,
New York, N. Y.





November 21, 1922

Pear Mr. Strong:


I have a class next Tuesday morning between
nine and ten, after which I will meet you at the Rezrve Bank
of NTA7-75727or at any other place which may be more convenient
for you.
/f you will let me know the name of the undergraduate
who you wish to see I will make arrangements with him.
about the University an undergraduate is always to be preferred
to a Professor.

After lunch it has occurred to me that you
might be interested to see the people connected with the Harvard
Bureau of Economic Statistics. Professor Bullock tells me that
he recently had a talk with you about the work of that Bureau.
In the latter part of the afternoon I shall turn you over to
Professor Hughes who plans to take you to his house, for tea I

I enclose the post card announcement of your
address, from which you will oberve that you will not have to
bother to dress for the occasion.
Very truly yours,

0. M. W. Sprague

Governor Benjamin Strong,
Federal Reserve Bank,
New York, N. Y.








December 18, 1925.

W. Benj. Strong,
Governor, Federal Reserve Bank,
New York, N. Y.
Dear Governor strong:
I am enclosing a transcript of those
sections of the Maine Banking Law which relate to
the segregation of assets as security for savings

The Maine Law is by all odds the simplest

of all of the segregation arrangements and it seems
to MB one which might be proposed for national banks

without exciting widespread opposition.

I am

planning shortly to go to Portland in order to
learn something about the working of this particular

method of protecting the savings depositors.
Yours very truly,







1,0+. e5


May 11, 1925.


Acting on the suggestion made on April 4.0 at the informal meeting of the

,Committee on -ational Bank Legislation of the reserve banks, I have prepared
the following outline regarding investigations that might prove helpful in formulating changes in the present law.
The subject naturally seems to divide into two distinct groups of more or
less inter-related problems -- those which are concerned with the liberalization
of the national banking act, widening the range of activities of the banks and

tending to makabanking under national charters more profitable and serviceable;
and, secondly, the working out of practicable modifications of the law, designed
to reduce the number of failures and in general to afford increased protection
to depositors.

Obviously, liberalizing changes in the law are comparatively easy to formulate, and ordinarily they excite little or no opposition.

The banks are favor-

ably disposed, and can on every occasion point to the broader powers enjoyed under
charters granted by many, if not all, of the several states.

On the other hand,

it must be recognized that it is not possible to devise generally acceptable and
at the same time adequate safeguards applicable to the many thousands of national

Differences in the size of banks, in managerial experience, and the

diversity of economic conditions in different sections of the country render
restrictions, which are advisable and even necessary for some banks, superfluous
and burdensome for Perhaps a much larger number.

In view of these conditions,

it is evidently advisable to confine within the narrowest possible limits legislation which would subject banking operations to detailed and complicated

- 2 -

A further obstacle encountered in securing the passage of banking legislation is found in the divergent interests of those who have to do with the
business of banking.

Of these interests, that of the depositor is no doubt the

most important, though it is patently the least articulate in any organized

Ability of the banks to serve the community through the extention of

credit and in other ways presumably comes nextin public importance.

But quite

as clearly, the interests of shareholders are a potent factor, especially as
the option is always available of organizing under a State charter.


akin to the interests of shareholders are those of officers and directors,
though in regard to some matters, notably the branch banking question, a distinct point of view may be discerned.

When account is taken of all of these

diverse conditions and interests, it is not surprising that the national_banking act, although it has been amended b7tnearly every Congress since its
Passage in 1863, continues to require extensive further revision.

These many

amendments, often tacked on as exceptions to the original law, have brought
the statute into a confusing and ambiguous condition.

In connection with the

considerable revision of the act, now in contemplation, the moment seams
opportune for a renewal of the effort made some fifteen years ago to secure a
scientific codification of the national banking law.

Dissatisfaction with the present national bank act, and the proposals
considered in the last Congress for its amendment are largely due io the increasing attractiveness of banking under state charters.

Banking must be not

less profitable under the national law, or the national system will continue
to lose ground and presumably at an accelerated rate.

