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October 29, 1925.

Hon. Benjamin Strong, Governor,
Federal Reserve Bank,
New York City.
Dear Ben:

I shall be very much pleased if you will
give the enclosed letter to Dr. Schacht.
I hoped to see him when I was last in New
York, but your secretary told me that it was doubtful
as to when he would return there and as I had to be
in St. Louis, I could wait no longer.
Thanking you for your kindness, I am,
Yours sincerely,








The Postal Telegraph-Cable Company Incorparated)transmas and delivers this message subject to the terms and conditions printed on the back of this blank

SENI* following Telegram, subject to the


back hereof, which are hereby agreed to

October 24,1914.








May 26, 1922.


Dear Mr. Mansfiald:

At last I seem able to undertake answering an accumulation of mail, and
especially your kind letter of May 12.

Owing to my own indisposition and to some

pressing engagements of Mr. Strivings, we have been unable to arrange a meeting be-

fore June first, when I hope to spend the day with him and discuss your letters, which
I have read with much interest.

Permit me now to comment at some length upon the various matters touched upon
in your letter of May 11 to Mr. Strivings, and I shall do so somewhat in the order in
which you dictated your letter.

First, permit me to say that I am grateful to you for the kind expressions
contained in your letter.

If I am ignorant of the matters in which you are deeply

interested it is due to no lack of interest or sympathy.

I an eager to have light

and welcome the opportunity for meetings with you and others of different experience
from my own, for that purpose.

You will, I hope, understand that I took my position

in the Federal Reserve Bank of New York at some sacrifice to myself in order to have
some small part in making the Federal Reserve System a success.
object in doing so.

That was my only

I am glad to feel that both you and 4r. Strivings understand

that, te well as my earnest desire to assist in working out the problem of farm credits.
The Federal Reserve System, as you say, its in a sense a cooperative organization designed among other things to furnish credit to its members, the banks.

I think,

considering all that has transpired, that its operations have in general been successful.

On the other hand, I am willing to admit that, as with all other human instru-

ments, especially new end untried ones, it may have made a mistake here and there;

but unfortunately it has been charged with many mistakes of which it has not been
guilty, and some of these charges have, I am afraid, misled the very people whom we
are most anxious
Federal Reserve Bank of St. Louis

to serve, among others, the farmers.


George A. Mansfield, Esq.

The Federal Reserve System has about 10,000 members.

Those members carry

Heir reserves with the reserve banks and in time of need borrow from the reserve banks

just as they formerly did from their correspondents in the reserve and central reserve
cities, only for much larger amounts.

The Federal reserve banks have not and should

not have the right to require any of these members to make any specific loan nor to
decline to make any specific loan.

Were the reserve banks or

have conferred upon them the power to direct the members as to what loans they should
or should not make, it would result in the creation of a financial autocracy in the
United States beyond anything ever witnessed in the history of banking, and one which
Therefore, I think it must be definite-

the people of the country would not tolerate.

ly borne in mind that where the credit requirements of a given community are not net
as they should .4o, the difficulty lies at the point of contact between the commercial

bank and its customer rather than between the Federal reserve bank and its members or
the Federal reserve bank and borrowers generally.

The Federal reserve banks are not voluntary lenders of money as are their
member banks.

A Federal reserve bank is called upon to make loans to a member when

that member has already made loans to a point where its reserves become impaired.


other words, the loans made by the reserve banks are simply for the purpose of restoring the impaired reserves of member banks.
reserve banks hre in effect ex post facto

Therefore, the lending operations of the
- they take place after the member hank

has concluded its lending operations - and they cannot be made in such a way as to
anticipate the needs of the member bank.

This is very little realized and is one of

the necessary elements of the reserve banking system, such as we have, and such as
prevails in those countries where the central bank which holds the reserves of other
banks, does not directly do business with the public.
You will also, I hope, understand what a great misfortune it is that so small
a proportion of the banks of the country, that is, about one-third of the total number,
are members of the System.

Many cases have come to our attention, like the one men-

tioned in your letter, where credit is needed, where the borrower is good, where the


George A. Mansfield, Esq.

May 28, 1922.

nity will be served by extending the credit, but where it can not be had either
ecause the banks of the community are not members of the Federal Reserve System, or
possibly, where one or two of them are, but have already borrowed so heavily from the
reserve bank that they dare not borrow any more.

