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CONFERENCE ?
THE FEDERAL RESERVE BQARD
With
THE GOVERNORS OF THE FEDERAL RESERVE BANKS.
Washington, D.C.,
Thursday, March 2, 1919.
A conference d
the Federal Reserve B rd with
the Governors of the several Federal "eserve Banks, and
the "xecutive Committee of the Federal Advisory Council,
was held in the hearing room of the Federal Reserve
Board, Metropolitan Bank Building, Washington, D.C.,
T h u r s d a y , March 2,
1 9 1 9 , at 1 o ' c l o c k a.m., there being
present:
Hon.
W.
P. G. Harding, Governor of the Federal
R e s e r v e B r d , (presiding).
Hon. C. S. Hamlin, Hon* A. C. MLller, and Hon.
John Skelton Will1ams, members, and Mr• J. A• Broderick,
Secretary of the Federal Reserve Board.
C. A. Morss, Governor of the Federal Reserve Bank
of Boston.
C. E. Spencer, Deputy Governor of the Federal
Reserve Bank of Boston.
Benjamin Strong, Jr., Governor of the Federal
Reserve Bank of New York.
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Federal Reserve Bank of St. Louis
E. P. Passmore, Governor of the Federal R e s e r v e
Bank of P h i l a d e l p h i a .
E. R. F a n c h e r , Governor of t h e Federal Reserve
Bank of C l e v e l a n d .
C. A. Peple, Deputy Governor of the Federal Bank
of Richmond.
M. B· Wellborn, Governor of the Federal Reserve
Bank of Atlanta.
J. B. McDougal, Governor of the Federal Reserve
Bank of C h i c a g o .
D. C. B i g g s , G o v e r n o r of t h e F e d e r a l R e s e r v e Bank
of St. Louis.
Theodore Wold, Governor· of t h e Federal R e s e r v e
Bank of M i n n e a p o l i s .
J. Z. Miller, Jr., Governor of the Federal Reserve
Bank of Kansas City.
•
L
VanZandt, Governor of t h e F e d e r a l R e s e r v e
Bank of D a l l a s .
J.
K. L y n c h , , Governor of t h e F e d e r a l R e s e r v e
Bank of San Francisco.
F.
I.
K e n t , Chief D i v i s i o n of Foreipn E x c h a n g e ,
F e d e r a l R e s e r v e Bea r d .
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3
jO
Mr. Geo.
L. H a r r i s o n , g e n e r a l c o u n s e l f o r the
F e d e r a l Reserve Board.
M. Jacobson, Statistician of the Federal Reserve
Board.
Mr. L.
L. Rue, Mr. D. G. Wing, Mr. F. O. Watts,
Mr• W. S. Rowe, Mr. A. B. Hepburn, members of the Executive
Committee of the Federal Advisory Council.
Hon. Robert L» Owen, Senator from Oklahoma.
Hon, Edmund Platt, Representative in Congress from
New York.
Hon. Walker D. Hines, Director General of Kgilreds.
PROCEEDINGS.
Governor Harding: Gentlemen, the meeting this morning will be of an informal character.
number of very important matters
The Bosrd has a
to discuss in executive
session with the Governors, and will do that tomorrow or
the next d a y .
Those matters relate to details of admin-
1stration and i n t e r - b a n k policy.
There are certain broader matters affecting our financial situation at this time which seemed to us to be
9 i m -
portant that we deemed it advisable to request the Executive
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
2
Committee of the Federal Advisory Council to join.
us in our discussion of those matters.
Before we adjourn this
morning we will have
a visit from the Director General of Railroads, who
will explain to us some of his troubles, and tho bearing that railra d.financo is going to havo on the
Fedoral Resorve system.
We are favored with the prsence this morning
of Senator Owen,
Chairman
of the Senate
Banking and
Currency Committoo, and alsc with the presence of Mr.
\
Platt, the incoming Chairme.n of the House Committee
on Bn king and Currency.
I take, great pleasure in introducing to the
conference Senator Robert L. Owen, of Oklahoma, who
1s Chairman of the Senate Committee on Banking and
Currency.
His Committee was in charge of the
original Federal Reserve Act in the Senate, and has
been in charge of all the bills amending the Federal
Reserve Act.
We are particularly indebted to him
for his very efficient work in overcoming almost
insuperable obstacles
and putting
through our last
amendment which gives the banks an increased surplus
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Federal Reserve Bank of St. Louis
5
fund, a matter in which you are all interested.
Senator Owen worked on this matter almost fortyeight hours without sleep, and he finally succeeded in
getting it passed through the Senate at 6 : 3 o ' c l o c k
Sunday morning.
Senator Owen: Governor Harding, and gentlemen.
It gives me great pleasure to be present at this meeting.
I came over simply for the purpose of sitting to
one side and hearing your discussion.
On looking at the program which you have before
you here, I realize that it would
several years
take the Senate
to dispose of it in the normal course of
the unlimited debate which prevails in that body.
I
will not take more time than simply to pay my
respects to you for the moment, and will leave you to
carry on your discussions.
Governor Harding:
I hope you will favor us with
more extended remarks a little later on in the morning,
Senator.
Gentlemen, in opening this meeting, a few thoughts
have occurred to the Board which it would like to submit.
It seems to us that the problems which now confront this
6
nation and the banks
of this country, are mere
complex in their nature than any problems that
have ever confronted us hitherto.
We remember,
of course, conditions which existed at the outbreak
of the European War, and it seemed to us that we had
some very serious problems in those days; but those
problems in retrospect look comparatively simple when
we recall the fact that the crisis at that time was
met very successfully by issuing $ 3 8 6 , , o f
emergency
w
o currency.
n
,
We, wou'6 not8 think
3 of $
for more than five minutes.
That covered the time
from the opening of the banks up to America's entrance into the war.
But it
seems to us n o w t h s t me really had no
Problems then•
when
Those were the days, you will remember,
the banks were flush; when they regarded the
Federal Reserve System as a very useful kind of insurance, but of no particular, practical value.
Tha e were t h e days
when
the
Reserve
B k s
were
buying municipal warrants and trading in such acceptances as they could pick up.
Every Federal Reserve Bank was
C a l l i n g on t h e F e d e r a l R e s e r v e Bank of New York to l e t it
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Federal Reserve Bank of St. Louis
7
h a v e some c£ 1 ts
p u r c h a s e d acceptances in o r d e r that
it might pay e x p e n s e s
Very few of t h e banks thought
anything about paying a dividend.
b
Some of the member
k s , you will remember, took liberties w i t h t h e Comp-
troller of tho Currency by charging off as a dead asset
their stock in the Federal Reserve Bank.
Then when t h i s c o u n t r y e n t e r e d t h e war, we r e a l i z e d t h a t we d i d have
p r o b l e m ; but our war financing
was not of the complex character which characterizes
the problems of t h e present day because, throughout
the war, everything was centered in the Government.
The
Government was the great employer of labor; it was the
great purchaser of goods.
It was a purveyor of credit
to foreign nations and Government finance was universally admitted to be paramount:
While we had
a
big problem in helping the Government raise the funds
that it needed, it was a concentrated problem; it was
not diversified, but was a single idea.
Government bond issue after another.
was oversubscribed.
There was one
The first issue
After t h a t we g o t o r g a n i z e d and every-
thing went t h r o u g h - - - I wont say w i t h comparative e a s e - - but with more or less facility•
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Federal Reserve Bank of St. Louis
We were
organized;
we all know what the problem was; there were no
8
cross currents in it, but it was a highly concentrated
problem.
Now we are confronted with this situation:
We have a large Government loan to float, a short
term note issue.
We know it is going to be a.matter
of some d i f f i c u l t y to place these short term notes
in the hands of the people, the investors, and get
a proper distribution.
because if ii
We must get the loan distributed,
is merely a banking proposition it is
going to have a very serious effect upon the reserves of
the system, and upon the power of the banks to take
Care of ordinary business and to develop our foreign
trade.
So we have that p r o b l e m in a l l its intensity.
We have not the strong incentive of spontaneous patriotim1.
We cannot eliminate the element of patriotism, but it has
got to be developed and brought out-
We must argue to
the man in the street that there is still a. patriotic
duty in connection with the purchase of these notes.
But it is going.to take a
demonstrate that to him•
good deal of argument to
We have not the boys in the
trenches exposed to the shells and poisonous gases of the
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Federal Reserve Bank of St. Louis
enemy to support.
Rhine.
They are keeping a peaceful watch on the
A good many of them are coming home.
It is going to
require a very well developed campaign of education to
d i s t r i b u t e t h e notes of the Government.
I think that th
e of us who have observed the very
efficient operation of the Federal Reserve Banks and
Liberty Loan organizations, and who appreciate the spirit
of the American people, can not entertain a doubt that
that issue will be successfully floated* But we have
several collateral problems connected with this issue.
Wy have the railroad problem.
The Director General of
Railroads asked for $ 7 5 , , . , a revolving f u n d ,
but the bill
was
lost in the closing day s of Congress,
and did not come up for a vote
Great appropriation
bills, amounting to nearly four billions
of dollars, failed
and we have the spectacle of several departments of the
Government without the necessary funds to enable them to
operate efficiently,
The banks of the country, therefore, a r e called
upon to bear a very unusual burden.
We have, in addition
to our ordinary commercial r e q u i r e m e n t s , our war d e b t s .
Through this readjustment period our-great industries are
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Federal Reserve Bank of St. Louis
k
c
a
c h a n g i n g t h e f o r m of t h e i r
b
activities.
into the employmentsof peace.
no longer being manufactured.
1
They are going
Munitions are
All war activities have
gone into the discard.
We have a difficult situation
there in this respect.
We also have the question of un-
employment and the disposition of returning soldiers.
We h a v e the question of readjustment of prices, and we
do not know exantly what the level is going to be.
When we are discussing the policy to be pursued by the
Federal Reserve Banks, a very interesting proposition
comes up in connection tnerewith with respect to the
projected buildings of the banks, as to whether or not the
banks will be subject to the charge of extravagance in
building under present conditions*
It may develop
that structural steel will be priced at a more reasonable
figure.
I understand there was a conference here yester-
day on t h a t s u b j e c t ·
The q u e s t i o n is whether the bm ks
would be subject to the charge of extravagance or whether
it would
be a great thing for the banks now to go ahead
with their building plans and announce t h a t the buildings
are going to be erected as soon as plans can be completed.
Perhaps such an announcement might have a stabilizing influence all over the country, and would inspire confidence
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Federal Reserve Bank of St. Louis
11
so that any actual money that might be lost in
b u i l d i n g now r a t h e r
than
a year from now, would be
more than offset by the corresponding advantage of the
e f f e c t on p u b l i c sentiment generally.
Of course, the conditions of the investment market
must be considered•
We do not know 'yet whet the rate
of interest is going to be on the next Government Bonds.
The ® e c r e t a r y or t h e " r e a s u r y has s a i d he is g o i n g to
announce that et t h e last moment and that he does not
kc
yet what the rate w i l l b e *
He manta to get the bene-
fit of a last minute survey before he announces it•
Of
course, the rate of interest on these Government notes
is going to have a
very material bearing on the v a l u e s
or investment securities generally•
We are also confronted with this situation:
The Government has, during the period of the w a r , made
advances*to foreign countries to the extent of approxmately nine billions of dollars.
It has available less
than one billion dollars, I understand, for further
advances.
T h e r e f o r e , w i t h i n a s h o r t t i m e our f o r e i g n
trade must be fostered through private and individual
financing'
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Federal Reserve Bank of St. Louis
The F e d e r a l R e s e r v e Banks w i l l , of course,
12
be called upon to take a. very important part in this
work.
You have r e c e i v e d c i r c u l a r s , I presume, f r o m t h e
u n d e r w r i t e r s of t h e B e l g i a n S y n d i c a t e ,
merely a beginning, merely a
That l o a n is
f i f t y million d o l l a r credit
to Belgium, to be f i n a n c e d by 9 d a y a c c e p t a n c e s , s u b j e c t
to three renewals.
The question of r a i l r d
acceptances has come up, a n d
Mr. Hines will explain that when he comes over•
There is e.nother m a t t e r w h i c h we must c o n s i d e r .
The Press d i s p a t c h e s indicate t h e t we are very close to
s i g n i n g a p r e l i m i n a r y peace w i t h " e r " a n y '
Of c o u r s e , t h e
tr-ea ty of r.ea c e must be r a t i f i e d by t h e e n e t e b e f o r e
becomes a c t u a l l y e f f e c t i v e in a l l r e s p c t s , b u t
it
there is a serious question as to vrhether the control,
which is now being exercised by the Federal Reserve
Board by v i r t u e of a u t h o r i t y g i v e n it
by t h e S e c r e t a r y
t h e T r e a s u r y under. t h e 2 r e s i d e n t ' s p r o c l a m a t i o n , can
Of
c o n t i n u e to be e x e r c i s e d a f t e r t h e preliminary treaty
Of'
Peaae is signed.
Our counsel has t h e matter up now
w i t h t h e " t t o r n e y " e n e r a l ' s o f f i c e , and he t e l l s me t h a t
we Will probably get
sometime next week.
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Federal Reserve Bank of St. Louis
a definite
opinion on the subject
\
13
There is a large anount of money held by the banks
in t h i s country for foreign a c c o u n t .
In v i e w of the fact
that our trade balances are running so heavily in our favor,
it seems reasonable to expect that these balances can be
kept here as payments for goods that are exported•
contrary, th6re 1s dangc, if all
of these
On th
restrictions are
removed suddenly, that there may be temptation to engage
ln ar·b1trage operations.
Balances may be removed from this
country and transferred to other countries where the
good:; con be bought on a. c h e a p e r b a s i s , and where l a b o r
The amount of foreign money held in this
is cheaper•
country is
l a r g e enough to be a v e r y c o n s i d e r a b l e factor
and would h a v e a v e r y i m p o r t a n t b e a r i n g upon our own
operations if
it
shoul
be removed s u d d e n l y .
vie must keep
all of these things in mind.
Then another question which concerns this h o l e problem very intimately is the question of transportation facilities, not only from the interior to
the sea-boerd but
our ports to foreign c o u n t r i e s .
I h e a r d Mr• H u r l e y , in a s p e e c h t h e o t h e r <fay, s a y
that a large number of first class vessels are being
constructed now for our o u t h American trade.
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Federal Reserve Bank of St. Louis
There is another factor which may have a very
rom
14
important bearing upon the financial operations of
this country, and that is the indemnity that Germany will
Pay to France, Belgium, Italy and England.
Those of
you who are students of financial history of course remember the very serious effect thet the inemnity paid by
France in 1 8 7 1 and 1 8 7 2 to Germany, which amounted to b o t
one billion dollars, had upon our own money market.
A
\
great mony people b e l i e v e t h a t it
had a v e r y d i r e c t
n e c t i o n " I t h our g r e s t p a n i c of 1 8 7 3 .
con-
They b e l i e v e t h a t
as our railroad enterprises had been looking to London
and Paris f o r financial aid, and also to Holland, that the
necessity for rrance to raise a billion dollars in cash
to Pay Germany
restricted European credits considerably,
and by shutting off credits from this country contributed
to our panic of 1873,
Germany t o o k a g r e a t p a r t of t h i s money e n d l o c k e d
it up in a tower at Spandau, to use as a war chest fund.
The money absolutely disappeared from circulation.
Some of that gold never saw daylipht until last
year.
The amount of money p a i d by Germany, the manner in
w h i c h s sh
...e 1s
to raise it, the frequency of t h e installments,
and the disposition mede by the l1Les of the money, is
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Federal Reserve Bank of St. Louis
15
€o9
going to have an effect upon the world finance.
or
course,
it is inconceivable that any sum of money paid by Germany
is going to be locked up in a
war chest.
That sort of
thing is out of date·
e have too much use for money to lock any of 1t
up in an unproductive employment, but paymentsof larg
sums of money by one c o u n t r y to a n o t h e r a r e bound to a f f e c t ,
and have their bearing upon, .world finance•
Which I t h i n k it
is
are already large.
Our exports,
our n a t i o n a l p o l i c y to foster and d e v e l o p ,
They s e e m to be l a r g e r t h a n t h e a b i l i t y
of foreign countries to pay for them, Anc it seems to be
imperative that arrangements should be made to hold our
customers by giving them the necessary credits through
short time acceptances, revolving credits, if you please,
or by some arrangement for the absorption of foreign secur1ties in this country.
It has been suggested that a very inviting and profitable field lies in South America; that 1f merican investors
s h o u l d t a k e o v e r t h e s e c u r i t i e s h e l d by Europe in S o u t h
America, we m o u l d t h e r e b y help our customers in Europe to
meet their bills with us.
We would get a strong foothold
on our own contihent and ·be in a position to have better
c o n t r o l o v e r our
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Federal Reserve Bank of St. Louis
t r a d e w i t h our P o u t h American n e i g h b o r s *
16
So
_1·.
t hink the present time is replete with most i n t e r e s t -
ing and complex financial problems, problems, many of them
p e r h a p s beyond my power of u n d e r s t a n d i n g and certainly
beyond my power of discussion-
Therefore, I have endeavored
to lay them before the meeting in this crude and informal
way.
These t o p i c s w i l l be f o u n d on the program, and with
t h e s e remarks I will n o t d e c l a r e the meeting open for
g e n e r a l and i n f o r m a l d i s c u s s . i o n .
these questions discussed this
,ve would l i k e to have
morning while we have
t h e honor of t h e p r e s e n c e of P e n a t o r Omen and Represen-
tetive Platt, who is to be the Cha.irmvn of the Banking and
Currency Com.l'!litte/3 of t h e n e x t House.
R
I want to sgy t h a . t .
p r e s e n t a t i v e P l a t t , as a m i n o r i t y member of t h a t Committee,
has always
shown £ r e s t i n t e r e s t in t h e F e d e r a l
S e +
tom and has almays been v e r y h e l p f u l in
eserve
passing the
amendments thet have been offered from time to time.
Gen-
tlemen, 1t gives me pleasure to introduce to the conference,
Hon. Edmund P l a t t .
Mr•. Ple.
tt,
I thank you very much, Governor Hard ng,
for your kind words of introduction.
s a y i n g a n y t h i n g t h i s morning'
I had no idea of
I " i l l s a y t h a t I have boon
v e r y much interested in the Federal R e s e r v e System and in i t s
establishment.
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Federal Reserve Bank of St. Louis
It
owes 1 ts s u c c e s s f u l e s t a b l i s h m e n t to a
I
'
17
large extent to the personnel of the members of the Board
who have l a b o r e d to make it
an unqualified success without
any partisanship or politics.
There has been very little
Partisanship displayed, as Governor Harding knows, in the
work of the Banking and Currency Committee.
I have been
a member of that committee ever since I have been in the
House, at nee 1913, when the Act was passed, and I see no
reason why there should be any considerable amount of partisanship in it from now on•
I certainly expect to be able
to cooperate with the Federal Reserve Boo.rd and with the
Secretary of the T r e a s u r y who, as you know, w a s for a
long 'time Chairman of the Banking and Surrency Committee,
j u s t as fully as has been done in the p a s t .
Governor Harding:
Our proceedings this
mornin, of
course, will be informal.
It is understood in a way that
this session is executive.
We take it that nothing should
be given to the press except by agreement·
Naturally,
this afternoon the press will want some statement as to what
was done or as to what was discussed at this meeting,
and we will appoint a. committee this morning to give out
such a formal statement as mey be desired.
Therefore, we
ought to be in p o s i t i o n to have our d i s c u s s i o n t h i s morning
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Federal Reserve Bank of St. Louis
p e r f e c t l y free and :frank•
\
We do not want to keep our
18
distinguished visitors
here all day, so I hope all these
broad matters of general interest can be discussed with
them this morning.
This afternoon we can get down to the
general routine business that will keep us busy for the next
two or three days.
The meeting is now open for discussion, and we will
w111 take up the program by topics, in their order.
A.
Sub
Present Financial Condition.
topics under that are (1) Reserves and Loans cf
Federal Reserve Banks; (2), Money Market, and (3), Investment
Marke t•
I have here a memorandum prepared by Mr. Jacobson
Showing the effect on reserve situation of Federal Reserve
Banke of discounts of trade acceptances of the United States
R a i l r d Administration.
ted
That memorandum will be distribu-
so that each of you may have a
copy.
I have also a chart showing deposit and note liabilities, also cash reserves of all Federal Reserve Banks during
the calendar years of 1918 and 1919.
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Federal Reserve Bank of St. Louis
Curve 1.
Net Deposits.
Curve 2.
Total Cash Reserves.
Curve 3.
Aggregate net deposits and Federal Reserve
19
n o t e liabilities.
/
I
Curve 4. Ratio of cash reserves to aggregate net
deposits and Federal Reserve note liabilities.
In the memorandum prepared by Mr. Jacobson you will
find a statement showing advances to the Allied Governments
by the United States, Government commitments a n d actual pay-
ments by the Treasury.
The total commitments were $8,859,567,
836.
Actual advances were 8,298,564,55.
You can see that we have not very much further to go with
Government aid, and that we are going to be thrown on our own
resources before very long.
There is also containud in the memorandum a statement
headed, Balance of Trade, also of gold and silver movements
since August l, 1914.
The memorandum also shows, from data furnished by the
War Trade Board, the imports and exports of currency from
July, 1918 to February, 1919.
It seems to me that that statement is incomplete,
because the Federal Reserve Board have granted permits fo
,
the exportation of United States Currency in September,
1917, of something like $ 9 , , .
We have no way of
telling whether all of the currency authorized to be export
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Federal Reserve Bank of St. Louis
2212,31,188.15
ed Was actually exported.
Mr. Rue: How much of that was gold?
Governor Harding:
Mr.
Rue:
No
gold.
Strictly currency.
It went to Mexico, chiefly, did it not?
Governor Harding:
No.
It went to Canida, Mexico,
England, France, Central American countries, a large
am·
ou.nt to Cuba, and some to South American countries.
Ninty mil11ons of dollars 1s the amount of currency
authorized by the Federal Reserve
Bc,3. rd
since that date in 1917, up to date.
the figures
.;.
to be exported.
I have not 1ven
on g o l d and s i lilvv e r t htnaia t haas bee e n au u t h ro' r. zi ze e d
for e x p o r t .
Mr. Kent: I had supposed those figures would be here.
Governor H a r d i n g :
They appear· in t h e Board's annual
roport.
"I,
icenaed for export Sept. 7, 1917, to Dec. 31, 1917:
To I n d i a . . .
..............
To t h e United Kingdom . . . , : . . . • • •
Total
5,45,63,92
26,336,25.19
Jan. 1, 1918, to Dec. 31, 1918.
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Federal Reserve Bank of St. Louis
. ........ .... ".
To the United Kingdom . . . . . • • • . ..
. ... . .
Total . . .
To India
"
/
251,345,563.¢"
•
I
21
My recollection was incorrect.
The. total amount
involved in licenses granted for the export of coin, bullion and currency, from September 7, 1917, to December
31, 1918, are: Gold, $128,688,515; Silver, $ 3 5 1 , 3 1 6 , ;
Currency, 1 5 , 5 6 , 5 6 8 , an aggregate of
The licenses for currency have amounted
$585,61,83.
to five or six
mill1on since then, making about $ 1 1 , , i n currency
t h a t we h a v e authorized f
export:
These Wa.r Trude
figures are evidently incomplete, do you not think so,
Mr. K e n t ?
Mr. Kent:
Yes.
Governor Harding:
War Trade Board.
This is data furnished by the
I do not l o w whether it represents
actual shipments or only part of actual shipments.
licenses have covered a much larger amount t h a
Our
that.
Mr. Kent: The bulk of that silver was the broken up
Silver dollars.
Governor Harding:
I have a letter here from the War
Department, aigned by Brigadier General Lord, Director<£
Finance, on the subject of obligations to commercial firms
under Wsr Department appropriations:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
"In compliance w i t h request from a r e p r e s e n t a t i v e of
22
the Statistical Division of your office I beg to submit
the statement whlch follows relative to obligations agsi ni
War Depaitment appropriations.
1.
In the Third Deficiency Appropriation Bill,
Which fa1led of paosage, there was a provision far a deficiency under "General Appropriations of the Quartermaster
Corps" of $829,375,295.1.
This appropriation covers the
ordin a r y maintenance of t h e Army, including purchase of
subsistence supplies, general supplies of many descriptions,
clothing, equipage, trucks, automobiles and all classes of
transportation accounts.
Pending the necessary steps to
finance the situation disbursing officers in Chicago, New
York, Washington, and the
Wool Purchasing Office in Boston
a
were instructed to suspend payment of all accounts of whatever character t h a t were payable from this appropriation,
but this suspension was
removed y e s t e r d a y and no War
Department accounts a r e nom b e i n g refused payment because
of lack of funds.
2.
The War D e p a r t m e n t , pending t h e enactment of a
deficiency bill, has made arrangements
that will enable it
to finance i t s u n d e r t a k i n g s and p a y all o b l i g a t i o n s under
the War Department appropriations t h a t may be p r e s e n t e d
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Federal Reserve Bank of St. Louis
23
f o r s e t t l e m e n t b e f o r e Congress can e x t e n d t h e n e c e s s a r y
/
r e l i e f , so t h a t t h e a s s is tsn ce of t h e F e d e r a l R e s e r v e Bea.rd
and ft s member b a n k J , and t h e a i d of' t h e b a n k i n g i n t e r e s t s
of t h e c o u n t r y w i l l n o t be n e e d e d to f i n a n c e War D@ r t m e n t
c o n t r a c t o r s b e c a u s e of t h e f a i l u r e of
the Third Deficiency
Appropriation Bi11."
The S h i p p i n g Board
tion.
out
h a s a l s o f u r n i s h e d some i n f o r m a -
They h a v e an a r r a n g e m e n t to f i n m c e themselves with-
a-i
Y h e l p f r o m t h e ban k s .
Mr. W a t t s :
But ds
n o t t h e a i d come i n d i r e c t l y f r o m
the banks?
Governor H a r d i n g :
ranged i t .
I presume it
They do n o t s a y how t h e y have a r would come i n d i r e c t l y .
it
is
if
t h e Government s e l l s t h e s e c u r i t i e s . ,
Of c o u r s e ,
g o i n g to come o u t of t h e banks in t h e l o n g run e v e n
I am i n f o r m e d t h a t t h e D i r e c t o r G e n e r a l of h a i l r o a d s dee s
n o t i n t e n d to i s s u e a c c e p t a n c e s f o r more t h a n $
;
,
,
.
These a c c e p t a n c e s w i l l be a g a i n s t current p u r h a s e s a n d w i l l
be on r e g u l a r t r a d e a c c e p t a n c e forms.
They w i l l not go back to
take c a r e of o b l i g a t i o n s made a y a r a g o , or s i x months a g o ,
but Will t a k e c a r e o f c u r r e n t p u r c h a s e s .
Some q u e s t i o n h a s beer
r a i s e d as to t h e a u t h o r i t y of t h e D i r e c t o r G e n e r a l to a c c e p t .
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
f
24
In a
decision of the Supreme Court, back in 1868,
it was held that no Government Department had
accept.
the right to
It had the right to incur an obligation but did not
have the right to give an acceptance in payment of the
obligation.
Attorneys construe it differently.
think that decision does not apply to this case.
one of them sr
Some of them
I heard
t h a t t h e v e r y opinion, which was c i t e d agi n s t
the power to accept, is an argument in favor of that power.
As you know, l a w y e r s have a way of looking at these things
from every angle.
I presume, though, the matter will be
thoroughly consddered and there will be no danger of any of
these acceptances being issued unless the right of t h e Direct o r General to accept is clearly established.
Mr. Hepburn: You
have,
I presume, the opinion of the
A t t o r n e y General on the subject?
Governor Harding:
will be furnished.
an opinion.
We h a v e
not yet, but I presume it
I have an impression he will be asked f
The Director General has furnished us with a copy
of the opinion by Judge Payne, his own counsel.
I imagine
it w i l l be taken up by t h e Department of Justice and t h a t some
form
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Federal Reserve Bank of St. Louis
opinion will be available before any accept@ices are
25
issued.
The War F i n a nce C o r p o r a t i o n has been extend ng at
the railroads.
to
It made a loan of fifty million dollars to
t h e Director G e n e r a l of Rail r a d s , dy
before y e s t e r d a y .
It
is Possible the War Finance C o r p o r a t i o n may e x e r c i s e the
authority, granted in the War F i n a n c e C o r p o r a t i o n Act, to i s e i
bonds or notes or its own before the present financial camps:tgn
1a o v e r .
No d e f 1 n 1 te a c t i o n has been t a k e n yet, but t h e ma.tter
is under· d 1s c u s s i o n .
.Any aJnount t h a t may be i s s i d b by t h e
War F i n a n c e C o r p @ a t i o n w i l l be compare.t i v e l y small and w i l l
(
have no adverse effect upon our general situation, because
the funds will be immediately realized in payment of o b l i g a tions.
Mr. Kent: Suppose Congress has not convened when these
n i n t y d a y acceptances of the R a i l r d
Administration mature.
Are they going to be in a p o s i t i o n to pay them?
Governcr H a r d i n g :
Mr. Rue:
for
I presume t h e y w i l l r e n e w them.
Would you c o n s i d e r t h o e a c c e p t m ces e l i g i b l e
re - d i s c o u n t by t h e F e d e r a l R e s e r v e Banks?
Govern
Harding:
Yes.
The Board has a l r e a d y rendered
an o p i n i o n on that.
Mr. Rue:
mot make th
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Federal Reserve Bank of St. Louis
Q
But t h e o p i n i o n of t h e
•
hem legal, necessarily.
A t t o r n e y General would
Gove r n a
Harding:
s u b j e c t to r e v i e w .
Of
26
c o u r s e , t h a t o p i n i o n woo ld be
Nothing s h o r t of a.n o p i n i o n by t h e
Supreme Court would s e t t l e i t , b u t , you u n d e r s t a n d , t h o opin-
ion of the A t t n e y General is the highest a u t h o r i t y a v a i l a b l e
Mr. Williams: It is n o t c o n c e i v a b l e that a d e c i s i o n by
any- c o u r t or a n y l a w o f f i c e r would a f f e c t t h e v a l i d i t y or
goodness of t h e s e a c c e p t a n c e s .
These a r e , 1n e f f e c t , accep.
t a n c e s of t h e U n i t e d S t a t e s Government and t h e whole Govern....
ment is
p l e d g e d to pay them.
It
is not c o n c e i v a b l e , whether
t h e y a r e l e g a l er i l l e g a l , t h a t a n y q u e s t i o n w i l l e v e r be
r a i s e d at
t h e tiime of r e d e m p t i o n .
Mr. R u e :
I think that is unquestionably true.
Mr. Hepburn:
l h e a r m e r of t h e a c c e p t a n c e w i l l bo a d d i -
tional security.
Mr. W i l l i a m s :
I do not t h i n k anyone would want more
s e c u r 1 ty t h a n t h e Government of t h e United S t a t e s .
Mr. Hepburn: I mean as affecting their legality.
Governor Harding:
tion d
holder.
I understand an ultra v i r e s transac-
a not make an obligation void in t h e hands
of t h e
It might still be an o b l i g a t i o n of t h e Government
even though t h e D i r e c t @ General of a i l r @ ds did n o t have
legal authority to accept.
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Federal Reserve Bank of St. Louis
27
Mr. Williams:
I do not think t h e y are likely to be
issued unless there is every reason to believe t h e y are v a l i d .
Mr. Rue: Will they carry the obligation of any particular r a i l r o a d in addition?
Mr. W i l l i a m s :
They have n o t only the o b l i g a t i o n of the
railroad but they have the obligation of the supply dealers.
In some cases they may have two or three names on them.
Mr. K e n t :
They would
n o t be renewed f o r t h e s u p p l y dea 1 ....
€rs--Mr· Williams: (Interposing) Suppose the American Car
& Foundry Company should draw on the Director General fo:r a..
million dollars; he should accept, and they would then take
1t to the Westinghouse Manufacturing Company.
If the last
named Company took it to a bank I could not conceive of better
paper than that would be.
Mr. Kent: Would they draw on the Director {eneral
on the Pennsylvania { a i l r d ?
Mr. W i l l i m s :
They would d r a w on t h e Director General.
Mr. Kent: So no partiuular railroad would be on them?
Mr. W i l l i a m s :
in which it
assigned.
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Federal Reserve Bank of St. Louis
No, u n l e s s in a, me unusual s i t m t 1 o n ,
passed through the a i l r
d
C o r p o r a t i o n a n d w as
28
Govern
Wold:
Is t h e r e not a. s t a t u t o r y provision
Preventing the assignment of an account against the
Government?
•
Governor Harding: Yes.
Governor Wold:
Then if
t h e obligation was bough'
without reference to the acceptance t h e h o l d e r of the acceptance could n o t recover.
the
Past.
Gowe r n
ti
That condition has e x i s t e d in
Harding:
I presume that involvesthe
a
es-
on of whether t h e funds of t h e D i r e c t @ 'eneral are
Government funds or not.
Mr. Hamlin:
An assignment is not good against tho
Government, but there is nothing in the law to prevent the
Government from authorizing the a.sigpment.
That question
was settled a year ago with regard to some vouchers.
It
was held the.t while the vouchers could not be a s s i gned
..t h e Government could permit the vouchers to be used
8s
\
collateral for a note and t h e Government would n o t s e t up
eny objection.
Governor Harding:
Mr. Harrison, general counsel f
the Board, is here and I will ask him to s ay a few w a d s o
t h e g e n e r a l s u b j e c t of t h o l e g a l i t y of t h e s e a c c e p t a n c e s .
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Federal Reserve Bank of St. Louis
29
Mr. Harrison:
Considerable doubt has arisen as to
the right of the Director General to acoept.
As Govern
Harding has s a i d , some lawyers have construed t h a t case
in the Supreme Court, known as the Floyd Accettanoe Case,
which has
been set up as an argument against the right to
a c c e p t , h e r o l y p r o v } ] u s r i g h t to accept.
In that case
..
the court went off on this ground: Acceptances were given
by the Secretary of War, or someone in his Department, to
Pay a clothing dealer for clothes to 'be delivered ninty d a y
after
thed a t e of t h e a c c e p t a n c e .
The c o u r t s a i d t h a t ,
g i v e n an acceptance n i n t y d e y s in advance of the d a t e of
delivery, all the Government had done in t h a t case had been
to loan its credit for ninty days in advance of consideration
received.
That presents a valid distinction from the presen'
case, where the acceptance is not to be given until the
goods are received.
The question is raised by the Railn:>ad
Administration as to whether or not they could give an
acceptance for goods contracted for.
That was specifically
ruled out because that very question had been covered by the
Floyd Accept
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Federal Reserve Bank of St. Louis
ce Case.
As to the assignment question, there was a case before
3I
the Floyd Acceptance Case, in which the facts were as follows:
The Post Office Department had no funds available
to Pay for the transportation of mail.
The Postmaster General
accepted a draft drawn on him, by a man who had a railroad
mail contract, to cover the cost of mail actually transported.
That was done on the basis of a debt due.
General accepted.
The Postmaster
The draft went through the bank and the
bank:brought suit against the Government to recover.
was in a set-off case.
Thia
There was no question of the suit being
actually brought against the Government.
It was a set-off
case, and the Supreme Court held that that draft was a vali
claim against the Government, assuming in that case the right
of the Postmaster General to accept, there being no qe question
raised as to his authority to accept.
The only question present now, isthat of the authority
or the Director General to accept, rather than that of his
right to assign the item after he had accepted it.
I think
that is a reasonable inference from the former case, where
the acceptance of the Postmaster General was negotiated and
Where the bank that held it finally was allowed to r e c a e r 1n
set-off against the Government.
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Federal Reserve Bank of St. Louis
The Director General has
been advised by his own general
31
c o u n s e l , and I believe by s p e c i a l c o u n s e l whom they have c a l l e d
in for consultation, that he has the legal right to accept
under the law, counsel citing the Floyd Acceptmce Case, drawin
the distinction between a line of credit before the goods were
received and this case where it would be actual payment for
goods received.
Governor Harding: Was
there not an earlier decision b
the Supreme Court, back in 1841?
Mr. Harrison:
That 1s the case of the Postmaster Gener-
Mr- W i l l i a m s :
Even if
al.
it
should. d e v e l o p t h a t the obli-
gation is an illegal one, that would not restrain or interfere
With the power of the Government to pay, or the power of the
R a i l r o a d Administration to pay.
Mr. Harrison:
If the Director General had the right to
accept, there would be no obligation on the Government at all,
Sir.
Mr. W i l l i a m s :
But t h e Government could D u •
Mr
H a r r i s on:
It could pay by C o n g r e s s appropriating t h e
Mr
Williams:
How a b o u t
money.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr. Harrison:
the Director General?
