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Hotel Trianon Palace, Versailles, July 29, 1926. _ID=ITIAL Dear '!r. Tiarrison: I have a big batch of mail from the Bank, received yesterday, but am unable to deal with it for a few days. This is to confirm a cable which I am sending out as per enclosed copy, on the subject of Dr. Miller's testimony. It is of course most confidential. I took opportunity to make some ;articular inquiries of Ir. Gilbert in regard to the position of the Reichsbank, its status and the question of the disclosure of foreign balances, etc. It seems that not only are the foreign bal- ances most carefully safegu-rdod in the statement, as I wrote you, but the law actually prohibits full disclosures on this subject, even to the Directors. The object, as you will appreciate, is to give the Bank the fullest freedom in dealing iith valuta accounts and -:iith their reserves so as to afford the utmost That Mr. Gilbert told me merely protection to the exchange ue of the mark. emphasized the serious char er of the disclosure, so I explained the situation to the Secretary, who expre d the view that it was a rather serious matter. I told him I was going to try and have it eliminated from the record. therefore is sent in the hope that in some way it can be arranged. `Sy cable I will hsve to leave the method entirely to you, and apologize for bothering you once more. post regards. Sincerely yours, !Ir. G. L. Harrison, c/o Federal Reserve http://fraser.stlouisfed.org/ Ism York. Federal Reserve Bank of St. Louis Bank of 'few York, Hotel Trianon Palace, Versailles, July 30, 1926. Dear Mr. Mellon: You wil] recall that the Poincare Government had not made its declaration to the Chamber until just before we left Tours, and since then we have been able to form some opinion of the prospects as a result of the change of Government. Further talks with Governor Moreau and Vice-Governor Rist of the Bank of France and with M. Monnet seem to justify my sending a cable to New York of which the enclosed is a copy. see it. It will give you a succinct picture of the situation as I Gilbert went over it this morning and agrees that it tells the story. The fact seems to be that there is much disappointment that the Ministerial statement was not more comprehensive, for in fact it leaves the country in doubt as to what is to be done in regard to debt ratification, stabilization, foreign credits and the policy as to the floating debt. 110 Aside from a few very general statements, the entire Ministerial declaration was confined to matters of taxation and proposes increases in taxes estimated to amount to 11 billion francs, without any proposal whatever as to taxes upon real estate or agricultural profits. The only sualification which I feel justified in suggesting as to a comprehensive program results from a conversation which I have just had with M. Francqui, who had just left the Prime Minister. He urged upon him a course somewhat similar to that being pursued in Belgium, the development of a full dress program, reducing the value of the franc and stabilizing it promptly. Me tells me that at first Poincar4 appeared rather opposed to so comprehensive a program, but finally admitted the need for cooperation between France, Belgium and Italy and asked Francqui to return later today. The latter, as you know, is both energetic and enthusiastic, and he may have overstressed M. Poincarg's reaction to his suggestion. 41, Of that I shall be unable to judge until I see Messrs. Moreau and Rist again tomorrow. It would Mr. Mellon. 2. ov, °lb July 30, 1926. not justify my changing the terms of my cable. Further evidence reaches me enclosed, I will greatly appreciate it yester- and i of the cable through Governor Norman, who was here indeed, day and today, that the new officers of the Bank of France are under present conditions, I proposals it contains are inadvisable determined to use His to that effect. every means at their command to force a thoroughgoing reform. hesitate to send me a few words by telegraph impressions of M. Moreau are identical with my own - that he is a Iquiet man, somewhat lacking in after a Mr. Gilbert and arrived in Paris in good time experience, but with ample determination. ride, but I am sorry to say that he found Mrs. Gilbert suffering Word also reaches me that the Government has assure vigorous measures to and discomfort. The doctors taken him that it is nothing import stop all annoyances to travelers, and so far as I can learn, they are successful progressing satisfactorily. He left for London with Governor Nor in public places, although causes ofto join me in expressing the pleasure we had in our me but desired irritation still seem to arise in the restaurants and shops. ing you good wishes. Very sincerely yours, While I may be a week in Holland, where my address will be care of the Nederlandsehe Bank, Amsterdam, my mail Mellon, Hon. Andrew W. and telegraph address on the Continent will c/o American Embassy, be care of Messrs. Morgan, Harjes 8 Company, 14 Place Vendome, Paris, who will be ROME, Italy. kept advised. If you feel able to send me any comments in regard to the contents BS :M (2) That owing to the existence of the pos TO of the schedule of 7aymento, it was entirely 7110.112"1177 R. B. jARREN Imagine these points being put into any form acc (3) That the Government had no intention o 41 comnsTioil 02 JULY 31, 1926 ebt e-T loreau said that he was aware of the exi ter, but did not '`now what use had been nr.de of it during the present rinic,,tr-y, although he felt sure that H. Poincare also knew of it. ( page 3 ) conversations with the Bank of France and would not do so without their opinions. He would net ask what Mr. Norman had talked with them about, but he was willing to wager that Mr. Norman had discussed at great length the question of the inde- pendence cf the Bank of France, as he knew that this was a subject on which he felt very deeply. Referring to the question of the introduction of a dual currency which had been raised by Mr. Riot in a previous discussion, Governor Strong remarked that while the scheme might have certain advantages, he wasconvinced that its principal effect would be completely to discredit the existing unstable currency and accelerate its depreciation, because the very reason for which it was proposed, ramely, that it would remove certain difficulties of transacting business under an unstable currency, would at the same time remove a certain amount cf resistance to the continuance of such an unstable currency in circulation. He could accept the idea of such a dual currency system only rid entirely of the franc, thathe was convinced tha was intended ultimately to get with one reservation, and as was that it the effect would be rapidly to destroy whatover value there was left of the franc Mr. Rist questioned this position and said that he believed that it would ha a tendency to discourage the flight of capital because it had worked to some extent in the Saar. Governor Strong, however, remarked that while he was not completely familiar with this phase of monetary economics, he was of the opinion that the example of the Saar, a small community attached to one much larger, was by no means a precedent for such a country as France. He cited at some length then the example of Germany during the period when the old Reichsmark circulated side by side with th Rentenmark, and explained with what difficulty the two currencies were maintained in circulation. It would, in fact, have been quite impossible in Germany if it had not been that at the time the Rentenmark was introduced, the entire valuecirc all the Reichsmarks in cf country. At the same time ( page 4 ) time when the Rentenmark was first introduced and the printing of Reichsmarks IIPstopped, and the time when Gcvernor Schacht took charge of the situation, the volume of Reichsmarks in circulation was entirely inadequate to meet the needs cf commerce in completing the contracts which had been undertaken. In other words, everybody in Germany, whether concerned in domestic or foreign trade, whether industrial establishment or bank, was short of Reichsmarks. Governor Schacht had ccrn- ered the entire available supply of Reichsmarks and consequently was able to make his discount and rationing policy entirely effective. apply in France at the moment, since This, however, would hardly he currency situation was by nc means compar- able, to what it had been in Germany at the time of the stabilization. In fact, given proper administration, it should be substantially easier fcr France to stabilize its currency and return to normal monetary conditions than it had been for Germany. Referring again to the letter which it was desired that M. Moreau should write, M. Moreau asked if it would be agreeable that this letter, which after all would be a sort of formal affair, should be dated at about the time of the first verbal invitation to undertake these discussions, that is, about the day before Governor Strong returned to Paris. This was acceptable to Governor Strong, who also agreed to sup- ply the Bank of France with a reply. In this way, the purpose and seep!) of these conversations would be made a matter of reca'd, so that if at any time either bank should be called into question, a satisfactory record would be available. Referring to the subject of the possibility of entering into some sort of tan- gible negotiations at some time, Governer Strong remarked that, while it was entirely outside his field or his interest to discuss the debt negotiatiens, it nevertheless was a fact that the ratification of the American debt settlement was an absolute antecedent to any practical considerations of inter-bank cooperation. was understood that the Chamber would adjourn Saturday, August 8th. 111 It If this were the case, since it seemed hardly probable that the debt negotiations could be ratified before that time, it would postpone for many weeks any possibility of ccoper- ( page 5 ) ative action. It was explained, however, that the Chamber was not to adjourn; it was merely to be given e leave of absence, the difference being that with the Chamber on leave, it could be reconvened at the call of the Ministry, while if adjourned, it could only be recalled upon the formal convocation of the President. In other words, provided the Ministry wished to consider the debts, the suspension of sittings next Saturday would not imply that all possibility cf ratification was indefinitely postponed. There was indeed some possibility that the Ministry itself might wish to hasten ratification, providing certain difficulties regarding the terms of the settlement cculd be arranged. It was understood that there had been within the last very few days a perceptible change of attitude upon the part of the press, and even upon the part of the Ministry. All present agreed that the change in tone on the part of the press had been quite distinct. Referring again to the matter of stabilization, Mr. Strong remarked that very like be n of R be r gold gold fect the and opin to t ( page 6 ) shipments amounting to 95 million dollars. Such gold might be provided in various ways, possibly even through some sort of cooperative arrangement with the Bank of England concerning the gold which was carried in the statement of the Bank of Fran Fa as held abroad, or if no feasible means were dissevered for pur- chasing such gold, it is possible that a gold credit might be arranged in New York which would permit the statement of the Bank of France to carry a certain figure es being on demand deposit abroad. This wculd assume, of course, that the present form of statement of the gold held abroad by the Bank cf France took on a more realistic form. The question then arose as to how, once the franc was stabilized and the Bank of France received a certain supply of foreign bills, such foreign bills could be carried in the statement, or indeed purchased by the Bank, owing to the lialtfirbitrarily established by law upon their circulaticn. This at the 'resent time had only a very small margin, and if, as was expected, it was necessary to expand the as after every fcreign bill purchased it would be necessary to expand the ties, circulation, they would presently find themselves in serious difficulliabilities by an equal sum. For this there were two proposals: (1) One offered by Governor Strong, that while it might be necessary at first to expand the circulation, before long the Bank would find itself in the necessity of contracting credit in order to prevent a disastrous inflation of prices. Under such circumstances, the holdings of domestic bills would decline, and their places would be taken to some extent at least by holdings of foreign bills. The exact difficulties of this operation, of course, depended to some extent upon the status of the Bank, as it did not seem to be entirely clear from the conversation whether or not foreign bills could legally be entered under the item of the portfolio in the statement or tether they could only be carried under the miscellaneous assets. At any rate, it was clear, according to M. Rist, that presently the Bank would find itself seriously troubled by the fact that circulation had reached its legal limit. 411 He wished to inquire whether or not public opinion in the United States would be disturbed at this time by a request on the part of the Bank of France to remove the ( page 7 ) legal limit on circulation. Governor Strong replied positively that if such a proposal were made as an IP411 isolated instance, it would undoubtedly have an unfavorable effect abroad, but that if it were part of a comprehensive program, it probably would have no such influence. It was also remarked at this point that, as far as the Chamber of Deputies was concerned, a request on the part of the Bank for the removal of the legal limit on circulation would hardly be disturbing if it was coupled with the simultaneous request on the part of the Bank to be given absolute and full responsibility for the maintaining of the exchange at par and the currency at a stable val-le. Referring to the effect on public opinion, Governor Strong remarked that it was quite true that foreign opinion had very largely lost confidence in the Bank of France, because abroad it was regarded simply as an agency of the French Treasury, and that unless this impression could be dispelled, any action taken regarding the 411 circulation would be simply regarded as being a demand by the French Treasury for a right to more inflation. Until the Bank of France was more independent of the Treasury, there is no doubt that foreign opinion would be somewhat skeptical of all currency measures. M. Moreau then said that they intended to ask the Ministry for a convention which would guarantee that during the period of stabilization the Governor and ViceGovernor of the Bank should be free from arbitrary removal by the Ministry, that is, that they should not be removed without the advice and consent of the Beard of Regents. Mr. Warren remarked that he saw no reason to limit this provision to the period of stabilization. M. Moreau said that that. was complimentary, but that they did not feel inclined to ask so much of the present Ministry, whereupon Governor Strong added that in those 411 matters affecting the prestige of the Bank, it was not necessary that the Governor should be personally too modest. ( page 8 ) Once again at this point the question of the problem of controlling the market came up, and Governor Strong remarked how greatly this would be simplified if a part of the State's debt to the Bank should be converted into 30-day, 60-day or 90-day Treasury bills of a sort readily negotiable in the market. Dr. Rist remarked that there had been formerly an active market in such bills, but that it had been destroyed. Mr. Strong said that it would greatly facilitate the entire operation of stabilization if there were developed in Paris a satisfactory, smooth-working money market, for which these Treasury bills offer a very natural, available medium. M. Moreau remarked that, for the present, while he recognized the inherent advantages of this idea, it was quite out of the question, because the Government was using these Bons de la Defense as a means for raising money for current expenses, and it was not urrtil the Government had satisfactorily put its budget in order that it would be possible for the Central Bank tc employ such operations primarily 1110 in the interests of controlling the money market. Mr. Strong recognized the strength of this, and remarked that the existence of a free market in this kind of paper would possibly facilitate the tosition of the government during certain cf the difficult days of the stabilization period. (Al- though this question of converting part of the advances to the state into negotiable Treasury bills, and the employment of these Treasury bills in open market operatione of the type familiar in New York and London, has been introduced in every conversation between Governor Strong and MM. Moreau and Rist, this is the first time that it has clearly appeared that both of them understood both the character and object of the operation and recognized its feasibility and applicability to the Paris market. It was quite clear today that both cf them had accepted the idea, at least in theory, and were prepared to consider its practical application). In conclusion, Mr. Strong remlrked that in go /ing over the proposals of M. Poincar4 it seemed to him that while the object, namely, the equilibrium of the budget, was commendable, the real problem of an equitable redistribution of taxa- ( page 9 tion was not even touched. ) Would it be possible, he asked, to secure modifica- tions or amendments of those tax proposals before they have become incorporated in law. Both M. Moreau and Dr. Rist agreed that this was quite, out of the question at the present time, and that the tax program as presented was necessary to be accepted because of its political expediency. Recognizing this, Governor Strong then remarked that at least, if it was not possible to exerci/e any influence on the part of the Ministry in regard to its tax program, it was certainly possible for the Bank to bring some pressure to bear on the Government in its process of adjusting the relations between the State and the Bank, in the process for example of revaluing their gold. I to Motel de 31Europo, Amsterdam, August 1, 1926. Dear Mr. Mellon: I have never seen situation change with the lightning speed that has been the case in France. 7hon I despatched my letter to you through the Embassy, it seemed to have been determined by M. Poincare that he would proceed with his tax progrmn, secure certain additional authorizations from the Chamber of Deputies, defer consideration of debt ratification and the general program of stabilization until the Fall, and then let the Parliament adjourn on Saturday, the 7th. During Saturday, the whole situation seems to have changed, as I learned from conversations with the officers of the Bank of Franco, with M. Francqui and with my friend, 'I. Joan .:Sonnet. The Prime Minister seems nag to have become con- vinced that the ratification of the Aierican and British debt settlements must be brought about immediately, if possible, and that steps looking towards stabilization must be attempted immediately thereafter. rithout recounting the detail of the long talks that I have had with these gentlemen, I believe that the following considerations have moved him to change his policy. (1) The accumulating evidence of dissatisfaction in political circles and of the public with the incompleteness of his proposals to the Chamber, manifested partly in the press, but mainly in the course of the rate of exchange. (2) Vary positive statements which have been made to him by some of his associates and by officers of the Bank of France that something further must be done than ambraced in his original proposals, if the Treasury is to be protected. (3) Some communication from the Bank of France and possibly from his own officials in the Treasury indicating that the Treasury is not in position to August 1, 1926. Mr. Mellon. 2. moot the State obligations beyond a period of say four to six reeks, unless further measures are adopted. (4) Vigorous representations which have been made to him by '4. Francqui an to the perils of the present situation, coupled with the rather spectacular success which he seems to have achieved in the enforced consolidation of a large portion of the Belgian floating debt and its immediate conversion next Monday into preferred stock of the newly incorporated Belgian State Railway lines. Of course all of this information reaches me in the greatest confidence, but, as I have indicated, from most reliable sources. developments is his decision, already announced, to have the Parliament recess but not to adjourn, and the further information I have that it in quite likely that the recess 1111 not occur for another fortnight. A recess of the Parliament leaves the Uinistry in position to recall it at any time, and adjournment would postpone the reassembling of Parliament until next October. I am writing you this because it is now my belief that the success or failure of this Ministry and of such program ss they may adopt will be determined by the success or failure of efforts to secure ratification of the debt agreements by the Chamber. I am informed that the letter which you addressed to M. Lacour- Gayet on the 14th or 15th of Juno in in the hands of the Finance Minister, but either because its terms may not exactly meet the existing situation or possibly even because it was addressed to an official and not to a Minister, it may not appear to be serviceable even in allaying the fears which undoubtedly exist and are widespread and, I believe, conscientious as to the commercialization clause, being Paragraph 7 of the debt agreement. The proposal now being discussed is to endeavor to secure from the American Government come atatemont which will be reassuring on the subject of the sale One Mr. Mellon. 3. of bonds to the public. August 1, 1926. The actual phraseology of such a letter would, I gather, need to be devised with great skill in order, on the one hand, to give satisfaction in France, and on the other hand, to avoid its being understood by the people at home as more than an interpretation of the meaning of the agreement. I gather that, while it would be most helpful if something could be stated in the nature of a security clause, it is realized that this would be most difficult to bring about, and that the point might be covered to the satisfaction of the French Government and the French people by a preamble to the act of ratification, the substance of which would be to state that the agreement had been entered into in coasequence of the action of the Funding Commission in applying a rule of capacity to the negotiations, and that while no assurances are asked pn the score of capacity if circumstances Change and the capacity to pay is materially impaired, the French Government would then rely upon the fairness of the American Government to consider proposals for a review or reconsideration of the debt in the light of existing capacity. Here again the question of language is of course of the utmost importance. Such a clause might be framed in a dignified way without any unfavorable reaction either in France or at home. On the other hand, it might be construed an a reser- vation and prove unacceptable. I have again taken the ponition and reiterated that the subject of the debts is one with which I can have no concern, and that if this matter is approached it must be done through the usual channels or in some way which will not in any manner invelve me in the discussion, indicating that `.he only relations which are possible by Lao are with the officers of the Bank of France. Quito privately, I have suggested tc 11r. lionaet that it might be wise for him to have a further talk with Ur. Gilbert upon the letter's return fram London on Tuesday, and that he cannot look to me to act as an interme iary. I have also advised Mr. Gilbert of the 4. Mr. Mellon. August 1, 1926. substance of whet I have learned in Paris, so I apprehend that you may hear from him shortly after his return. After most careful consideration of everything that has been disclosed during my stay in Paris, I now rather hold the opinion that if arrangements could be made for an exchange of letters satisfactory in terms to you and the President, which would meet the pressing needs of the Prime qinister to secure ratification of the debt agreement in the Chamber, the thole course of affairs in France might instantly change for the better and the most serious crisis, which i3 now likely to arise within the next twc or three months, be thereby avoided. I have been sounded unofficially on the subject of credits and have taken the position that certain things are prerequisite to anything in the nature of negotiations, the principal ones being: (1) Ratification of the debt agreements. (2) The adoption of a comprehensive program which would be acceptable to us, to the bankers of the French Government in America, and to the other banks of issue and private bankers who might become engaged in other gold standard countries. (3) That oven the adoption of such program by the Government and its approval by Parliament would not be sufficient unless provision was mado for continuity in the execution of the plan over a term of years, and covering that point it is utated to me by the officers of the Bank of France that they propose to insist and believe the Government will agree to give the Bank unhampered authority to execute a plan over a period of three or four years without governmental interference. Of course nothing in the nature of commit3ents or oven by way of encouragement thot credits can be arranged has boon offered to these gentlemen, beyond the bare statement that, the conditions being favorable, we will listen at a later 5. Mr. Mellon. August 1, 1926. Mr. nollon. 6. °It August 1, 1926. even though one of rather slender and indefinite character, could be furniehed at a later date to enable those who have made definite commitments against ratification to retreat from their position, it might be posoible to secure ratification and thereupon develop a really constructive and complete program of reorganization. I am terry to trouble you with this long letter during your holiday. If you fool that it is worth-while tc send mo any communication, it would reach me through the Legation at the Hague in the Italian 2mbausy code, as I am, arranging with the Minister here to take care of telegrams for me. With kindest regards, believe me sincerely yours, Hon. Andrew W. Mellon, c/o American Connulate, ROME, Italy. BS :It Hotel de l'Europe, Amsterdam, August 1, 1926. PERSONAL AND CalFIDTMTIAT Dear Mr. Harrison: It seems a shame to inflict you with these long letters all arriving at once, but the situation over here is so extremely critical and of such grave itportance that I an rather inclined to write the letters for the sake of a record and, cf course, in order that you also may be kept posted. But I tag of you to handle my letters with the utmost caution. "bile Mr. Gilbert and I were vith proposals to the French Chamber; 857! or of them had to do with the taxes and the proposed raising of 11 billion francs. '. lellon, 1. Poincarisulmitted his On the whole, the program is doubt- less a vise one, although inequitable in that the distribution of the tax burden is still unfair. The last budget showed only 76 million francs from agricultural sources and something over 300 million francs from direct land taxes. Both should be greatly increased, but politically it seems impossible, and that is the weak spot in the French fiscal system. The debates gave him a vote of confidence on his general statement, and yesterday by n large majority of over a hundred approved the legislation. nevertheless, the statement was a disappointment to the country, because it was regarded as incomplete. It failed to deal with debt ratification, stabilization, foreign loans and the floating debt. When we reached Paris, after visiting !!Jr. Mellon, the franc was declining sharply, people were again becoming discouraged and it looked as though there was a rocky road ahead. through. I had almost lost confidence that the Government could pull A long talk which I had at Dr. fist's house, with him and with M. Moreau of the Bank, added greatly to my discouragement and resulted in the despatch of my 2. August 1, 1926. As bearing u2on that, I enclose a copy of a letter whieh I cable No. 46. wrote to Mr. Harrison. 