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February PI, 1921. WO' 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. BS:MM 4 CM. 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 Inquiry. 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. Leffingmelt. some respects of that time. I was a subordinate, and the Thole 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. I 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 (Senator Lenroot here interrupted) sould have been as close to an #2 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 my 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 these 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. But defense by a policy of accusation. the steteaent which I made on the subject of the relation 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' conditions. 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, frith 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 The sentiment caused no doubt by the different sections, 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. It ee 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. All 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. CONFIDENTIAL 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. statement 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 it. 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 it ntAgubt, 4, 110-LI. 2 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. B.S.M7/ 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. LS.VM . Sprague, 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"'' Cambridge, BS.MM M388 . CC ?e, 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 2 policy. 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 the 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 to introduction 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 with was organized, and I am frank to sa3i A considerable difference of view. All 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 in the meantime, may I ask you to I shall elaborate upon retain 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 MU!. JOVE Olo' 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. BS.TAM 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 me. 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 A-1`04^- 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. 35.M114 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. ik:wever, 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. 3S.MM 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 the 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, ' 10e'. 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. with 2 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 ours. 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 Engineering 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. BS. MM. at your voir*1911 29-141 'vitt November 22, 1g22. Dear ro_eeeorwpraeue e 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. Other 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. BS.MM 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 to talking about such dry matters as I did. With kindest regards, I am, Yours sincerely, Profersor 0. M. W. Sprague, c/o Harvard'IWitirereitrre, Cambridge, Mass. 3S.MM 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. 67.NP) Seeretary to the Governor. Professor O. M. Va. Sprague, riarvard University, Cambridge, Mats. MSB 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 be, that "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 P 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? Prof. 6A/25. Sprague 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 i 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. 2. The 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 Arab'. Prof. 0.M.. Sprague #3 6/5/25. develop, it seeme to me quite likely that foreign institutions will themselves develop the business for us, either by opening their own establishments in this country, or by making close alliencee with American benke. 111 If the Federal Reserve Act should be amended so ee to discriminate against this 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. 041 3. 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 between increeeea or decreeees in the amount of o 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. rate. 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 1111,11/1111111 Prof. 0.M.. Sprague #4 5/5/25. money market, which at times is greater than is desirable. the rates at which we buy bills have 01/1' ' a 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 the 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 convincing 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, taken 'Atte repre- charters in con- 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. A It would also appear that the small up to the requirements of conditions to a ing Sprague Prof. 0.- 5 the situation independent bank has failed to five years of during the past degree that is startling 6/5/25 and exhibits a unusual bank- weakness which requires the United States In the year 1924 there were 613 bank failures in irmsediate remedy. mostly 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 mee,sure and system of resources branch and better banking. The failures have been principally among State institutions not members of the Federal Reserve System. It is too often customary to charged rates of interest critiee borrowers, without make those charges inevitable. They are these small banks considering largely in small local funds from depositors. rule, pay to If they cannot agricultural constantly, communities 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 customers. extortion in circumstances which seem to where credit requirements, seasonally, and in some cases cumulation of for get deposits in that way, they borrow heavily and, as a high rates, 5% and even 6%. The overhead and taxes 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 the extra hazard of crop failure and of other vicissitudes of agricultural sections. ioahhn 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. It is 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 enterprises. Prof. Cpregue 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: 1. 