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THE FORMATIVE PERIOD
O F

T H E

FEDERAL RESERVE SYSTEM
(During the World. Crisis)

BY
W.

P . G . H A• R
• D
+ I N G ,

A.M.,

LL.D.

Former Governor of the Federal Reserve Board

BOSTON AND NEW YORK
HOUGHTON MIFFLIN

COMPANY

Zbi &f Uctfibe
Camfcri&se
1925

CAMBRIDGE . MASSACHUSETTS
PAINTED IN T B S U.S-A.

P R E F A C E

IN the personal narrative which follows there have been
outlined the functions of the Federal Reserve Banks and the
laws and principles under which they have been conducted.
I have also touched upon some of the activities, policies,
and experiences of the Federal Reserve Board during the
eight years of my connection with it — the last six as its
governor. Those years, which cover the entire period of the
World War and four years of its aftermath, stand out as
among the most eventful and critical in modern times.
Every branch of the Government was constantly confronted
with new and perplexing problems which affected all those
engaged in banking and commerce, industry and agriculture. In dealing with many of the emergencies which arose
in those abnormal times, it was difficult to reconcile the
divergent interests of buyers and sellers, of employers and
wage-earners, and of producers and consumers. Complaints
and criticisms were inevitable, and during the period of
world-wide reaction after the war, many were directed particularly against the Federal Reserve Board. It has been
shown that in the main these were based on conditions not
of the Board's making and entirely beyond its control.
This volume is submitted to the reader with the hope that
its contents will aid in a correct appraisal of the part played
by the Federal Reserve System during the world crisis, and
of its value in the future.
W , P . G . HARDING
BOSTON, June, 1925

vi CONTENTS
I. Appointment of Members of the Federal Reserve
Board — Organization of the Board

II. Economic Disturbances Occasioned by European
War Gold Exchange Fund — Cotton Loan Fund

III. The Federal Reserve Banks Begin Business —
Their Policy Outlined
26
IV. Readjustment of Federal Reserve Districts — Agitation for an Embargo on Exports of War Munitions — Great Britain Declares Cotton Contraband 34
V. Par Clearance of Checks

VI. Changes in Board's Organization — Acceptance
Credits for Foreign Account — Board's Statement
Regarding Sales of British Treasury Bills
61
VII. Board Proposes Important Amendments to Act
Relating to Reserve and Note Issues
70
VIII. United States Enters the War — Congress Amends
Federal Reserve Act — President Wilson Urges
State Banks to become Members — Discussion of
the New Amendments — First Liberty Loan Campaign
82
IX. Executive Orders Restricting Gold Exports and
Regulating Transactions in Foreign Exchange —
Board Policy in Issuing Licenses
91
X . Economic Effect of the War — Capital Issues Committee — War Finance Corporation — The Pittman
Act — The Overman Act
106
XI. Board Urges Judicious Curtailment of Credit for
Non-Essential Purposes — Retirement of Messrs.
Delano and Warburg — After-War Readjustment
— Views of A. C. Miller
124
XII. Congress Authorizes Issues of 'Victory Notes* and
Amends Federal Reserve Act to Permit Reserve

CONTENTS
Banks to Accumulate Larger Surplus Funds—Relation of Federal Reserve Rates to Treasury's Financi n g — Review of Board's Discount Policy — The
Victory Loan — Rising Price-Levels
139

XIII. A Period of Readjustment Foreshadowed — Discount Rates Advanced — Attitude of the Treasury
— the Progressive Rate
156
XIV. Federal Reserve Conference on May 18, 1920 —
Rediscounting between Federal Reserve Banks —
Decline in Commodity Prices not Synchronous with
Advance in Discount Rates
168
XV. Conference with Representatives of Cotton-Growers
— Senator Owen Protests against Indiscriminate
Deflation — The Board Policy Explained
187
XVI. Correspondence with Comptroller Williams — He
Becomes a Critic of the Board
201
XVII. The New Administration — The Farm Bloc Joint
Commission of Agricultural Inquiry — Correspondence with Governor of Nebraska
215
XVIII. The Senate Inquiry Regarding Expenditures by
Federal Reserve Banks — Beginning of Movement
for a Farmer Member of Board — Senator Glass
Defends Federal Reserve System — House Committee on Banking and Currency Considers Amendment to Place Farmer on Federal Reserve Board —1
Conflicting Views of Secretaries Mellon and Wallace 232
XIX. The Act Amended to Provide for Membership of a
Farmer on the Board — Review of Board's Policies 244
APPENDICES
A

TREASURY METHODS OF FINANCING THE W A R IN R E L A TION TO INFLATION

Address by R. C. Leffingwell, Assistant Secretary of the
Treasury, before the Academy of Political Science, New
York, April 30, 1920
257
B

MEMORANDUM

Issued by the Federal Reserve Board Relating to the

CONTENTS

vii

Operations of the Call-Money Market in New York
During the Years 1919 and 1920
280
C

ADDRESS OF W . P . G . HARDING

Governor of the Federal Reserve Board, before the Annual Convention of the American Farm Bureau Federation at Indianapolis, December 7, 1920
284
D

LETTER

Of the Governor of the Federal Reserve Board to Senator
Reed Smoot, July 11, 1921
289
E

EXCERPTS FROM THE REPORT ON CREDIT

By the Congressional Joint Commission of Agricultural
Inquiry, January, 1922, and the Minority Opinion of
Ogden L. Mills
296
F

R E P L Y OF FEDERAL RESERVE BOARD TO SENATE RESOLUTION 308
306

INDEX

311

I L L U S T R A T I O N S

W . P . G . HARDING

Frontispiece

Photograph by Marceau
T H E FEDERAL R E S E R V E BOARD, 1 9 1 4 - 1 8
Photograph by Clinedinst Studio

T H E FEDERAL R E S E R V E BOARD AS CONSTITUTED IN D E CEMBER, 1 9 1 9
160
Photograph by Underwood & Underwood
T H E FEDERAL R E S E R V E BOARD, 1 9 2 0

188

T H E FEDERAL R E S E R V E BOARD, 1 9 2 1 - 2 2

216

THE FORMATIVE PERIOD
OF T H E

FEDERAL RESERVE
SYSTEM
• •
CHAPTER I
APPOINTMENT OF MEMBERS OF THE FEDERAL R E S E R V E BOARD —
ORGANIZATION OF THE BOARD

ONE morning toward the end of March, 1914, before the Federal Reserve Bank Organization Committee had announced
its decision as to the location of the Federal Reserve Banks,
I received a telegram from Colonel E. M. House, whom I
knew only by reputation, stating that he was leaving Houston for Washington, and requesting me to meet him the
following day in New Orleans. I replied that I could not do
so, and suggested that he stop over in Birmingham. He
replied that he was taking another route, and asked me to
meet him at his train, upon its arrival at Montgomery, at
six o'clock the following Sunday morning. The train was
scheduled for a stop of about two hours at Montgomery, and
thus there would be ample time for a conference. Knowing
something of his close relations with the President and the
Secretary of the Treasury, I was anxious to meet him in
order that I might have an opportunity of impressing upon
him the claims of Birmingham for a Federal Reserve Bank.
It happened, however, that his train was about two hours
late, and made a stop only of about ten minutes at Montgomery. I therefore rode with him as far as Opelika, a junction point about sixty miles east, where I could take a train
on another road back to Birmingham. Colonel House was
not disposed to discuss the location of Federal Reserve Banks,

THE FEDERAL RESERVE SYSTEM

but he asked a good many questions about business and
banking conditions in the South, and he stated that he was
particularly interested in the personnel of the Federal Reserve Board, He said that the President had many names
under consideration, and he mentioned three, from which
number one was likely to be chosen as the South's representative on the Board. He asked my opinion as to the qualifications of these gentlemen, but expressed no opinion as to
which one was likely to be chosen. On the afternoon of the
4th of May, an evening paper was brought to my desk in the
bank, and I saw on the front page that the President had
announced his selections for the Federal Reserve Board.
Greatly to my surprise, my name was on the list. A t that
time I had never seen President Wilson nor had I ever had
any correspondence with him. M y acquaintance with Secretary McAdoo was slight, and I had seen him only twice:
once at the hearing before the Organization Committee in
Atlanta, and first in the early summer of 1913, when I called
at his office in order to ascertain his attitude toward national
bank notes secured by two per cent consols, which were then
selling on the market at a considerable discount.
I felt complimented upon my selection to be a member of
the Federal Reserve Board, a body about which there had
been so much talk for several months. I had no idea, however, at first of accepting the proffered appointment* I was
a native of Alabama and had been for twenty-eight years a
resident of Birmingham. I had seen the place grow from a
town of ten thousand people to a city of more than one
hundred and fifty thousand inhabitants, and had been promoted from a bookkeeper's desk to the presidency of the
largest bank in the State. The A c t provided that no member
of the Federal Reserve Board should own any bank stock or
be connected in any way with a bank, and, furthermore, that
a member would be ineligible to hold any position or employment in a member bank for a period of two years after
he had ceased to be a member of the Board. The salary at-

THE MEMBERS OF THE BOARD

tached to the position was not attractive, and altogether my
acceptance of the post involved a very considerable sacrifice.
I deemed it improper, however, to make any announcement
of my intentions before receiving notice from the President
of his intention to appoint me, and told representatives of
the press that I should make no statement until after I had
heard from the President. I found, however, that there was
a general sentiment among my friends and business associates that the position was one of too much honor and importance to be declined, and that I ought to consider making
the personal sacrifices necessary to enable me to accept the
appointment. I was still undecided when I received a letter
from the President, asking if I 'would not be willing to accept the eight-year appointment on the Board.' He said:
I feel that there is here a great opportunity to serve the country, and I hope sincerely that you will feel that you can make the
sacrifices necessary to accept.
I must confess that the tone of this letter had a good deal
to do with my final decision. The President's evident desire
to have me become a member of the Board and his reference
to the opportunity of rendering public service appealed to
me, and after a few days I wrote the President of my willingness to accept.
The Honorable Richard Olney, of Boston, who was Secretary of State in the last Cleveland Administration, had been
tendered appointment as a member and Governor of the
Board, and Mr. Harry A. Wheeler, of Chicago, was offered a
membership on the Board. Both of these gentlemen, however, declined to accept, and the President was therefore
obliged to make new selections. Just at this time, the Secretary of the Treasury, Mr. McAdoo, married one of the daughters of the President and was away for about three weeks on
a honeymoon trip. The newspapers stated that no selections
would be made until his return to Washington. It was not,
therefore, until the latter part of June that the President

15 THE FEDERAL RESERVE SYSTEM
made formal nominations to the Senate of the following as
members of the Federal Reserve Board: Charles S. Hamlin,
of Boston, for a term of two years; Paul M. Warburg, of
New York, for a term of four years; Thomas D. Jones, of
Chicago, for a term of six years; W . P. G. Harding, of Birmingham, for a term of eight years; and Adolph C. Miller,
of Berkeley, California, for a term of ten years.
Mr. Hamlin was a lawyer by profession, and had been
Assistant Secretary of the Treasury during the second Cleveland Administration. He was occupying the same post at
the time of his nomination as a member of the Federal Reserve Board. Mr. Miller, who was at the time Assistant to
the Secretary of the Interior, was an economist, and had
been connected with the University of Chicago, and, later
on, was Professor of Economics at the University of California. Mr. Warburg, who for many years had been deeply
interested in the subject of banking reform and was a recognized authority on the subject, was a member of the New
York banking firm of Kiihn, Loeb and Company. Mr* Jones
was a close personal friend of President Wilson and was a
public-spirited business man. He was an officer of the New
Jersey Zinc Company and had within a few years become a
director of the International Harvester Company.
There was prevalent at the time, following the report of
the committee to investigate the so-called 'money trust,'
more than the usual amount of popular prejudice against
'big business,' and when the nominations came up for consideration in the Senate, opposition developed to Messrs.
Jones and Warburg because of their banking and corporate
connections. Action on their names was deferred, although
the other three nominations were confirmed on July 6th.
Later on, the President, at the request of Mr. Jones, withdrew his name, but he declined to act upon a similar request
from Mr. Warburg, who had been invited to appear before a
subcommittee to which his nomination had been referred.
Mr. Warburg persistently declined to do so, and the Senate

THE FEDERAL RESERVE BOARD, 1 9 1 4 - 1 8
Left to right, seated: Charles S. Hamlin, William Gibbs McAdoo, Frederick A. Delano
Standing: Paul M. Warburg, John Skelton Williams, W. P. G. Harding, A. C. Miller

ORGANIZATION OF THE BOARD

Committee refused to report his name unless and until he
appeared before it. This deadlock continued for some weeks
until just before the outbreak of the war in Europe. Mr.
Warburg then agreed to appear before the committee and
his confirmation by the Senate soon followed. Meanwhile,
Mr, Frederick A. Delano, of Chicago, for many years a railroad executive, and who was then serving as a member of
the Industrial Relations Commission, under appointments
by Presidents T a f t and Wilson, had been nominated and
confirmed as a member of the Board.
The oath of office was administered to each member on
the morning of August 10,1914, at which time the organization of the Board was completed by the President's designation of Mr. Hamlin as Governor, and of Mr. Delano as ViceGovernor. Mr. M. C. Elliott, who had been Secretary of the
Federal Reserve Bank Organization Committee, acted as
Secretary of the Board for a short time. Upon the appointment of Dr. H. Parker Willis as Secretary, Mr. Elliott became Counsel, and served in that capacity until 1919, when
he resigned in order to engage in private practice.
Up to this time no independent board or commission had
been housed in the Treasury Building, but under authority
given in the clause of Section 10 of the Federal Reserve
Act 'The Secretary of the Treasury may assign offices in
the Department of the Treasury for the use of the Federal
Reserve Board/ the members of the Board were given
offices on the second floor, on the west side of the Treasury
Building; flanked on one side by the offices of the Secretary
of the Treasury, and on the other by those of the Comptroller of the Currency.
It seems appropriate at this place to say something of my
impressions, which I believe were shared by some other members of the Board, of the attitude of these two officials toward
the Board. There had been a good deal of discussion, before
the appointments were made, of the importance and dignity
of the Board, and it was often alluded to as the Supreme

THE FEDERAL RESERVE SYSTEM

Court of Finance. This was obviously a misnomer, as the
Board had no judicial powers. It was thought by some that
the Board would rank in importance and dignity next to the
Supreme Court and the Cabinet, especially as the A c t fixed
the salaries of the Board members on a parity with those of
the Cabinet officers, which up to that time had not been the
case with any other commission.
The office of the Comptroller of the Currency, ever since
its creation in 1863, had been a bureau of the Treasury Department, and while the Federal Reserve Bank legislation
was pending in Congress, there had been some discussion of
the advisability of either abolishing the office and transferring its functions and duties to the Federal Reserve Board;
or else to have the Comptroller placed under the jurisdiction of the Federal Reserve Board instead of the Treasury
Department. All such suggestions, however, were disregarded, and under the A c t as finally passed the Comptroller
was made a member of the Reserve Bank Organization Committee, and a member ex officio of the Federal Reserve Board,
with the further provision that, in addition to the salary
paid him as Comptroller of the Currency, he should receive
the sum of $7000 annually for his services as a member of
the Board. This made the compensation of the Comptroller
equal to that of other members of the Board.
There were, moreover, some provisions of the Act which
were, from the time of the Board's organization, regarded as
liable to create some misunderstanding and confusion.
Although the law requires any bank incorporated under
State law desiring to become a member of the Federal Reserve System to make application to the Federal Reserve
Board, no change was made in that section of the Revised
Statutes of the United States which requires organizers of
new national banks to make application to the Comptroller
of the Currency, who can at his discretion grant or refuse a
charter. Therefore, while the Federal Reserve Board has
discretion in the admission of State banks as members, it

ORGANIZATION OF THE BOARD

has none in the matter of new national banks; nor does the
Federal Reserve Act contain any clause which specifically
requires the Comptroller of the Currency to furnish the Federal Reserve Board or a Federal Reserve Bank with a copy
of the report of examination of a national bank made by a
national bank examiner.
In view of the provisions of the Act, it was foreseen
from the beginning that it might be difficult always to avoid
differences between the Federal Reserve Board and the
Comptroller of the Currency, for some of the duties of that
officer related to matters which vitally concerned the operations of the Board, of which he was a member, although
he was entirely independent of the Board in the exercise of
the very important powers of his own office. During the
eight years of my service on the Board, there were several
instances where the Comptroller granted charters for new
national banks against the recommendations of officials of
Federal Reserve Banks, and where State banks which had
been refused admission to membership by the Board were
granted national bank charters by the Comptroller and thus
became members without the consent of the Board. The
Federal Reserve Board was authorized by law to have examinations made of all member banks, while the Comptroller
was directed to have each national bank examined at least
twice during each calendar year. The Board deemed it unnecessary, as a rule, to have examinations made of national
banks, assuming that the Comptroller would furnish Federal Reserve Banks with copies of the examiners' reports of
their national bank members. The Comptroller, as a matter
of courtesy, furnished incomplete copies to the Reserve Banks,
but for some time persisted in withholding from them certain information contained in reports made to him which
Federal Reserve Bank officers regarded as essential.
The legislative history of the Act indicates that the Secretary of the Treasury was desirous that the Federal Reserve
Board should be actually, if possible, but at any rate in

THE FEDERAL RESERVE SYSTEM

effect, a bureau of the Treasury, just as the Farm Loan
Board, which was created by the Act of July 17, 1916, was
made a Treasury bureau under the express terms of the Act
establishing it.
I do not believe, however, that Mr. McAdoo was at all
desirous of having the Federal Reserve Banks become political organizations, and, as a matter of fact, I recall several
statements of his which stressed the importance of keeping
them out of politics. The Federal Reserve Board has the
appointment of three ' Class C* directors for each Federal
Reserve Bank, including the Federal Reserve Agent, a salaried officer. Little, if any, attention was paid to the political
affiliations of these appointees, and it was afterwards ascertained, when the question had been raised, that the majority
of them were not of the then dominant political party. But
I do not think that Mr. McAdoo looked with favor upon the
establishment of independent boards and commissions, and
he always impressed me as sharing the views of those who
believed in having Cabinet supervision of all agencies of the
Federal Government. I do not recall any definite expressions of his to this effect, but my belief is that he would have
preferred that all boards and commissions be attached to
some executive department, and as many as possible to the
Treasury. At one time he advocated a change in the law
which authorized the Federal Reserve Board to levy an
assessment upon the Federal Reserve Banks for the payment
of its expenses, in order to make the Board dependent upon
a specific appropriation by Congress. The following is an
extract from Mr. McAdoo's memorandum to the Board on
this subject, written in February, 1916:
The Act should be so amended as to provide that the Federal
Reserve Board shall annually make an estimate to the Congress
of its requirements for the ensuing fiscal year, and secure an
appropriation therefor in like manner as the executive departments and other independent boards of the Government are required to do* If it should be desired to impose specifically upon

ORGANIZATION OF THE BOARD

the Federal Reserve Banks the cost of maintaining the Federal
Reserve Board, then the Treasurer of the United States should be
required to levy an assessment annually upon the Federal Reserve
Banks for the purpose of reimbursing the Treasury for the expenditures made by the Federal Reserve Board under authority of
the Congress. The independence of the Federal Reserve Board as
a Government body cannot be successfully maintained if it is
made by law dependent upon the Federal Reserve Banks themselves for the means of support.

The views expressed in this memorandum were not in accord, however, with those of a majority of the members of
the Board, and no further suggestion was ever made that
the law be amended in the manner indicated.
The annual assessments levied by the Board under the
provisions of the Act for the purpose of defraying the expenses of its organization, ranged during the years 1914 to
1922 inclusive, from .002 per cent to .005 per cent of the
amounts of the average paid-in capital of the Federal Reserve Banks. The amounts of these assessments were, year
by year, as follows:
1914
1915
1916
1917
1918

$191,897.30
156,257.44
192,143.60
237,776.82
382,081.00

1919
1920
1921
1922

$594,668.63
700,766.52
741,436.29
722,54461

After the year 1915 these assessments included also the
cost of publication of the Federal Reserve Bulletin, and of
the Board's proportion of the cost of operating the private
wire system by means of which instantaneous transfers are
made through the gold settlement fund. No department of
the Government and no other independent board with comparable activities has been operated at so small a cost. Although the expenses of the Board were paid entirely out of
assessments upon the Federal Reserve Banks, and not out
of appropriations of public funds by Congress, the AttorneyGeneral in the fall of 1914 ruled that the Board's accounts

THE FEDERAL RESERVE SYSTEM

were subject to the Government audit, and the amounts
received from the assessments were required to be covered
into the Treasury to be paid out on warrants of a disbursing
officer.
Mr. McAdoo also expressed himself at one time as favoring an amendment to the Federal Reserve Act under which
the member banks would be permitted to elect only four of
the nine directors, the other five to be appointed by the
Board; but here again he failed to receive the support
of a majority of the Board and his suggestion was never
pressed.
It is of interest at this point to compare portions of the
section which relate to the organization of the Board as embodied in the bill which passed the House on September 18,
I9I3> with the corresponding portions of the section in the
bill which passed the Senate on December 19, and with section 10 of the bill as agreed upon in conference, which became law on December 23, 1913. Certain passages in the
text below appear in italics in order better to attract attention.
B I L L AS PASSED IN THE HOUSE

SECTION 11: That there shall be created a Federal Reserve
Board, which shall consist of seven members, including the Secretary of the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency, who shall be members ex officio, and four
members appointed by the President of the United States, by and
with the advice and consent of the Senate. Of the four members
thus appointed by the President not more than two shall be of the
same political party, and at least one of whom shall be a person experienced in banking. One shall be designated by the President to
serve for two, one for four, one for six, and one for eight years,
respectively, and thereafter each member so appointed shall serve
for a term of eight years unless sooner removed for cause by the
President. Of the four persons thus appointed, one shall be designated by the President as manager and one as vice-manager of the
Federal Reserve Board. The manager of the Federal Reserve
Board, subject to the supervision of the Secretary of the Treasury and
Federal Reserve Board, shall be the active executive officer of the

ORGANIZATION OF THE BOARD

Federal Reserve B o a r d . . . . The Secretary of the Treasury shall
be ex officio chairman of the Federal Reserve Board.
B I L L AS PASSED IN THE SENATE

SECTION IO: A Federal Reserve Board is hereby created which
shall consist of seven members, including the Secretary of the
Treasury, who shall be a member ex officio, and six members
appointed by the President of the United States, by and with the
advice and consent of the Senate. The members of said boards the
Secretary of the Treasury, the Assistant Secretary of the Treasury,
and the Comptroller of the Currency shall be ineligible during the time
they are in office and for two years thereafter to hold any office, position, or employment conferred by any member bank. Of the six persons thus appointed by the President at least two shall be persons
experienced in banking or finance. One shall be designated by the
President to serve for one, one for two, one for three, one for four,
one for five, and one for six years, and thereafter each member so
appointed shall serve for a term of six years unless sooner removed
for cause by the President. Of the six persons thus appointed, one
shall be designated by the President as governor and one as vicegovernor of the Federal Reserve Board. The governor of the Federal
Reserve Board, subject to its supervision, shall be the active executive officer. The Secretary of the Treasury may assign offices in the
Department of the Treasury for the use of the Federal Reserve Board.
Each member of the Federal Reserve Board shall within fifteen
days after notice of appointment make and subscribe to the oath
of office. . . . The Secretary of the Treasury shall be ex officio
chairman of the Federal Reserve Board.
FEDERAL RESERVE A C T AS AGREED UPON
AT CONFERENCE AND PASSED

SECTION IO: A Federal Reserve Board is hereby created which
shall consist of seven members, including the Secretary of the
Treasury and the Comptroller of the Currency, who shall be members ex officio, and five members appointed by the President of
the United States, by and with the advice and consent of the
Senate.
The members of said board, the Secretary of the Treasury, the
Assistant Secretaries of the Treasury, and the Comptroller of the
Currency shall be ineligible during the time they are in office and
for two years thereafter to hold any office, position, or employment in any member bank. Of the five members thus appointed

24 THE FEDERAL RESERVE SYSTEM
by the President, at least two shall be persons experienced in banking or finance. One shall be designated by the President to serve
for two, one for four, one for six, one for eight, and one for ten
years, and thereafter each member so appointed shall serve for a
term of ten years unless sooner removed for cause by the President. Of the five persons thus appointed, one shall be designated
by the President as governor and one as vice-governor of the Federal Reserve Board. The governor of the Federal Reserve Board,

subject to its supervision, shall be the active executive officcr. The
Secretary of the Treasury may assign offices in the Department of
the Treasury for the use of the Federal Reserve Board.

The House bill went much further than did the Senate
bill toward making the Federal Reserve Board subordinate
to executive departments. It not only made the Secretary
of the Treasury chairman of the Board, but included as
ex officio members also the Secretary of Agriculture and the
Comptroller of the Currency, with only four appointed members; and the active executive officer of the Board was to be
designated by the President as manager, and was made subject to the supervision of the Secretary of the Treasury and
the Federal Reserve Board. T h e Senate bill provided for
six appointed members and made the Secretary of the Treasury the only ex officio member. Had the House bill become
law, all that could have prevented the Federal Reserve
Board from becoming a mere instrumentality of the Treasury would have been possible differences between the Secretary of the Treasury and the Secretary of Agriculture. There
would have been three ex officio members, all having exacting duties of their own, on a Board with four appointed
members required to devote their entire time to the business
of the Board. It would have been necessary to consult the
convenience of the three ex officio members in arranging for
meetings, and as an additional complication, the active executive officer of the Board would have been subject to the
supervision of the Secretary of the Treasury, as well as of
the Board as a body. It will be observed that the Conference Committee in reporting section 10 of the bill as finally

ORGANIZATION OF THE BOARD

passed, adopted in the main the language of section 10 of
the Senate bill, including the following clause, which has
been commented upon unfavorably by each of the three
Secretaries of the Treasury who have served since 1918:
The members of said Board, the Secretary of the Treasury, the
Assistant Secretaries of the Treasury, and the Comptroller of the
Currency shall be ineligible during the time they are in office and
for two years thereafter to hold any office, position, or employment in any member bank.

This was amended by the Act of March 3, 1919, to read:
The Secretary of the Treasury and the Comptroller of the Currency shall be ineligible during the time they are in office and for
two years thereafter to hold any office, position, or employment in
any member bank. The appointive members of the Federal Reserve Board shall be ineligible during the time they are in office
and for two years thereafter to hold any office, position, or employment in any member bank except that this restriction shall
not apply to a member who has served the full term for which he
was appointed.

The Organization Committee had framed a set of by-laws
to govern the operations of the Federal Reserve Board, and
at one of the early meetings these were presented to the
Board for adoption. One clause of the proposed by-laws
provided that whenever the Secretary of the Treasury was
absent from a meeting, the Comptroller of the Currency
should preside. This was not agreed to by the Board, however, and the by-laws as adopted provided that, in the absence of the statutory chairman, the Secretary of the Treasury, the Governor of the Board should preside; and in the
absence of both the Chairman and the Governor, the ViceGovernor should preside.

C H A P T E R II
ECONOMIC DISTURBANCES OCCASIONED BY THE WORLD W A R GOLD EXCHANGE F U N D — C O T T O N LOAN FUND

No governmental board was ever confronted with a more
difficult task than that which faced the Federal Reserve
Board at the time of its organization. The passage of the
Federal Reserve Act was a great achievement, for which all
of those who had a part in placing the law upon the statute
books are entitled to much credit. The consensus of banking opinion, when the Board took office, was that the Act
was about eighty-five to ninety per cent good, but there was
a diversity of opinion as to just what provisions comprised
the defective ten to fifteen per cent. The public mind, furthermore, was led to expect too much of the new law. Its
object was well described in the caption, or short title of the
Act, which reads as follows:
An Act to provide for the establishment of Federal Reserve
banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.

But no constructive law of this kind can possibly be selfexecuting, and a great deal must depend upon the manner in
which it is administered. The Act was a result of many compromises, and the meaning of some clauses was somewhat
obscure and ultimately called for judicial interpretation.
Moreover, no matter how wisely the law might be administered, it was folly for any one to assume that its operation
would usher in a financial and economic millennium, or that
the farmer, the manufacturer, the business man, or the banker
could disregard in future the dictates of common-sense and
business prudence, and rely upon the Federal Reserve Board
to do his thinking for him or to pilot him safely through

THE WORLD WAR

stormy seas, without reasonable cooperation on his own part.
Under the most favorable circumstances the task of the
Board would have been difficult, for it had to organize a system of banking entirely new in this country; it had no wellestablished precedents to guide it, and it had many deeply
rooted prejudices to overcome.
The members of the Board had been appointed from different sections of the country and some of the members had
never seen each other until they met in Washington. World
conditions were such when the members of the Board took
office as to make their problems even more difficult than had
been anticipated. During the preceding week, the war in
Europe had broken out, and when the members of the Board
assembled for their first meeting, the German artillery was
shelling the defenses of Liege. Ocean transportation was
paralyzed, for at that time most of the shipping was under
the flags of the various belligerent nations, and merchant
ships were seeking safety in neutral ports. For a week or ten
days before the declaration of war, American securities held
abroad had been rushed in great volume to American markets for sale. There was also a great disturbance in the commodity markets, and in order to avert disaster, some of the
leading exchanges, such as the New York Stock Exchange,
and the New York and New Orleans Cotton Exchanges, had
suspended operations entirely and remained closed for several months.
A currency panic would have been inevitable but for the
operation of the emergency law of 1908, known as the AldrichVreeland Act, which as originally enacted was to expire by
limitation on June 30,1914. The framers of the Federal Reserve Act had, however, with wise foresight inserted a section
in the new law which continued the Aldrich-Vreeland Law
in effect for a period of one additional year, or until June 30,
1915. Under this law, national banks were permitted, through
national currency associations, to receive additional circulating notes upon the security of good assets (other than

THE FEDERAL RESERVE SYSTEM

Government bdnds) specifically pledged. This additional
circulation was subject to a special tax, beginning at three
per cent and increasing at the rate of one half of one per cent
a month until the tax reached six per cent per annum.
It had not been anticipated, however, that so great an
emergency would arise, and it was evident that the terms of
the law were not sufficiently liberal to enable the national
banks of the country to meet the demand for additional currency. The Secretary of the Treasury, Mr. McAdoo, urged
Congress to amend this section immediately in order that an
adequate volume of additional national bank notes might be
issued through the national currency associations, which
were authorized under the Act of May 30, 1908. A bill was
quickly passed (August 4th) which amended some of the
provisions of the Aldrich-Vreeland Act, so as to give the
Secretary of the Treasury more latitude in permitting increases in the circulation of national bank notes. This legislation enabled the national banks to meet the unusual demands for currency without resorting to clearing-house
certificates or other expedients which had been employed in
acute financial crises and panics in the past. The maximum
amount outstanding of this additional national bank note circulation, secured bycollateral other than Government bonds,
was about $386,000,000, all of which was retired before the
expiration by limitation of the law which authorized it.
There were numerous conferences held at the Treasury
during the summer of 1914. The war had broken out at a
time when the major crops of the country were beginning to
move, and there was a heavy export demand for wheat and
other food products. Because of the demoralization of ocean
transportation, these commodities had accumulated at the
ports, resulting in embarrassing congestion of railroad and
warehouse facilities, as well as of bank credits. One of the
first effects, however, of a great war is to stimulate demand
for grain and foodstuffs, and after a few weeks this demand
was strong enough to cause a movement of these products

THE WORLD WAR

abroad, notwithstanding higher freights and increased insurance rates. As the German cruisers were driven from the
seas, this movement was accelerated.
The most serious embarrassment caused by the unexpected outbreak of the war was felt by the producers of cotton and by business interests located in, or which dealt with,
the cotton-growing sections.
Those who had large payments to make abroad were also
much embarrassed because of the high rates of exchange on
London and other European money centers. The United
States was at the time a debtor nation. For some years the
apparent balance of trade — that is, the difference between
exports and imports — usually had been in our favor to a
moderate extent, but the favorable balance was created by
exports of cotton and grain. Payments of interest and dividends on securities owned abroad, interest on borrowed
money, expenditures of tourists, ocean freights and insurance premiums paid to foreign companies, often more than
offset our favorable trade balance; and up to the middle of
the year 1914, it had always been the custom of American
banks, early in the year, to draw finance bills against credits
arranged with foreign banks. These bills would be liquidated
in the autumn by the sale of bills of exchange drawn against
shipments of grain and cotton.
The shortage of ocean transportation caused by the war
made it impossible for a while to export commodities in anything like the usual volume. It was found in most cases impracticable to secure an extension of maturing obligations
abroad. For some weeks the Bank of England rate was ten
per cent and sterling sold above seven dollars. A t the
same time, the largest crop of American cotton ever produced was coming upon the market. The export demand
was greatly curtailed, and, besides, it was practically impossible to secure space for cotton in foreign bottoms, the preference being given to grain.
The Federal Reserve Banks were not open for business

THE FEDERAL RESERVE SYSTEM

until November 16th, and the Federal Reserve Board had,
therefore, no financial machinery available for extending relief. The Secretary of the Treasury, however, at a meeting
with New York bankers on the evening of August 2, 1914,
had informed the bankers present — and his message was
carried to the country by the press — that, through the
issue of emergency currency, already described, the banks
would be expected to maintain themselves on a cash basis,
and that ample currency was ready for immediate delivery.
After the members of the Board had taken the oath of
office, they were requested by Secretary McAdoo to cooperate with him in various matters which concerned the Treasury directly, but in which the Federal Reserve Banks when
ready for business would be concerned. Obligations aggregating a large amount and payable in sterling were approaching maturity, and the British Government sent Sir George
Paish and Sir Basil P. Blackett to Washington to discuss the
exchange situation. These gentlemen remained in Washington for some weeks and were in frequent conference with
Secretary McAdoo and members of the Board.
I believe that it was Mr. Warburg who made the suggestion,
which was adopted, that an exchange pool of $100,000,000
be formed by some of the larger banks throughout the country, outside of the cotton belt, which at that time was in dire
distress. The members of this pool obligated themselves to
make payments in gold as called for by the Managing Committee for the purpose of forcing the rate for sterling down
to a figure approximating the cost of shipping gold.
In the annual report of the Federal Reserve Board for the
year 1914, the following reference is made to the gold exchange fund;
In order to cope with this extraordinary situation, it was felt
that joint action on a comprehensive plan would become necessary. The Federal Reserve Board, in conjunction with the Secretary of the Treasury, therefore, took the initiative in calling, September 4, a conference of representatives of the clearing-houses of

GOLD EXCHANGE FUND

all the Reserve cities. The conference had a twofold purpose. On
the one hand, it sought to establish, so far as that could be done,
the aggregate amount of the actual current indebtedness of the
United States to Europe, and, on the other hand, to devise a
means of cooperation in dealing with the situation.
The investigation undertaken by the Federal Reserve Board
and the conference above mentioned disclosed the opinion that
the current indebtedness of the United States to foreign countries
was to be stated at approximately §500,000,000, a sum the maturity of which was spread over a period of months. The conference also resulted in the formulation of a plan of relief. A committee of bankers appointed at this conference subsequently recommended a plan for the formation of a gold fund of $100,000,000,
which was approved by the Board on September 19, and a letter
was sent to the presidents of the clearing-house associations throughout the country under date of September 21, 1914, in which subscriptions aggregating this sum were asked. The Federal Reserve
Board had been requested to allot the pro rata of the contributions
to be made to each clearing-house district, and such allotment was
made. Action upon these allotments was prompt and effective,
and a total of over §108,000,000 was subscribed.
As had been expected, the beneficial effect of the establishment
of this fund became evident almost immediately, notwithstanding
that only a comparatively small percentage of the amount subscribed was actually called for, and not more than §10,000,000
was actually exported to furnish a basis for selling foreign exchange. By the time of the opening of the Federal Reserve Banks,
the premium had disappeared and the danger of immediate gold
exports had been removed.
T h e freer movement of grain and foodstuffs to Europe aided
also in reducing the sterling rate, and b y the time Sir George
Paish and his associate returned to London, the excessive premium had disappeared. Later on, sterling went
to a discount and did not regain its normal parity until
M a y , 1925.
Meanwhile the cotton situation was a subject of grave
concern. Congress was in session and many plans for relief
were suggested. One does not have to be long in official life
in Washington to learn that while public officials are anxious
to serve, and as a rule are extremely desirous of getting full

32 THE FEDERAL RESERVE SYSTEM
credit and publicity for good things accomplished, there are
some who are not looking for difficult problems which admit
of no immediate spectacular solution. There are always
many in Washington who are adepts in the gentle art of
' passing the buck.' There was, indeed, some talk in Congress
of legislation which could not possibly be obtained, and
which would have been ineffective and vicious, but there was
general acquiescence in the idea that the problem was one
which should be worked out by the Treasury Department
and the Federal Reserve Board. The situation was distressing and unique, and, while it resembled in some respects the
situation which afterward developed in the fall of 1920, it
was strikingly different in others. The cotton crops of 1912
and 1913 had been sold at from twelve to fourteen cents a
pound, which in those days was regarded as a satisfactory
price. A large acreage had been planted in the spring of
1914, and the season having been favorable, the result was
the largest production of cotton ever known before or since
— nearly seventeen million bales. The actual growth, no
doubt, was even greater, but owing to the depression much
cotton was left in the field unpicked. The war had destroyed
for the moment the export demand for cotton, and, as the
New York and New Orleans Cotton Exchanges were closed,
there was no means of obtaining official quotations. Domestic mills bought from hand to mouth at varying prices depending upon the immediate requirements of the mills and
the necessities of the producers. It was recognized that the
prices, indefinite as they were, were absurdly low as compared with the standards of preceding years and with the
actual costs of production. Few mills, however, were disposed to stock up in the absence of an organized market, and
altogether the situation was chaotic. Some well-disposed
persons started what is known as the 'buy-a-bale' movement, hoping in this way to create an artificial demand of
sufficient breadth to relieve in some degree the distress of the
producers. Several hundred individuals cooperated by buy-

COTTON LOAN FUND

ing a bale at ten cents a pound, but the futility of this movement soon became evident. The idea of being looked upon
as objects of charity was revolting to producers, and even if
it had been possible to induce five hundred thousand individuals to buy a bale in this way, the relief afforded would
have been negligible. The cotton situation in 1914 is comparable with the wheat situation in 1923 rather than with
the cotton marketing problems of 1920. In the latter year
there was an insistent demand for credit to enable producers
to hold their cotton. The feeling then was strong that, despite the large stocks carried over from previous years, and
although the current crop was the second largest in the history of the country — 13,400,000 bales, being next in size to
that of 1914 — the cost of production, estimated to be around
thirty cents a pound, could be realized presently if credits
could be arranged sufficiently liberal in volume and terms to
enable the producers to keep their cotton off the market.
In the fall of 1923 the producers of wheat were not asking
for ordinary credits, but they were clamoring for a market
just as the cotton producers in 1914 were practically unanimous in demanding a market rather than credit. In September and October, 1923, there were many in the Northwest
who urged that the Government through some instrumentality should purchase wheat at $1.50 a bushel, and in 1914
there were many in the South who demanded that the Government should purchase cotton at ten cents a pound. There
were others, however, including some leaders in Congress,
who thought that the situation could and should be relieved
by the deposit of a large volume of Government funds in
Southern banks (to be raised by an issue of 4 greenbacks' and
by the sale of Government bonds), to be loaned on cotton
exclusively. Secretary McAdoo replied, on October 9th, to a
suggestion of this kind made by Honorable Robert L. Henry,
of Texas, Chairman of the House Committee on Rules, in a
letter from which these excerpts are taken. Much of the
Secretary's letter would have been apropos in later years.

34 THE FEDERAL RESERVE SYSTEM
Your proposition is, in essence, to issue $400,000,000 of Government bonds, $200,000,000 of which are to be deferred obligations bearing 3 per cent interest, and $200,000,000 are to be demand
obligations, or greenbacks, and to deposit the proceeds in the
cotton States exclusively, to be loaned on cotton exclusively,
through some method too vaguely outlined in your letter to admit
of judgment.
It is extremely doubtful if so large amount of 3 per cent Government bonds could be sold at par in the present condition of the
money market. The rate of interest would in all probability have
to be increased. Moreover, the Secretary of the Treasury has no
power, under existing law, to do this. Y o u admit his want of
power because you suggest that if he needs ' a little more legal
authority* he can get it from Congress.
I cannot believe that this is true. You have been a member of
Congress for seventeen years; you are the head of its powerful
Committee on Rules, which determines what legislation may be
specially considered and advanced by the House of Representatives. If you think the necessary 'legal authority' can be had,
why do you not prevail upon Congress to give it?
Is it not because the Congress itself thinks the constitutionality
of such legislation is open to the gravest doubt, and the policy of
it even more questionable? Is it wise to issue $400,000,000 of
Government bonds and greenbacks, merely to lend on cotton?
Tobacco, naval stores, copper, silver, lumber, and other things
have been hurt by the European War. All have applied to the
Treasury for relief. If we disregard every suffering interest except
cotton and make it the sole beneficiary of governmental favor,
what becomes of the Democratic principle 'equal rights for all,
special privileges to none'? If we enter upon the course you suggest, we must help every distressed industry impartially. To do
that would necessitate the issue of many more than $400,000,000
in bonds and greenbacks and dangerously involve the credit of
the Government. It would be a hopeless undertaking, in defiance
of every sound principle of finance and economics, with certain
disaster at the end
On the 24th of August a special conference of representative
men in the different sections of the country interested in the production, manufacturing, and financing of cotton assembled in
Washington upon invitation of the Secretary of the Treasury.
A t the conclusion of that conference the Secretary of the Treasury
announced that he would accept, from national banks, through

COTTON LOAN FUND

currency associations, notes secured by warehouse receipts for
cotton, tobacco, and naval stores at 75 per cent of their face value.
This left the bankers free to lend such amount as they thought
safe upon the security of cotton, and made it possible for them to
convert 75 per cent of the notes so received into national bank
currency. Since the 1st of August there has been issued to national
banks in the Southern States, including Missouri and Maryland,
$68,000,000 of additional national bank currency. The national
banks in these same States may, by complying with the law, receive $151,443,000 of additional national bank currency. . . •
A f t e r pointing out that there was already available, to the
national banks in the Southern States, Government deposits
and additional national bank currency amounting in the
aggregate to $246,845,000, the Secretary continued:
Aside from the foregoing, I may say that the Secretary of the
Treasury has authorized the issuance, since the outbreak of the
European War, to national banks throughout the country, of
additional national bank circulation aggregating $348,795,210. A
large part of this currency has found its way to the South. Recently the Comptroller of the Currency, at my request, called on
the national banks of New York City for a statement of the
amount of loans which they had made to banks in the Southern
States from August 1, 1914, to date. These reports show that the
New York City national banks are lending to Southern banks
more than $40,000,000.
Moreover, existing law authorizes the Secretary of the Treasury, in his discretion, to issue more than $1,000,000,000 of additional currency to national banks throughout the country.
The banks, therefore, have ample opportunity to get more than
enough currency to meet every conceivable demand, if more currency is, as many seem to think, the remedy for the cotton situation. I do not believe it is. I am firmly convinced that neither additional nor unlimited issues of paper money will help the cotton
planter. I am equally convinced that the inevitable inflation which
such issues would cause would hurt him and hurt the country. What
is really wanted is a restored market for cotton at a profitable price.
This is the realfactt the real truth in the situation. It is impossible by
legislation to create a market for cotton or to establish a price for it.
The value of cotton has been injured this year by the European War.
This injury cannot be retrieved nor the market restored by legislation

36 THE FEDERAL RESERVE SYSTEM
any more than the injury to corn which was caused by the drought
last year in the great corn States of the West could have been repaired
by legislation.
Up to the present time there has been a disposition everywhere to
look exclusively to and rely wholly upon the National Government for
assistance. There are many things which the Cotton States and the
people of the South can do for themselves which the National Gorernment cannot do for them. The powers and resources of the Southern
States should be employed for the benefit of their people and the National Government should not be expected to do things which are beyond
its power.
The Secretary of the Treasury has exercised, and will continue
to exercise, all the lawful powers he possesses, consistent with
sound economics and safe financing, for the assistance of the cotton producers of the South and all other industries which have
been injured by the European War or which are entitled to assistance for any cause....
Reference has already been made to the effect of the closing of the cotton exchanges in Liverpool, New York, and
New Orleans upon the cotton market. There was no way for
the mills to contract for their future requirements or to
1 hedge' against their spot purchases, nor was there any established or authentic price for cotton. In these circumstances,
bank loans on cotton as security were made sparingly, with
reluctance, and always on a very low valuation.
Mr. Festus J. Wade, of St. Louis, at a conference held in
Washington during the latter part of August had suggested
that a fund of $100,000,000 be subscribed by banks out of
which loans on cotton should be made on a reasonable basis,
an arbitrary valuation to be fixed high enough to afford
some measure of relief and low enough to ensure the safety
of the fund. Many banks indicated their willingness to subscribe to this fund provided that the members of the Federal
Reserve Board, even though not acting in their official capacity, should give their support and sanction to the undertaking. T h e Attorney-General having given an opinion that
the operation of such a fund would not be in conflict with
anti-trust laws, the members of the Board, while reluctant
to assume any additional responsibilities, felt impelled by

COTTON LOAN FUND

the same sense of public duty which had actuated them in
the case of the gold fund to respond to the call and to act
as a central committee of the cotton loan fund. After the
members of the Board had consented to act in this capacity,
many conferences were held, with the ultimate result that
banks in New York City agreed to pledge a subscription of
§50,000,000 to the fund upon the condition that an equal
amount be raised by banks in other than cotton-producing
States. The plan provided that to the §100,000,000 to be
raised in this manner there should be added a further sum of
$35>000,000 to be contributed by banks in the cotton-producing States, and that the $100,000,000 should be called for
in proportion as the $35,000,000 fund should be subscribed
and paid in. Under this plan, if borrowers should absorb the
entire amount of $135,000,000, $100,000,000, or practically
two thirds, would be furnished by banks located outside of
the cotton-producing States, while only $35,000,000 would
be supplied by Southern banks. In this way material relief
would be afforded, while the banks not located in cotton sections which furnished $100,000,000 would have additional
protection in that they would have preference as the loans
were paid; Southern banks thus having in effect a second
lien. The loan value was fixed by the committee at approximately six cents per pound.
It was impossible, however, to put the plan into operation
until November 30,1914, by which time the Federal Reserve
Banks had been opened for business, thereby releasing a
large amount of reserve funds which enabled member banks
to make new loans and grant extensions which otherwise
would have been impossible. A t the same time there had
been some improvement in shipping conditions, and less than
$30,000 of the fund was ever applied for and only about
$20,000 actually loaned. As the cotton exchanges were not
reopened until after January I, I9I5» the loan value of six
cents per pound fixed by the committee was generally accepted as a bedrock valuation of cotton, basis middling, and
cotton sold in December, 1914, brought about that figure.

C H A P T E R III
T H E FEDERAL RESERVE BANKS BEGIN BUSINESS — THEIR
POLICY OUTLINED
W H I L E the cotton situation was engrossing public and official
attention, the Board was confronted with the problems of
organization, for upon it fell the duty of completing the directorships of the Federal Reserve Banks by appointing the
three 'Class C* directors for each and of speeding up the
preparations for opening the banks. In view of conditions
prevailing at the time the Board took office, there were frequent expressions of the belief that the opening of the Federal Reserve Banks should be deferred until the return of
more normal conditions. These expressions of opinion led to
many conferences and to many discussions at Board meetings. During the unusually hot summer of 1914, the Board
frequently remained in session five or six hours a day, and
the discussions impressed me as being generally interesting,
sometimes amusing, and occasionally tiresome. As a result
of many conferences and of long discussions and of the insistence of Secretary McAdoo, the Board concluded in October
to proceed forthwith with the organization of the Reserve
Banks with the view of having them begin business as soon
as suitable quarters could be secured, and competent operating staffs selected. The following extract from the Board's
annual report, which was signed by all the members of the
Board after prolonged consideration of the draft first submitted, throws a better light upon some of the primary
problems of the Board than would anything written by an
individual after this lapse of time, and I have therefore
incorporated it below:

The Board was also, however, firmly of the opinion that in undertaking thus early to establish the Federal Reserve Banks it
would be necessary to enlist the hearty cooperation of all the mem-

THE FEDERAL RESERVE

DISTRICTS

ber banks in two matters which were deemed of fundamental importance: (1) payment by the member banks in gold out of their
own vaults of the reserves they were required to contribute to the
new banks, thus diffusing the burden of providing the cash resources of the Federal Reserve Banks; (2) the adoption of a discount policy which would prevent the accumulated strength of
the banks from being dissipated and protect their resources from
being used to finance operations not calculated to add to the
strength or solidity of general banking conditions.
Before the banks could be set in actual operation, however, it
was necessary for the Board to complete the organization prescribed in the Federal Reserve Act by the appointment of three
Government directors in each of the several institutions. Pursuant to the requirements of law, the Reserve Bank Organization
Committee, consisting of the Secretary of the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency, had
already taken preliminary steps, resulting in the election by the
banks of six directors in each Federal Reserve District, and the
results of these elections were reported to the Federal Reserve
Board upon its organization.
There remained to be appointed by the Board three Government directors for each district, the first of whom was to be designated Federal Reserve Agent and Chairman of the board of directors, the second as Deputy Reserve Agent and Vice-Chairman.
Particular importance was felt to attach to the choice of all the
Government directors, and especially of the Federal Reserve Agents.
The Federal Reserve Act specifically designates the Federal Reserve Agent as the representative of the Federal Reserve Board at
the bank to which he is accredited, and invests him with very large
responsibilities. It was not, in the opinion of the Board, the intent
of the Act to constitute the Federal Reserve Agent the operating
head of the bank, but, rather, that he should be vested with the
function of promoting the general interests and purposes of the
system, assuring himself and this Board of the sound and impartial administration and efficient operation of the bank to which he
was accredited, and giving both to the Federal Reserve Board and
to the executive officers and his fellow directors of the bank, over
whom he had been appointed Chairman, the benefit of his advice
and knowledge. The office is undoubtedly one which calls for
exceptional qualifications, and is, therefore, difficult to fill, since
by the very terms of the Act, 'tested banking experience' is made
a prerequisite, while consideration for the general welfare of the

THE FEDERAL RESERVE SYSTEM

bank's administration requires that the incumbent be a man of
solidity, independence, and tried character.
Believing that the choice of the Government directors was a
matter of fundamental importance and that errors made in their
selection would produce serious consequences in the later working
of the banks, the Board deemed it essential to scrutinize every
name submitted for appointment, or suggested from any source,
with the utmost care. The process was one which required time,
and necessitated visits by members of the Board to various and
distant parts of the country, as well as the invitation of competent
advisors to Washington for consultation. A s the outcome of these
investigations and deliberations, the Board announced to the public at different dates early in October the three selections made for
Government directors for each of the Reserve Banks, or 36 in
all
In order to obtain persons of satisfactory banking experience, as
required by law, it was found necessary to give to Federal Reserve
Agents salaries commensurate with, or approximating, those prevailing in the banking community in each district for men of similar attainments, abilities, and experience. In a number of cases
it was found possible to attract to the service of the Reserve Banks
men of high qualifications at a rate of compensation substantially
lower than they had been receiving or were in a position to obtain.
The action of the appointees in accepting office on short notice
and at the compensation established was the more to their credit
in that in not a few cases it was necessary for them to incur substantial financial sacrifice because of the unfavorable conditions
under which they were obliged to dispose of their holdings of bank
stock, the Federal Reserve Act making it mandatory that each
Federal Reserve Agent and each director of Class C should divest
himself of ownership of this class of securities. . . .
As soon as the directors of the several banks had been chosen,
they proceeded to select the nucleus of a suitable staff, in order
that the banks might be ready to begin active operations when
qualified to do so. The Board particularly enjoined upon them
the choice of a suitable chief executive officer in each institution,
with the suggestion that this officer be given the title of governor
in order to differentiate his functions from those of the president
of a member bank.

While some members of the Board may have preferred that
the Board's own appointees and representatives, the Federal

THE FEDERAL RESERVE

DISTRICTS

Reserve Agents, be made the operating heads of their respective banks in order to strengthen the Board's control over
the banks, the conclusion was finally reached, and, if I remember correctly, unanimously, that under the terms of
section 4 of the Federal Reserve Act this was impossible.
The plain intent of the law was to establish a regional as
opposed to a central banking system. Provision was made
that six of the nine directors of each Federal Reserve Bank
should be chosen by its stockholding banks. Each Federal
Reserve Bank was made a body corporate, to have succession for a period of twenty years, and was empowered
to make contracts . . . to appoint by its board of directors such
officers and employees as are not otherwise provided for in this
Act, to define their duties, require bonds of them and fix the penalty thereof, and to dismiss at pleasure such officers or employees
. . . to prescribe by its board of directors, by-laws not inconsistent with law, regulating the manner in which its general business
may be conducted, and the privileges granted to it by law may be
exercised and enjoyed . . . to exercise by its board of directors, or
duly authorized officers or agents, all powers specifically granted
by the provisions of this Act, and such incidental powers as shall
be necessary to carry on the business of banking within the limitations prescribed by this Act.

And again it is expressly prescribed in section 4 that
Every Federal Reserve Bank shall be conducted under the supervision and control of a board of directors. The board of directors
shall perform the duties usually appertaining to the office of directors of banking associations and all such duties as are prescribed
by law.

The law requires the Federal Reserve Board to designate
one of the three directors appointed by it as Chairman of the
board of directors of the Federal Reserve Bank and as Federal Reserve Agent. His compensation is fixed, not by the
directors of the bank, but by the Federal Reserve Board, and
his duties in each of his dual capacities are clearly and specifically defined in the Act. As Federal Reserve Agent he is the

42 THE FEDERAL RESERVE SYSTEM
direct representative of the Federal Reserve Board to which
body he is required to make regular reports. His duties, as
defined in the Act, relate chiefly to the custody, issue, and
redemption of Federal Reserve notes; to the custody of gold
and other collateral held to secure Federal Reserve notes;
and to examinations of member banks, and of banks applying for membership. By direction of the Federal Reserve
Board he is required to keep it informed of the personnel of
the directorates of large member banks in his district, and to
forward with his recommendation applications from any individuals who wish to serve at the same time as directors of
two or more banks, one of which comes within the purview
of the so-called Clayton Act, which regulates interlocking
directorships.
He is charged also by the Board with the duty of assembling statistical matter and of making reports on financial
and economic conditions in his district.
As Chairman of the board of directors of the Federal Reserve Bank to which he is accredited, he presides at meetings
of the directors and shares with the other directors in their
duties and responsibilities as such.
He is required by law to supervise the election of directors
of Classes A and B, and to announce the result; and 'under
regulations to be established by the Federal Reserve Board 1
to maintain a local office of said Board on the premises of
the Federal Reserve Bank.
Nowhere in the law is there any provision requiring or permitting him to act as the chief executive officer, and the
Board felt that it could not vest him with such power without infringing upon the rights of the directors as defined in
section 4 of the Act. The law imposes upon the board of directors of a Federal Reserve Bank serious duties and responsibilities, in the discharge of which the directors are clearly
entitled to choose their own officers and agents.
As a rule there has been no friction between the Chairman
and Federal Reserve Agent and the Governor of a Federal

43 THE FEDERAL RESERVE

SYSTEM

Reserve Bank, and in those cases where friction has occurred,
it has been found to have been due either to personal considerations of a trivial character, or to a disregard or misconception of their respective duties as defined by law or as
delegated under the by-laws of the bank.
A few years after the organization of the System, the directors of one of the Federal Reserve Banks sought by resolution to make the Chairman of the board of directors the
operating head of their bank, but the Federal Reserve Board
was not willing to assume responsibility for the routine management of the Federal Reserve Banks which it would have
incurred had it permitted its own appointee and agent to
assume executive duties, and therefore declined to approve
the change proposed.
Notwithstanding the unusually difficult conditions which
confronted the Board upon its organization, which led many
to express the opinion that the Federal Reserve Banks could
not be opened before the first of January, 1915, conditions
had improved sufficiently to warrant an earlier date for the
opening, and the work of organization being well advanced,
the Board on October 26th notified all member banks to pay
in their first installment of capital stock on November 2d.
A t about the same time the Secretary of the Treasury, acting
under the authority conferred upon him by section 19 of the
Federal Reserve Act, fixed November 16th as the date for
opening the Federal Reserve Banks, at which time the reserves of the member banks were to be readjusted in accordance with the requirements of section 19 of the Act.
Many sections of the Federal Reserve Act require that the
functions described therein shall be exercised under regulations to be prescribed by the Federal Reserve Board. In
formulating regulations it was necessary for the Board to
agree upon the general principles or policies which should
govern the operation of the banks. While it was clear that
the Federal Reserve Banks are not authorized by law to make
loans direct to individuals, but can only rediscount paper

44 THE FEDERAL RESERVE SYSTEM
for eligible banks upon their endorsements, the open-market
powers, in which the Federal Reserve Banks might legally
engage under regulations to be prescribed by the Federal Reserve Board, opened to them an independent avenue for the
employment of their funds and a means of exerting a direct
influence in the money market. There were some who sought
to convince the Board that the Federal Reserve Banks should
be emergency institutions, and that ordinarily they should
not be allowed to engage regularly in many transactions permissible under the terms of the Act; others took the position
that the banks should, on the contrary, actively and continuously exercise all their functions at least to a moderate extent The Board after much deliberation and discussion agreed
that the banks should not be operated only as emergency institutions, and while merely for the sake of profit they should
not undertake to engage in business to the full extent of their
legal power, they should nevertheless be organized in such a
manner as to admit of the fullest exercise of all their activities when occasion demanded, and that as a matter of policy
they should regularly and constantly employ a part of their
resources in the exercise of their proper functions without
exceeding the bounds of prudence and moderation.
Under the caption ' Place of Reserve Banks/ in its first
annual report to Congress the Board said:
It should not, however, be assumed that because a bank is a
Reserve Bank its resources should be kept idle for use only in
times of difficulty, or, if used at all in ordinary times, used reluctantly and sparingly. Neither should it be assumed that because
a Reserve Bank is a large and powerful bank, all its resources
should be in use all the time or that it should enter into keen competition with member banks, distributing accommodations with a
free and lavish hand in undertaking to quicken unwisely the pace
of industry. Such a policy would be sure, sooner or later, to invite
disaster. Time and experience will show what the seasonal variations in the credit demands and facilities in each of the Reserve
Banks of the several districts will be and when and to what extent
a Reserve Bank may, without violating its special function as a

THE FEDERAL RESERVE

DISTRICTS

guardian of banking reserves, engage in banking and credit operations. The Reserve Banks have expenses to meet, and while it
would be a mistake to regard them merely as profit-making concerns and to apply to them the ordinary test of business success,
there is no reason why they should not earn their expenses, and a
fair profit besides, without failing to exercise their proper functions and exceeding the bounds of prudence in their management.
Moreover, the Reserve Banks can never become the leading and
important factor in the money market which they were designed
to be unless a considerable portion of their resources is regularly
and constantly employed.
There will be times when the great weight of their influence and
resources should be exerted to secure a freer extension of credit and
an easing of rates in order that the borrowing community shall be
able to obtain accommodations at the lowest rates warranted by
existing conditions and be adequately protected against exorbitant rates of interest. There will just as certainly, however, be
other times when prudence and a proper regard for the common
good will require that an opposite course should be pursued and
accommodations curtailed. Normally, therefore, a considerable
proportion of its resources should always be kept invested by a
Reserve Bank in order that the release or withdrawal from active
employment of its banking funds may always exercise a beneficial
influence. This is merely saying that to influence the market a
Reserve Bank must always be in the market, and in this sense Reserve Banks will be active banking concerns when once they have
found their true position under the new banking conditions.
It would be a mistake, therefore, and a serious limitation of
their usefulness to regard the Reserve Banks simply as emergency
banks. Regulation in ordinary times, as well as protection in extraordinary times, may be expected to become the chief service
which these institutions will perform.

It is evident, therefore, that the open-market operations,
in which, in recent years, the Federal Reserve Banks have
engaged, are entirely consistent with the policy announced
by the Board immediately after the Reserve Banks began
business.