3ellon accoppanying a copy of the cable sent to him. On Saturday, however, a kaloadoecoAc thence took place, and it is of oath great Importance that I en writing 71r. 74ellon giving a descriation of the situation ar; per enclosed copy. This will save a repetition of the story, except for a little em- broidery. "'.pile these gentlemen have been very csutious in their statalents to me, I have concludes without their saying so that they have made some very stern reped reventationz to the Prime !quieter end have probably point/out that ha is headed for disaster unless he produces a complete progrem. rranequi has also in- formed me that he has made some very definite ctatemonts to tho Primo ,g.ininter, mhith rhoc% him a good deal. Thee° were all the more effeetive bocauso Ftancqui has just accomplished what is really a great achievement in Belgium. * 7:o has sue- coed:1d in' converting the entire floating debt maturing within the next six months, including January I believe, into preferred stock cf the Reilway Company, thus removing the immediate menace of something like 7 billion francs, of Treazury bills and giving him a pretty clear field as to damectic finance for six months. Ho still has some 42 billion dollars of foreign obligations maturing right along to deal with. This is en enforced oonvarsion, and by a little skillful management of the pros :, by securing the cooperation of interested parties in advance and by giving the banks some special treatment co that they avoid a free= portfolio, he hee apparently carried out hic plan with a rosily enthusiastic public support. His description of the way ho ens working vac eecoodingly amusing, vs !!r. Yonng ell. appresinte. He said that just now ho was the "little God" in Belgium. He did the work and the King signed the decroor,aad everybody thought he wac the biggest man in nelgium, tut ho said: "They Moly will be Shooting at me at the 411 and of 2 or 3 months, so I want to get everything done that T can before they be gin shooting." nareison. 3. A:Ague. 3, 1v26. I promised to see Francqui again, nnd in passing, let me ca :i that the story that is now going about is that ho will remove Hautain from the Cover-northip of the Dank and that Theunis will take it. :Ms ray or my not be true. To get bao to Faris, the chaAge in the situation has became so signific=t ant: importmat that my cable Mo. 46 may be misleading, so I am sending you a brief cable as per enclosed confimstion to bring you up to date boron) our Directors of too far in discussing my 6G. This .c about all them is to say at the moment I bo hero for a seek er oven ten days, and as Schacht is at Noordwyk, I shall probably see him whilo Lore,. This letter, finally, I think I shell Liail to finish up the re- ports on to French situation for Ule moment. Sincerely yours, S G. L. Pftrrisca, c/o Federal Reserve Back of New York, New York. ESN # 2. et. Ur. Harrison. i August 3, 1926. k --- II0 If you think well of it, you might forward the enclosed letter to the Minister. If not, hold it and write him yourself that you have heard from me Lnd that I will &for an answer until I get home. 3inceroly yours, ;.Sr. G. L. Harrison, c/o Fodoral Reserve Bcnk of New York, New York. B!3:!: Hotel de 1'2urope, AfIsterdam, August 3, 1926. PERSONAL AND CONFIDENTIAL Dear lir. Harrison; This will reply tc your personal and confidential letter of July 8th, which covers pretty wide ground. Such of it is answered by separate letters already mailed. Generally, about the present attitude. One cannot expect them to grasp so complicated a picture as this, assieilrte it and take action when they really know nothing of the subject, have none of the atmosphere and hno7 none of the people. I am not disappointed in that, but I think if they wish to take a constructive attitude they must realize that, unless they are willing to tackle the job themselven, they have got to trust someone else to do so. It is just that failure in giving confid,nce that causes all the trouble. I have not boon able to learn much of Dr. Miller's visits. He has seen Dr. 19-scoring, who did not seem to be enough interested to report much of the conversation, nor have I cuestioned him particularly. Tho only significant statement was that Dr. Miller seamed to be strtngly in favor of the Federal Reservo System aiding with credits for stabilization purposes, which surprised Vie coring, ?s he was under the impression ths:t Miller had been rather opposed. I suppose this came through Merman. ny talk with Francqui was altogether too brief to really get at his mind or to bring the conversation around to a point where I could talk about antagonism to America and the American bankers. that score All that I was able to say on was that it had astonished me to hear the reports from Belgium in re- r ( 2. Mr. Harrison. August 3, 1926. r Hr. Harrison. 3. August 3, 1926. 11, returns, won't you please give her my sympathy and best wishes for a Irompt recovery. Sincerely yours, 1r. G. L. Harrison, c/o Fedeml Reserve Bank of :yew Yoe:. New York. 2. Mr. Harrison.' August 3, 1926. of the rashington correspondents who are receiving pay from the Whaley-Eaton Service. the list. Among others, the Associated Press man who covers the Treasury is on The understanding is that these men are paid for giving Whaley infor- mation ahich they get in the confidential talks in the various Departments and which they are not permitted themselves to publish. This is pretty low-down journalism, end Gilbert's suggestion was that this be taken up very privately with Kent Cooper of the Associated Press, that he be given enough information to justify his taking it up with other responsible newspapers, end then that they themselves as a body should undertake an investigation of the relations between their men and the Maley-Eaton Service. the matter, and Of course our neme must never appear in how it should be brought about would need most careful considera- Hotel de l'Eurepe, Amsterdam, August 3, 1926. Dear Ur. Harrison: Replying to another of yours of the 16th, I hope you keep in touch with Morgan's office in regard to the situation in France. Somethin g is liable to develop any moment. This letter is especially to refer to your cola:ilea about our rate. This year I don't think we can hesitate long about an increase, in case speculation shows its vicious teeth again. It may make it a little difficult for Gov- ernor Harman, but I warned him, and I think ho is reasonably complacent about it. The important thing is to give them notice in advance and, if possible, sufficient notice so that they will have time for consultation and to communicate with him in case he is away. :'.bile I think of it, I want to congratulate you upon the outcome of your negotiations with the Clearing House. It is surely an embarrassment to the other Clearing House Associations, especially Chicago, to have New York put the Whole country on the dismtionary list, and ray guess is that they may "wiggle and squirm" a bit, but in the end they will find that they are losing business to New York and will be obliged to abolish their charges as well. I hope they all do. Certainly Atlanta should, and there the charges, as I recall, are highest. And while I am on the subject of the work of the Bank, I must not overlook writing that I hear Case did a grand job in working out the June 15th operations. I think Mr. Mellon and the Treasury officials were all mighty pleased, and of course I was more than anybody. Sincerely yours, p Hotel de l'2uropo, Amsterdam, August 3, 1926. Dear Uco. Harrison: Replying to another of yours of the 16th, principally about public- ity, I have escaped it all since returning to Paris last time, but & on the edge of it again here in Holland. The newspaper people are watching Schacht, who has been at Noordwyk and returns there today. I have about decided not to go to Noordwyk, but as distances are short hare, we can stop with Dr. Vissering at Blom endaal and Schacht can come up there. Governor Norman arrives Friday morning, and between us we can arrange some plan to avoid publicity. I hate all of this dodging, but it cannot be avoided, and I am particularly anxious to do nothing which will arouse mistrust in French minds. our shadows in these matters, I will just have to come home and risk missing a chance to do eomething really constructive. Sincerely yours, 'Ir. G. L. Harrison, e/o Federal Reserve Dank of New York, Vow York. DSAI Hotel do l'Europo, Amsterdam, August 3, 1926. Dear Garrard: I have your fine letter of July 16th, written, if I may say so, with a considerable spice of resentment, at which frankly I am not greatly surprised. But after all, we must be charitable enough to realize that there are a lot of frayed nerves over here, and ,Shile Mr. Churchill's statement, which was unprovoked, is to my mind unforgivable, the attitude of the public may be regarded with more complacency. These feelings quiet down, and it is more important for us to aid in constructive work than it is to permit controversy. I really think our boot policy is to keep our mouths shut and lot the Winston Churdhills do the talking. Gilbert and I had a fine visit with Mr. Mellon. He arrived in France in the midst of a very panicky condition of affairs, and some of us were a little concerned lest he might meet with an unhappy reception and some unfortunate incident simply add to the bad blood. But everything went off beautifully. Rous- seau was very clever in all the arrangements he made and it was never discovered that Gilbert and I had been to Dinard to see him. I think we gave him a pretty good picture of the situation, and he is apparently quite sympathetic with our views, that if it is made possible, a little friendly sympathy and cooperation just now will be most helpful. I shall not send you details of affairs, as I am keeping Mr. Harrison fully posted and you will hear it all from him. My best to you as always. Sincerely yours, Hon. Garrard B. Winston, Under Secretary of the Treasury, Washington, D. C. BS:M Hotel de l'1urope, Amsterdam, Lust 3, 1926. Dear Garrard: Thank you for your letter of the 17th. I think Mr. Uellon's latter to Governor Crissinger, expressed in your best language, was fine. They write me from the office that there was some Q4 mur about the size of the expense account by =rebore of the noard, but they finally accepted the situation. Considering the amount of work which we had to do, which included weeks or preliminary preparation, and the fact that those two gentleme who came with me both left their college work without any notice and only a fax, days in which to get substitutes for their lecture courses, the charges strike as being moderate indeed. A0 an echo from this incident, I am advised from the Bank that a resolution has boon introduced in the Federal Reserve board directing an inquiry to our Bank or to the Directors as to the object of my trip to Europe. It is all of a piece with previous affairs of that sort, and of course I am getting heartily sick of it. About the subsidiary silver coinage, this of course is a rather complex matter just now. I am going to have a talk with Dr. Schacht about it, but any- thing that I might attempt to do would have to be regarded as most confidential just now, because itinvolves a lot of political questions over hero the same as with us at home. The Dutch are still coining silver, the British are coining it at a reduced percentage, that is, 500 fine; the Swiss are now boining silver, and in fact are putting a 5-franc piece into circulation, which I hear is not very popular. The Baak of France holds some 34C million francs of silver, principally, I imagine, Latin Union coins, and I had already had a talk with the officers of the Bank about V August 3, 1926. Mr. Winston. 2. a suggestion which struck Warren and me one day as being worth considering. It surprised them, but they may at least give it a chance in connection with some big program of restoration. Our notion was to have the silver rocoined whenever the now currency is undertaken, so that the Bank would realize a seignforage profit of possibly 1 or 2 billion francs, which is now possible through the depreciation of the franc. fine like the British. We thought they might issue a coin of say 500 Of course they fear that it will be hoarded, but the *Int- ter is under consideration and it may bo taken up. Italy and Belgium might consider it. If they do it, I think both Of course the subsidiary and minor coin of all three countries will have to be reorganized when the currency is revalued, as it is out of line with the general price level. I have already recommended to U. Moreau that the Bank should discontinue issuing 5-franc notes, which today have the value of about a 6-pence, and later if possible discontinue the 10-franc notes. This would give a place for silver coin, and as the substitution of silver coins for 5-franc notes would more than absorb the entire stock of silver of the Bank of France, there might be a chance there to find a new customer for silver. I cannot think of anything more that could be done at the moment, but this is just to let you know that the matter has been in mind and had already been discussed before receiving your letter. I really do not think it would be well to let any of our mining friends, like Mr. Robinson, at home know of these discussions. Those fellows are very active with propaganda and politically, and the impression must not be created abroad that I am engaged in promoting any such enterprise, for the main thing now is stabilization, restoration, and the question of a subsidiary coinage is distinctly one of detail. Many thanks for writing me, and beet regards. Hon. Garrard B. Winston, Under Secretary of the Treasury, Washington. Sincerely yours, Hotel de 1'r, rope, Amsterdam, August 6, 1926. Dear Garrard: Yours of July 21st just reaches me. I am indeed grateful to you for handling the matter of the silver inquiry with the Federal Reserve Board. It is as satisfactory as it can be, considering the difficulties we always encounter with the Board about any matter of expense. Considering the results and the great amount of work necessary to obtain them, I think the bill was moderate indeed. We certainly have had a hornet's nest buzzing around in connection with the debts. Austin Chamberlain made a speech day before yesterday on the eve of the adjournment of Parliament which I did not like at all. of me make out what they are driving at, but I agree with you that it is distressing does no end of harm and may endanger much of what we are endeavoring to do. If the French debt settlement fails, I feel that it is largely to be charged to Winston Churchill. About the Bank of England credit, I have no idea as to what their intentions may be, but I did have one discussion on the subject with Norman after this Churchill upset, in which I told him quite frankly that if we were asked to renew thegredit at the present moment, the feeling as it was at home and this wholly unoutburst from Churchill, I felt, would make it difficult and possibly impos e to recommend it. Norman, you realize, is an intimate friend of Stanley Bald- win's and visits him in the country frequently. I thought it just as well to say this to Norman, who will doubtless report it to the Prime Minister. By next Spring when the matter will come up, much water will have flowed over the dam and we can consider the whole subject in a calmer spirit. There is just one fly in the ointment. armistice loans, I am afraid, will not hold water. The statement about the postThe bulk of them were made for Mr. Winston. 2. August 6, 1926. the purpose of cleaning up existing contracts placed with American contractors, -,nd had we been unwilling to continue our advances to the Allied governments, many American contractors would never have gotten the money or would have been obliged to wait a long time, and some of them would have "busted". The exchange could not have been had, and the disorder and difficulty occasioned to our own people would have been very serious indeed. I am in close touch with the office by cable and am glad to gather that they are in close touch with you. Anything I write now will be so out of date when you get it that I will not duplicate what goes to the office. to enjoy a most interesting experience with me. My best regards as always. Sincerely yours, Hon. Garrard B. Winston, Under Secretary of the Treasury, WASHINGTON, D. C. BS :I I wish you were over here 1pf/ti,f2.6/,) FEDERAL }RESERVE 9AN K OF NEW YORK Hotel do l'Europe, Amsterdam, August 9, 1926. PERONAL ANL) CONFIDENTIAL Bear I.:I-. Parrison: It is literally imposeible to send you a decent account of things here when they change so rapidly, but I will send you a little cross-oection Lee of today, renewing various meetings. I arrived here Iasi Sunday, the 1st, from Paris, and saw Dr. Viesering on Monthly. The only intereeting developments were two: (1) That Francqui had asked him to go to Brussels to consult hie! about his program. Apparently the discrvion was super-theoreticel, which is 1748sorrz's hobby, Lnd I surmise that Frencqui got a bit tired of it, as he is too practieelte waste tilee on fino-spun theeriee about meeeures of value, etc. (2) The other development was my conviction that Dr. Visccring is getting old. He certainly is weak, has not definite opinions himself, en6 secene nel:e incL.ned to agree with the last an than I have ever known him before. He is oleo riding hobbies to death and it becomes difficult to hold him to a serious discuesion. In view of all of this, I was rather cautious in our talks, but I told him that I had promised Francqui tc let"him know my program, and Visserirg thereupon wrote Francqui simply advising him of my al-nivel here, that I would be hero about a week, stopping at Dr. Vissering's hales in tho country most of the time, end that he was expecting Governor Norman on Friday; aleo that Dr. Cchacht was stopping at Noordwyk, which is right near Bloemendaal, whore Dr. Visserirg lives. Te spent the time before Norman's aeeival in solee trips in tho country, reed then Nol-ile,L and I went down to the country with Dr. Viscering, where joined V.s. Schaen Meantime, Francqui telegraphed that he would be over for a "discreet" .tSERVE BANK OF NEW YORK 3. August 9, 1926. Mr. Harrison. 041'frO National Bank. In addition, there is owing to the banks of issue, in round t figures, $15,000,000, and there are short Treasury bills held abroad aggregating $37,000,000, making an external floating debt of $52,000,000. Of this external debt, about 17 millions is held in Holland, 8 millions in London, 15 millions by the banks of issue of Europe, and 10 millions in Germany. Other small amounts bring it up to 52 million. This operation absorbed about 6 billions of the 6% preferred stock of the Railway Company, of which 10 billions are available. Francqui claims to have a sale of 500 million francs practically concluded with Dutch and Swiss bankers, leaving al billions still in the Treasury. He also states that, during the course of advance of the franc, he has been able to purchase $18,000,000 of foreign exchange to build up his foreign balances, and I gather that the bank consortium loan of $10,000,000 which had been di - cussed with Morgans has been abandoned as not needed. In a word, therefore, the Belgian problem resolves itself to this: (1) How to deal with some 52 million dollars of foreign floating debt; (2) How to deal with some 6 billion 700 million francs owing by the 6 .arc. Treasury to the National Bank; (3) At what rate to stabilize the franc; (4) How to get money abroad and how much. As to the floating debt abroad, he -.ants to cover it by a long-time loan. As to the debt to the Bank, I think he has in mind also using a portion of the longtime loan, and in addition bank credits, say with the banks of issue. I figure roughly that he would need to repay about 64 million dollars of the State's debt to the National Bank in order to bring its reserve up to 60% of its note liabilities. To borrow 64 million dollars abroad for this purpose, plus 52 million dollars to fund the floating debt, is, in my opinion, an impossible and exceedingly expensive FEDERAL RESERVE BANK OF NEW YORK Aleguet .9, 4 4 million dollars, the State would be paying interest on t of a purchase of a like amount of gold, which will prod:Ace VOC-n3 to have been cor.beldened by tho C"..C.7d= of his project:1 be counting the cost as carefully as he should, although he never missing that aspect of any situation. me wae,devoted to the discussion of technique that we really a nice discussion with the :figures, but I think he vias jolted , S6-acht and myself when we pointed out to him that, with no e, he could either refund a pare of the debt of the Kate to c operation, or could permit the Bank itself to convert the lable security and liquidate it at hone, the effect of which e note issue, which cn the other hand would be correspondingly 's continuing to buy foreign exchange, in other words gold. ddle the State with the service of a very large foreign loan. nvert the State's debt to the Bank into a domestic loan and y its gold in the open market. There is no question as to isest. ly Francqui does not always rake a good impression. In the there were ssing the liabilities of the National Bank, / figures which such as ted/a deposit of a million eee.ling which the Reiche's,a-ik has n fact a gold liability for that amount, being the Belgian the German Dawes bonds, which were left in Belgium; eithee he he situation in the Bank in detail, or else ho is unailling to ortunate improreion arose through the fact that ho did not eeo deoll:og o n:_etioting for the sale of the re.:.'eey o he 1 eft :,1.,',, ho hoe preLably been dealing aith eeoe 192G. . FEDERAL RESERVE BANK OF NEW YORK 5. August 9, 1926. L. liUrl'i0011. If ho other than those who have stood by Belgium through these trying times. should abandon the bankers who have done the financial heretofore and go to sours firm like Dillon Road, or Mendelsohn in Berlin of se:,o Date% bank:, than Hope a Company: he would certainly make a very b4d impression. (See Postscript #2). A third situation which became perfectly clear was the fact that he was practically not on speaking terms with Hautain and that the Birk is being 4vrored by Francqui for the moment, as to any mtters where he has the power to give directions. On this last point, I do net think ho is roach to be blamed. antagonized everyone and they have all los.c, confidence in him. Hautain has There is a good deal of discussion of his successor, and I would not be surprised to see a change made any day. Another deelopment, which is most confiacntial, and which has the germ of sere trouble in it, is the fact that Francqui and Schacht have concluded negotiations of a rather complicated character, which I will briefly describe ac follows. Germany is to make a declaration of regret about the invasion of Belgium or something of that sort, then to enter into a compact of friendship by which Belgium will return Eupen and Malmedy to Germany, against which the Rhine Provinces to which Eupen and Malmedy for;lerly belonged will pny to Belgium V0,000,000, this being reimbursement of the amount spent by Bolgium on the railway and other state properties there, such as public utilities, postoffices, telk,raphs, telephones, etc. It is then proposed that the Reichsbank will loan to Belgium, or to the National Ban, or arrange a loan in some form of 30 r..11lions additional, which is to be repaid in ten installments of 3 millions each out of the Belgian share of the Gorman Dawes Plan annuity. This 60 million dollars is in fact, houover, the settlement by Germany lgium, which now :.,:mounts 71:: 111 FEDERAL RESERVE BANK Or NEW YORK G i< August 9', 1926 I surmise, and Schacht has been told, that the difficulties will be ;olio is: (1) Tne rectification of the Belgian-German frontier tray likrly require the -crant of all the signotori3s to the T,'eaty of Versailles; (2) These payments may possibly be considered as a transfer and require t? srt ef the Transfer Co=nittee; (3) They will almost certainly require approval by the Reparations Ce;1- mission; (4) How c.7..n Germany effect such a settlement with Belgium, of a sort of extra-legal character vis-a-vis the raves Plan and the Treaty of Versailles, without inviting France, Italy, Great Britain and others to inquire ;:hat they get out of it: At least as to 30 millicn dollars, it would appear to me to to an antici- pation of Da7,es pa:i.Lonts, something which the French would to very loath to agl.ee to unless in like proportion their annuities r.-ere anticipated. This project has all been discussed, apperently, with the French officials, as well as in Great Britain, and the next step Booms to be to cors,2.1t Gil- bert and see hew he stands. I think they will find him rather ltleaaro, altheuLb ho iaay approve in principle, subject to all interested parties approving; but I feel certain that he vculd not recognize a pledge or antieipaticn of the annuities and lie y question the legality of a transfer of such amount. I think Schacht ex- pects to use the milli= pounds sterling cwing by the National rank and the 10 milheld in Germany lion dollars or oven more of Pelgian Treasury bills/as a part of the payment, and i believe ho has other funds available have already been e*ortod, so the transfer would not bo very large as to the first 30 millions in reimbursement for public buildings, (0,:ci , 1,6 warn not cencern& t4-01 the mattcr at all a:u1 could not diLpeo;,8 it. Oi course, if such a programs should be carried out with everylody essenting, it would make it August 9, 1926. 3 tv, ° Hotel de l'Eurepe. Amoterdam, August 10, 1926. / My dear Mr. Mellon: Since our talk in regard to the agitation about the difficulties of the American farmer, I have had a further talk with Gilbert end we both felt that it might be well to put the substance of What we discuesedintomore concrete form, which I shall now attempt to dc. As you know, this subject has had our attention at the Bank, principally an a credit problem, ever since the agricultural inquiry of 1921. thouchts ar The following the result of a good deal of study, in conaection with which I have read most of the literature of the last few yearn and almost all of the bills offered to Congress; on this subject. The agricultural emblem divides itself naturally into four rnrts, an follown: (1) Agricultural credit; (2) Marketing facilities and methods; (3) The cost of making tho crops; (4) The market and market prices for the crops. AO to (1) - Credit. Beyond the gradual development of the present spites of Intermediate Credit Banks (especially for the benefit of the cattle industry), I do not think any good will result from enlarging agricultural credit facilities, which may indeed have a tendency simply to extend and perpetuate an unsound situation. If the farmers are deluded into thinking that their industry will become more profitable by growing more crops, which they may be encouraged to do by supplies of cheap money, they will add to their difficulties rather than solve them. (2) As to market facilities. 'Ruch has already been accomplished, and doubtless still other methods for facilitating cooperative effort in marketing and Mr. Mellon. 2. August 10, 1926. cheaper and more efficient means of delivering and distributing farm produce can and will be developed, but this is a slow growth and many of the measures attempted have demonstrated their futility through failure or have exhibited the incapacity of the farmers' organizations to manage them, as in the case of the recent unouccessful efforts to purchase the Armour grain elevators and mart grain by farmers' cooperation. The development of better and more economical marketing methods cannot be accomplished by legislation anyway, but will depend more upon intelligent cooperative effort among the farmers themselves. (3) The cost of making the crop. It is undoubtedly true that the causes of the farmers' high cost of production are our high standards of living, the high prices prevalent in the United States, the high cost of his land - which, in many cases, is heavily mortgaged - and high labor costs. will likely retard or prevent any decline in labor caste on the farm. The price of the farmer's land, the interest on his mortgage and his taxes are fixed and cannot be altered. The only costs which can be reduced are of those things which he has to purchase for working his farm (outside of seed), which might be reduced by a reduction of the tariff. The most apparent are: all chemical fertilizers which are still on the tariff list, farming machinery and farm implements, hardware, fence wire, lumber, tools and doubtless other things of like character. It has struck me that if concessions were possible on a very limited list of articles which enter considerably into farm use, it might reduce a widespread demand for general alteration of tariff rates, a project which would certainly prove to be disorganizing to the business of the whole country. It happens that most of those things which the farmers use, like special kinds of wire and lumber and of course fertilizer, and probably many of his tools and much of his hardware, are produced by industries which have a large and varied production and which would not be seriously affected either by tariff reduction or even by putting these few articles 4/4 August 10, 1926. Mr. Mellon. 