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On Board et/e TIsjoetic",
April 30, 1926.

Dear Mr. Harrison:

Unfortunately, I have been wretched on the boat and not feeling
up to handwritten letters
letter of kpril 23rd.

I am dictating this reply to your own fine

Mere is not anything that gives me so much satin-

faction as juot the sort of thing you havo written me, whether it is
deserved or not

I 'ail' defer writing you at length until I feel more

like correcdonding, 'eat in the meanti,ne i can assure you there will be no

doubt Lbcut the holiday.
Vdhcther it was just because I was over-tired cr because I piceed

up a "bug" before gettinz on the boat, I got a rather bad throat, had quite
a temperaturo, and just took to my bed until I felt bettor.

It has inter-

fered a lot with the work we planned to do, but the last two days I have been
up at noon arc able to take part. in the discussion of t.;10 hearings in London.

Dut I was pretty discouraged and a little anxious as to just what =_r ahead
ly thrort scene all right again, and fortunately my temperature has

of me.

about left, co T em feeling mat better, although o. little

tereeHatcly tht

'o finiel in London, I am going to Paris to spend

only e Ly or two or three, then to :tome, awl from .1eme just, as scot ac I can

make -rrengements I an going edmewhere on the shore;

co that I doubt if I

1's:telly Let off on bueiness for r month after I rettle down.
neent to find

If poosible,

littic cott-L(, :11t 6ier thorn or in OOM hotel, I am

really going to loaf.

tae" r

eelooth trir,

tree and a bit r-ri end cold, but it

ih -.e'er

ee-ther. thie: part
little difference to me,


rr. Harrison.


as i have hardly been on dock.

Tho Professors are profoundly interested in the job and seem

to be at it =mink; and night.
I will send you more particulars from London.
very best to all at the bank.
Sincerely yours,

Sr. G. L. Harrison,
Fodorel Reserve Bank or New York,
33 Liberty Street,
Ner:; York.

MAY 2 1 ':12.6


P. .7
Hyde Park Hotel,
London, May 2, 1926.

Dear Mr. Jay:

Since reaching London, we have had a long meeting at the
Bank with George Roberts.

I have also had opportunity for some quiet

talks with Norman and with Sir Henry Strakosch and Sir Norcott Warren,

the last two being members of the Indian Currency Commission, and the
impression I gain is most encouraging.

Roberts made a splendid presentation, partly in writing and
partly orally, and broke the ground for us in great shape.

I am

privately informed that the plan in the particular form submitted is
quite groggy, but they are very keen to hear us.

There is a new

project in the wind, I hear, for the creation of a central bank of
issue, with some sort of an approach to a gold standard plan, which
of course finds us somewhat unprepared;

nevertheless we get more in-

formation of what is in their minds every day and by a week from Monday
we shall probably be ready for that.

Unfortunately, I was ill all the way over on the steamer and
practically unable to do any work, but they have given us a week free
here and I expect to be ready by the end of that time.

Monday night

we are all dining with the members of the Commission at the House of

I have just had a very pleasant visit with our Ambassador,

who knew something of what was going on and has offered his assistance

Mr. Jay.


May 2, 1926.

and good wishes.

I am glad to say that I am feeling much better.
my best to all at the Bank.
Sincerely yours,

Mr. Pierre Jay,
c/o Federal Reserve Bank of New York,
33 Liberty Street,
New York, U.S.A.

Please give

Hyde Park Hotel,
London, May 5, 1926.

Dear Garrard:

I was planning to wire you today to go directly to Paris, when
your radio came.

The strike has stopped all trains and you would have

much difficulty coming up from Southampton.

Unfortunately, I was miserable on the way over and unable really
to prepare for those hearings.

7e havo spent a week here getting informa-

tion and getting ready to be heard.

The first hearing will be Friday,

and I hope we will all be finished by Tuesday of next week.

I will leave

for Paris just as coon as I can arrange about transportation.

It may be

necessary to motor to Southampton and cross on one of the liners.
George Roberts made a splendid statement to

he Commission, and

we gather from various sources that the gold standard plan is very groggy.
c hope it mill get its "knock-out" blow as tho result of our appearance.

I have Leon so wretched that I do not want to do any work as soon
as this job is finished, and my proposal is that we go on down to Italy and
stop at some place where I can get some rust.

Put that we can talk over

'when I meet you in Paris.

I hope you have had a good trip over.

Hon. Garrard B. ',7incton,

c/o Morgan, Harjes & Company,
14, Place Vendome,

Lest regards.

Hyde Park Hotel,
May 5, 1926.

My dear Itr. Harrison:

Thank you for your cable No. 2, to which I am replying as per
enclosed confirmation.

Miller's recommendations to the Banking and Currency Committee
impress me as follows:
(a) Abolishing the Federal Reserve !scents is likely the expression

of a desire to transfer more of the activities of those departments in the

Reserve Banks to the Federal Reserve Board and may be a repercussion from
the loss of Stewart and 'barren.

(b) Limitation on the speculative use of Federal Reserve funds is
a futile and foolhcrdy undertaking.

The implications of the possibility of

such limitations are such that it would spell disaster for us.
(c) The proposal to give the Board complete control over market
operations cnn only be answered by a request to the Committee to consider

the competence of the Board, not only intellectually but geographic,lly
and in every other way, to exorcise such control.

These suggestions are not directed to the betterment of the service
of the Reserve Banks, but to the enlargement of the powers of the Board.


someone said to me recently, "All impotent bodies seek to cure their disabilities by enlargement of their powers."

I suppose there is nothing to be

done about it at once, and in any event my opinions aro most incomplete
until I read the testimony which you say is coming by mail.
The strike situation is a novel experience for all of us.


cation of the newsixpers has boon suspended because of the strike, and the

Vir. Harrison. 5, 1926.


t has taken over the Press, so that likely some attempt at publi-

ll shortly be made.

I am enclosing a sample of the sort of news-

t now is published, being this morning's "Daily :Ida".

Lo busses

ng, practically all the train service except food trains has boon

, the Underground has stopped running, and the congestion in the

ecause of the enlarged use of automobiles and various types of

icles, dharabancs and the like brought into use, makes street move-


The other morning the streets were crowded with folks

o their offices, some of them walking no loss than six or seven

get to their offices and the same to get home.

e center of distribution of milk.

Hyde Park in close(

Of course, come inconvenience

ed, but so far hardly anything that cannot be treated as a joke.

in conversation a growing sense of outrage.

The Government is

for a long "tussle", but sentiment in the City is that it will be

duration and the men will begin to go back.
The Indian Currency inquiry has taken a variety of unexpected turns.

berts presented a splendid paper and made a very good impression

s heard orally.

have had opportunity to have talks with various

f the Commission at Norman's house, and night before last at a dinner

on Young gave us at the House of Comnons.
were there.

All the members of the

They seemed to be very keen, the Indian members

l informed and very well educated men, and they really seemed to

ly seeking light upon a very difficult problem.

There ha


ounding of the plan that Roberts' statement really made it very

nd it is expected that our appearance will deliver the "knock out"



1.1ay 5, 1926.

e have had to entirely recast our program, somewhat on this

account and somewhat because we have learned privately that another project
is being informally considered by the Committee along much sounder lines and
one which involves considerable banking reorganization in India.

7e have

decided to open the hearing by my presenting a rather formal prepared statement outlining our general nosition, following which Professor Hollander will
make a more scholarly general statement of the principles of our objection
tc the plan.

My preliminary etetemont will include an expression of hope

that the discussion will take a turn in the direction of something where
constructive suggestions may be made, rather th-n destructive criticism.

Following Hollander, Sarague will take un the questionnaire in

After that, I sin proposing to review their statements, filling in

some calla and elaborating some parts of it, after which we propose to have a
"battle royal".
"battle royal" is.

If you are familiar with prize-fighting, you know what a
In other words, there will be questioning around the

table, with all throe of us answerin.

Then I am proposing to conclude with

a summary, which will round up in a brief clarcification the various objections
to the proposal for s full gold standard as outlinca' in the plan and various

suggesticnr which we hope will be constructive.

The first appearance is Friday morning, and then tho hearings will
be resumed the following Monday morning.

I am most hopeful of the results,

especially new that we have been rather carefully couched as to the various
points in which susceptibilities might be aroused.

Tomorrow we expect to

have a "dress rehearsal" in anticipation of the hearing.

I wired Kinston not tc come to London.

In fact, I doubt if he


nr. Harrison.


Y.ay 5, 19:6.

could get hero if he arrived at Southampton, except by motor, with some
doubt as to whether ho could get a motor.

So I will hope to meet him in

Paris next week.

I was miserable all the way over and only the last day or two have
felt much like anything.

This has delayed my preparation, but also fortified

my intention to take a good rest as soon as the hearings are ended.


Professors seem to be enjoying the trip, and I imagine they are in no hurry
to go home.

This is all the news.

My best to all at the office.

:r. G. L. Harrison,
c/o 7ederal Reserve Bank of vow York,
33 Liberty Street,
Now York.

May 8, 1926.

MEMORANDUMof Conversation between Governor Strong
and Ambassador Houghton.

Governor Strong set forth the financial difficulties of France
which had come to a head during the course of the week on account of
the drastic decline in the exchange value of the franc, which threatened
the success of the measures recently taken to balance the budget, as well
as the acceptance by the Chamber upon reassembling on May 24th of the
settlement of the French debt to the United States government.


the morning he had been approached by M. Parmentier, representing the
French Treasury, who had requested a loan of 4100,000,000 from the
Federal Reserve Bank of New York, this loan to be secured by the deposit
of 4100,000,000 in gold to be withdrawn from the Bank of France.


to secure some such loan, acceptance of the debt arrangement by France
seemed altogether unlikely, but it was added that the grant of the loan
by no means assured the acceptance of the debt agreement by the French

On the other hand, it was quite clear that the loan by itself

would be only another stop-gap and that it would serve the undesirable
purpose of facilitating the withdrawal of capital from France by the
increasing number of people distrustful of the economic and financial
future of the country.

It was pointed out that the fall of the franc

is apparently not due to speculative activities but rather to the purchase
of foreign valuta by French citizens.

In these circumstances, Governor Strong requested a frank and
confidential expression of opinion from the Ambassador regarding present


conditions and tendencies.

In general, the views of the



On the part of th' ^ovorn-lent and on tha part of the opposition in Parlia-

ment, the most im?ortnt being the Blum-Herriot group, including likewise
the flank of France and all the important French banker°.

down their squabbles and get together on



Thoy must lay

Mr. Jay.

May 9, 1926.

An any program must b© trned u)on saving the American debt
oettlement from wreckage, it nay turn out that som sort of a temporary

exTenueuent for a credit to the reuk of France will be justified, but
I am not at all hopeful that the foundation for such n credit can be laid
at the present time.

This is about all 7 hr.lve in mind at the moment,

until I have met with the others mentioned.

As to the hearings, the whole story is comprehended in something
th;:t h,-.ppened after lunch on Friday.

7e had spent the morning before the

Commiesion, tho proceedings opening by a formal statement by me, followed
by a general argument by Professor Hollander.

immediately aftergrxds,

Professor Sprague took up the silver end of the discuesion and at the end

of that part
Federal Reserve Bank of St. Louis

of his talk many questione were asked us.

..;4) all left a

-r. Jay.


May 0, 1026.

Tilton Young is a eplendid presiding officer.

The whole

thing is conducted with great dignity and ord. r, everything being carefully
laid out in advance, co that it is not a rambling hit -or -rains affair as

one of our Congreesional inquiries.

It really is a joy to take part in

a proceeding that is so well organized.

Desidec that, these men ore a

fine lot - very earnest, certainly very intelligent, and with the exception
of one of the Indian members who is a lawyer and a bit truculent, it has
been marked by the very beet of good feeling.

Their expressions of apprec-

iation of our willingnoce to come over are unbounded.

Ail° Lerman, ndeic and George aoberts had mac tho plan groggy,
Sir Eonry Strukosch tolls me that it needed just the kind of appearance
that -en have made, with the evidince of very cnreful preliminary prepmration

and study, and such roporto as we had on diver production and the like,
to make a deep impression upon the °omission.
I am dictating this Sunday morning, and just an evid(nce of the
efficiency of the ray these things are done, yesterday afternocn
delivered to us four copies of the record, with all the charts and tnbles
we produced, in beautiful form ready for correction.

horman tells me a technical situation has arisen in Australia
which may enable hie: tc purchase C20,0CC,C0C. of told from the bank of issue.

He is propoeing to have it chipped to San Francisco for our credit, to add
to Lis present balance in Kew York, end rill wEert us to invest it for him.
It is a very confidential transaction and not yet conclude d, co please warn

the others in the office.


11:,V0 soap

CCU- doal of Lorme.n, but the arrengemer.t

cf our



May 9, 1926.

program for the hearings and the discussion of the material to be
aubmitted haD taken no end of time.

Dr. Burcess did a grand job for


This is about all the news, except that I am feelinc a good
deal better than I was, but still anxious for my 'loaf".
?Ay beet to all at the office.

itorre Jay,
c/o Federal Reserve Bank of Nov York,

33 Marty Street,
New York.


in balance.

However, since that time it appears that they have discovered

one item of a billion and a half francs which was overlooked;

second, the

budget assumes that maturities amounting to nearly 2 billion francs of


5-year loan due in December will be met by banking support or by extension,
and of course assumes that the floating debt will continue to float.

- 2 -

The 1926 budget includes a number cf extraordinary receipts,

and even if the franc had remained at 107 to the pound, could not give definite assurance that the budget would remain in equilibrium once these extraordinary receipts had ceased.
There is in the memorandum a table covering i;ne collections on the
heavy arrears in taxation.

These tables indicate that comparatively little

of these arrears is met with a cash payment.

Lost of it is paid in the form

of a 60 or 90 day mortgage on the real property of the delinquent, but it is

claimed that the State has no difficulty in disposing of these mortgages in
the event of a failure of the tax payer to redeem them.


The whole subject of the budget is greatly complicated by the question of the State railways.

rhese railways during the last few years have

covered their operating expenses with a small margin, in spite of the fact

that their passenger rates, reduced to gold, are rather below the pre-war
level and the freight rates only slightly above.

No attempt has been made

to meet any form of capital charges, even maintenance, from operating income
and these expenditures, where they have been made, have been made by appropriations from the budget.

These expenditures for railroad expenditures appear

to be classed by Belgian commentators on their own budget under the heading
of "Productive Expenditures".

Mr. Osborne presented two memoranda on the subject of the Belgian
railways, one by an Englishman, the other by a Belgian.

The English report

comes to the conclusion that, with the franc at 107 to the pound, an increase
of 25°73 in railroad rates reached gradually over a period of several years,
will be adequate
Federal Reserve Bank of St. Louis

to meet the expense of the proper maintenance of the rail-

- 3 -

roads and also to provide a very considerable sum toward capitalizing the
floating debt.

The Belgian report argues strongly against an increase cf

more than 10%, on the theory that it is of vital concern to Belgium to maintain extremely low rates both for passengers and freight in order to aid the
industrial life of the country and to secure for Antwerp traffic which otherwise would go through Rotterdam or Dunkirk.

1:aturally, if such a trifling

increase were granted, it would offer no possibilities of aiding the Government
in the problem of funding its floating debt.

It appears, however, that owing to the combined opposition of the
Socialists and of the industrialists, it would be very difficult to alter the
plan of railroad economics into such a form that they can be depended upon to
supply the State with revenues rather than with deficits.

There is no doubt

that the railroads are heavily overmanned and that their passenger and freight
rates are entirely unsound, but the interests which profit by these conditions
appear to be very strongly intrenched in Belgian politics.
Osborne also presented a memorandum which gives a history of the

negotiations between Belgium and the Bank of England and American bankers
during the last few months.

This memorandum, he stated, was entirely on his

own authority and was not to be taken as representing the views of Governor

In the course of this memorandum, there is a considerable account of

the dispute as to whether any loan granted to Belgium would be for a long term
or for three years only.

As a personal opinion, I ventured the idea that I

did not believe that any terms mutually satisfactory to the Belgian government
and the American Ambassador could be found which would permit the floating of
a three-year loan of any considerable size in the United States.


conversation, both on the budget and on the railroads and the

- 4 -

all of the data on the subject supposed the franc to be stable at 107 to
the pound, as compared with the current rate of about 150.

Mr. Osborne

also showed me a running confidential statement of movements of certain
items in the report of the National Lank of Belgium.

It appears that all

liabilities in foreign exchange are included under the general heading


"Private Deposits" and that the amount of those deposits is reached by sub-

tracting the figures of assets in foreign exchange from the liabilities in
foreign exchange.

It has been, however, a common practice for the bank to

buy spot and sell forward.

When this is done, the spot purchases are added

to their assets in foreign currency and so reduce the figure of the liabilities
in foreign currency, and no inclusion is made in the statement of any liabilities in foreign exchange arising out of these foreign contracts.

On the

last date in his record, which was as I recall April 1st, these liabilities
amounted to some 35 million dollars.

At the same time the Government, owing to its inability to keep its
floating debt afloat, has forced a considerable sum into the commercial banks.

Part of this was promptly discounted at the National Bank and is carried under
the heading of "Advances on Government Securities", an


which last

October Van Zeeland assured us never did contain any sort of a loan, direct
or indirect, to the Government.

It appears, furthermore, that a considerable

sum of these obligations, probably about 600 million francs, is overhanging

and should appear in the statement of the bank some time in the course of
nay, presumably under the item of the loan to the Government - an item which
hitherto has included only that transaction which arose out of the assumption
of the German mark currency.

For some time Yr. Osborne has had difficulty in getting these con-

population is desirous enough of stabilization to pay the inevitable price
which such measures must entail.

The one suggestion which has been forth-

coming in regard to getting rid of the enormous floating debt is the railway


reform, and neither shippers nor workmen seem to be willing to permit this
to be made available.


On Word s/s "Aquiteniaw,
tiay 15, Lae.

Dear Ur. llarrigon:

This will be about Poland.
soon co I arrived in London, the Polish LegnVon ':Toro after

me and I had tea with Constantine airmunt, the !aniatir.

is certainly

very agreaablo, a much cider than Ciechanowski, and I une.nraand

old -tkior in the service, elle= Lnglish indifferently and known 3ittl.:
about finance.

LIis only II:term-it, cn which he had no doubt been


by Ciochanowski, wl,s to ascertrin whether it wou1 L1 be pow:able for me to win

Governor Norman away from the League of Ne.tione program, which ht eeid was
utterly impoonible for Poland.


T gave him a general outline of what hc.d transpired am to the

Bankers Tract Company and Dillon, Read and Company natters and our tans
with Cinchanewski.

T rlso impressed upon him that unleos thinen improved

abrocc:, especially in r-ueh matters e2 thc Locarno situation, it would be
found vary difficult indeed for Americana to do very nuch in the er!..y of
assiotance to igurope.

I think hu quite apprecieted that point of view.

Then I told him I would have a talk with norm= and let him *snlw the result.
;oruan and 7 had two very full talks and agreed that there were
three pooaibl courses for roland: one was TeeEuo action, which Not -


after the Prli

favored but which he admitted mould be impossible

meeting and then only if r tati7factory Adjustment of the d4 putec which
arose at Geneva wacl effected.

I have explained to hlm,

that in the meantimc of course the patient might die.

-rd he under-tande,

The second courco

'r. arrison.


Vey 15, 1926.

which T rather fevered, van tc have romecreee mieuion ex ended sc as to
include repreeontntiveo of Tngland, France, Holland, possibly even Switzerland nnd 9re:den, and if the Polon. could be persuaded, e German repreeentative,

co as to meke ft full drone internrtionel inquiry, with rush official or unof-

ficial support from governnente es it might to pomei/ln to errange.

proven could be worked out ¶.n that faohion, then the degree

exorcized would of °puree be a utter of negotiation, ofd
probably have to bo en Aner:Ic-n.


Tr the

control to be

controller would

To thin proeren norm en said thet, ehIle he

would not commit himeelf permenently, he cud not object in princielo,

as he was feesible, right el/neer:plc the dioeeventageo of the Teague plan,

but would involve getting up nn orgenizatioNctieh with the Lenue wes elreedy
prepared to function inetnntly.

The third procrar mead be e pretticell Americen ono, built up
e.round 7..vanerer e report.

With that Nornnn mad not &enceinte himself, as

he dii net believe thet an effootive control mule

e devised by that method.

This wee co fer at Y could gat vith roman, PO I cam the ,anister
ju::t before leaving and explained thir position very cautiously indeed,

indict:tine trot neither %man nor I were in any way cemmitted end my function
at tl.c present tino wsz sinp/y to discuss what eight be possibiLities in case

they vented to pursue the

further to nee whether they could be made realitioo.

Put in the manntinm he hod inform& me thc.t there !led been a political upnot
in Polanii, the details., of which had not yot reached him, but it locked mther

rn fact, .'.10 faired that Pilsudrki

geined control of the Army

and that the military were taxing pot:tension and would oust the nrerent



Since then. it rppeers that exactly that hen happened, that the


Mr. Harrison.

May 15, 1926.

On board o/c "Aquitania",
May 15, 1926.

Dear Mr. Harricon:

This will be about Franco.

As I cabled you, Prrmentier flew across the Channel to pee me
at the request of Finance :Inister Perot.

His story was that, while they

had 30 million dollars left of the :'organ credit, the position of the franc

was disturbing and they did not want to attempt to hold it stesdy and use

up that balance without fortifying it with s further cred;.

My reply was

summarized in the cable, but meantime I had a very private talk with Ambacsador Houghton, to get soem line on whet was going on politically.

I did

not got very much of value, but what I did get was even gloomier then hip
unfortunate newspaper iatervThe, so gloomy in fact that I am inclined to
ignore it, or et :east minimize ito reliability.
Fortunately, Lamont and -dinston came over the following "edneedvy

and have been with us ever since.

You can doubtless get the storm from

Leffingwoll, as Lazont has cabled him very fully.

The following, I think,

suet arizee it briefly.

On returning from Spain, he found a cable from New York expressing
Leffingwell's suggestion for a financial Locrrno, to include France, Italy
and relgium and to attempt some broad, thorough plan of stability for the
three currencies at the mane level.

Lamont caw some poseibilitiee in the

plan and had arranged to talk it over with Driand, when ho was approached by
Perot for n credit of 100 million dollars.
consider it.

Lamont d= finitely refused to

Mere was a lot of misunderstanding because of Perot's 'ilex-

perience and incapacity, but meantime he saw Briand and laid the scheme
before him.

Briand saw advantages, and they had a Council meeting to

WI 15, 1926.

Ur. flarrieon.


discuso it, but ap)arently it developed that there was coma fear that
Italy aould be too strong for them.

At any rate, nothing came of it.

I think Lemont's attitude was rather that it was necentry to have
a thoroughly comprehenoivo plan and that someone in France roust tyke command

who was capable of controlling the French bankers, also the Regents of the
Den% of France and the parliamentary situation.

There was some discussion

of an approach being directly made to France by the Italians for some such

Thile ell this was being discussed, of course, the position

of the lira was regarded as being rather secure.

A number of foolish suggoe-

tione were made by Perot, ouch ao calling the tmbaceadore together for discussion, which of course would have wrecked the plan at the outset.

I believe

ho was asked to talk with aobineeu at the Tank, or at any rate he had lunch
there with the aegents, and the two points of viea there d(veloped which
stand out most strongly in his head were, on the one hand Robineau's tnat
the Dan:: would never pledge its gold, and Edward de Rothochild's, who said
there was no reason why the franc should not ultimately be restored to its
old parity.

It seems that the French Government has been sounding out other
.merican bankers.

They had a talk with Mortimer Schiff, who very properly

said that it was ::organso business and anyway such credits were of no value
to stabilize the franc when the French people were exporting capital.

I believe they also had a talk with flair's representative, who took somewhat the same position, and Lamont has written a very confidential letter
to Clarence Dillon discussing the matter in such a way that ho thinks will
result in Dillon doing nothing.

 This report, which is most sketchily outlined here, rage, retie at


Ir. Harrison.

the Bank to Norman, 'innton and myself.

lay 15, 1020.

Norman took the position that

a credit was impossible, and that the Italians should proceed at once to
s. gold basis, the French being left to come to their sense°, oven though

that did not develop until after r general election.

Mile of course we

have nothing to do with the situation at all, except it reaches a point

where some bank situation has to be &rat with, I did not hesitate to point
out to Norman that there were uncertainties in the situation which made
his proposal exceedingly inadvisable.

One wee that vie did not know how

well fortified the lira poof.tion wee.

Mile we were discussing the matter,

it seems, the lira broke from 122 to 127 and the spread between spot And
forword contracts widened about 12; per annum.

the proceeds

Lamont then stilted that

of the Italian loan had Leen reduced by pegging operations to

Mr. liarrinon.


