Full text of Papers of Benjamin Strong, Jr. : Correspondence with the Federal Reserve Bank of New York : Correspondence related to the Chicago Rate Controversy, 1927

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

'/// ///.
C?

/eLt)

)a_

>e,647(_

1964.1,

ideet e

t.010

/0/
7/6(2

A16.t6z

/./
5'rc

A,d-

erz eto
z/L__

4-1

)z/Le

eze,e7t)

///9-2,7

dd"Jta-7z/

eZlz-Q fav

0-1-1 ;
741 e/LI/e-.4.7c)

I 4-

eou-7)t,,

ece-4,i,i

7*E

0.-,6., 42:

A14.1-

3
-6--/

/117

7/a7/ /f '-7
W-4 1

tc'`.

10;e 'LOto7IN,7

:4Azee ecte6e,
e_k
7,zo - z 3
4 .4
ZAL2iLp

,4)

gleMoleRvFalee7 ,19774,-

7-0rk c/i/c/9p,(7/27-e,
em,iiCove0Y
91/2/1/qZ 7

THE CHICAGO RATE CONTROVERSY

This memorandum is prepared solely for the use of Mr. J. S. Alexandel
New York member of the Federal Advisory Council

to aid in the discussion oi

the above matter at the Council meeting to be held in Washington on September 16,
1927.

This statement and the documents attached are confidential, not to be

published, entered in any record of the meeting, nor distributed to the members.
Mr. Alexander will use his own discretion in making references to or reading
from the papers.

The discussion will be confusing unless care is exercised to separate
the three very distinct questions involved, to wit
1st.

The merits of the policy of lower discount rates.

2nd.

The general method employed to adopt a system policy of lower rates.

ord.

The particular method employed in the case of Chicago.

But before discussing these questions it is necessary to refer to
some erroneous current reports as to the motives which may have actuated the
Federal Reserve Bank of New York.

Those which have currency are mainly, -

To aid the Treasury's program for the 15th September financing.
To aid the Bank of England.
To support stock speculation.
As to (a).

When Mr. Mellon first took office in March, 1921, he

held the view that our rates were too high and might be reduced.

He was

probably right

but never urged that view.

early in 1921.

From that time to the present neither he nor his assistants

It was discussed more than once

have ever urged, requested, or suggested any change of rate, or any policy as
to open market operations.

We have always considered it our duty as Fiscal

- 2 -

Agents to keep the Treasury fully informed as to our policy and have done so.

It has always been initiated free of Treasury suggestion or influence, and
we have never proposed or volunteered policies beneficial to Treasury financing which were not based upon sound consideration of Federal Reserve policy.

At the time of the July 27 meeting of the Open Market Committee, when a
change was to be proposed, the matter was reported to Mr. Mills, then Acting
Secretary in Mr. Mellon's absence, but he refrained from advice even, and
said that he would observe the policy of not interfering with any Treasury

He attended the meeting in Mr. Mellon's absence, and when

consideration.

asked by me if he cared to discuss the subject of rates and opegiarket policy,

he declined on the ground that the Treasury should not attempt to influence
the decision.

So far as the Federal Reserve Bank of New York is aware, the

Treasury under Mr. Mellon has scrupulously pursued this policy of non-interference.

As to (b).

The relations between the Federal Reserve Bank of New

York and the Bank of England are little understood and frequently misrepresented.

It has been our purpose and policy, so far as might be possible

consistent with our own position, to aid in the resumption of stable monetary

conditions, stable exchanges, and the reestablishment of the gold standard
in Europe.

We believe that this policy is sound and not only aids in the

restoration of world trade and prosperity, but particularly in the preservation of our own markets abroad, and full employment and prosperity at home.

There has never been any obligation, express or implied, to aid the Bank of
England. or any foreign bank of issue when such aid is incompatible with our
domestic welfare.

Any suggestion to the contrary must be based upon ignorance

- 2 -

Agents to keep the Treasury fully informed as to our policy and have done so.

He attended the meeting in Mr. Mellon's absence, and when

consideration.

asked by me if he cared to discuss the subject of rates and opexnarket policy,

he declined on the ground that the Treasury should not attempt to influence
the decision.

So far as the Federal Reserve Bank of New York is aware, the

Treasury under Mr. Mellon has scrupulously pursued this policy of non-interference.
As to (b).

The relations between the Federal Reserve Bank of New

York and the Bank of England are little understood and frequently misrepresented.

It has been our purpose and policy, so far as might be possible

consistent with our own position, to aid in the resumption of stable monetary

conditions, stable exchanges, and the reestablishment of the gold standard
in Europe.

We believe that this policy is sound and not only aids in the

restoration of world trade and prosperity, but particularly in the preservation of our own markets abroad, and full employment and prosperity at home.

There has never been any obligation, express or implied, to aid the Bank of
England or any foreign bank of issue when such aid is incompatible with our
domestic welfare.

Any suggestion to the contrary must be based upon ignorance

of the facts as to our relations to Europe, especially to London, in monetary
and credit matters.

But since 1924 and 1925 it has been in the power of the Federal

heserve Bank of New York at any time, by rate advances and by a dear money
policy - to break down this very structure of stability we have been striving
to erect.

Withdrawal of foreign balances by American banks, closing our

markets to foreign loans, causing large exports of gold to New York, and
forcing dangerously high bank rates in Europe, could easily destroy all that
has been accomplished.

The penalty for us would be a recurrence of dis-

ordered exchange, and. a. loss of our export trade - no less in food stuffs and

cotton than in manufactured goods.

Europe and the Bank of England are de-

pendent upon us - not we upon them - and unless we recognize that fact and
avoid a hostile or destructive policy we shall suffer consequences about as
serious as those we could inflict.
As to (c).

It is hardly necessary to refute a charge that we aim

to promote speculation or protect the speculator.

But I have no hesitation

in expressing some views on this puzzling complication in our situation.
There is no doubt that the liquidation of 1920 and 1921 and the deprecia.tei

value of the dollar still remaining after liquidation was concluded, left both
fixed interest and equity investments below their real values, considering
the still reduced purchasing power of the dollar, that is, gold, and considering also the generally lower level of interest rates prevailing.

During the

past few years a gradual, and latterly a rapid, readjustment of these values
has been under way.

It has been much accelerated by the enormous savings

of the country, producing an unsatisfied demand for investments, urgently

- 4 --

reinforced by the release of from $500,000,000 to a billion dollars of funds
each recent year for reinvestment, due to the repayment of the Government
war loans.

The same development occurred to a less extent in the real estate

and building boom which reached its climax last year.

These readjustments

were bound to take place and to be largely financed by borrowings.

Fixed

interest investments have now greatly advanced and become more nearly stabilized; but speculation as was to be expected, has been centered upon common
stocks, although recently both the rate of advance of prices and of growth of
loans have been somewhat reduced.

The real question is whether we should

ignore all other objectives of policy and direct our efforts solely to checking stock speculation.

If so, we have the choice either of high rates or of

some form of direct aggressive action.

It is our opinion that either course

would involve policies which could not be supported on the ground of our
primary responsibility, which is not the stock market, and if successful in
reducing the speculation would have had other consequences, as above and later
suggested - too grave to face.

The Federal Reserve System was no more organ-

ized to regulate the prices of stocks than it was to regulate the price of
cotton or real estate or pig iron or wagees or rents.

And during most of

these last two years, there has been no commodity speculation and the price
level has declined.

One great peril to the Federal heserve System is the assumptio n,

by the System, or by the public, that it can manage or regulate or in some
way control these isolated and special movements, such as speculation in
stocks or real estate, or advances or declines in prices of individual commodities.

The demand that we should curb stock speculation is one manifesta-

tion of this tendency.

Once we submit to this demand, we must submit to all

- 5 -

The pending bill attempting

others and our responsibilities will crush us.

to charge us with the duty of price control is no less an evidence of this
tendency.
As to 1st.

Merits of the Rate Change.

The justification of our policy is to be found in four or five
simple facts.

One is that we are dependent upon Europe for a market for

our marginal production of export goods, mainly cotton, automobile, wheat,
meats, oils, and copper.

Another that we shall lose that market if monetary disorder, exchange
troubles, high interest rates and price declines abroad force liquidatio n there.
A third is that we cannot sell our surplus abroad during these years of recovery without extending credit.

A fourth is that Europe already has heavy obligations to meet in the United
States for war loan payments and the service of private loans, no less in
fact than a billion dollars a year.

And finally, that a restrictive credit policy will force gold shipments to
this country in default of other means of payment.
Let us briefly examine these facts.
cotton, the most important export we have.

The first is illustrated by
Last year we grew our largest

crop on record, 18,000,000 bales, of which we exported

11,000,000 bales,

within two million and a half of this year's total estimated crop,-and onehalf of our exports went to England.

Had the world not been able to borrow

about one and one-quarter billion dollars here that year, we could not have
sold all that cotton.

This applies equally to thd meat animals, which

consume the corn crop, and automobiles and other export goods, upon which
the Chicago district largely depends for its prosperity.

No discussion of the adverse influence of monetary disorder upon inter-

national trade is necessary before a meeting of bankers.
the world has expressed a unanimous opinion.

On that subject

A depreciation in the values

of Europe's currencies after the good progress made toward stability would
mean a brief period of artificially stimulated exports by Europe, Curtailment of our exports and then collapse - and world wide alarm.
The need for credit aid to Europe during reconstruction is shown
by simple facts.

In the last few years we have loaned over $5,000,000,000.

net abroad, and during that period have had no net exports of gold.

The

only way the borrowed dollars could be used was to spend them in buying
American goods.

So except for the balances left with our banks, all this

borrowed money has been used to pay for our goods.

Had we not loaned it

the goods would have been unsold., unless they had been paid for in gold.

We have maintained a lending market at reasonable rates and kept our trade
going and our people employed.

The liquidation of war obligations to our Government and meeting
service of loans privately held calls for gross payments of about a billion
dollars a year, - less what applies to securities repurchased by foreign
investors, - some fraction of the whole.

Pending the gradual restoration of

trade, elevation of living standards, increased capacity to consume and increased exports by Europe, these payments are now possible only by borrowing,
mainly in the United States.

That is feasible only if rate relationships

here and abroad are such as to make borrowings not only possible, but not so
costly as to impoverish the debtors.

In time the adjustments of production

and trade and of services to be paid for - or possibly even readjustments of
debts, will enable these payments to be made without unsupportable strain on

central bank reserves.

But in these years of recovery our credit is not only

needed but essential, and undue curtailment means a stoppage of payment and
disaster.

Finally, if credit is restricted in the United States and other means
of payment for new goods and old debts fall, we shall be paid in gold to the
extent gold can be spared.

So far we have succeeded in avoiding a perilous

gold inflation, and we can probably continue to do so if we are fairly liberal
as well as careful in lending.

Once we stop we will drain Europe of large

amounts of her gold, inflation here will be unavoidable and we shall then face
another period of worldwide monetary disorder

Europe drained of gold, we

glutted with it.

There are decided advantages to be gained other than those relating
to our trade, by deferring the test as to whether war debts can be met without
break down of monetary systems.

The Dawes plan has 80 far proved to be a

success, but it must be ranembered that the entire payment so far made by
Germany has been borrowed abroad, mostly here, and even 25 per cent or more
in excess of these payments.

The fourth annuity year just commenced will

likely impose no strain which cannot be met.

In the fifth year commencing

September, 1928, the full payment of $625,000,000 is to be made, and then the
test will arise.
to pay us.

If Germany cannot pay her creditors, they may not be able

The plan provides means for certain capital payments which can

be employed to ameliorate the burden.

Political considerations indicate

that an adjustment of that character will be unlikely until the German, French,
and American elections, all occurring in 1928, are out of the way.

So a policy

which maintains the present equilibrium in the meantime is justified on that
account as well.

- 8 -

It will naturally be asked

what relation has all this to the

Chicago (which also applies to the Philadelphia and San Francisco) discount
rate.

The answer is in New York money rates and their relation mainly to

London rates.

With the Chicago rate at 4 per cent., and New York at 3 1/2, we
can expect and believe we now observe three tendencies.
let.

Bank balances carried in New York tend to move to higher rate

districts.
2nd.

Interior banks (and other borrowers also) tend to increase borrow-

ings in New York, where rates have now somewhat cheapened.
3rd.

Money employed in Stock Exchange loans at 3 1/2 per cent tends to

be drawn home to the interior - especially by member banks, which at this
season need to borrow from the Reserve Bank.

This all tends to accentuate the usual seasonal demand on New York
banks, impairs their reserves, forces larger borrowing from us, and may cause
higher rates for money than can be continued without forcing advances in discount rates abroad.

The operation of these tendencies is illustrated in the

following chart and table:

The chart on reserves indicates that the Second

District lost 188 million dollars to other districts between July 1 and
September 7.

I1ILLION5o1POLLAR5

1200

1150

1100

1927
1050

1000
1926

950
900
29

JULY

2,4

5EPT.

AUG-.

Gold Reserves, Federal Reserve Bank of New York.
RATE

4 Y2

3/2

1927

JULY

20
AUG-.
13

Average Call Money Rate

SEPT.

(Renewal).

Loans to Brokers and Dealers - Secured by Stocks and Bonds

(000 Omitted)

For
Own
Account

1927

July

Aug.

13
20
27
3

10
17
24
31

Sept.

1926
7
July
14
21
28

Aug.

4
11
18

25
Sept.

1
8

For
Account
out-of

For
Account

town
Banks

of
Others

Total

41,105,949
991,498
981,769
1,047,608
1,109,556
1,063,670
1,022,037
1,000,961
1,045,669
1,046,074

41,155,799
1,204,315
1,202,644
1,187,441
1,189,518
1,216,369
1,248,136
1,246,848
1,222,914
1,236,325

4864,579
863,466
874,561
906,144
872,771
910,290
918,796
920,265
915,475
921,900

;3,126,327
3,059,279
3,058,974
3,141,193
3,171,845
3,190,329
188,969
3,
074
3,184,058
3,206,299

1,019,298
932,813
954,368
933,881
994,572
936,741
918,775
941,544
991,437
963,901

951,852
1,016,148
1,018,361
1,014,859
1,024,766
1,089,093
1,104,676
1,072,654
1,098,091
1,134,421

631,638
652,296
648,223
653,302
669,379
692,498
718,937
717,012
668,746
664,707

2,602,788
2,601,257
2,620,952
2,602,042
2,688,717
2,718,332
2,742,388
2,731,210
2,758,274
2,763,029

--.,.....

Discussions with the officers of at least five or six European
central banks, as well as our own observations, convince us that the importance
of the relative rate level between New York and London and some of the continental money centers, is greater than is generally understood.

For some

months after we advanced our rate to 4 per cent, thus reducing the differential to roughly 1/2 per cent, sterling and continental exchange rates were
maintained above their gold export points.
loans to foreign borrowers.

This was largely due to our

Early this year, however, an unseasonable

drain upon European reserves started, and so far this year we have imported
net about $145,000,000 of gold.

As the season of active exports of American
that

food products and cotton approached it appeared/very much larger imports of
gold were likely.

We learned that the heads of two important continental

banks of issue were consulting the Bank of England regarding a policy of
rate advances by all three on that account.

Our rate reduction at least

deferred and possibly prevented general advances abroad.
Something of the influence of our rate reduction may be seen in the
strength of sterling this August and September compared with a year ago.

The

average monthly rates have been as follows:

1926

1927

July

4.8589

4.8518

August

4.8540

4.8563

September (1-10)

4.8514

4.8574

If the drain on New York from other parts of the country causes such
advances as to much reduce the present differential of 1 per cent between New

York and London money rates, we will either be forced to buy large amounts of

- 12 -

securities in New York so as to reduce rates, or take in more of Europels gold
- until finally they are forced to advance discount rates.

Our policy would

then fail.

It must not be understood that the Chicago rate is itself fatal to
our policy.

We could adjust our plans to meet a 4 per cent rate there.

But

it will be easier now that they have reduced.

Evidence was and is still accumulating that there is some slowing
down of business in certain lines, notably iron and steel and automobiles, beyond the usual seasonal recession.

This is usually a condition in which rate

reductions can do no harm and may be helpful.

A reduction of our seasonal

exports would greatly accelerate a business recession.

Finally, we have a great advantage in our 3 1/2 per cent rate in case
an advance later becomes necessary.

Marking up rates from a 4 per cent starting

point would be much more dangerous than if we start from the 3 1/2 per cent level.
As to 2nd.

The Method Employed to Ado -t

a S stem Polic of Lower Rates.

This will involve narrating the events of the last few months.

On May 9 a meeting of the Open Market Investment Committee was held in
Washington, at which the whole situation was reviewed, and it was decided to pur-

chase, as need appeared, not over $100,000,000 of securities, the program to
terminate August 1.

We have rarely held a meeting where discussion and exchange

of views was more complete and it fully covered the European problem.

The situa-

tion was also set out in writing, and the statement has been sent to all Reserve
Banks and the Federal Reserve Board.
Between June 28

and July

20 we had meetings in New York with Governor

Norman of the Bank of England, Dr. Schacht of the Reichsbank, and Dr. Rist and
Monsieur Ricard of the Bank of France, and reviewed the entire situation with

- 13 -

them.

Governor Crissinger and all the members of the Open Market Investment

Committee spent a day in New York with these gentlemen, and discussed the
situation fully.

Governor McDougal heard all of the discussion, took part

in it, and then reviewed it separately with the officers of the Federal

Reserve Bank of New York, even to point of himself suggesting that Governor
Strong or Mr. Harrison go to Chicago to discuss the whole matter with his
directors.

The gentlemen from abroad met our directors, individually and at
meetings, and our directors heard all aspects of the problem discussed.

They

spent a day, July 7, in Washington and discussed the situation with members
All those responsible were called into con-

of the Federal Reserve Board.

ference, given opportunity to ask questions, and all questions asked were
.

freely answered by our visitors.
Finally, as our authorization to make open market purchases was ex-

piring on August 1, a meeting of the committee was held in Washington, all
being present, on July 27.

In addition the Governors of the Federal Reserve

Banks of Kansas City, St. Louis, and Minneapolis attended, and the Chairman
from St. Louis.

Again a written memorandum was submitted, and a discussion

lasting all day covered the entire subject.

No more complete or enlightening

exchange of views could have been possible.

The position of the Federal -Reserve

Bank of New York was briefly as follows:

We were convinced that the time was

at hand when we should reduce our rate to 3 1/2 per cent.

We felt that to

make the reduction effective we might need to purchase additional securities,
say $50,000,000.
reserve.

We invited those present to discuss our rate proposal without

We did not suggest that other banks should reduce their rates.

Governor Crissinger, supported by other members of the Board, did suggest that

- 14the change should first be made in the Middle West.

We stated that it was

not material to us who reduced first - nor even essential that all should
We felt it would be most helpful and was 22spibly necessary, for

reduce.

some other reductions to be made - especially Boston, Philadelphia, Cleveland,
and Chicago.

We would wait, or reduce first, as might be agreed.

The meeting was unanimous as to a reduction in New York.

Governor

McDougal said his directors would not then be in favor of a rate reduction in
Chicago and certainly would not take the lead, though they might follow if
conditions changed.

Some of the other governors expressed the view that

local conditions alone did not then justify lower rates, but that as a matter
of general system policy they favored a reduction.

Still others favored

reduction in their banks on both grounds.

When Governor Crissinger and the members of the Open Market Committee
were in New York, Governor Crissinger suggested that he and I should visit
Cleveland and Chicago for the purpose of meeting the directors of those two
banks and explaining the situation personally.

He raised the question again

either by telephone or when I was next in Washington.

I thought it over,

consulted my associates here, and decided that it would be unwise for me to

appear before the directors of any other Reserve Bank for the purpose of
discussing a rate change by that bank, and accordingly wrote Governor Crissinger,
copy of my letter on that subject being among those accompanying this memorandum.

Over three months has been devoted to these meetings

and no

change of

policy by the System has ever been canvassed more thoroughly than was this one.
For convenience of reference a chronology of the discussions is inserted here.

- 15 -

Chronology of Events Leading to Rate Reductions

May 9, a meeting of the Open Market Investment Committee was held in
Washington at which a memorandum was submitted discussing this whole situation, and this resulted in the authorization of purchases of $100,000,000

Government securities in the open market, of which, however, only about
$30,000,000 were purchased.

June 28, Dr. Rist and M. Bicard of the Bank of France arrived in New
York, having come for the purpose of discussing the whole central bank problem and the relations between the European and American money markets.
ITIgl:jo Governor Norman of the Bank of England and Dr. Schacht of the

Reichsbank arrived in New York for the same purpose.

of these gentlemen continuous discussion took place

Following the arrival
813

we immediately left

New York and spent five or six days at a private house on Long Island.

Lily-A,

Messrs. Norman, Schacht, hist, Ricard and Strong went to

Washington and spent most of July 7 in discussion with the members of the
Federal Reserve Board, lunching with them at the Hotel Willard.

July 1,

the members of the Open Market Committee, Messrs. Harding, Norris,

Fancher, McDougal and Strong, together with Governor Crissinger, spent the day
in New York, most of it devoted to a discussion of these same subjects with
Messrs. Norman, Schacht and Riet.

Thereafter the visitors from abroad left

on different dates, the last, Governor NormEn, sailing on July 20.
,July

Li,

a meeting of the Open Ma ket Iyestment Committee was held in

/WI--

lit

Washington for the purpose of reviewi g theAsituation, especially in the light

i-J0
'

of the meetings previously held, andA ecause the authority to purchase securi-

ties up to 000,000,000 was expiring on August 1.

In addition to all the

members of the Open Market Investment Committee and the members of the Federal

- 16 -

Reserve Board then in Washington (Dr. Miller and Mr. Cunningham were away)
there were present Governors Young of Minneapolis, Biggs of St. Louis,

Mr. Martin, chairmanof the Federal Reserve Bank of St. Louis, and Dr: Burgess
of the Federal Reserve Bank of New York.

Governor Bailey was in Washington

the day previous when Governor Strong was also there, in order to discuss the
situation with the Federal Reserve Board, and left at once for Kansas City as
his meeting occurred the following day and he had to return in order to lay
the matter before his directors.

At this meeting of the Open Market In-

vestment Committee a memorandum was submitted similar to the one submitted
at the meeting of May 9.

Following this discussion, on July 29, the Federal Reserve Bank of
Kansas City reduced its rate to 3 1/2 per cent.

A few days later the Federal

Reserve Bank of Boston reduced its rate, requesting the Federal Reserve Board
to make the announcement simultaneously with the announcement of the rate reduction in New York when that occurred.

On August 5, the Federal Reserve Bank of New York reduced its rate
to 3 1/2 per cent, and that reduction, together with the Boston rate was
announced on the same day.,
The other changes were made in the following order:
Cleveland, August 6
Dallas,

Atlanta,

Richmond,

On September 7, two meeting days having elapsed in Chicago, the
Federal Reserve Board reduced the Chicago rate to 3 1/2 per cent and announced
it.

On September 8, Philadelphia reduced.

4142Q-

- 17 -

On September 10, San Francisco reduced.
September 9 and

10, Governor Strong was in Washington on other

matters having to do with the Treasury Department, his visit there having
been arranged by Mr. Parker Gilbert prior to the action by the Federal

Reserve Board in reducing the Chicago rate, and his visit there was not a
result of the Board's action or in any way related to it.
September 12 Minneapolis reduced.
As to 3rd.

The particular method emIoyed in the case of Chicago.

There may be little gained by discussing the meaning of the law
as to rate changes.

I have never been willing

At best it is indefinite.

to believe that Congress intended the Federal Reserve Board to initiate
rate changes.

But on the other hand no formula appears for cases where

changes having been disapproved, a new rate must be fixed, or where a new
It

rate can be fixed, if an existing rate is not changed by the directors.

does seem, however, that Congress would hardly have required the vote of five
out of seven members of the Board to fix rates for rediscounts between Reserve
Banks, an infrequent and relatively unimportant occurrence, and then give unlimited authority to initiate changes of discount rate, our most important
act, by vote of a majority only.

This has been a matter of controversy from the start.

Early in

1915 the Governor of the Minneapolis Reserve Bank, by order of his directors,

reported to a meeting of the Governors that the Federal Reserve Board had
attempted to force a reduction in their rate.

The Governors passed a resolu-

tion unanimously protesting, and suggested testing the question in the courts.
This never became necessary, but I was told that an opinion, possibly informal,
was asked of the then Attorney General who did
I have never had

confirmed

not

sustain the Board.

nor has such an opinion even been published.

This

- 18 -

In 1919, for practically the entire year, and with increasing
insistence in the autumn, the Federal Reserve Bank of New York advised and
urged rate advances.
right

The Board never approved our doing SD, clearly their

but then also the opinion of the Attorney General was asked and Acting

Attorney General King wrote an opinion upholding the Board's present contention that they could initiate a change.
In 1915, the Federal Reserve Bank of New York obtained an opinion

from John G. Johnson of Philadelphia, who, as I recall, held that the Board
could not initiate a change but could determine a rate different from one
established by a bank and sent to the Board for review.
In 1920, White and Case rendered an opinion that the Board, under
its general supervisory powers, could initiate a rate change.

These opinions

are attached.

The nearest case to initiating a change by the Board of which I
have heard, was also in Chicago where the directors, on learning of the Board's
intention, acted promptly enough so that an issue was avoided.

In the present instance our relation to the Chicago rate change has
After seven or eight
already been explained save on one point.
banks had reduced their rates, Governor Crissinger telephoned
me that Chicago had declined to do so, that the Board had disapproved the continuance at 4 per cent, and at a meeting to be
held on Tuesday, September 6, proposed to make their rate 3 1/2
I stated to him that I hoped the Board would not do
per cent.
so as I doubted the wisdom of that course as well as the Board's
Tuesday morning he 'phoned me that the Board would act
power.
I suggested that Mr. Mellon was in New York and
that morning.
asked whether they could not wait one day until he reached
He asked me
Washington, when the full Board would be available.
This required time to go
to see Mr. Mellon and get his views.
uptown, which I did, explained the situation fully to Mr. Mellon
He said he hoped the Board would await his
and asked his views.
return Wednesday morning, and he would see the Governor at once
When I 'phoned this to Governor Criesinger soon
on his arrival.
after 12 o'clock (after 11 Washington time) on that Tuesday he
said that the Board had already acted, the wire was being or would
be sent, and he thought it would add to the difficulty were he to
I did ask him to think it
report my talk with the Secretary.
over again if not too late.

- 19 -

The Federal Reserve Act is lamentably lacking in separating and
defining the respective powers of the Board and the Banks.

It would be

far better, however, to find means of adjusting different views just now than
to attempt a series of amendments such as may well result from this controversy, or than to attempt arbitary action which invites controversy which is
detrimental to the System.

My own judgment is that the Board is too detached from the scenes
of operation and from operation problems, money markets and all the complexities of the business to wisely initiate ohanges of discount and open market
policy or attempt their execution.
more experience.

A nice balance can best be found after

If the Act must be change- then a limited power to initiate,

- say upon a specified number of majority votes, and only in a case where an
individual bank is recalcitrant, - might be granted to the Board.
There is one point upon which there must be no misunderstanding.

has been too frequently published in recent Chicago press articles to be ignored.

There is no desire and never has been any conscious attempt by the
Federal Reserve Bank of New York to dominate the Board or the System.

We have

in the past and shall in the future, urge views upon our associates, as we expect
them to do with us.

We are ready to submit our individual views to the authority

of the Board where it is clear the Board has authority, and I know of no case where
we have failed to oonfonn to System policies, even when our individual views were
contrary to those of the other Reserve Banks.

The practical question is how

policies are to be adopted and then executed.

Our views are clear enough.

Expressing the problem, in one extreme there is the choice of complete centralization of power to initiate policy and direct its execution in the Federal Beserve

- 20 -

Board, - or at the other extreme, complete decentralization, with power in
each bank to conduct its business in each district in a watertight comportment, with no System policy!

Either would be fatal to the System.

The plan has gradually evolved, so as to escape either danger, of
arriving at policies by agreement at meetings of the Governors and Chairman,
or of Committees of those and other officers.
is the one on Open Market investments.

The most important committee

This committee was first appointed

by the Conference of Governors, but in 1923 the Board arbitlarily, without

previous notice, dismissed the committee, and reappointed the same men as a
committee with largely the same functions, but with an attempt to subject it
completely to the Board's control.

That was a mistake which caused much un-

necessary controversy and friction, though there now exists a much better
working understanding.

My position as chairman of that committee has seemed

to everyone necessary, as the New York bank, in the principal money, security
and foreign exchange market, must execute most of the orders.

The alternative here again is for the New York bank to ignore the
other Reserve Banks, develop and execute its own policy, or subject itself to
some supervision and enjoy with other Reserve Banks some sort of cooperation
in a System plan, through Committee supervision.
This latter we have done as scrupulously as possible.

Repeated in-

quiry of members of the committee and of the banks not represented on the committee convinces us that they are satisfied and approve not only the plan but
the way the New York bank executes the committee's wishes and directions.

This committee now has supervision of (a)

All open market purchases and sales of Government securities,
save strictly intra,district transactions, with member banks.
(But even transactions with members, the Federal Reserve Bank
rif New York voluntarily makes a part of the committee account).

All purchases and sales of bills.

The distribution of these two investments between the Reserve
Banks.

Operation of all foreign accounts (banks of issue) which are
ratably divided.
All investments for foreign account.

All special foreign transactions, such as the credits to the
Bank of England, Bank of Belgium, and Bank of Poland.
All gold transactions abroad.

And as a matter of courtesy, and because changes in the New
York rate of discount probably have more effect upon other
districts than their changes have in New York, we have never,
since the committee came into existence, made a change of
rate without first consulting the committee either at a
meeting, or by letter, or by telephone.

61)e-

1/1/

eoffiiii7;
7e

44-5

frie7 11117a

ACt

COPY OF TELEGRAM

Dallas
CASE

1034A

JUNE 24

ANTONIO
IN V1E1 OF INCREASED EXPENSES INCIDENT TO OPERATIONS OF OUR NEW SAN

BRANCH IF OPEN AIARKET COMMITTEE HAS NO OBJECTION WE WOULD LIKE TO INCREASE

OUR HOLDINGS OF FOURTh 4is IN AMOUNT OF

1,000,000

tE OBSERVE PRICE OF

FOURTHS HAS BEEN STEADY FOR SEVERAL DAYS PAST AT 103.23

IF YOU DO NOT KNOW

ANY REASON WHY WE SHOULD NOT DO THIS WILL APPRECIATE YOUR BUYING

FOR US SOmEWHERE AROUND PRICE I HAVE MENTIONED

PLEASE ADVISE
TALLEY

4)1,000,000

COPY

TALLEY
DALLAS

JUNE 24, 1927

WE SHALL OF COURSE PURCHASE $1,000,000 FOURTH LIBLRTY LOAN 41% BONDS IF YOU

WISH US TO, BUT IT HAS OCCURRED TO US THAT, IN VIEW OF YOUR RECENT LETTER
TO HARRISON REFERRING TO SIZE YOUR GOLD SETTLEMENT FUND, YOU MIGHT PREFER
TO POSTPONE PURCHASE ESPECIALLY IN VIEW OF FACT ALL YOUR SHARE OF GOLD IN
LONDON WILL SHOR1LY BE EARNING APPROXIMATELY 4% OR SLIGHTLY MORE.

FURTHERMORE, OPEN MARKET INVESTMENT COMMITTEE WILL PROBABLY MAKE
REAPPORTIONMENT OF PURCHASES EARLY NEXT MONTH

CASE

STOP

COPY OF TELEGRAM
DALLAS

JUNE 24

356PM

CASE

IN VIEW OF YOUR 00EmENT IT IS JUST AS WELL TO DROP MATTER FOR PRESENT AT
LEAST.

ALTHOUGH OUR GOLD SETILhgENT BALANCE IS AMPLE FOR NEEDS AND IT

IS UNLIKELY THAT TRADE BALANCES wILL RUN AS HEAVILY OR AS ACUTELY AGAINST
US THIS SUMMER AS WAS THE CASE LAST YEAR, OUR MATURING BILLS BETWEEN NOW
AND 301H

ARE +2,000,)00

THE RETIREmENT OF WHICH :ILL IMPAIR OUR COLLATERAL

ACCOUNT 1I1H AGENT TO THAT EXTENT

ND UNLESS COMMITTEE IS GENEROUS IN

ALLOT-

MENTS 10 REPLACE OR NEXi REAPPORTIONMENT DOES NOT FULLY COVER OUR REQUIREmEINT WE COULD MAKE PURCHASE OF ADDITIONAL GOVERNMENTS MENTIONED WITHOUT

ANY SERIOUS INCONVENIENCE TO OUR COLLATERAL ACCOUNT AGSINST NOTE ISSUES,
NOW wOULD IT PROBABLY REDUCE OUR GOLD SETTLEMENT FUND BALANCE BELOW

REQUIRMENTS.

MATTER OF PURCHASE CAN BE DEFERRED UNTIL AFTER COMMITTEES

REAPPORTIONMENT EARLY NEXT MONTH

TALLEY

916AL

25th

OPY
Similar letter sent to:

Governor. Norris, Philadelphia)
Governor Fancher, Cleveland
Members of Open Market
)
Governor McDougal, Chicago
Investment Committee
)

June 27, 1927.
Dear Governor Harding:

Enclosed you will find a statement showing the gross and net earnings
of all banks for the first five months of 1027 and also estl,lated similar figures

for the last seven months, from which it appears that all of the banks, except

Richmond and Minneapolis, will have earnings during 1927 sufficient to cover all
The deficiency in the case of Minneapolis is very small, while that in

charges.

the case of Richmond is comparatively large.
It will be noted that the present estimated net earnings of the System
for the year, after all charges are $2,777,000.

Column "4" of the statement

shows the net earnings of each bank for the year as at present estimated, while
column "6" shows the distribution of these earnings in the proportion that each
bank's expenses, dividends and chargeoffs bear to the System total.

A comparison

of these figures would indicate that with one or two exceptions, notably Richmond,

no more than minor adjustments are necessary in the distribution of future purchases
of bills.

This statement does not include the income which will presently be re-

ceived from the investment of the foreign credit resulting from the sale of French
gold.

The income to the System from this source during the balance of this year

is likely to be something over $1,000,000.

While these earnings will be dis-

tributed among all the banks, it will not affect the comparative showing as disclosed by the statement enclosed.

There is also attached a memorandum showing in comparative form three
ratios for each of the banks as follows:

Ratio of each bank's expenses, dividends and chargeoffs
to the System total.

Governor Harding

6/27/27.

Present holding ratio of Government securities including
System investment account.
Ratio of earnings required other than from Government
securities during balance of year 1927 to cover
expenses, dividends and chargeoffs.
ssuming that the estimates which have been made by the banks as to
their earnings and expenses for the balance of this year are reasonably correct,
the use of the ratios show h in the third column of this memorandum in distributing

future purchases of bills would effect such adjustments as are necessary to enable
all banks to fully cover their charges for 1927,

We suggest, therefore, that these ratios be used in making future distributions of bill

purchases, and if this action meets with your approval and

that of the other members of the Open Market Investment Committee, the change
will be made as soon as we are so advised and all the Reserve banks approve.
If the change meets with the approval of the members of the Committee, we will,
of course, write each of the governors, advising fully as to the changes which

are being made, at the same time advising of the possibility of similar minor
changes from month to month, if the revised figures hereafter submitted by the
banks indicate that further changes are necessary.
An expression of your views

hill

be appreciated as promptly as possible.

Very truly yours,

BENJ. STRONG,
Chairman, Open Market
Investment Committee.
Mr. W. P. G. Harding,
Governor, Federal Reserve Bank of Boston,
Boston, Massachusetts.-

Enefosures.

M&MORANDUM SHOWING IN COMPARATIVE FORM
FOR THE TWELVE FEDERAL RESERVE BANKS
RkTIOS AZ INDICATED

Ratio of Each
Bank's Expenses,
Dividends and
Charge-offs to the
System Total

Boston

New York

Present Holding
Ratio of Government Securities
Including System
Investment
Account

3.7
17.

Ratio of Earnings
Required Other Than
from Government
Securities During
Balance of Year 1927
to Cover Expenses, is
Dividends and
Charge-offs

a
28

7.4

13.1

Richmond

2.6

Atlanta

4.5

2.7

14.6

St. Louis

8.1

Lanneapolis

Kansas City

5.5

8.3

Dallas

6.6

San Francisco

10.7

Phi]. de

Cleveland

Chic go

100

411

STATEENT OF ESTIMATED GROSS AND NET EARNINGS FOR YEAR 1927
(5 months actual - 7 months estimated)
(000 Omitted)
Expenses
Gross

and

Estimated
Year-end

Earnings.

Dividends

Actual for 5 months
Estimated for 7 months
Total

01,178
2 022
03,200

$ 1,086
1 482
$ 2,568

162
$162

Actual for 5 months
Estimated for 7 months
Total

4,036
6,045

3,641
5,191
$ 8,832

475

0AniIMILLI

Net
Earning

Ratios of
Expenses,
Dividends and
Charge-offs to
Total

Distribution of
Net Earnings on
Ratios of Expenses
Dividends and
Charge-offs

Boston
$

92
311.

470

194

New York

Philadelphia
Actual for 5 months
Estimated for 7 months

Total

$10,081

1,288
2.076
$3,364

$475

395
379
$

774

24%

666

39
328,
367

222

1,249

i686

$ 2,935

$ 62

Cleveland
Actual for 5 months
Estimated for 7 months
Total

1,716
2 420
44,136

1,425

--2404
$ 3,479

291
81

285
0285

372

278

139

4.5%

125

15%

417

139

5.5%

153

111

Richmond
Actual for 5 months
Estimated for 7 months

Total

-952l,1
663

750

$1,622

$ 1,882

87
147
$147

320
$

407

Atlanta
Actual for 5 months
Estimated for 7 months

Total

844

696

1,241

926

$2,085

0 1,622

Actual for 5 months
Estimated for 7 months
Total

2,571
.L599
$6,170

2,182
2,963

Actual for 5 months
Estimbted for 7 months
Total

1,370.

148

.231
$135

180

328

ChicaLl

$ 5,145

389

x 697.

