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April 15th, 1916. dear Lord Cunliffe: It was my intention to write you at some length mediately on my return home, in fact, I recall promising that I would do so the last time I saw you, but a wireless message received on the "St. Paul" informed me that I was expected in Washington to-mop row to attend a meeting which will last for a week or more and I am only able now to send you this brief line to advise you of my safe return and tell you once more how grateful I am to you and your associates for your many courtesies to me w#ile I was in London. I shall not be sat- isfied teat our account is on a fairly mutual basis until you have given me opportunity to entertain you in new York. Assuring you of my warm regards, and with best wishes to yourself and your associates, I beg to remain, Faithfully yours, Lord Cunliffe, Care The Bank of England, London. BS Jr /VC:.? ibq r). PRIVATE. May 23rd, 1916. My dear Lord Cunliffe: It has been impossible since my return home to write you in regard to our conversations on account of the nressure of other matters. There are two question still to be disposed of in completing the confidential memorandum prepared while I was in London: First, is the difficulty about days of grace. It has been arranged, 1. To obtain the opinibn of the Counsel of the Federal Reserve Board as to the application of our statute to fhe purchase of bills which are subject to days of grace, as now established by the law in England. 2. In case his opinion does not justify our exceeds ing the 90 days limitation, tee text of an amendment to the Federal Reserve Act curing this defect has been prepared and printed and has already, I believe, been submitted to the Committees of the House and the Senate. I am told there stiould be little difficulty in the passage cf the amendment, but it is just 6 well not to count on favorable action until it is actually accomplished. The other matter is the basis for earmarked gold and for gold shipments, and I would appreciate an exaression of your views as to how this should be dealtvith. Should we not arrange - or aunliffe. ay 23, 1916. for the establishment of a definite price per ounce at which gold, either in bars, or in gold coin will be earmarked by both institutions! So far, I have had little opportunity to study this matter, but am inclined to think that a fair plan would be to deal with the account on both sides upon the basis of the actual mint value of fine gold, either in bars or as found to be contained in the coin. Then, if gold coin is snipped in set- tic:went of existing balances, it would be furnished by the debtor bank and taken at bullion value, but if it should have been earmarked and subsequently recredited to the account of the creditor bank by the debtor bank, it would, I suppose, be credited back at its bullion value, thus giving the debtor bank the benefit of the recovery of any difference between the abraded and the bullion value which might have existed in the quantity of coin originally earmarked. She importance of this question would be minimised and possibly eliminated were we always able to use gold in the form of fine bars, if the price be a fixed one; on the other hand, it would become more complicated, should it become necessary to earmark or ship in coin other than sovereigns or eagles. In a preliminary way, I feel quite willing to recommend that the waiter be dealt with rather informally and without too detailed a plan being established in advance, so long as we find the means of carrying out the spirit of the memorndum which or' un contemplate) thft these transactions shall be fair and *eon Will you be good enough to the same basis as to each party. write me your views about this' For your information, i en- close a copy of the latest table of cnarges imposed by the mints and assay offices of the Unites States for the treatment of gold. Since returning, I have discussed quite in confidence with some of my associates, the general character of the plan we formulated while I was in London and have been over the memorandum with them. =heir attitude justifies my suggesting that we should endeavor to complete the uetails of the plan,particularly with reference to snipping and earkarking gold and establishing an understanding as to the price so as to be Inc-pared in case of nee:, to start operations this Falli .)though, as stated to you in London, it is not possible at this time to advise you officiril.. ly that we can do anything before the conclusion of the war. I suppose you have observed that a considerably larger acreage is being planted in cotton this year than last year. So far, 1 have seen no reason to modify the views expressed to you while in London in regard to the possible course of exchange this tall, except as they might be modified by the success you are realising in assembling American securities. If you Can confiden- tially give me any light on that subject, I would appreciate it. With kindest regards to yourself and your associates and again many thanks for your co rtesy to me while I w*,s in London, 1 Et., Faithfully yours, Governor. Lord Gunliffe, Care The Bank of England, London, England. http://fraser.stlouisfed.org/ RS Jr Federal Reserve Bank of St. Louis /VC S Denver, Colorado, January 6, 1917. y dear Lord Cunliffe: Accompanying this letter is a letter from the Deputy Governor of the ?ederal Beserve Bank of 77 York, which is the result of considerable study by my as.7ociates and myself, and I trust that it will meet your viays and those of your associates as to the character of the arrangements which may how be entered into between the Bank of rngland and the federal 7eserve Bank of 7ew York. In a general way I have endeavored to make somewhat more specific the plans which were discussed last "arch when I was in London, particularly as to the method of dealing with gold, adopting as the basis of values standard gold of the two countries in accordn7-,le with 1,710 suggestion conveyed tu ::k7 by nuputy Governor Cokayne's letter of June 15th last. Permit me to repeat the expressions which sere exchanged at our last conference in regard to the operation of this plan. It will be impossible to cover every detail in advance of the exrerience gained from actual operations and I, therefore, feel sure that ron 7:111 feel quite free to r4iggest modifications from time to time, as we would like to feel equally at liberty to do so, and in the meantime I an hopeful that an arrangement of this character as modified from time to time as the result of exnerience, will prove to be of inestimale value to our respective institutions and to the financial relations of the banlig of England and the 7nited Itates. I am just now in correspondence with 7onsieur Pallain of the Bank of 7rance, looking; tayard some arrangement of a similar character ith that institution, and trust that the references to that sugustion January 6, 1917. Co Lord Cunliffe. *In the enclosed letter meet with your entire approval. In any event, it is my nresent exnectation to visit both England and France, if ny health permits, in the early sumer of till's year, and any details which need further attention can be dealt with personally. "Iith warmest regards to yourself and your associates and best wishes for .the New Year, I am, Yours faithfully, (Signed) Benj. Strong. Rt. Lord Cunliffe, Governor of the Bank of England. BS /CC 7nc. New York, 7. Y. This letter was written by Governor Strong at a ti'-e when he expected me to sign the formal letter to the Governors of the Bank of !ngland. low Governor Strong has signed the letter himself, but I think that nevertheless it would be well to send forward this personal letter from him to you. Deputy Governor. Denver, Colorado, January 6, 1317. Gentlen2en: (1) 1 have the honor to advise you t he F :;land has consented to the appointment of the .eserve 3ank of New York as its co:resp Reserve Board ant, or agent, of London, in conformity with the the Federal the City e) of 3ootion 14 of the -Fedora.' Reserve Act -ongress which effect September 7, 1916. (2) actions between the In order to ester two institutions, t ens prepared in London in on with the amendment to Sec- :larch 191G shou1,1 now be as that amendment necessitates a t =on 14 above referred to modification of the to of the randu Paragraph 2 o to pa of orandum in certain particulars. should be modified to conform oction 14 as amended, Which now provides that "..IM RESERVE B3ARP (ever; Federal .:..oscrve Win:: THF CONSI:= ACCJUNTS 1e3R SUCH ?OIU1 d; shall have po T3 31).10 AND MAINTAIl. COUESPOEIDEUiS AG CIS ". stated in the randum, that bsiancos maintained by the Ban:: of akaand with the 'i.'ederal (4) It will not, therefore, be necessary, as Reserve Max of New Yor shall be held as ear-marted .'aragraph 3 of the memorandnm should be modified to conform to the said amendment which now provides that -every _edema .eservo Shall have porier * 4 to buy and sell * * bills of exchan3e _-allrI1M1.11. 2. 41 To the Governors of the 3ant of :gland. January 6, 1917. arising out of actual commercial transactions which have not more than 90 days to ran, 1.X011JSITS JP DAYS )F GAACEP. (5) All of paragraph (e) of Section 14 o quoted as folloas, the word in parenthesis the Act as amended is omitted from the origi- nal paragraph and the words in capitals being ose added to the original paragraph by the terms of the ame ".,very Federal Reserve 3an accounts with other Federal roe with the consent of the :'ode (banking) accounts in fore and establish agencies in best for the purpose of exchange, and to bey and through such correspondents out of actual corsaorci= trans days to run, EXClk of two or more onsible Fi:LRAI. RES-111V JARD TJ aeZi FeRaGN CYIL iDaNTS JE AGaNC paragraph thority in conferred b:; the law upon Rese Sta Meg, and colleetiag bills of or without its indorsement, vies, bills of exchan ge arising which have not more than ninety CL, and Which bear the signature THS 1TH THE CONSEAT WI 1; BALKING ACCOUBTS FOR SUCH twithstanding the amendment to (6) o allow t shall have p To establish e banks for axe purposes and, and maintain e Board, to o, s, appoint correspondents, es wheresoever it may deem st on deposits nor, ia fact, is any in- allowed on the 'eposits of funds of the Government of the United , or of the m not b r banks or the :Tystom, so it will consequently eat molification in the terms of that paragraph of the memo (7) earagraph 7, Gold Shipments, No agreement has yet boon reached as to questions of abrasion, price of bar gold, price of coin, shipping charges and other details of that character. It is, there- fore, suggested for yor consideration that the following arrangements shall for the ?resent apply to transactions ie gold, pending the determination of more precise terms, based upcy; experience: To the Governors of the Ban (a) of .Lb gland. January 6, 191.7. ao first two sentences of oaragraph 7 of the ae,Teement to resin unchanged. (b) The Ban: of Aadland to ear -mark d set aside refined sold bars for the Federal aesorve Bank of New , oar-:lar...ed at the rate of 77 shillings 9 ,hen sold is ordorod per -654-ta,ek standard ounce, eleven-twelfths fine, or standard gold bars are not avail (c) 3nsland to ear-ark and se the Banc of es for account of the.liew York Bank at their bullion v o of 77 s. 9 p. per ounce, for the equivalent of the iAgl of fineness, or (d) The BaW: ric and sot aside sovereigns at their bullion (e) . 9 p. ner ounce. so ear-rlared Int not shipped, to col be taken by t if returned to the credit of the tow 7Aut at Which 44mss oar-rte rkod in the first (f) it ahead cannot requir understood that the Federal Reserve 3amic of New he San 4 of gland to earrtiric eagles at bullion import them and realize the profit between the bullion 441111100.- value and face value of American coin. Tne right to determine in the event of shipment dbether America,: coins shall be shipped or not to rest with the Bank of :a gland. Ac erican sold coins Allah are abraded below the limit of tolerance of one-half of ono oar cent not to be ear-rt.:x*40d or shipped if other gold or coin is available. Tfle Federal Reeerve Bank of Bey York to ear-mark anu sot aside sold for liasow ane)dlitittie i.C41 Q.CCett4.41r. the Ban4 of England AO n the following basis: January 6, 1917. To the Governors of the 3an.: of gland. (a) jefined bold bars at the rate of v18.504651 ear United States standard ounce tetX the :f gold nine-tenths fine, assay office charge of SON per 4000 in value, or (b) Sovereigns at their bullion value s f .J8.604651 for each ttenAt Cgrew ounce of gold of the Amertese-i-htert standard, ne-Tenths fine, or (c) iagles at their bullion '04651 ner ounce. (d) Gold bars, or ,_;old coin, so ear-marked not shipped, to be taken by the Federal Res if returne:i to the credit of UM Bank of &gland) at the Which 1,6r first instatel Orr-11144/ tch4ak tact L Gary (e) It shout require the F dot.? t &boa 7ywnrrent) at cgf-tra ork to ear-mark sovereigns p kerwme 6414 e Mlareld. the Bank the nrofit be them and realize o England cannot value of in,;lish coin. at bullion v The rijit ipmont, Jhether dish coins shall tween the bull to de ft? rest eith the 2oderal Reserve Bank of Jew York. oh are abraded below the limit of tolerance not shipped if ( aka talkear-marked in the not to r gold or coin is available. ish saki coins old .'!Iger-marked or shipped by either institution to the 1.1) other must be suitable for coinage purposes, allot; to bo copper, and an allowance made for any variations in cold contents above or below standards soecified above. (;11 (9) The oar-marking acid shipment of the told coins of any other um414takt nation to be 41aut.-014h upon the basis of the value of the fine ,pld A tamed 1. sueu cans, with deduction of an allowance to cover the cost x_ 1 2 A.- 1),t s 5. gp, January 6, 1917. To the Governors of the 3ank of liaigland. or conversion into ,pld bars of Ilaglish or American mi..t standard respectively, In general, the concluding soutane (10) memorandum to apply to all transactions in of paragraph 7 of the -so that the effect of tho arrange:lents will be to ma,:o all shipment cold between the two institutions upon exactly equal ter ?aragraph 10. (11) No arrangement having ye concluded with the Bank of :,ranco, it is pro the Federal Re orvo Bank of New York endeavor forthwith t arrangement of similar character with that institution and three institutions s between all o each. t is proposed that the terms 4ith (12) rms of the understandin repared in ;.;arc". 1916 shall otherwise of the memorand aoply. that the Bank of imgland furnish the Reserve Bank of New :fork ;pith the necessary docurnts and papers to 111°.°11.1*- to the opehi. ,1" an account with the sauc. of iIialand and accom.. directions and forms applying to the openinj of . I ;. of ..-;ngland with the Federal le3serve Bank. of Lew York. (14) it is desirable, on account of difficulties of cable com- munication and the necessity for safe-guarding exchanges of cables in, volviag payments of money, that the Bang. of ,m gland should suagost the plan to be pursued in the use of cipher codes and Ghee.% words between the two institutions. To the Governors of the 311114 of bland. (15) January 6, 1917. The Federal Pneserve Bum:. of New York woul.: prefer that bills purchased for its account by the Bank of 14gland should consist so far as possible of those bearing the names f American drawers, or endorsors, so 10116 as this requirement does n of discount at primeBank other than the bills which are eligible c: WO uat;41 by the Federal Reserve 74arrya,. bills for the Bank thriatt,t45 or 641.gyt(ito d, should f bills by either institution t rates. lett rs, the Federal 1-1 © =rve f the above plan to the thar Item) with th provisions of morandum of aarch 1916 is attached t this time to form any opinion as to ye undertaken by Federal reserve Banks lan, but in general it is understood that nary to actual operations by either nterest of both institutions will be on of the proposed arrangement, the k will appreciate cable acknowledgment involve the acceptance Zenver, Colorado, alLnuary 18, 1917. Gentlemen: (1) 1 have the honor to advise you that t Federal Reserve 3oard has consented to the appointment of the 3ank of by the ;.sederal in the City of Reserve 3ann: of :Jew Yon: an Its oorrespo London, in conformity with the provisions of paraar of :Action 14 clot of Con6re of the Federal ReserVe Act as Which took effect September 7, 1916. (2) In order to establish tw of transactions beta on the tions prepared in -Aeolian in institutions, the h the amondmont tD 300- ::arch 1916 should now of nscossitates a tion 14 above refs a,: modification of the in certain oarticulars* to t a CAU (e) of Section 1 THEFAD=:: power) T) OP shall Should be modified to conform 1h (3) as amended, which now provides that ".,11% iSSAVA BOARD (every .Pederal hesorve Bank MWIRTALN BAUM ACCJUNTS 17._.V. SUCH FaBALON It will not, therefore, be necensary, as stated in the memormiurs, that balances maintained by the of ..;a6land with the :'ederal Reserve ilanz> of Neu York shall na hold as oar-mp.rglod geld. (4) ?Brame* 3 of the nemorandu:. should be modified to conform to the said amendment Match now provides that "every l'ederal Aserva :iam4 Mull to bay and soil have poclor * . bills of eacchantA Apr To the ..iovernors of the Ban,: of .:stand. January 18, 1917. arising out of actual commercial transactions ,which have not more thaw 90 days to run, :=TIKA,V4 JP DAV IF GRACiP. (5) All of paragraph (e) of Section 14 of tted from the origiquoted as folloas, the :lord in narenthosis boing o the original its' dmentt vo power (e) To establish for exchan6e purposes and, oarti, to opoa and maintain appoint correspondents, and soever it may deem best for collecting bills of exchange, indorsaaonts, throu,;h such arising out of actual than ninety days to run, the signature of two or nv , ik 12B 17415.:aAL _ an JUNTB 5UCH CJIViit,Sn twithstandinc the curondment to thority is conferred by the law upon deposits, nor, in fact, is any in- funds of thn ,:novornment of the United the Systom, so it will conseluontly fication in the terms of that paragraph ents. no agreement has yet been n, price of bar .;old, price of coin, of that character. it is, there- tion that the following arrungenronte nsactions in ;old, pandint, the de based upoq experience: o Act as anendod to To the :iovernors of the Bank of :.ngland. january 18, 1917. first two sentences of paragraph 7 of the agreement (a) t D remain unchanged. (a) The Bank of Nyland to ear-mark =., 4t aside refined jold bars for the Fodoral ::esorve aUMA of New York, an gold is ordered oar-marked at the rate of 77 Shillings 9 pence tilt:A.13h standard ounce, eleveno-twelfths fine, or (o) hen standard gold t available, r..'8ank of .rigland to emr-mr: and sot or account of the New York Wolk at their bullion vale of 77 s. 9 d. per ounce, for the cv,ulvalont of the ,414,41 (d) of fineness, or The Bank rand set asldo sovortizole at their bullion (o) f 77 3old 9 d. per ounce. or dold coin, to ear-marked bat not shipped, to be taken by the York . of Jagland ( 414 returnod to the credit of the Now Which they were oar-marked in the first ins it ahoudd bra New Yo bullion of requi orstood that the Foderal ]iosorve Bank of 3.:_ink of oagland to ear-mark ()kilos at or to import the and realize the profit betwoon the bullion value and face value of AmeriCan coin. Tho rift to de- termine in the event of shipment whother American coins shall be shipped or not to rest with the Sent: of =Gland. American gold coins which are abraded bele/ the limit of tolerance of one-half of one per cent not to be oar..markod or shipped if other jold or coin is available. The ;:edoral 1.osorvo anc of New York to ear -mark an for the sot asido jold Bank of Jngland and charge its amount on the following basis: T3 the ;;ovornars of the Bank of .laced. (a) .;anuary 18, 1917. itafinod gold bars at the rate of ,18.604651 nor United States standard ounce of gold nine-tanths fine, plus WI° assay offioo Charge of 501 por 41000 in value, or A(b) the United :Mates standard, 418.604651 thoir bullion value 3oyoreigno at for each tenths fine, or at their bullion va lo 51 per ounce. of 18 bars, or 80 MINalitited ,old cots, returned r at the ass :;0 A 11-. to t credit of the h 47-they were oar-marked in the th.co Charge above utantionod -Allah (if excluding ., not ship?ed, to ;Aid bars are returned, they .. ,. for remeltinE; amounting ioh is the axietin6 oharje. :he lever, Jill endeavor to have this 11 successful mill immodiately rstood that the lAnk of izgland cannot Bank of Yor4 to ear-mark soverol.-ls import them and realize the 2rofit botween alue of A6lish coin. zit, The rigt to doter- whothor .n(aiah coins Shall be shipped ral 1:osorvo Ban: of Sas York. Dm6liah ;fold w the limit of toloranoe not to be shipnod ilable. : d or ehippod by either institution to the nage purposes, alloy to be copper, and an b. To the Gavornore or the 3aa1t of .:1161and. January 18, 1917. allowance undo for any variations in gold contents above or below the standards specified above. The ear-markins and ahipment of the (9) coins of *iv other nation to bo undertaken upon the basis of the vs of the fine z;oId conm. trained in such coins, with deduction of sin all. to cover the cost of conversion into geld bars standard ro- spectively. (10) In genoral, the of paragraph 7 of the memorandum to apply to all t gold -so that the effect of arran,;emente will be to make institutions upon (11) pments of ,old between the two each". Pampa yet been ooacluded with the Bank of France, the Federal :.oeorve 3ank of Bev Yoram endeavor arrangement of similar character titution an the wit three itutions shall With the abo d terms of the understanding botwoen all =made known to each. modifications, it is proposed that the terms tions nrepared in _arch 1916 shall otherwise apply. (13) It is farther suggested that the Bank of ..n;,land furnish the Federal Reserve Bank of New Yor e. with the necessary docuzaints and papers to enable the opening of an account with the Bank of A241a4 and accompawing this letter are directions and forms aenlying to the opening of an account b7 the lank of York. ,n6land with the Federal reserve Bank of low Jamary 18, 1917. to the Csovornors of the Bank of england. (14) it is desirable, on account of difficulties of cable Com- munication and the necessity for safe-euarding araboadas of cables 'bead segeest the volvime payments of money, that the &mak of an oak in the use of plan to be pursued movie between cipher codes the two institutions. (15) The edaral Esserve Sank o Kew York refer that consist f eogland bills purchasod for ite account by so far as possible of those be endorsers, so long as this re of other than prime bills which are of neland, and a s policy 3ank ng the nemos in !, Chasing bills of New York of eaglish drawers ane. of : :n nand that pe_ a d it be possible to do SO4 es of bills by either institution ant market rates. memorandum of *.earch 1916 is attached sible at this time to form any opinion as to ions to be undertaliee by Poderel Eeserve Banks of the plan, but in general it is understood hanged preliminary to actual operations by either that the interest of both institutiona will be conclusion of the eroposed Eli-I-arum:lent. the f tiow Yor: will copreciato cable acknowlodgment, s of Lmorioan drawers, or s not involve the acooptauce blo for discount at the eane sued by the Izederal Emeorve Western Union - JFC gable Lord Cunliffe, Bank of eland, London, .;n,jland e suggest the follo Pleased to receive your letter Omit references in o1)ening memorandum stop First conclusion of war as earlier start might be desirable in paragraph six for earmarkipg gold only at convenie necessary to have :ccountadefinitely on gold basis bu may limit amount of such gold obligations in advance :levies paragraphs ten and twelve to conform to our se V;e will await reply by Stop changes satisfactory transmitting further proposals Char,,e Fed. RAs. Bank 120 Broadway CE DESIRED' essage -IfirE$TE ex- UNION TEL :Pre- AM. ter WESTERN UNION Message t Letter should mark an X oppoe class of service desired: ERWIS E TELEGRAM L BE Ti aLLZ.F.D AS A FAST D Receiver's No. Check Time Filed NEWCOMB CARLTON. PRESIDENT end the following telegram, subject to the terms on back hereof, which are hereby agreed to Denver, Colorc.fie Alrli 3, 1911. Lord Cunliffe. Ban:: of al,land. London, ::nclandi: .Affootionate gr3etings to you and your associates at last fro:. an enthusiastic friond and ally. Strong. (117. Benj. 7,trone. 41 A Eentvica 31v. 77GISTFRPD :TAIL PRIVATT: AND OONFIDE7TIAL April 12,1917. "y dear Sir: It gives me great pleasure to acknowledcm receipt of your letter of !larch 2, 1917, in reply to ours of January 18th last. Upon receipt of your letter we sent you a cablegram under date of :larch 26th, of which take pleasure in enclosing herewith a confirmation, and also a confirming copy of cable received from you in reply on Varch 28th. Referring to your letter of :larch 2nd, we are entirely in accord with the changes which 7ou have suggested with regard to the various provisions of the memorandum, with the exception of the ones cwicerning which we cabled, and we understand that you agree in principle to our suggestions as sent you by cable. Accordingly we have prepared a new memorandum, incor- porating changes in the opening paragraph of the memorandum and in clauses 6, 10 and 12, and trust that the proposal may now be found in form satisfactory to both institutions, so that we may have a ratification thereof by the directors of each in the near future. An indicated in our cable; we think it essential that all accounts should be reciprocally on a gold basis, except as definitely arranged in advance for specific periods and amonnts, and have consequently inserted phraseology to cover that point in clauses 6, 10 and 12. T7Ith respect to the Assay Office charge for remelting, amounting to one dollar per thousand ounces, which is referred to on pages 3 and 4 of your letter of :larch 2nd, we are pleased to be able to advise you that we have made arrangemente with the ?reasury repartrient and the Assay Office for the waiving 4/12/17. Lord Gunliffe. 