C H A P T E R IV
READJUSTMENT OF FEDERAL RESERVE DISTRICTS — AGITATION
FOR AN EMBARGO ON EXPORTS OF W A R MUNITIONS —
GREAT BRITAIN DECLARES COTTON CONTRABAND
P R I O R to the appointment of the Board members the twelve
Federal Reserve districts and the Federal Reserve Bank cities
had been designated by the Organization Committee. Bankers in certain cities, and in the territory adjacent thereto,
were not satisfied with the decision of the Organization Committee, which the law prescribed in section 2 of the Act
should 'not be subject to review except by the Federal Reserve Board when organized.' Soon after the Board took
office, it was requested in certain instances to review the
decision of the Organization Committee, but no immediate
action was taken because of the urgent duties imposed upon
the Board in the organization of the banks. That work having been completed, the Board announced that it would
proceed with the hearing of these appeals shortly after the
first of January, 1915. The applications generally were for
the transfer of certain territory from one district to another,
but there were two cases in which it was sought to change the
location of the Federal Reserve Bank of the district. One of
these was a petition from Pittsburgh member banks requesting that Pittsburgh be designated as the seat of the Federal
Reserve Bank instead of Cleveland in District No. 4, and
the other was a petition from Baltimore member banks requesting that Baltimore instead of Richmond be designated
as the seat of the Federal Reserve Bank in District No. 5.
Much of the Board's time during the whole year of 1915 was
taken up with the consideration of these cases, as well as with
the discussion of a proposition to reduce the number of Federal Reserve districts from twelve to eight or nine. There
was during that year an abnormally easy money market due

THE FEDERAL RESERVE DISTRICTS

to the rapid growth of bank deposits throughout the country, and to the large importations of gold for foreign account.
Some of the Federal Reserve Banks were not earning their
operating expenses, while only one of them, the Federal Reserve Bank of Richmond, had been able on the 30th of June
to pay its semiannual dividend.
Section 2 of the Federal Reserve Act provided that the
Organization Committee 'shall designate not less than eight
or more than twelve cities to be known as Federal Reserve
cities,' and to divide the United States into districts corresponding to the number of Federal Reserve Banks determined upon. The law also prescribed that
The determination of said Organization Committee shall not be
subject to review except by the Federal Reserve Board when organized: Provided, That the districts shall be apportioned with
due regard to the convenience and customary course of business
and shall not necessarily be coterminous with any State or States.
The districts thus created may be readjusted and new districts
may from time to time be created by the Federal Reserve Board,
not to exceed twelve in all.
Provision was also made in the Act, section 3, for the establishment of branches of Federal Reserve Banks.
Messrs. Warburg and Delano took the view that before
changing district lines the Board should consider the propriety of making some reduction in the number of districts,
and that in any case where a Federal Reserve Bank was abolished, a branch should be substituted in its place in order
not to disturb the customary course of business. A t that
time I shared with them the opinion that the System could
be more efficiently and economically operated with a smaller
number of banks, and I believe that Mr. Miller held the
same view. There was a question, however, as to the extent
of the Board's powers, and the opinions rendered by the
Board's counsel were somewhat vague, although the consulting counsel, Joseph P. Cotton, formally rendered an unqualified opinion that the Federal Reserve Board was fully

THE FEDERAL RESERVE SYSTEM

authorized by the Act to reduce the number of districts. Although I was at the time in favor of reducing the number of
districts to ten, I did not overlook the difficulties in the way
of effecting such a reduction, nor did I ever believe that the
reduction would be made. It would have been necessary to
have an agreement as to which of the banks should be eliminated, and, as three members of the Board were strongly
opposed to any reduction, it seemed to me probable that
there might be a disagreement among the four members who
favored a reduction in principle as to how the districts should
be readjusted.
While all these matters were under discussion, the Attorney-General on November 22,1915, addressed a letter to the
President which was transmitted by him to the Board. In
this letter the Attorney-General expressed the opinion that
the Federal Reserve Board had no power to abolish any one
or more of the Federal Reserve districts, nor any one or more
of the Federal Reserve Banks located in the cities designated
by the Reserve Bank Organization Committee.
Earlier in the year Governor Hamlin had appointed a committee on redistricting composed of Messrs. Delano, Warburg, and myself. Upon receipt of the Attorney-General's
opinion, this committee made a report to the Board reviewing the whole subject. In this report the committee reiterated the opinion which had often been expressed that the
number of the banks and districts was larger than was conducive to the most efficient operation of the System. This
the committee reported was not the fault of the Act, but was
due to the circumstance that the Organization Committee,
although acting in the best of faith, could not, in the short
time allotted to it, acquire such knowledge and experience
as was absolutely necessary for a final determination of such
an important question.
The committee, however, recognizing the authority of the
Attorney-General's opinion, and submitting to the conclusion
reached therein, recommended that the Board abandon any

THE FEDERAL RESERVE DISTRICTS

plan of redistricting which involved the consolidation of any
districts, and address itself to the specific appeals pending
and to such readjustments as might be permissible and practicable under the Attorney-General's opinion.
In view of the applications from Pittsburgh and Baltimore to be designated as Federal Reserve cities in place of
Cleveland and Richmond respectively, and of other applications for the transfer of territory from one bank to another,
which transfers would reduce the capital of a Reserve Bank
below the statutory limit of $4,000,000, the committee recommended that the Board instruct the Governor to address
a letter to the President requesting him to obtain the opinion of the Attorney-General on the following questions:
(1) Can the Federal Reserve Board legally change the present
location of any Federal Reserve Bank?
(a) In the case where there has been no alteration in the district lines? and
(b) In the case where there has been such a readjustment of
district lines as in the opinion of the Board necessitates
the designation of a new Federal Reserve city in order
that the convenience and customary course of business
may be accommodated as required by law?
(2) Must the Board, in exercising its admitted power to readjust, preserve the $4,000,000 minimum capitalization of each
and every Federal Reserve Bank?

On the 14th of April, 1916, the Attorney-General addressed a letter to the President in which he expressed the
opinion that the Federal Reserve Board had no power to
change the location of any Federal Reserve Bank, and reiterated his previous opinion that the Board could not reduce
the number of Federal Reserve districts or abolish a Federal
Reserve Bank. He did, however, express the opinion that
the Board had power to make reasonable readjustments of
Federal Reserve districts by changing their boundary lines.
This opinion made it unnecessary for the Board to give further consideration to the petitions of Pittsburgh and Balti-

THE FEDERAL RESERVE SYSTEM

more. It was clear and explicit, and effectively disposed of a
question which bid fair to be highly controversial.
Meanwhile the Board had made some readjustments of
district lines, some of the most important of which were as
follows: The transfer of Fairfield County, Connecticut, and
several counties in northern New Jersey to the New York
District- Originally, Jersey City and Newark had been
placed in the Philadelphia District. Mr. McAcloo was reminded that, while as builder of the Hudson tunnels he had
put these cities within ten minutes' touch of the financial
district of New York City, he had as chairman of the Federal
Reserve Organization Committee attempted to make them
tributary to Philadelphia, thus giving their banking business
a back haul, which would involve two days in getting into
New YorkOther changes in district lines made at this time involved
the transfer of two counties in the panhandle region of West
Virginia from the Richmond to the Cleveland District, and
of all but seven counties in southern Oklahoma (south of the
Arkansas River) from the Dallas to the Kansas City District.
The application of bankers in Nebraska and Wyoming to
have those States transferred from the Kansas City to the
Chicago District was denied, but later on their wishes were
complied with substantially by the establishment of a branch
of the Federal Reserve Bank of Kansas City at Omaha. A
year or two later other slight adjustments in district lines
were made involving the transfer of two additional counties in West Virginia to the Cleveland District, and a few
counties in Wisconsin from the Minneapolis to the Chicago
District, and of several parishes in southern Louisiana
from the Dallas to the Atlanta District.
Another problem to which the Board as well as the officers
of the Federal Reserve Banks devoted much attention during the year 1915 related to the establishment of a check
clearing and collection system. This problem was to be one
of the most difficult which was ever presented to the Board,

CHECK CLEARING SYSTEM

and events have proved that it could not be easily or speedily
solved. Even before the passage of the Federal Reserve Act,
a large number of banks, those located in small towns especially, were outspoken in their opposition to any steps which
would tend to the abolition of what they called their 'exchange charges'; that is, a charge that they had been accustomed to make in remitting their own checks drawn on correspondent banks in larger cities in payment of checks on
themselves which had been forwarded by holders residing
elsewhere. In every step taken by the Board and the Federal Reserve Banks to establish a universal par clearance
system, they were confronted with persistent opposition
which finally culminated in long-drawn-out litigation. In a
subsequent chapter will be found a review of the successive
steps which were taken to establish an efficient system for
par clearance of checks by Federal Reserve Banks, as well as
of the litigation which followed.
During the year 1915 some of the collateral effects of the
war in Europe became increasingly noticeable in Washington. A t the time of the outbreak of the war, the President
issued a proclamation enjoining strict neutrality, but it was
impossible to smother human preferences and prejudices.
Social amenities in Washington cut more of a figure in current affairs than they do elsewhere. It is not unusual for
matters of national, and even international, importance to
be discussed over coffee-cups and cigars after dinner at the
home of some official or unofficial hostess in Washington.
Great care was exercised by those giving receptions or dinners not to invite at the same time those whose sympathies
were with the Allies and those who were pro-German in their
feelings. The diplomatic corps was divided into two distinct
parts, and, instead of there being the usual diplomatic dinner at the White House in the winter of 1915-16, there were
two such dinners; one each to the envoys of the belligerent
groups, with the neutral ambassadors and ministers distributed between the two. Official circles were supposed to be

52 THE FEDERAL RESERVE SYSTEM
neutral, and while the preponderance of sentiment in Congressional and social circles was pro-Ally, there were prior
to the sinking of the Lusitania not a few partisans of the
German cause. While that event changed the feelings of
many, there were nevertheless some prominent German sympathizers up to the time of our own entry into the war
in 1917.
There were many evidences of propaganda work in
behalf of the German as well as of the Allied cause, but it
seemed to me that the German propaganda was far more
insidious and persistent.
The Allies had maintained an effective blockade of the
German ports ever since the beginning of the war, while the
German counter-offensive — the submarine terror — was
not nearly so effective in 1915 as it afterward became. England and France particularly were importing from this country large quantities, not only of foodstuffs, but of metals and
munitions of war. Cotton began to be used in appreciable
quantities in the manufacture of explosives such as guncotton, and it appeared that large quantities were getting into
Germany through the port of Gothenburg, Sweden.
There appeared before the Federal Reserve Board on
several occasions during the year a delegation of about a
half-dozen men who called themselves Labor's National
Peace Council. These people endeavored to convince the
Board that it was its duty to declare as ineligible for rediscount or purchase by Federal Reserve Banks all paper growing out of the exportation of war material or munitions.
There were at the same time rumors that the British
Government proposed to issue an order making cotton an
absolute contraband of war, and claiming the right of search
and seizure, in order to prevent that commodity from being
taken into those neutral ports from which it might enter the
German lines. The cotton market had recovered to some extent from its extreme depression of the previous autumn,
and the better grades were selling at from eight to nine

EXPORTS OF WAR MUNITIONS
cents a pound. Southern producers felt that the effect of any
further restrictions upon the export \>f cotton would be unfavorable to them, and some of the Southern Senators and
Representatives were insisting that if cotton was placed on
the contraband list by Great Britain, the United States
Government should retaliate by putting an embargo upon
shipments of war material and munitions.
Meanwhile, bankers' syndicates were arranging for the
flotation of both long- and short-term loans in the United
States for the benefit of belligerent powers, but mainly for
British and French account. The Board was not concerned
directly with long-term obligations, for the Federal Reserve
Act expressly prohibits Federal Reserve Banks from financing purchases of any bonds except those of the United
States.
There were, however, some short-time credits of the type
technically known as 'revolving credits,' the eligibility of
which the Board was asked to consider. It was proposed
that drafts be drawn against shipments of goods abroad,
having a maturity of three months, as provided by the
statute, with the understanding that there might be three
successive renewals. The question submitted to the Board
was whether renewal agreements, if the Federal Reserve
Banks were not a party to them, affected the eligibility of
the paper. There was also a question whether these drafts
were drawn to finance exportations of munitions, and
whether, in such event, the Board should declare them ineligible. The Board decided that munitions and war material were 'goods, wares, or merchandise' within the meaning
of the Act, and that drafts drawn against such shipments,
if otherwise eligible under the terms of the Act, were not
rendered ineligible by reason of the fact that the 1 goods,
wares, or merchandise' happened to be war munitions. This
was based upon the conclusion that it was the province of
the President and the Department of State, and not of the
Board, to determine whether shipments of munitions should

54 THE FEDERAL RESERVE SYSTEM
be made from this country to nationals of belligerent
powers.
The price of cotton, which had advanced from six cents a
pound in December, 1914, to about nine cents early in June,
1915, declined during the months of June and July, and
when it had reacted to eight cents, much alarm was felt in
the cotton-producing sections. Heavy losses had been incurred by cotton producers because of the drastic decline in
1914, and it was felt that, unless the new crop could be sold
on a basis of at least ten cents a pound, financial distress
throughout the South would be aggravated. German propagandists, no doubt, made the most of this situation, for the
decline in cotton was associated in the public mind with the
report that the British Government intended to put cotton
on the contraband list. As has already been stated, some of
the Southern Senators and Representatives were insisting
that, if this were done, our Government should put an
embargo on the shipment abroad of munitions.
Sir Richard Crawford, who was the commercial advisor of
the British Embassy, used to call at my office quite frequently, and he seemed to be especially interested in the
cotton situation. One morning late in July he came to see
me and said that the British Ambassador, Sir Cecil SpringRice, would like to have me take tea with him at the Embassy that afternoon. I called there at five o'clock, and, after
insisting that I follow his example and doff my coat, the
Ambassador came immediately to the point. He stated that
the British Government had no desire whatever to injure
the South, but, as Germany was getting so much cotton
through neutral ports, it had become absolutely necessary
to declare it a contraband. It would be very embarrassing,
he said, to have an embargo placed upon the shipment of
munitions, but that, come what may, his Government would
be compelled to put cotton on the contraband list. He had
asked me to come to see him as an individual and as a Southern man, he said, and he wished particularly to know whether

COTTON DECLARED CONTRABAND
the South would be benefited by a delay of sixty days of the
proposed order in council, which was even then ready to be
signed.
I replied that I was of the opinion that there would be no
advantage to the South in delaying for sixty days the order
making cotton contraband, for by that time the new crop
would be coming in rapidly, and the market would have to
sustain not only the shock occasioned by the order, but also
the weight of largely increased offerings of cotton. I suggested that the order be signed promptly and that it be made
public the following Saturday afternoon after the close of
the market, and that the British Government take steps to
give strong support to contracts for fall deliveries the following Monday morning on the Liverpool, New York, and
New Orleans Cotton Exchanges. I suggested that this support be continued steadily for some time with the view of
forcing prices beyond the ten-cent level. If this could be
done, I felt sure that there would be no agitation in the
South in favor of an embargo on exports of munitions.
The order in council was signed the next Saturday afternoon. The markets in Liverpool, New York, and New Orleans were strong the following Monday, and in all of them
cotton advanced steadily day by day almost without reaction, until, in November, the quotations were above twelve
cents a pound. As I had predicted, Southern agitation for
an embargo on shipments of munitions ceased.
The acquaintance which I formed at this time with Sir
Cecil Spring-Rice ripened into a personal friendship, the
memories of which are most pleasant. The Ambassador was
entirely lacking in the aggressiveness and effrontery which
characterized some of the envoys at that time. He was
modest and unassuming in his demeanor, and it was sometimes said that his diplomacy was of the negative type.
However this may be, he was an able representative of his
Government, and a most attractive personality. He was a
good raconteur and his stories of some of his diplomatic

56 THE FEDERAL RESERVE SYSTEM
experiences were most interesting. He told me on one occasion that his first assignment as ambassador was to the
Court of Czar Nicholas at St. Petersburg. This was in 1906
when Mr. Asquith was the British Prime Minister. The
Ambassador said that, in accordance with custom, before
leaving for his post he called on King Edward VII, in order
to receive any personal messages which the King might wish
to have delivered to the Czar. The conversation turned to
the autocratic powers of the Emperor of Russia as contrasted with the limited actual authority of a constitutional king, and in parting King Edward said, ' Y o u tell
Nicholas that after all I am better off than he is; for if it
rains in Siberia it is his fault, while if it rains in Scotland it is Asquith's fault.' Subsequent events certainly
proved the soundness of King Edward's philosophy.
The Federal Reserve Board in its annual report for 1915
gives the following account of the steps it took during the
summer to assist the orderly marketing of cotton and other
staple crops:
Because of the difficult international conditions, the Federal
Reserve Board early in the summer felt that it would be advisable
to be prepared for any contingency that might arise in connection
with the marketing of the cotton crop. Fears for the situation
were widespread in the South, some pessimistic observers predicting a repetition of the disastrous experiences of 1914. The Board,
therefore, in June, 1915, appointed a special committee to study
the condition and needs of the cotton-growing districts. The committee, realizing the importance of fostering a financial condition
in which producers would not be obliged to sacrifice their cotton,
but would be assisted in the gradual and orderly marketing of the
crop, began its work by investigating warehouse facilities in the
cotton belt and by making a careful study of the laws governing
warehousing in the Southern States. It also informed itself regarding the extent of crop diversification, which early in the year had
been strongly urged by the Department of Agriculture and by
bankers' associations in the South. It ascertained that the cotton
acreage had been greatly reduced and that food crops had been
planted to a greater extent than in previous years, and it was not

COMMODITY PAPER REGULATION
long in reaching the conclusion that the yield of cotton would be
much less than was the case in 1914. Finding the storage facilities
for such portion of the crop as might have to be carried over generally adequate, it recommended the creation of a special kind of
accommodation to assist those producers who, having made their
crop, might desire temporarily to withhold a portion of it from the
market. The committee entertained the view that warehouse receipts for cotton, grain, and other staple, non-perishable agricultural products of a readily marketable character, form an excellent
basis for bank loans, particularly as under the terms of the Federal
Reserve Act and the regulations of the Board, notes thus secured
are eligible for rediscount by Federal Reserve Banks.
During the summer, the committee developed a method by
which producers could secure low rates upon loans secured in this
manner, and in order to encourage cooperation between member
banks and producers, the Board issued on September 3, 1915, its
commodity paper regulation which provided that notes secured by
non-perishable staple commodities, having a specified date of maturity, and upon which member banks had not charged a rate of
interest or discount, including all commissions, of more than six
per cent per annum, should be eligible for rediscount in Federal
Reserve Banks at a preferential rate. It should be especially noted
that this commodity rate, so called, was not confined to any section of the country or to loans secured by any one commodity, but
was general in its nature. It applied not to cotton alone, but to
other staple products, such as grain, sugar, and wool. It was, in
fact, adopted by several of the reserve banks, some of them, however, receiving but little business under it owing to the abundance
of funds in member banks.
The Board, moreover, in the exercise of the powers conferred
upon it by the Federal Reserve Act, was fully prepared to set in
operation, if it should become necessary, at rates to be fixed by it,
the machinery of interbank rediscounting, in order to make available for Federal Reserve Banks requiring larger resources the available funds of other reserve banks, the collective strength of the reserve system as a whole being far in excess of any demands that
might reasonably be expected to be brought to bear upon it at
that time.
The Board's commodity paper regulation was issued September 3,1915, well before the time when the movement of the cotton
crop could be expected to give rise to drafts upon the southern
banks, and it was some time, therefore, before any considerable

THE FEDERAL RESERVE SYSTEM

number of applications for loans at the commodity rate was made.
During the month of November the southern reserve banks converted many of their loans into the commodity form. Such loans
aggregated $10,300,000 to the end of the year, $7,500,000 being
the volume outstanding on December 30, 1915.
The effect of the commodity paper regulation was mainly anticipatory and protective. The certain assurance that whatever funds
might be necessary for the gradual and orderly marketing of the
cotton crop would be available at moderate rates had an immediate and stimulating effect on sentiment. Other factors which contributed to the same result were the evidences of an early and active
buying movement and the realization that the cotton yield would
be much less than that of 1914* Within sixty days, prices advanced
from eight cents to twelve cents per pound. There was a steady
movement of the staple to primary markets, the price of cotton
seed advanced to a figure that added from $20 to $25 a bale to the
farmer's income, and comparatively little cotton had to be carried
by banks for producers.

It is difficult, however, to find any real justification for
preferential rates on commodity paper. They were in force
at three or four of the banks for two years, but were finally
suspended in December, 1917. A majority of the Board
then regarded them as unsound in principle, and they were
found to be of practically no benefit to producers, having
been availed of very little. In most of the agricultural States
banks may legally charge more than six per cent interest,
and outside of the larger centers in those States banks generally were unwilling to make loans at a six per cent rate,
particularly where they received no compensating deposits.
It was also feared in 1917 that the special commodity rate
might have a tendency in some places to promote speculative holdings of commodities which were needed in the conduct of the war. There was never, however, any difference
of opinion among members of the Board as to the propriety
of encouraging gradual and orderly marketing of staple
crops.
One of the important developments of the year 1915
was the establishment by the Federal Reserve Board of

THE GOLD SETTLEMENT FUND

a gold fund for the immediate settlement of balances arising out of transactions among the twelve Federal Reserve
Banks.
Section 16 of the Federal Reserve Act authorizes the Federal Reserve Board, at its discretion, to exercise the functions of a clearing-house for the Federal Reserve Banks.
Pursuant to this authority, the Board on May 8,1915, issued
a regulation covering the establishment and operation of a
gold fund. Each Federal Reserve Bank was required to deposit with the Treasurer of the United States at Washington,
or at any Sub-Treasury, the sum of $1,000,000 plus the net
amount of its indebtedness to other Federal Reserve Banks.
The Treasury Department cooperated with the Board in operating this fund, and the several assistant treasurers were
instructed to forward telegraphic advice of deposits received
to the Treasurer of the United States at Washington, who in
turn would issue gold order certificates in the denomination
of $10,000, payable to the Federal Reserve Board.
In the beginning, settlements were made on Thursday of
each week. On Wednesday evening each Federal Reserve
Bank transmitted to the Board advice of the amount due to
it by, or by it to, every other Federal Reserve Bank. After
completion of the settlement, a telegram would be sent to
each bank giving the amounts which other Federal Reserve
Banks had reported as due, together with the net amount by
which it was debtor or creditor at the clearing. Upon receipt of this telegram each bank charged the accounts of
other Federal Reserve Banks with the amounts reported due
by them, and credited their accounts with the amounts which
were due to them, the debits in each case having been extinguished by the operation of settling and the transfer of
title to gold held in the gold settlement fund. The principal
object of the fund was to make unnecessary the shipment of
funds by one Federal Reserve Bank to another.
Subsequently the Federal Reserve Agents' fund was established, this fund consisting of gold held by Federal Reserve

THE FEDERAL RESERVE SYSTEM

Agents to reduce the liability of Federal Reserve Banks
against Federal Reserve notes outstanding.
In 1916 the Act was amended to permit the Treasurer of
the United States to carry a special account on his books to
the credit of the Federal Reserve Board, as agent for the respective Federal Reserve Banks, payments being made by
checks signed by officials of the Board.
Upon the leasing of a system of private wires between all
Federal Reserve Banks and branches and the Federal Reserve Board, the operation of the fund was greatly simplified,
and settlements were made daily instead of weekly. Arrangements were made also with the Treasury to assume direct
custody of the fund as a special gold account, and, while the
fund was intended originally as a means of making immediate settlements of balances between Federal Reserve Banks,
its scope was afterward extended, and provision was made
in 1921 for a daily settlement between Federal Reserve Banks
for Federal Reserve notes, whether fit for use and returned
to the bank of issue, or unfit for use and returned to the
Treasury for redemption. Transfers were also arranged for
national banks to their five per cent redemption fund against
shipments of national bank notes.
The combined clearings and transfers through the gold
settlement fund from 1915 to 1922 were as follows:
1915- •. .$1,052,649,000
19x6
5.533.966,000
1917
27,154,704,000
1918....50,251,592,000

1 9 1 9 . . . .$73,984,252,000
1920
92,625,805,000
1921
68,223,882,000
1922
76,489,962,000

making a grand total of $395,316,812,000. The average cost
of making these transfers, including rental of leased telegraphic wires and clerical services, was less than one half of
a cent per thousand dollars.

CHAPTER

PAR CLEARANCE OF CHECKS

has already been made to the problems incident
to the establishment of a check clearing and collection system. The framers of the Federal Reserve Act foresaw that if
Federal Reserve Banks were to act as reserve depositories for
all member banks, it would be necessary for the Reserve
Banks to receive, as deposits from member banks, checks as
well as gold and currency. The establishment of a clearing
system, however, proved to be no simple task, and before
outlining the steps which were taken, and the problems which
were encountered in this connection, it would be well to review the methods employed in making domestic exchanges
before the Federal Reserve Banks were established and the
changes which became inevitable after the passage of the
Federal Reserve Act.
Prior to December 23, 1913, the only laws of national application which were designed to regulate the operations of
banks were those sections of the Revised Statutes which are
commonly called the National Bank Act. While these were
applicable to national banks only, the State banks and trust
companies, in collecting checks deposited with them which
were drawn on banks in other places, adopted practically
the same system which was employed by the national banks.
The National Bank Law provided for central reserve cities
and for reserve cities, and banks in other towns or cities were
permitted to count, as a part of their required reserves, balances which they carried with correspondent banks in the
reserve and central reserve cities. Some of the larger State
banks and trust companies also received deposits from country banks, and all country banks carried balances with one
or more banks in the larger cities. While many of the soREFERENCE

62 THE FEDERAL RESERVE SYSTEM
called country banks maintained reciprocal accounts with
banks in their immediate vicinity for mutual convenience in
making collection of checks, it was the general practice of all
country banks to send checks drawn on banks in more distant places to their city correspondents. City banks as a rule
adopted the practice of sending checks for direct collection
only to banks which maintained accounts with them, and
would in addition send to such banks checks drawn upon
other banks in their State or in their immediate vicinity.
As a rule the checks sent in this way for collection were not
charged by the city banks against the regular accounts of
their country bank correspondents, but were entered in a separate account called the 'collection account.' It was the usual
practice of the country banks, in remitting or giving credit
for items received from city bank correspondents, to make a
so-called exchange charge of one tenth to one quarter of one
per cent. Out of these charges the country banks in the
course of a year would make substantial apparent profits, but
these profits were more apparent than real, when it is considered that in order to get this business the country banks
were obliged to maintain balances with the city banks on
which they received interest usually at a rate of two per cent
per annum, which otherwise could be loaned to customers at
six per cent or more; and that, in order to maintain these
balances with the city bank correspondents, country banks
were often obliged to buy exchange at a premium or else bear
the expense of shipping currency. This routine resulted in
circuitous methods of collection, so that frequently checks
in process of collection were outstanding three or four times
as long as would have been the case if they had been sent direct. In the course of an investigation made by the Federal
Reserve Board, it was brought out that there were frequent
cases where a check originating at a city bank would in process of collection come back to another bank in the same
city, or to a bank in a near-by city, before it was finally forwarded for presentation to the bank on which it was drawn.

PAR CLEARANCE OF CHECKS

I recall an instance where a national bank in Rochester, New
York, sent a check drawn on a bank in North Birmingham,
Alabama, to a correspondent bank in New York City, by
which it was sent to a bank in Jacksonville, Florida, which
sent it for collection to a bank in Philadelphia, which in turn
sent it to a bank in Baltimore, which forwarded it to a bank
in Cincinnati, which bank sent it to a bank in Birmingham,
by which bank final collection was made. Not only were the
methods of collection circuitous, but the routine resulted in
the creation of fictitious reserve balances. In the case above
cited, had the national bank in Rochester, New York, sent
the check direct to the North Birmingham bank for collection, or had it sent it to a bank not an approved reserve
agent, the amount of the check would not have been included in the Rochester bank's lawful reserve; but as it
was sent to its correspondent bank in New York City, its
approved reserve agent, and was charged to the account of
the New York bank at the time it had left Rochester, it
counted from that moment as a part of the Rochester
bank's legal reserve, although more than two weeks elapsed
before it was finally collected.
The Federal Reserve Act as amended has made substantial reductions in bank reserves, but permits member banks
to count as lawful reserve only collected balances in their
respective Federal Reserve Banks. Consequently, checks in
transit, or 'float, 1 to use a technical term, no longer count as
reserve, and this element of inflation has been eliminated.
The Federal Reserve Board conceived it to be its duty under
the terms of the Act to establish a par clearance system for
making domestic exchanges throughout the country, and, in
carrying this plan into effect, met with determined opposition from many of the smaller banks which were reluctant to
give up their profits, real or imaginary, which they had derived under the old system. Some of the city banks also
looked upon the plan as an encroachment upon their functions and as a menace to their relations with country bank

THE FEDERAL RESERVE SYSTEM

correspondents. A t the outset the Board was hampered by
lack of facilities, which were afterward provided, such as the
leased wire system and the daily clearing through the gold
settlement fund, and no attempt was made to establish a
comprehensive par clearance system, but instead the plan
was to establish a voluntary system, necessarily of limited
scope and efficiency. One of the first suggestions made was
that Federal Reserve Banks should give immediate credit at
par for all checks deposited with them, and the checks on
member banks should be charged as received against their
reserve accounts. It was soon realized, however, that this
procedure would not be equitable, as it would be tantamount
to forcing a bank to pay a check in advance of actual presentation. It was finally decided to give deferred credit, based
upon the time in transit from the Reserve Bank to the banks
upon which the checks were drawn. A t first the actual initiative for the inauguration of a check collection system was
left to the respective Federal Reserve Banks, which established a voluntary system of clearance and collection in which
member banks might or might not participate as they chose.
Experience, however, soon demonstrated that this plan was
not sufficiently comprehensive and that there were many
factors militating against its success. The number of member banks assenting to the plan did not increase materially
and some districts declined. The plan adopted proved to be
a hardship to some banks, while it did not attempt and
seemed unlikely ever to reach such a plane of efficiency as to
make it a substantial factor in making domestic exchanges.
For these reasons the Board decided in April, 1916, to establish a more uniform and more comprehensive system, and it
formulated a new plan which was put into effect by the Federal Reserve Banks on July 15th. Under the revised plan,
member banks were left free to carry accounts for collection
purposes with other banks, but were required to pay, without deduction, checks drawn upon themselves upon presentation at their own counters. Remittances of such checks

PAR CLEARANCE OF CHECKS

through the mail to a member bank by the Federal Reserve
Bank was construed as presentation at the member bank's
counter, and the member bank was requested to settle with
the Federal Reserve Bank for these checks by permitting a
charge against its reserve account, or by sending a check on
some other bank acceptable to the Federal Reserve Bank,
The member banks were also allowed to make remittances
of currency to the Federal Reserve Banks with the understanding that the expense of transportation would be borne
by the Reserve Bank. This plan provided also that a small
service charge, not to exceed two cents per item, be made at
stated intervals against those banks which sent to the Federal Reserve Banks checks on other banks for collection and
credit. Member banks were not deprived of any income
which they were accustomed to receive from the collection
of drafts (other than bank checks) or from the purchase or
discount of commercial bills of exchange.
It was estimated by the Board that, as soon as a new clearing system could be put into operation, checks drawn upon
about fifteen thousand national banks, State banks, and
trust companies throughout the United States would be collected by the Federal Reserve Banks at par, subject to the
small service charge to which reference has been made. Some
members of the Board were optimistic enough to believe
that in a short time checks drawn upon practically all banks
in the United States could be collected at par by the Federal
Reserve Banks, upon the theory that a bank would be likely
to lose desirable business when checks drawn upon it would
be at a discount outside of its own neighborhood, while
checks drawn on a near-by competitor would be taken at
par. If the merchants and manufacturers of the country and
other recipients of checks had insisted that checks sent them
in payment of bills be free of exchange, perhaps this roseate
anticipation would have been realized; but in many cases
large dealers were able to induce banks with which they deposited to absorb collection chaises, and in other cases they

66 THE FEDERAL RESERVE SYSTEM
were not willing to return a check, say for a hundred dollars,
sent in payment of an account, merely because its collection
would involve a charge of from ten to twenty-five cents,
nor did they care to risk losing the good-will of a customer
in a controversy over an exchange charge.
In June, 1917, the Federal Reserve Act was amended so
as to allow Federal Reserve Banks to receive accounts for
collection and exchange purposes from any non-member
banks and trust companies which might agree to remit to
Federal Reserve Banks at par for checks drawn upon themselves, and which were willing in addition to maintain balances with the Federal Reserve Banks sufficient to offset the
items in transit held for their account by the Federal Reserve
Banks. Very few non-member banks availed themselves of
this privilege, however, and the Federal Reserve Banks were
still unable to collect checks drawn on many non-member
banks except at a heavy expense. Determined effort was
made in the interest of non-member banks and some member banks to amend the Federal Reserve Act by providing
for a standardized exchange charge not to exceed one tenth
of one per cent, to be made by any bank so desiring against
Federal Reserve Banks for checks sent for collection. This
effort, however, was not successful, and the Act as finally
amended provided that a member or non-member bank may
make
reasonable charges, to be determined and regulated by the Federal
Reserve Board, but in no case to exceed ten cents per hundred dollars or fraction thereof, based on the total of checks and drafts presented at any one time, for collection or payment of checks and
drafts and remission therefor by exchange or otherwise; but no
such charges shall be made against the Federal Reserve Banks.

In the opinion of the Attorney-General of the United
States, this required member banks to make remittances
without deduction for checks sent them by Federal Reserve
Banks, but this requirement did not apply to non-member
banks. The Attorney-General held also that Federal Re-

PAR CLEARANCE OF CHECKS

serve Banks were not permitted to pay exchange charges to
banks, although they might decline to receive checks which
they could collect only by sending to banks which would impose a charge. Consequently, the difficulties in the way of
the establishment of a comprehensive par clearance system,
applicable to member and non-member banks alike, were
not resolved by this legislation. With the view of making
the clearance system more attractive, there was put into operation by all Federal Reserve Banks a system of transfer
drafts by which any member bank might have its check
drawn upon the Federal Reserve Bank of its district, paid
immediately without time allowance or deduction at any
other Federal Reserve Bank. In this way every member
bank was given the same exchange facilities it would have
had if it carried accounts in each of the twelve Federal Reserve cities; but little use, however, was ever made of these
facilities.
During the year 1918 the conclusion was reached that
every effort should be made to increase the number of banks
on the par list. It was felt that the public and the banks
themselves needed a system which should be able to collect
all items. A t the beginning of the year 1919 checks on two
thirds of all banks in the country could be collected at par
through the Federal Reserve Banks, and the banks which
had agreed to remit in this way represented about ninety
per cent of the banking resources of the country. Yet the
number of banks which would not agree to remit at par, including some of substantial size and located in important
cities, was sufficiently large to make many banks hesitate to
use the Federal Reserve collection system because of the
number of items which could not be collected by the Federal
Reserve Banks.
The service charge which was at first made by Federal Reserve Banks for collecting checks was soon modified and later
on was entirely abrogated. Additional facilities were given
member banks and their customers through the absorption

THE FEDERAL RESERVE SYSTEM

by the Federal Reserve Banks of all costs of postage, insurance, and express charges incident to the shipments of currency to and from member banks; and the same facilities
were extended to those non-member banks which maintained
clearing accounts. Other non-member banks were provided
with stamped envelopes for use in returning remittances for
checks sent them, and all their expenses incident to shipments of currency made in payment of items sent for collection were borne by the Federal Reserve Banks. Many nonmember banks, however, still persisted in opposition to the
par clearance system despite repeated efforts to induce them
to make remittances without charge for checks sent them by
Federal Reserve Banks. These non-member banks, however, were able to avail themselves of the facilities of the par
clearance system, and, while they were able to collect their
own items without apparent expense through some correspondent bank, they were in many cases disinclined to reciprocate and refused to give up their profits from so-called exchange charges, which profits, as has already been explained,
were much overestimated. It was therefore decided that the
Federal Reserve Banks should undertake to collect all checks
received from member banks, and that, in cases where the
drawee banks declined to remit at par, checks should be collected through an intermediate bank, through an express
company, or by means of personal presentation. It was, of
course, anticipated that any method of collection except
through a bank would necessarily be expensive, but in view
of the demonstrated value of the par clearance system and
of the large number of banks which had assented to it, it was
hoped that the opposition of the non-assenting banks would
gradually disappear. This hope, however, proved to be illusive, and the opposition became more aggressive and more
thoroughly organized. Although the administrative officers
of the American Bankers' Association have always assumed
a friendly attitude toward the Federal Reserve System, so
large a portion of the membership of that Association is com-

PAR CLEARANCE OF CHECKS 69
posed of banks which prefer the old method of collection
that the Association has been put in the position, on the one
hand, of according cordial support to the Federal Reserve
System, and on the other of fostering opposition to one of its
important functions. A t an annual meeting of the Association a committee of twenty-five was formed, which was afterwards reduced to five, and this committee has been active in
throwing every possible obstacle in the way of the establishment of a comprehensive par clearance system by the Federal Reserve Banks. Due partly to efforts of this committee,
legislation was obtained in a number of States, mainly in the
South, requiring or permitting State banks to impose a collection charge, and numerous proceedings have been instituted in the courts. In most of the legislation to which
reference has been made, it was provided that there shall be
no right of action, either at law or in equity, against any
bank for refusal to pay a check when such refusal is based
alone on non-payment of exchange.
Meanwhile, in several of the districts, the Federal Reserve
Banks had appointed agents at various points to whom they
would send checks for presentation to drawee banks which
refused to remit at par.
The lower courts generally decided all questions raised in
the litigation in favor of the Federal Reserve Banks, and,
despite adverse legislation, the Federal Reserve Banks on
January I, 1921, had on their par lists all but 1755 of the
30*523 banks at that time existing in the United States. All
these banks were located in seven States in the Southeast:
Tennessee, South Carolina, Louisiana, Mississippi, Alabama,
Georgia, and Florida. During the year 1921 the legislatures
of North Carolina, Tennessee, and Florida, in addition to the
five States which had already enacted similar laws, put upon
the statute books of their respective States laws designed to
require or permit banks to make charges for collecting and
remitting checks which are presented to the payer bank
through or by any bank, banker, trust company, Federal

THE FEDERAL RESERVE SYSTEM

Reserve Bank, post-office, express company, or any collection agency, or by any agency whatsoever; and the legislature of Louisiana made it a misdemeanor punishable by fine
or imprisonment for any person to give any notice of the
non-payment of any check drawn on any bank in that State
after such bank had offered to pay such check without exchange-charge deduction. The North Carolina law made
it lawful for all banks and trust companies in that State to
charge a fee not in excess of one eighth of one pef cent on remittances covering checks, and provided also that all checks
drawn on such banks and trust companies
shall, unless specified on the face thereof to the contrary by the
maker or makers thereof, be payable at the option of the drawee
bank, in exchange drawn on the reserve deposits of said drawee
bank when any such check is presented by or through any Federal
Reserve Bank, post-office, or express company, or any respective
agents thereof.

Following the enactment of this law a number of North
Carolina State banks and trust companies obtained an injunction restraining the Federal Reserve Bank of Richmond
from refusing to accept in payment, when presented, checks
drawn on correspondent banks, and from returning checks
to their drawers as dishonored because the drawee banks
refused to pay them in cash. The Supreme Court of North
Carolina held that this legislation was unconstitutional and
dissolved the injunction, but the case was appealed to the
Supreme Court of the United States, which in June, 1923, in
an opinion rendered by Justice Brandeis (Mr. Justice Sutherland and Mr. Justice Van Devanter dissenting) reversed
the opinion of the Supreme Court of North Carolina and upheld the validity of the statute of that State. A t the same
time, however, the Supreme Court rendered an opinion dismissing a complaint which had been made against the Federal Reserve Bank of Atlanta in which the contention had
been made that it was ultra vires of Federal Reserve Banks
to collect checks on banks which are not members of the

PAR CLEARANCE OF CHECKS 71
System or affiliated with it through establishing an exchange
balance, and which had definitely refused to assent to clearance at par. The Court held that
wherever collection can be made by the Federal Reserve Bank
without paying exchange neither the common law nor the Federal
Reserve Act precludes their undertaking it; if it can be done con*
sistently with the rights of the country banks already determined
in this case. . . . Federal Reserve Banks are thus authorized by
Congress to collect, for other reserve banks, for member banks,
and for affiliated non-members, checks on any bank within their
respective districts, if the check is payable on presentation and can
in fact be collected consistently with the legal rights of the drawee
without paying an exchange charge. Within these limits Federal
Reserve Banks have ordinarily the same right to present a check
to the drawee bank for payment over the counter, as any other
bank, State or national, would have.
In the North Carolina case the Supreme Court held that
Congress did not in terms confer upon the Federal Reserve Board
or the Federal Reserve Banks a duty to establish a universal par
clearance and collection of checks; and there is nothing in the original act or in any amendment from which such duty to compel its
adoption may be inferred. . . . The Federal Reserve Act does not
command or compel these State banks to forego any right they
may have under the State laws to make charges in connection with
the payment of checks drawn upon them. The act merely offers
the clearing and collection facilities of the Federal Reserve Banks
upon specified conditions. If the State banks refuse to comply with
the conditions by insisting upon making charges against the Federal Reserve Banks, the result will simply be, so far as the Federal
Reserve Act is concerned, that since the Federal Reserve Banks
cannot pay these charges they cannot clear or collect checks on
banks demanding such payments from them.
As a result of the legislation to which reference has been
made, and following the opinion of the Supreme Court, Federal Reserve Banks no longer maintain agencies for the presentation of checks to non-member banks which refuse to
remit at par. They have revised their par lists omitting the
names of such banks and decline to receive on deposit or for

THE FEDERAL RESERVE SYSTEM

collection checks drawn upon them. The result has been
merely an abridgment of the par lists, although there has
been increasing volume of business. While it is manifestly
impossible, in the present circumstances, to establish a universal par clearance system except with the consent of all
banks, the system now in operation, incomplete though it be,
is efficient and performs a service of great value to the commerce and industry of the country. During my connection
with the Board it was pointed out on several occasions that
in their origin exchange charges were justified because of the
necessity for and the high cost of transporting currency, but
that under
existing conditions those charges can be justified upon no scientific or economic principle, since the payment of chccks at places
other than where the drawee bank is located involves little expense
and that is borne by the Federal Reserve Banks. Even the banks
which decline to remit at par to the Federal Reserve Banks receive
the benefits of the Federal Reserve check clearing facilities by
having the checks which they receive collected through a correspondent bank which is a member of the Federal Reserve System,
although they contribute nothing to the strength of the System.
To the extent that the practice of charging exchange is continued
under the operation of the Federal Reserve System, it is an anachronism which permits the charging banks to impose a charge
upon commerce and industry after they have ceased to perform
the service which in former times justified the imposition of such
a charge.1
1

Annual Report, 1920.

CHAPTER VI
CHANGES IN BOARD'S ORGANIZATION'—ACCEPTANCE CREDITS FOR
FOREIGN ACCOUNT — BOARD'S STATEMENT REGARDING
SALES OF BRITISH TREASURY BILLS

THE year 1916 was one of great commercial and industrial
activity in the United States and both capital and labor
found full and remunerative employment. The country was
feeling the stimulus of European demands occasioned by the
war, and of the large influx of gold. High prices for agricultural products and a general and well-sustained demand for
them brought to the farmers an unprecedented degree of
prosperity. Those engaged in all lines of business and industry were unusually strong and independent financially, and,
because of the increasing volume of deposits, member banks
generally had no occasion to rediscount, and therefore the
Federal Reserve Banks were able to maintain very strong
reserves.
Before the term of Governor Hamlin as a member of the
Board expired on August 9 , 1 9 1 6 , he had been nominated by
the President, and promptly confirmed by the Senate, for a
full term of ten years. There had developed a feeling, however, that the added duties and responsibilities of the governorship of the Board should not be imposed indefinitely
upon any one member, but that there should be rotation;
and the idea was advanced that each Board member during
the last two years of his term should serve as Governor of
the Board. The law, however, does not permit the Board to
choose its own executive officer; instead, he is designated by,
and holds his office at, the pleasure of the President. A t the
suggestion of the Secretary of the Treasury, I was designated
by the President to succeed Mr. Hamlin as Governor, although, if the plan of orderly rotation had been adopted, I
should not have been called upon to serve in that position

THE FEDERAL RESERVE SYSTEM

until four years later. A t the same time Mr. Warburg was
designated Vice-Governor in place of Mr. Delano.
The personnel of the Board remained unchanged and
there were no marked changes of policy as a result of the new
designations, although there were some modifications in operating methods. During the first two years, the Board had
been divided into a number of committees. The practice had
been to refer all questions, and various routine matters, to
the appropriate committee for consideration and report, before action by the Board was taken. This system worked
well in the beginning, but as it was evident that the Federal Reserve System was approaching a period of much
greater activity, it was deemed expedient to adopt some
plan of organization which would not delay the routine
work of the Board. Accordingly, some of the committees
were dissolved, and the conduct of purely routine and administrative matters devolved more directly upon the Governor, who under the law is 'the active executive officer'
of the Board, and upon the Executive Committee which
was composed of the Governor, the Vice-Governor, and, in
rotation, a third member of the Board. All the acts of the
Governor and of the Executive Committee were, however,
reported to the Board for ratification, and no important
steps were ever taken without the express authority of the
Board. The Board was never under one-man domination.
The Governors of the Federal Reserve Banks had from
the beginning been accustomed to hold frequent conferences
at which their own administrative problems were considered,
and these conferences were of great value in bringing about
better and more uniform methods of operation. It had been
the custom for these conferences to be held every three or
four months upon the initiative of the Federal Reserve Bank
Governors themselves, and at places to be selected by them.
The Federal Reserve Board would be notified that a conference was to be held in Minneapolis, or Chicago, as the case
might be, on a certain date, and would be invited to send

ACCEPTANCE CREDITS

one or more members to attend the meeting. Much work of
great benefit to the System was accomplished at these meetings, and there was never any intention to have them discontinued. The Federal Reserve Banks are autonomous institutions, each under the control of its own directors, but
the law does not give any Federal Reserve Bank or group of
Federal Reserve Banks any authority over another. Conferences of Reserve Bank executives, therefore, can only
make suggestions, which, if relating to routine matters, are
subject to the approval of the directors of the respective
banks, and, if bearing upon broader questions of policy, require action by the Federal Reserve Board, which alone is
vested by law with supervisory powers over all Reserve
Banks. The Board decided that henceforth these conferences should be held in Washington at such times as it should
approve. For some years past only two conferences a year
have been held; always under the auspices of the Board.
This arrangement has brought about a closer contact between the Board and the bank executives, and has expedited
the business in hand.
During the autumn of 1916 there was a falling-off in the
volume of gold imports which had been very heavy since
early in the year 1915, together with a marked increase in
the volume of American credits for European account. Some
of these were in the form of acceptance credits which involved renewals, and there were also offerings of bonds and
other obligations of foreign governments and municipalities.
A t the same time it seemed more probable from week to
week that the United States would be drawn into the
European War.
Toward the end of October it was announced that the
French Government had arranged with two large trust companies in New York, which at that time were not members
of the Federal Reserve System, for an acceptance credit of
$100,000,000; the bills to be drawn in such a way as to make
them eligible for rediscount at Federal Reserve Banks. Sec-

THE FEDERAL RESERVE SYSTEM

retary McAdoo was away from Washington at the time on a
trip through the West. As he was chairman of the Federal
Reserve Board, I felt that he should be advised of this important matter, especially as the Treasury might be interested in the outcome, and I therefore wrote him under date
of October 21st, enclosing newspaper clippings, some of
which gave emphasis in their headlines to a statement that a
credit to France of $100,000,000 could be rediscounted at
Federal Reserve Banks. I stated that I thought the Board
should make some public announcement of the position of
the Federal Reserve Banks in this matter, for should the
Board, in view of the great publicity given to the proposed
credit, take no notice of statements that the acceptances,
renewable for a period of eighteen months, were available
for rediscount at Federal Reserve Banks, it would put itself,
by its silence, in the attitude of sanctioning such statements.
I requested that he telegraph me his views as to the propriety and desirability of a statement by the Board. Mr.
McAdoo replied that he thought it would be wise for the
Board to authorize a press statement such as was outlined
in my letter.
A t its meeting on October 23d the Board considered the
question of French acceptance credit and by unanimous vote
agreed that it should take some action in the matter, particularly as it had learned that circular letters had already been
sent out to five or six hundred banks or trust companies
throughout the United States. The Board, therefore, directed me to send the following telegram to all Federal Reserve Agents, which telegram was given to the press on the
following day:
Board is advised that an acceptance credit approximating one
hundred million dollars, drawn on American banks and trust companies, is about to be concluded, on ninety-day drafts, subject to
five renewals, the accepting banks committing themselves to advance the money to the foreign borrowers at five and one half per
cent per annum, plus acceptance commission of one fourth per cent

ACCEPTANCE CREDITS

for each three months. In view of widely circulated press statements that these acceptances will be eligible for rediscount or purchase by Federal Reserve Banks, Board deems it its duty to point
out that banking prudence and obligations toward general commercial interests of the country require that Federal Reserve Banks
should not acquire acceptances of this character beyond a conservative amount. This view is consistent with the Board's policy in
the past, and while it wishes, through all legitimate means, to promote the development of the American acceptance market and to
further the growth of our export trade, and while it wishes to avoid
any attitude of interference with the powers of member banks in
this respect, the Board feels, nevertheless, that it should be clearly
understood that these acceptances, which represent obligations,
for cash advances aggregating a very large amount, by the acceptors for eighteen months, cannot properly be regarded as paper
self-liquidating within a period of ninety days. If offered in excessive amounts, Federal Reserve Banks may be obliged to discriminate against or to exclude entirely acceptances of this character.
Board feels that prospective acceptors should have a clear understanding of this.

About the middle of November, Mr. H. P. Davison, a
member of the firm of J. P. Morgan & Company, and who
had recently returned from a visit to London, came to Wash*
ington and conferred with members of the Board at an informal meeting. He outlined the financial position of the
British Government. He referred to the large importations
of gold which the United States had received from abroad
since January, 19x5, and expressed the opinion that further
importations would prove a source of danger or disturbance
to this country. He expressed the view that importations
of gold should be discouraged by the extension of credits to
those financially sound foreign countries which were large
purchasers of supplies in America, and stated that his firm
proposed to offer over its counter an indefinite amount of
British Treasury bills to the American public, to banks as
well as to private investors.
After considering the matter for several days, the Board
reached the conclusion that it could not with propriety give

THE FEDERAL RESERVE SYSTEM

its endorsement to this programme, and that, however reluctant it might be to make public a statement of its views, it
was necessary to do so. As the matter had been brought to
the attention of the Board by a member of the firm which
proposed to offer the British Treasury bills, it was felt that,
should the Board remain silent, it would put itself in the
attitude of tacitly approving the proposition.
The Board was not unmindful, however, of the delicacy of
its position, for any statement by it discouraging the purchase of these securities might be embarrassing to our Government in its conduct of foreign relations. As the Secretary
of the Treasury was at the time in Arizona, it was not possible through him to ascertain the attitude of the Administration. The Board, therefore, prepared a tentative statement
which was sent with an explanatory letter to the President.
Not only was approval given to the issuance of a statement
by the Board, but certain additions to it were suggested.
The Board, therefore, on November 27, 1916, made public
the following statement relating to foreign credits. The lines
which appear in italics did not appear in the original statement considered by the Board, but were added after correspondence with the President.
In view of contradictory reports which have appeared in the
press regarding its attitude toward the purchasing by banks in
this country of Treasury bills of foreign governments, the Board
deems it a duty to define its position clearly. In making this statement the Board desires to disclaim any intention of discussing the
finances or of reflecting upon the financial stability of any nation,
but wishes it understood that it seeks to deal only with general
principles which affect all alike.
The Board does not share the view frequently expressed of late
that further importations of large amounts of gold must of necessity prove a source of danger or disturbance to this country. That
danger, the Board believes, will arise only in case the inflowing
gold should remain uncontrolled and be permitted to become the
basis of undesirable loan expansions and of inflation. There are
means, however, of controlling accessions of gold by proper and
voluntary cooperation of the banks or if need be by legislative

BRITISH TREASURY BILLS

enactment. An important step in this direction would be the anticipation of the final transfer of reserves contemplated by the
Federal Reserve Act to become effective on November 16, 1917.
This date could be advanced to February or March, 1917. Member banks would then be placed on the permanent basis of their
reserve requirements and fictitious reserves would then disappear
and the banks have a clearer conception of actual reserve and
financial conditions. It will then appear that, while a large increase
in the country's gold holdings has taken place, the expansion of
loans and deposits has been such that there will not remain any
excess of reserves, apart from the important reserve loaning power
of the Federal Reserve Banks.
In these circumstances the Board feels that member banks should
pursue a policy of keeping themselves liquid; of not loaning down
to the legal limit, but of maintaining an excess of reserves — not
with reserve agents, where their balances are loaned out and constitute no actual reserve, but in their own vaults or preferably with
their Federal Reserve Banks. The Board believes that at this time
banks should proceed with much caution in locking up their funds
in long-term obligations, or in investments which are short-term
in form or name, but which, either by contract or through force of
circumstances, may in the aggregate have to be renewed until normal conditions return. The Board does not undertake to forecast
probabilities or to specify circumstances which may become important factors in determining future conditions. Its concern and
responsibility lie primarily with the banking situation. If, however, our banking institutions have to intervene because foreign
securities are offered faster than they can be absorbed by investors— that is, their depositors—an element would be introduced
into the situation which, if not kept under control, would tend
toward instability, and ultimate injury to the economic development of this country. The natural absorbing power of the investment market supplies an important regulator of the volume of our
sales to foreign countries in excess of the goods that they send us.
The form which the most recent borrowing is taking, apart from
reference to its intrinsic merits, makes it appear particularly attractive as a banking investment. The Board, as a matter of fact,
understands that it is expected to place it primarily with banks.
In fact, it would appear so attractive that unless a broader and
national point of view be adopted, individual banks might easily
be tempted to invest in it to such an extent that the banking resources of this country employed in this manner might run into

THE FEDERAL RESERVE SYSTEM

many hundreds of millions of dollars. While the loans may be
short in form, and, severally, may be collected at maturity, the
object of the borrower must be to attempt to renew them collectively, with the result that the aggregate amount placed here will
remain until such time as it may be advantageously converted
into a long-term obligation. It would, therefore, seem as a consequence that liquid funds of our banks, which should be available
for short credit facilities to our merchants, manufacturers, and
farmers, would be exposed to the danger of being absorbed for
other purposes to a disproportionate degree, especially in view of
the fact that many of our banks and trust companies are already
carrying substantial amounts of foreign obligations, and of acceptances which they are under agreement to renew. The Board deems
it, therefore, its duty to caution the member banks that it docs not regard it in the interest of the country at this time that they invest in foreign Treasury bills of this character.
The Board does not consider that it is called upon to advise private
investors, but, as the United States is fast becoming the banker of
foreign countries in all parts of the world, it takes occasion to suggest
that the investor should receive full and authoritative data — particularly in the case of unsecured loans — in order that he may judge the
future intelligently in the light of present conditions and in conjunction with the economic developtnents of the past.
The United States has now attained a position of wealth and of
international financial power, which, in the natural course of
events, it could not have reached for a generation. We must be
careful not to impair this position of strength and independence.
While it is true that a slowing down in the process of credit extension may mean some curtailment of our abnormally stimulated
export trade to certain countries, we need not fear that our business will fall off precipitately should we become more conservative
in the matter of investing in loans, because there are still hundreds
of millions of our own and foreign securities held abroad which our
investors would be glad to take over, and, moreover, trade can be
stimulated in other directions.
In the opinion of the Board, it is the duty of our banks to remain
liquid in order that they may be able to continue to respond to our
home requirements, the nature and scope of which none can foresee, and in order that our present economic and financial strength
may be maintained when, at the end of the war, we shall wish to do
our full share in the work of international reconstruction and development which will then lie ahead of us, and when a clearer under-

BRITISH TREASURY BILLS

standing of economic conditions, as they will then exist, will enable
this country more safely and intelligently to do its proper part in
the financial rehabilitation of the world.
As was expected, this statement became the subject of
much comment, both favorable and unfavorable, in this
country. It was received in London with mingled feelings of
surprise, resentment, and consternation. Messrs. J. P. Morgan & Company announced that, in view of this statement
by a Government Board, 'of which the Secretary of the
Treasury and the Comptroller of the Currency are members,'
the British Treasury bills would be withdrawn from the
American market. In issuing this statement the Board was
prompted only by the highest motives. Sentimental considerations had no part in the action taken, for there is no doubt
that a majority of the members at the time were pro-Ally
in their sympathies. This sentiment became unanimous in
April, 1917, when the United States entered the war. Both
before and during the war there was no one who rendered
more loyal and patriotic service to the country of his adoption than did that member of the Board who happened to
have been born in the enemy's country.