04 on the free list. And there is much justice in the claim of the farmer that, because his prices are fixed by world price levels and his costs are fixed by donertic price levels, he is at a groat disadvantage in contrast with other industry, which can regulate its production more accurately and scientifically with regard to world prices. The farmer it subject to the vicissitudes of weather which he cannot control, not only in his own country, but the crop weather of all other parts of the world. (4) But the farmer's chief difficulty Jo the low price which he getlizes for his production, both at home and abroad. farm production is exaorted. Roughly, between 151. and 201. of our In a general way, one-half of our exports are agri- culturel in their origin, end of our agricultural exports about one-half consists of cotton and cottonseed oil and cake. An exportable surplus of 17%, or even less than that, if it cannot be marketed, makes a sufficient surplus to disorganize domestic market apices. What the farmer neede is n larger world market for all exportable agricultural production, and that larger market we cannot exnoct to develop except by the gradual elevation of world standards of living. one thing which is so disturbing to the world's commerce and so dangerously lowers living standards as such conditions of financial and monetary disorder, with wide unemployment and consequent economy and poverty, as now exist in some parts of ruropo. The consequences are felt directly by the farmer, because those farm products which we export are to a certain extent luxuries in countries of lower living standards. Wheat flour, that is, rhite bread, meat, lard and even cotton are all capable of greatly reduced consumption when people aro obliged to economize. Belgium in now imposing limitations upon the amount of white flour in bread. The need for raising the price of bread, as has recently been done in France, has a tendency to reduce the consumption of wheat flour. In Italy prizes are being August 10, 1926. Ur. Mellon. offered for increased wheat production. The consumption of veal, chickens and other less nourishing meats in Europe can readily take the place of American beef and bacon and the higher priced meat products which we export. The pressure of economy in Europe is exhibited by 2,500,000 unemployed in Great Britain, 2,000,000 in Germany, 350,000 in Poland and many in middle Europe; possibly a total, with their families, of 30,000,000 who cannot afford the expensive foods we partly furnish. The same is true of the enforced economy of large classes who are impoverished in France, Italy and Belgium, and in other countries as well, because of the reduced domestic purchasing power of the currency. It seems to me that there is every argument for the development of a constructive policy towards European restoration, and that this may apply not only tc cooperation by the extension of credit, as at present, but may even extend to our policy in regard to the political debts. te are now engaged in making calculations at the Bank as to the burden of the payments which must be made to the United States, both on private loans and on the funded Government loans. So far as we have already gone, it ap ears that the service of all of these loans will next year call for payments very close to a billion dollars, if not quite that. Mile there are offsetting items, the principal one is of an un- certain character, namely, the possible return to European countries of the fugitive capital which has taken refuge in America. It may well be that this burden of pay- ments, which has now become so heavy, represents such a sudden and formidable change of balance, because of the war, from the days when we were a debtor nation, that the world is in fact today experiencing a real difficulty in paying for what it would otherwise buy from us, because at the same time it is unable to pay interest and principal of the magnitude required to meet what they already owe. This development is difficult to detect or appraise, but it can safely be assumed that the many August 10, 1926. Mr. Mellon. 4116 Ail 5. dollars required to pay loans reduce the amount available to buy our farm products. Mile I realize the difficulties of such a course, the question may be asked whether our policy as to the political debts cannot now or soon be modified in the interest of our own commerce, especially of the exports of the farmers. The possibilities of modification may be divided into: (a) Same scheme of cancellation. This would be so unpopular politically as to be out of the question. (b) Some plan for readjustment of individual settlements. only one which might be justified is the British agreement. Probably the To modify one without opening the door to changing others would seem to be impossible. Besides that, the feelings aroused by recent developments would appear to make any change in the British agreement very difficult. (0) A general From time to time it in suggested that, -within a few years, it may be pee:Able to effect some general aottlomerrt of German reparations. Such a settlement could not be effected by a down payment of cash, as the financial operation involved would be too large. It would necessarily involve crsploying some form of security, such as the railroad and industrial bonds created under the Dawes Plan, which would be a continuance of a part of the annuities on a capitalized basis. Such a settlement would of course greatly add to the difficulties of the Allied Governments in meeting their funded obligations to the United Staten Government. Their income from Germany would be reduced by the fact that the annuities were capitalized, and to the extent that the railroad or industrial bonds were sold in the markets, tho income would entirely cease. At the present moment, an attempt to settle the indebtedness to our Govern- ment by the use of the securities delivered by Germany would be unpopular in America, but might be possible after a lapse of yoaro. The only suggestion which seams at all feasible now, is for the American Government, into this year or early next year, on its own initiative to propose a moratorium (excluding Germany; also Austria, Mr. Mellon. August 1:., 1926. the latter being already postponed) for a short period, say for three or at the outside not over five years, during which no interest would be required nor even accumulated, so that at the and of the period, payments on all the Government debts would commence upon exactly the bases which are provided under existing agreements, unless a readjustment had been made. This would relieve Europe of an immense burden, greatly facilitate financial and monetary restoration and, I believe, do more to protect the farmer's market than any other thing that we could do. At the end of five years, the present bitter feelings would have subsided, and much more would then be known of the capacity of Germany to carry out the terms of the Dawes Plan than is now possible. At the end of two or three years, it might be possible to work out a general readjustment of the debts which would eliminate them as a source of irritation. It would relieve us of the unfortunate position which we now occupy of ex- acting payment from our debtors upon a fixed basis, when Germany's payments are so controlled under the Dawes Plan that they may be suspended if capacity to pay is ehown to be unequal to the burden. We now are in the unfortunate position of ex- tending greater leniency to the defeated enemy than tie show to our victorious associates in the war. ""bile it is not possible for me to comment upon the political effect of such a program, there are evidences that it would be popular with so many people at home that it would moderate the demands of those who are now so vehement in insisting upon full payment. Such a modification, applying to all agreements, after all had been ratified, might satisfy needs on both sides and overcome much of the present bad feeling. Sincerely yours, Hon. Andrew W. Mellon, c/o Hotel Royal, EVIAN-LES-BAINS. BS:M pow. Hotel Grand a Euler, Basle, August 13, 1926. Dear Mr. Harrison: I have been intensely interested by the printing of the enclosed article day before yesterday in one of the Dutch papers, which led me to cable you as per draft on tho back. in my long letter of the 11th. The whole situation is fully described There seems to be no occasion to make any denial, as these matters are of intere:t for a few days and they are then for- gotten, but still it is annoying and disturbing because of its effect on other people. Uy best regards as always. Ur. G. L. Harrison, c/o Federal Reserve Bank of l!ew York, New York. BS:Li Sincerely yours, Hotel Grand it Euler, Basle, August 17, 1926. 11000NF/MNTIAL Dear Mr. Harrison: Replying to yours of the 5th about the participaUon of foreign accounts in our purchases of Government securities, I think that matter is ended and am sorry to have given you so much bother as I did. The fact is that Norman and the others have got to take their chances in the market, just as we do ourselves, and I don't think 70 should strain our procedure in their behalf, no matter how urgently they 2ress us. Dr. Schacht never mentioned the matter, which confirms my feeling that Nornen is trading, or endeavoring to. Sincerely yours, Ir. G. L. Harrison, c/o Federal Reserve Bank of Neu York, New York. MEMORANDUM BY R. P. W CONVERSATION OF AUGUST 23. 1926 Place: Princess-Hotel, Paris Present: Governor Strong Governor Moreau Mr. Piet Mr. Quesnay Mr. Warren Time: About 3 hours. The conversation was opened by Governor Moreau, who referred to some points brought up in the discussion which occurred on the train from Evian between Governor Strong and Mr. Rist. He mentioned the fact that on some of the points of that discussion, he was unable to agree fully with the position taken by Governor Strong. For example, he did not agree that the system of indirect taxation for France presented the disadvantages which had been remarked by Mr. Strong. Second, in view of the efforts toward consolidating the floating debt, he did not agree with 110 the proposals that the Bank should undertake at the present time the practice of buying and selling State securities. He was afraid that such a practice would lead to increased borrowings by the Treasury from the Bank. Mr. Strong im agreed 6 this last position, but made it clear that, for the present, he had contemplated only the sale of Government securities held by the Bank and did not contemplate their free purchase as well as sale until after the relations of the Bank to the Treasury had been clearly determined and until an organ ized money market was functioning smoothly. Governor Strong then remarked that since his last meeting with them, he had been in Holland, where he had met Governor Norman, Governor Schacht and Governor Vissering, as well as Francqui and Delacroix. In the course of these ccnversations the general problems of stabilization and, to a certain extent, the specific problems of France, had been discussed in general terms by all present, but that no reference had been made to his conversations with Governor Moreau. During these ( page 2 ) meetings in Holland, the question of Eupen and Malmedy had come up, in which he, Governor Strong, had said that this was.aartaii.eiy a political question in which he had no interest, but that he was forced to remark that he doubted if such an agreement could be concluded between Germany and Belgium without appropriate compensation being given to all the other_aignatoriee of the Treaty of Versailles. As for its relations to any contemplated American participation in the stabilization program of Belgium, it is clear that there would be no relation, the entire disposal of that question being outside of Americas. interests. From Amsterdam he had gone to Basle, where he had met Governor Bachmann of the Swiss National Bank for a few hours conversations then he had gone to Evian where he had met Mr. Mellon. Mr. Mellon was considering the advisability of meet- ing M. Poincare if he passed through Paris, and as he had asked Governor Strong to take eampeeimasoundings, Governor Strong asked Governor Moreau whether he believed that it would be more or less desirable for Mr. Mellon to meet M. Poincare. The 411 reasons arguing for such a meeting were, principally, that Mr. Mellon had already conferred with representatives of the Italian Government, there was good reason to expect that he would meet the British Prime Minister and also the Chancellor of the Exchequer, and that for that reason it might be that M. Poincare would a elispirimmt slight to be omitted from such a list of calls. consider it 04.-*., On the other hand, there was-444464w the danger that such a meeting would be given a false interpreta- tion by the press, in which case the relations between the French Government and its Parliament, and that of the Administration at Washington towards its Congress, might be complicated. It was, however, the opinion of Governor Moreau, which was ftiatashared by Professor Rist, that, recognizing the difficulties of either of these alternatives, it was vorrmioeld4415; preferable that Mr. Mellon and M. Poincare should meet. 411 In order to find out if a meeting was desired, it was suggested that the approach be made through Mr. Whitehouse of the Embassy with the Ministry ( page 3 ) of Foreign Affairs. Governor Strong then asked whether there was any special topic of conversation which Governor Moreau would like to raise at this time, as it might be that, owing to pressure of other duties, Governor Moreau would not be able to be present at all of the conversations. M. Moreau said that the subject in which he was most v44,445, interested was the possibility of securing adequate foreign credits. Referring then to a program of stabilization a copy of which had been and specifically to that part which dealt with foreign credits, given him by the bank of France,/Governor Strong remarked that the sums proposed in the program seemed to be very large. In his own mind, he had outlined three sources of foreign credits: (1) A State loan; banks of issue; (2) Credit arrangements between the (3) Private arrangements between borrowers in 'trance and abroad. These were the methods which also were discussed at some length in the program. In order to clarify the position of the Federal Reserve Bank of New York, Governor Strong gave an extensive outline of the negotiation and terms of the similar credit to the Bank of England: (1) The reasons which induced the Bank to undertake this operation were the desire to facilitate the restoration of sound monetary conditions in Europe and specifically to hasten the return of the world to the gold standard. The op- eration, which had been to some extent criticized in the united otates, was, however, siatirda.lry-1-seeni-aimoi contemplated by the bederal Reserve Act itself. It in- volved the right of the Bank to open accounts with foreign correspondents, to purchase satisfactory paper in foreign markets, to buy and sell gold, and to make contracts. transaction. In one way and another, every one of these rights was involved in the The Bank contracted to sell to the bank of England during a period of two years gold to the value of 200 million dollars. The Federal Reserve Bank of New York would receive payment in the form of a deposit in the bank of England, 4IPwhich would be invested for its account in satisfactory commercial paper in the ( page 4 London market. ) When this transaction was questioned, it was pointed out that, while the Act sopeeifikeekky authorized the bank to buy and sell gold, the objection centered on the period of time involved in the contract. It was, however, demon- strated that the only feasible way by which the rederal Reserve Bank could sell gold to a foreign bank of issue would be ones an extended period of time, as ander any other form of contract which involved either no time or a shorter period, the ...eeltrervalue of the transaction would be lost. This precedent, therefore, had be- come firmly established as far as the Federal Reserve Bank of New York was con- cerned, and there was no doubt as to their capacity to make other agreement: of the same kind. Nevertheless, before engaging in this undertaking, the Federal Reserve Bank of New York had insisted upon three safeguards: (1) That during the period of the contract, no fundamental change in the character of the Bank of England itself should be made; status of the currency British the direction of an inflation (2) That during that time, the notes in Treasury should not alter the of that type lation; (3) That the British Government should bind itself during the du the contract to raise no barrier to the exportation of gold in case such tion should be necessary to meet the terms of the contract. This last provision, of course, required an Act of Parliament, been epeeigliosally written into what was now called the "Gold Standard Act 28, 1925." The other proposal had been for the British Treasury tc agree t Bank, in return for any sums drawn upon by the Bank of England, dollar Tr bills, and while they might have been legal, it was 4- less desira far as the Federal Reserve Bank of New York was concerned, than the type H ions actually made. credit of the Federal R ( page 5 110 ) which that was based was the promise to give in return British Treasury bills WI. nut ail expressed in dollars. While such security was no doubt good, it was am4hassater a collateral loan and as such was open to some question of The terms given to the Bank of England were "Mimosa* light, but could be justified for three reasons: (I) The **Peng desire of the Federal Reserve Bank of New York to facilitate the reintroduction of the gold standard in England; (2) The fact that the debt arrangements just concluded between England and the United States had been eeripreimetr burdensome to the British balance of payments; (3) The fact that the character of the loan itself waste high, since it was supported (a) by the credit cf our Government, (b) by the credit of the Bank of England, and (c) by the individual credit of the three names appearing upon all the paper in which the funds created under the issue of this credit would be invested in the London market. IP Protection against loss by exchange lay in the fact that, if the credit was used, the account would be adjusted from day to day in accordance with the fluctuation of the cable rate on New York. These exceptional conditions had justified granting this credit without any commission, but this leniency had been.e.fiwaralii criticized in the U nited States, even by persons who were friendly to the credit itself. In Governor Strong's opin- ion, there was much merit in this objection, and he believed that if the British credit were renewed it wpald be necessary to charge a commission. He was also of the opinion that if any further similar credits were offered to any central bank, some commission would be charged. r, Finally, 134-atifte-tietarbigirl---11 this generosity on ttepric -Wei cl the part of the Federal Reserve Bank itezd--remllr-spared. the British eople 11M4h-Realay, , its-try-me -trf-th-e-opinitnr- = ett,----th a amo ti:J=3:. ---/Per-eicel-ReserVeBan'e41 of Yew York l te: 14 privEtte- -bimkers..v461-4.-e,ceirripeti-4b. credi ( page 6 ) France would encounter a certain that a credit to opposition (II) It was necessary to state candidly amount of special the Bank of in the United ' While the Federal Reserve Bank of New York was authorized to act for the en System, it was o4-eompee necessary for Governor Strong to refer a matter of portance to the Federal Reserve Board and to the Secretary of the Tieasury. F,C,U4 et $ e-,tie, /1 elAP ib these people mnuld-hpve nn oct.u.authority-aitaar...leLraniaLuas such Cr A 14 gir es, their t4t14-adal was ecrtni.niv essential. Further, the Federal Reserve Bank A York in such a transaction would be acting as the representative and agent other 11 Banks of the System, and it would be necessary,...QL.ciammos, to have endorsement of a program. Finally, the Directors of the Federal Reserve B New York themselves would have to endorse the proposal, and this fact neces a mmmodioistatement of a previous transaction with the Bank of France. In 1916, on the occasion of Governor Strong's visit to Europe, at when the prospects of the Allies seemed none too bright, and having in mind 410 sity ofs,laireccoperation between central banks after the war, the Federal Bank of New York made certain proposals to the Bank of England. ter was at the same time transmitted to the Bark of Franca. A copy of Further, in or express a certain degree of interest, the Federal Reserve Bank of New Ycrk b 13 100,000 which it placed upon deposit in the Bank of England, and 1 million Nliich it placed upon deposit at the Bank of France. maintained continuously. Both of these deposits The one at the Bank of England had 44.ogiutimpe fall value during the period of the decline of the pound to the neighborhood of : it had 400041,4,464.1 recavered and now 44-41empole showed no loss. As for the d the Bank of France, it had steadily declined in value, but on one occasion, absence of Governor Strong from New York, it had been doubled, apparently wi object of averaging on the loss. At the present time, of course, this depo 2 million francs with the Bank of France represented practically the sole los II/ the Federal Reserve Bank of New York had ever sustained in any of its operat Digitized They had, in fact, for FRASER ( page 7 ) had no loss on any other type of loan cr credit, and the total ( page 3 ) liquidate it until the stabilization program was completely assured. 411 M. Quesnay further suggested that the proposal contained in the program, by which certain foreign credits were to be raised by the consortium of commercial banks in Yaris and the proceeds sold to or deposited with the Bank of Frame, would give those banks some interest in the maintenance of the value of the currency. Governor Strong said that one of his strongest impressions in regard to the difficulties which the French Treasury had faced during the last few years had been that they were due (1) to the refusal of the commercial banks to carry the proportion of the floating debt which they had formerly supported, and t2) to the fact that the budget had been left unbalanced year after year. The combined effects of the necessity of maintaining the floating debt and the necessity of balancing the budget by the issue of currency, had throvmmorrtrivetr upon the bank of Prance the burden which should have been shared between the commercial 411 banks and the taxpayers, and had forced the continuous increase in circulation. If the commercial banks were so strong that they could get along without the assistance of the Bank of France, amiamdby they were strong enough to give the Government and its Treasury 46-gmeat-cloomi more effective support than they had recently been giving. Returning again to the subject of the magnitude of the credits suggested in the program, uovernor Strong said that he would be unable off-hand to give any estimate of the amounts required. If the program of stabilization was a good one, 4.4"EiAims3.y a Jowly small sum would be needed. If it was a bad program, no sums that could be bor- rowed would be adequate to meet the situation. However, two factors which bore on the subject could be ascertained: (1) The V-MeZtAof the floating debt, and h-AlAwv,-- 04- (2) A comprehensive statement of the ialefte-ef- payments of rrans3, with special reference to the sums which must be found by the trench Treasury to meet its 411 foreign obligations. t page 9 ) New far as any credits extended by the Federal would Bank of Further, asYork to the Bank of France were concerned, itReservebe abeelo401. neces that those should be entered in the statement of the Bank of Prance in so c way that, in case they were drawn on or utilized, it would be obvious to th public that the Bank of prance was merely returning gold or credits which i borrowed abroad. wing to the prejudices existing in France regarding tjae of gold from the reserves of the Bank of France, it was necessary to take airix precautions to avoid misunderstandings which would be superfluous in the ca country which had a different popular attitude on gold movements. These 3:wire% objections which had been raised, such as the possi of commission charged, the difficulties arising from the previous transacti the Bank of France, etc., Governor Strong said that he had advanced, not fo purpose of creating a discouraging atmosphere, but simply to give a 4eeteliod--e statement of all of the factors involved in the transaction. 411 Governor Moreau then asked whether, in considering plans for the of credits with other banks of issue, Governor Strong would recommnend that proach be made at the present time to the Reichsbank. Governor Strong replied that he was convinced that for the presen approach would be undesirable. Governor Strong then menticned the fact that one of the greatest which would arise out cf the period cf stabilization would not be the diffi securing adequate foreign credits, but rather the difficulty of handling su sign credits as would be offered plus French capital which would be repatria From his conversation with American bankers, he was convinced that, just as the case with Germany, once the stabilizaticn program was adopted in France Bank of France would find itself almost swamped with valuta. 411 At the prese evenlw+uoid.maaaliwo& foreign capital was coming into France, and as an examp ( page 10 ) curious to note that while French capital was being exported to Germany via 410 Switzerland, .erTilmtr..Citmar.e4-German capital was coming into France and being in- vested in equities in French industrial concerns and in banks. In other words, the very capital which was exported from France to Germany was coming back into France, with the exception that in the transit, the control represented by this capital passed into the hands of strangers. This was sh.aireet. undesirable situa- tion, and in passing he made the remark that it wasay4t6 different from the attitude of the American investor in France. While American investors and bankers were interested in making profitable ottwerterererividob investments, there was not the same incentive nor desire to secure control of French enterprises that existed among investors in certain other countries. M. Moreau replied that he did not apprehend much trouble from the return of French capital, because he imagined that it would be .0007 slow in ccming back, even under a period of stabilization, and M. Quesnay advanced the ompoimmallows, re411 mark that he doubted if it would come back except under some sort of compulsion. M. Moreau then said that, while they were anxious to proceed with a program it was olylowletrImpossible for them to guarantee that a program of elaborate details would be possible of institution. The attitude of the Government on some of these was quite impossible to predict. details, Mr. Strong replied that these details were not disconnected, but would naturally one after another, once a stabilization program was put into effect, 614,A) tut that it was well to have the sequence in mind as early as possible. For example, the question of the reorganization of the currency would come up wanspromptly after stabilization. use. The present unit, the franc, was entirely too small for convenient Furthermore, the practice of issuing so, ll banknotes was .60.1.147 unsuited for any bank of issue in a great country; 410 therefore he anticipated that the inev- itable step following stabilization would be the creation of newlalLtin multiples ( page 11 of the present franc, at business ) naturally fall into the habit of tAzt, 410 using such units, but that jvie could be facilitated if were planned for from tabilized in the neighborhood of ZIV, iece cf 10 francs, worth about a quar- would be a piece worth about 200 francs, . This natural sequence would in- the Bank as soon as possible of bank- 50 francs, and their substitution by a sed the question of the position of sil- a value of something like 3 or 4 mil- e utilization of this silver, oirwmossiser evaluation not merely of the silver, but osmeso would involve a aliodiris isi change Bank. Governor Strong was on his favorite sub- t would be4orrirdifficult to persuade tle , that the Bank of France was a civil and rporation; that it would be quilin ably 0.6 in gold and 71-MT-francs in Bons de la ate would cancel its indebtedness to him gold and merely leaving him 10,000 e same in the case of the silver. lly the profits of seigi;Drage had revalorization of gold, there nd in the case of the silver, only ( page 12 ) part of the change in the value could be called seignAtrage, and the rest was revaluation; that the question of the bookkeeping profits derived from revalua- tion was anikekrITY distinct from that of the profits of seignprage, and the two should not be confused. However, Governor Strong said, as a matter of policy it might be-.erm ...,perright for the Bank to accord to the State as much as it pleased of the benefits arising out of this bookkeeping rearrangement, but the Bank should make its position aaWreetf clear, that any benefit given to the State this way could not be claimed as a right of the State; that the assumptions underlying the Experts' report in this matter and underlying much of the popular comment on it were aAiregmgelly false; that if the Government should be made to understand that/the Bank gave them this favor, it was doing so eadawalf as 8.41ft good 719) M. Rist remarked that, at this point, the Government might say that if the Bank of France refused this benefit, they would oblige them to restore immediate con v F h e i w th Ho wo me Ru of 411 ( page 13 ) same dividend in paper as they received before the war in gold. This could be justified only on the assumption that at some time the paper francs which they were receiving would be convertible into gold. currency,AA6melaress, this hope would disappear. With the reorganization of the At the same time, if the share- holders were asked to give up a very large part of the value which appeared in the assets under the form of gold, they could not properly be expected to give up all of that value; yet if in the process of reorganizing the statement of the Bank some sort of stock dividend were issued, it would 64-aomixas be necessary to take into account the Bank's capacity to earn a dividend upon the increased capitalization. if a ; MEMORANDUM BY R. B. WARREN -'"°. CONVERSATION OF AUGUST 24, 1926 Place: Hotel Princess, Paris Present: Governor Strong Dr. Rist Mr. Quesnay Mr. Warren Two hours. Time: This conversation was emaimpel, devoted to a discussion ofammieses topics mentioned in the program prepared by Mr. Quesnay. The first subject discussed was raised by Prof. Rist, who stated his be- lief that it would be umpodangerous to announce at the outset the details of a program of stabilization, and especially to accompany such a program by the statement that it was Isierailiriblapsailuoirm complete. Governor Strong opposed to this suggestion the idea that the more complete 41/ and definite the program announced, the more it would be likely to inspire the confidence of foreign investors. Mr. Quesnay, Isommovem, remarked that already, at the mere prospect of stabil ization, there was developing a amply.issamiloserlaiodemand that the holders of the pub- lic debt should receive some compensation which would recognize the fact that the franc- which they had loaned to the Government were of ww4e4PrerrirlveRI higher value than silmfmme at which it was proposed to stabilize. 