2. I reference thereto may proper- krrour favor, and consequently any y be omitted fr suggested in your letter. n our agreement, as In view o nearly completed, the fact that our arrangements seem so various offienclosing herewith signatures of the we are taking the liberty cers of this bank, who are an other docuorized to execute checks, drafts and nients in its behalf, and also f by-laws rclose heredith a certified copy of our as amended to date, and signetn who will e cards for execution by the offioern sign in your behalf. There is also enclosed draft of a for be given to the press einnitaneously *rests with your araroval. of public announcement to the two institutions, nrovided "e would, it course, be pleased to make any changes in the text of such announcement that nay be agreeable. to you and would suggest that the text and the date of publication be a tinged by cablegram. "ith respect to the last paragraph of y. your bank will take the initiative in preparing a co, ur letter, we assume that a for use between the two banks, concerning which we shall hope to hear from you ortly. In view of the entry of this Government into the against Germany, We do not doubt that you share with us the opinion that an early tablishmen4 of our proposed reciprocal relationship would be extremely beneficial financial and commercial interests of both countries. Assuring you of our very great pleasure in anticipating close relations between the two banks, I an, Yaithfuliy yours, Deputy Governor. Lord Gunliffe, Governor, Bank of "ngland, London, rngland. im... 72!:7° SPEC/AL DmivrnY April 23, 1917. ArGISTrerD "-AIL ir dear :sir: In the absence of Governor Strong tine_ of eoputy Governor Tranan, I take great pleasure, in behalf of the bank, in welcoming you to thin country. and hone that et may sone have the pleasure of arrant ine for n einit frorn you at the bank. neanwhile I' beg to enoloeo herewith a copy of a camunicetion, with the enclosures, whioh eeputy Governor ereman forwarded to you by reginterod mail on April 12th and which, unterelly, you have not end en opnortunity of Boeing. eonnibly your prenenne in this country will onelle es to weever-late these neeotiatiens earlier than would otherwise have been feasble, °specially in view of the exietine conditions, which arpear to es to mato such a course most advinable. eo have communicated with governor Strong to-day by telephone, he boing atilt unfortunately in eenvor on account of his health, and ho has requested 'is to send you his greetings and warn nersonal regards. eoth 7!r. "mean and eyeelf look forward with great pleas ere to eneting you at Secretary 7cAdoe'n to-morrow niteht. leeferrine to tho first paragraph on peel, 2 of Trenants letter of epril 12th, we are onitting from thin copy the signeturen of the various officers of this bank who are authorized to execute documents and also copy of our by-lawn and signature cards for execution by the officers of the !Stink of Theland. 2. Lord Cunliffe. p With assurances of high regard, believe me. :'ours faithfully, Chairman. Lord Cunliffe, Governor, Bali,- or rnland, C/O Rritish Commission, 16th Street, Washington, -. C. .7PC/CYP nos. 27,/17. Denver, Colorado, April 22, 1917. Ey dear Lord Cunliffe: It was a very great disappointmont to me not to bo in Now York or Washington so that I might extend to you personal greetings and a welcomo to our country. You know how keenly 1 desire that your mi-ssiou to this country will be a comploto succoss, as I have -evory roason to anticipate it will ,be. presence in this country will afford I trust to concludo the negotiations now pending between the Boaz of , England and the Federal Reserve Bank of Now York, and I have asked mg associates in New York to get into communication with you for the purpose of ascertaining When would be n'conveniont time for me to return East in order to moot you and continue our discussions. Ly health is now really completoly restored and I am expecting to return permanently about Juno 1st and could do so earlier if your plans made it necessary in order that I might see you before you leave. With warmest rogards, I bog to remain, Very truly yours, 1.t. IOU. Lord Cunliffe, 7;ashiugton, D. C. BS/CC 04-cA4A-v. aitA,/ 4 7c4-,_ p4t"eArvsk ,tu, hwagt,,7 ,44 4.44.s. /1"..4 tem. RAIA... frAly Xt. LAAramt-v.,, avrAA,v,a.4 et 4.44 0.4.1 ELM v,evu.Ar+,-2- 111 Denver, Colorado, May 17, 1917. M dear Lord Cumliffe: It was a great pleasure to have opportunity to Welcome you to this country and to discuss Vlo many important me'ters that are now occupying our attention. You undoubtedly realize how difficult will be the handling of financial transactions in a country or such vast extent as this and with a banking system as complicated as ours is. This first loan will be the test of our ability to handle similer future transactions and it has been of the greatest possible assistance to have the benefit of your views and advice in rreparation for the problems we are facing. My plans have now taken definite shape and I am proposik; to return to Yew York permanently the last of this month, so as to be there during the last stages of the placing of the Liberty loan. If, however, any questions arise in which I may be of any service to you or to your associates, will you not be good enou7h to write or telegraph me here and I will return at once, if it seems desirable for me t.) do so. I have left word at the office to proceed at once with the ar- rangement of the last details looking to the commacement of transactions with the Bank of England, and tae the liberty of su,,e'estin.,.: that it mi,:;ht be woll to have a memorandum prepared and sent to us as promptly as possible, indicat- ing just what procedure should be foliaged in case it seems desirable to arrange for ear-marking gold in South Africa or Australia. This I suppose should in- clude a statement of the character of the custody who will be responsible for safe-keePing of the gold, the character and quality of the gold and, if 2. Ilt To - Lord Cunliffe. May 17, 1917. possible, a cable code Which might be used in case of emergency for transmitting directions for its handling and disposition. As to transactions in London, those doubtless must be nominal while conditions are as at present. i.s soon, however, as our department is organized, signatures, etc., exchanged, i had thought to arrange for the purchase of a moderate amount of demand or cable sterling, simply to be held in account as a start; tne amount of course to be limited to Whatever the Bank of England considers desirable. Arrangements have been made for the engrossing of the memorandum agreement, Whic- will be forwarded for exemplification as soon as completed. 1 sincerely trust that you and your associates of the British Commission will return to England satisfied that the American people in heart and spirit are, without reservation, committed to your groat cause and that the influence of the resources of the country will be brought to bear to bring the war to a decisive conclusion in the near future. With warmest regards, believe me, Paithfully yours, Rt. Hon. Lord Cunliffe, 2829 Sixteenth St., Uashington, D. C. BS/CC BANK OF NEW Sent by YORK (FOE COPY OF TELEGRAM maliffe 71277111A, treat nehlugtm, _iovorrn- It7or7 lea se torar.;m to vet you arriq% Nov 74r* Akulay morning re ,Als atsf >ri ur, to irIvito you to lig. with hisi;Tualkicy or .!isdneu13, ,tGy fleet or second to neet wholly informally a fv0 of our 16ading byre 141 both lin and Ire hops r:oet sincerely 3mu eau ei%ar- u o* ef thee* eesii*O. We ondf-reti7:nd hoe dIffiaolt it le for you to WAX* definite plane ;.and linte your tele:honing us ov-r our vire to the Treasury VAiiding when you LIrc 0.oeivion able to roach l'iorr fodf:?..ral 120 Zroodvey Ateervc.,. 31s-Y4 Jay, June 28, 1917. My dear Lord Cunliffe: This is my first opportunity to send you some account of what has transpired with us in connection with placing the Liberty Loan, in the details of which I know you will be very mach interested. About one week prior to the closing of the books, which was scheduled for 12 o'clock noon on the 15th, the total subscriptions Realizing the gravity of reported aggregated about v1,000,000,000. the situation relative to any failure, arrangements were at once made to publish the subscriptions throughout the United States by districts and a rough apportionment of the loan was made first between Federal Reserve Districts, then between states and finally among all emir:unities and the banks in those communities. At the same time, clocks were pre- pared and set up throughout the country and bulletin boards were erected on which the day to day changes were posted. Various organizations which bad charge of the advertising and publicity extended their propaganda into even the remotest parts of tne country with typical American enterprise and enthusiasm. In twenty-four hours, the effect was felt and it is no exaggeration to say that sitting in this office one could feel the growth of the wave of response. a storm. It was like the approach of By the 13th and 14th it had taken hold of all classes, with the possible exception of the farmers who in this country get their news only once a week on account of the distance from neighbors and towns, and 2 To Do rd Cunliffe I think that now that the results ar pretty well judge of the extent to w can people was finally aroused. The total subscriptions wer we had ,300,000,000 privately pledge was never filed and I would estimate and Chicago there might have been 15 tion to those actually turned in had tion of the number of subscribers ha estimated to exceed 4,000,000 and do that figure, because so many banks fa opinions I can get indicate actually result is the scheme of allotment has which will have to be filled in some short certainly 15,000,000 of bonds order to take care of those whose sub reported in total and consequently re people subscribed for amounts not exc Our organization was very short time permitted for perfecting d The enclosed chart indicates the char city, which was supplemented by the s covering all the cities and towns in The chief money difficulty anticipated and explained to you whil began to withdraw balances from New #3 6/28/17. To Lord Ounliffe a were called upon to settle balances with the other reserve banks aggregating over ')O ,000,000 in the sixteen days. The arrangements in New York worked perfectl:; but this difficulty about interior withdrawals could only be net by our discounting very freely, which we did to the extent of about 250,000,000 and this was supplemented by imports of gold to New York, advances on which were made by this bank, by transfers of .deposits from the interior to New York City and by distributing ad- vances to allied governments as rapidly as the market showed sigue of needing that additional contribution. On the whole, we got by very well but the 6 % renewal rate on the stock exchange seemed to be inevitable with the enormous shifting of loans occasioned by these withdrawals of cash to the interior. By a very narrow vote in the Rouse and a very satisfactory vote in the Senate, the bill amending the Federal Reserve Act was finally passed and signed by the President on the 21st instant. This gives us the dement of elasticity which our whole system lacked and which I think we can rely upon for the future to take care of a reasonable bank aspen:lion, provided banks generally understand the situation and cooperate. Our local clearing house is taking the lead in this direction, all member banks now settling their balances through un instead of by the use of cash at the clearing house and I. anticipate that before the week is over arrangements will be made by Which our notes will serve all pur- poses of vault reserve and clearing house settlements where debit balances must be paid to nonmember banks in cash instead of being settled on our books. I am hoping that the issue of small denomination gold certificate: will shortly be discontinued by our government and then it seems there will To Lord Cunliffe 6/28/17. mo. be no obstacle to a very large accumulation of gold by the reserve banks. Already, the movement of gold into our vaults has started, this week showing the total of gold holdings to the reserve banks to exceed 41,200,000,000. On the whole, I think the results of this first offering of war bonds be our government has been an astonishing succeed, far beyond our anticipations and I am most hopeful about future issues. In general, the sami,, can be said of the satisfactory operation of the reserve banks. No such transaction would have been lossible in past years without the services of these institutions and we would certainly have had a repetition of an uncontrolled money market, issues of clearing house loan certificates and possibly a premium on currency. If my present plans are carried out, I shall leave in the course of a few days for Denver for a few weeks' rest and be back here probably arouni the first of enoast. We all have most delightful memories of your visit here and I hope that you and your associates took back with you an impression which will hearten and encourage everybody on your side. With warmest ro:;ards to you and your associates, I beg to remain, Faithfully yours, TO Lord Cunliffe, Care Bank of England, London, &gland NS,VCM 111111.-^ ,enver, Colorado, July 23, 1917. Six: bob: to °A:m=10dg° zooeipt of your favor of Juno that our oablo statod that the sun paia to the 21s ional City was _ erica' or ty12( :'hip was, of oourse. a q3hical orror, as tho exact sun vita Wo, of ,rstand that the rates quotod in your ,ld oa. casion ariso w o uo omploy any Tply at the tint), and Lhoulo ootho funds hold in oar-ti arkod oablo 1,1 adv apprecin you at your oonvonionoo as to the possiblo o to tho responsibility and oost for shippinr: quival of we mirrht temporarily amp oy by invoetnont i :a. in cul:ront account with the Lnnk. It :-.1ao occurred to me that ozoollont r your institution and ours to in touoll by nail or if nocessary, in rogard to our opoetivo nonoy nfl.raoto siblo transactions of imnortanco Which might offoot At the proseilt time our mvskot is fooling the offeots hoavy transfors occasionod as a result of the Liberty ments and the ahange isc the reserve requirements of l LankE. Doubtlee the market will settle down to a able condition within the next thirty days. .52,500,000. f Buell amount as comorcial bills n 41111114,1=6 July 26, 1917. :.;fInk of 41v1and. Should my ourgostion aT?peal to you favorably, wo night agroo to amshange =bleu on a certain day oaoh uvek, to bo supplenonted by a 'otter, civinr: naoh information as might provo c) vain° in oannootion'wit71 our money Lanrkoto. gratifiod to loam o that your -010asuro an ait to this side avo you w MO- t3ctisfaction L did us. With wrxr To of youk oaf() roturn and Tho Governor, of the Bank oi London, L. -ds to you your azsooiaton, August 16th, 1917. Dear Lord Cunliffe: Your fine letter of July 12th pleased me very much indeed. I cannot feel that Ave have fcund the logical method of rais- ing these great loans without money disturbances because we hwe a ver\ complicated and cumbersome machine in the United States for dealing with these mutters by reason of the great number of banks and trust companies, but we have at len.st had an experience which will be a good guide for the future and ve will all profit by it. If our next loan is brought out this Fall, as now seems likely, and if the ount is as large ar larger than the last offer, I can see that the money strain will be more difficult to avert bf:cause of the immense crop moving requirements of the " et which will come &t rJ)out the same time. The high price of our cereals and the high price of farm labor are going to require the employment of the greatest total bank credit for that purpose in our history. This applies p corn crop which bids fair to be a record crop And to require very large advances to finance its harvest and movement. But these mat- ters are being studied And I hope we are successful in coping with the problem. The enclosed clipping from the iiew York Times may be of interest in this connection. -2- 4 To Lord Cunliffe. 8/16/17. I am glad to say that the short notesof our Treasury are becoming very popular and even at the present limit of V.: I an- ticipate no difficulty in placing them in large amounts. We enjoyed your visit here very much indeed and if it is a possible thing I hope to return it before very long. With kindest regards to you and to your as,:,ociates, Very truly yours, To Lord Cunliffe, Care The Bank of England, London, England. I am, 0 1 , 1,5 s i.Witi:41 V 1 October 4-1a, 17s .4- VA" OC1 l'AVI PEASCrAL. - Dear Lord Cunliffe: 4111 I have just signed an official letter to you in reply to your latter of 5eptember 3rd which I trust is quite satisfactory. In addition to thnt, ] would like to send you this personal letter to inform you somewhat of conditions in 'ew York which, of course, reflect to some extent conditions throughout the country and to ask if you will be good enough on receipt of this tc write or, if nec- essary, cable me anything of imnortance which might occur to you in connection with conditions in London that sight have an effect unon our money market. Ity reason for asking this is because of the immensity of the transaction we are now facing, and as you very well know,the rany dif- ficulties of organizing our cumbersome and corplicated barking machin- ery so that thig next loan may be placed without serious disturbance to our money markets. I would like first to describe to you what is being done to- wards making the loan a success. I must confine myself to our own district which is probably the best organized of all the, twelve dis- tricts, but to a lesser extent the others are organizing along similar we have rotairvl our (leneral !Joan Committee, somewhat enlarged, which is almost entirely an advisory committee, not only connection with -2- To Lord Cunlifte. 10/4/17. the loan operation itself but in relation to a general policy of the 1011 associated banks of flew York and the Federal Reserve Brink itself. The influence of this Committee is what I have relied upon to secure cooperation among the big banks of New York and 1 think our plans so as those institutions ae c-ncerned are complete and effective. 67 of the larger banks and trust companies have entered into commit- ments with a Sub-committee of the Liberty Loan Committee, the Subcommittee consisting of the following: Ceorge F. Baker, Chairmen of the Board of nirectors of the First Pational Bank, James S. Alexander, President, National Bank of Commerce, Walter E. Frew, President, Corn Exchange Bank, Gates W. McGarrah, President, rechanics & Metals National Bank, Charles H. Sabin, President, Guaranty Trust Company, Frank 4. Vanderlip, President, National City Bank, James N. Wallace, President, Central Trust Company, Albert R. liggin, Chairmen of the Board of nirectors of the Chase Natloral Bark, and, Benjamin Strong, Chairman. This Committee is to furnish as called uron a minimum of 1230,000,000 in order that we may escape any real money pinch. amount will be furnished if needed. A larger This Committee also Proposes to have money available on the Stock Fxchan-e for call loans and in very large amounts every day. The effect has already been to reduce call rates but we have not yet succeeded in reducing time r tea as much as I had hoped. Possibly next week we will begin to lend time money and perhaps at the same time make some purchases of commercial paper. To be quite frank, it s simply another method of inducing the New York banks to borrow from the Federal Reserve Bank. If they will do -3- To Lord Cunliffe. 10/4/17. so to the extent pledged, we will create such a large surplus reserve among t e New York Clearing House banks that it will be possible to put rates down to a very low level. This, however, should not be done suddenly and the arrangement will be timed so that the closing week of the campaign will be conducted under rather easy money conditions I hope. As to the machinery for nlacing the loan, while still not all that I would like to see it in soma respects, is so infinitely better than l',st time, having been developed with more deliberation, that I have great confidence in the success of the loan although I h,.ve kept this opinion very largely to myself because we need hard work all along the line. The committee handling the actual distribution of the bonds is supervising a machine of tremendous proportions. Our publicity department consists of about 100 people and is divided between news, advertising, posters, "features", etc., etc. 7ie have some of the best newspaper men in the city in this organization and the whole un- der the supervision of the editors or proprietors of the larger Eew York papers who compose a committee of which Yr. Itons of the Associated Press is Chairman. r:e also have a Speakers Bureau which includes in its membership an organization known as the "4-rinute '.en" and I am told that we now h we in that department alone 1,000 effective and fairly well trained speakers who will cover every amusement place, eluding moving picture theatres, in the district. Sub-committees of the General Comrittee will have charge of (a) (b) (c) (d) Large subscriptions from corporations and wealthy individuals, Trust company subscriptions, National bank subscriptions, State bank subscriptions. -4- To Lord Cunliffe. 10/4/17. Our district has now been divided into eight sub- districts and we have twelve or fifteen hundred committees which cover all the important cities and towns in the district, these being under the supervision of committees in New York with exnerienced bondmen in charge of each subdivision and on the ground. We also have about 150 committees covering all the trades in New York City and eomewhat smaller organizations in other cities. Responding to the desire fer a nickname or slogan typical of this country, this trade organization is known as the "Rainbow Division" - I surnose because of its com osite character - and is operated under a general staff of efficient men who are developing a tremendous enthusiasm in this organization and whoue efforts I ar sure will nroduce wonderful results. At a meeting at the bank to-day of the small grout of men who are really in charge of the details and ranificatione of this great organization, I was told that including college students and other organized bodies, we probably have 100,000 salesmen at .ork today in 'this district. I have already signed about 15,000 letters appointing committeemen who report directly to the bark. are covering the district with rosters and banners; every newsnaper and periodical will hive news articles, advertisements and editorials every day on the subject of the loan from now on until October 27th. -orking alongside of this bank organization, we have gradutIlly succeeded in coordinating chat is known as the toman's Nation- al Liberty Loan Organization and their committees are reaching throughout the district along similar lines to those established by the bark. -5- To Lord Cunliffe. 40/1 Not only has our selling arrangement developed far beyond anything that was possible last June, but I am glad to say that the bank itself is now well equipped to handle the detail and the Department in Thshington is actually delivering the rermanent bonds to the Subtreasury in New York so that we may deliver them rractically as sold. With this, I am enclosing a Treasury Department prospectus of the loan Which will give you the particulars and da es of rayrnents. You will observe the tremendous transfers involved as these payments are made. I think, however, we have made adequate provision to avoid money market difficulties, at any rate, in the New York District. ve are propoeine to qualify all of the banks through which subscriptions will be received as government depositaries and i believe that the great bulk of the payments will be effected either by turning in certificates of indebtedness or by giving the government credit directly on their ovn books. The money will then be gradually drawn down and if this is done so rapidly as to inconvenience the depdsitary tes at omissory tifiaturity 3 rity than 4 A cotint 5 g 10/4/17. -6- To Lord Cunliffe. 10/4/17. Special Rates. For notes, drafts and bills of exchange issued or drawn for the purpose of buying or carrying bonds, notes or certificates of indebtedness of the United States, and se"cured thereby, having a maturity at time of discount of not more than 90 days 3W '-/L For trade acceptances having a m-turity at tine of discount of not more than 90 days 31 For one day promissory notes of member banks required in connection with transactions involving the fiscal onerstionc of the government, secured by elisi171e parer or bonds, notes or certificates of indebtedness of the United States 2 ,; to 4 s; The important rate is of course the 3J ;It rate for loans at 90 days secured by these :sonde. I air horeful thst the payments can be handled without too great a strain on our resources but it may well be that osr diosourts and loans will this time run over ;:S500,000,000 and possibly even beyond thst. You are about to start a considerable loan camnaign on your side and of course I am anxious to get the best forecast Dossible.as to the proSable courre of your rates. This enema particu- larly important at this season if we hsve a large movement of cotton because at the present level of rates our bsnks may be inclined to carry bill3 in portfolio in London and not discount them which would, of course, impose additional burdens unon us throurh locking up that amount of free funds. As our lovemmment borrowings increase in volume, I an much impressed with the importance of exchanging information with yuu ful;i your associates and hope that you will feel quite free to cable us fully of any material change in your market. -7- To Lord Cunliffe. 10/4/17. Won't you give my wa,mest regards to Cokayne and l!orman and the same to yourself. Faithfully yours, Governor. To Lord Cun/iffe, stank of England, London, E. 0., 2, England. BS/VW a Cctobe. 4th, 1917. MISCrAL. Dear Lord Cunliffe: I have just signed an o:ficial letter to you in rerly to your letter of :Yptember 3rd which I trust is quite satisfactory. In addition to that, I would like to send you this personal letter to inform you somewhat of conditions in New York which, of course, reflect to some extent conditions throughout the country and to ask if you will be good enough on receipt of this to write or, if nec- essary, cable me anything of imrortance which might occur to you in connection with conditions in London that right have an affect upon our money market. '.'y reason for asking this is because of the immensity of the transaction we are now facing, and as you very well know,thu many difficulties of organizing our cumbersome and complicated banking machinery so that this next loan may be placed without serious disturbance to our money markets. 1 would like first to describe to you what is being done towards making the loan a success. I must confine myself to our own district which is probably the best organized of all tat twelve districts, but to a lesser extent the others are organizing along similar lines. We have retain d our General Loan :ommittee, somewhat enlarged, which is almost entirely an advisory committee, not only connection with -2- To Lord 'Alnliffe. 10/4/17. -3- To Lord Cunliffe. 