CHAPTER VII
BOARD PROPOSES IMPORTANT AMENDMENTS TO A C T
RELATING TO RESERVES AND NOTE ISSUES

BY January, 1917, it had become almost a foregone conclusion that this country was soon to be drawn into the war.
Anticipating this, the Federal Reserve Board had shaped its
policies with the view of placing the Federal Reserve Banks
in the strongest possible position in order that they might
be well prepared to meet the heavy demands which inevitably would be made upon them. The Reserve Banks were
advised that they should discontinue the purchase of municipal warrants, and steps were taken in other directions to increase the gold holdings of the banks. T o this end the Board
requested Congress to amend the Federal Reserve Act in
several important particulars. Although the System had
been in operation for more than two years, the membership
was limited almost entirely to the national banks, which
controlled considerably less than half the banking resources
of the country. Repeated efforts had been made to induce
State banks and trust companies to become members, but
only about sixty had responded, and these did not include
the larger institutions. A t a conference with executives of
several large trust companies, the Board called attention to
its regulations regarding State bank membership, which had
been drawn in the most liberal terms consistent with the law.
The bank executives expressed their approval of these regulations, but pointed out that they could not have the effect
of a statute, for the Board could at any time rescind or materially alter them, and as the personnel of the Board was
subject to change, no assurance could be given against unsatisfactory changes in the regulations at some future time.
As the law then stood there was no provision for the voluntary withdrawal of a State bank or trust company which had

THE BOARD'S PROPOSED AMENDMENTS

become a member. While the Board had authority to force
such withdrawal for a violation of the law or for non-observance of the regulations, officers of banks operating under
State charters were not inclined to effect a voluntary withdrawal by becoming violators of the law.
Another objection raised was that, while State banks were
necessarily under the direct supervision of the banking departments of their respective States, they would as members
of the Federal Reserve System be to a certain extent also
under the supervision of the Comptroller of the Currency.
Thus, the State banks and trust companies as members
would be supervised by two distinct authorities, while the
national bank members would be under the supervision
only of the Comptroller of the Currency. It was pointed out
also that State bank members must comply with the reserve
requirements of the Federal Reserve Act and in addition must
carry the reserves specified in the laws of the States in which
they were located. Their legal reserves, therefore, would be
larger than those of their national bank competitors.
Upon consideration of these objections the Board became
convinced that, in order to secure the cooperation as members of any large number of State banks and trust companies, it would be necessary to amend the Act. The Board,
therefore, suggested to the Banking and Currency Committees of the Senate and House of Representatives that that
section of the Federal Reserve Act which related to membership of State banks and trust companies be amended in
order to provide that any such bank or trust company which
might desire to withdraw from membership in the Federal
Reserve System may do so after six months' written notice
to the Federal Reserve Board. A t the expiration of that
time, upon the surrender and cancellation of all its holdings
of capital stock in the Federal Reserve Bank, its membership would lapse. Precaution against excessive withdrawals,
which might be embarrassing to a Federal Reserve Bank,
was taken by a provision that no Federal Reserve Bank

THE FEDERAL RESERVE SYSTEM

should, unless under express authority of the Federal Reserve Board, cancel within the same calendar year more
than twenty-five per cent of its capital stock for the purpose
of effecting voluntary withdrawals during that year.
In order to meet the objections made against the dual supervision by the State banking departments and the Comptroller of the Currency, it was suggested that the State banks
and trust companies becoming members of the Federal Reserve System, while subject to all provisions of the Act which
relate specifically to member banks, should not be subject to
examination by the Comptroller of the Currency. It was
further suggested that subject to the provisions of the Act
and to the regulations of the Board made pursuant thereto,
any bank, becoming a member of the Federal Reserve System, should retain its full charter and statutory rights as a
State bank or trust company, and continue to exercise all
corporate powers granted by the State in which it is created.
In order, however, that State banks becoming members
should have no greater privileges than were accorded the
national banks, it was suggested that the law should require
Federal Reserve Banks in discounting for State banks and
trust companies to observe the same limitations which the
law imposed upon national banks in making loans to their
customers. It was not believed that Congress should undertake to regulate the amount which a State bank or trust company might lend to a customer, this being purely a matter
for the determination of the respective States, but, as the
law did make such a limitation with respect to national
banks, it was thought that Federal Reserve Banks should be
required to observe the same limitations in its dealings with
State bank and trust company members.
The Board proposed also that section 19 of the Act which
relates to the reserves of member banks be amended. As
originally enacted, this section provided that a bank not in
a reserve or central reserve city should hold and maintain reserves equal to twelve per cent of the aggregate amount of

THE BOARD'S PROPOSED AMENDMENTS

its demand deposits and five per cent of its time deposits;
that a bank in a reserve city should maintain reserves equal
to fifteen per cent of its aggregate demand deposits and five
per cent of its time deposits; and that a bank in a central reserve city should maintain a reserve equal to eighteen per
cent of the aggregate amount of its demand deposits and five
per cent of its time deposits. For a period of thirty-six
months after the establishment of the Federal Reserve Banks
the original law permitted a bank not in a reserve or central
reserve city to carry in its own vaults five twelfths of its required reserve and thereafter four twelfths. A bank in a reserve city was permitted for the same period to carry in its
own vaults six fifteenths of its required reserve and thereafter five fifteenths, while a bank in a central reserve city
was permitted to retain in its own vaults six eighteenths of
its required reserve and was required to carry in the Federal
Reserve Bank seven eighteenths, being permitted to carry
the balance of its reserve either in its own vaults or in the
Federal Reserve Bank, at its option. A bank not in a reserve
or central reserve city was obliged for a period of twelve
months after the establishment of its Federal Reserve Bank
to carry with the Reserve Bank only two twelfths of its required reserve and for each succeeding six months an additional one twelfth until five twelfths had been deposited
with the Federal Reserve Bank, which was the amount permanently required. A bank in a reserve city for a period of
twelve months after the establishment of its Federal Reserve
Bank was obliged to carry with that bank only three fifteenths of its required reserve and for each succeeding month
an additional one fifteenth until six fifteenths had been deposited, which was the amount permanently required. In
all cases the law permitted the balance of reserves required
of a member bank to be held either in its own vaults or in
the Federal Reserve Bank or in both, at the option of the
member bank. The Board's suggestion was that the reserves on time deposits be reduced with respect to all classes

86 THE FEDERAL RESERVE SYSTEM
of banks from five per cent to three per cent; and that the
reserves on demand deposits be reduced in the case of central
reserve city banks from eighteen per cent to thirteen per
cent; for reserve city banks from fifteen per cent to ten
per cent; for banks not in a reserve or central reserve city
from twelve per cent to seven per cent; and that the entire
legal reserves of all member banks should consist of actual
net balances with their respective Federal Reserve Banks.
It was recognized, of course, that member banks must necessarily continue to keep cash on hand, which would not, if the
Board's suggestion were adopted, be counted as reserve, but,
in view of the proposed substantial reductions in reserve requirements it was believed that this would work no hardship on the member banks which would be free to use their
own judgment as to the amount of cash which they should
keep on hand, while the Federal Reserve Banks would be in
stronger position because of the concentration of all reserves
with them even though the percentage of reserve required of
member banks be reduced.
It has been stated by some critics that the Federal Reserve
System has never had any well-defined policy with reference
to gold. With this statement I cannot agree. A discussion
of the gold policy will follow later, but it seems appropriate
here to point out that the first phase of the Board's policy as
to gold was developed in connection with the heavy influx
of that metal which set in shortly after the beginning of the
European War, and which up to the end of the year 1916
had added approximately twelve hundred millions of dollars
to the country's gold holdings. As the Board at this time
had no adequate means of impounding this redundant gold,
the Board in 1916 recommended an amendment which would
give it discretionary power to require member banks to
maintain reserves in excess of those prescribed by law. The
object sought was to prevent, whenever it seemed desirable,
the new gold which was accumulating in the vaults of banks
from becoming the basis of an undesirable expansion of

THE BOARD'S PROPOSED AMENDMENTS

credit. It was hoped that the leading member banks would
appreciate the need of cooperation with the Board in its endeavor to prevent the abnormal increase in our gold stock
from providing a basis of inflation, and that they would lend
their influence and support to this amendment. This suggestion, however, did not meet with general approval and
no action was taken by Congress. The Board then, as stated
above, proposed that the law be amended so as to require the
entire legal reserves of member banks to be carried with the
Federal Reserve Banks. These first phases of the Federal
Reserve Board's gold policy were developed as a method of
restraining undue and unnecessary expansion of credit at a
time when, by reason of abnormal additions to the country's
gold supply and a consequent increase in bank deposits, the
Federal Reserve Banks were powerless to exercise any effective control by means of discount rates, which, as already
explained, had up to 1917 been merely a negligible influence
because of the ability of most of the member banks to
expand their loans without rediscounting at the Federal
Reserve Banks.
Looking ahead, however, it was seen that the time might
come when it would be necessary to increase the credit
power of the Federal Reserve System. With this end in view
the Board suggested that the section of the Act which relates
to the issue of Federal Reserve notes be amended so as to
permit, in express terms, the issue of Federal Reserve notes,
dollar for dollar, against deposits of gold; that all legally acquired paper, bills of exchange and bankers' acceptances
bought in the open market, as well as paper rediscounted for
member banks, be made available as collateral for Federal
Reserve notes, and that the gold held as security by the Federal Reserve Agents be counted as reserve against Federal
Reserve notes. As first enacted, the law provided that:
Any Federal Reserve Bank may make application to the local
Federal Reserve Agent for such amount of the Federal Reserve
notes hereinbefore provided for as it may require. Such applica-

THE FEDERAL RESERVE SYSTEM

tion shall be accompanied with a tender . . . of collateral in amount
equal to the sum of the Federal Reserve notes thus applied for and
issued pursuant to such application. The collateral security thus
offered shall be notes and bills, accepted for rediscount under the
provisions of section thirteen of this Act. . . . Every Federal Reserve Bank shall maintain reserves in gold . . . of not less than
forty per centum against its Federal Reserve notes in actual circulation, and not offset by gold or lawful money deposited with the
Federal Reserve Agent. . . . Any Federal Reserve Bank may at
any time reduce its liability for outstanding Federal Reserve notes
by depositing, with the Federal Reserve Agent, its Federal Reserve
notes, gold, gold certificates, or lawful money of the United States.
In the early days of the System the volume of rediscounts
was small, and it was found impossible, under a strict construction of the section of the Act above quoted, to issue any
large amount of Federal Reserve notes. The theory of the
Act appeared to be that Federal Reserve notes would not be
required except as a sequence of rediscounting operations,
and that Federal Reserve Banks would therefore be in position always to supply currency needs by depositing their rediscounted paper with the Federal Reserve Agent as security for notes. In actual practice, however, it often happens
that rediscounts do not create a demand for currency, and
again there may be a demand for currency at times when
member banks have no occasion to rediscount. In the autumn of 1916, when the large cotton crop of Texas was coming to market, there sprang up in the Dallas district the
usual demand for currency incident to the crop-moving
period. Cotton buyers throughout Texas would give their
local banks demand or sight drafts on concentrating points
such as Dallas, Waco, Houston, or Galveston, and the large
dealers in those centers would draw sight drafts for large
amounts with bills of lading attached on dealers or mill
agents in New York and Boston. All such drafts were treated
as cash items by the member banks, and it was the practice
of the Federal Reserve Bank of Dallas to give member banks
credit for them. A t that time the law did not permit a Fed-

THE BOARD'S PROPOSED AMENDMENTS

eral Reserve Bank to rediscount sight drafts, and, although
the Federal Reserve Bank of Dallas was called upon to furnish large amounts of currency against balances created by
these drafts, it could not use them as security for Federal
Reserve notes. Consequently, its reserves were in danger of
depletion at a time when its member banks were borrowing
but little from it, for its note issues were limited to the
amount of rediscounted paper held by it.
It was deemed desirable also to bring under the control of
the Federal Reserve Banks as large a volume as possible of
the gold which was then flowing into the country, and accordingly some of the Federal Reserve Banks, notably the
Federal Reserve Bank of New York, adopted the expedient
of obtaining notes from the Federal Reserve Agent by depositing rediscounted paper, and then immediately cancelling
liability for these notes by depositing gold with the Federal
Reserve Agent; the collateral thus withdrawn would then be
used again as security for additional notes; and this process
would be repeated as many times as desired. This practice
met with a good deal of criticism, and when the Board's
proposition to amend the Act in the manner already described was submitted to the House Committee on Banking
and Currency, objections to this practice were raised by
some members of the Committee who complained that the
Federal Reserve Banks were, without authority of law, issuing and keeping in circulation a large amount of Federal Reserve notes secured by gold, which notes were in effect gold
certificates. The method, indeed, was a cumbersome one,
but the Board was advised by counsel that it was within
the law.
There were outstanding on January 26,1917, $291,693,000
of Federal Reserve notes, the security for which was
$273,320,000 of gold and $19,115,000 of commercial paper.
Neither contraction nor expansion was occasioned by the
process of accumulating gold with the Federal Reserve
Agents against the issues of like amounts of Federal Reserve

THE FEDERAL RESERVE SYSTEM

notes, for had the notes not been issued the gold would have
remained in circulation. It was not the desire of the Board
to force a larger volume of currency into circulation, but its
object was to protect the country as far as possible against
inflation growing out of large imports of gold, and conversely
against the evil consequences of a substantial loss of gold
whenever conditions should change so as to render such an
outflow advisable or necessary. A t that time gold in a bank's
vault was legal reserve, while Federal Reserve notes were
not. There was no sleight-of-hand about the method employed which was the best that could be devised under the
law as it then stood, nor was the method different in principle from the practice that has stood the test of time and
experience in other countries. The Board sought merely to
be forehanded and to assure itself, as far as it could under the
law then existing, that whenever large rediscount operations
were followed by withdrawals of gold there should be available the means of supplying Federal Reserve notes in such
volume as might be necessary.
The Board explained to the Committee that it was unable to see how deposits of gold against outstanding notes
could be prevented without making the issue of notes impracticable, and urged that if any attempt should be made
to interfere with the important power which was then exercised in part and held in reserve in part by the Federal
Reserve Banks, the usefulness of the Federal Reserve System would be seriously impaired. Any banking system which
requires its members to tie up so large a part of their cash
resources should be prepared to stand the severest test and
to render adequate protection without forcing drastic contraction at a time when such contraction might be most disastrous. Attention was called to the experience of the Federal Reserve Bank of Dallas in the autumn of 1916, which
showed clearly that currency requirements do not always
synchronize with rediscount operations. One rediscounting bank may require gold or a credit balance, while other

THE BOARD'S PROPOSED AMENDMENTS

member banks in rediscounting may require currency
against excess balances caused by remittances of check
and drafts.
After prolonged consideration the House Committee on
Banking and Currency reported favorably a bill which embodied, with some modifications, the Board's recommendations both as to reserves and note issues. In the bill that section of the Federal Reserve Act which relates to note issues
was amended so as to include, in the collateral security to be
offered for Federal Reserve notes, gold, gold certificates,
notes, drafts, bills of exchange, and acceptances acquired in
the open market. The collateral security was in no event to
be less than the amount of Federal Reserve notes applied
for. The amendment made no change in the provision that
each Federal Reserve Bank shall maintain reserves in gold
or lawful money of not less than thirty-five per cent against
its deposits, and reserves in gold of not less than forty per
cent against its Federal Reserve notes in actual circulation;
but it provided that when the Federal Reserve Agent held
gold or gold certificates as collateral for notes issued to his
bank, such gold or gold certificates might be carried as part
of the gold reserve which the bank was required to maintain
against its Federal Reserve notes in actual circulation.
The Banking and Currency Committee of the Senate also
reported the bill favorably. Although little time was left for
legislation, the opponents of the par clearance of checks
sought to take advantage of the legislative situation by proposing a further amendment designed to allow member
banks to make a so-called exchange charge in remitting for
checks drawn upon them. This was late in February, and
Congress was to adjourn sine die on March 4 (1917).
In a last effort to secure action, the Board on February
28th, authorized the transmission of two letters to Senator
Owen, who was the Chairman of the Senate Committee on
Banking and Currency; one official and the other of a personal character. The official letter was a reiteration of the

THE FEDERAL RESERVE SYSTEM

importance from the Board's viewpoint of prompt action on
the amendments and the personal letter was as follows:
I have been instructed by the Board to send you the letter enclosed herewith, the idea being that perhaps you might take occasion to read it in whole or in part to-morrow morning, should you
succeed in bringing the bill amending the Federal Reserve Act up
for consideration. It may be proper to state that the Board regrets
exceedingly that there seems to be some danger of vital questions
of national scope and importance — which are covered by some of
the sections of the bill — being complicated by an attempt to involve them with the question of exchange charges on checks drawn
upon country banks. The Board does not feel that this question
of exchange — however Congress may finally decide it — is of sufficient importance to let it obstruct the consideration or passage of
the very important bill that your Committee has reported to the
Senate. Member banks are not getting any exchange as the law
now stands, and the passage or failure of your bill would not affect
their status in this respect.
Would it not be possible to induce those advocating exchange
charges on country checks to let this question go over and be considered on its merits at a later date?
The bill, however, was not brought to a vote in either House
of Congress owing to the legislative jam incident to the closing days of the session, and it was left to the succeeding
Congress to enact the measure into law.
Recently there have been some evidences of a concerted
movement for the repeal of the note issue amendment as a
hastily devised war emergency measure which has outlived
its usefulness. While the necessity for this amendment in
the event of war was foreseen it was not conceived as merely
an emergency measure. It was discussed at Board meetings,
with Treasury officials, in financial journals, and with committees of Congress for at least twelve months before it was
finally enacted. The change made by it was of the greatest
value during the war and in the readjustment period which
followed; and if, as seems likely, we are approaching a time
when other countries will draw more heavily upon our stocks
of gold, it will be indispensable.

THE BOARD'S PROPOSED AMENDMENTS

In framing measures intended to cover merely war emergencies, it was the practice of Congress to place some limit
upon the time during which they should be effective. No
such limitation was placed upon this particular amendment,
which undoubtedly was intended to be permanent, and
should not be disturbed.

CHAPTER VIII
UNITED STATES ENTERS THE W A R — C O N G R E S S AMENDS FEDERAL
RESERVE A C T — P R E S I D E N T WILSON URGES STATE BANKS TO
BECOME M E M B E R S — DISCUSSION OF THE N E W AMENDMENTS
— F I R S T LIBERTY LOAN CAMPAIGN
M O M E N T O U S events were taking place, and shortly after he
had entered upon his second term, President Wilson called
an extraordinary session of Congress. On the evening of
April 2,1917, he delivered his memorable war address before
the two houses in joint session, which was followed on April
6th by the adoption of a joint resolution declaring that there
existed a state of war with Germany.
Bills amending the Federal Reserve Act substantially in
the manner described in the preceding chapter, were introduced in both houses soon after the new Congress convened,
and were reported favorably by the committees; and finally
passed both houses, becoming law on June 21, 1917, upon
the approval of the President. The amendment to section 9
of the Federal Reserve Act which was made at this time was
designed to remove obstacles which had previously existed
in the way of membership of State banks and trust companies. Several applications for membership were received
within a few weeks, but it was evident that a direct appeal
to patriotic impulses should be made in order to secure the
cooperation of a larger number. Believing, however, that an
appeal of this kind should not be made without the knowledge and approval of the President, I was directed by the
Board to submit to him the draft of a letter which it proposed to send to eligible State banks and trust companies
which had not yet applied for membership. As this letter
made an appeal to the patriotism of the banks, the suggestion was made to the President that a statement from him
endorsing it would be of great advantage in securing the response desired. With his usual promptness, the President
replied at once, approving the letter, but suggesting that it

WILSON'S APPEAL TO STATE BANKS

be redrafted for his signature, as a direct appeal over his own
signature would be more effective than a mere statement endorsing the Board's letter. The Board gladly complied, and
the President's appeal is here given in full, because of its historical value, and continuing applicability in time of peace:
It is manifestly imperative that there should be a complete
mobilization of the banking reserves of the United States. All who
are familiar with financial operations must appreciate the importance of developing to the maximum our banking power and of
providing financial machinery adequate for meeting the very great
financial requirements imposed upon our country by reason of the
war. A vigorous prosecution and satisfactory termination of the
war will depend in no small degree upon the ability of the Government not only to finance itself, but also to aid the Governments
associated with it in the war, which must be kept supplied with
munitions, fuel, food, and supplies of all kinds. The banking problem involved is one which concerns all banks alike. Its solution
does not depend upon the national banks alone, nor upon the
State banks. The burden and the privilege must be shared by
every banking institution in the country. The important functions
of the Federal Reserve Banks in the sale of the Government's
securities, in receiving and transferring the billions of dollars involved, in supplying credit facilities, and in protecting the reserves
of the country, have become so familiar to all that I am sure it is
unnecessary to dwell upon or expound them.
The extent to which our country can withstand the financial
strains for which we must be prepared will depend very largely
upon the strength and staying power of the Federal Reserve
Banks. The Federal Reserve Act is the only constructive financial legislation which we have ever had which was broad enough to
accommodate at the same time banks operating under powers
granted by the general Government and banks whose charters are
granted by the respective States. The unification of our banking
system and the complete mobilization of reserves are among the
fundamental principles of the Act.
The State banking institutions for some reasons have until recently seemed inclined to hold aloof. Congress a few months ago
prescribed very generous terms for the admission of the State
banks into the Federal Reserve System which have removed the
objections heretofore raised by State banks when considering
membership. As the law now stands, it leaves member State banks

THE FEDERAL RESERVE SYSTEM

and trust companies practically undisturbed in the exercise of all
the banking powers conferred upon them by the States. The law
provides also in definite terms the conditions upon which any
State bank or trust company may withdraw from the System.
Many of the largest State banks and trust companies are now becoming members, realizing that to win the war we must conserve
all of the physical, financial, and moral resources of our country —
that our finances must rest on the firmest possible foundation, and
that they must be adequately and completely conserved so as to
respond instantly to every legitimate demand. How can this necessary condition be brought about and be made permanently effective better than by the concentration of the banking strength of
our country in the Federal Reserve System?
May I not, therefore, urge upon the officers and directors of all
non-member State banks and trust companies, which have the
required amount of capital and surplus to make them eligible for
membership, to unite with the Federal Reserve System now and
thereby contribute their share to the consolidated gold reserves of
the country? I feel sure that as member banks they will aid to a
greater degree than is possible otherwise in promoting the national
welfare, and that at the same time, by securing for themselves the
advantages offered by the Federal Reserve System, they will best
serve their own interest and the interest of their customers. I believe that cooperation on the part of the banks is a patriotic duty
at this time, and that membership in the Federal Reserve System
is a distinct and significant evidence of patriotism.
There are probably eight or nine thousand State banks and
trust companies eligible for membership which have not yet united
with the system. These institutions have it in their power to add
enormously to the resources of the Federal Reserve Banks, thereby
broadening and strengthening the foundation upon which our
whole financial structure must rest. Permit me to urge that every
bank officer and bank director owes a solemn obligation to the
country which I am sure they wish to discharge. I, therefore, wish
again to impress upon them my solemn conviction that they can
best measure up to their duties and responsibilities through membership in the Federal Reserve System.
(Signed)
WOODROW WILSON
THE WHITE HOUSE, October 1 3 , 1 9 1 7

This letter was issued in circular form and was sent to
several thousand non-member banks and trust companies

FEDERAL RESERVE NOTE ISSUES

throughout the country. The effect of the appeal was to
bring into the System within a short time State banks and
trust companies which, though numerically in a minority,
represented a large proportion of the banking resources of
the country. Their accession as members greatly increased
the strength and prestige of the System, and resulted in giving its membership about seventy per cent of the banking
resources of the country. While many banks stated plainly
that they were joining purely because of patriotic motives,
it is worthy of note that only a comparatively small number
of them have withdrawn from the System.
In order to show more clearly the effect of the amendment
to section 16, relating to note issues, a table is given below
which shows the total of Federal Reserve notes outstanding
on November 5, 1920, at a time when rediscounts for member banks were at the peak, the amount of gold available as
reserve for note circulation, after deducting the required
thirty-five per cent for reserve against deposits, and the free
gold — that is, gold above the reserve requirements for these
two classes of Federal Reserve Bank liabilities. This table
should be compared with the table which immediately follows, which shows how much less the lending power of the
Federal Reserve Banks would have been had the Act not
been amended.
ACTUAL POSITION — NOVEMBER 5 , 1 9 2 0

Discounts for member banks.
$2,826,825,000
Federal Reserve notes in c i r c u l a t i o n . . . . . . . . . . . . . . .
3,354,180,000
$2,169,729,000
Total reserves
Less reserve of 35 per cent against
593,224,000
deposits
Gold available as reserve against Federal Reserve
notes in circulation
Required reserve of 40 per cent against Federal Reserve notes in circulation... . . . . . . . . . . . . . . . . .

I»576,505,000
1,341,672,000

Excess reserves (free gold)
234333.000
Additional lending power in form of Federal Re587,082,000
serve notes
43.0 per cent
Reserve ratio,

THE FEDERAL

RESERVE

SYSTEM

From the table below it will be seen that if on November
5, 1920, the Federal Reserve Banks had been operating under section 16 as originally enacted, assuming reserve deposits, loans to member banks, and Federal Reserve note
circulation on that date to be the same as they actually were
under the amended Act, the reserve ratio of the System
would have been 36.3 per cent, while the amount of paper
rediscounted for member banks and the amount of Federal
Reserve note circulation would have been $203,950,000 in
excess of the theoretical maximum if reserves were to be
maintained a t legal requirements (35 per cent against deposits and 40 per cent against notes).
THEORETICAL POSITION — NOVEMBER 5, 1920

Under original section 16
Discounts for member banks
$2,826,825,000
Federal Reserve notes in circulation
3»354» 180,000
Excess of Federal Reserve notes over eligible paper
527.355.ooo
Gold and lawful money
2,169,729,000
Total reserves after pledging with Federal Reserve
Agent gold and lawful money equal to excess of
notes over eligible paper
1,642,374,000
Reserve of 35 per cent against deposits
593,224.000
Gold available as reserve against Federal Reserve
notes in circulation
1,049,150,000
Federal Reserve note circulation subject to reserve
requirements (amount secured by eligible paper)..
2,826,825,000
Required reserve of 40 per cent against Federal Reserve notes...
*
1,130,730,000
Deficiency in reserves
*
81,580,000
Reduction in discounts and Federal Reserve note circulation necessary to restore reserves to legal minimum of 40 per cent against notes and 35 per cent
against deposits
203,950,000
*
36.3 per cent
Reserve ratio

Comparison of the two tables shows that under the present law the Federal Reserve Banks had an additional lending power of $587,082,000, while under the original law they
would have been over-extended by $203,950,000. In other
words, on November 5,1920, on the basis of maintenance of
legal reserves, the Federal Reserve Banks had a lending

GOLD RESOURCES MOBILIZED

power of $791,032,000 more than they would have had if the
Federal Reserve Act had not been amended. While the
Board was authorized by law to reduce reserve requirements,
the sentimental effect of such action was feared. The new
amendment obviated the necessity for reducing reserves
below the normal minimum.
An important effect of the amendment, permitting the
issue of Federal Reserve notes directly against gold, which
was anticipated by the Board, was to bring into the Federal
Reserve Banks much of the gold which had previously been
in general circulation. In this way the gold resources of the
country were mobilized and the Federal Reserve Banks acquired a credit-giving power which would otherwise have
been impossible.
On April 6, 1917, when Congress declared that a state of
war existed between this country and the Imperial German
Government, reserve deposits of the Federal Reserve Banks
were $758,219,000; their holdings of bills rediscounted were
$17,928,000; of bills purchased in the open market, $82,735,000;
of other investments, $124,878,000; and of gold, including
$378,450,000 with Federal Reserve Agents, $943,552,000.
Their reserve ratio against combined liabilities for notes and
deposits was 75.4 per cent. Had gold with the Federal Reserve Agents been counted at that time as part of the banks*
lawful reserves, as was afterwards permitted by the amendment of June 21, 1917, their reserve ratio would have been
84.6 per cent.
Four days before President Wilson delivered his war address to Congress, the Board received a letter from the Secretary of the Treasury saying:
I purpose borrowing for the Government $50,000,000 for ninety
(90) days, at two (2) per cent interest per annum, in anticipation of
the payment of corporation and individual income taxes due June,
1917. Treasury certificates of indebtedness, authorized by existing
law, will be issued in such denominations as may be necessary.
This is an excellent opportunity for the Federal Reserve Banks to

THE FEDERAL RESERVE SYSTEM

secure a desirable short-time investment and to demonstrate their
usefulness as fiscal agents of the Government. I purpose, therefore, to offer the Federal Reserve Banks, the opportunity to take
these certificates. Will you please get in touch with the Federal
Reserve Banks and ascertain whether or not they care to take this
loan and what amount they respectively desire to take? The funds
should be available to the Treasury on or before the 31st instant.
Upon receipt of this, a telegram was sent to the Governor
of each Federal Reserve Bank, as follows:
March 27, 1917

Secretary of Treasury informs Board he will offer to Federal Reserve Banks certificates of indebtedness authorized by existing
law in suitable denominations aggregating fifty million dollars for
ninety days at two per cent interest rate, in anticipation of income
taxes due June. Please advise Board promptly if you wish to participate, stating amount desired. Funds should be available to
Treasury on or before Saturday next. Secretary of Treasury expresses opinion that this is excellent opportunity for Reserve Banks
to secure desirable short-time investment and demonstrate their
usefulness fiscal agents of Government,
The opinion of a majority of the members of the Federal
Reserve Board, and of all the Federal Reserve Bank Governors, was that the rate proposed, two per cent per annum,
was too much below the market, and that it should have been
at least two and one half per cent. It was recognized, however, that the country was upon the verge of war and the
offer of the Secretary of the Treasury was accepted, each
Federal Reserve Bank taking its proper proportion of the
issue as allotted by the Federal Reserve Board. This issue
was only a beginning, and was followed quickly on April
25th by an offering of $250,000,000 at three per cent, which
was promptly distributed by the Federal Reserve Banks
among the member and non-member banks of their respective districts. These issues at varying rates have ever since
been a part of the Treasury's financial programme. During
the war they were made sometimes in anticipation of bond

THE FIRST LIBERTY LOAN

issues and at other times in anticipation of income-tax receipts, After the war they were made in anticipation of tax
receipts and more recently have been used in short-time
refunding operations.
In May, 1917, distinguished representatives of the English and French Governments came to Washington. Among
them were Mr. Balfour, Lord Northcliffe, and Lord Cunliffe, Governor of the Bank of England, M. Viviani, and
Marshal Joffre, the hero of the Marne. They were accorded
a most enthusiastic reception and evidently impressed upon
the authorities a sense of the necessity of making war preparations upon a very large scale and of prompt action. The
Federal Reserve Board had a number of interesting conferences with Lord Cunliffe, and one of its members, Mr. Hamlin, former Governor of the Board, accompanied him on a
visit to other cities.
Meanwhile the Secretary of the Treasury had taken steps
toward providing for the financing of the war. Pending the
passage of a revenue bill by Congress, an act was passed
(April 24, 1917) which authorized the sale of bonds and
Treasury certificates, and the making of loans by the Treasury to Governments with which this country was associated
in the war.
The Secretary of the Treasury consulted with the Federal
Reserve Board as to the amount of the first bond issue, and
he also conferred with the members of the Federal Advisory
Council. I recall that he put before the Council the question
as to the amount of bonds which might be floated without
serious disturbance to the money market. Some of the bankers named $500,000,000 as a maximum figure, while others
expressed the view that bids might safely be invited for as
much as $1,000,000,000.
Early in April there had been some sentiment expressed
in favor of giving the war bonds the circulation privilege.
The Comptroller of the Currency for a time at least seemed
to be in favor of legislation which would permit national

THE FEDERAL RESERVE SYSTEM

banks to issue circulating notes against their holdings of
such bonds with the proviso that the tax on national bank
notes thus secured be made equal to the rate of interest
borne by the bonds. The Board received letters from various
persons advocating this plan, all of which were transmitted
to the Secretary of the Treasury, with a strong expression
of its own disapproval of the suggestion. The Secretary
of the Treasury did not favor the plan and Congress did
not give the new bonds the circulation privilege, although
it made them fully exempt from income tax. Early in
May, Secretary McAdoo announced that he would ask for
public subscriptions through the Federal Reserve Banks to
an issue of $2,000,000,000 of bonds at three and one half
per cent; the bonds to be exempt from all income and other
taxes, except inheritance taxes. Secretary McAdoo then
made a trip through the country as far north as Minneapolis, as far west as Denver, and as far south as New Orleans,
returning to Washington by way of Birmingham, Louisville,
Cincinnati, and Pittsburgh, in order to arouse interest in the
bond issue to which he had given the name of the First Liberty Loan. A t his request I accompanied him on this trip.
The First Liberty Loan Campaign was a great success and
the issue was largely oversubscribed. Allotments were made
through the Federal Reserve Banks, whose Governors had
acted as chairmen of the Liberty Loan Committees in their
respective districts.

CHAPTER IX
EXECUTIVE ORDERS RESTRICTING GOLD EXPORTS AND REGULATING TRANSACTIONS IN FOREIGN E X C H A N G E — B O A R D ' S
POLICY IN ISSUING LICENSES

A s fiscal agents of the Treasury, the Federal Reserve Banks
during the war performed notable and valuable services.
They organized member and non-member banks all over the
country into bond-distributing agencies, and through the
cooperation of these banks, aided by liberal use of the Federal Reserve rediscount facilities, the public was able to subscribe during the period from June, 1917, to October, 1918,
for about $17,000,000,000 of bonds. Patriotic impulse was
the incentive, but the banks of the country, with the strong
support of the Federal Reserve Banks, furnished the means
which made possible the translation of impulse into action.
An immediate effect of the entry of the United States into
the war and of the large credits given the Allied Governments was an almost complete cessation of the movement of
gold to this country, which had been continuous since the
early months of the year 1915, although the movement had
begun to slacken as early as November, 1916. Foreign Governments had found it convenient to liquidate their obligations due in other countries by purchasing remittances in
our own markets, frequently against credits opened by American banks or by the Government. The aggregate trade balance as represented by excess of exports over imports continued during the year 1917 in favor of the United States,
although the balances were against us in some cases. There
developed a strong tendency on the part of neutrals, as well
as by countries associated with us in the war, to withdraw
gold from us, and during the months of June, July, and August (1917), the exports of gold exceeded imports by about

THE FEDERAL RESERVE SYSTEM

$ iootooo,ooo. As exports of gold had already been restricted
in all belligerent countries, demands for gold in settling international accounts, in adjusting exchange rates, and in
strengthening reserves, were naturally made in what was
practically the only free market remaining, that is, the
American market. As the movement began to assume larger
proportions, the President on September 7th issued a proclamation to the effect that:
Except at such time or times, and under such regulations and
orders, and subject to such limitations and exceptions as the President shall prescribe, until otherwise ordered by the President or
by Congress, the following articles, namely: Coin, bullion, and
currency shall not, on and after the 10th day of September, in the
year 1917, be exported from or shipped from or taken out of the
United States or its territorial possessions . . .
B y Executive order of the same date the President directed
that:
1. Any individual, firm, or corporation desiring to export from
the United States or any of its territorial possessions to any foreign country named in the proclamation dated September 7,1917,
any coin, bullion, or currency, shall first file an application in triplicate with the Federal Reserve Bank of the district in which such
individual, firm, or corporation is located, such application to
state under oath and in detail the nature of the transaction, the
amount involved, the parties directly and indirectly interested,
and such other information as may be of assistance to the proper
authorities in determining whether the exportation for which a
license is desired will be compatible with the public interest.
2. Each Federal Reserve Bank shall keep a record copy of each
application filed with it under the provisions of this regulation and
shall forward the original application and a duplicate to the Federal Reserve Board at Washington together with such information
or suggestions as it may believe proper in the circumstances and
shall in addition make a formal recommendation as to whether or
not in its opinion the exportation should be permitted.
3. The Federal Reserve Board, subject to the approval of the
Secretary of the Treasury, is hereby authorized and empowered
upon receipt of such application and the recommendation of the
Federal Reserve Bank, to make such ruling as it may deem proper

RESTRICTION OF GOLD EXPORTS 105
in the circumstances and if in its opinion the exportation in question be compatible with the public interest, to permit said exportation to be made; otherwise to refuse it.
In pursuance of this order the Federal Reserve Board, with
the approval of the Secretary of the Treasury, issued regulations governing the administrative procedure with regard
to the exportation of coin, bullion, and currency, and during
the remaining months of the war, and for some time thereafter, considered and passed upon all applications for such
shipments.
Applications for permission to ship gold to European neutral countries were, except for a few days following the date
of the order, invariably declined. A different problem, however, was presented in the case of applications for shipments
of gold to the Orient, to Canada, to Mexico, and to South
American countries, which had been furnishing necessary
raw materials. It was deemed important to continue these
trade relationships, while reducing shipments of gold to a
minimum. For a short time gold shipments were permitted
to go to India, in order to give importers reasonable time to
adjust themselves to the new conditions. Silver was permitted to flow freely to the Orient as a means of payment for
Asiatic balances. In addition, as a result of negotiations between the Treasury Department and representatives of the
Indian Government, provision was made for rupee exchange
to the extent of io,oooFooo rupees, which were allotted
by Federal Reserve Banks to importers according to their
necessities. (Later an additional credit of 10,000,000 rupees was arranged, and after January I, 1918, an exchange
agreement with the Government of Argentina was entered
into.) In a few cases shipments of gold were permitted to
South American countries.
Applications for shipments of gold into Mexico were
granted only for Government account and in cases where
such shipments were shown to be essential to effect the importation into the United States of necessary products. The

106 THE FEDERAL RESERVE SYSTEM
exportations were limited as far as possible and the greater
part of the gold which was shipped was for payment of Mexican export duties and for meeting the requirements of Mexican law as to the return into Mexico of the value of the full
gold content and twenty-five per cent of silver content of
ores and bullion exported from Mexico. Each application
was considered upon its own merits, the Board having given
notice, in its regulations dated September 21, 1917, that the
granting of any specific application would not constitute a
precedent. In considering applications the Board adhered
strictly to the principle laid down in the Executive order,
that if, in its opinion, the exportation applied for was not
compatible with the public interest, it should be refused, and
it acted also in close cooperation with the State and Treasury Departments and the War Trade Board.
After the flotation of the First Liberty Loan, the organizations which had been effected in the several Federal Reserve districts were continued and strengthened. The Treasury found it more convenient to deal directly with the
Federal Reserve Banks in all fiscal agency matters, and the
Board had but little to do with the successive Liberty Loan
Campaigns which followed the First.
It was not the function of the Federal Reserve Board to
determine the financial policy of the Government, nor did
the responsibility rest upon it for fixing the rates of interest
to be borne by the successive issues of bonds and Treasury
certificates. All of these were questions the determination
of which rested entirely with the Secretary of the Treasury
in his capacity as such, and not as ex officio chairman of the
Federal Reserve Board.
There were other matters, however, which kept the Board
fully occupied during the war. The restrictions placed upon
exports of coin, bullion, and currency by the President's
proclamation of September 7, 1917, and the duties imposed
upon the Federal Reserve Board by the Executive order of
the same date, obliged the Board to give close attention to

RESTRICTION OF GOLD EXPORTS 107
the foreign exchange situation. Much additional work was
entailed in passing upon applications for permission to make
shipments. As a general rule those whose applications to export gold were refused by the Board accepted the Board's
conclusions as final, but, in at least one case, heavy and longcontinued pressure was brought to bear to bring about a
reversal.
There was an importer of olive oil who had made large
purchases in Spain during the season of 1916 through credits
arranged by some American banks. For some reason he had
not purchased Spanish exchange with which to liquidate
these credits, but had preferred to renew them from time to
time. Meanwhile the premium on pesetas advanced steadily
despite a considerable excess of American exports to Spain
over imports from that country. This importer was obsessed
with the idea that it was the duty of the Federal Reserve
Board to furnish him in some way with Spanish exchange at
par or at a nominal premium. For a time he carried fullpage advertisements in some of the newspapers stressing the
importance and feasibility of maintaining a parity between
American, Italian, and Spanish exchange. Then he laid his
troubles before Senator Owen, who listened with a sympathetic ear. The restriction of gold exports which followed
the President's proclamation of September 7th increased the
premium on Spanish exchange and added to the difficulties
of this particular importer. For many months both he and
Senator Owen were persistent in protesting against the depreciation of the American dollar abroad; and, failing a general leveling of exchange rates, they were insistent that a
license should be granted to export to Spain sufficient gold
to meet the necessities of this particular case. There were
many personal interviews and much correspondence between
the Board and the applicant and the Senator, but, as the
Federal Reserve Board was unable to see that there was any
general public interest which required a license in this case,
it adhered to its original position and declined to grant the

THE FEDERAL RESERVE SYSTEM

application. Senator Owen then brought it to the attention
of Secretary McAdoo, who, in agreeing with the position
taken by the Board, observed that the business carried on
by the applicant 'is not an essential industry and serves no
useful purpose in the war, and for that, if for no other reason,
it is not entitled to special consideration.' Senator Owen
then communicated with the President, but for some months
was unable to convince the Chief Executive that the license
should be granted.
Finally, however, representations were made to the Board
by the banks which had been renewing these credits for the
importer that, unless the license to export was granted, the
applicant would be forced into bankruptcy and his creditor
banks would be subjected to substantial losses. It was argued that the public interest would be better served by permitting the export of $1,250,000 of gold rather than face consequences which might affect unfavorably, to some extent at
least, the banking situation in Baltimore and Washington
where the interested banks were located.
While the Board was deliberating as to whether it might
not properly in view of these facts grant the permit, it received an inquiry from the President as to the status of the
application. As the Executive order placing an embargo
upon shipments of gold had been issued by the President,
and as it was in his power at any time to rescind or modify it,
the Board felt that it would be relieved from responsibility
in this case if the President should indicate a desire that the
application be granted. A memorandum covering the case
was sent to the White House, and in his letter acknowledging, he said, 41 am very glad to avail myself of the intimation that the Board will act upon my advice in this matter,
and my advice is, that the license be granted, all the circumstances being taken into consideration/ The license was
accordingly issued (April 15, 1918).
A t this time the Federal Reserve Banks had a special deposit of gold in the Bank of England, and the licensee was

RESTRICTION OF GOLD EXPORTS

given the option of withdrawing gold for export in New York
or of taking an equivalent amount in British gold sovereigns
in London at a stipulated rate. Complaints were made to
the Board, to the Secretary of the Treasury, and to the President, who sent me a copy of a telegram signed by Senator
Owen protesting against the charge which had been made.
I wrote an explanatory letter to the President and in his acknowledgment he said: 'Thank you for your full and satisfactory memorandum under date of June 4 commenting
upon the telegram signed by Senator Owen, which I took
the liberty of transmitting to you the other day. . . . Your
memorandum convinces me that the arrangement for exchange which was proposed is the best that can be obtained.
Will you be kind enough to advise him what the arrangement is and what the discount amounts to/
Realizing the futility of further protest, the licensee authorized his banks to purchase British gold sovereigns through
the Federal Reserve Bank of New York at 4.985, which
represented an exchange charge for the sovereigns of about
$25,000, This was less than transportation and insurance
charges would have been on a shipment of gold from New
York to London, and in fact was somewhat below current
quotations in the London market. M y information is that
the banks were able to exchange these gold sovereigns for
French gold and that this Spanish indebtedness was finally
liquidated by a shipment of French gold from Paris, there
being no discount in Spain on French gold as was the case
with British and American gold.
Meanwhile the Board had established in New York a Division of Foreign Exchange under the immediate direction of
Mr. Fred I. Kent. His familiarity with foreign transactions,
his thorough knowledge of the intricacies of exchange, his
close attention to the work of this division, and the executive ability which he displayed in carrying it on, were of the
greatest value to the country.
The original Executive order of the President dated Sep-

THE FEDERAL RESERVE SYSTEM

tember 7, 1917, placed restrictions upon the exportation of
coin, bullion, and currency from the United States and was
amplified by Executive orders dated October 12, 1917, and
November 3, 1917; which in turn were amended by a new
order dated January 26,1918. In the preamble of this order
it was recited that the Executive administration, authority,
and power were vested in the Secretary of the Treasury, and
that upon the recommendation of the Secretary of the Treasury and in order to vest all necessary authority in the Federal Reserve Board to act as the agency of the Secretary of
the Treasury, certain orders, rules, and regulations were
prescribed and certain amendments were made to the regulations prescribed by the previous Executive orders.
In the Executive order of January 26, 1918, the terms,
'dealer,' 'foreign exchange,' 'securities/ 'correspondent,'and
'customer' were defined, and regulations were prescribed
covering the following: All transactions in foreign exchange;
export or ear-marking of gold or silver coin or bullion or
currency; transfers of credit in any form and transfers of
evidences of indebtedness or of the ownership of property
between the United States and any foreign country or between residents of one or more foreign countries by any
person within the United States; transactions in foreign exchange or in securities for or through foreign account, collection dividends, interest, or maturing obligations for foreign
account; and licenses from War Trade Board in transactions involving trading with an enemy or ally of enemy.
A committee of the Board met daily to consider and pass
upon all applications to export coin, bullion, or currency,
and the closest scrutiny was given to the applications, each
being treated upon its own merits. During the period from
September 7,1917, to January 1,1919, licenses were granted
permitting gold exportations amounting in all to $45,514,000.
In all meritorious cases the Board granted licenses for the
exportation of United States currency other than gold and
silver certificates; and permits were granted for shipments

RESTRICTION OF GOLD EXPORTS 111
of more than $86,000,000 of currency for use in Canada,
Mexico, Central America, and the West Indies.
The regulations of the Division of Foreign Exchange were
necessarily technical and elaborate, but the division was so
efficiently conducted that there was little complaint. All
cablegrams before delivery or transmission were obliged to
pass the scrutiny of the Division of Foreign Exchange. In
undertaking to carry through prohibited transactions, attempts were sometimes made to use a private code which
had the appearance of a harmless personal telegram. I am
told that on one occasion a cable was submitted to be sent
to an addressee in Holland, worded as follows: 'Father dead,
funeral Thursday/ There was something about the cable
which looked suspicious to Mr. Kent, but as he did not feel
warranted in stopping its transmission, he changed the language to read: 4 Father deceased, interment Thursday'; and
thus amended, let it go forward. A few hours later his suspicions were confirmed by a reply reading: 4 Is Father dead
or deceased? Explain interment 1 !
With the exception which has already been noted, there
was a general disposition manifested to abide by the regulations. A few dealers, perhaps, might not have been unwilling
to undertake operations for enemy account, but their knowledge that, if they did so, and were discovered, they would be
prohibited from continuing their foreign exchange business
for the period of the war, acted as a deterrent. This penalty
was one of the important safeguards provided by the Executive order, but on the whole the voluntary and patriotic
cooperation of dealers was a constant source of satisfaction.
The great banking institutions which transacted the bulk of
our foreign exchange business cheerfully subordinated profits
to the national interest.
A t this point it may be well to consider the purpose of
the restrictions which were placed upon the exportations
of gold and upon transactions in foreign exchange. The
embargo was established as a part of the war policy of

100

THE FEDERAL RESERVE SYSTEM

the Government,
interest:

Its purpose was to protect the public

1. By preventing shipments of gold, or remittances of exchange,
to destinations where such transfers might be of advantage to the
enemy;
2. By conserving the American gold supply for use in connection with the extensive credit operations of the Government.
In passing upon applications for permission to export gold
and to allow transactions in exchange, the Board's discrimination was limited to consideration of the question whether
the granting of the permit requested would be 'compatible
with the public interest.' The Board had no authority to
permit such transactions unless it found that they were 1 compatible with the public interest/ and it was expressly directed by the Executive order to refuse such applications if,
in its opinion, the exportations or transactions in question
were not 'compatible with the public interest/ The tests,
therefore, that the Board uniformly sought to apply were:
1. Will the transactions be likely to be of benefit directly or indirectly to the enemy? and
2. Will the diminution of our gold supply, resulting from any
transaction, be compensated by the addition to our supply of necessary materials resulting from the transaction?
Injury or inconvenience to private interests did not determine the Board's rulings. Public interest was the decisive
factor even where the safeguarding of the public interest
involved individual injury or loss.
Although exports from the United States during the war
period greatly exceeded imports, it is true that in a few countries American exchange was at a discount when under normal conditions it would have been at par or at a premium
because of the excess of our exports to those countries. This
seeming anomaly is accounted for by the fact that during
the war the United States was practically in economic as
well as military alliance with Great Britain, France, Italy,

RESTRICTION OF GOLD EXPORTS 113
and Belgium. It will be remembered that Congress authorized credits to the extent of ten billion dollars to countries
which were associated with us in the war, and that these
credits were for the most part used by these countries in the
purchase of supplies and war material in the United States.
Great Britain, for her own account, and for her allies, made
larger purchases in the United States than any other country, and these purchases created a corresponding British demand for dollar exchange. During the war the British Government found it expedient to maintain sterling exchange in
New York at an arbitrary rate of $4.76^®, and in order to
maintain this rate it was obliged during the early part of the
year 1918 to purchase sterling bills in amounts averaging
about $40,000,000 per week. These purchases did not represent the entire volume of sterling bills offered in the New
York market, but represented the excess which had to be
provided for in order to maintain the rate. The maintenance
of sterling at this slight discount was an important factor in
the conduct of the war, for it is obvious that, if the British
Government had not intervened and had permitted the market to take its course, the large offerings of sterling bills
would have depressed the market and forced sterling down
to a low point, which would have added greatly to the costs
of the supplies and war materials purchased by the Allies.
The credits extended by the United States Treasury under
authority of Congress were, therefore, more effective for
many months — until the American troops in large numbers
were ready for action in France — than the military assistance this country was able to give.
In the case of Spain, a neutral country, the trade balance
was in favor of the United States, and, even had it been adverse, the dollar could have been maintained at approximately ninety-seven cents by permitting shipments of gold.
(American gold was arbitrarily at a discount of three per
cent in Spain.) But England and France were both making
heavy purchases in Spain and these purchases in each case

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THE FEDERAL RESERVE SYSTEM

were far in excess of their exports to Spain. Consequently,
British and French exchanges were both at a discount in
Spain, and it is therefore plain that as long as the United
States cooperated economically as well as in a military sense
with these countries, and took no steps to protect the value
of the American dollar in Spain, Spanish exchange normally
would rise to a point based upon the adverse trade balances
of England and France, less the favorable trade balance of
the United States. The same observations apply to Switzerland, Holland, Norway, and Sweden, in which countries also
American exchange was at a discount. Spain and the Scandinavian countries had at this time a surfeit of gold and practically demonetized it by stopping its coinage and by placing
it upon a commodity basis. American exporters to these
countries usually drew in sterling, while American importers
were required to make payment in terms of the currency of
these countries. As the balance of trade was heavy against
England in these countries, exchange on London was at a
discount, and, conversely, their own exchanges were at a
premium. The prices paid for sterling exchange in New York
by the British Government made that city the world's highest market for sterling, and therefore holders of sterling bills
all over the world sent them to New York for sale. Although
shipments of gold from the United States to European neutral countries would under war conditions have been expensive and risky, it would still have been possible, if dollar
exchange alone was to be considered, to ship enough gold to
restore the parity of the American dollar in neutral countries; but it was neither practicable nor desirable to ship
gold in sufficient quantities to restore the parity of the pound
sterling or the franc, with which currency the American dollar was associated in the minds of the neutrals, and which
under conditions then existing would have to be fully protected before dollar exchange could reach its parity.
Senator Owen in his criticisms to the Board at this time
laid particular stress upon the fact that American importers

RESTRICTION OF GOLD EXPORTS 115
were losing heavily because of the discount on the dollar in
these countries despite the trade balance in our favor, and
was insistent that steps be taken to correct this condition.
In one of his communications he said:
The simplest remedy is to provide that exchange to and from
these countries shall be based upon actual merchandise shipments.
This can be done by forbidding any exchange or transfer of credits
for this purpose, except against actual commodities, until the dollar rises to par, or until foreign exchange is reduced to par.
A second remedy would be to require these countries as a condition of getting our goods to take international securities or our
Government bonds to cover their international trade balances.
The first remedy is the simplest and the easiest, because stopping
arbitrage settlements can be done by our own enactments without
the consent of other nations.
He further suggested that the Federal Reserve Board issue
a ruling that
No exchange or transfers of credit to meet exchanges shall be permitted by any bank or banker in the United States with any
country where the exchange is against the United States, except as
against actual merchandise, until the American dollar is brought
to gold parity in such country.
Senator Owen was insistent also that Federal Reserve
Banks should establish branches in foreign countries for the
purpose of stabilizing American exchange, and in a speech in
the Senate on February 25, 1918, said:
At first the Federal Reserve Banks contemplated that they
would open branches in foreign countries voluntarily, but they
did not voluntarily establish these foreign branches and thereupon
Congress passed an amendment authorizing the Federal Reserve
Board to require them to do this, but the Federal Reserve Board
seems not to have found it practicable for some reason to compel
any of these banks to establish foreign branches.
Section 14 of the Federal Reserve Act provides that:
Under regulations to be prescribed by the Federal Reserve
Board, Federal Reserve Banks shall have power to open and main-

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THE FEDERAL RESERVE SYSTEM

tain accounts in foreign countries, appoint correspondents, and
establish agencies in such countries wheresoever it may deem best
for the purpose of purchasing, selling and collecting bills of exchange, and to buy and sell, with or without its endorsement,
through some correspondents or agencies, bills of exchange arising
out of actual commercial transactions which have not more than
ninety days to run, exclusive of days of grace, and which bear the
signature of two or more responsible parties, and with the consent
of the Federal Reserve Board to open and maintain banking accounts for such foreign correspondents or agencies.
More than a year before this, announcement had been
made that an agency agreement had been entered into between the Bank of England and the Federal Reserve Bank
of New York, acting on behalf of all the Federal Reserve
Banks; and connections had been established also between
the Federal Reserve Bank of New York and the Bank of
France, the Bank of Italy, the Bank of the Netherlands,
and the Bank of Japan.
There is nothing in the Federal Reserve Act which gives
Federal Reserve Banks power to establish foreign branches.
They are authorized to have only correspondents and agencies. All that these foreign correspondents or agencies could
do, exclusive of matters relating to dealing in or ear-marking
gold, would be to make cable transfers and buy bills of exchange arising out of commercial transactions. Through
these agencies the Federal Reserve Banks would have power,
had they desired, to invest in bills payable in sterling, francs,
lire or guilders.
The suggestion had been made in 1916 by Secretary
McAdoo that Federal Reserve Banks establish agencies in
certain South American countries; but neither the Federal
Reserve Banks nor the Board, after giving consideration to
the question, felt justified during a period of world war in
engaging in such transactions. Federal Reserve Banks are
trustees of the reserve money of the member banks. They
could not during the World War have taken the risk of investing in foreign bills without having assurance that when

RESTRICTION OF GOLD EXPORTS

105

these bills matured they would be paid in gold; nor could
they assume the risk, pending maturity of the bills, of a serious depreciation in exchange rates which would cause a
substantial loss. During the war period Russia furnished a
striking illustration of the risks that were involved, and after
the war Germany and other countries under more conservative governments afforded similar illustrations. During the
war exchanges in the United States of all Allied countries declined to some extent and would have declined far more had
not the Treasury intervened by granting credits, thus enabling the Allied countries to sustain their exchanges. The
Federal Reserve Board felt that Federal Reserve Banks
should not during the war period take the risk of heavy loss
by purchasing foreign exchange, but that it was the duty of
the banks to keep their gold reserves available and as strong
as possible for the protection of our own credit situation; nor
would the establishment of Federal Reserve foreign branches,
even if permitted by law, or the establishment of agencies in
neutral countries, have benefited American exchange in countries where the dollar sold at a discount. The restrictions
upon exports of gold and upon foreign exchange transactions
doubtless caused some inconvenience to importers, and losses
in particular cases, but they certainly did not affect the
volume of exports. The Executive orders relating to these
transactions and the Board's faithful execution of the terms
of these orders were undoubtedly important factors in the
winning of the war.