May 15, 1.926.

be that they would come to a thoroughgoing program.

Ho is

lest they propose SOTS sort of a French commission of experts to invosticate
and report a program which will be no more than a gesture to secure the ar-

rengement of cm its, but really fruitless of results.
You will see that the oituation id very mixed.

I am proposing

to see Robineau promptly on Monday or Tuesday and make quite clear to him
what our position is.

Also, I am having lunch with Simon on ibesday, who

probably will have oonething to nay in behalf of his friend and old associate,

goes to London on Monday

Fortunately, Peret, the Finance

to endeavor to negotivto P settleaent of the British debt, so I will likely
escape anything upproeching a diecuccion of these matters with any officer
of the Government, for which I an duly grateful.
with the Polish Fl since Minieter and

Having escaped a meeting

ut off Hautain, who wanted to come to

Paris to nee mo, it seems as though I would be free to go away by cay Thursday.
I am planninz to leave ::!r. ',arren in rally, give him let tore to
oone of my friends, m.-tko him acquainted ut the Bsink


France, and also give

him c letter to the Swiss National Bank, in case he wants to run up there
while I am away, and then leave with 7ineton, 71oore and :;rneot directly for
aomo by truin.

Cne interesting devolopment of my talk with Lamont was the fact
that in every one of his convererytions with the French people, especially

Forot, it developed that what they rfelly wanted was the weans of improving
the franc before the deputies meet the end of this month, as otherwise they

of being kicked out in favor of a llerriot- government, which of

qr. Nareieon.


a capital levy.

Jay 15, 1926

If they should have such a government, the situation

would no doubt become much worse.

The French people would be frightened

and I fear the flight from the franc would get much worse than it ie now.

Laaat tells me that they all admit that their present tax program is so
badly distributed that it is much less productive than it might be.


eays a careful calculation shows that e batehelor of considerable means, if
he paid all of his taxes, would pay over about 96' of his income to the
State, cc of course none of them -:ay anything!

The some is true cf some

of the other taxec.

Thin is encugh to give you n little picture of the situation,

Which does not encourage me to believe that anything can be gained by

staying very

long in Paris.


Mr. Herrin=

inquire whether I would see him.

:.iuy 15, 1926.

The following afternoon I received a

call from Ar. Edwin L. &Li-oast Pario correopondent of th

:lea York "Timov",

who 3.-Ad that he had come to inquire the object of Parmentier's visit.
promptly told him thr,t I would not tell him the object of t...e visit, Lut I

would like to %noa how he 4nya that 1 was there.

He replied that he had

been aent to me by the French ]:ebascy in London, P.nd then it developd
by one of my statemente which he did not deny that he had gotten his infor
tion in the Ministry of rinE:nc© in Varin.

The came day, the enclosed article

appeared in the Paris "Herald", and although thin is said to be a cable from
New York, it is very likely that it orizinGted in Paris



Tim 1





On board s/s "Aquitania",
May 15, 1926.

Dear Mr. Case:

I have written Mr. Jay about the strike, Harrison about Poland
and France, and this will be something of our general plans.

We have had

a most interesting time so far, as you will gather when you read my letter
which will be addressed to Mr. Jay in regard to the Indian Currency matter.

I could not see as much as I should have liked of friends at the
Bank, although I did get out a number of times to dine with Governor Norman,

and he was good enough to drive me down to the boat today, which gave us
three hours together.

He is very tired and is planning to get away for a

holiday as soon as possible, but the pending negotiations for funding the
French debt and the strike situation have delayed his plans.

We determined to cross the Channel by the "Aquitania" from Southand

ampton because travel by Dover and Calais was so crowded/disagreeable.


reservations could be made, and the trains were filled, even the corridors
with people standing.

By this trip we expect to land at Cherbourg at 6:30 -

about three-quarters of ax: hour from now - spend the night at a comfortable

hotel there and take the 10 o'clock train to Paris Sunday morning.
Governor Robineau telegraphs that he will have us met.

By about

Thursday I hope to leave for Rome, and after a short visit there Winston and
I will probably motor north to Milan.

Mr. Warren will remain in Paris.

After a couple of days at Milan, I want to motor down to the Riviera, find
a comfortable place to spend a month, and just stay there.
after that depends on developments.

What I shall do

Winston has to be back by the middle

of June, so he will probably do little more than complete the Milan trip

May 15, 1926.

Mr. Case.


before returning for his boat.
I am glad to say that I am feeling very much better than I did,

as I was afraid for a time that I would be too knocked out even to go on
with the discussion of Indian currency.

You would be amused at the enjoyment

that the two Professors have had on the trip so far.

They certainly did

"spread"themselves in London, and I must say they have been most delightful
companions in every way and did a fine job with the Commission.

As it may

be the next steamer before I get off anything like a report, I will give you
a little sketch of how it was handled.

I made an opening statement, rather carefully prepared, which was
really our platform.

Then Hollander gave a doctrinaire discussion of the


plan as distinguished from the questionnaire, which was very well received,

although at times I felt that he was a bit over-emphatic, and later learned
that the Commission also got that impression.

That occupied all of the

first morning except for about half an hour, which Sprague used to develop
an outline of what he proposed to say.

The following morning, which was

Friday, he completed his statement, all of it being directed at a dissection
of the questionnaire.

In both instances, questions were asked by the members

of the Commission at the conclusion of the statement.

It was a most orderly

and dignified affair, held in the Council Chamber of the Indian Office on
Downing Street, the tables being arranged in a square, we sitting at one
side, the members ranged with the secretaries around in a horse-shoe and the

recording stenographer sitting alongside of the witness.

The reporting, by

the way, was excellent, and the following day we received four mimeographed
copies of the statements, one to be corrected and returned and the other
three to be retained.

Monday morning was my day, and I dismissed the


May 15, 1926.

Mr. Case.


questionnaire, which was covered fully by Sprague, except as to our gold
position, and covered all of that, then went into the banking situation
in India, following which many questions were asked.
devoted to their asking questions.

Tuesday morning was

We had no program of original discussion.

The Commission consists of six British and four Indian members.

They all have divergent interests, and in general the Indians are arrayed
against the British.

Three of the Indian members were rather sympathetic,

friendly and helpful, although not altogether in agreement and a little
difficult to judge.

The fourth Indian member, Sir Maneckji Dadabhoy, was

an Inner Temple man and trained barrister and has quite a reputation in
Bombay as a shrewd examiner of witnesses.

He is rather of the Samuel Unter-

myer type, and at times we had quite a good deal of difficulty with him.
Sprague was itching to get after him and could have given him a bad time,
for Sprague is not a person to handle uncautiously in such a battle.

I have

found him shrewd and quick as a flash, but I persuaded him of the unwisdom
of that.

Only, finally one day Dadabhoy got rather gay and it fell to my

lot to deal with him, which I was afterwards told was done effectively.
I am writing all of this aside from the report, as it would not

have a proper place there and will rather prepare your mind for the report
when it comes.

The experience was intensely interesting, especially as we

met all the Commission, including the Indian members, a number of times at
lunch, when we had a chance to have pretty frank talks.
I also spent an afternoon with Sir Purshotamdas Thadurdas.

He is

the ablest Indian in the Commission and, they say, one of the ablest and
most successful men in India.

He told me all their troubles very frankly

and proved to be a splendid fellow, but of course a thoroughgoing Indian.

Mr. Case.

May 15, 1926.

He is a high-class Hindou, whereas Dadabhoy is a Parsee.

On the whole,

I would put it down as one of the most interesting experiences I have ever
had of that character, and the way the proceedings were conducted would be a
model and example to our Congressional committees.

Hilton Young conducted

the proceedings with the greatest dignity and tact, now and then in a gentle
way restraining the obstreperous Indian member, and apparently after five
months, which I believe is the time they have already been at work, he seems
to have all the members of the Commission completely under control.


nately, Sprague and I were both able at times to introduce a little humor
when the situation was strained, and there were some hearty laughs, especially
over Sprague's rather droll but very apt retorts.

I must say that without

Sprague and Hollander, I would have had a much more difficult time, and doubt
if I could have succeeded in getting away


This is just a gossipy little picture of the setting which I thought
would interest you and the other boys at the Bank.
Sincerely yours,

Mr. J. H. Case,
c/o Federal Reserve Bank of New York,
New York.




May 15,

Y.r. Jay.

It incidtntolly developed that the Goverment had teen preparing
for a general rtrike for months and that it had an immenoe ergenization
ready to taks over the variouo services.

For a fed days, of courne, subways,

treme, newspapers, railroads, dock laborers, porters, and even the taxicab
service were all unmanned, and London presented a curious spectacle with an
enormous traffic on the streets of automobiles end other haeLily devised means
of tranc;)crtation, but revertholere crowds of people walking to work.
of them whom I talked with lied walked in seven


from the country.

Automobiles eickcd people up wherever they could and a sort of inprorieeu

aeeietance ens rendered in ell directions, am: gradually conditions were improving.

Ivan the railroad train service was .eettleg better, aathcegh

most inadequate, when more developments occurred which brought the strike to
a sudden concluoion.

Two were described to re in ooze


In the oats of the rellreedr, it came to the knee edge of the labor
londere that men deo

were employed by

one railroed would quietly present

thereelvet ac volunteers et erother railroad old there wan a general delft
takine plece,with the men

/rifting beck to work or other linos than the

ones :her- they welre originally emr/oyed.

P. looked as though the etrike lee caving in et that 7oirt.


the rrint!.re' =Ion tnt -t' the T.U.C. the day tefcre the strikes ended, told

them they did net know much about the ceueee of the etrike, end that they were
not in nInveathy with it anyeey, enpecielly ee they hnd heard that it was 11-

lega/, and they decided to co beck to monk the next day if they could get
their jebe beck.
 Labor leader,

The following dry, without any ereliminary notice, Pugh,

and come of hie colleagues went tc

leldwin and told him

Mr. Jay.


preliminary negotiations to that and.

May 15, 1926.

It just ended.

Mr. Duldwin showed

his splendid character then in the restraint with which he handled the situation, both with the Labor men and in his speech in the House, which had no
bitterness and no note of exultation in it.

I think Baldwin's attitude wade

a more favorable impression than anything that has happened, and he has
emerged from the trying situation in which he found himself, much the most

popular man in England and with his influence and prestige imeneely enlarged.
o none of us really suffered any inconvenience.

Lack cf news-

papers and taxicabs was the most obvious thing, but the eenential work went on
just the name.

The traffic made driving rather difficult, but I had a private

car during my stay, which relieved me of any fatigue.

Unfortunately, one

night when it was raining we barged into one of the metal posts that carry the
street lamps of Piccadilly, broke off the pont and smashed the oar pretty well;

also gave the driver a pretty bad bump and shock me up a bit, but with no cerJour consequences to either of us.

Some exceedingly arusing incidents occurred in connection aith the

One wne the parade of food supplies across London in a string of

lorries about a mile and a half long, which was escorted by armored care and

It made a tremendous impression upon the people in the streets and

convinced everybody that the Government was going to attend to the movement
of food at any cost.

I am told that there was not a gun drawn or fired

during the entire strike, although three million men were out.

At one of

the principal seats of disaffection, the police arranged a football game one
day with the utrikers, the wife of the Chief of Police kicked off the ball,
and they played a game through with the utmost good nature;
adjourned to a nearby pub for a drink.

they then all

An immense crowd watched the game.


7r. jay.

May( 5, 1926.

Llay15, 1926.

r. Jay.


very little good as yet, but of course the buscoe are running, the) taxi-

cabs and so on, and the food service is almost kok to normal.
will give you a little picture of just hoar it went.
is hart: to say vihat the consequences yin be.

7 hitd a long t-Ilk

Layton, viho says that i: the Government exerois.m sufficient r-Ttraint over
employerb, vo LILA they Jo not tal.a undue e.41vtuttoze o: tho n eu is their

preLeat plight, they think the results on the whole will be excellent.

The idea seems to be to turn

the loyalty of the men to their unions in

the direction of loyalty to ft ;rlacipl, aa4 that idea Mr. Baldwill is
endeavoring to caltivItte.

T hope he succeede.

the effect upon the

British budget to discussod as tuaniAg 6 4. or e v?tillInz rCditiont2 to
the income tax.

A shilling would meek an eat3L7ated loss in actual expend-

iture and lost revenues of possibly fro,
doubt if i

to 00 million sterling.

is as .11nch, but only time can tell.
This w.4.12 be enough for now.

Bea regards as alwRys, PnO

many thonkr fcr those fine cigars.
Sincerely yours,

Mr. Pierre Jay,
c/o Federal Reserve fenk of New York,
Llb,.!pty Street,

Neu York.


Grand Hotel,
ROM., May '11,


Dear ;1'. Harrison:

Cie of yew' cables contained a suggestion that you might have
had a talk with Dr. Miller about my health, because of the word I had
sent about being ill.
lot you

I am very mnch better now and think I ha0 better

know exactly what happened.

I must have gotten some infection;

si:nilar to what happened it Colorado, possibly my old enemy "stre,Jtocaurn.

At any rate, I Was feeling miserable before I got on the boat, and as soon
es I got on the boat, melaged to get up a 1.retty good temperature,. coughed

incessantly and felt like-the very devil - in fact, spent a.!ood part of the
time on the trip in bed.
cuch as I have had


There did not seem to be any antrum infection
but it was all my throat and chest.

The high-

cot temperature was 102 one day only, and then it gradually subeid d.

After a fua days in London it gradually disappeared, but I was still feel:41g

Wretched and weak, end the need for preparing for that inquiry and

then four days at that and finally a terrible ordeal in Paris, all co mbined
to sand me South tc Rome a bit of e. wreck.

strange to say, as coon as we

got cut of Paris I felt better, and I am much better today than I have been

time, so I don't ',7ent any of you tc bother about me a bit

Ze are herirg scree interaatini portles here.
Stri.vher, of the 71.F.n!

of Italy, tomorrow morning.

I expect to meet

Uonday newton, to man

named Puma and I ere motoring North to Perugia and back the next day.
Zos dine at the Fletchere Tueeday night.
two quiet motor tri2s in Vie neighborhood.

Then we are going to take one or
rriday night we are eining

;1,11 Pummi and Mucsolini, Just a quiet little informal party at a restaurant.

'Kr. Harrison.

Lay 22, 1926.


Saturday we motor North to Milan, then from there over to the Riviera,
where we shell go to a little place named Beauvnllon.

-From there linston

will go on to Cherbourg and sail for home, and I am planning to eend a
month at Benuvallonl
I will write you later about things in Italy.

13m zotting

more. information herr anl therm is much more freedom in Eiving in formation

than one ever experiences In Franco

sllnys excepting the Ban'! of Fmnce,

There they talked with me very frankly.
This is just. n. little account of vhnt I am doing to '-l-e up for

thn look of lattero since I left home.
Sincerely yours,

L. Earricon,
c/o Federal Reserve Bank of New York,
row York.



Grand Hotel,
Rome, May 23, 1926.

Dear Mr. Harrison:

Continuing something about France, which was covered to the time

I left London in mine of May 15th, on arrival in Paris we were met by
Robineau's secretary, and at his request I arranged to go to the Bank at
3:30 the following day, Monday.

Robineau was very much agitated about the situation, especially
in Parliament.

A sharp decline had already occurred in the franc, and he

was under great pressure from the Minister of Finance to negotiate a loan on

He admitted that there was no plan of a comprehensive sort, and I

gained the impression that he had little confidence that any plan could be
developed by the present Finance Minister cr even by the present Government.

I pointed out to him as tactfully as possible how very serious it would be
if we made large advances to the Bank of France secured by gold and then no
general stabilization plan was forthcoming, or any plan proposed proved to
be unsatisfactory to foreign banks so that the Government would be unable
to arrange credits and repay our advances.

It would result in our taking

gold from the Bank which had been pledged as security, and we would be excoriated from one end of France to the other.
It was a long talk.

The discussion was very frank and the inter-

pretation excellent, and when I left I had every assurance from Robineau,

Picard and Leclerc, the three Directors, that they were in entire accord with
what I said and intended to resist any proposal tc use their gold at the
present time and until a complete plan had been developed.

I must say they

struck me as being rather helpless and with very few constructive ideas.

We discussed whether it would not be possible for the present Gov-



P3, 1926.

U. Harrison.


ersment to Cet the cooperation of the opoosition in the ChaMber, for the
Bank of France to get the; cooperation of the entire banking comunity, and
then have the Government turn the mouestary problem over to the Rmek, which
would call in experts anti work up a comprehensive progrmm.

They diodlosad

that there were differences of view within the Dant itself, but practiosl

unanimity in oppoeticm to the use of their cold.

They else teemel indis-

posed to make use of the /ow,an credit, Whit they felt wee the "'net ditch".
They all oaid that th, budget, co long no prices did not advanct, wee really
balanced, but would net r*

.in oo unions th.c franc could be protected.

The mhturltien of the ZVI, of whinh some three billion francs were duo tc be
paid, ';:are really in cood chaps, and it turned out as a matter of foci that

11 of the hclecre w!-,o hod signified their intention to take payment at

moturi'zy left the procnedg on deposit with the Treasury and were actually pro-

pocing to take new incueo of Bone do la Defensc.

We did not get for enough along with the dleouesion to oatiefy
0.alneau Uondry aftornoen, no 1 returned Tuesday afternoon.
opportunity for a tall:

ono or :Am others.

Modk, Harjes and Dean Jay, Parker Giltert And

T fcr:nrt that the ?rondi Oovernment had appronthed Schiff,

Clarence Dillon, and rin-l_r 4 Conuany as well r%o

vienon of cue sort or

Tleantime, I had

.tc;t:an's and myzelf for ad-

alwnyr sruccoginc, the Dank of Froncl/as secur-

All had declinTd on the cround thr.t it woe merely temporizinc with the

si,;unton, that it would not be a cure but o zaliative, and that Maly muct
get 4: :t the cause of the difficulty.

On Tuesday morilinc I had another tan with Mork, who hae. been dies%

cunning the oituation 771.4;', Lcval, ainietor of Suotice, 4ho

reecrded as the


Mr. Harrison.


ablest man in the Cabinet, and with Sardou of the Foreign Office.



ex :reseed somewhat the same opinion that Montt and oil the rest of us had,

that those temporisinc moasures were bad and that a thorouchnoinc proiyam
waa necessary.
;Janet wanted to know hether I -tiould h,ve n talk with Priand it he

sent for mo, his idee brim to errange a 'sieetinE through Laval,

I told

him thjt I saw nothing but embarratement resulting and not to ottempt it.

Brat being in London netotietinc the debt oettlement, I felt that T would
ascr?e any cesbarrassinc ter's with officials.

TUeeday afternoon T found

that aaineau had had lunch with Briand und that Briand had apperently been
urging him to


Robireau seemed very dejectod, and

s 3re.n with me.

I gainod the impreocien thet he wee conveyinc this .estate as 6 :wtter of

form and duty, but withmt any conviction hluoelf.

Ve went over tho same

groune. very fully, ond .!non he wnls convSnood that I had no intention of

chzuzinz my opinion, he c-.nd the other Dircta'a ;)resent ethibited the greatest

possible relief.

They were very well afraid that I would opon the door in

tome wny as n moult of ;Iriond's montage.

Es then told ne thnt P4ret bad telephoned from London thot morning
to advise that he ewn flying beak from London on Wednesday and withed to awe
me at six o'clock Tedreteey eveninc.

I did my best to find a vs; to escape

mooting him, but RoiIinm-J4 insistod that it would make a very bad imprestion
ene. react upon him if T fnUed to ,AL


tea, Baron Edouard de Rothschild

Jacques deNeuflize. The latter mr in a perfect panic, said that
next day, and first :,tamed to


thin;c that we should let them hrvo the credit on gold end then thrt they should

Mvy L3, 1926.

Mr. Harrison.


employ the Morgan credit without limit.


and seemed perfeetly delighted that I had lee:Veer! tc

opposed both pl
J.:et rAvencee on gold.

One little joking remark sammiC V catch Ulad.r4tention and I
gather that it hoe passed all around Paris!

Behind Robineou's offiee ie

the old ball-room of the palace, in which hangs one of the finest Fragonerde
in eeietence.

I said Jokingly to Robinsou in our firct talk that I

did not were to come in to see him some day years hence and ree a picture

beslide that Frogonard depicting me riding on a amnion out of the

Bank of France with a cigarette in may mouth end the true: loaded 0:1th their

lothschild voka of it at once and rather agreed with me that if any

such tiler occurred, FrA-5.14 would not be a very comfortable plums for me to
 viuit hereafter.



Moy 23, 1926.


Ur. Harrison.

oomething that we were unwilling to do.

May e3, /Dee.

If the Bank of France -.milted to

skip the gold, of course that was for them tc determine and not for us, and
was not a matter for negotiation.

At the end of half an hour, Perot excused himself, and I surmised
from hie attitude that he rather expected tint I would stay and continue the
disouselon with his oneoeietee, although I e.,eo not asked to do sc.

I told

him that there wee nothing further that I could do, as I was leaving the
follo,d.rg day to be eone for a month or eix rele*s and that my pleae after

that were uncertain.

He end Robineon went immediately to the Tlyeee Palace, ebere the
President had called P !fleeting of tho Celina together with the officers. and

Bagente of

the Bank.

I leneesd afterwerds free: Boron Rothethild, eho was


rrJno :.

2,3, 1926.


May 23, others told me that thi

met, end no one knows w


the franc has ime

New York aupport, no on

continuer and then a g

eeople nre finally liab

prophecies of disaster,

up elth mobs in Paris

there :le a good chanc

eeodirti it cannot deve

disorder and only get o

gets Load, with somethi
There is one

ie the unbounded confi

chance thet 3000 Dank p



May 24, 1926.

Dear Mr. Mellon:

Following the determination to make thorough inquiry into the
probable effects of the adoption of the gold standard with circulation of
gold coin by the Government of India, our studies convinced us, as you
have already been advised, that it would be essential to present the result
of our investigations to the Royal Commission, then holding its sessions in

Investigations at the Federal Reserve Bank of Pew York were placed
in the hands of Mr. W. Randolph Burgess, and at various times we called into
consultation Professor C. U. W. Sprague, of Harvard University;
Jacob R. Hollander, of Johns Hopkins University;
of Columbia University;
serve Board;


Professor Wesley C. Mitchell,

Mr. Walter W. Stewart, formerly of the Federal Re-

Dr. Chandler, of the National Bank of Commerce; also two emi-

nent metallurgical engineers, Captain H. A. C. Jenison and Ur. Arthur Notman.
In order that you may have a complete record of the proceedings,
I am sending you herewith:

(1) A copy of the invitation from the Royal Commission to attend
and give evidence at the hearings;

(2) A copy of a plan suggested to the Commission for introduction
of the gold standard by the Indian Government;

(3) A questionnaire submitted to American witnesses as a guide
in dealing with the proposed plan;

Mr. Mellon.


May 24, 1926.

(4) Copy of a statement prepared by Dr. W. R. Burgess for
the guidance of those appearing before the Commission;
(5) Copy of the report of Captain Jenison;
(6) Copy of the report of Mr. Notman;

(7) Mimeographed copies of statements made before the Commission
by Professor Hollander, Professor Sprague and myself.
Prior to our appearance, it had been arranged that Mr. George E.

Roberts, Vice President of the National City Bank and former Director of the
United States Mint, should appear before the Royal Commission, which he did
on April 30th, and with this I am enclosing:
(3) A copy of the prepared statement which he submitted to the

Mr. Roberts' oral statement is not yet available.
The members of the Royal Commission are the following:
Commander E. Hilton Young, Chairman
Sir Norcott Warren
Sir Henry Strakosch
Sir Alexander Murray
Mr. A. W. Preston
Sir Manekji Dadahboy
Sir Rajendra flath lookerjee
Sir Purshotlandar Thakurdas
Professor J. C. Coyajee
Mr. Baxter
Mr. Ayenga

Accompanied by Professor Sprague, Professor Hollander and Mr.
Robert B. Warren of our office, I appeared before the Commission on May 7th,
10th, 11th and 12th, the hearings occupying each morning.
The scheme of presentation was followed as arranged in advance.
I first presented a formal statement of our position with regard to the plan.
Professor Hollander then made an extended argument on the economic aspects

Mr. Mellon.


of the plan.

May 24, 1926.

Professor Sprague then dealt specifically with the question-

naire, at the conclusion of which statements, in each instance, members of
the Commission asked many questions.
At the hearing on the 11th, I presented a statement as to certain
of the gold features of the plan and concluded with a formal statement in
the nature of a resume of the points made in the course of the argument
during the preceding days.