10/4/17. so to the extent pledged, we will create such a large surplus reserve among t e rew York Clearing House barks that it will be possible to out rates down to a very low level. This, however, should not be done suddenly end the arrangement will be timed so that the closing week of the campaign will be conducted under rather easy money conditions I hope. As to the machinery for placing the loan, while still not all that I would like to see it in some reseects, is so infinitely better than 1,:st time, having been developed with more deliberation, that I have great confidence in the success of the loan although I hnve kept this opinion very largely to myself because we need hard work all along the line. The committee handling the actual distribution of the bonds is sunervising a machine of tremendous orouortiors. Our publicity department consists of about 100 people and is divided between news, advertising, posters, "features", etc., etc. best newspaner men in the city in this organization and the whole under the sunervision of the editors or proprietors of the larger Lew York capers who compose a committee of which :"1.. Stone of the Associa- ted Press is Chairman. 7e also have a Speakers Bureau which includes in its membership an organization known as the "4-Yinute l'en" and I am told that we now have in that department alone 1,000 effective and fairly well trained speakers who will cover every amusement place, including moving picture theatres, in the district. Sub-committees of the leneral Committee will h.ve charge of (a) (b) (c) (d) :narge subscriptions from cornorations and wealthy individuals, Trust company subscriptions, National bank subscriptions, State bank subscrintions. 7e h -4- To Lord Cunliffe. 10/4/17. Our district has now been divided into eight sub-districts and we have twelve or fifteen hundred committees which cover all the imnortant cities and towns in the district, these being under the supervision of committees in New York with experienced bondmen in charge of each subdivision and on the ground. We also have about 150 committees covering all the trades in flew York City and somewhat smeller organizations in other cities. Responding to the desire for a nickname or slogan typical of this country, this trade organization is known as the "Rainbow Division" - I suppose because of its com osite character - and is operated under a general staff of efficient men who are developing a tremendous enthusiasm in this organization and whose efforts I am sure will produce wonderful results. At a meeting at the bank to-day of the small group of men who are really in charge of the details and ramifications of this great organization, I was told that including college students and other organized bodies, we probably have 100,000 salesmen at eork today in this district. I have already signed about 15,000 letters appointing committeemen who report directly to the bank. We are covering the district with Posters and banners; every newspaper and periodical will f-ve news articles, advertisements and editorials every day on the subject of the loan from now on until October 27th. 'orking alongside of this bank organization, we hive gradually succeeded in coordinating what is known as the Woman's National ,i.berty Loan Organization and their committees are reaching through- out the district along similar lines to those established by the bark. -5- "'o Lord Cunliffe. 10/4/17. -6- To Lord Cunliffe. 10/4/17. Special Rates. For notes, drafts and bills of exchange issued or dram for the purpose of buying or carrying bonds, notes or certificates of indebtedness of the United States, and secured thereby, having a maturity at time of discount of not more than 90 der For trade acceptances having a m turity at tine of discount of not more than 90 days zor one day promissory notes of member banks required in connection with transactions involving the fiscal ororations of the Government, secured by eligible papor or bonds, notes or certificates of indebtedneos of the United States 2 to 4 The important rate is of course the at 90 days secured by these bonds. % rate for loans I an honeful that the payments can be handled without too great a strain on our resources but it may well bo that our discounts and loans will this time run over ":500,000,000 and possibly even beyond th t. You arc about to start a considerable loan carnnaign on you side and of course I an anxious to get the best forecast nos- eible as to the prebable course of your rates. This seems Particu- larly important at this season if we have a large movement of cotton because at the present level of rates our bunks may be inclined to carry bills in portfolio in London and not discount them which would, of course, imnose additional burdens unon us through locking up that amount of free funds. As our Government borrowings increase in volume, I am much impressed with the importance of exchanging information with you and your associates and hope that you will feel quite free to cable us fully of any material change in your market. -7- To Lord Cunliffe. 1C/4/17. 'Ion't you give my wamest regards to Cokayne and roman and the some to yourself. Faithfully yours, Governor. To Lord Cunliffe, Bank of England, London, E. C., 2, England. Bs/vcit. November 5th, 1917. Dear Lord Cupliffe: It war most gratifying to have your cable of congratulations which roaches me just as t am leaving for a few weeks rest. I am away, T While are pronosing to write you a little account of our cam- paign to place this second bond issue and also a sketch of our plans for the future. Veantime, I have taken the liberty of sen,iing you a confidential message through Lord Reading which I am sure you will understard. Will you permit me to intrude in a very personal matter to say that I sincerely hone that by no possibility you will contemplate retiring at the end of your present term. If this war continues, there will be many important things to be done in which your fine institution and ours will have interests in common. Your many friends on this side would deeply regret any change which wo..ld deprive us of the advantages of your friendship and understanding of our affairs. With warmest personal regaitds, believe me, Faithfully yours, Lord Cunliffe, Care Bank of England, London, W. C., England. BS"C" Dictated by governor Strong but signed after his departure. Form 2903 CLASS OF SERVICE DESIRED Full Rate Halrl "Deferred Cable Letter Week End Letter -ark an X opposite *Ice desired; OTHER. BLECIFIAMFULL RATES. it..4 AT WILL BE WEST CAB NEWCOMB CARLTON. PRESIDENT GEORGE W. E. ATKINS, FIRST VICE-PRESIDENT Send the following Cablegram, subject to the terms on back hereof, which are hereby agreed to UNION RAM Dec. 2%, 1q17. :,ord Cunliffe, Bank of %gland London. Warmest Christmas greetings to you and your associates. Strong. Charge BSi"f^' Benjamjn Strorr, Federal Reserve Bank, 15 Nassau Street. January 21, 1910. My dear Lord Cunliffe: I have taken the liberty of giving a note of introduction addressed to you, to any friend, Mr. John T. Pratt, who is sailing for France this week. Mr. Pratt is a well-known New Yorker, the son of Mr. Charles Pratt whom you doubtless know as one time conSince the outbreak of nected with the Standard Oil Company. the war he has been engaged in some important work in the Department of Labor, in Washington, and has now resigned to take up work in France. He is a very warm personal friend of mine and a delightful fellow in every way, and I hope his engagements abroad permit him opportunity to meet you. Anything that you can do to facilitate the objects of his trip will be warmly appreciated. V.ith kindest remembrances for the New Year, and thanking you in advance, I beg to remain Sincerely yours, Rt. Honorable Lord Cunliffe, Bank of England, London, England. B... /ILO July 23, 1918. tilt dear 1,ord Cunliffe: It is >3 pleasure to receive your kind note of June 22nd, which reacher. ro jut ae I fvr utmko ax: the, country. i:ore are some points in connection with the Act of 1844, at least 4i: now appli'd to modern Waking acid flhrnos, L.ight bc dealt Lith tu which I vonuld unit' pram to 110 IL is a y. v7 big subject and one upon AP4itUrb to commit with diffidence, us r. child mit,,7t fool totiml its mother. That I &dmiro aly..In; your oys%om oo gmntly lo the v...almo frou. nor efficacy of tradition rA, ceptp/.inated and inflexible statutes. T Aril hop to arsmAtoga ef thaem feu uus%3 of rom.eation by giving some spocial thought to your letter, and will write you fully in the course of Anything that I said you may be used without reserve, for it will oe eased upon our oum experiences of the past four years under our now system, somo points of which I firmly believe might be adopted by your bank witsout ix../olv!ng any loss of tradition to the Dank of %gland, and, possibly, without rldical change of lair. It is a great pleasure to hear from you and I only with that I might have an opportunity to discuss this particular matter in person, correspondenco being a very unsatisfactory wey of expressing one'r ideas on 2 Lord Cunliffo 7:23:18 You are most kind to send me a copy of your photograph through rr. Hamlin, imiliah has not yot reached me, but I shall prize it very highly; and to show you that I am not unappreciative, I in sending you a copy of my own photograph, which I ;. With warmest regards, I h ami, 7,incorely yours, Rt. Honorable Lord Cunliffe, Headley Court, Epson, England. BS:GB better one. t Woods Hole,' Mass., August 10, 1918. Dear Lord Cunliffe: You must not think that I have overlooked your kind letter of June 22d. In fact, I have been m work preparing notes for a memorandum which I hope to send you in the course of about a week. In the meantime, I am reciprocating your courtesy 'y sending you, under separate cover, one of my photographs and am looking forward to having one of yours, through Hamlin, as you were good enough to advise me. We are now quite busy getting ready for our next Liberty Loan, vhich will be offered on September 28th, and will probably be for a very large amount, possibly $6,000,000,000. The country's enthusiasm for the war, and its great interest in what our men are doing in France leads us to believe that a loan, even of that great size, will be successfully placed. With warmest regards, I bag to remain, Faithfully yours, The Right Honorable Lord Cunliffe, Headley Court, Epsom, England, BS.? SB ,V/d/(Y ,ba1,7 FEDERAL RESERVE BANK OF NEW YORK FEDERAL :-ESERVE BANK OF NEW YORK_ 2 Lord Cunliffe 8.12.18. Under the law, as originally passed, it was understood by many, follows: 'and, possibly, contemplated certainly although not by the law that these 40 notes should ordinarily be issued against the security of bills and commercial paper and that each reserve bank should maintain a gold reserve in its banking department, in addition to the pledged collateral, equal to 40,. of the amount of notes actually issued and outstanding. Certain provisions in the Act, which permitted the substitulAon of gold as collateral, in place of commercial paper or bills withdrawn, afforded opportunity for the reserve banks, when they were first organised, to make the note issue the means of gathering in the floating supply of gold and of impounding the large imports of gold which took place in the early years of the war. Without, therefore, any true expansion of "assets" currency, the reserve banks, during the first two and one half years of their existence, built up an immense reserve of gold, simply by issuing notes upon the security of gold as opportunity afforded. These issues were made in variouE ways, 'nut, generally, in direct exchange for gold deposited with the reserve banks or purchased from those importing it from abroad. Various amendments to Federal Reserve Act facilitated this operation, the last amendment, in 1:=, doing away with all requirements that national banks carry reserves in their own vaults and providing that only deposit balances carried with the reserve banks should thereafter count as reserve. The amount of reserves to be carried on deposit was increased by the new law, and, in consequence, the gold reserves of the member banks were at once very largely transferred to the reserve banks, whose notes are now used as till money by those banks, although for National Banks) they do not count as reserve. Through these operations was laid the foundation of the present strength of the reserve ban-s, which has enabled them to meet the demands of our war financing with such ease. Commencing in April, 1917, the reserve system began to feel the strain of the financial operations of the Government, as well as the demands FEDERAL RESERVE BANK OF NEW YORK.. 3 Lord Cunliffe 8.12.13. for currency, caused by rapidly advancing prices for labor and commodities. While the gold reserves of the twelve reserve banks have been built up to nearly i2,000,000,000, being two-thirds of the country's gold supply, at the same time note issues hevs expanded to $1,955,000,000 and loans, dis- counts and bills purchased to J,541,000,000. In connection with this parwo graph, I am transmitting a series of statements of the Federal reserve banes, which will exhibit the growth of these various accounts from the commencement of the system until the present tire. out in marked contrast This expansion of note issu ©s stands locurrences during our Vivi' War. Due to various causes, in part to ignorance of sound principles of finance and to failure promptly to levy taxes, and to the timidity of the country resulting from the shock of civil war, our Treanury was led to issue the so-called "green-backs." Hardly six months had paused before our Government, and practically all of the banks of the country had suspended specie payment and from that time until long after the oonclusior of the war, gold commanded a premium, at one time equal to 180:, measured by the val a of our paper money or deposit balances. Our green-backs have never been retired and are still legal tender: The contrast tith prevent conditions is too striking to be passed without comment. 'oe have never had a premium on gold since the war started in 1914; there her been no lack of currency for commercial needs and we have continued to ship gold to creditor nations, while only in recent months have such ship- ments been subject t necessary Government regulations. Gold is still paid out by our banks to their depositors if demanded and the only legal restrictions upon gold transactions are those imposed by the export embargo which seeks to regulate and control the loss of our gold banking reserves in harmony with our war reauirenients aid those of oLr Allies. This statement is mode at some length in order to emphasise the point which is so obvious in our currency situation; namely, that the infusion of this FEDERAL RESERVE BANK OF NEW YORK... 4 Lord Cunliffe 8.12.18. largs smountof circulating media into our banking system and into trade channels under the stimulus of rising prices and expanding loans and deposits, is most unlikely to result in an irredeemable currency situation, because the general contraction of business and credit succeeding the conclusion of the war will automatically bring about a contraction of the currency circulation, and the gold redemption fund is unquestionably adequate, unless the war should last many years. The note if:-sue has expanded as business demanded, and has been an important instrument in effecting an accumulation of gold reserves. As to your situation, I can not help but feel that a different and not quits as sound a policy has, of necessity, been pursued. Your currency notes now appear to have taken a permanent place in the nation's note circulation, and, doubtless, occupy an important place in the cash reserves of the joint stock and ravings banks. The gold reserve maintained against them is trifling compared to that maintained by the Bank of 4ngland in its Issue Depart- ment, or that maintained by the reserve banks (now roughly 60 ) against combined note and deposit liabilities. The fact that the currency notes are secured by interest bearing bonds, together with a deposit balance at bank and a small gold reserve, is an explicit recognition by your Government of the urgent need for prompt retirement of this circulation, 1/2t the question arises, will its retirement automatically take place and how will the progress of its retirement be governed! It seems that this will largely depend upon the policy of your Government in dealing with the obligations by which the currency notes are secured. The notes should not be retired more rapidly than the reserve condition of your banks, the activity of your business, and the decline in the price level will permit. No refunding scheme for the sale of interest bearing bonds to the pubr lie will replace in the pockets of your people, in merchants' tills, e-,d in bank re- serves, currency which is nor required to meet demands for commercial and banking purposes. ?Iren the substitution of a balance at the Bank for the FEDERAL RESERVE BANK OF NEW YORK 5 Lord Ounliffe 8.12.10 Government's obligations now securing the notes will be no more than a gubstitutien of one form of obligation for another form of obligation. The real problem will be to provide automatic retirement for these notes when and as rapidly as their circulation is no longer required. I an inclined to think that the modification of your Bank Act, suggested in "B" following, might well be combined with a plan by which the currenc> nctee would be assumed and gradually retired by the Bank of 3ngland, or, possibly, its own notes sub, stituted at the proper time, and the issues merged. Unless human nature in England is quite different from human nature in this country, the currency notes will be a menace so long as they are in circulation. The demand for cheap money' by ignorant people can easily be focused upon the Government printing press, twit the conversion of the currency notes into bank notes, with provision for automatic retirement, should antici- pate and avoid the development. B. THE BANK OF ENGLAND NOTE ISSUE: Under "A" i have roughly de- scribed the operation of the note i511118 of the Federal reserve banks. In elaboration of that Isatement, it should be explained that under the law as now emended, the note issues of the Federal reserve banks are almost, if not quite fully, assets currency as are the notes of the Bank of France. All of the assets of the reserve banks are charged by law with a prior pledge to the note holders, before other creditors can be paid, so that the physical segregation of and gold with the Federal Keserve Agent, which is the equivalent of the establish- ment of an Issue Department similar to that of the Bank of England, is more a formality than a reality. When the period of post-war liquidation accompanied by declining prices for commodities and labor, unless the nation's banking reserves are disturbed by heavy gold exports, it may be expected that the liquidation of loans and deposits of the banks generally, and, in consequence, tie loan:: of the Federal reserve banks, will gradually bring about a re- duction of deposits and note issues without disturbance to either business or It may be a justifiable comr,lent upon the maintenance of the issue doFEDERAL RESERVE BANK OF NEW YORK__ partment of the Bank of &ngland in its present form, that its note issue was incapable of expansion like ours, to meet the needs of the war, and, had it been capable of such expansion, doubtless some of the serious currency difficulties of 1914, which resulted in the issue of the currency notes, would have been avoided. Since the outbreak of the war, the Federal Reserve Rank of New York has aimed to keep in stock unissotee of various denominatione of no less than $500,010,000 and the total of unissued notes parried in reserve by all the reserve banks has been kept at about ;1,000,000,000. The protection afforded to our banking system by the assurance which knowledge of that fact gives to bankers and business men has been of unaistakable value. No such stock of notes held by the Bank of gngland would have had similar effect upon sentiment as the ank has ne means of putting them into circulation. Later experience with our own system, if the war continues, risy require a modification of these views, but, up to the present time, I believe th,t our experience justifies a greater faith in the note issue plan of our Federal Reserve Etcy than in t',e plan of a separate department of issue without power of es- pension, required by your Act of 1844. the Bank of :'rligland, if operating under Realizing, further, that the position of law comparable to ours, would require fortification by a great addition to its gold reserve, leads to question C. ARE ENLISH BA'S'KS OVila-LENDING ON TRgIR RSSTRYES? During a visit to England in 1914, I recall stating to some cif your bankers that it appeared to me, and I believed to other American bankers, that the :,inglish banks as a whole were over-trading on their gold reserves. If the comments under paragraph "b" are justified and the Bank of gngland should he given the power in future te expand its note issue, then, in my opinion, no such change law would be safe without a greater store of gold, either in the central bank, or in the joint stock banks. FEDERAL RESERVE BANK OF NEW YORK 7 Lord Unnliffe 8.12.13. We have always been a nation ofstatutory minimum reserves; gngland has never imposed statutorl reserve restrictions upon its banks, and i should say that the 410 consequences of these dnrergant policies are, in the case of Anerican bankers, too great a reliance upon reserves and too little upon good banking, and, in the case of flglish bankers, too great a reliance upon good banking and too little upon reserves. We have been over-supelied with reserve money, but our banks have not kept as liquid as the if;nglish banks. Your banking institutions have done too large a busivass upon too slender agold reserve. While I mm opposed no -Lea principle of independent vault reserves and of statutory reserve requiremees, it is, possibly, fair to state, in the light of our war experience, that the griglimh banks have not fortified teeir central bank as much as they might, and, in order to build up the gold reserve of the Bank of england, it might be prudent to induce or require them to suffic- iently reduce their credits so as to enable the Bank of England to accumulate a greater general gold reserve and this would seem to be an essential requirement if the present restrictions of the Act of 1344 surrounding note issues are to be removed. D. DEPOSITED RElinRVn.5 VS INDIV16UAL BANK RES-,IITES: Since our National Bank Aet was adopted in 1863, and until the Federal Reserve Act was recently amended, all national banks in the United States had been required to keep a considerable reserve in their cemel vaults and had been permitted to carry a portion of their reserve on deposit winh other banks. Most of our State laws still require State institutions to carry reserves in their own vaults, (which may, however, in most States, consiee of the notes of the Federal reserve banks) and still permit a portion to be carried on deposit with other banks, which, in most States, include the Federal reserve banks. were undoubtedly a source of veakness in a country where branch banking was not permitted or encouraged and resulted in our reserve being scattered among 20,000 FEDERAL RESERVE BANK OF NEW YORK 8 Lord Cunliffe 8.12.18 or more banking institutions. 7.:Jhas finally been corrected by the recent amendments to the Federal Reserve Act so that now, as stated above, the Federal reserve banks carry reserves of nearly $2,000,000,000 of gold, available to all the principal banking institutions of the country. bank Over 8,000 and trust companies, including practically all the large ones, are new members of the system. There has recently, I understand, been a strong MOTO', :sent in &ngland looking to the carrying of independent cash reserves by the joint stock banks. This, I believe, would be less objectionable with you than in this country, owing to the mall number of commercial banks in England; but, on the other hand, it might retard the process of recoupera. tion from the war strain by the Bank of Ingland4 which should be promoted before any measures of that character are applied to your commercial banks. In general, I think that our reserve law, and, in consequence, our reserve position, is to-day such stronger than that of the Bank of England and of English banks generally and that your situation would be largely corrected by some bank liquidation which would enable the Bank of England to maintain larger gold holdings. E. DOMESTIC EXCHANGES: At the time of their establishment, the Federal reserve banks faced difficult, and what appeared to be insur- mountable obstacles, in overcoming the objections of the banks of the country to a proper regulation and control of the domestic exchanges. There are probably 30,000 banks and bankers in the United States, large and small, upon whom checks are drawn daily, many being sent to all parts of the country for various settlements. The collection of thAle checks and the adjust- ment of the resulting balances were long subject to no fixed rule as to cost or as to time of collection and settlement and, in consequence, many con- fusions and dangers arose, which it was the function of the reserve oyoen to cure. This has at last been well started and I refer to the matter only in order to comment upon the operation of your magnificent London Clearing FEDERAL RESERVE BANK OF NEW YORK Lord Cunliffe 9 8.12.1? House and the simple and effective methods by which your collections and exchanges are effected. The only modification of present practice might be suggested is possibly the establishment of a more uniform plan for settlements between Anglish and Scotch banks so that they might be more promptly effected and, possibly, at less cost. F. No department of .riglien banking has THA LONDON BILL 'ARK T: so influenced the development of banking in this country as has the example of your bill market. In every advance in this new line of American banking your own practices and traditions have been searched and examined for a better understanding of bow this business should be conducted and, I believe, notably in this respect Aftlish banking leads the world and should continue undisturbed, by regulation or restrixtion. O. Wig OVERDRAFT ACCOUNT: In our National bank Act and in the larger number of our State banking laws, provisions are now contained, most rigorous in character, which prohibit overdrafts by depositors in banks. In the case of the Federal lay, this is so strict that if intention can be proved, the depositor can visited with severe penalties. In some States to intentionally overdraw a bank account is a misdemeanor, punishable by imprisonment. This is in distinct contrast with the practice of many of the Anglish joint stock banks, which regularly grant credit to their customers on current account or overdraft. I firmly believe that this is a bad and danger- ous oustom and might well be dealt with by statutory prohibition. A ban% of all institutions, should know when it may count upon the repayment of indebtedrness owing to it. Furthermore, a loan of that character, which may run in- definitely, in time takes on the nature of a capital fund in the mind of the borrower and gradually merges into his business investment. hile I fully understand the CUTS which is taken by some of your bankers tosafeguard this method of extending credit, I can not but believe that the proper regulation of the relations between a bank and its customers can be better effected by the FEDERAL RESERVE BANK OF NEW YORK_..lo Lord Curliffe 6.12.15. employment of a bill or a note, rather. than by reliance upon an inscribed ascount. 