It is to be:expected,

therefore, that the grant of wider powers and the modification of present
restrictions will be urged with increasing emphasis, and there is consequent

- 3 -

danger that the demand for liberalization may overshadow the reouirement_of
adequate safeguards for the protection of depositors.
Investigation of the banking situation for the purpose of formulating


legislative changes may appropriately start with an examination of the adequacy
of the provisions of the law and of the administrative powers for the enforcement of those provisions which are designed to reduce the number of failures
and losses to a minimum and in general to safeguard the interests of the various
classes of depositors.

With this object in view, I venture to suggest the fol-

lowing subjects for investigation:

Penalties for violation of the national bank act.

Aside from fines for

deficient reserves and failure to make reports, capital punishment -- forfeiture
of charter -- seems to be the sole penalty.


Is further differentiation prac-


New banks.

Whether evidence of public advantage from the establishment of

additional banks should not be required of those seeking a charter?


tion of the effects of excessive numbers of banks in different localities.
Mortality among new banks, and corroding influence on older institutions.


d requirement of appr val of Federal Resfrve Board in addition to th
Comptroller of the C

p esent for banks with

rency (instead of


he Secretary of the Treasury as at

pital under l00,0) applicable to all nelibanks.

The capital requirement.. Whether it should not be increased to

ZO 000


The increa6e in wealth and advance in prices render that figure no more burdensome than was the :.:25,000 in 1900.

than two-thirds of the shares.

Increase of caoital on vote of halfrather

Capital not less than 10 per cent of deposit


-4Segregation of savings department assets.

Savings depositors are now at

a disadvantage compared with those having demand deposits, which may be withdrawn by check deposited with other banks, as well as over the counter.


over, the savings depositor as a class is less likely to become aware of the
condition of a failing bank.
Loans to officers and perhaps also loans to directors.

nhether such loans

are a frequent cause of failure, and if so, whether special safeguards are

This' matter was discussed at hearings of the Yational Monetary Commis-

sion in 1908.

Section 5200.

Investigation of failures and near failures, to determine

whether large loans to a few borrowers are a common cause of trouble.--'.Desimed

to determine, inter alia, whether the exceptions to the 10 per cent limitation
are proper or whether they should not be allov,ed in_lieu of the 10 per cent in

whole or in part.

Whether, further, the exception of the "discount of commer-

cial or business paper actually owned" should not include a provision excluding
notes taken on past due accounts.
Borrowing by banks.



hether absence of restriction on loans from reserve

banks may not have resulted in hypothecation of a larger Percentage of good
assets in the case of failed banks than formerly, and consequently a higher percentage of loss to depositors.


Turning now to proposals designed to liberalize the national banking law,
the Lc:Fadden bill may serve as a fairly comprehensive indication of subjects
for investigation.

The bill contains a number of provisions of a non-controver-

sial character covering matters of detail, such as authority to elsot a chairman
of the Board of Directors, indeterminate charters instead of for a 99 year
period, and simplification of procedure of consolidation of a State and national

- 5 bank.

Mention might also be made of provisions authorizing the purchase-of

real estate for business requirements instead of for immediate use, simplification of the process of capital increase by stock dividends, and the authorization of banks with a caldtal of 100,000 in the outlying. sections of large cities.

Obviously, detailed investigation is not needed in the case of any of these provisions, and the same can be said regarding those relating to thefts by bank
examiners and authority to sign reports of condition by additional officers. The
General Counsel of the Board has expressed some doubts as to the advisability
of a modification of the certification of checks section of the statutes.

it is

a matter which may be presumed to be within the knowledge and experience of many
members of the committee.
We now come to provisions of the McFadden bill, which definitely enlarge
the statutory powers of the national banigs.

Two of them definitely authorize

the conduct of certain kinds of business in which many of the banks have engaged
for a. long time -- safe deposit business and investment banking, dealings in

bonds and notes but not stocks.

Investment banking is to be condacted under

such restrictions as to volume and character of the securities as may be made
by the Comptroller, subject also to the law of the state in which a bank is
situated, and to the further limitation of not more than 25 per cent of
capital and surplus in any one issue.