111641101W Violatione of the National Bank Act. (e) 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. I 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. (b) Exceesive Loans. These are frequent end. persistent according to eur own informetion, largely drawn from reports of examination ot member banks. They 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. The 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. (c1 . 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.. (d) Fe lee or misleading reporte. Sprague 6/5/2s 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 6 P-fo1.7. 0. M. 4. Sprague C/E/25 Jniberohip as poosible, notwithstanding, the reepoosibilities resulting from that type of membership,. 4. 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 deponite. 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 Commeroiel Department Hanover Trust Company 35% Prudential Trust Co. 5Z-43;; Toemont Trust Com,aoy Z9-1/6% Cosmopolitan Trust Co. 16% 3avinoo Department 100% 100% 70% 06-Vs% ..flo it is not unlikely that the reverse of this result *auld he teen the ease with these ooncerne had there osen no eb®atdon 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 116 . 4.,ich ,aly officers or directors Prof'. 0. 9 . . Sprague 8/5/a5. the bank are directly or indirectly intereeted; Itnd it should be f3afegub.rded to operations which 4oulo eli'ect, indirectly, eAchangee of departments. the 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 holders 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 arise 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. SIGh 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. 6. Section Z, 20O. This entire section should be reonitteT, to Iiike dofinitions cle!'rsr. 1 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 asked ,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 oion. ity of CU ceci 1 not think tt4a-z, a.by liuitatn hnulo an? Lni.',,ed States c:::lige.tions, and am very dwibtrul of th to cover or 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. .ccounts. CIF . Frof. 10 EcIT 1 6/5 e . 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? ft 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 5/5/L5. All 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 li, of it. On the other hand, tte role 2rov1eior of that Act thich ruthorlYer the FfAerel rtes 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 Trt--,ury. , 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. L. W. tiarvrd University, Caftbridge, Meas. Ei;:-..t..,Tuo, ' untr) Ices 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 !..re 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. Ae 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 Act." 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 2 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 11..ve 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 ;tot." 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 3 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, GEORGE L. HARBISON, Leputy Governor. Prefesecr 0. M. &:prugue, Ht,rvard University, Ctqmbridge, April 17, 1926 My derAr Proteoeor aprague: 4th tbia ilk, 116 COPY of IribriKer, Cony 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 ..ch 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 °bah gnat,. Sprwat,-,, 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 illness. 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. am Stuyvesant aoad, Biltmore 2orest, CONFIDENTIAL 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 °there. . 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 Government 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. 2. 2/27/27. 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 purpose: One was to take indirectly 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 success. 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. 3. 2/27/27. 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 stocks. 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- curities. 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. 4. 2/27/27. 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 result liquidation On might 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 rate. If we high a level, w6 prevent the foreign banks of issue from reducing their rates and we invite further gold shipments. Meet of the banks abroad have themselves already lost control or 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. If 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. 83:M 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 with 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 cover 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 letters, Prof. Sprague. 2. /7/27. 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 O'Connor. I read it with much interact - in fact with some amusement - and wondered whether you had been preaChing to him. But it is not the kind of letter which I could comment upon very fully. 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. DS:71 it looks as Ao# A t-r-46# tm jLi 1,4 o 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. P danger- 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 score. 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 polioy 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 r 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 developed. 