CHAPTER X
ECONOMIC EFFECTS OF THE W A R — CAPITAL ISSUES COMMITTEE
— W A R FINANCE CORPORATION — T H E PITTMAN A C T
— T H E OVERMAN A C T

AT the beginning of the year 1918 the demands made by the
war upon the resources of the country were reflected in
advancing prices for goods, and personal service, higher
rentals, and generally increased costs of living. The financial requirements of the Government, which by common
consent were given right of way, made it more and more
difficult for private corporations to meet their own requirements, not only for new capital, but for funds with which
to pay off maturing obligations.
There was a tendency also on the part of banks throughout the country to increase the rates of interest paid on deposits. This tendency was not confined to the interest paid
on savings and time deposits, but in many cities banks increased the rate of interest paid on individual and corporate
accounts subject to check, and on balances carried with them
by other banks. Some of the banks in the city of New York
were bidding as high as three per cent for balances of other
banks payable on demand, and the rates offered for time deposits were higher. The reason given by the New York
banks was that they were compelled to meet the competition
of banks in other cities. This action on the part of some of
the large New York City banks led to reprisals by banks in
other cities which had not contemplated advances in the rate
of interest on deposits, and soon the bidding for business by
marking up interest rates on deposits threatened to interfere
seriously with the financial operations of the Government.
Finally, after a conference between members of the Federal
Reserve Board and the Clearing-House Committee in New
York, the Clearing-House banks of New York City agreed

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107

to fix a rate of two and one half per cent on bank balances
payable on demand, with the proviso that the interest rate
would be automatically advanced or reduced one quarter of
one per cent with each advance or decline of one half of one
per cent in the ninety-day rate at the Federal Reserve Bank
of New York. This action checked for a time a very dangerous tendency, although the Board realized that it was not a
permanent nor altogether satisfactory solution of the problem. It was believed, however, that, because of other steps
which were about to be taken toward the rationing of credit,
and because of the policy of the Treasury, there would be no
advance in Federal Reserve Bank rates during the period of
war, and that, therefore, under the New York ClearingHouse arrangement there would be no further increase during that time in the rate of interest paid on deposits. The
Board had occasion to deal with this question again in
January, 1920.
About this time Mr. Warburg and others conferred with
the Secretary of the Treasury on the necessity for making
some provision for the rationing of credit for essential purposes and its restriction for non-essential uses.
The Federal Reserve Board had created a Capital Issues
Committee with Messrs. Warburg, Hamlin, and Delano as
members. This committee invited all persons, firms, and
corporations who were contemplating unusual expenditures
involving the issuance of new securities, as an act of voluntary cooperation to submit their plans to the committee in
order that the essential character from the standpoint of
public interest, of the proposed expenditures might be determined. While this committee had no authority to prohibit
expenditures nor to restrain a corporation from offering its
securities on the market, its moral influence in most cases
was effective. It was evident, however, that there should be
some agency established which could provide for the maturing obligations of corporate enterprises, such as large manufacturing concerns, public utilities, and railroads, whose op-

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THE FEDERAL RESERVE SYSTEM

orations were regarded as essential in the conduct of the war.
Ordinarily such enterprises looked to the investment market
to absorb securities offered by them, but, owing to the large
and continuous offerings of Government obligations, the
investment market was no longer able readily to absorb private offerings. Having these conditions in mind, the Secretary of the Treasury developed his plan for the establishment of a War Finance Corporation and for the creation by
law of a Capital Issues Committee with larger powers than
the Board's Voluntary Committee could exercise. Accordingly a bill was prepared in the Treasury Department, the
objects of which were outlined in its caption:
A Bill to provide further for the national security and defense,
and for the purpose of assisting in the prosecution of the war, to
provide credits for industries and enterprises in the United States
necessary or contributory to the prosecution of the war, and for
other purposes.
On February 8th the Finance Committee of the Senate,
meeting for the purpose of considering this bill, had before
it the Secretary of the Treasury, Mr. Warburg, and myself.
Mr. Warburg was then Vice-Governor of the Federal Reserve Board and was also Chairman of the Board's Capital
Issues Committee. Among the members of the Senate Finance Committee who were present were Senator Simmons,
Chairman; and Senators Lodge, Smoot, Stone, McCumber,
Gallinger, Gore, Thomas, Townsend, and Jones, of New
Mexico. There was a full discussion of the reasons for the
establishment of a War Finance Corporation and for the
restriction of capital issues. Secretary McAdoo led the
discussion and the substance of his remarks was that
the proposed act to incorporate a War Finance Corporation should
be regarded primarily as a measure to enable the banks, both national banks and State banks and trust companies, to continue to
furnish essential credits for industries and enterprises which are
necessary or contributory to the prosecution of the war.
The Government's borrowings, particularly during the period

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109

immediately preceding and following each Liberty Loan, have
tended to preempt the credit facilities of the banks and often to
prevent them from giving needed and customary help to quasipublic and private enterprises. Many instances have been brought
to the attention of the Secretary of the Treasury and of the Federal Reserve Board where industrial plants, public utilities, power
plants, railroads, and others have found it difficult, if not impossible, to obtain the necessary advances to enable them to perform
vital service in connection with the war, because essential credits,
ordinarily available to them, are being absorbed by the Government itself.
In Europe central banks are permitted to grant to banks and
bankers loans upon stocks and bonds upon certain well-defined
terms. The Federal Reserve Act does not provide for these, and
the War Finance Corporation is designed as a war emergency to
fill this gap. The provisions of the Federal Reserve Act which
permit Federal Reserve Banks to rediscount and purchase commercial paper and paper secured by the Government's obligations
have had the effect of forcing the banks to discriminate against
loans on ineligible paper, even where such loans were vitally necessary for war purposes, in favor of loans on commercial paper even
where they represented activities or enterprises not related to the
war, and which might well be curtailed during the period of the
war. It is believed that the proposed bill has been wisely and conservatively conceived as a war measure to give relief from this
condition during the war. The banks of the country would, no
doubt, scrutinize with the utmost care both the loans themselves
and the security therefor and would exercise their individual judgment upon the borrower's credit before assuming a liability for the
amount of the loan, and also because they would be under the
necessity of advancing, out of their own resources, twenty-five
per cent of the amount loaned. The bill would authorize advances
to a bank of only seventy-five per cent of the amount loaned by
the bank on the notes or obligations of persons, firms, or corporations whose activities are necessary or contributory to the war.
The bill contemplates that the War Finance Corporation shall
lend money to banks, both national and State, which are making
loans to enterprises conducted by persons, firms, or corporations
producing materials or supplies, or doing anything else which is
necessary for or contributory to the war. If a bank, for instance,
should loan money, we will say, to a munitions company and take
the company's six months' note with the company's bond as col-

122 THE FEDERAL RESERVE SYSTEM
lateral security, that note would not be eligible for rediscount in
the Federal Reserve Banks; but the War Finance Corporation in
such circumstances could advance to the bank against the note of
the munitions company, so secured with that bank's endorsement
on it, seventy-five per cent of the face of that note. . . .
The provision of the bill permitting direct loans by the Corporation in exceptional cases is intended to provide for those rare instances where it may be made to appear to the Corporation that a
meritorious borrower is being unwisely discriminated against by
the banks.
As a corollary to the provision for the extension of credits, the
bill provides for approval by the Corporation, through a system of
licenses, of issues of securities with a view to preventing the use of
capital in unnecessary expenditures during the period of the war.
It is important that appropriate provision be made by law, so
that, for the duration of the war, funds available for investment in
securities shall be effectively and economically used to supply the
financial requirements of the Government and of those industries
whose operations are necessary or contributory to the war. The
ordinary flow of capital, which in normal times is left free to seek
its own investment, should during the war be so directed and conserved that these requirements shall be taken care of before funds
shall be invested either in new enterprises or for the expansion of
such old enterprises as are not necessary or contributory to the
prosecution of the war. In these critical times funds available for
investment must not be dissipated on miscellaneous capital expenditures which, however useful or desirable in normal times, will
not now aid in the success of the war. It is not so much a question
of money as a question of labor and materials. It is essential that
the demand for labor and materials for industries which are not
contributory to the prosecution of the war should be kept within
bounds, so that the war needs shall be first provided for. The test
must be whether the proposed expenditure will strengthen the
industrial and military structure of the country for the purposes
of the war. . . .
While patriotic business men and bankers have in many instances voluntarily submitted the question whether the particular security issue then contemplated will be in any way helpful to
the prosecution of the war, it is certainly not desirable that matters of such great importance should be left upon a purely voluntary basis. These questions should be dealt with systematically
under authority of Congress. The thoughtful and patriotic citizen

THE WAR FINANCE CORPORATION

123

who voluntarily submits his plans to the Government should not
be placed at a disadvantage with his less thoughtful or less scrupulous fellow-citizen who goes ahead with his private affairs without
reference to the war needs of his country.
The proposed license system for security issues is in line with
the act which established the selective draft in lieu of a voluntary
system of creating an army. The sacrifices which must be made if
the war is to be won should be made by all alike and not merely by
those whose patriotism impels them to volunteer and who would
have to carry the entire burden unless the slackers are compelled
to do their part.
The bill has been drawn with the double purpose of restricting
unnecessary capital expenditures and of providing facilities for
aiding those industries whose operations are necessary or contributory to the prosecution of the war. Broadly speaking, all these are
* war industries.' The bill is purely a war measure; designed to
conserve the supply of labor and materials for the purposes of the
war, and to help supply the war's financial requirements, and to
give them a first claim on capital seeking investment in like manner as the war's material requirements have been given a first claim
on productions. By the term 'war industries' is meant, not only
those industries turning out the actual munitions of war, but also
all those supplying any of the other elements of production or distribution in an industrial structure designed to meet the diversified
requirements of the war. The bill is not intended to interfere with
the continued existence and operation of existing industries, even
though not remotely contributory to the prosecution of the war.
Such industries should not, however, be permitted to assert a first
claim on fresh capital or be considered until the requirements of
the Government and of the 'war industries' have been fully met.
The proposed bill creates the War Finance Corporation, to regulate the sale of new issues of securities, and to make loans of its
funds or its credit in aid of 'war industries.' It prohibits any person, firm, corporation, or association from selling or offering for
sale any securities issued after the date of the approval of the Act
unless a license for such sale or offering (if required by the Corporation) shall have been obtained from the Corporation. Through its
regulation of security issues the Corporation will be able to keep
the field somewhat clear for the borrowing operations of the Government, and at the same time will stand ready and able to aid
'war industries' whose financial requirements may be rendered
difficult, if not impossible, to meet in competition with Govern-

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THE FEDERAL RESERVE SYSTEM

ment loans. This regulation of security issues will also tend to
prevent the further diversion of labor and materials into nonessential industries. . . .
The money required for increased facilities for ocean transportation has been provided by Act of Congress. Provision for at
least a part of the money required for enlarging railroad transportation facilities is contemplated in legislation now pending in
Congress.
The necessary increase, however, in machinery to produce goods
which requires the investment of capital in industrial enterprises,
not only has not been provided, but a considerable restriction has
been imposed upon the usual supply of capital for investment,
partly by reason of the investment market having been preempted
by the Government through the issue of its own bonds and partly
because of the natural tendency of investors who, notwithstanding
that they have money to invest, hesitate to do so on account of
the uncertainties of war.
The situation with which the country is confronted, therefore,
seems to require the imposition of reasonable restrictions upon the
investment of capital in industries and production not essential for
the conduct of the war. It is equally important that there shall be
some means of supplying necessary capital to the industries which
are essential to the production of war materials and of those things
which indirectly contribute to the efficiency of the Nation. The
restriction of unnecessary capital expenditures will relieve the
market of demands which now interfere, not only with the direct
financial requirements of the Government, but which make it
difficult for those who are furnishing the Government and the
people with essential goods to obtain the capital necessary to
increase their production.
The license system proposed is peculiarly applicable to a country of the great size of the United States, where banking and credit
transactions are conducted by a vast number of independent
banks and private banking firms.
The combined operation of the two functions of the Corporation — that is, the extension of credit and licensing — will make
the exercise of supervision and regulation by the Corporation
much more effective in putting the productive activities of the
country on a war basis than would be the case were the Government simply to make advances without at the same time exercising
supervision and control of security issues.
In so far as the Corporation may be called upon to make ad-

THE WAR FINANCE CORPORATION

113

vances to banks, its first concern would naturally be to aid those
for which other instrumentalities of relief have not already been
provided; for example, savings banks, and particularly mutual
savings banks, which are without capital stock, and which are not
operated for the profit of stockholders. As a class these institutions are not members of the Federal Reserve System nor are most
of them eligible for membership. Their investments consist for the
most part of the securities of the United States and of States and
municipalities and of the bonds of industrial, transportation, and
utility companies, and also mortgages.
Nothing will tend so greatly to prevent the development of any
possible uneasiness among savings bank depositors as the assurance provided by this Act that any solvent savings bank in case
of sudden withdrawals can obtain advances upon the security of
its investments and promptly liquidate the claims of its depositors.
There is considerable apprehension among savings banks as to
means of relief if an emergency arises, but I believe that the assurances of support which this War Finance Corporation will provide, will allay all apprehension and probably head off any demand
for withdrawals of deposits.
The next concern of the Corporation would be the requirements
of commercial banks, which are unable to get required accommodation upon the security of their investments through the Federal
Reserve Banks. Many banks which are now called upon to extend
large lines of credit to customers which are expanding their businesses to meet the present needs of the Government are obliged to
take securities from these customers which are not eligible for rediscount at Federal Reserve Banks. At the same time these banks
are being called upon to extend larger lines of credit to their
customers than ever before. Their customers are calling upon
them, not only for commercial loans to carry their large inventories, but for what are in effect temporary capital loans in order
to construct new facilities and add machinery to existing plants
for the purpose of filling Government contracts. The burden of
these banks is also heavily increased by the financial requirements of the Government which at the same time is calling upon
them to lend large sums through sales of Treasury certificates
of indebtedness.
In these circumstances the commercial banks are quite naturally discriminating in their loans between those eligible for rediscount by Federal Reserve Banks and those which are not. The
proposed Act, however, would remove the ground for any such

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THE FEDERAL RESERVE SYSTEM

discrimination, for it provides a means by which such banks may
procure accommodation upon certain securities arising out of war
conditions which are not eligible at Federal Reserve Banks. The
proposed Act would thus free credit pressingly needed at the
present time both direcdy and indirecdy for the Government's
use... •
When Secretary McAdoo had finished, I was called upon.
In the course of my remarks I discussed more particularly
the banking situation. The observations which follow are a
synopsis of my statement to the Committee:
This particular bill has never been sent to the Federal Reserve
Board for its consideration, and the Board, therefore, has not
taken any stand regarding it, either favorable or otherwise. The
Board, however, is interested in the objects which the bill seeks to
attain, and is impressed with the importance of some measure of
relief for the securities market.
Some time ago the Board adopted a resolution putting itself on
record that some governmental intervention was necessary in
order to take care of this situation, and it threw out the same idea
in its annual report to Congress, which was submitted about two
weeks ago. . . .
The Board has been urged repeatedly during the last four or
five months to take some step to protect the holders of securities,
as well as to liberalize its definition of eligible paper. The savings
bank situation has especially been brought to the Board's attention. The savings banks as a rule cannot come into the Federal
Reserve System. Mutuals, having no capital, are excluded under
the Federal Reserve Act as it stands to-day. Their securities are
of such character as to render them ineligible as collateral for
loans with Federal Reserve Banks. This applies to a greater or
less degree to the investments, not only of savings banks, but to
those of State banks, trust companies, and national banks as
well.
There has been another development. The Federal Reserve
Act defines very clearly what is eligible paper. There are two essential factors which determine the eligibility of paper. One is the
time that the paper has to run; in the case of commercial paper,
not longer than ninety days, and, in the case of agricultural paper
or paper based on live stock, not longer than six months. Time is
one factor. The other factor which governs the eligibility of paper

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115

is the use to which the proceeds of the paper have been applied. Those two things determine the eligibility of unsecured
paper.
The Act goes further, and expressly bars 'merely' investments,
such as stocks, bonds, and securities other than United States
bonds. As the Federal Reserve System has been developed, and
as the banks have found that certain classes of paper are eligible
with the Federal Reserve Banks, and that they could go ahead
and discount paper of that character very freely, at the same time
keeping their portfolios in liquid shape by reason of being able to
rediscount this paper with Federal Reserve Banks, a premium,
so to speak, has been put upon 'eligible' paper, and the banks
more and more have gone into the field of commercial paper and
bankers' acceptances. We find that several trust companies which
never had bought any paper, never had done any commercial
business, in the last six months have gone into the commercial
field. There is a distinct preference to-day for eligible commercial
paper. Every bank prefers to have a large proportion of bills discounted, eligible for rediscount with a Federal Reserve Bank,
thus assuring availability of funds whenever needed.
The new issues of Government bonds have had the effect,
naturally, of destroying, to a large extent, the securities market.
It follows that when the United States Government has issued a
very large amount of four per cent bonds, an amount greater than
the investment market can readily absorb, the ordinary securities
market is necessarily paralyzed; and the larger the Government
issues and the higher the rate, the greater will be the depression of
the ordinary investment market. The deposits of savings banks
especially go into these Government bonds. Savings banks depositors have invested freely in Government bonds. As these
depositors have taken bonds either for investment purposes or
from a patriotic sense of duty, their balances are drawn down.
Ordinarily, when savings banks deposits decline the banks sell
securities, but just now the savings banks have no adequate market in which they can dispose of securities. Regardless of intrinsic
values, when banks sell railroad or industrial bonds in the present
circumstances, they do so at a ruinous sacrifice, and the larger the
offerings are, the worse the situation becomes. So it has been
becoming more and more manifest for some time past that there
are only two plans to be considered. One is to broaden the base
of eligibility and to permit the discount by Federal Reserve Banks
of notes secured by ordinary industrial or railroad bonds, and the

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other is to adopt some plan providing for direct governmental
intervention or aid.
Senator Calder some time ago introduced a bill which provided
for the rediscount at Federal Reserve Banks of notes secured by
bonds as collateral, but the Board has never been in favor of this
plan. One of the underlying principles of the Federal Reserve Act
is the strictly commercial and purely liquid character of its assets.
The Federal Reserve note is secured by gold or by gold plus commercial paper, and the paper pledged to secure the Federal Reserve
note ought to be self-liquidating. The injection into the Federal
Reserve System of a vast volume of paper secured by miscellaneous industrial and railroad bonds would bring about a radical
change in the Federal Reserve System and would alter the character of the Federal Reserve note. The Federal Reserve note at
present is an elastic currency. A currency, to be elastic, must
have the ability to contract automatically as well as to expand.
There can be no elasticity if the movement is all in one direction.
It should work both ways in response to the varying requirements
of trade and commerce.
With the vast expenditures for war purposes, the great financial
operations of the Government, enormous issues of Treasury obligations, and the activity in certain lines of business, it is evident
that more currency is needed for purposes of circulation than was
the case two or three years ago.
Mr. Warburg, then being called, said:
I am heartily in accord with the objects and aims of this bill
and its general plan. There is no doubt but that some organ as
here proposed is imperatively required at this time. We have
created an emergency machinery for commercial requirements in
the Federal Reserve Act; but this is the only important financial
country that does not provide any emergency machinery for the
purpose of dealing with securities (stocks or bonds). The mere
fact that this lack exists creates in times of stress and war a feeling
of uncertainty which is a decided weakening of the national
strength. What is proposed here is destined to remedy in part
this defect and to cope with some of the difficulties and problems
caused by the Government's financial operations—the relief will
be both actual and in its effect on the general sentiment.
To illustrate: I think there is a great deal of psychology in the
situation, so far as savings banks are concerned. When once they
know that they can get relief, they probably will not need it so

THE WAR FINANCE CORPORATION

117

much. I do not believe that we will ever be called upon to issue
anything like obligations amounting to $4,000,000,000 of this Corporation, but the power is there, and that is a tremendous benefit
and protection for the general situation.
I understood that it is your wish that I should address myself
to the question of licensing securities. . . .
Secretary McAdoo at first put out a statement asking everybody to consult with him before issuing securities. The response
was so immediate that he found, after a while, that it was more
than he himself could well handle without an organization especially created for that purpose, and he asked the Federal Reserve
Board whether it would not undertake this for the country. We
agreed to do so with a great deal of trepidation. It is a thankless
task, and there is a great deal of responsibility connected with it.
We finally took it, and the chairmanship of that committee fell to
my lot, and that is why I am answering these questions.
We organized an advisory council of three. We asked three
men, the ablest and most experienced we could get from the
various sections of the country — Mr. Allen B. Forbes, from New
York; Mr. F. H. Goff, from Cleveland; and Mr. Henry C. Flower,
from Kansas City. These three men came here and served in the
capacity of our advisors. We secured Mr. Bradley W. Palmer, of
Boston, as our counsel. All these men serve as volunteers without
compensation.
What we do at present is simply upon request to express an
opinion as to whether or not, after careful examination, securities
which are to be offered are compatible with the public interest,
and that public interest we consider from two points of view.
One is the general public welfare, what is necessary for the health
and the strength of the people, and the other is the interest of the
Government in the prosecution of the war. We have organized
local committees at Federal Reserve Bank points and have invited
the most prominent experts to serve in an advisory capacity in
their districts. We have taken bankers, public-utility men, and
manufacturers — as a rule a mixture of all three — and we have
organized out of those a standing committee of five men, which
consists of the Chairman of the. Federal Reserve Bank, the
Governor of the Federal Reserve Bank, and three other men, as
described, and to those men we refer, wherever advice is necessary, the application for such local investigation as is necessary.
They give us their best opinion. After that our Washington advisory committee passes upon it, and then the committee of three

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THE FEDERAL RESERVE SYSTEM

of the Board finally renders its opinion. I have a copy of a letter
giving such opinion here. It reads as follows:
'Having inquired into the purpose of the issue above described,
we are of opinion that the sale of the said bonds is not incompatible
with the interest of the United States.
'Thisfindingconstitutes no approval of such issue as regards its
merits, security, or legality in any respect.
'In any public offer or advertisement of the said issue, this
letter must be incorporated in full.'
That last paragraph was for the purpose of avoiding some houses
using our approval as appearing to recommend the security as
such. We do not pass, of course, upon the intrinsic merits of any
security. . . .
Where it is a question of renewals, as a general principle
we feel that we ought to pass those, unless we found that
there had been extraordinary profits which might have been
used to pay off some of these maturing obligations. But as a
general principle we would say they have to be renewed.
The same way about refunding of banking debts, where
they have been incurred previously, prior to February 1st,
we would say yes, they have to be renewed. On the whole,
I think a body of this kind would always have the tendency
to be very considerate. It involves a terrific responsibility.
It is not an easy matter to say to anybody that he should
not extend his plant or go on with his regular business.
In reply to an inquiry, Mr. Warburg stated that the total
obligations of railroads, public-service, industrial, and municipal corporations maturing for the year 1918 amounted to
$799,000,000, as follows: $214,000,000 railroad; $224,000,000
public utilities;$182,000,000 industrials;$120,000,000State,
county, and city; and $58,000,000 companies having domicile in Canada, Cuba, and Mexico.
On the subject of possible inflation, Mr. Warburg said:
We are just now in a terrific process of inflation, the worst that
the world has ever seen, taking the world as a whole, not the
United States, but the world as a whole. . . . No doubt the
process that we are going through or that the whole world is going

THE WAR FINANCE CORPORATION

119

through is one of terrific inflation. That is to-day expressed by
the reduced purchasing power of the dollar. The dollar will buy
only fifty per cent of what it bought a few years ago. It is not a
question of Federal Reserve note issues. It is a question of the
rapid manufacturing of credit. It is because all Governments go
ahead and issue billions and billions of dollars of bonds for perishable things of no lasting value and create new credits for them,
and do it at such terrific clip that inflation is produced. The mere
fact that you take out $100,000,000 of currency is only a very
small factor in the case. We have now outstanding about
$6,000,000,000 of Government bonds, which all could be taken
into Federal Reserve Banks to-day in the same manner as the
prospective $4,000,000,000 short-term bonds of the War Finance
Corporation. Of these six billions only $300,000,000 have found
their way into the Federal Reserve Banks. . . . It stands to reason
that with each new issue there will be an increased amount going
in, and it must be our object, of course, to keep that down as far
as we possibly can. While the Federal Reserve Board and the
Federal Reserve Banks may bend their efforts in this direction,
the two decisive factors are the scope and speed of the expenditures of the Government, on the one hand, and the saving power
of the people, on the other. Whatever the Government spends in
excess of the savings of the people will have to be produced by expansion of bank credit. That cannot be entirely avoided, but we
have to be careful not to waste our strength too fast. That is why
I am so deeply interested in this question of the contraction of
unnecessary credit. Credit is just as much a limited thing as any
other thing, and we have got to save it, and every individual and
every department, State, or municipality, and every corporation
has got to save, and unless they do they will have to carry the
responsibility for the evil consequences of too rapid inflation.. . .
The final result depends upon the expenditures of the Government, on the one hand, and the power of the people and their
willingness to save, on the other. In between we can, of course,
use our influence to a certain degree, and make it felt within certain limitations, but as long as the war lasts we can put on the
brakes only to a degree that will not stop the big wheel of
Government from moving as guided by these two factors.
In the course of a few weeks the bill establishing the War
Finance Corporation was passed by both Houses of Congress
and became law upon approval by the President

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THE FEDERAL RESERVE SYSTEM

The War Finance Corporation had a capital of $500,000,000
all subscribed by the Treasury of the United States. The
Secretary of the Treasury, ex officio, was Chairman, and the
other directors nominated by the President and confirmed
by the Senate were: Eugene Meyer, Jr., of New York; Angus
W . McLean, of North Carolina; C. M. Leonard, of Chicago;
and myself. I was elected Managing Director for a period of
twelve months and retained at the same time my position as
Governor of the Federal Reserve Board. The law fixed the
sum of $12,000 per annum as compensation for each director
with the exception of Secretary McAdoo and myself, who
continued to receive salaries only as Secretary of the Treasury and member of the Federal Reserve Board.
Under the terms of the War Finance Corporation Act, the
President was charged also with the appointment of seven
members of the Capital Issues Committee, subject to confirmation by the Senate. From the Federal Reserve Board
he appointed: Charles S. Hamlin, of Massachusetts; Frederick A . Delano, of Illinois; and John Skelton Williams, of
Virginia. Mr. Hamlin was made Chairman of the Committee.
The new duties thus imposed upon me kept me fully occupied during the year 1918, and early in 1919 I asked to be
relieved of the managing directorship. Mr. Meyer was elected
Managing Director in my place. In January, 1920, I resigned as director, and was not connected with the War
Finance Corporation when the directors of the Corporation
voted to discontinue making new loans. In anticipation of
business reaction and financial difficulties at the end of the
war, the law was so drawn as to permit the W a r Finance
Corporation to continue to exercise some of its functions for
a limited time; but the Treasury burdens were so heavy in
1920 that Secretary Houston deemed it advisable that the
W a r Finance Corporation should suspend active operations.
Some critics of the Federal Reserve Board have shown a disposition to censure it for the action of the War Finance Corporation in discontinuing new advances, but it is only fair to

THE PITTMAN ACT

121

say that the members of the Board were not consulted in the
matter and knew nothing of the action taken until they read
of it in the newspapers. By Act of Congress the War Finance
Corporation was required in the early part of 1921 to continue to make advances under the terms of some of the sections of the original War Finance Corporation Act, which
enabled it to make new loans until some time in 1923. Additional powers were given the Corporation at the same time.
Congress afterward extended the time for making new advances for a period of twelve months, and it was not until
late in the year 1924 that the Corporation discontinued its
functions as a lending agency, and returned or released to
the Treasury the funds employed or set apart for its capital
stock. The Corporation, under its enlarged powers, did much
to relieve distress in the agricultural sections as it was able
to make advances of a character which the law did not permit Federal Reserve Banks to make.
The Capital Issues Committee exercised its functions during the period of the war, but was dissolved shortly after the
signing of the Armistice.
In April, 1918, a bill relating to silver coinage passed both
Houses of Congress and became a law within a few days from
the time it was drafted. This bill is commonly known as the
Pittman Act, as it was sponsored by Senator Pittman, of
Nevada. In ordinary circumstances the passage of such a
bill would have required several years, if indeed it could
have been put through at all. The Pittman Act was perhaps the most unique of the war measures, and its passage
relieved a situation fraught with the gravest possibilities.
The British army was conducting a campaign in Mesopotamia, and India was an important base of supplies for
this army. The people in India dislike paper currency and
demand gold and silver in commercial transactions. Lord
Reading, who had succeeded Sir Cecil Spring-Rice as the
British Ambassador at Washington, informed the Secretary
of the Treasury that the Treasury of the Indian Govern-

122

THE FEDERAL RESERVE SYSTEM

ment was faced with an utter exhaustion of its stock of silver,
and that its inability to maintain silver payments would create an alarming situation throughout India and would have
a disastrous effect upon the military operations in Asia Minor. The matter was regarded as being of such extreme delicacy that the information was imparted to only a very few
Government officials, Senators and Representatives. It being impracticable to obtain the amount of silver requisite to
satisfy the needs of India through market purchases, a bill
was prepared in the Treasury Department to authorize the
Secretary of the Treasury to break up standard silver dollars to an amount not to exceed $350,000,000 and to sell the
silver bullion thus obtained at a minimum price of one dollar
per fine ounce. The bill gave the Secretary of the Treasury
authority also to purchase silver from American producers
at the same price, a maximum of one dollar per fine ounce,
up to an amount necessary to replace the silver dollars
broken up and sold. In order to provide against any contraction in the circulating medium, the Treasury was authorized to issue one-year notes to be purchased by the
Federal Reserve Banks, upon the security of which those
banks were authorized to issue Federal Reserve Bank notes
in one-dollar and two-dollar denominations, such notes being
subject to requirements as to redemption and taxation similar to those imposed upon national bank notes. Although
few members of the House and Senate, outside of those who
were on the Banking and Currency Committees, were informed as to the reason for this legislation, both bodies accepted the assurance that avoidance of any discussion of its
real purpose was most desirable and that patriotic duty required their support of the measure. The bill was passed
very promptly without difficulty. About a year ago the repurchases of silver as provided in this Act were completed
and the Federal Reserve Bank notes which were issued to
take the place of the silver dollars have all been retired. The
urgency of the demand for silver in 1918 was so great that

THE OVERMAN ACT

123

for a short time the market price of silver bullion exceeded
its coinage value.
In May, 1918, an Act, commonly known as the Overman
Act, was passed authorizing the President 'to coordinate or
consolidate executive bureaus, agencies, and offices, and for
other purposes, in the interest of economy and the more efficient concentration of the Government.' Under this Act the
President was given power, during the period of the war and
for six months after the termination of the war by the proclamation of a treaty of peace, or at such earlier time as
the President may designate,' to make such redistribution of
functions among executive agencies as he may deem necessary, including any functions, duties, and powers hitherto
by law conferred upon any executive department, commission, bureau, agency, office or officer, in such manner as in
his judgment shall seem best fitted to carry out the purposes
of this Act.' Several Senators expressed a desire to have
some of the independent establishments, especially the Interstate Commerce Commission and the Federal Reserve
Board, exempted from its provisions, and motions to this
effect were lost on a close vote. Although the functions of
the Board were never disturbed by the President, the debates in the Senate and House make it clear that, under
the authority given him by the Overman Act, he could, had
he deemed such action necessary, have transferred to the
Secretary of the Treasury or to any other Government official any functions of the Federal Reserve Board, including
the power to approve the discount rates of Federal Reserve
Banks. 1
*See Congressional Record, Sixty-Fifth Congress, vol. 56, pp. 4573, 4579,
4952, 50l9»5fc>5» 5688, 5693-99. 6448I 6452, 6460.

CHAPTER X I
BOARD URGES JUDICIOUS CURTAILMENT OF CREDIT FOR NONESSENTIAL P U R P O S E S — R E T I R E M E N T OF MESSRS. DELANO
AND W A R B U R G — A F T E R - W A R READJUSTMENT —
VIEWS OF A . C . M I L L E R

IN June, 1918, the Board mailed a circular letter to banks
and trust companies calling their attention to the importance
of a judicious curtailment of credit granted for so-called nonessential transactions, and urging the banks to do their utmost in cooperating in a policy looking to a gradual but general curtailment of such credits. This letter will recall to
many the domestic conditions — financial and economic —
which existed at a critical stage of the war, and was in part
as follows:
On June 12th the Secretary of the Treasury addressed a letter
to all banks and trust companies announcing his financial programme for the ensuing six months, which involves the sale to and
through banks of approximately $6,000,000,000 of Treasury certificates of indebtedness in installments of not less than $750,000,000
every two weeks between June 25th and the 1st of November. In
this letter each bank and trust company was requested to invest
in these certificates an amount equal to approximately two and
one half per cent of its gross resources, or a total of five per cent
for each month. Announcement was made at the same time that
there was in contemplation an issue of $2,000,000,000 of certificates of appropriate maturities in anticipation of income and
excess-profits taxes, for sale more particularly to taxpayers, and
that the amount of the regular semi-monthly sales of certificates
of indebtedness would be reduced in proportion to the extent to
which these tax certificates are taken by the public.
The banking institutions have responded most generously to
the appeal of the Secretary of the Treasury. Throughout the
country they have pledged themselves without hesitation to subscribe to their allotment, and the result of the initial offering,
which has just been closed — a subscription of $838,000,000 in
response to a request for not less than $750,000,000 — is evidence

CURTAILMENT OF CREDIT

125

of the splendid patriotism of those who direct our national and
State banking institutions. . . .
The Board feels in duty bound to reiterate that the banks can
render a greater service to the country in this connection, not
merely by subscribing their allotments and by using the rediscounting facilities of the Federal Reserve Banks in making payments, but by providing the necessary funds for meeting payments
for certificates of indebtedness purchased, by employing for this
purpose the accretion of new deposits, and by utilizing the funds
that may be made available by a judicious curtailment of credits
asked for non-essential purposes.
In order to prosecute the war successfully, the Government is
compelled to issue obligations to provide for its large expenditures,
which involve waste and destruction rather than a permanent addition to the national wealth. This process in itself tends to inflation, and contributes to a rapid increase in the price of necessities. Abnormal demands by the Government, unavoidable and
necessary in the present circumstances, must be counteracted by
greater economy on the part of the civilian population, which
must decrease, by combined effort, the normal waste incident to
domestic life and business pursuits. There is not an unlimited
supply of credit, or of goods, or of man power. Wherever possible
all such resources should be conserved and set aside for the use of
the Government. Credit extended for non-essential purposes involves the use of labor, of transportation, of material, and reserves
which ought to be kept free for the use of the Government.
Unrestricted credit involves unnecessary competition with the
Government and needlessly advances prices, besides impeding and
delaying governmental operations.
'Business as usual' and 'life as usual' are impossible at a time
when the supreme business of the country is war, and cannot be
approximated without interfering with the work of the Government and inflicting serious harm upon the Nation as a whole. The
staying power of the country in this emergency depends upon the
extent of its resources in men, goods, and gold. An unnecessary
use of credit, a needless recourse to the discounting facilities of the
Federal Reserve Banks, weakens proportionately the gold reserve
of the United States — the financial backbone of the entire Allied
group. Whoever wastes the raw material and manufactured products of the country adds to our financial burden by increasing the
amount the United States must import from other countries and
by decreasing, at the same time, the volume of goods that should

126

THE FEDERAL RESERVE SYSTEM

be available for export purposes — the best means of paying for
the goods acquired from abroad.
Conservation of our commodities and of our gold — preservation of our economic strength — is of the greatest importance in
making provision for the period of readjustment which will follow
the reestablishment of peace. . . . The Board wishes to point out
also that, by refraining from buying luxuries and by restricting
the use of necessities to the actual requirements of health and
reasonable comfort, we can create a reserve purchasing power
which will be of the greatest value to our industries in bridging
over the period of reaction and reconstruction which must follow
when war enterprises are transformed into those of peace. An
intelligent and prudent use of credit, therefore, will be an important factor in strengthening the national resources during the
period of the war, in aiding its successful prosecution, and in
maintaining the economic strength of the country for the time of
rapidly changing conditions which will come when the war has
been won and the millions of men in our armies are returning to
the employments of peace.
Thus, by giving your cooperation now in the effort to conserve
national resources by the exercise of discriminating judgment in
granting credits, you will also do your part in averting the danger
of unemployment which is apt to follow a treaty of peace. The
Board appreciates the difficulty of laying down a general rule for
defining essentials or the degree in which any enterprise is essential, and requests that its remarks on this subject in the April
issue of the Bulletin be read again. The Board cannot suggest
specific ways in which credit should be conserved or unnecessary
expenditures curtailed, as each banker must determine this for
himself after conferring with the business men of his community
and after a careful study of his local situation. Reasonable discretion should be exercised, and drastic steps calculated to bring
about hardships or embarrassments or work injustice should be
avoided, but the banks should divert the use of their credit more
and more into productive fields, where its employment will result
in augmenting the national resources.
About this time, Mr. Frederick A. Delano, who had been
a member of the Federal Reserve Board since its organization, and Vice-Governor since August, 1916, tendered his
resignation to the President, in order that he might accept
service with the American forces in France as a Major in the

CHANGES IN THE BOARD

127

United States Army Engineer Corps engaged in the construction and operation of military railways. Mr. Delano
was an able civil engineer and experienced railroad executive, and rendered distinguished service in France. When
the Armistice was signed, he held the rank of Colonel. As
soon as Mr. Delano's colleagues heard of his resignation, the
matter was considered formally at a meeting of the Board,
and this resolution was passed and entered upon the minutes:
The Board has heard with extreme regret of the proposed resignation of Mr. F. A. Delano. It desires to record its appreciation
of Mr. Delano's able and faithful service as a member of the
Federal Reserve Board and of those high personal qualities which
have made his relation to his colleagues one of unusual mutual
confidence and regard. Mr. Delano has served two years as ViceGovernor of the Board and for nearly two years additional as
member. During this period of almost four years the Federal
Reserve System has attained its growth, while the banking and
financial problems of the Nation, in whose solution the Federal
Reserve System has necessarily had a large part, have been of unprecedented seriousness. The value of Mr. Delano's contribution
to the effective organization of the System and to the successful
solution of its problems cannot be overestimated. His departure
will be a serious loss to the System and a source of extreme
personal regret to his colleagues.
A few weeks later, the Board sustained another serious
loss in the retirement of Mr. Warburg, whose term of office
expired on August 9th. The resolutions adopted on that day
by the Board placed on record the following expression of
appreciation of Mr. Warburg's service:
The members of the Board, now that the term of their colleague,
Hon. Paul M. Warburg, is about to expire, desire to place upon
record this evidence of their high appreciation of the important
and valuable services which have been rendered by him in the
development and administration of the Federal Reserve System.
They wish to express also their sense of personal loss in being
deprived of their daily association with him and their feeling that
his retirement from the Board is a serious loss to the public
service.

128

THE FEDERAL RESERVE SYSTEM

Mr. Warburg's thorough knowledge of national and international
finance, his indefatigable and untiring industry, his masterly conception and firm grasp of the many important banking problems
which have come before the Board, have placed its members
under a lasting obligation to him.
The important amendments to the Federal Reserve Act relating
to reserves which have enabled the System to meet so fully all the
requirements which have been made upon it during the most
critical period of the Nation's financial history, and the extension
of the use of bankers' and trade acceptances, are among the many
important developments which have been due in a great degree to
his foresight and untiring efforts.
The Board has received from him also, especially since the
entrance of our country into the war, very valuable suggestions
regarding the fiscal relations of the banks to the Government,
foreign exchange, regulation of gold exports, control of capital
issues, and restriction of non-essential credits.
His services can be appreciated best by those who have had the
near view of colleagues. The sense of public duty, loyally and
ably performed, is after all the chief reward of official life, and
whatever the future may have in store for Mr. Warburg, he can
feel that he leaves office with the admiration, confidence, and sincere esteem of his colleagues, and with the satisfaction of knowing
that he has given valuable assistance to the Board in grasping and
solving many of the momentousfinancialproblems, both domestic
and international, which have come before it.
The Federal Reserve Bulletin for September, 1918, contained the correspondence between Mr. Warburg and the
President on the subject of his further continuance on the
Board. Under date of May 27,1918, Mr. Warburg addressed
a letter to the President calling attention to the fact that on
August 9th, his term of office as a member of the Federal
Reserve Board would expire. He then said:
Certain persons have started an agitation to the effect that a
naturalized citizen of German birth, having near relatives prominent in German public life, should not be permitted to hold a
position of great trust in the service of the United States. (I
have two brothers in Germany who are bankers. They naturally
now serve their country to the utmost of their ability, as I serve
mine.)

CHANGES IN THE BOARD

129

I believe that the number of men who urge this point of view is
small at this time. Thev probably have not a proper appreciation
of the sanctity of the oath of allegiance or of the oath of office.
As for myself, I did not take them lightly. I waited ten years before determining upon my action, and I did not swear that 41
absolutely and entirely renounce and abjure all allegiance and
fidelity to any foreign potentate, and particularly to Wilhelm II,
German Emperor,' etc., until I was quite certain that I was
willing and anxious to cast my lot unqualifiedly and without reserve with the country of my adoption and to defend its aims and
its ideals. . . .
Much to my regret, Mr. President, it has become increasingly
evident that should you choose to renominate me this might precipitate a harmful fight which, in the interest of the country, I
wish to do anything in my power to avoid and which, even though
resulting in my confirmation, would be likely to leave an element
of irritation in the minds of many whose anxieties and sufferings
may justify their intense feelings. On the other hand, if for reasons
of your own, you should decide not to renominate me, it is likely
to be construed by many as an acceptance by you of a point of
view which I am certain you would not wish to sanction. In these
circumstances, I deem it my duty to state to you myself that it is
my firm belief that the interest of the country will best be served
if my name be not considered by you in this connection. . . .
I have considered it the greatest privilege to serve my country
at this time, and I do not abandon lightly a work, half done, in
which I am deeply and genuinely interested. But my continuation in office under present conditions might make the Board a
target of constant attack by unscrupulous or unreasoning people,
and my concern to save any embarrassment to you and to the
Board in the accomplishment of its work would make it difficult
for me to conserve that independence of mind and freedom of
action without which nobody can do justice to himself or his
office.
In writing you this letter I have been prompted solely by my
sincere conviction that the national welfare must be our only concern. Whatever you may decide to be best for the country will
determine my future course. We are at war, and I remain at
your orders.
On August 9th the President replied expressing his 'appreciation of the fine personal and patriotic feeling which

142 THE FEDERAL RESERVE SYSTEM
made that letter one of the most admirable and gratifying I
have received during these troubled times/ and said;
Your retirement from the Board is a serious loss to the public
service. I consent to it only because I read between the lines of
your generous letter that you will yourself feel more at ease if
you are left free to serve in other ways. . . .
You carry with you in your retirement from this work to which
you have added distinction, my dear Mr. Warburg, my sincere
friendship, admiration, and confidence, and I need not add, ray
cordial good wishes.
On August 14th the resignation of Dr. H. Parker Willis,
Secretary of the Board, was accepted, effective September I,
1918, and Mr. J. A. Broderick was appointed as his successor. Dr. Willis resigned to accept the chair of banking at
Columbia University, New York. The Board, however, was
not deprived of his services altogether, as he remained until
July 1, 1922, as Director of the Division of Analysis and Research, and as editor of the Federal Reserve Bulletin under
the supervision as heretofore of the Board's Bulletin Committee, of which Mr. A. C. Miller was Chairman.
The vacancy occasioned by the resignation of Mr. Delano
was not filled for more than a year, until September, 1919,
when the President appointed Mr. Henry A. Moehlenpah,
of Wisconsin, to serve for the remainder of his term, which
was to expire on August 9, 1920. For some reason it appeared to be difficult during the last half of 1918 and the
first half of 1919 to induce properly qualified men of the Central West to accept membership on the Federal Reserve
Board. I am told that a tender of appointment was made
to more than a half-dozen men before it was finally accepted
by Mr. Moehlenpah.
On a warm afternoon in July, 1919, a gentleman from
that section called to see me and, after introducing himself,
stated that he had been offered Mr. Delano's place on the
Federal Reserve Board. He appeared to have no well-defined
idea as to the duties of the Board and inquired if the Board

CHANGES IN THE BOARD 143
met once a week or twice a month. He seemed astonished
when I told him that usually the Board met every day, and
said,' But of course no one ever comes back in the afternoon.'
I told him that, on the contrary, few members ever left for
the day before five o'clock in the afternoon, and that some
of us frequently remained as late as six or seven o'clock. He
then wanted to know when we played golf, and I told him
that I managed to get along without playing at all. He said
that he would not care to give up golf, and was informed
that he might be able to arrange for a game two or three
times a week. He then inquired as to the patronage that he
would have as a member of the Board. I told him that he
would have the privilege of appointing his own secretary and
stenographer, but that all other appointments in connection
with the Board's organization were made by the Board itself. This reply seemed to be rather disappointing, and he
asked, 1 If I become a member of the Board what will be my
prerogatives?' A t that time the Treasury had not removed
the restrictions regarding entrance to the building which became effective at the beginning of the war, and visitors to
the Treasury Department were obliged to use the employees'
entrance on Fifteenth Street, and each was required to give
his name and address and to state the purpose of his visit.
He would then be referred to the Captain of the Watch, who,
after further questioning, would admit him. The Secretary
of the Treasury had his own private entrance and other
Treasury officials as well as Federal Reserve Board members were allowed to use the west entrance which is on the
side opposite the White House. M y own office overlooked
this entrance. In answering his question as to prerogatives,
I inquired, 1 How did you get into this building?' He said he
had a hard time getting in. ' People at the door seemed to
think I was a Bolshevik, asked me a lot of questions, and referred me to the Captain of the Watch, who finally let me
come up.' I then said, 'As a member of the Federal Reserve
Board you would not be obliged to use the Fifteenth Street

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THE FEDERAL RESERVE SYSTEM

entrance with the attendant delay, but could come into the
building through the entrance here on this side* — (pointing
to the west entrance). 'This seems to be about the only prerogative which pertains to membership on the Federal Reserve Board.' The conversation then turned to other topics,
and, when he rose to leave, he said, 1 1 don't think I want
the job/
In October, 1918, the President appointed, as Mr. Warburg's successor for the full term of ten years, Mr. Albert
Strauss, of New York, and designated him as Vice-Governor of the Board. Mr. Strauss had been for many years
a member of a private banking firm in New York City, and,
for a year or more preceding his appointment to the Federal
Reserve Board, had represented the Treasury Department
on the War Trade Board, and on the Gold Export Committee of the Federal Reserve Board. His familiarity wTith
international finance was of especial value to the Board,
and he served until March 15, 1920, when he resigned in
order to resume his former banking connections in New
York.
In the autumn of 1918 complaints were made by growers
of sugar beets in the West that they were unable to obtain
requisite credits through ordinary banking channels. The
live-stock people in that section had also become nervous
over their situation, which afterward became very critical.
A t that time Federal Reserve Banks were not permitted by
law to rediscount any paper having maturity of longer than
ninety days, except ' that notes, drafts, and bills drawn or
issued for agricultural purposes or based on live stock and
having a maturity not exceeding six months,' might be discounted in an amount to be limited 'to a percentage of the
assets of the Federal Reserve Bank to be ascertained and
fixed by the Federal Reserve Board.' The Federal Reserve Board had long ago ruled that Federal Reserve
Banks might rediscount agricultural or live-stock paper to
the extent of ninety-nine per cent of their assets, being desir-

AFTER-WAR READJUSTMENT

133

cms of extending all possible aid to those engaged in these
essential industries. Those engaged in the business of breeding cattle, however, found it necessary to borrow for as long
as two years, pending the growth of young calves, and, in
fattening matured cattle for the market, credits of at least
nine months were often necessary.
In 1923, the law was amended so as to make the maturity
limit on agricultural and live-stock paper nine months instead of six months. Before the war a large volume of the
live-stock credits was extended by cattle loan companies
whose practice was to sell the notes of the ranchmen with
their own endorsement to banks throughout the country,
and such notes were offered at more attractive interest rates
than ordinary commercial paper. The cattle loan companies
were able in this way to finance themselves without much
difficulty. During the war repeated issues of Government
bonds and certificates made such heavy inroads on banking
reserves that the cattle loan companies were no longer able
to sell their paper in accustomed volume, and the cattle industry felt the pinch. Late in October, 1918,1 went West in
order to familiarize myself with the situation, visiting Salt
Lake City and San Francisco, and conferred with leading
bankers in each city. I found that they were extending credit
freely to sugar refiners and were caring for the more pressing
needs of the cattle men, but that they were reluctant to
make advances as freely to growers of sugar beets because of
the perishable nature of the product. Sugar beets are not
stored in warehouses, but, while awaiting shipment, are piled
up in the open and are subject to weather damage. They
are grown mainly north of the thirty-sixth parallel of latitude; and in the country west of the Mississippi River, usually on lands having an elevation of one thousand feet or
more above the sea. Being left in the open, they are apt to
freeze, and if a thaw follows the beets are ruined, although
they are not damaged if the cold is continuous and the beets
are kept frozen up to the time the refineries are ready for

146 THE FEDERAL RESERVE SYSTEM
them. As a rule the cold in the mountain States is continuous and little damage results.
I explained to the bankers in San Francisco that the War
Finance Corporation was not desirous of competing with
them, but that, unless satisfactory assurances were received
that reasonable credits would be extended sugar-growers by
the banks, the War Finance Corporation would feel obliged
to establish agencies for the purpose of making direct loans,
as an adequate supply of sugar was deemed necessary in the
conduct of the war. The bankers agreed to take care of the
situation and no further complaints were made by the beetgrowers. On my return East, I stopped over in Denver,
Omaha, and Kansas City for the purpose of further investigating the cattle situation. On the day of my visit to Kansas City, the premature report of the signing of the Armistice
came over the wires and for several hours the city celebrated
in true Western style. A few days later, I saw in Washington a modified repetition of this celebration on the day the
Armistice was actually signed.
The return of peace, however, did not solve the economic
and financial problems of the country. On the other hand,
it accentuated them, and the Federal Reserve System, in
particular, was brought face to face with a most difficult situation. Many of the war controls were at once discontinued
or relaxed, and agencies, such as the War Industries Board,
the War Trade Board, and the Capital Issues Committee,
were dissolved almost immediately. Europe and America
were, indeed, no longer concerned in the problems incident
to the carrying-on of a bloody and most expensive wrar, with
which problems they had become familiar, and in meeting
which they were aided by waves of patriotic impulse, but
were now confronted with the novel and hardly less difficult
problems incident to reconstruction and readjustment.
On the evening of December 21, 1918, Mr. A. C. Miller,
of the Federal Reserve Board, delivered an address before
the American Academy of Political and Social Science on the

AFTER-WAR READJUSTMENT

135

subject o f 4 After-War Readjustment.' In the course of this
address Mr. Miller said:
Of the eighteen and a half billions of loans thus far put out by
the Government, it may be estimated that six billions are being
carried by, or in, the banks. To the extent that subscriptions to
Government borrowings are paid, not out of cash which the subscriber has actually saved out of his income, but by credit borrowed from his bank, the payment of the subscription must be
regarded as having given rise to an expansion of bank credit to
approximately an identical amount. Such expansion of credit, unless it sets in motion new forces of saving, results in inflation, first,
of credit, then, of currency, and, as a consequence of both, inflation of prices. A bank's deposits and currency are the children of
its loans and investments. When the loans and investments,
therefore, which occasion an increase of deposits and currency are
not definitely tied to the production or saving of goods, they must
cause a rise of prices. When the rise of prices resulting from an
expansion of credit and currency is not able, or until it is able, to
induce a commensurate increase of productive industry to match
the increased buying power of the community, the resulting condition is one of inflation, that is one in which there is more purchasing power, in terms of money, afloat in the community than
is called for. . . .
Recent events, particularly in the United States and among the
northern neutrals of Europe, which like the United States have
experienced enormous accessions to their supplies of gold during
the period of the war, show that inflation may take place without
a suspension of specie payments or the occurrence of a discount on
paper. It was the very abundance of gold that helped to advance
prices in the United States before our entry into the war. The
currency of the United States now, as then, is a gold currency.
Prices in the United States are, therefore, gold prices. This fact is
incontestable. There is gold enough and more than enough to
assure the absolute convertibility of our paper currency in gold.
The trouble with our situation is not that the paper dollar is not
as good as the gold dollar; just the reverse is true: it is. The
trouble with our situation is that neither the paper dollar nor the
gold dollar will buy as much as they did before inflation of prices
began. At prices as they are, the paper dollar buys as much as the
gold dollar. The gold dollar is no better than the paper dollar.
The two are interchangeable. Our trouble, therefore, is with dol-

136

THE FEDERAL RESERVE SYSTEM

lars, irrespective of their kind. It is one of quantity, not of quality,
or, at any rate, not of quality in terms of gold. Our elastic note
issue system has enabled us to place the issue of paper dollars on a
quantity basis without endangering the integrity of their gold
value. The trouble is with the goods value, not with the gold
value of the American dollar. Our difficulty is, and therein consists our inflation, that dollars — good financial dollars, 'safe'
dollars, gold dollars — have been created in such abundance in
comparison with the amount of goods purchasable by them that
they have, as a necessary result, lost in their purchasing power —
in other words, the supply of money has become disproportionate
to the supply of goods with rising prices as the inevitable result.
Mr. Miller then quoted figures showing that between
July I, 1914, and September I, 1918, the total money in circulation in the United States increased $2,219,000,000, or
sixty-five per cent. In reviewing he compared the position
of all banks in the United States on June 30,1914, and their
situation on June 29,1918, and pointed out that their deposits between these dates had increased $11,310,000,000, or
fifty-three per cent; their loans and discounts, $6,719,000,000,
an increase of forty-four per cent; and their investments
(bonds and other securities) $11,058,000,000, an increase of
fifty-three per cent. In commenting on these figures, Mr.
Miller said:
To the extent that this increase in the supply of the purchasing
media of the country has not been offset by a like increase in the
production of goods, it must be regarded as unnecessary and
superfluous from the economic point of view, whatever may be
said in justification of it from the point of view of political and
generalfinancialexpediency. To the extent that it has been offset
by increased production, it presents no difficulty. That there has
been an enormous increase in the physical output of goods in the
United States during the past four years cannot be questioned.
Never before has the country come so near to realizing its full
productive capacity; never before has there been so little unemployment or idleness. Some estimates place the increase in the
physical products of the country during the past four years as
high as twenty-five per cent. If we take a more conservative
figure, of twenty per cent, it would suggest the inference that a

AFTER-WAR READJUSTMENT

137

commensurate proportion of the volume of credit and currency
existing in 1914, or some four billions of dollars in the aggregate,
was probably legitimately called for by the growth of production
in the past four years. . . .
It would appear probable, therefore, that some six billions of
credit and currency in the aggregate have been created in the past
four and one-half years that cannot be regarded as having been
occasioned by the requirements of industrial growth, as measured
in terms of physical units. This is also approximately the amount
of war securities and war loan paper, as has already been stated,
that the banking system of the United States is to-day carrying.
To this extent the expansion of banking credit and currency would
appear to have been occasioned by the banks having assumed the
burden of assisting the placement of Treasury borrowings by the
extension, use and lending of their credit. Such use of credit is
almost of necessity inflationary in its immediate effects and in its
continuing tendencies until corrected.
As to what form the correction should take, he said:
Where there has been inflation, there must follow deflation, as a
necessary condition to the restoration of economic health. Contraction of bank deposits and currency, through the liquidation of
war loan accounts, is clearly indicated as the next and necessary
step in the process of bringing the credit currency and price situation back to normal. * . . The problem of correcting a state of
banking inflation is mainly a problem in saving. We must either
put more goods behind the outstanding volume of credit and currency — that means production — or we must reduce the volume
of credit and currency to suitable proportions — that means
saving.
Expenses and spending must be kept down; money must be
saved. As it is saved, it must be paid to the banks in liquidation
of war loans and other non-productive borrowings. If the money
saved is in the form of deposit or checking credits, then the total
volume of these in existence and in use will be diminished as they
are used to cancel an equivalent amount of loans and thus will the
banking structure be contracted and prices be rectified. If in the
form of bank notes, the cash holdings of the banks will be built up
and they will be enabled to reduce their borrowings from their
Reserve Banks and, in this wise, the notes will find their way back
to the Reserve Banks, reducing at once the volume of their outstanding note liabilities on the one side and their holdings of bills

138

THE FEDERAL RESERVE SYSTEM

discounted on the other. Thus will saving effect the reduction in
the volume of outstanding currency and credit. The nation must
continue to practice thrift.
Looking ahead, Mr. Miller had this to say about the future borrowings of the Government:
The Government's requirements for the remainder of the fiscal
year have been stated as likely to be not less than seven billions.
This amount, added to the six billions of outstanding war securities which, it is estimated above, have not yet been permanently
absorbed, gives us a total of thirteen billions of public securities
which must be taken up out of genuine savings if our financial
and credit system is to be sterilized of the taint of inflation which
at present is upon it. When this is accomplished, prices are likely
to be at something that can be regarded as a normal level. Until
it is accomplished, there will be an unstable price situation. As
it is gradually accomplished, prices will go back to a normal basis
in an orderly manner. But if a considerable part of the new borrowings, which the Government must make during the fiscal year
and until war accounts are finally closed up, are financed by any
considerable expansion of banking credit, we are likely to have
more inflation and an aggravation of a price situation which i9
already sufficiendy serious and burdensome.

CHAPTER XII
CONGRESS AUTHORIZES ISSUE OF ' VICTORY N O T E S ' AND AMENDS
FEDERAL RESERVE A C T TO PERMIT RESERVE BANKS TO ACCUMULATE LARGER SURPLUS F U N D S — R E L A T I O N OF FEDERAL
RESERVE RATES TO TREASURY'S FINANCING — REVIEW
OF BOARD'S DISCOUNT P O L I C Y — T H E VICTORY
LOAN — RISING PRICE-LEVELS

IN the address from which quotations have just been made,
Mr. Miller took the point of view of an economist and enunciated certain broad economic principles. It should not be
assumed that he intended to convey the impression that the
Federal Reserve Board unaided should undertake to apply
these principles, or that it should put itself in the position of
attempting to dictate prices or of controlling credit with the
view of bringing about such price readjustments which in its
judgment might seem salutary. On the other hand, the
Board had an entirely different view of its duties and functions. The Board's position, stated at a time when prices
had reached still higher levels, will be discussed in a succeeding chapter. There is another point of view which also
must be considered, that of the Treasury, and this, too, will
be discussed later on.
The Congressional elections in November, 1918, resulted
in a substantial Republican majority in the House of Representatives, and in a Republican majority of one in the Senate. The old Congress met for its final session on the first
Monday in December, and was confronted with a large volume of unfinished business. Besides the usual appropriation
bills, it was called upon to consider the Government finances
and the necessity for another bond issue. The Secretary of
the Treasury, the Honorable Carter Glass, who had succeeded Mr. McAdoo upon the latter's resignation in Decern-

152 THE FEDERAL RESERVE SYSTEM
ber, 1918, prepared a bill, which he submitted to Congress
soon after the Christmas holidays, to authorize an issue of
four- to five-year notes for the purpose of relieving the Government of the large floating indebtedness it had incurred in
the purchase of supplies and war material for the maintenance and use of the army and navy, and in the construction and operation of war utilities, such as shipyards and
powder plants.
In the meantime President Wilson had gone to France at
the head of a commission to collaborate writh similar commissions of the Allied Powers in negotiating a treaty of peace
with Germany and her allies. The decision of the President
to head his own peace commission had been the subject of
much discussion throughout the country, and particularly in
Congress, where the Republican minority voiced its disapproval in common with some members of the Democratic
majority. It soon became evident that it would not be possible to finish the draft of a peace treaty before March 4th,
the date of the expiration of Congress, and, while it was
understood that the President intended to return to the
United States late in February in order to act upon bills
passed by Congress in its closing hours, it was known that
he intended to return to France early in March. Party politics, which, in the language of the President, had been 'adjourned 9 during the war, were again running high.
It was thought by some that if the regular appropriation
bills, and the bill authorizing the note issue, should fail to
pass, the President would be obliged to call an extra session
of the new Congress, and because of this he would feel compelled to remain in Washington. Much time was consumed
in debates in Congress, and while a few of the appropriation
bills passed both Houses, some important measures, including the Victory note Bill, had not been acted upon as the end
of the session approached. Among these bills was one to
amend the Federal Reserve Act which had been proposed
early in the session by the Federal Reserve Board. While

FEDERAL RESERVE ACT AMENDED

141

this was not a bill of first importance, it had no political significance and met with little opposition.
As originally enacted, the Federal Reserve Act provided
that, after the Federal Reserve Banks had paid their expenses and dividend claims, 'all the net earnings shall be
paid to the United States as a franchise tax, except that one
half of such net earnings shall be paid into a surplus fund
until it shall amount to forty per centum of the paid-in capital stock of such bank.' The Board believed that provision
should be made for a larger surplus fund. No limitation had
ever been placed upon the amount of surplus which a national bank or trust company might accumulate, and if the
Federal Reserve Banks were to be limited to a maximum surplus fund amounting to only forty per cent of their capital,
they would not compare favorably in respect to this element
of strength with many of their own member banks. Furthermore, the country was approaching a period of readjustment during which losses might be anticipated. Nor would
the Federal Reserve Banks with so small a surplus compare
favorably with central banks in many foreign countries.
For these reasons the Board suggested, in its annual report
for the year 1918, that the law be amended so as to permit
each Federal Reserve Bank to accumulate out of net earnings a surplus equal to one hundred per cent of its paid-in
capital, and that payments to the Government as franchise
tax be suspended in the case of each bank until its surplus
reached that amount. In discussing this proposed change
with the Banking and Currency Committees of the Senate
and House, I referred also to the fact that the Federal Reserve Banks were not provided with permanent quarters;
that in most cases the quarters then occupied were utterly
inadequate, and that it was impossible to acquire by lease
or purchase suitable quarters properly equipped. The banks,
therefore, would be obliged to acquire building sites upon
which to erect buildings adapted to their needs. I pointed
out that it was not advisable that the capital stock of any

142

THE FEDERAL RESERVE SYSTEM

Federal Reserve Bank should be represented by its real
estate, and that it would be much better to permit the banks
to accumulate a surplus large enough at least to counterbalance their investments in land and buildings. All of these
considerations seemed to have impressed the committees,
for the bill as reported by them and as passed by both
Houses of Congress made a far more liberal provision as to
surplus than had been suggested by the Federal Reserve
Board.
The amendment to section 7 of the Federal Reserve Act
as finally passed provided that, after the necessary expenses
of a Federal Reserve Bank had been paid and the dividend
claims fully met,
the net earnings shall be paid to the United States as a franchise
tax except that the whole of such net earnings, including those
for the year ending December thirty-first, nineteen hundred and
eighteen, shall be paid into a surplus fund until it shall amount to
one hundred per centum of the subscribed capital stock of such
bank, and that thereafter ten per centum of such net earnings
shall be paid into the surplus.
This made available as an immediate addition to the surplus
funds of the Federal Reserve Banks their net earnings for
the year 1918, which amounted to nearly $27,000,000, and
permitted them to accumulate a surplus fund twice as large
as the Board had requested, inasmuch as all net earnings
could be paid into the surplus fund until that fund equaled
the subscribed capital stock of the banks, which was double
the actual paid-in capital. In addition the banks were allowed, after they had accumulated surplus equal to one hundred per cent of their subscribed capital to retain each year
ten per cent of their net earnings as a further addition to
surplus; the remaining ninety per cent to be paid to the
Government as franchise tax.
This bill was passed by the Senate in language slightly
different from the House bill, although the intent was the
same. The House not receding, the bill was sent to a Com-

FEDERAL RESERVE ACT AMENDED

143

mittee of Conference, which quickly reported an agreement.
Ordinarily a Conference report is privileged and can be submitted for adoption at any time. It seems, however, in this
case, the Conference Committee inserted a word or two in
the bill as reported which did not appear in either the Senate
bill or the House bill which had been referred to it. The
Conference report was adopted by the House, but when it
was submitted to the Senate the point was made that, as it
contained new matter, it lost its privileged status and should
take its place on the calendar. It was given a place next below the bill to authorize the Victory notes, and almost up
to the last minute it looked as though it would fail to receive
consideration. However, on Saturday afternoon, March 2d,
Republican Senators held a caucus to determine their attitude on the Victory Note Bill, which was then being considered by the Senate. A t this caucus it was decided by a
majority of one that the defeat of the Victory Note Bill
should not be made a party measure. While the Republicans
were still in a minority in the Senate, they could easily at
that stage defeat any measure by prolonged debate; but as
the defeat of the Note Bill had not been made a party measure, few Senators felt disposed to lend their aid in talking it
to death. Senator La Follette, Senator Gronna, of North
Dakota, and Senator Sherman, of Illinois, however, kept
the Senate in session all Saturday night, and took turns in
discussing the Note Bill until half-past seven o'clock Sunday morning. A t that time they were exhausted and went
out for coffee. The Victory Note Bill was then brought to a
vote and passed, and immediately thereafter Senator Owen
brought up the Conference report on the bill amending the
Federal Reserve Act, and this also was passed. The Senate
then adjourned until Monday morning, and its final adjournment was taken at noon on that day.
This bill, which was the last one passed by the SixtyFifth Congress, amended also section 10 of the Federal Reserve Act by striking out the provision that assistant secre-

156 THE FEDERAL RESERVE SYSTEM
taries of the Treasury should not be eligible to serve as officers of member banks after leaving the Treasury, until after
a lapse of two years; and modified the same restriction upon
appointive members of the Federal Reserve Board by prescribing that the two-year limitation should apply only to
members who might resign, and not to members who had
served the full terms for which they were appointed.
The passage of the bill which authorized the issue of notes
known as the Victory Loan had a stimulating effect upon
business, which had been languishing since the signing of the
Armistice. Within a short time it became evident that the
renewed activity was not at all justified by underlying conditions, and there was imminent danger that there would be
excessive and unhealthy speculation. The price-level was
again advancing, and, because of rising commodity prices,
the fictitious ease of money, and the general optimistic feeling, there developed a tendency in the agricultural sections
to make extensive developments on the farms, in many
cases entirely on borrowed money, and to purchase land.
In effecting these purchases the frequent practice was to
make small cash payments and to give notes secured by
mortgage on the land for the balance. In many instances,
the land would be resold, and the sellers would receive additional notes for a part of their profits. Manufacturers also
showed a disposition to extend their operations and the speculative tendencies in the stock market were pronounced.
The officers and directors of the Federal Reserve Banks
looked upon all these tendencies with apprehension, and
many of them were inclined to advance their discount rates.
The law provides that each Federal Reserve Bank shall have
power 1 to establish from time to time, subject to review and
determination of the Federal Reserve Board, rates of discount to be charged by the Federal Reserve Bank for each
class of paper which shall be fixed with a view of accommodating commerce and business.' Consequently, no Federal
Reserve Bank could change its discount rate except with

FINANCING THE WAR

145

the consent and approval of the Federal Reserve Board. As
the Board did not approve any advance in the discount rate
at this time, it seems appropriate to outline here the Board's
rate policy.
During the year 1915 and for the greater part of 1916,
owing to the abnormal ease of the money market, there was
but little resort to the discount facilities of the Federal Reserve Banks. During this period the deposits of member and
non-member banks were increasing by leaps and bounds,
and the banks as a rule were able to take care of the legitimate needs of customers and to make large purchases of commercial paper without using their credit either with correspondent banks or with the Federal Reserve Banks. In such
circumstances it is clear that the Board's influence on credit
through discount rates was negligible. Reserve Bank rates
were low, in conformity with the general trend of the money
market, and open-market operations by Federal Reserve
Banks would merely have accentuated the prevailing redundancy of funds available for credits. Higher rates would
have brought in even a smaller volume of business. Late in
the year 1916, market rates began to stiffen and the volume
of discounts with the Federal Reserve Banks showed a tendency to increase, but the banks generally still held a surplus
of funds and slight advances in discount rates at some of the
Federal Reserve Banks did not materially affect the money
market.
After our entrance into the war, the whole situation underwent a radical change. The President, in an address to
Congress on April 2, 1917, pledged the entire resources of
the Nation to the successful conduct of the war, and war became the paramount business of the country. An issue of
Treasury certificates, announced immediately, was followed
by the First Liberty Loan campaign, the purpose of which
was to secure subscriptions to $2,000,000,000 of bonds bearing three and one half per cent interest. It was apparent
that this issue would be followed by others, and in the cir-

158

THE FEDERAL RESERVE SYSTEM

cumstances it was manifestly the duty of the Board to support the financial plans of the Treasury. Within twelve
months about $10,000,000,000 of bonds were sold by the
Government, and after April, 1917, there were frequent offerings of Treasury certificates, issued in anticipation of taxes
or of the proceeds of bond sales.
Not only with the view of saving to the Government, but
mindful also of the effect which high interest rates on Government obligations would have upon investment securities
and the money market as a whole, the Secretary of the Treasury determined to hold rates down to the lowest possible
level, and he soon announced his purpose to maintain as a
maximum a rate of four and one half per cent on Treasury
certificates and four and one quarter per cent on Liberty
bonds. The Federal Reserve Board felt that it should so
direct the policies of the System as to ensure prompt accommodation to banks whose customers might require assistance, either in providing for commercial demands caused
by increased business activities, or in making their payments
for bonds, as well as to banks which bought bonds for their
own account. It was deemed important to prevent disturbances in the money market and to keep interest rates as free
from fluctuation as possible. Therefore the Board, before
the subscriptions to the first Liberty bond issue were closed,
approved a preferential rate of discount for notes offered by
member banks secured by Government obligations, whether
certificates or bonds, and, in order further to assist the Treasury in disposing of bonds, the Board authorized Federal Reserve Banks to discount, for non-member banks upon the
endorsement of a member bank, notes secured by Government obligations, whether made by non-member banks
themselves or by their customers, when the proceeds had
been or were to be used for the purpose of carrying Treasury
certificates or United States bonds. The Board, in this way,
distinguished between commercial loans and loans made
upon the security of Government obligations, by approving

THE BOARD'S DISCOUNT POLICY

147

a preferential rate in favor of the latter. The policy of the
Board during the war was justified by results. The war was
won. The bonds were widely distributed, and each new issue showed a larger number of subscribers than the preceding one, the number of subscribers to the third Liberty loan
being more than seventeen million and to the fourth more
than twenty-one million. As the rates on Government obligations were advanced, the preferential rates on paper secured by these obligations were increased correspondingly
at the Federal Reserve Banks. So that instead of a rate of
from three to three and one half per cent as first established,
rates at the Reserve Banks after the early months of the
war ranged from four to four and one quarter per cent on
paper secured by Government issues, with a maximum rate
of five and one quarter per cent on ninety-day commercial
paper and five and one half per cent on six-month agricultural
paper.
The Board did not believe, during the war period, that
marked advances in rates would be advisable in view of the
obvious necessity of avoiding any policy likely to disturb the
financial operations of the Treasury. The needs of those industries and commercial enterprises which were directly
contributory to the conduct of the war had to be supplied at
all hazards, and a drastic advance in discount rates would
not have reduced the financial requirements of such concerns, but would merely have imposed an added cost upon
the people.
In its letter of July 6,1918, to which reference has already
been made, the Board called attention to the importance of
a wise discrimination between essential and non-essential
credits. It believed that the exercise of discriminating judgment on the part of the banks throughout the country in
making their loans would be more effective in counteracting
any tendency toward undue credit expansion than an advance in rates would be. The suggestion was made by the
Board that the Federal Reserve Banks organize, each in its

160

THE FEDERAL RESERVE SYSTEM

own district, local groups comprising leading bankers and
business men, in order to discuss ways and means of bringing
about the result desired.
In April, 1919, the Board gave serious consideration to
the suggestions made by several of the Federal Reserve
Banks that the discount rates be advanced. It had already,
during the period of business hesitation which immediately
followed the Armistice, approved their action in modifying
differential rates, as it no longer saw any reason for giving
holders of Government securities advantage in the way of
interest over those who desired to borrow money for use in
agriculture, commerce, and industry. The Treasury authorities, however, were opposed to an increase in the discount
rate at this time. They pointed out that they were then
organizing the Victory Loan Campaign to sell $4,500,000,000
of four-year notes, and that, in justice to those who had subscribed to the war issues, the Secretary of the Treasury believed that the rate of interest should not be substantially
higher than that borne by the third and fourth Liberty
loans, and that he had therefore determined to fix the rate
of interest on the notes at four and three quarters per cent.
As he could no longer invoke the patriotic impulses which
had been so effective in stimulating subscriptions to the wartime issues, the Secretary of the Treasury felt that in placing
the Victory Loan he was confronted with an undertaking
difficult enough at best. Unless he could rely upon the same
measure of support by the Federal Reserve System that had
been accorded Secretary McAdoo, the success of the loan
would be imperiled, and it was obvious that its failure would
be disastrous to the country. The Board, therefore, did not
approve any advance in rates. The Federal Reserve Banks
and the Board urged the public to respond liberally to the
needs of the Treasury, and the Liberty loan organizations
throughout the country were revived and functioned admirably. The success of the Victory Loan, oversubscribed by
sixteen per cent, by more than twelve million subscribers,

THE BOARD'S DISCOUNT POLICY

149

under such difficult conditions, was the crowning achievement of a series of financial operations unparalleled in the
history of the country. The success of the loan, however,
accentuated the dangerous tendencies to which allusion has
already been made. The volume of exports continued large,
but many overlooked the fact that the buying power of
Europe was overestimated, and that our exports to European countries in large part were being paid for out of the
unused portion of the credits of $10,000,000,000 which had
previously been authorized by Congress to countries associated with us in the war. These unused credits at the beginning of the year 1919 amounted to about $2,500,000,000.
The Board repeated its warnings, and did all it could, short
of approving higher rates, to discourage the excessive use of
credit for non-essential purposes.
It was thought that the removal by the President of all
the war-time restrictions upon the export of gold, June 7,
1919, with the resulting large exports of gold from the country, would exert a sobering influence and cool the ardor for
overtrading and speculation. During the first thirty days
nearly $100,000,000 of gold was exported, and the total exports
of gold up to the end of the year amounted to $346,000,000.
The excess of gold exports over imports during the year was
$279,333,000.* Net exports of silver amounted to $140,000,000.
The removal of the gold embargo, however, had no sobering
effect. The continued advance in prices brought about a
general advance in wages, and, as wages increased, the pricelevel would rise again. A vicious circle had been created,
ever widening as prices and wages sought to overtake each
other. H.C.L. (not Senator Lodge, but the High Cost of
Living) had become a very grave economic problem, and indeed bade fair to develop into a political issue. The President took occasion to communicate with Congress on the
1 This was offset in part by the receipt of $173,400,000 of gold from the
Reichsbank in payment of foodstuffs sold to the German Government. For
several months this gold was held by the Bank of England for account of the
Federal Reserve Banks, but it was eventually transferred to New York.