$697

177D-8-

St. Louis

MizIPAUlis
Actual for 5 months
Estimzted for 7 months
Total

Kansas City
Actual for 5 months
Estimated for 7 months
Total

694

854

Lau

$2,224

$ 1,733

543
73

477
723

$1,278

$ 1,200

916

805

1,126

1,176

42,242

1,981

160
317

14
0

174

102
$102

166
$166

111
16
95

Dallas

Actual for 5 months
Estimated for 7 months
Total

636

618

944
$1,580

_221
$ 1,535

1,679
1,951

1,326

18
14

$ 41

San Francisco

Actual for 5 months
http://fraser.stlouisfed.org/
Estimated
for 7 months
Federal Reserve Bank of St. Louis

1,757

251

353
57

Boston

Actual for 5 months
Estimated for 7 months
ft
Total

$1,178
2 022
03,200

Actual for 5 months
Estimated for 7 months
Total

4,036

1,o86
482

$ 2,568

162
$162

470

194

24%

666

222

io%

278

139

4,51,

125

15%

417

New York
$10, 081

3,641
5,191
$ 8,832

1,268

1,249

.2.076

6,04.5

395

0475

379
774

666

3.28

43,364

$ 2,935

$ 62

367

1,716

1,425

2 420
$4,136

__1104

285

291
81

.1,71

Philadel hia

Actual for 5 months
Estimated for 7 months
Total

Cleveland

Actual for 5 months
Estimated for 7 months
Total

$ 3,479

$285

372

Richmond

Actual for 5 months
Estimated for 7 months
ft
Total

$1,622

$ 1,882

Actual for 5 months
Estimated for 7 months
Total

844

1,241
42,085

696
926

3 1,622

2,571

2,1132

663

750

952_

WIZ

147
$147

320
407

Atlanta
148

$135

180
7-703

Chic so

Actual for 5 months
Estimated for 7 months
Total

St. Louis

Actual for 5 months
Estimated for 7 months
Total

2,963

$6,170
854
,

$ 5,145

x-ia
$697

389
61

I-3TE

694

l,03

$2,224

$ 1,733

543

477

160
317
$317

14
$

174

139

Minneapolis

Actual for 5 months

EstimILted for 7 months
Total

$1,278

7.
$ 1,200

916

805

$102

5.5%

153

111

Kansas City

Actual for 5 months
Estimated for 7 months
Total

111

_1.126
42,242

-1,1.2-6.
$ 1,981

166
$166

636
944,

618
917

$1,580

$ 1,535

$ 41

1,679
1,951

1,326

_____IL
$

Dallas

Actual for 5 months
Estimated for 7 months
Total
San Francisco
Actual for 5 months
Estimated for 7 months
Total
GRAND TOTALS

31E-

Includes possible loss $400,000

18
14
$

4,630

1,757

251

353
57

$ 3,083

$251

296

250

$41,612

$35,995

$2,840

$ 3,208

l00%

$2,777

$ 2,777 Net

COPY
Similar letter sent to: Governor Seay, Richmond
Wellborn, Atlanta
"
Young, inneapolis
"
Biggs, St. Louis
"
Bailey, Kansas Uity

"Taticy,. Dallas
Calkins, San Francisco

June 70, 1927
Dear Governor .)eay:

Enclosed you
ings of

all

will find

a stateMent showing the gross and net earn-

banks for the first five months of 1927 and also estimated simi-

lar figures for the last seven months, from which it appears that all of the
banks, except Richmond and Minneapolis, will have earnings during 1927 sufficient to cover all charges.
very small, While that in

The deficiency in the case of Minneapolis is

he case of Richmond is comparatively large.

It will be noted that the present estimated net earnings of the
System for the year, after all

charges,

are $2,777,000.

Column "4" of the

statement shows the net earnings of each bank for the year as at present
estimated, while column "6" shows the distribution of these earnings in the

,roportion that each bank's expenses, dividends and charge offs bear to the
System total.

A comparison of these figures would indicate that with one or

two exceptions, notably Richmond, no more than minor adjustments are necessary in the distribution of future purchases of bills.

This statement does not include the income Which All presently be
received from the investment of the foreign credit resulting from the sale
of french gold.

"he income to theLoystem from this source during the balance

of this year is likely to be something over $1,000,0J0.

while these earnings

will be distributed =long all the banks, it will not affect the comparative
showing as disclosed by the statement enclosed.

There is also attached a memorandum showing in comparative form
three ratios for each of the banks as follows;

Ratio of each bank's expenses, dividends and chargeoffs
to the 6y-stem total

Present holding ratio of Government securities including
System Investment Account

2
3.

June 30, 1927

hatio of earnings required other than from Government
securities during balance of year 1927 to cover
expenses, dividends and chargeoffs.

Assuming that the estimates which have been made by the banks as to
their earnings and expenses for the balance of this year are reasonably correct,
the use of the ratios auown in the third column of this memorandum in distributing
future purchases of bills would effect such adjustments as are necessary to enable
all banks to fully cover their charges for 1927.
Ali tae members of the Open Market Committee have approved the use of
tnese ratios in making future distributions of bill purchases and it is proposed

to begin their use as soon as approval is received from tne Governors of the other
banks.

I shall therefore appreciate receiving your reply by wire in order that

the change may be put into.operation at an early date.

it is possible that there

may be similar changes from month to month, on the same basis, if the revised
figures hereafter submitted by the banks indicate that further changes are
necessary.
Very truly yours,

BENJ. STRONG
uhairman, Open Market
investment Committee

Mr. George J. Seay,
Governor, Federal eserve Bank of Richmonu,
Richmond, Va.

FEDERAL RESERVE BANK
OF ST. LOUIS

July 6, 1927.

Dear Governor Strong:

We have your letter of June 30th, and inclosures,
from which it is noted that in making future distributions
of bills purchased, it is proposed to give this ban
the total purchases.

4% of

This ratio is satisfactory to us.

Very truly yours,
(Signed) D. C. Biggs

Governor

Bejn. Strong, Esq., Chairman,
Open Market Investment Committee,
Federal Reserve Bank of New York,
New York.

FEDERAL RESERVE BANK
OF RICHMOND

July 6, 1927.

Dear Mr. Case:

I am today in receipt of your telegram answering
mine of yesterday rela+ing to the distribution of System
investments, and note your statement that the ratio of distribution will be changed monthly to meet the requirements,
mnd that if the pro rats of this bank does not meet the requirements, the Committee will make proper adjustment, which
is, of course, entirely satisfactory.
T had out controller examine carefully the distrtbution plan and he reported that, while the ratio of distribution to the expenses of our bank- in proportion to the
total expenses of the System was liberal, the ratio in proportion to our need of revenue in comparison with other
It has been the pracFederal Reserve Banks was too small.
tice, I believe, in recent times, to adjust the ratio according to the apparent needs of revenue after such needs
had become sufficiently clear.
With kind regards, I am

Very truly yours,
(Signed) Geo. J. Seay
Governor.

Mr. J. N. Case, Deputy Governor,
Federal Reserve Bank of New York,
New York City.

TELEGRAM
70

STRONG

SAN FRANCISCO

JULY 7

320P

NEV YORK

Changed ratio for future distribution purchases of bills your

letter June Thirtieth acceptiable to us

CALKINS

911A

8th

TELEGRAM
162G

STRONG

DALLAS

JULY 7

1148A

NEW YORK

Referring your letter
tribution

of bill purchases

holiday and my

double

June 30

proposed ratio for future dis-

satisfactory to this bank.

absence

from city letter was not answered

sooner.

On account

237P

TALLEY

TELEGRAM
D

142C

ST. LOUIS

1128A

JULY 7

MATTESON

Wrote Governor Strong under date of sixth that distribution of bills
purchased to give this bank four percent was satisfactory to us.

BIGGS

203P

TELEGRAM
229G

MINNEAPOLIS

JULY 7

235PM

MATTESON

Just returned from the west to find Governor Strong's letter of
June 30.

Rates suggested agree.
YOUNG

448P

July 7, 1927.

Dear Governor Seay:

I have your letter of yesterday acknowledging my
telegram regarding the distribution of system investments,
and note that the ratio which it is proposed to use for
your

bank is satisfactory with, of course, the understand-

ing that it is subject to change as and when conditions may
make necessary.

It has been the aim of the committee to distribute
the earning assets purchased by it in an equitable way and
in such a way as will be satisfactory to al] of the banks,
and I do not anticipate there will be any difficulty in continuing this program.
Very truly yours,
(Signed) J. H. Case

Deputy Governor

Mr. Geo. J. Seay, Governor
Federal Reserve Ban. of Richmond
Richmond, Va.

FEDERAL RESE?VE BANK

COPY

OF ATLANTA

July 5, 1g27.

jin. Benj. 6trorg, Chairman,
Open. Market Investment Committee,
c/o Federal Reserve Bank of New York,
New York, M. Y.

Dear Governor Strung:
Referring to my telegram of even date, I am pleased to
advise that this bank concurs in the use of the ratios enclosed with
your letter of the 30th ultimo, in making future distributions of bill
purchases.

Very truly yours,
(Signed)

M. B. ,:ellborn

Governor

1,9
-

Lz/L Z4

MINUTES OF MEETINGS OF OPEN MARKET INVESTMENT CONLMITTEE

HELD IN WASHINGTON, D. C., DURING WEEK OF GOVERNORS
CONFERENCE, COMENCING MAY 9, 1927

The Open Market Investment Committee held a meeting in Washington, D,

at the office of the Federal Reserve Board, Monday, May 9, 1927, at 9 o'clock,
Present:
Governor Strong, Chairman
Governors Harding, Norris, McDougal
and Fancher

Mr. Harrison, Acting Secretary

The secretary read the preliminary draft of the memorandum of matters
to be considered by the Open Market Investment Committee prior to the preparation
and submission of a report an d recommendations

After discussing the preliminary

memorandum it was the opinion of the committee that copies of it with suggested
amendments should be submitted by the chairman of the committee to the Federal

Reserve Board for its consideration in order to familiarize the Board with the
factors which would be in the minds of the committee later in preparing its report,
The Open Market Investment Committee adjourned at 10 o'clock,

*******
The Open Market Investment Committee reconvened on Monday, May 9, 1927,

at 12:

o'clock,
Present:
Governor Strong, Chairman
Governors Harding, Norris, McDougal
and Fan cher

Mr, Harrison, Acting Secretary
The committee considered a redraft of the preliminary memorandum con-

taining the amendments agreed to at the earlier meeting.

With these amendments,

the chairman was requested to transmit seven copies of the memorandum to

Governor Crissinger for the members of the Board, with the advice of the committee
that the committee would be glad to meet with the Board to discuss the memorandum

at any time suitable to its convenience. These copies of the report were

transmitted to Governor Crissinger at 1:15 o'clock, when the Open Market Investment Committee adjourned.

The Open Market Investment Committee met with the Federal Reserve
Board on Monday, May 9,

192'7.

at 4:10 o'clock.

Present:

Governor Crissinger
Messrs. Platt, Miller, James, Hamlin,
Cunningham of the Federal Reserve Board
Governors Strong, Harding, Norris, McDougal.
and Fancher
Dr. Goldenweiser
Mr. Harrison, Acting Se cretary
There was a long discussion by various members of the committee and
the Federal Reserve Board of the preliminary memorandum previously distributed
among the members of the committee and the Federal Reserve Board.

Governor

Strong explained that this Preliminary memorandum did not embody any recommenda.
tions but merely raised points for discussion with the Reserve I3oard which would

enable the committee later to file a report with definite recommendations.

connection with the consideration of the memorandum and problems before the

cons.

mittee, Dr. Goldenweiser gave his statement of the present business situation with
particular reference to the 'price level.

The meeting adjourned at 5:45 o'clock, with the understanding that the
Open Market Investment Committee would submit its final report to the Federal
Reserve Board later on in the week.

The Open Market Investment Committee reconvened on Wednesday afternoon,
May 11, 1927, at 12:20 o'clock.

Present:

Governor Strong, Chairmen
Governors Harding, Norris, McDougal
and Fan cher

Mr. Harrison, Acting Secretary
The committee considered a draft of report prepared by the committee
at lunch on Tuesday, May 10. as modified by the chairman on Wednesday morning
before the meeting..

Upon consideration, it was

VOTED to approve the report as amended, and the secretary was request.
ed to have it retyped; with the understanding that the preliminary memorandum

as finally revised should be mimeographed to be substituted for the first draft
distributed among the committee and the members of the Federal Reserve Board on
May 9.

The preliminary memorandum as revised May 11 is attached hereto.

The

report of the committee as finally approved by the committee and the Governors
Conference is as follows:

"The Open Market Committee, after considering the attached

memorandum, and after discussion with the Federal Reserve Board, submits the following recommendations of policy for the period ending
August 1 next:

That no further sales of System securities be made in
order to offset arrivals of gold from abrdad now known or anticipated,

That it shall be the policy of the committee between now
and August 1 next, gradually to acquire, if possible to do so without
undue effect upon the money market, sufficient additional short-time
government obligations to bring the total of the committee's invest..
Trent account up to $250,000,000

In interpreting the expression

'undue effect upon the money market, v the committee would expect to

keep in mind any changes which might occur in the general level of money
rates, as well as the extent to which these purchases might effect a
duct ion in the amount of borrowings by member banks.

re..

"While this policy is not directed towards bringing about
.

reduction in discount rates by any Federal reserve bank, nor is that
immediately anticipated, it is recognized that some lowering of market
rates for money might nevertheless justify such a reduction later in
the year, especially at the principal financial centers.

The recom.

mendation in paragraph two is also made after consideration of the
fact that somewhat lower interest rates ordinarily operate to check
gold imports;

in fact, that was one of the effects of purchases of

securities made in 1924,

"The committee further expects to continue studies of those
methods set out in the preliminary memorandum by which increases in
the System's portfolio might be brought about without increasing the
amount of Federal reserve credit in the market.

It expects to dis..

cuss with the Treasury Department those methods with which the Treasury
is concerned, and requests that the Federal Reserve Board give considen.
ation to those particular items, such as reserves on time deposits,
which relate to the regulations of the Federal Reserve Board,"

Meeting of the Open Market Investment Committee
withthe Federal Reserve Bo ard
10:30 Thursday morning, May 12
Present;

Honorable A. W. Mellon, Chairman
Governor Crissinger, and Messrs. Platt,
Hamlin, Miller, James, Cunningham,
McIntosh of the Federal Reserve Board
Governom Strong, Harding, Norris, McDougal,
Fancher
Mr, Harrison, Acting Secretary
Dr, Goldenweiser and Mr. Eddy
The Acting Secretary distributed copies of the report of the Open
Market Investment Committee dated May 11, together with mimeograph copy of the
1927, and

preliminary memorandum relatiVe to open market policies dated May 9,
revised May 11.

After each member of the Board had had opportunity to read the report)
Governor Strong explained that the report had been prepared by the committeet..

after thorough consideration of all the factors referred to in the preliminary
memorandum, with a view to outlining a policy for the next few months for ap°
proval by the Board and the committee, with the understanding that the respon."
sibility for the execution of the recommendations would rest with the committee.

He also explained that the report had been studied by the Governors
and that it was unanimously approved by that conference.

Conference

After a thorough dis

cussion of the report concerning which various views were expressed by the differ*

ent members of the Board, Mr Hamlin made a motion that the report be approved.
Before action was taken on this motion, Dr. Miller moved as a substitute that
the report be received and made a special order for some later time to be fixed
by Secretary Mellon and Governor Crissinger,

After discussion this substitute

motion was passed and the meeting adjourned at 12:10 o'clock

ID.

George L, Harrison,
Acting Secretary,

Meeting of the Open Market Investment Committee
with the Federal Reserve Bo ard
10:30 Thursday morning, May 12
Present:

Honorable A. W. Mellon, Chairman
Governor Crissinger, and Messrs. Platt,
Hamlin, Miller, James, Cunningham,
McIntosh of the Federal Reserve Board
Governor:, Strong, Harding, Norris, McDougal,
Fancher

Mr, Harrison, Acting Secretary
Dr, Goldenweiser and Mr. Eddy

The Acting Secretary distributed copies of the report of the Open
Market Investment Committee dated May 11, together with mimeograph copy of the
1927, and

preliminary memorandum relative to open market policies dated May 9,
revised May 11,

After each member of the Board had had opportunity to read the report,
Governor Strong explained that the report had been prepared by the committee,..

after thorough consideration of all the factors referred to in the preliminary
memorandum, with a view to outlining a policy for the next few months for ap..
proval by the Board and the committee, with the understanding that the responsibility for the execution of the recommendations would rest with the committee.

He also explained that the report had been studied by the Governors
and that it was unanimously approved by that conference.

Con ference

After a thorough dis-,

cussion of the report concerning which various views were expressed by the differs

ent members of the Board, Mr Hamlin made a motion that the report be approved,
Before action was taken on this motion, Dr. Miller moved as a substitute that
the report be received and made a special order for some later time to be fixed
by Secretary Mellon and Governor Crissinger.

After discussion this substitute

motion was passed and the meeting adjourned at 12:10 o clock p. m,

George L, Harrison,
Act ing Secretary,

May 9, 1927.

Revised copy May 11.

PRELIMINARY MEMORANDUM RELATIVE TO OPEN MARKET POLICY

The Principal transactions in the Special Investment Account since
the last Governors Conference were reviewed in the chairmants report to the
committee on March 21, and copies of this report were sent to all Governors.

In accordance with the action taken at that meeting, purchases of 25 million
dollars of securities were made in the market to replace March 15 maturities,
and the Special Investment Account was thus restored to 200 million dollars,

which is approximately the same amount as has been maintained for the past
two years.

Recent transactions resulting from large purchases of gold,

are described hereafter.

General Credit Situation

For many months business has been active and has continued to
maintain, and in some directions even to exceed, the rate of production
and consumption of immediately preceding years, although a number of recent developments have been of a character which might have had a widespread unfavorable effect had the general business and financial situation not been fundamentally sound.

These developments are, of course,

the extensive floods in the lower Mississippi Valley, some overproduction
and price declines in the oil industry, disturbing financial developments
in Japan, reduced production and consequently reduced working time for
labor in two or three large automobile concerns, and not so recently the
collapse of a number of real estate and building speculations and of one
or two large installment finance companies.
The total volume of credit in use, estimated from the reports

of the reporting member banks, is now about a billion and a half dollars
larger than a year ago.

The considerable expansion of the last two

- 2 -

months has been distributed between increases in commercial loans, security
loans and investments.

On the other hand, the total amount of credit ex-

tended by the Reserve banks is about one hundred million dollars less
As the net gold imports (excluding the move-

than this time last year.

ment now under way) within this period were about 105 millions, the reduction of Reserve bank credit has about offset_ gold imports.

The figures for Reserve System earning assets are as follows:
(in millions)

April 27,1927

Bills
Bills
U. S.
Total

discounted
bought in open market
Securities
bills and securities

April 28,1926.

444

514

242
318

199
389

1006

1114

While total discounts at the Reserve banks are smaller than a year
ago, the difference is largely due to reduced borrowings by country banks
as reporting banks in principal centers are borrowing nearly as much as
they did a year ago.

Money rates are about 1/2 per cent. above this

time last year, as shown by the following table.
is for higher rates than last year.
than last year,

The present tendency

For example, time money is 3/8 higher

90-day bills are 1/2 higher, and Treasury certificates and

notes show an even larger increase.

The New York discount rate is 1/2 per

cent, higher.
lioney rates at New York
April 28, 1927

Call money
Time money - 90-day
Prime commercial paper
Bills - 90-day unendorsed
Treasury certificates and notes maturing June 15
maturing September 15
Federal Reserve Bank of New York rediscount rate
Federal Reserve Bank of New York buying rate for 90-day bills - - -

* Prevailing rate for preceding week.

April 28, 1926

3 5/8

3 1/2
4
4 4 1/4
3 1/8

3.46
3.51

2.51
3.07

3 1/2

3 3/4

3 1/2

4
4 3/8

4-4 1/4

- 3 -

A review of the general credit sitaation, of rates and business,
brings out the following striking facts:

That the general level of interest rates in New York, where
changes of rates generally originate, is about 1/2 of one per cent, above
last year, the discount rate of the Federal reserve bank also being 1/2
of one per cent. higher.

The amount of bank credit employed for conducting the a)untryls
business, at a volume certainly much above the average of the last few years,
is only $1,500,000,000 above what it was last year.

While irregularly distributed between the classes of goods,
the general level of commodity prices has experienced a considerable fall,

and over the greater part of the

year the decline in prices has been

in both agricultural and non-agricultural commodities.

Considering the

reluctance of member banks to borrow from the Reserve banks, coupled with
the considerable decline in interest rates which is occurring in Europe,

the question is raised as to whether the somewhat greater restraint now
being a?plied to the extension of credit at the money center (New York),
coupled with the reduction of the total of the open market investment account over the past 18 months or two years from $500,000,000 to less than
$200,000,000, has not gradually had the effect of exercising some pressure,
imperceptible in any chan,e over a short period, but now becoming apparent
when examined as to its effects over a longer period.

Gold Movements

Between January 1 and May 1 of this year; gold imports into the
United States have amounted to about 8110,000,000, including 88,000,000 from
Japan, and exports during the same period were $26,000,000.
during this period were therefore $84,000,000.

Net imports

Inasmuch as approximately

$14,000,000 of the gold exported was gold which had been earmarked before

- 4 -

///
//7

the period under discussion,

out $98,000,000 was the net amount added to

the monetary gold supply of the country during the first four months of the
year

This gold movement, together with the imports of 1926, account large-

ly for the fact that the System's earning assets show a decline during the
past year, in spite of an increase of some billion and a half dollars in bank
credit.

Entirely apart from the movement of gold referred to above, there
have been some significant developments since May 1, not included in the above
figures.

During the last part of Anril, the Bank of "Prance recovered approx-

imately $90,000,000 of gold from the Bank of England by the repayment of its
credit to the Bank of England.

Of this $90,000,000, $12,000,000 arrived in

New York last week, $18,000,000 is still on the water, and $50,000,000 was
purchased by the Federal Reserve Bank of New York on !'ay 6 and is now held
by the Bank of England under earmark for account of the New York bank.

addition to this Bank of France gold, $2,500,000 has recently been imported
from Australia, and another $2,500,000 more is now on the water from Australia and expected to arrive in this country this week.

A somewhat disturbing factor arose in the probability of the
importation and sale to the Federal Reserve Dank of New York of the
$90,000,000 of gold, negotiations for the purchase of which had been
concluded by one of the New York. member banks from the Bank of France.

It was learned that space had been reserved on the steamers and arrangements had been made for shipping the entire amount of gold; in fact, one
shipment was about to arrive in New York, and others were being loaded.

In view of this situation, after consulting with all the members of the
Open Market Investment Committee and with the Federal Reserve Board by
telephone, it was arranged to purchase from the Bank of France all of the

gold - nearly $60,000,000 - which had not been shined, and to sell the

Bank of France a like amount of the September maturity of certificates of
indebtedness held in the Open Market Investment account.

By this arrange-

ment, the money ma2ket status remained unchanged, except as to the gold
which had already been shipped, leaving the committee in position to determine later at its meeting whether these securities should be replaced or
not.

Securities were sold to offset $9,000,000 of the $12,000,000 already

arrived, but no arrangements have been made for sales to offset the balance
of the gold which will arrive from London and from Australia, amounting in
all to about

$20,000,000.

With the sale already made and further sales,

if made to offset further gold arrivals, the securities remaining in the
System's portfolio account will be a little over $100,000,000, too small
an amount to afford security against possible future developments.

This

will be appreciated, for example, if the $90,000,000 now purchased had
arrived at a time when we had no portfolio of government securities. available.

It is clear, therefore, that the committee must from now on give

careful attention to meeting this gold problem, either by increasing its
portfolio in anticipation of future developments, or by adopting other
measures.

The method of doing so should be determined with regard to

whether the time has or has not arrived when the Federal Reserve System
can afford to put new funds in the market, the effect of which would be
to reduce the borrowings of member banks, principally in New York, and
possibly to reduce the System's holdings of bills.

There are various

possibilities for dealing with the gold problem as a whole which have

never heretofore been discussed in the committee's report and which are
now submitted simply for discussion.

None of them are recommended at

this time, but are intended simply as a summary of all possibilities.
They are:

(1) The committee could replace the securities sold to the sank
of France.

The immediate effect would be to reduce the amount of member

- 6bank borrowings in New York, which are now running on the average at from
$100,000,000 to $150,000,000.
Those Federal reserve banks whi,:h have considerable holdings of

long time bonds could dispose of those bonds, realize their profit and repurchase
through the committee as a part of the committee's account, an equivalent amount
of short time securities.

These, with other short term government securities

owned by individual Reserve banks, could be added to the System holdings without
reducing the total earning assets of the individual Reserve banks, and thus in,

-rease the comittee's account to over $200,000,000.
Arrangements might be made with the Secretary of the Treasury for
lcmowhat increasing balances carried with the Federal reserve banks, and reducing
the amount carried with special depository banks.

Some or all of the $75,000,000 of 2 per cent. Panama Canal bonds
could be called and the national bank notes issued against them retired.

Fur-

ther purchases of the 2 per cent. Consols of 1930 could be made in anticipation
of their possible retirement in 1930, as contemplated by the Secretary of the
Treasury in his report of 1924.

By gradual stages, or all at once, the time schedule of the Par
Collection System could be adjusted so as to increase the volume of uncollected
checks and correspondingly reduce the reserve of members.

Plans could be undertaken for retiring the greenbacks, which
Jowever would require legislation.

Further amounts of the capital of the Federal reserve banks could
be called.

The reclassification of reserve cities could be gradually undertaken so as to increase reserve rN:luirements.

A readjustment of the relations of the Reserve banks to the
market for gold could be effected if the Secretary of the Treasury saw fit

- 7 -

as authorized by law, to discontinue paying cash up to 98 per cent. of the
value of imported gold, thus throwing the market for gold entirely upon
the Federal reserve banks and enabling them to reduce the gold point for

imported gold by the equivalent of a loss of interest for the period during which payment would be delayed.

By reason of our Treasury practice,

the United States is today paying the highest price of any world market
for gold.

The Federal Reserve Board, of course, afteradequate study,
could revise the definition of what constitutes a time deposit, thus raising the reserve requirements.

This is probably justified by the fact that

something like 60 per cent. of the increase in bank deposits in the United
States over the past ten years consists of that class of deposits which require only 3 per cent. reserve.

A revision of the regulations of the Federal Reserve Board

in relation to the maintenance ofreserves, by averaging reserves for a
period of a week in Federal reserve bank cities, and two weeks in the rest
of the country, ceald have the practical effect of somewhat increasing the
amount which member banks must borrow.
The Federal Reserve Board could revise its ruling relative to
currency in transit, which in effect reduces reserve requirements in those
districts where the ruling is now applied.
The above comprehend most, if not all, of the possible measures

available for dealing with the problem of gold imports in view of our reduced portfolio.

They are submitted for consideration and study.

The possibility of gold imports must not be overlooked, and may
indeed be imminent.

(1)

The underlying causes of such a movement would be:

The continued maintenance of our present level of interest

rates, somewhat higher than a year ago, in the face of declining interest
rates and reducing bank rates in Europe.,

The fact that our technical practice in dealing with gold
makes this the best market in which to sell it and one of the most difficult from which to export it.

The possibility, regarded by some as the probability, that
within the next two years Germany will be forced to ship us large amounts
of gold in order to meet reparation payments in the standard year.

Heavy foreign payments to meet the service on all foreign
loans.

Nor must the possibility be overlooked that conditions may change
rapidly and instead of experiencing a large addition to our gold reserve,

there is indeed a possibility, although more remote, that within the next
few years we may sustain a large loss of gold.
Gold exports from this country can arise from two causes:

The first is the perfectly normal movement resulting from
exchange rates reaching a level at which it is cheaper to make payments
abroad by shipping gold than by buying exchange.

The other, however, can occur irrespective of the gold
shipping point, because of large balances held in this country for account
of foreign governments and foreign banks of issue, which, as in the case
of Germany, may decide to take gold for reserve purposes, irrespective
of the gold point.

No danger need bp apprehended as to a normal export of gold, but
we might sustain a large loss of gold under the second category at any
time, and that we are now prepared to deal with successfully because of
the large proportion of such balances held by the Federal reserve bank,

the export of which could easily be p-ovided for by our purchasing the
securities now held for account of our foreign correspondents.

The only

embarrassment likely to occur as a result of such a demand will be due to
the la C1 of an adequate supply of American gold coin, concerting whidh

discussion

has been had. from time to time with

Looking,

therefore, to the

the

Treasury.

future, that is,

say for the next

three years, the committee is of the opinion that the policy of the Federal Reserve System Should be to prepare itself to deal with either a
large import movement of gold or a large export movement of gold.
other

position would expose the

System to the

Any

charge of lack of foresight.

In view of the many alternatives to be considpired, and especially

pi view of the fact that whatever may be the policy of the System it will

involve taking a definite position as to the money mrket, the committee
prefers to

defer any

recommendation until

after

discussion with the Fed-

eral Reserve Board ard a definite expression of their views.

CO F
FEDERAL RESERVE BOARD
WASHINGTON

May 13, 197.

Dear Governor Strong:

At the meeting of the Federal eserve Board thie morning, cuneideration was given to the report of the Open Market
Investment Committee, dated ilicy 11, 197, in which the Committee
recommended: "(1) That no further sft:i013 of System securities be
made in order to offset arrivals of gold from abroad now known
or anticipated" and "(E) That it shall be the policy of the committee between now and August i next, gradually to acquire, if
possible to do so without undue effect upon the money market,

sufficient additional short-time government obligations to bring
the total of the committee's investment account up to $60,000,000.
In interpreting the expression 'undue effect upon the money market,'
the committee would expect to keep in mind any changes which might

occur in the general level of money rates, as well as the
to Which these

extent

purchases might effect a reduction in the amount

of borrowings by member banks."

The board voted to

approve

the report and recommendations

contained therein, with the feeling that the securities

proposed to

be purchased should be accumulated slowly and with a view to the

poesibility that it may not be advisable to purchase the full
amount authorized within the period of time mentioned.

Very truly yours,
(Signed) D. R. Crissinger,
Governor.

gr. Benjamin ,:trong, Uhairman,
Open Market Investment Committee,

c/o Federal Reserve Bank,
New York, N. Y.

CONFIDENTIAL

Minutes of meeting of the Open Market Investment Committee for the
Federal Reserve System in Washington on July 27, 1927 at 11:DO a. m.
PRESENT:

Messrs. Crissinger, Platt, Hamlin, James and McIntosh
Members of the Federal Reserve Board
Governors Strong, Harding, Norris, Fancher and McDougal
Members of the Open Market Investment Committee

Governor Young, Federal Reserve Bank of Anneapolis
Governor Biggs and Chairman Martin, Federal Reserve Bank
of St. Louis
IA*. Harrison, Deputy Governor, Federal Reserve Bank of New York
Mt. Mills, Undersecretary of the Treasury
Vt. Burgess, Acting Secretary, Open lA rket Investment Committee
Messrs. Noell and McClelland, assistant Secretaries, Federal
Reserve Board

The meeting was called as a meeting of the Open Market Investment

Committee with the Federal Reserve Board and representatives of two of the
midwestern banks were present.

The Chairman presented his report reviewing

open market operations and credit conditions.

The credit policy of the System

was thereupon fully discussed.

Consideratlon was given to the continued fall in commodity prices, to
the fact that there was a diminution of borrowing from the reserve bunks due
apparently to some slackening in business, and especially to the relation of
money rates in the United states to money rates in Europe.

It was reported

that because of heavy foreign ,payments which are likely to increase with the

fall movement of commodities to Europe, there was a continued drain on European
central bark gold reserves, which made it more than likely that central bank
rates in Europe would need to be further advanced this fall.

The German and

kistrian rates have already been once advanced and there is some probability
of a one per cent advance in the rate of the Bank of England.

...

..,

All present at the meeting recognized that these developments would
necessarily have a depressing effect upon business abroad and might tend to restrict
the freedom of purchases of goods in this country at the usual season.

It was also

brought out that it is the duty of the central banks to keep money rates at as low a
level as may be attained with safety, and that at this time rates could be reduced
not only without harm but with reasonable expectations of beneficial results.

Was felt that the only possible adverse development resulting from a general lowering
of discount rates would be in the speculative security markets, but that this possibility should not stand in the way of the execution of an otherwise desirable policy.
There was no exception to the view that the time has arrived, or Was approaching, when the discount rate in New York should be reduced, and with one or two
exceptions there was no dissent from the view that a System policy of lower discount
rates should in general prevail.

It was pointed out, however, that local conditions

in some of the interior reserve districts did not indicate any demand for rate reductions in those districts and that the small borrowings from the reserve banks
indicate an adequate supply of credit for all needs at the present rates.

Officers

of some of the larger member banks were quoted as opposed to rate reductions.

the other hand, it was pointed out that reductions now, which would result in no
harm and considerable possible benefit, would place the reserve banks in position
to make increases later which might serve as warnings without penalizing business
with high rates.

It was also suggested that in order to make a three and one-half per cent
discount rate effective some further purchases of securities might be desirable up
to say350,000,000.

The moat important consideration at the meeting was undoubtedly the fact
that the differential between the rates in New York and the rates in London was
not to-day sufficient to enable London, and therefore the rest of

urope, to avoid

general advances in rates this autumn unless rates here were lowered, and that

the consequence of such high rates as would result in Europe would be unfavorable to the marketing of our export produce abroad and would have an adverse
effect generally on world trade.

Before adjournment of the meeting, the foregoing portion of these
minutes was read to the meeting and adopted without objection.

Thereupon, upon

motion of the members of the Federal Reserve Board present voted that the authority of the Open Market Investment Committee be extended for the purchase, as

and when conditions warrant, of not to exceed an additional 150,000,000 of
investments.

(Signed)

W. R. Burgess, Acting Secretary
Open Market Investment Committee

July 27, 1927.

CONFIDENTIAL

PRELIMINARY MEMORANDUM RELATIVE TO QjPEN

The gold movements of the past two months have illustrated the need for

preparedness on the part of the Federal Reserve System to deal with either gold
exports or importsv which was emphasized in the Chairman's memorandum discussed at

the last Governors' Conference. This year's gold movements have included the im-

port of 130 million dollars of gold from abroad, the eurchase of 62 million dollars.

abroad, the sale of 100 million dollars for earmarking here, and the resale of 60
million abread. There has thue been an impart movement, or its equivalent, of 190

million dollars and an export movement, or its equivalent, of 160 million dollars.
Fortunately these two movements have largely offset each other in their influence

on the domestic credit situation. Otherwise they might have occasioned eMbarrasse
meat, These movements were largely unfwooen and unforeseeable, although at any

time possible under present conditions.
Reeent transactions in the special investment account have been largely

for the purpose of dealing with these changes in gold. At one time, in May, the
account was as low as 136 million dollars, and it has now been restored to 265'

million dollars. The increase represents largely purchases to offset the ear
marking of 100 million dollars of gold here, but includes in addition the purchase

of about 30 million dollars of securities under the authority arranged at the time
of the Governors' Conforente, The following figures show the ehanges from week to

week in the special investment account.

It would appear that this portfolio should

be increased from time to time when favorable opportunity offers, if the system is
to be in a position to meet future eetraordinary gold movements.

April 27 .
May
4 -

$201 millions

11
"

18 -

25
1 8 -

June
"

136
152
188

15 22 -

222
316
246

250

13 -

in replacing 56 million of

11.2

250
250
265

increase in the account in

A temporary

250

July
"

200

ordinary course may be involved

maturities in September which

includes 30 million taken

over from a foreign account in exchange for March certificates.
to take over further

amounts of securities from foreign
The Credit

It may be necessary

correspondents.

Situation

A number of important changes have taken place in the domestic and foreign

credit

situation since the Governors' Conference.

These may be summarized as

follows:
I.

Money rates

abroad

have risen vigorously; open market money rates in

London, Berlin, Zurich, and a number of other centers

were three months ago. The
discount rates.

Open

Reichsbank and the Bank

market

are markedly

higher than they

Austria have raised their

Money rates are close to or above the bank rate in

London, Berlin, Zurich, Amsterdam, and Milan, as shown in an attached table.
firmer money conditions

are

and world prices, which is

undoubtedly

liable to

These

exerting continuing pressure upon world trade

react unfavorably upon our

own trade

and prioes.

There has been some reduction in business activity in this country,
not serious, but indicating a spirit of great caution in business.

There has been
Undigested new issues.

some congestion of the bond market,

due largely to

This sitUation has been partially corrected.

Due largely to reduced industrial payrolls there has been

a slight reduction in the past few weeks in the credit and currency demand, and
total bills and securities of the Reserve System have dipped below one billion

dollars. The New York Reserve Bank gained 50 million last week in transfers from
the interior and New York City member bank borrowing was correspondingly reduced.
5.

There is growing ease

in money conditions, although some rates are

still slightly higher than a year ago, due prebably to a higher discount rate at

the New York Reserve Bank. Current quotations for money are as follows compared
with last year.

A Year APO
Call money
90-day time money
Commercial paper
90-day bills

4
4
3

3/8

3 1/2

Discount Rate N.Y. F.R.B.

3/4

4 3/4i
4 1/4

3.03
3.31

(C of I)

Mar.

1/2

Treasury Issues
Dec. maturity (notes)

J/-41Y-.13-4-1-922-7

1/2

2.87
3.19
4

The Pros ect for Autumn

Normally the approaching seasonal demand for .funds
tighten money conditions somewhat.

If this takes place it would have the result

(1) of increasing the pressure on world
Bank of England discount rate,
consequent unfavorable reaction

might be expected to

=key

and certain of

markets and pernOpa forcing up the

the Continental discount rates, with

upon world trade

and prices; (2) of accentuating the

existing tendency towards some reduction in business activity.
If on the other hand steps should be taken which would prevent any seasonal
increase in money rates, and tend rather towards somewhat easier money conditions,
the following results might be anticipated:
1.

An easing of the pressure upon world money markets, which would react

favorably upon world trade.

The results would be felt partly

for balances to move in the direction of the

highest rate, and

through the tendency
partly- as lower bill

rates here would attract financing to our bill market which might otherwise go

London and require funds there.
Coming at the crop moving season easier money conditions would tend

crops at favorable prices.

to facilitate the marketing of the

It would tend to remove any credit pressure which may
upon business, and would encourage

exerted

business enterprise.

There would on the other hand
courage speculation.

now be

be danger that easier money

might en-

The spirit of business is so cautious that it seems doubtful

whether speculative tendencies

in business would easily arise, but

that easier money would stimulate

speculation in

it is probable

securities.