Neither the investment nor the safe de-

posit sections of the bill seems to require special investigation by the committee.

Section 18 of the bill would permit a positive extension of the powers of
the banks in the real estate loan field, lengthening the maturity period in
the case of city real estate loans from one to five years, allowing such loans
anywhere within the Federal reserve district, as well as within a hundred mile

- 6 -

radius as at present, and opening this business to the banks of central reserve cities.

The bill as presented to the Senate also raised the limit to one-

half time deposits, but this limit includes what might prove a burdensome restriction for some banks -- liabilities as endorser or guarantor.

These real

estate loan proposals seem to be a subject that might well be given detailed

consideration by the committee. A further restriction appears in this section,
limiting the interest that may be paid on time deposits to the maximum rate
that state banks may pay under state laws.

I question the wisdom of this

pecific Provision,'and would also suggest consideration of the general policy
of subjecting national banks to the legislation that may have been adopted in
the several states.

Here and elsewhere, the bill exhibits a tendency to go

further in this direction than heretofore.
Having already suggested the advisability of a comprehensive study of
Section 5200 when discussing additional safeguards, the particular modifications of the section in the McFadden bill are passed over without comment.
The burning question of branch banking completely overshadowed all other
features of the McFadden bill, both in hearings before the House and Senate

and on the floor.

The issues involved, though important, are

definite and somewhat narrow in scope.

There is general assent to the grant

of authority to national banks to open branches in cities in states which now
permit branch banking.

Opinion differs sharply regarding the prohibition of

such national bank branches in states that may hereafter allow state banks to

open branches, and also on the endeavor to use membership in the reserve system
as a means of limiting the further extension of branches by state banks,
depriving state member banks of the right to open mare branches outside city
limits where it is now permitted and of power to open any branches whatever in


7 -

states where branches are not now authorized.

me to furnish the occasion for an extended

These issues do not seem to


and further I venture to

express the opinion that the reserve system may well adopt, so far as may be
possible, a neutral attitude

in this

branch bank controversy.

Taxation also

seems to me a subject that it would be unwise to attempt to modify through the
initiative of reserve bank authorities.


-hristmas Cove, Me.

July 4, 1928.

Dear Mr. Jay

Your letter of July 1 reached me lust evening, and
in the same mail came the earlier letter about which you were
making inquiry.

It seems that it had found lodgment amid a

mass of second class mail matter at my office in Cambridge, and
was unearthed when certain publications for which I had written
were being gathered together.

Thc amount of the check is entirely satisfactory. How
could it be otherwise, when the trip itself was no eminently
Very truly yours,

0. M.

qt. Sprague




March 2. 1927.

Dear Governor Strong:

Your two letters are Particularly welcome
as an indication that you are making a good recovery from
your long illness. I shall look forward to a stimulating
talkfest with you on your return to New York.
No doubt, you perceived that my"Annalist" article on
reserve bank policy contained a pot shot at what seems to

be the Miller view that developments in the stock market
must be taken as a DrImary factor in the determination of
credit policies. Note the last paragraph.

Now for the general question, which I shall try to handle
in the suscinct manner of a Bank of England cable:

1. A world-wide declining price tendency, one factor in which
is an actual and prospective scanty supply of additional bank
credit in most countries other than the United States.
European situation:

Budgetary equilibrium and monetary stabilization making
satisfactory progress.

(b) Foundations laid for expansion of production and trade.

No evidence of a generally over-extended condition of business.
Increasing demand for bank credit to be anticipated, and

reasonable to presume that in the main the credit will be
wanted for productive purposes.
Gold imports to the United States.


European gold in shallow receptacles. Slops over into the



United States.

(b) Larger use of reserve bank credit calculateditho to an
uncertain extentlto reduce this inflow. Not necessarily
perhaps over short periods, but surely in the long run.
Presumably governments
Assume that by 1932 reserve banks have increased earning assets
by say,

'i1,PPID.PPP.900, Gold imports during the next five

years will be smaller than will be the case if earning assets
remain at the present figure.