34.-mig049-14Timmw.40941-44ch public opinion would have to be taken into account, as, if it were antagonized at an early stage of the proceedings, it might develop sufficient opposition to retard the operation. Referring to the demand in the program that the Bank should be given complete chargo of the monetary stabilization, and especially that it should be released from all obligations to lend money to the State, it was suggested that perhaps the 411 most satisfactory form to present such a request to the political authority would be to represent it as a return to the prewar status, rather than as a demand for some- ( page 2 thing eralipetrnew. 411 ) Before the war, the Bank of France did not lend money to the State beyond a v ocesmall fixed sum, which was provided for in the charter. However, Prof. Rist was jiii4lirrinsistent that political opposition was likely to develop at the prospect of releasing the bank entirely from its subservlance to the State, and that the subject would have to be approached withammememik dificiamis&caution. The principal danger, it was agreed, came from the uncertainty as to whether or not the budget would be balanced. if the budget were not balanced, idcomwervo~ette...41,apt the deficit could be met only by borrowing, either from the Bank of France or from the money market. Governor Strong emphasized the necessity of creating the circumstances which would oblige the money market to take over the obligations which would be is- T sued to meet any deficit in the budget, provided such a deficit should arise during theJAmcmAmcimoperiod of stabilization. tie recognized,moimeommrs, that provided the budget were,pimilly balanced, temporary advances to the State from the Bank of France in anticipation of repayments which were certain to be made out of current revenue, would ukoriPrsdo no harm. :Ect easy borrowing porisOmiy Nevertheless, in view of the fact that such by the ireasury, it would be better if such temporary borrowings were made 6.44,44,ftin the money market, rather than from the Bank of prance. under the topic "13 3" of M. Quesnay's program, which related to an under- standing between the Bank and the Treasury relative to the discount rate and the rate on Treasury bills, Governor Strong gave a brief account of the relations which prevailed in the United States. There, whenever the Treasury propcses an issue, the Secretary of the Treasuryminver*,44y consults the Federal Reserve Bank of New York. Also, when the Federal Reserve Bank proposes to raise or lower its discount rate, it lawmr4wity discusses such action with the Secretary of the Treasury. arrangement does not suppose that either will be subservient to the other. This The Federal Reserve Bank of New York does not pretend to dictate to the Treasury the ( page 3 ) terms of its borrowing, nor does the Treasury presume tc dictate to the Federal Reserve Bank the terms upon which it will supply funds to the market, but because of the intimate relation, it is desirable and it has been found.orrirkreiase. feasible to maintainoomftkil, exchange of views and the closest cooperation. At this point in the discussion, Governor Strong inquired as to whether the recent change in the rate of the Bank of France had been suggested by the Treasury or had been initiated by the Bank, inasmuch as the result of the in- crease in the Bank rate from 65 to 47-Lg had been accompanied by an increase in the Treasury bill rate merely from 5g to 65, leaving the differential between the discount rate and the Treasury bill rate rather wider than it had been before. Prof. Rist stated that the initiative in this instance had come from the Bank, but he also affirmed that the differential had not been changed, because the Bank rate had been raisedireveiy from 65 to 75. In this position, he was supported by M. Quesnay, but a statement of the Bank was produced which showed that neither 111 of them was correct, either upon-the present discount rate of the-Bank of France nor upon the rate which haa prevailed before the change, and as a matter of fact the situation was as Governor Strong stated, namely: that the differential be- tween the discount rate and the Treasury rate had been widened as the result of the recent change. Under the topic "B 4" of M. Quesnay's program, which covered the operations of the Bank of France in the exchange market, Governor Strong emphasized the need of securing an eor4remeimy able man to head such a department. Professor Rist said that they were intending to secure as good a man as they could, and that they had already received suggestions from a number of the largest banks in Paris, who offered them the services of their own operator for this position. Passing down to the topic "C (a)", the question was raised as to the 41/ amount of the long-time Government loan. Governor Strong leaned to the opinion that such a loan should be as small as possible, because the foreign debt charge ( page 4 ) of the French Government was alreadyyorronercus. In his opinion, $100,000.40100 erC) might be enough, and $150,000 in all probability would be the outside limit. Professor Rist expressed the opinion that it would be necessary to have sufficient funds available at the outset to insure confidence, but Governor Strong re- marked that if the borrowing was excessiverev, as for instance over 200 million it would be in itself an expression of want of confidence by the French Government and would in that way defeat theopepurpose for which it was raised. M. Quesnay's prospectus had raised the question as to whether or not this loan should be raised through the French Government's regular bankers, namely, J. P. Morgan 8, Company. In this respect, Governor Strong remarked that, while of course the French Government would he amoirtmilly free to select as its fiscal agent any firm which it chose, they should remember that there was a wevyftesesimieraiipsdifference in both -) the capacity and the reliability of various New York banking houses, and that if the Ministry of Finance changed its bankers, they should take care not to trust too heavily in the promises of any fir that firm to carry out its pr New York firm other than thei of Finance immediately do two (1) That he should refer for an opinion, and (2) That no offer be con the firm, and the terms thereof Only in this way could th rassing disappointment. The next topic raised in railway bonds to the scheme. as offering either of two poss 111 time Government loan, which is ( page 5 ) "for distribution in France to afford a means of consolidating the floating debt. 41' It was 41;iiiwiiireeberrpointed out that these bcnds were probably unavailable, ,06.1magercertainly unsuitable, for either of these purposes. and First of all, for the mobilization of these bonds it would be necessary to consider their legal status. As a creditor, the rights of France, although proportionally large, were in no way those of any other of Germany's creditors. superior in law Consequently, no mobilization of these bonds could take place in the interests of France unless with theconsentof every other creditor of the Reparations program. p 4se.mirp4 doubtful bond . such consent would be forthcoming. It was orrisiaftati. Second, the mobilization of these would introduce a new feature into the Reparations program. /hey could not be marketed unless the interest thereon could be given priority over There was nothing in the bond itself cr in the Dawes Plan or;der Reparation payments. which assured these securities ofomal priority, and consequently the only way that they 4144,. could be used in the manner proposed would be as.41,1011/orttrilgemeettr311,vrusaai act of grace by the German Government. There was no reason to believe that the German Government would wish to accord such a favor to France, even if it could be imagined that the French Government was prepared to ask such a favor of the German Government. There is a certain parallelism between the proposal to commercialize these German railway bonds and the proposal to commercialize the French debt to the United States. was It out of the question to commercialize any debt of France to the United States, following the terms of the Mellon-Berenger agreement. In somewhat the same way, it would be extremely difficult to commercialize the German railway bonds under 00-0. 11/m74410, 4frilorMewirwr:t 44444444412. the terms of the Dawes Plan Furthermore, a loan floated, fcr example in New Ycrk, first on the credit of the French Government and second with the proviso that at some 1 9 time it was expected to exchange it for railroad bonds, would in the opinion of Govt_ /46. 7/4/14v error Strong beiusk...mb*s difficult to sell than the straight unsecured bond of the 40 1 French Government. There was by no means an enthusiastic market for German securi- i (ties in New York, ( page 6 ) in spite of the fact that a very considerable number of small tt age 7 ) using the railroad bonds in onnection with either the refunding of the proposed stabilization loan or the consolidation of the floating debt was at the present time out cf the question. (It was quite obvious that this presentation of the status of the railroad bonds was entirely unexpected to Professor Rist and was in fact a verr.,erimiam.disappointment. While he did not say so, it seemed to be apparent from his general demeanor that ho had been counting Isespreivearriiigy upon these securities to support the proposed program of stabilization.) The next question that arose under the program of M. Quesnay referred to the proposed issue of Bank of France notes to meet the requirements of the Caisse de Gestion. It was explained, however, that it was not ccntemplated that the Caisse de Gestion should in any way transfer the internal floating debt tc an external funded debt, and that nothing more was ccntemplated by this proposal than that, if the Caisse do Cestion found itself in the necessity of reimbursing Bons de la Defense at a ratefaster th ceeds cf chase the Takin Strong rem that headi all four A to secure at the sam applicatio ( page 3 ) 60 million francs in Switzerland, M. Quesnay remarked that this loan had not been discussed with the Bank of France but had been contracted without their knowledge 411 cr accord. However, he remarked that it was not part of the stabilization program and that this might be advanced as an explanation for the fact that the Government had contracted this loan without reference to the wishes of the Bank. Governor Strong then remarked upon the oarilaadar.:646,0erket prejudice which any sort teiceAX of secured loan would 0165 to the market for the existing French securities or fcr any French securities to be offered in the future. The exact loan had ftLmosommolonot yet been officially announced, but certain reports had been circulated in the press which seemed to imply that this loan was secured by a pledge uponoipawirefl State property. If this were the case, 4.t.mhaiarhol4moullimmot it would prejudice the status of all of the existing rrench loans, none of which are secured, and would make itelv7/77 difficult in the future to issue any unsecured French ...WM.* loan. it would be necessary to provide security for all French loans if 4retrri-vm security were provided for any, and the aggregate of these had reached such a figure that it would involve pledging in one form or another to foreigners a wily great part of the domain cf the French Government and of their specific revenues. It was learned positively later that the loan in question of 60 million francs from Saitzerland did not involve a specific pledge of State property, but it was op= oghtway well that the disadvantages of introducing As pledgd:into the borrowing practice of the Fronde Government e emphasized to the authorities of the Bank of France. ----______ ... Concluding, the conversation, Governor Strong remarked that the United States had aopereal interest in stabilization - stabilization of France and general monetary stabilization throughout the Continent cf Europe. This interest was selfish, but it waS not the kind of selfish interest which had been represented in the newspapers. So long as monetary unsoundness prevailed in Europe, so long as conditions in Europe 411 represented a succession of inflationary booms and deflationary slumps, Europe would ( page 9 ) remain a poor market for American products, most particularly for American farm 411 400161Cerr-, products, because the purchasing power of the average European consumer wet too 61i tr WV: orgel to provide a market for our foodstuffs and cotton. dp. r. There was, A--wms-ingisromr...- an idea rather prevalent in the world that a nation got rich out of exports. was ailip)usloVel- false. This Prosperity comes from the total exchange of goods, exports and imports, and the United States could have a prosperous fa- eign trade only if the markets of the world were good places to buy in and good places to sell in at the same time. For this reason, the Federal Reserve Bank of New York was eabiamidlimmaw interested in the question of stabilisation, because it viewed stabilization as the only sure way of returning European markets to the normal purchasing power of prosperity, and because in the absence of such prosperous conditions in Europe ..--sper4,4tsr4imeisthe American farmer would have a.reilierbgAwreft poor market for his produc- tion and would consequently suffer from a relatively poor price for the goods which he produced, in comparison with the goods which he purchased. Professor Rist then raised the question as to why the American price index had, over a period of several months, been showing a steady tendency to decline. He asked whether, in the opinion of Governor Strong, this was merely a seasonal and brief tendency or whether it was to be taken as an indication that prices in the United States were showing a definite tendency to proceed to a lower level. ( Insert ) Mr. Strong said that the American general price index was rather deceptive as to the trend of prices in America and required careful analysis in order to ascertain the causes of the trend. Something like 53r. of the Department of Labor index, by present weighting, was made up of agricultural and food products, and xiik the decline in the prices of agricultural commodities and the decline in the price of cotton combined had offset a fairly steady or even advance in the price level for manufactured goods; the declining tendency shown by Amer- ican indices of prices which were comprehensive enough to include most agricultural production really was reflecting special declines that were taking place. This decline in the value of agricultural production appeared to him tc reflect somewhat the reduced power of consumption by Europe, especially of the more expensive foods produced in America. The suggestion that a America was resulting in domestic consumption of these commodities, and consequently the export was declining from natural domestic causes, could not be sus- tained, because domestic consumption of that character, which absorbed the surplus of American production at a time when there was any demand at all from Europe for these same goods, would result in advancing prices rather than declining prices. MEMORANDUM BY R. B. WARREN CONVERSATION OF AUGUST 25. 1926 Place: Princess Hotel, Paris Present: Governor Strong Professor Rist M. Quesnay M. Warren Time: about 2 hours. The conversation opened with the remark by Prof. Rist that it was extraordinary how many people still believed that the franc could go back to par, and how many more who no longer expected it to go back to par were hopeful that it could be very considerably appreciated in value. Governor Strong remarked that the only possibility for such a maneuver would be through an extremely drastic capital levy, and this again was possible only in Gtelow<theory, har.a.use-it-.4ibloael4etalpy-impossible 44- practice. http://fraser.stlouisfed.org/ Prof. Rist Federal Reserve Bank of St. Louis then remarked that Prof. Jeze was one of the few eminent persons in ( page 2 fication,,4441mTrEuropean banks of issue would hesitate to give their support to the stabilization scheme, because of the Ai.etay-litttyterea- doubt as to the 4.4441.44 of ( page 3 ) this of...4okome-would be a costly transaction. 'Znere remained, however, the suggested in th posal which had been pro- of dollar Treasury bills. Governor Strong, however, explai vantages: Vvr.4.4(tA., (1) 4;4456,4morer in the character t4.6%-s" IFigoe bye would be assimilated to ritt,or) and with both objections, it wez-lrir A >64.0K transactions:. 0., / kftePt Passing on to the question of th that the most eperketts difficul 44,6 i eerthe first few months, and then aga believed had been the case in a numbe England. Governor Strong questioned wheth t14. 144 larly difficulty accaoof- As a matter of fac A as large as they were at the time tha meantime been able to resume foreign bilged to make use of their American certain hidden assets - and yet, thei Sat France, because there was not that som home. On the whole, he was inclined strike, the situation in England would year. .> Passing then to the question of t tion, against iod44.41414A4ati.dur checking wide fluctuations in the exch 411 of giving certain speculative advantag ( page 4 ) who were considering repatriating their capital, or to foreigners who might think af buying francs. Governor Strong, however, took the view that there was no offereikh a speculative profit, and that on the contrary, the advantages of.s....comei. ,Aa4-thoroughgoing stabilization, once the moment had come to stabilize, Aoompf4.400per+, out -telgktolany arguments that might be made in favor of a delayed process. Referring again to the question of the duration of the credit, the relative advantages of a 1 -year credit with a privilege of renewal as contrastea with a 2-year credit were discussed. GLvernor Strong was of the opinion that a 2-year credit at the outset might be too long, and taat the advantage favored a 1-year crea t privilege of renewal. with a At the same time, he repeater: the probability that it would be necessary to charge a commission in the case of any further Federal Reserve Bank credits. M. Quesnay raised the question then of the relative cheapness of employing the ( page 5 ) exchange of visits. As for the question of the possibility of securing gold in the event that it not rec was desired to translate some of these credits into gold, there would of course be no he doub difficulties in the United States. Any claim upon any American bank could be in- support stantly withdrawn in gold. specifi Under the topic of the proposed publication of a reserve ratio by the Bank of France, Governor Strong sr recommended that this be done as soon as possible. Ltatal6 take th The public should be accustomed to look for fluctuations in the reserve. At the out- stabili set, it probably would have a desirable influence upon public sentiment to see gold coming into the Bank, whether from abroad or from the purchase of domestic gold. France stance As for the question of an accord with the Bank of England, Governor Strong ei- so/x.0e was not willing to speak for that institution, but he suggested that the Bank of France establish contacts with the central banks of other European countries as Co sized t from in rapidly as possible, and that when the time cane for international credits, they mightwould He Bank5of England, Sweden, Switzerland and Holland. consider approaching the V confere ( page 6 ) Genoa proposal of an international conference was wrong. At Genoa, it had been expected that 44epe would result as part of the stabilization process)a scramble for gold This had not materialized and there was no reason to believe that it would. Prof. Rist then remarked that world prices in gold had for the past year or 18 months shown a steady tendency to decline. He was inclined to attribute this to the gold situation and gave the impression that he believed that world deflation was in prospect owing to an insufficient supply of gold. Governor Strong remarked that he saw no prospect of a gold shortage of size sufficient to cause general deflation; that the only part of the world whose geld de- As for the mand seemed to be large enough to be a disturbing factor might Je India. )(AT-LOC /If < gold reserve of the United States, while it was true that the6total gold stock against >7%0 (Ito the total volume of currency and deposit liabilities was 1010, larger than before the war, it must be remembered that it was very much more efficiently used; with 2 billion 800 million dollars worth of gold in the vaults and nearly a billion more available in ( page 7 ) importance of permitting the Bank of France to control foreign loans, whether con411 tracted by French nationals abroad or loans of French capitalists to foreign countries; he was inclined to believe that there was a real danger of France's over- borrowing. Already France was indebted forusrrlarge sums, and it was not desirable that these should be expanded more than was absolutely necessary. Passing then to the rate of stabilization, Governor Strong remarked that the two principal things to determine the appropriateness of a given rate of stabilization were prices and wages. Prof. Rist remarked that one of the biggest factors in the question of both prices and wages in France was rent control, as the f nominal rent charges under the present laws had a very considerable influence on both. Governor Strong suggested that this matter be given the =Pet thorough study, in order that over the next few years there should be a gradual and just revalorization of existing leases. circulation of the country might expand under stabilization by something like 507., as for instance from 00 per capita to $75 per capita, if the exchange remained at about its present level. 0 Governor Strong remarked that such an increase would be safe only if it were assumed that the Bank had control of the market, and in this connection, it was important ( page 2 ) that such a market be established in Paris, particularly for trading in short-time 0 Government securities. 17werProf. Rist, of securities an , remarked that the banks were practically out of this kind they did not seem at all anxious to invest in them. Taking up the question of the floating debt, which was raised by this reference to the market in Treasury paper, Governor Strong remarked that there were three possible means of meeting it: (1) To reduce it by operation of a sinking fund (2) To convert it into a longer issue voluntarily (3) A forced conversion. The French Government had elected the first means, but this plan was defective in that, while it provided for the retirement of the Treasury securities, it did not make any provision for retiring the debt to the Bank. The Bank, of course, could be repaid in two ways: either cut of the proceeds of a foreign loan, or out of the acIIIcumulation of francs by the Government in the form of budgetary surpluses. In any event, to secure control of the market, it was desirable to be able to mobilize part of the State's debt to the Bank. Prof. Rist immediately raised the difficulties of inducing the State to mobilize this debt, inasmuch as it would be obliged to exchange a security on which it paid almost no interest for one on which it paid the market rate of interest. 14 ti-4- Governor Strong showed that this was si6aa41.y.-466 parallel Cimk ad. aa..4.. case of the British Treasury with regard to the currency notes in England. Prof. Rist, however, remarked that the Government was not wholly averse to this idea, and it was suggested that it might be possible to proceed/ to such mobilization yoradfriterigradually-'may limiting the demand of the Bank upon the State to amounts merely 1144,464 of a size dim by the Bank for some particular operation. The time when such an operation was likely to be required would be one when money was easy and confidence strong. It was true that the Treasury could sell its securities at such a time as ( page 3 ) well as the Bank, but if the sale were entrusted to the Bank, it would facilitate the Bank in getting the control of the market. At the present time, the Treasury itself conducted a kind of open market operation, in that whenever the public subscribed to Bons, the Government turned over the proceeds to the Lank and thereby reduced its debt to the Bank. However, under such a system, the Bank itself had no option.das.44.utiash.ofdpeoloowpwwlirremertn". Prof. Rist at this point remarked that there were certain people, particularly Industrialists, who were desirous of a violent program of deflation without stabilization, their object being to provoke a crisis which would enable them to consolidate French industry into a few powerful groups, somewhat on the German model. Governor Strong remarked that deflation without stabilization meant that higher ,/' Treasury charges would occur at precisely the time when revenues from taxation were 41.4t being reduced, and that it State bankruptcy. ' Passing then to .the question of the type of currency reform needed, Governor Strong said that there were three choices: (1) Abolition of the old unit and introduction of an entirely new one. Such a plan disturbed confidence and was ea.Laamoiry difficult to put into effect, saistimireerip unless the value of the old unit had been 1,ractically destroyed. (2) The second choice would be to make no change whatever, but to continue, even after stabilization, with the same during inflation. of currency that had been in use 4 10.