162

THE FEDERAL RESERVE SYSTEM

subject, and some members of that body, who eighteen
months later were most extreme in denouncing the Federal
Reserve Board because of the decline in prices which by that
time had taken place, were now violent in their criticisms
of the Board for having brought about inflation and high
prices. Early in August the Senate, at the instance of Senator Myers, of Montana, adopted a resolution (S.R. 142), directing the Banking and Currency Committee to investigate and report on the advisability of legislation to provide
for the gradual reduction of the volume of currency in circulation. The Chairman of the Committee addressed a communication on this subject to the Federal Reserve Board,
which on August 8,1919, replied in a letter in part as follows:
The Federal Reserve Board acknowledges receipt of your letter
of the 5th instant asking for an expression of its views as to the
advisability of legislation providing for the gradual reduction of
the currency in circulation as proposed by Senate Resolution 142.
The Board would suggest that, in determining whether or not
legislation is necessary or desirable to regulate the volume of currency in circulation, consideration be given to the various forms
of money which make up the sum total of our volume of currency.
A distinction should also be drawn between the stock of money
in the country and the amount actually in circulation.
With respect to gold coin, gold certificates, standard silver dollars, silver certificates, subsidiary silver, and Treasury notes of
1890, the Board assumes that it is recognized that no legislation
is necessary.
The United States notes, or legal tenders, which have remained
at thefixedamount of $346,681,016 since March 31,1878, have not
been a disturbing factor since the passage of the Act of March 14,
1900. An adequate gold reserve of more than forty-five per cent
is now held against these notes, most of which are in the form of
small bills of $1, $2, and $5 denominations. Notes of these denominations are needed in the daily transactions of the public,
and were the United States notes to be retired, the issue of an
equal volume of small bills in some other form of currency would
be necessary. To effect the retirement of the United States notes,
funds would have to be withdrawn from the Treasury to be supplied either by taxation or by the sale of interest-bearing obliga-

CURRENCY IN CIRCULATION
tions. The Board does not believe that any legislation with respect to United States notes is necessary or desirable at this
time.
The national bank notes outstanding on August I, 1919,
amounted to $658,118,855, a reduction of nearly $60,000,000
since July 1, 1914. The greater part of these notes is secured by
United States two per cent bonds, and provision has already been
made in section 18 of the Federal Reserve Act for their gradual
retirement.
Federal Reserve Bank notes, which are secured by United States
obligations and are taxed just as national bank notes are, have
been issued only to replace in part national bank notes retired and
standard silver dollars melted or broken up and sold as bullion
under authority of the Act of April 23, 1918, known as the Pittman Act. The issue of these notes has, therefore, brought about
no increase in the circulation medium.
The amount of Federal Reserve notes outstanding has increased
from $357,239,000 on April 1, 1917, to $2,504,753,000 on August
I, 1919. It appears, therefore, that those who see in the larger
volume of circulation in the United States the prime cause of increased costs of living and who seek a remedy by a forced contraction of the currency must have in mind the Federal Reserve note
and section 16 of the Federal Reserve Act as amended June 21,
1917, which provides for its issue and redemption.
In analyzing our present monetary situation, and in considering
the causes which have led to the expansion of credits and note
issues during the war, we should not lose sight of some of the developments of the pre-war period and of their effect upon credits
and prices. Very heavy purchases of supplies of all kinds were
made in this country by European belligerents during the years
1915 and 1916, payment for which involved the shipment to us of
large amounts of gold. The stock of gold in the United States on
July 1, 1914, was $1,890,678,304. This amount increased steadily
until April, 1917, the date of our own entry into the war, when it
reached $3,088,904,808, an increase of about $1,200,000,000. Bank
deposits likewise show a large increase, the net deposits of national
banks having risen from $7,495^ 49 »000 o n June 30, 1914, to
$10,489,217,000 on March 5, 1917, while the net deposits of all
banks in the United States increased from $17,996,150,000 in
June, 1914, to $24,891,218,000 in June, 1917. Net deposits of
national banks had further increased up to May 12, 1919, to
$11,718,095,000, and those of all banks in June, 1918 (the latest

164 THE FEDERAL RESERVE SYSTEM
date for which figures are available), to $26,769,546,000. Shortly
after April 6, 1917, when the Congress declared war, the Treasury
began to sell bonds, notes, and certificates in large amounts, resulting in a net increase in the public debt to August 1, 1919, of
$24,518,064,840.
On July I, 1914, the total stock of money in the United States,
exclusive of that held by the United States Treasury, was
S3.4I9»i68,368. On April I, 1917, the stock of money, estimated on the same basis, was $4,702,130,941, an increase of
$1,282,962,573, of which increase $883,481,028 was in gold.
On July 1, 1914, there were no Federal Reserve notes in existence, while on April 1,1917, there were outstanding $357»239p°0°*
The amendment to the Federal Reserve Act approved June 21,
1917, changed substantially the original reserve requirements for
member banks and provided that their entire lawful reserve should
be carried with the Federal Reserve Banks. This same amendment authorized the Federal Reserve Banks to exchange Federal
Reserve notes for gold. The result of these two changes in the law
was to transfer immediately large sums of gold from the vaults of
the member and non-member banks and from general circulation
to the Federal Reserve Banks, and this caused a change in the
methods of accounting for gold by the Federal Reserve Banks and
Federal Reserve Agents.
In order to avoid confusion in determining the volume of money
in actual circulation, it is necessary to distinguish between tables
showing the total stock of money in the country and tables showing the circulation outside of the Treasury and Federal Reserve
Agents' vaults, and to limit our view to amounts held by member
and non-member banks and the public, which are exclusive of
amounts on hand at Federal Reserve Banks, held by Federal
Reserve Agents, and held in the Treasury.
The Reserve money held by or for the Federal Reserve Banks
serves, of course, as a basis for credit, but it forms no part of the
currency in circulation. Upon this basis the amount of money in
circulation on July 1,1914 (there being no Federal Reserve Banks
in operation at that time), was $3,419,168,368, made up as follows:
Gold coin and certificates, $1,649,775,803; silver dollars and silver
certificates, including Treasury notes of 1890, $552,203,610; all
other currency,$1,217,188,955, being circulation percapita, $34.53.
The corresponding amounts of money in circulation on April I,
1917, December 1, 1918, and August i, 1919, are shown in the
following table:

CURRENCY IN CIRCULATION
AMOUNT OF MONEY OUTSIDE THE TREASURY AND
FEDERAL RESERVE BANKS
April I, 1917
Gold coin and certificates $1*989,152,000
Silver dollars and silver
certificates
(including
Treasury notes of 1890)
53^,700,000
Federal Reserve notes
357.239,000
Federal Reserve Bank
notes
3,170,000
All other currency
1,218,715,000
Total
Amount per capita outside the Treasury and
the Federal Reserve
Banks

December 1, 1918 August i, 1919
$861,245,000

$728,046,000

372,489,000
2,607,445,000

241,505,000
2,504,753,000

87,737*000
1,201,069,000

166,289,000
1,156,297,000

$4,100,976,000 $6,129,985,000 $4,796,890,000

$37*88

$48.13

$45-16

Assuming that the date, December I, 1918, marks the beginning of the post-war period, the table shows changes during this
period up to August 1,1919, as follows: Gold coin and certificates
in circulation decreased $133,199,000; silver dollars and silver certificates, including Treasury notes of 1890, decreased $130,984,000;
Federal Reserve notes decreased $102,692,000; Federal Reserve
Bank notes increased $78,552,000; all other currency decreased
$44,772,000, being a net decrease in circulation for the post-war
period of $333,095,000, or $2.97 per capita.
In considering the question of currency in circulation, there
should be taken into account the various factors which have entered into the demand for currency, among which are: the gradual
enlargement of payrolls, both as to the number of workers and
amount paid to each; the effect of higher wages upon deposits in
banks and upon the amounts of money carried by shopkeepers in
their tills and by individuals in their pockets; the amounts of
money locked up or carried on their persons by workmen who
have been receiving high wages, and who, especially in the case of
ignorant foreigners, are unwilling to deposit their savings in banks
or to invest in Government bonds; the amount of money carried
away by workmen returning to their homes in foreign countries;
and the fact that the circulating media of the Philippine Islands,
Hawaii, Cuba, Porto Rico, Santo Domingo, Haiti, Honduras,
Panama, and in part, Mexico, include United States paper cur-

154

THE FEDERAL RESERVE SYSTEM

rency and subsidiary silver. The amounts required in these countries, most of which are very prosperous, have greatly increased
in the last few years.
The total foreign circulation of United States currency cannot
be stated accurately, but is estimated to be at least §150,000,000.
The difficulty, indeed the impossibility, of keeping in circulation
an excessive volume of Federal Reserve notes should be understood. The issue of these notes has been carefully safeguarded by
the Federal Reserve Act, and ample provision has been made for
their redemption. Federal Reserve notes are redeemable in gold;
they cannot be forced into circulation in payment of the expenses
of the Government, or for any other purpose, as they can be issued
only in exchange for gold or against a deposit of negotiable paper
growing out of a legitimate commercial transaction, plus the required gold reserve of not less than forty per cent. Upon payment
of commercial paper which has been deposited to secure Federal
Reserve notes, there results either an immediate return of an
equal amount of notes to the bank, or an automatic increase in the
percentage of gold reserve available for their redemption. Federal
Reserve notes are not legal tender, nor do they count as reserve
money for member banks. They are issued only as a need for them
develops, and as they become redundant in any locality they are
returned to the Treasury at Washington, or to a Federal Reserve
Bank for redemption. Thus there cannot at any time be more
Federal Reserve notes in circulation than the needs of the country
at the present level of prices require, and as the need abates, the
volume of notes outstanding will be correspondingly reduced
through redemption. The increased volume of Federal Reserve
notes in circulation during the past three years, in so far as it is
not the result of direct exchanges for gold and gold certificates
which have been withdrawn from circulation, is the effect of
advancing wages and prices, and not their cause.
There has undoubtedly taken place during the last two years
acertain amountofcreditexpansionwhich, under the circumstances
connected with our war financing, was inevitable, but this will be
corrected as the securities issued by the United States Government for war purposes are gradually absorbed by investors. . . .
The principal cause of the advance of prices before and during
the war was the urgent need of the Governments of the allied
world for goods of all kinds for quick delivery in large volume, and
the competition of this buying by Governments with purchases by
private individuals who failed to contract their expenditures at a

RISING PRICE-LEVELS

155

rate commensurate with the growing expenditures of these Governments. In the post-war period, through which we are now passing,
the country has experienced rising prices owing, in part, to a general relaxation of the war-time regime of personal economy, resulting in an increased demand for commodities by individuals who
restricted their purchases during the war, but who are now buying
in competition with export demand. In addition, accrued incomes
and increased wages have led to heavy demands for commodities
not of prime necessity, which have resulted in diverting labor
and material from essentials to non-essentials.
The Federal Reserve Board believes that any currency legislation at this time is unnecessary and undesirable, and would
suggest that, whether viewed from an economic or financial
standpoint, the remedy for the present situation is the same,
namely, to work and to save; to work regularly and efficiently in
order to produce and distribute the largest possible volume of
commodities; and to exercise reasonable economies in order that
money, goods, and services may be devoted primarily to the liquidation of debt and to the satisfaction of the demand for necessities,
rather than to indulgence in extravagances or the gratification of
a desire for luxuries.

CHAPTER XIII
A PERIOD OF READJUSTMENT FORESHADOWED — DISCOUNT
R A T E S ADVANCED — ATTITUDE OF THE TREASURY —
T H E PROGRESSIVE R A T E

the Board did not believe that the large volume
of Federal Reserve notes in circulation was in itself responsible for the high cost of living and for the wave of reckless
extravagance which was sweeping over the country, some of
its members did believe very strongly that immediate steps
should be taken to correct the conditions growing out of the
artificially low discount rates which seemed to promote,
rather than to check, the undue extension of credit by banks
in general. These members now looked with favor upon a
substantial advance in the discount rates, having in mind a
maximum of six per cent. A t this time the rate on fifteenday paper, including member banks' collateral notes, secured by Liberty bonds and Victory notes, was four per cent
at eight of the Federal Reserve Banks, and four and a quarter per cent at Richmond, Chicago, Kansas City, and San
Francisco; and on fifteen-day paper secured by United States
certificates of indebtedness the rate was four per cent at all
the banks, with the exception of the San Francisco Bank,
where the rate was four and a quarter per cent. As an argument against an advance of rates, it was pointed out that
the market value of Government bonds would be depressed
and that the burden upon those who had borrowed money
to meet their subscriptions would be increased, as banks
undoubtedly would raise their customers' rates.
While Treasury officials were opposed to an advance in
rates at this time, they did not raise this objection. In an
address delivered in April, 1920, the Assistant Secretary of
the Treasury, Mr. Russell C . Leffingwell, after explaining
the considerations which determined the rates of interest
ALTHOUGH

A PERIOD OF READJUSTMENT

157

borne by the Liberty bonds and Victory notes, and referring
to the fact that four and three quarters per cent Victory
notes were then selling on an interest basis of about six and
a quarter per cent, said:
A year ago it was freely predicted by financial authorities that
Victory notes would shortly go to a premium, and the Liberty
bonds would be selling at or near par within a year or two. Every
one knows why these sanguine expectations have not been realized. With the Armistice, and still more after the Victory loan, our
people underwent a great reaction. Those who had bought Liberty
bonds as a matter of patriotism, but not as investors, began to
treat their bonds as so much spending money. Those who had
obeyed the injunction to borrow and buy Liberty bonds ignored
the complementary injunction to save and pay for them.. . .
This was the first and immediate cause of the depreciation of
Liberty bonds, affecting them particularly. . . . Liberty bonds
have depreciated because they [the people] are treating their
Liberty bonds as spending money.
Personally, I was anxious in August, 1919, to have the
discount rates advanced, and had frequent conversations
with Assistant Secretary Leffingwell on the subject of rates.
I assumed that the views he expressed coincided with those
of the Secretary of the Treasury. While he was not strongly
opposed to an advance in commercial rates, he protested
particularly against an advance at this time in rates on collateral notes secured by Treasury certificates of indebtedness. He pointed out that the total Government indebtedness — bonds, notes, and certificates — had about reached
its peak (the maximum was $26,595,000,000 on August 30,
1919), and that gradual reductions from this time on were
anticipated. He stated that Treasury certificates were being
issued in part as an outright borrowing by the Government,
as well as in anticipation of the quarterly payments of income and excess profits taxes. By January, 1920, he expected to be able to retire a substantial amount of the certificates, and after that date they would be issued only in
anticipation of revenue coming in from income and profits

158

THE FEDERAL RESERVE SYSTEM

taxes. The Treasury was unwilling to offer certificates at a
rate which would make them salable on the market without
the artificially low rate maintained by the Federal Reserve
Banks, and he said that an advance in the rate on paper secured by certificates would seriously embarrass the Treasury.
Early in September the Federal Advisory Council met,
and at its morning session decided to recommend that all
discount rates be advanced. Mr. Leffingwell, however, appeared before the Council in the afternoon, and, raising the
objections above outlined, stated that after January 1st the
Treasury would interpose no objection to an advance in
rates, and induced the Council to withhold the recommendation which it had decided to make.
Although the United States had again become a free gold
market, the central banks of other countries, which still
maintained rigid restrictions upon the export of gold, had
discount rates much higher than those of the Federal Reserve
Banks. These conditions increased greatly the demands
upon the American money market, and during the autumn
commercial paper ranged from six to eight per cent, and on
several occasions call-money rates in New York were from
twelve to thirty per cent. The low discount rates of the Federal Reserve Banks, coupled with stringent conditions in the
market, invited heavy offerings of paper, and the loans of
the Federal Reserve Banks rapidly increased while the reserves declined in a corresponding degree. During the month
of November all Federal Reserve Banks advanced their rates
one quarter of one per cent and these advances were approved by the Federal Reserve Board. This moderate increase, however, had no appreciable effect upon the general
situation.
Notwithstanding the high prices prevailing, the staple
crops of the year 1919 were not marketed as rapidly or as
freely as was normally the case. The inability of the railroads to furnish adequate transportation facilities was probably responsible in part, but there was a disposition on the

DISCOUNT RATES ADVANCED

159

part of many producers and middlemen to hold for still
higher prices. Meanwhile stocks of goods were accumulating on the shelves of the merchants and in the warehouses
and factories, all of which added to the strain on the banks.
In order to maintain their required reserve, several of the
Federal Reserve Banks had been obliged at various times
during the year, and some of them almost continuously, to
rediscount with other Federal Reserve Banks. Normally
during the month of January there is a large return flow of
currency to the financial centers from the country districts,
extending sometimes well into March. This would be accompanied by a reduction in the loans of the banks and by lower
interest rates on commercial paper. Hitherto the liquidation following the marketing of crops had been reflected in
substantial reductions in the loan accounts of the Federal Reserve Banks, but their holdings of discounted paper on the
last Friday of December, 1919, were only about $19,000,000
less than on the last Friday of November, and nearly
$500,000,000 larger than on the corresponding date in December, 1918. The total loans and advances made by all
Federal Reserve Banks to member banks, which on January 2, 1920, amounted to $2,231,000,000, had been reduced
by January 30th to $2,174,000,000, but by February 20th
they had increased to $2,358,000,000. On January 2, 1920,
the banks had outstanding, in actual circulation, Federal
Reserve notes amounting to $2,998,992,000. On January
23d this amount had been reduced to $2,844,227,000, but by
February 20th it had risen to $2,977,124,000. These figures
reflected the negligible relief afforded by the marketing of
crops, and also the abnormally large portion of the crops
still held back. T o the failure of the producers to market
their crops in an orderly way in the season of 1919-20 must
be attributed to a large degree their troubles in the fall of
1920, when the new crops were ready for market. Not only
was it burdensome to carry over these unsold stocks, but
their volume, adding materially to the supplies which sought

172

THE FEDERAL RESERVE SYSTEM

buyers in the fall, was an important factor in the demoralization of prices. This was especially true in the case of cotton.
During the month of January the Federal Reserve Board
approved for all the Federal Reserve Banks substantial advances in discount rates. While it was deemed expedient to
continue preferential rates on paper secured by Government
obligations, the rates at all Federal Reserve Banks were
made uniform. On discounted bills maturing within ninety
days, secured by Treasury certificates of indebtedness, the
rate at all banks was four and three quarters per cent; on
paper secured by Liberty bonds and Victory notes, five and
a half per cent; on commercial paper maturing within ninety
days, six per cent; and on agricultural and live-stock paper
maturing within six months, six per cent. A further change
was made during the month of February by advancing the
rate on paper secured by Treasury certificates to five per
cent at all the banks except those of St. Louis, Minneapolis,
and San Francisco.
After the death of Senator Martin, of Virginia, in November, 1919, the Governor of Virginia appointed the Honorable
Carter Glass, the Secretary of the Treasury, to succeed him
ad interim, pending the next regular election. Mr. Glass
having decided to accept this appointment, his resignation
as Secretary of the Treasury was accepted by the President,
who appointed to succeed him in that office the Honorable
David F. Houston, who, since March 5,1913, had been Secretary of Agriculture. The resignation of Mr. Glass became
effective on February 2,1920, on which day Secretary Houston took the oath of office. During his administration of the
Treasury the rates of interest on Treasury certificates issued
were considerably higher than the rates borne by previous
issues. The new rates conformed more closely to market
conditions and made it possible for the certificates to be sold
without the preferential and artificially low rates which had
been maintained in previous years by the Federal Reserve
Banks,

T H E F E D E R A L R E S E R V E HOARD AS C O N S T I T U T E D IN D E C E M B E R ,

IC)I9

Left to right: W . P. G. Harding, W. T . Chapman (Secretary), Adolph C. Miller, H. A. Moehlenpah,
Carter Glass, Albert Strauss, Charles S. Hamlin, John Skelton Williams

CALL-MONEY RATES
For some months call-money rates in the New York market had been high and were subject to frequent fluctuations.
On March 8,1920, the Senate adopted a resolution directing
the Federal Reserve Board 'to advise the Senate what is the
cause and justification for the usurious rates of interest on
collateral call loans in the financial centers, under what law
authorized, and what steps if any are required to abate this
condition.' In its reply the Board called attention to tables
showing discount and interest rates prevailing in various
centers in all Federal Reserve districts during the previous
sixty days, and pointed out that these tables showed that
the maximum and minimum rates on demand loans secured
by collateral had been approximately the same as commercial-paper rates in all cities except New York and Boston.
While the legal rate of interest in Massachusetts is six per
cent, higher rates by contract are authorized, and consequently the limitation to six per cent is occasionally exceeded, and a rate higher than six per cent is not necessarily
usurious. The Board called attention also to the fact that
the only financial center in this country in which there is
maintained a call-money market of national importance is
New York City, and that while the rates charged there on
call loans may frequently exceed the legal rates allowed for
commercial paper, they are not usurious under the laws of
the State of New York, which specifically exempt collateral
demand loans of not less than five thousand dollars from the
six per cent limitation which lenders must observe on other
loans on pain of incurring the penalty prescribed for usury.
The national banking law provides that national banks
may receive and charge, on any loan or discount, interest at
the rate allowed by the law of the State, territory, or district where the bank is located. As to the 'causes and justification ' of the high rates of interest which may legally be
charged on collateral call loans in New York, and as to the
'steps . . . required to abate this condition/the Board stated
that there existed

162

THE FEDERAL RESERVE SYSTEM

a wide difference of opinion among persons who had given thought
and study to the question. Indeed, broad and fundamental questions of general economic and social policy are involved — in the
last analysis, the whole question of the utility of speculative dealings in securities and commodities on organized exchanges is involved; and more immediately, the question of the methods and
practices of the leading speculative markets of the country,
margining, stock manipulation, and kindred matters also susceptible of abuse. As to these the Board has never had occasion
officially to form an opinion; the Federal Reserve Act specifically
precludes the purchase or discount by Federal Reserve Banks of
4 notes, drafts, or bills covering merely investments or issued or
drawn for the purpose of carrying or trading in stocks, bonds, or
other investment securities, except bonds and notes of the Government of the United States.' The Board could not undertake
to form a judgment upon the matters above referred to without
study and investigation of such a comprehensive nature as would
seriously interfere with the conduct of its regular work, and which,
had the Board the requisite authority, would require the services
of experts and assistants for the employment of which the Board
does not feel authorized to expend funds accruing from statutory
assessments on the Federal Reserve Banks for the purpose of
defraying the ordinary expenses contemplated by the Federal
Reserve Act.
With its reply the Board transmitted a memorandum
which had been prepared by the Federal Reserve Agent in
New York explaining at length the nature and operation of
the New York call-money market and the causes of high and
fluctuating rates for call money in that center. It was pointed
out that the New York Stock Exchange loans had for several
weeks reached the highest point in the history of the Exchange and that the rates on call money depended upon the
demand and upon the supply of loanable funds. Extracts
from this memorandum, which will be of special interest to
those who desire to know something of the operations of the
call-money market in New York, will be found in the
Appendix. 1
About this time there were indications that a reaction in
1

See Appendix B, page 28a

LARGE BORROWINGS BY BANKS

163

business was at hand. Commodity prices throughout the
world had risen to a point where consumption was checked
because of the inability or unwillingness of people to pay the
prices demanded. The event which foreshadowed the beginning of the readjustment period took place, not in the United
States, but in the Far East, in Japan. For many months
during a time of fatuous optimism and of reckless extravagance, there had been a heavy demand for silks. The exports
of silk from Japan to the United States and other countries
had been very heavy. The demand seemed to be insatiable,
and prices underwent frequent changes always on an ascending scale. Suddenly the demand fell off. A drastic price
reaction followed. Japanese banks began to call loans or to
require additional collateral, and during the closing days of
March there ensued in Japan a veritable panic. The crash
swept down many Japanese banks and commercial houses,
and while it produced no immediate repercussions in this
country, the Board was, I believe, unanimous in the belief
that the time had come to make further preparations for
weathering an economic crisis here.
While only about sixty-five per cent of the member banks
were borrowing at Federal Reserve Banks, many of them
were borrowing very heavily, and reports showed that practically all banks were fully loaned up. The gold reserves of
the Federal Reserve Banks amounted to but little more than
$2,000,000,000, and the average reserve percentage of the
banks had declined to about forty-two per cent. As the entire legal reserves of all member banks were required by law
to be carried with the Federal Reserve Banks, it was evident
that they were maintaining actual gold reserves only when
the gold reserves of the Federal Reserve Banks reached one
hundred per cent, and that, as the Reserve Banks had a reserve of only forty-two per cent, the actual gold reserves of
the member banks were weakened correspondingly. Acceptances made by member banks, as permitted by law, against
exports and imports did not find a ready market even at the

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THE FEDERAL RESERVE SYSTEM

high rates then prevailing, and were being purchased for the
greater part by the Federal Reserve Banks, mainly by the
Federal Reserve Bank of New York for its own account and
for that of a few other Reserve Banks which had surplus reserves. Many of the Federal Reserve Banks would have had
reserves far below the legal minimum but for rediscounts
made with other Reserve Banks. Nevertheless, a good deal
of pressure was exerted by Senator Owen and others to bring
about lower discount rates, and some critics have averred
repeatedly that the fall in prices which took place later in
the year could have been averted, or at least materially
modified, had the Federal Reserve Banks reduced their rates
of discount. Especially violent was the criticism against the
so-called progressive rate, which was in force for several
months at four of the Federal Reserve Banks. In order to
bring about a more uniform distribution of the financial burden among all member banks, Congress had early in the year,
at the suggestion of the Federal Reserve Board, amended
the Federal Reserve Act so as to permit Federal Reserve
Banks to adopt a graduated scale of rates based upon the
amount of borrowings by any given member bank. These
graduated rates were not mandatory, but were merely optional. The four banks which adopted the plan allotted to
each member bank an amount which it could rediscount
at the normal or regular rate. This amount was determined :
1. Upon the assumption that all member banks would borrow.
2. In such circumstances, upon the amount of accommodation
that the Federal Reserve Bank could extend to each member bank
out of its own resources, without rediscounting with other Federal
Reserve Banks, and without going below its required reserve.
If a member bank had borrowed the amount allotted to it in
this way, it would pay, in addition to the normal rate, one
per cent more on the excess borrowed up to a certain sum,
after which it would pay an additional one per cent on the
further excess. In the Kansas City district the effect was to

THE PROGRESSIVE RATE

165

distribute the burden and to increase the number of borrowing banks. In most of the States of that district contract
rates as high as ten per cent were permissible by law, and
when a bank which was a heavy borrower at the Federal Reserve Bank would be asked by a customer for an additional
loan, the rate it would usually charge would be higher than
the rate at which some bank which was not a borrower, or
only a moderate borrower, would be willing to lend. The
application of the progressive rate was intended as a corrective or deterrent to overextended banks, and as a means
of avoiding higher rates to all banks. In another district the
adoption of the progressive rate had no marked effect, and
in still another it did not work well and the plan was soon
discontinued. The progressive rate was abolished in all districts early in 1921, and in 1923 Congress repealed the
amendment authorizing it. The difficulty with the progres*
sive rate lay, not in the law itself, but in its administration
by one or two of the banks which had adopted it. While a
maximum rate on excessive borrowings of ten or twelve per
cent would have accomplished the purpose intended, and
probably have aroused but little criticism, no limitation was
imposed at first by the banks which had adopted the plan,
and one member bank paid for a few days, on an advance of
a few thousand dollars, a rate equal to eighty-five per cent
per annum. While the actual amount paid was small, and
while the Federal Reserve Banks afterward refunded to borrowing banks all interest paid in excess of a maximum rate
of twelve per cent, prejudiced critics made much of this
particular case and brought upon the Federal Reserve
Board and upon the System in general much undeserved
criticism.
Adverting to the contention that Federal Reserve Bank
rates should have been substantially lowered in April or
May, 1920, I wish to point out that, even if this course had
been adopted, it is by no means certain that the drastic
price reactions would not, nevertheless, have taken place.

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THE FEDERAL RESERVE SYSTEM

They did occur in all other countries, and had there been
no corresponding fall of prices in this country the demands
upon our banks would have been all the heavier. The United
States was a free gold market, and had it remained at the
same time the cheapest money market in the world, our
financial structure would have been subject to the severest
strain. The Board in that event would have been forced to
suspend the reserve requirements, which would probably
have resulted in the presentation of large amounts of Federal Reserve notes for redemption in gold for hoarding,
which would have reduced reserves still further. In such
circumstances prices could have been sustained only in terms
of irredeemable paper money. Continuous credit inflation
inevitably leads to currency inflation, and currency inflation is always progressive, making necessary time and again
recourse to the printing-press. T o prevent a catastrophe a
halt has to be called at some point. It is not denied that the
halting of inflation causes hardship and distress, but no one
can truthfully assert that in Europe the distress has been
greater in those countries whose currencies maintained some
value than in countries like Russia, Austria, and Germany,
whose currencies finally came to be utterly worthless. The
Board was never in favor of a policy of deflation; it sought
merely to prevent further inflation. In its Annual Report
for the year 1919, it said:
The expansion of credit set in motion by the war must be
checked. Credit must be brought under effective control and its
flow be once more regulated and governed with careful regard to
the economic welfare of the country and the needs of its producing
industries.
Deflation, however, merely for the sake of deflation and a speedy
return to 'normal' — deflation merely for the sake of restoring
security values and commodity prices to their pre-war levels without regard to other consequences, would be an insensate proceeding in the existing posture of national and world affairs. . . .
Too rapid or too drastic deflation would defeat the very purpose
of a well-regulated credit system by the needless unsettlement of

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167

mind it would produce and the disastrous reaction that such
unsettlement would have upon productive industry.
Radical and drastic deflation is not, therefore, in contemplation, nor is a policy of further expansion. Either course would in
the end lead only to disaster and must not be permitted to develop. . . . There need be no occasion for apprehension as to our
ability to effect the transition from war-time to peace-time conditions if reasonable safeguards against the abuse of credit are
respected. There is, however, no need for precipitate action or
extreme measures. Extremes must be avoided, the process of adjusting the volume of credit to a normal basis should be effected
in an orderly manner, and its rapidity must be governed by conditions and circumstances as they develop. Much will depend
upon the cooperation of the business and general community.
Indeed, without such cooperation progress can be neither rapid
nor substantial. Much will depend also upon the rapidity with
which the unabsorbed portion of the outstanding issues of war
securities passes into the hands of permanent holders. As the
national debt is thus absorbed and as it is reduced through the
operation of the sinking fund, the loan accounts of the banks
should be reduced correspondingly, until the proper balance between the volume of credit and the volume of concrete things,
which credit helps to produce and which are the normal basis of
credit, is restored. This equilibrium, it cannot be too frequently
or too emphatically stated, can be restored only by speeding up
the processes of production, by the orderly distribution of goods,
by the avoidance of wasteful consumption, and by the increased
accumulation of savings. These are the fundamental economic
processes upon which the proper functioning of the Federal Reserve Banks must depend. The Federal Reserve System can do
much to assist these processes, but it cannot of itself and alone
compel them. Efficacious action along these lines involves the
intelligent and earnest cooperation of the business and general
community. While the Federal Reserve Board will always be
mindful of the interdependence of credit and industry and of the
influence exerted on prices by the general volume of credit, the
Board nevertheless cannot assume to be an arbiter of industry or
prices. Its primary duty, as the guardian of the Nation's ultimate
banking reserve, is to see that the banks under its supervision
function effectively and properly as reserve banks.

CHAPTER

XIV

FEDERAL RESERVE CONFERENCE ON M A Y 1 8 , 1 9 2 0 — REDISCOUNTING BETWEEN FEDERAL RESERVE BANKS — D E CLINE IN COMMODITY PRICES NOT SYNCHRONOUS
WITH ADVANCE IN DISCOUNT R A T E S

SECRETARY GLASS, a short time before his retirement from
the Treasury, transmitted a letter to the Board in which he
expressed the hope that the Federal Reserve Banks would
not rely wholly or too heavily for the prevention of the abuse
of the facilities of the Federal Reserve System upon the increased rates which had been established, which, as he stated,
he himself had joined in approving. He said:
I believe it to be of prime importance that the Federal Reserve
Board should insist upon, and that the Governors of the banks
should exercise, a firm discrimination in making new loans to prevent abuse of the facilities of the Federal Reserve System in
support of the reckless speculation in stocks, land, cotton,
clothing, foodstuffs, and commodities generally. . . . I need not
say that such steps should be taken not only firmly, but with
discretion, and in such a way as not to involve grave hardship to
individuals or injury to the general welfare. . . . I need scarcely
add that this letter is written in no spirit of criticism. The Governors of the Federal Reserve Banks have served their country with
devotion, courage, and wisdom during the trying period that is
past. It would be difficult for me to give adequate praise to the
patriotic spirit of self-sacrifice which has actuated them or adequate appreciation of the skill and sagacity with which they have
performed their duties. During the war they have naturally
turned for leadership to the Treasury, since its operations were
the dominating factor in the financial situation. It would, however, be a great misfortune if, now that the Treasury operations
are on a diminishing scale, the Governors of the Federal Reserve
Banks are allowed to feel that the problems of the future were for
them to solve each according to his own best judgment The need
of leadership is no less great, the need of examining the situation
from a broad national and international point of view is no less

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169

imperative. I look to see the Federal Reserve Board, not critically nor aggressively, but patiently and persistently, provide
this leadership.
On January 6, 1920, the Board held a conference with
bankers representing twenty-five clearing-house associations
throughout the country. A t this time there was a renewed
tendency among banks to increase rates of interest paid on
deposits and bank balances. The same thing had occurred
in 1918, and reference has already been made to the action
which was taken by the New York Clearing-House. In opening the conference, I called the attention of those present to
the great expansion which had taken place in our credit
structure, and urged the importance of discouraging nonessential loans and putting the banks back into a position
where they could expand or contract their loans according
to the industrial and commercial requirements of the country. I reminded the bankers present that if the Federal Reserve Banks, as a reflection of the condition of the member
banks of the country, whose reserves are kept entirely with
the Federal Reserve Banks, should be permitted to expand
to the very limit of their resources, and if the country should
then be confronted with an emergency, we should be obliged
to meet that emergency just as though there were no Federal Reserve System. This significant statement was made,
which had been duly considered and approved by the Board,
' It is going to be necessary, perhaps, to raise rates beyond
their present level. I am not here to make a prophecy, but
you should all bear in mind that a further rate increase is a
contingency which must be reckoned with/ Reference was
then made to the rules regarding interest on deposits and
bank balances which had been adopted two years before in
New York and some other cities, which provided for a sliding scale on bank balances ranging between a minimum of
one per cent and the maximum of three per cent based upon
the ninety-day discount rate for commercial paper at the
Federal Reserve Bank. I stated that it should be thoroughly

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understood by bankers throughout the country that the
Board could not be hampered in its approval of discount
rates for Federal Reserve Banks by any arrangement made
by banks, or associations of banks, as to rates of interest
which were made dependent upon Federal Reserve Bank
discount rates. In other words, the Board would exercise its
statutory rights and would be absolutely and entirely free
to approve such rates as might in its opinion be demanded
by the interests of the country without reference to any
competition for deposits which might result.
In April, 1920, a movement began in the South, which
soon spread to other parts of the country, to induce men to
wear overalls. This movement was intended as a protest
against the high price of men's clothing, and it was argued
that a decrease in the demand for ordinary suits of clothes
would effect a reduction in the price. An immediate effect
was to increase materially the price of denims, of which material overalls are made. Perhaps this agitation had some
influence also in precipitating the decline in the price of
wool which followed a few weeks later. The movement was
of short duration, but its significance lay in the fact that
people were complaining of the decreased purchasing power
of the dollar and that high prices were tending to reduce
both consumption and production. About the first of May
a large department store in New York advertised a horizontal reduction of twenty per cent on many of the articles carried in stock. This indicated that the retail trade
was beginning to find it difficult to dispose of goods at prevailing prices.
On April 30th the loans of the Federal Reserve Banks,
together with bankers' acceptances bought, amounted to
$2,942,000,000; the Federal Reserve notes in actual circulation amounted to $3,074,555,000; the gold reserves held by
the banks aggregated $1,936,720,000. These figures showed
that not only was the gold reserve lower than in January,
but that since that time there had been an increase in loans

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and in Federal Reserve notes outstanding. The summer was
ahead of us, and then would come the crop-moving season
for which provision must be made. The discount rates at
Federal Reserve Banks ranged from five to five and a half
per cent on notes secured by Government obligations, and
at all banks the rate on commercial paper, and on agricultural and live-stock paper, was six per cent. Several of the
banks advised the Board that their rediscount rates were
out of line with current rates and were asking for a further
increase. One or two of the others, having determined to
give the new progressive rate a trial, were not asking for an
increase in normal rates. The Board was very reluctant to
approve for any Federal Reserve Bank a discount rate
higher than six per cent. While recognizing the force of the
arguments made by the banks which had asked for a higher
rate, the Board hoped that the exercise of a wise discretion
on the part of the member banks in making loans would
make further advances in the Federal Reserve Bank rates
unnecessary.
The Federal Advisory Council had notified the Board
that it would hold its regular quarterly meeting in Washington on May 17th, and the Board deemed the occasion
opportune for a discussion and analysis of the credit situation throughout the country. In order to ascertain the views
of a larger number of dispensers of credit than were represented by the twelve members of the Federal Advisory
Council, the Board extended an invitation to the three
'Class A ' or banker directors of each Federal Reserve Bank
to meet the Council and the Board in Washington on Tuesday, May 18, 1920. This conference has often been referred
to by extreme critics as 'the great conspiracy' or 'the crime
of 1920.' It had been known for several days in advance of
the meeting that this conference would be held, and the
fact that it had been held was immediately given to the
press, which gave the public an outline of the proceedings. A comprehensive account of the conference ap-

185 THE FEDERAL RESERVE SYSTEM
peared a few days later in the ' Federal Reserve Bulletin'
for June.
In my opening address, which was a general review of the
situation, I pointed out that since June 30, 1914, there had
been an expansion of banking credit in the United States,
probably attributable to the war, of about $11,000,000,000,
with an increase of money in actual circulation of about
$1,900,000,000; and went on to say:
The expansion of national bank credits was sixteen per cent,
or at the rate of ten and a half per cent a year, during the
nineteen months of the war. From April 1, 1919, to April I, 1920,
the increase in bank loans was approximately twenty-five per
cent. . . .
It is evident that the country cannot continue to advance
prices and wages, to curtail production, to expand credits, and
to attempt to enrich itself by non-productive operations and
transactions without fostering discontent and radicalism, and that
such a course, if persisted in, will eventually bring on a real crisis.
There is a world-wide lack of capital, and with calls upon the
investment market which cannot be met, there is an unprecedented
demand for bank credits. The fact must be recognized that, however desirable on general principles continued expansion of trade
and industry may be, such developments must accommodate
themselves to the actual supply of capital and credit available.
Official bank rates now in force in the leading countries are
higher than at any time during the present century, except during
the war panic week at the beginning of August, 1914. . . .
Our problem, therefore, is to check further expansion and to
bring about a normal and healthy liquidation without curtailing
essential production and without shock to industry, and, as far
as possible, without disturbance of legitimate commerce and
business.
As a rule there is a substantial reduction in the volume of commercial loans during the first quarter of the year. This liquidation
is entirely natural and healthy, and is necessary in order that the
banks may be prepared to meet the demands made upon them
during the crop-making and harvesting seasons. There has been
no such liquidation during the present year; on the contrary, commercial loans have steadily increased. Thus the public has anticipated demands for banking credit which are usually made later on

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in the year. The average reserves of the Federal Reserve Banks
are now about forty-two per cent, as against forty-five per cent at
the beginning of the year, and about fifty-one per cent twelve
months ago.
The solution of the problems confronting us will require the
codperation of all banks and the public. Whatever personal sacrifices may be necessary for the general economic good should be
made. The war-time spirit to do things that are worth while must
be revived, and there should be the fullest cooperation in an effort
to produce more, save more, and consume less. The banks should
lean less heavily upon the Federal Reserve Banks, and rely more
upon their own resources. Unnecessary and habitual borrowings
should be discouraged, and the liquidation of long-standing nonessential loans should proceed. Drastic steps, however, should be
avoided and the methods adopted should be orderly. Gradual
liquidation will result in improvement, while too rapid deflation
would be injurious and must be avoided. . . .
With respect to credits, the problems of the Federal Reserve
Board, the Federal Reserve Banks, and the member banks, while
interrelated, are distinctive. The Federal Reserve Board has but
little direct contact with the member banks; it deals with general
conditions and principles rather than with individual cases and
details. The Federal Reserve Banks, on the other hand, are in
daily contact with their member banks and have constant dealings with them. Between the Federal Reserve Banks and the
Federal Reserve Board, as the supervisory and coordinating body,
there is necessarily a close and intimate relationship. The member
banks transact the greater part of the primary banking business
of the country. They receive the deposits of the public and
are the media through which ordinary commercial credits are extended. . . .
Regardless of the extent of its legal powers, it would be a most
difficult task for the Federal Reserve Board, sitting in Washington,
to attempt, by general rule of country-wide application, to distinguish between 'essential' and ' non-essential' loans. During the
war there was a broad underlying principle that essentials must
be 'necessary or contributory to the conduct of the war,' but,
notwithstanding the sharp outline of this principle, much difficulty was experienced by the various war boards in defining
essentials and non-essentials. All the more difficult would it be
for the Federal Reserve Board to make such a general definition
now when there is no longer that purpose as a guide

187 THE FEDERAL RESERVE SYSTEM
In the Federal Reserve Act no express condition is made regarding the essential or non-essential character of the transaction
giving rise to a note which may be offered for discount, and the
Federal Reserve Board is not required and properly could not be
expected generally to adopt such a criterion of eligibility. It is too
much a matter of local conditions and local knowledge to justify
at this time any general country-wide ruling by the Board even if
such a ruling were deemed helpful.
On the other hand, there is nothing in the Federal Reserve Act
which requires a Federal Reserve Bank to make any investment
or to rediscount any particular paper or class of paper. . . . The
Federal Reserve Act, however, requires the directors of a Federal
Reserve Bank to administer its affairs 'fairly and impartially and
without discrimination in favor of or against any member bank,'
and subject to the provisions of law and the orders of the Federal
Reserve Board to extend 'to each member bank such discounts,
advancements, and accommodations as may be safely and reasonably made with due regard for the claims and demands of other
member banks.' Thus, the directors of a Federal Reserve Bank
have the power to limit the volume and character of loans which
in their judgment may be safely and reasonably made to any
member bank. . . .
It is the view of the Board, however, that, while Federal Reserve Banks may properly undertake in their transactions with
member banks to discriminate between essential and non-essential
loans, nevertheless, that discrimination might much better be
made at the source by the member banks themselves. The individual banker comes in direct contact with his customers; he is
better qualified than any one else to advise the customer because
of his familiarity, not only with the customer's business, but with
the general business conditions and needs in his immediate locality. In making loans he is bound by no general rule of law as to
the character of the purpose for which a loan is being asked. He is
entirely free to exercise discretion and can make one loan and
decline another as his judgment may dictate. He can estimate with
a fair degree of accuracy the legitimate demands for credit which
are liable to be made upon him, as well as the fluctuations in the
volume of his deposits. He knows what industries sustain his
community, and is thus qualified to pass upon the essential or
non-essential character of loans offered him. He knows, or should
know, what rediscount line he may reasonably expect of his
Federal Reserve Bank, and he ought not to regard this line as a

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permanent addition to his capital. With knowledge of the limitations or penalties put upon his borrowings from the Federal Reserve Bank, the banker may be depended upon to use a more
discriminating judgment in granting credit accommodations to
customers, and that judgment he must exercise if the present
situation is to be remedied fundamentally.
It is true that under existing conditions the volume of credit
required in any transaction is much greater than was the case in
pre-war times, but it is also true that the resources of the member
and non-member banks would be ample to take care of the essential business of the country and to a large extent of non-essentials
as well if there were a freer flow of goods and credit. If 4 frozen
loans' were liquefied, and if commodities which are held back
either for speculative purposes or because of lack of transportation
facilities should go to the markets, and if large stocks of merchandise should be reduced, the resultant release of credit would have
a most beneficial effect upon the general situation. . . .
While the problem of credit regulation and control is national
and even international in its scope, yet in the last analysis it is
merely an aggregation of individual problems, and the proper
working-out of the situation must depend upon the public and
upon the banks which deal with the public. The public must be
made to realize the necessity of economy in expenditures and in
consequent demands for banking credit.
The banks themselves are best able to impress the importance
of this policy upon the public. The Federal Reserve Banks may
be depended upon to do their duty to the member banks and the
public, but to accomplish results the banks and the public must do
their part in accelerating the processes of production and distribution and in restricting waste and extravagance.

In the discussion which followed, the directors of the Federal Reserve Banks described conditions in their respective
districts. After the bank directors had concluded their remarks, other members of the Board, including Mr. Miller
and Mr. Williams, expressed their views. Mr. Miller said
in part:
Sometimes on occasions of this kind you want a word or a
phrase upon which to hang things, and I was struck in the course
of deliberations this morning with the frequent occurrence of the
word 'discrimination.' I think the country will accept that as on

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the whole indicating a temperate and responsible attitude on the
part of the Federal Reserve System and member banks of the
country in dealing with this problem, and on the whole that is the
one thing that would seem to me worth specifying as a general
objective in any report a committee of this conference might make
in the way of a recommendation to the Federal Reserve Board as
to what in its opinion must be done to handle conditions successfully in this country so as not to dampen the ardor of enterprise,
not to throw any chill over industry, but also with the constant
suggestion that banks are to use such influence as they have to
restrain the unproductive use of credit, applying the test of unproductiveness under existing conditions and not under normal
conditions, and to restrain the reign of extravagance.
I have no hesitation in saying for myself that I do not feel at all
optimistic about the outlook. I do not for a moment expect that
we are going to deflate in this country, and I think we are only
deceiving ourselves if we talk about deflation. We must, however,
arrest the rate of growth of credit, and we must expect that, with
the swell in the productive activities of the country that come
with the approaching crop season, there will be a natural swell in
the volume of credit, which need not alarm us. . . .
As I see it, beyond that the problem is to present this in such a
way to the bankers of the country as will secure their cooperation,
and with their aid also to present it to the user of credit. After all,
credit is given only as somebody wants credit, and to a certain
extent our problem is to restrict the appetite for credit, and it is
not the banker that borrows credit, or, if he borrows it from the
Reserve Banks, he borrows it only as the first step in the process
of lending credit to somebody else. Eventually, it is the user of
credit that has got to be brought into a more or less responsive
and acquiescent attitude in this policy of control. . . .
I come back to the word 'discrimination' in the extension of
credit, as on the whole pointing the way toward the road that we
have got to travel, and perhaps in some parts of the country even
blaze, in order to get back to the situation that the Governor
very happily described this morning as the restoring of a more
normal relationship between the total volume of credit in existence
and the total volume of production. I would amend it only in one
particular, the production of those things that people who care
for the country, who are sensitive to the requirements of the
times, and who are willing to cooperate in a great national
endeavor will not quarrel with the production of things that

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177

immediately are more important, and the postponement of things
that for the moment are less important.

The following extracts are from remarks made by Mr.
Williams:
Mr. Chairman, and gentlemen, I do not know that I have anything special to add to the very excellent presentation of the
whole subject which you gave this morning, which was supplemented by the various speakers who have preceded me.
There are one or two aspects of the situation, however, to
which I think I would like to direct your attention especially.
You have been speaking of extravagance and the production of
non-essentials and luxuries. It seems to me it would be very helpful if every bank in the country should constitute itself a missionary for thrift and saving and try to urge upon the workers,
upon the laboring people, and upon those whose incomes have
been swollen, the importance of laying up for the rainy day and
for old age. It seems to me, with the large wages that are being
paid now in industrial establishments, that it offers a splendid
opportunity for you to increase and build up the savings deposits
in your banks. I was very much disgusted the other day to hear
of my chauffeur buying about three silk shirts at ten dollars
apiece.. . .
I think that, when these individual cases of extravagance and
luxury come to our attention, if we should call the attention of
the spendthrifts to the importance of starting a savings account,
it would be helpful. It seems to me that the banks could very
well afford to do some little additional advertising in behalf of
thrift and saving, and appeal to the laborers, who are getting
more now in their daily wages than they ever dreamed of in the
years gone by.
One difficulty of the present situation is that the conditions of
which we complain in this country are world-wide. We have not
simply to remedy things within our four borders, but they are
overlapping in all the civilized and uncivilized countries.. . .
I do think it is tremendously important that every individual
bank, besides being a missionary for thrift, should each admonish
and warn and hold the strings of their money-bags with a very
discriminating hand, and should bring about a proper and reasonable degree of contraction. I think my friend, Doctor Miller,
expressed the view of the meeting yesterday, that he was not very
hopeful of our ability to bring about much contraction — about

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as far as he went was to desire and hope that we should not inflate
any further. I think, though, that we should go further; I think
we should, and must, bring about a reasonable degree of deflation
or contraction. . . .
M y parting word is to urge that the member banks keep themselves in solid condition and lean as litde as possible upon the
Federal Reserve Banks, and that the member banks do not undertake to make their loans year in and year out, or month in and
month out, except on unusual calls and in emergency cases, from
the Federal Reserve System. I am reminded, in conclusion, of
the hopeful and reassuring lines of the old hymn:
' Y e fearful saints fresh courage take;
The clouds ye so much dread
Are rich in mercies and shall fall
In blessings on your head.'