If under these circumstances it should seem wise to follow a policy
favoring easier money conditions, the immediate problems would be (1) to localize

the

effects of easier money

conditions,

where they would be most beneficial; and

(2) to prevent excessive speculation or exceesive growth in the volume of credit,
In this connection the attached table shows the total bills discounted

at Federal Reserve Banks in the 12 districts.
smaller than it was a year ago

cent in the New

and the

The total is nearly 100 million

decreases in bills discounted exceed 25 per

York, Richmond, Minneapolis, Kansas City, and Dallas districts.
Total Bills Discounted b

FederalResays Banks

'(in millions of dollars)

koc
Boston
New York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago

St. Louis
Minneapolis
Kansas City

July 2
24

126
4435
43

44
56
35
-8

Ended

111112.214.12E.
32

87
42
28
19
37
55
33
6

Dallas

San Francisco

Money Rates in World Markets

y 1927

May 1927

.3/

3.69

- Market Rate
Discount Rate

4.25
5

4.5

- Market Rate
Discount Rate

4.5

4,88

- Market Rate
Discount Rate

2,25

2 .13

Amsterdam- Market Rate
Discount Rate

2,76

3.5
3.5

Brussels - Market Rate
Discount Rate

6.70

London

Berlin

Paris

Zurich
Milon

Vienna
Now York

3,5

4 .5

.68

2 .75

4.25
5.5

2.31
3.5

3.13
3.5

2 .81

8.6

9.25

- Market Rate
Discount Rate

5.38

7,6

- Bill Rate

3 3/8
3 1/2

... Market Rate
Discount Rate

Market Rate
Discount Rate

Discount Rate

.. .75

3 5/8
4

CONFiLLNTIAL
M'inutes of estine, of the Open esrket investment Committee for the Federal
heserve Syet es. in Ta. int;too on July ;-.7,

tit 111)0

iieesre. Crtttner, Platt, 1lth, Jar.es wad ,.olutosa,
tzbers of the Federal Reserve Board

Governors Stmng, Harding, Norris, Fextcher and ilcDougal,
limbers of the Upen kr...rkot investg:eat Gonwittee
...iovernor Young, Federal Reserve Bank of 1k:drat 4,01 i
dovernor Biggs end Chairmzn artin,Feder4s1 Reesrve B4,nw.

of St. Louis
er. harrin, lieeuty Jovernor, Feder-I heeerve Esnk of New Yzirk
U Li ci er et eret ta7 of the Treasury

Mr. Lurgess, Acting ,:ecretary, Open Lrkst Inveretaent Co,mittce
,srs. Noell n4acClelland,
istnt Secretaries, Federal
Reserve board
The meeting was ca-led ,idit

or of the on t.urket investent

Committee with the Federal Reserve Board and representatives of two of the miowestern beaks *ere preeent.

The Chairman presented hie report xviowing si,en

o erations kne credit conditions.

The credit policy of the 6ystei

er °upon f.uily di scu seed.

Consideration was iven to the continued fall in colmodity rices,

to the f r.ct that there was

diminution of borrowing from the reserve bnke

due ai,parently tosoae slackening in busins, and esi-eciaiiy to the relation
of money rates in the United Btttes to ;sooty rates in liuro-ps.

it was reecrt-

ed that bectnse of heavy foreign payaents iihich ere likely to increee %ith
the fail movement of ooiamoditiee to hitrope, tht-rc

..6 a continued drain on

European central blalk gold reserves, which. made it sore thn likely that

central bank rates in iAirope 4ould need to be further advanced this fall.

The

Ger in and Austrian rates have -already been once advanced -_nd there is some

probability of a one per cont. advance in the rate of the id4trik ofingle.nd.
All present at tut. meeting recogliked that these developments .ouid
n ecess ar i 1 y have

depresing effect uiion bt.16inse ,-,broad

miiht tend to

restrict the freed,..ea. of purchasee of goons in thi8 country ht the u su al so aeon .

It *us also brought out that it is the duty of the ctrl brinks to keep

moriey

rates at ee low e level ae may be sttained with sefety, Led the.t at this tioe
ratee could be re-'euced not only eithout harm but with reeeeneble exiiectetions

of beneficia result -.
reesal tins fro o

It wiee fait that the only poaeible adverse development

general lowering of discount 'rotes. would be in the e*etuistive

security osrsete, but thet this poestibility ehould not etend in the way of the
execution of an othereiee deeirabie

There was no exception to the view that the tioe h4 arrived, or tile
approaching, seen the discount rte in Sew York ehould be reduced, end with

one or twe exceptions there m n diee-siat from the view that
of lower discount rates should in general prevail.

EL Systcza policy

It wee pointed out, how-

ever, that local conditions in some of the interior rceer4 districte cud not
indicate eny dernand for rate reduction

in those districts and tbet the mail

barrowinge from the reserve ben'es indicate _.t.-za adequate supply of credit for all

necds at the preeent rates.

Officers of **Me of the lerger member banka *ere

quoted es o,yoseo to rate reductions.

On the other hand, it *es i:,ointed out

that reductions nee, ehich *mid reeelt in no herrn tad censidertbie possible
benefit, -eouldplace the reserve Lemke in poeition t

e.k.e increases later

which It serve es iiitrnings without-2endiring businefib with high rates.
It wee el eo eugge.sted that in order to make a three and one-half

per cent. discount rate effective /tow: further purchazes of eeturitits might
be desirable up `,,o say t5e,eex,,,3)0,

The moat important consideration at the meeting *es undoubtedly the

fiact that the differential between the ratee in Noe Toe( ised the rate6in
London was not today sufficient to enable London, end therefore the rest of,
Europe, to avoid general sdvance-6 in ratee this autumn uniees retes nere pere

lowered, acd thut tte consequsnce of such high rates &a would result in Europe
would be unfavor4ble to the marketing of aur export produce tabrod and would

have an adverse effect generally on yorld trade.
before adjournment of the me-Aing, the foregoing

portion of tee

minutes Wtt read to tL.le molting uhd adoted without objection.

Thereui:on,

14on motion thf, members of the Yed,r1ral Reserve board A4resent voted that tte

authority of te

et Invostment temmittee be extended for tLe euro see,
and whea conditions warrant, of not to excli.ed an additional 0:3,000,000.

of investa4ents.

(Signed)

W. h. Burgess, kctinz Secretaxy
Open k,rket Invt;atz.ent Qormitt e

July 27, 1927.

CONFIDENTIAL

PRELIMINARY MEMORANDUM RELATIVE TO OPEN MARKET ag_fy.,

The gold movements of the past two months have illustrated the need for

prepareanese on the part of the Federal Reserve System to deal with either gold
exports or imports, which was emphasized in the Chairman's memorandum discussed at

the last Governors Conference. This year's gold movements have included the im-

port of 130 million dollars of gold from abroad, the purchase of 62 million dollars

abroad, the sale of 100 million dollars for earmarking here, and the resale of 60
million abroad. There has thus been an import movement, or its equivalent, of 190
million dollars and an expert movement, or its equivalent, of 160 million dollars.
Fortunately these two movements have largely offset each other in their influence

on the domestic credit situation. Otherwise they might have occasioned eMberraesment. These movements were largely unforeeeen and unforeseeable, although at any

time possible under present conditions.
Recent transactions in the special investment account have been largely

for the purpose of dealing with these changes in gold. At one time, in May, the
account was as low as 136 million dollars, and it has now been restored to 265

million dollars. The increase represents largely purchases to offset the earmarking of 100 million dollars of gold here, but includes in aidition the purchase

of about 30 million dollars of securities under the authority arranged at the time
of the Governors' Conference. The following figures show the changes from week to

week in the special investment account. It would appear that this portfolio should

be increased from time to time when favorable opportunity offers, if the system is
to be in a position to meet future extraordinary gold movements.

April 27 May
4'.--

01 millions

June
"

18---25
- -18-

15 22 -

13 -

July

6---

136
152

188
222
316

246

250
250
250

200

250
265

ft
ft
ft
ft
II

tt
ft
0
It

A temporary increase in the account in ordinary
in replacing 56 million of

course may be involved

maturities in September which includes 30 million taken

over from a foreign account in exchange for March certificates.
to take over further

It may be necessary

amounts of securities from foreign correspondents.
The Credit

Situation

A number of important changes have taken place in the domestic and foreign

credit situation since the

Governore Conference.

These may be summarized as

follows:
Money rates

abroad have risen vigorously; open market money rates in

London, Berlin, Zurich, and a number of other
were three months ago.
discount rates.

The Reichsbank and

Money rates

Open market

centers are markedly

higher than they

the Bank of Austria have raised their

are close to or above the bank rate in

London, Berlin, Zurich, Amsterdam, and Milan, as shown in an attached table.

firmer

money conditions

are

undoubtedly

and world prices, which is liable
There has been some
not serious, but

to react

upon world trade

unfavorably upon our own trade and prices.

reduction in

business activity in this country,

indicating a spirit of great caution in business.

There

undigested new

exerting continuing pressure

These

has been some

issues.

congestion of the bond

This situation has

Due largely to

reduced

market, due largely to

been partially corrected.

industrial payrolls there has been

a slight reduction in the past few weeks in the credit and currency demand,

and

total bills and securities of the Reserve System have dipped below one billion

dollars. The New York Reserve Bank gained SO million last week in transfers

from

the interior and New York City member bank borrowing WW correspondingly reduced.
S.

There is growing ease in money conditions, although some rates are

still slightly higher than a year ago, due probably to a higher discount rate at
the New York Reserve Bank. Current quotations for money are as follow compared

with last year.
Call money
90-day time money
Commercial paper

Mar.

July 23, 1927

3 3/8

3 3/4
4 3/8
4 1/4
3 1/2

3.03
3.31

2.87
3.19

4 1/2
4

90..day bills
Treasury Issues
Dec. maturity (notes)
e

A Year Ago

(C of I)

Discount Rate N.Y. F.R.S.

a 1/2

The Prospect for Autumn

Normally the approaching seasonal demand for funds might be expected to
tighten money conditions somewhat.

If this tales place it would have the result

(1) of increasing the pressure on world money markets and perhaps forcing up the

Dank of England discount rate, and certain of the Continental discount rates, with
consequent unfavorable reaction upon world trade and prices; (2) of accentuating the
existing tendency towards some reduction in business activity.
If on the other hand steps should be taken which would prevent any seasonal
increase in money rates, and tend rather towards somewhat easier money conditions,

the following results might be anticipated:
1. An easing of the pressure upon world money markets, which would react

favorably upon world trade. The results would be felt partly through the tendency

for balances to move in the direction of the highest rate, and partly as lower bill
rates here would attract financing to our bill market which might otherwise go to

London and require funds there.

Coming at the crop moving season easier money conditions would tend
to facilitate the marketing of the crops at favorable prices.

It would tend to remove any credit pressure which may now be exerted
upon business, and would encourage business enterprise.

There would on the other hand be danger that easier money
courage speculation.

might en-

The spirit of business is so cautious that it seems doubtful

whether speculative tendencieb in business would easily arise, but it is probable
that easier money would stimulate speculation in securities.

If under these circumstances it should seem wise to follow a policy
favoring easier money conditions, the immediate problems would be (1) to localize

the effects of easier money conditions, where they would be most beneficial; and
(2) to prevent excessive speculation or excessive growth in the volume of credit.
In this connection the attached table shows the total bills discounted
at Federal Reserve Banks in the 12 districts.

The total is nearly 100 million

smaller than it was a year ago and the decreases in bills discounted exceed 25 per
cent in the New York, Richmond, Minneapolis, Kansas City, and Dallas districts.

Total Bills Discounted by Federal Reserve Banks
(in millions of dollars)

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

July 21,
24

Week Ended
1926

July 204 1927
32

126
44

87
42

28
19
37

43
44
56.

55
33

18
45

8
45

Money Rates in World Markets

11.4).y 1927

July 1926

May 1927

- Market Rate
Discount Rate

4.25

3.69

4.5

- Market Rate
Discount Rate

4.5

4.88

5.88

- Market Rate
Discount Rate

6
6

2.25

2.13

Amsterdam - Market Rate
Discount Rate

2,76
3.5

3.5
3.5

Market Rate
Discount Rate

6.70

4.25
5,5

3.75

Market Rate
Discount Rate

2.31
3.5

3.13
3.5

3.81
3.5

8.5

9.25

London

Berlin

Paris

Brussels
Zurich
Milan

Vienna

- Market Rate
Discount Rate

New York - Bill Rate

Discount Rate

4.31

5.38

5.75

7.5

3 3/6
3 1/2

3 5/8

3 1/2

0-2/7//(:?y9974

cifrire

CONFILEITIAL:

August 18, 19Z7

Vy dear Norris:
You win, I m sure agree that I hove been scrupulously careful in not

iotruding my on views upon other reserve benke in rate matters, nor in fact in any
other load affaire except those in which we are all concerned as a eyotem. Oh the
other hand, I have always felt that the New York rate had a greet beoring upon the

rote policy of other reserve banks, sa well se a definite retction upon their loOsl
conditions and o have never hesit4ted to invite discussion of proposed chanose in\

our rate with LI, co leogoes in other reoerve banks.

It does cievolop this time,

however, that policies as to rates, in acme of the other reserve cities, especially
Barton, Philadelrhis. and Ohio:ago, now have

considerable effect upon the

ew York

poel Lion, and it is for that revisor. that I em writing you.
ikon we reduced our discount rate to 5-1P% and se the result of that
action (.ad of open market purchaees) the general level or rotes for more liquid
bane in Nel York declined, there soon developed a tendency to withdraw funds from
NR4'

York; - not only funds which are it/toed here, but balsnces which are carried in

bank.
eeep

I believe that tendency has now reached a point where dvu,nds upon us for
ot,otiori y our lembers tire gfillV1what larger than they would be wers both

PhilEolelphia and Chicago to re140e their rates to 3-1/.
metter for you and your directors to judge and decide.

ThA, however, is a
The important considerations

for our present policy I think W-e die01108ed quite fully in Washington.

Ile oleo

invited the Open Market Committee to New York. so.as to die0168 the matter firet

hand with our foreign visitors.

This is the se- eon of the year ohen we export the gret bulk of our raw

8.13.21

Governor Morrie

materials, principally produced on the farms.

P&Iment In dollen° for these exporte

pats a heavy strain upon the elchange all.rket. Prior to our rte reduction mo5t of
the EUropeon exchanges were hovering around the point where Aold could be 2rofitab1y

ez,-oartec to this country;

loome gold wae coming here, end more sould have cone had

not been able to purchase 4nO hold gold in London, and by good fortune resell it.

le'e

were either directly advised or had other ree,-,cori to believe thz---A if se did not reduce

our rtte bank rates in Plirope would have to advance.

since our rte reduction Ime

announced, I hy,se advice directly from furope that at leaet three or four of the
principal banks of iseue which were then considering rate advances now feel that they
04o et least postpone and poseibly escape doing SO.

Of course the reduction in our rate is only effective if it is reflected
likewise in 'tricot rates.

Not only has our action for the present bcan soccessful

he to rates of diacount at the br.,nke of issue, but it h,e resulted in strengthening
sterling exchan,ge to a point where we have t.sen able to liquidate about 112,000,000

of our bal.sncee in the Eant of Digland, and we

hopeful that e 411 be able to

effect further reduction from time to time without impounding gold in Lon,Jon.

But

we my have difficulty still if any Winccaery drain on /4es York continues from out
of tc.:sn.

Now it seamed to me that thie situation, upon which SO much c1epends for

this country, is a thorough juatific4tion of our rite policy, irrespective of any
effect which our action teig,ht hve upon stook specul,ation.

Tht ogre will always he

with us and if the Federal Reserve System iv to be run w.)1ely with G Vi OS to regulat-

ing stock epeotsintion instead of being devote4 to the interests of the industry and
commerce of tte country, then its policy wi/1 d ce, en aritt e simply to rtmu 1 Lt.$ rig the

affire of g- -abler.

I hewe no hesitation in eressing my impatience 7fi th such

view of our role.
I am wonerin4., -ethather you and your colle,guee feel e I do in reg.hrd to

Governor Norris

the importance of this policy a.nd reelize that the position of your institution

And

the,t of Chicago as iell hse s direct bearing upon the VICCIP'S of shrit tue 4re under-

not writing to suge t much le f,s urge, that 11y om viers should
taking to do. I
be adopted in Philedelphik, but r-ther to invite Prot,: you 00 it +3 expletkition, if you
feel milling to give it, of the contrary vie mi which apperently your tee cl,tee hold.
I think e.lcl n exchtinge of views !Sejtild be of use to both of us.
trite me quite frunkly nd fully.
Best restarts,

Sincerely yours,

George N. Norris,
Governor, 'edema Reserve 3al2K of Phils.delphie,

Philedelphis,, P.

At Amy rate ple_se.

CONFIDENTIAL:

August 18, 1927.

My dear McDougal:

To save writing two letters, I m enclosing copy of one which

I have just sent to Norris.

without aid from you and him we may have q

quite a struggle to keep our money market in order through the next few
months.

The penalty for failure to carry through our program saccees-

fully will be higher bank rates in Ibrope, considereble depression of
the foreign exchanges, and, I am sorry to most reluctantly admit, that

I think it will have a very adverse effect upon our ability to market
abroad what we produce and must sell there.

This is really the whole story, and I am wondering whether

you will not send me a reply to the inquiry contained in my letter to
Norris just as you would express it orally if you were here in New
York.

Beat regards,
Sincerely yours,

J. B. McDougal, Esq.,
Governor, Federal .Reserve Bank of Chicago,

Chicago, Illinois.

August 22, 1927.

PEhSONAL ANL CONFILENTIAL.

Leer Mr. Hutt:

Your personal and confidential letter of August 20,
addressed to Governor Strong, was received here this morning.
Governor Strong is spending s. day or two out of town and will

not return until Wednesday, at which time your letter will be

brought to his attention.
I note with interest the report you make of the consideration given the rate subject by your directors on August 5
and subsequent dates; but, in view of the importance of the subject

mentioned in Governor Strong's letter, I em strongly inclined to the
belief that he would like to have it forwarded to Governor Norris

for his consideration.

I, too, am in sympathy with the idea of not

bringing business matters to the attention of the governor when he

is away on holiday, but I do think that this matter is of sufficient
importance for the letter to be forwarded to Governor Norris.
With kindest regsrde, / am,
Sincerely yours,

Mr. Wm. H. Hutt,
Leputy Governor, Federal Eeserve Bank

of Philadelphia,
Philadelphia, Pennsylvania.

J. H. CASE,
Deputy Governor.

tigit

August 22, 1927.

PLESONAL ANL CONkIIANTIAL.

Lear Mr. Hutt:

Your personal and confidential letter of August 20,
addressed to Governor Strong, was received here this morning.

Governor Strong is spending a day or two out of town and will

not return until Wednesday, at which time your letter will be

brought to his attention.
note with interest the report you make of the consideration given the rate subject by your directors on August 5
and subsequent dates; but, in view of the importance of the subject

mentioned in Governor Strong's letter, I em strongly inclined to the
belief that he would like to have it forwarded to Governor Norris

for his consideration.

I, too, am in sympathy with the idea of not

bringing business Letters to the attention of the governor when he

is away on holiday, but 1 do think that this matter is of sufficient
importance for the letter to be forwarded to Governor Norris.
With. kindest regards, I am,

Sincerely yours,

Mr. Wm. H. Hutt,

Leputy Governor, Federal Eeserve bank

of Philadelphia,
Philadelphia, Pennsylvania.

J. H. CASE,
Deputy Governor.

rEDERAL RESERVE BANK OF CHICAGO

Au4ust 24 1927.

1,11WA*1tXt:OKYInEXTIAL.

t(1_#I.vi.
(

Wr. Nm4. :iron*. Governor,
Pedermi Reserve Rank of New York,
Sew York, low 'fork.

Dear Oevereor Strong:

I have today returned from a short vacationup
North, and find awaiting your letter of the 18th instant, with
which there was snolosed a copy of your letter to Governor Morris,
intended also for Chioage, invitimg an expression of our views
with respect to the question of disocumt rate adjustments.
Ensuing en the meeting of the Open Market Investment Cennittee, held in Now York in July. I reported as fully as
possible to our Board, making particular reference to the views
expressed tiler* bearing upon the discount rate policy of the
Federal Reserve System and its relation to, and its effect upon,
the diseount rates of London and the eentral banks in Europe.
Later on. following the meeting of the Open Market Investment
Committee held in Washington an July 27th, I informed our Executive Committee of the developments there, and, of course, this
report tneluded the presentation of the minute of that meeting,
as prepared for submission to the Boards of Directors of all of
the Federal Reserve Banks. Consequently, my associates are informed with respeet to the underlying considerations which prompted
your action in the matter of rate adjustment. I think the important
footer's involved have been carefully considered here. There appeers to be nothing in the 1°0.11 situation here or in the district
undersituation mikioh would justify a change in our rate.
stood that the governing factor in the matter of your rate reduction. and. I believe. in the changes mad* by other banks, is the
intentional situation, and it seems to me that the desired result has already Omen attained through the reduction in your rate.

It is

With respect to the question of making the rate a
System matter, up to the present time we are not convinced as to
the necessity of having uniform rate in all districts.
'Mlle I understand from your letter that you hold
a contrary view, it 64,110 to me that action here would have little,
if any. effect upon the Sew York position. It seems from your letter

retear. 01111,NoT ....ft Or cmicAGO

Governor Strong.

-2-

that you are of the op,nion that failure an our part ant: an the
part of Philadelphia to act has resulted in a tendency to withdraw funds from New York. As a result of inquiry made locally,
we do not find that funds are being withdrawn from New York te
Chicago. On the other hand, however, we know that ants In this
district are transferring funds to London because of the higher
rats Obtainable there, and' this, according to my understandlag,
is a natural result of the establishment of s larger differential
as between your rate and the London rats.
In the foregoing, I have endeavored to inform yem
with reupeot to our position in the premises. and I can assure
you that we will continue to watch the situation closely and be
prepared to act if and when, In our judgment, it seems expedient
to do so.
Very truly yours,
4.1

Governor

August 28, 1927.

PEnSONit AND
CX)P4 nVENTIAL

My dear Mao:

/ have read that austere letter of yours d-ted August 4, ae after finishing it feel as though I wre sitting in an unheated chT.:zch in midwinter, somewhere in Alaska.

The fact is, my dear Mac, as. I explained to you in Washiniiton I

don't believe, and never have belied that local conditions in Citioaco would be

justification alone for a reduction in your rate. Nor do I believe that simply
local and domestic conditions in New York were justification for our rate reduction.
But what I do believe is that the objects which we noutht to accomplish by our rate
reduction 4::re mainly tor the benefit of the producers of exportable crape in your

district and the other districte, and that thoir ability to find their markets for
the surplus of their crops in Folrope is very much advanced by ahat we have done and

would be further advanced if you followed with a similar rate reduction.
words, it is neither a New York question nor a Chicrgo question nor

In other

district ciues-

tion, but a national question be! ring upon our markets in Europe, consequently an
international question., And .it. was solely on that. account that I felt justified in
writing you, and the fact that you and your as ao ci t ec in the bank take the position

that there is no justification in the ChinE.F0 eintriot for reducing the discount

rates strikes me as similar to a statement that there is no justification for bnybooy
viearing any clothes when the weather if

warm.

Ne don't wear clothes simply to keep

warm.

However, I am endeavoring to preserve my sense of humour and issnt you to

cultivate yours. If we don't agree, that ends it, but I am personally worry that
we could not work to6tIthsr op ei eyettm policy such as thi.-5 is

even mors in your interest as a. district than it is to ours.

It is as much or

J. E. McDougal

8/26/27.

Nov, put that in your pip and awoke it, Old Man, and dontt get to think
that 1have any leas rew,rd fey- you because we disao-e now and then.
Sincerely yours,

Mr. James B. McDougal,

q/o rederal Reserve Bank of Chicago,

Chicago, Illinois.
Beirtiz

,tpttNnber 1, 1227.

My dear Norris:

It wee kind of you to write me while on holiday.

In fact, I felt a

guilty that you should have been troubled by even hewing to read my letter.

What

you write me in most illuminating and, if I may ay ao, most encouraging an to the
spirit in which thene (mentions are oonAd:"red by you and by your associates in
Philadelphia.
You have always bad very keen appreciation of the importance .:nd the mag-

nitude of this problem o: our foreign relations. There arc tinet, when it gives us
a great denl of anxiety here, and that ie especially co Aton3ver thors appear to
develop nbiarp deviatione of opinion as to our policy.

Eeset. ae we are with a E reat variety of difficulties in dealing with the
personal equations which cannot help but exist in so large end complicated 4. system
as ours, it is encouraging when one of your 110$001. 41;.0$ and partnere rrita suel

letter ex the one I just had from you.
It by chance you are returning home through New York and ere: able to plan
to spend a dt., here I 1-4,..pe you R411 do so. If that i 6 not possible you may be able

to give up

day after your r:,. ..urn and sake' visit *ith 116. If so I hol:e you ex1

do it on the day ehon our -:11rectors meet whEn te can talk it all over. In any event

an not let tide matter disturb your vacation. That in really elto6etlicr too impor-

tant.
Sincerely yours,
Mr, Georke L orris,
Cio Sunset Lungelow,
Campobello,

ViaEaAport, Maine.

BANK OF FRANCE - PARIS
Confidential

July 28, 1927:

Cables

Strong to Moreau: (Gov. Bank of France:
One

Conditions now seem to justify reducing to 3-1/2 within
next fortnight and we expect some interior reserve banks
to do so earlier

Two

We feel that this is in the general interest as it
certainly is for our own position and hope you agree

Three

August 4, 1927

Out look is for further easing of all New York rates

Rist (Dept.Gov. Bk of France) to Strong:
One.

We note the change looked for in your discount rate which
we understand thoroughly.

We have discontinued buying

gold on London market since July 23rd.

EXTRACT FROM CORRESPONDENCE BETWEEN
FEDERAL RESERVE BANK OF NEW YORK AND BANK OF FRANCE
RE DISCOUNT RATES

August 10, 1927

Governor Strong to Governor Moreau:
"It is only fair that I should also write you something
They
of the motives leading to our recent rate reduction.
can be summarised briefly as follows:

There was clearly developing some hesitation
in business conditions, not yet widespread but rather spotty
as to location and as to the various industries affected,
but it nevertheless was becoming apparent that there was
some slight slackening of business in various directions.
We were just entering the season when very
heavy demands are made upon our banks for crop moving purposes
and when arrangements must be made for financing that portion
In view of the business
of the crop which moves to Europe.
developments it seemed desirable that these demands should be
arranged at the least interest cost which was safe, having in
view of course the possibilities of speculative developments.
The effects of the drag upon foreign bank
reserves because of the depressed European exchanges, arising
as it did at the commencement of the season when the heaviest
payments must be made in this country, convinced us that lower
interest rates in this country was the only thing which would
overcome this tendency and prevent another large movement of
gold to this country.
By acting as early as we did the arrangements
of credits for the export of our crops was more likely to be
made in dollars than in sterling, thereby relieving the exchanges of the immediate demand for dollars which would otherwise arise.
The only consideration against a reduction in
our rate was the stock market speculation. Personally I was
willing to ignore that as a factor as I believed it could not
possibly outweigh the importance of the other considerations,
and, in fact, I have felt that the advances in stock values and
the expansion of the stock loan account had pretty well reached
the maximum. Anyway, as it happens, President Coolidge's
announcement that he would not run for another term as President,
which happened to follow our rate reduction so promptly, has in
itself proved to be a check to speculation and I think the danger
which we might have apprehended on that score has now been reduced.
"We are now beginning, about a fortnight later than usual,
to feel the demand for credit.
Our banks are fairly steady borrowers but the position is now such that this necessary financing

August 10, 19 27 (continued)

will be conducted smoothly and probably without any advancing
interest rates. And we hope that the effect upon the position
of the exchanges will be favorable and will continue throughout
the fall."
August 19, 19 27 Governor Moreau to Governor Strong:

"I appreciate very much the explanation which you so kindly
give me of the reasons for your recent discount rate reduction at
'Ne understood very well in Paris that
the Federal Reserve Bank.
can only rejoice at
you desired to be of help to Mr. Norman.
any measure that tends to assure the stability of the pound
sterling."
August 30, 19 27 Governor Strong to Governor Moreau:

"Our rate reduction seems for the present to have accomplished
the results desired.
We were anxious to avoid further large shipments of gold to this country, and, even more, to postpone or
possibly to completely avoid the need for any general advance of
I believe such a development would
bank rates in airope this fall.
have been distinctly harmful and would have chilled business and
business enterprise and interfered with the normal course of economic recovery. Fortunately we have so far escaped anything like
an outburst of stock speculation because of this rate reduction
and the cheaper money which has accompanied it, but one cannot
promise as to the future."

BANK OF

ENGLAND - LONDON

Confidential Cables

Strong to Norman

July 28
ONE

Conditions now seem to justify reducing to 31
within the next fortnight and we expect some
interior reserve banks to do so earlier.

TWO

Please advise me fully of your prospects and
whether this may be expected to enable you to
avoid advance.

THREE

Outlook is for further easing of all New York
rates

FOUR

Norman to Strong

July 29

Am advising Schacht.

ONE

This is wonderful and you deserve a crown but it
is too early for me to answer your paragraph 2.

TWO

Exchange seems stronger for the moment owing to
repatriation of proceeds of German loans issued
in New York.

But the tendency is weak and our

prospects must depend on effect to be produced
by easing of New York rates and your eventual
reduction.

THREE

I doubt being able to give you any useful forecast for at least a month but undoubtedly prospects of our avoiding later advance will be greatly improved by your reduction and this I guess
applies also to Schacht.

Harrison to Norman

July 30

Our #21 paragraph #1 Kansas City reduced to
3 1/2 last Thursday.

August 2
ONE

Norman to Strong
Vissering came today to discuss question of increase

in his bank-rateto 4 1/2 per cent which he considered imminent - particularly in view of recent exports
of gold from Amsterdam to New York.

I outlined to

him our recent discussion in New York and pointed out
easing of your call money rate and reduction in Kansas
City with result that he hopes to continue without
change.

But he is somewhat doubtful how long he can so

continue in any event.
TWO

August 4

Was our 113/27 sufficient for your immediate need.
Federal Reserve Bank of New York to Norman
Our rediscount rate reduced to 3 1/2 per cent effective
August 5.

August 8

Norman to Strong
* * * * *

ONE

Your 30/27

TWO

Following your rate reduction there was some temporary
eaSing in discount rates and firm exchanges.

Besides

supplying continental demands I expect to secure some
gold tomorrow for Bank of England and for Federal
Reserve Bank of New York in accordance with your #28/27
August 10

Federal Reserve Bank of New York to Norman
No. 35/27

Our Discount rate reduction followed by

slight further decline in open market moneyrates;

ninety day time money 4 1/4, prevailing commercial
paper rate 4 per cent, bill rates unchanged.

* * * * *

EXTRACTS FROM CORRESPONDENCE BETWEEN FEDERAL RESERVE BANK AND BANK OF ENGLAND RE
DISCOUNT RATE

August 6, 1927

Letter Mr. Lubbock (Dep. Gov. B/E) to Governor Strong:
"The month of July was uneventful here. The market rite
of discount remained steady at about 4-5/16: The Bank neither
gained nor lost gold: several loans were issued, some of which
were not very successful: The exchanges showed a tendency
The situation was not satisfactory,
to move against us.
and we ought to have been gathering strength to meet such
demands as may be made on us later in the year.
Last week we received about 1.400,000 of the South
African gold, and your rate was reduced. On this the
market were prepared to assume that rates should be easier
here, and there was e temporary weakening; but money is
not plentiful and the rate has returned to its previous level,
where, for the present at any rate, it should remain. The exchanges have moved in our favour, but it is not satisfactory
that at this time of the year your exchange should still be
below 4.86."

August 16, 1927

Letter Governor Strong to Mr. Lubbock:
"I am grateful to you for writing me about the position
of affairs in London. Since our rate reduction the exchange
position has altered so materially that yesterday we were able
to draw on you for L1,000,000 at the minimum rate mentioned
and it may be that we will
in our recent cable exchanges;
liquidate the account still farther as opportunity arises from
day to day.
This I understand is according to the Governor's
desire, although, of course, if he would prefer to take advantage of the present opportunity to further reduce the
The important thing is
French balances we will not object.
that we should know precisely your own preference.
The present position has improved and of course the
foundation of the improvement is not a very substantial one.
Doubtless it is less substantial than it would be had not
the French skimmed everything off the market for a time
including such loose gold as came to London.
Yesterday I had a call from Mr. Armitage of the Commonwealth Bank and expect later to meet Mr. Mason.
Mr.
Armitage had a Mr. Collins with him and we had quite a
discussion of their plans for opening an office in New York;
for placing loans here; and more especially in regard to
I pointed out to him that
shipments of gold from Australia.
were it possible to induce the steamship companies to make
reasonable rates to London it would be more satisfactory
for us to accept deliveries of gold there at prices which we
could afford to buy at rather than to have it come here; and
that ultimately arrangements of this sort which would keep
gold out of this mouse trap would be to the advantage of everybody, especially the European banks of issue and quite possibly the Bank of England.

-2-

AuguEt_16,

1927 tcontinued)

Governor Strong to Tsh'. Lubbock:

"Our money market has not been working quite as easily towards
a lower level as we had hoped, largely because of what appears to be
a considerable demand for funds in the west, where the crops are now
being harvested and which has turned the domestic exchanges adverse
to New York and drawn down our gold reserves and impaired New York memBut I still feel that we can handle the situaber banks reserves.
tion satisfactorily through the period of fall demand."
Auoust 20, 1927 Governor Norman to Governor Strong:
"Since the reduction in your rate our position has been
this latgreatly improved and our control Quite satisfactory:
ter is partly due to the markets uncerteinties about the Autumn.
There is a Government maturity on October let of some WO mil.
which will he difficult to deal with except through the short
money market: on the other hand one cannot measure the effects
of the regular fall payments on the exchanges. But as people
seem alive to the dangers perhaps preparations have been made
in advance."

Aueust 2,

Governor Norman to Governor Strong:
"I have no more to say about gold purchases here for your
account, I mean other than those to prevent shipments to New
York, partly because the question depends upon your willingness
to purchase (of which you can judge and I cannot) and partly
because the direct shipments from Capetown to Buenos Aires are
likely to be so heavy thA I doubt whether for some weeks to come
there will he any gold iMondon Market worth counting. I wrote
you the other day how this question struck me and since then
you have sold more sterling than I expected.
"In continuation of what I wrote to you on the 11th about
the Sterling held by the Bank of France, I can most completely
bring you up to date by enclosing a copy of my letter to Rist
(to which they entirely agree).
"In so far as I was a party to any understanding, I felt
that this position-should now be cleared up one way or another.
I was committed to Rist as well as to you to do my best and,
if it had not been for Moreau's absence, it would have been
arranged a couple of weeks ago."

August 25, 1927 Governor Strong to Governor Norman:

"Our rate change seems to have been salutary and effective
and none too soon, but we have been scratching a bit to keep the
This is partly due to the
market rates in line with our discount rate.
to the regular seasonal demands and partly due to the reluctance of
Philadelphia and Chicago to reduce their rates, which results in
some drain from New York to those centers. I think we have lost
something like $130,000,000 of our reserves in the last few weeks
but I am still without apprehension as to the success of our program and even hope shortly to see these two rates also come down.
****,elc
"Yours of August 11 reached here while I was absent, and
I hope all rate advances abroad can be
has just been read today.
It will be one of the justificaavoided over the fall period.

-3_
August 25, 1927 tcontinued)

Governor Strong to Governor Norman:

tions of our policy which has aroused some slight criticism but
nothing disturbing.
*****
"On the whole I think you have done a wise thing in your
arrangement with the Bank of France, and I believe the transaction
It indicates such a willingness on your
is going through today.
part to be accommodating and helpful that it will certainly bring
an equally satisfactory response from them in later days when new
problems arise.
*****
"I think we do see eye to eye in regard to our sterling assets.
If the transaction was useful at that moment, that, after all, was
what we intended to accomplish, and there is some advantage to us in
transferring the London portfolio into a New York portfolio, besides
the advantage of having a reserve purchasing power for London bills
in case later such purchases become desirable. We would much
prefer to buy gold when it will otherwise come to New York, then we
can hold it with you and dispose of it as opportunity arises, thereby keeping it out of the mousetrap."
August 29, 1927

Governor Norman to Governor Strong:

"I have been cabling so fully as to the Exchange position that
I can say no more about it except that the news of the opening of
the Conversion Office (i.e., free gold export) leaves me uncertain as
to its probable effect on the Argentine Exchange and on the Argentine
It is true that our position may be tender, chiefdemand for gold.
ly because the French skimmed everything off the Market some three
months ago:
otherwise we should now have been in a strong position.
As it is, things are a deal better than a few weeks ago they seemed
likely to be."
*****
"Of course I am very anxious that, as we agreed, gold from
Australia should be sent to London rather than to New York: I will
have the question of freight charges, etc. gone into carefully. Rut
you will remember the answer of the Bank of England to this question
while I was in New York:
I see it set out in Lubbock's cable of
the 18th of last month.
As to gold purchaees and prices in general, I now have some
hope that the Bank of England will be allowed to pay more than
778/9d for gold on this Market in case of undesirable competition:
that would be a great help to us.
There has of course always been
a legal requirement that we should pay that price and legally we are
free to pay more. But I have only ascertained within the last few
days tgat 20 or 50 years ago, when there were heavy demands upon
this Bank for sovereigns, it was the custom occasionally to pay above
77s/9d for bars.
Of late, on the other hand (with no such demand
for sovereigns as formerly) it has not been thought we would be wise
to pay over the statutory price and the result of not having done so
has doubtless tended to supply gold for the Central Banks of Europe.
Before, however, I can speak definitely, I must wait to get the
blessing of Addia and several others, who have strong views on gold
purchases and prices. "

REICHSBANK - GERMANY
Confidential
July 28

Cables

Strong to Schacht
ONE

Conditions now seem to justify reducing to 3*
within the next fortnight and we expect some
interior reserve banks to do so earlier.

TWO

Please advise me fully of your prospects and
whether further advance by you is still probable if we reduce.

THREE Outlook is for further easing of all New York
rates.

FOUR
July 29

Am advising Norman.

Schacht to Federal Reserve Bank, New York.

Many thanks for information. Situation here
still tight hope to maintain present rate
especially if your measure comes soon.

Sent

copy to Norman.
July 30

Harrison to Schacht

Our #2 paragraph #1 Kansas City reduced to 3*
last Thursday.

72.7

rikii?fR

9a/07-Iii(e_ 7-1)

lc ce2lic r5gavt

/9/1//cc

ep/r

C 0 P Y

FEDERAL RESERVE BOARD
WASHINGTON
January 27, 1915,

My dear Governor Strong:

I have your letter of January twenty-sixth inclosing clipping from the
Annalist and copies of telegrams concerning changes in discount rates sent to you
from time to time by our Secretary's office with the Board's approval.

I was sorry to have the Governors raise this question of interpretation
of the law and thought that the Board had Made its point of view entirely clear.

Inasmuch, however, as you revert to this matter, I think it necessary to state
that since the conference with the Governors the Board has fully discussed the
question raised by you on their behalf and I repeat to you what was stated at
the meeting, and in doing so am voicing the opinion of all the members of the
Board.

The rights and duties of the Board are fully expressed in the law.
It is our function to review and determine the rates.

We may review and deter-

mine the rates of the Federal Reserve Banks at any time, just as much as it is
incumbent upon us, when we think it our duty to do so, to require one Federal
Reserve Bank to rediscount for another.

To concede that the Board should have

the right only to review rates when Federal Reserve Banks shall indicate their
willingness to make a change, would not only be abdicating a power, but would be
neglecting a duty which has clearly been imposed upon us.