- This, however, had the advantage in that it made no definite break with the inflation period. (3) The third was to retain the old unit, but gradually to introduce new units or denominations more calculated to serve the convenience of the public. M. Quesnay suggested that in the choice of the new denominations or units and their value, there were three possibilities: (1) The new unit could be stated in terms of a ccefficient of the old, as for instance the value of the franc could be stated as being 1/7 of the pre-war value. (2) The ( page 4 ) second choice was to make it a fraction of a foreign currency, as classes cf people in France seemed just, analysis of the figures presented, Gove ( page 5 41/ ) between 160 and 170 would seem to be qu always at its international purchasing power parity, because it is freely traded ent conditions. As for the relative ad On the other hand, shoes were relatively in in all markets all over the world. namely, the a p eliminary p For that reason, the analysis of inunsensitive to movements of the exchange. stabilized but would be limited in fluct tion once determined upon would be carri marked that he would support the idea of limited to the time required to determin occur, and during which a plan of stabil had been determined upon and the plan fo in putting the whole thing into effect a likely to be drawn into a pegging operat to failure. At this point, Governor St there were an unusual number of importan and assuming for the moment that no ques (-AO err. bp it would not bermarth-while for Governor a thorough exchange of views and underst stabilization. Such a meeting would de ( page 6 ) Bank very full powers, and there were certain advantages in moving rapidly under the present circumstances, since if action were delayed too long, the present popular confidence would be allowed to become lost. Prof. Rist, however, was of the opinion that such a meeting would be &beelutoly impossible without consulting the Government, although it was true that the Government might be willing to permit such discussions. Actually, Ilawevil; every- thing hinged upon the ratification of the debts, and Prof. Rist ilanthat it could not be denied that the prospects of debt ratification at the moment did not seem very bright. guard clause. The public was extremely worried over the transfer and safe- The public was also somewhat resentful over the American tariff, and suspicious of American penetration. They also resented what appeared to be the lenient attitude of the United States toward Germany in securing such transfer and safeguard clauses, while at the same time similar leniency did not seem to be extended to France. Governor Strong remarked that the whole atmosphere in regard to the American debt had been clouded on both sides by misunderstandings, and to a certain extent by misrepresentation. M. Quesnay then remarked upon the fear expressed in certain quarters that the world was entering upon a period of declining gold prices. He was somewhat afraid that France would be caught, as was Finland, with rising internal prices while gold prices elsewhere were falling, and that this would complicate the difficulties of stabilization, particularly if stabilization was effected at too high a level. Governor Strong remarked that a general fall in prices would be due to only one of two causes: the first would be over-production, the second would be general monetary deflation. As for over-production, the only sort of over-production which seemed imminent was that of farm products, and it could not be denied that the longer stabilization was poBtponed aver Europe, the greater the danger of a general decline in farm products, owing to the low purchasing power of European ( page 7 populations. 0 ) As for the prospects of general deflation, none were in sight As a matter of fact, if anywhere except possibly in France, Italy and Belgium. to convert part of the State debt to the Bank into a form a decline in world prices was threatened from any quarter, it was threatened from In all probab the increase of the commercial portfolio. these unstabilized countries and the reduced purchasing power of European populaeuver would at first increase the cost of borrowing by th tions, whose standard of living was threatened by a continuation of unsound monetary permit the Bank to gain effeZzcontrol of the money mar policies. The recent decline in world prices was due very largely to the low levels, and thus A.44;irrimmi;4. reduce the debt purchasing power and low consumption of the masses of Europe, resulting from inflapermitting reduced interest upon the short-time debt and tion, and at present continued even under stabilization by-the-enormous number of This naturally led to a question of th the longer debt. unemployed. .0?..#'0 604.044.-440,4ri-b 1444604)41-44.1.44171/4141P"'"44'. short-time debt and a renewed discussion of the possibilit Passing then to a discussion of the relation between the Bank and the Treasury, Governor Strong was again wile bonds for this purpose. Governor Strong remarked that if a central bank had a very large portfolio, compargestion was 506.6. impossible of application at the presen atively small changes in the rate at not very high levels was ext.emeely effective reason to believe that it would meet thaLelighteet support upon the market, while if the portfolio of the Bank was small, much wider changes A and muchsimilar effect. of This discount rate were required in order in view of the proposal higher levels the was a very important consideration, to produce a MEMORANDUM BY R. B. WARREN COFVERSATION OF AUGUST 27, 1926 Place: Hotel Princess, Paris Present: Governor Strong Professor Rist Quesnay Mr. Warren Time: About 2 hours. At the opening, Prof. Rist referred to the hypothetical question raised by Governor Strong the day before, as to the possibilities of an informal meeting with American bankers for the purpose of diLcussing details of a plan. Prof. Rist stated that M. Moreau's opinion was that such a meeting was;ORt* out of the question at the present time. Turning then to the program, he remarked that one of the first steps which the Bank desired to take was the purchase of gold in the domestic marke t. The Government was favorable to this idea and was anxious to have them start Ls soon as possible. The Regents, hoaever, were still firm in their opposition. Governor Strong then asked whether the commencement of purchase of gold would not automatically put the Bank in the position of being so at responsible for the exchange. Prof. Rist was of the opinion this would not be the case, because at any time the Bank could suspend purchases. The gold so bought would be kept as a separate item. When Governor Strong opposed some objection to such a further complication of the balance sheet, it was explained that this idea of keeping new gold purchased under a separate item, whether purchased at home or abroad, was merely a temporary measure until final d-termination of the new rate, as until that time, it would be impossible to adjust the corresponding items in the liabilities if any attempt was made to combine the new gold with the old. Governor Strong then raised the question as to how the Bank would be able to comply with the law, which requires 1001. cover for notes issued against new gold and ex- ( page 2 ) change and demands that, if gold cr exchange is lost, an equivalent amount of notes 410 must be retired. In the event of a rise in the franc, as for instance from 175 to 150, automatically a certain number cf notes would be left uncovered. M. Quesnay explained, however, that as the law provides the Bank should make neither a profit nor a loss on this transaction, the less in such a case would be adjusted by assessing it sw-a.siamagg.a against the Treasury. This question of profit and loss had also arisen in connection with the possible interest to be earned by the Rork on its valuta deposit. It was interpreted, how- ever, as not meaning that the Bank would not be authorized to earn interest on such accounts, although naturally the earnings on valuta turned over to it by the State would be still regarded as the property of the State, and the Bank would operate merely as an agent in such a transaction. Mr. Strong then raised the question of the need of securing an sAtesserilly able man to handle the exchange department of the Bank. 411 Such men, he said, were ely dif- ficult to get, particularly at the scale of salary prevailing in the Bank of France. It was also e melt' undesirable that their exchange expert should be a man with s .ere previous local attachments. Dr. Rist said, however, that the Bank intended to offer a salary adequate to secure a competent man. The question of valuta deposits again arose. With the margin of issue so narrow, it was clear that the Bank had voselittle room for maneuver. f Prof. Rist and M. Quesnay both remarked that the pressure for credit was becoming large and said that that v j day the Director of the Societe Generale had said that they had been obliged to refuse requests for credit from a .psert number of their clients. At the same time, Prof. Rist remarked that while the demand for credit was growing, it did not appear to have reached an acute stage, as there was not the slightest evidence of unemployment. In the opinion of both M. Rist and M. Quesnay, this fact was partly to be explained by the release of hoards, y perhaps under the pressure of higher money, and more ( page 3 probably ) der the revival of confidence a considerable amount o rency was being brought out, and thus the demand for credit was not finding its fullest expression as yet. Nevertheless, both were convinced that within a very short time the demand for credit would reach large proportions and would probably necessitate the introduction of rationing. In this connection, they suggested that, while there were several theories of rationing, the one which they were most inclined to was that employed by Governor Moreau in Algeria, namely, the allotment of certain lines of credit to each branch of the Bank and leaving it to the Manager's discretion to employ such a sum to the best advantage. This also was the method used in Germany. Continuing the discussion of valuta deposits, Governor Strong raised the tion of whether the Bank intended to lend francs against such deposits. ques- This, it appeared, would put the Bank into the swap market on a large scale. Prof. Rist said that such was not the in 411 of the Bank. The idea hadAigt- been written into the Experts' report at the insistence of the representative of the Banque de Paris, but such a policy of putting the Bank with unlimited powers of issue into the swap market would run contrary to all the policy of the Bank and Government for many years. They had, however, thought that they might offer, not int- erest on such valuta deposits, but possibly a special lending rate against such items. The same might also be used in the case of gold brought to the Bank; in case the owners did not wish to sell it for currency or exchange it at the Bank for a security they might leave it on deposit with the Bank and secure a loan against it as collateral. Governor Strong remarked that the opening of a valuta deposit account introduced into the Bank of France certain of the features of a gold discount bank. How- ever, the real function of a gold discount bank was not so such to lend francs (3.47 against the deposit of pounds or dollars, but to lend dollars or pounds are-4 rfranc Kt i=e47Passing down to ( pege 4 ) in connection with the interest charged or received upon these valuta deposits, 411 Geyer Strong raised the question of the facilities offered by the market for the employment of very short funds. It appeared that at the present moment practically the only available market for the employment of short liquid capital lay in the Treasury current account. This of course was recognized by Prof. Rist as being an unnatural state of affairs, as it was embarrassing to the Treasury"; a di ct competitor i the Bank, which offered no interest on deposits. Governor Strong then raised the question of the Caisse de Gestion. While it was true that this institution was provided with a very considerable aLlount of current income, it had no working capital. In the event of a sudden demand for reim- bursement in excess of its income, was it contemplated that the Caisse should apply to the Bank for accommodation? Prof. Rist said that under the circumstances it could do nothing else. The Experts' plan had intended to endow it from the outset with capital derived from a foreign loan. This was not now incorporated in the law of the Caisse de Gestion, and consequently they might at any time find themselves confronted with the old situation, in which, however, a direct loan to the State would be changed nominally into an indirect loan to the State through the Caisse. It was pointed out, however, that under the program submitted by M. Quesnay, it was contemplated that notes issued at the demand of the Caisse should be covered by valuta furnished by the State to the Bank out of the proceeds of its external loan. M. Quesnay also suggested that in the event of such a demand for reimbursement, the State and the Bank could agree not to permit the Bank to issue notes to reimburse these maturing Bons, but insist that the money market absorb them. A question arising as to the statutes of the Bank, Governor Strong asked that a complete set of such statutes be secured, if such were available. Reverting to his previously stated objections about taxation, Governor Strong remarked that sooner or later it would be necessary that France should Passing down to the question he had six possible solutions: ( page E. ) reorganize its tax system on a more equitable basis. 410 (1 ual amortization, (4) exchange for When this question came by the Bank o opoly, ( ) repayment the to be considered, would the Bank of France have any influence on loan.course of the None of these except eign 7 discussion. ticularly attractive, and most of Prof. Rist said that the Bank could have no direct influence on taxation, inas- one of t was likely to occur in in However, they might much as this was regarded as a peculiarly political matter. forced consolidation orexforced con ert a certain amount of influence through discussion, 4alawieampe44.111T and articles 41a*Am On the other hard, if the stabiliz , page 6 ) probably be possible to do something on a voluntary basis, on reasonably good terms. Either way, it was important to have a plan in mind, as the present plan 110 of gradual amortization was so slow that for years the situation would be threatened by the existence of this debt. The question then arose as to whether, with the increase in tax payments which might be expected to occur within a few weeks now, there would not be some demand for reimbursement of these Bons to raise money to pay taxes. Governor Strong therefore asked whether it was Prof. '.List's opinion that an acute crisis over the floating debt was likely to arise within, say, two months. Prof. Rist thought that it would not come within two months, but he would not be sure that it would not arise within, say, four months. pressed himself as hopeful. However, Prof. Rist ex- He had beenr(34stil last Spring; he had been ver(doubtful as to whether or not the Treasury would be able to get through the - = month of August without a crisis. 411 He was therefore ext Both times he had been ag y hopeful that his gloomy forecast of the possibility of a crisis within four months would prove equally vain. Governor Strong cautioned him against basing too firm hopes upon the optimistic features of the present moment, as some of these were undoubtedly temporary and it was enj y open to question whether they wcatIrictertosnistrt--trr-ccrertinunue-ep of sufficient magnitude to avoid the consequences of the weve,-ETave weaknesses witieh-- were inherent in the situation as it was today. M. Quesnay supported this view very-eobrenriy. He said that, while at the mo- ment the franc was stable but not stabilized, public confidence in the stability of the exchange was not very firm; in fact, people were openly skeptical. The present confidence, to a certain extent, was based upon the quietness of the exchange, but -apposyciase-isseer-a4-4,ettris everyone in financial circles knew a that some time in Sep- tember or October, seasonal demands upon the exchange would make themselves felt and aeople were *erz,apprehensive as to what would happen at that time. Governor Strong then raised the question of the possibility of doing something ( page 7 ) with the tobacco securities, but Prof. Rist was of the opinion - and in this he was supported by M. Quesnay - that at the moment it would be Owl/Wary i:rpossible 111 for the Government or the tobacco monopoly to issue any kind of a long-term security in France. Prof. Rist, however, advanced the belief that if no crisis happened between now and perhaps March or April of next year, a funding operation of that sort might be possible and probably would be. Governor Strong then inquired as to the character of the management of the floating debt in the Treasury - whether any flexibility or imagination was employed in its handling. Prof. Rist said that the entire operation was mechanical and automatic, with the exception of the operation of the investments of the Caisse de Depots et de Consignations. Up to the present time, this Caisse had been yer'reluctant to buy short of interest available (1) the rate of Government substantially below the rate securities, for two romene4on other types of return was bonds -and (4)....sf-seoposf-so Gov- ernor Strong pointed out, theabsence of a market in these short securities made them a vvy undesirable type of investment for an institution like the Caisse, which was subject to heavy demands for withdrawals from its depositors. Except for the flex- ibility offered by the purchases of the Caisse, there seemed to be no flexibility whatever provided in the handling of this mass of debt. Governor Strong then made the remark that losprwert- many people - and he was not sure that he should not be included in this list - were of the opinion that stabili- zation on a secure basis was .way out of the question until some more permanent 4, ; disposition was made of the floating debt. Until-the situation was relieved of the msnaca-prssented from this quarter, confidence was very difficult to secure, as at any-time the situation might be upset with very little warning. Prof. Rist agreed fully with this position and said that indeed the floating debt 111 was a kind of "sword of Damocles" hanging over their head. Turning then to the question of the flight of capital, Prof. Rist said that the ( page 8 ) Government was e ely embarrassed by the entire problem and would be very glad to turn it over to the Bank to get rid of it. 11, Governor Strong said that there were three ways of bringing capital back: (1) The first was to apply some measure of force to oblige people to repatriate their capital. (2) The second was to propose some sort of inducement or attraction to lure it back. (3) The third, which had been found sufficient in certain countries like England and Switzerland, where the value of the currency had not been greatly lost, - the natural and spontaneous revival of confidence - had been sufficient. For France, it seemed vg doubtful whether this capital could be brought back except by the use of some sort of pressure. Prof. Rist, however, rerarked that it was varl/difficult to apply pressure, for example by the restriction of credit, whether by rationing or by a high Bank rate, as 1111 holders of the floating debt could evade the consequences of it either by discounting their Treasury bills or by simply allowing them to mature. M. Quesnay then expressed the opinion that something might be done under such circumstances by forcing the Banks to take over Treasury paper as fast as it was presented at maturity under such circumstances. Governor Strong then raised the question as to what would happen if the debts were ratified by the complete program of monetary reform was not regarded as satisfactory. Under such circumstances, obviously a certain amount of the foreign support on which they were counting would not or might not prove to be available. This had been the case with Belgium, where after the debt ratification the program of reform (-4 41--- was not regarded as sufficient to justify foreign cooperation on the scale required dc to stabilize the currency. Suppose this same situation should arise in France. Would the French Government and the French public consider that they had been "1st ID down"' This idea had been vary indr.41141y circulated in Belgium. Without presum- ( page 9 ) ing to speak for various Governors of other banks of issue, Governor Strong said that he could readily imagine the questions which would be raised, even after the debts were ratified, in connection with the program of stabilization. For in- stance, the first thing that Governor Norman would inquire would be as to the status of the Bank, whether its independence was fully assured. With Governor Vissering, the foremost question would be fixing of the measure of value. With Governor Bach- mann, the question of the disposition of the floating debt and the availabilities of adequate foreign credit would be uppermost, while Dr. Schacht would also stress the dangers of the floating debt and probably advocate forced conversion. In his con- versations with Dr. Schacht, he had learned that the latter was of the opinion that only forced conversion of the floating debt would provide the necessary assurance. Governor Strong had asked him whether he was not attempting to apply measure which might be successful in Germany to a people of radically diffe ent temperament, but he 7)4440' 04., was sure that Dr. Schacht's reply to such a questio Jeas-that what had worked in Bel- 1, gium ought to be applicable to France. Speaking of this question of forced conversion, Governor Strong stated that he did not believe that forced consolidation would endanger the credit of France abroad. M. Quesnay, however, was sInangl of the opinion that forced conversion would have 4,401,t effect upon French Government credit within France, and M. Rist quoted from the Experts' report the phrase that "the credit of France is indivisible.' Governor Strong remarked that of course they were better judges of the reaction of the French people to any measure than ani outsider would be, but that as far as influence on French credit abroad was concerned, there was A° particular risk for France. He was further inclined to believe that, while a certain amount of extraordinary demand for credit might arise or would arise, even as a consequence of forced consolidation of a previously liquid security, this would not reach a magnitude sufficient to be dangerous, provided the Bank of France was in a position to exercise a reasonable measure of control over the money market. The conversation concluded with a warning of the dan- gers of reposing too much confidence in the optimistic features of the moment, as these were to a considerable extent superficial. MEMORANDUM BY R. B. WARREN CONVERSATION OF AUGUST 28, 1926 ( page 2 ) Continuing in the discussion of the program, which provides that in the event of an excessive influx of valuta it` can beietreaght-in in the form of gold and this II/ 74%.eit. ,1 gold put into circulation, Governor Strong remarked that the .0.4e) value of such a process would be on the assumption that this gold would be hoarded and would thus pass out of active circulation. This was neither a good habit to cultivate nor a It would be far:preferable to create Tory dependable measure of monetary control. a good market in which the Bank could sell Government securities when it was necessary to contract circulation. M. Quesnay remarked that another method, provided the Bank found itself with an excess of valuta, would be to encourage foreign loans, that is, loans of French persons to foreign countries. A ' Governor Strong agre9dwith this point.4p4 'At I Attil 0410'1064) 0 r. Governor Strong then repeated the point he had made at the and of the previous tively namely, that the larger the portfolio, the greater the effect of relaconversation, small fluctuations in the rate, while if the portfolio itself wereevAry small, very wide fluctuations would be required to produce the same effect and in the event of a desire to contract high rates. Prof. Rist remarked that this whole idea of money market control, whether throug the discount rate or through market operations, was vesf-auch-d a novelty in Francs. Before the war, French commercial banks had regularly maintained eactramsby large portfolios of London bills. Governor Strong said that this had wafilembeedly meant that the French monetary f ( 1,4-220.127.116.11c position was regulated on London, 'AAA it was an. outigrowli of the fact that the dis7-> count rate of the Bank of France was too low and too inflexibler 4heATeee very, facts, leading to the regulation of the French monetary position through London and .0 lip through Berlin, had practically destroyed the independence of the French money market and'aet the control of thti market had been abandoned, even before the war by the 41111 Bank of France r ( page 3 ) Passing then to a discussion of the recasting of the Bank of France statement, Governor Strong remarked that while the law provided that during the process of reaching stabilization, all loss or profit on the transaction should belong to the (A State, he supposed that once stabilization viere3oaffectiv the Bank would retain the 344 usual profits and losses on its exchange operations, julsre anybanko-wain-owect. Prof. Rist and M. Quesnay both agreed to this, and M. Quesnay added that after stabilization the Bank alone would be responsible for the regulation of the market, but that up to that time the State was responsible.and-ttnreit was consequently nec- essary that the State should bear the loss, and in that case of course also receive the profit. This would be an undesirable situationer, to perpetuate. Governor Strong then took up the question of the circumstances which would follow stabilization with reference to the sale of the valuta holdings of the commercial banks to the Bank of France. As at this period the market would be presumably operating under a high discount rate, there would be every inducement for the commerCZ- cial banks to 4,Seent valuta rather than to discount. feature of a policy of forcing the return of valuta. This would of -coos, be a At that time it would probably be necessary to sell securities to offset the easing tendency, but under such circumstances, namely of high interest and of some commercial depression, it would probably be safer to expand the note issue than it would under certain other circumstances. Taking up the proposal in the program that after the revalorization of the gold the State's debt to the Bank would amount to a total of 25 milliards, Governor Strong questioned whether the program a proposal that a residue of 10 milliards be left as a permanen debt and merely 15 milliards be made mobilizable would bean.- adequate distribution. 41! ate in the market. Fifteen milliards was a very small sum with which to oper1 ,(litte4) However, M. Quesnay pointed out that this would not represent the total of se- ( page 4 ) curities available for utilization in market operations, as there would be be- e sides this 15 milliards, 50 milliards of the existing floating debt, plus 5 milliards of new Treasury bills to be added. This would give a total of some 70 milliards of floating debt in the market, with which the Bank in cooperation with the Caisse de Gestion could operate. Governor Strong then raised the question as to whether, under this proposal, the right of the Bank to purchase prior to selling would be impaired, but M. Quesnay did not think that it should. Governor Strong then raised the question as to what legal provisions authorized the State to erect embargoes on imports or exports. Prof. Rist explained that there was no law providing for embargoes on imports, but that an old law was invoked to prohibit exports of certain food products, in order artificially to reduce the price of such commodities. This law was now in their favorable tax position. force and was one of the reasons advanced by the agricultural interests to excuse Governor Strong said that, while in theory he inclined toward free trade ideas, as a matter of practice they were *W04404hummunkaZike under the present conditions. For example, any abrupt change in the American tariff policy would undoubtedly work injury rather than benefit to Europe, since it would icrovoke an industrial crisis in the United States which would destroy the very market for European goods which theoretically a tariff reduction night be expected to expand. However, he thought that some benefit might be obtained in France by restrictions on purely luxury imports. Passing down to the question of securing a favorable public reception of the scheme, Governor Strong remarked that one of the barriers was the great secrecy which the Treasury maintained about it operations. He believed that the Treasury 021,7( should publish regulad. y -ay its statement of income and expenditures and the position of the floating debt. 111 Prof. Hist remarked that .wadembthe Experts' propoldthe Caisse was alidged,401 ( page 5 ) publish such statements, and he agreed that it would be desirable for the Treasury 411 to keep the public informed. Governor Strong added that if it were the United States, he would recommend that the Bank should secure a good publicity expert. In any event, it was important to remember that some of the most severe crises in French finance had been due to the sudden discovery of an unfavorable situation which had been running over a considerable period. When anything of an unfavorable nature is overhanging the market, candid disclosure and frank explanation is 39...werks preferable to a discovery, which sooner or later is bound to occur. Prof. Fist remarked that this policy of secretiveness had grown up in the Government during the war and it had been since continued, so that the Government sup- plied its financial information, not publicly to the Chamber, but confidentially to commissions of the Chamber. m. .