You mean, could he p a y ?
32
Mr• W i l l i a m s :
Yes.
Thore would bo no
qiestion
about his r i g h t to pay.
Mr. Harrison:
If the question of his being legally
bound was n o t b r o u g h t up.
Several r a i l r d attorneys c l a i m
that the acceptances could be pa.id out of o p e r a t i n g income.
Mr. Willia.ms :
I mean to say there is no q e s t i o n a out
his right to pay out any funds t h a t he has available?
Mr. Harrison:
Oh, no.
Mr. W11liams:
Even if
it is illegal?
Mr. Harrison: That is my opinion of it: I had not
thought of that particular phase of 1t:
The only time the
question would come up would be where he r e f u s e d to pay
end where suit was brought against the Government.
Mr. Williams:
That is assuming the Director General
would be unwilling to pay and would endeavor to evade it.
Governor Harding:
I would like to impress upon this
conference the importance of keeping our financial resources
liquid,moving,to avoid any hold-up or dam anywhere along the
line Which might interfere with the general distribution
of the forthcoming Victory Loan issue.
The free gold of the
'
Federal Reserve Banks on last Friday,based on.legal require-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
'
33
ments, amounted to $ 5 7 6 , , .
Based on normal requirements,
t h a t would take care of $ 1 , 6 4 , , a d d i t i o n a l d e p o s i t s , or
additional note issues of $ 1 , 4 4 , , .
You can therefore
see there is a. limit in sight to our resources.
We must
Play this came skillfully and make every new debt created pay
Off some old
debt, and
keep things moving along.
We c a n
not have any congestion anywhere.
Mr. Passmore:
To what extent did the Fourth Liberty
Loan reduce our resources?
Governor H a r d i n g :
all.
It d i d not reduce our resources at
It was a v e r y w e l l d i s t r i b u t e d l o a n .
Curve 2 on this
chart shows
the total cash reserves.
You. W i l l n o t i c e t h a t none of t h e l o a n s
_cash reserves materially.
have affected our t o t a l
The line is almost uniform.
reserve percentage was affected.
The
The ratio of c a s h reserves
to aggregate· net deposit and Federal Reserve Note Liabilities 9 1s shown in curve 4. You will see that in June, 1918,
there was a d r o p and then there was another drop in August.
There was another slight drop in October.
November.
It went up in
Then t h e r e was a. drop in December, and t h e n it "
goes on back so that by January 24 we had gotten back to
approximately the same reserve position we were in on the
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Federal Reserve Bank of St. Louis
34
6th of December.
On the 28th of February we had a higher
t:ercentage of reserve than we had had for some time.
The chart shows that we got through the Fourth Liberty
loan With improved reserves.
Mr. Passmore: The reserves actually increased,
Mr. Peple: Can you say to what amount certificates of
indebtedness issued in a.nticipation of the fifth loan,·are
now held by the Federal Reserve Banks? Have rou separate
f i g u r e s on t h a t ?
Mr. Rue:
You mean in the way of advances.
Mr. Jacobson: Out of fifteen hundred liDillions of loans
and advances, secured by war obligations, over five hundred
millions a r e secured by certificates of i n d e b t e d n e s s ; about
eight hundred millions are secured by Liberty Bonds.
f i g u r e s a r e as of J a n u a r y 3 1 s t •
I b e l i e v e the proportion has
I have no l a t e r
T h e
f i g u r e s ,
but
9d
been m a i n t a i n / a b o u t the s°me.
Mr. Peple: A little less than half of our Government
loans a r e r e a l l y in anticipation of the Fifth Loan.
Mr•
Rue:
Has the amount of the Fifth Loan been deter-
mined?
Governor-Harding.
is to sell all they can.
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Federal Reserve Bank of St. Louis
I do not think so.
I think the.idea
$
--,.
- - ·.. _ , _ .
- - - -·· - - - -
-- -
...
--
---
35
Mr.
Rue:
Up to a b o u t s e v e n b i l l i o n s ?
Governor Harding:
Mr. P e p l e :
The
Yes.
.
loan
-exact amount of the nextjlb.am not been
detorminod.
Governor Harding:
I suggest that in this informal dis-
cuss1on, while we a r e w a i t i n g far the Director Genera 1, t h a t
we take the districts in order and ask each Governor to make
a few remarks on the general situation
in mind in connection with the program.
or
anything that he has
Governor Morss, we
Will be glad to hear f r o m you.
Governor Morss:
The placing of tho Fourth Liberty Loan
in the First Distric t seemed to have quite a dist-tnct effect
on the finances of the district· Since that time there have
been ve-:cy heavy borrowings and the Federal Reserve.Bank has
had to re-discount with other Federal Reserve Banks almost
continuously.
Our reserves have been low and we had to re-
discount to keep our reserves from getting below forty per
cent.
Our reserves
reached the lowest point in January,
improved somewhat between t h a t time and the last of February
or
tho first of March, but we have shown a continued sign of
strain and largo borrowing necessities ever since that loan..
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Federal Reserve Bank of St. Louis
Of course, when the war stopped there was a great
36
deal to be done in the district in the way of splitting up
the old contracts.
Many of
our textile mills and many of our
Other m i l l s were r u n n i n g s i x t y - f i v e to e i g h t y per cent. on
war business.
l
They were told to stop tru,t business and
that their c o n t r a c t s would be c a n c e l l e d ,
They d i d stop, of
course, They were not stopped on the terms under which yaey
were supposed to be cancelled, but the contracts were what they
c a l l e d "terminated".
That meant t h e y had to mako a sup-
plemental contract f o r the cancellation of t h e i r contract,
and not according to the terms as stipulated.
has been going on.
That work
It has been pushed as fast as possible.
Most of the contracts were cancelled or s h i p m e n t s stopped as
of December l5th:
\
Many of them have a p p a r e n t l y r e a c h e d a
basis of settlement on the cancellation of those contracts
but no money has been paid on them to amount to anything.
have estimated t h e r e must be at
I
l e a s t $ 1 , , d u e New
England, and perhaps more) when t h o s e c o n t r a c t s a r e f i n a l l y
settled,
My basis for that is the fact that .the Quarter-
master
o
Department
t
estimates
,
they
, will have
4 to pay $
New England people when t h e c o n t r a c t s a r e s e t t l e d .
h a t money, however, has been paid.
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Federal Reserve Bank of St. Louis
None of
I s a y , "none of i t " ,
Q u a r t e r m a s t e r Department ' e s t i m a t e s t h e y may have to pe*
37
$ 4 , , , and so far they have paid $ 1 2 3 , , which is
Practically nothing.
Of course, when the war ended there was a reconstruction of the basis with respect to raw material.
Nobody
knew where that basis was going to be established upon
Which business would be carried on,and business stopped·
There was general hesitancy and uncertainty.
Thoe who were
Ptom1st1o hoped there would be a basis upon which it would
go on.
I am happy to say conditions are better in New
England today with respect to possibility of business developing in the next few months.
In January they could not
sell wool at the Government price or any other price.
Now
they are going ahead, at somewhat reduced, upset prices,
and all wool that is offered Ls taken freely, which is a
very different condition from that which has existed:
The cotton mills are apparently pretty well loaded up with
cotton.
Their business has not started up; they have not
found out upon just what basis they can go, but they are
in a better condition than they were.
Of course, the copper situation has improved.
The
Price has gone down and those companies buying oopper.,.and
companies whose raw material is copper, have found a little
more business.
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Federal Reserve Bank of St. Louis
Therefore, the business outlook for the nex'
38
t h r e e months in New England h a s improved v e r y much.
There really has not been any great amount of unemploymentThere have been cases of short employment.
Many mills are
running a few days a week i n s t e a d of full time.
The other d a y I heard some figures which illustrate
t h e disposition of t h e men coming out of the s e r v i c e , · The
compilation was apparently authentic, and the figures showed that 82 per cent of these men were r·oing back to their
Old positions; that about 5 per cent could take care of
t h e m s e l v e s , and t h e r e was 13 per c e n t t h a t had to be t a k e n
care of and for whom new positions had to be found.
Mr.. Williams:
Were those percentages based on a large
group or simply a small number?
Mr
Morss:
They were told to me.
I did not ask exact-
ly where they came from or who they were derived.
I under-
stood they came from this organization in New England whic'
I
is taking care of those people•
I thought it was a good
measure, probably, of what is happening to these men, and
very interesting on that account.
Mr. Williams:
Of course, the problem arises as to what
becomes of the people whose places they take when they come
back into the industries.
p l a c e others.
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Federal Reserve Bank of St. Louis
In many instances they must dis-
What becomes of t h o oe d i s p l a c e d ?
You know
39
they have been running full speed in all departments.
Governor Morss:
My
experience is t r . a t those men are
taken back w i t h very few displacements.
That question is
met, I understand, by running the mills three days a week
and giving everybody some employment, not throwing out anyone entirely.
I think New England has perhaps been as hard-pressed
financially in the last few months as any other district, and
perhaps moreso.
I think its reserves show that, but I think
1 t did remarkably well considering the sudd,:m stoppage to
busi ness.
I am very hopeful that we will get started now,
and that we will get a reasonable amount of business for the
balance of the year.
Governor Harding:
Local conditions are, of course,
interesting and important, but in this discussion this morning·, I hope the Governors will not feel obliged to l i m i t
themselves to a discussion of local conditions in their district,but will speak generally.
We would like to hear from you, Governor Strong.
Governor Strong:
I will say nothing about local con-
ditions, if you feel that those should be left out now.
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Federal Reserve Bank of St. Louis
Governor Harding:
We should be very glad to hear about
f
them
rs
i
4
you care to refer to them, but I want the Gove r n -
to feel that there is no 1imitation to the scope of
this discussion.
There was one point raised by
Governor S t r o n g :
Governor Morss which suggests a reference to conditions in
New York, and the.t is the amount of bank credit that is
reqi1red to place Liberty loans.
I understand that the
questionnaire sent out recently in New England discloses
the fact that 2 p e r cent, about, of the subscriptions to
t h e Fourth Liberty Loan, were f i n m ced by borrowed money.
Is not that a fact, Governor Morss?
Governor Morss:
I do not think I have seen those
figures.
Governor Strong:
I understand that fact is indica-
ted by the questionnaire.
We sold 2 , 4 4 , , b o n d s in the second district,
and our q u e s t i o n n a i r e indicates that nearly forty par cent
of the loan was financed by borrowed money.
That is to
say, complete reports show that 7 7 5 , , i n loans were
negotiated with banks to carry the bonds of the Fourth
Liberty Loan.
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Federal Reserve Bank of St. Louis
Mr. Williams:
In the New York District?
1
41
Go
We do
ernor Strong:
In the New York District, y e s .
not knav how much m o r e money was b o r r o w e d for that
Purpose by the use of other collateral than the bonds themselves.
Since then the second district has a b s o r b e d about
one-third of all the issues of certificates of indebtedness made by the Treasury, amounting to approximately
$
5
,
,
,
.
Notwithstanding that fact, the invested
assets of the New York reserve bank have from a maximum of
$
9
,
7
7
,
,
o 7 % , , a n d , I b e l i e v e today, to
t
,
.
I have not the latest figures.
The d a y after
the h e a v y t a x payment was macu in New York, money was
loaning at 3-1/2 to 3-3/4 per cent.
I cite those figures to emphasize what has been my
conviction from the very outset of the war, that we have
all underestimated the power of the Federal Reserve System.
We have underestimated the reliance which we can place
I
in it.
If it isrelied upon unqualifiedly, without timidity
and without any mental reservations it can be depended upon
to see this country through the war situation and the postwar s i t u a t i o n .
I am frank to say that the requirement in our dis-
trict for complete faith in the Federal Reserve Bank has
been greater, probably, t a n in any other district, because
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Federal Reserve Bank of St. Louis
42
things have focused there*
Mr. Hepburn, I believe, will
confirm my statement that it was because of that belief
in the strength of the bank that the tremendous amount of
,
financing, which has been done for the Government, has been
successfully carried on.
During all of this period, Governor Harding, we have
been expanding banking and business
has b e e n making money.
making money.
optimism.
it.
The b @ k s
credits, and everybody
rticularly have b e e n
Throughout a period of expansion you have
People are spending money generously and enjoying
Now t h a t t h e war 1s over we a r e g o i n g to have a c h a n g e
We are n o t g o i n g to see so much money made.
to enter a
We are going
riod of some contraction, which is always an
unpleasant and difficult situation.
possibly, h e r e and t h e r e *
It will produce losses,
One of t h e principal i t e m s of
Value obtained from these conferences, as a.result of dis©ussion a r o u n d t h e t a b l e , is that it aids us to make up our
minds as to where the problems that we discuss focus in the
Federal Reserve System, and we then direct our attention
to dealing with the crux of the problem.
Now that the war 1s over, and with our experience of
what the Reserve Banks have done through the period of expans i o n , the q u e s t i o n s b e f o r e us are, "what we a r e to do in
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Federal Reserve Bank of St. Louis
the new
reriod
of contraction, where Cs
this problem focus.
and how shall we deal with 1 t ?
It occurs to me that it
is clear that we are
d e n .ling
with the credit structure of the country, through rates of
interest and discount which can be used to perpetuate expans i o n , to i n c r e a s e i t , to check it
duce it.
o r , if
you please, to
re-
The policy adopted by the Reserve System and by
t h e T r e a s u r y , which must be c o - o r d i n a t i n g , is
the controlling features hereafter
to be one of
throughout this period
of reconstruction, in influencing the readjustment of price
levels, of costs, of labor, and of everything that enters
into our industrial and commercial life.
you gentlemen now are facing is:
I think the problem
Whet are we going to do
about credits in the United States? When the war started
we were on one s1de of the account only; we were lending
money and expanding, but we had no loans to take in;
that is, to contract.
billions of loans
Now we have
two and a. half
and we can take them in, and if we
should force their retirement we can bring
great contraction in the United States.
about
We have two re-
sponsibilities now instead of one as we had originally.
I dc
not want to suggest what the policy should be,but I hope in
this discussion we will be able to bring to a focus all or
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Federal Reserve Bank of St. Louis
44
the collateral problems and realize, as we must, that it
centers upon one very simple problem in the end, from our
stand point, which 1 s - - - w h a t is the rate p o l i c y and what is
the discount policy of the reserve system. to be.
Governor Harding:
illuminating statement.
Weappreciate
your interesting and
I think it ls as clear a statement
I
of the problem as I have ever heard.
We would like to hear from you, Mr. Passmore.
Governor Passmoref I want to touch briefly on the local
situation in our district in connection with the financing of
the last loan.
From a. comparatively affluent position dur-
1ng all the other part of the war period, our bank suffered
e very heavy reduction in its reserve following the financing
of the Fourth loan, and has been in the position in which
Governor Moras states the Boston district is in, for the
last three or four months, of being obliged to rediscount
almost continuously. In our district I think it was, perhaps, due to the fact that we pressed a little harder than
Other districts, under suggestions from Washington, to some
extent, the "borrow to buy" proposition.
We found ourselves
in the position of being obliged to ask our member banks to
accommodate their customers for as long a period as a year
at the cottpon rate
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Federal Reserve Bank of St. Louis
or
the bond.
In consequence of this,
I
45
there was a sort of a tacit understanding that the Federal Reserve Bank would go along on that proposition and
take care of the member banks-
Therefore, I do not feel
we are in a position to raise the rates or to bring any
Pressure to bear on our member banks to cut down their
Government loans.
I do not see anything else for us to do
except to go along and carry them for the period of a year,
if 1t becomes necessary to do so, although some liquidation
takes place as we go along.
I think at least 8 p e r cent of
our loans are secured by Government obligations, almost entirely of the Fourth loan.
Since that time, however, our
banking institutions have, with each succeeding issue of
cert1r1cates of indebtedness, taken their full allotment
without materially increasing their loans mith us.
On account of the industrial activity in the Philadelphia district, of course, we are suffering very much
over this railroad situation, and when the railroad comPan1es are in position to liquidate· their obligations,
it Will relieve the money situation to a very marked degree.
The settlement of the cancelled contracts, to which reference has already been made, will also very particularly
affect our district.
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Federal Reserve Bank of St. Louis
We are all very anxious and are looking
I
'
46
forward to a settlement of the question of the terms under
Which t h e approaching loan will be issued.
There is a very
deep feeling that it ls going to be a mistake to reserve
the naming of these terms until too late a.datec i a t e the argument t h a t it
We appre-
is perhaps not wise to give
away your e n t i r e hand in t h e situation, in order to h o l d
i n t e r e s t as long as possible, but nevertheless t h e r e are a
g r e e t many people of l a r g e means who are anxious to make some
calculation as to what they oan do, who want to subscribe
as liberally as they can to this new issue, but who will be
influenced largely by the interest rate the new securities
Will bear.
T h e r e f o r e , I hope some effort will be made to
secure the announcement of these terms at least within areaonable time prior to the beginning of the drive.
Governor Harding:
Governor F a n c h e r , we would like to
hear f r o m you.
Governor F a n c h e r :
With respect to local conditions in
t h e F o u r t h d i s t r i c t , we found t h a t i m m e d i a t e l y f o l l o w i n g
the closing of the subscriptions to the Fourth Liberty Loan,
our invested assets gradually increased from $ 1 5 , , t o
$ 2 2 5 , , l a t e in November; that there has taken place,
during January and February, gradual liaiidation to the
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Federal Reserve Bank of St. Louis
47
e x t e n t of $
1
,
,
.
This situation 1s one which we
have very readily taken care of.
We have at the present time outstanding certificates,
in ant:l.ipatton of the F i f t h loan, to t h e amount of $ 4 4 ,
,,
and t h a t amount has been t a k e n w i t h o u t any o.pPar-
e n t i n c r e a s e of credit to our member banks•
Our situation is affected, as is
t h e s i t u a t i o n in t h e
T h i r d d i s t r i c t , by two t h i n g s , t h e f a c t tbs. t 1 t is an i n -
dustrial d i s t r i c t , causing it
to be affected by the railroad
s i t u a t i o n and also by the adjustment of we.r contracts.
These
matters have a very vital bearing upon our credit situation.
The amount involved in war contracts is estimated to be
from $ 1 , , t o $ 1 5 , , .
If in the adjustment of
t h e r a i l r o a d s i t u a t i o n a l a r g e i s s u e of t r a d e a c c e p t a n c e s .
s h o u l d be made, f o r t h e purpose of s e t t l i n g current purc h a s e s , I am c o n v i n c e d a substantial amount of that paper
would find its way into our portfolios, which probably
would result in the liquidation of some borrowings and
create a situation which, so far as the question of expans1on is c o n c e r n e d , would not be serious.
The question present in the minds of Liberty loan
workers and banks, with respect to the Fifth loan, is what
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Federal Reserve Bank of St. Louis
48
the terms of the loan are going to be.
t i o n is
The further ques-
w h e t h e r t h e notes w i l l f i n d lodgment to any
great extent in the Federal Reserve Banks, or whether tha:ru
wil1 bo a national distribui1on cf them.
l a r g e l y , of course, upon the rate.
That will depend
If we have terms that
e r e attractive and an attractive r a t e , w e f e e l t h a t we can
P r o b a b l y g e t a r e a s o n a b l y wide d i s t r i b u t i o n of them•
'The
c r e d i t p o s i t i o n of our F e d e r a l R e s e r v e Benk i n d i c a t e s t h a t
we had a pretty wide distribution of the Fourth loan.
allotment of bonds was nearly
2 , , .
Our
While we expe-
r i e nr c e d demands
e
v f o r oc r e d i t , to t h e, extent
5 of 7some $
October and in to November, we have seen that amount
l i q u i d a t e d , and at t h e sane time we have seen absorbed
about $ 4 4 , , i n certificates of indebtedness in antic1pation of t h e F i f t h l o a n .
Mr. Willia.ms: Governor Harding, while you we?>e abst,n't.
from the room Governor F a i n e r b r o u g h t up an interesting
P 1 n t with reference to the issuance of acceptances by the
D i r e c t o r G e n e r a l of R a i l r o a d s .
He s t a t e d t h a t d o u b t l e s s a
fair proportion of those acceptances would find their way
into the Federal Reserve Bank of Cleveland, but that in
coming in they would result in the liquidation of other loans.
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Federal Reserve Bank of St. Louis
9±
49
Hull
1.2 M
Governor Harding. We will hear from
Deputy Governor Peple.
men:
. Peple.
Governor Harding and gentle-
The F i f t h D i s t r i c t h a s a l w a y s b e e n a borrowing d i s -
triet from t h e beginning.
Our relative position as lend-
ers advanced more rapidly soon after the Federal Reservo
System was organized than it d i d in other districts, and
we have kept up our record pretty well in t h a t respect.
The stoppage of the war and the adjustment of war
contracts has probably affected the State of Maryland more
than a n y other State in our District, but we h a v e felt the
effect indirectly.
Prior to that time, Maryland was borrow
ing to a very limited extent, and the demand loans in Maryl a n d s i n c e t h a t have i n c r e a s e d , not on commercial
per but
almost altogether on government securities, and the banks
were carrying their own securities for a time, carrying
their l o a n s on those securities, an:ias t h e y needed money
f o r other things, they have c a l l e d on us fr
loans, s e c u r e d
by government bonds and securities, because the rates were
lower.
In the Fifth District, as was the case in the others,
we urged the banks to help in the Fourth Loan, agreeing to
carry for a reasonable period at t h e coupon rate, and in
return we discounted for the banks at the 4 per cent rate;
t h a t i s , we l o a n e d d i r e c t l y to t h e banks on their fifteen
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Federal Reserve Bank of St. Louis
5
d
a
y
notes at the 4 per cent rate, and we rediscounted
their custumv..rs' p a p e r , s e c u r e d by bonds, at a 4 p e r c e n t
r a t e , p r o v i u e d they had given a 4 1-4 per Jent rate to
t h e i r customers.
During the Fourth Loan, and during the sale of
certificates in anticipation of the Fifth Loan, t h e banks
have leaned very heavily upon us.
Loan we were borrowing in this w a y :
Prior to the Fourth
We would dis©unt
$ 1 , , o f b a n k e r s ' acceptances or commercial paper
and allow that to run out, and just before it ran out, we
would renew it with another $ 1 , , .
As the Fourth
Loan progressed, and as the sale of certificates went on
in anticipation of the Fifth Loan, we have been compelled
to increase our borrowings to approximately $ 2 1 , , ,
that against 5 3 , J , o f Reserve Bank deposits.
our efforts
n
th
Fifth District lave been continual-
ly to limit the amount of borrowings as far as we p o s s i b l y
could, feeling that we were doing our part in the Federal
Reserve System by keeping down the borrowings as much as
Possible, and our business naturally did not have the direct
connection with world affairs that the business of the Federal Reserve Banks of New York, Boston, Chicago andPh1ladelphia, for instance, had.
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Federal Reserve Bank of St. Louis
*
51
3
The tendency in ' t h e lower p a r t of the D i s t r i c t
h a s been to borrow whenever any demand was made.
That has
been caused to a large extent by the cotton situation
a n d by t h e situation w i t h r e f e r e n c e to c o t t o n s e e d .
There has been a terrible con.estion in the cotton seed
situation, owing to t h e f a c t t h a t t h e p r i cI e was f i x e d on
cotton seed, b u t the price was not garanteed.
The re-
sult is the oil m i l l s a r e congested, the farmers have seed
n rianr1which they cannot dispose of, and c o n s e q u e n t l y
there have been tremendous demands on the banks.
South Carolina and North Carolina heve always had
a tendency to borrow heavily.
In south Carolina there is
a very widespread belief that the resources of the Federal
Reserve System are absolutely limitless, and that the
Federal Reserve Banks can be 'compelled to carry anything
if the right kina of pressure has been brought to bear on
them.
Our energies have been chiefly directed to limit
\
that tendency to borrow as fo.r as it has been possible for
Us
to do so, and we have held 1t down ' b y dealing w i t h ea ch
i n d i v i d u a l case rather than by the a d p t i o n of a general
policy.
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Federal Reserve Bank of St. Louis
There have been eight issues of certificates in antic1-
52
4
In three of those we o n l y sub-
pat1on of the Fifth Loan.
scribed to a small extent;
in four, our subscriptions
fell s h o r t of o u r a l l o t m e n t s , a n d I do not know what ihe
result h a s been on the eighth.
It had not c l o s e d when I
left the bank yesterday.
nut in every case we have fol-
lowed t n e suggestions of
the Treasury Department;
we have
brought all the pressure to bear on our member banks to
take their quotas, and on the non-member banks also, and
we have &lwsys been c a l l e d upon to support that by loans.
We have a number of cases in which b a n k s have bought certificates, borrowed money on them through the entire life
of the certificates, and paid out the loans when the certificates matured;
that has been true because of the de-
mands owing to the congestion in cotton, and owir.g to the
congestion in cotton seed, and the necessity fo fi,nds
in moving the new c r o p s ,
Governor Harding
Governor Wellborn.
e will hear Governor Wellborn.
I shall not discuss what has
t r a n s ; i r e d , because that is already before you.
I desire
to c o n f i n e my remarks to the immediate prospects of what
We shall be able to do in financing our district am slltlbscribing to loans.
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Federal Reserve Bank of St. Louis
As you a l l know, we have had a large
53
5
cotton holding movement in our section, andit looks to
me l i k e t h e y a r e about to win out;
c o t t o n 1 s advancing
in price, and they are now s e l l i n g at 28 to 29 c e n t s a pound.
It is astonishing how f e w rediscounts have been o f f e r e d
to us based upon cotton, for the reason the f a r m e r s are
quite well to do, and have been able to alrncst ftnance
themselves. our reserva is around 48 or BO per cent, and
we had no occasion to rediscount with other banks within
son.e t ' m e .
It
Of course there 1s a s l o w i n g up in business.
is v o r y a p p a r e n t t h a t many of our h l g h e r f i n a n c e s have
been settling down and curta111ng production, and mills
+hat have been r u n n i n g o v e r t i m e are jus t r u n n i n g r e g u l a r
hours.
Cf course there is not mu ch trading
The buyers
f e e l t h e y are waiting f o r f a l l i n g pr ices, which t h e y think
ere bound to come and no contracts are being made of any
magnitude whatever. That 1s, I think, one of the reasons
our reserves a r e going up, not so much trading or borrowing,
and I t h i n k in this way we shall be enabled to do our part
in t a k i n g t h e a l l o t m e n t f o r the
Governor H a r d i n g ,
L i b e r t y Loan.
Governor McDougal.
overnor McDougal. we have been one of t h o s e dist r 1 c t s wh!. ch h a s been v e r y f o r t u n e .te in h a v i n g t h e b e n e f i t s
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Federal Reserve Bank of St. Louis
54
of the great crops of grain and live stock, and to that
can be attributed our strong reserve position at the
present time, w h i r h is along about 7 p e r cent, about
where it has been for a good many weeks in the past.
There h a s been in t h e district a considerable slowing down
and liqtdation, I think, on commercial and industrial
credits, which ordinarily would, of course, place the
banks in a very strong position.
However, as that l!-
Q i d a t i o n hastaken place, the demands of t l e government
have been met and that credit has been absorbed.
We are naturally very much interested there at
the present time in what we may have before us.
We feel
that in regard to the forthcoming Victory Loan, that it
1s going to be important, particularly in our District,
to make a.bond with liberal and attractive terms.
I am very sorry to not be able to be optimistic
in regard to the outlook in the Seventh District for the
s a l e of t h e next Loan, but judging r o m most of the re-
ports that we receive there, new obstacles and very serious
Obstacles have to be overcome.
For instance, in the
State of Iowa, where in the Fourth Campaign * believe upwards of 6 p e r cent of t h e bonds that were sold were sold
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Federal Reserve Bank of St. Louis
55
7
to the farmers, the attitude of the farmer, based upon
a very careful and general canvass that has been made
lately, has changed materially.
Unfortunately they feel
that they have done their part.
I do not know what they
have d o n e .
They have gotten t h e i r $ 2 . 2 6 f o r t h e i r wheat
and gotten big profits for everything else, but they are
hard to deul with, and one point that has been up for discussion there relates to the interest rate on the forthocming l o a n .
here.
I
do not know t h a t we want to d i s c u s s t h a t
We believe that a 5 per cent bond can be placed with
the farmers, and we believe it can be placed with perhaps
the laboring men and the small investors, whereas we bel1eve that a 4 3-4 per cent bond would not be attractive
in those directions now.
We are going to have great
t r o u b l e in r e a c h i n g the farmer and a l a r g e p a r t of the
labor element.
As to our position, I speak of the 7 p e r cent reserve as the condition after having taken care of some
of the districts to some extent that were less fortunate.
We f e e l t h a t we are in a p o s i t i o n to take care of the
probable r e q u i r e m e n t s in o n u e c t i o n with financing the next
loan, which we believe will be great, perhaps greater than
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Federal Reserve Bank of St. Louis
56
--
.--
any
t i m e p r o v l o u s , and a l s o t h e commercial a n d i n d i i s i r i a l
requirements, t h e s i t u a t i o n t h e r e b e i n g on the whole
very satisfactory.
Governor H a r d i n g .
We w i l l h e a r f r o m Governor
Biggs.
Governor iggs.
Mr. Chairman and gentlemen:
The
conditions in the Eighth District are, in my opinion,
fairly good.
Business is quite active; labor is well
employed, quite as well as it has been at any one time in
twenty-one years. We have experienced no trouble at all
in c a r i n g f o r
our problems;
it
is t r u e t h e r e has been
some little feeling of uneasiness as to the next issue,
not based on any other thing but the question of whet the
rate is going to be, and whether the people will take -Lhem.
I do not kr.ow t h a t I have e v e r f o u r d t h e a g r i c u l t u r a l
conditions to be any better;
money;
the banks are all making
t h e y are using it freely;
our reserves are normal,
and I think we are in a position to help out reasonably
on any situation that confronts us..
Governor Harding.
Governor l d .
Governor Wold.
Governor Harding and gentlemen:
The situation in the Ninth Federal Reserve District 1s ab-
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Federal Reserve Bank of St. Louis
J
.
57
9
normal.
Farmers have been receiving v e r y l a r g e prices,
due to war conditions, for everything t h e y had to s e l l ,
and we have insisted on l i q u i d a t i o n s of our member b i s
tha t borrowed money from u s .
As a result, we have but a.
million and a half of rediscounts a n d a b o u t f i v e a n d oneh a l f millions of los.11s of member banks on government s e c u r -
i t i e s , l a r g e l y Treasury c e r t i f i c a t e s .
That is d u e to t h e
l a r g e p r i c e s the farmers received and due to a c o n s i d e r a b l e
e x t e n t to the manner in which the g r a i n is marketed, es-
pecially the wheat.
There are 5
,
,
b
u nels
s
of wheat
in warehouses in Minneapolis at the present time;
q u i r e s over $
1
,
,
;
t h a t money is
by t h e U r . i t e d S t a t e s G r a i n C o r p o r a t i o n .
that re-
being fumished
If
It
were not f o r
the method by which the g r e i n is being marketed, t h a t
bur-
den would fall upon the commercial banks, andmake our situat i o n v e r y materially d i f f e r e n t t h a n it
is now.
I t h i n k t h a t t h e p o l i c y which we h a v e p u r s u e d , in
i n s i s t i n g on liquidation where we knew banks c o u l d liquidate,
is
a w i s e o n e to f o l l o w .
I run constrained to f o l l o w Governor
Strong in a good many things, and I am glad to know there
a r e some optimists, but nevertheless, Governor He.rdir.g, ycu
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1I
have
stated c l e a r l y what the
possibilities of t h e Federal
is something we must recognize.
Reserve Sys ternare, and it
This optimism reminds me of the fellow who fell
out of a 2-story building.
When he passed the tenth story,
he said, "I am all right so far."
Well, we are all right
so far, but if the impression continues to prevail all
over the country as it does prevail in some places.
The gentlemen from Atlanta and Richmond suggest
that down there they seem to think there is no limit;
some people in our District seem to think there is no limit as to what the Federal Reserve System can do, and unless they are disabused of that impression, we will soon
reach our limit.
I think we should recognize that fact.
The situation in the copper districts, in the Montana copper country, they are having difficulties with labor;
it
is very serious.
On the other hand, in the Michigan
copper fields, they have reduced wages 15 per cent and
have increased production.
They thought it would result in
a very decreased production, but jus t the reverse has resulted, with a decrease of 15 per cent in wages the production of the same men has Increased.
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Federal Reserve Bank of St. Louis
Comptroller Williams.
The converse of that, I think,
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59
held during the war when wages increased and production
fell off.
Governor Wold.
Yes:
t h a t is
t r u e , t h a t wastrue
right along through the war.
The milling business is in
a s : r t of waiting position;
the mills are running on v e r y
s h o r t t i m e , due to the fact tho. t t h e millers do not know
what t h e policy of the United States Grain Corporation
is going to be relative to marketing the balance of the
1.918 crop a n d the handling of the 1919 crop.
As a result,
a good many men are out of employment in those industries,
but as soon as their policy is d e f i n e d , and I anticipate
it will be before long, that industry will become normal
again.
We, in the d i s t r i b u t i o n of Liberty Bonds, have not
followed the same practices as have been followed in some
of t h e o t h e r d i s t r l e t s .
We have not adopted t h e slogan,
"Borrow and Buy", and as I see the invested funds of the
Federal Reserve system constantly increasing, it seems to
me we have got to recognize the fact that we mus t
get baci:
to the old homely expression of "Save and Pay", because
we have got to clean up incidentally some time, and the
sooner we recognize the fact thet these debts must be paid
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in some way, and the obligations to the banks, and the
obligations of the banks to the Federal Reserve System
are m a t e r i a l l y r e d u c e d , and u n l e s s that is brought about
the s y s t e m will fall down should a really critical crisis
have to be met.
I dislike to introduce the note of pessimism into
these proceedings, but I cannot agree with Governor Strong
in the thought
tha
twe
can go ahead and take care of every-
thing and anything through the Federal Reserve System
on the theory that to keep business as usual is necessary.
I think the sooner that we recognize the fact thatthere
is a l i m i t to the possibilities of the Federal Reserve
System end that it 1s advisable for people to pay up, tho
sooner we·will get back to the normal basis, and t h a t is
what we all desire, of course.
Governor Harding.
You have sounded a note of cau-
tion, I take it, rather than of pessimism.
Governor Wold.
Yes;
caution would be the better
word, not pessimism.
Governor Harding.
But just c a r e .
We have got to
see where we are as we go along, I take it.
I
We will hear from Governor Miller.
61.
2 13
Governor Miller.
Governor Hardingand gentlemen:
The situation in the Tenth District s about normal. During the past three months agricultural and commercial
loans have gradually decreased, are still decreasing, but
the sales of certificates of indebtedness hove been carried very largely by the banke and our loans have increased.
At the end of the Fourth Loan, the Federal Reserve Bank
of Kansas City wes carrying about l p e r cent of iis earning resources in Liberty Bonds as collateral.
That has
increased by the sales of certificetes to about 3 p e r cent
of our loans, while, as I said, the cornmercia.l and agricultural loans have decreased,our loans as a whole, have
not very much increased.
A good part of our district suffered with a most
terrible drought last year, and the
corn crop was almost a
failure in Kansas, Nebraska and Oklahoma, and the wheat
crop was small in Nebraska, and that has made it necessary
for those districts to be carefully looked after andhelped
by the Federal Reserve Bank at Kansas City.
Our reserve has continued good and just as rapidly
as our reserve reached 55 or 6 p e r cent, we have offered
our facilities through the Federal Reserve Board to other
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14
districts,
o
tand as a result
,
we vhave c a r r ,i e d from 5
$ 1 2 , , c f discounts for other districts for the
past sixty days, I believe.
We have not suffered from the cancellation of war
contracts or from the stoppage of activities, but a great
many wool growers have complained bitterly that t h e y have
not received the pay for the wool they shipped to Boston
a year ago.
That comes to us from Wyoming and Colorado and
New Mexico.
Comptroller Williams. sold to the government?
Governor Miller, Sold to the government.
Comptroller Williams.
Governor Miller.
A year ago?
Yes; for last season's wool.
That has been t h e subject of some
r e s p o n d e n c e w i t h tl
d e p a r t m e n t s , and t h e l a s + r e p o r t is t h e y would be t a l e n c a r e
of as soon as they got inspectors.
In regard to t h e F i f t h L i b e r t y Loan:
Our people
a r e a g r i c u l t u r a l , not i n v e s t o r s . , a n d t h e fact that t h e s e -
cur1ties are to be referred to as notes is going to have
effect.
an
I think ft will be very difficult to sell our quota
a l t h o u g h t h e c r o p p r o s p e c t s w i t h us are g o d , andI do not
think it will be for the lack of money, but it will be for
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the lack of interest.