The last day's hearing, 7ednesday the 12th, was devoted to discussion of certain principles relating to the establishment of a bank of issue
for India.

.bile of course no decision has yet been arrived at by the Commission so far as we are aware, I have been privately informed by the Chairman
and by practically all the members of the Commission that the American evidence
submitted had been convincing and conclusive that a gold standard with a gold
circulation and with a fixed price for gold, such as is practiced in Great
Britain and in the United States, will be impossible and that it will be
abandoned by the Commission.

It is of course too soon to indicate what par-

ticular plan will be adopted in substitution therefor, but I am satisfied
from the statements made to me that little fear need now be entertained that
this rather dangerous experiment will be undertaken by India.
Fortunately, as disclosed in the testimony, it was not necessary
to present arguments in opposition to the plan solely upon the ground of
injury to American industry.

Inherent weaknesses in the plan and possible

disastrous reactions upon India were capable of presentation forcibly and
definitely and were in themselves conclusive to the Commission, without re-

gerd to what would otherwise have been regarded as the self-interest of the
United States.


Mr. Mellon.

May 24, 1926.

Prior to the receipt of this written report, you will doubtless

have heard from Professor Sprague and Professor Hollander in some detail
exactly what transpired at the meeting, and I shall not now burden you with
further details.

My own conclusion is that the menace of the plan is def-

initely past.

I beg to remain
Respectfully yours,


Hon. A. T. Mellon,
Secretary of the Treasury,
Washington, D. C.

Grand Hotel,
Rome, !lay 26, 192G.

Dear Mr. Harrison:

This will be about Italy.

I have had very little opportunity since my arrival here to engage
in any serious discussions, my first talks with Volpi and Stringher being
largely complimentary.

Today, however, there was a meeting at Volpi'c office

of Pirelli, FUmmi, -inston, Volpi, Otringher

nyself, which lasted a couple

of hours and which I felt Aa I! most enlightening.

Volpi gave ur an excellent account of conditions end expressed his


vie= as to the uncertainties surrounding a monetary program.

lie clearly

has no program and no plan, and I am inclined to think that he in amenable to
advice, but that it will be necessary to give it most cautiously in order to
avoid asvuming more reeponnibility than I, for one, would care to assume as to
their general policy.

7 think I may sum up his petition by stating that they

have ahead of them three possible courses.

One Is to do nothing beyond moder-

ating fluctuations in the lira with such resourcor as they have available and
wait until the air clears, especially in France.

Another course would be to

undertake an immediate program of utabilivAion acid return to the gold standard,
fixInz the value of the lira somewhere around its present exchange value.

The third possibility would be to effect come understanding with the French or
even the Belgians as well, which would enable than all to undertake a program

I had a feeling during the course of our talk that the third course

appealed to then rather strongly, but that they did not minimize the many difficulties, political and otherwise, to be overcome.

Re then asked me for my own views.

I may say that the translation by

Mr. Harrison.


ay 26, 1926.

Pirelli and Ilona appeared to be exeillent, as they Checked tied


After first explaining that 'shad no authority to deal with
foreign governments, but only with the bank of issue and that accordingly our
diocussion mai quite informal and unofficial and distinctly non-political, I
asked him to osesider the following points, which titer of course en external

of view.

(1) The adoption of a plea whim% would be preeeded by a careful study
of the elhole pries structure and wage structure in Italy, ehet the ocuroe of

both had bees fermis time past and that effect any/given price or value for

the lira mead


upon prices and wages, especially in their relations to

world prices.

(2) That equally eareful study

be given to the question of the

monetary circulation, what the experience of other gauntries had bean, co as to
arrive at some determination of

sets figure at vhish to value the lira.

(3) A beleoced budget with &margin for


reduction was essential.

(4) The settlement of foreign indebtedness suet be concluded - and
that has been dens.
(5) Internal rescurese for use in
gold eltandarCshould be



commotion with

the return to the

Irebeibly larger now than would have

been necessary had tho frtno been successfully stabilised.

The entire note issue Should be in the hands of the Bank of Italy.

This has alms* been provided for by a decree just promulgated.

beat be put


pertien of the Gemernaint's debt to the Ikok of Italy had

in amiable

form, so that any tendency towards inflation could be

dealt with by lividelimg the Imre portfolios of Government securities in

preference toasmdien eni

1101161* Maass in lissount



Mr. Harrison.

May 26, 1926.

(a) Any Government credits arranged abroad maid probably be
more effective if they could be arranged in more than one Gold otandard

(9) The amount of these credits need not be as large as otherwise

would be neeeesary if the Bank of Italy could be assured of acquiring valuta
arising from foreign borrowings of a useful and productive Character by private
borrowers skull as the Italian industries.

(20 It a film' program in connection with stabilization could be
made satisfactory to foreign bankers the would do the financing, then it might

be possible for the Federal Romeo Bank to establish relations with the Bank
of Italy an a supplement to Covernment credits.

(11) It woad be essential, as a nutterItaly be free to the Bank ofdiscount ra
of policy, that menage ito

the stability of the lira, without rega

or without interference by the Treasury

Failure in this respect might break daw

(12) Am an emergency precauti

developments, it night be voll to hem i
luxury imports, elthougeft this


beoauae of the tendeney

ebeild m


anticipation of es sberge.
(13) ltreige


lig I

really productive enterprise vhiels mad

arising from musk borrowings ihould be a

I think the above very briefl


Mr. Derriesa.

talk, which was followed by


May 26, 1926.

rowed from lelpi for information as to thethse

I thought it would be possible for them to arrows credits tor as nosh as

250 million dollars, in addition to vbat they =whose.

I onaidei any answer

to this, ogl' that it was so largely a matter for hiss to disease with the
bankers that / weald boo me opiates as yet.
Pirelli, FOmmi and Winston all felt at the conclusion of our talk
that the whole aubjest had bees laid before Volpi la a readier different light

fres anything that he hod considered and that he saw the importance of a4eMOP;
fully studied progress and of a very skillfully devised policy following the
adoption of the program.

The mutterings left in this *ape, with the eader

stending that I would see Strip ismarrree shish I trail do at tbseseeisa.
The following del I will have another ling talk with 11,101.

lity OMB observation

of his attitude during the talk was that house enessdlaely swinge and, if
may soy so, a bit inclined to deal with the Whole natter soneshat less light-

I will continue this letter after our further talks, lihieh nay not,
however, be possible until Friday.

Teetering afternoon !tr. amigos. ler. Fad sod i spent a

h trier at the feet of Italy, mad the Iseedes reProsimb

f Italy, Dr. Nathan, joined us lumber again to bans good

explained to us the neening of the decree just promulgated,
of Italy will take over the aorta issues of the Bank of

f sardinia.

I also have a translation of the decree


Ur. Harrison.


8, 1926.

and his written explanation of tits transaction, ell of Which I will send

foraard in due couroe.

The sukstsase of the transaction is that the note

issues will be seemed LW a July let rind the oatire gold reserve of them*
two banks, totalling about 80 million dollars, will be transferred at once.

the gold is to be valued at the average =hafts pries of the lira for the
month of April, this value however beim' tentative, subject to adjustommt
when the lira is devalued, at shish time the total amount of gold reserve of
the Dank of Italy will of course be revalued at

The rovalmatioo

ia fixed.

thing like

400 milli=


basic otabilisation

of the gold of these to banks will furnish some-

lire of oover in MOSSO

of lb* note issue ammo&

The gold will be added to the reserve of the Dank at its gold bullion value

and the dittoing., say a billies 600 million Its or thereabouts, viii be
Shown as a epeeist assount

figures, as they



final adjulftest.

I dial not give the

included in the delomontn.

The tee banks thus

deprived of their mote laces will

Sentinue ea

trammels* is a bit aslttoits4 it the fact
that they both took part in a large credit to the Oat of NSW roes it sot into
difficultiee, trim principal amount of the credit Maus boo adioss4
purely commercial banks.


Dank of Italy, so it is to be arrangcel that fibre


of Italy

will alas Mho

over those advances and liquidate the Idols account, instead of leads
portion with the other two banks of issue.

Dtrinsbor adotoos us

that the

liquidation of the affrire of the Dank of Mos and of ono ether smeller bank
which got into difficultiee

old lista

profit, sufficiaat in his opinion to

a billion 600

they assisted will result in a very large

optiraly wipe

out the special account of

million lire resulting from the transfer of the gold, and putting


Jr. Harrison.

i4ay 28, 1911.

thr, irtIre cold rearm en Ito lollio 'wins basis.
ray %1

The Beek of Mom, pm

11, got into dittleolties lesememiot lump lollotold and reel estuks

neeelMeree banks to

*eve, all the froth easet,e, leaving the

Beet of norm with a dear beam eheet.

It in now bet

enedsobed muesese*

fully', and eppers047 that situation prosente no diffieultioe ereopOlimehbon
th-1 nese embIrrase them in rote, 'heed 'WI the ?reeves of ocootery ree&srep

Ito mot ewer the Pank's %lanes Meet, and the fellesisg nem appear

to be of ewe Ntorowt.
(1) The geld roverre,Cf the mama* Ohaon in the statement, mhieh is

curried ot cold yew!, 2r million stir/Inc

Orme, being the mount


is in point of feet reld depoeitod

le to be returnee to the Mink of Ttaly after 1028

rritinh Oevernment in the sours* of the liouidation of the Itelien 00,*

women* debt undortho debt funding orresessset.

If that sold is veseversi es

they swot it will be, av T rosoll,during repayment, the sold over of the look

after taking mirth* other two toesries

be oomothing like 60% of the nobs

inane, nerundne that tb" cold in vt4uad roughly at 5 to 1.

Thin eurnsoloo

(1) The Portfolio.


billion lire.


toll on it amulets ma to over 5 lames Lift of prim asmarsimi tau me
promiosory notes, emd or to 3 billion lire of Isms u eitenome as geed slew*
it112, principally flovernmest essurtlies, on


minion lire morr.7 ane.

to 17 billion lire;


of the


('f) The Inoen! Tndependoot Destion.





eggrerrters P billion 700

therlailii *IR *0 Mt. imago are esoonlidated
t the 210 hello 9svoromoot oesorittes of roudhly



ms 1926.


One itIM


U4y 26, 1926.

of 75,000 lire beim esti/ally vort.4 :t


30 million lire.

(1.0 'Lim Use of "Donk Frer.isee, BO million Lire, ire of oaArve new

very man.
If the gold r &.arv'e ahead be entirely revnleed, oay is the rb.tio

5 tc 1, it will remit in a 'ictit to the lifvk. of 404 8 bitlioi lire.



lz a, saggeotIon that the egvirmaint rasq vie; to use this to reduee :to de.ut to

the fink, as we proposed in relgitas.

Ittrlagrist boss

to be eau

to 15raw1t

that, tut I doubt it he is able to. At wt ndkt, saw that traneacrtion
effecte, if tho go lack on s gold buds, it *Mild pot lib* elotemant of the
rkink in ozeellent shape Lad I should hope that at lapel


retaated by the bulk is order to inereano the emit 41

pert of it could be

dyes which is

of course meson the bookeftvery smallre it~race to woo rovelised.
it would be unneeestrarily 1^: in the geld Liabilltiono altboesb


le dizeucaintaattere Of policy with Strieiher, I weemmob hipooss
the feet that he iontboraelhgoing central balker. Hoban boss WNW

five ;; Gov.snrior of the al* of !tray and 4tellen the


lie mean to cot, the Bank f tee of too Puck Thee eiry
(11:7;atiOu3 man,



to mu

:11.1 7 think he

or dime :at.



Ian repatettialbere

every :roan' he Dive, but he

is so




way se is is said

"A-l". I


ego yes s

emroft41 not to smalblidomolt sr net

sdatoding rtrAfement that

enpnoially ± everyt':inc, must be treediated.

;4-N,61-us with Mei pretty


The iLvrenatoot I cot rave h


lie was frank, just
the ice was broken, asti he felt that we wars sytveabsitie vritia his poiA
!art I iii Owe he feels tho oven:S*6min influence of the too stress me, lius
nad Mr Dr..

lioi mod

wen in comry way

sod posolbly soosibotths4orlueass lass advisory soy a

y Ts VMS.

tire flarrimor).

TorAits, the head of the

aLant aiu

nca Comet-alio, she is Vied a3 see of



lhil I ben est eapvleto; tve4int Cup
tecl furnished me *beet the IterA, r: far ft.z.

re atocother tavorelle.


et litorelure sill& hes

1,4.v* already gene my lorreeedene

ed in & gaguireme NdltreCt

Ite rank Se

sp;zrantly dove a very lute laotaeon, and 2 fat ver7 mire fror te fib
of the eeseeeSto cod free ay gesorel Ilsteneatien about nringher Ilthart it Is am-

tervctivoly inexted rind

hta lens rencwurtoo Vett do net ,tirePr is the

ars to have Lad: today v1

ttaaeolinto Om* VeIrd end we's Obern,

tuut fttAlter discussion ftften- it*, eo please eslestier Ude** NOW chapter

:tad I all endasear to tint

the latter Cal

watt re r(9t tie 1 riCt a MAIM rime,. prenatal of

m14 1101


Rome, May 29, 1926.
Dear Mr. Harrison:

Continuing my letter dated May 26th about Italy, Winston, Ambassador

Fletcher and I lunched yesterday with Mussolini, Volpi and a party of about 15
men, mostly Cabinet members and Government officials,
Immediately after luncheon, Mussolini, Volpi, F'ummi

at the Villa Borghese.

(who acted as interpreter),

Fletcher, Mussolini's Chef de Cabinet and I adjourned to a small room for a
private talk.

It was noticeable that Stringher, Governor of the Bank, was not

invited to join us, and it was also noticeable that Mussolini made no move to
dismiss the rest of the party, but kept them waiting for about an hour until we
had finished.

This meeting started at about half past two.

I was told subsequently

that Mussolini had planned to leave at ten minutes to three, as he was to be at
the Senate at three o'clock, but he was sufficiently interested to wait until
about twenty minutes to four.

T -7111 not attempt a description of Mussolini

now, but will do so in a separate letter later.

He is one of the most interest-

ing characters I have evor met.

The meeting started with Volpi giving a long description of the European
currency problem, all of which we knew about and which was unnecessarily long.
It struck me that Mussolini was a bit restless at Volpi's oratory.
described the problem which Italy was facing.

He then

In the course of his remarks, he

referred specifically to the experiences of France, Belgium, Poland and Roumania.

He mentioned that he had just received confidential information that the Bank of
France note issue was three billion francs in excess of the amount reported in
the statement.

Concerning this I raised no question, fearing possible misunder-

He also mentioned the fact that, in view of the development of

Bank of Italy.

The difference may be in fact a book credit and not actually

It was denied by both Pirelli and Fummi that it was a premium on gold held

by the Bank of Italy, and Volpi stated that this was exclusive of the proceeds of
the Morran loan in America.


Volpi then r.sked if I would express my views to the Prime M4nister, be-

lieving that I had now had ormortunity to form some opinion of the situation in

Mussolini up to that point had said hardly a word.

i disposed of France, Belgium, Poland and Roumania by saying that their
situations were not quite comparable with Italy's, as it seemed as though confidence in their currencies had been largely destroyed, both at home and abroad, and
that in fact it was lack of confidence more than anything else which was causing
their troubles.

By that I meant lack of confidence in the fiscal and financial

policy of their Governments and lack of confidence in political conditions, and
that the Italians themselves could judge better than anyone else whether Italy with
a balanced budget, with some debt reduction taking place, with no currency inflation
occurring, with the American debt funded and with a strong Government, was necessarily in position where it need experience the same difficulties that those other

Mr. Harrison.


countries experienced.

May 29, 1926.

I then suggested that Italy might follow one of three


(1) Temporize and moderate fluctuations in the lira;
(2) Boldly adopt the gold standard at once;

(3) Endeavor to do so whenever France and possibly even Belgium were
prepared to do likewise.

I felt that the difficulties to be encountered were such as would require most careful preparation and study of various points, which I enumerated as

(1) A study of the whole problem of prices and wages, to be conducted

by experts in order to be certain that readjustments would not be forced upon the
country as the result of monetary reorganization;
Federal Reserve Bank of St. Louis

Careful study should also be made of the whole subject of the balance


May Z9, 1926.



lira againvthat is to say, the desire to borrow cheap money or to borrow
directly from the or to maintain too low a discount rate or to restrain

gold exports - all of these things might result in a failure.

While Volpi had in a former conversation made a long explanation of
the growing pressure of excessive population, which now reaches 42 millions, an
increase of 3 millions since the war started, this subject was only mentioned in
the course of the meeting with Mussolini, but I noticed from Mussolini's instant
reference to the population of 42 million that it was much in his mind.

I explained how our policy for the last three years had been to rather
encourage loans by American citizens to foreign borrowers, that many bond issues

had been placed in America by European Governments and corporations, and that the
total of our investments abroad in long time loans had been running at about a
billion dollars a year.

It was a new business and Americans were tempted to

invest their money in that way because of the high rates, but they were nevertheless timid and any shock to confidence would result in their declining to take
foreign loans, the consequences of which would be disastrous.

I felt that their

confidence had been somewhat shaken, partly by the developments in Poland, but

considerably by the disappointment that the Locarno treaties had apparently
failed of their purpose because of the outcome of the last Geneva conference;

that anything that developed uncertainty in America as to continued peace in
Europe would result in their buttoning up their pocketbooks.

tussolini then

said that there was not going to be any war - that none of the European nations
could afford it, being too exhausted by the former war.

I mentioned that that

was one of the chief elements of security for loans made by American investors,
that they sub-consciously felt that there could be no war in Europe, and if that

confidence was destroyed, that would be the end of placing loans in America.


Mr. Harrison.

May 29, 1926.

He replied that it would take 25 years - at least until 1950 - before we need
think of that as a possibility.

Meantime, he said there would be a certain

amount of snarling at each other but that it would not mean anything.
I explained to Lussolini that it was not necessary for me to discuss
all the technical details of the program.

I had already done so with Count Volpi,

but merely suggested that the principal requirements for stability were:
(1) Confidence both at home and abroad;

(2) A substantial credit, which I thought could better be arranged in
all the gold standard countries rather than just in America;
(3) As complete freedom by the bank of issue from any sort of Government
control as could be arranged;

(4) Good management of the program after it was adopted and set in
motion, and fort hat large reliance would need to be placed upon the Bank.
In the course of the talk, Mussolini interrupted a number of times with
questions, and it was quite plain to be seen that he wanted some guide as to

whether they should act promptly and at once, or delay awaiting developments in

I told him that once fundamental conditions, such as I had described,

were sound and justified going ahead, I thought a bold course was preferable to a
timid one.

He said "Yes", he believed in that himself, so long as they were

certain that the fundamentals were sound and the preliminary conditions as I
described had been accomplished.

Mussolini referred to monetary reorganization and a bold course as
being in the nature of a surgical operation, but if one was to be performed, he
would like to have the patient survive it.

I told him we had an American expres-

sion for that when we said that "the operation was successful, but the patient died."
He said that exactly described it.

He wanted to be sure that they were right and

Mr. Harrison.


May 29, 1926.

then go ahead boldly.

Special importance was urged in the course of the talk upon the three
points that there must be peace in Europe if they were to enjoy outside aid,

that the program must be a sound and complete one in all particulars with good
prospects of success, and that its success would not depend upon just a credit

but even more upon subsequent capable, strong management of the plan, and for
that management great reliance must be placed upon the Bank.
Count Volpi in the course of the discussion commented upon Stringher's
independence of Government control and upon his experience as a central banker.

I interrupted to ask who controlled the bank rate, and Volpi admitted that by law
the Treasury did, but as a matter of practice they did not interfere very much.

At the conclusion of the talk, which lasted about an hour, my impressions were that Mussolini was anxious to do whatever was necessary to stabilize
the currency, that he was ignorant of the technique of these matters, and that he
would need assurance that the plan had been carefully considered, and I thought
he was inclined towards getting outside advice.

He wanted to know whether it

would be a good plan to have a Committee of Experts at work at once, and when I
said I thought it would,he replied that one had already been secretly appointed.
On the whole, my impression from the interview was satisfactory.

They asked me when I would be back, and I told Volpi I would be glad to come back
when he sent for me, but I hoped to be back next year.

He replied that would not

do, that they might want to go ahead inside of two months.

The only thing to do now is to await developments,which I shall do
with much interest.

Mr. G. L. Harrison,

Sincerely yours,

Hotel du Cap d'Antibes,
Antibes, June 7, 1926.
Dear Ur. Harrison:

I have been promising you a letter about general conditions in

Of course, it must be no more than rather vague impressions, because

I was there such a short time, but after all, the impressions that I would get

from such a visit are not those of a casual traveler, who forms ideas from conversations with welters, cab drivers and casual acquaintances.

The people

Winston and I talked with were of course the most responsible in Italy.
First, about Mussolini.

He is undoubtedly a man of very unusual

qualities, though of very humble beginnings - his father was a blacksmith.


had most radical socialistic views in his youth, lived a life of more or lees

irregularity, and a rather tumultuous one;

was many times in prison, was driven

out of Switzerland and I think later out of Austria, took part in radical meetings and associated with a pretty radical crowd.

All the time, however, it is

observable that he was living almost in poverty and struggling to gain an education.

I believe he admits himself that the greatest influence on his life

were the writings of Machiavelli and Nietzsche.

He is a very forceful speaker,

has a wide range of knowledge of literature, and no far as money goes and his
ways of living, is a bit of an ascetic.

He lives, I am told, in a very small

apartment and very modestly.


or has Lhe appearance of arrogance and an exaggerated "ego",

but both Winston and I were impreceod by the fact that this was simply facade
and that when he got down to business, this all dropped away.

He has one of

the most penetrating eyes I have ever seen, and a good sense of humor.

I would


Mr. Harrison.


June 7, 1926.

size him up as being honest but rather ruthless, and absolutely adamant in his

demands of service from his associates.
He has undoubtedly worked a revolution in Italy.
October 1922 when he made his famous march on Rome.

I think it was in

At that time he had the

support of an enthusiastic body of young followers who were in revolt against the
Communistic effort of the organized labor of the country to take possession of
the country's industries and ruin them.

What his following lacked in numbers

and strength was compensated by its greet enthusiasm.

The introduction of re-

forms was really a whirlwind campaign and everything gave way before his energy
and his imagination.

I should say that for about a year or more now he has had

opportunity to settle down to a more normal management of things, where the spectacular elements are no longer as necessary nor as desirable.

In the early days

there .4-2s, a very persistent undercurrent of opposition and criticism, and I have

no doubt many things were attributed to him for which he was not responsible.
During the last year, he seems to have gained enormously in strength.
which were opposed to him are now gradually swinging into line.


I think almost

every Italian with whom I talked mentioned this as the outstanding characteristic
of the recent period.

There are of course many bitter enemies of his regime,

but they are not vocal and their numbers have undoubtedly been reduced.
have left the country;


others have learned to keep quiet.

There are a few matters where it seems to me grave difficulties may
arise in the future.

One is the policy of suppression of the press.

really do not know what is going on.
pretty much under control.


I imagine the whole press of Italy is

Under these circumstances, the imagination is

liable to picture many things as occurring or give credence to rumors of occur-

rences via& are exaggerated or which do not occur at all.

If he could grad-


Ur. Harrison.

Jane 7, 1926.

wally lift the embargo on free speech and free expression in the press, it
might let off the preasure of opposition without impairing his authority.
The second possible difficulty in in this new scheme which has just
bean adopted for organizing all the inductrios of the countr7, all the working
men - practically everybody in Italy - into sorts of 'syndicates.

I had little

opportunity to gain any views about this, the only talks I Lad being eith
Pirelli and with the head of the Fiat Company.
to the way it would work.

Some doubts were expressed as

In such a plant as the Fiat Company, where they em-

ploy 33 000 people, the workers are organised, have their repreoentatives to deal
with the owners, and so in all the trades and industries.

They say even the

doctors, lawyers and other professional people are subject to the operation of
the decree.

The third obvious danaer is lest MUssolini leave MO method for the ee-


lecticn of s successor.

Italy seems to have a Government comparable to that of

Japan under the Shoguns, but there the Daimios selected the Shogun, whereas here
there is no method of class selection.

One Italian told me that he was con-

vinced that Mussolini had left a political will, as was done by the menarche of
the Middle Ages.

If Mussolini should die or be assassinated or incapacitated,

it might be that the Faseisti organization could agree upon a successor at once,
or -the King might take charge, or the Army.

The danger would lie in the ambition

of individuals to succeed Mussolini, which would divide the country into factions.
These strike mo as being the three outstanding menaces at the noment.
Ey talk with Mussolini was rather reassuring as to his point cf view.