-Governor Strong remarked that this all complicated the securing of public e/rrl' sup portfor sound measures; that one of the +mawas of the Experts',P1AD was the fac that }t itas not "sold" to the public. It received very little attention from the newspapers and no effort was made to popularize it. Another policy should be adop with regard to this program of stabilization, and every effort should be made to ex plain it to the public in words of one syllable, so that they should have the fullest idea of what was going on. This would be particularly desirable in view of the possibility or probability that its institution would be associated with a cert ain measure of hardship. The public would be much more ready and willing to accep this difficult period if it understood completely what was going on, and in fact su alfunderstanding might wealywoola reduce the actual hardships which would be experienced. Passing to the question of the per capita circulation, Governor Strong recomme . ed that in their studies of the probable amount required or justified, it was more desirable to make comparison with countries where similar monetary and banking ( page 6 ) habits prevailed, 1:gstieer than with countries which had entirely different habits. 411 He believed that far greater value would be derived from studies of the per capita circulation of such countries as Belgium, Germany and Italy than by attempting to make comparisons with countries like the United States and England, where most of the circulating medium of the country was in the form of bank deposits. Prof. Rist remarked that it was v difficult an Ito secure figures of bank deposits in France, owing tc the fact that only a few of the banks published monthly statements, and not all of the banks published annual statements. Governor Strong added thatlit would be impossible to make too comprehensive studies regarding the changes which had occurred since before the war in prices and wages, in determining the amount of circulation required. Prof. Rist remarked that the data for France was e)5pacrely incomplete; which rn Goveor Stro recognized, and &01444a111 that probably the awl - data-they could (Thera get-th 411 - t 0. I tA. vbelf4.01 would be samples from various industries. A He explained briefly the methods employed by Dr. Snyder of the Federal Reserve Bank of New York in getting his index of wages, and suggested that an account of this be sent to the Bank of France to assist them in making similar studies. M. Quesnay remarked that the Reichsbank had developed a very considerable sta- 4-61-atistical organization of this sor-, reguladaig the rela44eml-e4 credit supplied to A A specific induetrieeN cad.that\,4henever it was discovered that the price of any given group of commodities in Germany was rising faster than the world price of a similar group, credit was restricted in that particular industry. Governer Strong then inquired as to whether France had any considerable liabilities for silver arising out of the Latin Monetary Union, except in the case of Switzerland. Prof. Rist said that practically their only liability existed toward Switzer- land, because the silver currency of all the countries of the Latin Monetary Union had drifted into that country. ( page 7 ) Governor Strong then mentioned the advantages which would accrue to the State out of the reintroduction of a silver coinage, and stated that he did not think that LI_ the French Government could afford not to take advantage of in arriving at an estivate of the am .trAmeli important the opportunities for enbrmous profit out of seigniorage which ably required to carry through a stabilization scheme. would arise from the introduction of a silver coinage. This of course involved the definitive breaking of gold movements before the war. gained from the study with the limitations prescribed by the Latin Monetary Union. the panic cf 1907, the United States received in a sin M. Quesnay remarked that at the present time it would be 1patil difficult to put figure was lars in gold. In the nineties, a similar a new silver coin into circulation; a ;pry years, owing to such conditions as industrial depre al consi,rfible quantity one leer currency was still in the hands of the public, and to tariffextent it still circulated at its and some changes. face value. The public would hardly be ready to accept a United States exported 130 millions In 1914, the new silver coin of approx- OTWYtivv\AAZ"' imately the size cf the old silver franc few five times These\would offer face value of to the m at months. or six times the some guide as the old coin. which might be required under two circumstances: (1) p Governor Strong then took up the question and the balance of payments andwas able to functi tion, of (2) assuming that the Bank referred EIN/14 tv to M. Menehoul's estimate that the flight of capital tie Bank alreadyran up to 700 million dolla meet thisA , during 1924-25 had over some- ., thing like 10 milliards each year. This study of the balance of payments was 46101g' added 300 million or so in credits, the total would cer two conditions just mentioned. page 8 ( ) Governor Strong then gave a brief description of the Belgian operation and This was a pegging operation, pure and simple. IIIits failure. The commercial banks of Belgium did not cooperate in the scheme and indeed did not believe in it. Bel- ,, gium secured extemporary credit°of 27 million dollare,utt whispers of the unsoundness of the proposals began to circulate and a flight of capital immediately set in (I7 on a large scale. The Bank did not advance its rate until the whole credit had been exhausted, and indeed supplied to the market the very funds which it needed in order to finance its export of capital. There was then a brief period of restored confi- dence, during which the Bank and the Government were able to repurchase a part of the The plan of stabilization was announced, but the bankers valuta which they had sold. still refused to believe in it, because it involved the use of short credits, because it was thought that the rate of stabilization was too high, because of an unfavorable et% political situation, etc. 14-6e( when such an-announeement was rt t = ,tutAttz irr; Mr. Jannsen announred-'that he had secured a loan at a time Jik tc4 The result was another burst neorrect -and when the market knew that it was of sellin inzacrect... funds required to finance the export of capital, i vances to the Government. Prof. Rist then remp.ked that the Belgian epis /0' of the dangerous floating debt, and Governor Stron existence of this floating debt which was responsi scheme. M. Quesnay said that there was a certain relat French situation, in that they did not have the coo In Belgium the bankers not only had refused to coop the scheme made haste to sell the market. Governor Strcng remarked that under such circu /e while to raise the Bank rate, say to 9%. 111 Whether ive, it was impossible to say, but it would have be ( page 9 ) had found under the period of the Rentenmark that even a 10% bank rate was scarcely Ili sufficient to be effective.eqc?# ruchrrof otov9 .71.4444tiz-mp/17, M. Quesnay then added that one of the reasons which had contributed to the failure of the Belgian scheme was the fact of the close relation which existed in everyone's mind between the rate on the Belgian franc and the rate on the French franc. It was hard for people to believe that the Belgian franc was worth 107 to the pound when they saw the French franc slipping from a similar figure to 120 or 130 and so on down. Governor Strong remarked that this illustrated the advantage of simultaneous action in the three remaining countries looking towards stabilization, and again expressed his opinion that something might be stirring in Italy at the present time. It seemed to him desirable that France should act first, for the reasons given in the previous day's discussion. M. Quesnay remarked that the idea of a common and simultaneous plan of stabilize. tion in the three countries had been even discussed, but that it presented sjiptettfdifficulties. 6' d t eto Governor Strong 300ed that it would be IrAir? difficult, and it W89 remarked by Prof. Rist that, because the position of the Bank of France was stronger than that of either Italy or Belgium, people would be inclined to think that under a simultaneous plan, particularly if it got into difficulties, the Bank of France was trying to carry those other countries. Further, M. Quesnay remarked that in the event of a failure of stabilization in one country or the other, it would be very easy for politicians to throw the blame upon the action of one of their neighbors. Governor Strong then referred to the necessity of creating a money market, and added that the surest way to induce cooperation would be to create an unsatisfied demand for Government securities. To this end, he suggested that the Treasury re- fuse to sell Bons de la Defense to the banks and oblige them to secure such paper "'from the market. This would automatically create the beginnings of a market in this ( page 10 ) kind of paper. Prof. Rist said, however, that this presupposed, tillrf:r Treasury paper 'o on the part of the banks and that this o- effect so long as the Treasury was dumping its securities into the market as fast as it could. Mr. Warren called attention to the fact that the amount of securities which the Treasury was authorized to put into the market from now on reached very large figures. The ordinary Bons de la Defense were capable of expansion by some 5 or 6 milliards, in addition to which the Government was authorized to issue 5 milliards of a new type of Treasury bill and to borrow 2 milliards from the Bank. M. Quesnay suggested that the subscriptions now coming in to the Government through the sale of securities ought really to form the capital of the new (Aims de Gestion, instead of which they were being appropriated by the Government and used for the purpose of repaying the Bank sums which it would be empowered to reborrow http://fraser.stlouisfed.org/ from the Bank after Federal Reserve Bank of St. Louis the Uaisse de Gestion had begun its functions. it was suggested ( page 11 ) which the Treasury "tempted to conduct this marketing operation. The duty was to the Federal Reserve Bank, with far more satisfactory results. Possibly there would be ways of inducing more businesslike methods into the French Treasury. M. Rist remarked that it appeared that something coule be done in this line, since the subscriptions to Bons seemed to be very sensitive to waves of sentiment. Qb-e, r. 0r4i4 then requested that, before the next meeting, the Bank should prepare a list of the elements of the program which it considered absolutely essential and inflexible, and a second list of those elements of the program regarding which certain flexibility or latitude would be permissible, without destroying the effectiveness of the scheme. For example, it was essential to revalue the gold, but the question of how the profit of revelcrization should be distributed was a matter for discussion. As a second example, it was alomertely essential that the program of stabilization should have permanence and continuity, e exact magnitude of the foreign loans required would certaarly be a matter of question. In conclusion, Mr. Strong stressed the importance of securing money market con. 4-> trol and of the repayment from the State oits debt to the Bank. Prof. Rist and M. Quesnay said that they were fully in acccrd that these were essential features of the program. Governor Strong then added that, so long as the floating debt was overhanging the market, it would be e ely difficult to borrow abroad. Many eminent finan- ciers upon whose help they would have to rely were of the opinion that stabilization was impossible so long as this floating debt overhung the market. He raised the question again of voluntary consolidation, but Prof. Rist remarked that the opportun- ities for this were now limited, since popular enthusiasm had already been exhausted by the campaign of voluntary contributions, and that the fuss made over the consti- tutionalization of the Caisse de Gestion had intensified the tion of the to ccnsolidaopposition debt. Governor Strong repeated that ( page 12 ) this floating debt and regarded it as .11157;tbaefirb-ttneteppevabable menace. M. Quesnay raised the possibility of consolidating a part of this floating debt in connection with the receipts of gold from the public. It might be possi- ble to induce some persons who brought in gold to accept payment in a form which would consolidate a certain amount of the Bons. nues affected to the Caisse de question Governor Strong then raised the Gestion. ofIt would be income of the tobacco the tothe total impossible to employ a n OneIC bacc o securities to fttnd the floating debt, since the holders of the unfunded remainmonopoly applicable to the floating debt. A der Rist gave Prof.could claim athat the of last year ofof their holdings had but agreed that and this figure security back about 11 milliards, been impaired, security had been granted to them by the Constitution. it would be probable that under better management this revenue could be increased. Altogether, Governor Strong said that he regarded the institution of,o,Caisse However, it was clear that the capital value of the tobacco monopoly could hardly ttIS r-0-/Ak r !?) de Gestion as a thiseemeillYJamia mistake,was therefore, in Governor Strong's of the It since in appropriating the revenues be put higher than perhaps 25 milliards. fikl. tobacco monopoly employ the capital value of the tobacco Parever debar the country opinion, impossible to to the floating debt, it would apparentlymonopoly in a censol" from employing the capital It might be supposed that underin funding the floating value of the tobacco monopoly certain circumstances idation of the floating debt. debt. perhaps 25 milliards of the floating debt could be funded in the form of tobacco se41) S-cq curities, but it must be remembered that the constitutional status of every holder of the floating debt gave him a claim upon all the protection afforded by the reve- 4l m Princess Hotel, Paris, August 30, 1926. 4110 PERSONAL Dear Garrard: Your letter of August 19th caused me a twinge of conscience, because it is a good while since I have written you; but I have been mighty busy, and the longer I stay the more difficult it is for Mr. Warren and Mr. Moore to keep up with the work. I had a fine visit with Mr. Mellon at Elden. discussed everything from top to bottom. Gilbert w Mr. Mellon was somewhat uncertain about returning home vie Paris, but Gilbert and I both were in Paris in time to make some judicious inquiries, and Gilbert returned with word that it seamed most desirable that he should. I think he really intended to anyway, but he arrived thin morning, and I expect that he will call on M. Poincare today or tomorrow and probably sec some others here, such as M. Briand, M. Berenger, and M. Moreau of the Bank of France. Mr. Mellon looks exceedingly well. His rest has set him up and he is brown and rugged-looking, although as lean as ever, if not leaner, for he has been taking a lot of exercise, walking and rowing, and seemed to enjoy it immensely. The situation here has fluctuated between optimism and Pessimism, the possibility of ratification and stabilization and then its abandonment, until one hardly could tell from day to day just what the situation would be. The French objections to ratification are of course a security clause, the commercialization clause, and a feeling of hurt pride that if the mgreement is ratified it is done under compulsion, because of the fact that they must have foreign credits, which means American credits, in ordrr to stabilize and these they cannot get without ratifying. August 20, 1926. Mr. Winston. 2. The situation today would greatly facilitate stabilization beyond any previous period, because the sharp decline in the franc to nearly 250 to the pound resulted in a rise in the prices of consumer's goods, and while there has been some decline in these prices since the franc has advanced again to about 170, the decline has not been sufficient to again cause the dangerous disparity between the domestic and external value cf the franc which existed before these occurranceo. Undoubtedly U. Poincare has vacillated a good deal between a desire to proceed vigorously with the complete program of reform and the hesitation to incur the risks of recommending ratification without a bridge over which ho and others can retreat from their position against ratification, taken only a few months ago. The important devolopmenta have really not been the establishment of the "Caisse de Gestion", the increase in taxed and the new convention with the Bank of France, zo much as in the streagthen4ec of the Bank itself and the consciousness which is growing within and without the Bank that the key to the situation largely rests with the control of the credit and monetary position. cers of the Bank very much. I like the new offi- They have displayed a good deal of knowledge of the problem and have a great deal of courage in dealing with it. Pat Harrison is in Purls just now, and while I don't expect to see him, a newspaper representative told Dwight Morrow that he thought the Senator would make a statement - likely, he said, to the effect that France could pay much more than was called for by the Mellon-Berenger agreement. This would be amusing to the Democrats, just after Secretary Baker puts out a statement that we ought to forgive the debts. Dwight Morrow has been here for a few days, and we have had come very interesting discussions. I think the whole situation can be summed up in a few words by saying that, in my opinion, as matters now look the whole problem of stabilization could Mr. Winston. August 30, 1926. be dealt with very promptly and successfully if France wero to ratify the debt agreements, get the domestic floating debt into a more manageable and secure position, and turn the job of stabilization over to the Bank of France. I have had a chance for some nice talks with Mr. Mellon about Federal Reserve problems, whidi you will hear about diroctly from him. The delay caused by my illness, which took about a solid month, and then the everlasting delays on account of the French situation here, will make it impossible for me to make the trip to Central Europe, so I an planning to sail for home on the "'Mauretania" on the 18th of September with Dwight Morrow, although if I could get good passage on a boat sailing a week earlier, I probably would do so. Everything seems to be booked up. I am glad you do not disagree with what I cabled about the Indian Currency report. Undoubtedly some disposition will need gradually to bo made of the surplus silver in the reserves when they begin to accumulate gold instead, but we must not forget that, if they succeed in maintaining the price of silver, which is the intention of the plan, then this silver need not be exported or sold but will gradually get into the silver hoards, just as it has in the past. The suggestion that 200 or 400 million ounces of silver was to be sold according to the terms of the report is wholly unfounded, as no sum is mentioned for sale, but simply, as I recall the language, that the silver in the reserve will need to ba reduced. My best to you and the others in the Treasury. my return and anxious to talk everything over with you. Sincerely yours, Hon. Garrard B. 7inston, Under Secretary of the Treasury, WASHINGTON, D.C. BS:1.1 An looking forward to MEMORANDUM BY R. B. WARREN CONVERSATION OF AUGUST 31. 1926 Place: Princess Hotel, Paris Present: Governor Strong Governor Moreau Prof. Rist M. Quesnay Mr. Warren The conversation was opened by Governor Moreau, who remarked that it appeared that they were in gmerccharmony and accord as toftrlhe essentials of the program. The few differences of opinion that had developed were by nc means of such a character as to prevent the two banks from rapidly coming to a nay working understanding, once the fundamental conditions necessary to such an understanding had been arranged by the political powers. magnitude was the The question uppermost in his mind of the credits which a stabilization scheme would necessitate. ( page 2 ) These figures, however, he named under a specLfic re- markets of the world. servation: at the moment they were probably out of the question, but they might be considered if conditions became more favorable than they were today. The hesitation and uncertainty displayed by the Government in tackling resolutely the problem of monetary reform had not inspired in the money markets of the world a feeling favorable to the flotation of loans of pesuch magnitude. M. Moreau remarked that there was some evidence that the United States was changing its attitude on the debt, or rather that public opinion seemed to be undergoing some change. He referred to the recently published statement by Mr. Baker and remarked that it seemed to be becoming an acute internal political question. Mr. Strong made a few comments about Mr. Baker, remarking that he was not by nature a controversialist, And-the-fact that had entered into this controversy might very well have been inspired by persons prominent in the Democratic party. 111 Mr. Baker was an extremely capable man who was, in fact, general counsel for the Federal Reserve Bank of New York, and he (Mr. Strong) hoped that this association would not lead people to attribute Mr. Baker's remarks to any conversations he may have had with Mr. Strong. attt. 11: dC tu M. Moreau remarked that one of M. Poincare's greatest problems at the moment arose out of his fear that the debt controversy would procure an acrimonious debate in Parliament. This had indeed been his reason for postponing the debt question until after the recess. M. Moreau believed that M. Poincare was sin- cerely desirous that, during the interval, public opinion should become more reas- onable and so would make it possible to bring up the debts upon the reconvening of the Chamber, under general conditions more favorable to a 41Waliff~fd...401Aiteeibtleiii solution. Mr. Strong remarked, speaking of Mr. Mellon's visit in Paris, that Mr. Mellon, 411 although he was President of the Debt Funding Commission and Secretary of the personally desirous of visiting the Bank of France and making the acquaintance of its Governor, and if it were agreeable, he should like to have the pleasure of introducing Mr. Mellon to the Bank of France. Governor Strong cautioned them that Mr. M llon was personally a man of vr¢ diffident and reticent manner, and for that reaso1 might seem, upon their meeting, somewhat reserved and distant. A I M. Moreau remarked that of course this would be the first time, so far as the public was concerned, that Mr. Strong would have visited the Bank of France since the incumbency of the present administration s= suggested that the following day an at 10:30 in the morning would be/agreeable time. Governor Strong agreed to arrange this hour with Mr. Mellon, and assured them that in their conversations they could discuss anything they wished with entire carAgemposai Citelek.N. M. Moreau then passed on to the general situation, remarking that at the mo- ment the exchanges were quiet and the Treasury was in an easy position. It of- fered an ideal time for the Bank to discuss with the Government the changes neces- sary in its relations with the Treasury, and offered an opportunity for the Government to undertake more satisfactory plans for dealing with the floating debt. If the time were so employed between the adjournment and the reconvening of Parliament, it would be by no means lost. 411 M. Moreau, then referring to the conversations which had taken place during ( page 4 ) the previous week, thanked Governor Strong for the thorough consideration 110 which he had given to their problems, and e was especially grateful for the detailed manner in which he had discussed the various subjects introduced in He requested Governor Strong to pre- the unofficial memorandum of M. Quesnay. pare a note, or rather an aide-memoire, indicating what the latter considered to be the indispensable conditions for monetary rehabilitation and also the condi! tions or means which might be more flexible. Governor Strong agreed to do this and remarked that, QtApeeeees under other circumstances, eyefroertain conditions that seemed to be essential at the present time might be subject to modification. ne further added that the note or memo- randum which he would prepare on this subject must be under two reservations: (1) that it applied to conditions as they were at the moment, and that these conditions might change, necessitating radical changes in the program; (2) that in presenting these opinions, he would be doing so on his cwn ac41/ count, and that it was possible that his conclusions might meet with the dissent of his associates in America. Fe added that he had of course been away from the United States already a very long time* itihert)ie had discussed his long absence with Mr. Mellon, who had agreed that nothing that he could do in New York was so important to the welfare of the United States and its people as the very program on which he had been engaged during the past summer in Europe. Governor Strong added that, for the purpose of freer communication between the Federal Reserve Bank of New York and the Bank of France, he would send to the latter a code machine. M. Moreau remarked that they were now engaged in the study of the problems connected with the concentration of a foreign exchange market in the Bank of France, and he expressed his thanks to Governor Strong for hip acceptance of their proposal that the Federal Reserve Bank of New York should handle their dollar account. 411 Governor Strong asked what rate of interest the Bank intended to pay upon those devisen that were deposited with it. r M. Moreau replied that they would pay 1% under the rate of interest which they actually earned on such devisen. Governor Strong then explained the rates now in force in the New York money market, differentiating on the rates on commercial paper and the rates on Treasury securities, the latter being tax free. He explained, too, the rates of com- mission charged upon various types of paper handled by the Reserve Bank on behalf of their foreign depositors, and also the terms charged on the earmarking of gold. M. Moreau remarked that of course, in order to secure these deposits of foreign exchange, it would be necessary for the Bank to offer some inducement, and said that the inducement they had in mind was to offer such depositors exemption from the law on the export of capital, his eg-eeterve would require the consent of the Government. Governor Strong said that the total operations of the Federal Reserve Bank cf 411 New York on behalf of foreign central banks were very considerable, and suggested that M. Moreau might very profitably make a visit to New York. He described at some length the vaults of the Bank, in which the earmarked gold was kept, and added .4,4 that these important relations between the Bank and foreign institutions arousedpse growt-delmt-le- interest and some +II:tee opposition in the United States. For ex- ample, he said that certain people in the United States complained that their tt . (4-N4s, t,4016 undertakings with England had cost them their own independence and that iaritim&44141444too much subject to influence of purely British considerations. in England the same complaint was lodged against Mr. Norman: On the other hand, that by undertaking these relations he had made the Bank of England subordinate to the Federal Reserve Bank of New York. Governor Strong then said that the following factors, in his mind, were abeam191..17 essential to monetary reconstruction in France: (1) Independ ce of the Bank. there was no need :of eiaboratitnev This subject had been thoroughly discussed and ( page 7 ) sential fuction of the Bank. Governor Strong remarked that if the Government, with the enerrove l44,6.14 , funde which it 4ad received out of the foreign loans and later which it would -.- have to make in payments on its charges, should appear at cross purposes with the Bank, it could very greatly hamper the effectiveness of the Bank in the exchange market. Governor Moreau added that he recognized the truth of this, but that one thing that they would have to avoid would be creating new bonds between the Government and the Bank which might embarrass the action of the Bank. M. Quesnay remarked, fcr instance, that they should not be put in a position in which they would be obliged to surrender foreign balances to the Bank with-, out payment on the part of the Government. (7) There must be reccgnition that the gold reserve cf the Bank belonged to the Bank. M. Moreau said that this question had already come up with the Treasury, which took the position that the gold belonged, not to the Bank, but to the holders of the notes. M. Moreau had replied that this reasoning might be applied to those persons who held notes that were issued at the volition cf the Bank, but it could not apply to the holders of those notes which had been issued at the demand of the State. Governor Strong said that his reply had been somewhat different in detail, -.? for he had said that if the State would agree to repay its debt to the Bank inpld, the Bank would be amply able to meet all its obligations on the note account in tha -same metal. (8) Governor Strong emphasized the danger of an increased burden of indirect taxation. The recent tax laws had provided for some 11 milliards of new taxation, a.,401 much of it indirect, in such form to be passed on to the consumer, who was already A underpaid and who, under the stabilization crisis, mi There was a possibility of social unrest sufficient t ( page 8 140 office. 