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CIRCULAR No. 1 ( .



August 22, 1919.


Notwithstanding the wide publicity that it has heretofore received, we take pleasure in
transmitting to our member banks and to all other banking institutions in this Federal Reserve
District Governor Harding's letter of August 8, 1919, to Honorable George P. McLean, Chairman,
Committee on Banking and Currency, United States Senate.
Your attention is invited to a thoughtful study of this letter. It presents a true picture
of our present monetary situation and is of intense interest to the banking community and public
at large during the present critical period of readjustment.
Governor Harding has skillfully and convincingly prescribed the proper conduct to be
"To work and to save; to work regularly and efficiently in order to
produce and distribute the largest possible volume of commodities; and
to exercise reasonable economies in order that money, goods and services
may be devoted primarily to the liquidation of debt and to the
satisfaction of the demand for necessities, rather than to indulgence in
extravagances or the gratification of a desire for luxuries."
Additional copies of Governor Harding's letter will be cheerfully furnished on request.
Yours very truly,

Deputy Governor.




Letter from Honorable W. P. G. Harding, Governor of the Federal Reserve Board, to Honorable
George P. McLean, Chairman of the Committee on Banking and Currency, United States Senate.

August 8, 1919.



T h e Federal Reserve Board acknowledges receipt of your letter of the 5th instant asking
for an expression of its views as to the advisability of legislation providing for the gradual reduction
of the currency in circulation as proposed by Senate Resolution 142.
T h e Board would suggest t h a t in determining whether or not legislation is necessary or
desirable to regulate the volume of currency in circulation, consideration be given to t h e various
forms of money which make up the sum total of our volume of currency. A distinction should
also be drawn between the stock of money in the country and the amount actually in circulation.
With respect to gold coin, gold certificates, standard silver dollars, silver certificates, subsidiary silver and Treasury Notes of 1890, the Board assumes t h a t it is recognized that no legislation is necessary.
T h e United States notes, or legal tenders, which have remained at the fixed amount of
$346,681,016. since March 31, 1878, have not been a disturbing factor since the passage of the act
of March 14, 1900. An adequate gold reserve of more than 4 5 % is now held against these notes
most of which are in the form of small bills of $1, $2, and $5 denominations. Notes of these demon inations are needed in the daily transactions of the public, and were the United States notes t o
be retired, the issue of an equal volume of small bills in some other form of currency would be
necessary. T o effect the retirement of the United States notes, funds would have to be withdrawn from the Treasury to be supplied either by taxation or by the sale of interest-bearing
obligations. T h e Board does not believe t h a t any legislation with respect to United States notes
is necessary or desirable a t this time.
T h e national bank notes outstanding on August 1, 1919, amounted to $658,118,555, a
reduction of nearly $60,000,000 s i n c e j u l y 1, 1914. The greater part of these notes is secured by
United States 2 % bonds, and provision has already been made in Section 18 of the Federal
Reserve Act for their gradual retirement.
Federal Reserve bank notes, which are secured by United States obligations and are taxed
just as national bank notes are, have been issued only to replace in part national bank notes retired, and standard silver dollars melted or broken up and sold as bullion under authority of the
act of April 23, 1918, known as the P i t m a n Act. T h e issue of these notes has, therefore, brought
about no increase in the circulating medium.
T h e amount of Federal Reserve notes outstanding has increased from $357,239,000 on
April 1, 1917, to $2,504,753,000 on August 1, 1919. I t appears, therefore, t h a t those who see in
the larger volume of circulation in t h e United States the prime cause of increased costs of living
and who seek a remedy by a forced contraction of the currency must have in mind the Federal
Reserve note and Section 16 of the Federal Reserve Act as amended June 21,1917, which provides
for its issue and redemption.
In analyzing our present monetary situation, and in considering the causes which have led
to the expansion of credits and note issues during the war, we should not lose sight of some of the
developments of the pre-war period and of their effect upon credits and prices. Very heavy purchases of supplies of all kinds were made in this country by European beligerents during the years
1915 and 1916, payment for which involved the shipment to us of large amounts of gold. T h e
stock of gold in the United States on July 1, 1914, was $1,890,678,304. This amount increased
steadily until April, 1917, the date of our own entry into the war, when it reached $3,088,904,808,
an increase of about $1,200,000,000. Bank deposits likewise show a large increase, t h e net deposits of national banks having risen from $7,495,149,000 on J u n e 30, 1914, to $10,489,217,000
on March 5, 1917, while the net deposits of all banks in the United States increased from $17,966,150,000 in June, 1914, to $24,891,218,000 in J u n e 1917.
Net deposits of national banks had
further increased up to M a y 12, 1919, to $11,718,095,000 and those of all banks in J u n e , 1918
(the latest d a t e for which figures are available) to $26,769,546,000. Shortly after April 6, 1917,
when the Congress declared war the Treasury began to sell bonds, notes and certificates in large
amounts, resulting in a net increase in the public debt to August 1, 1919, of $24,518,064,840.
On July 1, 1914, the total stock of money in the United States, exclusive of t h a t held b y
t h e United States Treasury, was $3,419,168,368. On April 1,1917, the stock of money, estimated
on the same basis, was, $4,702,130,941, an increase of $1,282,962,573, of which increase $883,481,028 was in gold.