He struck me as being desirous of knowing only what was the best thing for Italy.
He never referred to himself in the course of our meeting.
being an enthusiastic patriot with a great ambition.

He strikeo me as

I am frankly not greatly



Mr. Harrison.

June 7, 1926.

inpreszsd by the "imperialistic" talk which wo hoar so much of at home.
is very liable to turn out to be a bluff.
are comparatively you/II:).


Most of the men associated with him

At the luncheon, where there were about 15 or 13,

I was the oldest man there exce,A Striaghor, of the Bane of Italy.
One intoreeting develo2mont while we were in Rome appeeree to be
tendency on Mussolini's part to make peace with same of his political enemies,
which was being commented upon.
.%:3 to conditions in Italy, they are no dcubt better than in some parts
of Europe.

I think they here been having a little business set-beck in recent
There is constant reiteration of the pressure of over-population and

discussion of various means of dealing with it.

Italian pride seems to object

to export of population into countries where Itslions lose their nationality.
There is a feeling that Tunis is a natural outlet;


75% of the foreign population

i6 Italian, it is the nearest point to Sardinia and aeems to be naturally

tributary to Italy, but of course is controlled by the French.
lation is largely that of the Army and the "fonctionnaires".

The French popu-

Tripoli is further

away and loos desirable for colonisation.
1 was much interested in the visit to the Fiat plant, where the Managing
Director took us over much of the works.

They have 8 or

ueparate plants in

TUria, hero they employ about 38,000 people, of which 8,000 are women, many of
whom work at lathes, assembling and various mechanical operations.

They tell me

that they are paid a standard day's wage, with a bonus for output in excess of a
standard uwataAt.

As nearly as I could figure, the man earn from $1.25 to 41.50

a day, and the woman quite a bit loss.
paid weekly.

They have an 8-hour day.

Wages are

The plant wsz in magnificent condition, appeared to be equipped

with the most modern miehinery and made practically everything required for a

motor-car, including the heavy steel, the castings and the accessories.


qtr. Rarrison.



Juno 7, 1926.

working people certainly had the appearance of being contented, end they were
obviously industrious.

Tho Lirector explained that they had same difficOty

with housing and a great deal of difficulty with the transportation of their
workmen, but they were gradually solving this by their own offorts.


impresseu me most was the appearance of discipline in the plant.

The roads were in only fair condition, as there is a great earl of
traffic by motor bus, and conditions in Italy for railwry tranaportation are
difficult anyway;

the long range of mountains and the fact that so many of the

cities are perched up on hills

complicate railroad construction and operation

a good deal.

One thing that impressed we a great deal tae the general confidenco in
the Government.

There was not the name insistent discussion of the arehange

here as in France, nor the endless criticism of the politiciaas.

The attitude

of people generally was rather to state with considerable pride that Italy was
going steadily ahead.

nve Auseoliai's QUWAiii6 exprees admiration for his great

You have all heard rumors about his health, which undoubtedly was

badly impaired some time ago.

I am told that he suffered from a complication of

difficulties, but what was most menacing to his life was aa intertinal ulcer,
which is now under control or cured.
fencing or horseback riding.

He exercisos vigorously every day, siLher

I noticed that he enjoyed his lunch, ate heartily

and did not want to talk much while ihe WLinase of oatin6 as on.

1:e took

very little wine mixed with water.
His abrupt way of approach indicated a very direct mind.

For instance,

without any preliminaries he told we that lie was 44 years old and aeked me how
old I was.


When I met him, he said "New do you do.

ao you think of Italy1"

.elcome to Italy.

lie is not at all loquacious, but very direct.


I vas-

pact that some of his associates flatter him a bit, but I also suspect that he


Ur. Harrison.

June 7, 1925.

Hotel du Cap d'Antibes,
Antibes, June 7, 1926.
Dear Ur. Merrison:

Thank you for yours of the 27th.

I am sorry that the newnpaners have been ro bothersome.


is not one shred of foundrtion for all the stories, es I have not talked
politics with anybody outside of our inmediate friends.
It is a curious thing that the only word that 1 eaid to karmentier
was that everybody should est together, including the anvernment end Parliement,
and that not one :ord was said to Peret on the subject of politics, and yet the
newspaper stories have taken that slant;

end the reason for it is that,rithout

excehtion, every Frenchman thet 7 have talked with in Parie abused the Government and the Chamber of Deputies.

I think I have never heard such unenering

criticism as the Frenchmen themselves indulged in.

The atmosphere is sur-

charged with that kind of feeling.
I am glad the Bank Poleki situation 3.s c]eared up, es I felt sure it

rculd, from Mr. Stetson's letter.
I will write Jay about the Advisory Council meeting.

net you say about Mr. Case's situation ie es I surmised.

I really

cannot take the responsibility of deciding the met-ter for him, and I hope that

he does net surmise more from my letter than is justified by what I really feel.
I cm having a good rest here, but it is good to keep in touch with
What is going on.

Your letters are most illuminating and helpful.

The situation in France is very nuzzling.

Winston will tell you

the last word that he gained before leaving, of which he has just written me.
Herman Harjes now writes me that it may be desirable for them to consider

Mr. Harrison.


giving the French Government a ohort credit.

June 7, 1926.

Thsy do oecm to to 12.cing the

situation more definitely, but I am alwttys troublmd at the failure tc develop
constructive plans.

Even the Bank of France seems to be floundering in that


Best regards, end again many thanks for your letter.
sincerely yours,

Mr. C. L. Harrison,
c/o Federal Reserve alnk of Mew York,
New York.


Hotel du Cap d'Antibes,
Antibes, June 7, 1926.
Dear Garrard:
litany thanks for your letter, which is indeed illuminating.

l have

written Robineau as you suggest, as per enclosed ccpy, but of course could 'flake

no suggestion to him about a credit.

Lamont cables me that a suggestion for a

credit has been made or is about to be made, and I assume further particulars
will reach me in due course, but how rill this fit in with the ratifications
It might indeed raise Cain at home.

I have cabled Lamont that you have some

views and doubtless you will hear from him.

One disconcerting bit of informa-

tion from r."rren is to the effect that there is dissension within the Committee
itself, ceid then if the Bank of France hasn't any confivance in the Committee,

what hope is there of getting a constructive progrem?

One difficulty about the

Bank of France arranging a credit independently and subject to its own control
is that it would be administered under conditions where the Bank is not wholly
independent and where indeed Government policies might render the beneficial
results of such a credit wholly ineffective, whereas it might be not only necessary but effective if granted in conjunction with a constructive plan.
Under the present circumstances, I would regard it as distinctly unwise, oven impoerible, for us to extend a credit to the Bank of France and would
advise our people against doing so until the end of the road was within sight.
But my views may change before I leave.
Sincerely yours,

Hon. Garrard B. Winston,
Under Secretary of the Treasury,
Washington, D. C.

Hotel du Cap d'Antibes,
LItibes, June 3, 1326.

Derr Garrard:

I have writton you separately in reply to the business part
of your note, and this is to thank you for the personal part of it.

I enjoyed the trip immonsely.

It was just the sort of a visit

that T like to heve, and your good company was essential to its succors.
At times I thought possibly yell wore disappointed in not having more
opportunity for play and loss donands regarding business;

but if you

enjoyed it all, I am more than satisfied.

Best regards to you and the others at the Treasury.
Sincerely yours,

Hon. Garrard B. minston,
Under Secretary of the Treasury,
Washington, D. C.


(by Robert B. Warren)

June 10, 1926.

Selected Items from Bank Statement (000,000 fcs.)
Conn'l Loans
& Discounts

1st week June 1925

to State















Compared with the ccrresponding week of 1925, the statement of June 3rd,
1926, showed an increase in the combined items of commercial loans and advances to
the Treasury of just under 13,000,000,000. francs, or about 40%.

In the meantime,

wholesale prices (#) have risen about 32% and retail prices about


and dollar exchange have risen about 607, but as much of this rise has occurred in
comparatively recent weeks, the full effect has not yet been felt in the price structure and consequently in the demand for currency.

The "gold indexes", whether

wholesale or retail, are substantially below the level of a year ago.

As was shown in the series of price indexes mailed tonight, after several
months of stability wholesale prices began to rise in April, accompanying the drop
in the exchange.

This movement has been accompanied already by considerable borrow-

ing from the Bank of France, which has expanded its combined loans to the Treasury
and the market by nearly 3,500,000,00C between the end of February and June 3rd.

Part of this increase has been due to increased loans to the state, presumably in
connection with the maturities of May 20, the state having borrowed about 1,700,000,000

between the and of April and the 3rd of June, although some 500,000,000 was repaid


(#) Primary articles mostly imported or importable, as indexed by the Statistique
wholesale prices in general have risen much less.

( page 2

on the 10th June statement.


But the market has also been a heavy borrower at

even after clearing up the position of the end of May, the portfolio

the Bank;

of the Bank is up over 1,000,000,000 in the last three months, an increase of
about 30711.

In short, it appears that the recent break in the exchange has pro-

voked a rise in prices which is already forcing the Bank into a fresh inflation.

The word "forcing" is not tco strong, because the Bank is virtually helpIt is sometimes

less against it, owing to its peculiar relations to the market.

said that the Bank of France now conducts open market operations, and, technically,
this is perhaps true.

Actually it is far from being the case.

The Open Market Operations of the Bank of France.
In theory, the Bank of France has two operating media:
(1) It can raise or lower its rate

(2) It can protest a signature on a bill offered for discount.
The Bank never buys nor sells any securities in the market, and for this reason,
it is said that it does not engage in open market operations.

As a matter of fact,

since 1924 there has been a development in the Paris money market that puts the Bank
in a position in which it is obliged to concede credit to the market at the will of

the commercial banks, without being able to withdraw credit from the market in any
reciprocal manner.

This innovation is the Treasury's deposit account with the commercial

The commercial banks can deposit money on demand with the Treasury, at

215 interest, inferior to the rate on 3-month Treasury Bills, but, of course, superior to the rate on a deposit account with the Bank of France, which pays nothing.

Since the events of March 1924 and perhaps more especially since last Fall, when
there was some talk of a forced conversion of Treasury Bills into an issue not
eligible for discount at the Bank of France, the commercial banks have made it a
practice to carry considerable sums on deposit with the Treasury.

If pressed for

( page 3


cash, the commercial banks can either
(1) Discount at the Bank on usual eligible paper or
(2) Draw down their deposits with the Treasury, forcing the latter to
borrow at the Bank.

While, as was stated above, the Bank may at its option refuse any bill
offered for discount, it cannot refuse to grant the der ands of the Treasury, at

least up to the legal limit of advances.

In other words, in possessing a deposit

at the Treasury, a(1) Discount bank possesses bills
commercial of commercial a claim against the Bank of France
which the Bank is unable under any pretext to refuse, and which is not directly in(2) Discount of Treasury bills held by market
fluenced by the discount rate.
At the same time, the Bank in accepting this demand
(3) Advances to the Treasury

from the market, is totally unable to counter by selling an equivalent amount of
(a) because of Government needs

Within limits, therefore, the Bank of France does conduct a species
(b) because a commercial bank wishes to draw on its Treasury

of open market operations, with this important qualification.

It can be forced

Sinto the position of a buyer of securities from the market; but it cannot become a
It can withhold credit from the market in only two ways:
seller of securities to this market.
(1) By advancing its discount rate

In other words, the Bank is liable to give credit to the market in three
(2) By protecting a signature, that is, by refusing a bill- even a

Treasury bill - presented by a commercial bank.

( page 4


Under present conditions an advance in the discount rate imperils the floating debt;

and while it is always possible to protect a signature, it is evident that a three
months Treasury bill, if offered for discount by a commercial bank, cannot be refused
without causing very great alarm in the market.
These observations lead to two conclusions and one question.

The observa-

tions are:

(1) Any thoroughgoing plan of stabilization which I can imagine implies

firm control of the Paris money market by the Central Bank
(2) That market is now in full train of inflation.


exchange has already been felt in higher prices and a demand for further credit for

There is reason to believe that the full effect of the decline in the


exchanges has not yet been felt, that a further rise in prices is to be expected, with
further demands for credit for industry.

To this may be added a renewed demand from

the Treasury, as the rise in prices upsets the budget, and as the withdrawal of Treas
ury deposits and the discounting of Treasury bills by commercial banks forces the

Treasury into the Bank.
The question is:

How effectively, with the means at its disposal, will the

Bank of France be able to control this situation?
In my opinion, the Bank does not at present possess the means of handling

the situation, and there is some reason to apprehend that a scheme of reform may
possibly fail owing to the inability of the Bank to carry out the role which may be
assigned to it.

As was stated above, the means at its disposal are only two.

It may re-

fuse to accept bills by prote?ting the signature or it may raise its rate.

But in

opposition to this line of defense, the market possesses two very heavy pieces of
artillery, so to speak:

(1) The market holds something like 12,000,000,000 francs of 3 month TreasIII

ury bills, plus perhaps 3,000,000,000 in Treasury deposits.

While the Bank might

( page 5


protest every commercial bill offered, it could hardly refuse categorically to
Ilkaccept Treasury bills without virtually forcing the Government to one of two alternatives:

(a) It would be obliged to redeem these maturing bills as they

were offered by the commercial banks, which would throw the state into
the Bank on an even larger scale, or
(b) It would involve the state in some sort of repudiation.

At any rate, a categorical refusal to accept these Treasury bills at a price would
inevitably create a panic.

(2) There remains, then, virtually only the discount rate.

But the

structure of the Paris money market is such that at present the discount rate is

effective (insofar as it is effective at all) only against the Government's floating

With swaps at 30% gross and say 26% net, and three month local collateral

loans well over 10% at least, it would appear that to be effective in the commercial

loan market, the bank rate would have to be set at a figure which would make it extremely difficult to keep the floating debt afloat.

In effect, with the flcating

debt as it is, I do not see that much reliance can be placed on the discount rate
in carrying through any plan of reform which involves tight money, and it is a
question in my mind if any plan of reform can be successful which does not involve
either tight money in fact, or the effective threat of tight money.

As it is, it

seems to me that the Paris money market is in a position to snap its fingers at the


For this situation, the only solution that I can see involves giving the
Bank of France a weapon which will make it the master of the Paris market - that is,
to effect a change which will
(1) Make the Treasury bill rate subservient to the Bank rate, instead of

the reverse condition which obtains at present

(2) Give the Bank the means of conducting open market operations, which

( page 6


will enable it to bring the market under control by permitting it to take out of
the market at its will as much credit as it finds necessary;

in other words, put


the market at the mercy of the Bank, instead of the Bank at the mercy of the

I would therefore offer for your consideration the following proposals.
(1) That any scheme of financial reform must involve a radical change
in the relations of the Bank of France to the Paris money market - a change which
will make the Bank the unquestioned master of the market.
(2) That in order to effect this change a means must be provided whereby

the Bank can engage in open market operations at its will, regardless of the financial wishes of the Treasury.

(3) That to accomplish this end a market in Treasury bills should be
created in Paris, in which the Bank could operate both as a buyer and as a seller.
(4) That in order to provide protection for such a market, the ireasury

deposit system be discontinued, and the present type of 3 month Treasury bills and
Bons de la Defense be converted into a new type, not bearing a fixed and artificial
rate, but paying the going market rate for that type of paper - like the British
Treasury bills.

(5) That in order to provide the Bank with ammunition at the outset of the
campaign, a part of the present "advances to the state" be immediately converted

into the new type of negotiable Treasury bill, so as to enable the Bank immediately
to undertake operations calculated to make its rate effective and bring the money
market under control.

These remarks are not submitted for the sake of the conclusicns, but because they discuss, however imperfectly, one phase of the problem of financial reconstruction, which so far as I have observed, seems to be overlooked in Paris


namely,capacity or incapacity of that institution to carry out such a mission.the When one
the missicn to be assigned to the Bank of France in the campaign and

( page 7


recalls the dominant parts taken by the Bank of England and the Reichsbank in
the British and German reconstruction programs, and the extent to which success
depended upon the fact that the Central banks were the undoubted masters of their
respective money markets, one is forced to question if, under the present organization of the Paris money market, the Bank of France has at its disposal the means

of playing a similar part, should developments render it necessary
of the program of financial reconstruction in France.

to the success



( page 2


It is my opinion that it is the market which is forcing the Government

into the Bank at the present moment, and during the Spring.

I am far from

doubting that through April and probably through May current receipts have showed
a comfortable surplus over current expenditures.

But I believe that the market

has been drawing down its current account with the Treasury and probably letting
its Treasury bills run off at the same time in order to get currency to meet the
demands of industry operating under a rapidly rising price level.
On the third week in January the note circulation stood at 50,617,000,000

at the end of May, 53,390,000,000, an increase of 2,673,000,000 francs.

The following week although the market repaid 1,000,000,000 and the state 500,000,000
the note circulation did not decline perceptibly and the deposits only a trifle illustrating the importance of movements under the heading "divers".

The fact is that the fall in the exchange is having its inevitable effect rising prices, intensified demand for credit.

And owing to the structure of the

market, with its current account at the Treasury and its pockets full of eligible
Treasury bills, it looks as if there was no way by which the Bank could refuse this
demand, unless it is prepared to refuse to honor the Government's signature.


effect of such action upon the market would be so grave, that it can be left out of

My conclusion is that regardless of the proposals of the Committee of

Experts, the Bank is in for a period of further inflation.

Paris, June 18, 1926.

(by Robt. B. Warren)

The index of the textile materials is by far the highest of the groups of the
Statistique Generale, and is fully up to the world level - which is not surprising
in view of the fact that its major elements, cotton and wool, are imported.


from my inquiries in shops, department stores, etc., I find that the retail price
of textiles, in such forms as women's clothing, is at least very nearly up to the
level of the best stores in Washington.

For example, American "Interwoven" socks,

the standard 350 grade of Washington, retail here at 25 francs, and are cheap at
the price compared with the competing French lines.

This increase in common retail

textiles, which has raised them to virtually the American level, is the more striking
because before the war they were decidedly cheap.
So, making some purchases this evening, I engaged the salesman in conversation
about the haberdashery and knit goods trade.

He argued that relatively the line was

the highest in Paris, and that even then they had a hard time making a profit.


manufacturers now insist on quoting prices to the domestic trade in sterling, so that
apparently the manufacturing and wholesaling end of the textile business is now on a
sterling or gold basis.
to find.

This is the first instance of this that I have been able

Further, the export business is so strong that in some lines orders are

accepted only for delivery 8 months ahead, although ordinarily this line turns over
quite rapidly.

As a result, this particular shop, which is distinctly a luxury

shop, has abandoned some of its standard lines, and is carrying only those on which
it can get delivery within 2 months of the order.

The salesman's idea was that

export orders were ruling the price, for he said that the local retail trade in
haberdashery was dull, which is not surprising in view of the local price and salary

From this conversation, I gathered that the textile industry in France shows all

( page 2


the dangerous elements of inflation:

1. Heavy selling for export on a cost basis which involves a steady
decline in the exchange.

2. Forced buying by the local retailers at a price scale recognized
to be above the purchasing power of a good part of the customers.
3. Forward placing of orders by retailers in order to secure any deliveries

at all, at a time interval recognized to be in excess of the usual practice of the

4. Thatthe manufacturers are carrying their books in sterling and forcing
the retailers to accept the risks of the exchange.
5. That in this shop, at least, prices are frequently adjusted to the exchange, even in the process of disposing of a given consignment.

In other words, so

far as possible, this particular shop is fixing its prices on the basis of expected
replacement costs.

I am not sure that this practice is yet general in retail trade


From these facts, I infer that the textile industry would immediately be adversely
affected by stabilization.

If it is quoting prices and accepting orders in sterling

8 months forward, it is in one sense committed to a lower and ccnstantly decling value

for the franc, for under a stable franc it would quickly be caught between its firm
forward contracts and a rapidly rising cost of prcduction, from advancing wages, etc.
Of course, this is not a discovery;

but it is concrete evidence of a condition that

has long been generally known to exist.
The question is, how many industries are, so to speak, committed to
inflation and how much political influence can they command.


Obviously, the deputies

from Lille and Lyons will think a long time before they accept a program which will
their constituencies in a situation similar to what prevails in Manchester
and Oldham,
as well as the German textile centers.
In this connection, it is worth while to remember that some of the most

men in the Chamber come from those areas- Loucheur
from the Nord, Herriot from

Paris, June 19, 1926.

The appointment of M. Herriot as Premier could hardly be called a surprise,

for it had been recognized from the beginning that M. Briand's plan of a coalition ministry was more the expression of hope than of expectation.

In appraising the situation, M. Herriot's biggest asset is the probability
that he can count on more votes to support any policy he elects than any other
premier that could have been chosen.

This is of first rate importance, for one

of the weaknesses of the situation lay in the fact that no matter how good a program the ministry might formulate, it would be vain if it could not command a
working majority in the Chamber.

And, as the Infantry Drill Regulations say,

even a poor plan resolutely carried out is better than an ideal plan which cannot






surely occasion large movements in several items of the statement of the Bank

of France.

While these may be simply the normal reflection of the inflation

which has been in steady progress for a year, they may very well look quite alarming, and appear to show new factors in the situation, whereas in fact they may
merely be the evidence of economic facts for which M. Herriot is not responsible.
I should not be surprised if between them, the market and the Government had to
borrow upwards of 2,000,000,000 fr. from the Bank to get over the end of June,

for prices have been rising very fast, and I have previouely explained how a demand for commercial credit can show itself in an increase in the borrowings of the
State from the Bank.

Another very disturbing factor is the attitude of the Ministry on the American debt.

Both the Socialist and the Radical parties in caucus have announced

that they would support the Mellon-Berenger agreement only with reservations which,
I fear, would not be acceptable to our Senate.

These two groups, together with


the Louis Marin clique from the extreme right, could probably muster enough votes
to defeat the agreement;

but there was some prospect that under a Briand Ministry

they would simply abstain from voting and so permit the agreement to go through by
default, so to speak, because they were anxious enough to help the Government get
a loan,but did not want to go on record as supporting the accord.
In that way, the prospects of a ratification of the settlement were pretty
fair up to last night.

Now they are uncertain, because it is not clear whether or

not the new Ministry will sustain or oppose the programs of the caucuses of the
parties which it represents.

So, altogether, one can hardly say that the outlines of the situation are very

As far as the Government's finances are concerned, they are in fair shape,

and would be in rather gccd shape (relatively) if it had not bean fcr the magnitude

of the decline in the exchange since the budget was formulated.

The real obstacle

to financial reform is not the Government finance, but the possible attitude of





industry toward any policy which will change the prosperity of inflation to the
hardships of deflation;

and the very real question whether the machinery for

deflation now exists in France or is likely to be introduced by the Experts'

And, by the way, the attitude of the new Government toward the Com-

mittee has not yet been declared.
Speaking of deflation, it may be well to mention that the type of statement

which has been appearing in the British press, demanding not only deflation in
France, but even proposing that France should have a Dawes Plan and be placed

under some sort of foreign control or surveillance, is doing imense harm.


is certainly weakening the position of those very elements in the French population who desire reform, and who reccgnize that such reform must inevitably work
some hardships to certain industries.

It is probably true that France would pre-

fer to go to hell financially sooner than accept salvation from the hands of a
egroup of foreigners, if this involved anything like foreign control or even surveillance.

disclosing just where its gold is h

Board it does not disclose the amou
considered to be a hidden rnsorve.


as with us, which are not subject t

Hotel du Cap d'Antibes,
Bank's reserve of "devieen".
Antibes, June 19, 1926.
Reichsbank area part of the hidden

these balances in a public statemen

sure Dr. Miller would be a good dea

account should publicly state what
were holding for him, and tnere is

and such a statement by hie own ban

I am a bit uncertain as t
cannot be passed unnoticed.

Do yo

arrangement by which the foreign ba

It is only fair to say al

he expressed a good deal of anxiety

being made an to their balance.


CA second from 'net page


Ur. Harrison.

Juno 19, 1926.




Mr. Harrison.

June 21, 1926.

ward exchange has been reduced correspondingly, and I believe that a consid-

erable reduction haw been effected in the amount cf to benkere' credit of 2'7
million now in use.

Francqui has arranged in London to extend this until Sep-

tember 30th, but they have not yet received word from the iew York bankers as
to their attitude.

He has disclaimed any intention of joining hands with the French, although Norman believes that the French have approached him.

He says after he

has gotten a good understanding of the domestic situation he is going to take up
the question of the fcreign debt.

He frankly stated that when he went into the

Treasury, no one could tell him how much the Government owed.

Apparently he is

going at the job hammer and tongs, and he made an excellent impression upon

Norman, who Gee= to think he is the only man who can successfully put through a

Still there is great antagonism in Belgium to the American bankers.