4 He recognized tii,1004 the need of wye sources of immediate revenue as an emergency measure, but he tacommel.teed that the tax system should be thor410 oughly examined and revised. The small man might suffer patiently for a while, but no country could continue to live on a salary schedule such as now was prevalent in France, in which thousands of bread-winners for families received salaries of 600 or 800 francs a month. He added that he sympathized very consider- ably with the position taken in the Experts' report by Dr. Jeze. It was true that a country could by slow readjustment accustom itself to almost any kind of taxation, but the process was painful and slow and might Immo-mall give rise to social disorders or discontent sufficient to imperil the stability of the Govern!! 13A went or its program' A . ( - He apprehended that the riot'}-ooneelueneeeof an inequit- system of taxation in France might be as great as those out'of the floating out' of A debt. M. Moreau stated that he had had very considerable experience as a tax collector and that he had always found that indirect taxes were much easier to collect. In his opinion, they were the only kind of taxes that could reach the mass of the population, because of the numerous exemptions granted on all forms of 41A;v"A- taxation by deputies interested in protecting certain classes of their electors. In France direct taxes were already very considerable, and they fell almost entirely on the shoulders of a very small fraction of the population. Governor Strong then the principal sources of revenue, but no one was able to produce any very satisfactory answer to this question. Governor Strong then drew a comparison between the economic effects of indirect taxation and those of inflation. 44e4ey caused an increase in the cost of living, which bore upon the public without any regard to the capacity of the various classes, and he added that he thought that most modern text writers L. on the subject ofM. Moreau remarked that France was a country without-any great number of taxation would support his view. ( page 9 persons of extremely large income; ) further, the recent changes in the indirect taxes scarcely brought the schedules in gold up to the levels of prewar years. He added that tax-dodging was a national vice in France and had to be taken into account. Governor Strong then drew some illustrations from recent experiences Taxes had at one time been so high on certwith taxation in the United States. px,h0(404t ,a 4e4.-1 / (7#-1 ain brackets that altogether i 6111 had run up to the neighborhood of 86% on some t4q4by 7' very large incomes. Last year, however, after a tax reduction, receipts were ASP_ e, some ,5;000,000 in excess of the estimates, and it had been the experience of the United States that, as the rate of direct taxes had been reduced, the returns had steadily grown. One of the reasons for this unaaubtlidly was the fact that eva- sion was not worth the danger that it incurred. M. Moreau remarked that much of this reasoning had been applied by the Experts in their report. Governor Strong stated that there was still (1) no ta* worth mention- trr ing upon agricultural earnings, and (2) no effective tax on real estatl. 44,4 eoC, M. Moreau explained the small size of taxes on reel estate aud.4awagkad that, owing to the rent restrictions, income from rented property was very much reduced. For example, rents were only double what they had been in 1914, while the charges of upkeep of property had multiplied tires. Altogether, the return on capital invested in houses or apartment houses in Paris was now, in paper francs, hardly more than it had been in gold francs before the war. such circumstances, it was incapable of supporting very heavy taxes. Under He was, however, in full agreement in regard to the desirability of applying a heavier schedule of taxation to agriculture, but remarked that the difficulty there was political, just as he had explained in an earlier conversation. Governor Strong then stated that one could hardly engage in conversation ( page 10 ) with anyone without hearing stories of tax evasion, the sums involved sometimes being small but in the aggregate undoubtedly totalling up to engreous figures. 411 M. Moreau said there were several reasons for this, of which the greatest was the low state of efficiency in the tax administration. This was due to three principal causes: (1) The personnel of the tax service had been subject to very heavy casualties during the war; (2) The rate of paymigt was so low that worth-while men would not stay in their positions, and there were many resignations. Those who did not resign were discontented and consequently shiftless; (3) The nuslliig complexities of the laws, which made it extremely difficult even for a tax collector to know how much anyone really owed. Prof. Rist remarked that in the Experts' report, they had called attention to the low state of efficiency in the finance department and had recommended 111 that measures be taken to retain and attract good men by increasing thealesalary schedule, poeregardless of the general provisions of the Civil Service. Governor Strong remarked that these underpaid Goverl LUent functionaries whose inefficiency had just been ascribed to their low income would be severely pinched by stabilization and the probable ensuing rise in the cost of living. Under such circumstances, there was reason to apprehend that the servi4a would get worse rather than better. Referring to M. Rist's statement that the Experts had asked for salary increases in the Treasury, he asked if there was a probability that this increase would be granted. M. Moreau replied somewhat vaguely that M. Poincare was reorganizing the Ministry of Finance and possibly there would be something done in the matter. Concluding the conversation, Governor Strong asked Mr. Warren and M. Quesnay whether they wished to make any remarks. ; 111 suggestion; and Mr. narren said that M. Quesnay 4d#64064 offer ttio;t2'^Imm. 4k e thought that four matters of detail were ( page 11 ) quite essential to any plan of stabilization: (1) that the rattj time of stabilization should be left entirely at the discretion of the Bank and not made subject to any governmental influence; (2) that the plan should not be entered upon until the commercial banks were committed to its success; inasmuch as the provisions for the publicity of (3) the matter of publicity; the Caisse de Gestion recommended in the Experts' report had been omitted from the law establishing the Caisse de Gestion; A 1 (4) the necessity of securing adherence to the scheme of those foreign lit er- eats whose aid was counted upon, in order to avoid any misunderstanding such as had occurred in the case of the Belgian program. 4F-14 /1714 4 (Mk A (G.-N tiJ-Ct.t.l, 7ra. 1. et d 6.1 e tt ( 7,)kitt 1-0 t-fd-r)N )2uf 1.6 ): - ICE MEMORANDUM BY R. B. WARREN CONVERSATION OF AUGUST 31. 1926 411 Place: Princess Hotel, Paris Present: Governor Strong Prof. Gaston Jeze, of the Faculte de Droit, University of Paris Mr. Warren Time: About 11 hour. Prof. Jeze was introduced to Governor Strong through the intermediary of his colleague, Prof. Rist, both being members of the Facultd'de Droit of the Sorbonne. Governor Strong opened the conversation with the statement that he had noted with prompiwinterest Prof. Jeze's reservation in regard to indirect taxation in the Experts' report. In the United States there was a very common 44Wwsw4A4darfts belief that the French people did not pay taxes, but the American coming to France soon found that one of the commonest complaints of the French people was that they were overtaxed. Governor Strong was embesseir desirous of reconciling these con- ditradictory opinions and of coming to a just conclusion as to the tax burden borne by the French public. Prof. Jeze said that the reservation which he had entered in the Experts' report represented a papotewasi, conviction on his part as to the in- equities of the present system of indirect taxation, which was virtually a tax on consumption, but because he was a minority of one on the Committee, and because he did not wish to impair the spirit which actuated the Committee or spoil the report, he had entered this reservation under the form in which it appeared. One of the ..t dangers under any proposed stabilization plan lay in the budget. On paper, the budget for 1927 was satisisaismaly balanced. As a mat- ter of fact, Prof. Jeze doubted very-mmele. whether it would be possible to compress the expenditures of the State within the limits of the revenues which were provided under that budget. 1110 One of the p4.4440aa-reasons lay in the fact that the great body of civil servants of the State were 6114romeiry underpaid. As an ex- ( page 2 ) ample, he stated the pay of a Professor at the Sorbonne was between 30,000 and 410 40,000 francs a year, or roughly $1200. tionally highly paid position. This represented, a-atomise*, an excep- In the lower grades, the salary was nct a living wage, and this was rendering it more and more difficult to obtain cr retain a man of any competence in the civil service. For example, he had been a member of an examination committee of applicants for one of the minor posts in the Ministry of Marine. Six positions were vacant, but the Committee had found it possible to fill only 2. Another time that he was a member of an examining board, they found that not one single candidate of those that presented themselves was worthy of consideration for the posts that were vacant. The situation was particularly acute in the Min- 001,10,,r iiistry of Finance, as had been tomesamm..axiam. explained in the Experts' report.4 older Bureau chiefs had aAmiet4,-ewhirepi, found better paying positions in banks or industrial enterprises. The result was that the most responsible positions were now almae4-aulix= in the hands of young men between 30 and 35, who, as soon as 111 they became measurably proficient in the work, would mildrattedty resign and seek more lucrative positions elsewhere. time. This situation was bed enough at the present Under stabilization, the plight of the salaried workers would be almost in- supportable, and if to this condition cf underpayment were added general unemployment, the consequences could hardly fail to be 301.9. serious. He believed that this situation should be recognized by the property-owning classes, not merely as a matter cf justice, but as a matter of doimmemiliamer prudence in their own interest. The property-owning classes should recognize the dangers which lay in provoking the great mass of underpaid salaried workers. Governor Strong asked whether, in the opinion of Dr. Jeze, the discontent which was saill6.466 likely to follow stabilization would be sufficient to upset a Governself soon after it ment that was carrying through stabilization.and possibly overturn the program itProf. Jeze sa ( page 3 ) there would be political reactions in which deputies cr candidates for the SChamber would make very radical and menacing speeches, but once in office, he did not believe that they would overturn any plan of stabilization. There were two reasons for this: (1) That at heart, the French people themselves were Ambreft15. conservative, (2) That there was a kind of inertia in the French Government that made suc- ceeding Chambers and Covernmentsooerreluctant to throw over any sort of program dattlembemes actually under way. this. The 1924 elections were an ampo44,fft example of The elections were contested Arazzy.lacesly in a,-foasswief opposition to the tax measures that had been introduced by M. Poincare immediately before. The deputies of the Left had been elected almost -eat upon their election promises to reduce taxation. Once in office, however, confronted with the responsability of conducting the Government, they not only had not abolished any of the Poincare taxes, but they had meimm,qty been ready to vote further taxation. 41/ In the opinion of Dr. Jeze, the great obstacle to financial reform in France lay in the stupidity of the governing classes. There were three outstanding ex- amples of this: (1) The handling of the Reparation problem. At the time that the Treaty of Versailles was being negotiated, he had been called into conference with the then Minister of Finance, M. Klotz, who had talked to him of the fantastic sums which Germany was to be called upon to pay. The principal anxiety in the mind of M. Klotz was not the fear that they would ask of Germany reparations impossible of ment, but that they would set their demands too low. pay- In M. Klotz's mind, there was no sum which was beyond Germany's capacity to pay, and as for the problems of trans- fer, Prof. Jeze was lissom unable to make him recognize their existence. This want of realism in handling the Reparations program had persisted year by year, leading up in the end to the occupation of the Ruhr. 411 (2) The belief which many people persisted in down to a few weeks ago and which ( page 4 ) many people still held, namely, that the problem of restoring the currency was 410 solely oals-o$ psychology. If the people could be put in a proper frame of mind, this belief ran, the currency would stabilize itself. This of M. Poincare himself upon his assumption of the Ministry. t at France would be able to (3) The third example was the stabilize her currency without outside assistance. He was happy to say, how- ever, that an increasing number of people, including M. Poincarel, had already begun to realize that this was a fantastic idea. Discussion of foreign credits, however, -erf--evmrse-involved the question of the ratification of the debts. Prof. Jeze stated his attitude on the debts in all candor. His opinion was that France should accept the terms of the Mellon-Berenger agreement and should make every effort to live up to them. However, it was his opinion that eventually; it would be found that the sums proposed for transfer, not merely under the debt settle- * ments but also under the reparation program, would be medbamely beyond the capacity of the world to maintain. When this was clearly demonstrated, then it would be necessary to reconsider this whole series of problems Governor Strong said that in considering the debt questions, it was necessary to take account of the American attitude on the debts. Two-thirds of the popula- tion of the United States was either foreign-born or the children of foreign-born parents. They had come to the United States, not merely for the purpose of bet- tering their economic condition, but also to avoid certain of the disadvantages of European life, particularly the liabilities of the military service and the horrors of the war which, for more than a generation, everyone had been expecting. This was finally came, as everyone had predicted, but it included the entry of the United States, which had not been generally expected. It would have been ertiONEW possible for the United States to keveelimitistrits effort simply to the protection of its commerce upon the high seas. This, bAmaux was not done. The United States ( page 5 ) threw itself into the war, involving as it did no 444414.personal sacrifice and an enormous expenditure in money. It involved furthermore the abandonment of one of the great American traditions, perhaps the one political condition of our national life, namelyjseparation from European entanglements. war--14.e..el---i-rrvcIveci-enstnelel--ef-fert. -3 Ore-imilr.4441a--- One of the principal reasons why thiLfinancial effort had not involved the United States in the same currency disasters as European countries lay in the fact that, as we entered the war some years after its commencement, it was possible to profit by the financial mistakes of other States. For this reason, the Federal Reserve System had abloolwilmily refused had cooperated in war to lend any money directly to the Government, although finance, which had involved the creation of an enormous floating debt. al Reserve System had insisted that this floating debt should be The Feder- -(4 the market, although it had supplied the funds to the market which enabled the market to hold it. As a result of this situation, when the time came for deflation, it was not necessary to secure from the Government political support for a program of amortization of a State debt to the Federal Reserve Bane it had been possible to undertake the necessary program of financial restoratiorillftt securing any laws or political support. The result had been, however, that those persons who had suffered from the inflation had been eiwWmporer-bitter toward the Federal Reserve System. With the passage of time, however, it was more and more being realized that the hardships of deflation had been abee.+mbriy necessary for financial restoration, and the attitude toward the Federal Reserve System had eswimimel.p.. changed. In fact, it had changed so much that in a recent project of law, coming up many years before the charter of the Federal Reserve Banks would expire, it had been proposed to extend those charters for 50 years. had personally not been in favor of this proposal. Governor Strong said that he He w ul d have preferred to 144.44 make the dharter of perpetual or indefinite duration, that the 411 System should be subject to periodical examination by a committee representing ( page 6 ) both the Government and the System, such a committee being authorized to make changes necessitated by the progress of events. 111 Prof. Ieze quite agreed with this position, statirg that no bank charter should be perpetual, because economic conditions were constantly changing and what would be an excellent provision at one time might be egArien useless or harmful a few years later. Governor Strong then remarked that if the question of the Allied debts had been shrewdly taken up immediately after the war, it might have been possible to effect some other form of settlement than that which was now proposed. As a matter of fact, they were allowed to drift along for a number of years, and presently they were seized upon by politicians seeking to make capital. It was pambilmiavey unfortu- nate that certain politicians in Europe had endeavored to convince their respective countries that these debts were in some way a moral issue and that the borrowers had some sort of moral right to 'eke cancellation. Thja position had even been takej:that the money was not actually owed, and that it ought not to be repaid. The result of this was an inevitable reaction on the American mind, which was quicker- to accept the idea that the debts were a moral question and that the moral obligation cf repayment was the strongest feature of the question. Governo that whenever a responsible statesman came out with a candid recognition of liability i0r4 he debt and expressed a willingness to effect a aettlanent and to do the utmost .4244,-i,.4,,,A to make the paymenv, sammaadad under the settlement, the debt shrank in size, both in the debtor country and in the United States. On the other hand, when the liabil- ity on.41916.4mat was denied, it assumed at once an unusual magnitude in both countries. The best thing under the circumstames was for the various debtor nations to make their settlements and stop agitating the question. This would give time for everyone to cool cff and later approach the subject with a more open mind. As a matter of fact, in the case of France, what were the alternatives? By protracting the neg if France was be taken up a ( page 8 assets n ) stabilization The amount of French capital its, it was pa circumstances, he guidance of a of the Caisse de Po tremists. from the market. which were ess Governor Str fect the repatria flexible and well ever, that Prof. the problem could assets, which wou ,dmaiarrfacilitate ( page 7 ) the annual payments by a few million dollars, but by doing so, the French people ran the risk of permitting their currency to fall into complete disorder and themselves to be involved in a treestonationa3. economic catastrophe. Between these In fact, two alternatives, there could be no doubt as to which was preferable. such a catastrophe might involve France in an agitation that her finances be put under some sort of a supervisory committee, similar to that constructed by the Dawes Plan, which nobody either in France or in the United States had the slightest desire for. Prof. Jeze said that the problems of debts and reparations were quite similar. Europe in its post-war problems had been endangered by its politicians and saved by its technicians. It was a Committee of Experts which had rescued the Reparations ir problem from the 602.44,4411, -4 Al., 4440,400. It - was the Committee of Experts in France which had indicated for France the only method of financial salvation after the debacle into which the country had been plunged by its politic- ofans. Although financial restoration in France could not be effected without for- eign aid, he did not believe fer-ermsbnrtfe that the Government of France should appeal for this foreign aid until it was able to appear before the world with a sound, well worked out program of reform. formation. Such a program, he believed, was in the process of The PoincareGovernment had ia,Pev44 notwithstanding the declarations which had preceded its entry into office, accepted6ceixperts' report 01:,z1; except two of its provisions. Those two provisions were, first, the ratification of the debts, and second, the appeal for foreign credits. (Prof. Jeze had already indicated that in his opinion the attitude of the Prime Minister had fundamentally changed in recent weeks on the question of foreign credits). Governor Strong then raised the problem of the floating debt, stating that he believed that it presented a very serious menace to any stabilization program. Prof.the floating debt might have been put out of danger. Jeze, however, was inclined to believe that under the Caisse de Gestion, Friaao*.iertmettfertnetre-mftirrirmk... S MEMORANDUM BY R. B. WARREN August 31, 1926. DOLLAR BILLS IN PARIS MARKET Information sought for this memorandum was chiefly obtained from Mr. Llewellyn of Morgan Harjes & Company, and Mr. Berntsen of the Bankers Trust Co. Mr. Llewellyn said that there were very few dollar bills floating in the Paris market. The principal exports of France to the United States are manu- factured textiles, such as dresses, lingerie, millinery etc. The customers ef,i,,A the United States are for the most part either department stores or buyers representing groups of merchandising establishments. Principally, the exports of France to the United States arise out of purchases in Paris by representatives of department stores maintaining permanent offices in Paris or coming seasonally. It is a regular business between the manufacturers and their steady clients. For the most part, these are cash transactions, the buyer paying for his purchase II/ by direct payment into the account of the French seller in a New York bank; the latter draws against such an account for the sums which he wishes to return to France. Somewhat similar methods are followed by the buyers for the big New York department stores, which maintain permanent offices in Paris and make direct payments for their purchases. In this way, no bills arise in the market and there is no probability that the market will ever resort to bills for this kind of transaction. For other kinds of transactions, the market is of course under peculiar influences at the present time, owing to the unwillingness of French exporters to repatriate more of the proceeds of their exports than is absolutely necessary for the continuance of their business. Possibly over one-half and something less than three-fourths of the French exports to the United States are financed in this ( direct manner. page 2 ) Of the remainder, possibly half is financed through bills of exchange stated in francs, and the other half in dollar bills. These dollar bills, however, woe extremely rare andweilow very much prized by all of the French banks, for which reason they were accorded extremely favorable rates. They did not, however, float in the market, but arose always in connection with the regular established accounts of particular clients. Practically the only industry which financed its exports to the United States with the use of dollar bills was the walnut trade. In a conversation with Mr. Berntsen of the Bankers Trust, the latter said that, so far as he knew, there were no dollar bills in the Paris market. In his experience he had never seen such an instrument. From these conversations, it appears that there is only an insignificant quantity of dollar bills in the Paris market. 0 Furthermore, the character of the market is such that what few bills there are, are only likely to find their way into banks handling the general banking business of the exporter. No bank which was not prepared to engage in all forms of banking business in Paris could hope to secure the slightest fraction of this sort of business, for which it would have to depend solely upon its own clientele. No market in bills, whether drawn in dol- lars cr in francs, exists at the present time in Paris. There has never been in Paris a market in commercial bills. At the present time, the entire export business of the country has organized its efforts to avoid the repatriation of as much of its dollar and sterling balances as it can possibly retain outside the country. To a certain extent, there is no doubt that, with the stabilization of the currency, these peculiar features will pass and there is reason to expect that gradually there will develop in Paris an organized bill market. There is, however, no particular reason to believe that this market will ever include any considerable amount of dollar bills. 