As to the specific case that you mention; it is difficult to deal with a
report of that character without investigation and without knowing the parties.


you will.give me the name of the farmer and the name of his banker, I will he very
glad to take the matter up with my friends in the San Francisco reserve bank and ask
them to investigate it.

But please do not overlook the important fact that the re-

serve bank could not itself make that loan to the farmer who needed it, and should not
be able to make the loan, and that it has no power to direct any member bank to do so,
and has even no influence which would be effective in inducing a nonmember bank to do so.

It has frequently been stated to me that complaint is made in the West that
our investors are lending vast sums abroad when our farmers are unable to get the credit
they need.

It is true that our citizens ere lending very large amounts abroad, -

but it must be borne in mind that it is those very loans which have enabled the farmers
of this country to continue to market their crops at satisfactory prices not only
abroad but at home.

To the extent that the proceeds are used by the borrowers to buy

foodstuffs, cotton, meats, etc., in this country, the effPct is directly felt upon the
farm; where the credit is

however employed for the purchase of manufactured and other

goods it has resulted in giving employment to hundreds of thousands of workmen who
would otherwise be out of work but who are now enabled to support their families in
comfort and to make customary purchnses of the necessities of life, including those
produced upon the farm.

I feel very sure that had these loans not been made, the

gradual recovery of business which is now taking place throughout the country would
have been so retarded as to have greatly embarrassed the farmers generally in 'lurking
out of their difficulties.

It is true, as you say, that our Federal Reserve System was to a considerable
extent devised along lines which facilitated the extension of short time commercial
Digitized for distinguished

from long time agricultural credit.

The need for this limitation has


George A. Mansfield, Eeq.

May 28, 1922.

xpressed in the experience of banking countries the world over.

The bank which

sues the currency, if permitted to create credit for long periods without a definite
and certain process of liquidation by which that credit will be extinguished, is
simply inviting inflation and ultimate disaster.

The principle which has controlled

the issue of bank notes upon the security of the assets of the bank, that is, upon
its loans and discounts, is one which must be scrupulously observed and safeguarded
if banks of issue are to avoid becoming instruments of inflation.
a simple one indeed.

The principle is

It is in effect thatevery loan made by the bank of issue

shall represent a transaction involving the sale of goods, so that the proceeds of the

sale shall be applied to liquidatinE the credit and retiringas rapidly as the goode
go into consumption.

The abandonment of that sound principle by the banks of issue

of the Continent of Europe is one of the causes of the breakdown of the monetary systems
of Europe; and surely no one wishes us - in the face of the disastrous example now
before our eyes - to abandon the principles which have always been recognized as controlling the policies of the banks of issue.

I can well underetsnd the feeling of

the farmers generally that the Federal Reserve Act is incomplete from their standpoint,

but, on the other hand, their own interests demand that the country's currency shall
be kept sound and fortified against any disaster, such as has been witnessed in those
countries of Europe which have not been able to escape the calamity of currency inflation.

Later in this letter I shall take the liberty of suggesting more definitely

what I think could and should be done if you and others who are deeply interested in
the matter would lend your influence toward bringing it about.

the terms of your letter that a proposal to have the Federal reserve banks purchase
bonds upon the security of warehouse certificates representing agricultural and other
produce, would not appeal to you if you were once convinced that it would he the
entering wedge to break down the Federal Reserve System in the performance of its true

On that account I am asking you to consider the suggestion outlined later

in this letter.

As to the extent of the authority of the Federal Reserve Board over the
 banks, it

can hardly he such greater than it is; were it to be enlarged beyond


George A. Mansfield, Esq.

present terms of the Act, I believe that there would be danger in course of time
that the Federal Reserve System would become a part of the government machine, would
develop a bureaucratic and inefficient management, and might later become a political
inatrumant with capacity for much harm tr.., the wel"are of the country.

This is a

dogmatic statement of my own belief, but it is based upon experience since the
establishment of the System.

As to the political and economic pressure to which you refer, I really feel
that you say have been misled by some of our critics.

The Federal reserve banks, and

especially the Federal Reserve Board, have been the objects of the most ridiculous
and fantastic charges.

It has been our policy in the New Yor

is true generally of the other reserve banks, to make no public answer to these charges,

but to respond fully and accurately to all inquiries made by the Federal Reserve Board,
by the duly authorized officers of the sovernment, and by the Congress.

The official

documents bearing upon some o1 these controversies I believe have been placed in the
hands of a great many people, and they have given a more correct picture of the System,

of its policies, and its management than could be done in any other way.