On July 1, 1914, there were no Federal Reserve notes in existence, while on April 1, 1917,
there were outstanding $357,239,000.
The amendment to the Federal Reserve Act approved June 21, 1917, changed substantially
the original reserverequirements for member banks and provided that their entire lawful reserve
should be carried with the Federal Reserve banks. The same amendment authorized the Federal
Reserve banks to exchange Federal Reserve notes for gold. The result of these two changes in
the law was to transfer immediately large sums of gold from the vaults of the member and nonmember banks and from general circulation to the Federal Reserve banks, and this caused a
change in the methods of accounting for gold by the Federal Reserve banks and Federal Reserve
In order to avoid confusion in determining the volume of money in actual circulation, it
is necessary to distinguish between tables showing the total stock of money in the country, and
tables showing the circulation outside of the Treasury and Federal Reserve agents' vaults, and to
limit our view to amounts held by member and non-member banks and the public, which are
exclusive of amounts on hand at Federal Reserve banks, held by Federal Reserve agents, and
held in the Treasury.
The reserve money held by or for the Federal Reserve banks serves, of course, as a basis
for credit, but it forms no part of the currency in circulation. Upon this basis, the amount of
money in circulation on July 1, 1914 (there being no Federal Reserve banks in operation at that
time) was $3,419,168,368, made up as follows: Gold coin and certificates $1,649,775,803; silver
dollars and silver certificates, including Treasury notes of 1890, $552,203,610; all other currency
$1,217,188,955, being circulation per capita $34.53.
The corresponding amounts of money in circulation on April 1, 1917, December 1, 1918,
and August 1, 1919, are shown in the following table:
Amount of Money Outside the Treasury and Federal Reserve Banks
April 1,

December 1,

Gold coin and certificates...
$1,989,152,000 $861,245,000
Silver dollars and silver certificates (including
Treasury notes of 1890)
Federal Reserve notes
357,239,000 2,607,445,000
Federal Reserve bank notes
All other currency
1,218,715,000 1,201,069,000

August 1,

$4,100,976,000 $5,129,985,000 $4,796,890,000
Amount per capita outside the Treasury and
the Federal Reserve Banks
Assuming that the date December 1, 1918, marks the beginning of the post-war period,
the table shows changes during this period up to August 1, 1919, as follows: Gold coin and certificates in circulation decreased $133,199,000; silver dollars and silver certificates, including
Treasury notes of 1890, decreased $130,984,000; Federal Reserve notes decreased $102,692,000;
Federal Reserve bank notes increased $78,552,000; all other currency decreased $44,772,000, being
a net decrease in circulation for the post-war period of $333,095,000, or $2.97 per capita.
In considering the question of currency in circulation, there should be taken into account
the various factors which have entered into the demand for currency, among which are: The
gradual enlargement of payrolls, both as to the number of workers and amount paid to each; the
effect of higher wages upon deposits in banks and upon the amounts of money carried by shopkeepers in their tills and by individuals in their pockets; the amounts of money locked up or carried on their persons by workmen who have been receiving high wages, and who, especially in the
case of ignorant foreigners, are unwilling to deposit their savings in banks or to invest in Government bonds; the amount of money carried away by workmen returning to their homes in foreign
countries; and the fact that the circulating media of the Philippine Islands, Hawaii, Cuba, Porto
Rico, Santa Domingo, Haiti, Honduras, Panama, and, in part, Mexico, includes United States
paper currency and subsidiary silver. The amounts required in these countries, most of which
are very prosperous, have greatly increased in the last few years.
The total foreign circulation of United States currency cannot be stated accurately, but
is estimated to be at least one hundred and fifty million dollars.