011/ Before the war, even export ( page 3 ) bills, I understand, were usually drawn in francs, but the permanent character of the export trade of France with the United States is such that it can be financed with perfect facility in exactly the way in which it is being financed now, and there is absolutely no reason to anticipate that, even after stabilization, it will change its methods into a form which would create any considerable number of dollar bills, nor that the dollar bills which might be created under certain circumstances would be sufficient in volume to justify the establishment of a financial institution designed to trade in such bills, unless this institution was prepared to supplement its activities in the bill market by engaging in every form of commercial banking. MEMORANDUM BY R. B. WARREN CONVERSATION OF SEPT. 1, 1926 ( page 2 ) them with cattle, providing them with seed, and in general equipping them for productive farm work. These refugees had come from Turkish Thrace, Grecian Thrace, Macedonia, and the Dobrudja. The conversations with Mr. Norman, arising out of the necessities and demands imposed by the Finance Section of the League of Nations, had necessitated the complete revision of the statutes governing the National Bank of Belgium. knew As Governor Strond, this Bank had been a State institution, all of its officials being nominees of the Government. Under the new charter, the directors would be representative of commerce and industry, only the Governor and the Vice Governors being appointed by the State. Governor Strong remarked that evidently the Governor was intended to hold the balance between the demands of commercial interest on the one side and the Treasury on the other, but that he had remarked in the case of other banks with similar constitutions that the tendency invariably was for the Government directcrs, even /thoughthW had been appointed by the State, more and more to incline towards supporting the position of the commercial,representatives on the Board, against the insistence of the Treasury. Governor Ivanoff said that one of the principal problems confronted by Bulgaria had been the prewar debt. An understanding had already been concluded with the holders of CO% of this debt, who were residents of England, Holland, Switzerland and France. These terms provided for payments at the rate of approx- imately 45% gold, beginning with April of 1927 and thereafter increasing year by year until finally the full interest and amortization in gold would be provided for. The remaining 20% was held throughout Central Europe and particularly in Germany. They had not been able to make the same terms with these holders, particularly the Germans, because of the financial arrangements which had arisen between Germany and Bulgaria during the war. German banks, including the Reichs- 410 bank, had during the war extended credit to theEulge.rianGovernment in the form of ( page 3 ) loans which had been accepted into the assets of the National Bank cf Bulgaria to the amount of about 900 million marks. some al- billion leva had been issued. Against these German securities, The decline in the mark had of course destroyed the entire value of the assets lying behind the Bulgarian currency. As a result of this transaction, the Bulgarian Government found itself unable to come tc the same terms with the German holders of its prewar securities as it had with the others. Nevertheless, they hoped that inasmuch as this re- mainder was only one-fifth of the total outstanding, some satisfactory arrangement could be reached. Such an arrangement might involve some sacrifice cf principle, but the Bulgarian Government was anxious to get the thing cleared up. The real object of Governor Ivanoff's visit, evidently, was tc acquaint Gov- ernor Strong with the desire of Bulgaria that a certain fraction of the proposed Refugee Loan should be floated in the New York market. They had been besieged by an infinite number of intermediaries offering to handle this transaction for them, flisome of them representing banks with whose names they were familiar, but many of them representing concerns about which they had no information. that it was extremely important that the first Bulgarian loan floated in the United States should be a signal success, because they hoped in the not distant future to bring out a number of other loans. For instance, their Mortgage Bank wished to float some securities in the United States, and the Government had projects under consideration with Ulen Company for railroad construction and irrigation. Governor Strong remarked that under such circumstances, it was of the first importance that the underwriting firm with whom they opened connections should be a house of extremely high standing, and a firm that would not so much be interested in making a profit on the deal as one that would be interested in securing a permanent client whose interests they would seriously take to heart. Governor Ivanofr said that their banking connections in New York at the pros411 ent time lay with the Guaranty Trust Company and the Irving-Columbia. They were ( page 4 ) uncertain, however, as to what houses they should approach for the proposed II/issue of bonds. Governor Strong said that the Guaranty Trust Company was of course perfectly capable of taking care of the issue, but if they wished another name, he would suggest that of Lee, Higginscn & Company. He reminded Governor Ivanoff that houses of high reputation were much more difficult to approach than houses of lesser standing, and that at first approach they might seem to be rather austere in their terms. However, such a connection would be worth -while, while one of any other sort, though possibly offering a seeming advantage at the moment, would in the long run be an undesirable connection. Governor Strong emphasized e American bankers and investment houses were interested in turning an ny, Governor Ivanoff could rest assured that never did any ulterior polit- e lie behind an American loan. nor Ivanoff said that he appreciated this fact and that for this reason ticularly interested iL forming strong banking connections in London and k. They were less desirous of forming connections in Berlin, because cf cal considerations that they would involve. He said that the Bulgarian had no interest at heart at the moment except the peace and economic the country, and that in this program he and the National Bank were pre- ive the Government their hearty support and cooperation. ced that this loan was extremely well secured. Personally, he In the first place, it the surveillance of the League of Nations. Second, the foundations of currm thoroughly laid in their conversations with Mr. Norman; and last, 41' evenues of the State were pledged to its interest and amortization. He felt justified, both from these facts and because of his personal assurupon nearly 30 years in banking, first with the State Agricultural Bank with one of the largest commercial banks in Bulgaria, in endorsing this conclusion, he said that he hoped that Governor Strong would give this fic revenues from alcohol, salt, matches will be paid into the custody of ner; specific revenues now exceed the service demanded. ( page 5 ) proposal to introduce a Bulgarian loan into the American market his friendly 11/ cooperation. Governor Strong first asked to be reassured as to the question of whether there were or were not any outstanding debt controversies between Bulgaria and the Government of the United States arising out of possible Relief Loans. Re- ceiving an assurance on this head, he agreed to take the matter under his favor- able consideration and told Governor Ivanoff that within a few days he expected to be in London, when he would be able to discuss the matter at greater length with Mr. Norman. In the course of these conversations, definite suggestions might de- velop as to the placing of such a loan in the United States, although of course the actual terms would have to be arranged by the issuing house. Governor Ivanoff must remember that, since this was to be the first Bulgarian loan in the United States, it would be necessary perhaps to offer rather attractive terms, but that these would be worth-while, because it was important that the first Bulgarian loan there should be an outstanding success. The conversation then ended with an expression of gratitude on the part of M. Ivanoff for the courtesy of Governor Strong in permitting this interview. Princess Hotel, Paris, September 6, 1926. Dear Ur. Harrison: You doute e3s have received the original of the enclosed letter from Dr. Schacht. I hope nothing is done about it until my return, except to make the necessary investigations, to find out something of the business and responsibility of Jerome B. Sullivan r Company, to get a copy of the advertisement and to ascertain, if possible, whether any subscriptions were actually received and what was done with them. We can talk it over on my re- turn. I have written Schacht as per enclosed copy. Sincerely yours, Mr. G. L. Harrison, c/o Federal Reserve Bank of New York, New York. BS:if Benk of England, London, September 9, 1926. PERSONAL AND CONFIDENTIAL Dear Mr. Jay: I wrote you by hand to Paris, fearing that I might not have opportunity to dictate a letter, as I shall be rather busy in London, so this will be simply an elaboration of what I wrote briefly yesterday. The situation with the Bank of France is briefly as follows. We have been over all of the essential principles of a program of stabilization, without actually devising a plan, as that would not be possible until the domestic situation has developed further, until the debts have been ratified, and until more progress has been made in dealing with the domestic floating debt. http://fraser.stlouisfed.org/ it is that, Federal Reserve Bank of St. Louis Besides hardly possible to consider specific terms of the plan without con- Mr. Pierre Jay. 2. September 9, 1926. changes which might occur between now and the date of negotiation, that it should be possible for the French Government to place a loan as large as 150 million dollars in the American market, and another 50 million dollars in Europe. I stated that this could not be done at the present time, but I would expect that it would be possible with the improved atmosphere which would develop following ratification and in connection with the announcement of such comprehensive and sound plan of stabilization as could be devised, based upon the principles which we have discussed. As to credits, I told him that I thought, between all of the banks of issue in the gold standard countries, it should be possible to arrange credits of 150 million dollars, and if the commercial banks of France could be brought into the arrangement in some way, so that credits might be arranged with commercial banks in other countries, this amount might be increased to 200 millions. I was hardly in favor of an attempt by the French Government to place a large loan of say 200 million dollars in gold standard countries and at the same time for the Government to arrange a large bank credit as well. It seemed to me there was a duplication there which would have the effect of curtailing commitments for undera writing/large Government loan, as so many of our banks were underwriters of these foreign loans and might hesitate to make that commitment at the same time that they wore extending the French Government credit. In a general way, therefore, I am encouraged to believe as a matter of opinion that, with all the circumstances favorable, a loan and credits in all the markets aggregating from 300 to 400 million dollars would not be impossible. In general, I advocated keeping the permanent long-time Government loan as small as possible and arranging for as largo bank credits as possible, as that was more economical. Bank credits could possibly be arranged for one y) ar with a one year Mr. Pierre Jay. 3. September 9, 1926. renewal provision, or for two years with a privilege of cancellation at the end of one year. It was made perfectly clear that no such engagement could be made by the Bank of France, except in contemplation of ultimate gold payment if Ho and were have a strong leaning toward using the German railway the credits had been used and othersnot cleaned up at maturity. bonds now in the hands of the Reparation Commission. them,(explaining that it was none of my business, so that I could only expres personal views,)but I thought it was a great mistake at this time. I did no tell them so, but this is the conclusion I have arrived at after a long discu sion with Gilbert, and very confidentially, he has explained his views very f to M. Poincare. Neither the officers of the Bank nor the Finance Minister a with either Gilbert or me at the present time, but I am satisfied they will b the time for stabilization arrives. Now as to Ital , the situation has taken a sudden turn. Volpi and Stringher discussed with me various features of a plan of stabilization, and phasized the need for a further study than they had yot made before they were ready to take the final step, and also cautioned them on the peril of underta a program until the French had dealt with their situation. This they fully preciated, but in the meantime they had gone ahead with certain preliminary s which havabeen publinhed in the paper and which impressed me as being in the tion of good progress. he needed to see me. Just before I left Paris, Mr. FUnrai telegraphed me t He came to Paris from Northern Italy for the purpose, there made clear that Volpi was getting ready to go ahead with the program an was anxious to know whether I would be in Europe and able to discuss it again He would not admit that he had been sent by Volpi, but I am satisfied that ho was. Mr. Mellon and I talked it over quite fully, and he was disposed to ri7Mr. Pierre Jay. September 9, 1926. recommend that I stay on, at least until after he had returned home, sized up the situation and was able to cable me as to the wisdom of remaining on for a further period, so as to continue talks with the Italians. But the cable from have the Bank which you/read le(' me to go ahead with my plane to return home on the lath, and I shall do so unless something important and unexpected develops between now and then. So far as I can gather, the Italians and French are noL at odds in their views on this subject. In general, Governor Moreau's view is that it would be helpful to France to have Italy and Belgium put through a plan, provided it was a success in each instance. all around. An attempt at a plan which failed would be injurious On the other hand, he saw no immediate chance for a plan of stabili- zation in France and therefore recognized of the other countries resulting from a possible further break in French exchange was considerable. My own feeling is that plans of stabilization undertaken by Belgium and Italy first would require much larger credits and more underwriting, so to speak, than if France put through a program first, as later, when France undertook a program of stabilization, their own character and temperament would lead them to make just as heavy demands for credit as though Italy and Belgium had not stabilized. Therefore, if economy in the magnitude of commitments is to be arranged, it should result from a French arrangement first and the others later. One disturbing thing in Italy is that there appears to be no evidence or intention so far to make the Bank of Italy as completely independent of Treasury control as I would like to pee it. They may set up a facade appearing like independence, but really the domination of the Finance Minister would remain unchanged. This needs further examination. If you discuss these matters with Volpi and Stringher, you will find Mr. Pierre Jay. 5. September 9, 1926. that they have magnificent ideas of the amount of credit required, oven going so far as to suggest another Government loan. That I believe to be a mistake. They have pretty large resources now, and What they need is probably a Government one or two year credit of impressive amount and then a central bank credit. In all three countries, the support and cooperation of private bankers is so important that I would like to see them in each instance brought into some consortium and committed to some program in a definite way, so that they would themselves lose money in case the program failed. Now, replying to your letter of August 27th, Which I was delighted to have. First, as to the In di ment ourselves, but thought that possibly I had no idea of a public stateor someone in the Treasury would be able to make use of a careful analysis of the report prepared by Sprague. I think the Bank should keep out of it. I never heard of Faller and presume he is an exeloiter of some kind. Your (3): I an glad the Board is not going to undertake the examination of State banks, but it is of academic interest to us, as I understand our examinations by the State Departments are all satisfactory to you. If the failure in Georgia and Florida was the result of some carelessness by the Atlanta Reserve Bank, it would justify the Board possibly in some action, but as none of them were member banks, I do not eee why there is any excitement about it. The Board seems to over- look that for years they made no examination of the Edge Law banks, as the law contemplates. (4) I will be on hand for the Conference in November, and my notion is to lay the foundation for any foreign transactions that may grow out of the plans now under way in &rope. That should be the principal business of the meeting, and I Mr. Pierre Jay. 940 September 9, 1926. have made sure that we can get Mr. Mellon's support. (5) After careful inquiry in regard to Carroll, I have made up my mind to see him in Washington when I go there, and of course I will have a talk with (Mason) Julian Mason, but I am surprised to learn that he/has gone with the"Evening Post" (6) It is interesting to note that when rates stiffen up in New York, the Now York City participation in the Stock Exchange loan account goes down and lending by others goes up. There is not rich that we can do about it, except deal collectively with credit as a whole, and forget that the Stock Exchange is a special subject of excitement. I hope you have a bully trip, and suspect that you cannot help but become involved in the discussions about stabilization. It is just as moll to get another direct line on the situation while we have the opportunity. Please give my best to Mrs. Jay, and the same to you. Sincerely yours, Mr. Pierre Jc.y, c/o Morgan, Marjo° & Company, 14, Place Vendome, PARIS. MEETING AT BANK OF ENGLAND - Sept. 14, 1926 at 11:15 a.m. Purpose: To consider Belgian matters. Present: Messrs. Norman, of the Bank of England Ter Meulen, of Hope & Company Du Bois, of the Swiss Banking Corporation Morrow, of J. P. Morgan & Co. Whigham, of Morgan Grenfell & Co. Peacock and Arthur Villiers of Baring Brothers Brown, of the Westminster Bank Strong, of the Federal Reserve Bank of New York. Osborne, of the Bank of England Before I joined the meeting, Governor Norman outlined the present situation of the negotiations with Belgium, which I did not hear but which he stated to me covered the situation generally without more than a passing reference to the subject of the bank of issue. Ter Meulen, who is most conservative anyway, then expressed some doubt about financing a bond issue, because of the way in which Francqui had handled the mil- e road preferred stock. Two hundred millions had been sold to Nederlandsche Handel maat s chappy they being close competitors of Hope & Company. The sale was made without consult- ing Ter Meulen at all, notwithstanding that Hope & Company had been the Belgian bankers in Holland for years and that his firm had stood by them through recent difficulties. He thought Francqui had recently disclosed some characteristics which he did not like and which shook his confidence in him. So far as he could gather from a telegram received yesterday, the offering in Holland had been unsuccessful, the market understanding that only 50 million francs out of the 200 millions had been subscribed. He felt that when some 4 billion francs of the pre- ferred stock was delivered to the holders of Bons de la Defense Nationale in completing the consolidation transaction some time in December, there would be very large offerings of them and that their price might decline even as low as 94 or below and not only affect the price of the stock sold in Holland and Switzerland 4110 but make it difficult to successfully place a straight Government loan. He ( page 2 ) thought the railroad preferred stock with a bf dividend guaranteed by the Government was a somewhat better security than a straight Government obligation anyway. His first attitude was rather gloomy. Du Bois of the Swiss Banking Corporation spoke quite differently. He said that the 200 million francs of railroad preferred stock had been successfully placed in Switzerland; in fact, they had sold 230 million francs, and the money was all on deposit there to the credit of the Belgian Government or the National Bank for its account. He thought the railroad shares were good and was hopeful as to their future market value. He distinguished between the stock issued on the consolidation and that which was sold through the bankers in Switzerland and Holland, as the latter was list -A and the former was not. Du Bois said that he would join in handling a loan for the Belgian Government and a credit, but he agreed that it would be better, as had been suggested to him, to reduce the amount of the loan and consequently the fixed external charges 411 of the Belgian Government, and make up the difference by a banking credit to the Belgian Government. His only regret about the railroad transaction was that the actual properties of the railroad company were not transferred to the public corporation, instead of transferring their use under a lease for 75 years. thought the former would be a better plan. He He said very positively that he be- lieved Belgium would be strong enough with this transaction arranged to stand up in the face o a collapse of the French franc, and that if they did not put through a stabilization plan now and France should have a collapse, the opportunity to stabilize would be lost for a long time. He said there werelarge amounts of Belgian expatriated funds ready to return immediately that stabilization became effective. He wound up by stating that he had no doubt that when matters had progressed and Ter Meulen had satisfied himself of his doubts he would be glad to go along with Hope & Co. to handle the business, to which Ter Meulen did 41/ not dissent, although he laughed. ( page 3 ) There was then some general discussion in regard to the renewal of the existing credit, of which $15,000,000 was still unliquidated and whiel falls due the end of September. It was generally understood that those present who were interested would renew for 3 months with a commission of %. instead of The last commission of t 5 was made so small because the previous one was regarded as too heavy. Governor Norman and M. Du Bois then discussed at some length the question of the farm of the loan and the credit, and the amount, and they both agreed and the others seemed to assent, that it was preferable to keep the Government loan as small as would be justified considering the amount of actual reserves required by the National Bank. The indication was that the reserve should be approaching or in the neighborhood of 50g,which would mean substantially 70 millions cash from the loan that would be a definite completed transaction. The balance of the amount, whatever was finally decided, would be in the form of a banking credit to the uovernment running for a short period, which would be used in the event of emergency but which would not involve a long permanent external fixed charge on the Treasury. They seemed to think that the bonds would be improved marketwise if the bondholders were given the right to convert the bonds into the preferred stock of the railway company. It would not hurt the bonds and might give them some speculative value, and it would not appear to the Belgian people as collat- eral security. Mr. Morrow stated that his firm would be much embarrassed by any discussion of collateral or security for the new Government lcan, and he would prefer not to consider it. Governor Norman stated that it was his understanding from the London bankers with whom he had been in touch that they would not be willing to place a Govern- nd arrange Government credits unless at the same time the banks of is- rrange a credit for the National Bank of Belgium, as they realized the ( page 4 ) Without expanding this subject, he said that he importance of this support. and others with whom he had discussed the matter felt that Francqui's plan of an intermediate period of "de facto" stabilization and the arrangement of a Bank credit later when he was ready to undertake "de jure" stabilization, was not satisfactory; that once the loans and credits were arranged, the issue made and the plan completed and announced,"de jure" stabilization on the plan and at the rate agreed should become effective at once; and he then raised the question as to what should be said to Francqui, where he should be seen, and when it could be arranged. There was considerable discussion of the possibility of disclosure of the meeting in case anyone went to Belgium, and even greater possibility in case Francqui came to London. That subject was thoroughly threshed out and it was finally arranged that Messrs. Per Meulen and Du Bois would meet Mr. Dean Jay in Paris Thursday morning for breakfast, that Francqui should be invited to be 410 in Paris Thursday morning for a meeting and the position of the bankers made clear to him. The question was raised as to what he should be told, and Mr. Peacock suggested that there were 3 things to say to him: (1) That there would be no loans or credits arranged by the bankers for the purpose of stabilization unless the central banks were satisfied to extend a credit also to the National Bank; (2) That the amount of the long-time loan should be kept as small as possible to meet the requirements of the National Bank for reserve,and that any addi- tional amount should be in the form of credits to the Government for a period so as to avoid heavy fareign debt service; (3) That "de jure" stabilization should take place at once that the plan was worked out and effective. The total amount of the loan and credit by the bankers was not discussed 411 except by implication from the fact that Francqui had asked for 100 million. ( page 5 ) It was suggested that not less than 70 millions cash would give the Bank with its present resources a 507 reserve against its notes. Someone raised the ques- tion as to why a 505 reserve was necessary, whereupon M. Du Bois stated again that there were very large amounts of Belgian balances in foreign countries ready to return the minute stabilization was accomplished. Mr. Peacock, Mr. Morrow and others raised the question as to whether this would not force an inflation upon Belgium. I pointed out that for every t28,000,000 of gold or valuta re- turning to Belgium there would almost certainly be a ccrresponding increase in the note issue of the National Bank of a billion francs, unless the Bank were capable of otherwise contracting the note issue. Governor Norman pointed out to Ter Meulen that this was exactly what had happened in every country where they had prcceeded with a plan of stabilization under the auspices of the League of Nations, which Ter Meulen admitted. There was quite a bit of discussion of policy and management after the plan was made effective. return of funds; Du Bois stated that he was thinking a good deal about this he was satisfied that unless they would have an actual "de jure " stabilization, ho did not want to handle the loan, but if they did, he was ccnfident that it would weather any storm caused by difficulties in France. There was some discussion as tc the reasons for the intimate relation in the movements of the French and Belgian francs. Francqui explained it to Ter Meulen as being caused by the fact that al]. the Belgian press was dominated by the French press and when anything went wrong in France, Belgium was flooded with bad news. I repeated the explanation given to me by Bachmann at the Swiss National Bank as being partly responsible. Down tc this point, I made no statement whatever of the attitude of the Federal Reserve Bank, but just at the conclusion of the meeting made, in substance, the following statement:' M. Francqui had asked us for no credit as yet, although we had learned through ( page 6 ) other channels that he had mentioned the possibility of it at a later date. At this meeting it had developed that the bankers would require as a "sine qua non" of any loan operation that a credit should be extended to the National Bank by other banks of issue, in order that they might gain the moral support thereby afforded and assurance as to the direction, management, policy, continuity and independence of the National Bank. My own position was briefly as follows: The Federal Reserve Bank at the time of the earlier effort at stabilization had taken a sympathetic attitude and in fact had at that time undertaken, if called upon, to furnish 115,000,000 or thereabouts. Since then changes had taken place in the Belgian situation which made this a more favorable opportunity for stabilization than was the case six months or more ago. If the transactions discussed by the bankers were for the purpose of enabling the National Bank to stabilize the currency at a new value and to redeem it at once or ultimately in gold, obviously any such program required for its successful execution a very skillful management of the credit and monetary position in Belgium, without interference from the Government if it was to be successful. The entrusting of such a program to changing Finance Ministers would, in my opinion, be perillous. If the National Bank were to be entrusted with the program and it was a "sine qua non" that we should extend credits to the National Bank before loans could be made, I would, before willing to recommend such credits, wish to know about the condition of the Bank, what M. Francqui proposed in the way of reorganization, what effect the plan of stabiliza- tion would have upon the statement and affairs of the Bank, and what he contemplated in the matter of management and direction. Therefore, I was unable without more information and without consultation to make any statement as to what we would do. We had originally been sympathetic and in fact had endeavored to assist in the plan of stabilization to Belgium, and I felt it was safe to assume that my associates at home had had no change of mind in that respect, but that we would only be willing to consider the matter this time upon a thoroughly sound basis. ( page 7 ) They all seemed to agree that this was essential, and it was in fact the object of the particular statement that they were proposing to make to M. Francqui. There were repeated statements throuelout the meeting raising doubt as to the possible inflation involved in his proposal for a further issue of a billion francs of currency. They all had it in mind, but none of them seemed to have any suggestions or solution of the problem to offer. They were merely aware of the fact that Francqui had repeatedly stated that Belgium did not have an adequate supply of currency now. The impression I gained from the meeting is that they are all ready to go ahead with the program, that they none of them feel very intimately acquainted with the problems of central banking credit manlgement, that they are most anxious that that matter should be dealt with by people in whom they have confidence, and as soon as they feel that it is so to be dealt 4 with, they are pretty confident of a successful operation.