There was a general agreement with the views expressed
in my address, and a resolution was adopted approving the
sentiments expressed by me as representing the views of the
Federal Reserve Board. It was further resolved, 'that the
bankers here assembled believe that the widest publicity
should be given the address, and that they hereby agree to
abide by the spirit of the address in the conduct of their own
affairs, and that they will encourage its general adoption by
the bankers and people of our country.'
The effect of the transportation situation upon the credit
situation was generally remarked, and there was a disposition to attribute much of the continued heavy demand for
credit to unsettled conditions in transportation. A resolution was adopted stressing the need for increasing transportation facilities, and this resolution was presented by a committee of five directors on May 19th to the Interstate Commerce Commission and to the Shipping Board.
Toward the close of the conference there was some discussion of the possibility of a further advance in discount
rates and of the effect which might be expected. It had always been the policy of the Federal Reserve Board, and has
continued to be up to the present time, to discourage any

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179

public discussion by Federal Reserve Bank officers and directors of possible changes in discount rates, and, as the conference was about to adjourn, I cautioned those present to refrain from making any statements which might give the impression that a further advance in rates was in contemplation. It was not certain that the rates would be advanced,
and it was obvious that any public discussion of the possibility by any member of the conference would have a disquieting effect without producing any good result. The records show that, exclusive of members of the Federal Reserve
Board, there were forty-nine persons present at the conference, representing every Federal Reserve District. The suggestion made in my concluding remarks that nothing be said
about possible changes in discount rates has been seized upon
by one of the Board's most irreconcilable critics as conclusive evidence of a design that those present at the meeting
should profit from advance information which was to be
withheld from the general public. As a matter of fact,
no one at the conference was in a position to know that
any changes whatever would be made. Changes in discount rates must first be proposed by the directors of a
Federal Reserve Bank, and to become effective must be approved by the Federal Reserve Board. It was manifestly
desirable that the impressions created upon the public mind
by the conference should be reassuring rather than alarming,
and, as it had always been the policy of the Board not to
discuss discount rates with representatives of the press, it
seemed to me advisable to call the attention of the bankers
present to this fact. M y remarks at this conference, which
were unanimously endorsed by those present, did not suggest or indicate any change in the policy which the Federal
Reserve Board had followed consistently for several months.
In fact, my remarks were based upon and followed closely
a statement made by me in opening the conference which
was held by the Board on January 6,1920, with bankers representing twenty-five clearing-house associations through-

193

THE FEDERAL RESERVE SYSTEM

out tlie country. This statement, which was given to the
press on that day, outlined clearly the policy of the Board
and appeared in leading newspapers throughout the country.
A s an evidence of the state of the public mind at this time,
mention should be made of a resolution offered by Senator
McCormick, of Illinois, and adopted by the Senate of the
United States on May 17, 1920 (the day before the conference was held), which reads as follows:
Resolved: that the Federal Reserve Board be directed to advise
the Senate what steps it purposes to take or to recommend to the
member banks of the Federal Reserve System to meet the existing
inflation of currency and credits, and consequent high prices; and
what steps it purposes to take or recommend to mobilize credits
in order to move the 1920 crop.
In offering this resolution, Senator McCormick no doubt
was influenced b y complaints which were then coming in
from all quarters regarding the high cost of living.
Some months later, after commodity prices had declined
as a result of world-wide reaction, he was reproached by
some for having, through the resolution which the Senate
adopted at his instance, incited the Board to put into effect
4 a murderous deflation policy.' The Board did not put such
a policy into effect and never considered doing so, but, in
justice to the memory of the late Senator McCormick, it is
only fair to state that his resolution had no bearing upon
the policies of the Board, which had already been developed,
and its adoption by the Senate on the day before the conference with the Federal Advisory Council and the 'Class A f
directors was merely a coincidence. T h e Board in response
to this resolution called attention to the conference which
had been held and incorporated the substance of my address to the conference. In this letter to the Senate the
Board went on to say:
The Board feels assured that the banks of the country now
realize the necessity of more conservatism in extending credits

FEDERAL RESERVE CONFERENCE

181

and of a reasonable reduction in the volume of credits now outstanding. The Board will not hesitate, so far as it may be necessary, to bring to bear all its statutory powers in regulating the
volume of credit, but wishes to point out that the more vital
problems relating to the movement of the 1920 crop are physical
rather than financial.
This was the unanimous view of those present at the conference on the 18th instant, at which the following resolution, was
adopted:
The whole country is suffering from inflation of prices with the consequent inflation of credit. From reports made by the members of this
conference, representing every section of the country, it is obvious that
great sums are tied up in products which if marketed would relieve
necessity, tend to reduce the price-level, and relieve the strain on our
credit system.
This congestion of freight is found in practically all of the large railroad centers and shipping ports. It arises chiefly from inadequate transportation facilities available at this time and is seriously crippling business. We are informed that the per-ton-mile of freight increased in
three y e a r s — 1916, 1917, and 1918 — 47 per cent, while the freight
cars in service during the same period increased 1.9 per cent.
A striking necessity exists which can only be relieved through the upbuilding of the credit of the railroads. This must come through adequate
and prompt increase in freight rates. Any delay means the paying of
greater cost directly and indirectly, and places a burden on the credit
system which in the approaching time for seasonal expansion may cause
abnormal strain. Even under the load of war inflation, high price-level,
and extravagances the bank reserves would probably be sufficient if
quick transportation could be assured during the time of the greatest
strain.
Therefore be it resolved: That this conference urge as the most important remedies that the Interstate Commerce Commission and the United
States Shipping Board give increased rates and adequate facilities such
immediate effect as may be warranted under their authority, and that a
committee of five, representing the various sections of the country, be
appointed by the Chairman to present this resolution to the Interstate
Commerce Commission and the United States Shipping Board with
such verbal presentation as may seem appropriate to the committee.

O n M a y 10th, President Wilson sent t o the Senate the
n a m e of the Honorable Edmund Piatt, of N e w Y o r k , Chairman of the House Banking and Currency Committee, to be
a member of the Federal Reserve Board, and the nomination w a s confirmed on M a y 28th. M r . P i a t t who was desig-

182

THE FEDERAL RESERVE SYSTEM

nated by the President as Vice-Governor of the Board, was
appointed to fill the unexpired term of Mr. Albert Strauss,
of New York, who had resigned on March 15th.
In order to approximate market conditions more nearly,
the directors of some of the Federal Reserve Banks voted
during the latter part of May to increase their discount
rates. These increases as approved by the Board brought
the rate on paper secured by Treasury certificates of indebtedness up to five and a half per cent at eight of the banks,
while on such paper Boston, Kansas City, and Dallas still
maintained a five per cent rate, and San Francisco a rate of
five and a quarter per cent. The rate on paper secured by
Liberty bonds and Victory notes was advanced to six per
cent at New York, Richmond, Chicago, and Minneapolis,
to five and three quarters per cent at Cleveland and San
Francisco, and the other banks maintained a rate of five
and a half per cent. The rate on commercial paper, and on
agricultural and live-stock paper, was advanced at this time
to seven per cent at New York, Chicago, and Minneapolis;
and soon afterwards the rate at the Federal Reserve Bank
of Boston was advanced to seven per cent on commercial
and agricultural paper. A few changes were made in the
rates on paper secured by Treasury certificates of indebtedness and by Liberty bonds and Victory notes, bringing them
up to a maximum of six per cent at six of the banks. These
rates were the highest ever maintained by the Federal Reserve Banks, but compare with a minimum rate of eight per
cent in effect at the Bank of England during this period.
Because of the low reserve percentage of the banks and of
the constant tendency of balances to shift from one Federal
Reserve District to another, it had become necessary in
1919 to resort to large and frequent rediscount transactions
between the Federal Reserve Banks themselves. Such transactions increased both in frequency and in volume during
the year 1920 and continued in a smaller degree for several
months in 1921. During the year 1920 the total of the

REDISCOUNTING BETWEEN BANKS

183

rediscount transactions and sales of bills between Federal
Reserve Banks amounted to $3,672,792,000. By far the
larger part of the accommodation given in this way to
other Federal Reserve Banks during the year was extended
by the Federal Reserve Bank of Boston ($1,000,557,000) by
the Federal Reserve Bank of Philadelphia ($758,875,000) and
by the Federal Reserve Bank of Cleveland ($1,478,882,000).
The banks to which the larger part of this accommodation was extended were: Richmond, $700,000,000; Atlanta, $307,997,000; Chicago, $283,178,000; St. Louis,
$315,499,000; Minneapolis, $293,500,000; Kansas City,
$411,636,000; and Dallas, $436,013,000.
The net balances due lending Federal Reserve Banks by
borrowing Federal Reserve Banks on account of notes and
bills rediscounted at the close of each calendar month during the year were as follows:
January
February
March
April
May
June.........

$114,460,000
106,156,000
96480,000
163,084,000
148,552,000
126,167,000

July...
August.
September
October.
November
December

$148,704,000
2I5455.O00

250,296,000
260,440,000
168,435,000
122,174,000

Rediscounts between Federal Reserve Banks can be made
only by consent of the Federal Reserve Board, which is
authorized by law to permit, or, upon the affirmative vote
of five members, to compel, a Federal Reserve Bank to rediscount for another. The banks, however, showed such a
spirit of cooperation that no compulsion was ever necessary,
although there were times when at least one of the banks
(Cleveland) was rediscounting larger amounts for other Federal Reserve Banks than it was for its own member banks.
No application of a Federal Reserve Bank for rediscount accommodation was ever declined.
Much has been said in the halls of Congress and elsewhere
of the 'murderous deflation1 alleged to have taken place
during the year 1920. As far as the Federal Reserve Sys-

184

THE FEDERAL RESERVE SYSTEM

tem was concerned, there was no contraction of credit or
currency during that year. On the contrary, there was a
substantial increase during the year both in the amount of
bills discounted and of Federal Reserve notes in circulation, as will be shown by the following table:
FEDERAL RESERVE NOTE CIRCULATION AND BILL HOLDINGS OF THE
TWELVE FEDERAL RESERVE BANKS COM DINED
(In thousands of dollars—ooo omitted)

D a t e , 1920

January 30
March 26
April 30
May 28
June 25
July 30
August 27
September 24
October 29
November 26
December 30

Federal
Note

Reserve

Circulation

$2,850,944
3,019,984

Bills
Discounted

$2,174,357

3,048,039

a.453.511
2,449.230

3,074.555

2.535.0/I

3.116,718

2.519,43*
2.43«.794
2,491,630

3,107,021
3,120,138
3,203,637
3,279,996
3,351.303
3,325,538

3,344,686

2,667,127
2,704,464
2,801,297
2,735.400
2,719,134

Bills Bought
ik Open
Markjtt

$561,313
531.367
45l,«79
407.247

418,600
399.185
345.305
321,965

307.624
298,375
247.703
255,702

It has been shown in the preceding pages that all advances
in Federal Reserve discount rates took place before July 1st,
and that the most marked advances were made before March
1st. It is interesting, therefore, in considering the effect
of these advances upon prices, to note the price trend
throughout the year of the three great agricultural staples,
wheat, corn, and cotton. Accordingly, there is inserted
here a table giving quotations upon these commodities on
or about the 15th and the last day of each month throughout the year.
It will be seen that material advances in all three of these
staples occurred after the discount rates had been advanced
in February, and that there were no substantial or continued
declines in the prices of any of them until the new crops began to come upon the market. On October 31st, wheat was

DECLINE IN PRICES

185

QUOTATIONS ON WHEAT, CORN, AND COTTON ON OR ABOUT THE
FIFTEENTH AND THE LAST D A Y OF EACH MONTH IN 1920

Date

W h e a t — -No. 1 Northern
Minneapolis

Corn—No. 3

(cash)

•2.215
•2.215
February I 5 - .
*2.2I5
29..
•2.215
•2.215
March
ISto 3.00
31.. 2.85
April
to 3>05
15.. 2 - 9 5
to 3 . 1 5
3°- • 305
May
to 320
I5-* 3 - 1 5
2.95
to 3.10
31-.
June
to 3.00
15.. 2.90
2.80
to 2.85
30..
2.90
to 3.00
July
15..
to 2.40
2.35
3i..
August
to 2.75
I5-. 2.65
to 2.52
31.. 2 . 4 5
September 15.. 2 . 5 3 6 2 5 to 2.60625
to 2.355
30.. 2.255
2.2525
October
to 2.2825
15..
2.0825
to 2.1325
31..
1.825
to
November 15.. 1 - 7 7 5
to
30.. 1.46875
1.50875
December I 5 - . I . 5 7 I 2 5 to 1.61125
1.7025
to
1.7425
3*.January

15..

31..

Chicago

1.48

to
to
to
1.55
to
1.65
1.68
1.80
to
to
Hi
1.88
to
1.825 to
176
to
to
i-53
to
1.45
to
1.595
1.50
1.475

1.48

— N e w

1.50
1.49
1.49
1.575
1.66
1.83
2.16
1.90
1.85
1-77

.94
.885

.725
•73
•73

.40.25
.39.88
.39.25

.40.25
•41.00
.41.00
.41.50
-4125
40.25

40.00
.40.75
•3950

1.55

.39.00

1.455

.38.75
.35.00

1.60

1.3675
1.255

Orleans

(spot)

to
I.5I5

Cotton Middling

to 1.28
to
-945
to
.895
.84
to
•73
to
•74
to
•74

.29.50
.28.50
.23.00
.20.25
.20.50
.18.25
.1525
•14.75
.13.50

* Govemment price.

still above $2.00 a bushel. On August 31st, corn was still
around $1.50 a bushel, and did not fall below $1.00 until
October. Cotton was 4 0 ^ cents a pound as late as June
15th; 35 cents on August 15th; 2 8 ^ cents on September
15th, and did not fall below 20 cents until after October
31st. The large volume of unsold stocks of these commodities carried over from 1919 had much to do with the drastic
decline which followed the harvesting of crops in 1920. In
the case of cotton, on July 31st, the end of the cotton year,
the carry-over was about 5,000,000 bales, and the new
American crop, 13,400,000 bales, was the second largest
ever produced. This amount of American cotton was too
much for the world market and a drastic decline in price
was inevitable.

186

THE FEDERAL RESERVE SYSTEM

On September 20th, Mr. D . C . Wills, Federal Reserve
Agent at the Cleveland Bank, was given a recess appointment as a member of the Board by President Wilson to fill
the vacancy occasioned by the retirement of Mr. Henry A.
Moehlenpah, whose term had expired on August 9th. This
appointment was made under section 10 of the Federal Reserve Act, which provided that 4 the President shall have
power to fill all vacancies that may happen on the Federal
Reserve Board during the recess of the Senate by granting
commissions which shall expire thirty days after the next
session of the Senate convenes/ The commission which the
President first gave to Mr. Wills limited his tenure of office
to conform to this requirement. As the Senate was to convene on December 4th, this would have made the term of
Mr. Wills expire on January 3, 1921. While Mr. Wills was
unwilling to accept an appointment for the full term of ten
years, he had expressed his willingness to serve until a permanent appointment could be made. The paragraph from
section 10 of the Federal Reserve Act which has just been
quoted does not conform to the Constitution of the United
States, which provides that, in filling vacancies which may
occur during the recess of the Senate, the President may
grant commissions which shall expire with the next session
of the Senate. Upon being apprised of this fact, President
Wilson sent Mr. Wills a new commission which extended his
term until March 4th. The Act of June 3, 1922, amended
the Federal Reserve Act in this particular to conform to the
constitutional provision.

CHAPTER XV
CONFERENCE WITH REPRESENTATIVES OF COTTON-GROWERS
SENATOR OWEN PROTESTS AGAINST INDISCRIMINATE
DEFLATION — T H E BOARD'S POLICY EXPLAINED

—

D U R I N G the summer of 1920, the Presidential election campaign was in progress. Members of the Board were urged
by some political leaders to bring about a reduction in discount rates, and the suggestion was made to me that a rate
as low as three per cent would be popular and therefore desirable. The Board, however, not being influenced by purely
political considerations, agreed with the view of Reserve
Bank directors that conditions warranted no reduction.
Because of my residence in a Southern State, there were
many in the South who felt that I should do something to
protect the price of cotton. Some of my correspondents,
apparently overlooking the fact that I was not the entire
Federal Reserve Board, and was not omnipotent, urged me
to issue a statement calling attention to the intrinsic value
of cotton, to its importance as an article of export, to the
high cost of producing it, and to urge upon banks generally
that they should make liberal advances on warehouse receipts for cotton, with the assurance that the Federal Reserve Banks would discount freely such paper when offered
by member banks. A t a conference which the Board held in
Washington in September with representatives of cotton
producers, it was pointed out that should the Board issue
such a statement it would be called upon to issue a similar
statement respecting wool, wheat, corn, and other commodities, to say nothing of manufactured products. Such a statement would be likely to defeat its purpose because it would
advertise the weakness of the market position of the commodity affected. Comparatively few banks would be influenced by such a suggestion. Prudent bankers always con-

188

THE FEDERAL RESERVE SYSTEM

sider their liability as endorsers of rediscounted paper, and
in making loans have regard to their own safety. All bankers knew that the Federal Reserve Board had nothing to do
with the actual rediscounting of paper, and it was a matter
of public knowledge that the Federal Reserve Banks in the
South were already heavy borrowers from other Federal Reserve Banks. It was my belief, in the circumstances then
existing, that any attempt to enlist banking support for any
particular commodity by a statement to the press would be
unwise, and that any advances made would be on a very low
basis of valuation. This would tend to lower the market
price so that it would approximate the loan valuation; a result which followed the formation of the cotton loan pool in
the autumn of 1914. I suggested that it would be much better to let the situation, unpromising as the outlook seemed
to be, work itself out in a natural way, as I was assured that
the Federal Reserve Banks were doing, and would continue
to do, everything in their power to aid, and I expressed the
belief that the member banks would be in position to function more effectively if nothing were done which might create a panicky feeling. Unfortunately, no stenographic record was madeof the proceedings of this conference, but those
who participated in it expressed themselves at the time as
being satisfied with the position taken by the Board, and
some of them in newspaper interviews so expressed themselves. However, within a few months I was charged with
having brought about the drastic decline in the price of cotton which had occurred, and with causing the ruin of thousands of cotton farmers and merchants throughout the South.
One chronic senatorial fault-finder charged me with being a
traitor to my section, and to substantiate the charge said
that I had it in my power to prevent the price of cotton from
falling below thirty cents. He stated that I could have advised member banks to loan at this figure and could have
compelled Federal Reserve Banks to rediscount the notes,
and that had I done this the market could not have declined

THE FEDERAL RESERVE

BOARD,1920

Left to right: David F. Houston, W . P. G . Harding, Charles S. Hamlin, Edmund Piatt, John Skelton Williams,
D. C . Wills, A. C. Miller

CONFERENCE WITH COTTON-GROWERS

189

below thirty cents; for who would sell his cotton for less
when he could borrow at that figure? The cotton mills,
thus, not being able to buy cotton below thirty cents, would
have been compelled to pay that price or more for their
cotton, and in this way the market price would have been
stabilized!
On December 7th at the invitation of the officers of the
American Farm Bureau Federation, I addressed the annual
meeting of that organization at Indianapolis. In my remarks there I reviewed the banking situation and incorporated the substance of some of the statements I had made
at the Washington Cotton Conference in September. This
address to farmers will be found in Appendix C, page 284.
During the autumn of 1920 some rather insistent requests
we**e made of the Board for a ruling defining as eligible for
rediscount certain classes of paper which, in the opinion of
t*ie Board's counsel, could not be admitted under the terms
of section 13 of the Federal Reserve Act. Representatives of
firms engaged in the cotton factorage business appeared before the Board in October, and urged that the Board rescind
the ruling which it had made twelve months before under
advice of counsel, that notes of cotton factors, when issued
or drawn for the purpose of obtaining funds to lend to others,
were not eligible under the terms of the Federal Reserve
Act for rediscount by a Federal Reserve Bank. In issuing
that ruling, however, the Board stated also that the mere
fact that the maker of the note was a cotton factor did not of
itself render the note ineligible; and that in cases where a cotton factor had the status of a merchant, and had borrowed
money to make payments for cotton actually purchased by
him, his note was eligible, because the proceeds were used
for a commercial purpose. A t a later date the Board had
pointed out also that, where a cotton factor took a note from
a customer to whom he was making advances, such note
would be eligible for rediscount if the proceeds were used by
the customer for a commercial or agricultural purpose. The

190

THE FEDERAL RESERVE SYSTEM

Board with two dissenting votes declined to rescind or modify this ruling, and the charge has been made that its refusal
to do so forced upon the market hundreds of thousands of
bales of cotton which otherwise could have been carried over.
It has never been shown, however, that any appreciable
amount of cotton was affected by the Board's ruling. The
Federal Reserve Banks had never held at any one time previous to the Board's ruling in October, 1919, more than
fifty thousand dollars of cotton factors' paper of the kind declared ineligible by that ruling, and no evidence was ever
presented to the Board to show that the ruling affected the
ability of cotton factors to obtain credit. Fifty years ago
the cotton factorage business was far more extensive than it
is to-day. The development of local transportation facilities, the establishment of banks in practically all towns in
the cotton belt, and the direct dealings of local merchants
with the farmers, have operated to reduce to a very great
extent the business of cotton factors and to circumscribe
their field of operations. A t the present time the larger part
of the cotton factorage business is transacted in New Orleans,
Memphis, Savannah, and Augusta.
In a conversation with Senator McKellar, of Tennessee,
whose home is in Memphis, I suggested that, in order to
meet the wishes of the Memphis cotton factors that their
notes be declared eligible for rediscount, it would be necessary to amend the law; and at his request I drafted for him a
bill which provided that 'the notes, drafts, and bills of exchange of factors issued as such making advances exclusively
to producers of staple agricultural products in their raw
state shall be eligible for such discount.' In January, 1922,
Senator McKellar offered this bill from the floor of the Senate on a day when several other bills amending the Federal
Reserve Act, and offered in the same way, were adopted;
but at that time he failed to secure a majority vote for his
bill. It was, however, adopted later on in the session, following a favorable recommendation by the Committee on Bank-

CONGRESS AND CREDIT SITUATION

191

ing and Currency, and is now a p a r t of section 13 of the
Federal Reserve A c t .
W h e n the Sixty-Sixth Congress reconvened in December,
1920, for its final session, the effect upon its temper of the
marked decline in commodity prices which had taken place
w a s a t once apparent. T h e Federal Reserve Board which in
M a y had been blamed for having permitted inflation and
high prices, w a s now denounced for having caused deflation
and falling prices. T h e activities of Congress were immediately directed t o the consideration of measures designed
t o relieve the credit situation in general, and agricultural
conditions particularly.
In his annual report, the Secretary of the T r e a s u r y , in
referring to discontinuance of the activities of the W a r
Finance Corporation, said:
. . . Producers whose products could not be satisfactorily marketed and whose prices were falling demanded that the Treasury
intervene. They asked either that it deposit money in certain
sections or that the activities of the War Finance Corporation be
resumed. Neither of these things was feasible. The Treasury
had no money to lend and no money to deposit except for Government purposes. It is not in the banking business and should not
be. It is borrowing money periodically to meet current obligations at a cost of about six per cent. . . . Furthermore, the War
Finance Corporation was a war agency and was created to help
win the war. It was clearly desirable that war agencies should
cease to function as quickly as possible. The only power of the
Corporation which had any possible bearing on the situation is
one which was inserted after the Armistice with a particular
possible state of facts in view. Fearing that, with the cessation
of exports for military purposes after the Armistice, exports might
not go forward, Congress empowered the Corporation, in order
to promote commerce with foreign nations, to make advances
under certain conditions. The War Finance Corporation had no
money of its own. It or the Treasury would have had to borrow
the money and borrow it at a cost of about six per cent.
In a hearing before t h e Joint C o m m i t t e e on Agriculture
shortly before Congress reassembled, Secretary Houston re-

192

THE FEDERAL RESERVE SYSTEM

iterated and amplified this statement. Nevertheless, during
the first two weeks of the session a resolution was adopted
by both Houses of Congress authorizing and directing the
War Finance Corporation to resume its activities. This resolution was vetoed by the President, but was passed again,
over his veto, and thus became law. A t the same time, in
response to demands for a general relaxation of credit, a bill
was introduced in the Senate to fix the maximum rate of
interest or discount which Federal Reserve Banks could
charge at five per cent per annum. This bill was referred
to the Banking and Currency Committee of the Senate,
and a copy was sent by the Chairman of that committee
to the Federal Reserve Board with a request for an expression of its opinion. In its reply dated December 16th, the
Board referred to the fact that, prior to the year 1834, a similar limitation had been imposed upon the Bank of England
with disastrous consequences, which had compelled the removal of the limitation; and went on to say:
The Federal Reserve Board desires to put itself on record as
unalterably opposed to this bill or to any bill which in any way
attempts to limit the power now vested in it and in the Federal
Reserve Banks to regulate the rates of discount which those banks
may charge. . . . In conclusion, and by way of summary, if this
bill should become a law it is the Board's firm belief that the
Federal Reserve Banks would find it impossible while functioning
in a normal way to protect their gold reserves, that the Federal
Reserve System would within a very short time cease to be in any
sense a reserve system, and would become a mere instrument for
the acceleration and perpetuation of expansion, and that a wholesale scramble for the funds of the Federal Reserve Banks would
ensue which would leave those banks only two alternatives — one,
to lend their funds at the rate prescribed until the exhaustion of
their reserves had been completed, and the other to fix a definite
limit upon their total volume of loans, thus adopting a rigid
system of credit rationing. In the one case they would reach a
point where they would be unable to make further rediscounts,
no matter how insistent or meritorious the demands might be, and
in the other they would fincj it necessary to place all applications

DISCOUNT RATES

193

for discount accommodations on a waiting list until repayment of
prior loans made new funds available.

This bill failed to pass, and a similar bill was defeated in the
succeeding Congress.
Meanwhile, pressure was being brought to bear upon the
Board for a reduction in discount rates. Perhaps the directors of the respective Federal Reserve Banks were likewise
urged to submit lower rates to the Federal Reserve Board
for its approval, but as to this I have no knowledge. No
Federal Reserve Bank, however, during the final months of
1920 and the early months of 1921, requested the Federal
Reserve Board to approve a downward revision of its rates.
On the contrary, all Reserve Banks took the position that
the maintenance of existing rates was necessary. During
the month of December current open-market rates for
prime commercial paper, running from thirty days to six
months, were generally, at all financial centers, eight per
cent, with occasional quotations ranging from six and a half
to seven and three quarters per cent. A t the same time commercial banks in the larger cities in all districts reported on
customers' paper, maturing from thirty to ninety days, minimum rates of six per cent and maximum rates of eight per
cent, except in two Western cities where maximum rates of
nine and ten per cent were reported. A few cities located in
States which had rigid usury laws reported maximum and
minimum rates of six per cent.
The accompanying table (see page 194) taken from consolidated statements of the twelve Federal Reserve Banks shows
the position of the Federal Reserve Banks on December 30,
1920, as compared with their position on December 26,1919.
These figures show conclusively that there was no contraction of currency during the year 1920. On the other
hand, there was an increase of $188,000,000 in the amount
of money in actual circulation. The total loans and advances of the Federal Reserve Banks also showed a substan-

194

THE FEDERAL RESERVE SYSTEM
PRINCIPAL ITEMS IN CONSOLIDATED STATEMENT OP
FEDERAL RESERVE BANKS X
(In thousands of dollars — ooo omitted)
December 26,1919

December 30,1920

$2,078,342
2,779.57®
3,057,646

$2,059,333
2,321,417
3,344,686

40,615

"5.257

69,899

6,917

1,510,364
684,514

1,141,036
1,578,098

585.212

255,702

26,834
64,000

26,859
69,000

273,507

261,263

January x, 1920

January x, 192s

$7,961,320,139

$8,372,970,904

5,312,009,003
$49.81

5.500,702,153
$51*29

Total gold reserves
Total gross deposits
Federal Reserve notes in actual circulation
Rediscounts with other Federal Reserve
Banks
Bankers' acceptances sold other Federal
Reserve Banks
Bills discounted, secured by Government
obligations
All other
Bills bought in open market
Investments:
United States Government bonds
United States Victory notes
United States certificates of indebtedness

General stock of money in the United
States
of which there was held outside the
United States Treasury and Federal
Reserve System
Per capita
1 From United States Treasury statements.

tial increase during the year. The reduction of $330,000,000
in the amount of bills bought in the open market was attributable mainly to the decline in the volume of foreign trade.
The reduction of $360,000,000 in the amount of advances
made by Federal Reserve Banks on notes secured by Government obligations indicates that Government securities
were being absorbed by permanent investors. These reductions were more than offset by an increase of more than
$893,000,000 of commercial and agricultural paper rediscounted by the banks. The decrease of $458,000,000 in the
total gross deposits reflects, of course, a much greater de-

RESERVES INCREASING

195

crease in the deposits of member banks, whose increased
borrowings, however, show that their loans had not been
reduced in proportion to the decline in deposits.
During the month of January, 1921, it appeared to the
Board — or at least to a majority of its members — that
there were some signs of improvement in the situation. The
crops were moving with greater freedom, the borrowings of
Federal Reserve Banks were being reduced, and the cash
reserves of the Federal Reserve Banks were increasing. It
seemed an opportune time to stress the favorable factors in
the situation with a view of developing a more confident and
optimistic spirit. Attention was called to the fact that the
banks of the country generally had responded to the urgent
needs of those dependent upon them for credit accommodations, and, while exercising care and discretion in making
new loans, had not resorted to precipitate or drastic means
of forcing collections. It was pointed out that there had
been no deflation for the sake of deflation, but that, with the
passing of the era of reckless extravagance, undue expansion
had been checked. The Federal Reserve System, which had
shown its ability to assimilate credits in ever-increasing volume in order to meet the requirements of a great producing
country in time of war, had during the past year shown its
ability to absorb the shock of sudden reaction and had prevented a money panic such as hitherto had always occurred
after periods of extraordinary expansion* It was pointed
out that the reserve position, the inherent strength of the
Federal Reserve Banks, had so much improved that no apprehension need be felt that the Federal Reserve System
could not continue to render effective aid in stabilizing the
general banking situation.
There were some, however, who felt that the most pressing need was a lower rate at the Federal Reserve Banks, without which there could be no improvement, and with which
they seemed to think there would be an immediate revival.
Senator Owen, who had early in the year 1920 written two

196

THE FEDERAL RESERVE SYSTEM

letters to the Board protesting against an advance in rates,
wrote again on November 18th a letter to which wide publicity was given. As Chairman of the Senate Committee on
Banking and Currency, he had taken a prominent part in
the framing and passage of the Federal Reserve Act, and
because of this fact the views expressed in his letters to the
Board were given more consideration and publicity than
would have been accorded similar views from a less prominent source. There was certainly a wide difference of opinion between Senator Owen and a majority of the members
of the Federal Reserve Board as to the relation of the Board
to the Federal Reserve Banks, and as to the functions of the
Federal Reserve Banks, which under the law can have no
direct dealings with the public, but can only make loans and
advances to their member banks in the manner prescribed
in section 13 of the Federal Reserve Act. The Board was
not inclined to accept as correct many of the dicta in the
Senator's letter, nor did it regard as logical the conclusions
drawn from them.
Senator Owen began his letter by saying:
I wish to again appeal to you and to the Federal Reserve Board
to lower the rates of interest charged by the Federal Reserve
Banks, and expand the loans of the Federal Reserve Banks to the
extent which may be required for purposes of legitimate production and distribution. American banks are justified in charging
six and seven per cent, because they pay two and three per cent
for deposits, and they are entitled to make a profit of two and
three per cent above their overhead charges on the deposits which
they handle as merchants of c r e d i t . . . . The Federal Reserve
Banks under these high interest rates are measurably destabilizing credits and promoting industrial depression under the arbitrary high interest rates which the Reserve Banks are charging.
If the Reserve Banks would be content with the same margin of
profit in interest rates which the average bank of the country obtains, they would be charging a rate of between three and four
per cent.

Senator Owen protested against the Board's alleged pol-

SENATOR OWEN'S POSITION

197

icy of indiscriminate deflation and the refusal of credit t o
legitimate industries, which, he said, ' t h e Reserve B a n k s
can well afford to make t o w h a t e v e r extent required b y the
country.' In order to demonstrate this he pointed o u t t h a t :
The Bank of England has outstanding 139,920,000 pounds sterling in Bank of England notes secured by 121,420,010 pounds of
gold held in trust by the Issue Department of the Bank of England
for the benefit of the noteholders, together with 18,500,000 pounds
of Government debt, and other securities so that the Bank of
England notes, though not underwritten by the British Government, are secured up to one hundred per cent. However, under
the need for the economical use of gold, public opinion and the
Government of Great Britain sustains the Bank of England in
refusing to redeem its notes in gold just as the Bradbury notes are
not redeemed in gold. England is not on a gold basis. Last
Saturday gold was selling in London per ounce at 121 shillings
and 11 pence (par value 85 shillings per ounce). In other words,
gold was at a premium of forty-five per cent in London, while
selling at par in New York. This explains why the paper pound
sterling in New York is selling on the Exchange around $3.35
per pound.
The Treasury notes of the British Government issued for currency have behind them thirteen per cent of gold, and are not
redeemable in gold.
The Bank of England notes are not redeemable in gold, as a
matter of fact. . . .
The deposits of the Bank of England have a cash reserve running from ten to fourteen per cent in Bank of England notes,
including about one per cent of actual gold. The Bank of England
can command gold, nevertheless, and is not alcr??ied. . . .
If the Federal Reserve notes were issued up to the thirteen per
cent reserve of the Bradbury notes, the $2,100,000,000 of gold
would sustain Federal Reserve notes equal to $16,155,000,000, or
an expansion of credit equal to over $12,000,000,000.
T h e Board had never sought t o interfere with or t o influence the Federal Reserve B a n k s in the proper exercise of
those s t a t u t o r y powers which were conferred solely upon
them, and the discount rates in effect had been approved b y
the B o a r d a f t e r t h e y had been proposed b y the directors of

THE FEDERAL RESERVE SYSTEM

the Federal Reserve Banks. The demands made upon the
banks for accommodations were so heavy that many of them,
in order to maintain their required reserves, were rediscounting with other Federal Reserve Banks. It is true, as
Senator Owen said in his letter, that the law made provision
for a reduction of these reserves below the normal minimum,
and it is probable, had the war continued another year, that
the Board might have been obliged to avail itself of this provision. It is probable also that it would have been necessary
to do so had the discount rates not been advanced early in
1920. The banking conditions in England, as described in
Senator Owen's letter, were not brought about as a deliberate choice of the British Government and the Bank of England, but were the result of war-time necessities. While protesting against the Federal Reserve Bank rates of six to seven
per cent, Senator Owen took no exception to the eight per
cent rate of the Bank of England which bank he held up to us
as an example. During recent years we have seen in various
European countries that there is such a thing as the flight of
capital. This has taken place in Germany, in France, and
at times even in England; and as long as certain unfavorable
conditions, such as currency inflation, unbalanced budgets,
unscientific income taxation, and agitation for a capital
levy, continue, the flight of capital cannot be checked
merely by oratory, nor by appeals to the people to have
confidence in their country, in its money, and in its government. The United States had been maintaining a free gold
market since June, 1919. Reference has already been made
to the large volume of gold exports during the months which
immediately followed the removal of the gold embargo, and
while in November, 1920, it seemed that other nations were
no longer in a position to draw gold from the United States,
there was still a possibility that we might experience in this
country a flight of capital, not to other countries, but to
strong boxes and to various hiding-places. Lack of confidence in banks causes depositors to withdraw funds and to

THE BOARD'S POLICY EXPLAINED

199

put their money in hoarding. There were indications, as an
analysis of bank statements will show, that large amounts
were being hoarded during the period under review. As
long as the money hoarded was in the form of paper currency, the stability of the Federal Reserve Banks was not
materially affected; but what would have been the result
had the hoarded money been gold or gold certificates?
Senator Owen in his letter, although commenting favorably
upon the British banking situation, stated that Bank of
England notes were no longer being redeemed in gold, and
that although the British banks were abundantly protected
by public opinion and by the support of the British Government behind the Bradbury notes, and that while public
opinion and the British Government sustained the Bank of
England in refusing to redeem its notes in gold, there was a
premium on gold in London of forty-five per cent, while it
was selling at par in New York.
The Federal Reserve Banks had outstanding at this time
more than $3,300,000,000 of Federal Reserve notes. The
law requires that these notes be redeemed on demand in
gold or lawful money at any Federal Reserve Bank, and in
gold at the Treasury in Washington. The banks and the
Treasury were complying with the law and were redeeming
Federal Reserve notes in gold whenever called upon to do so.
Had the reserves of the Federal Reserve Banks, in the pursuance of the cheaper credit policy advocated by Senator
Owen, fallen below the legal minimum, what assurance was
there that holders of Federal Reserve notes might not have
become alarmed, and generally have begun to demand their
redemption in gold? Such redemptions would have reduced
the reserves still further, and, as the total volume of Federal
Reserve notes outstanding was already more than a billion
dollars in excess of the total gold reserves held by the Federal
Reserve Banks, repeated demands might have compelled
the banks to suspend the redemption of the notes. Without
redemptions it would have been impossible to maintain the

214 THE FEDERAL RESERVE SYSTEM
parity of the notes with gold, and they would have gone to a
discount- Assuming that this would have brought about an
advance in prices and a return of activity, an increased volume of notes would have been necessary which would have
caused a still greater discount. Prices, although rising, would
have been quoted in terms of irredeemable paper money.
The Board may have been overcautious, but those who profess to see no danger in permitting reserves to fall below a
prescribed minimum, arbitrary though it be, should remember the predicament of the second Cleveland Administration, when the Treasury's gold reserve fell below the traditional $100,000,000. The courageous steps taken by President Cleveland, with Congress refusing to aid, to restore the
gold reserve, alone enabled the Treasury to continue redemptions of legal-tender notes in gold, and saved the country from a silver basis. A t the end of the year 1920, Federal
Reserve notes outstanding amounted to nearly ten times as
much as the legal-tender notes which caused 3 \ I r . Cleveland
so much trouble, and the national debt, represented by
United States bonds and Treasury notes and certificates,
was about twenty times as large as in 1894. With all these
considerations in mind, the Board did not feel justified in
suggesting to directors of Federal Reserve Banks that discount rates be lowered without regard to current market
rates; nor did it feel that it would be prudent, in defending
its policy, to refer to the possible effect of a renewed credit
expansion upon the ability of the banks and the Treasury
to maintain Federal Reserve notes on a parity with gold.
In its reply to Senator Owen the Board therefore refrained
from touching upon this point, although tempted to suggest
that, if the situation warranted steps which might result in
placing the country upon a paper money basis, the responsibility for such action should be assumed by Congress,

CHAPTER XVI
CORRESPONDENCE WITH COMPTROLLER WILLIAMS —
BECOMES A CRITIC OF THE BOARD

THE statutory five-year term of the Comptroller of the Currency, Mr. Williams, expired on February 2, 1919. He had
been nominated by President Wilson for another term, and,
if I remember correctly, the Senate Committee on Banking
and Currency reported his name favorably to the Senate.
However, Senators who were opposed to Mr. Williams
blocked action upon his nomination, and the Senate adjourned on March 4, 1919, without having confirmed it. A
law was enacted about thirty years ago, which permitted
heads of departments to retain in office bureau chiefs whose
statutory terms had expired, pending the appointment and
qualification of their successors. Under authority of this
law, Mr. Williams was permitted to hold over as Comptroller of the Currency by Secretary Glass, and later by
Secretary Houston. Upon the assembling of the SixtySixth Congress, President Wilson again sent to the Senate
the nomination of Mr. Williams to be Comptroller of the
Currency, and over this nomination a remarkable contest
developed which extended over a period of about eighteen
months. Strong support for Mr. Williams was enlisted, and
some Republican Senators indicated their intention of voting to confirm him. It is probable that, had his nomination
been reported by the Senate Committee on Banking and
Currency, it would have been confirmed by a majority vote
of the Senate, even though the majority report of the committee had been unfavorable; but several members of the
committee, including its chairman, were opposed to the confirmation of Mr. Williams, and, after some meetings at which
no action was taken, the chairman declined to call the committee together for further consideration of the nomination.

202

THE FEDERAL RESERVE SYSTEM

Toward the end of the year 1920, Mr. Williams became convinced that the committee would make no report to the Senate, and he accordingly-made his arrangements to retire
from office early in March, at the end of President Wilson's
term. About the time he reached this conclusion, on December 28, 1920, he addressed a letter to the Board in which he
took an extremely pessimistic view of existing conditions,
and in which he stated that 'it is my strong belief that it is
within the power of the Federal Reserve Board at this time,
by the adoption of new, wise, liberal, and sound policies, and
the announcement of such policies, to instill a feeling of confidence and hope and to check the spirit of demoralization
which, unless arrested in time, may lead to disaster.' While
he suggested that 'definite and energetic action, even if precedent must be disregarded, accepted rules suspended or
waived, and new plans and methods devised/ the policies
which he specifically recommended were:
1. The suspension or modification of the progressive interest
rate in the two or three districts where it had been adopted.
2. The reduction of the rate of interest charged by Federal
Reserve Banks on loans of member banks secured by Liberty
Bonds, to a uniform rate of four and a half per cent.
3. A stipulation by the Federal Reserve Board that banks borrowing from Reserve Banks should1 not exact from customers
interest in excess of some rate or margin to be determined,
which will leave not more than a reasonable profit to the
member bank/
And by inference:
4. The establishment of a uniform Federal Reserve Bank rate
of six per cent on commercial and agricultural paper; 'six per
cent interest is enough to charge under present conditions.'
The core of his letter, however, was contained in the
following paragraphs:
While there appears to be this scarcity of money, and of credit
in the great agricultural and producing sections of the West and

COMPTROLLER WILLIAMS'S LETTER

203

Northwest and in the South and Southwest, we find that individual banks in New York City are borrowing from the Reserve
System, in a number of cases, more than 100 million dollars each;
and sometimes as much as 145 million dollars is loaned there to a
single bank — twice as much as the total loans some of the Reserve Banks have been lending recently to all the member banks
in their districts.
The records show that at the time of the last call for reports of
condition of the banks, about the middle of November, one bank
in New York was borrowing over 134 million dollars, or about 20
million dollars in excess of what the Federal Reserve Bank of
Kansas City was advancing to the 1091 member banks in the
Tenth Federal Reserve District covering the States of Kansas,
Nebraska, Colorado, Wyoming, and parts of Missouri, Oklahoma,
and New Mexico.
Another banking institution in New York was borrowing at the
same time from the Federal Reserve Bank about 40 million dollars more than the aggregate which the Federal Reserve Bank of
Minneapolis was lending to its 1000 member banks in the great
States of Minnesota, North and South Dakota, Montana, and
part of Wisconsin.
Another individual bank in New York was borrowing from the
Reserve Bank at the time of the last call about 30 million dollars
more than the Federal Reserve Bank of Dallas was lending to all
the national banks in that district, including the State of Texas,
and parts of Louisiana, Oklahoma, New Mexico, and Arizona;
while still another banking institution in New York had gotten
loans from the New York Reserve Bank which approximated in
amount the total of the loans made by the Federal Reserve Bank
of St. Louis to the 569 member banks in that particularly important district, including the whole State of Arkansas, parts of
Illinois, Indiana, Kentucky, Tennessee, and Mississippi, and the
larger part of the State of Missouri.
The Federal Reserve Bank of New York was also lending to
one of its member banks at the same time 20 million dollars more
than the Federal Reserve Bank of Richmond was lending to all
the member banks in the Fifth Reserve District, including the
States of Maryland, Virginia, North and South Carolina, and the
larger part of West Virginia. . . .
Briefly, the official figures tell us that four banking institutions
in New York City, at the time of the last call, were borrowing
from the Reserve System an average of over 118 million dollars

218 THE FEDERAL RESERVE SYSTEM
each — or practically as much money as the Federal Reserve
Banks of St. Louis, Kansas City, Minneapolis, Dallas, and Richmond all combined were lending to the more than 4000 member
banks in twenty-one (21) States in the Union, comprising more
than one half of the entire area of the United States. If our
Reserve System has the funds to lend in such huge sums to the
banks in New York, for such uses, is it not difficult to understand
why money should be so scarce in the interior where the real
wealth of the country is being so largely provided, and where
money is so distressingly needed? . . .

A copy of this letter was sent by Mr. Williams to every
member of the Board, and it was afterwards ascertained that
he had sent copies to various other persons, including some
Senators and Representatives; but he persistently declined
to give the names of those to whom copies had been sent.
The Comptroller's office was located adjoining those of other
members of the Board, and he could easily have made
known his views to them informally or expressed them orally
at any meeting of the Board. It appeared that his purpose
was to bring outside pressure to bear upon the Board. A few
days after the receipt of this letter, Senator Glass called at
my office and stated that he had received a copy. He was
much disturbed by some of the statements made in the letter until I went over them with him, and made the explanations which will presently appear in this text. Mr. Williams
continued at frequent intervals until his retirement from
office to write letters to the Board, sometimes sending two a
day. Much of this correspondence has been printed in a report of a Congressional Joint Commission in the summer of
1921, and there is no occasion to reprint much of it here.
However, in order to give the reader an idea of the Board's
point of view, extracts from its reply dated January 13,1921,
to Mr. Williams's letter of December 28th, are presented
below:
. . . It is our confident belief that but for the precautionary
measures taken several months ago, general conditions to-day
would be far worse than they are and that the prospects of

THE BOARD'S REPLY

205

stabilization and revival would be much more remote. We wish
to emphasize the fact that this process of drastic readjustment
has been world-wide and that the effects have been most severe
in those countries where the inflation of bank credit and currency
has been most pronounced. We believe that as far as this country
is concerned the crisis has been passed, and we are of the opinion
that the policies which were carried into effect by the Federal
Reserve Board have prevented one of the greatest financial
cataclysms of modern times.
We do not agree with you that, in order to relieve existing conditions, 1 precedents must be disregarded, accepted rules suspended
or waived, and new plans and methods devised/ particularly if
those new plans and methods are fundamentally unsound. We
believe your suggestion that the Federal Reserve Board reduce
the rate of interest charged by Federal Reserve Banks on loans
of member banks secured by Liberty bonds to a uniform rate of
four and a half per cent is essentially unsound. You say that
'The owners of those bonds do not ask the Government to buy
their bonds to save the holders from loss, and it hardly seems
right under present conditions to tax these borrowers for interest
on money borrowed from the Reserve Banks one and three
quarters per cent or two and three quarters per cent more than the
bonds yield, especially when this interest so collected goes to the
Government indirectly/ Entirely apart from the question whether
these bonds were sold to a patriotic public at rates of interest
lower than they should have borne, the Federal Reserve Banks
are certainly under no moral or legal obligation to protect the
bondholders from loss of interest, and the discount policy of the
Federal Reserve System cannot be adjusted to suit the convenience
or relieve the necessities of individual holders.
Many billions of these bonds have been paid for in full and the
effect, in the present circumstances, of a Federal Reserve Bank
discount rate of four and a half per cent on paper secured by
Liberty bonds would be to induce a temporary and artificial ease
in the money market, which could not be sustained, because the
lending power of the Federal Reserve Banks has its limitations,
and which might result in a temporary revival of the speculative
spirit which was so strongly in evidence fourteen months ago and
which had such an unhappy effect upon the commerce and business
of the country. . . .
Apparently you hold the view that the decline in prices has been
caused by restriction of credit on the part of the Federal Reserve

206

THE FEDERAL RESERVE SYSTEM

Banks and by the member and non-member banks of the country.
Your own reports show that there was a marked increase in the
loans of all national banks between September, 1919, and November, 1920, and the rediscounts of Federal Reserve Banks for
member banks increased steadily until November 5, 1920, when
they reached the highest point in the history of the System. Since
that date there has been a moderate reduction in the loans and
discounts of Federal Reserve Banks, due mainly to seasonal liquidation. It is significant, however, that the most rapid decline in
prices took place before November 5th, while the loans and advances made by the Federal Reserve Banks were constantly
increasing and the volume of Federal Reserve notes outstanding
was still expanding. It seems clear to us, therefore, that the
decline in prices was due to economic causes and cannot be
ascribed to restriction of credit or to contraction of currency. . . .
We are surprised at the references you make to the dealings of
individual banks in New York City with the Federal Reserve
Bank there, and particularly at your attempt to show that a few
large banks in that city have been receiving undue favors at the
hands of the Federal Reserve Bank. Your statements are calculated to mislead the uninformed, for you say that, about the
middle of November, one bank in New York was borrowing about
20 million dollars more than the amount the Federal Reserve
Bank of Kansas City was advancing to 1091 member banks in the
seven States or parts of States embraced in its district; that
another New York bank was borrowing at the same time about
40 million dollars more than the amount which the Federal Reserve Bank of Minneapolis was lending to its 1000 member banks,
and that another bank in New York City was borrowing 30
million dollars more than the Federal Reserve Bank of Dallas
was lending to all national banks in its district (making no reference to advances to State member banks). You say also that
another New York bank had received advances from the Federal
Reserve Bank of New York equal approximately to the total
loans made by the Federal Reserve Bank of St. Louis to its 569
member banks, and again that the Federal Reserve Bank of New
York was lending to one of its member banks 20 million dollars
more than the Federal Reserve Bank of Richmond was lending
to all member banks in the Fifth Federal Reserve District.
These statements, if made public, would lead, no doubt, to
much unjust criticism of the Federal Reserve Bank of New York
which had made the loans, and of the Federal Reserve Board
which had not prohibited them, but they are far from giving all

THE BOARD'S REPLY

207

the facts in the case. In the first place, you take no account of the
banking power of the Federal Reserve Bank of New York as compared with the Federal Reserve Banks of Richmond, St. Louis,
Minneapolis, Kansas City, and Dallas, nor do you think it worth
while to state the amount of the capital and surplus of the five
banks referred to and what their reserve balances are. You probably know that all Federal Reserve Banks have a theoretical
basic or normal discount line, which is based upon the reserve
balances carried by the member banks plus the member banks'
stock-holding in the Federal Reserve Bank. You do not state,
what you doubtless know, that there are many member banks in
the Federal Reserve Districts of Richmond, St. Louis, Minneapolis, Kansas City, and Dallas which have rediscount lines at their
Federal Reserve Banks many times in excess of their basic lines
and relatively greater than any line ever given by the Federal
Reserve Bank of New York to any of its member banks. In order
to correct any wrong impressions which you may have or which
may be received by any who may read your letter, we call attention to the following table which shows the basic lines, borrowings
from the Federal Reserve Bank, and ratio of such borrowings to
basic lines of five large New York City banks and all member
banks in six Federal Reserve Districts, as of November 15, 1920.
The five New York City banks named in the table are undoubtedly
the banks referred to in your letter.
Borrowings from
Basic Line

(New York City)
Bank A
Bank B
Bank C
Bank D
Bank E
Total
All members in the Federal
Reserve District of
Atlanta
St. Louis
Minneapolis
Kansas City
Dallas
Total

Federal

P e r c e n t op

Reserve Borrowings

Bank

Basic Line

Il8

41,884,000

$123,818,000
118,125,000
97,150,000
102,746,000
65,000,000

157
174
155

S357,920,ooo

$506,839,000

142

$102,188,000
81,913,000
121,648,000

$123,555,000

I2X
211

$104,966,000
89,838,000
62,058,000
59,174.000

128,355,000
91,763,000

172,658,000
142,927,000
107,520,000
147,118,000
101,057,000

$611,012,000

$794,835,000

85,145.000

131

117

126
"5
110

130

208

THE FEDERAL RESERVE SYSTEM

You will notice that in the Atlanta District the percentage of
borrowings of all member banks to their basic line is 211, which is
greater than that of the New York City bank which shows the
largest percentage of borrowings to basic line. You will observe,
furthermore, that the average percentage of borrowings to basic
lines of the five New York City banks on November 15th was 142,
while the average percentage of borrowings of all member banks
in the six Federal Reserve Districts of Richmond, Atlanta, St.
Louis, Minneapolis, Kansas City, and Dallas on the same date
was 130. It should be borne in mind that the borrowing banks in
these districts constitute probably not more than sixty per cent of
the total members, so if only borrowing banks are considered their
percentage of borrowings to basic line would be much greater than
that shown in the table, which relates to all member banks. . . .
Normally the discount rate of a Federal Reserve Bank should
not control the rates at which member banks loan money to their
customers. In many States the Federal Reserve Bank discount
rate is so much lower than the contract rate permitted by law that
the Federal Reserve discount rate, as a matter of fact, does not
control the rates at which customers are accommodated by member banks. No Federal Reserve Bank has a flat rate or an average
rate higher than seven per cent for any class of paper. In six
States the legal rate of interest is eight per cent and in eight States
that rate is permitted by contract; in eleven States a contract rate
of ten per cent is allowed, and in ten States a twelve per cent rate
is legal by contract. Four States — California, Maine, Massachusetts, and Rhode Island — permit any rate to be charged under
contract, and in New York any rate agreed upon in writing is
legal on collateral demand loans of five thousand dollars and over.
We believe that the theory that discount transactions should yield
a profit to the member banks is a fallacy which owes its wide credence in part to the fact that the Federal Reserve Banking System,
which has some of the attributes of a central banking system, is
comparatively new, and partly to the abnormal times through
which we have passed, the inevitable effects of which are now
being experienced. . . .
We do not agree with you that it would be wise to encourage
further expansion by reducing rates, and it should always be remembered that there are about twenty-four billion dollars of Government obligations available to member banks as collateral for
loans eligible for rediscount by Federal Reserve Banks. Based
upon the experience of other countries, it is evident that if the

MR. WILLIAMS AND THE BOARD

209

limit of expansion should be reached in this country, a condition
of depression infinitely more serious and more widespread than
that now existing would follow. . . .

After the retirement of Mr. Williams from office, his attacks upon the Board became more and more violent, and
continued until the expiration of my term of office in August,
1922. In general his criticisms did not impress me as being
constructive, but seemed to appeal to passion and prejudice
rather than to calm judgment. In public addresses, reprints,
and posters, he denounced the Federal Reserve Board and
the Federal Reserve Banks for their alleged extravagance
and inefficiency, and it appears from the 'Congressional
Record' that he prepared at least one speech which was delivered by Senator Heflin on the floor of the Senate in which
the Board was charged with a deliberate attempt to destroy
the industrial and agricultural interests of the country and
with responsibility for wrecking the prosperity of the Nation. It has already been pointed out that his attempts to
discredit the Board began with his letter of December 28,
1920. The climax of his invective against the Board was
reached in an address which he made at Augusta, Georgia,
in July, 1921. This address was widely circulated throughout the country, and the local newspaper which reported it
demanded in flaming headlines that the members of the
Board be immediately removed for their malfeasance and
incompetence. Y e t there appears to be nothing in the official
reports of Mr. Williams, as Comptroller of the Currency,
which coincides with the statements made in his letter of
December 28th, or with the personal views he expressed after his retirement from office. The last annual report which
Mr. Williams made as Comptroller of the Currency was sent
to Congress in page-proof form on February 7, 1921. In it
there is nothing which reflects in any way upon the administration of the Federal Reserve System, nor is there any
suggestion that the drastic decline in prices and the general
depression which set in during the last half of 1920 was due

224 THE FEDERAL RESERVE SYSTEM
in any respect to the policies or operating methods of the
Federal Reserve System. On the contrary, several pages are
devoted to a discussion of the world-wide economic causes
which brought about the drastic reaction, and there are several passages which refer in complimentary terms to the
Federal Reserve System. The following quotations are made
from this report:
The story of Japan's industrial and financial experience is largely
similar to the experience of South American and European countries — some of them our allies, and others neutral. Some of these
countries are now going through a business cataclysm similar to
that through which Japan has so recently passed. In our own
country we have been thus far fortunate enough — thanks largely
to the splendid efficiency and stabilizing influence of the Federal
Reserve System — to avoid the financial crises and complete disorganization which have made havoc elsewhere. We have passed
with comparative safety through exceedingly troubled and nerveracking times; but difficult and dangerous problems remain to be
solved, the solution of which will demand clear heads and steady
nerves. . . .
The deflation which at that time (1919) was obviously inevitable has come, and the country is now in many respects on a
sounder basis, economically, than it has been for years. . . .
Largely through the aid and excellent functioning of the Federal
Reserve System, the business and banking interests of the country
have passed successfully through the perils of inflation and the
strain and losses of deflation without panic and without the demoralization which has been produced in the past at various times
from far less serious and racking causes. Those banking and other
interests which at the outset so vigorously opposed the Federal
Reserve System are now among its warmest advocates. . . .
The past seven years have been, in numbers of persons and extent of interests involved, the most momentous and critical in the
history of this Republic. We have had to face and solve gigantic
and unprecedented problems, and the banking and financial machinery of the country has been subjected to a test and strain unparalleled. It has been the duty of our country very largely to
finance the world, and in carrying out the program which fate
imposed upon us we have overcome successfully difficulties that
at times seemed almost insurmountable and we have met every

MR. WILLIAMS AND THE BOARD

211

righteous demand made upon us. Our Federal Reserve financial
and banking system, inaugurated in 1914, has been of inestimable
value; and without its aid, tasks which we have so successfully
accomplished would have been impossible.
On the occasion of m y birthday anniversary in M a y , 1920,
M r . Williams wrote me a v e r y cordial letter in which he said:
I share the pride and satisfaction which the people of your State
and section feel in your well-deserved success in public life. The
qualities which won for you a high place and position in civil life
have enabled you to hold with credit and distinction the very important office you now occupy, and in which you have rendered
signal service to the country in the particularly trying and difficult
times through which we have been passing.
I am sure that your record in Washington will always be a
source of pride and thankfulness to yourself and to your posterity
in the years to come.
I trust that you may live to enjoy many more years of usefulness
and honor.
Shortly before his retirement, M r . Williams invited all the
Federal Reserve B o a r d members t o be his guests over the
week-end a t his c o u n t r y estate near Richmond, and the invitation w a s accepted b y three of t h e m . M r . Williams is a n
admirable host, and upon this occasion he arranged a n unusually delightful programme for the entertainment of his
guests. In describing the arrangements he had made, in a
letter to me under d a t e of F e b r u a r y 10, 1921, he said:
I am looking forward with great pleasure to having my colleagues with me in my home city and am glad that my friends
there are to have the opportunity of making the acquaintance of
the members of the Board who have performed such very valuable
services to our country in the critical and serious times through
which we have been passing.
M r . Williams w a s undoubtedly sincere in his belief t h a t
the discount rates of the Federal Reserve B a n k s should h a v e
been reduced in J a n u a r y , 1921, without regard t o actual conditions in the m o n e y market. B u t other members of the

212

THE FEDERAL RESERVE SYSTEM

Board, equally sincere, recalling the effect of artificial rates,
believed that Reserve Bank rates should be related to market rates, and that improvement in the position of the banks,
increasing confidence in them, and the redepositing of hoarded
money, would most speedily and surely result in a general
relaxation of interest rates. This opinion was in accord with
that of the officers and directors of the Federal Reserve
Banks, and of the members of the Federal Advisory Council. They were all reluctant to adopt a policy which might
tend either to check the development of a stronger banking
position, or to impress the public as merely a gesture. The
Federal Reserve Banks could not make direct loans to individuals, firms, and corporations, and the interest rates to
such borrowers depended upon the strength of their names,
the value of their collateral, and the supply of loanable funds,
rather than upon the Federal Reserve Bank rate. The improvement in the banking situation, noted in January, continued in a moderate degree, and beginning in April the rates
were reduced, and continued to be reduced throughout the
year as changing conditions appeared fully to warrant them.
Perhaps with the perspective gained after the lapse of years
there may be some who, although thinking differently at the
time, are now satisfied that the rates might safely have been
reduced in January, 1921; although it is not clear that a moderate reduction would have had any marked beneficial effect, and a slashing cut might, as has been explained in comments on Senator Owen's letter, have been distinctly dangerous. As a matter of fact, Mr. Williams up to the day of
his retirement had never suggested that the rate on commercial and agricultural paper be lower than six per cent.
Six of the Federal Reserve Banks had never exceeded that
rate, although of these six, two with the progressive rate
schedule were charging higher rates on borrowings in excess
of the so-called normal line. I have always been at a loss to
understand what occurred between February and July, 1921,
to change the good opinion which Mr. Williams had so gen-

IMPROVEMENT IN BANKS' RESERVES

213

erously expressed of the work of his colleagues on the Federal
Reserve Board.
The improvement in the reserve position of the banks
which was noted in January continued during the month of
February, and it is probable that there would have been a
downward revision of rates during that month but for one
important factor — Treasury financing. With its large outstanding indebtedness represented by short-term notes and
certificates, the operations of the Treasury had a most important bearing upon the money market, as in fact they
have to-day and will continue to have for many years to
come. A new administration was about to come into power,
and it was the feeling of the Federal Reserve Banks, in which
a majority of the Board concurred, that consideration of
rate changes should be deferred until the incoming Secretary
of the Treasury had an opportunity to determine and announce his policy. Under Secretary Houston's policy of issuing Treasury certificates bearing rates of interest at which
they would normally sell on the market, much pressure on
the Federal Reserve Banks had been avoided, and it was
generally hoped and expected that his successor would continue this policy. This expectation was realized.
Two days before the expiration of President Wilson's term
of office, I wrote him a brief note expressing my appreciation of the uniform consideration he had always accorded
me, and, while I indicated that no acknowledgment was expected, I received on the next day a cordial note from him
in which he said:
Your generous letter of March first gives me an opportunity to
say how glad I have been to show my confidence in you, which has
been very great, and to express my admiration for the way in
which you have administered the very difficult duties assigned
you.
I had only three personal interviews with President Wilson
during the whole time he was in the White House. The fact
that the Secretary of the Treasury was Chairman ex officio

214

THE FEDERAL RESERVE SYSTEM

of the Federal Reserve Board made it unnecessary as a rule
for me to ask for an appointment with the President, but
several times I had occasion to communicate with him in
writing. He always replied to my letters on the day of their
receipt, except once, when he wrote the following day and
began his letter with an expression of regret for his delay in
making acknowledgment.