Since the war is over, the people
s e e m to want to put their money i n t o i n v e s t m e n t s in t b e h •
own business, and it
is going to be a very hard t h i n g to
sell our q u o t a of the notes, although our organization is
good, and we believe that we will at least come very near
the s a 'l e of our quota.
Governor Harding.
Governor van Zandt.
Tre
Governor Van Zandt.
Governor Harding and gentlemen:
Eleventh Federal Reserve District is in just about as
blue a condition as it possibly could be. We have had
three years drought in our district; we have had s u f f e r i n g
from the effects of the holding of cotton, of the nonliquidation of our district through the means of cottun,
which is practically our only means.Inahe western part of
the district the wool has not been sold;
the cotton seed
Prices have been fixed, but nothing can be sold at those
•
Prices, and we have really nothing coming in and everything
going out.
ing season.
Our district is just about approaching its borrov
It is just getting t h r o u g h what is normally a
season where n
•
bank in the district borrows, and during
•·
h a t season the banks have bean further expandingand have
borrowed more than they h a v e ever before.
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Governor McDougal, talking about Chicago, about
his ability to loan, reminds me of the fact that practically 7 per cent of the total reserve of the Federal Reserve
Bank of Dallas today is borrowed from the Federal Reserve
I
Bank at Chicago, and we see nothing in sight before us in
the way of liquidation before Fall.
Comptroller Williams.
Will you not sell a good
deal of cotton in the next few months?
I hope so.
Governor Van Zandt.
comptroller Williams.
Is there any reason why you
should not with improved prices?
Governor Harding.
Most of your Texas cotton 1s
export cotton, is it not?
Governor van Zandt.
It 1s export cotton.
And anothe:
thing, those people down there saw cotton at 25 cents a.
pound
once and they did not get rid of it at that time, t h e y
could not, and they think nothing less than 35 cents 1s
gooa for them.
We are carrying no cotton loans.
The people are
able to carry I t , but it will be but a very short time until
we Will have to take on these loans, to take on these
people in preparing for their crops,
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The wheat s i t u a t i o n is another t h i n g that is g o i n g
to hurt materially down in our part of the country. We
do not raise so very much wheat, and we import a great
deal of feedstuffs.
I find that all through those sec-
tions of the country that have been raisingcorn heretofore,
they are raising wheat instead to get this J2.26 a bushel,
and feed is going to be almost prohibitive in price, which
Will affect our district very materially.
I hope that we will get through on our next Liberty
Loan by reason of the fact that a small part of our State
is dabbling in 11, the State of Texas, which may help out
some.
Governor Hard 1ng.
Governor Lynch.
Governor Lynch. M r . Chairman and gentlemen:
We
have our troubles as well as other portions of the country.
We are largely agricultural.
Our bean men and barley men
have got last year's crop on hand to a very great extent.
The barley situation, I think, is gradually being taken
c a r e o f , but t h e bean s i t u a t i o n is b a d .
I do n o t t h i n k t h e ;
can sell the beans at a price that will approximate t h e
cost of r a i s i n g them.
ters.
However, those are very minor mat-
The district, on the whole, is prosperous.
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18
I should like to very strongly emphasize what Mr.
Passmore said about the necessity of announcing the terms
of
l o a n early.. I am a w a r e of the difficulty which co:i
thb
fronts the Treasury, and the immense responsibility, but
this loan is only f o u r weeks away, a month away, practical
ly, andit is particularly desirable in our district t h t
the terms be announced early.
In the preceding loans, there
has hardly been a time when literature of one kind or
another by t h e ton has not been prepared and absolutely
wasted because it could not be distributed in time to be of
any use.
In this case, I understand the Congress has al-
ready legislated so the Secretary has it
in his own hands,
a n d I w i s h v e r y much t bat he would come to realize the n e c e s -
sity of announcing it.
Then there is another reason for i t :
t h e y are notes.
The fact that
The i m p r e s s i o n h a s gone o u t , has gone
l
abroad 1n· our distriot, even among the people who take the
Commercial and Financial Chronicle and the Wall Street
Journal, that the individuals have nothing to do with this
loan, that it is something that is up to the banks.
The
note idea seemingly carries that impression to the public
mind.
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Federal Reserve Bank of St. Louis
Of course that is absolutely wrong, and we are doing
67
all we can to combat it, but the stronger the announcement
can be made and the more definite it can be made that
this is to be a popular loan, even in the form of notes,
the better.
I think, in order to feel sure of the result, that
the rate should be 5 per cent, with liberal tax exemptions.
It is true that if it is made at any lesser rate than that,
we W i l l s e l l it
somehow, b u t a f t e r all t h e placin; of the
loan, the original placing, which has been rather crude
in each case, has got to be remembered.
The loan that 1s
not well placed is going to be thrown on the market at
some price or other, and is going to embarrass the banks,
andis going to embarrass the Federal Reserve Banks, and,
indirectly, will embarrass the Government.
Governor Harding.
Gentlemen, while we are laboring
Under complex and difficult problems, it always gives us
a feeling of relaxation to meet a man who has greater problems than we have, and I take great pleasure in introducing
to the Conference the Director General of Railroads. (Applause).
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Federal Reserve Bank of St. Louis
ADDRESS OP HON. WALKER D. HINES,
Director General of Railroads.
Mr. Hines.
Governor Harding and Gentlemen:
It is
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Federal Reserve Bank of St. Louis
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8
a great pleasure for me these days to feel that I can be
of assistanceto somebody else.
I find it so hard to be
of assistance to myself.
I want to tell you very briefly what you already
know, My embarrassment in talking with bankers is they always know things to start with, they get the information
as soon as the man does in touch with it, and when he tells
them they already know it. But I want to tell you, very
b r i e f l y , about t h i s s i t u t i o n th t h a s grown up as t h e r e -
sult of the failure of the Railroad Appropriation.
As you know, in a g e n e r a l way, it
situation.
is a v e r y unu ma l
I can state specifically that in the presen-
tation of this matter to the Appropriations committee of
the House and to the Appropriations Committee of the Senate,
it
was evident th t everybody on both committees recog-
nized the necessity for the appropriation.
Those who were
opposed to the Democratic administration, those who were
opposed to continued Federal control of the railroads, no
matter what they were opposed to, they agreed that this appropriation was necessary. It was unanimously reported in
the House;
15.
it
was passed in the House by a vote of $72 to
It was unanimously reported to the Senate, and the con-
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69
viction of those in touch with the situation there was
that everybody practically was for the appropriation, and
its failure grew out of entirely extraneous conditions,
but the failure of it of course left the Railroad Administration 1n a difficult situation, but the real difficulty was a difficulty of the country rather than the
Railroad Administration. It left the railroad companies
where they were unable to get any cash, which was due
them, in order to pay the interest and dividends, and
enable them to meet their maturing oblisations, and left
the equipment companies where they were not in a position
to pay the material men who had supplied them with materials
whi h were being constructed into cars, and to some extent.
h a p s , wherethey could not satisfactorily meet their pay-
rolls.
It precipitated a situation where a very large
amount of money had to be raised in some other way.
To a great extent, I take it, the money which needed
thw
to be raised would be merely to dis cha rge obligations
already in existence; I take it to a large extent with
respect to equipment, for example, somebody has already borrowed the money which was due from the government, and t h a t
any temporary financing which was forced by this situation,
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e
r
e
m
7
involved a renewal of obligations, or rather a
substitution of new obligations for old ones, and that
would be t r u e also with respect to the maturing bbliga.tions of the railroad companies.
The situation, of c o u r s e , is
t h a t the needs of
the railroad companies and of the equipment companies do
not all come at once.
They fall due month by month from
now thrtough t h e a r l y part of the y e a r , ending in October,
and the adoption of the appropriation by the next session
Of
Congress.
As we estimate, there will be required between now
and J u l y first to p a y the railroad companies to e n a b l e
t h e m to meet t h e i r i n t e r e s t c h a r g e s a n d d i v i d e n d s , and
other corporate charges, approximately 2 6 6 , , , and
to pay for equipment which has been ordered by 'the Railroad
Aam1n1stration, approximately @ 2 5 8 , , , and to pay tor
securities of the railroad companies, which are maturing,
$119,ooo,ooo.
Now, those amounts represent the aggregates, which
are due, which must be provided for up to July 3lst next,
and of course they do not all have to be provided at once.
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Federal Reserve Bank of St. Louis
For example, up to April first, we ought to provide approximately $ 6 3 , , t o enable the railroad companies
to meet their interest and dividend requirements an
other corporate charges, $ 7 4 , , t o pay the equipment
companies for equipment already delivered and to
e
de-
livered up to t h e end of April, and o b l i g a t i o n s matu ring
between now and April first, so that represents the
outstanding features of the situation to be met by April
first, being roughly a total of 1 3 7 , , .
We have been considering what expedient should
be adopted in order to deal with this situation.
We
reached the conclusion that with respect to the amounts
due to the railroad companies, and which it is necessary
to p a y them, we w i l l meet t h e i r requirements for interest,
dividends and other corporate chrges up to and including
April first, by the issuance of a form of certificate of
indebtedness, signed by t h e D i r e c t o r General, evidencing
an amount due e q u a l to what t h e y need to meet their r e quirements.
In other words, there may be cases where there
is more owing to the railroad company than it needs to
meet these requirements.
It would not be our purpose in
72
24
t h a t event to issue a certificate for an amount in excess
of what is n e c e s s a r y to meet t h e requirements.
The i d e a has been that t h a t certificate of ind e b t e d n e s s would bear i n t e r e s t and would be a v a i l a b l e as
collateral upon which the railroad companies could b o r r o w
the money they need, a n d i t is the purpose of t h e War
Finance Corporation to aid in taking care of thatsituat i o n to t h e e x t e n t t h a t t h e r a i l r o a d companies a r e not
a b l e o t h e r w i s e to b o r r o w their r e q u i r e m e n t s .
We have f e l t it was v e r y d e s i r a b l e in a p r o b l e m
of t h i s
s o r t to s t u d y t h e s i t u a t i o n and p r o f i t by our
experience as we go along, so that at the moment we are
u n d e r t a k i n g to only deal with that situation up to and
i n c l u d i n g A p r i l f i r s t , t h i n k i n g t h a t as a r e s u l t of t h a t
experience, we will be in a better position to adopt the
Policy to meet the succeeding requirements.
Now, t h e other p r e s s i n g necessity of t h e s i t u a t i o n
1s how to meet the
r e q u i r e m e n t s of t h e equipment companies,
Aggregating up to July 31st, $ 2 5 8 , , . We have not
reached a final conclusion as to how t h a t ought to be dealt
With.
We have had under consideration the
p o s s i b i l i t y of
the Director General accepting the ninety day drafts of the
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Federal Reserve Bank of St. Louis
equipment companies on the t h e o r y that they would be elig i b l e for r e d i s c o u n t by t h e F e d e r a l R e s e r v e Banks.
Of
course, another theoretical alternative, or an entirely
practical a l t e r n a t i v e , p u r h a p s , would be the i s s u i n g
of c e r t i f i c a t e s of i n d e b t e d n e s s .
There seems to b e , how-
ever, a v e r y great advantage, if it were feasible, of
having a d i f f e r e n t form of security so it c o u l d be h a n d l e d
in a d i f f e r e n t way, so as not to force the handling of
a l l t h e s e r e q u i r e m e n t s through e x a c t l y the same c h a n n e l s ,
and therefore 1t has b e e n our hope th at we would be a b l e
to work out this acceptance plan in t h e way of meeting
t h e situation, and in that way to d r a w on resources which
might not be a v e i l a b l e if
it
h a d to be met in precisely
t h e same way we are pow p r o p o s i n g to meet t h e r e q u i r e m e n t s
of the railroad companies.
The matter of acceptances is open to some question
as to t h e a u t h o r i t y of t h e Director G e n e r a l , w h i c h is not
true asto t h e i s s u i n g of a c e r t i f i c a t e of indebtedness.
The counsel of the Railroad Administration is perfectly
clear t h a t in v i e w of t h e u n i q u e character of the U n i t e d
States Railroad Administration, the power to make these acceptances e x i s t s and should be f r e e from a n y q ± s t i o n , but
26
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Federal Reserve Bank of St. Louis
we are perfectly aware that the fact that a question has
been raised necessitates it being d i s p o s e d of in an en-
tirely businesslike and conclusive way in order to make h a t
plan a success, therefovu we are not proposing that at
the moment as a suggestion which we propose to adopt.
have it
We
under consideration w i t h a v i e w to suggesting t h a t
i f , upon f u l l att:lnsideration, we r e a c h the c o n c l u s i o n t h a t
it
is so f r e e f r o m q u e s t i o n t h t we can count upon te
support of the banking interests of the country in putting
1 t through.
The thing I want to emphasize, and which of course
is clear to all of you gentlemen without any emphasis at
all, is that this 1s a most critical emergency, and that
it is of the highest importance to find a satisfactory
way to take care of these obligations, which otherwise cannot be taken care of, for the time being, and a failure to
take c a r e of which would produce very embarrassing conditions in the general financial situation.
I have been gratified to find, since this appropriation failed, the unqualified disposition on the part
of everybody concerned to cooperate in working this out in
a Practical way.
rt has been recognized that it is an emer-
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Federal Reserve Bank of St. Louis
gency situation;
that nobody who has had any direct and
responsible contact with it was to blame for the situation which has arisen, and yet the situation has arisen,
and if it is not met, it promises to have a most unfavorable effect upon the general financial conditions.
Grow-
ing out of that condition on the part of everybody with
whom I heve come in contact, I have found the most cordial cooperation, and I am hoping that when we are in
position to develop a specific plan with respect to meet-
ing these equipment obligations, that we will secure the
cordial cooperation of you gentlemen, and I hope also,
so far as it may come in your way to deal with railroad
companies, in aiding them to meet their requirements on
t h e basis of t h e s e certificates of obligation w h i c h are
to be issued, that you will do all in your power to make
a success of those operations.
We have all been put in a very deep and uncomfortable hole by reason of this curious and wholly unexpected,
unprecedented combination of circumstances w h i h brought
about t h e f a i l u r e of an appropriation w h i h everybody r e c o
nized ought to have been made at once, and I appeal to you
gentlemen, as we get the thirg@worked out, to
do all you ca..
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Federal Reserve Bank of St. Louis
76
)
to help the general financial situation out of the hole
Which has been dug for it in this unforeseen and uncontemplatedway.
I do not believe I can put anything more
before you at the moment, and as I say, I feel some hesii
tancy in taking up your time telling you what you already know, but I thought there might be some advantage
in summing the thing up in this way.
Mr. Hepburn.
Mr. Hines, you have given this
matter full consideration, of course, from all standAre you clearly of the opinion that a railroad,
points.
through its board of direction now under the control of
the government, has a right to borrow money?
I have never had that question raised.
Mr. Hines.
I cannot imagine how that could be raised, so ' cannot
say that I have considered 1t because it never occurred
to me that the question would arise.
Mr. Hepburn.
It has been raised and seriously con-
sidered.
Mr. Hines.
That is the assumption woud seem to be
that the powers of the corporation are destroyed by the
fact that the railroad is under government control?
Mr. Hepburn.
Suspended.
That 1s a question.
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Mr. Hines.
I never heard that before.
Mr. Hepburn. I ask you for Information
Og course
every man in this room, I assume, is fully in sympathy
With what you are trying to accomplish.
I was asking this
que stion for information.
Mr. Hines. Yes, I appreciate that, but I did not
w.nt to g i v e just an offhand opinion w i t h t h e idea I had
considered it, for, frankly, the thing has not come to my
attention.
I will say, though, ever since Federal control
began, the railroad companies have been borrowing money
day by day, either from the government or from other sources to meet their necessities, and the whole scheme of the
Federal Control Act is predicated on the theory that the
railroad companies will borrow, and in fact the Federal
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Control Act confers a u t h o r i t y upon the railroad companies
to borrow whet is necessary to meet their requirements, and
authorizes the President to give a certificate that it is
in the public interest for them to borrow, and sums have
been borrowed, day by day, from the War Finance Corporation, so I s h o u l d s a y , -- it
sion-
is a matter of first impres-
because I never had that question raised before,
-- that so far as there being any suspension of the power
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on the part of the ra1lroad companies to borrow money,
there has been a direct confirmation of that power by
the act of Congress and really a direct grant of power
to the corporations to borrow money.
Mr. Hepburn.
But a power more or less circum-
scribed by the directions as to the manner in which it
should be do n e ?
Mr. Hines.
The procedure is pointed out, and of
course all we suggest here presupposes that procedure will
be followed, that it is to the public interest to borrow.
Mr. Rue. Will these certificates have a n y fixed
security?
Mr. H i n e s .
No;
they w i l l be p a y a b l e when the
funds are available.
Governor Harding.
T h e r e is not, I t a k e it, any
idea they will be discounted by the Federal Reserve Banks
They would not be eligible?
Mr. Hines.
No; we had not assumed they would
be eligible for rediscount.
Governor Harding.
Gentlemen, we all appreciate
very much the time the Director General has given us and
the information he has furnished.
I feel assured he can
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79
· c o u n t upon a l l t h e c o o p e r a t i o n t h a t the
F e d e r a l Reserve
System can legitimately give.
Mr. Hines.
I am very much obliged to you, gentle-
men.
Governor Harding.
Senator Owen.
Senator uwen, gentlemen.
Gentlemen:
There are some things
Which occur to me that mightbe brought to the attention
Of
members of the Board who are here present in addition
to those things which you naturally consider in a domestic sense, and recognizing that it is already l o'clock,
I Will only take a few minutes to make the suggestion which
I think might be of some interest for you to consider.
I think it 1s peffectly obvious that nations pay
for commodities and services with commodities and services,
and that our relationship to other nations must be considered in the light of that economic trutn.
The United
States has already made advances in the way of commodities,.
Whir h have reappeared in the form of obligations to for-
eign governments to the extent of nearly nine thousand
million dollars, and it is quite obvious that the extension
Of further credits by the Government of the United States
will be called for in rehabilitating Europe.
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The flow of
e
8
s
e
commodities now is
h
t
8
a p p a r e n t l y larger t h a n it has
been b e f o r e , and asthe transportation facilities improve
by the building of American ships, by the taking over of
t h e German merchant m a r i n e ; and by t h e d i s c o n t i n u a n c e of
transport s e r v i c e s which a r e i m m e d i a t e l y r e q u i r e d f o r t h e
t r a n s p o r t of American t r o o p s f r o m Europe to
t h i s country,
the o p p o r t u n i t y of f u r n i s h i n g these g o o d s t o Europe w i l l
steadily increase.
In the meantime the conditions in Europe i t s e l f
are in rather an extraordinary condition.
Take France, for
instance, and the French Government, which has been borrow1ng so heavily from us, while they have passed a c t s author1 z i n g an income tax and an excess profits tax, they have
not applied the taxation system t h e r e b u t have been d e f e r ring the q u e s t i o n of taxes until they would d e t e r m i n e as to
Germany t h e method a n d e x t e n t of r e p a r a t i o n , and b e c a u s e
they have not done t h i s , t h e y have found it somewhat difficult to place their bonds in France;
they have not really
made a s u f f i c i e n t effort, 1n my judgment, to do s o .
They
have p l a c e d in t h e Bank of ]·ranee t w e n t y b i l l i o n s of bonds,
against which they have issued French f r a n c n o t e s , and t h e
issue, when I last saw the account some three weeks ago,
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amounted to thirty-one thousand million francs, which
amounted to a p p r o x i m a t e l y $ 1 5 p e r capita, a g a i n s t the
United States, with our expansion of rrency, a per capita
of $ 5 7 ;
the French have therefore nearly three times
t h e per c a p i t a c i r c u l a t i o n .
The consequence is t h e French
franc, in France, is buying about 33 per cent of what it
ought to buy in terms of commodities within the
F r a n c e , so t h e t if
body of
t h e y should convert the French f r a n c s
·into pounds sterling and convert t h e pounds sterling into
terms of British commodities and take those commodities
across the channel into France and sell them for French
francs, they would get in return two or three t i m e s as
many French francs as they would be able to buy if the
French franc were actually upon a gold basis.
Governor Harding. senator, may I ask you right
there?
Pardon me f o r i n t e r r u p t i n g you.
now is it
they
c o u l d convert the French franc into the British pound sterl i n at an advantageous r a t e if t h e purchasing power of the
franc had been reduced in France? How are they going to
maintain their full value in England?
S e n a t o r Owen.
\
They cannot permanently do so u n l e s s
this matter is corrected, and that is exactly why I call your
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34
a t t e n t i o n to i t .
exchange is
Here is a c o n d i t i o n where t h e r a t e of
arbitrary.
It
is
ert1f1c:!.al.
It was f i x e d
f o r a good w h i l e . at $ 5 . 4 5 as r e l a t e d to t h e A m e r i c a n d o l l a r , a n d c o r r e s p o n d i n g w i t h t h e pound s t e r l i n g .
Governor S t r o n g .
May I i n t e r r u p t
to s a y t h a t I
have j u s t g o t a message to t h e e f f e c t t h a t t h e B r i t i s h
Government is announcing today t h a t t h e y a r e g o i n g to
d i s co n t i n u e s u p p o r t i n g t h e s t e r l i n g exchange?
S e n a t o r Owen.
The very reason which l have pre-
s e n t e d h e r e j u s t i f i e s t h e a c t i o n on t h e p a r t of Great
B r i t a i n , b e c a u s e Great B r i t a i n cannot a f f o r d to c o n t i n u e
to put up pounds s t e r l i n g in er.change f o r F r e n c h f r a n c s
When t h o s e pounds s t e r l i n g bought by French f r a n c s can be.
c o n v e r t e d i n t o British merchandise a n d s o l d f o r French
f r a n c s for two or t h r e e t i m e s as much as t h e y ought to b r i r G
if
t h e F r e n c h f r a n c s were c o n v e r t e d i n t o g o l d , and I t h i n k
t h e w o r l d ought to u n d e r s t a n d t h i s , because it
is t h e
d u t y of F r a n c e , and we have t h e r i g h t to s p e a k of t h e d u t y
of F r a n c e when F r a n c e is
a p p e a l i n g to us f o r t h e contin-
u a t i o n of t h e extending of g r e a t c r e d i t s to France, -- if
we a r e g o i n g on w i t h t h o s e c r e d i t s we have a r i g h t to a s k
t h a t F r a n c e t a k e t h e o r d i n a r y s t e p s w h i c l 1 prudence would r e
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quire.
What t h e y ought to do is patent, and we have t h e
right to ask France to improve her own credit within the
confines of France by imposing the same character of taxes
upon incomes and upon excess profits which have been imposed in the United States andin Great Britain upon the
people of the United States and Great Britain, so that the
French credit will be improved at home, and so that they
W i l l t h e n place these bonds by a. bond drive, s u c h as we
are proposing to put across in the United States for these
n o t e s , and as we have done in the past for the raising of
money from our p e o p l e .
We are taxing our people to raise
t h i s money to furnish France, and
we ought to ask, through
our proper authorities, that tre French Government pursue
the economic methods whbh are so essential to the restoration of French credit.
There is no reason why they should
not do it except a somewhat timidity on the part of their
ministry;
their ministry 1s somewhat apprehensive of the
s u p p o r t of the
French Chamber if
they compel the payment
of taxes.
I t h i n k it is t h e part of prudence t h a t t h e United
States should bring its influence to bear upon France, bec a u s e if France pursues a p o l i c y which is unsound funda-
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mentally, which will affect internatiornl exchanges, and
will affect us, and w i l l affet the very principle which
l first announced here regarding the interchange of commodities.
I ti1ink it is worth w h i l e to c a l l your attention
to t h i s .
I realize, of c o u r s e , t h e time w h i c h I s h o u l d
take to discuss a matter of this kind is extremely limited;
and I only take t h i s opportunity of c a l l i n g y o u r atuention
to the facts in the case, so that you may yourselves consider from your s e v e r a l points of v i e w what is a d v i s a b l e .
Governor Harding.
Have you noticed t h e n e w s p a p e r s
taking t h e s t a n d t h a t the F r e n c h Government is doing this
d e l i b e r a t e l y in order to protect i t s e l f against undue im-
ports and protect its exports?
senator Owen.
I have heard that offered as an ex-
planation that they were taking that step in order to discourage i m p o r t s , but that is no a d e q u a t e answer.
not a sufficient a n s w e r .
It is
It does not serve France in any
permanent sense that she should interfere with her imports
in this way.
She can interfere with her imports by d i r e c t -
ly prohibiting imports, but insofar as her credits
arecon-
cerned, she ought to pursue the policy of establishing her
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credit at home by t a x i n g in comes and by t a x i n g excess
profits, jus+
as we have done here, and when she shall
have strengthened her credit at home, she should sell
those bonds and she s h o u l d take t h e proceeds of those bonds
and retire these excess issues of franc notes, which are
now 1n the p o c k e t s of the people.
n o t e s , a n d it
is
The people have th ese
a q u e s t i o n of exchanging these F r e n c h
franc notes, which constitute an immediate, present obl1gation, for a long-time obligation in the form of a French
bond, which would be payable in the future out of the taxes of the people, and I think it is a matter of the very
gravest importance.
I think this government should use
its influence upon France to see that she puts herself in
position to deserve credit, 1f we are to continue to extend these credits.
I thank you, gentlemen.
Governor Harding.
One moment, Senator.
Governor
Strong has just stated that Great Britain is going t
continue stabilizing her exchange.
dis-
I wondered what effect
it would have on other foreign exchange if a pound sterling
should seek e more normal level on account of the absence
of artificial stimulation, and what effect that is going to
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have upon our general commerce.
Seret o r Owen.
What I understoed Governor Strong
to say was that London is no longer willing tofurnish
the pound sterling under these c i r c u m s t a n c e s , and I t h i n k
London is entirely right about it.
They ought not to
continue to do so unless they arrive at a clear understanding with the French Government, and I have no doubt
t h a t London appreciates t h e i m p o r t a n c e of requiring of
the F r e n c h Government its r e c o g n i t i o n ct' these fundamental
principles, which we have all r e c o g n i z e d in our own affairs
here.
If you have the French exchange breaking down
obviously It will cut offthe purchases of French supplies
from the United States; if the French franc goes down to
ten francs for one dollar, it will have the effect of cutting off French purchases in this country, and yet France
very greatly needs from this country machinery and metal
goods of all kinds for tho p u r p o s e of r e h a b i l i t a t i n g her
factories.
Comptroller Williams.
It would stimulate our pur-
chases in France, though, would it not?
Senator Owen.
It might stimulate our purchases in
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France;
yes, it
might do that.
Comptroller Williams.
It will enable us to bring
in more goods from France?
Senator Owen.
It would be far better, however,
for France to buy her goods from this country upon a
basis of credit which 1s just to France, arrl which isfair
to us.
We are not in a position where we should ask France
to p a y 2 p e r cent for her.purchases from this c o u n ' r y .
I do not think she would purchase very much goods from
this country under those circumstances, and to some extent,
of course, it would stimulate our purchases from France,
but it would do so to the disadvantage of France, because
if a dollar b u y s ten francs in France -Comptroller Williams.
It would be a great advant-
age to us but a disadvantage to France?
Senator Owen.
It would be a disa.cvantage to France.
Now the true way in w h i h
nations should deal w i t h each
other is upon a gold basis, where commodities are exchanged
upon a fair basis and I call your attention to this, because it
will affect the exchange of commodities and services
between this government and F r a n c e .
Just at present, of
course, it has benefitted France very much because of our
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expenditure
1
8
5
,
,
a month for our soldiers,
that they will have in fact bought $ 1 3 , , o f commodities, and will be in effect our contributing to France
about $
5
,
,
a month, which I do not think advan-
tageous to us, and I do not think we are called on to
make those expenditures, but we are in a position w h e r e ,
instead of avoiding it, I think it worth while for you
to have your attention called to this matter, because it
is a question w h i c h w i l l affect t h e stabilization of exchange t h r o u g h o u i
t h e world, a n d it is of great import-
ence to America that the exchange throughout the world
..
should be upon a sound and stable basis, just asit has
been of advantage to us in the United States to put the
credit of this country upon a sound and stable basis.
This deals, of course, with international credits,
and justas we have stabilized credits within our own confines with the Reserve Act, we should take steps now, so
far as we have influence, to put the exchanges of the
world upon a sound basis.
I do not know whether you gentlemen, p e r h a p s , have
r e a l i z l t h e effect upon Japan.
Japan at p r e s e n t , because
of war conditions, has increased its gold per capita about
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1.
Now the effect of that is that a workman on contract
P o r a day's labor, other things being equal, would receive
about one-sixth, in terms of gold, of what an American
workman wouldreceive here for labor of like quality and
quantity.
That Ls thereal thing which compels the United
States to have a protective ta.riff to protect its industries against labor paid upon a basis of gold where the
per capita circulation is only one-fifth or one-sixih
of what it is here, and it is not a question so much of
race between the United states and Japan, as it is a question of gold per capita circulation, and the workman
in Japan receives so small relatively an amount of gold
that when that labor is converted into commodities and
the commodities are brought into this country, it of
course produces a competition which would be most injurious
to the labor of America, interfering with the sale of its
product.
Therefore this question of interna tiona.l ex-
change is a metter which affects the commodities of the
United States, both the imports and the exports, and I
think that this country ought to pursue a policy which
would at least fix the Am6rican dollar at par throughout
the world, and I have been insisting upon that for a couple
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O
9
years, regarding it as essential.
If the United
States is to take t h e very high place which its enormous
b a n k i n g power J u s t i f i e s , w h i b h i t s enormous productive
power
j u s t i f i e s , I t h i n k it is
of t h e h i g h e s t importance
t h a t i n t e r n a t i o n a l contracts and terms of commodities
should be measured by a dollar which is not permitted to
vary, and I t h i n k should not be p e r m i t t e d to vary either
above or below a gold par basig.
I think if t h e American dollar begins to apprec i a te that it
would be b e t t e r f o r the U n i t e d S t a t e s , f o r
t h e c i t i z e n s of
i h e U n 1 i e d S t a t e s , and t h e banks of t h e
United States, to extend s u c h credits as a r e sound a n d
c l e a n to t h e c o u n t r y where t h e l o c a l currency is d e p r e c i a t ing
as r e l a t e d to
t h e a p p r e c i a t i n g d o l l a r , so t h a t a
dollar at least would be a sound basis of value in intern a t i o n a l con t r a c t s .
mptroiler W i l l i a m s .
idea is
live
As I u n d e r s t a n d it, your
should h a v e s u c h a c o n d i t i o n of f o r e i g n e xcha.nge
that e a c h dollar of American gold will be able to procure
a. d o l l a r in t h e g o l d aimency of e v e r y other c o u n t r y ?
S e n a t o r Owen.
A b s o l u t e l y , j u s t as w i t h i n t h e l a s t
Year we saw the extraordinary condition that a gold dollar
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of America would only buy 67 cents of gold in swain.
of course h a d t h 1 s
emt'argo o n .
But t h a t does not pro-
mote commerce between the United States and Spain;
interferes w i t h it.
We
it
We ought to have the dollar on a g o l d
par basis throughout the world.
I think with reesonable
limitations and dealing with the neutrals, it would be
advisable to m r m i t the
shipment of gold to bring the
American dollar to par, and in my opinion it would q u i r e
a very small amount of gold, because the United States
is a world creditor, it 1s a. commodity world creditor, 1 t
Will continue to be a commodity world creditor, and we
have not only this nine billion due us now for commodities
already sent a b r o a d , but we will have a c o n t i n u a l e x p a n s i o n
of t h a t credit unavoidably.
Therefore, we may anticipate
there will be a constant flow of gold from the world by
virtue of the trans a c t i o n s which will t a k e place all over
the world, there will Le a flow of gold to t h e United
States;
therefore, we need have no fear of losing our gold,
we are the strongest nation in the world in gold;
we have
more gold than all Europe combined.
comptroller Williams.
What argument is there against
that principle you are suggesting now?
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Senator Owen.
I do not really understand what
the argument against it 1s.
Mr. A. C. Miller.
t i o n , it
is
When you s p e a k of stabiliza-
not thinkable that in v i e w of the o n d i t i o n
you paint the French currency, that we could presume to
stabilize the dollar in terms of francs, on the assumption
t h a t t h e f r a n c is a g o l d f r a n c .
c u r r e n c y because it
has been over-issued.
Senator Owen.
mentally sound.
That is a d e p r e c i t e d
I think the French credit is funda-
The only thing is t h e y have been pursuing
a. m i s c h i e v o u s p o l i c y , a policy t h e y ought to
c h a n g e , and
whi ch I t h i n k they intend to c h a n g e , but they ought to
change it promptly.
You take the French as a productive nation, they
have a wonderfully industrious people, they have the most
thrifty people in the world; they have people who realize
the i m p o r t a n c e of saving, and t h e y a r e very saving, and
t h e y are v e r y productive, a.nd the produ,.ct.ive capacity of
France is much greater now than it was at the beginning of
t h e war in my ju gment, n o t w i t h s t a n d i n g t h e l o s s of a
million men.
She hasbrou@ht into the industrial life mil-
lions of women.
She has brought into her industrial life
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45
a w o n d e r f u l i m p r o v e m e n t Jr
m a c h i n e r y a n d methods, and I
have observed, among other things, that we are going to
s e l l all the things we have taken over to France to
France, and many of those things I think it is advisable
to sell, but I do not think it is advisable to sell
these knockdown warehouses, which are standardized warehouses put up by Austin & Company, which can be taken down,
compactly put together in a shiphold, and brought back
r·warehous.1ne:facilities
here and put u p , and give prop:3
for the products of this country, because we have now no
adequate storage place for co ttonseed, a n d the c o t t o n
house at Atlanta, which could store
3 , b a l e s of cot-
ton, is packed full of the produce belonging t
the govern-
ment of the United States.
Those warehouses can be taken down and loaded at
almost a negligible cost, and to sell them to France for
almost nothing when weactually neod those warehouses for
terminals in t h i s ountry,I think would be most imprudent,
and most improvident.
And as far as France is
France will p a y her debt speedily,
concerned,
I do not mean within a
few months or years, but she will pay her debt as soon as
we will.
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Mr. A. C. Miller.
Senator Owen.
You mean her debt to us?
I mean her debt to the world.
r
do not know whether this is intentional or not on the part
of France to take advantage of the expenditures of Great
Britain and the United States within t h e confines of France
by selling us goods, using a depreciated currency in France
or n o t , but because they are a very intelligent p e o p l : ,
I t h i n k it
ls n o t beyondthe bounds of r e a s o n to presume
they understo
what
they were d o i n g when t h e y put their
currency in the position whlh compelled us to pay her a
tribute of 5
,
,
a month.
I cannot think it was al-
together accidental, because I think those people understand finances just as well aswe do, and I think they should
be called on to adjust themselves now and do it
without any
delay.
Governor Harding. Senator Owen has raised a very
interesting question, a n d if there ls no objection, I will
refer the matter to a committee consisting of Governors Stron
Lynch and Morss.
We have an invitation f r o m Mr. James L. Wilmeth,
Director of the Bureau of Engraving and Printing, as follows:
"I understand there is to be a. conference of the
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Federal Reserve Bank of St. Louis
Federal Reserve Bank Governors with the Federal Reserve
oard in Washington at an
early date, and I am sending you
this line to invite the members of the Board and the
Governors to visit the Bureau of Engravin
and Printing
at some convenient time durin6 the period covered by this
conference.
I believe an hour spent in the Bureau will
be very interesting for all of you, and I shall be pleased
if you will, on my behalf, extend an invitation to the members of the Board and the Governors to pay the Bureau of
Engraving and Printing a visit dur ng the forthcoming
conference.
'The work of the Bureau can be seen at best advantage between the hours of 9 and 11 a. m. and 1 and 3 p. m."
I acknowledged that letter, stating that we had
a great deal of business to discuss, and that I did not know
whether the Governors could find time or not, but that I
would lay the invitation before them and this could be acted upon.
(Whereupon, at 1:3o'clock p. m., the Conference
took a recess until 3 o'clock p. m., on the same d a y . )
96
AFTERNOON SESSION
The conference reassembled,pursuant to recess,
at
2
o'clock p.m.
Governor H a r d i n g :
Mr.
L e f f i n g w e l l has sent word t h a t
he may n o t be nhle to g e t h e r e t h i s a f t e r n o o n h u t t h a t he 1s
going to be on hand for the dinner tonirht•
I would s u g g e s t t h a t we d e f e r a n y s p e c i f i c d i s c u s s i o n
of t h e f o r t h c o m ' n p l o a n u n t i l t o n i c h t .