Vandorvelde frankly said that they demanded a pledge of the railroads and a lot
of unreasonable conditions.

This is so at variance with the truth that Phillips

was a good deal disturbed about it.

His job is to preserve good relations, and

he has seen them grow steadily worse since the "blow-up" of our plan.

lie has

advised against my visiting Belgium until things get a little more comfortable.
My present notion is to arrange to see Francqui eomewhera else before I return,
if conditions justify doing so.

You might have a talk with Owen Young about

this, as he knows Francqui well and may have some definite views.

Of course this letter is most confidential, especially the first part
of it.

It all bears on mieunderstandings that may develop at home which I would

greatly rugru...



Paris, June 23, 1926.



Just in the course of conversations and desultory reading, I have come
across three samples of French bookkeeping, which show how little has been
learned from the experiences of Central Europe.
(1) Annual Report for 1925 of Paris-Orleans Railway:
"The continued decline in the market of fixed income securities was obliging
us to pay a very high rate on our capital issues.

For this reason, we have temp-

orarily ceased to cover, through the floating of debentures, the entire charges

for expenditures on capital account and of the claims against the State for deficits in 1925 (under the guarantee law, N.B.)

The amounts necessary, principally

for this latter purpose, were obtained by Treasury operations, until the condition
of the market permits us to resume the issue of our securities at a more moderate

rate of interest."

All of which is a circumlocution for saying that as earnings were insufficient
to meet necessary capita] expenditures and the guaranteed dividend on the shares
and debentures, and as the State was unable to advance the sums guaranteed as they
fell due, the railroad let its capital expenditures go, and paid its interest and
dividends by borrowing on 6-month notes from the banks, presumably against its
book claims against the State.
(2) A company in which a friend of mine is a director tells me that at the
directors' meeting to consider the dividend on 1925 profits, they proposed to write

up the inventory to a level corresponding to the increase in value represented by
the price changes resulting from the decline in the exchange, call the result operating profit and distribute it in dividends.
(3) A paper mill in which some friends of mine are stockholders.

The company


since 1914 has been regularly recapitalized to follow the advance in prices.






now has a capital structure of 1,500,000 fr. bonds and 80,000,000 fr. stock.

Very moderate earnings have been reported since 1920, and dividends have been

the company imports its raw material, but sells the product in France.

The statement shows about 6,000,000 fr. of current assets and current liabilities,
the balance of 220,000 fr. representing working capital.

The company paid no

dividend last year and earned only 5

on the stock, which is currentl


That is, the market value of this concern is about $1,500,000;

its indi-

cated earnings last year were $120,000, and its working capital at the end of the
year, in which no dividends were paid, is something under V7,000.

Probably the

"earnings" represent inventory appreciation.
And yet people say "Economically and industrially France is sound as a bell;
it is only the Government finances that are unsound."

I do not know how far

these instances are typical, but I have no reason to believe they are exceptional.

The daily railroad wreck is one comment on the financial position of that industry.

Paris, June 23, 1926.


The extreme difficulty which has been experienced both by M. Herriot and
M. Briand in finding a Finance Minister is not without its encouraging implications.

It may be interpreted to mean that French politicians have at last come

to realize that the Ministry of Finance is something more than a mere political
routine job.

While no doubt the reasons advanced by the numerous gentlemen have

been many and diverse, I think several may be imagined for them by a bystander.
(1) The Buuget is certainly unbalancing.

After showing a surplus, at 13ast

on papor, for the first part of the year, it will very possibly show a substantial deficit the last half.

The next Finance Minister will have to bear the

burden of the superficial accusation that he unbalanced the budget.
(2) Should the deficit mount rapidly, it could only be met by printing notes.

As I have several times remarked, it is by no means improbable that the end of
June settlements will necessitate a marked amount of borrowing at the Bank, which,

like as not, will show up in the State's account, even if it represents commercial

The man whois Finance Minister on June 30th will be held responsible,

even though he takes office only the day before.
(3) The next Finance Minister, inheriting an unbalanced budget, will be
obliged to adve ate increased taxation;

which will be in disagreeable contrast to

M. Beret's valedictory promises of tax reduction.
(4) The debt settlements.

These are universally unpopular.

Both the Soc-

ialist and the Radical groups in caucus have stipulated reservations.

If the

agreement passes the Chamber, I think it not unlikely that it will be by a minority
vote of the total deputies;

and those who do vote for it will probably make it

quite clear that they regard it as a species of bargain - no settlement,
no loan.





M. Briand tried to form a coalition and failed;

M. Herriot tried the other

tack - to form a party government of Radicals, and to purchase the support of the
Socialists by some sort of a capital levy.

But, knowing the attitude of those

two groups on the debt settlement, it is not surprising that he could not get one
deputy of distinction to join him in forming a Ministry - even regardless of the
capital levy scheme, which was, as usual, quite nebulous, and perhaps on that account doubly terrifying.

Now M. Briand is trying again.

For the Ministry of Finance, Poincare, who

accepted last week has now refused.

The rumor is that after he looked into the

condition of the Treasury he decided that he did not feel equal to the responsibility for what he saw.

Now Caillaux has refused.

As far as I can make out, Call -

faux is the one man in France who clearly sees that stabilization means deflation


deflation of the stock market, where speculation has become the great Parisian
pastime, deflation of the great export industries, unemployment, political discontent.

When I say he is the only one who sees it, perhaps I exaggerate.

I think

there are a number of deputies who see it - and who are for that reason covertly
opposed to stabilization.

The Financial Situation
I do not know the details of the Experts' program, which has not, in fact, been
formulated, although some elements are leaking out, as you will see in the Herald.
But from all that I hear, I are accumulating the impression that the uommittee is

approaching its task as a problem in Government finance, pure and simple, rather than

as a problem of national economic readjustment from inflation to normalcy, in which
problem the Government finare es are only one element.

the former view.

Before I came to Paris, I had

After being here twc weeks, I came to the conclusion that it was

a dual problem - Government finance and economic readjustment.

Now I have reached

the conclusion that of the two elements, the problem of economic
readjustment is



infinitely the more difficult.



French industry no more realizes the extent to

which it is inflated, than the "Statist" would admit in 1919 that British industry was inflated, or than the manufacturer's Record would admit it in our country
in early 1920.

I question if even the banks, with all their opportunities for

observation, appreciate how thoroughly sick trench industry is, although I think
they have been operated very conservatively as a group.
And even the Bank statements are not too reassuring.

Loans and deposits

have roughly risen with the fall of the exchange.

Certainly they have kept pace

with the rise in prices that has so far occurred.

But capital and surplus is

usually about where it was in gold francs in 1913.

Now unless one assumes that

the banks have been able to accumulate enough hidden assetstx), so that after
stabilization they can write up their capital and surplus proportionately, it is

clear that there will be some house cleaning in trench banking, some day.
willing to make such an assumption for the big metropolitan banks;

i am not able

to make it for the smaller banks.

b0 with industry diseased from head to foot, and the banking system certainly
none too robust in places, I do not see how the economic readjustment can be made
unless the Bank of France is able to extend the scope of its operations by developing an open market policy;

and in the absence of an organized market for commer-

cial paper, this means the sale as well as the purchase of Government securities.

That is why I regard the floating debt as the principal means of salvation - the
one potentially bright spot in the whole situation.

It is not the magnitude of

the floating debt that bothers me, it is its hideous form and unwieldy shape.

As a matter of fact, the true floating debt is none too large - perhaps it is even
too small for the magnitude of the operations in which it might be employed, if it
were put into a form which would make it available for such operations.

It seems (x) in r


p. 4


to me that the whole history of England for the last seven years shows this; and
that the experience of uermany confirms it.

Gov. Schacht's task, it seems to me,

was rendered doubly difficult by the fact that he had no floating debt with which
to operate - on the a:ntrary, hehad to contend with the floating credits originating from the Government surplus.

It is true that in its present form the floating debt - that is, the Bons de
la Defense - is a menace to everybody.

But it seems to me that it would be rela-

tively easy technically tabarness it, and bring it under control, so that it could
render invaluable aid in pulling France through the period cf readjustment.


fact, I fear that any program which does not imorporate this idea, in one form or
another, will be incomplete, and to that extent uncertain of success.
by any means wish to go sc far as to say it would fail;

I do not

it would simply be more


And there

are enough uncertainties in the situation anyway to make it desira-

p. 5

that market.


It is perhaps true that successful programs can be devised which

do not involve extending and fortifying the control of the Bank of France over
the money market.

But it is my conviction that such programs would contain

hazards and uncertainties which could readily be eliminated if the Bank of France
were given thcee means of market control which are commonly attributed to other
great central banks.

Hotel Chatham, Paris,
June 24, 1926.


One of the biggest factors in the stabilization program is the attitude of
the Bank of France.

I am forced tc say that from what I gather from conversations,

the Bank of France does not enjoy the confidence of any important element.
(1) The commercial banks, that is, the big banks, can either get along without

it, or fcrce it to grant credits by presenting directly or indirectly claims on the

(2) The Treasury regards it simply as the note issuing agency of the State, and
under the "plafond unique", this relation is now virtually the law of the land.
The Treasury regards it as its creature, which in fact it is.

It may protest

against the Treasury's demands, but it invariably accedes to them - and the Treasury
knows it.

(3) Its rate is entirely ineffective except against Treasury paper, and for
that reason it cannot use its rate.

It has no other market machinery of any real


(4) In regard to a program of reform, it has none of its own;

and has so far

been unable to support any of the other schemes presented - as I think, with good
But having nc plan of its own, and always appearing to oppose any other


plans suggested, it is put in the light of not being interested in the reform movement.

In fact, a most horrible rumor has begun to circulate in circles where you

would last look for it - that the Bank is willing that the franc should go the way
of the mark, so it could reorganize its position on a fresh foundation.

I repeat

this rumor, horrible as it is, because it circulates not among communists and radicals, where ycu might expect it, but among serious people.


It is, of course,

but it illustrates as nothing else does, the very low esteem in which the





Bank is held by the people who should have the most implicit confidence 3n it.
(5) The Bank is regarded as a miser, hoarding its gold, and neglecting all
its responsibilities toward the currency.
(6) The fact that the Bank has falsified its records on one known occasion is
not forgotten.

Every time the movement of the "divers" in the statement is at

all noticeable - and it frequently is large - the old suspicions arise.

The Bank

cannot regain confidence until something is done which will decisively erase that
terrible blot.

The simple fact is that the Bank is unable to render effective aid in any program of monetary reform.

It has no plan or program of its own, except to hoard

it has no machinery to make a plan effective if it had a plan;

its gold;

and no

viii to demand from the Government the modifications of its relations which would
enable it to function as a true central bank.

The Bank of Fr

it is a ury.
commercial bank, acting the the note-issuing commercial banks; TreasIt does not hold as reserves of the department of the


its only weapon of control is its rate, which is dictated by the Treas

and is not very effective under present conditions anyway.

I am personally ashamed to rrite such an unkind letter about an institut

where I have been received with more than courtesy, and where, I hope, I have
some friends.

But I cannot disguise my conviction that financial reform in

should begin with the Bank of France;

thet until the Bank of France i9 resto

the position of a central ban?:, other reforms are uncertain and precarious.
conviction is an obsession with me.

But until such a change occurs, I feel

doubts as to whether the Federal Reserve Bank of New York would be justified
entering into such relations with it as with the Bank of England.

Such rela

with the Bank of England were possible, because the Bank of England was willi

ready, and capable of assuming the responsibilities that went with the advant

Governor Norman could guarantee that he would and could control the London ma

( P. 3


at least against every contingency short of revolution.

The Bank of France can

guarantee nothing, can promise nothing except its wretched gold.

And it is very doubtful if the Experts' Committee will advance any plan
calculated to give the Bank the position in the market which seems to me requisite

before relations can be assumed between the Bank of France and the Federal Reserve
Bank of New York similar to those with the Bank of England.

But this is another

matter on which I shall write later, discussing the new Ministry.
Further, I hear a rumor that Picard has made a most unfortunate impression on
the Experts' Committee.

He has had absolutely nothing constructive to d'fer, and

has generally appeared in opposition to other proposals.
are supposed to be confidential and secret.

The Experts' sessions

But a good deal has leaked out, and

in a day or so I think I can send an advance statement of their program.

In con-

clusion, I may say I think I understand the attitude of the Bank of France, and
that I appreciate the reasons for this attitude.

But what I am most afraid of

is that their report will assume, either explicitly or implicitly, that, following
the adoption of their program, if it be adopted, a credit will forthwith be opened
in the Federal Reserve Bank of New York.

Perhaps it will;

but until this becomes

an assured fact, it will be most unfortunate if it becomes a public assumption, as
a refusal then could only disturb the :thole situation.

I shall keep you in close touch
lowing fairly closely....

:1.-th the situation, which, I think, I am fol-

The longer I stay in Paris, the more convinced I am

that the problem of the Government finances is the simplest of the lot.

The atti-

tude of industry and the enormous speculative public, happy drunk with inflation;

the impotence of the Bank of France both in act and will, both seem to me far more
dangerous than the Treasury situation.

Compared to the difficulties of carrying

the country through deflation, the problem of fixing up the Government finances
 like child's


Of course, it is all one problem,but with three angles



p. 4


liko a fort with three salients - industry, the Bank of France and the money
market, and the Treasury.

A program which will successfully arrive at a

course of action for the Bank will, automatically almost, be adequate for the

A program of Government finance only is likely to be very inadequate.

Paris, June 24, 1926.


Through its current account with the big banks, the Treasury has become the
holder of bankers' deposits, largely supplanting the Bank of France in that respect.

I cannot get a trustworthy estimate of the sum, but I understand that it is usually
over 3 billions.

The total private deposits of the Bank in the last statement was

2,780,000,000, of which a large part were not bankers' balances, but commercial deposits.

I have inquired at the Bank of France regarding this item, and they assure

me that the current accounts of the Treasury are insignificant.
lieve it.

I think they be-

"At the Bank of France", by that I mean the Statistical Department, where

I have become well acquainted.
about the Paris market there.

I must say, however, that they know very little

The so-called Bureau d'Etudes Economiques is simply

a clipping and translation department, supplying M. Descamps with data and files.

It does no real

research and has no active contacts with the commercial banking

( page 2


In the latter event, the

the Bank of France, or draw on its Treasury balance.

Treasury increases its borrowing at the Bank of France to get the necessary funds
to meet the draft.

As things now stand, I am sure that the demand liabilities of

the Treasury exceed its unused margin of advances at the Bank.

In this way, the

State's loans at the Bank may show an increase unrelated to the position of the
Treasury, and this probably explains why the State has had to increase its bsr rowIt is another

ing at the Bank during a period when the Budget has shown a surplus.

example of the way in which the Bank has abandoned or lost its function of a central
bank - it does not hold or control the bankers' balances.

I have seen the Bank of France from cellar to attic.


lite in showing me the mechanical details, but I found that, when it came to asking
questions, there were areas with "No Trespassing" signs all over.

In an expansive

moment,asked me if there was any question I should like to ask about anything in the stateM. de Valette, who had just introduced me to one of the branch examiners,

I took him at his word and asked about the "divers".

Instantly, I knew I

had asked one question too many, so I offered a suggestion as to what I thought it
contained, in part, namely those accounts they call "ecarts'.
obvious relief, seized upon this explanation and improved on it.
tion he gave - he can tell it to the Marines.
the movements;

The examiner, with
But the explana-

It would not account for a tenth of

but I was glad that a pretty embarrassing moment went by without a


It was the same way at the Credit Lyonnais.

I went all through the Bank,

which is really wonderful, and their Statistical Department, which is really a combination of a Credit Department and a Bureau of Research for their stock exchange
operaticns, and I was greatly impressed.

The best man I met there was the

head of their Portfolio Department, with whom I had a long and very enlightening
conversation on the rate structure of the market.

I asked him about the position

( page 3

of the Bons in the market.


At first he took the position - the usual one here -

that the floating debt floated on confidence and not on its yield;

but when I


quoted to him the 1923 report of the Credit Lyonnais itself,that it stated flatly form.
me which was not good


that the floating debt would not float after the demand for commercial they do ex- feel safe
tioned above, credit not

panded, he turned his position and agreed that that was just about what had happened
assured me that the big French banks
So altogether, that
during the last two years and was more or less happening now. Discount Department of the Bank

was a good morning - and the principal reason was that the franc was up ten upwards of 500 mi
Lyonnais totalling points
at the opening.

If the franc had been down ten points, statements, have gone sc
I would not I asked if these were me

My reception among French people varies with the rate of exchange;
were not, although but certhey said it was

tainly Americans are not popular here, by and large.
enthusiastically as the English.

Although wecn the Bank the as
palm off are not hated small bills
hardly pay the cost of collection.
their portfolio as a whole and they

I have learned so many contradictory facts about theThey formerly published the average
Bank of France's portfolio
The American banks in
that I don't know as much about it as I did before I came. run about 25 days.
But I don't

general do not rediscount at the Bank of France.

At the Bankers Trust they assured
minimum limit on places where there


a good many of them.

page 4


Generally speaking, however, I do not believe that with

the Government pouring currency into the market as it has for 12 years, that the
big banks have had much occasion tc discount at the Bank of France, and I think
for that reason that their best customers are the smaller country banks and their
I understand that ever since the charter of 1897 the

direct commercial accounts.

Bank has been hard put to it to keep up its earnings;

and this is given as the

principal reason for the abandonment of central banking and the expansion of their
purely commercial banking efforts.

These latter would not be worth much if they

had to pay any interest because on a good many of them, the interest does not pay
the cost of collection.

A bill for 1,000 francs is pretty fairly good size, from

what I saw, and assuming that this runs the average length of 1 month, the interest
on it would be about 15 cents.

As it has to be ccllected by hand, the ccst would

run up formidably if it were not for their low operating coats, for example salaries.

If the Governor of the Bank only gets 62,000 francs a year, how much does

the collector, the "garccn de recettes", get?
I think it is true that the better part of their business comes in from the

agencies, at least the more profitable part, and this is given as the reason for
multiplying the number of such agencies.

The conclusion in the above paragraph is,

I think, no overstatement, namely that the Bank rate is effective over only a very
small volume of bills, and those mostly not coming in from the big banks.

So far,

the one subject on which I have found unanimous accord is that the Bank rate has no
influence on the money marls t.

I can get no idea of the magnitude of the swap market.

Because the bank I

went to first is very active in that field, I got the ingression that it was the
dominant rate in the money market.

This is incorrect;

but no quantity figures

are given out, and opinions are at both extremes, ranging from "enormous sums" to
"insignificant amounts".

My guess is that the field is mostly occupied by the

foreign basks, bat that the whole thing is small enough to be under control of

( page 5


as the report market on the stock exchange is under control.
concerted action - at least the Credit Lyonnais said it was under control, just

Paris, June 25, 1926.



The new Cabinet was announced late in the evening of June 23.
the Briand-Caillaux Cabinet, for good reason.

It is called

As the price of his adhesion, M.

Caillaux insisted that he be admitted on a parity with M. Briand, and he calls the
combination government by "the two consuls".

Further, M. Caillaux himself named

a good part of the other members, including, as may seem strange, the War Minister,
Gen. Guillaumat;

the General, I believe, who replaced Gen. Sarrail at Salonika, and

who was Commander of the Paris Area in the desperate summer of 1918.

While the

new Cabinet has not stated its program, it must be admitted that it would not take
much to make it a dictatorship.
The personnel meets with general approval.

Beside M. Caillaux, no less than 5

others, among the Ministers or Sub-Secretaries are men of high reputation as financial experts.

Pietri for example was offered the Finance Ministry by M. Herriot,

and several others might properly have been considered for the post given M. Caillaux
Altogether it is a financial Ministry, and certainly an extraordinary group of men.

Re policy is still to be announced, and certainly one cannot guess it from the
vague discourses of M. Caillaux, which, however, do show that he realizes more than
moat people - certainly more than the public - that stabilization means deflation.

The two questions that will immediately confront the Cabinet are the debt settlement and the report of the Experts.

As was stated in other letters, I am sure

that the Experts intended to recommend the Berenger Agreement, because their program
rested on an American credit.

Now, personally, I de not believe that M. Caillaux

gives to an American credit anything like the importance which M. Perot did, and,
in fact, I doubt if he wants it.

Further, if I am right in assuming that the desire

for American credit was the sole reason for expecting the Agreement to pass, it logoically follows that the chance of its passage is reduced.

The Socialists and the

Radicals, and the Marin group of the extreme right, are either opposed or are for

( page 2

passage with amendments.


Now Pertinax has launched his campaign.

So I find
myself obliged

feel confident

of a character

is in session a

until our Senat

passed only wit

I should be ast

As for the

talk, not unpla
the conclusion

earlier view, w

cn M. Peret's b

Caillaux did no


edly en
will be

and it m

ment wil


to his w

M. Caill


from the

it is wo


( page 3


This was certainly their origine) program.

I have given my reasons

for questioning if this part of their program will not be modified.


questions arise from my estimate of the attitude of the Chamber and my

guess as to the attitude of M. Ceillaux, who has spoken in a way which
leads one to expect his opposition tc ratification.

I must say that my

views on the debt ratification are at variance with the best opinions on
the subject.

My belief is that the Committee will recommend ratification

now - but with reservations.

2. Stabilization at about the present level of the exchange, say 170.


is little doubt in my mind that the exchange could be put back to 150 with-

out much effort, but as this would add to the immediate difficulties, I see
no reason to expect that the exchange will be moved much from its current

This probably involves a further rise in prices, which have been

going up pretty fast.
3. The floating debt.

The remaining advances, if any, may be quite gradual.

This part of the program as given in the paper is a very

sore point with me, but I think I get the idea.

The limit of advances to

the State is 38,500,000,000; the figure on June 24 stood at 36,600,000,000
with a normal expectancy of going much higher at the end of June.

The cir-

culation figure is 53,000,000,000 (June 24) with a legal raximum of 58 billion.

In other words, under present laws, the remaining margin on the ad-

vances to the State is less than 2,000,000,000; while the margin on circulation is nearly 5,000,000,000.

Under the scheme given in the "Quotidian", e

new item would be introduced into the Bank statement, termed advances to the
Consortium of French Banks, which would permit, or rather would oblige, the
Bank tc advance money to the State, indirectly, up to a limit of 5 billion
or more without changing the circulation law, while under the present arrangement only 2,000,000,000 can be advanced directly.

As you will see,

this is merely a device for confusing the Bank statement in such a way as to

force the Bank of France to put 5 billion francs at the disposal
of the

( page 4


Treasury without its appearing frankly as a loan to the State, and without the
necessity of altering the law covering circulation and advances tc the
From this, you can imagine why the Bank's representative on the


Committee was unable to show much enthusiasm for the scheme.
more inflation, very thinly disguised.

It is simply

When I wrote the letter criticizing

the Bank, I did not wish to imply that I did not entirely endorse their position of opposition to schemes like these;

but I doubt if I made myself

What I criticized was their inability or refusal tc assume the

initiative in proposing a good scheme of reform, and the fact that they
limited their opposition to mere verbal remonstrance and in the end invariably accepted measures which they knew, or believed, were dangerous.


this is really the Experts' program, I do not think M. Picard should have
opposed merely verbal objections.

I think he should have ccme out flatly

in opposition and then if he could not carry his point, that he should have

But, of ccurse, what I really believe is that the Bank should

have taken the initiative from the organization of the Committee, in all
matters directly concerning the note circulation and the control of the
money market.

Now all this confirms my worst apprehensions, namely, that the Experts' program
will put upon the Bank the probability of further inflation;

that instead of its

separating the Bank and the money market from Treasury control, it increases the hold
of the Treasury on both, and that it continues the vicious system which forces the

Bank to put credit into the market, whether at the instance of the Treasury or of the
market, without in any way providing a means by which the Bank can withdraw money

from the market, except possibly through the operation of a discount rate the dubious
of Bank, it does n

In short, if this is the program, it does not enhance the prestige of the pre
it reduces

( page 5


which it has verballyBank is the creature of the Treasury.
and impotently opposed, and it emphasizes again that the

Bank the servant of

Bank is not that it

that it objects onl

The iss

France is going to

unreservedly, let i

Treasury and always

of all responsibili

if it is to be an i
and for the control

France wishes to be
Bank, no foreigner

R. B. of N. Y. c

those of an indepen

tions of fact could

ent - I almost said

considerations lead

cases would not be

Probably I am

has not yet been an
pletely formulated,

Experts' Committee,

pel:41w the critica

tion of the Bank of

eure of the Treasury
tions in France, I
exaggerated - concer

Paris, June 26, 1926.