(These assets, by the way, are

running more than )100,000,000 under the totals of two years

4. Can additional reserve bank credie put into the market
sans damaging consequences? This the crux of the problem.
(a)Immediate effect inevitably and always in the stock

A matter of no great consequence aside from

possible political comeback.

No indications of a generally over-extended business

Always some weak soots, as now perhaps in

certain classes of buildings, and installment sales.
On the other hand: Farm land prices unduly low with
few or no buyers. An abundance of current savings
seeking investment. Security holdings of banks not excessive,
when account is taken of increase in deposits of an inactive

(c) No doubt some danger of excessive foreign borrowing,

but it would take time for it to reach serious proportions,





and therefore does not run counter to the:

5. Conclusion that the present seems an occasion for an

elastic, ex)rimental reserve hank policy.

The system is an

animal that is not very quick on its feet, or to change the
Eetaphor, changes in the course of the vessel seem to involve
a sort of senatorial pow-wow with no cloture. A policy, wise
in one set of circumstances, is apt to be continued after
conditions have changed. Accepting the view that )0licies of the
last three years have been eminently wise, I would suggest the
possibility that these policies may be pursued longer than may
be disireablelprecisely because they have proved satisfactory
the past.

Here is a nut for you to crack! In the good old days,iold
movements brou-,ht back e.,ailibrium through contrasting

repurcussions in the money markets of the importing and ex'lrting coun+ries. Will the gold standard prove satisfactory if
gold is persistently sterilised in 'Is it comes in to this

Lest it precipitate a relapse, I will stop at this point
for the time being.

Very sincerely







March 31, 1927,

Dwae Governor Strong:

shall gladly be of whatever service
may lie within my competence to Mrs. Cobb and her son. His
record, so far is excellent is some subjects, in particular,
mathematice, which I consider far better training than
economics, a subject which is largely concerned with a common
sense balancing of numerous and confusing factors.

What say you to this problem?
iven the assumption of a slow doenward tendency of

the rate of interest, a condition with which the business
community has had no experience since last century,and
Rather rigid interest rates on deposits, and on most
customer loans made by the banks.

May not much good commercial loan financing be lost to the
banks by the substitution of long term sefuritv financing,
(preferred by borrowers at moderately grea er Jost)
and incidentally a larger proportion of -wig bank assets
become securities and collateral loans?
Suggested conclusion: a reftuction in interest rated on

deposits, and of rates on customer loans, and Possibly
an increase in credit furnished by reserve banks


than contraction of same as has been suggested in some

Sincerely yours,








April 14. 1927.

My dear Strong:

I find myself agreeably in disagreementwith
the position set out in your letter of the 12th. In the
Annalist of April 16, you will probably find my ideas somewhat
further developed, but if I had had the advantage of your letter,
I might have carried the analysis a bit further.

I think the growth of time or savings deposits, especially
in the case of banks outside the money centers, may have
troublesome consequences. Many of them are reaching out after
deposits from beyond their own locality, often offering as much as
4 1/2 and even 5%, and in order to secure the accustomed return
taking in less satisfactory mortgage and other investments.
I quite agree that the funding of bank indebtedness has in
eneral been advantageous from every point of view. And I

draw the conclusioh that the decline in commerCial loans may be
a token of health,and vice-versa. But may not this as with
other good things be carried undesireably far?
But leaving details, what I have in the back of my mind in
my letters and various articles is that there are no positive
indications that the supply of bank credit in this country has been
excessive during the last five years, and that there are some
believing that#0###Y0#000
tho not compelling reasons for

with a bit more credit and at lower cost would not be an insane
proceeding. I say this because it has come to my ears that the




advisability of a 4200,000,000

reduction in open market investments

a short time ago. No change
was brought forward for consideration
to be made, I
may well be the wise course, but if a change were
rather than
should say the situation suggests an increase

to decide whether I shall
I go to 2ashington to-morrow night
inquest on the reserve system which is
in the
conducted by the Chamber of Commerce.
the otherswill be greatly
The dinner with Hollander and
for talk uninterbut I shall also expect some occasion
my liking,
economic babblers.
rupted by the presence of all those other

Sincerely yours,





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