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 etabilizer. rroIebwuK v. A. W. faku;u6uc 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. W. opl'iltiuc 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. fluog tmeaasyyo$3 italloR stemtila ,.0 .R (atomIliE .VRQI tP-R dotsk fIn3 B and :auziasq .6du0 szilawAT tosaaiolg lataoq .aIM ,wilm to bnalt1 .aoimon000 01 blo nA,aool000 od,1 ni !Issio:r bstsato/n1 emooad earl *z gtow a/A soodAs off* btavtall'n1 oolvbs boas .M07 00ti o/ 16.13 *coo *oa ol oda t.idt avolxna al sac: ,b1,c)mg.H 4111bnommoo3t -/nommoo LCiw has 11/qA to d.n1 ad/ no yidudot lvdw to no/Izoibni mod led av13 n laldt tad lo 10-1sAll Iliw iialoa s%.a3Ig maI y.ocr 3AI WI tad ot Nvca wan a111 09 $ OViiri I Loa rf Illw April lc :moic d*lw otso t pw.ii ct a ad Illw 0'70_1, t--- 3rf .1)d .aaivba o$ ano on and arL1 as So/glad ,ddon vino!!al U-i$ 111.5100:q)cm doum dold lo 7anidlontia .assaaio %c00% lo ado n1 a7t ad 10.1 r"VaAr ooY- 149 al* Icsiv Si blo ym iinfgnia boa lo 10.1a5IS *A* blooda FivAd oaalloo besz loodoo an.toa al-ad 1I tuAI-walv 4114 41taatrigxa Nur; .noi/J:;mtolni to Ilut /I Ito/a ton bna tcled hapoi3vbs 11tow ad bnim *al kaet4 bloodu arrIntat$ ,bc11 ynn 20 laJdam aid loodos laoindo noioaslo-ul a otni 10 .loodos wsi Inoindos$ a11 aocdoa Isoibans :via/no oil lasile/lobno oi ..toItq ITRWU 0 9d - Al tot 606100D Uhl le noltoala2 aid e w2ve dtlw od bloods rni$Z04b9 .oulaa,31o7q As tcl fliw /cid ,noteaoloIq no2/191Aqiptq totzi a1d lo aona a qu gist Sea Illw ad tad$ aAnIdt sobi-adI boarasfoono tedIzt I aao doldw nt bi/od bri solmenova ,asennul -%Dd:qul ban no sabott ati,..,t/naonoD tthAlm ed mid antoo øi 03 botaalelnl /1 /1 /Ed* ./oaLloo tzdt 1.tat o/ 9I4I/lat4d bnuoti; atatoso old Pnow ooy aqod T aidt dtlw 9.31-aaalb go uoy. IX .08 tad 4110 I shalleppreciate very much any advice or help you can give her. Sincerely yours, Arat: biy Professor 0. M. W. Sprague, Harvard University, Apr, Cambridge, Mass. e it full tvaivivt 4 big c rmatien. .1tp be op sulertakiu tl.;4*e ant QM. Imrstion gnu he pror*esion. 4 ta43 up a pro;.: . .other imoom. 141 ,,. trate on econew buiki 09131p7-700 AP*SP' RwmAing ng7A6L!Ta: -.LoT,est)ox. ot g' TnaEn*' cruoLaT'i, 'Kenn!' 7.TAG pGt $41iTTTAbbneaTata A4t.1 amp IT #Tos OLOr) Ion /gm &.(57-T../11 JeLCt 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; 1907. 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 _2 4/l2/z7 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 dangerous. 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 4/12/27. OM. 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 MP, 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. Sreturn Nesley about the Mitchell 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 -2" 4/16127. 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. ,ke r".;. 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 Washington. 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 a Professor Sprague 4/25/28. 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- likely. 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. GLH.MM May 7, 1928. OONFID4NTIAI. ito -A- Dear Sprague: 4\Y'' kro- 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 .x-- 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 customers. 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 circumstances. 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 If 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. discrimination. 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. The 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." 4 Professor 0. N. W. Sprague 5/7/28. 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. If 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 expt.es- 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. HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADM1NISIRAIIUiN 0. M. W. SPRAGUE JAN 30 0 1922 ..20NIVER5E PROFESSOR OF BANKING AND FINANCE c,;1 CAMBRIDGE, MASSACHUSETTS Jacksonville, Alabama, Jan. 15, My dear 1922. 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 industrial changes. 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 credit 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 0 partisan Democrat, I should prefer to see the guns-of Heflin et al, trained upon Messrs McAdoo, Glass, an Leffingwell. With the view, you express, that the course of prices HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE NVERSE PROFESSOR OF BANKING AND FINANCE is CAMBRIDGE, MASSACHUSETTS 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. increasing 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 responsible. It 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 HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE aVERSE PROFESSOR OF BANKING AND FINANCE CAMBRIDGE, MASSACHUSETTS 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 ,,-sytm'vr57111* ft°73`,,e-vIctr's r".c 4 b 0, HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION WILLIAM JAMES CUNNINGHAM ssMES J. IIILL PROFESSOR OF TRANSPORTATION ACkNOW LEDOErfAMBRIDGE, MASSACHUSETTS AUG / 19P ..Greensbore, Vt S. Vt. Aug, 8,/922. My dear Mr. Strong: I 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 elueliatien, Very sincerely yours, AUG 10 -- !II' EC' 1' GOVERNOR'S RECEIVED HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE CAMBRIDGE, MASSACHUSETTS ONVERSE PROFESSOR OF BANKING AND FINANCE 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. OMWS:EJ ' fr X ' 4A. ,r7-677.7" k07.",41''A - HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 1, i',. 0. M. W. SPRAGUE -...,CONVERSE PROFESSOR OF BANKING AND FINANCE r I CAMBRIDGE, NTASSACrIUSETTS 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 war. 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, slightly less in would 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 -- 2 10/10/22 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 days. 