CHAPTER XVII
T H E N E W A D M I N I S T R A T I O N — T H E FARM BLOC-JOINT COMMISSION OF AGRICULTURAL INQUIRY — CORRESPONDENCE
WITH GOVERNOR OF NEBRASKA

after his inauguration at noon on
March 4,1921, immediately sent to the Senate the names of
those he had selected for his Cabinet. Confirmation followed
at once, and the Honorable Andrew W. Mellon took the
oath of office as Secretary of the Treasury, thus succeeding
the Honorable David F. Houston. The resignation of the
Comptroller of the Currency, Mr. Williams, had become
effective at the close of business March 2d, and the interim
appointment, made in September, 1920, of D. C. Wills as a
member of the Federal Reserve Board lapsed on March 4th.
About the middle of March, President Harding appointed
D. R. Crissinger, of Marion, Ohio, to be Comptroller of the
Currency, and in May, he appointed as a member of the
Board, to succeed Mr. Wills, John R. Mitchell, of St. Paul,
Minnesota.
Money rates remained steady during the month of March,
and there were practically no fluctuations in the rate for
commercial paper. In the stock market during the first half
of the month there was a slightly increased demand for funds,
which was related probably to preparations for the payment
of income taxes. Immediately following the income tax payments, there was the usual temporary relaxation which generally occurs after the quarterly tax payments are made.
Call-money rates in New York declined from seven per cent
to six on several successive days, although the ruling rate
remained at six and a half to seven per cent. The demand
for investment funds as well as for bank loans continued active, and offerings were promptly taken without satisfying
the demand. Not only was there continued domestic dePRESIDENT HARDING,

216

THE FEDERAL RESERVE SYSTEM

mand, but many foreign corporations were arranging their
affairs with the view of obtaining accommodations in the
United States. The situation still appeared to warrant careful
nursing and the avoidance of any policy which would result
in an unwise use of credit. The new Secretary of the Treasury, Mr. Mellon, in his first statement to the banks said
that 'the Nation cannot afford extravagance, and, so far as
is possible, it must avoid entering upon new fields of expenditure. . . . The people generally must become more interested in saving the Government's money than in spending it.'
On April 15th, the Federal Reserve Bank of Boston reduced its rate on commercial and agricultural paper from
seven to six per cent, and this action was soon followed by a
reduction in the rate of the Federal Reserve Bank of New
York to six and a half per cent. During the month of May,
readjustments were made by other Federal Reserve Banks
so that, by the first of June, eight of the banks were maintaining a six per cent rate on commercial and agricultural
paper, while four, those of New York, Chicago, Minneapolis, and Dallas, had a rate of six and a half per cent. A t the
same time the Federal Reserve Bank of Philadelphia had a
rate of five and a half per cent on notes secured by Liberty
bonds and Victory notes, while at all other banks the rate on
this class of paper was six per cent. The rate on notes secured by Treasury certificates of indebtedness was six per
cent at all the banks.
Meanwhile, the progressive rate had been discontinued by
the Federal Reserve Banks of Atlanta and Dallas, and the
application of that rate had been modified by the Federal
Reserve Banks of St. Louis and Kansas City, A t the St.
Louis bank the average borrowings in excess of the basic
line were subject to one half per cent progressive increase
for each twenty-five per cent, while at the Kansas City bank,
the rate on discounts in excess of the basic line was subject
to a progressive increase of one half per cent for each twenty-

THE FEDERAL RESERVE

BOARD,I921-22

Left to right: Andrew W . Mellon, VV. P. G . Harding, Edmund Piatt, Charles S. Hamlin, A. C . Miller,
D. R. Crissinger, John R. Mitchell

THE NEW ADMINISTRATION

217

five per cent by which the amount of loans exceeded the basic
line, with a maximum rate of twelve per cent.
A t the end of May the consolidated statement of the Federal Reserve Banks showed a marked improvement over
their condition at the end of May, 1920. Their gold holdings
had increased about $448,000,000, their loans had declined
$972,000,000, and the amount of Federal Reserve notes in
circulation had decreased about $376,000,000. This improvement in condition was not, however, uniform throughout the System, for banks located in agricultural sections
found it necessary to make additional advances and renewals, while the liquidation had been most pronounced in the
manufacturing and commercial sections of the country. Despite the reduction made in Federal Reserve Bank rates,
reports to the Board indicated that banks throughout the
country were making no corresponding reduction to their
own borrowers. B y July 1st, the rate on commercial and
agricultural paper at all Federal Reserve Banks had been
reduced to six per cent, except at Chicago and Minneapolis,
where the rate was six and a half per cent on paper maturing
within ninety days and seven per cent on maturities after
ninety days. A t that time the Kansas City Bank was the
only one which continued the progressive rate, but under another modification, excess borrowings at the Federal Reserve
Bank of Kansas City were subject to an additional charge
of one per cent for the first one hundred per cent by which
the amount borrowed by a member bank exceeded the basic
line, and for any further excess an additional rate of two per
cent was charged, making the maximum rate eight per cent.
Later on in the month the progressive rate was discontinued
entirely by the Federal Reserve Bank of Kansas City, and
further reductions were made in the discount rates by some
of the banks. The rate at the Federal Reserve Bank of Boston, New York, Philadelphia, and San Francisco was then
five and a half per cent on commercial and agricultural paper; six and a half per cent at Minneapolis, and six per cent

218

THE FEDERAL RESERVE SYSTEM

at all the other banks. There had, however, been no appreciable reduction in current rates for prime commercial paper.
Reports made from the various cities in which the Federal
Reserve Banks and their branches were located, showed
that six per cent was the minimum rate, ten per cent the
maximum, and average rates generally around seven per cent.
Congress met in extraordinary session shortly after President Harding's inauguration, and it was evident from the
outset that agricultural problems would be given first consideration. A number of Senators and Representatives from
agricultural States formed what is known as the 'Farm
Bloc,' which proved to be a powerful factor both in that
Congress and in the succeeding one. The Bloc was composed
of Republicans and Democrats who cooperated usually without regard to ordinary political alignment. Senator Kenyon,
of Iowa, was the leader of the Bloc when it was first formed,
and, upon his resignation from the Senate to accept a
Federal judgeship in Iowa, Senator Capper, of Kansas, succeeded him. At the behest of the Farm Bloc there was
appointed, from the members of the Senate and House,
a committee called the Joint Commission of Agricultural
Inquiry. The personnel of this commission was as follows:
Representative Sydney Anderson, of Minnesota, Chairman; Senators Lenroot, of Wisconsin; Capper, of Kansas;
McNary, of Oregon; Robinson, of Arkansas; and Harrison,
of Mississippi; Representatives Mills, of New York; Funk,
of Illinois; Sumners, of Texas; and Ten Eyck, of New York.
This commission was directed to investigate and report
particularly upon the causes of the depressed condition of
agriculture; to make a study of agricultural credits, transportation facilities and rates; and to recommend a plan for
the amelioration of existing conditions.
Meanwhile, there was an active and systematic propaganda to discredit the Federal Reserve Board and its policies, and especially its Governor. Advantage was taken of
the distress in agricultural sections of the country to enlist

THE JOINT COMMISSION

219

the sympathy of the farmers particularly in these attacks,
and to have them believe that the Federal Reserve System
was responsible for their troubles. On July 14, 1921, the
former Comptroller of the Currency, Mr. John Skelton Williams, in a public address at Augusta, Georgia, made an attack upon the Federal Reserve Board, its personnel and
policies, to which reference has already been made. In view
of the charges made in this speech, the Board addressed a
letter to Senator McLean, Chairman of the Senate Committee on Banking and Currency, requesting an investigation
of its operations by that committee. Senator McLean introduced a resolution in the Senate to authorize the Banking
and Currency Committee to investigate all complaints and
charges which had been made against the Federal Reserve
Board, but after the resolution had been reported favorably
by the Committee on Audit and Control of Contingent Expenses of the Senate, to which it had been referred, objection
was made by some Senators to an investigation by the Banking and Currency Committee. The matter was thereupon
referred informally to the Joint Commission of Agricultural
Inquiry, which had been created for an entirely different
purpose.
About this time, July 8 , 1 9 2 1 , 1 received a personal letter
from Senator Smoot, of Utah, in which after referring to the
current criticisms of the Board, he asked me to explain the
discount policy of the Board, and to state its attitude toward
agricultural credits. The reply, which was sent under date
of July II, 1921, was a condensed and concise review and
recapitulation of the economic and banking conditions over
the post-war readjustment period, and will be found in full
in Appendix D, page 289.
The Joint Commission of Agricultural Inquiry began its
hearings on August 2d, and Mr. Williams was the first witness to appear before it. He occupied two days in making
his statements, and at the conclusion of his testimony, the
Commission gave me a hearing. I was followed by Governor

235 THE FEDERAL RESERVE SYSTEM
Strong, of the Federal Reserve Bank of New York; Governor
Miller, of the Federal Reserve Bank of Kansas City; and by
a number of others who were not connected with the Federal
Reserve System. The Commission adhered closely to a line
of inquiry bearing upon agricultural conditions and credits
and did not appear to be interested in the alleged inefficiency
and extravagance with which the Board had been charged.
A stenographic report was taken of these hearings and the
report of the Commission was submitted to Congress in four
parts at intervals from December, 1921, to March, 1923.
Part 1 was entitled 'The Agricultural Crisis and Its Causes';
Part 2,'Credit'; Part 3, 'Transportation'; and Part 4, 1 Distribution and Marketing.' This report followed an exhaustive inquiry and is most comprehensive. It is replete with
statistics, and covers every phase of the production, distribution, and marketing of agricultural products of every
kind, including live stock. Together the four parts form a
volume of 1350 pages, of which 159 pages are taken up with
the discussion of credit. In the credit section of the report
alone are there any references to the policies of the Federal
Reserve Board.
While the Commission in its discussion of credit did not
meet in all respects the expectations of the friends of the
Federal Reserve System, the report as a whole was a distinct
disappointment to its critics. The charges of alleged extravagance in buildings and salaries were ignored entirely, and
the Commission confined itself to a discussion of the Federal
Reserve Banks as purveyors of credit and the general discount policies of the Board and the banks. The most serious
charge which had been brought against the Federal Reserve
System was that it had deliberately discriminated against
the farmer. In its discussion of credit conditions from 1914
to 1921, the Commission completely exonerated the Federal
Reserve System from this charge. It reached the conclusion
that the expansion of bank loans in rural districts during the
period of inflation ending in June, 1920, was relatively greater

THE JOINT COMMISSION

221

than in the industrial sections, taken as a whole; that the action of the Federal Reserve Board and the Federal Reserve
Banks during the so-called deflation period did not produce
a greater curtailment of bank loans in the rural districts
than in the financial and industrial sections, and that credit
was not absorbed by the financial centers at the expense of
the rural districts for the purpose of speculative activities.
It was evident that agriculture and the depression of that
great industry were foremost in the minds of the members
of the Commission. In that part of the Commission's report
which relates to 1 Credit,' some statements were presented as
facts which may well be disputed, but the actual facts were
stated fairly, and much of the reasoning based on these facts
was unquestionably sound. In parts of the discussion, however, opinions expressed by the Commission do not appear
to be logical conclusions from the premises, but rather a concession to the bias of some of its members.
After remarking that the national and State banking systems were the principal agencies for furnishing short-time
credit to the farmer, and that the State and national banks,
together with the Federal Farm Loan System and the private farm mortgage companies, furnished the great bulk of
long-time credit to farmers, the Commission noted the fact
that short-time credits were usually extended for periods of
six months owing to the fact that paper of longer maturity
than six months for agricultural purposes was not at that
time eligible for rediscount at the Federal Reserve Banks.
The Commission also remarked that long-time credit could
be secured only on the basis of farm mortgages, and even if
it was possible to do so it would not be wise to make farm
mortgages the basis of credit for production or marketing
purposes. Of the recommendations made in the Commission's report, the only ones affecting the Federal Reserve
Banks were these:
It is proposed that notes taken or discounted by a Federal
Land Bank shall be eligible for rediscount with any Federal Re-

222

THE FEDERAL RESERVE SYSTEM

serve Bank, when such loans have reached a maturity of less than
six months. In addition, any Federal Reserve Bank is authorized
to buy and sell the debentures issued by the Farm Loan Board to
the same extent and in the same way as they now buy and sell
farm-loan bonds.

While Congress did not legislate to carry out the specific
recommendations of the Commission, it did early in 1923
pass the Agricultural Credit Act which included an amendment to section 13 of the Federal Reserve Act, making agricultural paper of maturities up to nine months eligible for
rediscount by Federal Reserve Banks, and authorized the
establishment of Federal Intermediate Credit Banks and of
National Agricultural Credit Corporations. B y this legislation, notes discounted by Federal Intermediate Credit
Banks which do not bear the endorsement of a non-member bank which is eligible for membership in the Federal
Reserve System, and have a maturity of not longer than
nine months, are made eligible for rediscount by Federal
Reserve Banks.
It is evident that the Commission recognized the fact
that the Federal Reserve Banks had no power, under the
law as it stood in the years 1920,1921, and 1922, to aid member banks in extending the particular form of credit which
agricultural interests especially desired.
In summing up, the Commission said:
The position of Federal Reserve Banks and the Federal Reserve
Board during the period of the war and throughout the business
cycle of expansion, extravagance, speculation, deflation, and depression, which followed it, was extremely difficult. The banks
were the fiscal agents of the Government. Through them and
their auxiliary organizations the enormous issues of war bonds
were floated. Their policy was not only interwoven with the policy
of the Treasury Department, but subordinated to it. The decisions
which had to be made were difficult and important. Doubtless in
these circumstances mistakes of judgment were made which the
clearer judgment of retrospect would change. The Commission
believes that a policy of sharp advances in discount rates should

THE JOINT COMMISSION

223

have been inaugurated in the first six months of 1919, and cannot
excuse the action of the Federal Reserve Board and the Federal
Reserve Banks in this period in failing to take measures to restrict
the expansion, inflation, speculation, and extravagance which
characterized the period.

As a matter of fact, all legitimate steps were taken by the
Federal Reserve Board to restrict expansion, inflation, speculation, and extravagance during the year 1919, except one
— a sharp advance in the discount rates; and it is not at all
certain that even that expedient would have been effective
at a time when the public seemed to care little for expense.
In all events, the necessities of the Treasury during this
period should not be overlooked, and the Board felt that it
was its duty to cooperate with the Treasury authorities.
Failure to cooperate would have been tantamount to an undertaking by the Board to dictate the policies of the Treasury. In such a case I think the Board would have heard
something of the Overman Act. Under this Act, which at
that time was still in effect, the President could, by Executive Order, have transferred any of the functions of the
Federal Reserve Board to the Secretary of the Treasury, or
to any other officer of the Government.
The best evidence that the report of the Commission was
not altogether satisfactory to extreme critics of the Federal
Reserve System is that, in the attacks which continued to
be made upon the Federal Reserve Board, there was never
any reference to the Commission's report.
While the Joint Commission of Agricultural Inquiry was
pursuing its investigation of agricultural credits, there were
being made in the Senate, almost daily, speeches denouncing
the Federal Reserve Board, and myself particularly.
The accompanying letter to Chairman Anderson, of the
Joint Commission of Agricultural Inquiry, has reference to
some of the insinuations made in speeches on the floor of
the Senate:

224

THE FEDERAL RESERVE SYSTEM
September 19, 1921

D E A R M R . CHAIRMAN:

The attention of the Federal Reserve Board has been called to
the speech delivered by Honorable J. Thomas Heflin, a Senator
from Alabama, in the Senate of the United States on August
15th, which was published in the Congressional Record of August
22, 1921, in which the following paragraph appears at the top of

Page 5934:

Mr. President, I am not advised as to whether or not any of the
friends of the Federal Reserve Board were speculating in cotton at that
time. The Senator from Georgia (Mr. Watson) reminded us the other
day that they loaned to themselves in the System the sum of $18,000,000.
I want to say just here, Mr. President, that if they invested any of that
$18,000,000 in speculating on the bear side of the cotton market in the
month of August last year, they made a lot of money.

I am directed by the Board to suggest that the Commission
consider the propriety of inviting Senators Watson and Heflin to
appear before it for the purpose of stating to the Commission
what information, if any, they have on this subject, to whom the
money was loaned, by whom the loans were made, and what reason they have for believing that members of the Board speculated
either directiy or indirecdy in the cotton market.
W . P . G . HARDING

Governor

The Commission, however, was not concerned with personal attacks and did not act upon the suggestion made.
Had the Senate Committee on Banking and Currency been
authorized to investigate all complaints and charges against
the Federal Reserve Board, critics would have been more
careful in making such statements, for they would have been
called upon to prove them. All such statements were designed to create an atmosphere of distrust and suspicion,
and, although libelous, could not be resented by the Board
because of the constitutional immunity which attaches to
statements made in the halls of Congress.
About this time I had some correspondence with the Honorable Samuel R. McKelvie, Governor of Nebraska, who
urged that the Federal Reserve Bank of Kansas City be directed to reduce its discount rate as a means of relief to the

GOVERNOR McKELVIE'S LETTER

225

farming community. In his letter dated September 12,1921,
Governor McKelvie said:
As the result of an inquiry that I have just concluded among
Nebraska bankers, I am convinced that financial and business
conditions are improving throughout this State, but I am also
convinced that there is need for credit relief for the farmers and
cattlemen in this territory now, and it is regarding this situation
that I address you. . . .
The simple fact is that the urgent demand for liquidation and
the contraction of credit during the past twelve months has imposed unusual and extraordinary hardships upon the farmers and
cattlemen. In order that these demands could be met, the farmer
has taken heavy losses in the sale of grain and live stock. It is true
that bank deposits and reserves have improved during this periodr
but this improvement has been accomplished at the expense of
interests that should have been protected and conserved. . . .
I am not unmindful of the relief that is being offered now through
certain private banking sources, as well as from the War Finance
Corporation. These are good and the work that is being done by
them should not in any sense be disparaged, but with the Federal
Reserve Banks holding seventy per cent of the reserves, it seems
apparent that here lies the medium through which additional
credit may be afforded at a much more reasonable rate of interest
than is now required.
Especial consideration should be shown to the cattle interests,
both to breeders and feeders. If this is done, it will also greatly aid
the grain-growers, for it will afford a profitable outlet for a product
that must otherwise be sold at a loss.
Our last Legislature passed the Grain Warehouse Law, which
provides for the taking of receipts for grain that is housed on the
farm. I am wondering if these receipts may not be used as the
basis for credit to farmers in this State.
I do not want to burden you with a further enumeration of these
facts, though I may say that I have only touched the high spots.
Nor would I have you believe for a moment that I would have the
Federal Reserve Bank System encourage an extension of credit
that would result in unwise inflation or speculation. Too much of
that has been done already. But I would like to see the Federal
Reserve System operate as an agency for financial relief at a time
when it is most urgently needed. May I be advised of anything
that you think may be done to help us out?

226

THE FEDERAL RESERVE SYSTEM

My reply, dated September 15th, contained the following:
The Federal Reserve Board has always stressed the importance
of sustaining the agricultural and live-stock interests of the country, and its policies have always been shaped with a view of encouraging member banks to extend all reasonable accommodations to those engaged in these vital industries. . . .
Federal Reserve Banks are not permitted by law to make loans
direct to individuals, firms, or corporations, and they can rediscount only paper which bears the endorsement of a member bank.
Consequently, in order for a Federal Reserve Bank to render
financial assistance to those engaged in agriculture or the raising
of live stock, it is necessary that the loans first be negotiated with
member banks. Neither the Federal Reserve Bank nor the Federal
Reserve Board has any control over the loan policy of any member
bank. We cannot compel a member bank to make a loan which it
does not desire to make, nor can we restrain it from making a loan
which it wishes to make.
About one third of the member banks in the Kansas City District have been very heavy borrowers during the past year, another one third have been only moderate borrowers, while the remainder have not borrowed at all. It is possible that the Federal
Reserve Bank may have called the attention of some of the larger
borrowers to the advisability of reducing their discount lines at the
Federal Reserve Bank, but in no case has the Federal Reserve
Bank undertaken to say to a member bank just what particular
loans it should call or ask to be reduced.
I was formerly in the banking business myself and know something of banking psychology. Banks as a rule do not like to admit
to customers that they are short of loanable funds nor do they like
to stir up enmity in declining to make loans or in asking for reductions. I know that in many cases they have found the Federal
Reserve Bank or the Federal Reserve Board a convenient buffer
and have stated to borrowers or would-be borrowers that they
would like to grant extensions asked for or to make loans desired,
but that the Federal Reserve would not permit it. Such a procedure has a tendency to relieve the situation as far as the local
bank is concerned, but it is not altogether fair to the Federal Reserve System. The Federal Reserve Board has repeatedly issued
public statements calling the attention of the banks of the country
to the importance of granting adequate credits to farmers and
catdemen....
I understand that the laws of Nebraska authorize a maximum

REPLY TO GOVERNOR McKELVIE

227

interest rate of ten per cent per annum. The progressive rate
which prevailed for some months at the Federal Reserve Bank of
Kansas City was abrogated last June, and all rediscounts made
by that bank are now at a flat rate of six per cent per annum, regardless of the amount of accommodation extended to the borrowing member bank. I have before me a report of bills discounted for
member banks by the Omaha Branch of the Federal Reserve Bank
of Kansas City on September 9, 1921. This report shows that 111
notes, aggregating $1,031,835.09, were discounted for 21 member
banks, by the Omaha Branch Bank on that date, all at the rate of
6 per cent per annum. The report shows also the rate of interest
charged the customers by the borrowing member banks. This report shows that in the case of 52 notes the borrowing banks
charged their customers 10 per cent; on 21 notes they charged 9
per cent; on 2 notes 8/4 per cent; on 14 notes 8 per cent; on 13
notes
per cent; on 5 notes 7 per cent; on 2 notes 6}4 per cent;
and on 2 notes 6 per cent.
Under an ideal operation of the Federal Reserve System, it is
not intended that a member bank should make a profit on its rediscount transactions with the Federal Reserve Bank. The object
of the Federal Reserve System is to afford a ready discount market,
but member banks generally, especially in the West and South,
seem to have an idea that they should make a profit on such transactions. In some States, where the maximum legal rate of interest
is six per cent and the Federal Reserve rate is also six per cent, no
profit is possible, but in States where the laws permit of rates as
high as ten and twelve per cent, there is, of course, an opportunity
for a very substantial p r o f i t . . . .
The abrogation of the progressive rate has made it possible for
banks in Nebraska to make a larger percentage of profit on their
rediscount transactions with the Federal Reserve Bank, but the
daily statements made to the Board do not indicate that the
Nebraska banks, as a rule, have shared this advantage with their
borrowers. Is there any reason to believe that in case the discount
rate at the Federal Reserve Bank of Kansas City should be still
further reduced the Nebraska banks would give their customers
lower rates than they do at present?

In acknowledging, under date of September 22d, Governor
McKelvie said:
The facts that you give regarding the rate of interest that is
being charged by correspondent banks on loans that are redis-

238

THE FEDERAL RESERVE SYSTEM

counted through the Federal Reserve Bank are intensely interesting. I am not prepared to say that these margins have given any
unusual profit to the banks that have been patronizing the Federal
Reserve System, but I do feel that there is something radically
wrong with a system which requires such wide margins. Also, I
am convinced that this and other hampering influences must be
remedied before the System will be very useful to agricultural
borrowers here.
I am further informed that the banks in this district are not
generally patronizing the Federal Reserve System. It would seem
that if the margins indicated in your letter are profitable to the
correspondent banks, there would be a more general patronage of
the Federal Reserve System. . . .
In conclusion, I desire to suggest the desirability of a close
cooperation among all of the agencies that have a controlling influence over the handling of Federal Reserve funds in this district.
This is not the condition that obtains now, and I am sincerely
hopeful that something will be done to bring it about. M a y I
anticipate your hearty interest in that direction?

In answer to this I wrote at length explaining how rediscounts and advances were made by Federal Reserve Banks,
how discount rates were established, and showed how the
reduction in the rates which had already been made had no
apparent effect upon the rates of interest paid by the smaller
borrowers to their local banks.
In order to promote a clear understanding of rediscount
functions of Federal Reserve Banks, and of the principles
which govern their rates, the reader's attention is directed
to these fundamental facts:
(i) The law does not permit Federal Reserve Banks to
compete generally for business with each other or with the
national banks, State banks, and trust companies of the
country. They are not allowed to receive deposits from the
public, nor are they permitted to make loans or advances
direct to individuals, firms, or corporations. In their rediscount operations they are limited to notes and bills defined
as 'eligible' which bear the endorsement of a member bank.
It follows, therefore, that Federal Reserve Banks cannot

REDISCOUNT FUNCTIONS

229

extend any discount accommodations to the public except
through the medium of a member bank, with which institutions the loans must first be negotiated. Federal Reserve
Banks have no funds to lend the public through the instrumentality of member banks acting as brokers. A Federal
Reserve Bank does not take the initiative in making loans
to a member bank for the purpose of enabling the member
bank to distribute the funds so advanced to its customers.
The Federal Reserve Bank lends to the member bank
against transactions already made for the purpose of enabling the member bank to restore its reserve to the legal requirement, after the reserve has been impaired or is about
to be impaired because of increased loans or withdrawal of
deposits.
(2) The Federal Reserve Bank has no direct control over
the policy of its member banks with respect to loans and
it cannot compel a member bank to make a loan which it
does not desire to make nor prevent it from making one which
it wishes to make. Neither can a Federal Reserve Bank control the rate of interest charged by member banks. In case
of State banks the interest rate is regulated by the laws of
the respective States, and in the case of national banks the
Federal law permits those institutions to charge up to the
maximum rates permitted in the States in which they are
located.
(3) No Federal Reserve Bank can rediscount paper for
member banks outside of its own Federal Reserve District.
Its rediscount transactions are limited to dealings with its
own member banks. The Federal Reserve Act does not require rates of discount to be uniform in all districts. Each
Federal Reserve Bank is authorized by paragraph (d) of section 14 of the Federal Reserve A c t ' to establish from time to
time, subject to review and determination of the Federal Reserve Board, rates of discount to be charged by the Federal
Reserve Bank for each class of paper, which shall be fixed
with a view of accommodating commerce and business/

230

THE FEDERAL RESERVE SYSTEM

One of the early drafts of the Federal Reserve Bill which
was considered by Congress in 19x3 provided that the Federal Reserve Board should each week fix the rates of discount
to be charged by the respective Federal Reserve Banks and
that it should notify each Federal Reserve Bank what its
discount rates would be for the ensuing week. This provision was stricken out in a later draft of the bill and the Act as
finally passed contains the language above quoted. It seems,
therefore, to be the intent of Congress that the discount
rates shall not be initiated by the Federal Reserve Board,
but by the directors of the respective Federal Reserve Banks.
This is consistent with the theory of the Act, which does not
create a central bank, but a regional banking system, comprised of twelve independent units. This theory is based
upon the presumption that the directors of a Federal Reserve
Bank are more conversant with credit conditions and current rates for money in their respective districts than the
Federal Reserve Board in Washington can be expected to
be. While the Federal Reserve Board undoubtedly has power
to direct any Federal Reserve Bank, which persists in maintaining a discount rate which is clearly not warranted by
general conditions, to change that rate, the Board so far has
had no occasion to initiate a rate for any Federal Reserve
Bank.
In considering the proper level of discount rates, the directors of the Federal Reserve Banks have taken into consideration not only the reserve position of the bank, but also current local rates for money. It is the purpose of the Federal
Reserve Banks to afford a ready means of rediscounting paper for member banks, but when artificially low rates have
been established the result has been an unhealthy stimulation of loans b y member banks.
It is, of course, most desirable that the Federal Reserve
System operate as an agency for financial relief at a time
when it is most urgently needed, but in order to keep the
Federal Reserve Banks in position to extend such relief, it is

REDISCOUNT FUNCTIONS

231

necessary that a policy be adopted which will not encourage
an undue expansion of loans made for the sake of the profit to
be derived by rediscounting with the Federal Reserve Bank.
Coming back to the situation in Nebraska in the autumn
of 1921, Governor McKelvie said that he was altogether
convinced that the Federal Reserve System was not functioning as it should in that district, and that he was informed
that the banks in Nebraska were not generally patronizing
the Federal Reserve Bank. It is true that a large majority
of State banks, for reasons satisfactory to themselves, had
not deemed it advisable to apply for membership in the
Federal Reserve System and there were also a number of
member banks which had no occasion at that time to rediscount with the Federal Reserve Bank. Many of the nonmember State banks, however, borrowed from their correspondents in Omaha, Kansas City, and other cities, and
those banks in turn rediscounted with the Federal Reserve
Banks.
On August 31, 1921, there were 203 member banks in
Nebraska. A t that time 74 of these banks were not borrowing from the Federal Reserve Bank. One hundred and twentynine Nebraska member banks were at that time rediscounting to the extent of $11,263,345. On June 3, 1920, 135
Nebraska banks were borrowing from the Federal Reserve
Bank $30,068,992, and on October 30, 1920,168 Nebraska
members were borrowing $38,294,175. When it is remembered that the total rediscounts and bills payable of all national banks in the United States, as shown by the official
report of the Comptroller of the Currency, on August 22,
1907, amounted to $59,177,000, it would seem that the advances, in October, 1920, of over $38,000,000 by the Kansas
City bank to member banks in Nebraska alone would indicate very effective functioning on the part of that bank.
Older bankers have not forgotten the panic of 1907, and remember that for several weeks before the panic developed
credit conditions were most stringent.

CHAPTER XVIII
T H E SENATE INQUIRY REGARDING EXPENDITURES BY FEDERAL
RESERVE B A N K S — B E G I N N I N G OF MOVEMENT FOR A FARMER
MEMBER OF B O A R D — S E N A T O R GLASS DEFENDS FEDERAL
RESERVE S Y S T E M — H O U S E COMMITTEE ON BANKING
AND CURRENCY CONSIDERS AMENDMENT TO
PLACE A FARMER ON FEDERAL RESERVE
BOARD — CONFLICTING VIEWS OF
SECRETARIES MELLON AND
WALLACE

of the charges made by the former Comptroller of the
Currency alleged waste and extravagance in the erection of
the buildings of the Federal Reserve Banks and in the salaries paid their officers and employees. So much publicity
was given these charges, and they were repeated so frequently, that on October 4,1921, the Senate adopted a resolution directing the Federal Reserve Board to furnish it with

SOME

the number of employees, together with their respective salaries,
employed by the Federal Reserve Bank in New York, as well as in
the other Federal Reserve Banks in the country, and the expenditures made by each branch bank in the erection of public buildings and the general expenses in the administration of each Federal
Reserve Bank, and how much of the net earnings have been paid
to the United States as a franchise tax.

In response to this resolution, the Board furnished the
Senate with a detailed report covering salaries paid and
other expenses, cost of building operations, and the amount
of franchise taxes paid. This report was printed as Senate
Document No. 75, and was also reprinted on pages 359-491
of the Board's Annual Report for the year 1921. In its reply
to the Senate's resolution, the Board called attention to the
fact that a full report covering the operations of each Federal
Reserve Bank had been made annually to the Speaker of the

EXPENDITURES BY RESERVE BANKS

233

House of Representatives in accordance with the provisions
of the Federal Reserve A c t .
T w o paragraphs from the Board's letter t o the President
of the Senate are quoted below:
The Federal Reserve Act did not establish a central bank. On
the contrary, it made possible the establishment of as many as
twelve Federal Reserve Banks, each almost wholly independent
of the others in operation as well as in local policies. From a legal
standpoint these banks are private corporations organized under a
special act of Congress, namely, the Federal Reserve Act. They
are not in a strict sense of the word Government banks, but are
only quasi-governmental institutions in that they are under the
general supervision of the Federal Reserve Board and have on
their boards of directors three men representing the Government,
who are appointed by the Federal Reserve Board.
The directors (of each Federal Reserve Bank) are immediately
responsible for the administration of the bank and are familiar
with the requirements for its efficient operation, with the qualifications of the officers and employees, with local conditions, such
as cost of living, competition for services by member and other
banks of the community, and the fair value of the services rendered. . . . The Federal Reserve Board has not approved in a perfunctory way salaries proposed by Federal Reserve Bank directors. . . . But the Board has taken the position generally that, as
the directors are primarily responsible for the operation of the
banks, great weight must be given to their representations.
In order t o bring out the difference in the average salaries
paid to officers b y the Federal Reserve B a n k s and b y the
larger member b a n k s in the Federal Reserve B a n k cities, t h e
a c c o m p a n y i n g table, which w a s submitted b y the Board as
p a r t of its reply, is presented here (page 234).
I t will be seen from this table t h a t in 1921 the average
salary of officers in all Federal Reserve B a n k s w a s $7743,
while the average salary paid b y the larger member banks
in Federal Reserve B a n k cities was $13,092, or sixty-nine per
cent in excess of t h a t paid b y the Federal Reserve Banks.
A n investigation made b y the Federal Reserve B a n k of
N e w Y o r k in 1919 showed t h a t the average annual salary,

249 THE FEDERAL RESERVE SYSTEM
including bonus, paid to employees b y the bank was $1440,
while the average annual salary, including bonus, paid to
employees b y ten of the large N e w Y o r k C i t y banks ranged
AVERAGE ANNUAL SALARIES PAID TO OFFICERS BY EACH FEDERAL RESERVE
BANK AND BY THREE OF THE LARGER MEMBER BANKS IN EACH FEDERAL
RESERVE BANK CITY AS OF OCTOBER, 1921
(Bonus excluded)
Federal Reserve
District

Boston . . . . . . . . .
New York
Philadelphia
Cleveland.......
Richmond . . . . . .
Atlanta
Chicago

Federal
Reserve
Bane
$9,679
,745
10,125

Meuber

Federal Reserve

Banks

District

$14,745

15*733

7,792
6,696

10,061

5,677
7.946

7,828
15,440

6,473

St. Louis
Minneapolis . .
Kansas C i t y . .
Dallas
San Francisco.
System

Federal
Reserve
Bank

$7,078
6,478

Meubek
Banes

6,459

$".675
10,621
10,313
8,767
",409

7,743

13,092

6,147

5,512

"Six national banks.

from $1620 to $2265. In fact, it was found that in six of
these banks the average salary paid employees w a s in
excess of $2100.
T h e buildings owned b y the Federal Reserve B a n k s are
not 'public buildings.' T h e y constitute a part of the invested assets of the respective banks, the funds for their
acquisition or construction were not provided by a congressional appropriation, the title is vested in the Federal Reserve Bank and not in the United States, and they are subject
to State and local taxation. Amounts invested in buildings
b y Federal Reserve Banks are capital expenditures, and do
not diminish the amount of their franchise taxes payable to
the United States except t o the extent t h a t the Federal
Reserve B a n k s are authorized to charge depreciation and
amortization allowances on their bank premises t o current
net earnings* T h e cost of Federal Reserve B a n k buildings
will be discussed in a succeeding chapter.
In the autumn of 1921, there seemed to be some misapprehension in official circles as to the manner of appointment or
election of directors of Federal Reserve Banks, and of the

FEDERAL RESERVE DIRECTORS
' C l a s s C , ' or Government directors, particularly. I t w a s
evidently the intent of the framers of the Federal Reserve
A c t t h a t the Federal Reserve B a n k s should be k e p t out of
politics. While the law as finally enacted provides t h a t
members of the Federal Reserve Board shall be appointed
b y the President, b y and with the consent of the Senate, it
also provides t h a t the Federal Reserve Board shall appoint
the three ' C l a s s C , ' or Government directors, while the remaining six shall be elected b y the stockholding member
banks.
M e m b e r s of the Board heard t h a t applications were being filed with the President for ' C l a s s Cf directorships in
Federal Reserve Banks, and before the end of the y e a r it
w a s openly asserted b y applicants in t w o districts t h a t
their appointments had been promised b y t h e President.
Other selections, however, were made b y the Board, which
during m y time never surrendered a n y of its prerogatives in
this respect.
L a t e in October I received a letter from President Harding
in which he said:
I am enclosing you herewith a note from
expressing his
personal interest in one of the members of the Reserve Bank of
Chicago. I wish you would sit down and tell me about the situation relating to this bank. If Mr.
is the only Democrat on
the Board, and if he is a capable and acceptable member thereof,
I quite agree with
that he ought to be retained. A t your
leisure I would like a note outlining the situation to me.
M y reply follows:
October 3 1 , 1 9 2 1
M R . PRESIDENT:

I acknowledge receipt of your letter of the 29th instant, with
which you enclosed letter from
. I have read his letter with
interest and return it to you herewith.
I may say that Mr.
is not a director of the Federal Reserve
Bank of Chicago, but is only a subordinate officer , , . not appointed by the Federal Reserve Board.
The Federal Reserve Act provides that there shall be nine direc-

236

THE FEDERAL RESERVE SYSTEM

tors of each Federal Reserve Bank; three of Class A, who shall be
representative of the stockholding member banks and may be
bank officers and directors; three of Class B, who at the time of
their election shall be actively engaged in their district in commercial, agricultural, or some other industrial pursuit, and who
may own stock in banks, but must not be officers or directors;
and three of Class C, who are designated by the Federal Reserve
Board and who shall not be officers, directors, or stockholders in
banks. Class A and B directors are chosen by the member banks
and the board of directors of the Federal Reserve Bank appoints
all officers and employees and fixes their salaries. The law does
not give the Federal Reserve Board a voice in the appointment of
officers and employees of Federal Reserve Banks, but requires
that the compensation fixed for them by the directors must be
subject to approval by the Federal Reserve Board.
(Then followed a list of the nine directors and t h e name
of the t w o principal officers and t h e member of its Federal
A d v i s o r y Council.)
I have no personal knowledge as to the politics of most of
these gentlemen, but I have been told that they are all Republicans. . . .
I assure you that it will be a great pleasure to me to give you at
any time any information that you may desire regarding the
Federal Reserve System.
During the late summer and a u t u m n of 1921 there were
successive reductions in the discount rates of the Federal
Reserve B a n k s based upon the improved reserve position
and easier market rates; and on D e c e m b e r 1st, the rates on
all classes of paper and of all maturities were uniform. A t
the Federal Reserve B a n k s of Boston, N e w Y o r k , and Philadelphia t h e rate w a s four and a half per c e n t ; a t t h e Federal
Reserve B a n k s of Cleveland, A t l a n t a , C h i c a g o , K a n s a s C i t y ,
and San Francisco, the rate w a s five per c e n t ; and a t t h e
other Federal Reserve B a n k s it w a s five and a half per cent.
These reductions, which were logical and were m a d e in accordance with a definite policy, p u t an end t o the clamor for
lower rates, although critics still continued t o denounce the

SENATOR GLASS'S SENATE SPEECH

237

Board for having approved the higher rates which had prevailed when conditions were entirely different.
In J a n u a r y , 1922, Senator Glass addressed the Senate on
the subject of the Federal Reserve S y s t e m . H i s speech,
which consumed parts of t w o d a y s in its delivery, w a s a
masterly exposition of the intent of the Federal Reserve A c t ,
and w a s a straightforward discussion of the functions and
policies of the Federal Reserve Board and of the operations
of the Federal Reserve Banks. Fortified impregnably with
facts, its reasoning w a s clear and cogent, and it w a s an
effective and unanswerable defense of the Federal Reserve
S y s t e m . I t w a s printed in due course in the 'Congressional
Record,' and the Board w a s notified t h a t reprints of t h a t
part of the ' R e c o r d ' containing it were obtainable.
On J a n u a r y 28th, I sent a telegram to all Federal Reserve
B a n k s advising them t h a t copies were available and suggesting their distribution.
E a r l y in J u l y , 1922, the Senate adopted a resolution
(S.R. 308) offered b y Senator Heflin requiring the Federal
Reserve Board to advise the Senate a t whose instance this
speech was distributed, how m a n y copies were sent o u t b y
each Federal Reserve B a n k , and to furnish a list of the
names and addresses of those to w h o m copies were sent.
T h e Federal Reserve B a n k of A t l a n t a furnished a list of the
residents of A l a b a m a to w h o m copies were sent, b u t t h e
other Federal Reserve B a n k s declined to m a k e their mailing
lists public.
T h e Board's reply t o Senate Resolution 308 will be found
in A p p e n d i x F , page 306.
It seems t h a t some critics of the Federal Reserve System,
w h o were making e v e r y effort to bring its administration into
disrepute, t o o k umbrage because representative citizens in
the various S t a t e s were afforded an opportunity of hearing
the other side of the question as presented b y a Senator of
the United S t a t e s on the floor of the Senate, w h o was, b y
reason of his experience as Chairman of the House C o m m i t -

238

THE FEDERAL RESERVE SYSTEM

tee which framed the Federal Reserve A c t , and his more
recent experience in the administration of the A c t while he
was Secretary of the T r e a s u r y , certainly as well qualified
t o discuss the subject as a n y other man.
Shortly after the delivery of Senator Glass's speech, the
Senate adopted, without prolonged debate, or reference to a
committee, a resolution offered from the floor which provided that no Federal Reserve B a n k should hereafter be
permitted to expend more than $250,000 in the erection of a
building without the specific consent in each case of C o n gress; b u t t h a t this should not apply t o buildings already in
course of construction or for which contracts had been made.
Subsequently, this resolution w a s incorporated in an amendment which passed the House and became a part of the law.
T h e Federal Reserve B a n k s themselves were not affected b y
this action, with the exception of the Federal Reserve B a n k
of St. Louis, which, although it had acquired a site, had not
a t that time let its contracts; and plans which had been
made for buildings for branches a t some important points
were delayed. Bills were introduced later, permitting the
expenditure of the amounts required for the erection of these
buildings and were passed without difficulty.
E a r l y in the y e a r 1922, a resolution w a s offered in t h e S e n a t e
b y Senator Smith, of South Carolina, directing the President
t o fill the next v a c a n c y which might occur on the Federal
Reserve Board, b y death, resignation, or the expiration of
the term of a member, b y the appointment of a m a n whose
'business and occupation' is farming. A s t h e members of
the Board were all in good health, and as none a t t h a t time
showed a n y disposition t o resign, it seemed t h a t this resolution was directed against me, as m y term w a s t o expire on
A u g u s t 9th. I had already informed S e c r e t a r y Mellon t h a t
I did not desire a reappointment, b u t I had been requested
b y him to m a k e no public announcement of the fact, and he
asked me not t o close m y mind entirely on the subject. A
perusal of the foregoing pages is no d o u b t enough t o satisfy

MOVE FOR FARMER MEMBER

239

a n y one t h a t m y position w a s no sinecure, and hardly more
pleasant than t h a t of a baseball umpire. I should h a v e resigned several months before b u t for the a t t a c k s which were
being made upon the Board. T h e governorship of the Federal
Reserve Board does not carry with it a n y political prestige
and from a material point of view offers no attractions. I
had served in this capacity continuously since A u g u s t , 1916,
and had been a member of the Board from the beginning. I
had seen the Federal Reserve System developed beyond the
experimental stage t o a point where it had become the
strongest banking force in the world. There w a s nothing for
me to gain b y accepting a reappointment, nor did I feel t h a t
I w a s under a n y public obligation t o do so. In deference,
however, t o the wishes of Secretary Mellon, I agreed t o
a w a i t developments.
W i t h o u t a n y effort or solicitation on m y part, resolutions
were adopted during the spring and early summer b y bankers'
associations in all sections of the country requesting the President t o reappoint me, and similar resolutions were adopted
b y chambers of commerce and other commercial bodies.
Some members of the C a b i n e t and some of the officials of
the American F a r m Bureau Federation urged m y reappointment upon the President, as did some members of the F a r m
Bloc in Congress, including t h e Honorable S y d n e y Anderson,
Chairman of the Joint Commission of Agricultural Inquiry.
T o use the President's own language, the Secretary of the
T r e a s u r y w a s for me 190 per cent, and the Secretary of W a r ,
189 per cent.
T h e demand for the appointment of a farmer upon the
Federal Reserve Board continued. Finally, a bill w a s introduced in Congress to increase the number of appointive
members from five to six with the intent t h a t the new member should be a farmer. T h e law a s it had stood since its
original enactment provided t h a t ' i n selecting the five appointive members of the Federal Reserve Board, not more
than one of w h o m shall be selected from a n y one Federal

255 THE FEDERAL RESERVE SYSTEM
Reserve District, t h e President shall h a v e due regard t o a
fair representation of the different commercial, industrial,
and geographical divisions of the country.' T h e proposed
amendment provided t h a t 'in selecting the six appointive
members of the Federal Reserve Board, not more than one
of whom shall be selected from a n y one Federal Reserve
District, the President shall h a v e due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the c o u n t r y /
T h e House Committee on B a n k i n g and C u r r e n c y held a
hearing on the bill on M a r c h 15 and 16,1922. A t this hearing
statements were made b y the Secretary of the T r e a s u r y , the
Secretary of Agriculture, and the Governor of the Federal
Reserve B o a r d ; M r . G r a y Silver, Legislative A g e n t of the
American Farm Bureau Federation; Mr. A . D . Adams, Chairman of the Committee on Federal Legislation, A m e r i c a n
Bankers Association, and M r . T h o m a s C . A t k e s o n , of the
National Grange. M r . Wallace, the Secretary of Agriculture,
M r . Silver, and M r . A t k e s o n favored the amendment which
w a s opposed b y Secretary Mellon, M r . A d a m s , and myself.
T h e official report of this hearing shows t h a t Secretary
Mellon saw no occasion for enlarging the Board. H e believed
t h a t a board is more efficient when it is not t o o large, and
t h a t the larger the board is made, the more the responsibility
of each member is lessened. H e stated the Federal Reserve
Board had been functioning v e r y satisfactorily, and pointed
out that the Board itself did not pass on t h e discounting of
paper b y Federal Reserve Banks. H e suggested t h a t if the
idea of having an additional member on the Federal Reserve
Board w a s t o give more consideration t o some particular
branch of industry or t o some particular region, t h a t purpose
could be accomplished better b y membership on the boards
of directors of the Federal Reserve B a n k s themselves which
discounted the paper of the member banks. H e saw no occasion for singling out a n y particular class for representation
on the Federal Reserve Board and t h o u g h t t h a t , in the ap-

MOVE FOR FARMER MEMBER

241

pointment of a member, his capacity should be considered.
H e need not necessarily b e a banker, b u t he should h a v e a
general, comprehensive knowledge of trade, commerce, industrial and agricultural activities; b u t t o require t h a t he be
engaged in a n y particular business did not seem t o be logical.
In reply t o an inquiry as t o whether a n y member of t h e
Federal Reserve Board represented agriculture, he stated
t h a t M r . Crissinger had one of the largest farms in Ohio. A s
t o the policy of the Board toward agriculture, Secretary
Mellon said t h a t an analysis of the accommodations granted
b y Federal Reserve B a n k s to agricultural interests would
show t h a t these interests had been treated as liberally as a n y
others, if not more so. T o specific questions whether t h e
members of the Board had paid due attention and given d u e
consideration to the agricultural interests, and whether t h e y
represented the whole country irrespective of w h a t the interests might be, he answered, ' Y e s , ' which w a s also his
answer as t o whether in his opinion this w a s true in M a y ,
1920, and in September, 1920. W h e n asked if there would
be a n y objection, instead of increasing the number of appointive members of the Board, to adding the Secretary of Agriculture as an ex officio member, Secretary Mellon stated t h a t
there would be the same objection, as there would be a n
unnecessary enlargement of the Board, and the Board would
be to t h a t extent less efficient; t h a t generally speaking a
board consisting of seven members is better than a larger
board. H e did not a d v o c a t e reducing the membership of the
Board, b u t said plainly t h a t he thought i t should not be
increased.
T h e Secretary of Agriculture, M r . Wallace, w h o followed
M r . Mellon, stated that he did not regard the Federal Reserve
Board as a purely administrative b o d y , b u t rather as an institution which determines the general financial and credit
policies of the country, and t h a t the Federal Reserve Board
would in time, through t h e exercise of its administration of
the great credit machinery of the country, h a v e a v e r y direct

257 THE FEDERAL RESERVE SYSTEM
influence upon prices and upon business in general, and therefore it should be a cross-section of the country's industrial
life, including agriculture. H e saw no force in the objection
t o increasing the membership of the Board, w r hich he t h o u g h t
should be sufficiently large to bring into the councils of the
Board a direct personal knowledge of the business and industries in which the people in the various sections of t h e
country are engaged. H e stated t h a t he w a s in full s y m p a t h y
w i t h the proposal t o increase the membership of the Board
b y adding a member recognized a s being fully informed as t o
agricultural interests and w h o would represent agricultural
interests.
I followed Secretary Wallace, and described the powers of
the Federal Reserve B a n k s as clearly defined in the law, and
I agreed w i t h the Secretary of the T r e a s u r y t h a t t h e duties
of the Federal Reserve Board are largely supervisory and in
a general w a y administrative, expressing the v i e w t h a t the
Board under the law could not exert such influence on prices
as Secretary Wallace had indicated. I called attention to the
a d v a n t a g e of having an odd number on a n y board, commission, or tribunal in order t o avoid a tie v o t e . If the B o a r d
were a central bank, I should f a v o r a larger number of
directors, b u t I said;
The Board's functions are such that if you created a larger
board I think you would very materially decrease its efficiency.
There would be more talk and less action. The proposition to
have one member of the Federal Reserve Board from each Federal
Reserve District is, in my opinion, very unwise. Whether or not
the Board as at present constituted measures up to the requirements is a matter for you gentlemen to decide, but it is conceded
that the Board as at present constituted should have a national
viewpoint, should consider all interests, and give everybody a
square deal as far as possible. If you had one member from each
Federal Reserve District, then you would immediately localize
each member, and each man would say to himself, 4 1 do not represent the country at large; I represent my particular district/ W e
should have meetings of the Board where each man might be

MOVE FOR FARMER MEMBER

243

wanting something for his particular district, and there would be
the danger of a disposition to trade favors with each other.

In summing up, I said:
As to the increased membership, experience has shown that a
board of seven is of convenient size, and if it is desired — I see the
force of the argument — to have on the Board some man recognized as agriculturally minded, as you say, and broadminded
enough to know something about the general principles of finance,
if you could find a man of that sort, he would probably be a very
valuable man for the Federal Reserve Board.
There is no occasion to amend the law in order to get such a
man, because there is going to be a vacancy on the Federal Reserve
Board in August, my term expiring at that time, and if you leave
the law as it is, there is nothing to prevent the President from
appointing a farmer. Why do you want to amend the law? I am
not speaking from a selfish standpoint at all. You remember when
the agitation first came up in the Senate — the Banking and Currency Committee reported to the Senate a short bill adding the
word 'agricultural' — to require the President to consider agricultural as well as financial, industrial, and commercial interests
in making his appointments to the Federal Reserve Board; and
then Senator Smith, of South Carolina, offered an amendment in
a legislative session of the Senate providing that the President, in
filling the next vacancy to occur on the Board, whether by resignation, removal, or expiration of term of office, shall appoint a man
whose business and occupation is farming.
If I were concerned about my own position or ambition, I
should be here advocating the bill you are now considering, because its enactment would be the only possible chance for me to
get a reappointment. But the question of whether or not I continue as a member of the Federal Reserve Board is not a matter
of vital importance to me, and certainly of no consequence to the
country. I am talking from a purely disinterested standpoint,
based on eight years' experience on the Board, for what I think is
the good of the country and the Federal Reserve System. I think
you will all agree I am arguing against this bill, and am therefore
arguing against any possibility of my own reappointment. But
the issue lies a good deal deeper than that, you see.
Then why do you want to change the basic structure of the Act,
when all you have to do is to wait until August and get the man
you want?

CHAPTER

X I X

T H E ACT AMENDED TO PROVIDE FOR MEMBERSHIP OF A FARMER
ON THE B O A R D — R E V I E W OF BOARD'S POLICIES

NOTWITHSTANDING the evident reluctance of several members of the House Committee on B a n k i n g and C u r r e n c y t o
enlarge the membership of the Federal Reserve Board, the
bill which w a s discussed in the last chapter w a s f a v o r a b l y
reported and was duly passed b y the House; similar action
having been taken in the Senate, the bill became a law on
June 3 , 1 9 2 2 , having received the approval of the President.
W h i l e there is certainly no objection to the membership
of a practical farmer on the Federal Reserve Board, provided he possesses other desirable qualifications, it would
seem that, in amending the A c t so as t o require t h a t one of
the members be a farmer, a dangerous precedent has been
established. Other classes as they acquire political power
m a y also demand representation on the Federal Reserve
Board. Senator Norris, of Nebraska, when the bill w a s being
debated in the Senate, said that it had been given* an importance v a s t l y beyond w h a t it deserves.' H e also said:
The farmers of the country have been given to understand that
they are going to get great relief by the passage of the bill and get
representation on the Federal Reserve Board. They are going to
be fooled again. There will be no relief any more than there is now
so far as the Federal Reserve Board is concerned. After all, we
cannot by a legislative act take away the discretion that is vested
in the appointing power. Under the law as it stands now the
President can appoint all farmers, practically, with the exception
of two — yes; he could get all farmers as members of the Federal
Reserve Board if he desired. . . .
It is said we shall have a farmer on the Federal Reserve Board,
and after that everybody in agriculture will prosper. But, Mr.
President, the appointing power could select a farmer who is
more reactionary than any Wall Street banker that ever lived, if

ACT AMENDED

245

he wants to do that. There are plenty of them whom he could
get
So, after all, in my judgment it is nothing but camouflage; and,
while I may probably vote for some of the proposed substitutes,
so far as I am concerned I shall do so more as a protest against the
action of the Federal Reserve Board in the last two or three years
than for any other reason. . . . Y e t the bill itself cannot directly
accomplish anything.
Senator K e n y o n , the leader of the F a r m Bloc, said:
If I had time to read the Republican platform of last year, I
could cite a declaration in that platform that would sustain this
legislation. In his speeches the President has committeed himself
to the proposition, and has appointed a farmer, or a representative
of agriculture, on the Interstate Commerce Commission, and will
unquestionably appoint a representative of agriculture on the
Federal Reserve Board. It is not going to accomplish a great deal,
as the Senator from Nebraska and the Senator from Connecticut
have said. It is not going to remedy all the ills that the farmer is
suffering from. It will simply be helpful, and if this Federal Reserve System is to be a great superlord of government and a great
supergovernment in this country building up this industry, destroying that one, then it is proper that all the various interests of
the country be represented thereon.
A s soon a s the bill w a s signed b y the President, the efforts
of those w h o were opposed t o m y reappointment were redoubled, for it w a s felt t h a t the passage of the bill had
removed the principal obstacle t o m y reappointment. I t w a s
represented t o the President b y some of the practical politicians w h o were not concerned with banking and economic policies, t h a t the office w a s one of the most desirable
within his g i f t ; and t h a t it would be bad politics t o confer it upon an appointee of the previous Administration.
Others w h o had exerted their influence early in 1920 to induce farmers t o hold their products for higher prices, and
had since been unpleasantly reminded t h a t the prices finally
realized were much lower than those which could h a v e been
obtained had sales been made in a normal w a y , were strong
in their opposition.

246

THE FEDERAL RESERVE SYSTEM

During the months of June and J u l y and u p t o the expiration of m y term on A u g u s t 9th, speeches denouncing me were
made in the Senate t w o or three times a w e e k ; and the Senators w h o remained in their seats were regaled with speeches,
or rather w i t h repetitions of the same speech, which, while
possessing less literary merit, were more bitter in invective
than the philippics of Demosthenes or t h e orations of Cicero
against Catiline. E v e n the newspaper correspondents in the
press gallery, who failed to see a n y news value in these orations
after they had been repeated a few times, were assailed for
their venality in not remaining in their places t o report them.
In one of his speeches, m a d e about ten d a y s before m y term
expired, Senator Heflin declared t h a t I had been speculating
for a decline in the price of cotton and had for t h a t reason
favored a policy of drastic deflation. T h i s w a s a v e r y serious
charge, and in substantiation no proof w h a t e v e r w a s offered.
A s this statement w a s made upon the floor of the Senate,
there w a s not open t o me the usual course of demanding immediate retraction, and of instituting suit for libel if retraction was not made. I, therefore, addressed a letter to Senator
M c L e a n , Chairman of the Senate B a n k i n g and C u r r e n c y
Committee, in which I flatly denied the charge and m a d e the
statement, which is now reiterated, t h a t I had not during
m y term of service on the Federal Reserve Board speculated
in stocks or bonds, cotton, or a n y other commodity, and
t h a t I had bought or sold nothing w h a t e v e r on a n y of the
exchanges; t h a t the only bonds I had purchased had been
direct from the G o v e r n m e n t in the various L i b e r t y L o a n
campaigns, and t h a t I had had only one transaction in
cotton, and t h a t w a s t o b u y one bale a t ten cents a pound
in the autumn of 1914 when a m o v e m e n t w a s under w a y t o
induce purchases a t t h a t price for the purpose of aiding producers of cotton. Senator M c L e a n v e r y kindly had this
letter inserted in t h e ' Congressional Record. 1 Senator Heflin
declared t h a t I w a s personally obnoxious t o him, and I a m
informed t h a t the President w a s advised t h a t senatorial

REVIEW OF BOARD'S POLICIES

247

courtesy would be invoked t o defeat m y confirmation in case
m y nomination w a s sent in. T h e President did not send m y
name t o the Senate; and some weeks after the expiration of
m y term, w h e n upon his invitation I called a t his office, he
told me t h a t he had never seriously considered doing so until
these a t t a c k s on me became so frequent and intemperate.
D u r i n g the first week in A u g u s t most of the matters pending before t h e Board were disposed of, and on the afternoon
of the 9th, I t o o k official leave of the Secretary of the Treasu r y and m y colleagues on the Board, and turned m y office
o v e r t o M r . P i a t t , w h o had been redesignated b y the President a s Vice-Governor of the Board. For about nine months
M r . P i a t t w a s the acting governor of the Board, the organization of which w a s finally completed b y the appointment
of D . R . Crissinger, of Ohio, to be Governor of the B o a r d ;
H e n r y M . D a w e s , of Illinois, t o be Comptroller of the
C u r r e n c y ; and M i l o D . Campbell, of Michigan, t o be the
farmer member of the Board. M r . Campbell died suddenly
a few d a y s a f t e r taking office and w a s succeeded b y E . H .
Cunningham, of Iowa. In M a y , 1923, John R . Mitchell,
of Minnesota, resigned as a member of the Board and was
succeeded b y George R . James, of Memphis, Tennessee.
Comptroller D a w e s resigned in December, 1924, and was
succeeded b y J . W . M c i n t o s h , of Chicago.
I n t h e foregoing pages an effort has been m a d e t o review
in narrative form some of the principal problems encountered
b y the Board in the establishment and operation of the Federal Reserve B a n k s . N o reference has been m a d e t o some of
the routine w o r k of the Board, such as the granting of trust
powers t o national banks, and giving permission t o individuals t o serve as directors in not exceeding three b a n k s where
the institutions concerned were found not t o be in substantial competition; nor has it been attempted to enter into a
full discussion of all the various amendments t o the Federal
Reserve A c t . M u c h of t h e criticism of the B o a r d and its

248

THE FEDERAL RESERVE SYSTEM

policies w a s unscientific and intemperate; b u t there were
some who, while expressing their disapproval of some things
which were done or left undone, made friendly and constructive criticisms, which are well worth considering. T h e constructive critics in t h e main have been economists w h o h a v e
not always agreed among themselves a s t o w h a t policies
should h a v e been adopted. Some of these, however, are in
agreement t h a t the Board had no consistent discount policy,
and that it had no definite policy as t o gold and open-market
operations. Other critics believed t h a t too much m o n e y w a s
expended b y the Federal Reserve B a n k s in the construction
of their banking houses. In this connection it seems proper
to state t h a t the Board from the beginning w a s of the opinion
t h a t the Federal Reserve banking system w a s no mere experiment or temporary expedient, but t h a t its usefulness
would be so clearly demonstrated as to assure its permanence
in the field of American banking. In this country experience
has shown t h a t public buildings and b a n k buildings which
h a v e been erected in growing communities are seldom large
enough a f t e r the lapse of a comparatively few years t o serve
the purpose for which t h e y were intended. In m a n y cases
either additions h a v e been made involving inconvenience
and greater expense, or buildings have been torn d o w n and
replaced b y larger ones. W h e r e an old building has been sold
and a new site selected, the amount realized from the sale
has frequently been the value of the land w i t h o u t a n y reimbursement for the cost of the building itself. A s land v a l u e s
h a v e a rising tendency in most American cities, the cost of a
new site has usually been much greater than t h a t of t h e
original one. T h e directors of most of the Federal R e s e r v e
Banks, having these facts in mind and finding it impossible
t o acquire b y purchase fireproof buildings suitable for their
needs, determined t o construct buildings large enough t o
answer requirements for a long period of years. In t w o Federal Reserve B a n k cities where this principle w a s not followed,
the buildings upon completion were found t o be inadequate

REVIEW OF BOARD'S POLICIES

249

and were immediately enlarged, additional land being purchased in each instance.
T h e Federal Reserve B a n k of N e w Y o r k has been most
frequently cited as affording an example of e x t r a v a g a n t expenditure in the construction of its b a n k building. T h e
statement has been made on m a n y occasions t h a t the b a n k
had entered into contracts amounting t o $26,000,000 for the
erection of its building alone, and that the amount expended
for t h e land t o be covered b y the building, something less
than $5,000,000, w a s excessive. T h e necessity for locating
the Federal Reserve B a n k of N e w Y o r k in the financial district should be apparent to a n y one w h o is familiar with t h a t
c i t y and w h o is informed as t o the operations of the Federal
Reserve B a n k . N e w Y o r k is the great financial center of this
c o u n t r y and the daily cash transactions of the member banks
with the Federal Reserve B a n k are v e r y large. H a d the Federal Reserve B a n k been located a w a y from the financial
district, not only would much inconvenience h a v e been occasioned to member banks, b u t in their necessary dealings with
the Federal Reserve B a n k , which involve the transportation
of currency and securities through the streets, there would
h a v e been incurred the additional danger of robbery and loss
of human life. W i t h i n the past year the building of the Federal Reserve B a n k of N e w Y o r k has been completed. I t s
cost w a s not $26,000,000, b u t about $14,000,000. T h e b a n k
a t one time had over three thousand employees and has now
something more than twenty-five hundred, and as business
expands it will probably h a v e a larger number in the future.
T h e laws of N e w Y o r k lay down certain requirements which
m u s t be observed in the provision of space in new buildings.
Should the bank be obliged suddenly to abandon its building
because of d a m a g e b y fire, serious inconvenience, if not posit i v e loss, would be experienced b y the business of the entire
c o u n t r y . Fireproof construction was, therefore, necessary,
and in order t o provide properly for the safe-keeping of the
v a s t a m o u n t s of gold and securities entrusted t o its care, it

250

THE FEDERAL RESERVE SYSTEM

w a s necessary t o use e v e r y means t o m a k e the v a u l t s n o t
only fireproof, b u t burglar-proof and mob-proof. I t should
be remembered t h a t in the year 1919 Congress abolished the
sub-treasuries and transferred t o the Federal Reserve B a n k s
as a part of their fiscal agency duties the functions which
formerly had been exercised b y the sub-treasuries. Since the
Federal Reserve B a n k of N e w Y o r k removed t o its n e w building, it has held in its v a u l t s always v e r y large amounts of gold
and currency, besides the large volume of Government bonds
and other securities owned b y it and held for a c c o u n t of its
clients. T h e paid-in capital of the b a n k is a b o u t $30,000,000
and surplus about $59,000,000, making a total of $89,000,000.
T h e investment of the bank in its building, including land,
is something less than $20,000,000, or about t w e n t y - t w o per
cent of its capital and surplus. H a s a n y commercial b a n k
having a capital and surplus of s a y $5,000,000 ever been
criticized for investing $1,000,000 in a banking house? T h e
old Sub-Treasury Building in N e w Y o r k which occupies the
historic site a t the corner of Broad and W a l l Streets is no
longer in use as a sub-treasury; all business formerly transacted there is now carried on a t the Federal Reserve B a n k
of N e w Y o r k , and the G o v e r n m e n t is able t o use t h e building for a n y other purpose it m a y desire. T h e site, one of the
most valuable in the world, is worth several millions of dollars. T h o s e w h o think t h a t the new building of the Federal
Reserve B a n k of N e w Y o r k represents t o o large an investment should bear this fact in mind and d e d u c t from the
amount invested the v a l u e of the old sub-treasury site.
Before the expiration of m y term, the B o a r d adopted the
rule that each Federal Reserve B a n k should charge off each
year an amount equal t o two per cent of the cost of its
building in order t h a t the amortization should be complete
a t the end of fifty years, and this rule has never been rescinded. T h o s e w h o think t h a t the b a n k buildings a t the
end of fifty years will still be t o o large are certainly n o t
optimistic a s t o the f u t u r e of A m e r i c a .