With this

I as taking the liberty of sending you a printed volume of the Hearings before the
Joint Commission of Agricultural Inquiry in Washington, which contains a statement
that I made and which I would much appreciate your reading.
I know of no case where any one has peen punished for criticizing the System,
and know of no method by which such punishment could in fact be administered.


case to which you refer has never come to my attention, and if you will be good
enough to send me the papers, I will see if I can get the facts and send them to you.
As to the difficulty which you experienced yourself, will you not be good enough to
write me :filly what the circumstances were and who were concerned in it, and again
I will be glad to take it up with my friends in San Francisco, although as ynu realize,

there is some delicacy in an officer of one reserve bank interferring in any way with
the affairs of another reserve bank.

I am familiar with the action of the Federal Advisory Council, quoted in
your letter.
Federal Reserve Bank of St. Louis

you think, however, that that is an indictment of the Federal

George A. Ilantrield, Esq.

=rte System?

26, 131-.

Is it not simply pointing out a defect in our credit system, for

which the Federal Reserve System is not in any way responsible.
You are absolutely correct in your statement, that no one is so deeply in-

terested as is the farmer in our having an absolutely sound currency.

The debasement

of the currency does more harm and injustice to the man who lives upon a narrow margin
of earnings than upon any other class.

In a period of inflation, an artificial buy-

ing power is created which lasts only until the day of collapse comes.

Habits of

extravagance are developed which bring about artificially high prices.

When the

collapse arrives, wage earners are thrown out of employment, their buying power is
restricted, and then the burden of loss principally falls upon those who produce the
articles of most general consumption - that is, upon the farmers.

'Terefore, I am

led to believe that the farmer's own interest would be distinctly injured were the

Federal Reserve System to undertake to extend credits for periods as long as three
'ears, tying up their resources in that way, and issuing currency against suc'


such currency should only De issued against instruments representing actual transactions

in goods which automatically liquidate the credits for which tne currency was issued,
as described above.

In a nut-shell that is the whole story.

lengthen the period for which we can make loans has been brought forward time and
again and I have always opposed it and have always suggested an alternative course which
I believe is eound, which will meet the farmer's needs and which will protect the
Federal Reserve System, but at the same time will place a portion of its resources
at the service of the farming community.

Let me now indicate in more detail just

what I have in mind:

Some means must be found to induce State banks, which are qualified, to

become members of the Federal Reserve System.

Some means must be found to furnish the farmer and the live stock man

with credit for periods of from Fix months to three years without necessitating the
reserve banks extending credit for periods exceeding six months.

As to the first, I am not yet prepared to suggest a plan by able) this may
be brought about,
Federal Reserve Bank of St. Louis

although legislation, I am told, is in course of preparation for


Gecrie A. Mansfield, Esc.

rpose of facilitating the admispion of State banks to membership which have not
w the recuired capital.

There teem to be two alternative methods of bringing about

the desired result: One is to make memherehip in the System so attractive that State
banks will take advantage of the opportunity to join - in some respects it is not of
sufficient advantage to them, or at least they do not believe that, it is.

The other

metros' could be pore form of compulsion such as a prohibitive tax, or something of

that sort, upon the name principle which was applied to the circulation of notes of
State banks.

I personally do not like the second method.


would raise n storm of protest; and on the whole I believe that we must rely upon
enking membership in the System sufficiently ettractivg to induce the State banks to
becore members.

As to the second, I would recommend that the Federal Farm Loan System should
at once be empowered to establish eeberate farm credit departments Por the nurpose of
makias loans of from six months to three years to National and State banks and to
cattle loan companies and cooperative marketing associations, so thet those types of
loaning institutions could and would in turn make loans for like periods to their
flrmer and live stock customers.

The Federel Farm Loan System might require slightly

more capital than at present, but the larger portion of the funds could be raised by
the sale of debentures secured by these loans, the debentures to mature in say from one

to three years, according to the requirements of the farm loam banks.
be no difficulty in marketing these debentures.

There should

Banks in the money centers which

have surplus funds are always looking for short time investments that are sound and pay
a reasonable return, and there are large classes of individual investors and corporations that are constantly in the market for that type of investment.