4IL H. RATA FIXING: The Federal reserve Act provides that the directors of Federal reserve banks shall fix the rates of discount for the various classes of leans which they make, the rates so fixed being subject to review and determination by the Federal Reserve Board. asking similar types of loans. These rates must apply to all borrowers The language of the statute is somewhat ambigu- MIS as to whether the Federal Reserve Board has the power to initiate a rate. That question has never been definitely determined, and I doubt if need for such a determination is likely to arise. This is a marked defect, however, in the regional bank plan, as uniformity of rates can not well be brought about, and the influence of the central bank rate is to some extent impaired. The influence of the rate of the Bank of Angland is so pronounced, in fact so much nom pronounced than the rates of the Federal reserve banks, which are so various as to different types of loans and differ rather widely between the different reserve banks, that I doubt if comparison can be made between the practices of the two institutions. I should hope, hoov of your own money market, that no development would take place which would have the effect of altering the stability and uniformity of rates now so well governed and controlled by the Bank of Zngland. 1. THE PAYMENT OF INTERLST TO DEPOSITORS: Federal reserve banks are neither authorised nor expressly prohibited by law in the matter of allowing interest on balances. As a natter of practice, and in view of our interpretation of the law, it has been generally considered that we were without power to allow any interest on deposits. It would nullify other provisions of the la quire us to pay all surplus income over our 6. dividend and the maintenance of our surplus at to the Government. If interest were allowed, there roun, in fact, be little or no surplus income, in which event the profits payable to the GoverumeA, in lieu of franchise and all other taxes, would never arise. FEDERAL RESERVE BANK OF NEW YORK__.0 Lord .':uriliffe On the other hand, keen competition for business among our commercial banks end 10 trust companies, and the advance in the general level of interest rates, ocsasioned by the war, have led to the precLice in some parts of the country of paying interest upon active checking abc:)uhts far beyond what banking prudence Conditions governing this matter in Zngland have been somewhat dif- warrants. ferent. The payment of high rates of interest has at times been effective in attracting and retaining balances from abroad, and, frequently, in protecting your market against heavy discounts of foreign: paper. 1xperierice in this country has led us to believe that no mere subtle influence exists for the promotion of n) unsound banking than the competition which takes the form of allowing high rates for deposits. Whether brought about by the influence of the Bank of dIngland or of your Clearing House, or, possibly, by statute, it hem seemed to me that some regulation of the rates of interest allowed on balances by the English banks, as well as the return by the Bank of 6ngland to its former policies in that respect, will be required at the conclusion of the war. J. SlCURITY INVBSTMENTB: The unprecedented decline in security values since the outbreak of the war, including bonds of the highest grade, has been a convincing argument to many American bankers that they have pursued a hazardous policy when they have invested a considerable proportion of their deposits in long time securities. Some of our smaller country banks have suffered such serious shrinkages in their surplus or "rest" funds, through the decline in the market value of their investments, that it will take many years, even in some cases with suspension of dividend payments, to restore these accounts to a proper proportion of capital. The war has likewise resulted in a large ac- cumulation of Government securities by the itnglish banks; probably larger in proportion than are the holdings of Government bonds by American banks. An understanding between your Government and the bankers looking to a liquidation of these holdings is greatly to be desired and doubtless is already receiving consideration. FEDERAL RESERVE BANK OF NEW YORK.... K. The e o_ Ilr 8.12.12. Lord Cuniiffs VIMPETITIO" BETwIEN THe MIR& BANK AND ITS DAPOSITOAS: provisions of the Federal Reserve Act at first led many American bankers to conclude that the Federal reserve banks, with their iemenme resources and power, woulc'. become dangerous competitors, in varioee lines of banking, with the very institutions which were to be the owner*, of the capital etock, and, (outside of the Treasure) the sole depositors in the new institutions. The feeling referred to was a parlous ebsteele to our development ie. the larger cities, at one time, and wee held by officers of merry of the larger banks. It has been our effort from the outset to overcome this impression and, with the exception of our 'Redondo dealings in the open market in the purchase of bills, we are not in competition with out own stockholders and depositors in any department of banking. This has not always been the case with the Eank of englaed and it is a fair question to ask whether, if the joint stock banks are to be required to help build up the reserves of the Bank, as suggested in paragraph "C", and, possibly, are to be expected to maintain larger balances at the Bank, it may not be important to consider to what extent direct competition between the Bank of gngland and its own cliental; should :a avoided. An in- telligent discussion of this subject would necessitate an examination of the accounts of the Bank of 1ngland sue* could only be made by an officer of the Bank. The Rnglish Banking System has rested upon the Bank of england us upon a rock foundation. That foundation does not depend upon any legal require- ment as to the maintenance If reserver with the Bank of gngland, u in the ease of the Federal Reserve System, but tradition, the desire for mutual self- protection and the magnificent unity of the British banking system has preserved the Bank'e position unimpaired up to the present time. No small part of this is due to an illustrious record of successful and conservative manageNent by the directors of the Peink; but the question is now likely to arise, unlese our information here is misleading, as to whether this gond will and tradition can FEDERAL RESERVE BANK OF NEW YORK. ........ Lord Cunliffe alwaee be relied unen 8. 12. 18. monte referred to BANKth in A L. practically !Ol. of o under various limitat only he effected betw been a natural and ef to amalganate and ;fe and reducing over-com in the United States. incorporated banks of savines banks. Amal statutory limitation, in the nmmber of inst ficult for new banks where branch banking immense siss which ha pair the influence of question. Aside fro supervision, security danger in the develop mining of the supremac only meaeured by its r stability which its p wnrld. In reading t have expressed relate war times rather than quired, hovever, to ad FEDERAL RESERVE BANK OF NEW YORK_...14... Lard Cunliffe 8.12.18. out of this war must take into account that the period of readjustment suclliceeding the conclusion of the war will, possibly, bring a greater strain and present more novel problems in banking and finance than even those which arose at the time of the outbreak and now confront us during the continuance of the war. In this respect the Federal Reserve System has had a distinct advantage, because we wore embarking upon a new and untried enterprise, in which defects were expected and which could only be discovered through The amendment of a law approved by the President as recently as perience. December 13, 1913, naturally has not encountered such opposition as would be aroused by changes proposed in the fundamental banking law of your country, adopted in 1844. Unfortunately the literature in relation to the Federal Reserve System and its development is most limited. managing the system have had little time to spare for the preparation of critical works which would be of value to you and your associates in the problems which you are now considering. I am, however, sending you, under separate cover, the following documents: 1. The Federal Reserve Act, as it originally became law December 13, 1913. 2. All subsequent amendments to the act, as tabulated. 3. A bill now pending in the Senate and House proposing further amendments to the Act, known as the Phelan Bill, the passage of which is still uncertain. 4. A digest of the Act, prepared by Honorable C. S. Hamlin, Member of the Federal reserve Board. 5. The A. B. C. of the Federal Reserve System, a recent publication by Z. W. Kemmerer, Professor of Economies at Princeton university. 6. All the regulations established by the Federal noserve Board which are now in effect. 7. All of the annual reports to Congress made by the Federal Reserve Board, which include statements of all twelve of the Federal reserve banks. http://fraser.stlouisfed.org/ 8. Federal Reserve Bank of St. Louis series of statements referred to in Paragraph "A" Those who h FEDERAL RESERVE BANK OF NEW YORK__ is Lord Cunliffe 8.12.18. In conclusion, permit me to say that in no part of the world has the Ilksh banking system a greater numb:r of friends and admirers than are to be found in thks country; the best evidence of which is the extent to which our own recent banking reforms have been influenced by a study of your methods. Possibly also it may not be out of place in closing this letter to reaffirm tho statement which I made to you in London in 1916, to the effect that a close alliance between the Bank of 2;ngland and the Federal Reserve System, for which, fortunately, the foundation has now been laid, should afford protection to the banking system. of our two countries of a value that can not be over-estimated. Ath assurance of my esteem, and wishing you every success in your task, I beg to remain, Faithfully yours, Right Honorable Lord Cunliffe, Headley Court, Speen, England. BS.MSB September ZO, 1.18. My dear Lord Cunliffe: Your letter of September 1st has just reached me, and I hope that by now the photograph has also arrived. It was sent under separate registered cover, which, possibly, accounts for its apparent loss. Registered mail is not always as rapid as regular mall, but if by now the picture has not arrived, will you not please advise me, and I will start another copy on the way. Governor Hamlin sent me your photograph finally, and I now adorns my room, so I am hopeful that mine may safely arrive also. I hope that the committee on currency and foreign exchange will permit me an opportunity to read the full text copy of its report. The matters you are dealing with are of the greatest Interest to me ns you must realize, and I only wish that we had opportunity to discuss them in person. Correspondence is so exceedingly unsatisfactory, particularly when the mails arc so slow. your makinc;* us another visit? Is there any possibility of I can promise you a royal welcome from the many friends you have on this side. With warmest regards, believe me, Cordially, The Right Honorable Lord Cunliffe, Headley Court, Epsom, England. BS/M3B 1 k- December 3, 1918. SS' My dear Lord Ounliffe: Your confiderAialraiarer-of October zCth reached me some time ago and shortly afterwards the interim report, which I have read with very great It covers matters of such great importance that I shall not attempt interest. to send you comments that are very much in my mind about it until I have time to write you more fully than is possible at the moment. I am indeed glad that that picture reached you, and hope that it will serve as a souvonier of an association which I shall always cherish most highly. My respect and admiration for the great institution over which you presided during almost the entire war period, and particularly of your own administration of its affairs, are absolutely unbounded. justified itself, and my sole mental reservation having to do with financial r construction is largely resolved by the conservative and constructive characte of the splendid report which you have now submitted. You are doubtless experiencing the same difficulties that we are in combating the relaxation of all classes and the desire to immediately resume normal habits of business and private life. Our Government still requires many billions and we will have difficulty in raising the funds without undue expansion unless our Government makes a very tempting offer in the terms of its next loan. Nothing would be so helpful to me just now as opportunity for a visit and discussion with you, not only in relation to these immediate matters, but another and more important matter which I am sure is as much in your mind as it is in mine. My visit to England in 1916 was definitely inspired by a desire to undertake the establishment of relations with the Bank at a time when such negotiations might have been least expected. I believed then, as I believe no that the world's future very largely depends upon the character of the understandings between your people and ours, whether, in fact, they are formal and aovernmental, or simply social and sympathetic. Now that the war is over - and won, to permit these two great nation to drift apart simply because of ancient and out-worn antagonisms, or, worse, ecause of commercial rivalry, would be a calamity of the first order. Stupid d selfishness would be largely to blame. There are many of us in this coun o are hoping that the peace conference may be the instrument for eliminating e underlying causes of international commercial rivalry which will be a mena happy relationships in the future. Sheet No. 2 12/2/18. Lori Ounliffe 04%,4 r suiTosed At least the banker7-- iiipf the two'dountries, who are sometimes somewhat wider to be endowed with more than average Intelligence and to have duty to form partnervision than other classes of business mciik!should make it their In and promote discord. ships and promote good feeling rather than stanth,apart still have duties of this matter, it may be that your great institution and ours importance ahead of us. expressions of 7ith many thanks for your kind letter and the personal warmly reciprocate, I regard which I shall always cherish, and which I just as beg to remain, iaithfully your friend, The Right Honorable Lord Cunliffo, Headley Jourt, Ersom. England. BS/M3B Sheleff. Lord Cunliffe No. 2 2.5.19. in France, and particularly in the Central Powers. 're have still immense banking reserves untouched and after the period of liquidation and paying debts, Which seems now to be ahead of us, our banking system will be fully capable of assistance to the world in reconstruction matters if it is prudently handled. "by can't 7ngliehmen realise that if this problem is approcchad in a friendly and cooperative spirit they ae the one nation in the world to Which credit will be freely given here, because, after all, it is the 7,nglish busi- nessmen end hanker that we trust. If men of the Holden type were willing to admit the necessity of the surrender of some pert of the business of Lombard Street to New York at the present time; would make the surrender grcefully and generously; all be batter off. re would Americen banking would he sounder and English banking would be able to draw on resources in this country with greet freedom. Don't trouble to answer this letter. I em just now indulging in a clean up of mail, with nothing much else to do, and this is the next best thing to having that chat of Which I really feel a great need. with warmest regards, I om, Sincerely yours, The Right Honorable Lord Cunliffe, Headley Court, Tpsom, Tngland. BS.!/SB P. S. You have undoubtedly already heard of the mnny complimentary things which Lip' Sheet ro. 3 Lord Cunliffil 7:...Q.4760001 2.5.19. Cll. have been said in this country about theAreport of the committee of which you ere chairmen. If there are any more extended remarks or exhibits in connection with this report which can be furnished to me privately anl in confidence, I would great appreciate it. Vank of (Ifitstith Caith of (EN IlanA PRIVATT & CONWIDENTIAL. Further consideration leads to the conclusion Clause 6. s. d that 77/10, . pe s ounce should be substituted throughout s d for 77/9 and for the following reasons s d (1) 77/101, is the Statutory British rint nrice for veld (i.e. the bullion value of gold), and corresponds exactly to the United States price of y16-604(151, While there appears to be no price in tle United s d States corresponding to 77/9. (2) It is the raininura price which the Rani: of England receives for gold. (3) While the Bank of 7n-land is bound to purchase s d (assayed and annrovod) gold at 77/9, it is only able to do so if there are no ()Vier buyers at that nrice or at a higher price and, in practice, only for limited quantities: a hifller price has frequently been paid. (4) The accepted par of Fixehanif,13 - viz. 4.866564 - is based upon the above bullion values of Mold of d s 77/10; , and 016.604651 for 'gland and the United Itate respectively. s d (5) The right to take gold here at 77/9 would permit the Federal Reserve Bank of New York to rake a profit from shipment (excludinr expenses) even at the par of flxchange - a prospect wl,ich can never be intended. The fact is not overlooked that the figure of a d 77/9 per ounce was su-ested by the Deputzr Governor in a letter to you dated June lrth 1916, on the understanding that the correspondin,T price could be fixed on your side, but as there ..,s in fact no corresponding price in the United States our prelininary calculation cannot be adopted. Indeed on further consideration we think that even if there were a corresponding price in the United States, it would be :ere correct to take the Statutory Vint price in both places, and we have therefore little hesitation in now putting forward an amended 4111. It would seer that this would be the second charge to be levied on the say e gold, if said gold were IP returned after be-i n:? set aside, rather than shipped. The effect would tend to force shipment, which is hardly the object of proposed arranTement. Althou-h the charge would be trade by the Assay Office and doUbt- less against te wish of the Federal Reserve Bank of Ilew York, it is hoped that arrangements nay have been node to abrogate it (as is sur:-ested) and the sentence is therefere anitted in the --,resent draft. In view, however, of the first ehn,ree of 50e 'Which apparently cannot be avoided, it would seam that it would suit the Bank of England to earn ark eagles instead of bars. The reraininp alterations which are sue rested ray be considered as verbal, or for the sake of clearness. I sI all look forward to hearing fron you, after you have had tine to consider the revised TTemoraniml, whether you have any further modifications or additions to su7est. A note has been TAade that papers rust be sent to you later for conpletion in connection with the opening of the Account here; also, your sumestion as to necessity of fixing a code for use between the Bank of Tngland and your rank has attention and I will return to those details when the arrangerents proposed have reached a rore or less final stage of discussion. I al y :, Yours faithfully, Governor. IPMORANWIT OP MARGIT 1016 redrafted in accordnnce with letter from The Were). Reserve Benk of New York: dated January 18th, 1017, end further amended by The Bank of rneland. The following points confidentially tend tentatively agreed upon for subnissien and retifiention by the respective institutionn, with a view to beine put into operation after the conclusion of the WertThe releral 2enerve renk of New York to act for itself 1. and for such of the other eleven (11) Pederel Reserve Benks as join the eceount. ACCOUNTS. 2. The Federal Reserve Bank of New York to maintain nn eceount with the nank of Fnglnnd end vice versa. The ec-ounts respectively to be kept free of charges 3. end oorrnission - except as regards sotual out-of-pocket expenses. BINS. 4. The Bank of rnglnnd to eurchnse, as and when so requested, prime sterling bills for aceount of the Federal 7.eserve Bank of New Yort, for the payment of which, at meturfty, the Punk of Rneland will be responsible. These bills to be such es are believed to arise out of actual connerciel transactions, to have no more than ninety (c))) days to run, exclusive of dive of grnoe, mnd to bear the sii7nntrre of two or more responsible 711n flelerrl ReIerve !lank of partiPa. rev' York, Likewise, to prrohase prim dollar bills of a similpr neture for account of the Peril of rngland, and to be responsible for their paylent at maturity. Such bills to be nt the absolute disposal of the institution for whose account the purchese is nnde in either case. (a) The Federal 'reserve Benk of New York would prefer that bills purehesed for its account by the Bank of !!v and should Ovoid consist so far as possible of those bearing the narles of kierioan drawers, or endorsers, so long as this recrire-yent does not involve the acceptance of other than Ilrino bills whieh are eligib/e for disoount st the Bank of rnoland, and n similar policy woule be pursued by the Federal reserve Bank of rew Yorl in nurehnninp bills bearing the names of English drawers, or endorsers, for the Rank of England, should it be possible to do so. (b) It is expected that purchases Of bills by either institution for the other will be at the emrrent market rates. 5. INTnoTT. When balances with the Pant of England cannot be invested in bills, the s000unt of the Federal Reserve flank of IftW York may be dealt with on an interest basis, at rates to be agreed upon. As the Federal Reserve flank of Neu York is not authorised by lel, to allow interest on balances, balances at thee credit of the Rank of Pngland, if they are to earn interest, must be invested in bills. 6. GOLD. Subject to Clause 10 an as below stated, the debtor institution will, at the request of the creditor institution end so far an it conveniently can, set aside and earmark rold on a bullion basis representing belanoes due. such gold to be clearly identified se to ownership. (a) The Rank of PnI7land to earmark and set aside refined gold bars for the Federal Reserve Rank of New York, when so requested, end &arra its aceount at the rate of 77 shillims 10 pence nor Pnglieh standard ounce. eleven..twelfthe fine, or (b) When standard gold bars are not available, the Bank of England to earnark end set nside eagles frr account of the New York Bank at their bullion value, at that rate of 77/10 per ounce, for the equivalent of the r-v:lish standard of fineness, or (o) The Rank of England to earrInrk nod set aside sovereigns at 10 et their bullion value, at the rite of 77/10;, per ounce. (d) Gold bsrs, or gold coin, so earmarked but not shipped, to 41) be taken by the Pnnk of Rtrland (if returned to the credit of the New York Banl.) at the same value at whioh they were earnerked in the first instnnoe. (e) It should be understood that the Federal Reserve rank of Vew York emn.lot require the Bark of England to earmark eagles nt bullion value in order to twort the . n.!1,:! realise the profit between the bullion value and face value of American coin. The right tr determine in the event of shipment whether Amerienn coins shall be shipped or not to rest with the Rank of Pngland. The Federal Reserve Bank of New York to eermftrk end set aside gold for the Bea of "aginnd when no requested nnd charge its nocount on the following hosts(f) TZefined gold bars at the r' to of $18.804651 per United Statue etanderd ounce of geld nine-tenths fine, plus the Agony Office ohnrge of 500 per $1,000 in value if nnd when incurred, or (c) Sovereigns at their bullion value of $18604651 for each ounce of gold of the United States standard, nine-tenths fine, or (h) Parles at their bullion vrlue of a8604651 per ounce. (1) Gold bore, or Fold ooin, so earmnrl.ed but not shipped, to be taken by the Pedern1 Reserve Rank (if returned to the credit of the Pre lk of Pngland) at the ewe value at which they were earmexted in the firet instance, exeluding the Assny Office ohnrge nbove-mentioned whioh will be borle by the Rank of Pngln.nd. (j) It should be understood that the Bnnk of England cannot require the Federal Reserve Rank of New York to soverlims oarinri- at bullion value in order to inport the- and realize the profit betwoon the bullic value of English coin. value and face The right to determine, in the event event of shipment, whether rnglish coins shall be 'hipped or not to rest wit" the federal. Reserve Ben/ rf Vew Yon). 7. Subject to Clnusen 6 and 10, the debtor inetitvtion to ship gold to the creditor institution, on request, at the cost and risk or the creditor institrtio:l. (there gold is chipped to the other and not at the by one institution or its awn to sad request of tho other, such shipment to be at the risk exvIense of the shipping inst.l_tution.) 8. Gold bars earmarko,, or shipped by oither institution to the ot"her must be suitable for ooiningl, purposes, alloy tr be de for any vari-otions in gold copper, and an allowance oontents above or below the standards specified above. 9. other The earmarkine and shipment of the gold coins of o:ly nation riny be undertaken upon the heels of the value of the fine gold contained in such coins, with deduction of an allow/14e- to cover the cost of conversion into gold bare of Vnglisp or 10. American standard respentively. The intention of the arrangements is that all trane- actions in gel.'? (o her than earlarked gold) between the two institutions shall be, voluntary and upon exactly equal terms es to oath. 11. INPORMATIOV. It is expected that information will be exehanged by eorrfsspondnnee res7,eeting *Milt ,latters and finaneial conditions. DURATION. The arrangerient to be enbjeet to cancella- tion by either institution, trfrvinetions in Whole or in part, excePt es to in prooesse on notice t/y letter or cable; beinv und ere to od that any unl Iquidated balance either be settled in gold if so agreed. justify it way may If eirenmetalor-s require or oa-nonoinu, operations before the conclusion of the War, a suggestion to thot effect =wty be ma-le by either institution. 