As t h e E x e c u t i v e
Committee is w i t h us t o d a y , a n d may n o t be a rile to be h e r e
tomorrow, I suggest we turn to t h e s e c o n d s h e e t of t h e p r o gram, Topic 1,
"Discount P o l i c i e s " , and i n v i t e t h e Executive
Committee of the Advisory C o u n c i l to exchange v i e w s with t h e
G o v e r n o r s on s u b j e c t s covered hy s u h - t o p i c s a, h,
,
d and
Our discount rates d u r i n g the war necessarily had to
co-or-c11nv.te w i t h t h e T r e a s u r y r a t e on c e r t i f i c a t e s of i n d e h t e d n e s s an
them.
l i b e r t y b o n d s , and e v e r y t h i n r ; :was a n b o r d i n n t e d t.o
I assume it will be n e c e s s a r y , in t h i s a p p r o a c h i n g
loan, to b e a r that fact in mind and o b s e r v e t h e same p o l i c y .
But t h e q u e s t i o n a r i s e s as
that Polley;
to how l o n g we s h a l l c o n t i n u e
i f , a f t e r the n e x t l o a n , we s h o u l d n o t g i v e
due· notice that we would e x p e c t the Treasury Department to
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Federal Reserve Bank of St. Louis
97
co-ordinate itself rather more with the Federal Reserve
system, because they have these financial interests to
look out for, and the financial situation has
broadened.
After the next issue it will not be entirely
a Governmental proposition.
I I t h i n k t h e main t h i n g to d i s c u s s t h i s afternoon
is what our discount policy shall be, pending the
flo-
tation of the Victory Loan; whether or not any modifications in our present discount rates ore advisable, either
in the immediate future or in the course of the next two
or three months.
Governor
Lynch: Do I understand that you are invit-
1ng an expression of opinion on that subject?
Governor Harding: We are inviting an expression of
opinion.
We invite the Advisory Council to conduct a dis-
cussion with the Governors.
Governor Lynch:
Just to start the subject, I will
venture the opinion that we must keep in mind the Treasury
needs and other Government requirements until the war has
been finally financed.
We will have to adjust our discount
rates so they will not interfere with Government financing.
Governor Harding: You mean covering the period of
the next Liberty Loan?
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Federal Reserve Bank of St. Louis
98
Governor Lynch: Covering the period of the next
Liberty Loan.
Governor Harding:
Or do you mean for a year or more?
Governor Lynch: To such a time further than that as
necessary.
loan.
We have been told that this will be the last
I do not know.
Governor Harding:
It may or may not be.
There may be
another one next Fall.
Governor Lynch:
Yes.
I do not see how we can avoid
adjusting our rates mo that they will not hinder the financing of the war.
Governor Harding:
As
But there 1s this point to coni der.
long as we were at war, we had e v e r y reason to co-ardi-
nate our policy with the Treasur policy.
We c o u l d do that
because we had absolute control of our foreign exchanges
and could regulate the exportation of gold from this country.
Suppose we come to a point where we have a defacto peace,
and these restrictions on exchanges and the shipments of
gold should be removed.
Then the only way we would have of
protecting ourselves would be through the discount rate.
If
we should h a v e that k i n d of a peace, and a. formal proclam-
ation of peace was delayed for several months, it seems to
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Federal Reserve Bank of St. Louis
99
we would be forced to request the Treasury to conform
its policy to our necessities
and requirements.
We could not,
if the Treasury wanted to put these certificates out at 4-1/2
per cent., maintain the present reserve bank rate of four
Percent. and r i v e the present differential, e srecially in
the face of the requirements and appeals that might be made
to us by foreign countries. We have an entirely different situat1on there than we had during the war.
I think it is a
very interesting question, and it is a pretty good way
to get a discussion of it.
Governor Lynch:
I agree with what you say, but I
would suppose, on account of the very intimate relations
between the TreHsury Department and the Federal Reserve
Board, that those matters would be considered and adjusted together.
It 1s obvious that neither one can a ct
absolutely independent of the o t h e r .
Governor Harding:
It :ts a p r e t t y h a r d proposition,
and someone must lead.
Governor Passmore:
Speaking specifically on the ques-
tion you have raised, has not the Advisory Council, as a
result of their recent conference on this very subject,
gone on record with a recommendation?
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Federal Reserve Bank of St. Louis
.
r
Governor Harding:
M
1
They have pone on record in rela-
tion to the coming loan, b u t I do not t h i n k they have
approached anything beyond that.
Lest
time the Advisory
C o u n c i l was here, we were n o t , apparently, so c l o s e to e_n
actual p e a c e as we are now.
According to t h e n e w s p a p e r s , it
looks as though we might have a defacto peace inside of two
weeks.
T h i s "hole proposit1or a b o u t our f o r e i g n exchange and
control of these foreign deposits and shipments
be opened up in the n e x t two or three weeks.
of gold may
Is n o t t h a t
p o s s i b l e , Mr. K e n t ?
Mr. K e n t :
Y e s , u n l e s s t h e a.ttome-ys f e e l th.q,t t h e
Executive Order will carry until the Senate hap approved the •
treaty.
one t h i n g ve h a v e to w a i t to f i n d o u t .
That is
Governor Harding:
They have not given any opinion one
way or-the other?
Mr. K e n t :
No*
(
Governor Harding:
They admit there is a question i n -
volved?
Kent:
Yes.
If a preliminary treaty 1s signed the
Executive Order may still be operative, but h e n the treaty
is approved
by
the Senate that will possibly automatically
stop authority extended under the Trading with the Enemy Act.
Governor Harding:
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Federal Reserve Bank of St. Louis
There is another important factor in
11
this which I think Governor Strong might bring out.
He
stated this morning he h a d been advised t h a t t h e British
Government had
change.
abandoned
t h e i r p e g g i n g of sterling e x -
C o u p l e d up with what h a s h a p p e n e d in France, what
effect does
that have on our discount policy?
Governor Strong;
A very material effect, I think,
Governor Harding.
Governor Harding:
We a.re all loyal, and we are all
glad to back up the Treasury, but we cannot do the imposa1ble.
I do not think we ought to be mealy-mouthed at all.
If we have reached certain conclusions we ought to be perfectly frank with the Treasury; we should say so and g ve
our reasons for it.
We should advise the Secretary of the
Treasury of what we think ought to be done.
I want to say in that connection that the Secretary of
the " e a s u r y asked me to sey to the gentlemen present
this meeting that he was
at
exceedingly sorry he would not
be able to be at t h e meeting.
He knew of the meeting
several weeks ago, but he found it necessary to make some
engagements to do some preliminary loan work out in the
West,
He is in Chicago and Minneapolis this week and will
not be back until Monday.
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Federal Reserve Bank of St. Louis
Mr.
Leffingwell will be at the
12
dinner tonight and we can discuss all of these matters
quite freely with him.
If you think it is important, we
cans end over and ask Mr. Leffingwell to come over now.
I think he would be interested in this stage of the discus9ion.
Governor Strong:
.
I should think this is about as
important us any part of our deliberations.
Governor Harding:
I do not think Mr. Kent wants to
€lvo out the figures of the foreign b a l a n c e s in this country.
You all have an idea what they are.
considerable*
They amount to
They are not by any means negligible.
They
are of sufficient amount to cause us to consider them.
Mr. Rue:
You mean t h e foreign balances 1n t h i s
country?
Governor Harding' Yes.
Mr. Rue:
Which may be removed from this country?
Governor Harding:
Mr. Kent:
those
fig
Yes.
The President particularly req ested that
1v
gures bebe not given
o uutt . That is the reason they
have not been turned over to anyone except the Treasury
De p a r t m e n t a n d t h e F e d e r a l R e s e r v e B o a r d .
It
is
suffi-
cient now for the purposes of this discussion for us to
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Federal Reserve Bank of St. Louis
13
know that they amount to an a p p r e c i a b l e sum.
The balance against the United States is a littlo
over $ 1 , , l e s s than it was last June.
That shows
that, without the s h i p m e n t of Fold, we a r e g r a d u a l l y w o r k i n g
out from under the situation, where, in c a s h b a l a n c e s , we
owed the world quite a sum.
Governor Harding:
It has been about equal to the
amount of c u r r e n c y f o r mhich we hove i s s u e d p e r m i t s to
go
out.
Mr. Kent:
That has been v e r y helpful, y e s 4
Mr• Rue: "ere those balances created largely by
loans to forelgn countries?
Mr.
Kent:
Oh, no; the -et balances that are due to
foreign institutions are figured out by us, after deducting from the amount the total balances beloning to Great
Britain, France and Itely, represented by l o a n s made by
the United States.
So that we have had, since February
2Oth of last year, an exact cash balance as between the
United
States and e ach country of the world, and the total
difference n t the close of business every Wednesday night.
That b a l a n c e is made up from the f i g u r e s which come to
the Division of Foreign E x c h a n e through the Federal
Reserve Banks.
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Federal Reserve Bank of St. Louis
14
I am glad of this opportunity to sny to the Governors of the Federal Reserve Banks that all of the work which
they have undertaken in the various banks, in order to get
these figures to the d i v i s i o n of foreign exchange, has
etually
becn availed of.
The
figures
heve
the balnnces have been compiled from them.
been used and
One of the
Governors asked me whether the reports were just filed
without b e i n g u s e d , a n d I was glad to assure h i m t h n t that
was not so.
The balance that we get is a cash balance.
lt does
uot include any unmatured loans, or anything of that sort;
it does not include loans that we havo made to other Governments, even if they are in the form of demand loans.
It
.
representsthe difference between what the bankers and exporters and importers have owing to them in cash in foreign
countries, and what the bankers, exporters and importers of
foreign countries, and some others, have in the U n i t e
States owing to them.
We carry it
on tro s i d e s so t h a t
we know exactly what our balances consist of.
We also know
every week what it is that makes the difference between
the balance one week and the balance the following
week.
The figures come to us in such detail that we are
able to analyze all important changes.
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Federal Reserve Bank of St. Louis
The majority of reductions in balances that this
15
I;
J
c o u n t r y omes o t h e r c o u n ' r i e
nave been occasioned by
Norway, R u s s i a , Greece and J a p a n :
1
,
,
.
The t would c o v e r about
The Norwegian b a l a n c e s have b e e n " o r k e d o f f
to a c e r t a i n e x t e n t throurh t h e p u r c h a s e of British securi-
ties in the United States, from these balances.
Mr. Rue:
Mr. Kent:
How could t h e h u s s i a n balances be a f f e c t e d ?
The + u s s i a n b a l a n c e s are balances held in
the United States belonging to Eussian institutions.
Some
of them were put here in order to get the money out of
Russia, a n d depositors
have drawn on them "hen they
have been able to get out of hussia.
We have not a l l o m e d
these b a l a n c e s to be drawn against by parties who were
in Russia, f o r f e a r they would
get into t h e hands of the
Bolsheviki.
The Norwegian b a l a n c e s were piled up l a r g e l y through
freights.
They r e w very rapidly because the Nor-werian
s h i p owners preferred to take the d o l l a r s r a t h e r than t r a n s -
fer them into t h e i r money at t h e h l e h p r e v a i l i n g rGtes for
Norwegian exchange.
Recently all of these Scandinavian
exchanges have readjusted themselves, particularly since the
Armistice.
They were at v e r y h i g h p e r c e n t a g e s of premium,
but now have come v e r y c l o s e to par.
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Federal Reserve Bank of St. Louis
F o r instance, the normal
=
z
z
./
1.6
mal exchange in Sweden is about twenty-six and eirht-tenths.
It went up to about thirty-eight or thirty-nine.
around thirty-one, thirty-two and thirty-three.
exchange has come d o n in t h e same proportion.
Now it r u n s
Norwegian
D a n i s h ex-
change 1s l o w e r , and Dutch exchange has d r o p p e d from a bout
fifty-two, I believe, to around f o r t y - t h r e e or forty-four.
S w i s s exchange has d r o p p e d v e r y - m a t e r i a l l y .
b e f o r e the Armistice, when it
Just
was thought the war ras near-
ing the end, these rates began to mork off.
It was a sort
of a sentimental adjustment.
T h e r a t e in S p a i n went down to s b o u t t " e n t y age i n s t
a mint par for pesetas of l9.3, but has since mone up to
a b o u t twenty-one a n d a. h a l f . . That has n o t affected our
Government materially b e c a u s e we had established two hundred and fifty million Spanish pesetas credit that enabled
t h e T r e a s u r y Department to get a l l t h e p e s e t a s it required,
to take care of the necessities of the Quartermaster who
Was buying largely in Spain.
Foreign b a l a n c e s , as I see i t , lie in such a way
that if we handle
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Federal Reserve Bank of St. Louis
our
foreign
trade
properly we
17
vre c a n work t h e m down, t h r o u g h t h e shipment of g o o d s .
Take t h e c a s e of Greece:
Greece bas a l r e a d y pur-
c h a s e d goods fr·om b a l o n u e s w·hich s h e h a s in t h e U n i t e d
States, to t h e amount of n e a r l y nineteen million d o l l a r s .
There are o t h e r things t h a t Greece is able to take and
might have taken if t h e r e had n o t b e e n such c.ifficulty
about shipping.
As s h i p p i n g becomes a v a i l a b l e , 1f me c a n hold our
d i s c o u n t r a t e s in such a way that f o r e i g n banks w i l l p r e f e r
to l e a v e t h e i r money h e r e u n t i l they c a n u s e it to buy g o o d s ,
r a t h e r t h a n to t r a n s f e r .it to some o t h e r center where t h e y
c a n g e t a. h i e her r a t e , a. l a r g e p a r t of t h e foreign b a l a n c e s
will be worked out in foreign trade•
The { u s s i a n s i t u a t i o n is
one which I t h i n k it
be w e l l to m e n t i o n w h i l e I em speaking*
ornment is
a month.
might
The B o l s h e v i k i Gov-
printing one b i l l i o n , three hundred m i l l i o n r u b l e s
They were p r i n t i n g t h r e e b i l l i o n , f i v e hundred
million before their ink and paper g a v e o u t , and they had to
come down to u mere one b i l l i o n , three hundred m i l l i o n .
They a r e u s i n g t h e s e rubles to make f o r e i g n exchange in
a l l p a r t s of t h e w o r l d to
u s e f o r propaganda.
They have
f o u n d a way to p r i n t f o r e i g n exchange, so to s p e a k , s o m e t h i n g
t h a t might have b e e n q u i i e u s e f u l to us w h i l e "e mere in t h e
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Federal Reserve Bank of St. Louis
18
war, if
ve had
known how.
I t h i n k it
" o u l d be w e l l to e x p l a i n t h e t a l L t t l .
b e c a u s e we must ll
r e a l i z e t h e t it
is a s e r i o u s r o b l e m t h a t
J
confronts
U8•
d u c e p e o p l e in
The woy they make these r u b l e s good is to inthe various c o u n t r i e s . Russians, Finns, Poles,
and others, to put in twenty-five, fifty or-a. hundred doll a r s , and more where t h e y can, of t h e i r money in Russ i n n
r u b l e s , on the b a s i s of 1 2 ,
15
or 18 c e n t s a p i e c e , t e l l i n g
t h e p u r c h a s e r s t h a t if t h e y w i l l h o l d t h e r u b l e s f o r a time
t h e y w111 be a b l e to g e t f i f t y c e n t s a p i e c e for
them.
Because
of' s u c h operations; there h a s b e e n a. big demand f o r rubles
in G r e a t B r i t a . i n , F r a n c e , t h e united S t a t. e s , in the A r g e n t i n e ,
and
other c o u n t r : t e s .
The s i t u a t i o n became so s e r i o u s we took it
the B r i t i s h end F o r e i r n Governments.
up w i t h
A f t e r investigation
t h e y d e c i d e d t h a t t h e y would be ;.,arranted in proh1b1 t i n g
t h e e x p o r t o t i on and i m p o r t a t i o n of r u b l e s ; _ a n d b o t h Govern-
•
ments t o o k s u c h a c t i o n .
t h e same a c t i o n .
a regulation
rubles.
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Federal Reserve Bank of St. Louis
Then, t h e a n a d i a n Government t o o k
The F e d e r e l Reserve Board t h e n put o u t
prohibiting the e x p o r t a t i o n or importation of
·i'his c a u s e d more or l e s s
h a r d s h i p to some of our
19
exporters, and
mos p a r t i c u l a r l y interesting to those on
the Pacific coast, because they eneeavorea, for the purpose
of p r o t e c t i n m themselves, to have r u b l e s deposited in Vladivo s t o k , Japan, or o t h e r p l a c e s , to c r e r t h e v o l u e of t h e i r
exports.
It is quite a difficult p r o p o s i t i o n f o r them,no
that we have prohibited the exportation or importation of
rubles.
mai.
nt
But it
ned.
is very n e c e s s a r y that t h e r e g u l a t i o n be
I am
i t e certain they c a n f i n d u r:o.y out
of the proposition.
I might say, Governor Lynch, that I have taken the
matter up with t h e rla.r Trade Boa.rd, and a s k e d t h e m to have
their representative in Vladivostok study the s i t u a t i o n
with t h e idea of seein[: if
there is not sorne
'rfi!ay
that
we c a n p r o t e c t our exporters so t h a t t h e y may not be o b l i g ed to have r u b l e notes d e p o s i t e d f o r t h e i r a c c o u n t .
It
was
also f o u n d t h a t the British Government a n d our
own Government were t r y i n g to buy Russian rubles, for various
Purposes, in very l a r g e amounts.
Now that they have stopped
this practice, 1t 1s making it more difficult for the Bolsheviki to spread their propaganda.
The rubles are printed on the presses of the former
Czar in such a way that you cannot t e l l them f r o m the old
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Federal Reserve Bank of St. Louis
.
s
e
l
b
u
r
1
1
They sell t h e rubles in t h e Scandinavian
countries where they are exported to other countries.
My attention was called
to the fact that the Swedish
Red Cross was trying to get in position to transfer a mill i o n rubles a m n t h f r o m Sweden to Vladivostok.
That was
stopped because it s i m p l y took t h e r u b l e s out of Sweden
and so made a market for the rubles that tho B o l s h e v i k i
s e n t over there.
The n e x t move they make is
to
t a k e t h e Swodish
crowns which they receive for the rubles and
put them
in a b a n k in Sweden, where they c a n draw d r a f t s on them
f o r any purpose r e q u i r e d .
The Swedish banks have large balances in this country and are able to sell Bolshevik! agents drafts on New
York.
The
a rafts
a r e made to t h e o r d e r of t h e p e o p l e h e r e
who a r e s p r e a d i n g p r o p a g a n d a , a n d t h e y a r e b r o u g h t o v e r by
various men who are in their pay.
t h e m in
These agents 1:'lrin,T with
t h e i r t r u n k s propaganda, in the l a n g u a g e of the Finns,
the Ftussians and Poles, that they int-end to put out in this
country.
Through the division of foreign exchange the
P e d e r r..l R e s e r v e Board h a s b e e n a b l e to s t o p payment on
some of t.hc a x a . f t s , and t h e beneficiaries in this country
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Federal Reserve Bank of St. Louis
111
been able to collect them.
With the money received, Bolsheviki agents are
able to pay men in the United tates to go out among
the laboring men and others and carry out their propaganda.
We f i n d that there are a number of orge.niza.tions
doing t h i s .
There is one in Los .t•ngeles, t h e narne of
vrritch I have not been a b l e to o b t a i n .
Mexican name, a n d if
I think it 1s a.
Governor Lynch c o u l d obtain that
J
name for us it mould help very much.
There Ls another
one in Hartford, Connecticut; there. is one in Boston,
and several in New York.
There is also one in Minne-
8polis.
The Minnesota s i t u a t i o n is quite difficult b e c a u s e
of the non-partisan league point of view.
Gentlemen, it looks to me as though this count:ry
would have to stamp this thing out as q u i c k l y as possible or a serious condition will arise.
As long
as the
Bolsheviki can print bllars in Russia, and buy people
to talk against our interests in this country, they
have a great advantage over us
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Federal Reserve Bank of St. Louis
112
That is one situation that I think we ought to b e u r
in mind*
As
ime
g e u om, we may h o v e occasion to write
to the different Federal Reserve Banks to help us g e t
information on this subject.
In connection with the exchange situation, there are
one or two things that have come up that I think might
interest you.
Take, for instance, the situation in France.
This is confidential, I might say, but we all have to
bear it in mind.
France is not in as
ood position to
Prevent the importation of goods that are not needed as
she Wishes to be, and as a result many French houses have
been importing into France things in the nature of luxuries
because the American and British soldiers w a n t e
to b u y them•
As you mow, it
doesn't make any d i f f e r e n c e whether a
thing is manufactured in a foreign country or not, if a
Person is there they want to b u y it.
France has been importing many things that were not
required"
In order to protect herself and get do"n to a
right basis as quickly as possible, it has been thought
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Federal Reserve Bank of St. Louis
113
necessary to u n p e g the French e x c h a n g e .
the franc will find its
proper
By so d o i n r · ,
level which it is felt
W i l l work to prevent the importation of things t h a t
are not necessary.
In p e g g i n g an exchange, we really are trying to
create a c o n d i t i o n t h a t w i l l e n a b l e those c o n c e r n e d to po
on a n d on to a worse a n d worse condition, b e c a u s e we
are makin
it easier for them to import and we are not
a f f o r d i n g the p r o p e r i n c e n t i v e to p r o d u c t i o n f o r exr,,o:rt-
Foreign exchanges are r e a l l y o n l y barometers of what
is
happening•
cause.
If
F o r e i g n e x c h a n g e s a r e a result a n d no
e,
a.
the trade of a c o u n t r y shoms about the same
proportion of imports and= xports, the foreign exchanges
tell the story, and they help regulate t r a d e , b e c a u s e
when they go a g a i n s t a. country they have a tendency to
s t o p i m p o r t s and to i n c r e a s e exports.
France has taken
that position.
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Federal Reserve Bank of St. Louis
In Italy they also have a very difficult situation
114
they have not the same control over their importers
that we have.
France has been figuring on the German Indemnity
as one of the things that could be used directly and
indirectly to help out their situation.
They figure---
and I think it may work out t h a t way---that the German
indemnity can be placed back of credits which will be
established, that will ensble them to import necessities from other countries, particularly from the United
States•
Just what form thet rill ta'ke is not y e t fully
understood, because they have got to meet whatever conditions a!'ise when the terms of the t r e a t y are finally
worked out.
If the French Government rives credits to those who
Prove their claims against ermany, it may be a book credit.
Then, if the French Government recognizes a form of
assignment, which will enable those h a v i n g book credits on
the books of the Governmenr to transfer such credits to
others, it m i 1 1 immediately become possible to place thom
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115
1
as collateral for credits which may be opened for the
Purpose of importing goods from the United States.
There is no question but that the French Government is going to endeavor to do sll the reconstruction work
pos sible itself.
It is going to try
to give it
to its
own people.
France will, however, wish to import things from
us that s h e n e e d s now and things she 1s
oing to need
for reconstruction purposes.
I t a l y , a.s a matter of f a c t , has stated that she
wants 2 O O , , o f credits in this country for the
purpose of taking care of imports.
In t a l k i n g with their
l"'ep:resentatives, I have taken the ground that it was nocessary for their good and for ours for them to pay promptly
for everything they imported which could be turned over
within 9 d a y s , but that in the case of commodities
which could not be turned
er w i t h i n 9 d a y s , like machinery
and t h i n g'- s of that sort which require a longer time before
t h e f u n d s would come b a c k , that l o n g e r term credits
could be arranged.
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By h a n d l i n g t h e m a t t e r in
t h a t way we p r e v e n t t h e
'
116
holding of funds by spinners, and others who should not
hold them•
For instance, if a cotton spinner in Italy
imports cotton end manufactures it into cotton cloth,
Sells
the cloth and gets lire in 9 d a y s , he should
not be allowed to hold that lira for the period covered by one 9 d a y acceptance with the privilege
of three renewals.
He might invest that money badly.
It is not his business to invest money.As funcs received promptly are used for prompt payment, it is going
to make it less necessary to float longer credits for
such large amounts·
At first.
At first, the represen-
tatives were not inclined to think that that was feasible, but t h e y are now be@inning to feel that the principle
1s c o r r e c t .
Another reason why they were anxious, of course, to
c a r r y payments over, was to take advantage of the e x p e c t ed l a t e r r i s e in t h e exchonge'
They a l l f e e l t h a t , w i t h
the exchange as much against them as it now 1s, that they
can make their payments in lira, leave them in Italy for
a year, and that by the time the year is up they will
be able to buy dollars on a very much better basis.
They
feel in I t a l y that after t h e y have had time to proc:uce some
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117
of the things they normally export they are going to be
able to take their place in the world in the right
sort of way.
Thoy now have in
T t n l y about 4 , , w o r t h of
s i l k which they are in a p o s i t i o n to export*
They a r e
having difficulty, hoever, over the q u e s t i o n of transporta tiono
Another difficulty is that Japaneese silk
ls 1n t h e way of t h e i r m a r k e t '
•
h a r d f o r them, still s i l k is
w h i l e t h a t makes it
one of t h e things t h a t t h e y
expect to be able to export as time goes on.
The other exports of Italy will take longer to
produce, an
t h e y probably can n o t start t h e m forward
f o r another s i x months or s.
they r e q u i r e at
The p r i n c i p a l i m p o r t s that
t h e moment, a n d t h e most n e c e s s a r y o n e s ,
are materials for the r e c o n s t r u c t i o n of their r a i l r a d s .
There was something 11ke 5 , , w o r t h of food destroy-
ed in Genoa harbor simply because they did not have means
of transporting i t .
That# as because of the bad condi-
tion of their railroads.
Of course, at t h a t time many of
I-
their trains were being used on the Eastern front: which
have now b e e n c a l l e d b a c k , b u t at t h e same time, t h e y
need greater railrrad facilities and the idea is to try
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118
to utilize their water p o r e r in the Northern part of
Italy so that they can run the railroads by electricity.
That would mean a. large amount of b u s i n e s s for this
country, but it is business that will have to be carried
for rather a long time, and Italy is
going to make re-
q u e s t s f o r c r e d i t s to meet e x p o r t s f r o m t h i s country
for such purposes:
going
If they con do that, it is going to
to help Italy meterially because their require-
ments of coal will be very much reduced.
buying a
They have been
large part of their coal, as you know, from
Great Britain, but Great Britain has now only sufficient
In fact, it
h a s not
Labor troubles there have made it
hard to
coal to supply its own needs.
enough·
get a sufficient amount of coal for their requirements,
w i t h the result that t h e people in England c u n only keep
one house going at a time·
They are not a l l
ed to keep
a c o u n t r y house and a city house open at the same time
because of'the extra coal needed.
They are preventine the
waste of coal in every way that they can.
In Czecho-Slovakia, they feel they must have certain
things from the United States·
They
cb
not know yet exactly
how they are going to establish their credits, but it looks
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I
119
as though they will req.i
ire quite a little help.
In connection with t h a t proposition, is
the quaes-
tion that has come up a.bout food, which I think you gentlemen ought to be f a m i l i a r with.
In o r d e r to d i s t r i b u t e
food to Poland, Czecho-Slovakia, Roumania, Serbia, GermanAustria, Hungary, Herzegs71na., and some o t h e r c o u n t r i e s ,
it is going to be necessary 1or this c o u n t r y to take payment wherever we can, b e c a u s e we are not able, financially, to feed t h e whole world.
A means has been de-
veloped to make use of foreign moneys that will be r e ceived for f o o d , which is about as follows!
A l l dealers in t h e U n i t e d S t a t e s who heve been in
the habit of makin: r e m i t t a n c e s for foreigners in the
U n i t e d S t a t e s , a r e to be i n s t r u c t e d to t a k e d o l l a r s
from the foreigners who wish to remit to those countries snd send them, together with a list of beneficiaries,addressed to their regular banking correspondents in
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Federal Reserve Bank of St. Louis
e
s
o
h
t
2
.
1
countries, to the Amer-jean Relief Administration
o f f : ice
in New York.
The A m e r i c a n Reli.e.:'.Administra.-
tion office "ill keep the dollars:
Checks for dollars
that will come forward will be placed to their account in
New York
They will forward the lists of beneficiaries
to their P a r i s office; t h e Paris o f f i c e m i l l sort
the lists to the different countries to which they
are addressed, and send them to the representatives
of the American helief Association in those countries.
Then as the food reaches those countries from the
American Relief Administration in the United States,
1t will be sold by the representative of the American
F e l 1 e f Administration in t h e f o r e i g n money of the
foreign country.
When s u f f i c i e n t foreign money is
r e c e i v e d to cover t h e l i s t s a d d r e s s e d to a ·rnrta.in
foreign bank, it
will be deposited w i t h the bank,
together with the remittance lists.
As a result, the dollars that are to be remitted
from the united States will be used by the American
Relief Administration to pay for the food in the
United States.
The food t 1 i l l go from here to the
foreign country, and that food will be sold in the money
or t h e f o r e i g n c o u n t r y , and the money of the foreign
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121l
c o u n t r y will be paid to the persons in that country
who are to receive the remittances from their friends
in the United States.
That makes a very clean proposition.
The plan
was cabled over a few days ago and a cable a s received
today approving the arrangement·
It wi1l be
put in
force, probably, within a very few days.
Of course, none of us know what sum will be represented by such transfers because the addresses of
People in that part of Europe ·have not been known to
their friends, in some cases, for two, three or four
years; but under ordinary circumstances it would run into
a very large amount, and would probebly take care of the
food proposition very well•
I have already succeeded in transferring about
1 5 , w h i c h is
ha-idled in this
going to Poland, and which will be
manner·
That 1s a preliminary propo-
81tion.
The average postal money order one year was about
$7.52.
That shows you what a tremendous numher of
these transactions will have to po through in order to
r o a c h any large sum.
But they usually do move in such
numbers that there 1s a fair change that they will take
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Federal Reserve Bank of St. Louis
c a r e of t h e f o o d s i t u a t i o n very n i c e l y in t h o s e count r i s, if those who might wish to r e m i t realize t h a t
when t h e y make a r e m i t t a n c e w h i c h p u t s f o r e i g n money in
t h e hands of t h e i r f r i e n d s , t h e y are
p u t t i n g f o o d in
w i t h th
at
t h e se.me time
t h e c o u n t r y f o : r t h e i r f r i o n d s to buy
f o r e i g n money t h a t t h e y r e c e i v e .
T n - r e is
a n o t h e r t h i n g t h a t hes d e v e l o p e d which
...
may cause some s e r i o u s losses in t h i s c o u n t r y and t h a t is
t h e c a n c e l l a t i o n of l e t t e r s of c r e d i t .
There a.re e. g r e a t
many e x p o r t e r s , p a r t i c u l a r l y those to S o u t h America,
Who h a v b h,ttc:-:rs of cre-dit i s s u e d to
t i o n da
t h e m t h a t bear e x p i r a -
Some of t h e m bought goods when t h e y r e c e i v e d
tHS.
their licenses from the War Trade Board a u t h o r i z i n g shipments and t h e y were p r e p a r e d to ship_. b u t the s t r i k e s in
S o u t h America, p a r t i c u l a r l y in Buenos A i r e s , have p r a c t i c a l l y s t o p p e d all s h i p p i n g and as a r e s u l t l e t t e r s of
cred:1.t in r.-:any c a s e s have e x p i r e d and o t h e r s a r e c o n t i n u a l ly e x p i x t i n g .
be-cause t h
There is no we.y to m\':"'et t h e s i t u a t i o n at a l l
c r d i ts c a n n o t be a v a i l e d of u n l e s s t h e goc,d$
a r e a c t u a l l y s h i p p e d and t h e b i l l s of l a d i n g and o t h e r
s h i p p i n @ docum ent s d e l i v e r e d to t h e banks w h i c h h a v e opened
t h e c r e d i t s . That is
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oin
to moan a. l o s s to many e x p o r t e r s
123
because the prices on some goods that they purchased
have gone down since their purchase·
It is a problem that
will have to be met by some of the banks in some of the
districts.
I doubt, however, if the banks themselves
will meet with much loss.
I think that such losses as
occur will fall almost entirely on the exporters and
importers as most of those who have been caught, so far
as I can find out, are very good concerns.
I do not know of anything else in particular that
you might want me to speak of a.t the moment•
(Assis ta.nt Secretary L e f f i n g w e l l entered the
conference room).
Governor Hard ng:
Mr· Leffingwell, we have just
been discussing the foreign situation and the effect
the fall of the French franc, and the condition of the
sterling pound, will have on our local situation.
The discussion was opened upon the question of what the
discount should be during the period of this next Victory
Loan.
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Federal Reserve Bank of St. Louis
I
Iii
1.24
We
/are a l l committed to t h e p r o p o s i t i o n t h a t our policy
would, of course, be dominated by the Treasury rate during the period of the war and during the next loan.
However, according to the press, it looks as though we
may have a defacto peace in the course of two or three weeks,
and we do not know what effect the.t 1s going to have upon
our control balances that we owe foreign countries, or
Upon our power to regulate the exportation of gold.
I
understand legal advice is being taken as to that question.
Then , we do not know just how soon a formal treaty of
peace mill be ratified by the Senato.
There might be a
period of several months during which we would be constructively at war and yet in an actual state of peace.
Of course, we have got to protect ourselves,through
t h e control of discount r a t e s , against any undue w i t h d r a w a l s .
All these domestic problems have come up, and it is a
q1
8-
tion then of presenting these facts to the Treasury so that
you Will be on notice that the .ti'edera.1 Reserve Board and
the "deral Reserve Banks would have to consult their own
necessities in the future rate, so that the Treasury, 1f it
issues any more paper beyond a certain period, could meet
the money c o n d i t i o n s .
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Mr• Leffingwell: What in the world are you afraid
Of?
•
Nothing•
Governor Harding:
Mr• Leffingwell: The only conceivable effect of the
removal of the pegs would be to reduce the strain upon our
gold.
It seems to me perfectly clear that there is coming
a time, and that very soon, in view of the removal of the
pegs, when you will want to let the gold go freely because
you know it wont go anyway.
I cannot see anything in the international situation
to justify an apprehension about the protection of our gold
reserves.
It seems to me that we have a peculiarly fortu-
nate position internationally, and it is largely a question
of the skill with which we handle our national finances.
It has become very apparent that the amount of loans
Which we can, or should
make to foreign governments, is
going to be very much curtailed,
curtailed by the lack
of authority to make loans if nothing else.
I think it is the sound Judgment of the foreign Governments, that it is necessary for them to protect their own
credit resources.
They realize there is a limit to credit,
and a limit to the amount of foreign debt t h a t c a n be
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Federal Reserve Bank of St. Louis
126
accumulated.
I assume the removal of the exchange pegs
1s the first step toward a self-supporting financial
Policy on the part of the Governments concerned.
going
to be a little difficult for them.
It is
Almost anything
may happen during the period of readjustment and strange
events may occur, a till I see no reason in the world·to
suppose that out of the situation, where all of the coun-
tries in Europe are eager to buy our foods and materials,
and are, as yet, unable themselves to produce finished articles for export, that there can be any strain upon our
financial structure.
If I have responded to the point you had in mind, I
think that is about all.
Governor H a rd in g :
That was one of the p o i n t s .
Would
it be possible for those balances to be used in arbitrage
operations a n d shifted about? (The buying of wheat in a
cheaper market than here).
Mr• L e f f i n g w e l l :
I would l i k e to ask Mr• Kent how
big those balances are and how much concern the matter gives
him.
Mr. Kent: Would you consider I would be justified,
after what the President has said, in giving out those
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127
balances?
If you do, I would, of course, be more than
Pleased to state them•
Governor H a r d i n g :
the proprieties.
I do not t h i n k it would be within
We know they are not negligible, tha.t they
amount to quite an appreciable sum.
Mr• Leffingwell:
tw. Kent.
Perhaps that was not a fair question,
I think it is perfectly obvious that we should
give very serious consideration to that question,
I imagine
it is a question that ought to be considered in council in
the Treasury Department.
This particular question that Governor Harding has referred to is one which has arisen over-night:
I do not suppose
we ought to decide a fundamental question of policy without
analyzing the details.
What I meant to s a y with regard to the whole situation,
taking it
by and large, is that the overnment of the United
States, 1s a creditor and is in great danger of becoming more
of a creditor as time poes by.
f•
And while there may be here
and there certain p e c u l i a r i t i e s in t h e situation which might
lead to our position being reviewed, it seems to me that the
time is not now to take steps indicative of fear on the part
of the banking system of the one great strong, solvent. country
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Federal Reserve Bank of St. Louis
128
in the world.
Governor Harding
These gentlemen have decided ideas
about what t h e rate of interest on the next loan should be,
and we have decided to postpone any discussion of that
feature of it until the dinner tonight.
Mr, Willia.ms:
Could n o t Mr. Kent answer this question
by assuming that the b a l a n c e s are so much, that their loss
might injure the United States?
He can make an arbitrary
assumption*
Mr. Leffingwell: Even then, I am quite sure that we
ought to sit down and go over the situation before expressing any opinion.