In order that the seasonal demands which would likely reach a peak in both
the rpring and the fall might not necessitate constant borrowings for a maximum amount
through sales of debentures thus leaving idle funds for a portion of the year with
the Federal Farm Loan System, it has seemed to me that the farm loan banks should be
permitted to discount this paper with the Federal reserve banks whenever the paper



George A. Mensfield, Enc.

ached within six months of meturity.

May 2P, leP9.

Thus the Federn1 reserve benkp would tske

f of the bends of the fern loan benke, as required, all the paper of rix months
enturity or lee's, at a time of the year when otherwise the demands upon the farm loan

benks might be exeessive snd might require eRlep of debentures in excess of the normal
mean requirements of the fermers for long time tocommodetion.
Thin is a very nimple plan, (lees not reqeire the establishment of n brand

new and elaborate organization, can be inaugurated without deic:, brings both of the
credit organizations, that ie, the Farm Loan System end the Federal Fererve System,
into cooperation, and 'voile tying up the reeourees of the Federel reserve banIce in

long tine peper, which is contrary to sound principles for e hank which issues currency.

Loins of the cherecter above described would wen in fact to cover the needs
of the grain, hay, vegetable and cotton fermers, who requtre credit for not over e y e er,

or very little over a year at the outside; the live stock breeder who requires credit
for a maximum of say three years; the live stock fattener who requires credit for from
one to two yenre; the orchard man who at times requires credit for pay up to three
yearn; and the dairymen who in the East requires credit for from rine months to one

Another point which I think is overlooked in Rome other Ilene vhich I have
peen eescribed, lies in the indirect result of a plan moth es I have outlined shove.

There is no doubt that to-day there i c a general lack of edeoeate short-term hankine
credit throughout many sections of the rest and South.

This is evidenced by the

exceedingly high rates of interact frequently charged for bent( loans.

If the

fermer's needs for periods exceeding six menthe end up lo three years ere fintnced
out of the exieting resources of local berke, who in turn must, borrow from the Federal

reserve hank, there will be no real addition to the credit resources of the districts

If, as by this plan, inventment fund& can be drewn into those localities

through the sale of debentures in the money centers, it will release a considerable
amount of local banking credit now employed in loans to farmers, end tend to create a

Plow or capital from investors and the money lending carters to the borrowing section.


George A. Mansfield, Fee.


May 2E, 1922.

The plan contemplates no separate system of banking credit for the farmer.
gets his credit from the local bank or loan company where he has always gotten it.

It does, however, create two avenues of credit relief for the local bank or loan
company; one is the farm loan system for the longer time loans; the other is the
Federal Reserve System for the shorter time loans.

It is, however, essential that

the State banks should more largely become members of the Federal Reserve System.

Were it possible for me to do so, I would like to discuss this subject with
you personally.

In fact, I am tempted to suggest that we might indeed meet ih Chicago,

or some convenient central point, for that purpose.

There is nothing to be accomplish-

ed by the perpetuation of misunderstandings, and my whole effort, as I think you will
gather from the record which I am sending under separate cover, has been directed towards
suggesting something of value in the way of legislation which will produce real results.

Tharo his been so much controversy on this subject that I think I must ask you to hold
this letter in confidence.

It expresses my own point of view, butit will do no good

to have these views given publicity beyond what they were given at the time I appeared
before the Commission.

You may he sure, however, that I understand some of these

problems very much better than possibly YOU realize, that I em deeply sympathetic with

the point of view which you represent, and wish most earnetly to do something to

In conclusion, I understand that the Congress has just passed a bill providing for the appointment of a sixth member to the Federal Reserve Board, end I gether
that it ie generally understood that this new member shell be especially representative
of the interest of the farmers.

It is unfortunate that a provision was attached

limiting the powers of the reserve banks in the wetter of their bank buildings.


buildings are urgently needed for the security of the business and for its economical

If the sixth member is to be appointed upon the Federal Reserve Roerd, I

feel very strongly that the interests of the farmers will not necessarily be served
by appointing in actual tiller of the soil.

The new appointee eheuld be a man of

broad experience and point of view from the agricultural section, who has had exper


May 26, Is,

e in lending to farmers, rather than in farmin7.

I make this suggestion in the

interest of the object which you yourself desire to serve.
I am most grateful to you for Triting ma and for sending me
letter to Mr. Strivings.

Please do not hesitate to write me further and et Roy

time, e,nd command me in any way you desire.

I beg to rempla,
Yours sincerely,

'Benj. Strong,


George A. Mansfiold, Eso.,
keuford, Oregon.

copy of your

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