13. It is hoped th"t the Federal reserve nen' of flew Yon] will eventually reach en arrangement on similar lines with the Rank Prnt of Prmnoe, to http://fraser.stlouisfed.org/ prorrees. Federal Reserve Bank of St. Louis end negotiPtionr am stresdy in RIVATI1 & CONFIDENTIAL Bank of England, London, E. C. (2) Clause 6. Further consideration leads to the conclusion that d s 77/10i-per ounce should.be substituted throughout s d for 77/9 and for the following reasons - it a (1) 77/10,i- is the 3tatutory British 'lint price for gold (i.e. the bullion value of gold), and corresponds exactly to the United States price of .18.604651, while there appears to be no price in the United States s d corresponding to 77/9. (2) It is the minimum price which the Bank of England receives for gold. (3) While the Bank of Angland is bound to purchase (assayed s d and approved) gold at 77/9, it is only able to do so if there are no other buyers at that price or at a higher price and, in practice, only for limited quantities: a higher price has frequently been paid. (4) The accepted par cr.: exchange - viz. 4.866564 - is based s d upon the above bullion values of gold of 77/10 and 018.604651 for 1:1Lgland and the United States, respectively. s d (5) The right to take gold here at 77/9 would permit the Federal Reserve Bank of New York to make a profit from shipment (excluding expenses) even at the par of exchange - a prospect which can never be intended. s d The fact is not overlooked that the figure of 77/9 per ounce was suggested by the Deputy Governor in a letter to you dated June 15th, 1916, on the understanding that the corresponding price could be fixed on your side, but as there is in fact no corresponding price in the United States our preliminary calculations cannot be adopted. Indeed on further consideration we think that even if there were a corresponding price in the United States, it would be more correct to take the Statutory Mint price in both places, and we have therefore little hesitation in now putting forward an amended figure. (3) Nor is it desired to hide the fact that at the price of d 77/101 per ounce the Bank of England may be realising an apparent s d (say) 77/9. profit on such gold as may have been purchased at 3ut this apparent profit which ignores the cost of interest on gold during minting is no more than the minimum which the Bank of England is by statutory right entitled to retain, and would in no sense be retained at the cost of the Federal ReservI; Bank of New York. Clauses6, 7. 8, 9, 10. It 13 felt that the earmarking of gold and the shipment of gold, except as regards gold already earmarked, should in all cases be voluntary - a view which has already been expressed to you in correspondence. Clause 6 (e) and (I). The following sentences are among your eg I : suggestions - gold coins which are the limit of tolerance not to be earmarked abraded below or shipped if other gold or coin is available". These coins would be reckoned as "bullion" rather than as "coins": it is therefore suggested that these two sentences may be omitted, as their object is hardly clear. (i) The following sentence is among your suggestions "If gold bars are returned they may be subject to a further Assay Office charge for remelting amounting to one dollar p, r thousand ounces, which is the existing charge. The iederal.Reserve Bank of New York, however, will endeavour to have this charge abrogated by the Assay Office and if successful will imaediately notify the Bank of England". Itwould seem that this would be the second charge to be levied On the same gold, if Baia gold were returned after being set aside, rather than shipped. The effect would tend to force shipment, which is hardly the object of proposed arrangement. Although the charge would be made by the assay Office and doubtless against the wish of the Federal Reserve Bank of New York, it is hoped that arrangements may have been made to abrogate it (as is suggested) and the sentence is therefore omitted in the present draft. (4) In view, however, o the first charge of 50p5 which Form 2006 WEST CAB ceivedet 9111419 1:16TWAV&8111ti Stt"g4 D.17P1s. t\ 't;ra2V /lo R71NY FB 20 EPSOM APR 8 1917 STRONG 1660 FILEe a / A70-74, LENVFN (COLO) WARMEST THANKS AND A HEARTY WELCOME TO OUR SPLEL.LID NEW ALLY WHOSE COOPERATION MEANS :1YCH TO CUNL I FFE 5A1\,1 Ls. Ss BAM: OF EITGLAITD, B. C. PRIVATE AND CMIDE72IAL 21st June, 1917. The Governor, Federal Reserve Bank of New York, TTew York. i r : I beg to acknowledge the receipt of your cablean to-day advising the bank that the sum of ,',52,400,000. has been paid to !Ir. F. A. Vandorlip at the 77ational City Bank, for which I thank you: I assume that a clerical or telegraphic error has been made and that the actual sun paid was 52,500,000. "Zith reference to the cable sent you on the 5th instant, you will of course realize that both the quotation at which Commercial Pills could be bought and the rate at which the bank would be prepared to borrow your money are liable to variation. Should you at any time think of releasing part of the ;;old earmarked with a view to employing it at interest here, on receipt P a cable from you we shall be happy to send you further quotations. I am, Yours faithfully, (Signed) Cunliffe Governor. inanh if (1410anb London, E.C.2. 12th July, 1917. My dear Mr. Strong. T was of course greatly struck and delighted at the immense sv.ccess of your Liberty Loan, and very anxious to learn something riore than can be gleane0 fro-1 the newspapers as to how you did it. I am therefore very grateful to you for taking up sorry., of your valuable time in giving me such interesting and graphic details of the arrangements for the issue and I congratulate you most warmly on the magnificent result of your efforts. I can see too, if only by the rapid decline in money rates on your side, that you have been most successful in getting the proceeds of the loan distributed - a task which must be infinitely greater in your vast country than here. I cannot, help feeling that nov you have sheen what your Country can do in the matter of raising loans, there is practically no limit to the amount of money you will be able to raise, because, unlike our case, all the money will 7.(3 spent in your own country and will merely go round in a circle. 01 r O Our own financial position gets no easier, in fact the outflow of our gold has reached such alarming proportions since rw- return here as to make me very uneasy. I look tack ith the greatest possible pleasure to my visit to America and to the really extraordinary kindness and friendship sheen to me by you all. Hoping that your well earned rest in Denver may refresh you and that I may have the pleasure of seeing you here before long. I OM, Yours very sincerely, BENJAMIN STRONG, 4100, MONTVIEVT BOULEVARD DENVER, COLORADO. , NK OF ENGLAND. LONDON, E.G. 27th October, 017, Pear Mr, Strong, Thank you very much for your note of the 4th October and your interesting personal letter of the same date. You certainly are leaving no stone unturned to make a success of your new Loan, and I have not the faintest doubt that it will be a triumph. You understand the art of pushing things much better in your country than we do here. All you tell me about your plans for avoiding the temporary locking up of money (which is the real danger in these large loans) is particularly interesting to me. and I am much obliged for the prosoectus of the Loan which you enclose. The right to allot up to one-half the amount of any over-subscription is an ingenious and to me quite a novel idea. Your offer to lend freely at 31% for the purpose of carrying Liberty Loan Bonds is a bold step which ought to helm a good deal in getting the Loan subscribed. We have been much interested in your various t0. grams about money rates &c. and are most anxious to reciprocate freely in the natter of such information, but to tell the truth there is very little to be said just now from this side. We have for the time being settled down into a sort of humdram state with little to ruffle the surface of our money market. The new National War Bonds create hardly any disPlacament of cash, as the money goes round continuously and is disbursed by the Government as fast as it is collected. If only these Bonds could be placed in sufficient daily quantity to meet the needs of the Goverment there would be no necessity for further heroic measures. It is true that at the beginning of Pecember Government will have to pay out some 50 million sterling for interest on loans, but probably a fair proportion of this amount will be invested in War Bonds and the balance does not frighten me. I am, huuever, somewhat apprehensive that the issues of War 9 et War Bonds may not suff1ce firsr daily requirements. A canpaign to push them, through the "War Savings Corrdtteen, was inaugurated the "other day, as you will probably have heard, by a. big Meeting in the Albert Hall, and I sincerely hope that it may prove successful, but it is easier to work up enthusiasm for a special operation than to keep it alive for a continuous effort. The amountoftheshort debt (Treasury Bills and "Ways and Means" advances) is of course pretty heavy, but if the War Bonds care for the daily expenditure we might hope for a reduction in the short debt when the Revenue receipts become heavier in February to April, and in that case I do not see why the internal situation should derand any s-ecial measures or occasion any disturbance in the money market meanwhile. The external situation is far from pleasant. It is true that, thanks to your splendid co-operation, the American position is no longer the bugbear that it used to be, but we continue to inDort from nost of the world while our exports are greatly restricted, and, as a result, not only are the exchanges in a pretty bad state but we have been compelled to part with some gold to meet liabilities. I was interested to see that you have checked the flow of gold from America ald am only sorry that so mach had gone already to Spain and other places. I did rey best to interfere with such shipments as far as I was able to do so at this end, as I knew they were contrary to your wishes, but unfortunately I was not in a position to prevent them. If you had been willing or conpelled to part with more gold to India for vireliases there, the plan suggested in oul- telegram of the 18th instant should have suited you and us very well, and I was at first somewhat disappointed at your reply. But having now heard from Mr.K.eynes that you are arranging to finance your Indian Purchases in silver, I can only congratulate you on your decision for I am, as you know, in cordial symathy with your desire to economise gold as far as possible. Of course in so far as you may pay them in silver which you buy in the market from your own or Mexican or other Mines Mines, the advantage to the Allies as a whole will not be very great as you will be competing with India herself and incidentally ourselves gird others for those supplies. But I gather from M may utilise some of your large silver reserves for this purpose. This seems to me a most excellent plan and one which I have long hoped might be adopted. Silver is just as useful to Ind is not as useful to you, while it is difficult to believe that a more favourable opportunity will recur fbr cutting the loss (as measured in gold) on some of your silver reserves. While writing this I have opened your Bank's cheering telegram saying that your new loan may. reach 51000,000,000! I am delighted to hear it is such a success and am only awaiting the first result before telegraphing congratulations. I sincerely hope you are keeping well and will not overwork yourself again. Cokayne and Nornan both join me in kindest regards. Yours sincerely, Benjamin Strong, Esq. COPY 28th Nov 17 Bank of England Dear Mr. Strong I .m indeed sorry to learn from your letter of 5th inst. that the huge amount of work that you have had to do in connection with your gigantic loan has been too great a strain and that you have been compelled to take a rest. lthough I have seen Lord Reading several times he has not so far given me your message and I must remind him of it on his return from Paris and in the mean time I think you most cordi,lly for the very kind expression of your confidence and can assure you that the fact of ceasing to be Governor of this Bank will not in any way interfere ,iith the very happy and cordial relations which exist between the two Banks. On the other hand I hope it may strengthen[?] them as I would propose taking another trip to your side at the end of April as soon as my time is up here that is if you can find me useful employments for a few weeks. It will be strange to find oneself one of the unemployed after 4/5 years of fairly strenuous work but there ill be many compensations not the least of which will be the chance of peeing you all again. Hoping to hear soon of your complete recovery Yours very truly [signed] Cunliffe COPY 411. Private + Confidential 5th J.,ny 19 Headley Court, Epsom. 10 Dear Mr. Strong Your letter of 3rd Dec reached me some days since but lat not been quite in my usual health and having in one way or L..nother a good deal on hand I have been more than usually lazy over my correstondence. I wish I still had some of your vitality + keenness but the fact is I am growing old and begin to feel it. It is probably that same old age creeping on that makes me pessimistic und anxious as to the future but I am indeed nervous as to the outcome of all this enormous credit inflation fld huge floating debt. I Lm convinced you are right and that there is little to fear if our two nations pull together and share as maybe the finance of the world but I am forever meeting that green eyed monster jealousy wandering around and I fear trouble. If I am not mistaken there are signs that all is not well even in Banking circles but I do trust that as yet it has not reached the Bank of 11 and everything during the next 5/10 years depends on our being England. able to;trade and finance together as friendly competitors certainly[?) but without nasty jealousy and I do pray that I ,m wrong and that there are no signs of the latter. Trusting that we may meet again before very long. Yours truly [signed) Cunliffe Mr. Benjamin Strong [Stamped(' Filing Dept. Mar. 5 1919 Federal Reserve BIlk Atr-2,-e_t_i_ic.. /r/V14, 744 C-(4,44: Ga PYr /31s- /--e cire-24. ez-4-17 Airt7 4elyiet--y Cos-g-1 4,e,/e. A/(4 oef.. '4444-11":y 14.17,/}4.0.6a /4.4 401/1.1.4;04 k71,1;t, e.cir r-co k; liL1,'. 1/; %Gt-O. ee.41.% 11.1 /7'1,4 11/17-LZ 14. /64.416 Atit:ar-p- 1-,:-/-1 "tc ,ItG01,4-fi-z4-0 Vor_cos_3 fl. 4e-e- Ace.c 44- f iti-44;4 dee°2`4 zfe.<4.0-s. G4e-tif ee-)04--/e-441. Vault of 641410 11:010011,EC 2 9th February, 1918. My dear Mr.Strong, Many thanks for your letter of the 21st ultimo, and I shall he delighted to welcome your f2iend, Mr. John T.Pratt, and do anything for him that is possible, but I expect he has so many friends already on this side that he will need for nothing. However I shall he very pleased to see Mr.Pratt and hear the news of you and all my many friends in the States./ Hoping to see you myself before very lone, Yours very sincerely, BPTJAMITT STRONG, ESQ., FEDERAL RESERVE HPTY Or NEW YORK NEW YORK, U.S.A. PRIVATE AND CONFIDENTIAL C C Headley Court Epsom 22nd June 1918 P Dear Mr. strong The Government have appointed me Chairman of a Committee on Currency and Foreign Exchanges including in the reference any matters connected with the Bank of England or other Banks that it might be desirable to reconstruct. We have already examined many witnesses but though there has been considerable discussion in the newspapers and some rather pressing demands for the repeal of the Act of 1844, I must say that as yet no evidence has been placed before us that would go far to prove that any very drastic alterations are imperative. On the contrary, almost all those in favour of great and farreaching reforms have broken down under examination and though some reforms are no doubt needed, yet I believe it to be the opinion of the Committee that the old Bank Act of 1844 has stood the strain fairly well. Of course, as you are very fully aware, a certain amount of licence has been taken at times, and even perhaps rules and regulations broken, but that has little to do with the Act of 1844 which every one harps on; and, in my opinion, the alterations will have to be made in some of the fetters that have from time to time been imposed on the Bank. Now as you are the great authority on your side I should very much value your views and suggestions for I know what a keen interest you take in our Banking propositions and have little doubt but that you have noted several of our imperfections or faults. Anything you may tell me I will, if you wish it, regard in the strictest confidence but, of course, if I might use your name it would add greatly to its importance. Hoping for many good and important suggestions Believe me Yours very truly (signed) CUNLIF7E I fear you never asked me for my photograph but any way I sent you one by Mr. Hamlin as a little memento of all your goodness to me last year. C 4Ge444-z-s- fre0,7fra <04_ ..e-a Aro--s.egeo, 5Z--/-4, A frf-s-4ve /1-4 14Z /7-1dAesz. "40 G4,11 1 CSC APCI-4-G4 GIA L /. 1-4;0-cie 4- A- La/4-7-14-a6*4 A/aZ #44. leiaa ig-414- /r-te-41- 4 /44 u 9 40/4-e.", Peki. it4efttia, 4-40//x-J,7,4- tow /4,4. Aesc44, 1u4c, AL, l Li rge-ix-sj 47:1-4 .4.Ac his1Z-410-4/,4;7-g--:! Offer-4-il i frf-L4- 9.4~. *-00-ile-e- A-z- Aitpc4Lr.7"-ry :-""4 fr$ hor,/tede5-kuele-4- LI% /14 owe .1 Digitized -.(;C for FRASER 4. af he; " l o g.4 .-)e-r., CURRENCY AND FOREIGN EXCHANGES',:, - FIRST INTERIM REPORT OF THE COMMITTEE ON CURRENCY AND FOREIGN EXCHANGES AFTER THE WAR Presented to Parliament by Command of His Majesty. LONDON: PUBLISHED BY HIS MAJESTY'S STATIONERY OFFICE. To be purchased through any Bookseller or directly from H.M. STATIONERY OFFICE at the following addresses: IMPERIAL HOUSE, KINGSWAY, LONDON, W.C.2, and 28. ABINGDON STREET, LONDON, S.W.1; 37, PETER STREET, MANCHESTER; 1, ST. ANDREW'S CRESCENT, CARDIFF; 23, FORTH STREET, EDINBURGH ; Or from E. PONSONBY, LTD., 116, GRAFTON STREET, DUBLIN. 1918. [Cd. 9182.] Price 2d. Net. 4 confronted with an increase of interest charges, if not with actual difficulty in renewing loans, and with the prospect of falling prices, tended to press their goods on a weak market. The result was a decline in general prices in the home market which, by checking imports and stimulating exports, corrected tip adverse trade balance which was the primary cause of the difficulty. 6. When apart from a foreign drain of gold, credit at home threatened to become unduly expanded, the old currency system tended to restrain the expansion and to prevent the consequent rise in domestic prices which ultimately causes such a drain. The expansion of credit, by forcing up prices, involves an increased demand for legal tender currency both from the banks in order to maintain their normal proportion of cash to liabilities and from the general public for the payment of wages and for retail transactions. In this case also the demand for such currency fell upon the reserve of the Bank of England, and the Bank was thereupon obliged to raise its rate of discount in order to prevent the fall in the proportion of that reserve to its liabilities. The same chain of consequences as we have just described followed and speculative trade activity was similarly restrained. There was therefore an automatic machinery by which the volume of purchasing power in this country was continuously adjusted to world prices of commodities in general.. Domestic prices were automatically regulated so as to prevent excessive imports; and the creation of .banking credit was so controlled that banking could be safely permitted a freedom from State interference which would not have been possible under a less rigid currency system. 7. Under these arrangements this country was provided with a complete and effective gold standard. The essence of such a standard is that notes must always stand at absolute parity with gold coins of equivalent face value, and that both notes and gold coins stand at absolute parity with gold bullion. When these conditions are fulfilled, the foreign exchange rates with all countries possessing an effective gold standard are maintained at or within the gold specie points. CHANGES WHICH HAVE AFFECTED THE GOLD STANDARD DURING' THE WAR. It will be observed that the fall in a number of the foreign exchanges below the old export specie points which has taken place since the early part of 1915* is not by itself a proof that the gold standard has broken down or ceased to be effective. During the present war the depredations of enemy submarines, high 8. freights, and the refusal of the Government to extend State insurance to gold cargoes have greatly increased the cost of sending gold abroad. The actual export specie point has, therefore, moved a long way from its old position. In view of our enormous demands for imports, coupled with the check on our exports due to the war, it was natural that our exchanges with neutrals should move towards the export specie point. Consequently, the fall in the export specie point would by itself account for a large fall in our exchange rates. Such a fall must have taken place in the circumstances, even though all the conditions of an effective gold standard had been fully maintained. 9. The course of the war has, however, brought influences into play in consequence of which the gold standard has ceased to be effective. In view of the crisis which arose upon the outbreak of war it was considered necessary, not merely to authorise the suspension of the Act of 1844, but also to empower the Treasury to issue currency notes for one pound and for ten shillings as legal tender throughout the United Kingdom. Under the powers given by the Currency and Bank Notes Act, 1914, the Treasury undertook to issue such notes through the Bank of England to bankers, as and when required, up to a maximum limit not exceeding for any bank 20 per cent. of its liabilities on current and deposit accounts. The amount of notes issued to each bank was to be treated as an advance bearing interest at the current bank rate. 10. It is not likely that the internal demand for legal tender currency which was anticipated at the beginning of August,. 1914, would by itself have necessitated extensive recourse to these provisions. But the credits created by the Bank of England in favour of its depositors under the arrangements by which the Bank undertook to discount approved bills of exchange and other measures taken about the same time for the protection of credit caused a large increase in the deposits of the Bank. Further, the need of the Government for funds wherewith to finance the war in excess of the amounts raised by taxation and by loans from the public has made necessary the creation of credits in their favour with the Bank of England. Thus, the total amount of the Bank's deposits increased from, approximately, £56,000,000 in July, 1914, to £273,000,000 on the 28th July, 1915, and, though a considerable reduction has since been effected, they now (15th August) stand as high as £171,870,000. The balances created by these operations passing by means of payments to contractors and others to the joint stock banks have formed the foundation of a great growth of their deposits which have also been swelled by the creation of credits in connection with the subscriptions to the various War Loans.t Under the operation of these causes the total deposits of the banks of the United Kingdom (other than the Bank of England) increased from £1,070,681,000 on the 31st December, 1913, to £1,742,902,000 on the 31st December, 1917. 11. The greatly increased volume of bank deposits, representing a corresponding increase of purchasing power and, therefore, leading in conjunction with other causes to a great rise of prices, has brought In the abnormal circumstances at the outbreak of war the neutral exchanges moved temporarily in our favour owing to the remittance home of liquid balances from foreign countries and the withdrawal of foreign credits. I' This process has had results of such far-reaching importance that it may be useful to set out in detail the manner in which it operates. Suppose, for example, that in a given week the Government require £10,000,000 over and above the receipts from taxation and loans from the public. They apply for an advance from the Bank of England, which by a book entry places the amount required to the credit of Public Deposits in the same way as any other banker credits the account of a customer when he grants him temporary accommodation. The amount is then paid out to contractors and other Government creditors, and passes, when the cheques are cleared, to the credit of their bankers in the books of the Bank of England-in other words is transferred from Public to " Other " Deposits, the effect of the whole transaction thus being to increase by £10,000,000 the purchasing power in the hands of the public in the form of deposits in the Joint Stock Banks and the bankers' cash at the Bank of England by the same amount. The bankers' liabilities to depositors having thus increased by £10,000,000 and their cash reserves by an equal amount, their proportion of cash to liabilities (which was normally before the war something under 20 per cent.) is improved, with the result that they are in a position to make advances to their customers to an amount equal to four or five times the sum added to their cash reserves, or, in the absence >f demand for such accommodation, to increase their investments by the difference between the cash received and the proportion they require to hold against the increase of their deposit liabilities. Since the outbreak of war it is the second procedure which has in the main been followed, the surplus cash having been used to subscribe- for Treasury Bills and other Government securities. The money so subscribed has again been spent by the Government and returned in the winner above described to the bankers' cash balances, the process being repeated again.aud again until each £10,000,000 originally advanced by the Bank of England has created new deposits representing new purchasing power to several times that amount. Before the war these processes, if continued; compelled the Bank of England, as explained in paragraph 6, to raise its rate of discount, but, as indicated below, the unlimited issue of Currency Notes has now removed this check upon the continued expansion of credit. 