There cannot be any

doubt that it is our function to use our influence in regulating rates to such
an extent as it may be necessary to bring the various Federal Reserve Banks into
harmonious relation and cooperation with each other, and to exercise such influence

-2or power in such a way as may be indicated by the requirements of any district,
or the entire country, and by its relationship to the world markets.
clearly contemplated a central authority as a means

The law

coordinating the twelve

banks under a comprehensive policy, and the Board has determined to act upon
these lines.

As you stated, you and I certainly are not very
matter.

far

apart in this

We all have only one thing in mind, and that is to achieve the best

possible results, and I am convinced that when once the system will be well
under way and when normal times will be re-established,the rates will originate
in their natural way in the districts and that normally the Board's function
will rather be to approve than to indicate rates.

Under no circumstances, however, can the Board consider

for a

moment

failing to insist on its legal right to suggest changes in rates or to review
and determine them whenever this should be required, for the best of all.

The question is of such importance that I thought that I should
express myself

fully and

clearly upon the subject.
Very truly yours,

(signed) Paul M. Warburg

Benjamin Strong, Jr., Esq.,
Governor, Federal Reserve Bank,

New York.

P Y

-ft
FEDERAL RESERVE BOARD
ASHINGION
December 6, 1917.
Dear Sir:

Inclosed herewith is a table showing the discount rates which have
been approved by the Federal Reserve Board as of December 4th. This
table shows the changes which were made by all the Federal Reserve Banks
at the suggestion of the Board, except in the case of the Federal Reserve
Bank of New York, which, because of conditions of a local character, has
asked that action be deferred until December 15th.
The table will show greater uniformity in the rates established
It
by the eleven banks which have acted than has existed heretofore.
has been the desire of the Board to simplify the rate schedule and the
means of acting upon changes in rates. There are only two schedules
for fifteen day paper, one for commercial paper and collateral notes secured by commercial paper, (including commodity paper and trade acceptances) and the other for collateral notes and customers' paper secured
by Government securities. Heretofore there were four rates, as some
banks charged a different rate for a note secured by commercial paper
than for fifteen day commercial paper discounted, and some had a rate
one-half per cent higher for member banks customers' notes secured by
Government securities than for a collateral note secured in the same way.
Some banks had a special quotation for the fifteen day trade acceptances.
In telegrams which were exchanged between the Board And the
banks some confusion has arisen because of difficulty in describing the
character or maturity of the paper to which the rate referred. In
order to avoid this in the future there has been inserted in the table
a code word at the head of each classification of paper, and hereafter
in telegraphic correspondence regarding rates these code words will be
An additional code word has been inserted for bankers' acceptused.
ances, and two additional code words appear for commodity paper having
from 16 to 60 days and from 61 to 90 days to run, for use by such banks
as still maintain a quotation for this kind of paper, although for the
The
time being the rates are the same as on ordinary commercial paper.
fifteen day rate for commodity paper shall remain merged with the
fifteen day rate for commercial paper, even though a special rate for
longer time commodity paper be reestablished later on.

It should be understood that fifteen day trade acceptances
will be taken under whichever classification may be the lower. To
illustrate, one of the banks has a trade acceptance rate of 3i% for
1 to 60 days and a fifteen day commercial paper rate of 4%. Fifteen
day trade acceptances will according be taken by that bank at 31-%.
At another bank the rate is 31% for trade acceptances from 1 to 60
days and 3% for fifteen day commercial paper. In that case the trade
The
acceptance would be taken at the commercial paper rate of 3%.
Board is of the opinion that when commercial paper or trade acceptances
have run down to fifteen days, the difference in classification is not
of sufficient impottance to warrant a special quotation.

Very truly yours,

Governor.

o
COPY

FEDERAL RESERVE BOARD

ASHINGTOU
X-1307

December 14, 1918
SUBJ1i,CT:

Rates of Discount.

Dear Sir:

You have been reporting to the Board weekly, on form No. X-877,
rates of discount prevailing in your district and your recommendations
as to what changes, if any, should be made. As you know, the Board
requested that in order to have all reports considered at the Board
meeting on Thursday, your report be in its hands each Wednesday, and
carry your recommendations of rates for the succeeding week.

The Board has decided to discontinue the use of these mail
reports, and reouests that recommendations of changes be sent in by
telegraph on each Wednesday. If it is desired to continue in effect
prevailing rates, a telegram to that effect should be sent, so that
the rate situation in your district may be before the Board constantly.
In telegraphing changes recommended, kindly identify the various classes
by the code words shown in form X-877, as follows:
Open
Trade
Market
:Acceptances: Pur-

DISCOUN TS

chases.
:DUAL
DRUM: DALE : DYRE:
DOVE
:Secured by US:
:Within :16 to:61 to:Agri- :certificates :1 to :61 to:
All
Maturities :15 days :60
:90
:cultur :of indebtedness 60
:
90
maturities
:includ- :days :days :al and :or Liberty Loan days:inclu:
in
:ing
:live
bonds
insive:
:member
:sive :e1u- :stock :Within 15:
c1u-:
days
;banks'
:sive :paper :days in- 16 : sive:
:collat:over :eluding
to
:eral
:90
:member
90
:notes
:days
:banks'
days:
:
:
:collator- in:
:al notes clu
:
:
sive

CODE WORDS: DAIS

:DEAN :DINE :DOOR

Kindly acknowledge receipt.
Respectfully,

The Chairman,
Federal Reserve Bank,
New York, N. Y.

W.P.G. Harding
Governor

oe forwarded to reach the
Jderal Reserve Board not later
than Thursday a.m. each week.

Date

New York, N. Y., December 11, 1918

MOMMUMIU

Federal Reserve Board,
Washington, D. C.
Sirs:

I have the honor to forward the recommendation that no Change be made in the
existing discount rates for the vote of our directors, for the week ending Thursday,
December 19, 1918.

(signed) R. M. Gidnez__
Federal Reserve Agent and
Asst.

Chairman of the Board

I have the honor to request that the following rates be approved by the
Federal Reserve Board for the Federal Reserve Bank of
191

to become effective Friday morning

DISCOUNT
CODE WORDS :

DAIS

: DEAN

: Within : 16 to
Maturities : 15 days : 60 days
: includ, : inclusive
in
:
ing
:
: member :
:
days
: banks'
collat:

eral

: notes

DINE

- .

61 to

90 days

Indusive

OP EN
DALE
DIRE
DRUM
MARKET
DOOR
DUAL
Secured by U.S.
FUR1
to
61
to
CHASES
Agricul- certificates of
indebtedness or 60 days 90 days
tural
inclus- inclusand live Liberty Loan
lye
ive
bonds
stock
Within 15:
paper.
days in- : 16
over
eluding : to
90
:
member
days
90
banks'
:days
oollater-:inclusal notes : ive

and so forth

OPY
February 2, 1920.

Dear Governor Harding:

At the last meeting

of our directors the proceedings in regard to

the establishment of the rates of discount which were announced by this bank
on January 22 were reviewed and considered, particularly with respect to the
new minimum rate of 5 1/4% for the purchase of acceptances in the open market,

which was fixed by the Board not only without recommendation from or consultation with OUT directors or officers, but as far as our officers can remember

we had had no previous intimation from the Board that it felt our buying rate
was too low.

The discount market which centers in New York City is a delicate
affair, the resultant of adverse interests and made up of many elements, including national and state banks, private bankers, branches of foreign banks,
discount houses and bill dealers.

Stability is one of its essentials and,

while it must necessarily fluctuate with the demand for money, yet it is
important that such fluctuations should be reasonably gradual.

iH81-188HHH8SH

Our directors, accordingly, ask me to request the Board
the minimum buying rate

to reduce

to 5% in order that there may be an element of flexi-

bility available should it be, considered advisable, from time to time, to

buy very short prime import bills at somewhat less than 5 1/4%.

In sending the Board this request our directors have asked me to
express to you their unanimous feeling that whatever may be the legal powers
of the board in respect of fixing rates, it is desirable, if the interest and
services of responsible directors are to be retained, that there should be a
continuance of the practice heretofore followed of arriving at discount rates

by cooperation between the bank and the Board which seems to them to be the
procedure indicated by the wording as well as the spirit of the law.

Hon,P.G.Harding,
http://fraser.stlouisfed.org/
Governor,Federal Reserve
Federal Reserve Bank of St. Louis

Very truly yours,

Pierre Jay
Board,

Chairman.

COPY

FEDERAL RESERVE BOARD

WASHINGTON
March 4, 1920

Subject:

Recommendations covering changes
in discount rates.

Dear Sir:

Since the Board no longer considers recommendations
for changes in discount rates at Federal Reserve Banks upon a
stated day each week, and is at all times prepared to consider
such recommendations in its regular meetings, it is reeuested
that the practice be discontinued of sending to the Board each
Wednesday a code telegram submitting your recommendations regarding discount rates in your district.
The instructions regarding reports to the Board each
Wednesday Idth respect to discount rates, contained in the
Board's letters of December 14, 1918, and August 7, 1019, (X-1307,
"Rates of Discount", and X-1645, "Additional Code Word for use
in Discount Rate Telegrams") are accordingly revoked, and hereafter, the Federal Reserve Banks will advise the Board only when
submitting recommendations for changes in the prevailing discount
rates for the review and determination of the Board. When
recommendations are forwarded by wire, the code suggested in the
Board's letter of December 14, 1918 (X-1307) should be used.
Very truly yours,

Secretary.

Mr. Pierre Jay,
Chairman, Federal Reserve Bank,
New York, N. Y.

(.4.y.

r.0

6
TT

7-4-5i: 10

FEDERAL RESERVE BOARD

I;A
Hr,

F.DRAtiAll0iC41
DnESF 9,FFICIAL. CORKE5F0111,EY4
FEDERAL RESERVE BOARD

WASH I NGTON
TO

ndand

January 5,

1926.

nur,lbfir.

X-4493

Procedure at Reserve Banks on Rates.

_421:67iiii-6T:

Dear Sir:

In order to give greater uniformity to the
procedure in the matter of fixing discount and open-market
rates and to provide for a consideration of these questions
at each meeting of the Boards of Directors of the Federal
Reserve Banks, the Board requests that each Federal Reserve
Agent, in his capacity as chairman, present to his Board
of Directors a complete schedule of the rates Prevailing
at the bank for their consideration and action.

The schedule of rates should include the
following:

Discount rate.
Minimum buying rates by maturities for bankers,
acceptances.
Rates at which bankers, acceptances may be purchased, with agreement to resell (so-called
repurchase agreements).
Rates at which Government securities may be purchased'with agreement to resell.

Following each meeting of the Board of
Directors the Board desires to be advised by telegraph of the
action taken by the Directors, either in approving the existing schedule of rates, or in recommending change in any
one of the rates.

Very truly yours,

nA0
JAN 6

1926

r-, p
TO ALL FEDERAL RESERVE AGENTS.

D. R. Crissinger,
Governor.

fk earl.
4/AAA.

September 1, 1927.

re:
At the meeting of our directors held today the following

schedule of existing rates was presented and no changes were made:

Discount rate - 5 1/2%.
Buying end repurchase agreement rates:
Bankers acceptances Minimums established by this oank:
61 to go days- 31/4%;
1 to 60 oeyE 4 months - 3 3/6%; 5 and 6 months - 3 3/4%;
Repurchase - 3%.

Currently effective:
1 to 45 days - 3%; 46 to 0 days - 3 1/4%;

4 months - 3 3/8%; 5 knd 6 months - 5 3/4%;
Repurohaee - 3 1/4%.

Trade Bills:
Minimum established by this bank - 3 1/2%;
Currently effective - 3 1/Z%.
Government,:
Repurchase - 3 112%.

Respeotiuliy,
J. E. CRAU,
Assist&nt Secretary.
Federal Reserve Board,
Neshington, D. C.
IHB

45,

'-dua

cte
(j)

7,4

aThirna.SAIMILlai

Ototober //, 1926,

Dear Governor Harding'

During the past fee weeks negotiations hove takea p/am in Leaden be-

tween the Wilma goverment mg its baskets ott the me hang and the National

Bask of telgium and mortals be of issue on the

other head, looking toward

the

establiorment of loam and credits for the purpose of stabilising the Belgian
currency.

Mr. Joy, who happened to be abroad at the tine, was present at the

meeting between the new Govereor of the National leak of Beigium, Mr. Franck,

and the myresehtatives of other matte/ banks, end on Ootober 3, cabled to us
that thegatimal Seek of Belsium Mi sifted us to groat them a credit.
It was proposed that we Mona/ agtee for a period of one year to purchase 9u-day ommerelal bills drawn either to Belgian francs or other stable
ourrency with the following understand/awl

( a )

That the hills whoa dismounted muld have a maturity of
at /east 20 days.

(b)

That they would bear two names besides thot of the rational
Bask of reloiesh

(o)

2hat the Nations/ BIM of Belgium vould agpee to export
gold if necessary to repay any drawings leder the credit
and that the Jovemmat would undertake to place no obstacles In the Illey of mob experts.

(d)

That the rote of disomat wouLi be me per

cent above our

dieoount rate, with a minimum of five per amt.
(o)

That the rational Beak of De/glum would defray any stump
duty payable on bills bought by es.

(f)

That apy seevate needed by the rational tank of Be/gium
under their various credits pith the severai beaks of
Issue would be drama and repaid ratably aad part paean
and

W. P. G. Hardin& Esq.

10111/16

(I) That the commission for our undertaking for a period of
one year to purchase bills would be eme half per °eat
per seme.

The propose/ is that several oentral hooks, which have been requested
for a cretikiacauding the Bank of Ragland., the Netherlands Bank, the Relahstgaik,
the Aries National bash, the Bungarien National Bank and the Federal Reserve Bank

should agree to pure/wise or make advanoes upon eamersial bills in sweats equal
in the aggregate to five ad/liea wails sterling or

its equivalent,

.While neither

the aggregate seemet mer our amount is as yet definitely determined., it

is contesp.

plated that we Mheuld agree to purohase somewhere between five and ten million

doltares
It 18 emdersteed, however, that none of the banks of issue will give
any credit emeOpt as
(ne

a part if

a program which will compraheed an arrangement

hi promos of seeeilatiem) betook the Belgian Government and its bankers

La Amsterdam, Babel, London, Bow York, and elsewhere, for the issue of a loan or
credit for an aggregate amemat of not less than the

equivalent of, say, fifteen

within thirty days, and the

all/lea pounds, to be likened

p/seed at the disposal of the

entire ;mewl to be

National Bark of lielgimmterthwith to be devoted

toy them to immediate do jure stabilisation of the Belgian currency,

Our direotors, with the apprcrtai of the Federal Reserve bard, hare
authorised. Ur. .lay to orris* the

National Beak of Seleiem that we 41/ agree to

purshase bills on the proposed terns and oamiltions set forth above, with the
understanding that the legal

authority of the Nations/ Beak of Belgium to par-

chase and guarantee bills will

satisfactorily

determined.

Om federal Reserve

however,
BoardP A la granting its approval, suggested a review of the condition relating to
the charge of a commission.

Our directors therefore tatend to reconsider this

question an Thursday.

Mile none

of the terms and oondit;ons have been finally agreed upon

3.
with the Bational Bank of Belgium, nevertheless, it is likely that they will
be concluded within a short time, Lnd this /otter is mereiy to advise you of

the progress of the negotiations so that you night disease the matter very eenfidmatially with your directors. We shall of course be glad to send you any
further information that you may desire in ocrameotien with this proposed transaction and 'hall advise you definitely towards the end of this week regarding the
proposal to *barge a commission for the credit.

elate your prompt advice whether you care

We would then very much appre-

to pertielpate with us in the event

that the oredit is finally arranged and made effective as outlined in this letter.
/ shall of course advise you if and Shen that is dm&
We have not as yet made any stateemst to the press and if we later te-

do so we shall of course telegraph you its form so that you may be kept
fully advised. In the oirmumetances I hope you will impress upon your directors
sti* to

the need for caution regarding the details and terms of this letter, Which are
most oonfidential and should not be made public.

Very truly yours,

Gaga44 L. Hallii/bUR,

Deputy Governor.

Ootober P1,

CONFIDENTIAL

19E6.

Dear Governor MoDongal:

I have just finished

talking to you on the telephone and as you have

requested me to give you in writing some of the matters which we discussed so
that it might go to you by to-night's air mail, in order to save time I am taking the liberty of enclosing a copy of a letter Which / have to-day diepatched
to Mr. Curtiss in Boston, who asked me several

garding the background of
ferred to in this

questions on the telephone re-

credit.

this particular

letter cover questions which you

Some of

the matters re-

also have placed before me.

A copy of the agreement which I shall forward to you

later

to-day

will cover some of the other questions, but as that may not reach you in time

for your

meeting, I am glad to tell you in

the rate of exchange is guaranteed.

reply to your first question,

In other

that

words, bills bought by us, in

bear two names plus the guaranty of

whatever currency they are payable,

the National Bank of Belgium that they will be repaid in

dollars

at the same

rate of exchange as that at which they were purchased. Furthermore, we
have take the additional precaution of getting assurances from the Belgian
Government that it will interpose no

gold if that

obstacle in the way of the export of

beoomes necessary in order

that the National Bank of Belgium

may fulfill its guaranty to us.
You ask in your second question what would be

the proposed

stabilized currency.

That is a

the gold value of

matter, of course, which is

entirely

within the decision of the Belgian Government, and while I presume

for obvious reasons, will make no statement to any one as to what

that they,

October 21, 1928

Governor McDougal

that figure will be in advance of their proclamation, / understand that the
figure which has been diecuesed from time to time is a ratio of about seven
to one.

The fifth question Which you ask relates

situation
matter

upon the

*Lich

proposed stabilisation of

we know

has

been

to the

effect

of the French

the Belgian franc.

That is a

discussed very carefully and intimately in

connection with the proposed Belgian plan, and while, of course, the French

price level, as any other
effect upon

external price level, will necessarily have some

the exchange of goody between France and Belgium and a

effect upon the Belgian exchange, nevertheless it ie

believed that the

program le so conservatively worked out that Belgium will be

to withstand
in the

consequent

present

in a poeition

any adverse influences that might result from any possible change

situation in France.
With the internal and external floating debts of the Belgian Govern-

ment virtually eliminated or provided for, with what /
balanced budget, and

with what we believe

to be a capable and courageous man-

agement In the National Bank of Belgium, there is every
the present program will
it is an

after being made effective.

require firm and

intelligent management

Governor Franck, the new Governor of the

National Bank of Belgium, is, from all

reports, the best man available in

Thet in itself is, we believe, an important con-

Belgium for the position.

In any event, as

have felt that it is

reason to hope that

be successful, although every one must realize that

important step that will

eideration.

understand to be a

I mentioned in my letter to Mr.

Curties, ee

wise and proper for Us to agree with the National Bank

of Belgium to purchaee bille under the terms which se have outlined as a
of the comprehensive program
will be successful.

which, in

our best judgment,

we hope and

part

believe

Governor McDougal

October El, 1978

If there is any further information that you may want or that I
can give you, I know that you will be good enough to let we know. In the

meantime, I hope you will please excuse this very hurried letter which I am

dictating just before going into our directors meeting.
Fith kind personal regards, I 4m,
Very truly yours,

GFORGE L. HARRISON,

Deputy Governor.

Mr. J. B. McDougal,
Governor, Federal Reserve Bank,

Chicago, Ill.

GLHAM

Enc.

October 21, 1926.

FIDEMI'I AL

Dear Governor McDougal:

I have just finished talking to you on the telephone and as you have
requested me to give you in

writing some of the matters which we discussed.90

that it might go to you by to-night's air mail, in

ing the liberty of

order

to save time I as tak-

enclosing a copy of a letter which I have

to-day dlepetched

- to Mr. Ourtiee in Boston, who aaked me several questions on the telephone re-

garding the background of this particular credit.
ferred to in this letter *over questions which you

Some of

the matters

also have placed

A copy of the agreement which I shall forward to you

re-

before me.

later to-day

will cover some of the other questions, but as that may not read: you in time
- for your

meeting, I um glad to

the rate of exchange is

tell you in reply to your first

guaranteed.

question,

that

other words, bills bought by us, in

whatever currency they are payable,

bear two names plus the guaranty of

the National Bank of Belgium that they

will

rate of

exchange as

be repaid in

that at which they were purchased.

e take the additional precaution of getting

dollars at the ease
Furthermore, we

assurances

from the Belgian

overnment that it will interpose no obstacle in the way of the export

gold if that becomes necessary in order that the National Bank of Belgium
may fulfill its guaranty to us.
You ask in your second question what would be the 'gold value of
the proposed stabilized

currency.

That is a matter, of course, which is

October 21, 1026

Governor McDougal

entirely within the decision of the Belgian Government, and while I presume
that they, for obvious reasons, will make no statement to any one as to what

that figure will be in advance of

their proclamation, I understand

that the

ratio of about seven

figure which has been discussed from time to time is a
to one.

The fifth

question Which you ask relates to

the effect of the French

situation upon

the proposed stabilisation of the Belgian franc.

matter which

we know

That is a

has been discussed very carefully and intimately in

connection with the proposed Belgian plan, and

price level, as any other external price

while, of course, the French

level, will necessarily have some

effect upon the exchange of goods between France and Belgium and a consequent

effect

upon the

Belgian

exchange,

nevertheless it is believed that the present

program is so conservatively worked out

that Belgium will be in

a position

to withstand any edverse influences that might result from any possible change

in the situation in France.
With the

external floating

internal and

debts of

the Belgian Govern-

ment virtually eliminated or provided for, with what I understand to be a
balanced budget, and with what te believe to be a capable and courageous management in the National Bank of

the
it

Belgium, there is every reason to hope that

present program will be successful, although every one must realize that

is an important step that will require firm and intelligent management

after being made effective.

eevernor Franck, the new Governor of the

National Bank of Belgium, is, from all reports, the best man available in
Belgium for the position.

sideration.

That in itself ie, we believe, an important con-

In any event, as

have felt that it is

I mentioned in my

letter to lir. Curties, we

wise and proper for us to agree with the National Bank

of Belgium to purchsee bills under the terms which we have outlined as a part
of the comprehensive program which, in our beet Judgment, we hope and believe

will be successful.

Governor McDougal

October 21, 1928

If there le any further information that you may want or that I
can give you, I know that you will be goal enough to let me know. In the

meantime, I hope you will please excuse this very hurried

dictating just before going into
With kind

personal

our

letter which I as

directors meeting.

regards, I um,
Very truly yours,

GFORGE L. HARRISON,
Deputy Governor.

Mr. J. B. McDougal,
Governor, Federal Reserve Bank,
Chicago, Ill.

Enc.

WANK

October 21, 1926.

21112111LUAL

Dear Mr. ()artless

OM-

In referenoe to our tolophone coovoreation of yesterday afternoon

owning our prepeeet arrangement with the National Bank of Belgium, I am glad to
semi you my rather hurried comments regarding the matters which you asked me to

sine you.
First of all you mated to know whether
with the negotiations mtioh have been in
our proposal

to give

Booretary Mellen is

progress and

whether

ly familiar not only with the proposal of the Belgian

jure stabilisation of its currency, but also with mach
proposal for the

the lines

It so hopping' that Seorotary Mellon

was in London when Govornos btrong mas there in Neptember and

which the

he approves

a credit to the National Bonk of Be/gium along

outlined in my letter to you of October 11.

familiar

he boos= thorough-

Govermmmat to

of the

afoot

a de

bmegremnd out of

present credit to the National Bank of Be1glam arose.

blues Mr. Mellon returned home, we have kept him fully advised of each stele in

the

negotiations, and I think I can assure you of his full Approval of the action

of our directors in
under

agreeing to purchase bills from the National Bank of Belgium

the terms and conditions it forth in my earlier letter to you.

bidden-.

tally, Mr. Mellon was present and took part in the discussions at the meetings

of the Federal Reserve Board when

the wales

of our diroctors in

this natter was

approved by the Board,* end he has since impressed to me his own personal interest

in and approval of our proposed participation in

the program..

Another matter which you suggested for comment is one which involves
the propriety of our participating in arrangements of this charoot's.

I think

104/10.

Ourties, Lg.

Fro Lyric

4111

there can

little question of our legal authority to purobase comnerolal

bills at home or abroad mor of our right to make an agreement to exercise that

right, for a period of time. Ammo legal aapeot this &grommet is similar to
the temporary ane shift, with the Federal Reserve Deard's approval, we mole olth
the tatianal Beak of Belgium last winter.

asked is whether

our purpose

all

Federal reserve

the only qoestion of

It seems to us, therefore, that

baAks paalleipateel.

ty which might

ta that semooMmat

prapri.

in entering such an agreement is

in all the oireumetanoes a sound one.

It has been the belief of the officers and directors of this bank,
since efforts were first ands
should 000porate within the

abroad to reestablido the gold

limits of our powers in

standard, that we

aiding books of issue, who

are our correspondents and agents abroad, to take their part to a program of
stabilisation having reaeonable proopeots of success.

moral obligation we

have to aid in the reestabliehment

in these Gauntries shoe.

exchanges have

usr or post-war influences,
one of

the most

Batirely apart from say

we bellies

of the geld standard

been seriously deranged beoauss of the
that from

a who/ly selfish standpoint

offestive ways ta whith the Federal Reserve System

own agriculture, serros and industry is by rendering every

OMR

aid eur

proper assistance

in the stabilisation of the currencies in those countries to Wash wo soma
export our surplus prod:oats.

ohmages during

Owing to the

the past ten years we have

world's monetary gold. We believe that

moil-adjustment of
asevmmlated

international ex-

a large pereentage of the

it would be most short-sighted were we

to adopt any policy which would new disoeusege the reestablishment of the gold
standard in other ocruntries, which would Molloy the

notion to

the free shipments

of gold between naticmat in settlement of trade balances, or which would mike
our own large stock of geld any less useful to all or less valuable to us.

Hut as you say, it has boon solagestol

that

these purposes might be

Nrederic N. Curtiss,

ici/4/2s.

Beg.

411

acoomplishei through the private banks and bankers rather than through the

Federal reserve banks. That of course is a
to different opinions.

It should be

question which might be susceptible

remembered, however, that

the problem of

monetary stability is peculiarly a matter within the privince of the banks of
issue, that no successful program

stabilisation can be accomplished without

the aid or cooperation of the bank shift issues the our:env to be

and that, as

stabilized,

we view it, it is wholly natural and proper that the bank of issue

should turn to other banks of issue which are its correspondents for assistance
in their peculiar problem.

On the other hand, we believe that it

and proper that the foreign government or
in its part of a stabilisation program,

aloe natural

its flumes minister should Melt aid

not from the banks of issue abroad, but

from its own bankers in those foreign countries where thror may be seeking loses.

Bometines the line of demaroation between these two reactions is difficult of
determination

but the principle involved seems clear and

in the present case,

as in the ease of ngland, the Belgian Ooverommat has sought its loans from its
ova bankers and the National Bank of Belgium hes turned for the aid whidh it

needs

$o other banks of issue which are its correspondents.

to their request in those oirommetanoes that we

It Is in revues

have agreed to the present credit.

Mile these two temetions,of the government aad the bank of issue are

separate and distinct in themselves, nevertheless, they are inter-dependent in
that each is a necessary part of the complete program. ln considering the
present proposal our

directors louLd

oleariy net

have

approved of our entering

an arrangement with the National Bank of Beigium for the purpose of assisting

In the stabilising of its ourrenoy had we not beim assured that the Belgian
Government on its part has been making arrangement* with its bankers for loans

which would enable it suooessfully to carry out its part of the program. By the

irederie 11. Curtiss, beq.

iCkl21/16.

same token / think it is fair to say that the bankers of the Belcian Government
probably would have been /oath to
been satisfied as to

the management and

which they emderstand is
program once adopted.

proceed with theirnagetiations had they not
polioies of

the institution that will

As feet

that

have to oarry through the

other central banks of issue which are the

correspondents of the National Bank of Beasima are
stanoes to

extend it credits ie of itself

bankers on this

point and

the National Bank of Belgium

satisfied ta all the *from,

a strong influence in satisfying the

encouraging them to proceed with their part of the

In this connection it is generally realized that confidence in a program of Stabilization is a quite vital factor lu its sueoess. That foreign banks

program.

of issue stand ready

to give credits in

me form or

another to the bank Which

must be responsible for the management of the program is a most important element
in creating oonfidemee,

till another matter to which you referred is the fact that the proposed
credit contemplates our hiving

not on -y bills poyab/ in Belgian francs but bills

payable in other stab/. currencies.
one.

The reason for this latitude is a practical

The National Bank of Belgium holds in its portfolio a large percentage of

bills payable in foreign currencies whieh they need to have

alon9 with their own

domestic bills.

available for sale

In either event we have the guaranty of

the Motional Bank of Belgium to repay us in gold at the same rate of eiohons* as
that at which we purchased the bills.

Be/glen Government

We will also have the assurance of the

that they will interpose DO

objection to the National Beak of

Belgium's exporting gold if it is necessary for than to do

Si.

I think this covers the matters concerning whisk you asked me opeolfloally
for oomment.

There is one other matter which was left open in the letter /

you on October U. That concerns the *emission charged for granting

the

de / had inaicated to you, thi, iedera/ Reserve beim, in approving of our

a credit with

wrote

credit.

negotiat1/4

the liatimal Bank of Belgium under the oonditiems / then outlined,

trod/trio a. Jurtles, us,

1#2.3124.

miseestat a mire of the shafts of a ooesaissien, aspressing the belief *that
a oonsissitek is not sealed tar in coonsotion with the posehses of prise bills
IS reirmal Reser,* iystem taderemikin OSRUSi blinkS4n AS empated tew tbe

Board, our direotors sowlemei this saner meet oaratullg and seriously lest loft.

it vas their teat Judgment atter reviesing all the ammente pro and sea that it
is quite ,croper and right that, entirely spelt fres the dissountinceived on bills
bought, us should thaws for the sirs lee rendered la ommitting ourselves for a

speeified period of time to ;unless a gloss amseat of bills. Ow thesofere
votel to charge a owed sets In this Gass hat vi th the teeterstandlog that In
ostler not to be °hanging the Istiellal Bask

are not chanty the Dank of

of be

at tho awe time that we

level oebate OA part of our oomemilteien

as covers the period that the bank of isgbood credit still has to rm.
lOr your confidential isfosaation we NINO nag authovised Ur. .ay, oho

Is abased, to sign the esteemed with tie bathesl boOk of Weiss to purchaes
440.00,40020 OSestsmercia/ bills um4er ths torus sat couditimetemallaed to you

ta ow earlier letter. all. we ars committal. therefore, to any resat, es would
be glad if your board of dippatara, after careful esitaltselation of Car vials ais10.
ter. Should decide to yeattolpato with us

this agreement as in other woo-

ls stiob sit fsdelet resorts boas soy portiatpats. If thee, is any further
the might wish to ark, I hops you will Alois be cOod seeugh to let us

knee. But It there is no further infornation oh/oboe gen famish you, we should

like to have you advise us as soon mine, be convenient *lethal', or mot you ooze

to paslicipste.in this coos.
/ an sure that ,ou and your dirootomrsodil Appresiate the confidentia/
of all the tommeend *auditions recording this *relit, %dila have been
to you in otouldnuce and not far pOhlicetios. It,. are MI mike

aisSomat

24( &3/2$.

vU4n

*Mg Pretarlimi of InabllIsatles Is flasily somplotet, / $hall of

0OUTS0 advise yofaliV

Oa UWMI;FOU may b. ikaillar with

given to thio press,

With kind personal marts, / an,
italthfulky yours,

Devitt/ Ocrywract.

Mier/a A. %;artlse,
Chairman, tedessi 2amesw Boma of 3ostiss,

Bestene Ass.

the fists

AN IDENTICAL LETTER WAS SENT TO MR. FREDERIC H. CURTISS OF BOSTON.

STRICTLY CONFIDENTIAL'

October 22, 1926.

Deer Governor McDougal:

In order to supplement my letter of yesterday, I am glad to enclose
herewith a copy of the Agreement defining in detail the terms and conditions
under which we have obligated ourselves to purchase prime oommercial bills
from the National Bank of Belgium.

I know that you and your directors will realize the confidential character of the terms and conditions of the credit covered in the enclosed agreement as well as in my earlier letter. We have as yet made no public statement
and although we shall probably do no when the program of the Belgian Govern-

ment is finally completed and announced, probably next week, we shall of course

advise you by telegraph so that you may be entirely familiar with the facts

given to the press.

This letter and its enclosure Is sent to you to supplement my letters
of October 11 and 21, and my telegram of last night in which

told you

of the completion of the agreement and asked for your advice whether you might

care to participate with us on the usual basis.
With many. thanks for your most helpful cooperation, r am,

Very truly yours,
J. B. McDougal,
Governor, Federal Reserve Bank,

Chicago, Ill.
GLa.1111

Eno.

GEORGE L. HARRISON,

Deputy Governor.

TO ALL GOVERNORS EXCEPT BOSTON AND

mum

STRICTLY

IP CONFIDENTIAL

October 22, 1928.

Dear Governor
In confirmation of my telegram of yesterday, I am glad to

advise you

that we have Agreed with the National Bank of Belgium to purchase 110,000,000
of prime commercial bills under the terms and conditions set forth in

detail in

the enclosed Agreement, whioh as you will see is in substantial-oonformity with
the terms briefly

outlined in my letter of

October 11.

While each of the provisions in the agreement ie

we think,

self-

explanatory, there is one clause about which some comment is needed, that is,
clause eleven which provides for

a commission of one-half of one per cent, of

the mount of the credit.
As I indicated in my letter of October 11, the Federal Reserve Board
in approving of our entering into an agreement with the National Sank of Belgium
under the terms and conditions then outlined,

suggested a review of the clause

relating to a commission, expreeeing the belief "that a commiseion is not called
for in connection with the purchase of prime bills by the Federal Reserve System
indorsed by central banks."

As suggested by the Board, our directors

ed this matter most carefully and seriously last week.
ment,

after reviewing

It was

reconsider-

their best judg-

all the arguments pro and con, that it is quite proper and

right that, entirely apart from the

discount received on

bills bought, we should

charge for the service rendered in °omitting ourselves for a specified period

of time to purchase a given amount of bills. They, therefofe, voted to charge
a commission in this case, but in order not to be charging the National Bank of
Belgium a COMMieSiOD at

the same tine thtt we are not charging the Sank of England,

October 22, 1026.

it is our intention to make a pro rata rebate of such part of the commission as
covers the period

of the unexpired

part of the Sank of England credit, on which,

as you know, no commission is charged.
I

explaining this in some detail because there is no reference in

the agreement itself to our purpose in regard to a refund. Ne hope, however,
that you will agree with us in the circumstances that this partial

rebate should

be made.

For your information I an taking the liberty of enclosing a copy of
a confidential letter which I wrote

Curtiss of the Federal Pe-

yesterday to

serve Bank of Bbston in reply to come questions he raised concerning some of
the aspects of the credit.

seem of your directors.

It may be that it eill be of interest to you or to

But if there are any

further questions which

you might

have in mind I hope that you will please be good enough to let us know.

I know that you and your directors will realize the confidential charac-

ter of the terse and

conditions of the credit

as well as in my earlier letter.

covered in the enclosed agreement

he have as yet made no public statement and

although we shall probably do so when the program

cf the Belgian Government is

finally completed and announced, probably next weak, we shall of course advise

you by telegraph so that you may be entirely familiar with the facts given to

'the press.

This letter and its enclosuree are all sent to you
,

supplement my

earlier letter of October 11 and my telegram of lest night, in which we advised
you of the completion of the agreement and asked for your advice whether you

_might care to participate with us upon th6 usual basis.

With many thanks for your most helpful cooperation, I am,

Very truly yours,
WOMB L. HAMM.,
Deputy Governor.

id*

TO ALL GOVERNORS EXCEPT BOSTON AND CHICAGO

STRICTLY
CONFIDEITIAL

October 2, 1928.

Dear Governor

In confirmation of my telegram of yesterday, I am glad to advise you
that we have agreed with the national Bank of Belgium to purchase t10,000,000

of prime commercial bills under the terms and conditions set forth

in detail in

the enclosed Agreement, Which as you will see is in substantial-conformity with

the terse briefly outlined in my

letter of October 11.

While each of the provisions in the agreement is, we think, selfexplanatory, there is one clause about which some comment is needed, that le,

clause eleven which provides for a commission of one-half of one per cent, of
the amount of the credit.

As I indicated in my letter of October 11, the
in approving of our entering into an

agreement with

Federal

the National

under the terms and conditions then outlined, suggested a review

relating to a

commiseion, expreseing the belief

central banks."

of the clause
called

the Federal heeerve

System

As sug;ested by the Board, our directors reconsider-

ed this matter most carefully and seriously last week.
ment, after reviewing all the arguments pro and

right that, entirely apart from the
charge for the service

Bank of Belgium

"that a commission is not

for in connection with the purchase of prime bills by
indorsed by

Reserve Board

rendered in

It was their best judg-

con, that it

discount received on

oommitting ourselves

is quite proper and

bills bought, we Should
for a

specified period

to purchase a given &mount of bills. They, therefore, voted to charge
a commiseion in this case, but in order not to be charging the Nattonal Bank of
of tine

Belgium e commission at the same time thet we are not charging the Bank of England,

490

October 22, 1926.

it is our intention to make a pro rata rebate of ouch part of the 00mmiseion ae
covers the period of the

unexpired part of the Bank of England credit, on which,

as you know, no caMissiOU is charged.

I me explaining this in

eons detail because there is

the agreement itself to our purpose in regard to a

refund.

no reference in

We hope, however,

that you viii agree with us in the circumstances that this partial rebate should
be wade.

For your information I um taking the liberty of enclosing a copy of

a confidential letter which I

wrote yesterday to kr. Curtiss of the Federal Fe-

serve Bank of Bbston in reply to some queetions he raised concerning same of

the aspects of the credit.
some of your directors.

It nay be that it will be of interest

to you or to

But if there are any further questions which you sight

have in mind I hope that you will pleese be good enough to let us know.

/ know that you and your directors will realize the confidential Charac-

ter of the terse and conditions of the credit covered in the enclosed agreement

as well as in my earlier letter. %e have as yet made no public statement and
although we shall probably do so when the program of the Belgian Government is
finally completed and announced, probably next week, we shall of course advise

you by telegraph so that you may be entirely familiar with the facts given to

the press.
This letter and its enclosures are al/ sent to you to eupplement my
earlier letter of October 11 and ay telegram of last night, in which we advised

you of the completion of the agreement and asked for your advice whether you

might care to participate with us upon the usual basis.
With many thanks for your most helpful cooperation, I au,
Very truly yours,

GEORGE L. HARBISOB,

Fnc.
GLH/KMC

Deputy Governor.

A copy of this letter, with

enclosure, was

sent to the Governor of each F.R.

Baft.

October 25, 1926.