Mr. Kent has been over h e r e with you
gentlemen and I have been in the Treasury Department.
This
thing has happened within twenty-four hours, and I do not
believe it is a matter which could be decided exc·ept in
Executive session* So far as t h e Treasury is concerned,
I do n o t mean to do anything more than to deal with generalit1es.
Governor Harding:
I think we are all agreed that the
financial problem is very much more complex than it was a
year ago or six months ago, when we were in a state of war,
when the Government was employing labor and purchasing
supplies, and Government financing was admitted to be
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Federal Reserve Bank of St. Louis
129
paramount all along the line.
We feel now that thexe will
be some side c u r r e n t s to this thing, and that Government
f i n a n c i n g will not be the whole thing, and that the field
is much b r o a d e r .
Mr. Leffingwell:
I think the problem is considerably
less complex on the whole as the situation is relieved of
1ts artificiality.
We
may make some blunders in elim-
inating artificial conditions, but we are all going to have
less to do, less to decide, and less opportunity to make
i m p o r t a n t mistakes.
Governor Harding'
I think it will be less complex
a f t e r we get through with t h e transition p e r i o d , but while
we are passing over the bridge we ought to watch out that we
do not make any false steps.
Mr. A. C. Miller:
I would like to s a y a word in sup-
port of Mr• Leffingwell's last prediction, but I will go
a l i t t l e f u r t h e r w i t h respect to their b e i n g no
danger from our beginning to life the bars on gold. I think
the real danger is that we are going to be stuck permanently
with a large part of this gold, and that 1t will simply lie
.
as a d ead asset in our b a n k s .
.
I think the sooner we begin
to give some indication of our policy to use this gold in
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Federal Reserve Bank of St. Louis
g
n
i
z
i
l
i
b
a
t
s
3
1
exchange with countries that are actually on
a gold basis, the sooner we will be in a fair way to establish
the fact with other countries that the gold stand-
ard is going
to be the standard in the future as it has been
in the past.
Governor Harding' Governor Strong, you are familiar
with thir whole situation, and we would like to have your
views on i t .
Governor Strong:
I have been puzzling as to what
change in our position is necessary in consequence of this
development in foreign exchange.
That has a very important
bearing on all these matters that we have been discussing.
My feeling is that it very much simplifies the gold
Problem and greatly reduces the danger of gold losses, because loans under the exchange conditions that might result
in this country would be very expensive loans for some of
the foreign nations to negotiate here.
I am inclined to
think that it will relieve a good deal our embarrassment
With respect to these foreign balances.
Governor H a r d i n g :
You think the foreign balances will
be worth more for them to check against?
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Governor Strong!
Yes.
They will be at a premium abroad
131
for use in dollars in this country to pay for goods.
As soon as our lending policy is perfectly clear, and the
fact established that transfers of credit made to one nation cannot be used for the benefit of another nation which
is selling largely to the borrower, the demand on our gold
is going to be
checked through neutrals where the ex-
changes are adverse to us.
In a.sense, it seems to me
that letting the exchange situation work itself out will
be a protection to us.
Governor Harding: You k n o , we have the power regardless of any further executive orders by the President, to
issue such licenses for the exportation of gold as we may
see fit.
Would you advise, as our policy in the course of
the next two or three weeks, that we become more and more
liberal in permitting the exportation of gold to foreign
countries?
Governor Strong:
My
feeling in general, Governor Har-
ding, is that I would like to see the figures first:
But as-
suming the figures are about what I believe them to be, I
would be inclined to say yes, that the time has come to let
some gold go.
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Federal Reserve Bank of St. Louis
Governor.Harding:
We have let a good deal of it go
::
132
to Venezuela and Columbia.
Governor Strong:
Governor:
Not a very vast amount.
Not comparatively speaking, no.
Governor Strong:
If
the situation with Chili is what
r
understand it to be, the demand from Chili for gold will disappear to a great extent very soon, if not entirely.
Mr. Kent:
The gold desired by Chili is to meet expens-
es of workmen in the mines there, particularly the Chili
Copper
Company, and the Braden Copper Company.
Of course,
the copper companies being owned in the United States, the
Payment for the copper itself is not necessary in the form of
exchange or e . n y t h i n g e2.se.
There has b e e n
a ite a demand for
gold to put these people in a position to pay their help.
So far as Chili is concerned, that 1s about the only
demand that I can see now, because the nitrate situation is
practically settled.
In the case of
Bolivia, they have at the moment
only about 2 , , t h a t they could demand.
That is rep-
resented through balances with the Federal Reserve B a n k ,
which was the result of t h o . $ 5 , , c r e d i t t h a t
established:
That credit was piled up to about $ 4 , 5 , .
They have withdrawn and ha"i.'e been able to use about
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Federal Reserve Bank of St. Louis
was
1.33
$ 2 , 5 , , leaving about $ 2 , , g o l d that they may
want.
The Argentine would probably take quite a little
gold.
Of course, their balances in all of the Federal
Reserve Banks is about 8
,
,
, represented by de-
posits that were made here against which notes were issued
in the Argentine.
As the Argentine Government did not
clearly understand that proposition, due to the fact that
it
really was not explained properly, as was shown by arti-
cles in their newspapers, which some of you may have seen,
I am rather inclined to believe that-the Argentine may want
quite a little of that amount in gold before long; that is,
when t h e y get/'opportunity to take i t .
They have in the
Past allowed quite an amount of gold to remain in Great Britain and the United States as reserve against notes which
they have issued in the Argentine; but heretofore it
n e v e r r u n i n t o as large f i g u r e s .
has
We had e a r - m a r k e d in t h e
U n i t e d Sta t e a when the war broke out, about 1 7 , , a c c o u n t
Argentine.
That was just before the gold embargo was placed.
That { 1 7 , , t h e Argentine has withdrawn and it is in
Argentine now.
t h a t much l e s s .
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Of course, that means they would reqiire
134
In Uruguay, I think there will be a
demand for some
gold.
Brazil would not be able to ask for any gold.
exchange is the other way, and conditions
Their
are such that I
do not believe they could take it for some time.
Of course, Columbia and Venezuela are going to want
While the balances do
more gold for quite a little:
n t
fa v o r e .b l e
show it, their trade has been very large.
It is customary with those people to ship their coffee
to the United States on consignment, and then, when they sell
I
the coffee, they have the dollars.
They do not sell it to
an American unless the Americen be the importer.
the exporters from Columbia.
They are
It so happened that the price
of coffee going up to 27 and 28 cents made a big profit for
those people, so they had dollars accumulated here.
Governor Harding:
Would Japan take gold from us if
She had the opportunity?
Mr. Kent:
Yes.
one and a v e r y b i g one.
The Japaneese situation 1s a peculiar
I do not know ho" far you want me to
go w i t h t h a t question, but I can go a long ways.
Governor Harding:
go into details.
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Federal Reserve Bank of St. Louis
I do not think it is-necessary to
We all know it is a large question.
135
Mr. K
Mr. Kent:
The situation is this:
One of the Japan-
ese b a n k s has a provision in its charter under '!Vhich it
has the right to e s t a b l i s h the exchange r a t e s ,
In J a p a n
they had e f e e l i n g that it o u l d be a d v i s a b l e to hold
the exchange rotes as low as they could, and as a result
the rate established by the Japaneese bank was under
the r t e established by the American and British Banks,
w h 1ch
i c hhave b r a n c h e s in
b
ks P o u l
As a r e s u l t , t h e Japanese
Japan.
get a l l the bills•
1·1hen
they obtained these
bills , the larger proport16n of thich a r e United States
bi1ls
,
olthouh they pet them from other countries of the
world as " e l l , t h e y p a y o u t t h e y e n in Japan to cover
the S h i p m e n t s say of silk, which used to run, as you know,
around
n
$ i 6 8 , ,, t o {
, 8 , 2, .
1917, and
more in 1918•
1
It was 1
The banks were obliged to ho
to the Japanese Government to obtain loans to put them
in a position to meet the situation, because they had so
much money in other countries, particularly in the United
St
•
ates.
Now, they have invested a pood part of that
money, not a large proportion but a large sum, being in
British T r e e s u r y bills.
I think the t o t a l runs around
$ 3 7 , , t o $ 4 , , .
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Federal Reserve Bank of St. Louis
In taking the situation
136
altogether, the Japanese banks
had quite a little diffi-
culty handling themselves.
I do not want to give the wrong impression, that
tha e banks are not in good condition, but it merely means
When opportunity offers they are going to call on us for
great desl of gold.
They are also now quite anxious to get silver·
I
have seen the Japanese bankers r.ho ho.ve offices here, and
have been over the whole silver situation
tic
wtith
far as it was possible to co so.
them us
They have agreed not
to ask for silver, and have been extremely nice about 1t•
They h a v e r e a l l y b e e n very h e l p f u l .
However, certain other Japanese interests have been
trying to get silver from Mexico, thinking that if they
could get Mexican silver they could possibly ship it in
bond through the United States to Japan, and, if that was
n o t a l l o w e d , possibly ship it
.:A
r e ct t :
I t h i n k J a p a n bought t h r e e thousand tons of sugar in
Mexico not long ago, and they sent over their boats for that
in the hope that they might take back silver in exchunge.
So far, we h a v e b e e n a b l e to p r e v e n t t h a t b e i n g done.
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Federal Reserve Bank of St. Louis
,t'
137
•We h ave been taking silver from the Mexican Government.
The Mexican Government has changed its coinage
by
putting
less silver
irn the peso and tostone annd in orrde.er t o
v
make a profit on the silver, because of the rate being
one dollar and one and a half cents an ounce, the Mexi©an Government
has been taking
eki
ver
up pesos
coinage and shipping them out•
of the10
old
We he.ve been able to
control that situation up to t h i s time.
The Japanese balances are such that only a very
3mal1
Part could be covered in silver because there is
not enough silver production in the world at the moment
to take care of the demand.
On account of the price of copper havinf-fallen,
t h e p r o d u c t i o n of copper is
rapidly decreasing,
In
Mexico , Peru, Alaska and in the United States, the pro-
duction is decreasing.
A great deal of the silver comes
from copper,so that the production of silver is falling.
The Price of silver h a s been established at a dollar
as a minimum for what will p r o b a b l y be a considerable
t i m e , b e c a u s e s i l v e r o f f e r e d t h e U n i t e d S t a t e s Gr ernment
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Federal Reserve Bank of St. Louis
138
will have to be taken up at that rate.
Our Government
can only cover in the silver that has been broken up
from the surplus each year, and on that account there is
fair reason to believe that the price of silver will be
maintained for a
long period.
That, unquestionably,
means that some of the silver mines which have been
Closed down are going to open up, which will give us a
little more silver.
for
That, however, will not come about
sometime, possibly not until the labor
that is now developing copper is released because of
decreased production of copper•
I think we can look
for a little larger production of silver later on from
the silver mines themselves
The mines were cl
ed
When Silver was running around 48 to 6 c e n t s an ounce•
Jevo will wsnt considerable gold, because Java
Ships
to this country a great deul of tobacco.
Mr. A, C. Miller:
Give us an ides of what you mean
when you say a considerable amount of gold?
n
Mr. Kie n t :
At ,t h e moment,
, Java would
1
1ike $
go1e, just for a start:
Concern us it
That is not a matter that need
seems to me.
Governor Harding: Does Java want the gold actuslly
Shipped, or does it want to ear-mark it?
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Federal Reserve Bank of St. Louis
)
139
Mr. Kent:
Juva wishes to do this:
The Javasche
Bank buys bills on the United States and accumulates dol-
lars.
'1hey want to buy gold with the dollars and ear-mark
1t and issue notes in Java against the gold.
allowed to do that under the Dutch law.
They are
The Java bank-
lng law is the banking law of Holland.
Governor Harding:
The
manager of that bank is in
town now, u n d Vit111 be here f o r t h e next f e w months.
Mr. Kent: So I understand.
gold in Great Britain.
They used to keep that
It was ear-marked in Great Eritain,
and they issued their notes against it at that time·
their trade is toward the United States.
Nom
Before the war, as you know, the trade from Java
used to go to Holland, and then we imported from Holland.
This
wer hes opened
up new trade routes, and there
is no question in my mind but that Java is going to
c o n t i n u e to export to t h e U n i t e d States in a. l a r g e way.
H o l l a n d is
going to r e q u i r e food f r o m u s , and
Jav-a. owes Holland, because the Dutch have their investments
In Java, Sumatra, and that part of the world, and those
Investments bring them very large returns in the form
Of
,
dividends and interest.
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Federal Reserve Bank of St. Louis
t
a
h
T
4
1
means that Java, although it is an exporting
country, has to r e m i t to Holland a large amount.
If gold is e a r - m a r k e d in the U n i t e d S t a t e s for
Java, it will ultimately be left here probably because
Java will owe Holland and Holland will owe us, because
she is having to take so much food from this country.
It seems to me there is a
situation that we can take
care of very essily, without difficulty, and which is
really to our a d v a n t a g e .
Sweden will n o t n e e d gold·
They put an embargo
upon the importation of gold into Sweden because they
had no use for it.
Spain will not need g o l d , because their currency
is metal covered to about ninety-nine and a half per cent.
Part of that is silver, but they had so much gold in
December,1917, that they were charging six per cent
discount
on 8 1 a .
Spain and Sweden have large b a l a n c e s
here in the United States, and it is not probable that
they Will want to pull these balances out in gold.
We
always want to bear in mind, in that connection, that while
they may not take t n e gold from us, they may transfer
those balances through arbitrage operations.
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Federal Reserve Bank of St. Louis
141
Mr. A. C. M i l l e r :
What injury are we going to sus-
t ..
ain if they do take some of our gold?
It s t r i k e s me that
all of this argument 1s predicated upon the a s s u m p t i o n t h a t
if we l o s e some c o l d we a r e g o i n g to s u s t a i n very serious
injury, age.inst which we must protect ourselves·
I think
this matter ought to be hooked up with a. discussion of
the d i s c o u n t policy, if
1s g o i n g to be really profita-
at a conference of this kind.
ble to discuss it
Governor Harding:
around t o .
it
That is what we are g e t t i n g
We are getting a diagnosis of the ca.so•
Mr. Rue:
With r e s p e c t to the b a l a n c e s mhich you
say the foreign countries have here, while they may not
want the sold themselves, yet London is paying
4-1/4 per
cent on bala.nces, and 1rould they not s h i p those b a l a n c e s
by an exchange operation into London to get the higher
rate of interest?
Mr• K e n t :
They p r o b a b l y would to some e x t e n t .
But that would not harm u s , because s t e r l i n p :exchange is
available, and they mould have to buy a considerable
amount of sterling
exchange
before
it would
get to a point where it would be necessary to ship
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Federal Reserve Bank of St. Louis
142
gold.
Of course, in outlining t h e proposition, I was
not attempting to s a y whether it was a.good, bad or
i n d i f f e r e n t p o l i c y , b u t I was s i m p l y trying to shom what
t h e r eel ations were between the United S t a t e s and
these o t h e r c o u n t r i e s , a t h i n g that we should consider
when making up our minds what is the
Mr.. Rue
t ithin,
. i n g toto
a io.
T h i s $ 8 , , f o r South America, for
i n s t a n c e , is that ear-marked gold?
Mr. K e n t :
1.
Rue:
That gold 1s in the Federal Reserve B a n k s ?
Mr• Kant
Mr, Rue:
1s not e a r - m a r k e d now.
It
Yes.
Are the Federal Reserve Banks issuing notes
against that gold?
Mr.
Kent:
Mr
Rue:
Mr.
Kent:
Mr• Rue:
work.
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Federal Reserve Bank of St. Louis
Is it part of the reserve?
Yes•
Then it is serving a. dual p u r p o s e ?
Yes·
It
is
It
is v e r y u s e f u l gold.
useful because it
is d o i n g double
I+ mould, of c o u r s e , e f f e c t t h e r e s e r v e s of t h e F e d e r a l
143
Reserve Banks 1f t h a t g o l d is withdrawn.
Mr. A. C. M i l l e r :
the
a
That is the reason I think that
estion w h i c h we should center upon, in trying to
decide what our gold policy will be and our discount
P o l i c y , ls
to what e x t e n t we want liquidation and to what
e x t e n t we want to a l l o w t h e r e d u c t i o n s in r e s e r v e per
centage.
I do n o t s e e how we can determine what ought to
be done unless we can strike a balance in the figures.
I t h i n k t h e w a y to get at
t h i s m a t t e r is f r o m t h e o t h e r
end; t h a t i s .
j u s t what we think our d&1i s c o u n nt
t
,
d
•
p o olic
JLcy
um ht
to he When we g e t through w i t h t h e next Liberty Loan,
Whether we anticipate heavy demands, whether we want to
m a i n t e i n an e a s y market
'iTi
th
l o w r a t e s in o r d e r to have
ample reserve and a higher reserve percentage, or whether
we think it
is desirable to c o n t r a c t .
If we r e a c h t h e
latter conclusion, as I am rather inclined
should
, we can l e t it
justify i t s e l f
to think we
t h r o u g h loss of
r e s e r v e s , which artificially suggest an e l e v a t i o n of
rates as a natural protect1on.
I think the reserve sys-
tem w111 be in a v e r y i n d e f e n s i b l e p o s i t i o n w i t h t h e
general public if
it should undertake to r a i s e r a t e s
when our r e s e r v e per c e n t a g e s a r e h i g h .
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Federal Reserve Bank of St. Louis
We c a n r a i s e
144
them very readily, however, if our reserves begin to
run off as they might, and as I hoped they would when we
lifted the embargo on gold.
Governor Harding I t h i n k we could get a t
something definite perhaps in this way.
Mr. Kent, you
have shown your familiarity withthis whole proposition,
and you r e a l i z e it
is
p r e t t y h a r d to f o r m an i d e n of
discount policy unless you know something of the smounts.
I would like to ask how much, in
your opinion, based upon
I
I
present discount rates, how much net loss of gold we would
be liable to incur if the restrictions are removed, say
in the n e x t 9 d a y s ?
What
would be your r o u g h guess as
to the net loss of gold which would be involved.
That
can be answered without saying anything about any particular country.
Mr. Kent:
a l a r g e amount.
In 9 d a y s , I wouldn't say it would be
I b e l i e v e it
would be under $
2
,
,
.
I believe that 1n the case of every country having a
balance here, that the amount of gold they would nstura l l y d r a w would be f a r l o s s t h a n t h e b a l a n c e s t h e y have.
It 1s n o t n a t u r a l to covar o t a l
never has worked that way.
b a l a n c e s in
gold.
It
For instance, in ordinary
times, suppose you figure a trade of five billion dollars,
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Federal Reserve Bank of St. Louis
1.45
you WOUla find that the gold that moved, when gold
was f r e e , to c o v e r a t r a d e of f i v e b i l l i o n d o l l a r s , might
not be more t h a n T i f tvy"
million dollars.
The c o s t
of
t h a t · t r a n s a c t i o n , based on one q u a r t e r of one per c e n t ,
$125,ooo
_
M:r·. , J i l l i a m s :
ture of it.
a.rnount,
We
I t h i n k we a l l u n d e r s t a n d t h a t f e a -
You have placed 2
,
,
a
s a maximum
What do you think would be the minimum amount
would be likely to lose?
s Mr. s Kent:
e
Il s h onu l d us a y somewhere
,
,
5 around
2
$
conditions develop which we cannot now anticipate.
Governor Lynch;
That is a v e r y s m a l l indication, but
I take it the whole trouble is we started to peg the
rates of exchange, to fix the price.
Now that is, of
Course, passed, and there is no use in talking about it
now, but the quicker we get back to the open market
the quicker 1t will adjust itself.
I come from the only
district in America that has had an actual gold currency
for the last fifty years, and had it right up to about
a Year ago•
Now, the Federal Reserve Bank in San Francisco
and the other coast banks are paying no gold.
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Federal Reserve Bank of St. Louis
I asked our paying teller how many Federal Reserve
146
Bank Notes had been presented to him for exchange for
gold---that
d
l is across
u
the
o counter---and
w
,
he5 said $
cover it.
Of course, there have been certain demands made
for gold by banks that needed, it f o r some special use.
I
The g o l d h a s been given to them, because they were promi s e d if
they had any special use for gold they could get
the gold.
They have not been refused; but aside from
that, t h e r e has not been over $ 5 , r o d u o m u d o u t of a l l
the millions that have been put out.
Governor Harding:
My recollection 1s, the average
redemption is running about six million a month.
Governor Strong:
With most of it in New York.
Mr• Leffingwell:
We average a turn-in of about twenty
m i 1 l 1 n s a month, so there is a n e t g a i n of about f o u r t e e n
millions a month.
Mr• Williams: You mean in gold?
Governor Harding: Yes, the redemption of Federal
Reserve n o t e s in g o l d .
Governor Strong:
Mostly in gold certificates which
were furnished to the banks in New York and which are paid
out against Federal Reserve notes.
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Federal Reserve Bank of St. Louis
Governor Harding:
..
•
Are those large notes helping you to
147
keep your gold now?
Governor Strong:
They have had no effect yet.
1 1 1 have an e f f e c t , I hope.
They
We supplied the banks of
New York with the gold required for manufacturing.
We
furnish the banks with gold certificates and they go over
to the assay office or the sub-treasury, and get the gold
bars.
Mr. Williams:
Probably three-fourths of the rold
withdrawn is for that purpose?
Governor:Strong' Yes, and it is withdrawn right at
our c o u n t e r .
Governor Harding:
While we a r e on this discount pol-
icy, and while the members of the Advisory Council are
with u s , I think it would be of interest to ascertain f r o m
the Governors what the general opinion 1s as to the present
discount rates which are, in a sense, artificial rates
baaed upon certain reqirements,- and how far those artificial rates vary from what would be a t r u e discount r a t e
it we disregarded the Treasury requirements.
In other words,
how close to a normal rate are we.
Mr. Wing:
It seems to me that the real trouble is not
t h e gold situation, but it is really a question of a tie-up
between t h e T r e a s u r y D e p a r t m e n t and t h e R e s e r v e Banks. • The
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Federal Reserve Bank of St. Louis
ZSWJJ
148
larger reserve banks are having to carry this load of
Government securities whether they want to or not.
Theo-
• ret1cally, the rate should be raised until these loans
are Paid and the bonds forced into the hands of investors, but each time that that is talked of there is a new
loan coming along and it must not be done at that time;
it must be postponed.
But sometime that time is coming.
Perhaps it will not come until after this loan, but it is
coming when the Treasury financing should be divorced from
the Reserve Banks, and the Treasury should get its money
as other people get mcney.
I think the reserve policy should
be to gradually eliminate Government securities from other
loans.
That cannot be done all at once,
One way to eliminate these securities 1s to increase
the
rate gradually, and I think it should be done.
Mr. Leffingwell:
I think that is a challenge, Mr. Wing,
and I Will have tos ay a word or two about it!
I would like
to ask you, Mr• Wing, if you know, just how the Treasury
would go about getting ten billions in the way in which
ther
1or
:reople get money.
You know what would be the market
secur1 ties generally if
the Treasury w anted to get
ten bill1on dollars the way other people get money.
If
you e stablished a discount rate so that the loans the banks
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Federal Reserve Bank of St. Louis
149
are carrying now, based upon L i b e r t y bonds, had
to be
taken up by investors, do you know what would happen to
this country?
Mr. Wing:
Mr.
You will notice, I s a i d " t h e o r e t i c a l l y " .
Leffingwell:
And you w i l l n o t i c e I s a i d I w a s
g o i n g to take it as a c h a l l e n g e .
This is a b o u t the situa-
t i o n t o - d a y , and n o t w i t h s t a n d i n g there is
a l o t of' hard work
to do, it is one that ought to g i v e us a good d e a l of sat-
isfaction, a good deal of confidence and a good d e a l ct:
courage.
On the whole, I think those are things which we
are entitled to enjoy again.
Let us remember t h a t we a i d win t h e w a r , t h a t t o d a y
we have only $ 2 4 , , , o f Government debt against which
we hold 8
,
,
,
i
n foreign Governments debt,
That does not take i n t o consideration the salvage and it does
not take into account investments of the Go ernment which are
liq id, including investment in farm loan bonds, war finance
corporation bonds, and some r a i l r d investments.
it
I think
1s s a f e t o s a y , u n o f f i c i a l l y , t h a t we w i l l n e v e r owe
more than thirty billion d o l l a r s , g r o s s , or a n e t of
twenty billion.
We have in the banks of the country Treasury certif i c a t e s to t h e a m o u n t , r o u g h l y s p e a k i n g , of f i v e b i l l i o n
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Federal Reserve Bank of St. Louis
s
r
a
l
l
o
d
now, or will have in a fow days.
5
1
I do not think
there is any likelihood of our having to do more
than that
again.
·• When the next Liberty Loan is closed, we w i l l be
w i t h i n a one hundred yard dash of our final goal.
Just so long, however, as that paper has to come
out, the process of liquidation cannot be complete.
The reason we cannot finance the Government today
for the whole
amount of the war debt, is that mechani-
cally and physically it is impossible to clean up the
settlements.
vie talk about expenditures of our army in
Europe. But if we have a million, six hundred thousand
. men in Europe at one hundred dollars a month apiece, it
1s only one hundred and sixty million dollars.
The things
we are· paying for today are settlements of Army contracts,
Ship settlements, and all kinds of things, that the
Government, in the process of making itself into one
huge war enterprise, has accumulated in the way of liabil1ties*
The liabilities have to be liquidated.
The liqui-
dation of those liabilities will liquidate the System.
whether you want 1t or not, whatever your rates are:
In-
stead of having, as we have had after every other Liberty
Loan, to confront an increasing credit expansion, due to
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Federal Reserve Bank of St. Louis
151
an ever increasing demand of the Government, far an
ever increasing production of war-materials a n d supplies,
you are going to have a complete cessation of that thing,
and the one thing that you are interested in, that every
American is interested in, is to get somebody to oome
i n t o t h a t v a c u u m which w i l l be created in our whole indus trial system by the withdrawal of tha overnment's buy-
1ng power.
If the b a n i n g system of the country sends up a
n o t e of warning to
t h e e f f e c t t h a t t h e r e is not enough
c r e d i t , there 1s going to be a contraction.
Mr. Wing:
You think it
is important to distrib-
Ute the next s s u e among the people and not have the
banks c a r r y t?
Mr* L e f f i n g w e l l :
I t h i n k it
is
absolutely v i t a l .
Every day, in season and out of season, we should imPr-ess thEJt.1 w i t h the f a c t that this is just as much a
liberty loan as any loan that was ever floated, just as
much a loan to be absorbed by the people.
that !t
We realize
1s going to be harder to impress that fact upon
them.
You gentlemen, as Governors of the Federal Reserve
Baniks , whenever you hear anyone say that the banks are
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Federal Reserve Bank of St. Louis
152
going to take the loan, communicate with me, and we will
immediately send you word under t h e name of the Secretary
of the Treasury,
.y,
re
±si
you must nott t at ak ke e it•
n ta t
t h' a
reason thee SSecretary
That is
the
t h e T r e a s u r y is a p p e a l i n g to
of
p a t r i o t i s m a l l over the c o u n t r y ; he knows,- we a 11 know,
thexe is no rate of interest which will move five or six
billion dollars in bonds of any character conceivable withOut th...e P a t r i o t i c a p p e a l .
There were a b o u t t h r e e or f o u r hundred thousand
i n v e s t o r s in
the
nited st
S t a tt e
V,
s
bof
bof'ore
t hne
war,
an
nd t h e y
could not conceivably buy those bonds. Even if the t1wernment Paid six per cent interest, the only way they could buy
them would be to dump their securities on the market mith
a cor.i.sequential loc.d
falling upon the.banks.
D o n ' t you think the patriotic appeal,
Governor H a r d i n g :
Plus the investment value would be attractive?
Mr. L e f f 1ngwe 1 1 ;
value, G o v e r n o r .
1t.
·we have a l w a y s g i v e n i n v e s t m e n t
We a r e s p e a k i n g a b o u t t h e b a n k i n g end of
The Government is
going to t r y to be reasonable.
We
are t a l k i n g patriotism, and of c o u r s e , we r e a l i z e that
we must so to the people.
We are not talking patriotism
because we a r e t r y i n g to b e a t t h e r a t e down.
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Federal Reserve Bank of St. Louis
We c a n s e l l
153
bonds
e a s i l y at
s a t i s f e c t o r y r a t e s to
p a t r i o t i s m t h a t is
the banks.
It
is
g o i n g to s e l l t h e m to t h e p e o p l e . That
is t h e r e a s o n we a r c : p r e a c h i n g that d o c t r i n e ell over the
country.
.,.
.1..
am v e r y much a f r a i d t h a t e h i g h r a t e would a p p e a l
too much to t h e banks of t h A c o u n t r y .
that
I am sorry to sey
n i n e . out of e v e r y t e n l e t t e r s t h a t come in w i t h a re-
q u e s t f o r a h i [ h r e t e of i n t e r e s t , c o n t a i n a l s o a p a r a g r a p h
to th
.Le
e. f f t ! c t t h a t t h e banks w i l l ha Vt to t a k e t h e m a n d
w i l l take them.
One of the t h i n g s that worries me most is
how to make t h e s e s h o r t t e r m n o t e s et t r a c t i v e .
To g e t b a c k to t h e g e n e r a l s u b j e c t of our :t'u t u r e :tn
t h i s country.
At t h e r i s k of repeatin
Say this again:
We are now in a period when t h e Government
exJ')ena1 t u r e a o u t of
liquidation.
myself, I want to
t h e p r o c e e d s of l o a n s p r o d u c e s a c t u a l
That means t h a t that c o n d i t i o n w i l ] be w i t h
us during practically t h e whole of nextxt year.
we borrow
rre
a d o l l a r it
Where it
'
g o i n g to bebe r e l e a s e ded toto go bback
belongs.
As to our i n k . r n a t i o n a l p o s i t i o n , es t h e r e s u l t of t h o
J
"'
is
L v e r y time
"
t to be u tt
os9ible
removal of' th e pegs, it is going
t t e r Jl y 1impass
for
you, f o r me, or f o r Governor H a r d i n g , or f o r t h e Gold
o m m i t t e e , to r e a c h t o d a y a d o g m a t i c c o n c l u s i o n .
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Federal Reserve Bank of St. Louis
You h a v e
154
got to examine those figures.
way along.
You have got to feel your
I do not hesitate to predict that out of all
the action which has been taken, no added strains can come
Upon the finances of the United States, unless some excessively stupid thing is dona in the Treasury or by the Gold
C
omm1ttee.
It seems to me that that thing is perfectly
Clear; that one of the things that created the strain upon
the finances of the United States has been removed.
As to the general international situation,, it seems
to me to be about this:
Our business men have made the
fatal mistake of thinking that a Europe, whichwas stricken
by four years of horrible warfare, was going to prove an
eager buyer of American goods at war prices.
Whether it
be the United Stotes Steel Corporation, the Copper Producers, or the Food Administration with its wheat, each and
everyone of them has been making that blunder of failing to
discr1m1nate between an appetite, and an effective demand.
Governor Harding:
Tpey also made that mistake with
*2
respect to cotton.
Mr. Leffingwell:
Yes.
They failed to discriminate
between the appetite and the effective demand.
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Federal Reserve Bank of St. Louis
Europe has the appetite, but only to a very limited
155
extent.
Has s h e the credit to make that appetite effec-
tive?
You will find the s a m e principle applies to this
e s t i o n of the supply of credit, and that there is not
g o i n g to be that strain upon our capital, upon our credit
resources which we might, at first flush, be i n c l i n e d to
fear,
Europe's margins of profit are too narrow, her posit i o n is
t o o desperate, t h e d e m a n d s of her l a b o r are too
grent to make it possible f o r h e r to successfully f i n a n c e
t h e problem of r e c o n s t r u c t i o n at hi@h interest rates:
We v i 1 1 not h a v e , to my mind, the e x c e s s i v e demand
f o r capital, w h i c h some fear, a n y more t h a n Mr. How er
Will have an excessive demand for his wheat or the cotton
people for t h e i r cotton., or J u a r e Gary for his steel, or
t h e copper p e o p l e for their copper.
Governor Miller:
The item of price has as much to
do With this thin, if not more, than the interest rate,
has it
not?
Mr. Leffingwell:
in the situation.
Prices are a very serious element
The point is,
. t h e r e are n o t enough
b o r r o w e r s over t h e r e w i t h good enough credit to constitute
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Federal Reserve Bank of St. Louis
I
156
an effectlve demand on our investment capital at any
price.
Governor.Harding:
There is a big appetite for all
these things, but there is no economical demand for them,
for the reason that t h e y h a v e not t h e a b i l i t y to
gra-
tify the appetite.
Mr. Leffingwell:
They haven't the credit to make
e f f e c t i v e an e c o n o m i c a l demand.
Mr. A. C. Miller:
Europe has collateral in this coun-
try to the extent of several hundred million dollars,
as a. c a r e f u l
i n v e n t o r y h a s d i s c l o s e d . O u t difficulty is not
so much to
get satisfactory security as it is to get Europe
to
ome in a n d buy f r o m us for purposes of rehabilitation.
Mr. Leffingwell:
1lateral
I think it is a fact that she has
to the extent of several hundred million dollars,
but I do not think she has credit facilities to take care of
the turn-over in the international situation, which arises
from the fact that the United S a t e s has become creditor to
t h e e x t e n t of ei@ht t h o u s a n d million dollars.
The i n t e r e s t
on the total amount loaned will equal the favorable balances
befa e the w
and
w ar r, ,
ui
ties.
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Federal Reserve Bank of St. Louis
we
ha ive bcp0ugrght
b pac!
a r k our AAmr er rii c¢ a n s e c u r4i -
A f e w hundred million dollars of available securities
\
. '
I
157
Is a bagatelle in the situation.
In a d d i t i o n to t h a t , G r e a t B r i t a i n has s c r a p e d t h e
b o t t· o m of t h e banks f o r American s e c u r i t i e s , f o r which
she d e s e r v e s c r e d i t .
She went out and g o t p e o p l e to come
in b e f o r e we were in t h e war and turn over their
h e ' securities.
You c a n n o t f i n d miscellaneous secu
Mr. A. C. MllJer:
t h a t form.
/hst
t i e s available---
But I do not mean collateral in
I mean is
t h a t Europe has been p r e t t y h a r d
hit, but her industries, if she h a s n o t been pretty h a r d
h i t by B o l s h e v i s m , w i l l r e s u m e , a n d a men who l o a n s money
to a worthy European manufacturing e n t e : p r i s e , stands no
greeter c h a n c e to l o s e t h a n one who loans to an American
enterprise, p r o v i d e d , that e n t e r p r i s e could go out into
t h e market in
two or t h r e e hence a n d buy r a w material at
prices which "ill justify their purchase.
Mr. L e f f i n g w e l l :
Mr. A.
c. Miller:
P r i c e s have g o t to come
a own.
They can not do it w i t h prices
f o r Silk, c o t t o n and o t h e r things remaining as they were
l a s t year,
Mr. Leffingwell:
No.
I just want to add the one word.
I d i d n o t mean to s u g g e s t t h a t I t h o u g h t t h e r e was n o t opp o r t u n i t y f o r i n v e s t m e n t of c a p i t o l in Europe.
I hope t h e
United States will finance the requirements of Europe.
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Federal Reserve Bank of St. Louis
48
Hu11
M r . Hamlin.
What does that suggest to your mind
445pm
as an appropriate discount for the Reserve Banks?
Ur.
Leffingwell.
It
does not suggest anything
It has been the policy of the Treasury for
to my mind.
a Year and a half, and we have worked along µ·etty close
to that policy with the discount policy of the Federal
heserve Banks as it i s .
If you want just a casual opinion about the dis-
count policy of the Federal Reserve Banks, l will venture
one, and that is there ought to be an adjustment of the
discount policy of h e Federal Reserve Banks on a certif1cate basis, and it ought to be an adjustment down of the
n o t a varying rate, a n d sometimes
mmerulaJ. rate, wh1 ch is
twenty per cent of their transactions are on the rate of
government loans today.
•
Mr. Hamlln. you put it the other way around.
Mr. Leffingwell.
That would be the difference
between us .
M r . Hamlin.
But I think from your point of view, --
personally I do not share your optimism,
l think this loan
Will have hard sledding unless the banks take the biggest
bite out of it.
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Federal Reserve Bank of St. Louis
If I did not, I would say the best thing
159
to discourage banks from t a k i n g h o l d of t h i s would be
a good, big discount rate at the reserve banks.
Iir. Leffingwell.
I do not know how you
reach that conclusion.
Mr. R e .
The time must come.
Mr. Hamlin. We will never get
c l e a n e d up if we
do not do 1 t.
Mr. L e f f i n g w e l l .
It
is not h e r e now, buc i.t
Will have to come s o o n e r or l a t e r .