I have now arrived at a point where I can make some observations on the Paris
money market.

When I arrived here in the middle of May, I deluded myself with the idea that
I already knew something about it.

So my first task was to unlearn the things I

thought I knew, and my second was to get the facts without offending anyone in the
The third was to fit the facts into the general situation.


I have been fortunate in the people whom I have met;


to M. Pagnamenta of the Bankers Trust Co., to M. Verdier of the Credit Lyonnais and
to Mr. Aragon and M. Manice of Morgan Harjes, and to M. Laroux of the Bank of France.
There is, properly speaking, no money market in Paris.

There was formerly -

that is, up to one or two years ago - a kind of market in Bons de la Defense.


for reasons previously stated, this was dealt a severe blow in March 1924, and was

utterly destroyed last year by the threats of forced consolidation of the floating

There is not and there never has been a market in commercial paper for two


First, it is not considered good form for the banks to sell their clients'
Perhaps that is putting it too strongly;

but the fact remains that it is

considered better form not to, even to the Bank of France.

While the big banks do

it, on occasion, it is only under considerable pressure, and then only to the Bank
of France.

Even then, they mostly try to limit their rediscounting to collection

Second, there is still a strong tradition in French business that it is

an evidence of weakness to resort to bank credit in any form.

There are firms

with whom it is a matter of proud tradition that they have never discounted a
scrap of paper.

For such bank credit as is employed, the conventional form is the three month,
three name bill.

,chile the total deposits of all French banks,

reduced to gold,

are at about the 1913 figure, the ratio betwceen the
types of assets against


page 2


total liabilities has profoundly changed.

Before the war, the deposits usually

were represented by the portfolio, and the capital and surplus by investments,

reports, and collateral loans or overdrafts.
tained among the commercial banks;

These proportions are still main-

but since capital and surplus of such banks as

the Big Three stand at nearly the same figure as in 1913, it is evident that, so
far as their statements show, these items, together with the assets that conven-

tionally stand against them, have shrunk to about 1/6 of their pre-war value in
On the other hand, deposits have roughly increased with the depreciation


of the franc, and the portfolio of bills has increased in much the same proportion.
?or example, the combined balance sheets of the Big pour showed at the end of
1925 reports of 173,000,000, against 193 at the end of 1933.
3,704,000,000 against 1,516,000,000 in 1913;

Overdrafts were

that is in francs they had doubled,

but in gold they were about one-half.

The reason for this movement ishas been liquidity.
eideration of the banks the fact that in recent months, the first conThis has completely dominated thei
action, for three reasons.

First: to lend paper money for any length of time i

period when the franc was declining or likely to decline in purchasing power, wa

certain way to lose real money value, as the rate of interest obtainable could n

equal the actual or threatened loss in the value of the principal when the latte


the banks were apparently aware of the fact that any arrest o

flation, even if it took a form no more severe than stabilization, would destroy

solvency of many of their clients, and considered that a three-months bill was le
likely to freeze up than any other type of commercial asset.

Third: the threat

consolidation of the floating debt forced the banks to dispose of their Treasury

bills, or at least frightened them into doing so, and obliged them to seek for co
mercial bills in order to find employment fcr their deposits.

As this coincided

with a time when prices were rising and business expanding, the consequences were


The market dumped upon the Government about 10 billion francs of floa

( page 3


debt causing the equivalent expansion of the currency in 1925;


replace the equivale
and sought to

As the amount of acc

demand, the result w

The ensuin
a t

for first class comm

short-time Governmen

a market which was a

the best that the mar

ital issues in the f

the astonishing spec

3-month Treasury pap

the Treasury current

At the en

( page 4


special considerations - the special considerations being the almost complete

absence of credit - credit in the sense of a belief in values.

Now to an American or Englishman, the question immediately arises, "What is
wrong with this pretense!

Where is the Bank rate!"

rate last year was not in the picture.

The answer is that the Bank

Early in the year, the Bank rate was 7,1()

and possibly was having some effect upon the maintenance of the floating debt.

But after the Government had made its threat of conversion, and subsequently had
begun to pour currency into the market, what little influence the Bank rate had was
it was dropped to 6% in July;


but it plays no part in the stcry.

bard. rate was kept at 8% and probably had a negative influence;

The Lom-

that is, a lower

rate would have induced. borrowing at the Bank to carry Government bonds for their

But all this is more or less water over the mill.

If the peculiar position

of the money market in 1925 and the first half cf 1926 was due to lack of confidence-


lack of confidence in the worth of the currency and lack of confidence in the State's
contract with its security holders, what will happen if this confidence is restored,
if the exchange is stabilized and the threat of forced conversion is removed!


some degree, it seems to me that as the cancers are removed, the results will be

There will be less urgency for the banks to employ their funds in bills

at say 5h1. and mcre desire for them to permit overdrafts at twice that rate.


there is indubitably a real demand for credit, and a demand for credit which is not
Inlikely to grow as stabilization sets in motion the forces of deflation, the tendency would naturally be for the commercial paper rats to rise.

But this rate can-

not rise much without Treasury cooperation, for it is only a short distance from
the Bank rate, which, which if it is not effective as a restraint to inflation can
certainly become effective as a restraint on deflation;

and the Bank rate can hardly

( #) Treasury paper does not enjoy a special rate at the Bank; it discounts at the
official rate.

( page 5


be raised without Treasury permission, as it might provoke a flood of redemption.

As these redemptions can only be met by forcing the Bank to issue currency, the
increase in the currency would tend to bring the money rate down again, and so on
ad infinitum.

It may be that there are other solutions, and there probably are;

but so far I cannot see any answer to the problem except to grant the Bank of France
the power to control the supply of credit in the market by allowing it to turn back
into the market the securities which it does not wish to keep, that is to enable it

to take credit out of the market as easily as the market takes credit out of the

It appears that I have only one chorus to all my songs.

No matter what sub-

ject I elect for a memorandum on the various aspects of this political-financialeconomic situation, it always seems in the and to lead to the same conclusion,
if I start out with the intention of saying nothing about it.


Hotel du Cap d'Antibes,
Antibes, June 26, 1926.

Dear Mr. Harrison:

The enclosed letter from Dean Jay, of Masers. Morgan, Made° &
Company, explains itself.

These rare the cables which I sent to you person-

ally, and I am going to ask you if you will be good enough to remit
a draft
for the amount to Messrs. Morgan, Marjes & Company, addressing the
letter to

 Jay and explaining whet it is for.
 regard to the vouchers,
needful in

This will enable you to do the

Paris, June 30, 1926.


Dear Mr. Governor:

Immediately upon arrival here, I went to see Col. Harjes.
well anticilated their reaction, and had tried to prepare for it.

I had pretty
Briefly, Mr.

Why said that they would have no part in any credit operation in which the F.R.B.
did not participate;

and that M. Caillaux would not go ahead with the debt negotia-

tions unless he had some assurance of credit, and that unless the debt negotiations
had the full support of the Ministry, they had not a chance in the world, or rather
in the Chamber.

I told him this was a mere bargaining attitude;

but I did not

add what was on the tip of my tongue, that such an admission was anything but encouraging for the success of a comprehensive and long-run program of reform;


his own account, the keystone of the arch was the debt ratification, and this
could only be secured by a precarious vote in the Chamber and on terms which might
be disrespectfully termed C.O.D.


position and that of the Bank.

Instead, I went to great length to explain your
This was not a little difficult ,for Mr. Jay be-

lieved that there was some sort of moral obligation resting upon the American people
and the American Government to intervene in this situation, and that this moral
obligation rested specifically on the F.R.B. of New York.

I took a different

view, told him that the Bank was bound by many considerations, that it would be
quite impossible to think of going into any scheme which, after thorough and detailed consideration, did not give almostperfect assurance of success;

that the

English arrangement had been questioned by Congressional Committee, but had been
endorsed because it had been eminently successful;
had justified the operation before Congress.
fumble would bring down the wrath of Congress.

that, so to speak, i

On the other hand, the slightest
In short, I argued about one hour,

and in the end was satisfied, for Mr. Jay said that he now understood thoroughly
the attitude of the Bank.

In the course of the conversation, it was asked if, since you did not wish

( page 2


to see a representative of the Treasury, you would be willing to see a represent4110

ative of the Bank.

I replied that you were absolutely unwilling to see any repre-

sentative of the Treasury, and urged that no representative of the Bank should come
to see you until you had expressed your readiness to receive them or him;
only with the assurance of the most perfect discretion.

and then

I told them I would rather

make fifty trips to Antibes than have a repetition of the Parmentier episode.


seemed to believe that M. Moreau or M. Rist (who has replaced M. Aupetit) were
likely to rush off to Antibes at the first excuse.

I told them that I did not know

M. Moreau, but that I had met M. Riot in Washington, and, from a very brief impression, I saw no reason to place too much reliance upon his discretion.

Mr. Jay

then asked if I would personally see M. Monnet or M. Riot to explain the position of
the F.R.B., to which I replied that I knew you had great confidence in M. Monnet,

and that I did not know what you knew of Riat, but that personally I had no great
amount of confidence in him, and that I was unwilling to see either except with your


As they (I mean Mr. Jay) were very anxious that I should explain the

position of the F.R.B., I said that if you would authorize me to, I should be very
glad to have a conversation with them and that I would immediately ask you if you
wished it.

For that reason, if you do or do not wish me to speak with some repre-

sentative of the Bank, will you please telegraph at once.

If the answer should be

affirmative, I assure you that I will use the utmost discretion.
I have seen an explanation, evidently a translation and probably from an authoritative scurce, of the proposed Caisse de Liquidation.
would receive $150,000,000 borrowed in the U.S.

Briefly, the Commission

As the Bons de la Defense were

presented for redemption in currency, the Commission would pay an equivalent sum in
gold or dollars into the Bank of Franca.

In this way, the circulation could be

expanded about 5,000,000,000 fr. but the additional currency would be completely
covered by gold or its equivalent.

The document admitted that it was a variation

of the "plafond unique" idea disguised to avoid disturbing public confidence (I

( page 3


add personally, the idea of the "plafond unique", after the experiment with it
last year, quite terrifies the public).

I told Mr. Jay that I doubted if this

scheme of inflating the currency would meet with any great enthusiasm on your
part, and he agreed.

Mr. Rist has succeeded M. Aupetit or M. Picard, I am not sure yet which, and
I have met M. Rist, as I

seems to be regarded as M. Moreau's right hand man.

said above, about a year ago in Washington, where he paid a brief visit to the
Division of Research.

It was my impression that he had only a superficial under-

standing of banking and monetary economics, and that, personally, he was obsequious

to official attention, by which he seemed nattered.

Although this was before the

days of the "plafond unique", he expressed opinions tending in that direction, and
absolutely the opposite of those which seemed reasonable to us, and at variance
certainly with the ideas expressed to me recently by M. Verdier of the C. L.

Farther, some of the monetary and banking theories which appeared in the LaytonRist Report on Austria of last August, were certainly his, and I must admit that,
while ingenious, they seemed to me absolutely unsound.

I have little right to

form an estimate of his professional attainments from so slight a knowledge; but
until I know more, I must form my working opinion on what little I do know.
Under separate cover I am sending the morning clippings.

As you will see,

the report of the alleged conversation between M. Moreau and yourself and Gov.
Norman is denied.

It is none the less clear that the story originated in loose

remarks from headquarters, either at the Bank or the Treasury, and the denial is

worded in such a way as to convey the impression that negotiations are going forward.

In short, little seems to have been learned from the Parmentier episode.

As you will see from the clippings, the announcement of the Ministry met a response in the Chamber which can at best be described as luke-warm.

The swap rate

has widened out again.


Robert B. Warren.




Mr. Harrison.

July 1, 1926.

Hr. Harrison.


I am very fond of Governor Criscinger indeed.

July 1, 1926.

He hes been an orrnest supporter

of sound things in the Board, and I know ho has had an unhanpy time, to some extellit on our account, for a good while.

You will gather from my letter to !Ir. Jay and my cable of this drte

that I um hoping to see

and tit": over all these difficult mmtters.


I am enclosing copy o' a letter I am writing Tinston in reply to one received
from him.

itre best regards,
Sincerely yours,


- An enclosing a letter from Dean Jay which will give you a little

slant on the situation in Faris.

Ur. G. Ii. Harrison,
c/c Federal Reserve Bank of New Yor':,
Wew York.

Hotel du Cap d'Antibes,
Antibes, July 1, 1926.
rear Garrard:

Yours of June 16th is just received, and I have read it and the enclosures with the greatest possible interest.
right, and 2r. lilellonez letter is a masterpiece.

Your interview struck me as all
Cf course the effect was salu-

tary, and the we Nary-Haugen bill, I understand, is dead.
It was inevitable that the sidewalks would be a bit slippery while you
were in Paris.

I think you got out of the situation admirably, but I am wondering

what you are saying to the Senate Committee about debts and about all the miss-

chief that I am up to here, none of which has happened:

You can speak for me now

with authority, and I am mare you have kept in close touch to )(elm of develoements
subsequent to your leaving.

the situation in France today has certainly undergone a radical change,
so far as one can gather from a distance.

I think the Government has, 90 fer as

appearances go, reached a real determination to do something, but I fear the practical difficulty is going to bo in formulating a detailed plan.

Some way or other,

they do not seem to have the knack or faculty of getting together in mass formation
for a comnon purpose, formulate and put through a plan.
I have felt obliged to remain here for a longer rest than I had thought
was necessary, and may not leave until just time to meet e:r. Mellon in Faris, if

ho sails as planned, about the 15th.

It is really rather important that I should

have a talk with him, in part about some of my personal matters and of course about
the Board situation, and in part about the situation over here.

If you find he

is willing to do so on receipt of this letter, would you kind asking the boys at
the office to cable me about arrangemente for meeting him, when and where he ur-

July 1, 1926.

Mr. Winston.


rives, etc. and I will make my plans accordingly.
About the constructive suagostiony, I heard of the Forgan proposal,
but frankly, it doer not appeal to me.
much ability.

I have never regarded him as a man of

Be, like his brother, has always been a person of very rigid views,
ge is getting well along in years, and he has

such se we expect from the Scotch.

not made a very striking record as a banker, as you knew.
I have long had a strong feeling that Sydney Anderson would make a splendid man on the Deard.

He did a great piece cf work in the Agricultural Inquiry,

has a fine mind, is a lawyer by profession, has a fine knowledge of the Federal
Reserve System as a result of the Agricultural inquiry, and is a Mail of the highest
possible integrity and character.

Besides that, he is from the Minneapolis dis-

trict, Which is not now represented on the )card, and he is not of a type who would
be regarded as shigh-brov" banking talent.

He io a Republican, and if either

of the present members of the Foard who might retire leaves a vacancy, both of those
being Republicans, a Republican could be aprcinted.
question of money.

One difficulty might be the

I think. Anderson is probably getting a considerably larger

salary just now.
Why don't you ta)7e the job?

You like Washington and public life, know

the ropes better than anybody, and I would not mind ycu as a boss - in fact, I think
we might be able to collaborate in some very important matters over here.


Hamlin is reappointed, as seems likely, your appointaent would depend entirely upon
whether Cunningham continued or not.

On the other hand, if Criseinger's illness

necessitated his retirement, then it mizht be necessary to make an appointment from
either the Philadellhia or Cleveland district, those being two of the largest and
most important districts which would be unrepresented.
CT course, if Neerton Baker co'ild bn appointed, it would be line, but he !


Mr. Winston.

July 1, 1926.

a Democrat, and then he is a highly political person, and those are serious

defects, as we know.

-Jut the Democrats have Laen almost eliminated from the

Beard and it would be a fine independent move at present to appoint a Democrat
in the place of a retiring i:epublican.

I have puzzled a little about a possible candidate from the Philadelphia
district and cannot think of c. suitable one.

::orris was one suggestion.

He is

also a Democrat, IAA I au not sure that my colleagues, nor am I sure thnt I myself,

can give satisfactory evidence of his qualifications.

sorry that I cannot send you

something more definite, but trait may set you thinking on the subject.

You did not enjoy the trip any more than I did.

I would like nothing

better than to have another fee: weeks in Rome with you end then make another motor
Possibly we can 6o it next year, but all sorts of thins's are

trip in Italy.

liatle tc hari.en before that.

Please give my best regards to

rellon and Dewey, and the same to


sincerely yours,




owed you come.

When I

r. Aoore tells me that you owe me some money.

I as not going to render an account, but we can match for it

get home.

Hon. Garrard E. Winston,
Under Secretary of the Treasury,
rashington, D. C.

I thought I

Paris, July 4, 1926.



This report was published in the evening papers of July 4, 1926.
program, with reference to Annexes which have not yet appeared.

It includes a

In the absence of

the Annexes, it is impossible to criticize most of the detailed statements, especially the figures.

The following are merely notes on certain phases.
The Budget

(1) The report is rather vague on the method of meeting the 12-14 milliards estimated still due for reconstruction.
(2) While it is stated that some 20,000,000,000 fcs. of expenditures and only
some 10,000,000,000 fcs. of receipts rise with an advance in the price level, the effects of this upon the budget position are not precisely indicated;


plained how the estimated deficit of 2,500,000,000 fcs. in 1926 and 5 billion in 1927
is reached.

(3) The principal source of increased revenue is the railroads, and it is stated
that a 155 increase in rates would not only make them self-sustaining, thus relieving
the Treasury of the present subvention, but would supply a surplus available to the
State in the form of taxation.

As the pre-war railroad investment was in the form of

bonds or stocks which are now virtually fixed-interest bearing, it is clear that with
the franc at 1/6 of its pre-wer value the relation of capital charges to potential
operating income has been enormously reduced.

On the other hand, it would seem as if

the railroads were so badly run down that very considerable new investment was necessary.

In the absence of the detailed annex it is impossiU.e to criticize the esti-

mated results of a 155 increase in rates;

but it hardly seems adequate in view of the

current and prospective rise in prices, the cost of living and wages.

It would appear

however that the traffic can bear a much heavier increase.
The Treasury

(a) Current accounts: the figure given is 1,600,000,000, but it is stated to have
been much more considerable recently.

This figure is, under the estimate of 3 billion

( page 2


which I gave Governor Strong, but it confirms the conjectures expressed in previous
lipmemoranda, that the market, in preference to rediscounting at the Bank of France, has

been drawing down its current accounts with the Treasury, thereby forcing the latter
to borrow at the Bank.

While it is recommended that the system be modified, no

plans are offered.

(b) Bons do la Defense Nationale: It is proposed to limit the amount of these
Bons de la D. N. to the present figure of 49 billion, with a more flexible rate of
The handling of these is to be turned over to a Commission (autonomous),


with the following provision:

(1) Interest charges to be met by the Budget
(2) Annual amortization provided in the Budget of 500 million (viz. 15)
(3) An initial endowment of 4 billion (roughly $100,000,000) provided by a
foreign loan.

This will be placed to the credit of the Caisse de Ges-

tion with the Bank of France, and will be increased from other sources

until it reaches 205 of the Bons or roughly 10 billicn francs.

If the

Bons are presented for reimbursement at maturity, currency will be issued to meet them, such currency having a 1005 cover in gold or its

(4) The receipts of the Tobacco Monopoly are specifically affected to meet
the demands of this scheme on the budget.

In case of need, the Caisse

will be able to borrow against this income sums which might be needed.
They will continue to be discountable at the Bank of France.

The Caisse is to

publish a detailed fortnightly statement.


This scheme is, of course, the familiar "plafond unique" with three very

important modifications:

(1) It gives the Bons a better status and so should free them from a panic
rush to convert into currency, such as occurred in 1925.

(2) The currency issued against them will have a full cover of gold or

( page 3


(3) The Bone are to pay the market rate of interest, which may be changed
once a fortnight.

This fact is extremely important for 2 reasons:

(a) It relieves the "plafond unique" of 90 of its objectionable features
(b) And more important, in one way, it creates in the Paris money market
an agency with very large powers of controlling the market;

it is

an agency entirely capable of open market operations of very considerable magnitude, since it can buy from the market up to 4 billion
francs at the outset, but cannot sell to the market any sum which
will put the total above 49 billion.

However, it must be remem-

bered that of the total amount of these Bons outstanding, nearly 3/4

are of the 1-year type, and the remaining 1/4 of the 1-month, 3month type.

The 1-year Bons are largely held by investors, and it

is hoped that these can be reached by conversion operations and induced to exchange part of these 1-year Bons into Rentes.

It is

clear however that by manipulating the rate of interest a large proportional amount of switching might be effected, with corresponding,
effects on the money market.

The combinations are almost limitless.

This commission is to include a representative of the Direction of
the Iliouvement General des Fonds" and of the Bank of France, who will

furnish the assurance that the fixing of the maturities and of the
rates will take into account all the elements of the market, and,
specifically, existing conditions for the other Treasury engagements
and for commercial operations.

In other words, the Paris money market is offered an agency for
conducting open market operations, and this agency is placed under
the joint control of the Bank of Prance and the Treasury.



page 4 )

same quarter against the reeeipts from the Tobacco Monopoly.

At the same time, from its control of the rate of interest on the
varying maturities, it is clear that it has wide implied discretionIt seems clear that here is

ary powers in contracting the market.

an agency which has greater power over the money market than has the
Bank of France- but which is after all under the joint management of
the Bank and the Treasury.

Because it is a dyarchy, it is clear

that the two heads can be either in harmony or discord;

but while i

it is clear that in harmony they can cooperate, it is equally probable that if they are in discord, it would be quite possible for the
Caisse de Gestion to have greater control of the market than the
Bank csn, acting in opposition.

In view of the possibilities in this, it seems to me to merit
the closest scrutiny.


(c) Bons du Tresor: These to the sum of 2,600,000,000 will come under the Caisse
de Gestion.

They are to be replaced by another type;

but it is not clear exactly how

they are to be eliminated or exchanged.
(d) Short-term bonds (3-1C years):

The report envisages without concern the op-

tional maturity of 3,018,000,000 Credit National Ponds in February 1927, and 4 billion
Treasury Obligations in September 1927.

It is proposed to concentrate purchases of

the Caisse de Depots et des Consignations on these, evidently because that institution
can be obliged to carry over or convert.

Altcg ether, while 7 billion is not a very

alarming proposition (say t200,000,00C) it must be admitted that the report handles it
pretty sketchily.

They say that there is enough time between now and February to

make dispositions.

(e) Advances tc the State: About half of these will be written off by the revalor-


ization of the gold reserve;

the Bank will operate a sinking fund as at present and to

this will be added a budgetary sinking fund of 1 billion.

( page 5


New Type of Treasury Bill

While it is planned to keep the budget in balance, the irregularity of receipts
at various seasons necessitates the creation of a vehicle for short-time Treasury
borrowing in the money market, and since both the Bons and the present type of Treasury Bill are to be arrested at their present figure and the Treasury current account
reduced, an entirely new form of Treasury Bill is to be created, with flexible interest, to a maximum legal limit of 5 billion francs.

Further, that a foreign loan of

3 billion fcs. (nearly 0100,000,000) be floated, and used to repay that amount of the
advances to the State.

( NOTE: From this it appears that while the legal limit of advances to the State

will thus remain at 38,500,000,000, the capacity of the State to borrow at the Bank
of France will thus be expanded by 3 billion.

As there is a present margin of

rather over 1 billion, this phase of the report proposes to authorize the State to
borrow something over 4 billion fcs. from the Bank and 5 billion fresh money from the

As the Caisse do Gestion is authorized to buy 4 billion of Bons, it is clear

that this scheme provides for giving the Hank about 0200,000,000 in gold or its equivalent against which would rest a demand liability to issue 8 billion fcs. in currency,
covered by gold or its equivalent to the extent of about 7/8;

and in addition author-

izes the State to borrow 5 billion in the money market.

In other words, the proposal is to authorize the State to take 4 billion
from the Bank, and the market another 4 billion through the operation of the Caisse
Gestion, and then to authorize the State to borrow 5 billion from the market.



gives the State, assuming it wishes to work the Caisse de Gestion, a claim directly or
indirectly upon the Bank of France for at least 8 billion fcs., and more against the

market if it forces the Caisse de Gestion to borrow at the Bank of France against the
Tobacco Monopoly.

Under such circumstances, I do not wonder that the maturity of 7

.010 billion (of which part will be converted anyway) in 1927 causes very little concern.)

( page 6



The part of the report dealing with stabilization is less precise than the

The subject is discussed under the questions of time, rate, method

and means.

(1) Early stabilization is recommended.

(2) The rate is not indicated, but it is suggested by a bracket, of which the

bottom would be the purchasing power parity based on the cost of living, and the
As the bracket would work out based

top the effective rate at the moment chosen.

upon the cost of living index for the first quarter of the year (the last I have
with me), the proposed rate of stabilization would be somewhere between 2
5-3/8 cents per franc - a rather wide bracket.