CORF/DARTIAL

Dear Mk.. Curtiss:

I am

glad to advise you that the credit arrangement with the

National Beak of Belgium, a copy of which / seat to you in my letter of
October

22; was finally

delivered and made effective as of to-day, so

that it will run for a period of one year from October 25, 1926.
I want also to let you know that the Bank of France has parti-

cipated in the agreement for the amount E2,000,000, and appropriate

ref-

erence to that fact should be made in the agreement.

For your further information, I am enclosing a copy of the Royal
Decree of Monetary Stabilization which was signed by the King yesterday
and which went into effect upon its publication in Brussels to-day.
Very truly yours,

GEORGE t. HARR/SON,
Deputy Governor.

Mtederio R. Curtiss, Esq.,
Chairman, Federal Reserve Bank of

Boson, Mass.

Bac.
GIE1/1011

Boston,

TO ALL GOVERN23,15_,..

June 22, 1927.

STRICTLY CONFIDENTIAL

My dear Governor Harding
You may remember that at the recent

Conference of

Governors we

referred in come detail to the efforts then being made by the Government
of Poland to devise a program of sonetary

stabilization.

We reported that Dr. Mlynarski, Vice Chairman of the Bank of
Poland, had cone to this country

early in

Government in discussing a program of

loin with the

February first to represent his

stabilisation and t

stabilization

bankers of his Government and second to confer with the Fed-

eral reserve bank concerning the monetary aspects of the program.

referred to the views exchanged with
lovornor Moreau

concernine a

Governor

possible credit

We also

Norman, Dr. Schacht and

to the Bank of ?oland in the

event that the banks of issue thonld.be asked for &

credit as

Dr. Elynaraki

had indicated they would be.

In order to keep you fully informed we want now to let you know
that on June L, 1921, we received a telegram from the Bank of Poland advising us that its Government had approved of a program of stabilization,
cogy of which was forwarded

to us through the

Few York bankers of the

Polish Government, and that the Bank of Poland wanted to know

would be prepared now

whether we

to discuss terms and conditions of a credit.

June 6, 1927, the Federal Reserve Board approved of the action of our

directors in
for

authorizing us to

the purchase of up

make an arrangement with

the Bank of Poland

to $10,000,000 of prime commercial bills.

For your

information I as enoloeing a oopy of our letter to the Board as well as
,their 1etter of approval.

June 22, 1927.

Governor Harding.

Since that time vs have bees Negotiating terns and conditions for

an arrangenest with the Bank of Poland closely following the lines of the
arrangement with the National
as now

Bank of Belgiun. In brief, the arrangement

proposed will conprise the equivalent of a $20,000,000 credit to

Bask of Poland in Which about

fifteen

banks of issue will participate.

the

The

arrangement will be for a period of one year from the date of final legal

pronu/gation of the program of stabilisation by the Polish Goverumeot.
rate charged will
rate of the

be six

per cent except

participating

bank of issue exceeds six

charged to the Bank of Poland by
rate.

A conmissios of

that in *my

that bank shall be

one-half of one

case

per

cent, then the rate
its discount

per cent will be charged by each par.-

will agree to purchase up to $8,000,000

the Bank of

where the discount

the same as

ticipamt on its share in the arrangement as vsa done in
Belgian credit. At the sanest it seems likely that the
the Reichsbalik and

The

France will

the case of the
Federal reserve bank

bills, that the Bank of England,

each

take

the equivalent

0,000,000 and that approximately ten other banks of issue will take the

balance of

the $20,000,000 in varying anountk.

One clause in the arrangement provides that the granting of the
credit 'ill be subject to the final legal promulgation of the
the Polish Government, Which is to include
bankers to

the

a loan by the Government's

Government aggregating apnroxisately $80,000,000, of which

we understand about $25,000,000 is to be issued abroad.
at the

moment the

congested.

program by

It so happens that

narket for new issues of bonds in New York is somewhat

That fact, coupled with the recent unfavorable

garding the murder of the Soviet

Minister et Warsaw, has made the

decide to defer an issue of bonds for the present.

arrangements for the

publicity

re-

bankers

As a result, while the

credit by the banka of issue to the Bank of Poland are

proceeding, nevertheless, it seems unlikely that

the

program, upon which

that credit will depend, will be finally consummated until a more auspicious

Julie 22, 1927.

moment for the issue of a lose.

This is but a brief outline of the status of the proposed
arrangement with the Bank of Poland and is intended merely to keep you

informed of the progress which has been nad and to let you know that it
seems likely that the arrangement will be concluded in the near future
when we shall of course offer you a participation on the usual basis.
In the meantime

please regard this

letter as most

confidential

and if there are any questions which you might care to ask, I hope you
sill be good enough to let us know.

Very tray years,
':(),41(*

GEORGE L. HARRIBOM,
Deputy Governor.

Mr. W. F. G. Harding,
Governor, Federal Reserve Batik,
Boston, sass.

Encs.

GLH.AMC

ca_Q_

June 29, 1927.

STRICTLI CONFIDENTIAL

Dear Governor Harding:
On June 22 I wrote to you concerning the status of the negotiations for a credit to the Bank of Poland.

In order to supplement that

letter, I aa.1$d ta enclose herewith for your confidential

Loose la be

coil of the Program of Stabi/isation as

agreed upon by

information a

the '!'olieh Govern-

ment sod their tdankers, as well as a copy of the proposed bar& of issue
agreement with the Bank of Polend.

Program of

As you will, of course, realize the

Stabilisation has beer given to is in strict secrsoy pending

its fins/ legal promulgation by the Polish Government.

Inasmuch, however,

as the request of the Bank of Poland for a credit from the banks of issue
is predicated in part on this program, you may be interested in

examining

it together with the draft of agreement with the Bank of Poland so that
you may have it in rind

in determining

whether or not you care to partici-

pate with us in the bank of issue credit.

This arrangement with the Bank of Poland has been agreed to in
principle by the various banks of issue listed in Clause 17

of the

agree-

ment and is now being forwarded to each of them for signature with the
understanding, as specified in Clause 16, that if

the legal

promulgation

of the Program of Stabilisation and the issue of the loan provided for in
that program are not consummated before August 20, 1927, the credit shall
not become effective.

which is being

While we have not yet

actually

signed the agreement,

forwarded to us from Paris where it was printed and signed

June 29, 1927

Governor Harding

by the representatives of the Bank of Poland, nevertheless we expect to do

so as soon as it is received in New York.
become effective until the
Government and the issue

please be good enough

Even though

final legal promulgation

of the loan by

program by the

of the

the bankers, nevertheless will you

you have had an

let us know, after

study all the documents, whether you care to
agreement to purchase up

the credit will not

opportunity to

participate with

up in our

to $5,250,000 of prime commercial bills under the

terms and conditions set forth.

I understand that the bankers do

not yet feel tbst it 16 time

float a long term bond issue as contemplated by the ?rogram of Stabilisation.

They are, however, discussing sith the Polish Government the grant-

ing of a short term credit of apiroximately *15,000,000 pending the issue
of the bonds.

This credit is entirely independent of the bank of issue

credit which is to be granted to the Bank of
effective only on the

conditions

Poland and which will become

outlined in Clause 10.

Because of the status of this whole matter
the date of final action by the Polish Government and
I an sure, appreciate the need

for

in the strictest confidence.

?lease do not

and the uncertainty of

its

bankers, you will,

regarding it and the enclosed

there are any further questions you may care

documents

hesitate to let us know if
to

consider before advising

us whether you will participate on the usual terms.
Very truly yours,

GEORGE L. HARRISON,
Mr. N. P. G. Harding,
Governor, Federal Reserve Bank,
Boston, Nees.
Enc..

GLH.NN

Deputy Governor.

THIS LETTER SENT TO2

CUIXIECUIr

Norris

Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis

Faucher
Seay

Wellborn
McDougal

Biggs
Young

Y CONDENTI
I
STRICTLY
AL

IL Bftnk

Augnet 10. li27.
lansAs uity
Dallas
San Francisco

Bailey

Talley
Calkins
Dear Governor Harding:

Referring to our letter of June 29,concerning the Central Bank

Credit to the Bank of Poland,

and to your participation with us in this

agreement, we explained that if the legal promulgatiorAtf the program of

stabilization anci the issuance of the loan are not consarw.ted before
August 20, 1927, the agreement with the Bank of Poland shall not become
effective.

When this

time limit was fixed, it was contemplated that an

extension might be required.
The private

bankers have

recently

advised the Polish

Government

that it would be inadvisable to attempt a large public offering in this
market, euch as

the program

contemplates, before the middle of September,

unless conditions should suddenly change.

At the suggestion of the Bank

of France and in concurrence with the Bank of England and the Reichsbank,
we have agreed to

the extension

of this date from August 20 to November 1,

1927, which would permit of the issuance of the loan and

the promulgation

of the program in October, if necessary.
Very truly yours,

BENJ. STRONG,

Mr. W. P. G. Harding,
Governor, Federal Reserve Bank of Boston,
Boston, Massachusetts.

JEC HAB

Governor.

THIS LETTER SENT TO EACH GOVERNOR OF OTHER FEDERAL

August 22, 1927.

CONFIDWZIAL

Dear Governor

aEszav=

Harding:

We have received a request from the Austrian National
Bank, Vienna, to open an account for it on our books and invest
its funds in bankers acceptances.
The Austrian National Bank opened its doors on

January 2, 1923 after having assumed the assets and liabilities
of the Austrian Section

of the Austro-Hungarian Bank and having

absorbed the Central Exchange Bureau.

It is an independent

joint-stock company with a share capital of 30 million gold kranan
(about $6,000,000) which was fully paid up in June, 1923.

The

bank is under the direction of a board, all the members of which

the exceytion of the Chairman who is appointed by the President of the Austrian Confederatio.
According to the banking law and the statutes, the
operations of the Austrian National Bank must be purely commercial
are elected by the shareholders with

and the bank is expressly forbidden to grant directly or indirect-

ly any advances to the State,

the ?rovinces or the Communes

unless they cover in gold or foreign currencies the amounts issued
to them in bank notes.

than one-quarter of

The Government controls somewhat more

the share capital.

Of the net profits less the statutory deductions to
be made for a reserve fund and a pension fund, two-thirds to

three-quarters, depending u on the amount of these profits, will
be allocated to the State, the rest being used for dividends.
According to an agreement between the

Government and the

bank,

August 22, 1927.

part of the profits allocated to the State will be used for paying
off the State debt to the bank. A copy of the bank's balance sheet
as of July 31, 1927 is enclosed.
At the meeting of our board of directors on August 18, the
officers were authorized to open an account on our books for the
Austrian National Bank, to establish a relationship with that bank
along the same general lines as our arrangements with other foreign
central banks, and to appoint the said bank as our agent and correspondent in return for a similar appointment from it.
The Federal Reserve Board has approved of the foregoing
action of our directors, and we are opening an account to-day for
the Austrian National Bank, the initial deposit therein being
$1,000,000 most of which will be invested in bills.
While it is not likely that this account will be very active
for the present owing to .the fact that the Austrian National Bank
is restricting its investments in bills because of the tax an discount earned on bills held by a foreign corporation, nevertheless
we would like to offer you an opportunity to participate in the
account ueon the usual basis, and would be pleased to learn whether
or not you care to do so. If so, may I ask you to send us telegraphic
advice in order that the participation of the account may be made as
promptly as possible.
With kind regards, believe me
Very truly yours,
Mr. W. P. G. Harding,
Governor, Federal aeserve Bank,
Boston, Mass.
JEC:ILK

3. H. CASE,
Deputy Governor.

THIS LETTEll SENT TO

I GOVERNOR OF OTHER FEDERAL

ESERVE BKS.

August 22, 1927.

cONFIDENTIAL

Dear Governor Harding:
We have received a request from the Austrian National
Bank, Vienna, to open an account for it on our books and invest
its funds in bankers acceptances.

The Austrian National Bank opened its doors on
January 2, 1923 after having assumed the assets and liabilities
of the Austrian Section of the Austro-Hungarian Bank and
absorbed the Central Exchange Bureau.

having

It is an independent

joint-stock company with a share capital of 30 million gold kranan

(about 0,000,000) which was fully paid up in June, 1913.

The

bank is under the direction of a board, all the members of which
are elected by the shareholders with the exceytion of the Chairman who is appointed by the President of the Austrian Confederation.
Acco2ding to the banking

law and the statutes, the

operations of the Austrian National Bank must be purely commercial
and the bank is expressly forbidden to grant directly or indirectly any advances to the State, the ?rovinces or the Communes
unless they cover in gold or
to them in bank notes.

foreign currencies the amounts issued

The Government controls somewhat more

than one-quarter of the share capital.

Of the net profits less the statutory deductions to
be made for a reserve fund and a pension fund, two-thirds to

three-quarters, depending uon the amount of these profits, will
be allocated to

the

According to an

agreement between the Government and the bank,

State, the rest being used for dividends.

August 22, 1927.

part of the profits allocated to the State will be used for paying
off the State debt to the bank.

A copy of the bank's balance sheet

as of July 31, 1927 is enclosed.
At the meeting of our board of directors on August 18, the
officers were authorized to open an account on our books for the

Austrian National Bank, to establish a relationship wtth that bank
along the same general lines as our arrangements with other foreign
central banks, and to appoint the said bank as our agent and corres-

pondent in return for a similar appointment from it.
The Federal Reserve Board has approved of the foregoing
action of our directors, and we are opening an account to-day for
the Austrian National Bank, the initial deposit therein being

$1,000,000 most of which will be invested in bills.
While it is not likely that this account will be very active

for the present owing to

the fact that the Austrian National Bank

is restricting its investments in bills because of the tax on discount earned on bills held by a foreign corporation, nevertheless
we would like to offer you an opportunity to participate in the
account upon the usual basis, and would be pleased to learn whether
or not you care to do so.

If so, may I ask you to send us telegraphic

advice in order that the participation of the account may be made as
promptly as possible.

With kind regards, believe me
Very truly yours,

Mr. W.
G. Harding,
Governor, Federal deserve Bank,
Boston, gass.
JEC:EIC

J. H. CASE,
Deputy Governor.

THIS LETTER SENT TO EACH GOVERNOR OF OTHER FEDERAL RESERVE BKS.

August 22, 1927.

CONFIQENTIA4
Dear Governor Harding:

We have received a request from the Austrian National
Bank, Vienna, to open an account for it on our books and invest
its funds in bankers acceptances.

The Austrian National Bank opened its doors on

January 2, 1923 after having assumed the assets and liabilities
of the Austrian Section of the Austro-Hungarian Bank and having
absorbed the Central Exchange Bureau.

It is an independent

joint-stock company with a share capital of 30 million gold kranen
(about $6,000,000) which was fully paid up in June, 1923.
bank is under the

direction of a board, all the

The

members of which

are elected by the shareholders with the exceetion of the Chairman who is appointed by the President of the Austrian Confederation.
Accoeding to the banking law and the statutes, the
operations of the Austrian National Bank must be purely commercial

and the bank is expressly forbidden to grant directly or indirectly any advances to the State, the 7}rovinces or the Communes

unless they cover in gold or foreign currencies the amounts issued
to them in bank notes. The Government controls someehat more
than one-quarter of the share capital.

Of the net profits less the statutory deductions to
be made for a reserve hind and a pension fund, two-thirds to
three-quarters, depending u.)con the amount of these profits, will

be allocated to the State, the rest being used for dividends.
According to an agreement between the Government and the bank,

August 22, 1927.

part of the profits allocated to the State will be used for paying
A copy of the bank's balance sheet

off the State debt to the bank.
as of July 31, 1927 is enclosed.

At the meeting of our board of directors on August 18, the
officers were authorized to open an account on our books for the
Austrian National Bank, to establish a relationship with that bank
along the same general lines as our arrangements with other foreign
central banks, and to appoint the said bank as our agent and correspondent in return for a similar appointment from it.
The Federal Reserve Board has approved of the foregoing
action of our directors, and we are opening an account to-day for
the Austrian National Bank, the initial deposit therein being
$1,000,000 most of which will be invested in bills.

While it is not likely that this account will be very active
for the present owing to the fact that the Austrian National Bank
is restricting its investments in bills because of the tax on discount earned on bills held by a foreign corporation, nevertheless

we would like to offer you an opportunity to participate in the

account upon the usual basis, and would be pleased to learn whether
or not you care to do so. If so, may I ask you to send us telegraphic
advice in order that the participation of the account may be made as
promptly as oossible.

With kind regards, believe me
Very truly yours,

Mr. W. O. G. Harding,
Governor, Federal aeserve Bank,
Boston, Mass.
J'EC:INE

J. H. CASE,
Deputy Governor.

,_?(
#

roc

Q/?

1(ov)

C. /1i

e 614

Vepoct

-0-07

r ;de;

7iCi9a oh.

5e an

vo-pt 5e, ,c?-11/
?Ye

ARTICLE XI
Where Interest Rates Apply

Section 3. Except as otherwise provided in Section 1 of
this Article, no member of this Association, nor any non-member
clearing through a member, shall pay or agree to pay directly or indirectly interest on any credit balance or on any certificate of deposit in excess of the rate fixed from time to time by the Clearing
House Committee to any person or persons, corporations, associations,
or co-partnerships, residing, organized, located or having its principal place of business in Continental United States, Alaska, Hawaii
and the Dominion of Canada, provided, however, that any rate so fixed
shall not apply to credit balances of and/or certificate of deposit
issued to any person, corporation, association or co-partnership located or having its principal place of business outside of Continental
United States, Alaska, Hawaii, or the Dominion of Canada, or to the
Government of the United States of America or any department, territory or dependency thereof, to the District of Columbia, to any state
of the United States, or any sub-division thereof, nor shall they affect interest rates now or hereafter fixed or regulated by law; provided however that any foreign branch maintained pursuant to legal
authority by any member of this Association or by any non-member clearing through a member, shall be permitted to pay, on deposits received
by such branch in the normal course of its business, interest at the
current rates prevailing where such branch is located.

No member, nor any non-member, clearing through a member, shall
however solicit, directly or indirectly, or use any branch in a foreign country for the purpose of soliciting, American Dollar deposits
from persons, corporations, associations or co-partnerships residing,
organized, located or having its principal place of business in
Continental United States, Alaska, Hawaii or the Dominion of Canada,
by offering rates of interest thereon higher than those then prescribed by the Clearing House Committee with respect to deposits in New
York City unless the deposit solicited is to be made in a branch in a
foreign country in which the currency is United States Dollars and
such deposit will be maintained for the normal requirements of the
business of the depositor in that country.

CHICAGO CLEARING HOUSE ASSOCIATION
January 28, 1920.

The following resolution in regard to payment of interest
on bank deposits was unanimously adopted by the members of the Chicago
Clearing House Association at a meeting held this day, effective immediately.

No member of this Association and no bank or trust company
clearing through any member shall agree to pay, or shall pay, directly
or indirectly, on any credit balance payable on demand or within ten
days, or on any certificate of deposit so payable, by its terms,
issued to or for the account of any bank, trust company, or other
institution conducting a banking business, or private banker or bankers, located in the United States, interest at a rate in excess of
one per cent per annum when the then ninety-day discount rate for commercial paper at the Federal Reserve Bank of Chicago is two per cent
or less, and an additional one-fourth of one per cent for every onehalf of one per cent that-such discount rate of the Federal Reserve
Bank shall exceed two per cent, except that the maximum rate paid or
agreed to be paid on any such credit balance or certificate of deposit
shall not in any case be higher than two and one-fourth per cent per
annum.

ACC

oF
ri Or

;01

/
0113

COPY
Topic /i20 - DISCOUhT RATES - was then taken up for
discussion.

This discussion covered not only the question of

the initiation and establishment of discount rates by the Federal reserve banks for member banks, but also the proper method
to be pursued in case Lb should be desired to establish rates
of discount between the Federal reserve banks themselves.
motion duly made and seconded, it was

VOTED that the Chairman be requested to present
to the Federal Reserve Board a fair consensus
which would represent the views of those in attendance at the meeting who had discussed the
matter thoroughly with their respective boards
of Directors as well as at this Conference.

MEMORANDUM

To be attached to the copy of the discussion of the subject of the
initiation of rate changes by the Federal Reserve Board at the
Conference of Governors,

20-23, 1915.

Pdrolant to the resolution adopted at the meeting
above referred to, directing me to make a report at the Joint
Conference of the Members of the Federal Reserve Board with the
Governors of the Federal Reserve Banks, I reviewed orally and at

great length the views expressed at the separate meeting of the
Governors held the evening before.

And the statement, which was

merely a repetition of those views, ended by my advising the
Board that it was the unanimous view of the Governors that in case
the Board endeavored to assert its right to initiate changes in

discount rates, the Banks should test the power to do so in the
Courts.

A part of the discussion upon which my oral statement

was based was purposely left out of the stenographic record.

-13e

5+ro

Chai rman, Governors, Conference.

(Dictated 9.17.27)

COPY
The Chairman:

No. 20 is the question of discount rates and

the action of the Federal Board in regard to them.
Aiken:

Preliminary, Mr. Chtairman, to that discussion,

I would like to call the Governors' attention to the exact wording of
that paragraph (d) under Section 14, which seems to me to be the es,

sence of the whole thing.
The Chairman:

jli you read the reference that you refer to

into the record, Governor Aiken?
r. Aiken:

(Reading):(--.

"ESTABLIShED RATES OF DISCOUNT.
"91(d).

To establish from- time to time, subject to rev iew

and determination of the Federal Reserve Board, rates of discount to

be charged by the federal Reserve bank for each class of paper which
shall be Tixed with a view-of accommodating commerce and business

What I had in mind was'the phrase, "establish from time to
time."

The Chairman:

The discussion of this matter has been under-

taken at different times, informally, and I believe that all of t he
Governors have decided views as to what our attitude should be in this

matter, which is a very important one of policy; and if someone would
make a motion expressing their personal views of what action should be
taken by this meeting, it would give us an opportunity to discuss it
with some chance for a conclusion.
kar. O. Wells:

r. Chairman, I undertake to move that d aring

our meeting tomorrow we express to the Federal Reserve Board in s ession
the probable effect that will ensue if the practice of fixing the rate
by the Board by suggestion as to what the rate should be should b e followed, without the same having been initiated by the Federal Rese rve
banks, as seems to be clearly intended by the language of the Act

those

effects being, minimizing the scope of authority and policy of not
only the executive officers of the Federal ileserve Banks, but the direc-

tors as well; and that in doing so we naturally give them an opportunity to discuss with us that matter, in order that there may be some
understanding between ourselves as representatives of the Federal Reserve banks and the members of the Federal Reserve Board.
The Chairman:

Governor Wells has suggested that our policy

should be to make an expression to the Federal Reserve Board tomorrow
of the view of this conference.
with that policy.

Personally, I am heartily in accord

It occurs to me that it would be very effectively

made to the Federal Reserve Board if we were able to submit to them a
-esolution which would Carefully, conservatively and unanimously express the sense of this meeting; that resolution having due regard to
the fact that each of these Federal Reserve banks is really managed
by, and the executive officers are subject to, direction of directors
in our respective districts who are men of importance with local experience, and, in some cases, very positive views; and that while we

may be able personally to arrange these matters in a friendly way with
the Federal Reserve Board, we have got to regard the fact that we have
directors at home who are entitled to consider that we represent not
our own personal views, but a composite of the views of the directors
of the Federal Reserve banks who have great responsibilities themselves

which they want todischarge.
kr.

o'old:

Mr. Chairman, the directors of the Minneapolis

bank have carefully considered this paragraph in reference to rates and
are unanimous in their opinion that the initiation of the rate falls

upon the bank, and it was such an important matter that we do not believe we want to delegate that power to the Executive Committee and
provided in their by-laws that the change of rate can only be effected

by a rp,jority of the Board of Directors.

And now, to have the Federal

deserve 1.1oard initiate rates here and then make it necessary for us to

telephone around to secure the consent or approval of the majority of
the board, makes it very embarrassing not only to the management but
to the directors themselves.

They feel that it is a duty of their own.

I second r. 4ell! motion.
Ns. beay:

I would like to say, Mr. Chairman, that I feel

that there is no one particular which would deliver the management of
the reserve banks more over to the Federal Board than this one of fixing the rate.

It is something which takes the control of the resources

out of the hands of the executives of the Federal Eeserve banks.

It is

one of the most vital things, I think, to our own autonomy that we have
to consider.

Ir. Fancher:

May we have the motion read, as stated by

Wells?
The Chairman:

Might I be permitted the suggestion that this

is such an important matter that I am going to take the liberty of asking each of those present to express his views, based upon the statement
that I made, that we are not expressing our individual views only, but
in this matter we are really speaking for a bank in each instance which
is managed by a Board of nine directors.

Withyour permission I will ask each of the Governors to state
his position in the matter, with the fact in mind that you are speaking

in a representative capacity; and at the conclusion I will ask the
stenographer to read Governor

motion.

Governor n_cDougal?
.

lacDougal:

The matter of fixing discount rates is one

that has been discussed by our board a number of times, and they have
been individually and collectively opposed to the initiation of the

rates coming from Washington, feeling that they were entitled under
the act to indicate the rate that they thought should prevail.

I feel

quite sure that they would like to have the opportunity of availing
themselves of that privilege without interference from the Board; knowing, of course, that they have the right to refuse if they see fit.
Mr. 0. Wells:

i should like to correct that, if I may:

That they must review; not if they see fit.

They must determine be-

fore our action becomes operative.
The Chairman:

Governor Wells, I would not like to have that

statement appear on the record as accepted by the Governors present,
because I am advised by counsel that that is not the case.
Mr. 0. Wells:

I was only trying to use the language of the

The Chairman:

I will state what our understanding is in

Act.

this matter of the rate.

The Federal Reserve Act provides that the

Federal Reserve banks shall establish rates of discount, subject to
review and determination by the Federal Reserve Board.

That does not

mean, as we construe the language, that the rate once established by
the bank does not become effective until it has been reviewed, but
the minute that the Federal Reserve bank establishes that rate it
can commence doing business at that rate, and that the power of the
Federal Reserve Board is limited to requiring, if you please, a suspension of the_operation of the rate until they review it and determine it.

My personal opinion about this matter, which I believe is
shared by the directors of our bank --- certainly by mr. Curtis, who
has advised us in the matter --- is that we are really entitled to
establish a rate, and within five minutes to discount paper at that
rate; that our duty is certainly to report it by the promptest possible

means to the Federal Reserve Board, and that their duty is undoubtedly
to review it and determine the rate, finally; that the establishment
of the rate is a matter that rests within the power of the directors
of the Federal Reserve Bank.

As a matter of fact, this custom which is developing of suggesting a rate, I believe is fraught with danger; that it may result
in each Federal Reserve bank gradually getting into the position where
it must respond to a suggestion because some other bank has established
a rate which influences the Federal Reserve Board to force uniformity.
I do not believe that that is going to be a sound development of this
system; that if any Federal Reserve bank succeeds in establishing a
rate that is out of line with local conditions, or with conditions that
necessitate rates in other districts, it may be their misfortune to be
loaded up with discounts that they have taken at very low rates, and
in order to protect themselves they may be obliged to take some losses
to relieve themselves of the load.

Certainly any other policy applied

to the making of rates is a very unnatural banking policy, because it
makes a rate regardless of what the local condition may be.

Governor McCord, may I ask you to express your views in regard to this matter?
lar..Chairman, I think that the rate should be

Mr. McCord:

initiated at the reserve bank, and not at the Board.

It should not be

published until the Reserve bank has determined absolutely on the rate,
and due regard should be given to their local conditions, regardless
of those of the entire country.
The Chairman:
Mr. Aiken:

Governor Aiken?

Mr. Chairman, I feel that the rates should be es-

tablished by the banks in each district, and that the initiative should

lie in the bank and not in the Federal Reserve Board.

The Chairman:

Governor Fancher?

For our board, we have rather resented these sug..,

Fancher:

gestions coming from the Federal Reserve Board, mentioning the lowering
of rates in some of the other districts.

They feel that they were given

the right under the law to establish rates, and that they were best
qualified to judge conditions in the district and determine what should
be the prevailing rate.

That is their privilege, and should continue to

be their privilege under the Act.
r. Kains:

ivir. Chairman, the directors of our board who do

not directly owe their appointments to the Government, I think are unanimous in their feeling of surprise and resentment at having suggestions
made to them.

ment directors.

However, I do not think that that applies to the GovernThat is just my opinion.

We have taken no action on

the matter at all except that personally I am a believer in the autonomy
of the Federal Reserve banks, and I heartily agree with your statement
that we should establish these rates.

We know more about them; we know

more about our own local conditions than anybody else does, and we feel
competent to establish these rates.

We should be very glad to act.

do not desire at all to act in any way contrary to the desire of the
Federal Reserve Board, but we feel that we have that right, and that
we know more about things, within our boundaries than they.
The Chairman:
mr. Wold:

Goirernor Jold?

Lir. Chairman, the directors of our bank are thor-

oughly in accord with the statement made by Governor strong.

They feel

quite strongly that the law clearly intended that the rate should be
initiated by the various Federal Reserve banks, and they resented the
suggestions of the Federal Reserve Board as to rates, and disapprove of
the announcement of rates from -dashington before they are announced at

the headquarters of our bank.

The announcements should be made by the

banks themselves, and the rates should be initiated or the change should

be initiated at that bank subject to confirmation by the Federal Reserve Board.

Our opinion is that when the rate is initiated it should

go into effect and remain in effect until the Board have either confirmed or refused to confirm.
The Chairman:

Governor Wells, your statement is already on

the record in the formal motion which was seconded by Governor Wold.
Mr. 0. Wells:

I should like to add, inasmuch as the expres-

sions have taken the turn of representing the opinions of the various
boards, which my motion did not include, perhaps, that we have never
had a formal expression of the attitude of our board on this subject.
We have it expressed without any form, but I think I reflect their
expression when I say that they do regret the action of announcing a
willingness to make a rate before it has been discussed by the Board
of Directors of the Federal Reserve Bank of Dallas.

At our initial

meeting the Board were of the opinion that this was a matter of sufficient importance not to be delegated to an executive committee, but
that we should follow the suggestions of the by-laws submitted at the
conference in October, that the making of the rate should be vested
in the Board of Directors of the bank.

I frankly confess that we have been proceeding upon that
theory, and that it was essential to submit the rate, having made it,
for review and determination, and that the whole operation was necessary before the rate became fixed, and we had no other thought in mind.
The Chairman:

The expressions of the Governors present ap-

parently are almost identical in terms, and the scope of our resolution or recommendation in this matter can be considerably enlarged for
submission to the Federal Reserve Board over what was contained in
Governor Wells' motion if he and the seconder, Governor Wold, are willing for the moment to withdraw.

Mr. 0. Wells:

I am quite willing to withdraw the motion,

with the understanding that it will be covered in the form of a resolution of sufficient breadth to include the expressions to which we
have listened around the board.
The Chairman:

Gentlemen, what is your pleasure as to the

method that we should employ in expressing the consensus of opinion of
those present with regard to this matter of the method by which rates
are made?

Mr. Kains:

I move that the Chairman most respectfully bring

the matter up to the board at the earliest opportunity, say tomorrow.
Mr. McDougal:

I second the motion.

Mr. 0. Wells:

That does not broaden it.

Mr. Seay:

Mr. Chairman, I was convinced, and I am sure that

all were convinced, when, without warning, the subject was brought up

at the Federal Reserve Board this afternoon, you stated in a very bold
and penetrating way, and very briefly, the attitude of this body.

I am

convinced that the Chairman has the fullest grasp of the situation, and
he has that faculty which retains in the mind the expressions of opinions
which we have ourselves delivered, and I do not believe it could be more
forcefully presented than if he will consent to use the language he used
this afternoon and express the opinions he has expressed to us, and incorporate in it that portion of our own opinion that we have expressed
as to the feeling of our boards of directors on this subject.

I believe

that would be the most effective way of presenting the matter to the board,

If the Chairman is willing to consent to do so.
The Chairman:

Gentlemen, I understand the difficulty or possi-

ble danger, or, at any rate, the possible embarrassment, of endeavoring
to make a record that expresses the composite views of a number of different people, and then later, a year or two years hence, being required

to refer to it as a record.

It seems to me undesirable that in a matter

of this character we should make a record which would appear to be a
commitment of the directors of the various Federal Reserve Banks.

you feel like acting upon the motion that has been made, I will endeavor
to express what has been discussed here tonight to the Federal Reserve
Board tomorrow in a verbal report, and have the Board understand that
that simply is a verbal expression in general terms of the result of
the discussion; that we pass no resolution now that might appear to be
a permanent record of policy adopted by the directors of all of these
banks.

On the whole, I think that is a wise way in which to handle
it, if you agree to entrust to me the duty of making that statement,
which I will gladly do.

Is there any further discussion of the motion?
Mr. McDougal:

Mr. Chairman, I did not make my statement in

just the way that I should like to have it appear on the record.

my statement I spoke of the directors, "individually and collectively."
I may have done some of them an injustice, because I am not clear as to
just how the so-called Government directors did stand in the matter.
So I should like to have my statement changed so that all the directors
will not be implicated in my statement.
tice.

I may be doing them an injus-

The matter had been discussed, and I know our directors as a

body were very much disturbed because of the fact that they were not
permitted to establish rates subject to the later approval of the Board.
There may have been two or three of the directors who had no voice in
that discussion.
The Chairman:

I do not suppose any of us would feel that we

were acting here under a resolution of authority from our respective
boards of directors.

opinions of

We are simply expressing our own individual

the way our banks, as banks
managed by boards of directors,

should be represented at this meeting.

Certainly the same condition prevails in every bank, that
there are three directors appointed by the Federal Reserve Board who
may feel, as a matter of loyalty and duty to their appointing body,
that they ought to follow every suggestion that they get from that body.
however, I have no hesitation in stating on behalf of our bank that
there is a feeling that a mistake is being made, and I regard it as a
duty to convey that impression to the Federal Reserve Board.

If you

are willing to act on the motion that has been made, I will endeavor to
make a moderate statement of the matter as forcefully as I can that will
represent a composite of the views expressed here; and if any Governor
present, hearing what I say, feels that it should be modified or enlarged or changed in any way to meet the situation in his own district,
why, I will take the liberty of inviting such a statement after I have
concluded tomorrow.
Mr. Seay:

To fortify you in your position, Mr. Chairman, I

will state in conjunction with my previous remarks, that our board of
directors, in framing their official by-laws, which were afterwards
changed, gave the power to the executive committee to change the rate
for extraordinary reasons'.

They thereby showed where they expect the

control of the rates to lie, and from what source they expected a rate
to emanate.

I am sure that I am representing the controlling sentiment
of our board.

No dissent has ever been expressed when utterance has

been given to it.

They expect the rates to initiate with them, and

they have been very careful'in their language, when they have made

rate, and it has been reported that they have fixed the rate themselves.
It is something which brings us intimately in contact with our member

banks, and when we fix the rate it affects the entire banking business

of our district.

I just want to fortify you in your position, sir, as far as
speaking for our own bank goes.

I do not think you would make any

error in stating that.
Mr. Wold:

ments I have made.

Li.. Chairman, I do not care to qualify the state-

I think they fairly reflect, not a majority vote,

but I think they fairly reflect the entire vote, including the Class C
directors.

In fact our Federal Reserve ii.gent has, by communication to

the Federal Reserve Board, suggested that the rate should initiate with
the bank and should be announced from our bank and not from the Federal Reserve Board in Washington.
Mr. Seay:

He has a vertebrae.

It seems to me,

Ir. Chairman, if I am not taking

too much time, that my judgment as a banker is that something unsound
is being attempted in the effort to equalize rates where conditions
vary.

The Chairman:

Gentlemen, I am going to ask you whether you

will authorize me, in stating this matter to the Federal Reserve Board
tomorrow, to refer to one matter which is in my mind as conjecture.

am distinctly under the impression, although I admit that the grounds
for it are very slight, that the apparent effort that is being made by
the Federal Reserve Board to reduce rates is originated by pressure
that is brought upon the Board from outside sources.

I do not know

what the character of that pressure is, but I just sense the feeling
that there is pressure, and that if there is pressure of any kind, the
statement should be made before the Federal Reserve Board that if it
were known to the management of the Federal Reserve banks or any of
them that influences of any kind have been brought to bear in connection with the discussion or decision in this matter of rates, it would
be very seriously resented by the management of the Federal Reserve
banks.

I admit that that is conjecture; I have no ground for making
that statement other than an instinct, possibly; but it is the one
thing that this system must be guarded against, and I would not be
ashamed to read whatever statement is made to the Federal Reserve Board

in regard to the demand thatthey be absolutely free from any influence
whatever in considering the rates; that it should come from the Governors of the Federal Reserve banks; that their duty is to sit there
as a judicial body to review what we suggest to them.

What we have in

fact established at the respective banks is for them to pass upon, and
nobody is entitled to go to that board and tell them what they ought
to do in suggesting rates to the Federal Reserve banks.
Mr. Kains:
Mr. Seay:

I am heartily in accord with that, Mx. Chairman.
You have carte blanche, sir, from me.

Mr. 0. Wells:

Would you not rather say that the suggestions

of rates should come from the boards of directors of the Federal Reserve banks rather than from the Governors?
The Chairman:

Yes; I spoke in a collective sense there.

is a bad habit that I am guilty of.
Mr. Wold:

That is where it comes from, as a matter of fact;

it comes from the Governors, does it not?
Mr. 0. Wells;

No';

it comes particularly from the chairman

of the board as coming from the board.
Mr. Wold:

It does not in our case.

Mr. Seay:

I would like to mention something and ask the

stenographer not to report it at present.

(An informal discussion thereupon occurred which the stenographer was directed not to report; after which the following proceedings
were had:)

The Chairman:

Gentlemen, we have a motion.

I do not want to

hasten a conclusion in a matter of the
great importance that this has,

but I cannot help but feel that there is such a unanimous expression
here as to what our course should be that if any of you now feel disposed to call for a vote on that motion we can conclude this matter, if
you will permit me, after this motion is put and acted upon, by making
a short statement on the subject.
(Cries of "Question.")

(The motion under discussion, having been duly seconded, was
put and carried.)
The Chairman:

The statement I would like to make is this:

The next likely development of real importance in the matter of rates
is to my mind of even greater importance than the one we have been discussing.

Just now all the Federal Reserve banks are loaded with money

and there has arisen so far and may not arise for some time, no question
in regard to a rate of discount to be established for rediscounts between the Federal Reserve banks.

Having participated in the discussion of this bill prior to
its adoption, before the Senate Committee, I can assure you that there
was no subject that caused greater concern in New York than the possible delegation to an independent body of the right to take some of the
assets of the banks of New York and lend them in some other part of the
United States without the banks of New York having any right to say
whether that loan should be made or not.