Governor strong.
Governor H a r d i n g , I am not sure
Whether it is clear in our own minds entirely just what
the sound reason would be for any change of rate at all.
I mean what t h e fundamental, necessary object of a change
in
r a t e s i s , if
a n y is
contemplated.
Governor Harding.
I am getting t h e opinion, a n d
the only thing left that is p g g e d is t h e y would have reserve discount rates.
Governor S t r o n g .
It h a s not b e e n discussed as to
Just What would be accomplished by the change of rates.
Governor Harding.
Hw long do your New York C i t y
bank commitments run? Your New York City banks obligated
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Federal Reserve Bank of St. Louis
r
o
n
r
e
v
o
G
6
.
1
&
themselves to subscribe for Liberty bonds for a certain
time.
strong.
A l i m i t e d number of banks have
Obligations to carry their customers for a year.
is, until next Fall or Winter.
That
The total of all of that
following is not a very material factor in the situation.
Governor Harding.
Will that sort of arrangement
be made a g a i n on t h i s coming loan,
Governor Strong.
you think?
That is a s u b j e c t a l w a y s of a
v e r y delicate negotiation, b u t I f e e l that we cannot g e t
a conclusion on the rate policy until we are absolutely
definite in our minds as to what we are going to accomplish by i t , and at the
risk of't a l k i n g too much at this
meeting, as I did this morning, may I indulge in a few
words for the record on that subject?
The best exposition I know of in language of the
Object of a r a t e polioy by a c e n t r a l bank a p p e a r s in t h e
report of the so-called Cunliff Committee, and in a word it
is this, using the Bank of England as an illustration.
When
O v e r t r a d i n g o c c u r s in England the price level is too high,
and t h e p r i c e level of t h e product of English mills is too
high, their exports stop on that account, and the exchanges
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Federal Reserve Bank of St. Louis
161
4
-
&° a g a i n s t t h e m ,
t h e n t h e b a n k r a i s e s i t s r a t e , a n d it
raises its rate not primarily to attract gold to the
English market but in order to reduce the price of commodities and get the exchanges in favor of the London market.
That is the primary object of a change in the.bank rate
I
and leaving out of consideration just now the interests of
the Treasury of the United States, I think the main problem
in this country, and the world over, ±s therelative price
level of the goods t h a t we produce and sell abroad.
My views have been very much modified in some particulars about this question of an attempt to control our
price level by the rate of discount of the Reserve Banks by
What has happened in the English exchanges.
When the Bank
of England, under normal conditions, raises its bank rate,
1 t means t h e p e o p l e have to pay t h e i r l o a n s o f f ;
when t h e
I o p l e p a y their loans off t h e y s e l l goods in order to pay
their loans off, and when they sell their goods, t h e r e is an
oversupply of goods, and the price comes down, and t h e y meet
the international competitive price level and expat god s
again, and turn the exchanges in their favor.
England has already done that for us without any act
Upon our part.
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Federal Reserve Bank of St. Louis
England and France, the minute they pull the
1.62
5
Peg out of the support of exchange, theresult in this country 1s an increase in our bank rates. we impose a check
upon our imports, we create an oversupply of goods in this
country;
by reason of the Qbeck upon our export trading,
it Will have the same effect, liquidate credits, and make
money easy, as though we put our bank rate up.
In an inter-
national sense, the result of this act DY the English
government is t h e same as a bank rate.
Governor Harding.
I appreciate that, but a rate,
after all, is merely relative.
But our rates, I think, are
relatively higher, as I said a while ago, relatively higher
than last November. When you consider what is happening
in the rest of the world, our bank rates are relatively
higher, for all practical purposes, than they were last October andNovember.
You know the figures are the same.
Governor Strong. Yes. Personally, Governor Hardi n g , what I am beginning to fearas the result of this
Of
act
the British Government is that our liquidation may come
a bit too fast for us, and that we may have to take measures •
to control 1t;
that our problem is almost reversed on our
hands overnight.
The figures for the export trade of this country today include two major i t e m s , one, the miscellaneous export:
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Federal Reserve Bank of St. Louis
163
6
of private citizens to t h e i r regular customers a b r o a d ;
other, government purchase#.
the
Now, under the c o n d i t i o n s
that have existed up to the present t i m e , the government
has said tu p r i v a t e importers f r o m t h i s country, ttwe will
restrict you in the character of the things that you buy
f r o m the U n i t e d States and we, the government, will buy ev
thing t h a t we w a n t . "
Now the government says, "We will
discontinue ourselves b u y i n g anything b u t the absolutely
essential things for which
we can negotiate credits, and
as to therest of you, you have got to paddle your own canoe.•
We are going to let the exchanges go and you probably Will n o t be able to import anything, and the same if
the exchanges reach a prohibitive level. so that too danger
of this country is that the liquidation, which is inedtable,
will proceed rather too fast than too slow, and if we have
that liquidation, if money eases up, I have no deubt that
the reserve banks will get rid of a lot of the loans they
are carrying fer their member banks pretty fast.
Governor HRrding.
I agree to all of that, Governo:.
I t h i n k t h a t is a v e r y e x c e l l e n t s t a t e m e n t of t h e situatior
Governor Strong.
The same argument that applies to
t h e price l e v e l and to t h e export trade of t h e country ap-
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Federal Reserve Bank of St. Louis
1.64
7
Plies to gold imports and exports, exactly.
The consequence
of this change in the exchange situation has got to be examined with regard to the effect it
ports.
Thet is inevitable.
has upon our gold ex-
We are not going to have the
balance of trade in new exports of commodities that we have
h a d heretofore.
Governor Harding.
What is your v i e w about the pres-
ent differential?
Governor Strong.
Governor Hard1ng.
In the rates?
In rates in favor of an obliga-
tion secured by government securities.
You know there is
quite a pressure in some quarters, particularly on the part
of those who are holding commodities.
to get a lower rate.
They are very anxious
I do not think some of our friends
in the Southern reserve banks would be in favor of that, but
t h e y munt know t h a t soma of t h o s e people t h e y are carrying,
they all want lower rates, they want that old commodity rate
established.
Governor Wellborn.
in Atlanta.
I think that is generally true
They want th lower rates.
Governor Harding.
Then it
seems to be the general
concensus of opinion, does it not, t h a t t h e r e is no
need fo_
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Federal Reserve Bank of St. Louis
165
a
any furthvr discussion of any change in our present rates?
Governor Fancher.
Not until after the next loan
is published.
Governor Strong.
Governor Harding, conditions are
so different in other parts of government as distinguished
from rates on other paper, that it is quite possible that
the Reserve Bank in New York could adopt a principle very
different from that in some of the larger cities, and particularly those cities in sections where the rates are h i . er.
High rates do not generally prevail in the Second Dis-
trict.
I think that generally now the maximum rate is 6
Per cent, with.very few exceptions, and furthermore I think
the banks in our district have been educated and clubbed
into limiting their borrowings to those that are really
necessary, u t in other sections of the country, where bank
money is worth more, it may be that any tendency to reduce
rates for commercial paper would simply be an invitation
for unwise extension of bank credit, andl should not like
to assume that conditions that might apply to us in New Yori
would be fair to other districts at all.
Governor Harding. some of us have entertained the
idea that probably the safest way to get business back upon
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Federal Reserve Bank of St. Louis
166
9
more of a comme:rctal be.sis would be for the Federal Reserve
Banks, in open market purchases or discounts of member
banks, of higher grade bankers' acceptances.
You see you
have got a spread on them anyhow, -- exercise that author- •
ity at such times as you might deem wise to make a differential in there by reducing the rate on high grade bankers'
acceptances as occasion might seem opportune, and in that
way you could lay the foundation for a greater commorcialization of the system.
Mr.
Watts.
ls chat n o t one of the evils of mak-
i n g a uniprm r a t e on government securities;
you put New Yo
and St. Louis upon tbe sa.rne basis, regardless of whether the
conditions are identical?
Governor
strong.
Yes;
and I realize perfectly
Mr. Watts, that if we make a particularly favorable rate for
acceptances in New York, the effect of it will be to d r i v e
all the buyers into one p o r t f o l i o , unless the other reserve
banks ave complacent enough to buy from us at a rate which
they think 1s too low.
Unfortunately, the e f f e c t of that
Policy would be half good and h a l f bad.
market for buyers in the
We would narrow the
United States, but we would p o s s i b l y
stimulate the opening of dollar credits, because the competi ti
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Federal Reserve Bank of St. Louis
Ve
rate would be more f a v o r a b l e than it is now, compared
1
.
1
.
6
7
With the foreign rates. We have got to consider whether
we want to stimulate the opening of credits or to broaden
the market for our buyers.
Mr. Watts.
In a particular operation, the basic
rate of the system now is the borrowing on government secur1t l e a .
Governor Strong. Yes.
Mr. Watts. And that being uniform, of necessity
makes a uniform rate throughout the country, and that is one
Of the evils, according to my idea of it, of giving the differential rate.
Governor Strong.
What would be possible in New York,
and that probably would not have any unfavorable effect upon
our position. would be something like this:
If the next government loan had a primarily higher
rate , without assuming or guessing as to what it might be,
somewhat above the present 4 1-4 per cent rate, I have no
doubt that without any but a fa»rable change in the conditior
of the Reserve Banks, we could make all of our rates 4 1-2
per cent, but that is peculiar to the New York district. It
would not apply to otner districts.
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Federal Reserve Bank of St. Louis
M r . Watts.
Still giving the banks of the country a
1. 68
11
differential between the rate paid by the government and
the rate they receive, and whether you put the government
rate up or the commercial rate
cb wn,
you finally shift
the rates to a point where the comme:rcia.l rate is slightly .
below the government rate, then you would have the effect
of just reversing the present situation.
I have in mind an institution having four and a half
million dollars of temporary Treasnry certificates;
a mil-
lion and a half of the various issues of Liberty bonds, and
borrowing from the Reserve Bank $ 3 , , .
Now they are
Using only their government securities in that borrowing.
There is no reason why that institution sho&ld not use its
commercial paper in that borrowing, andit is only this differential rate that causes t h a t , of c o u r s e .
Governor Harding.
That p r o b a b l y accounts for a gret
deal of the government paper held by the Federal Reserve
Banks for commercial paper, they want to get the benefit of
the differential.
Mr. Watts. Absolutely. The lendings of this bank,
or course, are not all to the government, yet all their borrovwings Are on government securities.
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Federal Reserve Bank of St. Louis
Governor
Strong.
But in your statement,
.LVll'•
Watts,
1. 69
they
have $
3
,
,
o
f t h e i r own r e s o u r c e s in
government
loans and 3 , , o f
Mr. Watts. In Federal Reserve Banks.
Governor Strong. -- borrowings from Federal Reserve Banks, so that a considerable part of their own resources have been withdrawn from other uses.
Mr. Watts.
Surely.
Governor Wold.
If you did not have a favoruble
rate on government securities, you would not be selling
government securities. That is what enables us to distribute government securities.
Mr. Watts.
I do not know the differential being
made in the case of the institution buying the securities.
Governor Wold.
Would the Third National rediscount
n i n e t y d a y paper and reinvest.it in 4 1-2 per cent cer-
tificates to a great extent?
Mr .. We.tts.
I did not catch it.
Governor Wold. would you rediscount ninety day
bills at 4 1-2 per cent?
Mr. Watts. We would not discount ninety day bills,
We
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Federal Reserve Bank of St. Louis
would discount the shorter time bills.
Governor Harding.
I
If there is no suggestions further
:z
3
.
1
7
1
along this line at present, I would suggest that we continue this phase of the subject tonight at the
dinner, and
take up another topic just now, which is rather out of
Place, but I bring it up on account of the fact that the
gentleman 1s going to leave on the train tongt.
This has
to do with the building projects of the Federal Reserve
Banks.
The Federal Reserve Bank of New York has had a
consulting architect for some time, Mr. Trowbridge, and
Governor Strong and Mr. T r o w b r i d g e h a v e e x p l a i n e d to
Board their plan of building.
the
I think it has made a very
favorable impression on all members of the Board, Mr. Trowbridge seems to have devoted a great deal of study to this
Whole proposition, and we are anxious tor all banks that
have building projects to get the benefit of these ideas
With a view of adopting any features that are suitable to t h e i .
Purporses and avoiding mistakes they might otherwise make.
We thought if
an arrangement could be made by which M r . Trow-
bridge could be used as a sort of clearing house of building
Ideas, the Fede:al Reserve Banks paying the expenses i n v o l v e d .
that it might be well to do so.
Mr. Trowbridge came down here yesterday at the invi-
tati
on of the Board, and remained over today.
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Federal Reserve Bank of St. Louis
He has been
171
going over p l a n s of three of the banks and wants to gt
back on the train tonight.
A committee of the Board wishes
to see him before he leaves.
I will ask Governor Strong if he will explain to
the Governors briefly just whet Mr. Trowbridge's function
ls, and j u s t p u t this v i e w of the c a s e up to them.
You
know, Governor Strong, you a n d I. t a l k e d about t h i s y e s t e r -
day afternoon in regard to having this a sort of clearing
house of building ideas and utilizing Mr. Trowbriage for
all the banks to a certain extent.
Governor Strong.
Of course, Governor Harding, when
you made that statement, J had not in mind any thought that
VI
r.
Trowbridge would extend his field of operations to the
other Reserve Banks at all.
Governor Harding.
way.
He could only do it 1n a general
He said he could not leave New York, and has to de-
vote some time to his own business. You have only part of
his time, I understand?
Governor Strong.
Yes.
Mr. Trowbridge felt, as I
do, that he would like to have the benefit of the studies
Of the building problems t h a t might be made by the other Re-
serve Banks, and of course whatever studies we made ourselves
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Federal Reserve Bank of St. Louis
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s h o u l d be m a d e a v a i l a b l e to
t h e o t h e r b a n k s , a nd after a
six months review of our inside situation at the bank, I
think we all agreed that some radical changes in our conception of both organization and building are necessary.
Governor Harding.
Mr. Trowbridge is not going to
be your architect for the building?
Governor Strong.
No.
Governor Harding. so he will be in the same position as to your plant as he would on any other plant; they
would have their own architects, butthis would be a sort of
c l e a r i n g house?
Governor Strong.
Mr. Trowbridge is
a salaried
member
of the bank staff there to study the organization and its
needs in the new building from the standpoint of utility, and
he has been working on that problem for six months.
I am frank to say that the pressure we have been
under has led us to follow in New York, rather slavishly,
the commercial idea of bank organization and bank machinery
to house the organization, and after going into it very
thoroughly, we have made up our minds that the commercial
bank organization, and the commercial bank building, such as
a
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Federal Reserve Bank of St. Louis
m.m.ercial bank has, is entirely out of rlace for a Reserve
173
16
Bank, or at least for the New York Reserve Ban,
and I
have no doubt that the same rule would apply to the other
Reserve Banks.
The reason for it, fundanentally, is this:
\
A large commercial institution, like the National
City Bank, or the Gueranty Trust Gompany, has thousands
of austomers who cane ln to do business with the insti-
tution.
They r e q d r e t h e s e r v i c e s of a g r e a t many t e l l e r s
and others at windows and a big lobby, which naturally
l e a d s to t h e development of a b i g , monume1ital bank room,
uch
as mes t l a r g e banlcs h a v e .
Now t h e F e d e r a l R e s e r v e
Bank of New York hs.s l e s s t h a n one h u n d r e d c u s t o m e r s to
m
jn a n d b u s i n e s s at the counter, end the representatives
of those one hundred customers t h a t come in a r e , as a rule,
messengers and porters, and officers in uniform. and they
come in not w i t h a oepos 1 t of a check or t w o to make at a
t e l l e r ' s window, or w i t h a check f o r
1 t o drau f o r pocket
money, b u t t h e y come in w i t h sacks of money and big; l e a t h e r
cases filled w i t h it, and s e c u r i t i e
..
and at
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Federal Reserve Bank of St. Louis
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for d i s c o u n t ,
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vrov1ded for the business we do in a banking room.
therefore now o
We are
nsidering the idea of building a bank
building without any monumental banking room at all, but
rather to provide for the officers simply suites and rooms
where their business can be conducted with the greatest
facility by having their s e c r e t a r i e s n e a r at hand, a n d
their tellers' cages, and a series of independent rooms
where these men can go with their s a c k s and where they can
have tables, or whatever they need to check up their money,
andthen instead of a little pigeonhole, so small in fact
that they have to open their p a c k a g e s , break them up and
put t h e m through in s m a l l pieces, to have o p e n i n g s where
they can just dump the whole thing inside the cage and have
it checked up, and then have a place outside where they them-
selves can check it up, a n d if we find by a study of the
Problem
it
f the main banking room that if we adopt this p l a n
c h a n g e s t h e whole theory of t h e b u i l d i n g f r o m top to bot-
tom, -- it changes the elevator service, for instance, and
I am c o n v i n c e d t h e t we can save a g r e a t many hundreds of t h o u s ands of dollars in the type of building we put up, a n d t h a t we
can s a v e a g r e a t deal of money in t h e a c t u a l o p e r a t i o n of t h e
bank by adjusting our organization on a little different
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Federal Reserve Bank of St. Louis
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1.8
t h e c r y of whui a R e s e r v e Bank is
or s h o u l d be .
The p r o b l e m in our c a s e is
e x a g g e r a t e d by t h e f a c t
tn
h a t we now have 2i7 c l e r k s in t h e, b a n k , a n d a b o u t 1
a d d i t i o n w o r k i n g f o r the
government in d i f f e r e n t c a p a -
c i t i e s , a n d we h a v e g o t to read,_1
u s t our whole i d e a of
b a n k o r g a n i z a t i o n to meet t h e d i f f i c u l t i e s of d e a l i n g w i t h
s u c h a l a r g e number of p e o p l e .
We a r e p r o p o s i n g to do t h a t
by t h e s e p a r a t i o n of a l l m a t t e r s of o p e r a t i o n f r o m a l l
m a t t e r s of o r g a n i z a t i o n , a n d have the
of the
operating a.fflcials
b a n k , t h a t do t h e b u s i n e s s , not troubled at
q e s t i o n s of o r g a n i z a t i o n .
all w i t h
The machine is t h e r e made f o r
t h e m w i t h a l l f a c i l i t i e s , and t h e y do not have to b o t h e r
a b o u t h i r i n g clerks a n d p r o c u r i n g office f a c i l i t i e s a n d
t e l e p h o n e s e r v i c e , a n d a l l of t h o s e t h i n g s .
F u r t h e r m o r e , we my
u l t i m a t e l y d e c i d e to make some
Very radical changes in t h e d i s p o s a l of the o f f i c i a l s t a f f ,
so
t h a t t h e men w i l l work more t o g e t h e r in t h e d i v i s i o n s
Where t h e y b e l o n g , and w i t h fewer j u n i o r o f f i c e r s a w a y f r o m
t h e d e p a r t m e n t s , a n d , in g e n e r a l , Governor h a r d i n g , we a r e
g o i n g to a b a n d o n any t h o u g h t t h a t a R e s e r v e Pank is a comm e r c i a l bank at
a l l a n d make t h e k i n d of a b a n k we b e l i e v e
a R e s e r v e Bank s h o u l d b e , wh:1.ch is
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Federal Reserve Bank of St. Louis
not a bank r e q u i r i n g a
176
1.9
monumental
b a n k i n g r o o m of
any
sort.
That
1s
simply the
underlying principle of the plan um er which we are proposing to develop our bank building and our organization.
Governor Harding.
Governor Strong.
Governor Harding.
Trowbridge.
More of a wholesale type?
Yes;
adte that.
What was your idea about Mr.
He told me he could not come down here very
Well, but that he would be perfectly willing to examine
these various plans and make suggestions.
Governor Strong.
Mr. Trowbridge is working as one
of a committee, that committee representing yarious elements in the bank that are capable of not only conducting
a reorganization of the schema of organization but also of
making the general designs of the interior of a building to
fit the organization that we are proposing to create.
For instance, we have a man on the committee that
represents the personnel of the bank, who has had general
supervision of the employment of the clerks.
We also have
I
the man who has general supervision of the accounting, and
Who
understands the accounting relationship between the dif-
ferent departments, and we have another efficiency man, and
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Mr.
Trowbridge, the architect, and from those four men
we propose to get a solution, if possible, of the problem
of organization and building together, as one problem.
Mr
Trowbridge makes his headquarters at the bank,
and he will have a staff of men, and as the organization
unfolds on the new basis, he is supposed to work that out
Practically in the interior arrangements of the building,
Which involves, of course, a study of vault program, an elevator f•rogra.m of the building, and t h e general layout of
typical floors, and of standards of partitions which can
be moved from one part of the building to
Comptroller Williams.
entire
another.
Is it your idea to use the
building?
Governor Strong.
structing;
yes.
The entire building we are con-
The building we have 1n mind will have
about 4 , f e e t of working space, and 1 suppose we would
move in with a smaller force than we now have, but it must
provide large space for expansion.
Governor Harding.
There is one thought I should like
to lay before the Governors, and that is this.
Congress was
unexpectedly liberal in the matter of permitting the banks
to increase their surplus, so that these buildings and the
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Federal Reserve Bank of St. Louis
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lots on which they will be built, the lots required by all
the b a n k s , and the buildings to be e r e c t e d t h e r e o n , will
all come within the surplus t h a t the banks will accumulate,
and as the surplus belongs to too government in the last
analysis, a liquidation of a bank, and the stockholders
getting the par value of their stock, plus accrued divi-
dends back, the ordinary liabilities being all liquidated,
then all surplus remaining shall be the property of the
United States.
That is the language of Section 2, I believe,
so that means that these bank buildings are, in effect,
government property.
Now it does not take very long for tlat
idea to become generally known, andyou can see the responsibility that rests upon the governors and directors of the
Federal Reserve Banks, and upon the Federal Reserve Board
in its supervisory capacity, that there ought not to be any
waste of money in providing these facilities for the banks;
that they ought to be adequate and suitale for the purposes
for which they are intended, and that in years to come the
expenditure may be justified by personal inspection.
can see that if
You
any bank shculd erect a building t h a t was
unsuitable for its purposes, e i t h e r too small or very much
too large, or not properly arranged, any inspection of that
proposition would invoke the criticism that here a serious
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Federal Reserve Bank of St. Louis
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*
mistake was made, and it would be a more o? less serious
reflection upon the jw gment of those who were responsible
for a construction of that sort.
so it is not as if you
were expending the money that belonged to your own stockholders;
it is really subject to the board of directors
in the sense of an expenditure of' money belonging to a
National bank.
But really this 1s a public trust, this is
public money you are expending for these buildings, and
the building, in the last analysis, belongs to the government of the United States.
Governor Morss.
For how long a time should we
provide for the needs of a Federal Reserve Bank, andhow
should those needs be estimated?
That ls, should we esti-
mate on ten years from now t h t the needs of those banks
would be greater than today?
Governor Harding.
That is almost aseasy a question
as I asked Mr. Kent a moment ago.
Governor Morss. Y e s ;
that is a very important mat-
ter in deciding on the size of the building you want and how
it should be built.
Governor Harding.
It is a very hard matter to gauge,
because so large a proportion of the bank's operating force
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Federal Reserve Bank of St. Louis
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1
is engaged in this fiscal agency work. We do not know
how long so large a force will be necessary.
It 1s prob-
able, though, that the government will keep you busy for
a goodmany years to come.
I imagine t h e r e will be ex-
changes of t h e s e bonds a n d coupons f o r revision, a n d all
that sort of thing. we do not know w h e t h e r you are expected to perform the functions of a sub-Treasury, although that comes up almost every time that congress meets.
vf course it may be assumed that
Governor Morss.
Governor Harding.
Of course your present force 1s
very much l a r g e r than the force you had two y e a r s a g o , and
t h a t is the c a s e in a:'..most a l l banJrn.
Governor Morss.
ago.
More than double what it was a year
But the duties tha t the F e d e r a l R e s e r v e Banks will
ha?e to p e r f o r m will probably fluctuate more or less in
volume from time to time.
It might be possible that what
they would have to do in five years from new might be less
than it is t o d a y , and greater again in ten years f r o m now.
Governor Harding.
It seems to me, Mr. Morss, that
you have a much better idea of what t h e needs will be t h a n we
in W a s h i n g t o n , b e c a u s e you can form just as good an i d e a of
the various functions you have to engage in as we could, anc
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Federal Reserve Bank of St. Louis
1.81
you have a very much better idea of the amount or space
you have to provide for to properly perform those functions.
You know how many men are required, you knnow how it is going to grow, and you can form just as good an idea of the
fiscal agency function as we can.
You can guess at it bet-
ter t h a n we can.
Comptroller W i l l i a m s .
This should be borne in mind
also, the increases required of the Reserve Panks are not
likely to be in proportion to the growth of the district
because as a district grows it is more l i l l y that more branches Will be established.
It is conceivable that the business
\
Of
t h e main bank may n o t be much more t e n years from now th," .1
1t now has, still it may be that the business of the district
will be three times
de
great.
Governor Harding.
In some cities they are able to
provide for the future by acquiring a large lot at a reasonable Price and reserving a part of it, or building a t h r e e
or four story structure sufficiently strong to ?1tttnd an addition.
In other cases, it seems to be the sensible thing
to provide for your requirements as you can see a bead for t e n
or fifteen years.
In other cases, t h e same result can be ac-
complished by ace@iring an entirely separate property at some
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Federal Reserve Bank of St. Louis
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25
cheaper location, because as a bank grows in age and experence, it has always a vast amount of accumulated records and files, and things of that. sort that it will
for; you do not want to burn them
need storage capacity
Up;
you may want to refer to them occasionally, and you
can always look ahead with the idea of making more room
by acquiring a cheaper lot and putting up an inexpensive
warehouse in some other part of the town, or lt might be
you could decrease
ome
of your departments.
You might
find it possible, if you had to, to put your transit depart- ..
ment somewhere else.
I do not know how that would work out.
Governor McDougal.
We have got it
somewhere else
now.
Governor Morss.
We are in four buildings now, and
we do not like it any too well.
Governor harding.
If you fina you should outgrow
your buildings, I should think it would be possible for you,
in most cases, to get within a radius of two or three blocks
some cheaper property to use for storage purposes, or to
Put some inactive departments in.
Governor Van Zandt.
Is it your idea that Mr. Trow-
bridge should come over to t h i s meeting?
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Federal Reserve Bank of St. Louis
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26
Governor Harding.
No.
Was It your idea to have
him over here?
Governor van Zandt.
No;
I thought he was 1n
town.
Governor Harding.
bridge is not going t
It seems to me that as M r . T r o w -
be one of the constructing archi-
tects, but his s @vices are to be availed of by all the
banks to sort of c h e c k up and make suggestions here and
there, that would be of use;
in this way;
of course 1t might be arrange 1
the Federal Reserve Board could employ him
in an advisory capacity in passing on these plans, andin
that way his compensation would be assessed in such a way
that all the b a n k s would p a y in proportion to the assess-
ment we levied.
That would be a little bit unfair to At-
lanta, that bas already completed a building, but they may
want to plan an annex sometime.
Governor Wellborn.
We might come in on the whole
thing.
Governor Harding.
Do you think t h a t would be a better
way than to let the banks pay it directly?
Governor Van Z a n d t .
better way.
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Federal Reserve Bank of St. Louis
I t h i n k l h a t is very much the
1.84
27
Governor Wold.
It seoms to me all the banks should
Pay it direct. There is no reason why Atlanta should be
assessed.
Governor Harding.
him direct?
Are you all willing to deal with
How does the idea strike you?
Governor Wellbom.
Why would it not be a good idea
to have Mr. Trowbridge go ahead andget up those plans, and
after they are adopted, iet the others take ideas from them?
Governor Harding.
Here is the whole proposition.
The Act imposes a certain duty on the board in the matter
of supervision and approval, and we ought to be qualified
to act in general, both in justice to the banks and in justic
to ourselves, and for that reason members of the Board have
been very anxious to have some one like Mr. Trowbridge to
advise with, so that if there are any q..1.estions to be raised
at any time such as, "now did you happen to approve t h i s ?
What do you know about a b a n k building," and so on, v.e could
say we hadhad the services of a competent architect to advise us in this matter.
Governor Fancher.
I understand you would like to
have a man, such as M r . Trowbridge, stud. the requirements
of the various banks, andthen have a contract with the boar:
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Federal Reserve Bank of St. Louis
185
28
here?
Governor Harding. Y e s ;
in other words, we would
prefer to have him as the Board's adviser.
He would have
to communicate with each bank, of course, to find out what
its views were, but we would want him to advise us.
Comptroller W i l l i a m s .
Cu.S 8
Why not let t h e banks d i s -
this tomorrow and then make their recommendations to
the Board?
Governor McDougal.
It is my understanding that
you propose to have a clearing house, with Mr. Trowbridge
at the head, to receive suggestions from all sources, and
Offer sue;gestions as well?
Governor H a r d i n g .
Yes.
Governor McDougal, But I do not understand it is
Your purpose to have this arrangement interfere with the
employment of architects by the banks, and injecting into
their enterprise ·t,heir individuality and own ideas, unless
they clash?
Governor Harding.
Yes; as I understand the Federal
Reserve Bank of New York proposes to have an entirely separate
architect to make their plans?
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Federal Reserve Bank of St. Louis
Governor Strong.
Yes; Mr. Trowbridge is debarred
1.86
by the very fact of his employment to compete. When he
was employed several months ago, I was very careful to
explain to him tha
viously, it
t we would have comp,tition, a n d , ob-
w o u l d be u n f a i r for him to enter the c o m p e t i t i o n ,
Governor Harding.
Suppose t h e members of the Fed-
e r a l Reserve Board w i t h d r a w and l e t the Governors dis cuss
this matter between themselves, and we will meet at & o'clock
at the Metropolitan C l u b .
("hereupon, at 5.3o'clock p. m., the
Conference
adjourned until lo'clock a. m. March 2lst, 1919.)
1 ,
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Federal Reserve Bank of St. Louis
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187
NIGHT SESSION.
Metropolitan Club,Washington, D.C.,
Thursday evening, Mar. 2,
Present:
1919.
rd,
The membo:.:s of t h e Federal Reserve B<11.
the Executive Committee of the Federal Advisory Council;
and t h e Governa s of t h e F e d e r a l R e s e r v e Banks, as i n d i c a t e d
at the o p e n i n g of this record•
Governor Harding
presiding.
Governor Harding* Gentlemen, Mr. Leffingwell 1s with
us this e v e n i n g , and I think it would be profit@ le for us
to discuss with him the forth-coming Victory Loan i s s u e ,
With r e s p e c t to which I would l i k e to hear from all the
gentlemen present:
I presume you would
like to hear the views of all
t h e g e n t l e m e n now, Mr• L e f f i n g w e l l ?
Mr.
Leffingwell:
Governor H a r d i n g :
Very much so, Governor Harding.
Mr. Rue, we will h e a r f r o m you f i r s t .
Mr• Rue: I was delighted to hear the enthusiasm with
Which Secretary Leffingwell said he would like to hear from
the banks on this s u b j e c t , because that show
he is
entirelv
in s y m p a t h y w i t h the bankers.
At home I have, as have all other b a n k i n g men, I am rure,
come in c o n t a c t w i t h a g r e a t many d i f f e r e n t busi n e s s pople,
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Federal Reserve Bank of St. Louis
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188
and have been interested to hear their remarks with res ct
to the forth-coming loan.
To a very large extent, the business men have settled
down to the belief that it is a bankers' proposition, and
we will have to eradicate that belief from their minds.
I think that ts the opinion of the public.
I do not know
how many different men in different walks of life have
expressed that opinion.
I think probably the wish is father
to the thought.
They one and ell start to talk about their taxes being
o
heavy.
If
1t is a. corporation or business f i r m they talk
about the large excess profit taxes, and the individual talks
about his income tax; that he has not sold his last bonds.
We know that to be tru in most cases because we are still
c a r r y i n g them.
consequently, they have accepted this as a
bankers' proposition.
We are always interested in hearing
their suggestions as to rates, and they one and all seem to
have t h e idea that the loan is p r a c t i c a l l y fixed at 5%.
That seems to be the rate which they have fixed in their minds-
5% bonds, subject to tax, or possibly a 4% bond free of all
taxes.
That seems to be the general sentiment.
I have been deeply interested in hearing recently from
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Federal Reserve Bank of St. Louis
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a number of large employers of labor who have expressed
the sentiment that it would be utterly impossible for
them to canvass their employees for this next loan.
They
say, to use their phrase, that the men "would not stand
for i t " .
I have heard that from a number of very large man-
ufacturers.
Just why that attitude has been taken by the men, I
do not know, but that condition seems to exist.
Probably a great many of them were urged
I think
to take more bonds
Probably than they f e l t they could afford to carry, t h e y have
not yet p a i d f o r them in f u l l , a n d y e t they h a v e seen tllor e
I think that is a factor that must be
not
considered, that is, that we will/nave among that class,
bonds depreciate.
the w i d e d i s t r i b u t i o n that we have had in previous l o a n s .
Therefore, 1t seems to me that the loan must be made attractive to two different classes, first to men of large
means,or corporations who will be attracted to a bond that
1s free of tax, and then to the farming element.
we may be able to reach the:
farming element .
I hope that
The Western
men, of course, know that condition better than the Southern
men, but it seems
to me it has got to be a 5% bond in order
to reach that class.
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Federal Reserve Bank of St. Louis
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1
do not think it is desirable that the banks should
take this loan.
I have combatted that idea
man with whom I have come in contact.
with every
If the banks do have
to take it, I think the rate of interest should be suffic1ently attractive so that later on, if the banks have to
step into the b r e a c h at first, 'he bonds bearing an attractive rate of interest, could be p l a c e d later on with the
investing publlc by the banks, because it certainly is not
desirable that the banks should carry the
The bonds would
1an•
certainly find their way into t h e
Federal Reserve Banks which, again, I think is undesirable,
as they should be kept liquid.
I believe the loan will be placed w i t h o u t any question.
I personally am not convinced in my own mind that it is
desirable to make too early an announcement as to the rate.
3
While I know that opinion dees not coincide with the opinion
of others present, I think you are going to lose a good deal
•
of the psychological effect if too early an announcement
is made.
The public is on the anxious seat; they are con-
sidering the rate, you are keeping them talking about it,
and it is not a
bad idea to do that.
If the rate is announc-
ed too early they will pretty nearly forget about it by the
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Federal Reserve Bank of St. Louis
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time the loan comes around, and lose interest in it.
That 1s my opinion of it, sir.
Governor Harding:
Mr• Wing:
Mr· Wing?
Mr· Rue has expressed
w i t h r e f e r e n c e to t h e loan.
I t h i n k it
my e x a c t s e n t i m e n t s
has got to be a 5%
rate.
I think t h e longer t h e terms are put off, if they
a r e g o i n g to be a l i t t l e b e t t e r t h a n t h e p u b l i c has b e e n
a l l o w e d to e x p e c t , t h e b e t t e r ; but if
t h e y are going to
disappoint the public when they come ,ut, t h e y may as well
come out at one time as another.
Mr. Rue:
I will accept t h a t amendment, Mr. Wing,
I
think it is a good one.
Mr• Wing:
I have t a l k e d to a. g r e a t many people ab out
t h e loan, perhaps as much about that as about any other one
thing.
Every man that comes in has something to say about
his taxes and about the new loan: and I have ya t to f i n d a
man who previously has taken bonds, either because he was
told to or because he thought he ought to for one reason or
another, who voluntarily says he will take these bonds, except as an investment.
The sentiment me.y change.
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Federal Reserve Bank of St. Louis
I
1
have no doubt that
1.92
it can be worked up by the Liberty Loan campaign people
so that a great many of the bonds will go; but it is going to
be a
much harder proposition than it was before.
I think .
the bonds should be so attractive that institutions such
as s a v i n g s b a nKk s
insurance companies, and people who are
now investing in other securities on account of the interest rate, can take those bonds and take them in large amounts.
Otherwise the banks will have to take them.
Governor Harding: We would
like to hear from you,
Mr. Watts.
Mr. Watts:
Recently Mr• Franklin, who represents the
Treasury DeP:l,rtment, under Secretary Leffingwell, was in
St. Louis, and, at a dinner of this kind he passed around
cards and took a referendum, getting an expression of opinion
from the bankers and others who were present on the terms
of the new loan.
I sat next to him and he gathered these
cards in at the beginning of the dinner.
St. Louis is not
as d r y as Washington, and by the time the sped ing bemun
there was a.decided change in sentiment.
One very prominent
banker who had said it would be impossible to have a lam
f l t e d
at less than 5%, with the usual tax features, 4%
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Federal Reserve Bank of St. Louis
4
193
tax exempt, and other attractive features, rose to his feet,
made a Fourth of July oration, and during that he declared
that the loan could be floated
on a n y basis that Mr. Frank-
lin wanted it floated on.