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 OMWS:EJ 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, REJ 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? MAW PP. 58-9. Is not the acceptance rate proposed and the one adopted reversed in the memo? CLASS OF SERVICE SYMBOL CLASS OF SERVICE SYMBOL Telegram Telegram Day Letter Dan letter Message Night Message ht Letter NL Night Letter If none of these three symbols If none of these itrite eels appears after the check number of words) this is a telegram. Otherwise ilet ,racter is indicated by the symbi :caring after the cheek. RECEIVED AT 0 appears after the check (number of words) this is a telegram. Otherwise i ts character is indicated by the symbol appearing after the check. NEWCOMB CARLTON. PRESIDENT Eilrir°11 BA 876 6 FY CAMBRIDGE MASS 17- 545P BENJAMIN STRONG 1-162 FEDERAL RESERVE BANK OF NEWYORK NEWYORK NY FRIDAY ENTIRELY CONVENIENT AFTER ELEVEN Blue Nile OC LOCK 0 L W. 3)RAGUE HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE CAMBRIDGE, MASSACHUSETTSI ,VERSE PROFESSOR OF BANKING AND FINANCE ).t 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 eos's BY HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 29 0. M. W. SPRAGUE CAMBRIDGE, MASSACHUSETTS ;,...,NVERSE PROFESSOR OF BANKING AND FINANCE October 79.1922. Dear Mr, Strong: I appreciate your cordial invitation ?Or 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, OGeett, - HAliVARD- UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0.M.W.SPRAGUE CAMBRIDGE, MASSACHUSETTS VirtIVERSE PROFESSOR OF BANKING AND FINANCE 1) 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. OMWS:EJ Zi61 &6' HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE DNVERSE PROFESSOR OF BANKING AND FINANCE A.,KNOW1 NOV 3 c:DGEI` CAMBRIDGE, MASSACHUSETTS 1922 November 2, 1922 Dear Mr. Strong: 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 it. Yours very sincerely, O. M. W. Sprague Gov. Benjamin Strong Federal Reserve Bank of New York New York, N. Y. OMWS: ID 1' ivg 1,94 p. HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE CONVERSE PROFESSOR OF BANKING AND FINANCE CAMBRIDGE, MASSACHUSETTS 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. dents. 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 public. 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. OMWS:C 'STRATTON CAMBRIDGE, MASSACHUSETTS Plow, 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 suppose. 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, 44Cf 0. M. W. Sprague Governor Benjamin Strong, Federal Reserve Bank, New York, N. Y. OMWS:ID HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0.M. W. SPRAGUE CAMBRIDGE, MASSACHUSETTS LONVERSE PROFESSOR OF BANKING AND FINANCE November 21, 1922 Pear Mr. Strong: Aa.-74 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. 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 suppose. 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. OMWS:IE o .171; 104 HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE CAMBRIDGE, MASSACHUSETTS. CONVERSE PROFESSOR OF BANKING AND FINANCE 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 deposits. 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, ci Enclosure OVWS/SD -' hro 1,0+. e5 Co May 11, 1925. SUGGESTIONS RELATING TO NATIONAL BANKING LAN STUDIES 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 banks. 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 restrictions. - 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 fashion. 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. Glosely 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. ticable and Is further differentiation prac- desirable? New banks. Whether evidence of public advantage from the establishment of additional banks should not be required of those seeking a charter? Investiga- tion of the effects of excessive numbers of banks in different localities. Mortality among new banks, and corroding influence on older institutions. sue- 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 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 3t10 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. liabilities.. Increase of caoital on vote of halfrather Capital not less than 10 per cent of deposit Gros -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. Libre- 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 needed. 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. ;;41,1.4, 7.14E.:46 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. e 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 Committees 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 inquiry, 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 enjoyable? Very truly yours, igned) 0. M. qt. Sprague HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE CAMBRIDGE, MASSACHUSETTS ,ONVERSE PROFESSOR OF BANKING AND FINANCE 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: (a) 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. (a) European gold in shallow receptacles. Slops over into the HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE LONVERSE PROFESSOR OF BANKING AND FINANCE CAMBRIDGE, MASSACHUSETTS 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 ago). 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 market. A matter of no great consequence aside from possible political comeback. No indications of a generally over-extended business condition. 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 character. (c) No doubt some danger of excessive foreign borrowing, but it would take time for it to reach serious proportions, 1 HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION CAMBRIDGE, MASSACHUSETTS 0. M. W. SPRAGUE ..ONVERSE PROFESSOR OF BANKING AND FINANCE 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 country? Lest it precipitate a relapse, I will stop at this point for the time being. Very sincerely ' r, ,. _oe" HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE CAMBRIDGE, MASSACHUSETTS -ONVERSE PROFESSOR OF BANKING AND FINANCE 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 rather than contraction of same as has been suggested in some quarters. Sincerely yours, ;r- :1?1 61, HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE CAMBRIDGE, MASSACHUSETTS JN VERSE PROFESSOR OF BANKING AND FINANCE 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 experimentation 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 HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION 0. M. W. SPRAGUE CAMBRIDGE, MASSACHUSETTS ,ONVERSE PROFESSOR OF BANKING AND FINANCE 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 contraction. to decide whether I shall I go to 2ashington to-morrow night being inquest on the reserve system which is in the participate conducted by the Chamber of Commerce. to 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, t .,r -