"The rate of stabilization should

be sought between these limits, taking into consideration all factors, and especially the necessity of retaining or attracting outside funds, and of provoking the

rapid return of expatriated french capital.

prom this point of view, and from

many others, the selection of a rate for the franc higher than the present rate
would be desirable."
(3) The method recommended is by three stages: (1) in which the rate is allowed to find its level;

(2) a period of stabilization in fact;

uation and issue of new monetary unit.

(3) legal reval-

It is recommended that the first period

be short, in order to hasten the time when the money rate will be internationally

(4) The means suggested are (1) foreign loans, (2) credits to be obtained by
the Bank of France, (3) private commercial credits.

The report at this point recommends the acceptance of the Washington agreement
"as soon as possible", and an arrangement with England.

To attract funds from

abroad (whether French or other), it is proposed that the Bank of France accept

foreign money on deposit;
least "simplified".

the law on the export of capital to be repealed or at

Such deposits in foreign

currency to be sold to the bank,

( page 7


with or without repurchase agreement, or used as collateral for loans in francs.

It must be admitted that this part of the report is full of uncertainty, for
under the first option, there is certainly a very fair possibility of inflation, while
under the second it is clear that the Bank is asked to conduct on a vast scale the
worst type of business in the swap market, for there would be a big inducement for
firms to put as much of their capital into foreign currencies, and borrow their working capital from the Bank, with an obvious interest in a decline of the exchange.
This scheme was tried in Austria, of course;
borrowed abroad, I believe.

but against capital for the most part

I fail to see the advantages to be gained by opening

these deposit-loan accounts in France and I can see very grave disadvantages.


ever, granted skillful management and clever employment of effective interest rates,
no doubt most of the objections could be overcome.

But it must be remembered that

this is placing upon the Bank the responsibility for operating in a very difficult
field in which it has had no previous experience.
First Period

As a corollary of these schemes, the advances to the State having been arrested
at their present figure, all legal limits on the maximum figure of the circulation
should be repealed.

Such a limit "presents in fact serious inconvenience to commer-

cial activity, and can hinder the Bank of France in its purchases of gold and foreign
exchange, necessary to strengthen its reserve."

In other words, the dangerous con-

sequences of a sudden expansion of the repatriation or import of funds from abroad
seem to be overlooked in the report.

But, after all, possibly they were merely omit-

ted to avoid encumbering the report with details of Bank operation which can be met as
they arise.

Second Period
The final rate having been determined, the Bank goes on to the gold exchange
standard, or modified gold standard.


From this point "a return to internal culvert-

ibility could be quite rapidly effected.

It would be possible to take precautions

against possible embarrassments arising from this return by deciding that gold ccn-

( page 8


vertibility should only be provided at the head office of the Bank.

We may say

here that an early return to internal convertibility for the banknote is, in our
opinion, without practical importance;

but its demonstrated possibility could have

a considerable effect in restoring confidence in the banknote."
Third Period
Legal devaluation and issue of a new unit.

Personally, I fail to see how a gold

coin could have been put into circulation in advance of a legal determination of its
value, weight, etc.

But that again is a detail.

Thereport concludes with a warning that stabilization will be followed by an
industrial crisis, but very forcibly argues that the hardships of stabilization now
will be much lighter than the ruin which will follow postponement of action, and a
further fall in the franc.

In conclusion, the report gives some specific recommenda-

tions on measures to be adopted by industry and the State to facilitate and shorten
the passage through the crisis.
General Observations

While I have tried to approach this report in a critical spirit, this is not the
but simply from a desire to analyse and explore certain of its

result of

A21 things considered, it is a remarkable document, and provides the


Government and the people with a program of thoroughgoing reform.

Some of the de-

tails are far from clear, and it is of course obvious that the success of the program
as a whole or of any of the parts in detail will depend upon the honesty, courage and
technical skill of those charged with their execution.

This would be true of any


The presentation of the report is not wholly olccessful.

It bears some evidences

of having been hurried to a conclusion, without sufficient time being given for its

Many of the chapters, such as that on the Treasury, resemble detached memo-

randa placed in sequence, but not tied together.

41 the Budget and on taxation, the same thing appears;

In others, such as the comments on
certain means are elaborated in

considerable detail without any clear statement of the specific end desired.


( page 9


shortcomings can be viewed as the result of pressure and haste;

or the whole thing

can be regarded as a series of brief memoranda on particular topics designed to
assist the Government in formulating policies.

In general, I find in this report a confirmation of my views that the problem
of the Budget is simple, that of the Treasury a little more difficult but not especially troublesome, and that of readjusting industry very hard.

As for the Budget, the Committee finds that it is at present only a little out
of balance.

It proposes shifting the burden of taxation somewhat;

but its main new

rescurce is the railroads - a page obviously taken from the Dawes scheme.

As for the Treasury, it offers two proposals - to restore confidence by a strong
declaration against schemes like forced conversions, etc;

and to keep the floating

debt afloat by paying the market rate.
But when it comes to industry, it seems to me I find a somewhat divided purpose.

There is full realization that stabilization will automatically react against those
numerous industries that have profited by inflation;
they have been;

or whose books seem to indicate

that there are still large readjustments of prices and wages to be

but there is certainly in this report, on every page and permeating every para-

graph, the fixed idea that the chief medicine for the malady will be lots of currency
currency of stable value, the new issue to be heavily covered by gold or foreign exchange, but still available in abundance.

As commerce requires funds to tide it over


the difficult time, the Caisse/Gestion is prepared to put 4 billion of currency into
the circulation;

although the advances to the State are nominally to be arrested at

the present figure, the Treasury is actually authorized to borrow 4 billion above the
figure of the end of June, itself the highest in history, direct from the Bank, in
addition to 5 billion from the money market.

Further special inducements are to be

offered to attract French capital from abroad into the coffers of the Bank of France,
and against these sums, whether sold to the Bank or deposited with it, currency is to


be issued.

In short, the most precise part of the program is the

that no obstacle be put in the way of expanding the currency,
so long as the new


( page 10 )

issues are covered by gold or foreign bills, while of course the usual discounting
privileges will remain open.

In short, while there is reference to the fact that

the French money rate must be high enough to attract funds from abroad, and the rate
on Treasury paper as high as the market rate (which under the circumstances would

mean that the rate on this paper would still be in the close vicinity of the Bank
rate), there is not a line in the report that suggests a policy of deflation.
This is, I think, the most important fact about the report.

It is clearly fore-

seen that the ending of inflation will itself cause an industrial and commercial crisis, and it is intended, in my opinion, to moderate this crisis by a very large expansion of currency and credit, not issued against the command of the State, but at the
demand of industry, and amply covered by gold or its equivalent.

In the meantime,

the exchanges are to be kept in order
(1) By foreign credits, etc.

(2) By an assumed favorable balance of payments, once the flight of capital is
(3) By the return of French capital.

NOw is there not a very grave danger that this would pile a gold inflation on top
of a paper inflation?

I am not sure that it would;

but I raise the question.


is true that the United States has been able to absorb in the last few years an inflow
of reserve geld far in excess of any imaginable inflow of gold (or devisen) into

and it has done so without inflation.

But it must be remembered that this

inflow with us came after a period of severe deflation, and was met by a central bank
enjoying powers of handling its mcney market with a high degree of flexibility, not to
say ingenuity.

But a similar flow of gold (or its equivalent) into France would find

industry highly inflated, and a bank of limited powers and very inflexible methods,

unless the Caisse de Gestion develops extraordinary facility in substituting for a
central bank.

In short, would it not be a parallel case to imagine what would have
happened in and a
been immediately

( page 11


and perhaps on a scale proportionately larger?



I do not know what would have hap-

and, anyway, to some extent the parallel is vitiated by the changed condi-

tions in the world in general.
It is not my wish to be too captious about this report.

They cannot do better

than to follow it, and meet the problems which it may cause as they arise.
of its provisions raise questions, like those of any other program;
question of all is this one of stabilisation without deflation.

But some

and the biggest

It is of course

easier for rrance to face this crisis, armed as she is with her own expatriated cap-

ital and with almost a whole world willing and able to help, and with the experience
of other countries to help and guide, than it would have been for her two or three
years ago, and than it has been for Germany or roland.

But I must say that I should

feel easier at the prospect, if the Central Bank had the machinery to moderate and
But it has little except its discount rate to retard the

regulate the process.

market with, while it is forced by the present law and by the proposals of the Commit-

. tee to grant credit to the market in great quantities.

A discount rate is a useful

a steam shovel is a useful engine, but it is not suitable for the daily

chores about the garden.

As I have said, the proposed Class° de Gesticn exercises or can exercise some of
the open market policies of a central bank - that is, it can put money into the market
at will;

granted the will and the skill, it could reverse and take a certain amount

out of the market.

But nothing in the report indicates that this latter policy is

The whole report is oriented in the direction of putting more currency

into the market, if this should be desired, and absolutely nothing is provided for
taking money out cf the market.

And with so many facilities for pumping money into

the market, I fail to see how the discount rate can be trusted, should circumstances
indicate that strong-arm methods were needed.

Of course, they may not be.

It is a little absurd to wonder what the public thinks of the report.


411 four Parisian papers published it: "L'Information Financiers
", "La Journee Industrielle"

( page 12

"Le Temps" and the "Journal des Debate".


The abstract officially issued is very

incomplete, and that is all most people have seen, let alone read.
As I telegraphed, not one of the dailies has come out flatly for the program.

The warmest endorsement (about 42° Fahrenheit) was that of "L'Informaticn", which commended it for the earnest consideration of the Chamber; and tonight its financial page
came out with a savage slur to the effect that the Committee had stupidly outlined a
program which at best could only plunge the country into years of misery, by seeking
stabilization through depression instead of following the example of Roumania and

As I am not familiar with the Roumanian program, I am

seeking it through prosperity.

unable to appreciate this remark.

The "Temps", on the other hand, is horrified at the

idea of the franc being devalued, instead of carries gradually and easily back to par;
this is repudiation, bankruptcy, etc.

Other papers are opposed to the tax program,

other: to the abolition of the 8-hour day, others merely point out inconsistencies cf
detail or style.

"L'Information" attacks it because it is deflationary and the "Temps"

because it is inflationary.

I have not read one newspaper comment which sounded as if

the writer had read the whole report through carefully from start to finish.

In fact,

it is pretty fairly dull reading compared to the usual provender of the Parisian press.

Paris, July 4, 1926.



The evening papers published the text cf the Report of the Committee, but
evidently it was received too late for comment.
ning papers had only a brief summary.

In fact, I think most of the eve-

I have been going through it hurriedly this

evening, noting some of the interesting points, and possibly putting a wrong interpretation on some of the features.

As far as I have gone, I am unable to make any conclusion on the Budget and
tax parts, as they are based on annexes to the report which have not yet appeared.


would particularly invite your attention to the paragraphs dealing with the "Caisse de
Gestion" of the Bons de la Defense Nationale, as this introduces a new element of first
importance into the Paris money market.

The character of this element, it seems to me

will be even more political than the present organization of the Banque de France, and
the Caisse mar become an even more powerful influence in the market than the Bank.
I do not, of course, wish to imply that this power would be used improperly;

but merely

to remark that here is a new engine, and one which, it appears, could be the dominant
factor in the market.

I would further invite attention to the provision for expanding

the State's borrowing power at the Bank, and to the fact that the first $200,000,000 of
foreign money is to be given to the Bank of France for the purpose of permitting a potential increase of 8 billion in the circulation, tobe covered up to about 7/8 by gold
or foreign exchange.
At the same time, it should be noted that the interest rates on
the present Pons de la Defense Nationale and on
the proposed new issue cf 5 billion new type Treasury Bill are to be flexible and free
to follow the market.

As for an opinion cn the report as a whole, I shall reserve judgment until I
have had time to go through it more thoroughly.

Some of the rather obscure proposals

may be clarified by the cements in the press tomorrow morning.
After all, they came out flatly for the ratification of the debts.

But now


p. 2


that our Senate has gone home, and with a good part of the Chamber committed to
ratification only with amendments or reservations, I wonder what would happen if the
Ministry should try to buy support for the program at the price of some reservations.

And now that the program is out, the keystone and corner stone and cap stone
of the whole structure is the simple advice to pay the market price for money.



Paris, July 5, 1926.


I have taken all the imp

and the Left Socialist "Oeuvr

most of the others pu


This abstract, as

No paper has yet pub

which naturally limited itsel

Reduced to its simplest
(1) Abandonment of idea

an unindicated figur
(2) Debt settlement

(3) Foreign loans of $20
(a) $100,000,000 is

through issue of
(b) $100,000,000 to

floating debt in

(4) Domestic borrowing a

up to 5 billion fran

(5) Provision that Treas

(6) Creation of a new ag

will assume some of

open market operatio

Treasury and the Ban

(7) A shift in the incid


p. 2


Of all these provisions, the most significant is of course No. 5;

and in view

of the source of this provision, it was most appropriate that the report should be
issued on July 4th.

But the effective use of the money market depends upon the

will of the Treasury, just as it nas during the past 12 years.

wished to use interest rates as an eaine of stabilization it could have done sc long

If it wishes to now, it can do so without the slightest necessity of foreign


So far as I can see the proposed uzo to be made of foreign creakL is to

permit an elaet4c exnansion of the currenc', against cnv-r, which will serve as a
cushion against the shock of stabilization.

In the meantime, the indefinitenos of

the program, particularly upon the time and level of stabilization, will open the door
to lengthy debates.

The vague suggestion that the level of stabilization ought to be

rather higher than the present rate of exchange is perhaps designed tc facilitate the
scheme by encouraging bullish speculation in francs, but in view of the uncertainties

to which this will give rise, It can hardly make the situation easier for business con

cerns which are under the necessity of making long-time contracts and who have no desire to speculate in the exchange.

On the other hand, it must be admitted that as

neither wages nor the cost of living have advanced to the level of the exchange, a
higher rate than the present one of 180 is certainly academically defensible.

Whether or not it is economically desirable would be a matter requiring elaborate
study, and this the Committee has not ventured to make.


(3) M. Moreau and Rist are fully conscious of the dangers of publicity.
In conclusion I asked him to present your compliments to M. Moreau.

By the way,

I approached M. Rist instead of M. Moreau for three reasons: (1) he had personally
Dear Mr. Governor:


asked to meet you through Mr. Jay;

P. 2


(2) he has represented the Bank in a recent

conversation with Mr. Jay concerning a subject mentioned in your memorandum to
the latter;

(3) because, as I had met him in Washington, it made the first con-

tact a little less formal.

Very respectfully,
(sgd) Robert Warren.

Hotel du Cap d'Antibes,
Antibes, July 8, 1926.

Dear Garrard:

I am just sending to George Harrison a letter, the enclosed copy of
which explains itself.

It is inspired by the receipt yesterday of yours of

June 22nd.

Your comments about the Bank are of course justified.

The indications

seem to be that an important change is taking place, but that it will not be productive until the status of the Bank with the Treasury is better established and
especially until the relations between the new Uanagement and the Regents have
become more settled.

I feared dissent there, as we both realized when we were

in Paris.

Since your letter was written, our friend Peabody has come out with another blest, which has been widely quoted over here, and as you say, that never

I agree with you that we would be inviting trouble to arrange a credit

with the Bank of France until they ratify the debt agreement.
appearance of buying ratification, which in fact it might be, and it certainly
would be interpreted by our Senate as in some ways tying their hands.

If, how-

ever, the French ratify the debt agreement, adopt a sound and complete program, and
proceed with stabilization, I should hardly think the argument would hold good.
Our Senate would still be free to accept or reject the agreement and the risk, if
it was a risk, would all be assumed by the French and by the American bankers.
But the outlook at the moment is not particularly hopeful anyway.
I am very glad that you and Harrison had the meeting with the Board.
Harrison wrote me all about it, and I since hear that the Indian matter has been
cleaned up with your good aid.

Norman has just heard from London that the


'Jr. Harrison.


July 8, 1926.

Commission has submitted a report in India, but the tense of it are not known.
You certainly handled it in fine shape.
It may not be a bad idea to let some of those Senators from the ;Vest

get en inkling of what we have been doing in regard to the Indian silver proposal,
but they :Mould not use it publicly.

I am sure it would still cause trouble.

I recognize the touch of irony in what you write.
Dill Phillips has lust arrived «nki tells me that Hiller spent a couple

of days with him in Berlin and announced that he was proposing to say to Francqui
that he was in Brussels for the purpose of studying the monetary situation and the
question of stabilization, otc.

Phillips pointed out that that was about the

worst possible statement he could make in explanation of his presence, as they
would then have him on the job in a day or two with ao,-lications for credits

and have him advertised as visiting Brussels for purposes of stabilization, etc.
It apparently scared him a bit, and he was approaching a dinner that Francqui
was giving for him to meet all the benkere with a good deal of uneasiness.
I shall hear pretty soon what happened.

He is expecting to go from Brussels to

Amsterdam to see Vissering, who is away just now, and then to Berlin to see
Schacht, who is away and will not return until the ene of July;

then I bellow)

he is going to Hamburg, probably to visit Max 7srburg.
This is all the news at the moment.

I will write you again if anything

new develops.
Sincerely yours,

Hon. Garrard B. «ineton,
Ender Secretary of the Treasury,
Washington, D. C.

Paris, July 7, 1926.
Dear Mr. Governor:

In view of its importance, I wish to translate that part of M. Caillaux's
speech of July 6th relating to the debts.
After a statement of amounts due, he said:
"There is the situation.

It is clear.

I said we could not extract ourselves

from this mass of charges except on the condition of obtaining credit, which hitherto

has been granted to us from abroad, but which today depends in large measure, if not
entirely, upon the settlement of our political debts.
"The Government, gentlemen, intends to present this nroblem as a whole to your
sovereign judgment.

"At the moment, I have resumed negotiations with England.

They are going for-

Although, as you understand, the fact that I am in the course of negotiations

obliges me to observe special caution in my speech, it would not be candid to hide

from you that the ratification of the agreements (des accords) - with the ameliora-

tions which we shall hone to secure for them or with the assurances of which certain
have already been obtained by us - appears to us ir.dispensible."

Then followed certain remarks on debts in general and the British debt in particular, concluding:

"Such, gentlemen, are the general observations on the subject, to which I wish

to limit myself, the Committees having in hand one project and the Government having
stated that it intended to ask the Chamber to approach the discussion of the settlements only in their entirety.
"Having said this much, without pledging myself to anything, for there are now
negotiations in progress, I do not push the subject further."

As you will note, there is no direct reference to the American debt apart from
the British.

As you will see, the references to the amendments run dramatically

( page 2


only back to the "negotiations" cf the British debt, but the irrplication cerIIItainly extends to the American debt.

vague, but I am afraid of it.

The phrasing, i am sure, is intentionally

Un the other hand, it is, I think, absolutely

essential here, as I have repeatedly written, to the continuance of the ministry.


R. B. Warren.

Paris, July 7, 1926.
near Mr. Governor:

the accompanying comment of the London "Times" correspondent received this
evening confirms my letter and telegram sent this morning, but it hardly does
justice to the shrewd and tactful approach of M. Caillaux to the Uhamber.

I aspro-

sure you that if M. briand and uaillaux had come out flatly for the Experts
gram, the Cabinet would have fallen yesterday.

There was not the slightest evi-

dence that the Experts' program had aroused any real popular support - I almost
said "interest", but there was interested opposition.

As I have repeatedly re-

marked in these communications, too many people are enjoying the drunk, and while
they are willing to pay lip service to "stabilization", they and their representatives shudder at the consequences.

My letter of this afternoon translated the equivocal paragraph about the "reservations" on the debts.

It was the best he could do - he had to mention them,

and he had to idly that le could or might or had secured modifications.



ically, his statement is or may be literally correct;
in session, the fat

would be in the fire.

but if the U. S. Senate were

Still, as I wrote the other day, the

majority - almost the whole Chamber - is hostile to the debt settlement, and it is
at least doubtful if M. Caillaux can get a majority even by receiving or suggesting
that he has received or will receive more favorable terms.

But it was I

fear that these and other necessary ambiguous remarks about reservations, uttered
in a desperate attempt to obtain a working majority, will have the unfavorable effects in Americo, that I strongly urge that no further conversations with the Bank
of France be held until the situation here and the position of the Administration
on the debts is clearer.

Because I feared something like this, my first reaction upon receiving your
instructions to visit the Bank was to delay over Tuesday, to see how M. Caillaux
would fare.

However, nothing was said in that conversation which would. not bear


repetition before the most antagonistic Congressional Committee that

could be

( page 2


My first remark to M. Fist was to express my pleasure at being able to

renew in Paris an acquaintance begun in Washington, etc.

Of course, this remark

of M. Caillaux's may pass entirely unnoticed at home.

But I

course of the debates there is at least an even possibility that M. Caillaux may
be forced to take the alternative of coming out flatly for acceptance of the agreements with reservations or of facing an adverse vote.

The only possibility of his

being able to secure a vote for the acceptance et the agreements as they now stand,

would be by frightening the Chamber at the possibilities that lie in refusal - and
the Chamber does not see it that way.
For that reason, in view of the eventualities that may turn up in this debate,
please permit me to suggest that no further steps be taken toward conversations,

until the attitude of the Ministry and the Chamber on the debts is clearer; and
until/unless it is also clear that the French attitude, whatever it may prove to
be, is acceptable to the American government.

So far, nothing has been done which
can cause the slightest embarrassme

You will recall that I wrote a

ness lay not in its capacity nor cou

absolutely in "selling" its program

prudently jettisoned the report exc

to sell the principles of the repor

Chamber heavily charged with what t

In doing so, he may find it necessa
of cne kind or another.

Hotel du Cap d'Antibee,
Antibes, July 8, 1926.
Dear Ur. Harrison:

The situation in Paris is just now one of great uncertainty.


ing the receipt of your cable from Yashington, I telegraphed 7arren as per copy
enclosed, to which I received replies as per copies of his telegram and letter

I em sending than as it will give you the best information I have at the


Judging from Warren's reports, from the nsespaper accounts, and from vat
I have heard from a Baron La Grange oho is here and seems to be pretty well posted,

the fate of the Experts' report, of Caillaux's plans and indeed of the present Government is today hanging by an eye-lash.

The opposition seems to center about three

main points: as to the Socialists, indiroet taxes anther than direct taxes; or a
capital levy;

as to various elements in the Chamber, ratification of the wanhington

debt agreement;

and also as to a mixed group, as to further foreign loans.

There are same obvious defeats in the program which I shall not elaborate
in a letter just now, because within another 48 hours or so the whole program may be
scrapped anyway.

If the present Goverment falls and the present opportunity for

otabilization is lost, the outlook will be dark indeed for a time.

Various hints

appear that one of the difficulties is the ougceetion whispered about the Char fiber

that Caillaux contemplate° a "coup d'Etet" and that the appointment of his old
friend and intimate, Gen. Cuillaumat, as Minister of Tar was no loss than preparation for just such a step.

The abandonment of constitutional forms in France,

following their suspension in Italy, would be a singularly significant development
these days, and I think a good many people are commenting on the fact that our


Ur. Harrison.
Sincerely yours,

July 8, 1926.

Ambassador at Berlin in his Fourth of July speech seemed to go out of his way
to reconcile dictatorships with modern theorise of government.
In view of all the circumstances, I Shall wait hero in the hope of

getting word that Ur. Mellon will be in Paris around the 21st, and then go from
here to Paris, probably on my way to Berlin.

But I shall not start until I feel

certain that I am not going to got knockod out again.

Zhitmarth drove up from Monte Carlo yesterday and I had a pleasant hour
with him, but hie news from horns was of course over a month old.

My beet to all at the Bank.


Mr. 0. L. Harrison,
q/o Federal Reserve Dank of Now York,
New York.


Paris, July 8, 1926.
Dear Mr. Governor:
You will

Let me make, first, one general remark on the Experts' report.

remember that in my other comments I said that its outstanding feature was that

it provided every facility for expanding the circulation, and no facilities for
contracting it at any point of the process, should need for contraction arise.

This remark was qualified by the belief which I expressed that, given the will and
the skill, the Caisse de Gestion could devise means of moderate contraction, although such means were not suggested nor even implied in the report.

The reasons,

cf course, as I see them for the position of the Experts was (a) that such currency
expansion was indicated as interior prices and wages advanced to meet the level of

the exchange and (b) that this would act as a cushion during the period of readjustment and previous stabilization from becoming deflation.
It has just occurred to me that this part of the report has a familiar ring.

It is in fact the very program which J. M. Keynes formulated for France about a
year ago and published, I think, in the "Nation" and "Atheneum".