5 about a corresponding demand for legal tender currency which could not have been satisfied under the 460ringent provisions of the Act of 1844. Contractors are obliged to draw cheques against their accounts rder to discharge their wages bill-itself enhanced on account of the rise of prices. It is to provide t is currency that the continually growing issues of Currency Notes have been made. The Banks instead of obtaining notes by way of advance under the arrangements described in paragraph 9 were able to pay for them outright by the transfer of the amount from their balances at the Bank of England to the credit of the Currency Note Account and the circulation of the notes continued to increase. The Government subsequently, by substituting their own securities for the cash balance so transferred to their credit, borrow that balance. In effect, the banks are in a position at will to convert their balances at the Bank of England enhanced in the manner indicated above into legal tender currency without causing notes to be drawn, as they would have been under the pre-war system, from the banking reserve of the Bank of England, and compelling the Bank to apply the normal safeguards against excessive expansion of credit. thus continually being issued, not, as formerly, against gold, but Plainly, given the necessity for the creation of bank credits in favour of the Government for the purpose of financing war expenditure, these issues could not be avoided. If they had not been made, the banks would have been unable to obtain legal tender with which to meet Fresh legal tender currency is agaiiist Government securities. cheques drawn for cash on their customers' accounts. The unlimited issue of currency notes in exchange for credits at the Bank of England is at once a consequence and an essential condition of the methods which the Government have found necessary to adopt in order to meet their war expenditure. 12. The effect of these causes upon the amount of legal tender money (other than subsidiary coin) in bank reserves and in circulation in the -United Kingdom are shown in the following paragraph. 13. The amounts on the 30th June, 1914, may be estimated as follows :... ... ... ... £18,450,000 ... Fiduciary Issue of the Bank of England ... ... ... Bank of England Notes issued against gold coin or bullion ... £38,476,000 Estimated amount of gold coin held by Banks (excluding gold coin held in the Issue ... Department of the Bank of England) and in public circulation ... ... £123,000,000 Grand total ... :- The corresponding figures on the 10th July, 1918, as nearly as they can be estimated, were Fiduciary Issue of the Bank of England ... £18,450,000 Currency Notes not covered by gold £230,412,000 Total Fiduciary Issues ... ... Bank of England Notes issued against coin and bullion ... Currency Notes covered by gold ... ... ... ... : Estimated amount of gold coin held by Banks (excluding gold coin held by Issue Department. of Bank of England), say ... ... ... ... ... ... Grand total ... £248,862,000 £65,368,000 ... £28,500,000 £40,000,000 £382,730,000 There is also a certain amount of gold coin still in the hands of the public which ought to be added to the last-mentioned figure, but the amount is unknown. 14. As Bank of England notes and currency notes are both payable at the Bank of England in gold coin on demand this large issue of new notes, associated, as it is, with abnormally high prices and unfavour- able exchanges, must have led under normal conditions to a rapid depletion, threatening ultimately the complete exhaustion, of the Bank's gold holdings. Consequently, unless the Bank had been prepared to see all its gold drained away, the discount rate must have been raised to a much higher level, the creation of banking credit (including that required by the Government) would have been checked, prices would have fallen and a large portion of the surplus notes must have come back for cancellation. In this way an effective gold standard would have been maintained in spite of the heavy issue of notes. But during the war conditions have not been normal. The public are content to employ currency notes for internal purposes, and, notwithstanding adverse exchanges, war conditions interpose effective practical obstacles against the export of gold. Moreover, the legal prohibition of the melting of gold coin, and the fact that the importation of gold bullion is reserved to the Bank of England, and that dealings in it are limited have severed the link which formerly existed between the values of coin and of uncoined gold. It is not possible to judge to what extent legal tender currency may in fact be depreciated in terms of bullion. But it is practically certain that there has been some depreciation, and to this extent therefore the gold standard has ceased to be effective. RESTORATION OF CONDITIONS NECESSARY TO THE MAINTENANCE OF THE GOLD STANDARD RECOMMENDED. 15. We shall not attempt now to lay down the precise measures that should be adopted to deal with the situation immediately after the war. These will depend upon a variety of conditions which cannot be foreseen, in, particular the general movements of world prices and the currency policy adopted by other countries. But it will be clear that the conditions necessary to the maintenance of an effective gold standard in this country no longer exist, and it is imperative that they should be restored without delay. After the war our gold holdings will no longer be protected by the submarine danger, and it will not be possible indefinitely to continue to support the exchanges with foreign countries by borrowing abroad. 'Unless the machinery which long experience has shown to be the only effective remedy for an adverse balance of trade and an undue growth of credit is once more brought into play, there will be very grave danger of a credit expansion in this country and a foreign drain of gold which might jeopardise the convertibility of our note issue and the international trade position of the country. The uncertainty of the monetary situation will handicap our industry, our position as an international financial centre will suffer and our general commercial status in the eyes of the world will be lowered. We are glad to find that there was no difference of opinion 1 among the witnesses who appeared before us as to the vital importance of these matters. The notes issued by Scottish and Irish banks which have been made legal tender during the war have not been included in the foregoing figures. Strictly the amount (about £5,000,000) by which these issues exceed the amount of gold and currency notes held by those banks should be added to the figures of the present fiduciary issues given above. 18643 A3 , 6 CESSATION OF GOVERNMENT BORROWINGS. 16. If a sound monetary position is to be re-established and the gold standard to be effectively ma tqined, it is in our judgment essential that Government borrowings should cease at the earliest possir moment after the war. A. large part of the credit expansion arises, as we have shown, from the fact that the expenditure of the Government during the war has exceeded the amounts which they have been able to raise by taxation or by loans from the actual savings of the people. They have been obliged therefore to obtain money through the creation of credits by the Bank of England and by the Joint Stock Banks, with the result that the growth of purchasing power has exceeded that of purchasable goods and services. As we have already shown, the continuous issue of uncovered currency notes is inevitable in such circumstances. This credit expansion (which is necessarily accompanied by an evergrowing foreign indebtedness) cannot continue after the war without seriously threatening our gold reserves and, indeed, our national solvency. 17. A primary condition of the restoration of a sound credit position is the repayment of a large portion of theme enormous amount of Government securities now held by the Banks. It is essential, that as soon as possible the State should not only live within its income but should begin to reduce its indebtedness. We accordingly recommend that at the earliest possible moment an adequate sinking fund should be provided out of revenue, so that there may be a regular annual reduction of capital liabilities. more especially those which constitute the floating debt. We should remark that it is of the utmost importance that such repayment of debt should not be offset by fresh borrowings for capital expenditure. We are aware that immediately after the war there will be strong pressure for capital expenditure by the State in many forms for reconstruction purposes. But it is essential to the restoration of an effective gold standard that the money for such expenditure should not be provided by the creation of new credit, and that, in so far as such expenditure is undertaken at all, it shiyuld be undertaken with great caution. The necessity of providing for our indispensable supplies of food and raw materials from abroad and for arrears of repairs to manufacturing plant and the transport system at home will limit the savings available for new capital expenditure for a considerable period. This caution is particularly applicable to far-reaching programmes of housing and other development schemes. The shortage of real capital must be made good by genuine savings. It cannot be met by the creation of fresh purchasing power in the form of bank advances to the Government or to manufacturers under Government guarantee or otherwise, and any resort to such expedients can only aggravate the evil and retard, possibly for generations, the recovery of the country from the losses sustained during the war. USE OF BANK OF ENGLAND DISCOUNT RATE. 18. Under an effective gold standard all export demands for gold must be freely met. A further essential condition of the restoration and maintenance of such a standard is therefore that some machinery shall exist to check foreign drains when they threaten to deplete the gold reserves. The recognised machinery for this purpose is the Bank of England discount rate. Whenever before the war the Bank's reserves were being depleted, the rate of discount was raised. This, as we have already explained, by reacting upon the rates for money generally, acted as a 'check which operated in two ways. On the one hand, raised money rates tended directly to attract gold to this country or to keep here gold that might have left. On the other hand, by lessening the demands for loans for business purposes, they tended to check expenditure and so to lower prices in this country, with the result that imports were discouraged and exports encouraged, and the exchanges thereby turned in our favour. Unless this two-fold check is kept in working order the whole currency system will be imperilled. To maintain the connection between a gold drain and a rise in the rate of discount is essential to the safety of the reserves. When the exchanges are adverse and gold is being drawn away, it is essential that the rate of discount in this country should be raised relatively to the rates ruling in other countries. Whether this will actually be necessary immediately after the war depends on whether prices in this country are then substantially higher than gold prices throughout the world. It seems probable that at present they are on the whole higher, but, if credit expansion elsewhere continues to be rapid, it is possible that this may eventually not be so. CONTINUANCE OF DIFFERENTIAL RATES FOR HOME AND FOREIGN MONEY NOT RECOMMENDED. 19. It has been argued before us that during the period of reconstruction and perhaps for many years afterwards it will be possible and desirable, even though the exchanges are adverse, to keep money for home industry substantially cheaper in this country than it is abroad and yet retain an effective gold standard by continuing the present practice of differentiating between home money and foreign money. It is held that relatively low rates should be offered for home money and charged on domestic loans, while gold is at the same time prevented from going abroad by the offer of high rates for foreign money. In our judgment, so soon as the present obstacles in the way of international intercourse are removed, any attempt to maintain this differentiation must break down because it would be impracticable to prevent people from borrowing at the low home rate and contriving in one way or another to re-lend at the high foreign rate. This could only be prevented, if at all, by the maintenance of such stringent restrictions upon the freedom of investment after the war as would, in our opinion, be most detrimental to the financial and industrial recovery of this country. Even, however, if differentiation, as a post-war policy, were practicable, it would not, in our judgment, be desirable. For the low home rate, by fostering large loans and ,o keeping up prices would continue to encourage imports and discourage exports; so that, even though the high rate offered for foreign money prevented gold from being drawn abroad, it would only do this at the cost of piling up an ever-growing debt from Englishmen to foreigners. It would be necessary at the same time to continue to pay for our essential imports of raw materials by borrowing in the United States and elsewhere, instead of by increasing our exports, thus imposing further burdens of foreign debt. This process could not continue indefinitely, and must sooner or later lead to a collapse. We are, therefore, of opinion that the need for making money dear in the face of adverse exchanges cannot, and should not. be evaded by resort to differential rates. LEGAL LIMITATION OF NOTE ISSUE NECESSARY. 20. The foregoing argument has a close connection with the general question of the legal control of the note issue. It has been urged in some quarters that in order to make possible the provision of a liberal supply of money at low rates during the period of reconstruction further new currency notes should be them created, with the object of enabling banks to make large loans to industry without the risk of finding themIt is plain that a policy elves elves short of cash to meet the requirements of the public for legal tender money. this kind is incompatible with the maintenance of an effective gold standard. If it is adopted there will no check upon tne outflow of gold. Adverse exchanges will not be corrected either directly or indirectly through a modification in the general level of commodity prices in this country. On the contrary, as the issue of extra notes stimulates the conditions which tend to produce an advance of prices, they will become steadily more and more adverse. Hence the processes making for the withdrawal of our gold will continue and no counteracting force will be set in motion. In the result the gold standard will be threatened with destruction through the loss of all our gold. 21. The device of making money cheap by the continued issue of new notes is thus altogether incompatible with the maintenance of a gold standard. Such a policy can only lead in the end to an inconvertible paper currency and a collapse of the foreign exchanges, with consequences to the whole commercial fabric of the country which we will not attempt to describe. This result may be postponed for a time by restrictions on the export of gold and by borrowing abroad. But the continuance of such a policy after the war can r- only render the remedial measures which would ultimately be inevitable more painful and protracted. No doubt it would be possible for the Bank of England, with the help of the Joint Stock Banks, without any legal restriction on the Note Issue, to keep the rate of discount sufficiently high to check loans, keep down prices, and stop the demand for further notes. But it is very undesirable to place the whole responsibility upon the discretion of the banks, subject as they will be to very great pressure in a matter of this kind. If they know that they can get notes freely, the temptation to adopt a lax loan policy will be very great. In order, therefore, to ensure that this is not done, and the gold standard thereby endangered, it is, in our judgment, imperative that the issue of fiduciary notes shall be, as soon as practicable, once more j limited by law, and that the present arrangements under which deposits at the Bank of England may be exchanged for legal tender currency without affecting the reserve of the Banking Department shall be terminated at the earliest possible moment. Additional demands for legal tender currency otherwise than ' in exchange for gold should be met from the reserves of the Bank of England and not by the Treasury, so that the necessary checks upon an undue issue may be brought regulally into play. Subject to the transitional arrangements as regards currency notes which we propose in paragraphs 43 to 46, and to any special arrangements in regard to Scotland and Ireland which we may have to propose when we come to deal with the questions affecting those parts of the United Kingdom, we recommend that the Note Issue (except as regards existing private issues) should be entirely in the hands of the Bank of England ; the notes should be payable in gold in London only, and should be legal tender throughout the United Kingdom. MACHINERY FOR THE CONTROL OF THE NOTE ISSUE. 22. So far we have addressed ourselves to the principles upon which the retention and main- tenance of an effective gold standard depend. We have now to consider the particular machinery in regard to the control of the Note Issue by which the observance of these principles can most effectively be secured, and what modification (if any) may be desirable or permissible in the system in force before the war. 23. We would in the first place observe that, while the obligation to pay both Bank of England notes and currency notes in gold on demand should, in our judgment, be maintained, it is not necessary for the maintenance of an effective gold standard, nor do we think it desirable, that there should be an early resumption of the internal circulation of gold coin. For the present at any rate we think that it will be more economical that gold should be held in a central reserve as a backing for notes in circulation. We do not think that any legislation on this subject will be required. People have by now become fully accustomed to the use of notes, and it is probable that (except for the limited requirements of persons proposing to travel abroad) they will continue to circulate instead of gold coin much as they do at present. Informal action on the part of the banks may be expected to accomplish all that is required. If necessary, however, the circulation of gold coin could be prevented by making the notes convertible at the discretion of the Bank of England either into such coin or into bar gold, though for our own part we should prefer to maintain the right of the noteholder to receive payment in gold coin and to trust to the informal steps suggested above to prevent gold from flowing into internal circulation. 24. Secondly, while it is a necessary condition of an effective gold standard that the import of gold should be free from all restrictions, it is not necessary to allow gold coin or bullion obtained otherwise than from the Bank of England to be exported. In view of the fact that it is convenient that the Bank of England should have cognizance of all gold exports, we think it desirable that the export of gold coin or bullion should be subject to the condition that such coin or bullion has been obtained from the Bank for the purpose. Manufactured gold should be deemed to be bullion unless it is in the form of articles containing a prescribed fashion value (say of 10 per cent.). The Bank should be under obligation to supply gold for export in exchange for its notes. These conditions will be sufficient to enable parity to be maintained between currency and bullion, since importers of gold will be free to sell it either in the market or to the Bank of England. 25. Thirdly, in view of the withdrawal of gold from circulation, it is, we think, desirable that the gold reserves of the country should be held by one central institution, and we recommend therefore that all banks should transfer any gold now hel& by them to the Bank of England, except such small amounts as they may require to keep for the convenience of travellers. In our opinion, the prohibition against the melting of gold coin should for the present be maintained. 26. We have carefully considered various proposals that have been laid before us as regards the basis upon which the fiduciary note issue should in future be fixed. It has been urged that the raising of the discount rate by the Bank of England may be delayed too long to check effectively an undue expansion of credit, and that under the rigid restrictions of the Act of 1844 a famine of legal tender money might ensue. Crises of this nature necessitating the suspension of the Act arose in 1847, 1857, and 1866, and on the first two occasions notes were actually issued by the Bank in excess of the maximum authorised by law. On this ground mainly it has been urged tliat these rigid restrictions ought to be transformed into something more elastic. To this end the following principal proposals, either separately or in combination, have been put before us by various witnesses :epartment of the Bank of England should be amalgamated ; tes, instead of being required to be covered £ for £ by gold, should I 9 to be temporarily suspended on certain rare and exceptional occa irears of the Act's this conclusion.experience of working the syste ion, invalidate operation when We recommend, therefore, t king Departments of the Bank of England should be maintained continue to be published in its present form. MODIFICATION OF PROVISIONS OF ACT OF 1844 IN RESPECT OF ISSUE OF EM 33. This conclusion, however, has not prevented us from consi modifying the Act of 1844 as to make provision for the issue of em difficulty. It might, no doubt, be sufficient to leave matters as the possibility of the law having to be broken, subject to indemnity from share the objections which have been expressed in many quarters to th opinion that the provisions of Section 3 of the Currency and Bank No of England may, with the consent of the Treasury, temporarily issue no be continued in force. It should be provided by statute that Parliam any action taken by the Treasury under this provision by means of a T before both Houses. The statute should also provide that any profits be surrendered by the Bank to the Exchequer. It will, of course, be n raised to, and maintained at, a figure sufficiently high to secure th excess issue. 34. In connection with these emergency arrangements we have c which shoilld be held by the joint stock banks quite apart from their no As we do not contemplate a resumption of the internal circulation o served by their accumulating gold which can be more effectively em maintaining the exchanges and supporting the note issue. We have co be required to hold a certain proportion of their deposits in the form dated Government Securities, which, in the event of a crisis, mig England and form the basis of an issue of emergency currency, if req that such reserves should be held, we have come to the conclusion tha any legal regulation of the matter. Our attention has, however, bee of Bankers have recommended that banks should in future be requi in the form of Appendix I. to this Report showing the average of the month. We entirely concur in this recommendation and we suggest t amplified by the addition after " money at call and at short notice " of maturing within 12 months." If this is done, we think that the consequ to secure the object whicb we have in view. AMOUNT OF FIDUCIARY NOTE ISSUE AND GOLD Having come to the conclusion that the amount of the fiduci said in paragraph 33, be fixed by law at some definite amount, we h fiduciary issue ought to be. Assuming the restoration of an effective gold standard, and given t practice and the customs of the public as regards the use of currency, (other than subsidiary coin) which can be kept in circulation, includin 35. and the Banking Department of the Bank of England, will determin currency becomes redundant, the rate of discount will fall, and prices exchange for gold for export and the volume of the currency will be r hand, the supply of currency falls below current requirements, the rate gold will be imported and new notes taken out in exchange for it. 36. -Under the arrangements which we contemplate virtually the w the country will be held in a central reserve at the Bank of England ; a in which we are using the term, will consist (apart from the subsidiar consider) in part of fiduciary notes and, as regards the balance, of notes circulation-being automatically determined, it will follow that the high issue the lower will be the amount of the covered issue and, conseque vice versa, while, if the fiduciary issue were fixed at a figure which requirements of the country for legal tender currency, the covered issue would disappear altogether. It is clear, therefore, that the amount of a figure low enough to make sure, not merely that there will always be s always be a covered issue of sufficiently substantial amount to secure tha the central reserve never falls so low as to give rise to apprehension as 37. If the post-war requirements proved to be no larger than £180,000,000, exclusive of subsidiary coin, as shown in paragraph 13) issue of £249,000,000 would have to be reduced by £69,000,000 befo central reserve at all. Evenoupon the supposition that the policy of su that reserve is completely successful, in order to have a central gold re issue would have to be reduced to £80,000,000 and, even so, we shou country than before the war. 38. The pre-war requirements, however, had relation to the level conventional standards in regard to banking reserves, and the habits amounts of money which they carried in their pockets and kept in t instruments in place of cash. It is probable that after the war world not permanently, at a greatly enhanced level, and that the banks ma higher standard for their holdings of legal tender money. Furthermor of legal tender money which may take place though the extended use O instruments may be more than offset by the fact that a larger share o enjoyed by the wage-earning classes who are the chief users of legal te 10 tend to increase the amount of legal tender money which the country will, consistently with the maintenance , of a gold standard, be able to retain in bank reserves and general circulation to a point much above the pre-war figure, but the precise amount of the increase can only be determined by experience. 39. Until such experience has been gained it would in our opinion be dangerous to seek to lay dat any precise figure for the fiduciary issue. The adoption of an unnecessarily low figure would result in the accumulation of a gold reserve of larger dimensions than is strictly necessary for the protection of the gold standard and the security of our national credit-a luxury which we shall be ill able to afford in the difficult times which are ahead-:--while the adoption of too high a figure would destroy the gold standard altogether. 