That matter has not been ac-

tive in our minds, or in the minds of the member banks, because they are
all now laboring under the impression that no situation of that character can arise, at any rate in the near future; but the action that has
been taken by the Federal Reserve Board in permitting or suggesting, or
at any rate authorizing, a rate of discount in some sections of the
country that is lower than the rate which has been authorized by the
Federal Reserve 13ank in New York and in other districts may result in

the accumulation of discounts resulting from the retiring of the

Aldrich-Vreeland currency or the spring demand for money in connection
with preparation for crop planting, and so on, so as to cause this very
situation to arise, that possibly some of the banks in the south or
west will get a very large line of discount even to such a point where
they may find it desirable to ask for one of two methods of assistance.
One is Government deposits; the other, rediscounts.
We have had two meetings of Governors, and I want to tell you
that my concern which was an honest one a year or more ago on this subject is just about dispelled.
this:

The only remnant of it that is left is

That I would dislike very much to feel that any Federal Reserve

bank felt under the necessity of making application to the Federal Reserve Board for a rediscount with the Federal Reserve Bank in New York.
If any of the Federal Reserve Banks of the South or West reach
a point where their resources are getting low, in the interest of the
managements of all of the system, I believe it will be highly desirable
for that bank to make direct application, either to New York or Chicago,
or wherever they may feel it desirable to apply, for a rediscount.

do not mean by that that one of the Federal Reserve banks which may be
discounting at four per cent is required to come to New York and rediscount at 4 1/2 per cent and take the loss.

The provisions of the Act

are broad enough so that the Federal Reserve Bank of New York can establish a rate of discount which will recognize the value of the endorsement of the bank that applies for the rediscount.

In other words,

with conditions as they are, I would be disposed to recommend in New
York that we maintain our present rates for the time being, and that we
invite any other Federal Reserve bank that feels it desirable to rediscount any paper to make direct application to us and to permit us to establish a rate for that transaction, which will enable them to rediscount

the amount that they apply for at a lower rate than they are receiving
on their own rediscounts, and that we in New York will follow whatever
procedure we think is desirable in order to make that rate effective.
The object in making this suggestion is this:

I know that

in some districts there is a large amount of Aldrich-Vreeland currency
outstanding.

The rate of tax on that currency is increasing.

The

rate of discount at some of the banks is lower than the rate of tax
will be in the near future.

If the amount of discounts applied for

becomes excessive, I hope that there will be no hesitation in sending
word to New York on any ground that rediscount would be acceptable,
and I can assure you that if it can be arranged, with or without the
approval of the Federal Reserve Board, we will do it.

The question

has not been submitted to the Federal Reserve Board, and I do not believe that I would care to have it submitted in anticipation of any
such transaction; but I think we would feel badly there if we were not
permitted to act directly in a transaction of that sort without it
being necessary to ask someone in between to make the suggestion for
us.
idr. 0. Wells:

What is your construction of the law in that

The Chairman:

Governor Wells, I do not believe we need to

respect.

read the words and letters of the law to determine what we want to do.
It may be that some obstacle to a direct procedure of that sort will
be found, but I doubt it very much.

I do not believe it is the inten-

tion of the law to require that there should be a board of seven men
acting as a broker between the Federal Reserve banks, and I make the
suggestion seriously to you, because I think that that is the sound
.basis on which this business ought to be conducted.

that, and

Mr. Aiken:

I would like to express my hearty approval of

to say we shall be glad to cooperate in the plan as outlined

by you.

Mr. 0. Wells:

I think, Mr. Chairman, representing a section

of the country which is more likely, because of conditions existing,
to become a borrowing bank than any other sections represented around
this board, it would be very pleasing to us to handle the proposition
in that manner.

We can recognize in it the elements of good sound

business procedure, but I believe if this discussion had not arisen
at this time, or if I had been making an application, with my impression of the requirements of the Act, that the application would have
been made at least in conjunction with some approach to the Federal
Reserve Board.

Would you not have done so, Governor Seay?

Mr. Seay:

Being in a district, Mr. Chairman, which will

probably have full use for its resources, I therefore construe your
remarks as being somewhat in the nature of an expression of cordial
feeling,and I desire to express appreciation of them.

I should, how-

ever, have taken the course which you have outlined, and applied
directly to the Federal Reserve Bank of New York.

If there had been

any reference to the Board, I think that would come after I had first
opened negotiations with you.

(An informal discussion then occurred which the stenographer
was directed not to report; after which the following proceedings
were had)

Mr. McCord:

Mr. Chairman, I deeply appreciate your offer,

and that would have been my attitude.

I would have first opened nego-

tiations with you or with Boston or Chicago, probably, or some of the
districts, a little before I would have taken it up with the Board; and
I will do so now if it becomes necessary.
clear of that.

I am going to try to drive

I hope to be able to do so, but in the event that I am

not able to do it, I deeply appreciate it and I will certainly communi
cate with

you.

Mr. Kains:

I do not anticipate for San Francisco that we

will ever be doing that sort of thing, but I certainly think that that
is the business way to have this bank managed.
The Chairman:
Mr. Kains:
Mr. Seay:

Plural, please, gentlemen.

Yes --- "these banks" managed.
And "we think."

Mr. 0. Wells:

Mr. Chairman, while I realize that we are only'

conjecturing as to what we would have done, it would not have been for
the purpose of obtaining it under the belief that that was the means of
obtaining it, but it would have been the question of being authorized
to discount and of obtaining the rate under which it would be done,
and I think decency would have perhaps impelled carrying on negotiations also with the Federal Reserve Banks as to their wishes or as to
their desire in the premises.

But I still maintain that my natural

course would have been to have handled it as a function to be negotiated through the Federal Reserve Board, because of my impression of the
reading of this Act, that being the only place in the Act under which
we obtain authority to rediscount.
The Chairman:

We are hardly under the necessity of antici-

pating the future in this matter to the extent of taking some action
here.

I did not want this meeting to be concluded without expressing

that view of our interpretation of the meaning of the law.

We are

prepared to act in accordance with the understanding, and I believe
firmly that Mr. Curtis will support us in that opinion.
Mr. 0. 4ie1ls:

iiow that the matter has arisen, Mr. Chairman,

and supplementing the statement about the Aldrich-Vreeland circulation
remaining outstanding in the South to the extent to which it does exist, and the rates tending toward a point that might be attractive as
compared with the tax upon the Aldrich-Vreeland Bill, with the further

construction

that has recently been placed upon the retirement of the

Aldrich-Vreeland currency, which seems to be mandatory by June 30 --I frankly say to you that in our district the necessity of having between $15,000,000 and 420,000,000 of emergency currency by June 30 being
that the problem is upon us for immediate consideration, because we
will have no natural liquidation with which to take care of it, of any
consequence, between now and June 30, and it is rather imperative that
we look towards the retiring of it at some early date rather than waiting until nearly the time set for its retirement under the construction
as recorded in the paper this morning, that being a statement given out
under authority, as I stated, from the Federal Reserve Board.

I am

rather of the opinion that it may come up and that it will be discounted
only to the extent proper for the retirement of this amount of money,
and for taking care of the needs of the season of producing another crop
If it can be done without having the interview take a turn of pressing
the question, from a practical point of view, or from the point of view
of an operation, but simply for our information, if there can be brought
out at the interview tomorrow some construction of what would be done
under this law, it might be very helpful to us.
Mr. McCord:

Do you think that is wise?

Mr. 0. Wells:
Mr. McCord:

,I would like to know what we all think.

Do ybu not think the course suggested by Governor

Strong is the best, that we know what the law is ultimately, anyhow;
and do you not think it would be better rather than to invite a decision in advance, to let us handle it otherwise, and then if it takes
their approval, we can say that we have consulted and it is agreed to?

I would rather be put in that attitude than to be put in the other attitude.

I would hate to have to go to the Board and let it be said that

the Atlanta district had forced New York to do so and so.

Mr. 0. Wells:
Mr. McCord:

I did not mean that, Mr. McCord.

But that would be the result if the decision was

against us.

The Chairman:

I have no authority for making this statement,

but I have reason to believe that the Federal Reserve Board would be

very glad to have this Matter dealt with in such a way that no such
situation could arise.
Mr. 0. Wells:

I can see no objection to asking for an in-

terpretation of the law, whether we do it as a body or not.
The Chairman:

I can see objection to asking the Federal Re-

serve Board to interpret the law on that point, that is, the paragraph
I read under Section 11, which was not taken down for the record, if
it gave rise to the amount of hesitation and doubt in the minds Of the
Federal Reserve Board that arose as to a transaction involving the purchase of gold today --- and I brought the matter up not to ask that any
action be taken, but simply to make clear on the record and to you
gentlemen what our attitude is in New York.

Knowing that attitude,

of course you will in each instance follow your own best judgment as
to what ought to be done.
r. Seay:

We first, Mr. Chairman, will have to determine

the fact as to whether the inherent right is in the Federal Reserve
Bank of New York to make'a rate for that purpose.

The Federal Reserve

Bank of i. ew York might have to reply that "We are willing to do it, but

we will have to see what rate we can make you by reference to the Federal Reserve Board."
The Chairman:

I think, Governor Seay, if you send us a tele-

gram about such a matter we could get you back a pretty prompt answer
about the rate.

I think so.

I would not say definitely what our

Board would do, but I would go so far as to invite you to send the
telegram, at any rate.

4,9q

a Pytg,s-

\al

Land Title Building
Philadelphia

Chestnut-Sansom & Broad 3t.

February 15, 1915.

Benjamin Strong, Jr., 4sq.,
Governor,

Federal Reserve Bank of New York.

Dear Sir:I have heretofore acknowledged receipt of yours of the 11th
ins t.

I have still further reflected upon the matters about which
you asked me to express my opinion, with the result that I have reached
a somewhat different conclusion about some of the points and will therefore ask you to treat this letter as my final reply to yours.
It is impossible to answer some of the questions you put without adding that the answers embody a statement of views entertained by
counsel in the interpretation of a Statute which inaugurates a new system, and has not, as yet, been sufficiently dealt with by the Courts to
afford a reasonable certainty as to what will be their attitude. They
may feel inclined to a liberal, or to a narrow, interpretation. Very
much will depend upon their point of view.

After the Courts have dealt with the subject, the Federal Reserve Bank Act may, like the Sherman Aot, be no longer recognizable by
its draftsman.
The opinion which I will express will be one given by me with

full appreciation of the fact that other counsel, better able than myself, to construe, may reach an opposite conclusion. What I will say,
will not be said in ignorance of the force with which an opposing
opinion may be urged.

The Act was intended to bring the banking system of the country

as far as possible under a centralized supervision, and, in some particulars, a centralized control. To accomplish this, the Federal Reserve
Board was created.

I do not think that an interpretation which does not give a
very large measure of power to the Reserve Board, will be sustained by
the Courts.
In what I may say as to the method in which the rate of dis-

count is to be determined, I do not mean to include the subject of rediscounting by a Federal Reserve Bank, of the discounted paper of other
Federal Reserve Banks.

The Reserve Board is to exercise general supervision over the
Federal Reserve Banks and is to "perform the duties, functions, or services specified in this Act,',* with power to "make all rules and regulations necessary to enable aaid Board effectively to perform the same."
Supervision does not of necessity include initiation; but

this I will specially consider later.
The performance of duties, functions and services involves
the idea of more than supervision.
We must therefore examine the Let very carefully in the endeavor to ascertain concerning any special matter, whether the power

of the Board is one of supervision or of original action.
Lech Federal Reserve Bank, so far as regards the other Federal Reserve Banks, is an autonomous entity; but the autonomies are
intended to be brought into as much accord as differing situations and
circumstences may permit. The method by which they will thus be brought
Into accord is the exercise by the Board, of its powers of supervision,
and where they are conferred, of original action.

I believe that the Act will be so interpreted by the Courts
as will give to the Board such latitude as, consistent with special
powers conferred upon the lieserve Banks, will weld the banking system
into a harmonious whole.

In the matter of fixing rates of discount, the power conferred upon the Board is that of supervision and modification, not of

initiation.
Upon the Reserve Banks is clearly conferred that power of

initiation, in this respect, Which is essaatial in view of the fact
that rates of discount must differ in different localities. The initial
establishment in each locality, of the rate of discount to be oharged
by the Reserve Bank of the District, can undoubtedly be very much better
effected by the Reserve Bank in each locality than by the Reserve Board.
On the other hand, the final determination of these rates by each Reserve Bank acting for itself, without any supervision, would make impossible that general harmonization which the Act contemplates.
It is not necessary for me to deal with some of the matters
In Which there appears to me some confusion, resulting from the fact
that at times, probably without any intention to make a change, the
draftsman shifted from one word to another. He did not always suf-

ficiently project himself into the future to bring about provisions
anticipating what will sometimes occur.
The questions which you put to me, though requiring to be
considered in connection with the whole context, involve the interpre-

tation of this particular Section,
"very Federal Reserve Bank shall have power ***a to
establish from time to time, subject to review and determination of the Federal Reserve Board, rates of discount
to be charged by the Federal Reserve Bank for each class
of paper, which shall be fixed with a view to accommodating
commerce and business."

The questions I am asked and my answers thereto, are as follows:-

Does the &et contemplate that rates of discount for commercial paper, shall be initiated by the Federal iteserve Bank only, or
by such banks and the Federal Reserve Board, or by the Board only?"
"1.

I am very decidedly of the opinion that the initiation of
the rates of discount for commercial paper is to be by the Federal Reserve Banks alone. A joint power of initiation by the Board and the
Banks, or a power by the Board alone, to initiate, is not conferred.
Most clearly, in my judgment, are the powers of initiation
and of supervision, separated, the first being conferred upon the Reserve Banks alone, and the second, upon the Reserve Board.

Irrespective of the general contemplation of the Act,
have the Federal Reserve Banks power to establish an effective rate of
discount? If so, does it become effective at once upon its establishment and before it has been reviewed by the Federal Reserve Board?"
It is only subject to the review and determination of the
Board that the rates initiated by the Banks become effective.
It may be argued with great force thet to the Banks is given
the power to establish the rates, and that, having thus established
the same, such rates go into effect before the Federal Reserve Board
has either approved or has otherwise determined upon review.
I think, hewever, that the establishment by the Banks is not
meant to become effective until the Reserve Board has been given the
opportunity to review and finally to determine.
Of course the establishment of the rates by the Banks must
yield to the exercise by the Reserve Board, of its power of review and
determination, and no rates of discount originally established by the

Banks, can be sustained after adverse action by the Board. I think,
however, that the rates do not become effective, and cannot be acted
upon, immediately upon the establishment by the several banks, before
an opportunity has been given to the Board to consider the same.
Most strongly do I advise you not to put into effect any
rates which you may establish, until after opportunity has been afforded by notification, to the Board, to exercise its power of review and
determination.

The Board itself will probably establish some regulation
governing the submission to it of the rates and the manner in which,
before they become effective, it will act. Necessarily, such a regulation must be obeyed.
In the absence, however, of any such regulation, I would advise against the making effective, by your Bank, of the rates which it
establishes, until after you have become reasonably assured, - the
rates having been notified to the Board, - that it does not mean to
review.

It is more judicious, however, I think, for you not to act
at all, after notification to the Board, until it has notified you of
its action in the premises.
The rates can only, in my judgment, be held to have been
fixed after establishment by the Bank and review and determination by
the Board.

It may be that a failure by the Board, after the lapse of a
reasonable time, may be taken as indicative of its intention not to
review; but I would not advise action by your Bank on such suggestion.

I therefore answer generally, that I do not think the rate
established by your Bank, becomes effective upon such establishment,

until it has been reviewed by the Federal Feserve Board and that Board
has made its determination in the matter.
If the rate does not become effective prior to review
"3.
by the Board, does its effectiveness, when it is finally reviewed and

approved by the Board, date back to the time of its establishment by
the Bank?"

I prefer to answer this question by saying that, until the
rate established by the Bank, has

been reviewed and

determined by the

Board, it does not become effective.
4.

Mey the Federal heserve Board, in reviewing a rate

a Federal Reserve Bank, determine that a different rate,
not established or reoommended by suoh Bank, shall become effective?"
established by

The power of the Board is not one merely to affirm or rejeot.

The power cenferred upon it is to review and determine.

A review carries with it something more than the idea of examining with a vieorto more dissent or assent.

The werd "review"

used in connection with the very potent word "determination", convinces

me that the review may be of such a charaoter as to involve changes

Of rates, and that the determination by the Board that such changed
rates should be charged, is final and conclusive upon the Bank.
I think the Board has the fullest power to alter and modify
rates, and to insist upon its final determination as cpnclusive upon
the Bank.

The review by the Board is not like that whioh an Appellate
Tribunal makes, in the case of a judgment submitted to it upon appeal.
In fact, in many cases, the Appellate Tribunal may modify, and does
modify, decrees.

Had it been intended to confer upon the Board nothing more
than a power to approve or disapprove, the idea, in my judgment, would
have been expressed in very different language from that which we find

in the Act.
If the Board cannot compel the Bank to accept the rates which
It finally determinec in review of those established by the latter,
what becomes of the power of review? If the Board can merely disapprove, we will have an endless see-sawing between the Bank and the
Board.

The rates, in my judgment, which becomes effective, are those
which result from the initial action of the Bank, supervised, reviewed
and modified by the Board.
In my opinion, the Bank must carry into effect only such rates

as shall finally be determined by the Board, in review of the initial
establishment by the Bank.
5. May the Federal Reserve Board review and determine the

Late at any time, or is it limited to review such rate within a reasonable time after its establishment by the Bank?"
I see no warrant in the Act for advising that there le a
limitation of time upon the Board in its review and determination in
the matter of rates established by way of initiation, by the Bank.
Naturally, the Board, if it feels that the Bank cannot act
In the matter of rates until it has determined, will feel constrained
to act promptly. It is not compelled so to do, however.
I think it may defer, for as long a time as it shall Me fit,
Its action in the way of review and determination, subject to its
sense of duty, as to hieh it alone must be the judge.
It may be that if the Board defers its action for any defi
http://fraser.stlouisfed.org/
niteBankspace
of time, the Bank may infer that its rates are estahl'-'
Federal Reserve
of St. Louis

but I do not advise it so to infer.
What is the effect of the word "determine"in Section
14? Does it mean that the Board may determine a rate and make it effective at any time, for any Bank, without prior action by the Bank?"
In my opinion, the Bank having deferred for such length of
time as to it shall seem proper, its action of review and determination,
may finally review and determine, and the rate will become effective
only thereafter.
In my judgment, no other action is demanded by the Bank after
it has established the rate, and the same has been reviewed, modified,
if thought wise, and determined by the Board, than to carry the rate,
thus finally determined, into effect.
"7. May a rate established by a Bank and reviewed and approved by the Board, be re-reviewed by the Board without any inter.

vening action by the Bank?"
An affirmative answer to this question may be sustained with

great force, and my first impression was, that the answer should be in
the affirmative.
More careful consideration of the whole Act, and a much more
thorough study of the Section I have quoted, however, convinces me that
the answer should be in the negative.

I was at first very much impressed by the fact that, if the
Board had no power of re-review, there would be a paralysis of action
in case the Bank determined to stand by a rate determined by the Board,

after it, the Bank, had originally established the same.
This view, however, I am convinced, was too superficial. It
lost sight of the very important words "from time to time."
The Bank, at any time, may initiate the establishment of a
Digitized fornew
FRASERrate, subject to the action of the Board in reviewing and deter

mining upon such newly established rate.

Of course, if I am right in what I have heretofore said, the
new rate established by the Bank, cannot he put into operation until
the Board has acted by way of review and determination. Were it
otherwise, the Bank could always set aside the action of the Board
by establishing a new rate and sking the same effective until the
aoard should have acted anew in the review of the Bank's later motion.
It is the Bank which may "from time to time" establish rates.
Nothing is said about the Board, from time to time, reviewing and
determining the rates eat bliahed by the Bank.

The lot, I am convinced, after additional reflection, clearly gives to the Bank the initiative in the matter of establishment of
the rate. It makes such rate effective after the Board has reviewed
and determined. The rate remains in force until the Bank has acted
anew, its action being subject to the reviewing power of the Board.
If the Board, after the Beak has established the rate and
after it has acted thereon, may thereafter, under the guise of a re:eview, without intervening action of the Bank, establish a rate, the
Initiative will have been shifted from the Bank to the Board by reason
thereof. The Act does not, in my judgment, permit such shifting of
power to initiate.
Presumably, the dank, under changed circumstances, will es-

tablish a new rate and will not continue to retain an old one, in
order to prevent any further supervision in the matter by the Board.
Different conduct by the sank is almost inconceivable.
I think we may assume that the draftsman of the Act acted
upon the theory that, from time to time, as the Bank should find
business exigencies would require, it would esteblish a new rate,

even at the risk that such newly established rate would be modified
by the Board in the exercise of its supervisory power.

I am

Very truly yours,
(Signed) John G. Johnson

OPINION OF ATTORNEY GENERAL PUBLISHED IN VOLUME 32, PAGE 81
OF OPINIONS OF ATTORNEYS GENERAL
REGULATION OF DISCOUNT RATES OF FEDERAL RESERVE
BANKS BY FEDERAL RESERVE BOARD

The Federal Reserve Board has the right, under the powers conferred by
the Federal Reserve Act, to determine what rates of discount should be
charged from time to time by a Federal reserve bank, and, under their
powers of review and supervision, to require such rates to be put into
effect by such bank.
Department of Justice,
December 9, 1919.
Sir:

In response to your request for my opinion concerning the powers
of the Federal Reserve Board to regulate discount rates of the several reserve banks, I reply as follows:

By section 14 of the Act of Congress, designated by the short
title "Federal Reserve Act" (Act of December 23, 1913, 38 Stat. 251, 264),
it is provided that "every Federal reserve bank shall have power "(d) To establish from time to time, subject to review and determination of the Federal Reserve Board, rates of discount to be charged by
the Federal reserve bank for each class of paper, which shall be fixed with
a view of accommodating commerce and business."
By section 4 of said Act each Federal reserve bank is under the
supervision and control of its own board of directors, subject, however, to
the provision of section 11 of said Act (38 Stat. 261), which provides, in
part, that "The Federal Reserve Board shall be authorized and empowered
*
(j) to exercise general supervision over said Federal reserve banks.
"The Federal Reserve Board is also further authorized and empowered to examine at its discretion the accounts, books and affairs of each
Federal reserve bank * * * and to require such statements and reports as it
may deem necessary." (Sec. 11, subdiv. a.)

By section 12 there is also created a Federal advisory council
composed of representatives chosen in the manner prescribed in said section,
which is to confer directly with the Federal Reserve Board. Among its
powers it is authorized to "call for information, to make recommendations in
regard to discount rates, rediscount business," etc.
The question for determination is whether, taking into consideration the language of section 14 (d), giving the power to the Federal reserve
banks to establish from time to time rates of discount, "subject to review
and determination of the Federal Reserve Board," and the further power of the
Federal Reserve Board to exercise general supervision over said Federal reserve banks, the power of the Federal Reserve Board is limited to reviewing
and approving or disapproving rates of discount made by such banks, or
whether said board may, in the exercise of its powers, from time to time
review the rates of discount in use and direct specific changes and alterations thereof.

The legislative history of the act shows that as originally drawn
section 14, subsection (d), conferred the power upon the Federal reserve
banks to make discount rates "subject to review" by the Federal Reserve
Board, and that said section was amended in committee by adding the words
"and determination" after the word "review," so as to make said section read
as now enacted.
It is quite evident that if the Federal Reserve Board is confined
to the power to review and approve or disapprove rates of discount made by
the Federal reserve banks, and is without power to itself direct specific
changes, the words "and determination" are wholly without significance. The
very signification of the word "determination" used in such a connection,
carries with it the right to pass upon and to decide and fix, and thus determine what should be done. Coupling this with the power given the Federal
Reserve Board to supervise the business of each Federal reserve bank, taking
also into consideration the recommendations contemplated by the advisory
council to the Federal Reserve Board in regard to discount rates, such power
would be futile if such Federal Reserve Board could not, if agreeing to such
recommendations, direct them to be carried out. I think it is quite clear
that the Federal Reserve Board is the ultimate authority in regard to rediscount rates to be charged by the several Federal reserve banks and may prescribesuch rates.
This is in all cases necessarily a review of rates existing at
the time in the bank, and therefore strictly calls for the exercise of this
power. The determination reached by the board carries with it the exercise
of the power of determination specified in section 14, subdivision (d), and
also exercises the power of supervision granted in section 11, subdivision
(j).

The scheme of the entire Act is to have Federal reserve banks in
different parts of the country, so that their operations may be accommodated
to the business needs of each section, and to vest final power in the Federal
Reserve Board, so as to insure a conduct of business by each bank which will
not be detrimental to the carrying out of the entire plan. The powers of
the Federal Reserve Board are therefore to be exercised in regard to each
reserve bank as the conditions surrounding said bank may dictate, keeping in
view the general purpose and plan of the Federal Reserve Act. Bearing in
mind such general purpose, I am of the opinion that the Federal Reserve
Board has the right, under the powers conferred by the Federal Reserve Act,
to determine what rates of discount should be charged, from time to time by
a Federal reserve bank, and, under their powers of review and supervision,
to require such rates to be put into effect by such bank.
Very respectfully,

AUX. C. KING,
Acting Attorney General.
To the Secretary of the Treasury.

COPY
WHITE & CASE
14 WALL STREET
New York, February 25, 1920.

JDW.LC
Federal Reserve Bank,

120 Broadway, New York.
Dear Sirs:

You have asked for our opinion as to whether under the Federal Reserve Act the federal Reserve Board has the power to initiate
discount rates from time to time, or whether such power resides solely
in the Federal reserve banks.
There can be no question as to the power of the Congress.
The Federal Reserve Board could have been given the absolute and exclusive power to initiate rates. In fact in subdivision (b) of Section 11 of the Act iS has been given the exclusive power to fix the
rediscount rate to be charged by a Federal reserve bank on the rediscount for other Federal reserve banks of discounted paper. The question is, therefore, what the Congress intended by the language of the
several sections of the Act as to the power of the Federal Reserve
Board in connection with the discount rates.
No legal principles seem to be involved in the question except a few simple maxims of statutory construction. The Attorney
General in his opinion of December 9, 1919, invokes one of these that, if possible, meaning must be given to all words of a statute.
In applying this principle he emphasizes the use of the word "determination" in subdivision (d) of Section 14 of the Act, wherein it is
provided that discount rates as established from time to time by a
Federal reserve bank are subject to review and determination of the
Federal Reserve Board, and the conclusion he draws, which seems to us
justified by the language, is that the power of the Federal Reserve
Board is not limited to a review of such a rate but that the Federal
Reserve Board may follow such review by a determination establishing
another rate, if not satisfied with the one under review. And the
Attorney General goes further and holds in effect that the Federal Reserve Board has the power to initiate rates.
The same principle of statutory construction requires, however, that use be made of the words found in the same subdivision giving to every federal reserve bank the power "to establish from time to
time *** rates of discount." Our opinion is that themEaning which
must be given to those words is that the Federal reserve banks have the
power to initiate rates and, because we find no specific grant of such
power to the Federal Reserve Board, that that Board has no such power
except in so far as a determination in connection with a review may be
regarded as initiation. We think that the Federal Reserve Board's
power is, however, spent after a review and determination in respect of
a rate established by a Federal reserve bank.

Federal Reserve Bank.

2-25-20.

But there is a practical side to the matter. Subaivision (j)
of Section 11 of the Act gives to the Federal Reserve Board general
supervision over the Federal reserve banks. Those words, which have
received SOMB judicial consideration and construction, are broad and
effective in their scope and it has been held that an officer who can
only advise or suggest to another has no general supervision over him,
his acts or his conduct.
Bearing in mind the scope of the power of general supervision,t
assume that a bank was satisfied with its existing rate, which had already been reviewed and determined by the Board, and assume that the
Board had decided that the rate should be changed. The Board might cafl
upon the bank to establish and report its rate, and even though the rate
so reported might be the same as before we think there would have been
a sufficient exercise of the power of initiation by the bank to open
the door for review and determination by the Board.

Or assume that the bank was not satisfied with the rate established by the Board, after review and determination. It might establish a new rate, which also would open the door for another review
Should such a course result in an unseemly race beand determination.
tween the Board and a bank to fix the rate, it would, we think, be a
fair construction of the general supervision provision of the Act to
hold that in such circumstances the Board might direct the bank not to
change the rate as determined by the Board until the lapse of some arbitrary but reasonable period, unless some change in the situation
"with a view of accommodating commerce and business" (Sec. 14 sub. (d))
should, in the judgment of the bank, have reasonably suggested it that is, some change from the conditions obtaining at the last determination by the Board. Such instructions would practically tie the
hands of the bank, because its directors could not resolve that in
their judgment such a change had taken place merely because they
thought the rate was wrong. They would in justice to themselves be
obliged to believe and find that some such real change had taken place.
We are not commenting on the wisdom or unwisdom of the statute but on the statute as we find it.
The history of its passage
shows a struggle between the ideas of a central bank and of more or
less autonomous regional banks. The latter policy prevailed in general
and yet the statute is in several respects a compromise, and the intent
Is clearly reflected to co-ordinate the several banks through a central
power to which is given, among other powers, "general supervision,"
such absolute and coercive control as the power, on the affirmative vote
of five members of the Board, to require a bank to rediscountthe discounted paper of other banks at rates fixed by the Board, and the power
to suspend or remove any officer or director of any Federal reserve bank.
There are inconsistencies in the statute, as there usually are
in statutes that have passed through the fire of compromise between
strongly-urged conflicting theories, but the idea of central control,
while it may have, in the popular understanding of the statute, been
defeated, nevertheless is really the dominant thought of the statute as
a whole.
As a further instance, it is provided in Section 4 that the
board of directors of a Federal reserve bank shall "subject to the provisions of law and the orders of the Federal Reserve Board extend to
each member bank such discounts, advancements and accommodations as
may be severally and reasonably made with due regard for claims and demands of other member banks." The conclusion seems to us to be clear
that the intent of the Congress was, for all practical purposes, to

tederal Reserve Bank.

2-20-20.

give to the Federal Reserve Board the power, directly or indirectly,
eventually to enforce its own views as to discount rates to be charged
by the Federal reserve banks.
Our conclusion, therefore, is that the banks alone have the
power to initiate rates but that the Board has the power to change
those so established; that the Board has no power directly to initiate
a rate but that the sweeping power of the Board is sufficient to enable
it by one means or another to bring about any changes in the discount
rates in any district that its judgment may dictate.
Yours very truly,
(Signed) White & Case.

KWIC

( rip

SENT TO GOVERNORS OF OTHER FEDERAL RESMRVE BANKS.

Day 12, 1927.

Tri./CmLY CONIMOVILL

Dear Governor

We were advised yesterday afternoon that the Governor* Conference
had authorized the participation among all Federal reserve banks of the gold

which we recently purchased in London.

A telegram to that effect was im-

mediately sent to you in order that the distribution of

the account might be

reflected in yesterday's press statement, and I am enclosing a copy of the
telegram

for

oonfirmation.

I understand

that Governor

Strong has

fully explained this transac

tion to you at the Oonference, and I am now writing merely to confirm the

details as &matter of

record.

We purchased from the Bank of Franoe on Llay 6,

69,596.0622 fine

kilos (2,860,643.662 fine ounces) of gold, delivered at the Bank of England,

London.

At the statutory mint prioe the value of this gold is $69,546,191.64,

and we paid for it

::,59,3379206.05 vhich, you sill observe, gives us a margin

of 4210,965.49 less than the full mint value.
this gold took

into

consideration the

slapping

The price at which we bought
charges to New York which

would mount to about $126,422.65 and also the interest
Bank of iranoe by our making

ly brought to7kew

York at

immediate

current

payment.

that was

saved to the

Assuzing the gold is

ultimate-

rates the allowance made for interest would,

of course, represent profit in which all Federal reserve banks will partioipate.

The item of 4210,965.49, pending final disposition of the gold, is being
carried in suspense an our books.

Will you be kind enough to writo

at your

convenience confirming

nay 12, 1927.

the participation of your bank in this purchase of gold so that our records
will be complete.

With kiniest regards, believe me

Faithfully yours,
J. H. OAVZ1,

Deputy Governor.

X110:11K

c11

frLL
STRICTLY CONFIDENTIAL

June 14) 1921.

Doer Govermor Harding:

ram writing to confirm the tolograa whioh I sent you yosterdwy,
and to complain in a

litt-le more

detail the transaction to whioh it re-

ferred.

You have daabtless soon referenoe in the newspapers to the fast
that the 'Mak of Transco has boon accumulatiag large balances abroad, particularly in London and ley York.
standing of the situation,

whia

No would like to explain our undergives rims to the prevent transaction.

Owing to the flew of fends to Farts heavy purchases of foreign
smehaage he** been made by the Bank of Franco* in order to keep their amchange rate stable.

In tine

with their preterit monetary policy, it

has

been the desire of the Bork of Frames to convert some of these 1arge
foliage balanees into gold to be held under earmark for then abroad.

This has alroady been demo on a oonsiderable seal* both in London and

New York and, in order to festinate those large operetions, now under

way by both the Bank of Prance sad the Bank of Ragland, we have wood to
resell to the Bank of France for poysont in sterling the gold which we
bought from them last month and which is now earmarked for our asoount
with the Bank of England.
The selling prim, agreed upon is 04 s. 21 15/11 4. per fine ounce

which is the Bank of England's statutory selling price and the equivalent

our mint parity. At the present rate of sterling exchange, *4.85 6/8,

there is a potoskial profit of approximately $95,000, but eines seer.

taking meat

sterling, our aotual profit, when converted into dollars,

inns 14, /WS.

Ir. W. P. G. Hardin.

With England

will depend upon the rate of exchange at the time of °emersion.

on a gold basis and on the basis of present shipping sesta, the gold import
point free London to New York is approximately 44.85.

eider that as the minimum

We may therefore cop-

rate below which sterling will not fall under preset

Instead of taking the profit of 985,000 on this sale of gold at

conditions.

this tine, however, we propose to use this sum to writs down the value

of the

sterling received in meant for the geld to a price slightly under the gold
/sport point.

The net

effect of this transaction will be to convert a

deposit ef gold into earning assets abroad which, when
meant

non-reserve

written down bf the

of $85,000 referred to above, will represent a book value below which

tetatA.

value

4hety actual

should not fluctuate under existing conditions.

The Bank of England has agreed either to invest the sterling for us

in prime (monomial bills or else to employ the money at interest as eentemplated hy our original 1917 agreement with
the Federal Reserve Bank of New York has at

the Bank of
banks.

the

Bank of England.

the

England which is not participated among the various Federal

It comprises the equivalent of $275,000

Bank of England account has never in the past
among the other Federal reserve banks oiling to

before England returned to
While that loss

in prime

has

This side of the

been offered for participation

the fact

that

for

some time

the aceount.

ceased to exist since England's return to the gold standadd,

to justify its participation.

that

the amount of the account was too small

As you may remenber, this Ratter has been

from tine to tine with the Open Market Immanent Committee

Gevornors Conferenees, when it vas understood that
in sise there would be
reserve banks.

reserve

commercial bills;

gold standard there was a loss

nevertheless we have felt until now

you know,

present time an account with

$243,000 balance at interest and $541,000 free balance.

no omission to

and at the

discussed

various

until the account increased

offer a participation to the other Federal

June 14, leaf.

40*

In its broader espeets we believe this treimmotion constitutes
a east oonstruotive step in our cooperation with the foreign banks of

issue and one which sill assist vaterially in pronoting the stability of
the gold standard abroad. Our directors have given the setter their east
oarefta consideration and entirely approve of the proposed

Amnion.

Sill you please be good enough to lot es know at your early eon-

vesienee whether you ears to participate in this soeount with the Beak or
England. / as sere that you will appreciate the need for regarding the

contents of this letter as nest confidential.
Very truly yours,

BUJ. STROM,
Govornor.

Mr. I. P. O. Harding,

Governor, Federal Reserve Bank,
Bootee, Sess.

$1111.010

FEDERAL

RESERVE

BANK

RICHMOND

June 17, 1927

Dear Mr. Harrison:

Receipt today of the Board's tabulation St. 5405, showing the
average rate of current net earnings on paidin capital of the several Federal
heserve Banks, brings to my attention the fact that this bank is showing
earnings upon capital lower than any bank in the Systerk at the present time.
In times past, we have had several methods of distriouting
System investments, one being upon the basis of capital and surplus, another
particular bank bore to
UEOD the relation which the earnings and expenses of a
banks,
and
another upon the need
the aggregate earnings and expenses of ail the
dividend
requirements and
of a particular bank to build up its earnings to meet
It
does
not
appear
that
adjustment
has been made
certain depreciation charges.
the
year,
although
1
believe it
in the plan of distribution since the first of
has been the practice to make such adjustments heretofore.
We did not join in the general plan of distribution of System
investments for the purpose of adding to our earnings, which since the organization of the System up to tae present time have been adequate for requirements
Inasmuch, however,
in the regular course of rediscounting for member banks.
attention
as we have joined in participation in'system investments, I am calling
to the fact that* apparently, some adjustment Should be made in the present rate
heretofore there has been an
Or distribution which will meet our requirements.
occasional deficiency of earnings in the first six months of the year, usually
in the first three months When it occurred, but in the latter half of the year
Up to this time, there has been no reason to think
we made up the deficiency.
that the result of the latter half of the year would not conform to previous
It is now rather doubtful that this
experience in making up the deficiency.
will be the case.
From the enclosed sheet you will see the amount of participation
of six banks in System investments in comparison with their capital and surplus.
The participation of the Richmond bank is the lowest of any of them and relatively it is much the lowest because the capital and surplus of the Richmond bank is
very much in excess of that of any of the other banks specified.

Will you please call to the attention of those who have the
matter in charge the fact that some adjustment of distribution is called for?
Yours very truly,

(Signed) Geo. d. Seay
Governor

fUr.6eorge L. Harrison, Deputy Governor
Federal Reserve Bank of New York,
New York Uity

kEDERAL RESERVE BANK
OF RICHMOND

STATEMENT JUNE 15, 1927
(Even Thousands)

Atlanta

St. Louis

$ 6,206

4 5,103

4 5,289

12,198
418,404

9,6.1?

9.939

;14,735

Ri hmond
Capital
Surplus
Total

Holdings of:
Bills Bought in
Open Market
4 8,329
4 9,860
U. S. Government
Securities
_22,342____
$19,451
418,671
Total

linne

ohs

Kansas Ct

Dallas

$ 3,005

$ 4,237

$ 4,247

$15,228

410,532

$13,246

412,462

411,427

$ 7,013

9,175

$ 8,629

283O
$40,257

23p15

3385

$30,028

443,028

26,416
435,045

NOTE:
The earnings of Richmond for year to June 15, 1927, are insufficient to meet
expenses and dividends, there being a deficit of 487,383, not including in the deficit
the end-of-year charge offs.

COPY

June 18, 1927

My dear Governor Seay:

I want to thank you for your letter of June 17, referring to the
present distribution of the System's investments and enclosing a tabulation
of the allocation of those investments to six of the reserve banks.