I believe the members of the Advisory Council have expressed
themselves on this subject, and while I am a decided
minority in some of the views expressed, I have had nothing
happen in Washington to change my opinion on it.
I think, of course, it is going to be much harder, and
we must expect that the banks and organizations, after using
w1,1l
every possible effort, / find themselves with more of this
loan than of any other.
That reminds me of an incident which occurred soon
after I moved to s t . Louis.
nogro
him.
chamffeur.
I took to St. Louis with me a
s t . Louis was quite a show at first to
One of my friends came to St· Louis and asked the
chauffeur how he liked St. Louis.
He said he liked it fine.
Then the gentleman wanted to know what thing in particular
he liked above everything else in the City, and the darkey
replied, "the policemen, t h e y don't carry no clubs".
I have an idea t h a t is what will be particularly
Pleasing to our customers in this
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Federal Reserve Bank of St. Louis
campaign.
That is, we
194
are not going to be able to carry many clubs this time.
Therefore, I doubt very much whether we will be in a position to have our hop s realized of placing the bonds with the
investing public.
However, the public has done remarkably
w e l l up to the pesent time.
That probably is true more
in the West and South than in some of your Eastern centers.
I believe the banks of S t . Louis probably are not
carrying any loans, either for the individuals or for
other banks, doing business directly with the banks---and
many of the state banks are doing that•
carrying about
8
They are only
of their total loans in loans on Govern-
ment securities.
An analysis of those loans shows that they are gradually liquidating, and t h a t practically the only l o a n s of a n y
size that are now in the b@ ks of S t - Louis are those on
the fourth Liberty Bond issue.
Governor H a r d i n g :
be interesting if
Governor S t r o n g , I t h i n k it
you would
would
discuss this matter from the
standpoint of the Federal Reserve Bank, the effect it
will have on the reserves of the bank,
the possibility of
floating it with the public, your views as to the effect
of the size of the r a t e on the possibility of f l o a t i n g it,
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Federal Reserve Bank of St. Louis
195
and s t a t e frankly what you would like to see d:>ne•
Governor Strong: Governor Harding, Mr• Watts has.
apm rently s e t a precedent here that entitles me to tell
a story at the outset.
,
I do not know whether you have
read Ida Tarbell's Lire of Abraham Lincoln, but there is
a very interesting little account there of Mr. Lincoln's
habit of going r e r to the War Department to read the
disp tches from the Army.
He generally sat in Colonel
Eckert's office, where the dispatches were piled u p .
When he finished r e a d i n g a pile he would
say to Colo-
nel Eckert, "Eckert, I am doWn to raisins now", and walk
out.
and
After a few months Col. Eckert got his courage up
asked Mr• Lincoln what he meant by the phrase, he was
"aown
to raisins".
The President, having waited three
months for that inqiiry in order that he might tell the
story, said that when he was a boy he and a little girl
friend
of his made a raid on the pantry; that the lit-
tle girl started with
raisins; then had some cake, some
Pie, some preserves and one thing and another.
After while
she disappeared out the kitchen door and he heard evidences
of distress.
He went out to her to ask if there was any-
thing wrong, to see if she was alright.
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Federal Reserve Bank of St. Louis
He asked her if
I
mm2EA
19€
she was
alright and she said yes, she would be alright
in a minute, that she was,eown to raisins.
In these Liberty Loans now; I think we are down to
raisins.
I think we ought to consider this matter of rates
with regard to what has happened in the past and also what
is likely to happen in the future.
The Government has been receiving money during a period,
when there was some uncertainty as to the outcome of the
war, at 4-1/4%.
Now suppose we offered an issue of five
1'ar notes, exempt from normal tax, which is the status
of the 4-1/4% b o n d , it
w o u l d mean to· those subscribers to
bonds who have income subject to normal tax, that the Government would be paying equivalent to five and six-tenths fer
cent. interest.
That seems to me a pretty big rate.
It may
be n e c e s s a r y to pay i t , on the ground that an increase in
the income tax justifies an increase in the rate, but whether
Uncle Sam has got to pay a rate of five and six-tenths per
cent just now, strikes me as very doubtful; an
it
becomes
increasingly doubtful when we consider, unless all signs fail,
that we are e n t e r i n g into a great m r i o
of liquidation in
this country*
I do not like to prophesy what is going to happen in
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Federal Reserve Bank of St. Louis
I
197
the future, but realizing that in the face of these enormoussales of certificates of indebtedness in New York, our
reserve percentage is constantly increasing---and yesterday
got above 5% for the f i r s t time in months---we might be
surprised to find ourselves selling a very high rate and
comparatively short term Government bond in a very easy
money market.
Now, that is a possibility.
It"depends upon
a number of circumstances and a number of developments
When we commence losing the foreign trade, how rapidly are those stocks of merchandise going to be liquidated
in the United States and bank reserves pile up? I do not
know; nobody knows.
What I do knew is this:
Th.A.t in a
situation which is so kaleidoscopic and which changes so
r a p ± d i y . ) % » t w e e n thismorning and this a f t e r n o o n my omn views
..
have changed v e r y m a t e r i a l l y about the future, on account of
this development in sterling exchange, it would be
a very
hazardous and very improvident thing for the Secretary
of t h e Treasury tos ay today that he was going to pay
f o u r , f i v e 'or s i x per c e n t .
He ought to w a i t until he gets
every development possible, analyze thom carefully, then
make the r a t e .
I t h i n k it would h e l p s e l l t h e l o a n if' t h a t p o l i c y
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Federal Reserve Bank of St. Louis
\
.
198
were p u r s u e d .
If
t h e S e c r e t a r y of t h e Treasury s h o u l d s a y
today he was going to pay 5, four and three-quarters, or
four and a quarter per
discounted
Th
cent, the whole situation would be
to that basis before we started to s e l l the bonds.
e gentlemen here who have had experience in sell-
ing bonds realize that that is one thing that a skillful
bond selling organization avoids, having the market d± count
What is going to be sold in the future.
Governor Harding, replying specifically to the inquiry
suggested by you, I believe it is quite likely that the banks
Will have to take more of this bond than of the fourth loan.
But after all, that is not going to be a terrible calamity.
So f a r as
t h e New York banks are concerned, I believe they
Will be in a better position if they have to underwrite some
Part of the issue.
There is a little opportunity here for discussion of
the attitude of bankers.
It was stated here tonight---I do not
Want to say whether it was Mr• Wing or Mr• Rue that said it--that 1t is the advice of the bankers that five per cent should
be paid.
Does that indicate that he believes that five per
cent will sell the loan, or does it indicate that he does not
believe the loan will sell anyway, and, being obliged to take
some of it, he would rather have it at five than at a lower
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Federal Reserve Bank of St. Louis
199
r a t e ? I d o n ' t know.
(Laughter).
I would not hazard a guess as to w h a t t h e rate should
be three weeks
decided.
hence or four weeks hence, when it must be
But I want t o s ay t h i s a b o u t the rate of interest:
I have stated it to representatives of newspapers in New
I believe it was about a month a g o , was 1t not, Mr.
York.
Leffingwell, when Secretary Glass was there?
Mr• Leffingwell: Yes.
Governor t>trong:
I so.id that the one thing t h a t they
needed, in fixing the terms of this loan, was to have Congress
give one man authority to determine what the terms should be,
and for t h a t man to have the courage to fix if
and stand
upon his own judgment and see it through- Secretary Glass
called upon the committees of Congress; he told them that
he must have that authority; Congress gave him the authority;
and he is going to make a decision in the course of the
next few
weeks.
I do not care very much what the decision is.
courage that the
The
c r e t a r y of the Treasury has displayed in
asking for that authority, and in taking the responsibility,
is justification for every one of us seeing the loan through.
We a r e g o i n g to do it
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Federal Reserve Bank of St. Louis
in New York.
We a r e going to s ell
')
u
O
2
quota.
Garernor Biggs:
And we will do it
Governor Strong:
in St• Louis.
Of course you will.
And Mr· Rue
end Mr. Wing will do it in Baston and Philadelphia.
I have ta1ked
recently at great length with the
members of our crganization, and I find the greatest enthuiasm about the loan in New York:
3
Our organization believes that the log can be successfully placed in the second district, and I am convinced
that they will do it.
I am satisfied to wait until ecretary Glass decides
What the rate shall be.
decision:
I believe he will make a wise
I think Mr. Leffingwell will influence him
largely in making a wise decision.
When the decision is
made, then my view is to fly at it and sell it.
Governor Harding:
Mr. Rowe, can Cincinnati come up
to St. Louis and New York?
Ml°'•Rowe:
add
I do not think I can say anything that would
to it in any way.
In discussing it with some of the
large corporations that have taken bonds all the way through,
I have been surprised that they claim they are not able to,
or do not expect, to take a large amount
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Federal Reserve Bank of St. Louis
this time.
I
21
also know, from some of our young men there, who handled
the campaign locally, that that is exactly what some of
these men said before, and our young men are q uite optomis tic over the situation and believe that a god
many ot
those people will come ir a n i take just as many as they did
before.
Some of them, we know, will not be able to do that.
So far as the Federal Advisory Council is concerned,
my observation is that we have
what is to be done.
always guessed wrong on
If you will go back to the beginning
of' it, you will remember that some of us hesitated on a
billion and a half, let alone two and a half billion, or
three billion, and I know that we felt that way about it.
We know we were w rong and we know it all went over.
I
have some regret that we did rely so much on patriotism
in getting the loans over.
I regret the price at which
o m e of the previous bond issues are selling, and the consequent loss to some people who thought that they had to
t a k e them.
Probably, I am wrong again, but my theory is
that it would have been a little bettor to have paid a
little more each time.
I say that because I believe it.
But that water has gone over the mill.
I am not compe-
tent to say whether or not the people will take to the
same extent that they dld before.
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Federal Reserve Bank of St. Louis
1
-mm2A
22
The campaign people seem to feel that of course
they will put it o v e r , and I believe they will, but I
would rather see something put over this time that would
stay real close to the issue price.
Governor Harding:
Mr: Leffingwell, would
you like
to hear from each of the r e r n o r s ?
Mr• Lefflngwell:
I would, very much, Governor
Harding.
Gcv ernor MoDouga.1:
I was very much interested in
and very much p l e a s e d with what Governor
trong had
to s a y .
I only have one request to make at this time and that is
when the quota committee is appointed that he not be
eligible for membership, in order that New York may be
given her full quota when the time comes.
Governor Strong:
(Laughter).
But not more than her f u l l quota,
Governor-McDougal.
Governor McDougal:
1zed.
No.
Our district is well organ-
We have maintained the organization which was ac-
tive heretofore, and they have a great deal of confidence
in their ability to perform.
As a result of a careful canvass that has been made ,
I am very sorry to report that there is very little encour-
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Federal Reserve Bank of St. Louis
23
ment received throughout the district.
The situation in
the agricultural sections is very unsatisfactory, and
we hear from many sections that we cannot expect them to
do what they have done in the past.
They have not the
r i g h t viewpoint.
Comptroller Williams:
What is the trouble with the
farmers, Governor MeDougal?
Governor McDougal: I do.not know what the trouble
is, but there has always been some trouble with them.
it is, I do not know.
What
It is pretty hard to get them to
perform.
Comptroller Williams:
They are prosperous, alright,
are they not?
Yes, t h e y are very prosperous,
Governor c D o u g a l :
but it is a strange thing, Mr. Comptroller, there is a
pretty general expression from the farmers which indicate
that they febl they have done their full share;
I sup-
pose by subscribing to the Fourth Liberty Loan and taking
$2. 26 for their wheat.
Comptroller W i l l i a m s :
Do they f e e l that t h e y s o l d t h e i r
wheat at half price?
G o v e r n o r 1Vl¢Dougal:
fied with the price.
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Federal Reserve Bank of St. Louis
I am not sure that t h e y are satis-
The prospects are not encouraging there.
24
Of course, we do not know what conditions are going
to be in a month from now.
The general concensus of opin-
ion is y and I agree with that opinion, that the rate should
be five per cent, the bonds, perhaps, being convertible
into 4 per cent, tax free bonds.
I think we need all the help we can get from all directions, and I believe the farmer can be brought around to
a five per cent bond, whereas I do not believe he would be
attracted to a 4-3/4% bond*
I think the difference between
4-3/4% and 5% 1s going to mean a lot to them.
I fear we are in very much the same position as Mr.
h
ue says they are in in Philadelphia, that is, that we can
not expect too wide a distribution, in the s teel plants
around Gary and Chicago.
A great many of the man have
left and we can not expect wide distribution there.
The
same thing is true with some of the manufacturing interests.
I believe it is going to be necessary to make an attractive rate, and I would say it should be 5% with perhaps 4%
t a x oxompt,
with the conversion features.
Governor Fancher:
I think the situation in the Fourth
district has changed somewhat in the last three or four
weeks, and the last two weeks particularly, as far as the
Liberty Loan organization is concerned•
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Federal Reserve Bank of St. Louis
I think up to t h a t
25
time they were very much discouraged over the prospect
of f l o a t i n , s
the l o m , but they seem to have gained c o n f i -
dence 1n the last two weeks and now believe 1t will be
Possible to sell whatever quota is put upon us.
But we
are essentially a manufacturing district, a n d t h e situation to which Mr• Rue refers is one which we are eoing to
encounter.
In the Fourth loan our total subscribers was in
excess of 2 , 5 , .
Of that amount,
two million, rour
hundred and sixty odd thousand subscribed for amounts from
fifty to five hundred, and the total of that was a.bout 13Jb
<f'
the total an otint sold.
f
seven h u n d r e d and two million.
Our large manufacturers tell us it 1s
Sible to make a shop
oing to be impos-
canvass. That situation has con-
vinced our organization that it is n e c e s s a r y to change
the form of campaign.
They are organizing now more
intensely, organizing into wards and districts, and getting it down to the point so it i l 1 be a house to house
canvas
They are going to canvassthe men in the shops
and get the employers
to do what they have done before
in the previous loans, and they are going to endeavor in
that way to make a w i d e d i s t r i b u t i o n .
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Federal Reserve Bank of St. Louis
Of c o u r s e , condi-
26
tions may develop in t h e next two or t h r e e weeks that
Will have a. bearing on t h e rate, but the rate we hear commonly mentioned is 5%, with the bond subject to tax, and
a 4% rate with tax exemption.
Of course, we want to reach
all classes of buyers.
I was quite impressed with the application fa rediscount which came into our bank the latter part of last
week, u bank in one of the richest farming counties in
Ohio.
I think there were twenty odd notes in the last
batch and we had copies made of the statements by the
f a r m e r s to the b a n k s .
The banks in t h i s particular C o u n t y
have been very active in petting s t a t e m e n t s from borrowers.
We have sent out statements covering different forms
of borrowing, and they are able to submit copies of the
statements which t h e farmers huve rendered•
Out of twenty
statements only five showed that the farmers owned any
Liberty Bonds.
The highest amount owned was $ 1 5 , and the
statement showed that that man had a. net wa th of 7 4 , .
The smallest amount was 3,
it w a s a b o u t $
3
,
and as I recall the net worth.
.
That i m p r e s s e s me w i t h t h e f a c t t h a t we have not y e t
g o t the farmer to b u y b o n d s .
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Federal Reserve Bank of St. Louis
Four and
a
quarter per cent does
iiiii:-%
27
not attract him.
I think we got a little better distribution in the
third loan than. we did in the fourth loan, because I think
the farmer likes to buy something that is going to mature
within a reasonable time, and he is going to live long
enough to s e e it
m a t u r e , and c o l l e c t i t .
I am r a t l i e r convinced that a short m a t u r i n g note or
bond, bearing an a t t r a c t i v e rate of interest, will r e a c h
a. buyer that we have n o t yet r e a c h e d .
I am quite h o p e f u l
that this is so.
I am confident we are not going to get the distribut i o n with the small subscriber, and t h a t t h e number
df
sub-
Scribers is going to be very much reduced.
Of course, whatever rate the Secretary, after investigation, will make, whatever terms are finally named, we are
g o i n g to s e l l t h e bonds, they are going to be placed; but I
am convinced that we are not going to get the distribution,
and thet it
is g o i n g to be n e c e s s a r y for t h e b a n k s , at
the
outset, to take more of the bonds than they have heretofore.
3
I hope that the terms will be such that the issue will maintain par, or nearly par, so that the banks may be able to
r o l e to
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Federal Reserve Bank of St. Louis
distribute them later; to take them at the outset.
-mm
28
distribute them later, and be relieved of them.
Garernor VanZand t:
We had a very wide distribution,
for our sect1n of the country, in the last loan.
I do not think we are going to have anything like the
same distribution next time.
The first distribution was with
the small buyers, from fifty to a hundred dollars.
I feel,
1n talking with my Liberty Loan Workers, wh e organization
has gotten so proficient that they are going to sell some
bonds to the farmers, something they have never done before.
I b e l i e v e t h a t we •rrill be able to dispose of our q u o t a domn
there, no matter whet the rate is.
It is going to be very
hard to sell it if it 1s anything under a 5% taxable bond.
If it is a
tax free bond, with a smaller rate, of course,
we wont sell anything to amount to anything.
investors are few and far between.
Our large
I have had the same ex-
perience that Governor encher has had.
I h a v e noticed from
the statements that have come under my observation
that the
farmers and cattlemen, and particularly the cattlemen, have
b e e n b o r r o w i n g from the War Finance C o r p o r a t i o n , and making
applications for loans to that c o r p a a t i o n , and it
is appall-
ing the lack of'interest that those people have taken in
the liberty Bond Campaigns.
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Federal Reserve Bank of St. Louis
29
The street car conductor owns more bonds than the
•
cattle man who in worth from fifty to seventy-five thousand
dollars.
Those are the people we are going after in the next
loan, a n d I t h i n k we will sell our quota alright•
Governor o l d :
In our district, as you know, we have
followed the allotment plan, and I think we got a wider distribution than would have been possible under any other
method.
The farmers in our district have got bonds; they
had to take bonds.
If
they d i d not t a k e them willingly
they took them unwillingly.
3ut I do not think we will have
the same influence in this next loan as we have had in the
We had t h e cooperation and support of t h e State
past.
Public Safety Commission, of every State of our district,
comprising six States, and they were very active in supPorting us.
When a farmer would not take his bonds the
Commission was notified and he took them.
We will not have that lever in the next loan•
We have been about 9 d a y s trying to prepare for this
and build up an organization, and it
couraging work.
has been very dis-
In the last few weeks it has been going
..., a
little better.
I have said to them upon every occasion that the bonds
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Federal Reserve Bank of St. Louis
e
r
going to be sold.
a
1
2
We did not know what the rate would
be, but the Secretary had said, or Mr• Franklin, speaking
f<l:"
the Secretary, had said it would be a rate that would
carry tax exemptions privileges or, as someone sa:1:iin the
previous loan, there would be perfumery enough
1t so
On
that when it was sold it would maintain itself at par
in the market.
Under those conditions, I have stated that whatever
allotment wac gtven to our district would be sold.
If the
rate is less than 5% and the banks have to buy them, we will
have to b J . i b e r a . l . , because, as I have indicated, we have not
t h e same power to f p r e
the farmer to b u y , e v e n w i t h wheat
at $ 2 . 2 6 , in proportion to t h e i r a b i l i t y to p n y , that we
have had in the preceding loans.
But we want these bonds kept out of tho
banks of the 9th e d o r a l Reserve District, and I am sat1sfied that they will be 1f the rate is 5%, without
any tax exemptions, not even normal tax, and 4% tax exempt.
Governor Wellborn:
I do not agree with many of
my colleagues in the position that the banks will have to
carry these bonds, or subscribe largely to them.
with
M.*
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Federal Reserve Bank of St. Louis
I agree
L e f f i n g w e l l that this campaign w i l l have to be
211
Pitched on the plane of p a t r i o t i n , to get p e o p l e to
subscribe to them.
I believe that will be
a
winning
card.
As to rates, I think we ought to have a 5% rate,
but there ought not to be any tax exemptions at all.
I think that is wrong in principle.
I think every ma
ought to be appealed to on patriotic grounds to take the
bonds, and he ought not to be exempted from taxation.
I think a 5% rate will be a patriotic rate, because
the interest rates are higher now, and people who take
the bonds
at 5% could obtain better rates outside.
Governor Lynch:
Mr- Chairman, the gentlemen have t a l k -
ed a good deal about placing these bonds, and how they
were placed.
Mr. W"ld
told you how some of them were placed.
They were in ore way or another forced upon a large rt
of the community.
It is true there are a great many patriots in the
country, and I think they are in the great majority, but
the patriots are pretty well filled up w i t h bonds now.
A great many people of mderate means that I know have
strained themselves to carry these bonds, and they have
been obliged to sell them, and we all know they have sold
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Federal Reserve Bank of St. Louis
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them in a
very soft market.
Governor S t r o n g is a much better authority than
any of the rost of us on what the market will be, because
New York is the ultimate market.
It is not placing bonds in a proper sense when you
get men to take them because they-have to·
That was done
in every district, and lots of them were sold through pres'(
o:f
SUJ:'le
one kind or another, economical, social, and some-
times the pressure of the ax-handle was brought to bear to
Place the bonds.
Lots of people paid down five dollars
or t e n dollars s i m p l y to get rid of t h e s e l l e r , to g e t h i m
out of the way, and to buy that much immunity1 but they have
not made a n o t h e r payment and the banks are carrying t h o s e
bonds in most cases, they have taken them over•
they could afford to do it:
Of course,
The loan has been sufficient
to carry that discount.
This, we hope and are told, is the final loan.
For
the sake of a half per cent or a quarter per cent, is it
wa th going to all of the trouble that has been gone to?
We have not got the same clubs here, you see, and the
patriotic impulne is not as strong as it was.
I know all the talking points in favor of the loan,
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that it is the Victory Loan, and that it means the end of
the war; that it is the closing up of bills and contracts
into which we have entered. I can talk those points just
as hard, just as strong, and just as long as anyone, and
I Will talk them, no matter what the rate of the loan is,
whether it be 3% or 5%.
1ze the lo
But
1
i
t
worth while to jeopard-
for the sake of a fraction of one percent?
The time isn't long:
position fa
Isn't it a
better economical p o -
the Government to put out this loan at a rat e
that will carry itself, than it 1s to go through with the
other process?
It is a hard thing to jam down the throats of people
who do not want to take it.
Jvfr.
Rue has told you that the employers
say that their men will not take them.
of l a b o r
We are told exactly
the came thing by the large employers on the Pacific C st.
They are sure up in Seattle that they will not take them.
A great many of the men have left, and some of them left
unfilfilled contracts.
The sentiment among the working people seems to be
generally, that the war is over and that it is now up to
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someone else to carry the loan.
that same s e n t i m e n t does
I do not know that
not run through every c l a s s ,
in every community.
I think we ought to get out with something that
will appeal to people as an investment; that will appeal
to the man who has money.
Of course, c o n d i t i o n s are changing f r o m d a y to d a ,
and we only have 32 days between now and the time the
l o a n w i l l be launched, and, s p e a k i n g for my own district,
I t h i n k t h e sooner the t o r s
a r e announced the better.
I have a t e l e g r a m f r o m Mr. Weeks, who is an ex-
perienced bond man, and one of the a b l e s t in the c o u n t r y ,
who is very i n s i s t e n t that the terms of the loan be announced as quickly as possible.
You must remember, we have a lot of educational
work to do.
there.
The word "notes" is a. very u n f o r t u n a t e word
It was necessary, I know, but we have got to ex-
plain to the people why it
is j u s t as zood as a. bond,
and why Tom, D i c k and Hgrry have g o t to
t a k e it
just
as much os the bank has got to take it.
The impression seems to prevalent t h a t this loan is
something devised for the banks, and that it is not
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intended to be a popular loan.
very bad
There evt ently was some
press work done when the first announcement was
made.
The time is extremely short in which to do the n e c e s sa.ry educational wo:rk and got the matter fixed 1n the minds
of the people that this is
a
popular loan,
and
that, as citi-
zens of the country, they are called upon to take it.
The question of tax exemption is too large a question
to go into in an after dinner talk·
You must, remember,
however, that you are going into competition with state,
city and county bonds, that are all absolutely tax exempt,
and 1f the amount t h a t
a
man would le
by
sacrificing
the tax was put entirely upon another loan over a five
year period it would add wonderfully to the ease with which
the loa.n could be sold.
That, however, can be adjusted
by the rates.
I recall Mr. McAdoo's statement, at a meeting held in
March a. year a g o , I think it
was.
Perhaps 1 t was long be-
fore t h a t , b u t he said, "you are a.11 very l i k e l y good b kers,
and probably k n o w a great desl b o u t banking, but you know
very little about the American people and the
of the American people."
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He was absolutely right, and we
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were al 1 wrong.
But there is another side to it.
Thsse
loans did not maintain at par. The people t o o k them for
but
p a t r i o t i s m ? i r o u l a not c a r r y them, and e s p e c i a l l y mould n o t
carry them when t h e y saw t h e m going at a discount.
There-
fore, there is some virtue in selling a loan that will carry
at par after it is sold, that can be placed at the bank,
end will not be immediately put on the market again.
I suppose Mr• L e f f i n r w e l l has been impressed somewhat
with the depreciated prices
of
bonds.
I have no doubt that
that has given the Treasury Department some anxiety.
And now,
four of these loans out of the way and there is a fifth
one to place.
I would s a y t h e r a t e s h o u l d be such that would avoid
unnecessary anxiety and mental wear and tear, and actual
l o s s of credit, which is involved in putting out a loan t h a t
Will n o t remain at somewhere near p a r .
-j
If Governor Strong is r i g h t , there is
g o i n g to be a
m a r k e t ; t h e r e 1s g o i n g to be such liquidations t h a t t h e
banks will be full of money.
I do not pretend to know
what is going to take place, but I do believe that a 5%
rate is one which you can depend upon, that will have the
loan we11 taken throughout the c o u n t r y , sold with areas o n a b l e d e g r e e of e a s e , and remain at c l o s e to par.
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that is true with almost every district, but it
1s hard to
hold the organizations together.
We have all sorts and kinds of excuses given us
every day.
One man, or another man, cannot work this time.
They take the position, I believe, that it is no longer
important, that the war is over and the country is safe;
that none of t h e things, the terrible t h i n g s that were
talked about have happened or are going to happen, and
they should not be called upon to abandon their business
)
and work t h r e e or f o u r weeks to put t h i s l o a n o. e r ; t h a t
the Government ought to finance itself now on a commercial
basis.
That is a common gt@tumont and it illustrates the
popular feeling.
Deputy Governor Peple:
It is very difficult, indeed,
to make any predictions for the fifth district.
In every
one of the four loans there have been times before the
campaigns closed
whon we did not believe that we were going
to be able to place our quota.
In the fourth loan, just
before the close of the campaign, the returns that came in
were so bod that we had prepared in the bank a spcial
Circular to the banks asking them to make prov1s1onttl
subscriptions to be used in case they were absolutely necessary
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1n order for t h e f i f t h distrio t to make its quota.
In the next two or three days there waa a remarkable
change and we came out of it very nicely, and were
second on the list, just below Boston, in over-subscriptions.
In the third loan, I think it was, a good many
f
ur
banks made the mistake of appealing to their
large customers to buy bonds, take t h e i r losses, and
sell them•
We felt at the time that it was a mistaken
policy, and we d i d a l l we could to stop it.
Ve felt
that the embarrassment of the Government, in view of
the fact that the fourth, fifth and sixth loans might
follow, in having prices depreciated by large blocks
of bonds being thrown on the market, would be worse
than the failure to take those bonds, at least to a
certain extent,
But we got over that situation.
In the fourth loan we know there was wide distribution on the part of employers of labor,which we
cannot expect
this time.
We know that a great
many people were appealed to, just as the other
Governors have stated, to take bonds on patriotic"'
grounds, and we know that a large number of those
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People are holding those bonds now.
In our bank we have loans on the first, second,
third and fourth loans, and on certificates, in anticipation of the fifth loan.
I said something today about the cotton situation,
and the cotton seed situation in our district.
Unless
there is a change, which will enable our farmers to sell
their cotton and to dispose of their cotton seed, unquestionably the banks in our district will have a large p r t
of this burden to carry, even if the loans are placed with
the public, because the public to a great extent in portions of our district will have to depend upon the banks,
and the banks w i l l have to depend upon the Federal Reserve
Bank to help them out.
We have been feeling very badly about the condition
of our reserves, the over-borrowing of some of our banks,
and the fact that we have large rediscounts with other
Federal Reserve Banks.
I am beginning to feel a little
bit better about that situation, however, when I hear so
many of the Governors from the larger b a n k s express the
fear that their loans are going to be liquidated to such
an extent that their profits will fall off, and I feel
t h e y w i l l be g l a d to help us to aa.rry our part of
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2
are rel y i n g upon the fsct that there is a tremendous amount of patriotism in our district, and we are
relying upon the fact that we have gone over with every
loan so far, and we have made up our minds that we are
going to do it this time, if it can be done---and it
has
been done four times' We h v e not a l l o m e d ourselves
to be discouraged by reports that have come to us, because
these reports have been a repetition of our previous experience.
But there is one thing t h a t is giving us con-
Siderable discouragement in the preparation for this
campaign.
We cannot h e l p f e e l i n g that there is
some sig-
n1fic§nce in the very large number of cases of nervous
Prostration that have developed amoung the gentlemen
who have been asked to serve as Chairman of State committees and district committees.
I am not going into par-
ticulars, because we really would not like to have some
of the gentlemen, who have accepted these positions,
know how many people had been asked before the matter
b
was submitted to them.
8ign1ficant
thing,
That, unquestionably, is a
I do not doubt that these gentlemen
have worked hard, and some of them have doctors certif1cates h o m i n g they unquestionably were not in good health,
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I c a n n o t h e l p :reel:t11g th.at if
but
c o n f i d e n c e in our a b i l i t y to Dell
t h e y had h a d more
the loan this time,
they probably would not have appealed to the same doc-
tors.
I cannot help feeling that it would be of tremendous advantage to us in" more ways than one if
of t h i s
l o a n a r e such t h a t the bonds w i l l
Par a f t e r they are sold.
the terms
rt3ma.1 n
at
I cannot h e l p feeling t h a t
the psychological elements in the proposition are such--knowing t h e pi;ople. in our d i s t r i c t as I d o - - - t h at if
we
c a n Place the loan at this time and have the bonds remain
tt
p a r , it will have a decidly improving e f f e c t on the
previous issues of bonds.
It may be mathematically correct that if the next
issue is 5% and remains at par, that the 4-1/4% bonds
ought to sell at 93, but I do not think that necessarily
follows.
The bonds are selling at a low p r i c e , not because
the Government security is not worth more than that, but
because of the tremendous number of those bonds that are
being offered for sale.
I think that the issue of the fifth Liberty Loan, at
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a p r i c e and under terms which would keep it at par would
unquestionably have a stimulating effect upon withholding
f r o m sale bonds of the previous issues and that, in turn, '
would affect the market price.
Go,er-nor Miller; Our quota of the fourth Liberty
Loan was $ 2 6 , , .
We s o l d # 2 9 5 , , .
I think
it
f i l l be very
o
much harder
,
for us
, to sell 2
the new bonds, even if the rate of interest is 5%,
than it was for us to sell $ 2 9 5 , , o r the last
icsue.
Patriotism amounts to a great deal in bond campaigns.
In the next issue we will not have the henefit of the
C o u n c i l s of D e f e n s e .
Then, again, the c a p i t a l Issues
c o m m i t t e e has c e a s e d to f u n c t i o n end it
has
turned l o o s e
in our district thousands of investments in oil schemes,
and every other sort of scheme, which has taken up all
the money in our district:
I hope Mr: Leffingwell will
make our quota about half of what it
was last time.
It was very u n f o r t u n a t e t h a t the Kansas C i t y Star
carried an article,not more than a week or ten days ago,
in which 1t quoted Secretary Glass as saying that he
hoped there would be a wide distribution of the fifth
Liberty Loan among the people, ns that would prevent the
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banks having to take the balance of the bondshas had
a
That
bad effect upon the selling of certificates
of indebtedness.
The bankers have read the Kansas City
S a r and they are afraid to purchase these certificates
of indebtedness for fear the Government will fine them
as owners of the certificates, f o r which the proceeds
of these bonds are to pay, and will just assess to each of
the banks, or allot each of the banks, as many of those
five year notes as will liquidate the certificates.
I do not know whether
that was authentic or not,
but the article appeared, Mr. Leffingwell.
lengthy statement.
about it.
It was quite a
I suppose we had hundreds of inquiries
It looked as though 1t were an absolute state-
mont that the banks would be required to take these bonds
if the people did not take them.
As to the rate of interest, I do not think our
People would be much interested in bonds under 5%,
though
possibly they would be interested in a four per
cent bond with tax exemptions.
We have some wealthy people in our district, especially the Oklahoma
11 Magnates, who are large investors.
They have tens of millions of other issues of bonds.
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We had a
call from one of the oil men the other
day who wanted $ 5 , , o f the new issue if it bore as
high as 4%, ,tax exempt. , He said his2 income was $
a
year, and he had something like six or seven million
dollars worth of real estate, and by the time he paid
the income tax from his earnings, and his advelorom
tax,
f
that heoowed himself
, money.
He
, had about $
the 3-1/2% bonds, and was willing to take four or five
million of the fours if
he could get them tax free.
He
sa1a he would not be interested in them at much less
than that.
I hope Mr. Leffingwell will remember the tenth district and deal gently with it in regard to its cµota.
Governor Biggs:
I do not think I will go quite so
far as my neighbor in Kansas City and ask for half the
allotment•
I do not recall exactly the allotment we
had before because I am not thoroughly familiar with it,
I hope you will not increase it, as you have
with the certificates from time to time by telegraphing
in to raise ten per cent more in twenty-four hours.
Mr. Compton, who is
has been in Florida.
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Federal Reserve Bank of St. Louis
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I feel confident that we will be able to get by with
anything in reason•
I do not think there ls so much ques-
tion about t h e price of the bonds, because I believe it is
largely the selling force. I think it is largely a quesyou
tion of selling* II,Eo about it right, you can sell
anything.
I do not feel that we have covered the field in our
section w i t h t h e f a r m e r s as c l o s e l y as it s h o u l d have been
done.
A good many p e o p l e go out and want to s e l l a bond
too q i c k l y .
When you know t h e f a r m e r v e r y w e l l you know
that you cannot trade with him in a minute.
He likes to
sit on the f e n c e and talk with you and argue with you
about it.
On t h e first effort you meke le w i l l n e v e r take
it, no matter what it is.
It
is
t h e same with the s i t u a -
tion with regard to the wheat which was brought up.
If
you make the price $ 4 . 2 h e wants $5.2, and he would n o t
9e1l t h e wheat t h e f i r s t d a y if
man t h e second day.
he had a chance to s e e t h e
It is well to take the m a t t e r up
With the farmers when they are prosperous and when they
can i n v e s t .
They have b e e n a b l e to i n v e s t funds v e r y
readily in livestock, which has been making money for them,
and which I think is selling as high today as it did dur-
ing the war.
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Hogs and cattle and sheep, and such things
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as
t h a t , a r o at
abnormally h i g h p r i c o s .
know that
I
t h e f a r m e r s a r e in a v e r y p r o s p e r o u s condition, and it
s i m p l y a q u e s t i o n of ha
tu ruach them.
#
is
That is a f i e l d
in which to operate, w h i c h I think w i l l take the place of
t h e f i e l d where y o u f i n d tho l a b o r i n g man.
I do n o t think there is any question but what the
smallbond buyer is going to be very hard to get hold of.
A good many of them have changed their locations, escially in t h e munitions p l a n t s .
Wages have not decreased, but
they will come back and say that they bought the first,
second and third issues, and it will be very hard to talk
them i n t o b u y i n g a n y more
this time.
It takes a great
many s a l e s of t h a t kind to make a. hundred thousand dollars•
A g r e a t many of t h e men s p e n t , or w i l l s p e n d , t h r e e
weeks raising $ 1 , , when t h e y · could p o s s i b l y g e t one
man to t a k e a m i l l i o n d o l l a r s in t e n minutes by t a l k i n g to
him properly.
We
w i l l have to work on t h e l a r g e r men, the
l a r g e r investors.
G
ernor Passmore: Governor Harding, and gentlemen,
I c a n not add very much to what Mr. Rue has a l r e a d y said.
in explanation of the conditions in our district.
He stated
it v e r y much better t h a n I can say it.
We fear that the placing of this approaching loan is
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going to be a. very different proposition from the loans
have preceded it, but I am sure that we have never been
well organized to prosecute a campaign successfully as we
ere at this time.