\C\lo - C0L

T h e difficulty, indeed the impossibility, of keeping in circulation an excessive volume of
Federal Reserve notes should be understood. T h e issue of these notes has been carefully safeguarded by the Federal Reserve Act, and ample provision has been made for their redemption.
Federal Reserve notes are redeemable in gold; they cannot be forced into circulation in payment
of the expenses of the Government, or for any other purpose, as they can be issued only in exchange
for gold or against a deposit of negotiable paper growing out of a legitimate commercial transaction, plus the required gold reserve of not less than 40 per centum. Upon payment of commercial paper which has been deposited to secure Federal Reserve notes, there results either an immediate return of an equal amount of notes to the bank, or an automatic increase in the percentage
of gold reserve available for their redemption. Federal Reserve notes are not legal tender, nor
do they count as reserve money for member banks. They are issued only as a need for them
develops, and as they become redundant in any locality they are returned to the Treasury at
Washington, or to a Federal Reserve bank for redemption. Thus there cannot at any time be
more Federal Reserve notes in circulation than the needs of the country at the present level of
prices require, and as the need abates the volume of notes outstanding will be correspondingly
reduced through redemption. The increased volume of Federal Reserve notes in circulation
during the past three years, in so far as it is not the result of direct exchanges for gold and gold
certificates which have been withdrawn from circulation, is the effect of advancing wages and
prices, and not their cause.
There has undoubtedly taken place during the last two years a certain amount of credit
expansion which, under the circumstances connected with our war financing, was inevitable, but
this will be corrected as the securities issued by the United States Government for war purposes
dK giadually absuibed by investors. This credit expansion is equal t o t h e difference between
the total of the war expenditures of the Government on the one hand, and on the other, the total
amounts raised by the Government through taxation and by the sale of its obligations so far
as paid for out of savings. No reliable estimate can be made of this difference, which must be
gradually absorbed through future savings for the reason that banks are lending and will always
lend freely on Government bonds as collateral.
T h e principal cause of the advance of prices before and during the war was the urgent
need of the governments of the allied world for goods of all kinds for quick delivery in large
volume, and the competition of this buying by governments with purchases by private individuals
who failed to contract their expenditures at a rate commensurate with the growing expenditures
of these governments. In the post-war period, through which we are now passing, the country
has experienced rising prices owing, in part, to a general relaxation of the war time regime of
personal economy, resulting in an increased demand for commodities by individuals who restricted
their purchases during the war, but who are now buying in competition with export demand.
In addition, accrued incomes and increased wages have led to heavy demands for commodities
not of prime necessity, which have resulted in diverting labor and material from essentials to
T h e Federal Reserve Board believes that a n y currency legislation a t this time is unnecessary
and undesirable, and would suggest t h a t whether viewed from an economic or financial standpoint,
the remedy for the present situation is the same, namely to work and to save; to work regularly
and efficiently in order to produce and distribute the largest possible volume of commodities;
and to exercise reasonable economies in order t h a t money, goods, and services may be devoted
primarily to the liquidation of debt and to the satisfaction of the demand for necessities, rather
than to indulgence in extravagances or the gratification of a desire for luxuries. T h e war is over,
—in a military sense—and while the bills have been settled by loans to the Government, these
obligations, so far as they are carried by the banks, must be absorbed before the war chapter of
the financial history of the~c6untry can be closed.
Very truly yours,
W. P . G. H A R D I N G ,
Hon. Geo.P. McLean, Chairman,
Committee on Banking and Currency,
United States Senate,
Washington, D . C.

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