Your letter and the table seem to me to indicate the need of some
readjustment but inasmuch as I personally- have no contact with the handling

of that account, I have discussed your letter today with Mr. Matteson in
'Mr. Case's absence and learned from him that they are now working on figures

and estimates of earnings with a view to making an early redistribution of
the account largely because of your own exceptional position.

In the cir-

cumstances I wn giving your letter together with the enclosed table to

Mr. Matteson for his information in connection with the work which is now
being done in this matter.

I understand from him that while the reallocation of the account
is ordinarily not made until the latter part of the year, nevertheless
they are considering an earlier readjustment largely on account of your
present position.
am calling your,letter to the attention of -mr. Case from whom

you will probably hear'directiy.
Very truly yours,

GEORGE L. HARRISON
Deputy Governor
Mr. Lxeorge J. Seay,
,,overnor, Federal heserve Bank
hidamond, Va.

GLH.KM0

COPY

FEDERAL

RESERVE

BANK

R10E&OND

June 20, 1927

Mr. George L. Harriam, Deputy Governor
Federal Lleserve Bank of New York
New York City

bear mr. Harrison:
1&41-1

in receipt of your letter of the 18th in response to

mine with respect to the present rate of distribution of System investments, and note that you say this comes more particularly under the
jurisdiction of

mr.

Case and we will probably hear from him in due

course.

Very truly yours,
(Sighed)

eo.J. Seay
Governor

COPY
FEDERAL

RESERVE

BANK

BOSTON

June 28, 1927

Dear Governor Strong:

I have received your letter of June 27
with statement showing the gross and net earnings of all
the bunks for the first five months of 1927 with estimated
figures for the last seven months.
It seems to me that the ratio to be used
in making distributions of bill purchases is equitable as it
is based upon the ratio of earnings required from assets
other than Government securities during the rest of the year
to cover expenses, dividends and chargeoffs.
This is to signify my approval of the plan.
Very truly yours,
(Signed)

W. P. G. HARDING
Governor

Mr. denjamin Strong, 6hairman,
Open Market investment Committee,
Federal Reserve Bank
New York, N. Y.

COPY
June 29, 1927

Dear Governor Norris:

I have

with regard
received your letter of June 28

purchases of bills, and note
to future distribution of System
memorandum accompanying my
that the ratios stated in the
up-Tcyval.
letter of the 27th instant have your
particularly to the
Your further comments relating
have been duly noted.
item of chargeoffs for bank buildings

This is an

difficult for the Comitem vihich has been rather

to have been taken cure of
mittee to deal with, but it seems
1 judge in a manner which
in afaitlyequitabie manner and

is reasonably

however,

satisfactory to the majority of the Banks.

might ue orought up at u
this is a matter whioh

future meetin8 of the Committee.
Very truly yours,

Benj. Strong.
Chairman, Open Market
Investment Committee

George W. Norris, hsci.,
Governor, Federal kieserve
Philadelphia, Penn.

Bank of Philadelphia

COPY
FEDERAL

RESERVE

BAIM

OF PHILADU,PHIA

June 28, 1927

Bay dear Governor Strong:

I am in receipt of your favor of the 27th instant, in
reference to future distribution of bill purchases, and beg to
advise you that the ratios used in the third column of the memorandum attached to your letter seem satisfactory, and have my approval
as a member of the Committee.
There is but one point, which I have previously made in
correspondence and conference with Mr. Case, and which I wish to
repeat.
That is that it is entirely proper that these distributions
Should be made with due consideration of the gross earnings of the
banks from other sources, and their expenses, dividends, and such
charge-offs - furniture, fixtures, and possible losses - as really
appertain to transaction of the banks' business, but there ought not
to be taken into consideration any charge-off which a bank may see
fit to make on its building.
If a bank desires to make a large chargeoff on this account, and can do so out of earnings from business originating in its District, no other Reserve Bank is in a position to object
or criticize, but I strongly object to taking earning assets away from
banks which have been economical in their building program to amortize
the cost of more elaborate buildings erected by other banks.
Such a
course is in fact a levy upon some banks to pay for the buildings of
other banks.

My recollection is that in 1926 over $2,000,000 was charged
off for depreciation on bank buildings.
The figures in the statement
attached to your letter indicate that Charge-offs on this account are
likely to be less this year, as the total of charge-offs is only
$2,840,000. of which $400,000. is for possible losses in the Seventh
i am,
District.
Very truly yours,

(igned) Geo. W. Norris
Governor
Mr. Benjamin Strong, Governor,
Federal Reserve Bank,
New York City

FEDERAL

RESERVE

BANK

CLEVELAND

June 60, 1927

Mr. Benj. Strong,
Chairman, Open Market Investment Committee,
Federal Reserve bank of New York,
New York, N. Y.
Dear Governor Strong:

Your letter of June 27, with enclosures, received.
I have carefully gone over the statement of gross earnings
and expenses and note the realignment of percentages for the
distribution of bills, to become effective in the near future
if approved.
the proposed basis, with the
imposed
that
the
matter
will again be studied in
condition
September, having in mind that perhaps there should be some
adjustment in the percentages as of October 1.
I am in accord i4ith

Very truly yours,
(Signed)

L. R. Fancher
Governor

COPY

FEDERAL RESERVE BANK OF CHICAGO

June 30, 1927

Mr. benj. Strong, Chairman,
Open market Investment Committee,
Federal Reserve Bank of New York,
Nev York, N. Y.
Dear Governor Strong:

Your letter of the 27th instant was duly
received, and based upon the exhibits which accompanied
the same, tile proposed plan for distribution of further
purchases of bills seems to be equitable to all concerned,
and consequently 1 aave today wired you in accordance with
copy of telegram enclosed herewith.

Very truly yours,
(signed) J. B. McDougal

Uovernor

COPY OF TELEGRAM

CHICAGO

1046A

JUNE 30

STRONG

SUBJECT YOUR LETTER 27TH INSTANT, THE RATIOS '4VHICH
YOU HAVE SUGGESTED FOR MAKING FUTURE DISTRIBUTION OF

BILL PURCHASES HAS MY FULL APPROVAL AS A MEMBER OF THE
OPEN MARKET COmMITTEE
McDOUGAL

1156h

July 19, 1927.
My dear Governor Crissinger:

After a good deal of reflection I em hesitating a good deal
about making a trip west. It would te most fatiguing during the hot

weather and, as you realize, there is alweye some possibility of e misunderstanding and other unfavorable reactions.
The action taken by the Board on the recommendations of the
Open Market Investment Committee made in May suggests the need for a

meeting of the committee the latter pert of this month, and / am wonder-

ing whether this may not be e substitute for our trip.

Would you advise

me in reply on what date we oould expect to find the members of' the Board

available in Washington for e diecuseion toward the very end of this
month and I will communicate with the members of the committee to see

whether a meeting can te arranged.

Things are very quiet here. Money has shown an easing tendency
and we are now making no further purchaees beyond the $15,000,000 already

reported.

Very truly yours,

Behj. Strong
Governor

Hon. D. R. Crissinger,
Governor, Federal Reserve Board,
Washington, D. C.

(Similar letter sent to Messrs. Norris, Fancher and McDougal)

duly PO, 1927.
Deer Governor Harding:

With further reference to our telephone conversation with yoU
today regarding the large holdings of Government becnritiee bele by

foreign

correspondent maturing on September 15, 1.927, and the probable difficulty we

Will have iu rep/soing them at that time witb other short maturities, I

glad to advise you that ell ;ember& ef the Committee have epproved of our
deliverfng to this correspondent March maturities from the System Account in
exchange for September maturities.

This will afford an opportunity to effect a better dietribution
of the maturitiee in the yatem ccount ea ee ere noe holding upwerde of
81 million dollars mataring

roh 15, 192S, an

comperetiveiy smell emount

(about 25 million eollare) of tit6 Sept, Lor 1947 maturity.

I have therefore

arranged an exchange of this sort of 10 million dollars. It is poeeible that
other exchange

y to made at an early date.
You were Cleo advised that the Treasury is aesirous at this time

of purchasing a. round amount of Second Liberty Loan bonds.

They are Ian Pi diffi-

cult to obtain in the market and it is ploposed to sell to the Treesury, if
neceeeary, all or any part of the 9 million dollars of that issue in the System
Account to be replaced. kith other short maturities. The mese:sere of the Committee
have also approved this and. we shall be guided accordingly.
Very truly yours,

W. P. G. Harding, Seq.,
Governor, Federal Heeerve Bank,
f3oston, Mass.

http://fraser.stlouisfed.org/
LFS.LS
Federal Reserve Bank of St. Louis

BENJ. STPOWG,

Chairman, Open Market
Inveetment Committee.

COPY

FEDERAL RESERVE BOARD
4ASHINGTON

July 27, 1927

Dear Governor Strong:

This is to advise you formally of the action of the
Federal Reserve Board today, following its meeting with the

Open Market Investment Committee, in voting that the authority of
the Committee be extended for the purpose, a s and when conditions warrant, of not to exceed an additional $50,000,000
of investments.
Very truly yours,
(signed) D. R. CRISSINGER,
Governor.

!r. Benj. Strong, Governor,
Federa 1 Reserve Bank,
New York, N. Y.

July 28, 1927.

My dear Governor Criseinger:

Thie is to acknowledge and thank you for your favor

of July 27 advising

the action of the Federal Reeerve

aoard in extending authority to the Open Market Investment
Committee to make further investments not to exceed an addition

of $50,000,000, a and when conditions warrant.
Very truly youre,

Benj. Strong
Governor

Ron. D. R. Oriesinger,
Governor, Federal Reserve Board,
faehington, D CL
Bs/Rm

July 20, 1927.

ly dear Governor Orisainger:

This mill4 'ere to acknowledge your favor of July 27
enclosing for our confidential information copy of the minutes

of the meeting hid in Waehinston on July 27. This report was

read to our directors at their meeting to-day, and I may say gave
much satisfaction.

de all feel that it was a most enjoyable and constructive

meeting, and that the action teken was greatly in the interest of
the System sad of the country.
Very truly yours,

Benj. Strong
Go7ernor

Hon. D. R. Criesinger,
Governor, Federal Reserve Board,
Washington, D. C.
BS/RAH

August 15, 1927.

PRIVATE AND CONFIDENTIAL:

Its dear Governor Crissinger:
am sending you a letter today as Chairmen of the Open Market Inveetment Com-

mittee which I think explains itself, but wish to add something to it personslly so that ycu
may understand the atmosphere.
There his been a oonsiderable movement of funds away from Ni-w York.

It resultea'

,s you have observed in the money market remaining somewhat firmer than Ise had anticipated

and it not only resulted in our purchasing somewhat more for open market account than I had
expected, but in our doins, so much more rapidly than had been anticipated.

The trans-

actions reported in my separate leti,er are &Amply routine and arose in connection with

adjustments made in the various accounts as exaained.
,Ve

are

about facing the need for a very considerable preparation for the

September 15 financing.

le hold for account of the Open Merket Investment Committee and

for account of our foreign correspondents something over $200,000,000 of the certificates

If repayment or these sere received from the Treasury without
any offsetting purchases it ,,ould of course result in a very severe stiffening of money

maturing September 15.

rstes and a large ehortage of reeervee in New York, much the largest in fact that we have
experienced in some yers.

In view of this fact we are now proceeding vigorously to

purchase several longer maturities against offsetting sales of the September 15 mturities

as rapidly as these can be effected.

The account will be up and down from day to Say,

but I want you to understand just ICA is taking place, and hope you will explain it to
your colleegees in the Board.
From this time on I anticipate there may be a fairly ki tel.dy growth in demands

il.overnor Cri e,singer

8 . 15. 27

wish to have the money situation complicated
upon us by the money market and we would not

by failure to anticipate these maturities.
;tith beet regards believe me,
Sincerely yours,

Honorable D. 1. Crissinger,
Governor, Federal Re-serve Board,
shington, D. C.

EIMILAE LETTEE. TO:

Geo. W. Norris,
E. F. Bancher,

Governor, Federal Reserve :iank of Philadelphia

J. B. MCDougal,

Cleveland
Chicago

August lb, 1927.

Dear Governor Berding:

I have today written Governor Crissinger a letter outlining the
present status of the Open Market Investment Account.

A copy of the let-

ter is enclosed for your information.
As you probably know, there has developed within the last few

dy s good demand for the new Treasury 3 5/0 bonds, and it has, therefore,
eeemed a good opportunity for us to carry out the program agreed upon in

June; viz., of trading out this $20,000,000 of bonds and acquiring in their
place short-teTm Governiient obligations.

it indicated in my letter to

Governor Cries:Inger, we shall probably diepose of the remaining 00,000,000
of S VS% bonds within the next few days.
We rot bold something more than $200,000,000 of September 15

certificates for account of Foreign Correspondents, and for the Open Market

investment Account, which tay create a difficult transaction to handle in
September.

At occasion' offers between now and that date, it seems desirable

to switch aoae of these September lE obligations in the System Aceount into
other short-term paper maturing in December and/or next year.
Do you agree?

Very traly yours,
WW. STEM,

Ir. F. P. G. herding,

Governor, Federal Feserve Bank of eoston,
Boston, tlassechusetts,
Encl.

Chairman, Open Market
Investment Committee.

August 15, 1927.

Lear Governor Crissingert

At the opening of business this morning the Open market Investment

Account stood at about 4301,000,000, with additional purchases made last

week, for delivery today, of 44,000,000, which rill make the total
*305,000,000.

This brings us up to a total of 440,000,000 of purchazee

against the $50,000,000 recently authorized.
This morning one of our foreign correspondents requested US to

sell 410,000,000 of September 15, 1927 certificates, which we are taking
for the System Account.

This will complete our purchases for the present.

In addition to this 410,000,000 purchese we have been offered a block of

420,300,000 of the September 15 certificates, and as we hold in the
System account 420,000,000 of the Treasury 5 3/0 bonds (for which we turned

in Second Liberty Loan 4 1/bonds on June 15) which can now be sold to an

advantaee, it has seemed to us an opportune time to make the switch.

are, therefore, taking in the t20,000,000 of September 15 certificates,
against which we will sell the long-term 5 MS% bonds, and have today sold

410,000,000 of the latter at 100 22/32, for delivery tomorrow.

The re-

maining 410,000,000 will undoubtedly be sold within the course of the next
few daye.

Very tray yours,
BENJ. STUNG,

Honorable D. F. Crissinger,
Governer, Federal Reserve Board,
Washington, D. C.

Onairman, Open Maeket
Investment Committee.

HIS LETTER SENT TO GOVERNORS OF ALL OTHER FEDERAL RESERVE BANKS

August 16, 1927.

PaIVAT7 & CONFIDENTIAL

Dear Governor Harding:
I am enclosing copy of our telegram advising you

of £1,000,000 from the account with the
participate.

Bank of England in

or the sale
which you

You will recall that our purchases of gold in London last

spring were made to avoid the importation of gold into this country

and that the

subsequent conversion of this gold into sterling bills and

England and the
a balance at interest was effected to aid the Bank of

Bank of France
Since

in adjusting the
these purposes

Paris-London exchange position.

have now been at least partly accomplish-

sterling balance
ed, we have arranged with the Bank of England that our

may be gradually brought home as and when

favorable opportunity offers.

such an opportunity
The recent strength of sterling exchange afforded us
namely.
by permitting the -sale of £1,003,000 at an attractive rate,
As this sterling cost about $4.6493, this transaction nets
$4.86-3/32.
uncertainty as to the method
a profit of $11,637.50 but in view of the
Bank of England or
of disposing of the balance of the account with the
thought best to
the rates at which it might be disposed of, we have
defer for the time being distribution of this profit.

We are, there-

fore, carrying this in suspense for distribution at a later date.
It may be that if sterling continues firm we will make

further sales, and we shall send you telegraphic advice from time to
time should that occur.
Very truly yours,
Ur. W. P. G. Harding,
Governor, Federal Reserve
Boston, Mass.

JEColiX

J. H

Bank,

CASE,

Deputy Governor.

HIS LETTER SENT TO GOVERNORS OF ALL OTHER FEDERAL RESERVE BANKS

August 16, 1927.

PRIVA17 & CONFIDENTIAL

Dear Governor Harding:

I am enclosing copy of our telegram advising you of the sale
of £1,000,000 from the account with the Bank of England in which you
participate. You will recall that our purchases of gold in London last
spring were made to avoid the importation of gold into this country

bills and
and that the subsequent conversion of this gold into sterling
England and the
a balance at interest was effected to aid the Bank of
Bank of France in adjusting the Paris-London exchange position.

Since these purposes have now been at least partly accomplished, we have arranged with the Bank of England that our sterling balance
may be gradually brought home as and when favorable opportunity offers.
The recent strength of sterling exchange afforded us such an opportunity
rate, namely.
by permitting the sale of £1,000,000 at an attractive
$4.88-3/32.

nets
As this sterling cost about ;4.8493, this transaction

uncertainty as to the method
a profit of $11,837.50 but in view of the
of disposing of the balance of the account with the Bank of England or

the

rates at which it might be disposed of, we have thought best to

defer for the time being distribution of this profit.

We are, there-

fore, carrying this in suspense for distribution at a later date.

further

It may be that if sterling continues firm we will make
sales, and we shall send you telegraphic advice from time to

time should that occur.

Very truly yours,
Lir. W. P. G. Harding,
Governor, Federal Reserve Bank,
Boston, Mass.

http://fraser.stlouisfed.org/
"TEC $lIX
Federal Reserve Bank of St. Louis

J. H. CASE,
Deputy Governor.

HIS LETTER SENT TO GOVERNORS OF ALL OTHER FEDERAL RESERVE BANKS

Pazvaq

August 18, 1927.

& CONFIDENTIAL

Dear Governor Harding:
of the sale
am enclosing copy of our telegram advising you
of

£1,000,000 from the account with the Bank of England in which you

participate.

Lou will recall that our purchases of gold in London last

spring were made to avoid the importation of gold into this country
into sterling bills and
and that the subsequent conversion of this gold
of England and the
a balance at interest was effected to aid the Bank

Bank of France in adjusting the Paris-Landon

Since these purposes

exchange position.

have now been at least partly accomplish-

that our sterling balance
ed, we have arranged with the Bank of England
favorable opportunity offers.
may be gradually brought home as and when
afforded us such an opportunity
The recent strength of sterling exchange
attractive rate, namely.
by permitting the sale of £1,000,000 at an
transaction nets
As this sterling cost about $4.8493, this
$4.86-3/32.
uncertainty as to the method
a profit of $11,837.50 but in view of the
Bank of England or
of disposing of the balance of the account with the

have thought best to
the rates at which it might be disposed of, we
We are, theredefer for the time being distribution of this profit.

fore, carrying this in suspense for distribution at a later date.
It may be that if sterling continues firm we will make

advice from time to
further sales, and we shall send you telegraphic
time should that occur.

Very truly yours,
Mr. W. P. G. Harding,
Governor, Federal Reserve Bank,
Boston, Mass.

http://fraser.stlouisfed.org/
JEC:121
Federal Reserve Bank of St. Louis

J. H. CASE,
Deputy Governor.

August 19, 19 27

CONFIDENTIAL:

Dear Governor Criseinger:

Matters are developing from day to day in money market affairs and once

more I should advise you just what is transpiring:
In the first place you will observe from the gold settlement fund
figures that we have lost over $120,000,000 of our reserves in the last few weeks

to the rest of the country.

Thile this is not unusual at the season, I have

feeling which is shared by some of my eueociates here, that the movement has been

accentuated by the failure of Chicago and Philadelphia to reduce their discount

rates. But after all that is . metter for them to decide and we must make our
arrengements accordingly.

Until the last day or two the trend of the money market disclosed an
underlyine streegth which disturbed me somewhat, but within the last forty-eleht
hours it has shown evidence of ease, stock exchange rates today were reduced to
3-1/2%, there is a somewhat leosened demend for Federal Reserve funds, and signs

that the commercial paper market has eased a bit as well as the rate on colleterel
time lceeas

One of the resulte of this ease, of course, is to strengthen the
sterling rate somewhat and we have been successful in disposing so fer of about
L 3,750,000 of our sterling balances - in round figures about $18,010,000 -0
This, of course, takes money out of the money market and considering that it
involves no change in policy and simply a shift in portfolio from London to New
York, we have felt, obliged to buy a moderate emount of governments in order to

offset these withdrawals.

Governor Crissin-ger

8.19.27

Taking the situation as a whole, it hss worked out most satisfactorily.

If me find after the turn of January that our portfolio is larger than necessary

we can readily liquidate a part of it. And as matters stand today I think it
may be better later in the year to let the needs of the market be al pplied by the
member banks borrowing from us.

The liquidation immediately following the

first of ,Fnuary will enable us to judge of the extent, if at all,
sell overnnent oouriti ne.

we should

I hope the whole prot;mm has worked out to your satisfsIction. I know

it has to ours, and our directors exeresa,d satisfaction when the subject was
reviewed at yesterday's meeting.
beg to remain

Sincerily yours,

Honorable D. R. Crisainger,
Governor, Federal Reserve Board,
Washington, D. C.

CONgptlilIA4

AttglAg;

Dear Governor Crissingert

Since qi letter of August 16 in reference to changes in the Open

Market Invests= Account, the strength in sterling hat enabled us to we
further sale from our London account.

Such sales have reached 4 total

7,180,300 throutt the close of buaineas tonight, involving the with-

drawal from this market of approximately 04000,000, and up to the close
of business lest night we bad parthased for the System Aocoun' dE, an offset,

a total of t17,004,0 par value of Government securities.
Today one of our foreign car/vapour:lents requeats us to sell from

itebc,1dings *24000,000 of Treasury certificates maturing September lf
next; of this amount we have purchased for tho System Account *14000,000,

making total purchases to offt sales of sterling $32,000,000 and increasing
the holdings in the System Account to 4347,000,000.

The remaining

410,000,C00 of these September certificates we have purehased for our on

investment account, to be held there taporr1j for tale to the TreasurY
early in September.

With the continued strength in sterling, wewEll, no doubt, be able

to make further substantial sales, in thich event we ahall continue making

setting transactions.
Very

Honorable D. R. Crissingor,
Governor, Federal Reserve Board,
Ilenhington, D.

6T-RaNG,

Chairman, Open Market
Investment Committee.

(The following letter aent to Governors Seay, iiellborn, Biggs, Young,
Bailey, Talley and Calkins )
CONFIDENTIAL

Aueuat a, 1927.
Dear Governor Stay:

In view of the activity in the Syetem open market inveatment Account

and the consequent changes In the Government aecurities held, it beano deeireble
to summarize-the recent traneectione which have appeared in detail in our weekly
report e.

On June 9 you were advieed concerning (1) the increase in the account

from a total of $130,000,000. to $218,000,000. due to purcheeee made to offset
$100,000,000. of gold eermerked for account of one of our foretell correspoedente,

d (2) the trensactiore incident to the June 15 maturities in the eyetem account
and in the holdings of foreign correspondents.
Durine June ard duly additional purchaees agereeatine $Z9,00O,000 were
made under the authority given the eommittee at the Governore, Conference in May

which termineted an August let. Thie brought the total purchases up to $285,0A,000_

at which the figure remeined until recently when an additional $50,000,000 eere
purchased pursuant to action taken at a meeting of the Open Merket Investment

Committee held in leehineton on July 27, thus bringing the account to 4115,000,000.

During the last tea days additional purchases agsregetins $12,000,000

have been necessary as an effect to the lisle in this werket or the Syetam's sterling
balencee.

Sterling exchange since our rate reduction has been consietently strong

and it ha, therefore, eeosed deeirable to liquidate a portion of our London account.

Up to thie date ee hove &old in round figure 67,000,000. It is probable

that further sales of sterling will be made from time to time as the market eermite.
These 'sties, of course, have the effect of trains money out of the market in Hew
fork, consequently impeiring banking reserves, and such aecurity purchases, there-

fore, are in the neture of Offaetting transactions. Tho total of the system account

iveoras L. Seay

at, the present time is $347,000,000. Ne do not contasplato further additions to

it except a a an offset to ede of the stbrling balances.
In the meantime, come e..ol_tuvee have been made in the ccount which have

not affected it* total. On June 28, $20,000,000. of Second Liberty Loan 4 1/4e
were exchanged for a likeoint of the new 3 3/8 per cent. Treasury toads under
the terms of the Treasury's offer, artiii on August 6 these Treasury bonds wcr old
in the a.,-sricet and a like 6-nount of certificates insturi4 :ieptember 15, 19127, were
purchased.

On July 8 an exchange of $3,400,000. certificates maturity; Septawber

15, 1027, and of U7,000,000. certificates maturine; December 15, 1927, wee made

i-rith other Federal reserve banks for a like amount of Third Liberty Loan 4 44e

)eld by those banks outside of the syetem acouut. On July 21 we transferred to a
foreign corr,spondent 450,000,000 5 1/4 per cent. certificates due March 15, 19L8,

and took in exchange a like :mount of 3 1/4 per cent. certificates due on September
15, 1927. Since the first of August we have sold in the market $30,000,000. of the

September 15, 1927, certificates and purchased a like amount of Third Liberty Loan
4 1/4

At the present time we are holding in the eyetta coount. approximate/7
$75,000,000. of certificates maturing September 15. Ss are oleo hc.elding for the
account of foreiAt correeponeents approximately 00,000,000. of the a&gle maturity.

Aa opportunity offers we shall make exchange of these certificatas for others of a
longer maturity, and poseibly between now end September 15 it may be desirable
temporarily to purchase some additional 141Iounts to be held in nticipati.n of the
September lb maturity.

The program which bee been followed durine the patt two oonthe he

quite eatiefactory frost our t-itancipoint and we hope is omelly wo to you. The only
problem at the moment is to mt-,Are satisfactory disposition of the rather heavy
maturities which will occur on September 15.

tr. GoorEe S. Seay

8/2Z/27.

You will observe that, at least for the present, we have accomplished
the important object discuesed by the committee et the time of th4 Governors'
Conference in itiahinfton; newly, the Accumulation of an a(;equate portfolio or

govornment ceouritise without placing an undue eisount of our funds in the oarket.

If you heve any eugeotions in connection with the Candling of to
account won't you feel free to prito me quite frankly.
Sincerely yours,

Benj.

tron

Chairman

Open Varket Investment Gamaittes.

Geore O. Stuy,

Governor, Fedora Reserve Bank,
Richmond, Va.
Ha' EAR

COPY

(sample of telegram sent to Governor of Each Federal Reserve Bank)

August 26, 1927

We have sold from our account with Bank of England further
amount of 1=1, 000 ,000 the cost of which was $4,849, 300.00

proportion is $

Your

which amount we credit you today.

Please apply this credit on your books to account "Eu e from Foreign

Banks-Bank of England Special Interest Account."
CASE

Harding, Boston
Norris, Philadelphia
Zurlinden, Cleveland
Seay, Richmond
Wellborn Atlanta
McDoug al , Chicago

Biggs, St. Louis
Young, Minneapolis
Bailey, Kansas City
Tall ey, Dallas

Calkins, San Fran.

Amounts
Li sted

Detail s by mail

FEDERAL RESERVE BANK
OF MINNEAPOLIS

August 27, 1927.

Mr. J. P. Case, Deputy Governor,
Federal Reserve Bank,
New York, N. Y.
Dear Mr. Case:

Our net earnings today %mount to t192,000.00, our
dividends, depreciation charges and furniture and equipment
iwount to t191,000.00, leaving us a bare margin of t1000.00
over and above our dividend and depreciation charges. From
now on our rediscounts should decrease as our country hanIcs
will be paying us very fast in the next sixty days and, of
course, the city bans are only in and out from day to day.
Would it be possible to allot us a somewhat larger
proportion of acceptances?
I feel that'we should have an
additional
10,000,000. of earning assets of one sort or another.

I shall be glad to hear from you at your convent
ence.

Very truly yours,
(Signed) W. B. Geery
Deputy Governor.

COPY
August 30, 1927

Mr. W. B. Geery, Deputy Governor,
Federal Reserve Dank of ..,inneapolis,
Minneapolis, Minn.

Dear Mr.

Geery:

I have received your letter of August 27 with regard
to your earning requirements for the balance of the year.

With a view to effecting a redistribution of those

earning assets which come within the scope of the Open Market
Investment Committee, a revision of the allotment percentages
has been made based upon the figures recently furnished by all
of the banks. The new ratios will go into effect September 1

and the ratio for your bank will be double that recently used.
These ratios will, of course, be subject to change should figures to be submitted later indicate further changes are necessary, but provided the earning assets of the system keep up to
about their present level, the Committee hopes to be able to
distribute them in such a way as to give all banks sufficient
earnings to cover their requirements for this year.
I hope this change will be satiafactory to you, but
y further adjustments are
if it should later develop that
Ate you
necessary we expect to be in b. position to make them.
know, the problem of the Committee is to so distribute the earn-

ing assets coming under its direction as to effect an equitable
distribution to all banks.

Very truly yours,
J. H.CASE
Deputy Governor
L

GORY

FEDERAL

RESERVE

BANK

OF 11NNEAPOL1S

September 1, 19E7

-r. J. H. Case, Deputy Governor,
Federal Reserve .bank,
New York, N. Y.
Dear

wr.

Case:

i have yours of

the 30th and note that be6inning

eptember 1, you will double
of acceptances.

our proportionate

allotment

think this will probably carry- us through

in good Shape and I want to thank you for your action in
the matter.
Yours very truly,

(Signed) W. B. Geery
Deputy Governor

SENT TO EACH GOVEHNOA OF OTHEA FEDEAALS

CONFIDENTIAL

(

September 6, 1927.

Dear governor Harding:

Owing to the weaker tendency of sterling exchange during the past fortnight, we have temporarily discontinued
sales of sterling from our balance with the Bank of England.

may, of course,. resume again should the exchange strengthen but we

are now entering the

season when there is normally some pressure

on sterling and it may be, therefore, that we shall have to defer

further sales for the

present.

In any event, we have
purpose.

accomplished our main

You will recall that the gold which we bought in London

was sold for payment in sterling and that there was a potential
profit in the sale of $85,000 if we calculated the value of sterling
However,
at the then existing rate of exchange, say $4.85-5/8.
we did not take this profit but instead wrote down the value of the
We were thus carrying the

sterling on our books to $4.8493.

sterling at less than the gold import point from London which is
about $4.85.

The strength of sterling during August offered

us an opportunity to convert our

London balance into dollars at

an advantageous rate and at the

same time permitted us to reduce

the Bank of Sngland's liability to us which they were pleased
to do

without

depressing sterling.

an average rate of about Z4.86-1/8.
carried on our books at $4.8493,

We have sold £7,525,000 at
Since this sterling was

there was a profit on the sale

9/6/27

of $89,625.92.

I think it is advisable to hold this profit in

suspense for the present since the London account is not entirely
liquidated. We still have £2,435,000 employed at interest,
approximately £2,463,600 bills and £77,800 in current account.
The money employed at interest yields us 3-7/8% while the bills
carry 4-1/4%.

I hope you feel as I do that this account has worked out most satisfactorily not only from the larger standpoint of
assisting our guropean neighbors and improving our own economic

and monetary situation but also from the standpoint of profit.
I shall keep you fully informed of any new developments in this account.
With kind regards, believe me
Faithfully yours,
//A
SMONG,

Governor.

Li.. W. P. G. Harding,
Governor, Federal Aeserve Bank,
Boston, Mass.

FEDERAL RESERVE BANK
OF BOSTON
W P G. HARDING, GOVERNOR

FREDERIC H. CURTISS

WILLIAM W. PADDOCK, DEPUTY GOVERNOR

CHAIRMAN OF THE BOARD
AND FEDERAL RESERVE AGENT

WILLIAM WILLETT, CASHIER
KRICKEL K. CARRICK, SECRETARY

ALLEN HOLUS
DEPUTY CHAIRMAN OF THE BOARD

ASSISTANT CASHIERS

ELLIS G. HULT
ERNEST M. LEAVITT
L . WALLACE SINEETSER

CHARLES F. GETTEMY
ASSISTANT FEDERAL RESERVE AGENT

September 7, 1927

ear Governor Strong:

I have received your letter of September 6 and note
with much interest what you have to say regarding the saies of sterling
from the balance with the Bank of England.
I think the System is
grectly indebted to you for theMtreglry way in which you have handled
this whole transaction and as far as this bank is concerned, I wish to
express our appreciation of what you have done.
I am gratified to learn that the Federal Reserve Bank
of Chicagohas at last come in line with the discount rate.
I presume
that Philadelphia and perhaps San Francisco will not lag behind much
longer.

With kind regards, I am
Sincerely yours

vornor.

Mr. Benjamin Strong, Governor,
Federal Reserve Bank,
New York, N. Y.

FEDERAL RESERVE BANK

Mr. Benj. Strong, Governor,
Federal Reserve Bank of New York,
New York, N. Y.
Dear Governor Stronp:

I have your confidential communication of September 6
outlining the handling of tha.aliulilidobalance with the Bank
of England.
It is noted that sales have been discontinued
temporarily and that the profit realized from sales already made
will be held in suspense.
I know that Governor Fancher will be interested and
pleased with your report and it must be very gratifying to you
to see this account work out so satisfactorily in all respects.
With warmest regards, I am
Very truly yours,

FEDERAL RESERVE BANK OF CHICAGO
230 SOUTH LA SALLE STREET

OFFICE OF THE GOVERNOR

September 8, 1927.

CONFIDENTIAL

Mr. Benj. Strong, Governor,
Federal Reserve Bank of New York,
New York, N. Y.
Dear Governor Strong:

I have received your confidential letter of the
6th instant, and note therefrom that because of the recent
weakness in sterling exchange, you have temporarily discontinued
sales of sterling from our balance with the Bank of England.
I also note your reference to the present status
e account and the profits that have accrued to date. I
agree with you as to the advisability of holding these
profits where they are for the present.
It seems to me that the whole matter has been
admirably handled; that the desired objectives have been
- accomplished, and that the results ensuing should be most satisfactory to all concerned.
Thanking you for your advice in the premises, and
with kindest regards, I am
Very truly yours,

HS.

FEDERAL RESERVE BANK
CI F. _AT A.N
COFFICMOY

September

9#L,

1927.

Er. Benjamin Strong, Governor,
Federal Reserve Bank,
New York, N.T.
Dear Governor Strong:-

Receipt is acknowledged of your confidential letter
of the 6th instant, furnishing us a resume of the handling
of the Sterling account with the Sank of England.
I fully concur in your feeling that these transactions
have been very beneficial from a broad standpoint in assisting our European neighbors, and at the same time helping
our own monetary situation. Our responsibility as the world
financial center is, in my opinion, being properly borne in
the handling of these matters, and I wish to congratulate
you on the manner in which this has been accomplished.
We thank you for this information, and desire to assure
you of our appreciation of the usual participation by us
with your bank in connection with foreign transactions.
With assurances of high esteem, I am
Very truly yours,
2/216171-----M.B. Wellborn,
Governor.

FEDERAL RESERVE BANK
A. J. BAILEY, Caoven.00k
JOHN PHILLIPS. OPI., ASST. CASH IER

E. P. TY N ER Ass.r.CAsmem

M. L.MgCLURE

C. A .WORTHINGTON,DCPUTY GOVERNOR

J. W. HELM, CASHIER

CHAIRMAN BOARD OF DIRECTORS
AND FEDERAL RESERVE AGENT

KANSAS CITY

HEBER HORD
DEPUTY CHAIRMAN
BOARD OF DIRECTORS

G. E. BARLEY, Asirr.O.m.

A.M. MgADAMS

MW E. pARK, ASST. CASHIER
G.
PIPKIN, AssT. CASHIER

A.SST. FEDERAL RESERVE AGENT
AND SECRETARY

SEPTEKBER NINTH,

- 1 9 2 7 -

Dear Governor Strong:

I thank you very much for your letter of
September sixth, in which you
transactions with the
bank is interested.

Pally

explain your

Aang.cif_Moland,

in which this

The letter was submitted to our

Executive Committee and they join in expressing their
satisfaction of your conduct in this matter.
Very truly yours,

Benj. Strong, Esq.,
Governor, Federal Reserve Bank,
New York, N. Y.

FEDERAL RESERVE BANK
NA. J. BAILEY. C.v.KoK
J. W. HELM. CAsmIcK
JOHN PHILLIPS. ..M., ASST. CASH I eft

E P. TY N ER Ass, CAsKien
G. E. BARLEY, Assy CASHIER
MW. E. PARK . ASST. CASNICK
G. H. PI PK I N ASST CASHIER

M L Mc CLURE

C. A.WORTHI NGTON, OcInrH GOVERNOR

CHAIRMAN BOARD OF DIRECTORS
AND FEDERAL RESERVE AGENT

HEBER HORD

KANSAS CITY

DEPUTY CHAIRMAN
BOARD OF DIRECTORS

MeADAMS
ASST. FEDERAL RESERVE AGENT
AND SECRETARY

SEPTEMBER NINTH,

-1927-

Dear Governor Strong:

I thank you very much for your letter of
September sixth, in

whioh you

transactions with the
bank is Interested.

fully explain your

Bankaf_Mgland,

in which this

The letter was submitted to our

Executive Committee and they join in expressing their
satisfaction of your conduct in this matter.
Very truly yours,

Benj. Strong, Esq.,
Governor, Federal Reserve Bank,
New York, N. Y.

FEDERAL RESERVE BANK
OF MINNEAPOLIS
September 10,1927.

Mr. Benj. Strong, Governor,
Federal Reserve Bank,
New York, N.Y.

Dear Governor Strong:

This will acknowledge receipt of your letter
of September 6 in reference to the disposition of
a portion of our free balance with the Bank of England.
These transactions required a little study on
my part, which oocasioned delay in my replying to
at the whole
your specific inquiry. I believ
.fi: sly, an. Our bank
transaction has been handled
s to p tioipa e.
wants to thank you for permitt
Yours ve

FlOr
R. A. Yung
Gove
RAY-C

FEDERAL RESERVE BANK
OF MINNEAPOLIS
September 10,1927.

Dear Governor Strong:
This will acknowledge receipt of your letter
of September 6 in reference to the disposition of
a portion of our free balance with the Bank of England.

little

study on
These transactions required a
my part, which occasioned delay in my replying to
at the whole
your specific inquiry. I believe
ly, an our b
transaotion has been handled asJ
ioip
s
to p
wants to thank you for permitt

R. A.
Gove

FEDERAL RESERVE BANK
OF MINNEAPOLIS
September 10,1927.

Mr. Benj. Strong, Governor,
Federal Reserve Bank,
New York, N.Y.

Dear Governor Strong:

This will acknowledge receipt of your letter
of September 6 in reference to the disposition of
a portion of our free balance with the Bank of England.

little study on

These transactions required a
my part, -which occasioned delay in my replying to
your specific inquiry. I believe
at the whole
transaotion has been handled a
ly, and/Our b
moats to thank you for permitt
s to p ticip
Yours ye

R. A.
Gave
RAY-C

PARIS

WASHINGTON, D. C.