It is unquestionably true thai the conditions in our
great industrial plants, due to the cancellation of contracts,
and to other reasons incident to t h e e n d i n g of the war, is
greatly unsettled, and it has greatly upset the installment
subscriptions to the extent that a great many corporations
have had to take over installment subscriptions where the
subscriber has entirely fallen down, and often times moved
elsewhere.
Those who are still employed in the establish-
ments will be still paying installments on the third and
fourth loans until long after the fifth loan is out of the
way.
Our selling people, I think, are very strongly of
the opinion that we should have two types of notes to
Offer.
One tax-free note and the other subject to tax.
They think that that will be a very distinct advantage.
While I thoroughly a g r e e w i t h both Mr* Rue and Mr.
Strong that there is no occasion to fix the rate at this
time and that in fact it would likely be unwise to do
s o , s t i l l I came f r o m a L i b e r t y Loan C o m m i t t e e m e e t i n g
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directly to the train to come to this conference, and
the last word hollered to me, as I went out the door, was
to be sure and ask Mr. Leffingwell to announce the terms
of the next loan, at least a reasonable length of time
ahead of t h e o p e n i n g of t h e campaign, and it
seems to
me it would be a d i s t i n c t advantage to know t h o e terms
at least ten days or two weeks ahead of the opening
date.
In s p i t e of the severe exactments of this war, I
feel that this country is not in an impoverished condition
financially.
We are still a very rich country, and cer-
tainly there is j u s t as much patriotism in it as ever
before.
It is only going to require a little stronger
pull to arouse it
to the proper pitol?.
The wealth of the country 's e v i d e n c e d if you will go
down to Atlantic City, where you will find the hotels
filled with people with lots of money to spend, people
coming from St* Louis, Cleveland, Minneapolis, hicago, and
other cities.
They tell me there is hardly a sea shore
resort anywhere where you can get acommodations at the
hotels.
The t h e a t e r s , opu:re.s, movies, h i g h - p r i c e d e n t e r -
tainments, and low-priced entertainments, are all patron1zed as never before. It is very evident to my mind that the
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country is very prosperous financially.
make our appeal
But we must
to a different class of people in this
loan from the class which we endeavored to reach before.
It seems to me that these commercial and business
houses, whose profits have been large particularly as a
result of the war, and who have not paid out all of their
profits in Government taxes, ought to take at least a fair
share of this coming issue.
I think it is very essential that it should be made
Plain that the distribution should be made beyond the banks,
as far as possible, and that the banks themselves be enlisted in this campaign to help bring about that distribution,
for their own sakes as well as for ours.
It is our belief that the loan will be well taken
up but that it
i
going to be taken on a 11ttle different
basis than heretofore.
Governor Morss:
We have hed a good deal of discus-
sion in the last three months amongst our Liberty Loan
Committees about the terms of the new bonds.
Every little
While we get together and see how we feel about it.
Perhaps
a month ago we had a meeting of six or eight Liberty Loan
committees, and we tried to find out exactly what their
I'
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a
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were about the rate of interest for the
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loan:
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think, rather to the surprise of most of us,
Lt came out that they had an idea that 4-3/4%, with
normal tax exempt, was about the right figure.
I think
that was the general idea, although some of them wanted
in addition
4%bonds
entirely tax-exempt.
Then, I notice
in talking with bond men and business men, that the busin e s s men a l m o s t u n i v e r s a l l y s a y , "I do not s e e how you
are ever going to get that loan over.
We cannot take
any more", or they say thoy can take very few of them.
The bond men feel a little differently.
They have been
able to place bonds with attractive rates and terms,
rather to their surprise, I think, although some of the
bond men me talked to have offices in every part of
the country. '.they have told me that the Boston district,
as a market for bonds, 1s declining very much in its relation and proportion to other places.
One of our largest
houses told me that their Chicago office, within the last
two or three months, had
taken more bonds than Boston,
and the.tit was the first time in their experience that
anything of that sort had happened.
It seems to them very
significant that'the money was out at Chicago for investment and not in Boston» It is getting near the time, and
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the district has been canvassed most carefully, and the
opinion 1s not Po put out a bond of less than 5% 1f they
want them placed, and also a 4% wholly exempt bond.
We cannot expect to do
as much w i t h Our manu-
facturing concerns and our small subscribers as we did
the la.st time.
As I told you this morning the factories
a r e r u n n i n g on s h o r t timo:
Over time is e l i m i n a t e d .
The
people have changed about from one l a c e to another and
5
there ha been
tions
much larger lapsesin the small subscrip-
than ever before, very much larger.
I do not be-
lieve we can depend upon the small subscribers to the
same extent that we did before.
Mr· L e f f i n g w e l l will recall the figures I sent him
on the fourth loan, showing that three quarters of one
p e r c e n t of t h e total number of subscribers took over
6% of the loan.
That is to say out of a million six
hundred thousand subscribers, twelve thousand took four
hundred million dollars out of six hundred and thirty-two
mi1l1on.
We believe t h a t the amount that the smell subscribers
t a k e w i l l be c u t down.
T h e r e f o r e , probably half of the ancunt
subscribed by small subscribers will have to be taken up by
Illa..
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m a µ p o
p
/
232
the twelve thousand subscribers who took more than 6%
of t h e . lo
, and t h e q u e s t i o n i s , how a r e we g o i n g to
get them to subscribe.
One f a v o r a b l e f e a t u r e is
t h a t t h e s a v i n g s banks de-
•
posits have been increasing, and we propose to ask them to
take more th
they did last time.
.
We would ask the
insurance companies to take more, but they have had
l
very heavy losses to pay through the influenza ep:tdemio,
and are not in as good condition on that account.
It seems to come down to the point that we have got
to ask the people *ho can subscribe, and especially institutions, to subscribe as much as t h y possihly can, and
we have p.ot to p-ive t h e m a bond t h a t w i l l be e t t r o c t i v e .
The savings banks pay four to four and
a
half per
cent on savings
e
c deposits;
n
a
r generally
u
s they
n
ipay 1
4-1/2%;
1
1
compenies pay 4-1/2%.
1n order to do that•
They have got to have more
They uanot pay that if they only
got 4-1/2%.
Comptroller Williams:
Would n o t it hurt t h e s a v i n g s
'
banks if we made the rate 5%,
for from three to five
years?
Governor Morss:
their deposits?
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Federal Reserve Bank of St. Louis
What do you mean? 'vould t h e y l s e
3
233
Comptroller Williams:
Governor Morss:
Yes.
We do not fear that.
We think that
one of the things which kept the money out of the savings
banks was hoarding.
That seems to have been a very material
factor, and it was one of those things you could not estlmatt
We could not tell definitely whether there was much hoarding going on or not,
The way the deposits have come back into the savings
banks, it
would seem to indicate tb.nt there was a god deal
of hoard ng.
Of course, a great proportion of the indus-
trial population are foreigners, and it 1s hard to get
their state of mind, as they are very secretive about what
they
do.
You cannot find out about i t , but the results
would indicate that there wes a good deal of hoarding going
On.
The opinion of most of the members of our committee
is that the rate should be at least 5%.
They are not so
sure but that they will have to place quite a number of
them w i t h the banks, e v e n at that r a t e , because some of
•
the corporations that subscribed largely before are not
1n a position to do it
now, and then this
c p e s t : t o n of
settlement of contracts and all that sort of thing handicaps
it
very badly just now.
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Federal Reserve Bank of St. Louis
I am in hopes that that matter will
be straightened out before the loan comes on.
It would
be very helpful if it was.
As to the question of p a t r i o t i s m , I believe we all
agree with Secretary Glass as to the necessity for arousing
t h e s p i r i t of p a t r i o t i s m .
The l o a n is a b i g o n e , so b i g
that I do not believe you can make people subscribe enough
to 1t if you do n o t talk patriotism to them.
In order to get the small subscriber to subscribe,
they ought to made to feel that they should subsoribe;
that they should take their part 1n this loan the same as
they did in every other loan.
I thoroughly believe in talking patriotism in placing the loan.
I believe the rate should be 5%.
As to the a e s t i o n
of allotment, I have only one thing to say---if you want
money, go where money i s .
Gr e r n o r H a r d i n g :
Mr• L e f f i n g w e l l , I t h i n k it
is
v e r y e v i d e n t f r o m what t h e s e Governors have s a i d , t h a t
I
they are going to put this loan av-er.
I had a t a l k a
f e w weeks a go w i t h
M.
C h a r l e s Edward
M i t c h e l l , P r e s i d e n t of t h e National C i t y Bank*
t h a t in placing a. loan fo
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He s a i d
f i v e or six billion dollars,
235
tl.e m o u n t was so g r o a t t h a t no m a t t e r how a t t r a c t i v e
the r a t e of interest might be, that in his judgment it
would be impossible to make a success of it unless the
spirit of patriotism be aroused.
He s a i d further t h a t we should not be discouraged if
t h i s lo
s h o u l d sell s l i g h t l y b e l o w par after it
had b e e n
placed; t h a t that was almost an inevitable consequence.
He
s a i d if it was a short time loan that the closeness of the
date of maturity would keep them near par.
He said it
was almost inevitable that a l o a n , under any conditions,
might sell below par shortly a f t e r it had been placed.
I have been convinced for sometime that Mr• Mitchell is right:
He was the first experienced bond salesman
that I had heard advance the idea of the importance of
the patriotic element in placing this loan.
It seems to me t h a t a good d e a l can be accomplished
by a r o u s i n g some pa t r i o t i c memories.
has a good deal to be proud of.
I t h i n k t h a t America
She has a right to be
proud of the record made by her soldiers abroad, a large
body of untrained men, taken from all the walks of civil
life, put into training camps, and sent over to France.
Within
a. very short
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time they had turned the whole tide
of battle.
The news for the first week after the 15th
day of last July looked almost too good to be true.
We
wondered if it was just tomporary, and how long it would
keep up:
It never changed.
We have our patriotic memo-
ries of Belleau Wood, Chateau 'Thierry, St. Mihiel, and
the Argonne Worost.
We have a wonderful record over
thore, We h a v e the memory of those more than fifty thoun r d g a l l o n t sons of America mho have p a i d the sup:reme
eaor1f1oe and whose bones are resting forever beneath
the aod of France- We have pitiable evidence of the
s a c r i f i o e made by others who have come back, minus an arm,
a leg, who are blind, and who carry scars of battle on
other parts of their body. We have still over a million,
four hundred thousand men abroad.
It Should be remembered, and it should be impressed
upon the people of this country by able speakers, that this
country went into war two years ago practically as a
U n i t e d N a t i o n , w i t h a d e t e r m i n a t i o n to w i n ,
did win gloriously.
ma t h a t it
That in the division of tho work it
was understood, from tho start, that we were not all to go
to t h e t r e n c h e s .
That was imroas :f.ble, 1.mt each of us t o o k
his own part in this conflict to support the millions of
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Federal Reserve Bank of St. Louis
237
men in khaki, both here and abroad, and each has done
his duty.
Some of our mf,n a.re over t h e r e yet and must be
brought back.
The war is not over, and
our duty is not
fully performed until we get those men back, and until
we enable this Government to pay all of the obligations
which it has incurred in prosecuting this war.
ijh1le t h e fighting is over, while our soldiers
and sailors have finished their part of the job,
we should remember that after all they constitute
o n l y a:>out f o u r per cent of our p o p u l a t i o n , and it
is
up to the rest of us to enter into this undertaking
just as they did, with the determination thot "e will
do our part in furnishing the credits and supplies
necessary for ths successful prosecution of the war•
It
is
up to us to f i n i s h our
psrt of the work, which
is not y e t finished.
We must go over the top once more, and we must
put this loan over.
.
Now, I believe t h a t if the t idea.is impressed upon
t h e people of t h i s c o u n t r y t h e t t h e s e p a t r i o t i c memo-
ries will arouse all the la.
tent feelings, which a re
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238
not deacl, a n d create a S p i r i t
of patriotism which w i l l
I
be s u f f i c i e n t to make a. g r e a t s u c c e s s of t h i s coming loan.
Mr• Comptroller, we would like to hear a f e w w a d s
f r o m you.
Comptroller Williams:
I concur very heartily in
the splendid sentim....
rits to which you have given expression,
which I am s u r e found
every man present.
a
responsive chord in t h e heart of
It is getting late, I do not want to go
into any extended remarks, but w111·merely become a little
reminiscent for the moment, and remind you of the doubts
and qualms with which we took up the first Liberty Loan.
You will remember t h a t Secretary McAdooscugt the advice
of the most expert bankers e
could find, and they ad-
vised him it would be very dangerous to risk an attempt
to raise in this c o u n t r y at that time more t h a n one bill i o n dollars.
That was t h e o p i n i o n of some or t h e a b l e s t
and most e x p e r i e n c e d b a n k e r s we had.
advice and doubled
He d i s r e g a r d e d t h e i r
the amount they suggested he should
ask for, and he n o t only o b t a i n e d double the amount which
they thought could be raised, but he got an over-subscript i o n of f r o m f o r t y to f i f t y per c e n t :
loan.
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Tha
was t h e
first
f
I
3
2
anyone at that time had predicted what our coun- •
t r y would do in t h e e n s u i n g two y e a r s , he probably would
have b e e n regarded as a w i l d man, and y e t know t h a t s i n c e
t h a t time we have raised, as Mr· Leffingwell has told us,
twenty four billions of dollars, twenty-four times as
much as it was thought at t h a t time could
be raised in
the n e a r f u t u r e .
If
I remember t h e f i g u r e s of t h e l a s t L i b e r t y Loan,
there were about twenty m i ) i o n subscribers*
Is that not
about right, Mr• Secretary?
Mr. Leffingwell:
That is the estimate.
Comptroller W i l l 1 a s :
Nov, we have t h a t r e c o r d
to
l o o k baclt upon and I h a v e n ' t t h e s l i t h t e s t doubt of our
ability t o r aise,
r h a p s not so e a s i l y , but r e a d i l y ,
with the energy and push t h a t we will put behind it, the
f i v e billion, and more, t h a t will probably be e x p e c t e d of
us.
What dres t h a t mean? Five billions? It means an average of two hundred and fifty dollars per subscriber.
t h i n k it
I
would be e v e r y moderate e s t i m a t e to s a y t h a t t h e
f o r t y m i l l i o n p r o d u c t i v e wage e a r n e r s a n d workers of t h i s
country have had an income of twioe that much on the average
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Federal Reserve Bank of St. Louis
e
h
past
ye ar.
t
4
2
Perhaps it may not be cµ 1te twice as much,
but I should say one and a half times as much.
I would say
that the average salaried man: and vrage earner has received
in the past year very much more than two hundred and fifty
dollars in excess of what he got two or three years a go.
We know that common laborers who formerly got the l w e s t
wage of a l l , who f o u r or f i v e y e a r s a@over
getting from
75 cents to a dollar and a. quarter per d a y , in this past.
y e s r have been g e t t i n g f r o m 2 . 5 t o $ 4 . p e r d a y .
We
know that in many l i n e s of industry the i n c r e a s e over
former wages has amounted to three, four, and sometimes
five dollars a day.
I do not believe it will be a very
difficult undertaking to raise the five billion dollars
that we must raise, that we are going to raise.
Few people h a v e
comprehension of the net earn-
ings and income of the American people at this t i m e .
,
,
17,
, in bonds have been placed, a comparatively
small proportion of which are being borrowed on, and they
give an income of six or seven hundred millions a year.
That income is very largely going to people who are not
dependent on that income for their living.
That return
represents very largely a surplus over their expenses
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Federal Reserve Bank of St. Louis
241
which can be put back into Liberty Bonds, and then
compounded.
We also know that the income which has been made
by the great corporations the past yaar has probably
exceeded the previous earnings which any country on
earth has ever made before at any time in history, with
everything going full speed.
Whereas, we have estimated
that, prior to the war, the invested income of thi
country was ten billions a y e a r , the probabilities are
that for this past year the surplus earnings of the
people, over and above their cost of living, has probably been somewhere between twelve and eighteen billions
of dollars•
Of course, a good deal of that has gone back
into industry, come of it has gone back into buildings
and into plants which have been engaged in war work,
but I clo not t h i n k we have a full comprehension of the
invested surplus income of this country.
There is another item that I think we should bea
in mind in this, and that is that there is more money
idle than ever before.
The foreigners, referred to by
Governor Morss, have gotten over their alarm, and indiCB t1ons
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on all sides are that they are putting their
Er
242
money back into the banks.
The money which in the past
in
has been hidden7cellars and other places is coming again
into sight and will be available to a large extent for
investment in the new Liberty Bonds.
I do not feel exactly
8s
Governor Morss ds
making this loan five per cent:
about
I think it might have
an unfavorable effect upon t h e savings bank investors.
As at p r e s e n t a d v i c e a , and s u b j e c t to change, I be-
l1eve t h a t Mr' L e f f i n g w e l l and t h e Government c o u l d p l a c e
ftve billion dollars of Liberty Bonds at f o u r and a half
I
per cent without the total exemption from t a x a t i o n that
has been s u g g e s t e d .
Mr. Hepburn, f o r example, has s u g g e s t e d t h a t t h e r e
be a $ 3 , 6 5 bond e n t i r e l y exempt from taxation, one c e n t a
d a y , so t h a t you c o u l d r e a d i l y c a l c u l a t e t h e i n t e r e s t *
If a $ 3 . 6 5 bond
o u l d be i s s u e d , I t h i n k it
run longer than than two or three years.
ought not to
It would be very
attractive at the start, but I think it ts a bad principle
to put out bonds t h a t r u n for any considerable t i m e , which
exempt the owner from all taxation.for the support of the
Government.
I do feel that a four and a
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h a l f per cent bond, under
f
243
resent conditions could,ond should be floated.
As has been suggested by other speakers, there is
a tendency at the present time for money to accumulate.
The bank reports for the last call, which are being compiled now and which are coming in, show, somewhat to my
surprise material increases in resources a n d deposits in
t h e national ban ks in many cities.
I had r a t h e r expected,
in view of the heavy liquidation of loans, that there would
probably be a falling off in deposits and a falling off in
resources.
Vie cannot tell yet what the tota1 result
will be, but in q i t e a number of cases there 1s an increase in deposits and in resources in spite of the liquidation which has
taken place.
So I think, with the money
market which we can reasonably expect to have, with the
splendid organization which hos been prfected throughout
t h e c o u n t r y and which is s t i l l ready to go out at t h e
firing of the pistol, that we can make the Fifth Liberty
Loan a great success if we should get it out as we have
done heretofore, and do not encourage them with a rate of
more than four and a half per cent•
Governor Harding:
Governor Hamlin, will you give us
a model for a ringing Victory Loan speech?
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244
Go e r n o r Hamlin:
As t h e hour is
l a t e , I suppose
t h i s 1s a r e q u e s t to pronounce the b e n e d i c t i o n .
I am reminded of an i n c i d e n t which happened some
y e a r s a g o when a r e c e p t i o n was g i v e n to P r e s i d e n t Cleveland
at B u z z a r d ' s Bay
A committee was a p p o i n t e d to d e c i d e
upon t h e s p e a k e r s .
There was one o l d clergyman t h e r e , a
very good man, who had had q u i t e a successfu1 career,
but who had finally p l a c e d in the p a s t u r e s by his parisho n e r s f o r tho rest of h i s l i f e .
The only trouble w i t h
him was that he was v e r y long-winded•
F i n a l l y , after much d i s c u s s i o n as to whether or not
it was s a f e to a s k h i m to s p e a k , someone made a ha ppy sugg e s t i o n t h a t he be a s k e d topnomounce t h e h e n o d i o t i o n ,
w h i c h c o u l d n ' t l a s t l o n g . So t h e y w a i t e d on h i m and a s k e d
h i m to do t h a t .
He w a i t e d p a t i e n t l y f o r t h e m to finish
what t h e y had to s o y .
Then drawing himself up he s a i d ,
" I f my f e l l o w c i t i z e n s had a s k e d me to come h e r e on t h i s
a u s p i c i o u s o c c a s i o n and d e l i v e r an a d d r e s s to t h e Honorable
e x - P r e s i d e n t of t h e United S t a t e s , it would have g i v e n me
g r e a t pleasure to r e s p o n d ; but, gentlemen, I will be damned
if I will pronounce the b e n e d i c t i o n .
However, g e n t l e m e n , I l o o k a t · t o o t in a. d i f f e r e n t way.
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I feel very much honored in being
asked to pronounce
a short benedlction•
I have heard a great deal said here tonight about
the farmers•
That appealed to me because I am a farmer.
My vocation is farming, my avocation for a number of
:13ars was the law, and now as a member of the Federal
Reserve Board.
If I could get 2 . 2 6 a bushel for the rocks and
sand on my Cape Cod farm I could cease to worry the remainder of my life:
I remember how we started that farm:
When we began my wife and I a s k e d each of our f r i e n d s to
contribute a present, and our friends responded very well
indeed, but after awhile the gifts ceased and we adopted
a different expedient and we informed those of our friends
•
who had not subscribed t h a t if they did not we should name
a pig after them•
Now, in my humble opinion, if the farm-
ers of the United States do not respond and take this loan
we ought to name pigs after them, and I think the supply
of pigs will he
ro1
ple for the purpose.
I have talked a good deal with the small buyers, the
they are
men of moderate means,ofdchya great many in New England,
and I have been perfectly amazed at the patriotism t h a t
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Federal Reserve Bank of St. Louis
246
t h e s e men have shown.
In the little town of Mattapoisott
where I live,
more money was s p e n t in subscribing to bonds t h a n I supposed
the whole town possessed:
In fact, they were so patriotic
that l was asked to serve as arbiter on this important
question:
Two or t h r e e of t h e m had g i v e n s u b s c r i p t i o n s ,
and the rumor got around that t h e y intended to pay for them
by wi t h d r a w t n g t h e i r s a v i n g s bank d e p o s i t s , and I w a s a s k e d
to s e r v e as a r b i t e r and pronounce judgment ss
to w h a t
s h o u l d be don©, whether t h e s u b s c r i p t i o n s h o u l d be r e t r : n o d
with scorn, or what should happen.
I think in all my
s e r v i c e on t h e F e d e r a l R e s e r v e Board t h a t was t h e h a r d e s t
l e t t e r to answer t h a t I ever had to answer.
I d i d not g e t
a reply, and they apparently accepted it.
Now, I have t a l k e d a g r e a t deal w i t h t h o s e men, patriots.
a lot of them' One man came to me, a small farmer who has
I
done s p l e n d i d l y in t h e s e l o a n s , and he s a i d , "Mr. Hamlin, I
h e a r d you make one s p e e c h in which you a d v
a t e d subserip-
tions and it has convinced us all that it is the safest investment in the world, and if we had to sell there would be
no t r o u b l e at a l l and we could alway
g e t back our p r i n c i p a l , "
He s a i d , "we a r e n o t c o m p l a i n i n g t h a t t h e p r i c e has d e c l i n e d
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Federal Reserve Bank of St. Louis
247
at all, but we are afraid of the Government bonds, because
we are afraid that if we buy them and have to sell them that
we will be classed as traitors."
I told h i m he could always
borrow on t h e m , but he s a i d he did not want to borrow.
A
great many people have a horror of borrowing.
After I was married I bought a house-
There was a.
mortgage on the house and, of course, I took it subject to
the mortgage.
My w i f e v o l d me
that that mortgage must be
paid; that she couldn't live under a roof that had a montgage on it, and I went down to a f r i e n d and got down on
my knees and asked him as a personal favor to permit me
to pay it off.
man has.
That 1s a trait that I notice the small
If there is any way in this loan, that we can
convince people that they can sell if they have tos ell,
and that they wont be branded as traitors, I t h i n k it will
be one of the greatest things in the world.
Thats what
makes me feel we ought to have a r a t e that will hold 'the
issue approximately at par, so that we can say to our poople that they can sell if necessity forces them to do it·
I believe the surface of the patriotic spirit of this
country has not yet been scratched.
I have gone over alma t
t h e whole of t h e c o u n t r y on L i b e r t y Loan m a t t e r s , and I
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Federal Reserve Bank of St. Louis
248
havo t a l k e d w i t h thousands of p e o p l e , and I can s a y with
perfect confidence that we can arouse a strong spirit of
patriotism over this loan that we have never been able to
a p p r e c i a t e in any of t h e o t h e r l o a n s , if
is managed w i t h
it
t h e skil! that Mr. L e f f i n g w e l l has shown before and w h i c h
he 1s capable of s h e w i n g a.ga1n1
a.1d if
t h e Governors of
banks and o t h e r people who have put ' h e s o l o a n s o v o r ,
w i l l show the same skill t h a t they have shown h e r e t o f o r e .
I t h i n k Governor Harding has touched
t h e keynote.
I think when the people of our country r e a l i z e what our boys
have done, when they r e a l i z e that our t r o o p s made t h e famous
P r u s s i a n g u a r d s , t h e c r a c k g u a r d of t h e German army, in t h a t
little town that has become famous, where for two or three
days the boys met tho crack krussian guards, fresh troops,
brought up for the purpose of crushing them, and defeated
them•
Our boys lost the town,and though they were exhausted,
t h e y g a i n e d it a g a i n and f i n a l l y at n i g h t t h e l a s t of t h e
I
famous P r u s s i a n guards had e i t h e r s u r r e n d e r e d or were l y i n g
dead on t h e f i e l d , a n d t h e town was in t h e p o s s e s s i o n of
our troops.
Why, my f r i e n d s , t h e r e is m a t e r i a l f o r arousing t h e
people of this.country as they have never been aroused before.
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I haven't the slightest fear nor the slightest apprehension
as to
t h a t question.
I promised to pronounce a benediction and a benediction
ought to be short.
There were some important and valuable nuggets of thought
t h a t I intended to g i v e you, but I have forgotten all about then
I am in somewhat the same position of a railroad in Massachusetts called the Boston, Barre & Gardner Railr@ad. While it
was called the Boston, Barre & Gardner Railroad it did not
begin at Boston, and did not go through Barre, and it never
reached Gardner·
I have f o r g o t t e n what I i n t e n d e d to s y ,
so I d i d not start f r o m Boston.
I have f'orgottoll t h e valua-
ble nuggets of thought that I hoped to be able to spread over
the country during this campaign, so I did not go through
Bn.rro "; but f r o m the anxious look on Governor Harding's
f a c e , u n l i k e thet r a i l r o a d , I long ago reached my t e r m i n u s ,
and will take my seat.
Mr·
Leffingwell:
Governor Harding, and gentlemen, I
wish this migit be the doxology, as no doubt you all do, but
really it is not time to say, "Praise God from whom all
blessings flow".
Lets go out and get them.
I am not really prepared to tell you what you would be
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I am not q u i t e c l e a r in my own mir.d,
a f t e r l i s t e n i n g to so many and so w e i g h t y o p i n i o n s a b o u t . t h e
next l o a n , what I ought to s a y , and so I em g o i n g to a sk for
your forbearance.
I remember Mr- D o o l e y s a i d t h a t t h e Supreme Court
s t a t e d , in c o n s t r u i n g some s t a t u t e , " T h i s l a w means what it
means and not whet it s a y s " .
I gm going to ask you to be-
11eve t h a t of me:
In l o o k i n g back over
our experience during the l a s t
three years, I think of how we have
each loan
a g o n i z e d before
before each i s s u e of
T r e a s u r y c e r t 1 f 1 c a tes, a n d
I am reminded
of t h e d i c t u m ,
of a lady in New York who said, "life is just.one damn
**
thing
a f t e r another".
That 1s t h e way it
looks to t n e
T r e a s u r y Department sometimes, p a r t i c u l a r l y a f t e r one of
t h e s e experience m e e t i n g s *
I cannot help f e e l i n g that there are c o n s i d e r a t i o n s
in connection with the general situation which you, who
come in from the firing line, you field generals, who are
in intimate touch with the working and fighting force
in getting ready to put over t h i s next loan, oucht at
l e a s t to.ke into consideration b e f o r e you let e v e n your own
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mindsc r y s t a l i z e about the terms of the lo@n.
We were talking today over in the Metropolitan Bank
Building about the fact that t h e S e c r e t a r y of the Treasury
had gone to Congress and askod f o r authority to fix the rate
of interest, a thing which, so f a r as we knew, had never
been done in the history of the United States.
He did not
do it for purposes of'strategy; be did not do it because he
wanted to have the
b u c k } passed to him, but he did 1t
because ho knew that this was a. changed situation.
gentlemen, it
Now,
cannot be true that 5%, 4%, 3%, or any other
rate, is the answer to any proposition continuously for a
period of five months when every other thing in the world
1s changing just as rapidly as possible.
fluctuating situation*
It is an ever-
The Treasury certificates which
could not be sold at four and a half per cent last summer.
were sold at four and a half per cent last summer; those
which could not be sold in January. were sold, at four
and a half per cent., and, for the first time in months,
we had to shut down tight on all issues of Treasury c ert1ficates because the Treasury was embarrassed by the success
with which they are meeting.
liquidation 1s setting in.
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That is due to the fact that
You cannot judge tonight the
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effect of the change in
the foreign exchange situation,
which has taken place within 48 hours.
I cannot judge
it.
Governor Strong made a very clear statement this
afternoon, the clearest I have ever heard, much clearer
t h a n was made in t h e famous r e p o r t which Governor S t r o n g
complimented highly, of the effect of these exchange rates
upon t h e g e n e r a l p r i c e levels, upon t h e movement of gold,
and upon our whole structure.
Those things must be watched·
Let us take into our minds tonight the fact that there is
no man who can tell you today what is the right rate at
which to sell five or six bill1on d o l l a r s of bonds, six
weeks from to-day.
I v e n t u r e to say there is no banker in
this room, or no banker of your acquaintance, who would
s i g n his name t o d a y to a
contract to buy fifty m i l l l o n
d o l l a r s of t i e b e s t bonds of t h e b e s t r a i l r o a d in t h e
United States, or of tho best industrial company, for
delivery on the 2 t h of May.
The
Pecretary
of the Treasury cannot sign his name
tonight to a form contract to sell five billion dollars of
the UnitedStates Government bonds at any price for delivery
.
on the 2 t h of May; and he ought not to do i t .
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Federal Reserve Bank of St. Louis
If he did do
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it there would be such a readjustment of the whole price
level of securities throughout the country, t h a t it would
be harder to sell a 5% bond f o r delivery ultimately on
it
the 2 t h of May t h a n / w o u l d have been had he kept h i s counsel until the last moment and made the rate according to
his own best judgment at that moment.
About that q u e s t i o n , t h e r e can be no d o u b t .
d e f i n i t e fact; about that I am dogmatic.
Thai is a
There are no two
sides to it, and every banker who is in business selling
s e c u r i t i e s knows t h a t a l l the way down to t h e g r o u n d that is
t h e f act of the s i t u a t i o n and not a. m a t t e r of opinion.
So I e. 3k you not to be dogmat.tc t o d e y , but to believe
t h a t t h e e c r e t a r y of t h e T r e a s u r y regards t h i s g r e a t q u e s -
tion, not as a political q e s t i o n , not as a narrow-minded,
selfish p e r s o n , n o t for the purposes of his own career,
but solely from the point of view of a Trustee for the whole
American people; and he must reserve the right, just as he
has the unl1m1 t e d r e s p o n s 1 b i l i t y , t o d e c i d e t h a t question
in t h e l i g h t of the f a c t s as t h e y develop at t h e moment
when the issue is made.
There 1s one thing 1n following out that line of thought
that you gentlemen can do.
It is very important that you keep
4
us informed, not only as you have tonight, but up to the last
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moment of the changes in the situation, of your views.
It is very important that you let us know just how bad
you think things are; just what you think the difficulties
are:
If you think the loan cannot go, do not hesitate to
let us know, but do not let the merican people think you
think that it cannot be done, or that the terms on which 1t
can be done are such and such, no better and no worse*
That would have the effect of discounting the attraction
of the issue, whatever it may be, long in advance, and
bearing the m a r k e t for existing securities along with the
market f o r L i b e r t y Bonds.
Let us k e o p our own counsel. Around this table we have
the people who have this loan to sel1.
Let us get together
at the last minute and make up our minds; then spring it on
the people as an attractive surprise, and I think the patriot1 s m which h a s been a r o u s e d in the previous campaigns will
cause the people to come together, without consideration for
t h e i r d i f f e r e n c e s , p o l i t i c a l and o t h e r w i s e , in one g r e a t
united
effort, in April and May, and these problems will
cmlver themselves.
The people will stand with you, you will
stand with the Treasury, and we will see a united American
people again for the first time since the war.
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At the risk of keeping you longer than I should, I
want to bring to your minus some thought of what it is
that you have done during this period of the war.
not know that you can realize as
I do
easily as I do what has
been the military importance of the financial efforts
• which you have made.
You know we were not w e l l prepared
to start into the war.
We were q i t e unprepared, and you
will remember that for the first six months
1t
was
the credits that we gave which kept the war rolling; it
was the thing that for fully six months kept Russia.in
line.
If we had to write off the $ 1 8 7 , , t h a t we
loaned to Russia, it
would be a
gme
11 pr ice to pay , for
the fact that the Fussians held the Hun busy on the "astern
line during the whole of that first Summer, when there
were no Americans in Europe.
Almost the first thing I had to do, when I ceased to
b o a dollar a year man in the Treasury and became Assistant
Secretery of the[reasury, sitting alone in the Treasury,
because Mr. Crosby had gone abroad, nd
Mr: McAdoo was 111
and had gone away, was to receive the Italian Embassador
and determine whether a credit for $ 2 2 , , s h o u l d
be established for tho Italian Government.
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256
It was at the moment when the Germans had broken the line
with their dreadful offensive on the Italian front, had
taken the Italian stores and under-mined the Itel1an morale,
and were pressing down deep into Italy.
I assure you it
was the credit which the American people were able, by your
e f f o r t , to establish for the I t a l i a n Government that gave
new courage to those sorely tried people which enabled them
to hold the Italian front in November of 1917.
A little later, in the Spring of 1918, when the Hun
o f f e n s i v e was pushing forward on the Western f r o n t in 1'1rance,
and when the lun propaganda had undermined the morale of
India, the sink of the Prussian metals, it was the financial
resources of the United States that kept the Indian Empire
in line and made it possible to maintain the
1an Army.
Mesopotam-
We took the two hundred million ounces of silver
that were lying dead or nearly dead, in the vaults of the
old Treasury down here and pledged that for the currency of
I n d i a , restoring t h e confidence of t h e I n d i a n people in t h o
redeemability of their currency, and making it possible to
maintain a Mesopotamian Army, and continue sending supplies
which they had
to have.
Last Summer, when the hun was forging on toward Paris,
it
was t h o s e c r e d i t s t h a t we
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establishedthat h e l d the
l i n e on t h e Western f r o n t and g a v e c o n f i d e n c e to t h e
F r e n c h p e o p l e , and gave us time to make felt our g r e a t
weight in m i l i t a r y power.
And in a l l t h o s e things 1t was that lavishness of effort,
it was that l a v i s h n e s s in men and materials, that gave a s s u r ance of an early victory.
So, while you and I and all of us deplore the waste,
for their'has been weste and t h e r e has been e x t r a v a g a n c e ,
le t us remember t h a t if we had stopped to count the c o s t
and f i g u r e j u s t how l i t t l e wo could spend in t h e war, we
s h o u l d have h a d a n o t h e r y e a r ' s war or maybe two y e a r s , with
a possibility of a deadlock at the finish.
do t h a t .
But we did not
We t h r e w o u r s e l v e s i n t o i t ; we t h r e w our e v e r y e f -
fort into it, our men, our money and our energy.
We had to
use u n t r i e d men in p o s i t i o n s which t h e y had no e x p e r i e n c e
to f i l l , but t h e y a l l gave of t h e i r e n e r g i e s s n d of t h e i r
enthusiasm and. the best judgment they had, and t h e y put
t h i s big thing over.
I tell you it has been more than an
operation in finance, it has been a.real military effort,
and I want to say to the Liberty Loan organizations, and I
want to say to t h e Governors of the F e d e r a l Reserve Banks,
that e v e r y man of us muat go out in t h i s
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Federal Reserve Bank of St. Louis
loan, not with
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an a p o l o g y , b u t w i t h t h e c o n s c i o u s n e s s t h a t we have b e e n
f i g h t i n g the war, and
I
that we have won t h e war al ong
with the brave fellows over in France.
to be ashamed o f .
We have n o t h i n g
We have f i n a n c e d t h e war to t h e b e s t of
our a b i l i t y and a c c o r d i n g to our best judgment, and I think
t h i s little l a s t effort will be e a s y for u s ,
(Whereupon, at 11:3o'clock p.m. the conference
adjourned u n t i l Friday, March 21, 119, at 1o'clock
A.M. , at the Assembly Room of t h e Federal Reserve B a r d ,
in t h e M e t r o p o l i t a n Bank B u ! ' d i n g ) .
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