40. It, therefore, seems desirable to approach the problem from the other end, and to attempt to fix tentatively the amount which we should like to see held in gold in the central reserve,. leaving the ultimate dimensions of the fiduciary issue to be settled as the result of experience at the amount of fiduciary notes which can be kept in circulation-in banking reserves (including the Banking Reserve of the Bank of England), and in the pockets of the people-without causing the central gold reserve to fall appreciably below the amount so fixed. 41. The pre-war gold reserves were about £38,500,000 in the Bank of England and an amount estimated at £123,000,000 in the banks and in the pockets of the people. If the actual circulation of gold coin ceases and the whole of the gold is concentrated in the central institution, some economy is permissible in view of its increased mobility. On the other hand the aggregate amount of currency required will undoubtedly be larger. We accordingly recommend that the amount to be aimed at in the first instance as the normal minimum amount of the central gold reserve should be £150,000,000, and that, until this amount has been reached and maintained concurrently with a satisfactory foreign exchange position for a period of at least a year, the policy of reducing the uncovered note issue as and when opportunity offers should be consistently followed. In view of the economic' conditions which are likely to follow the restoration of peace, it will be necessary to apply this policy with extreme caution and without undue rigidity. When the exchanges are working normally on the basis of a minimum reserve of £150,000,000 the position should again be reviewed in the light of the dimensions of the fiduciary issue as it then exists. REDUCTION OF PRESENT CURRENCY NOTE ISSUE DURING INTERIM PERIOD. 42. If these arrangements are adopted, there will be an interim period beginning after the completion of demobilisation during which it is probable that the present issue of Currency Notes will have to be gradually reduced until experience has shown what amount of fiduciary notes can be kept in circulation consistently with the maintenance of this reserve. It was suggested to us in evidence that, until that amount has been ascertained, steps should be taken as soon as possible after the war to reduce the uncovered issue at the rate of not less than 3 per cent. per annum of the outstanding amount, and that, subject to arrangements for meeting a temporary emergency, the issue in any period of six months or one year should not be allowed to exceed the amount outstanding in the preceding similar period. We think that it would be highly desirable to aim at a steady and continuous reduction, but we are disposed to doubt whether it will be found to be practicable to work to any precise rule. We confine ourselves therefore to the general recommendation of policy indicated above. We entirely concur, however, in the suggestion that, when reductions have taken place, the actual maximum fiduciary circulation in any year should become the legal maximum for the following year, subject only to the emergency arrangements proposed in paragraph 33. TRANSITIONAL ARRANGEMENTS PENDING REPLACEMENT OF CURRENCY NOTE ISSUE BY A BANK OF ENGLAND ISSUE. 43. It remains for us to consider how and when the present issue of Currency Notes is to be replaced by the Bank of England issue. There would be some awkwardness in transferring the issue to the Bank of England before the future dimensions of the fiduciary issue have been ascertained. We, therefore, recommend that during the transitional period the issue should remain a Government issue, but that such post-war expansion (if any) as may take place should be covered, not by the investment of the proceeds of the new Notes in Government securities, as at present, but by taking Bank of England Notes from the Bank and holding them in the Currency Note reserve, and that, as and when opportunity arises for providing cover for the existing fiduciary portion of the issue, the same procedure should be followed. The effect of this arrangement would be that the demands for new currency would operate in the normal way to reduce the reserve in the Banking Department at the Bank of England, which would have to be restored by raising money rates and encouraging gold imports. 44. We should thus in course of time have the Currency Note issue covered partly by the £28,500,000 of gold at present held and partly by Bank of England notes covered by gold in the Issue Department of the Bank of England ; the balance, forming the fiduciary part of the issue properly so-called, being covered by Government securities as at present. During the transition stage the greater part at any rate of the demand for gold for export will fall upon the Bank of England, since currency notes are not likely td be presented to any large extent for actual payment in gold, but will be paid in by the banks which collect them to the credit of their accounts with the Bank of England, the balances thereby created being used when necessary to draw gold from the Bank of England for export in the ordinary way. We accordingly think that it will be desirable that Bank of England notes should likewise be substituted in the currency note reserve, either immediately after the war or from time to time by instalmants, for the £28,500,000 gold now held by that reserve, so that when the time is ripe for the final transfer the whole of the gold reserve may be in the hands of the Bank. 45. When the fiduciary portion of the issue has been reduced to the amount which experience shows to be consistent with the maintenance of a gold reserve of £150,000,000 in the Issue Department of the Bank, the outstanding Currency Notes should be retired and Bank of England notes of low denomination substituted, the Bank of England fiduciary issue being simultaneously increased by an amount equal to the then issue of Currency Notes covered by Government securities. As the Bank of England notes held in the Currency Note reserve and the gold against them would already appear in the Bank return, the only effect on that return of the ultimate merger would be to add to the total Bank of England issue the amount of the fiduciary portion of the Currency Note issue as ultimately ascertained, and to add the same amount of Government securities to the securities in the Issue Department. 11 46. The settlement as between the Treasury and the Bank would take the form of the Treasury handing over to the Bank in exchange for a like amount of Currency Notes withdrawn by the Bank from &illation the Bank of England notes held for the Currency Note account, and in respect of the remainder o e Currency Notes withdrawn Government securities. These securities should be either Ways and Means advances, or Treasury Bills and other marketable securities being part of the ordinary Public Debt, and should be taken at current market value. In so far as any of the assets of the currency note redemption account at the time of transfer might not come within these categories they should be retained by the Treasury and other securities substituted. The Bank of England notes of small denomination would be issued by the Bank in place of the currency notes withdrawn from circulation, partly in substitution for the Bank of England notes returned to them from the Currency Note Reserve (which would be already covered by gold in the Issue Department), and partly in respect of the Bank's new fiduciary issue based on the transferred securities. The profits of the increased fiduciary issue would be payable by the Bank to the Exchequer. SUMMARY OF CONCLUSIONS. Our main conclusions may be briefly summarised as follows :Before the war the country possessed a complete and effective gold standard. The provisions of the Bank Act, 1844, operated automatically to correct unfavourable exchanges and to check undue expansions of credit. (Paras. 2 to 7.) During the war the conditions necessary to the maintenance of that standard have ceased to exist. The main cause has been the growth of credit due to Government borrowing from the Bank of England and other banks for war needs. The unlimited issue of Currency Notes has been both an inevitable consequence and a necessary condition of this growth of credit. (Paras. 8 to 14.) In our opinion it is imperative that after the war the conditions necessary to the maintenance of an effective gold standard should be restored without delay. Unless the machinery which long experience has shown to be the only effective remedy for an adverse balance of trade and an undue growth of credit is once more brought into play, there will be grave danger of a progressive credit expansion which will 47. result in a foreign drain of gold menacing the convertibility of our note issue and so jeopardising the international trade position of the country. (Para. 15.) The pre-requisites for the restoration of an effective gold standard are :possible after the war. We recommend that (a) The cessation of Government borrowing as soon at the earliest possible moment an adequate sinking fund should be provided out of revenue, so that there may be a regular annual reduction of capital liabilities, more especially those which constitute the floating debt. (Paras. 16 and 17.) (b) The recognised machinery, namely,- the raising and making effective of the Bank of England discount rate, which before the war operated to check a foreign drain of gold and the speculative expansion of credit in this country, must be kept in working order. This necessity cannot, and should not, be evaded by any attempt to continue differential rates for home and foreign money after the war. (Paras. 18 and 19.) (c) The issue of fiduciary notes should, as soon as practicable, once more be limited by law, and the present arrangements under which deposits at the Bank of England may be exchanged for legal tender currency without 'affecting the reserve of the Banking Department should be terminated at the earliest possible moment. Subject to transitional arrangements as regards Currency Notes and to any special arrangements in regard to Scotland and Ireland which we may have to propose when we come to deal with the questions affecting those parts of the United Kingdom, we recommend that the Note Issue (except as regards existing private issues) should be entirely in the hands of the Bank of England. The Notes should be payable in London only and should be legal tender throughout the United Kingdom. (Paras. 20 and 21.) As regards the control of the Note Issue, we make the following observations :(1) While the obligation to pay both Bank of England Notes and Currency Notes in gold on demand should be maintained, it is not necessary or desirable that there should be any early resumption of the internal circulation of gold coin. (Para. 23.) (2) While the import of gold should be free from all restrictions, it is convenient that the Bank of England should have cognizance of all gold exports and we recommend that the export of gold coin oil bullion should be subject to the condition that such coin and bullion has been obtained from the Bank for the purpose. The Bank should be under obligation to supply gold for export in exchange for its notes. (Para. 24.) (3) In view of the withdrawal of gold from circulation we recommend that the gold reserves of the country should be held by one central institution and that all banks should transfer any gold now held by them to the Bank of England. (Para. 25.) Having carefully considered the various proposals which have been placed before us as regards the basis of the fiduciary note issue (paras. 26 to 31), we recommend that the principle of the Bank Charter Act, 1844, should be maintained, namely, that there should be a fixed fiduciary issue beyond which notes should only be issued in exchange for gold. The separation of the Issue and Banking Departments of the Bank of England should be maintained, and the Weekly Return should continue to be published in its present form. (Para. 32.) We recommend, however, that provision for an emergency be made by the continuance in force, subject to the stringent safeguards recommended in the body of the Report, of section 3 of the Currency and (lank Notes Act, 1914, under which the Bank of England may, with the consent of the Treasury, temporarily issue notes in excess of the legal limit. (Para. 33.) We advocate the publication by the banks of a monthly statement in a prescribed form. (Para. 34.) We have come to the conclusion that it is not practicable to fix any precise figure for the fiduciary Note Issue immediately after the War. (Paras. 35 to 39.) We think it desirable, therefore, to fix the amount which should be aimed at as the central gold reserve, leaving the fiduciary issue to be settled ultimately at such amount as can be kept in circulation without causing the central gold reserve to fall below the amount so fixed. We recommend that the normal minimum 12 of the central gold reserve to be aimed at should be, in the first instance, £150 millions. Until this amount has been reached and maintained concurrently with a satisfactory foreign exchange position for at least a year, the policy of cautiously reducing the uncovered Note Issue should be followed. When redut. have been effected, the actual maximum fiduciary circulation in any year should become the legal maxi for the following year, subject only to the emergency arrangements previously recommended. When the exchanges are working normally on the basis of a minimum reserve of £150,000,000, the position should again be reviewed in the light of the dimensions of the fiduciary issue as it then exists. (Pares. 40 to 42.) We do not recommend the transfer of the existing Currency Note Issue to the Bank of England until the future dimensions of the Fiduciary Issue have been ascertained. During the transitional period the issue should remain a Government issue, but new notes should be issued, not against Government securities, but against Bank of England Notes, and, furthermore, when opportunity arises for providing cover for existing uncovered notes, Bank of England Notes should be used for this purpose also. Demands for new currency would then fall in the normal way on the Banking Department of the Bank of England. (Paras. 43 and 44.) When the fiduciary portion of the issue has been reduced to an amount which experience shows to be consistent with the maintenance of a central gold reserve of £150 millions, the outstanding Currency Notes should be retired and replaced by Bank of England Notes of low denomination in accordance with the detailed procedure which we describe. (Paras. 45 and 46.) We have the honour to be, My Lords and Sir, Your obedient Servants, (Signed) CUNLIFFE (Chairman). C. S. ADDIS. R. -E. BECKETT. JOHN BRADBURY. G. C. CASSELS. GASPARD FARRER. HERBERT C. GIBBS. W. H. N. GOSCHEN. INCHCAPE. R. W. JEANS. A. C. PIGOU. GEO. F. STEWART. W. WALLACE. G. C. UPCOTT (Secretary). 15th August, 1918. APPENDIX I. PROPOSED MONTHLY STATEMENT TO BE PUBLISHED BY BANKS. Statement of the average figures of the weekly Balance Sheets during the month of Capital :- LIABILITIES. Cash :- (1) Coin, Bank and Currency Registered £ Subscribed £ Paid up Notes, and Balances with the Bank of England (2) Balances with London Clearing Agents and with other Banks, Bankers or Banking Companies in the United Kingdom -£ (3) Items in transit -£ Reserve Fund Current, Deposit, and other Accounts Acceptances Endorsements, Guarantees obligations Notes in Circulati 19 ASSETS. and other Money at Call and at 8hortiNotice British Bills of Exchange - - Foreign Bills, Foreign Bank Bills and Domiciled Bills Balances abroad - - - - Investments :(1) Securities of, or guaranteed by, British Government and Colonial Securities, British (2) Indian - - Government Corporation Stocks, British Railway Debenture and Preference Stocks (3) Other Investments Loans and Advances Other Assets Bank Premises - - - Liabilities of Customers for Acceptances, as per contra Liabilities of Customers for Endorsements, Guarantees and other obligations, as per - contra - - - Printed under the authority of His Majesty's Stationery Office By DARLING AND SON, LIMITED, BACON STREET,' E.2. - - - FEDERAL RESERVE BANK OF NEW YORK DUPIICITE Woods HDLI, CaJo., August 11, 1913. LI1 ,;4..r Lord Cunliffe: .no no following remarks, kf..1 which I an sending in response y.,) four .c-,e of Juno 22, 1913, I trust will be road by you and by Llass rith the full understanding that in no respect should bi taaon ac criticism where they appeer to ba such, but rather as evidencing a dc-::ire to answer your inquiry rrith the frankness which is reqtdred in should order tLat this letter may be of servioe, and with the candor % e...7actorize the suggestions of a friend. honored I need not tell you ;err greatly feel in being asked to aid in such an important and colliplicatcd matter au that upon which you are just now engaged. The Federal Reserve Systen, while ambodying the results of inquiries coni.;:etA in all the modern banking countries, is, nevertheless, more largely mo:f.eled in its fundamentals upon English banking experience and tradition t1;-;1 upon those of any other nation. Its most important variati, from the British syetem consist in our haing twelve regional central teaks, instead of ono, with branches, and in these banks having the power to cir- culating notes, secured by their assets, instead of solely against gold. I an submitting below some comments which seem to be justified in vie,., of our four years experience under the new Federal Reserve Act, but I --ot confining these suggestions to the scope of the inquiry augg.ited by let'.er. Twelve headings will be dealt with somewhat in t: o:der of their importance, discussing first our own experience, and, later, commenting upon certain aspects of your position in the sass of eaoh heading: £. TH72 CURRZNCY NOTE ISSUES OF THE BRITISH GOVF.FLIP!ENT: The history of the note issues of the Federal reserve banks may be summarized as FEDERAL RESERVE BANK OF NEW YORK.. 2 Lord Cunliffe 8.12.19. FEDERAL RESERVE BANK OF NEW YORK. 4 Lord Cunliffs 8.12.18. large anountof circulating media into our banking system and into trade chan111 nels under the stimulus of rising prices and expanding loans and deposits, is most unlikely to result in an irredeemable currency situation, because the general contraction of business and credit succeeding the conclusion of the war will automatically bring about a contraction of the currency circulation, and the gold redemption fund is unquestionably adequate, unless the war mould last many years. The note issue has expanded as business demanded, and has been an important instrument in effecting an accumulation of gold reserves. As to your situation, I can not help but feel that not quite as sound a policy has, of necessity, been pursued. different and Your currency notes now appear to have taken a permanent place in the nation's note circulation, and, doubtless, occupy en important place in the cash reserves of the joint stock and savings banks. The gold reserve maintained against them is trifling, compared to that maintained by the Bank of England in its Issue Depart- ment, or that maintained by the reserve banks (now roughly 60j) against combined note and deposit liabilities. The fact that the currency notes are secured by interest bearing bonds, together with a deposit balance at bank and a small gold reserve, is an explicit recognition by your Government of the urgent need for prompt retirement of this circulation, 'c,1.4-t, the question arises, will its retire.ment automatically take place and how will the progress of its retirement be governed? It seems that this will largely depend upon the policy of your Government in dealing with the obligations by which the currency notes are secured. The notes should not be retired more rapidly than the reserve condition of your banks, the activity of your business, and the decline in the price level will permit. No refunding scheme for the sale of interest bearing bonds to the putr lio will replace in the pockets of your people, in merchants' tills, and in bank reserves, currency which is now required to meet demands for commercial and banking purposes. even the substitution of a balance at the Bank for the FEDERAL RESERVE BANK OF NEW YORK. 5 Lord Gunliffe 8.12.10 FEDERAL RESERVE BANK OF NEW YORK_ 6 Lord Cunliffe 8.12.18. eanking conditions. It may be a juetifiatle covIent upon the maintenance of the issue donartment of the Bank of i,nEland in its present form, that its note Jesus' was in- capable of expansion like ours, to meet the needs of the war, and, had it been capable of such expansion, doubtless some of the serious currency difficulties of 1914, which resulted in the issue of the currency notes, would have boon avoidad. since the outbreak of the war, the Federal Reserve Bank of New York has aimed to keep in stock uniss146tes of various denominations of no less than $500,0.-.1,000 and the total of unissued notesrrie:1'.n reserve by all the reserve banks has been kept at about 01.000,000,000. The protection afforded to our banking system by the assurance which knowledge of that fact gives to bankers and busireoe men has been of unmistakable value. No sueh stock of notes held by the Bank of England would have had similar effect upon sentiment as the BlAnk has no means of putting them into circulation. Later experience with our own system, if the war continues, may require a modification of these views, but, up to the present time, I believe thrt our experience justifies a greater faith in the note issue plan of our Federal Reserve Acc than in the plan of a separate department of issue without power of expension, required by your Act of 1844. Realising, further, that the position of the Dank of .:ngland, if operating under a law comparable to ours, would require fortification by a great addition to its gold reserve, leads to question C. ARE ELLISH BANKS MAT-LENDING ON MIR RESFRYEST During a visit to England in 1914, I recall stating to some of your bankers that it appeared to me, and I believed to other American bankers, that the English banks as a whole - were over-trading on their gold reserves. If the comments under paragraph "B" are justified and the Bank of England should be given the power in future to expand its note issue, then, in my opinion, no such change of law would be safe without a greater store of gold, either in the central bank, or in the joint stook hanks. FEDERAL ..-SERVE BANK OF NEW YORK_ 7 Lord Cuuliffe 8.12.18. FEDERAL RESERVE BANK OF NEW YORK. 8 Lord Cunliffe 8.12.18 or more banking institutions. 7r:i.has finally been corrected by the recent amendments to the Federal Reserve Act so that now, as stated above, the Fed . oral roLorve banks carry reserves of nearly 42,000,000,000 of gold, available to .11 the principal banking institutions of the country. Over 8,000 banko and trust companies, including practically all the large ones, are now members of the system. There has recently, I understand, been a strong move - meat in England looking to the carrying of independent cash reserves by the joint stock banks. This, I believe, would be less objectionable with you than in this country, owing to the small number of commercial banks in England; but, on the other hand, it might retard the process of recouperap tion from the war strain by the Bank of England, which should be promoted before any measures of that character are applied-to your commercial banks.In general, I think that our reserve law, and, in consequence, our reserve position, is to-day much stronger than that of the Bank of England and of English banks generally and that your situation would be largely corrected by some bank liquidation which would enable the Bank of England to maintain larger gold holdings. E. DOMESTIC EXCHANGES: At the time of their establishment, the Federal reserve banks faced difficult, and what appeared to be insurmountable obstacles, in overcoming the objections of the banks of the country to a proper regulation and control of the domestic exchanges. There are probably 30,000 banks and bankers in the United States, large and small, upon whom checks are drawn daily, many being sent to all parts of the country for various settlements. The collection of th3se checks and the adjust- ment of the resulting balances were long subject to no fixed rule as to cost or as to time of collection and settlement and, in consequence, many confusions and dangers arose, which it was the function of the reserve system to ours. This has at last been well started and I refer to the matter only in order to comment upon the operation of your magnificent London Clearing FEDERAL RESERVE BANK OF NEW YORK_ 9 Lord Cunliffe 8.12.18 FEDERAL RESERVE BANK OF NEW YORK._10 Lord Curliffe 8.12.18. employ ant of a bill or a note, ratherlthan by reliance upon an inscribed ancount. H. RATE FIXING: The Federal Reserve Act provides that the directors of Federal reserve banks shall fix the rates of discount for the various olaesec of locale which they leaks, the rates so fixed being subject to review and determi- nation by the Federal Reserve Board. These rates must apply to all borrowers mating similar types of loans. The language of the statute ous so to whether the Federal Reserve Board has the power to initiate a rate. That question hag never been definitely determined, and I doubt if need for such a determination is likely to arise. This is in the regional bank plan, as uniformity of rates can not well be brought about, and the influence of the central bank rate ie to some extent impaired. The influence of the rate of the Bank of England is so pronounced, in fact so much more pronounced than the rates of the Federal reserve banks, which are so various as to different types of loans and differ rather widely be- twen the different reserve banks, that I doubt if comparison can be made between the practices of the two institutions. I should hope, hoover, in the interest of your own money market, that no development would take place which would have the offoot of altering the stability and uniformity of rates now so well governed and controlled by the Bank of England. I. TH3 PAYMENT OF INTEREST TO DEPOBITORS:v Federal reserve banks are neither authorised nor expressly prohibited by law in the matter of allowing interest on balances. As a matter of practice, and in view of our interpretation of the law, it has been generally considered that we were without power to allow any iliteregt on deposits. It would nullify other provisions of the law which re- quire us to pay all surplus income over our 6A dividend and the maintenance of our surplus at 40% to the Government. If interest were all in fact, be little or no surplus income, in which event the profits payable to the Government, in lieu of franchise and all other taxes, would never arise. FEDERAL RESERVE BANK OF NEW YORK 11 Lord Alnliffe 8.12.18. Oa the other hand, keen competition for business auong our °commercial banks