WHALEY-EATON SERVICE
FOUNDED 1918

FOR CLIENTS ONLY

American Letter No. 471.

September 10, 1927.

Dear Sir:

In our American Letter of June 18 we outlined the developing divergence of opinion in the Federal Reserve System and indicated that a crisis
was to be expected.

That crisis has developed through the action of the Fed4iNit

eral Reserve Board to reduce time rtdiscount rate.

The issues involved are so

fundamental, affecting finance and business everywhere, that this entire Letter will be devoted to the subject.

We necessarily give largely the

Washington viewpoint.
HISTORY:

It is not true that this is the first time the Board has ordered a

Reserve Bank to reduce its rate.
to the Chicago Bank.

The Board, in 1921, gave an identical order

The latter, however, on the afternoon of the same day,

after conference by telephone with the then Governor Harding, requested that
it be permitted to "ask for" a lower rate, this to be sanctioned by the Board
and to take the place of the "order."

This device was employed and the order

itself, it is believed, was expunged from the record.

In the present case, 'Chicago submitted the then current rate
Chicago was left
to the Board, which declined to approve it.
for several days without any authorized rate and asked for
delay on the ground that a quorum of competent officials could
not be got.
The Board refused to permit delay on this account and, after notifying the Chicago bank to that effect,
took action on its own account.

Similar pressure had already been brought on the San Francisco
bank, the Board declining to sanction a continuation of the
old rate.
The only difference was that San Francisco technically asked for an approval of the lower rate as if the action were voluntary, whereas Chicago refused so to do.
The Policy of easing the money situation was ad..pted at the
conference of central bankers in New York, in July. The plan,
before adoption, was submitted to each of the 12 Federal

9/10/27.

Reserve Banks.

It was accepted by 11 of them, Chicago

'objecting.

AUTHORITY AS TO RATE:

As to the authority of the Federal Reserve Board to order

a particular rate, it is not believed that Senator Carter Glass, "Father of the

Federal Reserve Act", is correctly reported as being dubious.

There is on

record a letter written by Mr. Glass, in 1919, to the Attorney General, wherein
he states, we are told, that he not only concurs in a legal opinion favoring
the Board's authority, but adds that the opinion by counsel "could have been
made even stronger had he known the facts as I know them," and urges, we are ad-

vised, that unless the Board did have complete power to fix rediscount rates,
"it would be powerless to control operations of any regional bank in the System
which might engage in transactions perilous to the entire System and to the commerce and industry of the country."

And Mr. Glass was the more insistent on

this point because, he pointed gut, the authors of the Act realized that ratemaking might, and frequently would, affect the commerce and industry of the
whole country.

Official Washington is entirely convinced that there is no

doubt as to its legal authority in the premises.

It looks for political, not

legal, attack, meaning that the issue is not one for the courts, but for the
people, to decide.
4.

MOTIVE:

The Federal Reserve Act specifically provides that discount rates

"shall be fixed with a view of accomodating, commerce and business."

There is a

powerful element in Washington which takes the following view:

It is mandatory that rates be fixed to accommodate commerce.
The movement of crops is commerce. Therefore, when crops are
to be moved, instead of money rates hardening, as they have
done in the past, they ought to be put at the lowest possible
figure.
It ought to be fundamental national policy, and it
is believed the Federal Reserve Act so directs, that annually,
in crop-movement time, the Reserve System should be used to
ease the situation.
Discount rates, in normal circumstances,
should be lowered every Autumn.
This year there were abnormal and compelling circumstances.
The foreign central bankers were quite frank in declaring
that they could not of themselves handle prospective American
crop purchases this year.
They insisted, however, that if

9/10/27.

American rates were such as to attract bills to New York,
New York thus bearing the burden, Europe could fill her enOn the other
tire crop requirements, and do so soundly.
hand, Britain, in particular, could not maintain the gold
standard and nurchase in volume in America also.
The "easy money program was adopted, therefore, for one purpose and one purpose only, namely, to assure European purThe domeschases of American crops under facile conditions.
tic factor was the determining factor absolutely."

"It is idle to talk of helping the farmer by new legislation
That
if we do not use the legislation we already have.
good to grant him subsidies or any other aid if every Fall
we raise obstacles against the free movement of his crops to
market? He is entitled to have the Reserve System used for
his benefit, as it is used for the benefit of all other industry, and that is how it is now being used."
CENTRALIZED POWER:

The broad issue raised is as to whether or not the Federal

Reserve Board is to have the equivalent powers of a central bank in fixing discount rates.

We are told that in the Glass letter previously referred to the

statement is made that it was the intent of the authors of the Act to enable
the Board to exercise a power on discount rates throughout the country "tantamount to the power exercised, over the money market by the Bank of England."

get this point of view:

There is certain to be centralized control. The only issue
is whether that control shall be through the New York Bank
In one case, there is
or through a Board in Washington.
private control and in the other there is partial Government
control.
The System is now .regional only in the sense that the reThere must
gional banks issue currency and do discounting.
There is such control. Were there
be centralized control.
not and could American finances not be mobilized, were no
consideration given to world requirements, as affecting maintenance of our foreign markets, this country being the world's
capital reservoir, a disaster comparable to that of the deIn these circumstances, it is
flation period would ensue.
That is the
essential that the Board have complete power.
practical aspect, and any discussion otherwise must be academic.
POLITICAL PHASES:

It is believed in Washington that the Thompson anti-foreign

campaign in Chicago has affected the attitude of Chicago financiers.

It is al-

so believed that the present incident, which gives the appearance of an American
financial policy having been dictated abroad, will give the Thompson elements .a

9/10/27.

strong position before the people, which even the agricultural feature responsible for the policy may not overcome.

It may fire anew the old Anti-League

issue, and thus be determinative not only of the Presidential candidate to be
named by the Republicans but also of the election.
It is well known in Washington that Mr. Mellon's first choice
for the Republican nomination is Calvin Coolidge, if he can
be persuaded to accept, and his second choice Mr. Hughes. The
movement for Mr. Hughes is already far developed in important
business and other quarters. But Mr. Hughes has been taking
a broad view in international matters. He would hardly fit
into a Republican campaign a chief feature of which would be
to win the Middle West on an anti-foreign platform.
It comes more and more to be accepted in Republican circles
"Is it better to
that Smith will be the Democratic nominee.
bid for the whole Middle West and figure on winning without
New York or to run the risk of losing some of the Middle West
and winning in New York'?" In other words, which is safer, a
Middle Westerner or Hughes (Coolidge)?

A fight on the Reserve System which developed a sectional issue would
complicate the whole political situation.
7. QUARRELS:
It has been the practice of the Administration to try to prevent,
within reason, public quarrels on economic issues, as in the case of Eastern
railway mergers where the executives have been urged to get together and solve
their own problems.
It is feared that if the bankers now permit a banking issue to go to the polls, as they did mistakingly in Jackson's time, there will be

trouble ahead.
Other issues automatically subordinate themselves to a banking
An effort may be made, when the Fedfight, when the question is fundamental.
or
eral Advisory Council meets next week, to reach some sort of accommodation,
elections.
at least to postpone a general fight until after the Presidential
Thic Chicago position, however, will have formidable support and not even New York
is inclined to acquiesce in far-reaching powers for the Board.

8, PERSONNEL: Criticism of the personnel of the New York bank administration is
not taken seriously
"We do not see how Governor Strong could safely be replaced just now." As to the Board itself, there are to be vacancies in several
of the independent commissions and the Board is not considered as immune to
If there are any, however, this situation will not have caused them.
changes.
.

The very vitals of the Administration's policy, as developed over the
past few months, is the stimulation of business through the Federal Reserve SysThe Treasury operations of this and other countries are
tem, and otherwise.
There will be no change of policy, as
based on the promise of cheap money.
The outlook, therefore, is or
will be shown when the Minneapolis rate drops.
a continuation of stimulating influences. Moreover, the influence of Mr.Mellon,
"the optimist". has made Washington even more confident that business over the
Fall is to be good. Not much importance Is attached to complaints of commercial
banks that the "easy-money' policy imperils their ability to make earnings.

WEALEY-EATON SERVICE.

PARIS

WASHINGTON, D. C.

WHALEY-EATON SERVICE
FOUNDED 1918

FOR CLIENTS ONLY
Foreign Letter No. 439.

September 13, 1927.
Dear Sir:

There is apprehension in Europe lest the controversy between the
Federal Reserve Board and the Chicago Reserve Bank may lead to a political campaign, similar to that over the League of Nations, and thus destroy, or tend to

destroy, the delicate equilibrium of international finance.

We get, in sub-

stance, the thoughts of a gentlemen who participated in the New York confer-

ence of last July, where the policy of easing credit was accepted.
We presented no ultimatum to the American authorities. They
had their own complete reports of the situation and did not
It was a simple matter
need our observations to guide them.
of arithmetic to show that the maintenance of the gold standard in Europe was out of the question unless America intended
to perform her proper function as the credit capital of the
world.
She was asked to do nothing that Britain has not done
a dozen times, as a matter of course, in the days of her financial supremacy.
Even so, the deciding arguments came from
domestic American considerations, particularly facilitation of
crop movements.
It would be unfortunate if the contrary were
believed in the United States.
There is reason to believe that the foregoing is a comparatively mild
statement.

It is no exaggeration to say that the situation described at the

New York Conference was one of intense seriousness.

So much so that such ex-

pressions were used as "a collapse possible within a week", etc., etc.

London

is not alarmed over the present outlook, since there is no possibility of a
change in the agreements entered into in July.

Adoption subsequently of a

provincial attitude on finance by the United States would have far-reaching
and disastrous results, it is believed.
COMPULSO
acceptance

ITRATION.

It is admitted

diplomatic ci cles that StreAemannle

f th princle g.fornpulsory arbitration wil

assuthe larger_lm-

WASHINGTON, D. C.

PARIS

WHALEY-EATON SERVICE
FOUNDED 191B

FOR CLIENTS ONLY

American Letter No. 472.

September 17, 1927.

Dear Sir:

It is Probable that, within 30 days, the Florida Citrus Exchange

will formally make an offer which Secretary Jardine will accept, resigning
from the Cabinet.

The negotiations, so far, have been through intermediaries,

wherefore "denials" have been technically correct.
Mr. Coolidge has returned from the Northwest pretty well
convinced that some sort of farm relief is imperative.
It is indicated that he would favor naming a new Secretary
of Agriculture who would personify a positive farm legislative program, as an alternative to the McNary-Haugen proposal.
APPOINTMENTS:

In addition to the vacancy on the Federal Reserve Board occa-

sioned by the resignation of Governor Crissinger and the foregoing probable
vacancy in the Cabinet, the President will be called on to make appointments
to two or three other of the independent commissions, by reason of resignations.
It is indicated that some of the bitterest fights in the Senate will be waged

over some of these appointments.
a.

Although farm-organization leaders are saying publicly that
they are "open-minded" as to the confirmations of Messrs.
Meyer, Cooksey and Fqrrison as members of the Farm Loan Board,
they are acImally antagonistic.
Their complaint is not so
much against Mr. Meyer personally as against the fact that
two of his intimate subordinates were appointed with him,! the
effect being to give one man three votes on the Board." There
is complaint also about Mr. Meyerls optimistic forecasts as to
farm income for this year, it being urged that such forecasts
are not part of his job and are not accurate.
The Administration, on the other hand, feels that Mr. Meyer has read order.
into the situation and that his record of achievement will be
decisive in his favor.

FEDERAL RESERVE POLICY:

The resignation of Governor Crissinger, it is indicated,

will occasion no change in broad Federal Reserve policy.

On the contrary,

9/17/27.

(1) As-

that policy may be strengthened in its essential details, which are:

sertion of America's world financial supremacy by courageous performance of
the functions this entails, including active cooperation with the central
banks of other nations;

(2) Use of the System actually to accommodate business

by fixing rediscount rates with that end in view, with particular reference to
facilitating crop movement every Fall and enabling Europe to buy surplus crops;
(3) Full concentration of the nation's financial reserves, a step in which
direction was taken by the enactment of the McFadden measure at the last session of Congress.

The theory underlying (3) is that finance, like man-power,

is the first line of the national defense, and must be ready for immediate
mobilization.

It may be stated authoritatively that Treasury requirements

were not determinative as to the present cheap-credit policy.

Moreover, the

policy was decided on in connection with the July conference of world central
bankers, is in the nature of a definite engagement and could not be changed
without breach of faith.

Therefore, it will not be changed until the engage-

ments have been carried out, which means that a stimulating financial policy

will continue, in the absence of unexpected developments, over the next few
months.-

Governor Crissinger has been the outstanding "farm member"
His symof the Board, although not agpointed as a farmer.
pathies throughout have been with agriculture, he having
personally experienced its difficulties through his own farm
operations.

An accommodating spirit has been shown in an effort to patch
Apparently it has gone too far, howup the Chicago affair.
ever, for the issue to be avoided in Congress, where a real
It will center, in the House, around
battle is forecast.
the Strong bill, which directs the Board to fix rates so as
to stabilize prices.
q.

The delicate feature. of the situation concerns the weight
given to international requirements in fixing Board policies.
Unquestionably the British situation was ,a major influence
Frank statein fixing the discount policy now in effect.
ments that Britain would have to abandon the gold standard,
This opens a field for political
unless aided, were made.
activity.
The Thompson elements, of Illinois, in. all their
conferences as to a Republican Presidential nominee, have laid

9/17/27.

it down as a sine qua non that the man they support must
be 100% anti-League and 100% anti-internationalist. It is
stated as a truism abroad that should the United States refuse to cooperate in stabilizing world finance, new debt
settlements would become almost immediately requisite.
4.

TARIFFS

There appears to be an idea in Europe that the American tariff bar-

rier can be crossed through the negotiation of treaties, on the theory that a
treaty is supreme law in the United States and would over-rule a mere tariff
law.

The Administration is utterly hostile to any such device.
Section 317 of the Tariff Act directs the President to levy
Unew and additional duties" against foreign nations which
The Administration
discriminate against American commerce.
reads this as a mandate to negotiate most-favored-nation
treaties only.
Four such treaties have been negotiated,
those with Germany, Hungary and Esthonia being in full effect,
while that with Turkey has not been ratified by the Senate.
Fourteen such treaties are in nrocess of negotiation, with
Norway, Sweden, Finland, Latvia, Poland, Switzerland, Austria,
Serbia, Czecho-Slovakia, Honduras, Guatemala, Salvador, Brazil
and France.
A most-favored-nation clause apnears in the
modus-vivendi agreements under which commerce is now carried
on with Albania, Brazil, Dominican Republic, Finland, Greece,
Guatemala, Haiti, Latvia, Lithuania, Poland, Rumania, Turkey
and Spain.
Wi.th all other countries (except Cuba which has
special reciprocity) old treaties of various kinds are still
operative.
There is no important nation, it is felt, that can afford to
France and
enter into a trade war with the United States.
other nations might be able to gain some concessions in the
administration of certain laws, outside the Tariff Act, which
It is intimated that
burden their commerce with America.
this may be an object of the present French strategy.

Dominant factors in the Tariff Commission rather welcome the
Argentine refusal to permit American agents to investigate
production costs, .a system which has caused much trouble and
hard-feeling.
The alternative is "United States Valuation",
and that is what elements which formerly demanded "American
The
Valuation" will fight for in the next tariff measure.
French agitation has not strengthened the hands of those who
want a "trading feature" in the next tariff bill.
The Tariff Commission has just completed final revision of
Copies should be ready for disits Dye Census for 19,25.
tribution about September 23.
The volume of tariff matters reaching Washington is growing rapidly
and indicates that the country is getting ready for tariff revision.

The

next session of Congress will lay the ground for this as an issue in the
Presidential campaign.

9/17/27.

4.
5.

A significant view as to treaties is furnished by a high authority:

TREATIES:

Treaties are no longer political; they deal with commerce
More and more, our commercial policies
almost entirely.
will have to be determined through treaty provisions.
Manifestly this will be impossible, in practical politics,
if treaties continue to be made by the Chief Executive with
There will have to be a
the sanction of the Senate only.
constitutional amendment providing that treaties shall be
subject to approval by both Houses of Congress and that a
majority vote shall be decisive in each House.

The article, "Prosperity but no Profits", in the Nationls Busi-

"NO PROFITS":

ness, has been enthusiastically praised by numerous manufacturers who claim
that they are being forced to accept non-profitable contracts "by the tyran.,

nical methods of purchasing officers of large corporations."

The official

view is that Washington can do nothing about it and that the motor industry,
in particular, will have to solve this problem for itself.
BOLSHEVISM:

In advising business leaders not to contribute to organizations

soliciting funds with which to combat Bolshevism, the adviser on public relations to some of the most important American financial interests takes this
view:

"The best way is to let the radicals talk themselves to death.

They

are not fooling American workmen who know a gold brick when they see one."

This is in contrast to the great number of letters reaching Washington protesting that Bolshevism is active and should be watched carefully.
CONSOLIDATIONS:

Work on the Parker railway .consclidation bill has been going

on all mummer.

It will be introduced so soon as Congress convenes.

Quick

committee action is not yet assured, but it is hoped final passage will be got.
It is understood to be the position of the Interstate Commerce Commission that
"legislative removal of some existing impedimenta" to mergers wuald be helpful.
Professional
The political situation continues to be confused.
They are confused by
Republican leaders are in doubt which way to jump.
statements, said to have been made by the President himself, that Peso or
Hoover would do, and they cannot tell how far the Hughes situation has actualNeither are they by any means convinced that Mr. Coolidge is
ly developed.
out of the picture. Admittedly, however, active support of any candidate by
Mr. Mellon would be almost decisive. Reports continue to flow in of the increasing strength of Smith and of the practical manner in which his campaign
in the provinces is being conducted.

ITHALEY-EATON SERVICE.

TWO VIEWS OF EUROPE.
(Pamphlet Vol. II. No. 24 - Now Ready.)

The text consists of two private letters to Whaley-Eaton Service.
The first of them is written by an American who knows Mussolini intimately.
It quotes the Duce on such subjects as the Sacco-Vanzetti case and gives the
"strong-government" view of conditions.
The other letter, much shorter, is
written by an authority who has been in intimate touch with European industrial leaders all summer and who denies that there is any substantial antiAmericanism in business circles abroad.

Those who have
The price for single Pamphlets is 25 cents each.
not placed a blanket order for all Pamphlets, as issued, will find the form
below convenient for ordering Pamphlet No. 24.

Whaley-Eaton Service,
Munsey Building,
Washington, D. C.

Please mail to the following address

1927.

copies of "Two Views of Europe."

The price is twenty-five cents the copy.

September

Charge to my account.

(Signed)

(Address)

September le, 1100.
My dear Herding:

You have been eood enoueli to send me a copy of your letter to Governor

Seay dated September 14, and I neve just receivee yours of September 18 aedressed

to Mr. Platt. r am eending you a copy of e letter which I wrote to Governor Seay
td one
ihich I ea to-day addressing to Secretary Mellon.
e--With most of your letter of 3eptember 16 I aft in entire accord, but there

is one point where I think we take a diffwent vie
which you will find diecussed in my letter

of the meaning of the Act

to SecretaryMiellon.

If Congress intended that rates should be initietta only 4 the directore
of the Reserve banke, that Oben initiated they shoule bt once become ef.ective, aaa
that the right of review by the Feasral Reserve hoard was not simply the right of
review of that particular change when it muet with reasonable prosper:cies be &p-

proved or disapproved, then the language of the Act is indeed very inepL in eeprese-

ing any other intention. For inetence, if as liUggefsten in your letter., tee Board
ehould accept the decieion of the directors of any reserve bunk, permit thk. rate to

became effective and continue for, say, a year, than exercise its right of review,
and, after reviewing, determine to change the rate, obelouely the right of reeiew

is continuous nom the day the rate is cheneed until the hoard in ite dieoretion
decides itself to initiate a change, and the Act could readily and clearly have
expressed that intention in other language so clear and unmistakable that the leaewe that it die employ cou.d hardly be accepted as conkednine that seenine.

own opinion has always been that the compromise expreseed in this language left

out of account certain possibilities which have, in fct, arisen from time to Use,
and it is those very possibilitiee which cauee the trouble.

Most, I think, are first, where a rate is established by a reeerve

bank

which is either an increase or a deereese too grout at the nomtat to be just-Lae:a,

Mr. i. P. G. Harelag

9/19/27.

and where the Board, deeiring to increase or decretwe the rate, decides tit 10,-L. it will

do so but not to the extent proposed by the directs:fru of the Reserve bank. In that

event, would the Board have the right to dieepprove the rate eutnitted but to establish some other rate different from the one ilihiete had then them in operation?
The second possibility is the question which ha e terieen inGhicago, where

the directors decline to make a change but re-submit the old rate. There is no
formula in the Act to determihe whether the re-submission of the old rate by the

directors of the Reserve bank gives rive to the right of review, and if so, whether
the Board has the right then to establish some different rate after disapproving the
continuance of the old rate.
Third, except for these two poesibilitiee I sea no chance of wieunder-

standing ae to the meaning of the Act, and cannot read into it the ineeut that the
right of revisit should be continuoue. You mention the provihion of Section
paragraph (b) as sustaining your view. I think it more nearly sustains the view
expressed in my letter to Mr. Mellon.

I had intended to telephone you atxnat this matter last week, tut was so

busy that I did not get around to it. You have given such a whole-hearted support
of the program ,dopted last July that I am most. anxious you should not misunderstand
our position in New York.

We have not wished to intervene in the controiterey between

the Federal Reserve Board end the Federal Reserve Bank of' Chicago, and, in fact,

have scrupulously refrained from doing so from the very beginning, with one excep-

tion. When I learned from Governor Crissinger that the Board proposed to take the

action that it did take, I expressed a strong hope that they could be persuacied not

to do so, and on the eve of their ection I had opportunity to talk it over with
Secretary Mellon and had hoped that his own wishes in counselling delay until he
reached Washingtou would prevail.

Unfortunately, the Eioard had already acted when

I communicated this to Governor Oriesinger.

Mr. X. P. G. Harding

9/19/27.

I am eure you will also recall that ihen we submitted the proposal for
a reduction in New York add &eked the views of the membere of the Open Market

Investment Committee, I was careful to state that we would not make any recommenda-

tion as to rate Changes in other districts, that what we wanted was their reaction
as to a change in our rate, and according as might be decided at the meeting we

would either reduce first, or if others preferred to reduce first we would 1it

until they tvel opportunity to take it up with their directors. -

I do hope this matter can be dealt with so as to avoid either ligation
or appeals for amendment.

Many thanks to you for sending me the letter.
Sincerely yours,

Mr. W. P. G. Harding,
Governor, Federal Reserve Bank,
Boston, Mass.
BS/RAH

September 10, 1927.
My dear Sr. Es..krr:

it is eood ne;,-Eto let...rn that you are expeo,ting shortly to be in New
York, and I hope you c.5a3 epr.ro the time for a visit with us.
linowing hor intLrested you must he in recent developments in our af-

fair. I thought you might be able to upere the time for

little chat about that

The question of the authority to initiate c'zangss of discount rate titifth

been the subject of a difference cf opinion within the System end, at times, of
some dispute, frost the very beginning.

AP is so often the case this ari.,-,e6 from

inept 1angue6e it the statute, chosen es the resilt of comprortis(:: of opinion,
and possibly celitrtrately ambiguous so es to be capable of construction to meet

different.. vise.
The whole question revolves around the meaning of Paragraph (a) of

Section 14, and would probably boil down to a decision as to whether th, establikhment of r:-tea 'from time to time" by the Reserve tonks offers th. occeeion
for tt Ireriew ,nd determint.tionn 'Atli changes Ntre made only, or whether that

revieT is continuous Lnd m4 be exercised at any tiVe . fteI a rate is established

and result in the initie,Alon of a di- fsrent rate
I have never

tat

ths rebult of that review.

that Congress istendsd tat the Board should have

that power, partly be-cause it would have teen so simple to have expressed it

differently in language of unmistakable intent, and partly because it ,earis to
be inconaistmt with the provisions of Paragraph (b) of Sciction II. Sould Congress have required five votes out of seven (the numtt..-r of meab,rs of the Eo..r.,

originally provided) iu order to require this occasional end comparb.tively unim-

portant act, and then .permit a. bare majority vote in order to require a Reserve

Hon. Nsiton D. Baker

9/19/27.

bank to change its diecount rate which is the most important act it performs?

There are certain general provisions in the Act of supervieion, regulation and control which have been donetrued by thoe:e previously rendering opin-

ions as r,:ivink' the loard this po4'er, irrespective of tb.ie specific question of

Section 14, sad there is still anctasr view occs.tionelly expreesen that the generr..1 pewere al the board cou1d. be exercised to require e. change of discount rate

by some one er two res,.,rve banks Atich were reoalcitrsat in conforming to a
general: ..yst..Aa .policy.

dosever this sey be, and whatever Congreab may nave

intended, i deplore the whole thing un6 tAievt: it is unnecessary and likely
to do us an imasnse ahra unless understanding can be arriveu at which will be

6tifficieatay satisfactory to escape a lot of legislative tinkering with the Fooderal Reserve Act.

Frankly, wtvtt I ffr is orasething which has never as yet artsn ithin
the iipderel iteeerve Jystsm,

nd hich ts4 be precipitated by this contiovc.rey.

I he.ve haJ ..)coasion sore than once to apps&r before Congress in order to Rake

oxplanationa- of various matters connected vith the ayst:An, and they nava lii

instance been the result of tikici

ei.,ch

by the public or by a.imbers of Cone;ress or

by others out.?ide of the Sysa e o ome particular thingstht w wive done.
If Congress inguire5into this 'matter in connection with atteapts to _Assad th Act

it ,iii involve the appearance. of various acabnrs of our osn oronization
hold contrary opinions on this subject, and the country will be concerned :1 eat

internal war lead to a situation in which the 'whole country aightyauffsr.

Con-

gress estisables in lees than three months. Between now and then it cams to
tte suet find some forauie. anc publicly announce it so as to avoid discrediting

ourGelves by giving evidence of int6rnai diaeensioh.
I ea really(4.4etr,3ssed beyond my poaer to express it.

It is co di( hour-

ei,ing after these thirteen yers to feel that we way an be victisige4 by this
silly and wholly unnecessary and, on might even Del, quite gratuitous advrticing

Non. 1104ton D. baker

of differce43 of opinion between men ot mature experilace who should be capable

of more foresight then has been exhibited in this matter.
Now, I have let off tide steam, and it hes done me 6,00d. then you COM8
to New York I will tell you all L.:-,hut
You All be int,irected to know clia4., I tut d ,tuits
!wt. George F.'linker dt 're*

ixt,t).

He inquiren vitioularly about you, ndeta

I found him inLeres,,ed in hie old a.ge it rethu

thin eUxilL the Constitution

of the 'United fitaLes, I haw:: tient 111.1 it copy of your book.
With bee', reE,arde,

Faithfully yours.,

Non.. Ne4.tcct

Union Trust Building,
el vv :land, Ohio.

"lac. b.:, Tuxedo with

September 19, 192T.

Dear Mr. Secretary:
You may not heve understood my comments upon the suggestion of obtaining

further opinion from the Attorney General in regard to the right of the Federal

ard to initiate changes of discountrate, as the telephone connection we
not satisfactory. The points I desired to make were the following:
Reserve

First, it has been stated to me that it is the practice of the Attorney
General not to review opinions rendered by his predecessors in office, but always

if possible to rely upon former opinions such as the one rendered by Solicitor King
on this subject in 1919.

Second, if this practice prevails

should tither decline to render

another opinion gIvtng a diffdrent interpretation of the law, or tshould .tdo t the
opinion of Solicitor King as the view of the Department, the only alternative protest
resting with the Federal Reserve Beck of Chicago would be either to resort to the

courts or to attempt to secure azirendatent to the Act. As either of these courses,
it seems to me, might be quite unsatisfactory in their consequences becaue of the
widespread agitation, I had hoped that some other method of djuetthg the_difficulty
would be found poeei bl e.

Third, if the practice referred to above does not prevail and the Attorney
General should render a new opinion, then a further difficulty lies in the very
circumstances under which such opinions are usually sought.

The one requested by

former Seoretsry Glass in 1919 was, se understand, the result of a difference of
view bet,een Secretary Glass and his associates in.the Treasury end the Federal Reserve Bent of New York, the latter having with increasing urgency advocated advances

in discount rates throughout the year 1919.
time woe in the form of

The sutaieion of the question at that

letter addrcseed to the Attorney General by Secretary

Glees, 000hisPonied by an opinion of Svoial Counsa Elliott /which we are advised

Hon.

urged the Treasury's point of view.

A. W. Mellon

9/19/27.

The position of the Federal Reserve Bank of

New fork as to the true intent of the law and as to the facts of the eituctlon at

that time wee, of couree, never preeented to the Attorney Central. The year 1919

was one of very serious strain upon our credit resources at a time of feverish
peculation in teeth securities and commodities.

A very large expansion of bank

credit was taking piece, and we were facing the probability of laree e-porte of gold
following the removal of the embargo. On the other nand, the Treasury had a float-

ing debt of over $8,000,000,000 and contemplated a large refunding loan of possibly

0:000,000,300 in the fall of that year. There efts, in fact, almost a national
emergency in th

fall of that

year.

is only fair to remember that the Attorney

General's opinion was rendered in that atmosphere.

fourth, at the present time the circumetances are quite different. There
is no national emergency, the action of the Board in forcing a reduction of rate
in Chicago can hardly be sustained upon that ground, end

a review of the Act to

determine the true intent of Conerese should, it seems to mc, be undertaken judicially, without any influence such as might have been important under the circum-

stances prevailing in 1919. Indeed it has been suggested by some of our directors
that this difference in cicumetancee between 1919 and 1927 might possibly make the
basis for an opinion limiting to an emergency whatever rights the Federel Reserve

board may have to initiate rates.
Fifth, the officers end directors of the Federal Reserve Bulk of New York

have never a;reed to the interpretation given by Solicitor King to Section 14 of
the Act which provides *every Federal

reserve bit* should have power

* * (d) to

establish from time to time, subject to review and determination of the Feaerel
Reserve Spare, rates of discount to be charged by the
class of paper, which shall be fixed tith
ness.*

e view

Federal

reserve bank for eaoh

of accommodetine commerce and busi-

This language appears to be appropriate to whr,L would unuoubtedly be the

Hon. A. .. Mellon

practice of the Federal Reserve 3ystem

9/19/27.

Rates, according, to chteging circumstances,

should be subject to change by the different Reserve banks "from time to tire."
These changes of retee made at recurrent periods should be subject to "review
and determination by the Fedora Reserve Board.* If the Board foiled to approve
ohangee wade from time to tinte it would obviously h.,..Are the pootar to veto any chenge

under this language. But the Act i not cloar on two or three points, namely, (a)

in ot e the Board dieepprovee a change of rate eotabliehed by a reeerve bank, can

it fix some other rate, or must it simply require the old rate to oontinue? tab)
is the right of "review and determinution" a continuous right or oeei it only arias
*from time to time" as new rates are eeteliehed by a reserve bank.
It has always seemed to us that when a Federal reserve bank submits a new

rate, that rote becomee effective from the moment of its eetablishmtat by the Federal reserve beak and approval by the Federal Reserve Board. We do not believe that

the board once hating approved of the: new rate could later review and change it.

Id'

The only poesible exception 6eVii5 to us to be that where a :3yeterx policy has been

adopted, the Board under the general provisions of the Act giving them broA super

viaory powero, might require a change of rats after an appropriate interval to
avoid a possible emergency and only after it became clear that such change wasnot

only juetifted in the ordinary owes& but that it was actueny required in order to
give effect to a necessary system policy.

The aseumption of the right by the

Federal Reserve Board, as recently attempted, to initiate a ohange of rate, would
appear to be predicated upon the theory that the right of "review and determination*

is e continuous right of review, that once the directors of the Federql reserve beak
had established a new rte which the Board had approvoed, they nevertheless hawn the

right at any time to make a review of that rate ono if not then l'ounu autiefoctory,
to esteolieh e new one.

The longutt,0 of the pot:et-mat is et is eo inept in expressing

itny intention to zivo the Board this continuous right of review (which could hem
been oimply and effectively expressed by the use of other words) that we cannot

Hon. A. X,. Mallon

9/19/27

believe Coneress had any ouch intention.

Furthermore, we believe our view is upported by reference to &estion
in which are enumerated the powers of the Federal Reserve Board and ihich resets in

part as follower "The Federal Reserve board snail be authorized and empowered * *

(b) to permit or, on the affirmative vote of at least five members of the Reserve
Boerd, to tequire Federal reserve banks to rediscount the discounte., paper of other

Federal reserve benke at rites of interest to be fixed by the Federal Reserve Board.'
At the time the Act els passed the Board consisted of seven members, and this pro-

vision required five votes out of seven to five the Board power to require such

rediecounts end to fix the rate. Trsnsactione of that character are infreeuent and
of compel- *ively minor coneequtnce, while, on the other hand, probably most important

act performed by a Reserve bank is fl change of its established discount rate.

mould seem inconsistent with the intention of CongreeL thet fife out of seven votes

wouldeecirequired to permit the lidewrd to fix th, relatively unimportant rate and at
the same time enahle the Federal Reserve Bourg to initiate 8 chanee of the estab-

linhed ditcount rhte vitt' only a calamity vote.
Sixth. At the present time the Board's procedure i 6 frequently embarrassed

by the f et that it consists of eight members, and the possibility of a tie vote not
only maker the decinion of important questions of policy at times difficult or im-

possible, but elso leads to the unsatisfactory possibility that the Board's position
must sometimes be det mined by whether the proposed action ie in an affirmative or

negative resolution; in other words, whether it is an ettompt to adopt a new pro-

posal which requires at least five votes with all in attendance, or Whether it is an
attempt to reverse a form( r action where four votes would h- ye the affirmative
ef-Pect of continuing action formerly taken.

It has seemed to me that the soiUtion of this difficulty, if anemendment
to the Fed,-iral Reserve Act should become neceseery, would be to require either that

Han. P.

Velion

sM/27.

the ts'ovrnaz of the Bokrd chould be given two votes or that at Least five affirma-

tive votes should be requirec_ In order to enFble tht Board to initiat e chang,e of

rate.
seventh. After thirteen years discussion of this setter which has bean recurrent since January of 1915, / ea personally of the opinion that, with euitektle
safeguards, th-; Board should have the power in an emergency or when a System policy

so requires and core inditidual bank is recalcitrant, to initiate a change of rate.
But even in such a cL!::43 it should be provided that the number of votes required

should be large enough to incurs that hasty and ill-considered action is not possible.
If the Federal Reserver..-3t-yard ould acres upon a formula, which would be

satisfactory to all parties interested it should be desicned to obviate thi a difficulty. I should hope that by that method all need for a resort to the courts or
an antes dment by Congress could be obviated.

I an inspired to larite this letter because of Lhe number of lettere which
are now (-Amain& to me from officers of other Federal reserve banks, indicating their

deeire to Lave the matt: r settled without furtner controverey anu agitation.
7 beg to remain,
Respectfully yours,

ion. A. 1. Uif.,11on

Secretary of the Trea sury ,
1- ash tai; tor, ,

D. C.

`;-)

ATE AND CUOILENTIM.:

SEPTI-

a ,t e,

9) 1

ER 21, 19E7.

My dear Mr. Governor:

-lord rea.ches ate that considerable notice has been taken in the press;
&broad ofwilafi i-Any appear to be 4 serious controversy between the Federal Reeerve

aoard wad the Fenersi Reserve Bank of CM osgo in regard to the recent reduction of

discount rate, and I thini I should write you explaining something of the (drawnstencee.
The lenguage of the Federal

e er v e 4ct on thie point ie. as follow.:

Section 14.
"Every Federal reserve hank shall have pooer 40*frt'",,*******
(d)

to establish from tine to time, subject to review and

detersin-ation of the Federal Reserve 13oard, r',._tes of diecount

to be charged by the Federal reserve bank for ekch class of

paper, which shall IA fixed with s -view of accommodAting
cc.irmerce nd busineas."

It Is difficult of exact construction told he been dispute poini ever eince the
I shall not eistborate thu various vise e
Ft'tteral Aeserve 444ten Imo 36sta:b1t r;sti ig1.
to the le claAng of the Section. They are too :zany and varied to be recounted. In the
present instance a policy wt.,e propoeed at a Di ti t at held in July, and with 'fair
unanimity OM

System.

h do t a ci by those present in the hope that it would guide the ,lhole

The directors of the Federal Reserve Bank of Chichgo did not necessarily

disapprove of the policy ao to other Federal ro4erve hanks, especially New York, hot

rather held that the load olfaction within their district gave no indc4tion of
need for a. redaction. After a delay of a few weeks the Federal Rserve Board under-

took to reduce the ref.* at Chicago from 4 to 3-1/2 per cont.

The reduction 0%81 ac-

oe.pted by thf.: directors and given immedigte efect, and as San Francisco and Minneapolis

promptly folioed by similar reactions the whole System now has a 6-117. per cent rate

0./t1.27.

GairmTur Moreau

in the eietatime, homer, it has been reported that the Chicag-o Fed-

of discount..

objected to the action of the Board; and the Federsi Advieory

eral

erve

Coo

has taken the tame poeition; but the lalter has expreesed no view .n to the

Nisdom of the .pclie;/, of re4q.totione of discount rates.

They

erely disproved the

method seiopted by the Board.

Much un.fortuntde and mielending publicity hes been given to the matter,
itne there has been conAderable f.7urt-sieet....ts to whether the Chicago bank 411 teat the

posers t the Fetteral Reeerve oard in the courts or hether Congress 41.1 he naked

to clarity the Act 4 a,. .adment. I hops that neither couree All be neceactry, but
have ho meant of ill on

s111 .1ventual1y

ppen.

The aigriificeuce of the incident OM) be wuch exaverkted. For thirteen
ye,tre the Feiierel Reserve

etco has oecapeci z certoue controversy on this point, -and

I hope that it. cko continue to do 50 without litiption or ao
GQvernor Criesingeri

thin development.

to the Act.

reaignetion, announced recently, hexi no relation to

He had informed me over a. month before of hie intention to resign

shich he could net do finally without tiwaiting the return of the President and.
Sccratary Mellon;

but his elgagasecte alreAdy made were fk7 eh that he could not defer

carzying, out hie t:ecision even tbouh it did t.44ripm to come at 1.,:n unfortunate movent.
The ;:.,ppreheusiene expresen in eome of the naveporere that this a411

reteult in

6erickie centroverey tiiroughout the country, I believe are exaggerrAsd.

There nay be sosc

tiei7

t sai on when Congress convenes vitich I hope will be minimized

or do I feel tbat
there are likely to be any subatentiel changes in the policiee of the
which
ttnti result in no material ckanges in the Federal Flacerve Act.

in esler&I. .4ave enjoyed in..cret:sing public approval lanc: support.
Sincerely yours,

Monsieur toile Moreau,
The Bani. of France,
Pt,r1z, France.