He expressed it

then, as I recall it, about as follows: that the exchange should be pegged at the
market rate of a given test day.

That as internal prices were below the world

level (that is, that the rate of exchange was below the purchasing power parity)

the stabilization of the exchange would be followed by a rise in prices and a
demand for currency which could be used by the State to pay off part of the floating debt, and to ease the process.

That is, since the exchange would be stabil-

ized at or near the market rate, and since this level would be below the purchasing

power parity, the operation would of necessity require a further depreciation of
the internal value of the currency (its external value being fixed) measured by
the extent of the rise in prices which would reduce the purchasing power parity
to the level of the exchange;

and that the Government could turn this deprecia-

tion to its account.
"iithout giving any credit to the author of the scheme, the Experts appropriat-

( page 2


ed it with some modification of detail.

Mr. Keynes proposed, of course, to peg the exchange by the use of the
Bank's gold;

the Experts proposed to do it by foreign credits.

Mr. Keynes pro-

posed to employ the increase in currency in reducing the floating debt;

the Ex-

perts proposed to employ about half in reducing the floating debt and about half
in meeting deficits in the current expenditures of this year.

Under the Keynes

scheme, the gold reserve would diminish as the circulation increased, with a consequent drop in the reserve ratio.

Under the Experts' plan the gold reserve

would increase as the currency expanded - but it (the reserve) would be increased
by foreign credits.

Personally, I consider Mr. Keynes' proposal as honest and

frank, and perilous in the extreme;

the Experts' variant was designed to prevent

a shock to public confidence, as the public would see the reserve rising and forget
what made it rise.

But with all that, there were valid objections to the program's

proposal flatly for a the circulation by borrowing which would have of coming out
to increase hard-boiled interest policy abroad, instead moderated rather than
facilitatecl the inevitable expansion of the currency, and have obliged the market
to repatriate (or to borrow abroad) the devisen which, sold to the Bank, 'could have

permitted the is unfortunately true and what is worse circulation to theobvious, tha
(#) It necessary and gradual expansion of the is even becoming required
level. Experts' presentation of the Treasury position for the current

year was gros

But, essentially, the theory underlying the Experts' program was Mr. Keynes',
uncondid. At the very beginning of his speech Tuesday, M. Caillaux was oblig

and once again, as Istatement often said, it represents the search for the magic
give a clear have so of the Treasury position, and it came as an honest to
formula, theshock to the Chamber. which would enable France to achieve the benefits
ness philosopher's stone,

( page 3


of a return to sound money without paying such a price as every other country

has had to pay in proportion, so to speak, to the bill which it had run up

during its period of inflation.

Yesterday the Government was asked for a flat "Yes" or "No", whether it
wished to go on record as sponsoring the program.

The answer was equivocal and

evasive, and the question, I think, will be pressed again.

But whatever the an-

swer, the fact remains that the program as a program is dead as a door-nail; although M. Caillaux is trying desperately to save its essential, basic principles.

Since Monday morning, it has been evident that the Experts' report had few
friends, and those luke-warm;

that it had many enemies and those violent.


Caillaux probably realized it Tuesday, but perhaps he could not estimate the position completely.

At any rate, he did the best he could with it - endorsed it in

spots, tried to interpret others to make them more acceptable to the Chamber.
But it is no use trying to make that report palatable.

I honestly think the posi-

would have been stronger if M. Caillaux had

mounted the Tribune Tuesday afternoon with the report in his hand and, before he
said a word of his speech, had torn the report in two and flung the pieces in the
waste basket.

You remember the sign they used to hang up over the piano in California dance
halls in '49: "Don't shoot the professor;

he is doing his best."
(sgd) R. B. Warren.

Paris, July 9, 1926,


The violent decline of the franc to 194 yesterday does not seem attributable
so much to political aevelopments in France as to the combined influences of
weakness in Belgian and Italian rates and a bad Bank statement.
The Bank Return

The combined note and deposit liabilities increased by almost an even 1 billion over the previous week, which brings the total increase since June 17 to just
under 2,500,000,000.

Of this, about 400,000,000 only is due to increased dis-

counts, about 1,300,000,000 to advances to the State.

The remainder, 800 million,

is found chiefly through "adjustments" of the divers, possibly through the inclusion
of the proceeds of the Morgan loan.

I am convinced that it is the recent rapid

inflation of the currency on Government account that has enabled the market to avoid
heavy discounting at the Bank, such as might have otherwise been anticipated from
the strong price rise now obviously in progress.

The Stock Market

The boom in stocks, which up to about a week ago was almost strictly confined to
sterling values, now has taken in domestic securities as well, and since Monday
these have been climbing in a manner astonishing to cne habituated to the modest
fluctuations of our stock exchange.

The principal reason is undoubtedly the pro-

posals of tax reduction, which is one of the few parts of the Experts' report specifically endorsed by the Government.

A second reason is that under current sys-

tems of bookkeeping, industrial companies are undoubtedly showing fabulous profits
for the first half of the year, and in all probability tax reduction would be followed by a wave of extra dividends.

Financial papers, of course, have not failed

to comment upon the anomoly of a stock market boom accelerating in the teeth of the
precise and unmistakable warnings of the report.

This is not so surprising after

all: few people have read the report, and almost everyone is sere, as I have repeat-

( page 2 )

edly stated, that a way will be found - a magic formula - to avoid such dire

The third reason, of course, is the recent inflation, which has

increased the means of payment far beyond the immediate needs of commerce and inaustry, and which is now finding its outlet in security speculation.
I dare say that there is also some tendency to commodity speculation.
franc declines further, commodity prices will rise further;

If the

on the other hand, the

Experts' report also indicated that even if the franc is stabilized, a further substantial rise in commodity prices is to be expected, and the program specifically

devises means by which this price rise is to be facilitated "to accommodate commerce and industry", so to speak.

So altogether it is not surprising that the

prices of industrial securities are soaring.

After M. Caillaux's masterly and conciliating speech of Tuesday, the attack
developed in two columns, one from the Right flank and one from the Left.

The attack from the right was commanded by Louis Marin and Franklin-Bouillon,
both of whom concentrated on the Washington settlement.

It was most significant

that it was not against debt:: ettlement itself, but was confined to insistence on
certain reservations.

It was met by the Government exactly as the German army met

the threatened British offensive on the Somme in April, 1917 - by a strategic retreat.

The Government holds out vague assurances of "amelioration" secured or ex-

pected and has more or less cut the ground from under both Liarin and FranklinBouillon.

This has enormously strengthened its hold upon the right cf the Chamber.

The attack from the left,developed by Leon Blum, was met by a vigorous counteroffensive.

M. Blum concentrated upon the Experts' plan of stabilization at a level

which would involve a rise in domestic prices.
flation at every page";

The program, he said, "oozes in-

he advocated deflation by means of a capital levy.

Caillaux met him precisely on his own ground.


In the first place, M. Caillaux

has not committed himself to this part of the report,
so he was able to hold out

( page 3


prospects of a rise in the exchange which would prevent a rise in prices;
second, he demonstrated pretty clearly that a capital levy of the type advocated

by M. Blum would itself involve inflation.
certainly won much support on the right.

This part was very well done, and
He replied to M. Blum's charge that

the Experts' program "oozed inflation" by the rejoinder that M.
"reeked with inflation".

Bium's plan

But this part of the

And he proved it, I think.

debate was of the utmost significance, for both the aoverhment and the Socialists
were most outspoken, in their condemnation of inflation.

Tuesday, the battle was very much of a draw.

Caillaux' speech provoked no

enthusiasm whatever, and the best thing that could be said was that he had survived.
This in itself was a victory on points;

for one false move Tuesday and the Ministry

might have gone by the board.
Wednesday, if anything, started the other way.

The attacks on the debt settle-

ments were almost unanimously applauded, while the vague On the other hand, M. Blum's speech
tions" were not received with much conviction.
references to "ameliora-

on the capital levy drove again the wedge between the right and left of the Chamber;

and I think tended to counteract the unanimity developed around the debt settlements

So at the end of the day, the position of the Government was better than it had bee
24 hours earlier.

Thursday, as I have described, was very much Caillaux's round.
took the wind out of the Marin-Bouillon group;

He very largely

and his rebuttal of M. Blum, while

making perfectly clear his position on the capital levy, was so courteous and fair
and able, that it convinced everyone except the doctrinaire Socialists.

One of the

most important points made by M. Caillaux on the debts was that he wished to disassociate debts and credits.

He said: "This consideration leads me to declare that

we do not intend to create any relation whatever between the opening of credits and
the settlement of our debts;

this attitude would be unworthy of our great country".

If I am not mistaken, this is the first time that the question has been
lifted to

( page 4 )

this plane in the course of the discussions in the Chamber.

So altogether, I think the sky is a little clearer.

But if it does clear,

and if a program is presented and accepted and inaugurated by the Government, it
will, in my opinion, be a fundamental mistake to credit it to any great awakening
of public sentiment cr any particular change of heart in the public or in industry
or the Chamber.

There may have been - probably has been - a good deal.

mostly it will be due to the political adroitness of M. Gaillaux himself.



the other view, it seems to me personally, there is little evidence.
Another thing.

No program has yet been presented by the Government.

one is presented, it may follow the report or it may not.

But the Government has

specifically declared that it will not follow it "servilely".


t4 7

Paris, July 9, 1926.


In considering the exact status of affairs, it is necessary to consider
that the American papers here give a very erroneous view of what is happening,
and none of the papers a very clear or comprehensive view.
Specifically, the situation is as follows:
(1) Sunday night a Committee chosen by a defunct Ministry presented a report
which had been virtually completed when the present Ministry took office.


Committee was composed of men of high qualifications, but without any popular following.

The Committee left its offspring on the doorstep of the Ministry and


It made not the slightest attempt to sell itself to the public.


Ministry which inherited this Committee itself includes a considerable number of
men whose reputations in finance are equal to if not superior to those of most of
the members of the Committee.
(2) Monday.

The report or its summary was ready by the public and the Chamber.

It was received with varying degrees of faint praise, qualified approbation, antagonism and apathy.

It found support, if anywhere, only in a small, but of course

important financial milieu.
(3) Tuesday.

The new Ministry presented itself before the Chamber.

In a very

capable and comprehensive speech the Ministerial spokesman introduced the report

with the remark that he was inclined to consider the plan with some favor because
most of its elements had b een frequently presented to the public by himself and his
colleagues in speeches and articles, but that he had no intention of following it

In the course of a two-hour speech, he made numerous references to

details of the report, some commendatory, others critical.
In this speech he outlined a fiscal program, part of which similar to elements
of the report;

but at no point in the elaboration of this program was any reference

made directly to the report.

It was presented as hiw own;

and consisted of 4
points, to be elaborated

( page 2 )

(a) Increase of wages in civil service
(b) Establishment of a correlation between revenues influenced by
rising prices and expenditures subject to the

same influence (indi-

rect taxes)

(c) Reduction of certain direct taxes
(d) Simplification of the fiscal system.

There was an expose/(very guarded) of the debt situation, referring it to a
later time, and warnings regarding inaction.

He then referred to the dangers of

foreign control of industry through credits, and disclosed the Treasury position as
being much worse than in the report.

The reference to the foreign credits was

interpreted as a rebuke to the Committee in some quarters;

the disclo

Treasury position certainly reflected on the candor of the Committee, or its penetration.

He then, after some references to negotiations with England, said that

the Government would ask for "delegation" of powers in a text of law to be presented.

From this time on the session was frequently interrupted and the reference to
stabilization was not very precise nor coherent.
(4) Wednesday: Debate by opposition.
(5) Thursday: Rebuttal by M. Caillaux.

These two days were outlined in my

letter of this morning.

(6) Friday: The Government will present its bill for a delegation of powers
and ask a vote.

The dope at noon (acccrdinj to"L'Information") was that if Caillaux could
have the support of the Marin group on the right and of the Radical Socialists,

both of whom are committed to no ratification without safeguards, he would get
about 280 votes.

This is, of course, a minority, but it is regarded as safe be-

cause it is expected that many of the others will abstain from voting.
Now the situation leaves itself this way:
(1) If M. Caillaux remains in
office, it will be at the price
of an

( Page 3


understanding with certain of the Chamber groups regarding amendments to the
debt settlements.

The terms of the bargain may or may not be public.

(2) If he obtains his delegation of authority, it will be either by the
vote of an actual minority of the Chamber, or of a slender majority.
(3) No general program has yet been enunciated by the Ministry.

While its

program, if permitted, is likely to have a relation to the plan of the Committee,
it will be presented as the Ministry's program and ray differ widely in essential
details from the plan of the Committee.

My personal opinions on the Experts' report are mixed, but may be summarized


As fax as the relations between the Ministry and the Chamber are con-

cerned, its existence has been a source of embarrassment rather than assistans3.

If the Ministry lives, in its relations with the public, the report is likely to
be an educative factor of considerable help,as whatever program is adopted gets
under way.

You will recall that the first Cunliffe report was ignored by the

"Economist" and excoriated by the "Statist", and neglected, it appeared to me, by

the Government for nearly a full year.

Yet it became almost a part of the Consti-

Hotel du Cap d'Antibes
Antibes, July 16, 1926.
Dear Mr. Harrison:

I am cc sorry that you had all the trouble of writing ne out your
longhand letter of July 6th, but I was equally sled to got it and would reciprocate in kind except that I RM doing mighty few hand-picked letters.
Your lettor covers the whole around eminently satisfectorily, but it
does justify my saying that !r.. Jay's letters to me were equally unsatisfactory.

They really to

ne nothing, except whet he and the Directors i)ropoeed not to co.

I krur that you and he sometimes think that I am too downright in my approach to
a good many things, but after s good many yeere experience i, human affairs, I
have found that in tho end, that is the best method.
I shall now have a nice talk with Y.r. Mellon and will see where we get.

Of course I will write you just what heppons, but in any event, it will not be
possible for me to show proper regard for my associates and for the Directors unless I withhold a final decision cn my own programs until I get home.

This I think

you should tell Mr. Jay, because it would certainly be en impropriety of the first
order for inc to dc otherwiee.

You will be interested to know that Bill Phillips yesterday showed me a
letter he had received from Adolph Miller describing hie dinner party in Druscels,
which took place after Phillips had left.

Francqui, who I hear is a very sick man,

was in fact taken ill the day of the dinner, cc was nct there.

Miller's talk,

apparently, carte principally with Cattier and with Houtard, the Finance Minister.

They must have pumped him pretty full of information about a forthcoming program
of stabilization, concerning which he seemed to be rather enthusiastic.

I wonder

if he recalls those opening lines of Ccesar's "Commentary", or if you do, in which



Hr. Harrison.


July 16, 1926.

Caesar described the Belgians as the "worst of the bunch".

They are a very

difficult people, f.nd seem to live in the clouds.

Phillips was so indignant, following the reading of our cables, that he
went right to the Prime 7inieter on his return to Brussels from his first visit
here and secured from him a categorical denial that the American bankers had demanded a "gaze" for the loan, hanging his staterimt upon what ho describ ©d as
statements appearing in the foreign press.

This, of course, was to let Vendor-

velde out, becausc it aas Vandervolde who made that statement in the Pclgian ParIt was a good thing for Phillips to do.

I only wish ho could have

gotten at some other things also.
This will fill u.) the budget for to&:-

.gain, a thousand thanks for

your letter, and ospocially for the spirit that led you to write it.
Stncers13, yours,

Mr. G. L. Tarrison,
c/o Yale Club,
Vanderbilt Avenue,
New York.


Hotel du Cap d'Antiboc,
Antibes, July 16, 1926.
Doar Mr. Harrison:

This will be about Hungary.

You will recall that when Jeremiah Smith vent to Hungary to represent
the nations which wore contri-uting to reconstruction under the plan of the
Finance/ Section of the League of Nations, the British also sent a Mr. Siopmann

to becamo technical advisor to the Hungarian National Bank.
been completed, as you know.

Their work has now

Smith has gone homo, and Siepmann has boon here

with us for the last few days, at Norman's request, as ho has arrangod to become
a mombor of the staff of the Bank of England, where he takes up his duties

selection of
Federal Reserve Bank of St. Louis


Ur. Harrison.

July 1G, 1926.

a candidate from any one would develop opposition from the other


Hr. Harrison.

July 16, 1926.

de Popoviee seems to take advantage of this to extend hie dictation over the
Bank to include the activities of the Board.

But Siapamme come to think it

works very wall and much barter than if tho Directors were more of an influence.
The Beth hoe nothing to do with the domestic crechangeo, ctrarz.: to say, which are

handlod by rn association of the banks, like ear Clearing Uouoc, whith conductc
'Lao cleareicev, one for the city of Budapest and the other for the root of Hungary.

This body elm has certain legal pewerc, as it is incorperatod;


other,, the right of exaninetion, Which they so:ureic:a rather effectively, and in
the CP.OV cf any ban% trcublee, they do the nuraie6.

Interior =thence paymente ere made through the banks and not by the
National Bank.

Me Nations/ Dank, however, iv a large dealer in a:chango, and

with the eoeselltion of some railroed and other special funde, it in the solo depos-

itary of the Government.

 ueuva tredc

:to portfolio of de2ortic bille coneistc entirely of

bib bearing two name, which largely came from private cuctomers


July 16, 1026.

Mr, Harrison.

The Government owes the Bank an old debt from pre-reconstruction days
of about 5 million sterling, Which is being reduced out of certain profits, and
they claim that this will be reduced to about 2 million sterling at the end of
ten years.

Under the statute, vihonever the Government's debt is no larger than

the Bank's capital, the Bank must then resume gold payment.

A considerable proportion, probably half, of all the domestic bills
come to the Bank through their 18 branch offices.
The Bank's earnings after mooting all expenses are appropriated, first,
105 to the Bank pension fund, 'hid?' is now a large amount and will shortly be fully
established on an actuarial basis, so that it will need but moderate appropriations;
second, V. to reserves;

third, payment of en 85 dividend.

The surplus beyond

that amount is divided, Aion to an additional dividend and 2/3 to the Government,

until the dividend gets up to 105, when the ratio again changes so that in practice

they estimate that the stockholders can never get more than 10e.

Under an ar-

rangement with the Government by shish the interest on the Government debt is readjusted from tine to time, it works out that the stockholders are virtually guaranteed an a5 dividend.

The Dank is undoubtedly a large factor in the foreign exchange market,

and it has a regular commercial foreign exchange business, except that it issues
no letters of credit.

It today has a disclosed reserve of about 8 million ster-

ling, dish includes gold and foreign balances Which aro shown in the statement.
It has an undisclosed reserve of foreign balances of about 4 million sterling,

and it has possible reserves of foreign exchange beyond that, consisting of the
balances really owned by the Government, being the unexpended proceeds of the
reconstruction loan of roughly 5 million sterling.

Of this 5 million sterling,

about 2 millions are appropriated for certain construction work, leaving ultimate
foreign balanc© resources of the Government at about 3 million sterling, which may


July 16, 1926.

Mr. Harrison.

be used in the event of a heavy drain on the Bank's reserve by the Bank requiring the balances from the Government in exchange for Hungarian crowns.

Unfortunately, the banks of Hungary do not maintain reserve balances
with the National Bank.

They are not required to do no by law and prefer to

adjust their reserve position largely in their foreign balances.

The net ef-

fect of this is that the banks are not dependent upon the National Bank, and not

being dependent upon the National Bank, the Bank has no position in the money

Mile there ie smme market for bills in Budapest which are traded in

between banks, the National Bank has no position in that market.

Under theca

circumstances, if Hungary should sustain trio successive years of bad crops, the

Bank might need to ask for outside assistance.

It Deana that in the Spring the

exchanges always run against the Bank and it takes between 2 and 3 million sterling of the Bank's foreign reserves to meet the drain.

Then in the Tall, when

the crops are exported, tho balance turns the other way and the reserve is built
up again.

The drain on the reserve has heretofore been within the limits of the

undisclosed reserve, but they have not had two successive yearn of bad crops
since reconstruction.

Two years of bad crops would exhaust the undiscl000d re-

serve, draw down the Government'o balance of valuta, and might require tho Dank
to dip into its published reserve.

People in Hungary are so timid that the

appearance of any great depletion of the reserve would cause exchange difficulties of the first order.

Siepmann tells me that they carry a very large amount, for thamoof
American currency in their vaults, partly because there is a constant demand for
it in HUngary, where it is regarded as the most stable of all currencies, but

also because it is a very good barometer by which to judge of the state of public
feeling about the currency.

If any distrust arises, it in imediately shown in


Ur. Narrison.

Yuly 1C 192G.

a deLand for Amorican currency.
In connection with general conditions in Fc/-n-', Zicpmann hap given me
a lot of most interesting information, 1.:lich I shan't Lot.or to recount.

the not important

is the fact that, -chile the


pl ins wore almost

denuded of cattle during the u-ar, larg,ly by the Roum-n5-;,c, the herd' have been

eubstantially built up to pre-war stqndarde.


.21 11,ortat fast in the

oconomic life of Hungary, Mich is 4 large fur'tther cf w--,t in
ages and other manufactured pr000cts to nearby cc.--.trilr.

,.. form of



:netI. is ca geed

tonne with her neighbors, except the liotz--Aiaas and the Czechs, - the

because of the treatment accorded them erring the Lary MU 'Le Czechs boc.v.:,o of

their intimate relations with the French, Idle are not re ulnr in Euntry.
Siopmann sayn that conditions there politically sic, nowt stable.


sees no possibility under ordinary cirmeastancos of anyCling like a political or
social upheaval.

Those dLys, since the of Bela Kum, aro over.

have changes of government, but tLoy

They s.,y

be orderly rmd wittzin i ho lai.

thinks on the Whole the °canonic position of the country is coed, that the J.3n..: is

thoroughly well established, and barring succeseivo croe failures or unforeseen
disasters of an unusual typo, they have a very favorable outlook.
country is described generally as being a country of children.

Of course) the

ohile they aro

not exactly unstable, they aro ingenue= and rather rirAeininded.
outetandil-ag faults is a willingness to

One of their

any sort of a stz.te--ant or promise

rather than appear to be irApolite or harsh.

/ ems amused by Siopnaaa's bringing no

meenago from Jersniall Dmith,

recalling an incident that I had comAetely forgotten.

It seems that we had

traveled together when he was on his vay out to Hur.,ary, and I told him then Lhst

a nation vbieh

has a favorable balance of payments could have any kind of a cur-

Mr. Harrison.


raw that it wonted, and one that h

July 16, 1926.

a persists it unfavorable balance of pay-

ments could not have any sort of a monetary system,

so that if I ware to take his

job, I would concontrate upon building up exports and insist that the Bank Should
build up its foreign balancen againot 'elm day of adverse trade.

me by .11eTcon that thic had barn hi

Re sent word to

Pible and. toxt-boe: over since taking vo

}tin job and he nttributei thoir succors in groct part to that fundamoatal principle.

Undoubtedly those two follows did a great job in Hungary.

They gave

them v nost tremondouo rend-off %Ilan they loft, and reading lostessa the lines, I

gather that Norman'o policy with the rank had be

so gimsrems end yet so firs

that then Bank or England hos r credal place in their affections.

On the 'whole,

my aro oArono/y favorablo, but I am confirxed in my opinion that it
ib a 1,-71.4f r, r,tt:l.elmont tad uhntevor they do in New York io a side Josue to :hot

they ao

in London.





05,1, of the 3anTes reserve:,: are carried

lit London, and the portion now held in Nay York is a
from the stabilisation 20 r..


balance arising

On the other %and, is Siepmann's advice to the /*elk

is followod, they -sill be caroful to maintain closo

day of bad crops, adveroo trado balances, and



with urn against the

nood for foreign assistance.

There la eono doubt as to the wipla'a of lay going there.

It in a gooeipy

place, and I learn that, despite caution whict my friend Flotahor


Ro le uont to

our Malabar, Ur. Brentano, he promptly spread word armad that I uns shortly to
arrive in Budapest, and owrybody there is expecting me.
"Beware of tolbasoadors":

They remind

The Gallant on that is

taoof the fano= statement made of ac moono

lesura you know in '71:4hington, that them are thrso meano of rapid

-Adhiruton: tslegroo-h, to :hone and tell




If you put the vord "AmUls-

soder* in the blank mpaco, you will gat the poraphraoe.

Yesterday I received your cablo about Mr. Mallon's plane, o.nd of MUM)

Ur, Harrison.

am looking forward to Geeing him.

July 16, 1926.

There are my things about the situation

over hore Which he should know and whiCh he cannot get except by a meeting.
Best regard-) to all at the Bank.

Sincerely yours,

nr. C. L. Harrison,
c/O Federal Reserve Bank of Neu York,
New York.

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