and trust coillpaniee, and the advance in the general level of interest rates, oc- onsio.led by the war, have led to the practice in some parts of the country of ing prudence somewhat dif effective in prateoting in this country promotion of ing high rates f -J:ngland to are that 4:Inglish policies in n security st grads, has pursued a of Lheir de- s have suffered the decline ars, even se accounts to a large Lclarger in nks. An liquidation of ceiving con- FEDERAL RESERVE BANK OF NEW YORK__ K. 12 8.12.10. Lord Cunliffe COMPETITION BET EN TH4 C';1:4TRAL DAM AND IT3 DEPOSITOASs The brood provieions of the Federal Reserve Act at first led many Ammricon bankers to conclude that the Federal reserve banks, with their immonma resources and power, would become dangerous competitors, in various linos of banking, with tho very institutions v'hich wore to be the owners of the capital stock, and, (outside of the Treasur4 the sole depositors in the new institutions. The feeling referred to was a serious obotpcle to our development in the larger cities, at one time, and was held by officers of merry of the larger bulks. It has boon our effort from the outset to overcome this impression and, with the exception of our moderate dealings in the open market in the purchase of bills, we are not in competition with out own stockholders and depositors in any department of banking. This has not always been the ease with the Bank of Znglend and it is a fair question to ask whether, if the joint stock banks are to be required to help build up the reserves of the Bank, as suggested in paragraph "C", and, possibly, are to be expected to maintain larger balanoes at the Bank, it may not be important to consider to what extent direct competition between the Bank of England and its own cliental; should :a avoided. An in- telligent discussion of this subject would necessitate en examination of the accounts of the Bank of England suclyas could only be made by en officer of the Bank. The English Banking System has rested upon the Bank of England as upon a rock foundation. That foundation does not depend upon any legal require- ment as to the maintenance of reserves with the Bank of England, as in the cane of the Federal Reserve System, but tradition, the desire for mutual selfprotection and the magnificent unity of the British banking system has preserved the Bank's position unimpaired ep to the present time. No small part of t.his is due to an illustrious record of sucoessful and conservative managunient by the directors of the Bank; but the question is now likely to arise, unless our information here is misleading, as to whether this good will and tradition can , - FEDERAL RRSEV,VE RANK OF NEW YORK. Lord Cunliffs 13 B. 12. In. alva7n be relied upon in tho future and, especially, in view of the develop mente referred to in the following paragraph. L. BANK MALGAMATIONS: Our National Thnk Act and the laws of practically all of our States permit the consolidation of banking institutions under various limitations. In general, however, these ooneolidatione can only be effected between institutions in the sere municipality. This has been a natural and effective curb upon the ever-development of any tendency to amalgamate and possibly has had the effect of curbing loose banking methods and reducing over-competition. in the United States. But we are in a way over-stocked with banks There are no less than one hundred end thirty-seven incorporated banks of deposit in the City of New York, exclusive of the mutual savinvi banks. Amalgamations of banks in Sngland,. however, proceed without statutory limitation, and, in recent yearn, have resulted in a great reduction in the number of institutions and, consequently, haveleade it inoreasingly fioult for new banks to be organised. This is always tho ease in a country where branch banking becomes highly developed. The creation of banks of the immense size which have resulted from recent amalgamations, nay somewhat imp- pair the influence of the Bank of Tngland, which should be maintained beyond question. Aside from all questions of economy of management, efficiency of eupervision, security, maintenance of competition, eta., I believe the greatest danger in the development of these analgamations lies in the possible under. mining of the supremacy of the Bank of England, the importance of which is not only moaaured by its relations with the great banks of London, but by the stability which its prestige has afforded to the blinking eystans of the whole world. In reading the above you may be led to conclude that the views I have expreoped relate more particularly to banking practices in Fnrland in war times rather than under penes conditions. The changes which are re- 'quired, however, to adjust banking affairs to the unexampled situations arising FEDERAL RESERVE BANK OF NEW YORK,.. 14 Lord Cunliffe 8.12.13. out of this war must take into account that the period of readjustment succeeding the conclusion of the war will, possibly, bring a greater strain and present more novel problems in bunking and finance than even those which arose at the time of the outbreak and now confront us during the continuance of the war. In this roapect the Federal Reserve System has had a distinct advantage, because we wore embarking upon a now and unried enterprise, in which defeats were expected and which could only be discovered through exThe amendment of a law approved by the President as rooently as perionoo. December 23, 1913, naturally has not encountered such opposition as would be aroused by changes proposed in the fundamental banking law of your country, adopted in 1844. Unfortunately the literature in relation to the Federal Reserve System and its development is most limited. Those who have boon engaged in managing the system have had little time to spare for the preparation of critical works which would be of value to you and your associates in the problems which you are now considering. I am, however, sending you, under separate cover, the folliwing documents: 1. The Federal Reserve Act, as it originally became law / December 23, 1913. 2. All subsequent amendments to tho act, as tabulated. / 3. A bill now pending in the Senate and Rouse proposing further amendments to the Act, known as the Phelan Bill, the paesap.,e of which is still uncertain. 4. A digest of the Act, prepared by Honorable C. S. Hamlin, Member of the Federal Reserve Board. 5. The A. B. C. of the Federal Reserve System, a recent publication by E. W. Kemmerer, Professor of Economics at Princeton University. 6. All the regulations established by the Federal Reserve Board which are now in effect. 7. All of the annual reports to Congress made by the Federal Reserve Board, which include statements of all twelve of the Federal reserve banks. 8. series of statements referred to in Paragraph "A" United Kingdom. All Indian and Colonial Banks, Bankers or Banking Companies with Head Office in the United Kingdom. MEMORANDUM. CLASS 4. All Indian and Colonial Banks, Bankers or Banking Companies with a Branch or Branches in the United CLASS 3. Kingdom but with Head Office in India or the Colonies. CLASS 5. All Foreign Banks, Bankers or Banking Companies with a Branch or Branches in the United Kingdom. Banks, Bankers or Banking Companies who would be included in Class 4 or 5, must not be allowed to register unless properly constituted and recognised as a Bank, Banker or Banking Company under the laws of the country where such Bank, Banker or Banking Company is domiciled. The published Balance Sheet must be in the standardized form Publication of Balance Sheets A annexed ; no Profit and Loss Account need be shown. In the case of Banks, Bankers or Banking Companies in Class 2, 3 or 4, the Balance Sheets must show, in the standardized form, the position of the Head Office or the Branch in the United Kingdom. (In the case of Banks, Bankers or Banking Companies having more than one Office in the United Kingdom, the accounts of such Offices must be consolidated). In addition to these Head Office or Branch Balance Sheets, such Banks, Bankers or Banking Companies must publish in London each General Balance Sheet of their Bank, copies of each general Balance Sheet to be lodged with the Board of Trade, or other Government Department, within reasonable time after publication. In the case of Banks, Bankers or Banking Companies in Class 5, the Balance Sheets must show, in the sta ardized form, the position of the Branch or the Branches in the United iingdom ; the Government to enact that British Government Securities to t! Rtent of x per cent. of the liabilities of the Branch or Branches in the U ited Kingdom shall be lodged with the Bank of England, or other approved institution, the amount of such Securities to be adjusted according to the liabilities disclosed by each yearly or half-yearly Balance Sheet, as may he determined. (In the case of Banks, Bankers or Banking Companies having more than one Office in the United Kingdom, the Accounts of such Offices must be consolidated.) In addition to these Branch Balance Sheets such Banks, Bankers or Banking Companies must publish in London each General Balance Sheet of their Bank, copies of each General Balance Sheet to be lodged with the Board of Trade, or other Government Department, within reasonable time after publication. In addition to the yearly or half-yearly Balance Sheet, all Banks, Bankers or Banking Companies must publish a Statement at the end of each month (signed by a qualified Officer of the Bank) in the standardized form B annexed, the figures of such Statement to be the average of their weekly Balance Sheets during the month ; in the case of Banks, Bankers or Banking Companies in Class 2, 3, 4 or 5, the figures to be 'those of the average of the weekly Balance Sheets of their Office or Offices in the United Kingdom. Auditing of Balance Sheets. Each year one Balance Sheet in the standardized form must be audited by either (1) Members of the Institute of Chartered Accountants, cr (2) Members of the Society of Incorporated Accountants and Auditors. The average Statement published at the end of each month need not be audited. Detailed instructions must be drawn up, both for the guidance of Banks, Bankers or Banking Companies in compiling the Balance Sheets and Monthly Statements and for the guidance of the Auditors in auditing the Balance Sheets, as to the class of item which may be included under specified headings. The Committee consider that the following-instructions should be laid down :(1) The items under the heading of " Money at call and at short notice " must not include money placed at more than a month's notice. (2) The items under the heading of "British Bills of Exchange" must include only Bills payable in the United Kingdom, drawn on, and accepted by, British persons, British firms or institutions domiciled in the United Kingdom, and Banks, Bankers or Banking Companies included in Classes 3 and 4. (3) If account is taken of "goodwill" it must be set out as a separate heading in the Balance Sheet and in the Monthly Statement. (4) Any operative charge on any of the Assets must be disclosed in the Balance Sheet. (5) Such contingent liabilities as, in the opinion of the Auditors, it is essential to disclose must be shown in the Balance Sheet. (6) A Bank, Banker or Banking Company holding 25 % , or more, of the Shares in, or Stock of, any other Bank, Banker or Banking Company must give full particulars of such holding in the Balance Sheet on a separate line between the headings "Loans and Advances" and "Other Assets." Crossed Cheques. The Committee recommend that only Banks, Bankers or Banking Companies comprised in Class 1 be entitled to present " crossed" cheques for payment over the counter. The Committee are aware that, under their proposals, certain firms or institutions, such as Discount Houses, would not be entitled to register as Banks, Bankers or Banking Companies, and that certain hardships might be inflicted on them because, with regard to assessment of Income Tax, they have hitherto been classed with Banks, Bankers or Banking Companies. The Committee recommend that, with regard to such assessment, the special nature of the business of such firms or institutions be taken into consideration by the Inland Revenue Authorities, independently of the question whether they are entitled to register as Banks, Bankers, or Banking Companies. The Committee recognise that an Act of Parliament will be required before effect can be given to the foregoing recommendations and they are of opinion that the Act should provide that Banks, Bankers or Banking Companies who have been established for at least five years at the date of the passing of such Act shall be allowed a period of twenty - four months, calculated from the date of the passing of the Act, before such Bank, Banker or Banking Company is required to conform thereto. 28th February, 1918. Form A. (NAME OF BANK). BALANCE SHEET as on 19 ASSETS. LIABILITIES. Capital :- £ Cash :- Coin, Bank and Currency Notes, and Balances with the Bank of England . (2) Balances with London Clearing Agents and with Banks. Bankers or Banking (1) £ Registered Subscribed Companies in Kingdom . Paid up Reserve Fund (3) Items in transit Domiciled Bills Balances abroad . Acceptances Endorsiltin i , Guarantees and other . Investments :(1) (2) obligations Securities of, or guaranteed by, Brititth Government Indian and Colonial Government Securities. British Corporation Stocks. British Railway Debenture and Preference Stocks . (3) Other Investments Notes in Circulation . Money at Call and at Short Notice British Bills of Exchange Foreign Bills, Foreign Bank Bills and . Current, Deposit, and other Accounts Loans and Advances Other Assets Bank Premises Liabilities of Customers for Acceptances, . as per contra . Liabilities of Customers for Endorsements, Guarantees and other obligations, as per contra . other the United . . c Form B. (NAME OF Bo). Statement of the average figures of the weekly Balance Sheets during the month of ASSETS. LIABILITIES. Capital :- 19 Cash :- Coin, Bank and Currency Notes, and Balances with the Bank of England . (2) Balances with London Clearing Agents with other Banks, Bankers or Banking (1) Registered Subscribed and Companies in the United Kingdom . (3) Items in transit Paid up Reserve Fund Current, Deposit, and other Accounts Acceptances Endorsements, Guarantees and other obligations . Notes in Circulation . . . Money at Call and at Short Notice British Bills of Exchange . Foreign Bills, Foreign Bank Bills and Domiciled Bills Balances abroad . Investments (1) (2) . :- Securities of, or guaranteed by, British Government Indian and Colonial Government Securities, British Corporation Stocks, British Railway . Debenture and Preference Stocks (3) Other Investments Loans and Advances Other Assets Bank Premises Liabilities of Customers for Acceptances, . as per contra . Liabilities of Customers for Endorsements, Guarantees and other obligations, as per contra . (Signed) 4 Headley Court Epsom 1st September 1918 C 0 p 111, Dear Mr. Strong Your letter of 23rd July has reached me but alas as you will gather from the enclosure the fates have dealt equally humbly with us as regards photographs. I had the greatest difficulty in smuggling mine out through official channels but I will have some more struck off and then impose on the kindness and good nature of Lord Reading to deliver one to you on his return to your side. Your photograph I shall look forward to receiving from you in person either here or in New York wherever we may first meet. The Committee on Currency and Foreign Exchanges has just handed its first interim report to the Lords Commissioners of the Treasury and the Minister of Reconstruction, and if it is accepted and approved for publication, I will send you a full text copy through the Foreign Office as the abridged summary does not always convey the true inward meaning. You will note that the Committee share the views you shortly express in your letter under reply but I am sure you are right and we should find some opportunity for discussing this most important matter in person. With very kindest remembrances to yourself and all those who were so good to me during my visit to your side. Believe me, Yours very sincerely, (signed) CUNLIFFE Mr. Benjamin strong Hr )LEY pus f COURT, 11;-f-i,e_4,;if "C 7-44 /4- fr;04e. X6f.s.,c, 4 /440-01-1-0-44.04-G-Xl G1.4GIAACOZ 4,14.0( */ 4v;,& 2s-tLe 0- 17$.41 &>Ge.' Ge/A-y Oes.E4. o'gr 4;4 Ae0 ko-srs-s-04 ,11.441-t ifyls "At 47-P114- /C1-16 ,kta. Ap, Ag44. 44-Wc ts,0444<) 0';e-d / 7 244,27 eic/I-s-it, /44 1-44s44. /44 t^tit-4- <rx,v. 04 71144.r A44 lam- As,7, fp-vil $4e#17 44c4-1-1 Ls. Pr0-y. .4--s4r/-401-14-s-hica-ss.04. "44. Ars,,,ir...-04 144,1/4 re-fre-x-e. n-s-e,X1' 0;s0.s441ie_ /44.17- - /gAr-4116 Sx-okee-"ro x /60; e.7 A44-1- 10*4-4; hil*: /54.14e trit;sy. -1,491! TELEGRAPHIC ADDRESS. g4fINI_IFFE.LONDOW cee....e0W(01/. 9th September 1918 EI' TE=EPHONE 1,49 1535 AvcNUE My dear Mr. Strong, Your letter of 10th Auguet has reached me, and I am looking forward to receiving the memo on your Federal Reserve Board System, but a packet of books and pamphlets on the subject have just also reached me, and I ought to be able to get quite well posted. It is really very good of you to to so much trouble, and' will most carefully go theoue,h the -carious documents, many of which I notice i-c.n to 111 returned to you, though the half yearly reeerte I presume I may keep. To me, however, any drIOU t of literature and correspondence is not equal to a few day, together in which to discuss the thing closely between us in all its bearings, and I hope that I may find an opportunity of visiting you. No news as yet as to the lhancellorts attitude on the report of the Committee on (urrency, so it will not be Published for same time. Ere this you will have received the long promised photograph from Mr. Hamlin, but I am afraid yours is lost to me for ever, unless I can arrange to visit you and get it for myself, which would be the beet solution. With very kindewt rementranoeB9 Believe me, Yours very truly, Mr. B. Strong. Wood5Hole, Mass., Is October 25, 1918 Very Private & Confidential 41' Headley Court, Epsom. My dear Mr. Strong: Your letters of 12th & 27th Aug. also 30th Sept. have reached me and I also have to thank you for the really speaking likeness of yourself which I am so glad to receive at last after so many disappointments. I certainly need nothing to remind me of you but I shall always be very proud to point to you as a very great Banker whom I had the honor to call a personal friend. I am sorry to tell you that I can make no headway the Committee on Currency as the entire attention of everyone is fixed in the various and changing prospects of the war and no one in authority seems to bear in mind the financial position that will have to be faced one day. 4 el,c1s, True we are obtaining the immediate volowit of war in a most wonderful way and very cheaply Wit when as Governor of the Bank I invented the system of having Treasury Bills on "Tap" and later on advised the Chancellor to adopt the same method with 5% War Bonds I did not anticipate that he would carry on so long without funding. 1 You shall most certainly have a copy of the Interim report of my Committee the same moment that I am permitted to send you one but I dare not now as I have so far failed to get it considered and I do not know when, if ever, it is to be published although it was submitted to the Chancellor and the Minister of Reconstruction last August. I have read your letter and suggestions with the very greatest interest and find all you say most illiminating and helpful, but indeed I do wish that I could come over and discuss things personally as a few hours conversation would be more satisfactory than means of correspondence. However, for your letter to be of any definite use I must get the first stage of my Committe's work recorded before proceeding to discuss it but you cannot have any idea of the difficulty I have in getting anyone to think of or consider anything but the immediate or even daily war prospects. Perhaps I am getting old and nervy--Let us hope so!!! With renewed thanks for your photograph and the immense trouble that you are taking to help me. Mr. Benjamin Yours very truly, /s/ Cunliffe Strong fr."- A4:14 17-1/1,4(4-7a-4.0e09idee HEADLEY COURT, EPSOM. r Aro-<-ai 841,01 40.0 3,e4elker,v feaeicue.",.. s=k-41a d1-4 Acty 41:le;-L441 04.14-11-*; ..C/te;ri, 14'k°'t ,fit "g4 11-#14 Ne441,4 1-U geelei f "yfr~.-e3 /11/-k0410-1-. AY-A' tee- - #4;tee-710-1/7 49,1144 1:16,10/441 e41 of at4t./( edGf,r4,c7 74,-%. a0 A 4e-A07.;e- %,*erf47 rrt.e.g4.-Z" 74Ce-s4-44-s. /1/1r-i,7r& 4Atelz-v7 4. frA /gee,1" I 4 Hu- ,$17 di44,4*s. G17 I ,444.47 /;4- eate-o-t, /44. eftr126.96.36.199-w, 744 iv-re-L. Gee. hum k /et, .14114,0,s4. at-c-4.-- 4111 Afrrtif 4" A irc,e4..4i 14. 4c4-e A- f Wit. /44 fP. 7/ _iee--;/ 4-d-o-fr- .44;4" .37c, ae4k,- f4%-:!,e feet 4.7 - 11/7/}d-d "We0-el C-0-74-7 40 A k34- d .4(.4-0! 0%4. AA- .ifseer4..ere" tt-0,z" frg- fr:14-01 1e- AGVc40-C4,2--e4--%-c.110-407r.- dee' Afic AL- ier- ie",11-11.0 1- LvDei 0410-4^;.+'7 /44 1,14 1407t1-0-fee.'"Allecc y deor_e /-,;Zu4, /-44_ 47.V. /471iipr-t-pogir7 /fg-c44 /4-so-L A-44-a 1,-411,4- A0,C ex/,,zet lisLve fe-rs.#1+1 /7-44-,,-f,,,ai As-a i.,74641.47 u,4.-" -e6*-c ftc - I 4,,44 fru Pool, eite-.1(-47, /1C4. _ Ac-0 /":% 06_ itt 4".e-s-1- fer - fi"e/Z-0 fel- fyi ye-4-7-p; 324>f I7 ITELEGRAPHIC ADDRESS. ) 'CUN LI FFE. LON DOW' TELEPHONE N9 3 s 19Wo-trith:// 1535 AVENUE. YttE"L ( ovw 4Lutt._ cx_1, CLt) 49-`11 Loos iu file 11 c-141sL-cal-tZ) inAL 4f-/441,/ /11 ke-tAY--YertAi tge-r /IF St .E5 REPORT OF LORD CUNLIFFEIS COMMITTEE, 11/ (Manchester Guardian, Oct. 30, 191g) The first interim repoyt of the Committee, under the chairmanship of Lord Ounliffe, appointed to investigate the question of currency and foreign exchanges after the war, was issued Oct, 29 (2g ?). The Committee say that, in their opinion, it is imperative that after the war the conditions necessary to the maintenance of an effective goirl standard should be es Cored withoat delay. Unless the machinery, which long experience has shown to be the only effective remedy for an adverse balance of trade and an undue growth of uredt is once more brought tnto play, there will be grave danger of a progressive oredit expansion, which will result in a foreign drain of gold, menacing the convethbliity of our note issue, and, so jeopardising the international trade position of the country. Among the pre-requisities for the restoration of an effective gold standard is the cessation of Government borrowing as soon as possible after the war, and the Cormodttee recommend that an adequate sinking fund should be provided out of revenue, so that there may be a regular annual reduction of capital liabilities, especially those which constitute the floating debt. YThe issue of fiduciary notes should, as soon as practicable, once more be limited by law, and the present arrangements under which deposits at the Bank of England may be exchanged for legal tender currency without affecting the reserNe of the Banking Department shuuld be terminated at the earliest possible moment. In regard to the control of the note issue, the Committee observe that, while the obligation to pay both Bank of England notes and currency notes in gold on demand should be maintained, it is not necessary or desirable that there should be an early resumption of the internal circulation of gold coin, and in view of the withdrawal of gold from circulation, they recommend that the gold reserves of the country should be held by one central institution, and that all banks should transfer any gold now held by them to the Bank of England. The Committee recommend that the principle of the Bank Charter Act, 1g44, should be maintainednamely, that there should be a fixed fiduciary issue beyond which notes should only be issued in exchange fer. gold. They suggest that the normal minimum of the central gold reserve to be aimed at should be, in the first instance, L 150,000,000. Until this amount has been reached and maintained, concurrently with a satisfactory foreign exchange position for at least a year, the When policy of cautiously reducing the uncovered note issue should be followed. the exchanges are working noomal4 on the basis of a minimum reserve of L 150,000,000 the position should again be reviewed in the light of the dAmensions of the fiduciary issue as it then exists. The Committee do not recommend thestransfer of the existing currency nute issne to the Bank of England until the future dimensions of the fiduciary issue ha'e been ascertained. HEADLEY COURT, EPSOM. ,4?.., Ao- A.._ .eIf /114C J,2f AKee--,P b/A-!--- li-e,e- /e-ea-.E- gt"Z"-Le t3d se-e--e.c-e Ox_ AZ--iz-z A fsic t Lord Cunliffe Dies in Lon4on Twice Governor of the Bank of England -End Came Suddenly on Way to Dinner. LONDON, Ja 6. -Lord Cunliffe, First Baron of Headley, died sudden17Thst night while on his way to a dinner. Walter Cun liffe had been- leader in years. British financial circles ma He was born in 1855 and wa made governor of the Bank of Engin d in 1913. Lord Cunliffe was in his 65th year,. He was educated at Harrow and Trinity College. Cambridge. He embarked early upon a financial career and was one of the members of the firm of Cunliffe Brothers. In 1895 he became a director of the Bank of FInVland. He also was a director of the Northeast- ern Railway Company. In 1911 Lord Cunliffe became deputy governor of the Bank of England and two years later succeeded to the governorship. He served in this capacity for two years anil was forthwith re- This was the first tithe in the history of the organization that a man had been elected to succeed himself as governor. In 1914 he was created the first Baron of Headley. American bankers met,. Lord Cunliffe in 1915 when he visited this country with Lord Reading to negotiate the first British war !Gan in America He was one of Lloyd George's advisers at the Paris Peace Conference.. elected. 42-actt )A40%) O(GLvat4 4_, itAru rec att.( HEADLEY COURT, Epsom. ot.k a/N * v z tAa/Vkaxi_, iNgrap -02 runt I/ fr12,74/9111 - 791-7i6 :740`i -frryct cyrutiy 404) -Ny 71, r/47/7)/ #"7"") rre9 _Try -vac 'NP47iV.P1'77%q 527v) -N'V1)1-4 P 'Vbr/2 7'12), /5/rt.ipu wrrrdi HEADLEY COURT, 02.3' EPSOM. Will you forgive a printed letter? I have been trying to write personally to the many friends whose sympathy has been such a help in this time of sorrow and loss ,. but I begin to realize that it woul take months to acknowledge all the letters, a though each one has been gratefully appreciated It becomes increasingly difficult to write, as each day brings fresh duties, but I am very anxious that all who have sent such wonderful tributes to the memory of my husband, and such kindly sympathy to me and mine, should know how grateful we are, and that we thank you with all our hearts. 444 crx> Jr-fa-14 tAAsimf' ivrti'Vb