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251

A s t o the gold policy of the Federal Reserve System, it
m a y be said t h a t the law as originally enacted provided t h a t
'subscriptions t o the capital stock of the Federal Reserve
B a n k s shall be paid in gold or gold certificates.' P a y m e n t s
were made accordingly. Upon the announcement of the date
set for the opening of the banks, the Board requested member
banks so far a s possible to p a y in their required reserves in
gold, and this request met with a gratifying response. Reference has already been made to the amendment which permits Federal Reserve B a n k s to issue notes in exchange for
gold. A s it became evident t h a t this country would be drawn
into the war, e v e r y effort was made to increase the gold holdings of the Federal Reserve Banks, for it w a s anticipated
t h a t a great expansion of credit would result and a large
stock of gold w a s necessary as a foundation for these credits.
I t w a s not practicable during the war t o put in practice any
scientific policy covering the conduct of open-market operations b y the banks. Embargoes on shipments of gold existed
in all countries and open-market purchases were necessarily
one-sided, being confined t o the purchase of bills arising from
imports or growing out of domestic shipments. A n y purchase
of foreign bills would h a v e been a speculation in foreign exchange, and generally speaking would h a v e been attended
with h e a v y loss. These conditions in the main continued
until a few months ago, and are still existent with respect
t o a n u m b e r of foreign countries.
D u r i n g the y e a r 1919 and u p t o the beginning of the
y e a r 1922, the rediscounting operations of the Federal
Reserve B a n k s for their member banks and for each other
were so h e a v y that their open-market operations were systematized. A few months before I left the Board, however, a definite open-market policy w a s formulated, and i t
w a s arranged t h a t there should be concerted action b y the
Federal Reserve B a n k s in the exercise of these powers. T h i s
policy has since been elaborated and standardized.
Despite the large issue of Federal Reserve notes outstand-

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THE FEDERAL RESERVE SYSTEM

ing, the gold reserves of the Federal Reserve B a n k s h a v e been
a t all times sufficiently large t o permit of the p r o m p t redemption in gold of such notes as were presented; and of the money
hoarded when the pressure upon the banks w a s greatest, b y
far the larger amount w a s in the form of currency. T h e purchasing power of the Federal Reserve note w a s a l w a y s equal
t o its equivalent in gold. During t h e y e a r 1922 the volumes
of gold imports increased heavily and the policy w a s adopted
of having the Federal Reserve B a n k s p a y o u t gold and gold
certificates instead of Federal Reserve notes, in order t o minimize the effect upon their reserves of the large importations
of gold.
M u c h can be said regarding the Board's discount policy
and there has already been some discussion of it in these
pages. N o banking system has e v e r experienced so m a n y
vicissitudes within a few years as has the Federal Reserve
S y s t e m since its establishment. T h e World W a r w a s in progress when the banks began business and, as has already been
shown, the rediscount transactions of the Federal R e s e r v e
B a n k s were negligible during the first y e a r or t w o of their
operation. T h e rate exerted b u t little influence. E v e n had
conditions been normal, there were no established precedents
in this country which could be followed in formulating a discount policy. W h e n t h e United S t a t e s entered the w a r , t h e
Board felt t h a t its d u t y was t o cooperate w i t h the T r e a s u r y .
T h a t it should or could h a v e pursued a different policy is inconceivable. R i g h t o r wrong, the T r e a s u r y policies dominated the r a t e policy of the Board during t h e war. M a n y
steps which were t a k e n m a y h a v e been unsound from an economic point of view, b u t i t should b e remembered t h a t w a r
itself is the most uneconomic of all processes, for it involves
waste and destruction on a large scale. N o a t t e m p t will be
made here t o explain t h e policy of t h e T r e a s u r y , b u t t h e
reader is referred t o a n address w h i c h w a s delivered before
the A c a d e m y of Political Science in N e w Y o r k on A p r i l 30,
1920, on ' T r e a s u r y M e t h o d s of Financing t h e W a r in R e l a -

REVIEW OF BOARD'S POLICIES

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tion t o Inflation/ b y R . C . Leffingwell, Assistant Secretary of
the T r e a s u r y undersecretaries M c A d o o , Glass, and Houston.
T h i s address will be found in Appendix A , page 257.
T h e Joint Commission of Agricultural Inquiry expressed
the opinion in its report that the Board, regardless of the apprehensions or wishes of the T r e a s u r y Department, should
h a v e seen t h a t Federal Reserve B a n k discount rates were
advanced early in the year 1919. T h e Commission appears
t o h a v e overlooked the fact t h a t technically the country w a s
still a t w a r a t t h a t time. H a d the Board undertaken to obstruct the T r e a s u r y , means were available of depriving the
Board of power to interfere. Military operations, indeed,
had ceased, b u t unpaid and unfunded obligations of the
G o v e r n m e n t were v e r y large early in the y e a r 1919, and the
financial necessities of the T r e a s u r y were a s g r e a t as t h e y
had been a y e a r before, and funding operations were perhaps even more difficult.
In its report the Commission referred also t o the unwillingness of the Secretary of the Treasury t o fix the interest
on V i c t o r y notes a t rates sufficiently high to induce the market t o absorb them. T h e writer holds no brief for the Treasury, b u t would refer those w h o believe t h a t the rate on the
V i c t o r y notes w a s too low t o M r . Leffingweirs discussion of
T r e a s u r y policies, t o which reference has j u s t been made.
Before the war, when the principal countries of the world
were on a gold basis, one of the most important functions of
a central b a n k w a s to regulate the movement of gold to and
from the c o u n t r y which it served. If the movement w a s adverse, the official bank rate would be raised. W i t h a h e a v y
inflow of gold, the rate would be lowered. T h e gold movem e n t s were quickly reflected in current market rates which
a l w a y s followed them and sometimes anticipated them. B e cause of embargoes during the war, and the general suspension of gold p a y m e n t s abroad which continued a f t e r t h e
Armistice, the rates of central banks no longer controlled
gold movements, b u t they were still related to the m a r k e t

254

THE FEDERAL RESERVE SYSTEM

rates prevailing in their respective countries. M o s t of these
countries looked forward t o the time w h e n t h e y could with
safety resume gold payments, b u t had their central banks
disregarded market rates, and attempted t o maintain rates
below the market, such resumption would h a v e been indefinitely postponed and made increasingly difficult.
Beginning with t h e y e a r 1920, and continuing u p t o the
time I left the B o a r d , t h e discount rates which were approved
from time to time for the various Federal Reserve Banks,
while lower in some districts than the average going rate,
were related t o current market rates in the larger centers.
I n regarding market conditions and rates as the chief factors
to be considered in t h e establishment of a Federal Reserve
B a n k rate, the B o a r d and the banks adopted a principle
which has long been recognized and put in practice b y central banks in other countries. Some economists both in this
country and abroad h a v e during the last t w o or three years
suggested that Federal Reserve B a n k rates should be based
upon the general price-level. In v i e w of present conditions
the Federal Reserve B o a r d is perhaps in better position t o
consider the merits of such a suggestion than it w a s a t a n y
time during m y connection with it, b u t so f a r it has given no
intimation that it is willing to reverse a policy repeatedly declared, and t r y the experiment of making the general pricelevel the determining factor in the rate structure. It would
seem that such a determination would p u t the B o a r d in the
attitude of assuming t o be the arbiter of prices, and t h a t then
an advance or reduction in rates would reflect the B o a r d ' s
opinion t h a t prices were too high or too low, as t h e case m a y
be, and proclaim its intention t o a t t e m p t t o r e c t i f y them.
T h e question then arises, Would the country be willing t o
commit so important a question a s the fixing of a proper
price-level t o a n y board or commission? A n y announcement
b y the Federal Reserve Board of a purpose t o control prices
b y means of discount rates would, in m y opinion, lead t o the
destruction of the Federal Reserve S y s t e m . N o r is it certain

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255

t h a t a n y advance or reduction in Federal Reserve B a n k discount rates would synchronize with changes in the pricelevel. T h e substantial advances in rates which were made in
J a n u a r y , 1920, were not followed b y a decline in the general
price-level until July, and the successive rate reductions
which were made in the y e a r 1921 and early in 1922 were not
followed b y a higher price-level until the autumn o f 1922,
L o w discount rates h a v e prevailed since July, 1923, b u t for a
y e a r there w a s no general advance in prices. Federal Reserve
B a n k rates usually h a v e little effect upon the cost of credit
to the small producer and distributor, and certainly the cost
of credit is only one of the m a n y factors which enter into the
costs of production and the determination of prices. In recent years it has not been the fashion to say much about the
old economic law of supply and demand; but nevertheless
this law invariably asserts itself, whether the thing affected
is an agricultural commodity, or a manufactured product, or
credit. Because of the w a r emergency, and as their contribution to the inflation which the exigencies of w a r finance
seemed to m a k e necessary, the Federal Reserve B a n k s maintained artificially low rates through the years 1917 t o 1919.
N o w t h a t t h e y are in position to maintain rates based upon
actual or impending conditions in the money market, it would
be the height of folly for them to disregard these conditions,
and, in an effort to control prices, t o resort to arbitrary and
artificial rates entirely unrelated to market conditions. T h e
law requires t h a t Federal Reserve B a n k rates be 4 established
with the v i e w of accommodating commerce and business.'
T h e s e rates w h e n properly adjusted have a stabilizing effect
and prevent violent fluctuations in the money market, and
in this w a y m a y exercise a corrective influence; b u t it would
seem t h a t this influence can be exerted more safely and effect i v e l y b y the maintenance of a proper relationship of Federal
Reserve B a n k rates t o market rates and conditions which
normally are responsive t o the requirements and activities
of commerce and business.

A P P E N D I X

T R E A S U R Y METHODS OF FINANCING T H E W A R
IN RELATION TO INFLATION
ADDRESS BY R . C . LEFFINGWELL, ASSISTANT SECRETARY OF THB
TREASURY, BEFORE THE ACADEMY OF POLITICAL SCIENCE
NEW YORK, APRIL 30, 1920
I
FINANCING THE WAR

THE Treasury's war problem was to meet the financial requirements of the Governments of the United States and the Allies
promptly and without stint, and to meet them so far as possible
from the saved incomes of the people, avoiding avoidable inflation.
These objectives must be pursued in such ways as would not interfere with, but on the contrary facilitate, the mobilization of the
Nation for war purposes and the production and transportation of
munitions and supplies. It was necessary that the Treasury should
reach its determinations without the possibility of knowing the
duration of the war or, consequently, the magnitude of the ultimate financial effort which the country would be called upon to
make. The Allies had about reached the end of their tether because of their dependence upon imports for an important part of
their munitions and supplies. They had nearly reached the limit
of their ability to finance these through private channels in
America and the neutral world. The Central Empires, more selfcontained in fact and aided by the blockades maintained by the
Allies, appeared to be less subject to the risk of economic breakdown. The United States, the last great nation to enter the war,
was also the last great reservoir of available wealth which could
be tapped in the Allied cause. If America failed to meet the
financial and economic demands upon her, the war was lost.
For about a year after our declaration of war, our loans to the
Allies were our principal effective contribution to winning the war
which they were fighting. During the first six months the loans we
made to Russia and the knowledge of our willingness to make
further loans kept Russia in the war and held the eastern front for

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six months. It was the loan we made to Italy in the fall of 19*7*
when the great offensive broke on Italy, that gave the Italian
people courage and enabled Italy to replace the lost munitions and
supplies. In the spring of 1918 it was our silver that held India for
the Allies. In the summer of 1918 American credits sustained the
French when Paris itself was under gunfire.
As our own military effort grew, the demands of our own army
and navy in large measure displaced those of the Allies in respect
to American production and transportation, and consequently the
burden which the Treasury had to bear came increasingly to represent the expenditures of our own Government and decreasingly
those of the Governments of the Allies. The rapidity with which
our financial and economic resources were mobilized made possible
the termination of the war a year sooner than had been hoped by
the most optimistic. Our military and economic effort was, Ijbelieve, planned to reach the peak in the spring or summer of 1919.
Though hostilities ceased on November 11, 1918, the Treasury
was called upon to meet expenditures to the average amount of
about $2,000,000,000 a month in November and December, 1918,
and January, 1919 — the full amount of the First Liberty Loan
each month. The peak of the war debt was not reached until
August 31, 1919 (when the floating debt amounted to over
$4,000,000,000, and the total gross debt amounted in round figures
to $26,596,000,000), and it was not until January, 1920, that the
Treasury was able to reduce the floating debt to manageable
amount and maturities.
In the period, lacking six days of three years, from the declaration of war to March 31,1920, on the basis of Treasury daily statements, excluding transactions in the principal of the public debt,
the Government's current expenditures amounted in round figures
to $37,455,000,000, and its current receipts to $14,198,000,000, the
difference being covered by a net increase in the public debt of
$23,257,000,000. On March 31, 1920, the gross debt had been decreased by about $1,900,000,000 to $24,698,000,000 from taxes
and salvage, including in the latter item the reduction of the net
balance in the general fund made possible by the reduced ordinary
and public debt disbursements. Though the current months of
April and M a y will show an important increase in the public debt,
in large measure due to the heavy burdens thrown upon the Treasury in connection with the return of the railroads to private control, the Treasury is hopeful that the ground lost in the first two
months of this last quarter of the fiscal year will be regained in

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259

June when another installment of income and profits taxes is
payable, and that the end of the fiscal year on June 30, 1920,
will show a reduction in the gross debt of somewhere near
$ii75°,ooo,ooo from the peak in August, 1919, and that the
operations of the whole fiscal year will show a decrease in the
gross debt of some $600,000,000, which is more than accounted
for, however, by the decreased balance in the general fund. This
means that for the fiscal year beginning seven months after the
cessation of hostilities, three days after the signing of a peace
treaty which is still unratified by America, and two months before
the peak of the war debt was reached, the United States should
balance its budget within a couple of hundred million dollars
— current receipts against current expenditures.
The total disbursements of $37,455,000,000 include expenditures for loans to the Allies and obligations taken from the Allies
and other Governments upon the sale of goods on credit in the
aggregate amount of, say, $10,000,000,000, and in addition several
billion dollars' worth of more or less salvageable investments. T o
what extent and with what degree of expedition these investments
may be liquidated depends upon questions of public policy as well
as practical finance.
The most rigid economy in governmental expenditure should be
enforced, adequate revenue from taxes should be maintained, and
rigorous salvage methods adopted with a view to the rapid retirement of the floating debt and of a portion of the Victory loan before maturity. If due progress is thus made in reducing the floating debt, Victory notes should be accepted at par in payment of
the five income and profits tax installments falling due in the
calendar year 1922 and the first quarter of the calendar year 1923;
or, if the notes are then selling at or above par, a portion of them
should be called for redemption in June and December, 1922.
This would raise the level of all other Government securities and
make possible the refunding of the reduced balance of the Victory
loan upon terms advantageous to the Government.
These measures are feasible and necessary. If, however, we reduce taxes, increase expenditures, and delay salvage operations,
the Government's financial predicament will be grave, for the
debt outstanding and maturing within three years amounts to
$8,000,000,000.
The maturities and redemption dates of the Liberty bonds and
Victory notes were arranged conveniently for the retirement of
the public debt. The sinking fund will retire the entire funded war

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debt (over and above the amount of obligations of foreign Govern
ments held by the United States) within less than twenty-five
years if, say, $1,250,000,000 a year is provided for the service of
the debt, including interest and sinking fund.
II
T H E T R E A S U R Y ' S METHODS

The methods pursued for accomplishing these results were intended to and did hold the inevitable war inflation in this country
down to a minimum. There are three ways of financing Government expenditures: taxes, loans, and paper money. The last and
worst of these methods was resorted to, to a greater or less extent,
by all the European belligerents, and, to a disastrous extent, by
some. It was avoided in the United States as a means of meeting
the Government's war expenditures. The Government did not
issue paper money; nor did it borrow directly from the banks of
issue except (a) temporary borrowings for a day or a few days at a
time which were promptly repaid by withdrawals from depositary
banks or out of tax receipts, and (6) certificates sold to Federal
Reserve Banks under the Pittman Act as a basis for the issue of
Federal Reserve Bank notes to replace silver withdrawn from circulation and sold to the British Government for India. There
have been a few instances of purchases of Treasury certificates of
public issues by one or more of the Federal Reserve Banks, but
these have been in such small amounts and of such brief duration
as to be negligible.
Taxation. The Treasury persistently and, on the whole, successfully insisted that one third of the current war expenditures
should be met from current taxes. The effort to go further would
probably have defeated itself and made the speeding-up of production for the winning of the war impossible. When tax rates
are low, the inequalities, injustices, and economic injuries from
errors in the incidence of taxation are slight enough, but as rates
go higher their consequences become graver. The income of the
business man in a period when the demand is for increased production ought to be turned back into his business. The income
of the rentier ought to be taken up to the point where the most
rigid economy in personal expenditures would be enforced. As a
practical matter the distinction cannot be made, so we impose
taxes as high as we dare upon both and seek to take the surplus
income of the rentier by loans.

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261

The first War Revenue Act became law on October 3, 1917,
about six months after the declaration of war. Six or seven months
later, it became apparent to the Treasury that war expenditures
were mounting very rapidly and, immediately after the third
Liberty loan, the Treasury took steps to obtain additional revenue
from taxation, demanding $8,000,000,000 in taxes against a rough
estimate of $24,000,000,000 of expenditures. The proposal was
resisted bitterly by leaders of both parties in Congress, who were
anxious to adjourn for the summer and were looking forward to a
general election in the fall. The issue was laid before the President,
who, after careful consideration, sustained the Treasury, and on
May 27, 1918, delivered a special message to Congress demanding
an increase of taxes. After months of delay the House passed a
bill estimated to produce $8,000,000,000 of taxes, but this bill was
still before the Senate Finance Committee when the Armistice was
signed. The Treasury, three days after the Armistice, reduced its
estimates of expenditures for the fiscal year from $24,000,000,000
to $18,000,000,000 (a figure which proved to be correct within a
few hundred millions of dollars), and advised the reduction of the
taxes to be carried by the pending bill from $8,000,000,000 to
$6,000,000,000 for the current year and $4,000,000,000 for subsequent years. These recommendations were ultimately adopted in
the second War Revenue Act, which did not, however, become
law until February 24, 1919.
The Treasury's tax policy measurably limited the inflation inevitably incident to the war. But we must not assume that to the
full extent that Government expenditures are met from taxes inflation is avoided. There are good and bad taxes. Congress gave
effect to the demands of the Treasury as to the amount of revenue
required, but the House of Representatives and the Ways and
Means Committee of that House are very jealous of the right and
duty which they believe to be theirs to initiate revenue measures.
The Treasury was consulted and given the most courteous consideration and the fullest opportunity to express its views, but the
tax bills were written in Committee and the Treasury's views
were overruled in many important instances.
The Treasury, though favoring, and indeed urging, the war
profits tax as a tax upon profits roughly attributable to the war,
strongly opposed the excess profits tax as a tax upon profits in
excess of a given return upon invested capital. Experience has
shown, what the Treasury always asserted, that the excess profits
tax discourages initiative and enterprise, rewards overcapitaliza-

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tion and discourages conservatism in capitalization, confirms great
corporations in their monopolies, encourages extravagance and
wasteful management, and adds to the cost of living.
Similarly, the Treasury advised against excessive rates of surtax
and urged heavier rates of normal tax. Excessive surtaxes do not
produce revenue, but drive capital into the billions of exempt
securities; and the manufacture of additional amounts of exempt
securities is stimulated by the very existence of these high surtax
rates. This encourages wasteful or deferrible expenditure by States
and municipalities at a time when the world-wide shortage of
capital makes it urgently necessary that our capital resources be
conserved for productive business. Graduated surtaxes are necessary and desirable socially, but, particularly where there exist
billions of dollars of securities carrying exemption from these
taxes, excessive surtax rates defeat their own ends, and, in the
last analysis, the burden is shifted to the community as a whole
because of the consequent shortage of capital for useful and
necessary purposes.
The departure from the Treasury's views concerning surtaxes
and normal taxes has seriously impaired the market value of
Liberty bonds, which are exempt from the normal taxes, but,
within certain limitations, subject to surtaxes. It is within the
power of Congress, by reducing surtaxes and increasing normal
taxes, to lift Liberty bonds to practically any market level it
chooses.
In the last analysis, taxes can only be paid out of income, and
the best tax is a properly graduated income tax. When a tax is
imposed upon something else, or measured in some other way, the
taxpayer who has not current income available must shift the
burden to some one else. If possible he will shift it to the ultimate
consumer. Capital taxes, including retroactive war profits taxes,
and excessive surtaxes, excess profits taxes, and sales taxes — all
these must be shifted sooner or later — after much economic disorder in some cases — if possible to the consumer. Because the
whole income of the poor man is spent on things he consumes, and
the greater part of the income of the man of modest means, but a
negligible part of the income of the rich man, taxes of this sort are
unjust and unnecessarily burdensome.
There is an even greater evil in these indirect taxes, and that
lies in the fact that Congress is perpetually urged to make expenditures out of the public purse for the benefit of some class or group
in the community. A system of indirect taxation makes it possible

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263

to conceal from the great mass of the voters upon whom the burdens fall the fact that they are being mulcted in order to confer
special benefits upon a part of the community. The notion that
in some mysterious way the other fellow will pay, the profiteer or
the plutocrat — or perhaps the general public without knowing
it — leads to wasteful expenditure.
Thus, the beneficent effects of the Treasury's policy to pay as
we go one third of the war expenditures from taxes were limited
by the character of the taxes imposed. Inflation was avoided to
an important extent because the spending power of the individual
was curtailed and transferred to the Government without the
issue by the Government of credit instruments. The full value,
however, of these measures was not obtained because certain of
the taxes imposed tended to dissipate or penalize capital and
inflate prices.
Liberty loans. When the war began, the investment bankers of
the country had, it is said, sold bonds of all kinds to some four
hundred thousand persons. The Treasury grappled with the problem of loans boldly, relying upon the patriotism and capacity for
self-sacrifice of the American people; it devised a sound plan of
decentralized organization for mobilizing the financial resources
of the country; and it promptly drew into its headquarters staff
experts from the business and financial world, who gave to the
fine old Treasury organization the necessary leadership for solving
the problems of the war.
The Sixty-Fifth Congress convened on the 2d of April, 1917,
war was declared on the 6th, and the First Liberty Loan Act was
approved on the 24th. It was the third Act passed by the SixtyFifth Congress, being preceded only by two deficiency appropriation bills. Bankers differed in their opinions as to the amount of
bonds which could be sold, some believing that the amount might
run as high as $1,500,000,000, others that it must not exceed
$500,000,000. The Treasury demanded $2,000,000,000 and the
loan was oversubscribed fifty per cent. The Treasury disregarded
all accepted methods of bond-selling, paid no commissions, employed the Federal Reserve Banks as fiscal agents, and called upon
the leaders in the banking and business world in every community
to form Liberty Loan Committees and lead the movement. In
organization it pursued a policy of decentralization, vesting leadership in the Governor of the Federal Reserve Bank of each district
and in committees appointed by him.
The first Liberty loan not only filled the Treasury for the mo-

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ment, but It prepared the American people for the draft and made
them realize the war. It taught millions of them what a bond is
and how to save and pay for one.
From May, 1917, to May, 1919, the country was thrown by the
Treasury every six months into throes of a Liberty loan campaign
— five loan campaigns in two years. It is estimated that twenty
million people or more subscribed for some or all of the loans, and
that two million people took part as workers in one or all of the
campaigns. During these two years, covering the whole period of
our participation in the war and six months after the fighting
stopped, no one in America was ever allowed to forget that there
was a war, that he had a part in it, that that part included buying
Liberty bonds, and that to do so he must save money. In the
history of finance no device was ever evolved so effective for procuring saving as the Liberty loan campaigns. Every one was
always buying a Liberty bond, or trying to pay for one, or getting
ready to buy bonds of the next issue. The first, second, third,
fourth, and Victory loan campaigns stand out in my mind as the
most magnificent economic achievement of any people. For conception, direction, and detail the Treasury is entitled to credit
and must assume responsibility, but for the actual achievement
of one hundred million united people, inspired by the finest and
purest patriotism, no man or group of men could be so foolish a*
to imagine themselves responsible. Those Liberty loans were the
principal instrument in raising cash and getting the people to
save for the war.
In fixing the terms of the loans the Treasury had always one
major consideration in mind, and it perhaps accounts for some
divergence of opinion between the Treasury and some of the
bankers. It was not from a willful desire to make the sale of bonds
hard, but from a determination to finance the war so that it should
never be lost for financial reasons, that the Treasury sold long
bonds, and sold bonds at low rates of interest. There must never
come an end of the war in defeat because of lack of foresight, lack
of courage to take the first steps in a careful, thoughtful way,
looking to the possibility of a long war. In addition to the effect
of high rates of interest and short maturities, in depreciating
other securities and in causing apprehension as to the future, must
be kept in mind the psychological effect at home and abroad.
As to maturity, the experience of the Governments of the Allies
showed conclusively the grave embarrassment which must confront any Government in the course of a long war which failed to

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265

place long-time bonds. The theory that short bonds would keep
themselves at par has not been sustained in practice. Very much
the highest interest bases have been established by the short
bonds and notes of this and other Governments. The explanation
is simple. When bonds are sold, to the accompaniment of patriotic
appeal, to an amount in excess of the normal investment demand,
subscribers who have overbought sell first the bonds which they
can sell with the least loss of principal. They do not bother much
about the interest basis.
Given the necessity of selling bonds of long maturity, it was undesirable to burden the country with a high interest rate for a long
period of time with the moral certainty that very high interest
rates would drive the bonds to a premium long before maturity.
But above all, the Treasury must give ground slowly, remembering that the limit of the task was not in sight and that the credit
of the Government of the United States was the last financial
resource of the Allies. We were engaged in war, not conducting a
commercial operation. Indeed, there was no rate of interest which
would float several billion dollars of Liberty-bonds or notes as a
commercial operation.
But the bankers differed as much with each other as with the
Treasury, and I do not recall any instance when there was any
considerable opinion in favor of a rate in respect to any Liberty
issue more than one quarter of one per cent higher than the rate
actually adopted by the Treasury. A comparison of the present
opinions of some financiers and publicists with those expressed
during the war, and of record in the Treasury, would furnish
amusing reading.
When the Treasury fixed the terms of the Victory loan, I was
told by a banker, who is second to none as an expert in the distribution of securities, that they were unnecessarily attractive. A
leading newspaper criticized the issue bitterly on the same ground.
The attractiveness of the issue was proclaimed by the financiers
of the country with such unanimity that serious apprehension was
aroused lest the people at large should get the impression that the
Victory notes were so attractive that they might leave them safely
to the bankers and business men and that no subscriptions involving self-denial on their part were necessary to assure the success of the loan. The head of the Publicity Bureau of the Liberty
Loan Organization, after a tour of the country, told me that the
Treasury had jeopardized the success of the loan and destroyed
the patriotic appeal by offering notes upon such attractive terms.

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Federal Reserve authorities became very apprehensive lest the
banking institutions of the country should subscribe heavily for
their own account, and the Treasury and the Governors of the
Federal Reserve Banks were hard put to it to prevent their doing
so. Recently the four and three quarters per cent Victory notes
have been selling on an interest basis of about six and one quarter
per cent.
The rates of interest determined upon by the Treasury were at
the time fair rates for the Government to pay, having regard to
the exemptions from taxation which the bonds and notes carry
and their maturity. No one could foresee the probable course of
the market for the bonds and notes in the immediate future with
any degree of confidence. A year ago it was freely predicted by
financial authorities that Victory notes would shortly go to a
premium and that Liberty bonds would be selling at or near par
within a year or two.
Every one knows why these sanguine expectations have not
been realized. With the Armistice, and still more after the Victory
loan, our people underwent a great reaction. Those who had
bought Liberty bonds as a matter of patriotism, but not as investors, began to treat their bonds as so much spending money.
Those who had obeyed the injunction to borrow and buy Liberty
bonds ignored the complementary injunction to save and pay for
them. A fifty dollar bond in the hands of a patriot turned spendthrift was to him a fifty dollar bill to be spent Saturday night, or,
to her, a new hat, and if the fifty dollar bill turned out to be a
forty-five dollar bill, small matter. This was the first and most
immediate cause of the depreciation of Liberty bonds, affecting
them particularly. I shall mention later other conditions affecting
the general situation and them incidentally.
I doubt whether higher rates of interest on Liberty bonds, which
would have meant more taxes for the taxpayer and more spending
money for the bondholder, would have had any other effect than
to increase the inflation which has been rampant since the Victory
Loan. 1
1 'Some people argue that a low rate of interest makes people save more
because it is necessary for them to save more in order to acquire independence.
Others maintain that a high rate of interest induces people to save because
they can see the direct advantage of doing so. Both these arguments are
probably true in some cases. But, as a rule, people who have the instinct of
saving will save, within certain limits, whatever the rate of interest m a y be.
When the rate of interest is low, they will certainly not reduce their saving
because each hundred pounds that they put a w a y brings them in compara-

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267

Some critics say that the Treasury should have foreseen the
after-the-war reaction and, in order to protect bondholders from
the consequences of their own acts, issued the bonds and notes at
rates of interest which would insure a market price for them at or
near par even in the period of reaction. This is inflationist doctrine. The bonds and notes were never meant to be treated as
spending money. The Civil War gave us our fill of interestbearing currency. Depreciation in market price serves as a check
upon those who wish to spend their bonds.
There was no plan of financing the war or of financing the
period of readjustment which would protect the holders of the
Government's securities or the Government's credit against subsequent folly and waste.
War savings. The Liberty loan campaigns were supplemented
by the work of the War Savings Organization, which disseminated
sound economic doctrine and produced some cash.
Treasury certificates. By selling Treasury certificates in anticipation of each Liberty loan and of income and profits tax installments, the Treasury provided current funds to meet outgo, made
provision against the money strain which would have been involved if Liberty loan and tax installments had been paid on one
or several days without anticipatory borrowing, and, more important in economic effect, tapped the credit resources of the banks
and trust companies of the United States and mobilized them for
the uses of the Government, thus limiting commercial inflation
during the period when the Government was the principal buyer
and needed to have the credit resources of the country placed at
its disposal.
The Treasury issued as great and as frequent long loans as the
market could absorb — in fact, greater and more frequent than
the market could absorb. The point of saturation for long Government loans had been reached — and passed — with the fourth
Liberty loan. Investors require diversification of their investments. In a little over two years we created $25,300,000,000 of
debt (at the maximum). It was bad enough to ask the people to
absorb that amount of the obligations of one Government. It
would have been intolerable to insist upon their buying only bonds
of one character — that is, long-time bonds. After Armistice the
only way to get additional investment money into Government
tivcly little, and when the rate of interest is high, the attraction of the high
rate will also deter them from diminishing the amount t h a t they p u t aside.'

(Hartley Withers: War-Time Financial Problems, p. 7.)

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securities was to offer some diversification of terms, and this
was done by issuing Victory notes and thereafter by revolving
Treasury certificates.
The result of forcing out more long loans would have been the
perpetuation of the war debt. There is no greater influence toward
economy of expenditure and maintenance of adequate revenue
than the existence of short-dated debt. No Administration could
have resisted the pressure for reduction of taxes and increase of
expenditures if the war debt at its maximum of $25,300,000,000
had been funded, and it had subsequently appeared that taxes and
salvage would more than meet current expenditure. The time to
pare down war debt is immediately after the war.
During the war Treasury certificates were sold largely to taxpayers in anticipation of taxes. Since the Victory loan campaign,
efforts to procure distribution of both tax and loan certificates
among investors have been increased and marked success has attended them. The banking institutions of the country have been
asked to buy the certificates and sell them to their customers, and
their fine efforts to that end have been supplemented by mailing
circulars describing each issue of certificates to a selected list
of taxpayers and bondholders of the United States. The success of these efforts is evidenced by the fact that on April 16,
1920, of $2,693,808,500 loan and tax certificates outstanding only
$462,114,000 were pledged with Federal Reserve Banks as security
for loans and discounts. In view of the fact that the Reserve
Banks were maintaining a preferential rate for paper so secured,
it is safe to assume that the remaining $2,231,000,000 certificates
were in the hands of investors, including banks which were not
borrowers.
War loan deposits. Technically the Treasury's special depositary
system is one of the most interesting, as it is one of the most valuable, devices for financing the war. Our problems were different
from those of European countries. W e had to deal with some
thirty thousand independent banks and trust companies scattered
all over the United States. The device of 'payment by credit'
was worked out in connection with the first Liberty loan at a
Sunday conference in May, 1917, between representatives of the
Treasury, of the Federal Reserve Board, and of the New York
Liberty Loan Committee. Unchanged in principle from that date
to this, but simplified and perfected in the course of three years, it
served to weld together and mobilize for war the banking resources
of the United States, including in the Government's depositary

APPENDIX

269

banking system ten thousand of the thirty thousand banking
institutions of the country.
'Payment by credit' is a device for permitting the banking
institutions which purchase Government securities to defer payment for them until the Government actually needs the money.
It was adopted to prevent money stringency. It developed the
further advantage that in the difference between the rate borne
by the securities and the rate charged on the deposit, banks found
some compensation for their time, trouble, and the loss of deposits resulting from the sale of securities to investors. If, instead
of permitting the banks to make payment by credit, the Treasury
had required them to make payment in cash and had held the
cash, it is apparent that the operation simply could not have been
carried out. A very modest increase in the balances in Treasury
offices involves money strain. The attempt to make payment into
Treasury offices in cash on one day of the proceeds of the smallest
issue of Treasury certificates — not to mention a Liberty loan or
tax payment — would create a panic. Bankers and the public
have become so accustomed to the ease and smoothness with
which Treasury operations are conducted that they take them for
granted; yet two years ago the business and banking community
was in an uproar because of the fear of money strain in connection
with the first income and profits tax payment — a strain which
never occurred because the Treasury's arrangements to deal with
the situation were so complete.
'Payment by credit' was well calculated to limit inflation incidental to war borrowing. If, instead of permitting the banks
to make payment by credit, the Treasury had required them to
make payment in cash and had then redeposited the proceeds, to
the extent that it did not require to make immediate use of them,
it would have pursued a course more likely to create inflation.
If the Government were to draw into the Reserve Banks and the
Treasury offices cash in excess of its current requirements, the
first effect would be to make money very tight, and increase
money rates, with consequent interference with the Government's
financial operations. The second effect would be heavy discounts
by the Reserve Banks to meet the demands so artificially created.
Discounts so made would be for periods from one to ninety days.
Upon the redeposit of the proceeds of certificates depositary banks
would be put in possession of loanable funds.
I t was better to make one bite of the cherry and to avoid the
money strain and inflation which would have been inevitable if

270

APPENDIX

the money had been first drawn out of the banks and then
redeposited with them.
In order to sell Liberty bonds and Victory notes it was necessary
to give subscribers the option of making immediate payment in
full or of making payment in installments over a period of months.
This injected an element of great uncertainty into the Treasury's
calculations. It was quite impossible precisely to anticipate receipts under these circumstances. As a matter of fact, the privilege
of making payment in full on the opening day was largely availed
of, and the Government's balances were consequently swollen
until certificates of indebtedness issued in anticipation of the loan
matured or could be called for earlier redemption. This was done
as promptly as possible, but the operations were on so huge a scale
that it was a matter of two weeks after a payment was made before
the Treasury could obtain really reliable information as to the
amount of the payment.
The same principle (payment by credit) was employed in handling the great tax payment in June, 1918 (which was only about
half covered by anticipatory borrowing), although modified necessarily in detail. Checks received, drawn on qualified depositary
banks, were forwarded to them and the amount credited by them
in the War Loan Deposit account. This was done instead of collecting the checks and redepositing the proceeds.
A similar problem, though not of such great dimensions, presents itself in connection with the current routine business of the
Government under war and armistice conditions. The ideal thing
would be to have the Government's receipts precisely equal its
expenditures from day to day. That ideal, however, being impossible of attainment, the Treasury has consistently pursued the
policy of borrowing sufficiently in advance to meet its requirements, without direct borrowing from the Federal Reserve Banks.
The Treasury plans to sell certificates to an amount sufficient to
cover the estimated requirements for some three weeks in advance.
This is a small margin of safety in view of the impossibility of
estimating closely. It is physically impossible to issue Treasury
certificates more frequently than every two weeks, and it takes
ordinarily two weeks from the date of the offering of an issue of
Treasury certificates to the date of closing the issue for the ascertainment of its results. Sometimes it happens that the Treasury
miscalculates its cash requirements and borrows in excess of the
amount which turns out to be actually necessary at the time.
That happened last September. Sometimes it underestimates its

APPENDIX

271

requirements. That happened only last month. Indeed, it is very
much more difficult to gauge the current income and outgo now
than it was during the period of active warfare. Expenditures
increased at the rate of about $ 1 0 0 , 0 0 0 , 0 0 0 a month pretty regularly during the war. The physical limitations upon production
and transportation prevented expenditures increasing by leaps
and bounds — imposed a certain sobriety upon them. There has
been no similar brake upon the decrease since Armistice. In consequence of settlements and sales of accumulated stores, receipts
and expenditures have jumped about in such a way as to make
them utterly impossible of calculation. The Treasury has no
control over the expenditures or salvage operations of other
departments.
A depositary bank, when it makes a 'payment by credit,' does
not put itself in possession of loanable funds. What actually happens is that the bank becomes possessed of an asset, to wit,
Treasury certificates, and is charged with a liability, to wit, an
entry in the Government's War Loan Deposit account. It does
not have any money to lend or to spend until it sells the certificates
or borrows on them. Like most human devices, payment by credit
may be subject to abuse, as, for instance, by the application of the
proceeds of sale or borrowings on the certificates to other purposes
than meeting the Government's calls, but the Governors of the
Federal Reserve Banks, under the wise guidance of the Federal
Reserve Board, have been alert to prevent such abuse.
The view that bank deposits are potential currency 1 is inapplicable to the deposits created in the Government's War Loan
account. No checks are ever drawn upon or charged against the
Government's War Loan Deposit account with depositary banks.
Remittances are made by them to Reserve Banks on receipt of
letters or telegram.
The number and amount of United States Government disbursing officers' checks outstanding or in process of collection at
any given moment of time is not affected by the amount of the
Government's deposits in depositary banks. The Treasury has no
control over the drawing of these checks and the credit of the
« ' A s many people may be puzzled b y the assertion that the Government
increases the currency b y borrowing from banks, it is better t o explain the
process briefly here, though in another book I have already shown how loans
made b y banks produce manufactured money by adding to the banks* deposits,

which embody the right of their customers to draw the cheques which are the chief
form of currency that we now use.' (Hartley Withers: Our Money and the State,
p. 61.)

272

APPENDIX

Government of the United States has at all times been sufficient
to float them regardless of its bank balances. These checks have
involved an important expansion of currency. The Treasurer of
the United States handled as many as three hundred thousand
checks in one day during the war. He is now handling something
like eighty thousand checks a day. This is not potential currency,
but real currency. We have struggled to keep enough money in
the bank to meet these checks as they come in, but the checks
have been floated, not on the faith of our bank deposits, but on
the general credit of the United States Government.
Collateral agencies. During the war many collateral agencies
were created to conserve and mobilize the resources of the country
and limit the inflation of prices and the expansion of currency and
credit. Some were initiated by, others were quite independent of,
though acting in cooperation with, the Treasury. The Capital
Issues Committee discouraged issues for non-essential purposes.
The Sub-Committee on Money of the New York Liberty Loan
Committee fixed the price of call money and rationed credit to the
stock market. The Division of Foreign Exchange of the Federal
Reserve Board licensed imports and exports of gold, silver, and
capital. The War Trade Board licensed imports and exports of
commodities. The War Industries Board fixed prices and priorities for commodities. The Shipping Board, the Food and Fuel
Administrations, and the Railroad Administration, were all parts
of a comprehensive plan for mobilizing the resources of the
country.
It was impossible to rely upon prices and rates to prevent inflation at a time when the first duty was the winning of the war.
When the Government requires the services, the wealth, the productive capacity of all the people for the purposes of a great war,
it must practically go through a process of condemnation and pay
a price determined by properly designated functionaries. The
law of supply and demand cannot be allowed to function in wartimes so as to permit some of the people to extort from all of the
people, represented by their Government waging a righteous war,
prices, whether for commodities or credit, based upon the fact
that the supply is very limited and the demand for all practical
purposes unlimited.
When the fighting was over, most of these controls were broken
down one by one as rapidly as seemed possible, with a view to
restoring natural conditions.

APPENDIX

273

III
INFLATION

Before the war. Before we entered the war, we had what, for
lack of a better short description, may be called, though inaccurately, gold inflation.
During the war. Currency expansion, as distinguished from
credit expansion, has been very moderate in this country. 1 The
Treasury has not manufactured currency at all. It has not manufactured credit directly with the banks of issue. It has limited the
expansion of credit as far as practicable. The expansion of currency and credit which has taken place has been the result, not of
Treasury methods of financing the war, but of the unlimited buying power of the Government of the United States when supported
by the devotion of the people. Government expenditures and
commitments were the cause of price inflation, rather than the
methods which the Treasury employed to meet those expenditures. Expenditures and commitments always outran the provision made for them by the Treasury, whether in cash or credit.
Government contracts covered future production for months or
years ahead; but the Treasury never during the whole period of
the war had provided money or bank credit sufficient to meet its
requirements for more than a few weeks ahead. Prices rose in
response to the effective demand of the United States Government
sustained by the general credit which its resources and taxing
power and the devotion of one hundred million people gave it.
They were influenced by two conflicting forces, the desire of the
Government to stimulate production and the desire of the Government to prevent profiteering. The expansion of currency and bank
credit, which followed the Government's expenditures and commitments, sustained and distributed the price inflation. In much
of the discussion of currency and credit inflation and their relation
to price inflation, insufficient attention has been given to the
practical difference between the operations of private persons and
companies, on the one hand, and a government in war-time, on the
other. A government in war-time may, as a private concern cannot, upset the balance between the supply and demand for commodities without first obtaining currency or bank credit.
1 L e t t e r of Governor Harding t o the Chairman of the Banking and Currency
Committee, United States Senate, dated A u g u s t 8, 1919; Federal Reserve

Bulletin for August, 1919.

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APPENDIX

The cost of living here has increased less than in any of the belligerent countries (including Japan 1 which assumed no appreciable
part of the financial burden of the war) or in the neutral countries
of Europe.2 This was in no small measure due to Treasury methods
of financing the war.
Japan has a bank rate above eight per cent. Her inflation is a gold inflation.
'The cost of living has advanced threefold more than before the war. . . .
The gold holdings of Japan have now reached the unprecedented total of
1,899,000,000 yen, of which 1,061,000,000 yen belongs to the Government and
838,000,000 yen to the Bank of Japan. Of this large sum only 545,000,000 yen
is in Japan, 1,354,000,000 yen being invested or deposited in England and the
United States.' (.Economist, January 3, 1920, pp. 19-20.)
'The abnormal inflation of currency not only keeps up prices, but is lending
impetus to speculative fever, which now knows no bounds. Investments in
new enterprises between January and October this year amounted to no less
than 2,859,000,000 yen, or more than for the whole of last year, when investments totaled 2,676,000,000 yen; and the expansion of capital is now such that
the authorities can no longer regard the situation as wholesome. Banks have
been officially instructed to restrict loans, and to preach economy and caution,
but speculation continues rife. It is frequently reported that officials are interested in speculation, and that that is one reason why no control is exercised
over note inflation. The same thing went on after the war with Russia, but it
was followed by panic and numerous business failures, leading to prolonged
business depression.
'The effect on industry and society is far-reaching and disaffecting. Many
enterprises, such as weaving and shipping, continue to pay enormous dividends,
though most of the mushroom enterprises can hardly pay their way. Industry
is marked by increasing unrest, with frequent strikes for higher wages and
shorter hours. Of late the greater part of this unrest has been in shipyards and
mines. At one of the copper mines recently the troops had to be called out to
put down violence when six thousand miners began to take matters into their
own hands. This is the first time in the industrial history of Japan that troops
have had to be called out to deal with strikes. The cotton mills, which are
paying such big dividends, being manned mainly by women, have labor in their
own hands, and so far they experience no labor unrest. In most cases mill work,
so far as women go, is little less than a form of slavery, as the girls are not free
to leave when they wish, and seldom get away until invalided out. On the
other hand, the luxury and extravagance of the profiteers and the newly rich
tend to demoralize society, and cause revulsion of the poor against the rich.
The most prosperous concerns in cities are the restaurants, houses of questionable pleasure, and the dealers in jewelry and expensive ornaments. The
wealthy are buying up whole lots of houses, and pulling them down to erect
grand mansions with spacious gardens for themselves, to the great resentment
of the poor, who cannot find dwelling accommodation. A great part of big
cities like Tokyo is taken up with these gardens of the privileged and the
wealthy, while space for common dwellings is at a premium, the poor being
driven into the slums. This leads to social disaffection and encourages
Socialism.' (Economist, February 7,1920, p. 263.)
x

a British White Paper (Cmd. 434, 1919), Statements of Production,
Movements, and Currency Expansion, in certain countries.

Price

APPENDIX

275

Since Armistice Day. Since Armistice Day the world has not
only failed to make progress toward the restoration of healthy economic life, but in fact has receded farther from a sound position.
We have failed to restore peace and peace conditions in Europe,
and in America unsound economic ideas have in many instances
prevailed, and the effort is being made, first here, then there, to
improve the condition of some of the people at the expense of all
of the people.
Inflation here since Armistice Day is attributable to three principal causes: (a) world inflation and the internationalization of
prices; (b) heavy expenditures by our Government and Government Interference with business; (c) reaction and waste among
our own people.
(a) For five years the world has been consuming more than
it produced, living upon its capital, and the Governments of
the world have been issuing evidences of indebtedness to represent the wealth destroyed. This has caused world inflation of
prices.
The inflation which has taken place here since Armistice seems
attributable in no small degree to the inflation of the Continental
European currencies operating upon the optimism of the American
people.
People have been led to believe that there is a mystery about
foreign exchange, and that in some way America is at fault for not
protecting the European exchanges from depreciation. In wartime the measures taken by the belligerent nations in respect to
international trade and finance were more or less complete. Embargoes on the export or import of gold were accompanied by
embargoes on the export and import of commodities, by domestic
price-fixing, by fixing the price of money, by control over capital
issues, by control over foreign exchange, and by Government
loans in foreign countries. These controls probably should not
have been removed if the gold embargoes were to be retained; for
the gold held in Europe has been made a basis for further inflation
there and the ever-expanding European currencies have been sold
for dollars to be used to purchase things not needed as well as
those needed. The depreciated price at which European currencies
are taken in consequence of these methods means for them a
rapidly increasing foreign debt which will make the ultimate
resumption of a gold basis more difficult.
Our own prices are being inflated and our own banking and
currency position expanded by the feverish speculation in Euro-

276

APPENDIX

pean currencies, credits, and securities, including those of countries
with which we are still technically in a state of war.
In the present position of the international balances and of the
foreign exchange and because of gold embargoes, Federal Reserve
Bank rates cannot function internationally, and will operate
solely upon the domestic situation.
(b) Government expenditure is at the root of inflation all over
the world. Wise methods of meeting it may mitigate the inflation,
but they cannot prevent it.
The Government of the United States has been slow to realize
upon its salvageable war assets and to cut down expenditures
growing out of the war.
While Congress deliberated, the Government held control of the
railroad systems of the country for a year and a quarter after
fighting stopped, and furnished transportation at less than cost.
Then Congress ordered the railroads returned to their owners with
a new expenditure of $1,000,000,000 by the Government for their
account and the deferment for years of $1,000,000,000 the railroads owe the Government. 1
The interference of Government in railroad affairs, begun many
years before we entered the war, has subjected business and industry to the gravest hardships for lack of adequate transportation
and has involved a great additional strain upon our credit facilities. You can fix the price of capital, but you cannot make it work
for that price. You can fix the price of labor, but you cannot make
it work for that price. B y holding down rates for the shipper, the
railroads have been kept so poor that neither capital nor labor
will work for them. The shipper has cheap rates, but he cannot
get transportation. If the railroads had been allowed to charge
reasonable rates, the Government would have lost nothing in their
operation, and it would not have been obliged to invest any considerable amount of money in them, for, given reasonable rates,
they could have obtained capital through private channels.
1 The actual cash expenditures of the Railroad Administration for the six
months ending June 30, 1918, were $120,000,000; for the fiscal year ending
June 30, 1919, were $359>ooo,ooo; and from July 1st to March 31, 1920, were
$776,000,000, a total of $1,255,000,000. The recent legislation and that now
pending make specific appropriations to the amount of $800,000,000 and
indefinite appropriations (including a gift to short-line railroads which were
not taken over by the Government) which will involve expenditures to the
estimated amount of $300,000,000. It is safe to say that the Government's
expenditures and losses on account of the railroads and its investments in the
railroads will shortly amount to $2,350,000,000.

APPENDIX

277

The United States Shipping Board expended in the fiscal year
1917 $14,000,000; in the fiscal year 1918, $771,000,000; in the
fiscal year 1919, $1,820,000,000; and in the fiscal year 1920 (to
March 31, 1920), $433,000,000. The actual cash expenditures
since Armistice Day amounted to approximately $1,600,000,000,
while Congress deliberated as to our shipping policy. Notwithstanding the fact that it has been engaged in commercial shipping
at a time when it is exceptionally profitable, the Shipping Board
has made as yet no net return to the Treasury, its expenditures
still exceeding its receipts.
Five billion dollars spent or invested in railroads and ships, the
larger part of it after the fighting was over! Why are the railroads
being run to-day at a loss at the Government's expense? To what
end are we moving in our shipping policy?
Instead of telling the people frankly and boldly that prices are
high because they are wasting, we fix prices and prosecute profiteers in order that the people may buy more and pay less.
Instead of telling the people that Liberty bonds have depreciated because they are treating their Liberty bonds as spending
money, we clamor that the rate of interest upon the bonds is too
low and urge a bonus to bondholders disguised as a refunding
operation.
Instead of telling the young men who were drafted to fight the
war, and who came back better and stronger and more fit to
fight their own battles than they ever were before, to go to work
and save their money and look out for themselves as any selfrespecting man should, we listen complacently to their organized demands for a bonus, euphemistically called 'adjusted compensation.'
Penny-wise and pound-foolish, we leave the executive departments underpaid, and undermanned so far as regards supervisory
employees. While Congress struggles to effect economies at the
expense of efficient administration of the Government, it takes
time to add $65,000,000 to Civil War pensions.
From November, 1918, to March, 1921, nearly two years and
a half, the first two years and a half after fighting stopped and
probably the most critical two years and a half in the world's history, the Government of the United States has been deadlocked
against itself, a Government by obstruction. It is at least questionable whether the progress of reaction would have been so complete or so disastrous if our institutions had not given this country,
during the most critical period of the world's history, a govern*

278

APPENDIX

ment divided against itself, and therefore incapable of effective
leadership in national or international affairs.
(c) A t this most critical moment in the history of Europe, when
our own financial and economic stake in Europe's affairs is so great
that disaster there could mean only disaster here, many of our own
people have turned gamblers and wasters. For plain living and
high thinking we have substituted wasting and bickering. We enjoy high living while we grumble at the high cost of living — of
silk stockings and shirts for the poor, of automobiles for men of
small means, of palaces for the profiteer and the plutocrat.
Unhealthily stimulated, commercial business appears to prosper
and commercial expansion proceeds unchecked. From March,
1919, to March, 1920, though holdings of, and loans upon, Government war securities of all reporting member banks of the Federal
Reserve System (about eight hundred member banks in leading
cities believed to control about forty per cent of the commercial
bank deposits of the country) decreased from $4,000,000,000 to
something over $2,000,000,000, their other loans and investments
increased from $10,000,000,000 to over $14,000,000,000. For every
dollar of credit released by the Government, two dollars were extorted by business. From May 2,1919, to March 19,1920, though
the Reserve Banks reduced their loans and discounts upon Government war securities from $1,800,000,000 to $1,400,000,000, they
increased their other loans and discounts from $350,000,000 to
$1,400,000, ooo.1
High rates of interest and discount, limitations of currency and
credit, these and all other traditional methods should be used
courageously; but they will not suffice under the abnormal world
conditions now prevailing.
* On the other hand, though Federal Reserve Banks* loans and discounts
secured b y Government war obligations rose from about $250,000,000 a t the
end of 1917 to a high of over $1,800,000,000 in M a y , 1919, their other loans
and investments never during the war rose above about $850,000,000 (in
November, 1918) and were down as low as about $350,000,000 in M a y , 1919.
All reporting member banks' holdings of, and loans upon, United States war
securities increased from a low of about $1,250,000,000 in December, 1917, to
a high of about $4,000,000,000 in M a y , 1919. Their other loans and investments increased from about $9,500,000,000 in December, 1917, to a high
of about $10,750,000,000 in August, 1918, and contracted t o less than
$10,000,000,000 in March, 1919. A smaller number of banks (about 630
controlling about thirty-five per cent of the commercial b a n k deposits of the
country) were reporting in December, 1917.

APPENDIX

294

IV
REMEDIES

We must get together, stop bickering, and face the critical situation which confronts the world as we should a foreign war. We
must recognize our responsibility to and our stake in Europe, and
in one way or another lend her our moral support and leadership
and economic assistance, but without Government loans. We
must cut Government expenditure to the quick, abjure bonuses,
and realize promptly upon all salable war assets, including ships,
applying the proceeds to the war debt. We must have a national
budget with teeth in it, which means, among other things, that
no appropriation shall be made by Congress without a critical
examination and report on ways and means by the Treasury,
representing the financial end of the executive branch of the Government, and the Ways and Means Committee of the House and
the Finance Committee of the Senate, representing the financial
end of the legislative branch. We must promptly revise our tax
laws to make them more equitable and less burdensome without
reducing the revenue. We must restore the railroads to a selfsupporting basis by establishing rates which will insure a return
for capital and labor commensurate with the return to be had
elsewhere at a time when there is a world-wide shortage of both.
And, above all, we must work and save. We must produce more,
but, more important still, we must consume less.

A P P E N D I X

MEMORANDUM
ISSUED BY THE FEDERAL RESERVE BOARD RELATING TO THE OPERATIONS
OF THE CALL-MONEY MARKET IN NEW YORK DURING
THE YEARS 1 9 1 9 AND 1920

THE principal supplies of money for collateral call loans are loanable funds of banks and bankers located both in and outside of
New York City, including foreign banks and agencies of foreign
banks; and similarly the loanable funds of firms, individuals, and
corporations seeking temporary investment. The proportion of
the whole fund loaned by these several interests varies seasonally
and in accordance with the attractiveness of other opportunities
for investment, either locally or in other markets. . . .
In the matter of the supply or attraction of funds to the callmoney market, there is generally a definite and well-understood
obligation on the part of banks to accommodate first their own
commercial clients, so that it is only the excess of loanable funds
which they may have from time to time that is available for the
collateral call-money market or for the purchase of commercial
paper in the open market. This excess of loanable funds available
for employment in the securities market varies, therefore, according to the commercial requirements of the country. It has long
been recognized that for assurance of a sufficient amount of money
to finance the volume of business in securities, reliance cannot be
placed on a rate of interest limited to the rates which obtain or
are permitted in commercial transactions whose prior claim on
banking accommodation is universally conceded. . . .
Prior to the institution of the Federal Reserve System, bankers,
especially in reserve centers, were accustomed to look upon call
loans as their principal secondary reserve on the theory that, inasmuch as those loans were payable upon demand, funds so invested
could always be promptly obtained on short notice to meet withdrawals of deposits or for other use. In these circumstances there
was ordinarily available for collateral call loans a supply of funds
sufficient for ordinary market requirements and at low rates, although at times the rates rose to high levels as the supply of funds
diminished or the demands increased.

APPENDIX

281

This attitude of the banks toward call loans as their chief secondary reserves has been greatly modified by two causes. The
first was the closing of the stock exchanges at the outbreak of the
European war in the summer of 1914, when it became practically
impossible to realize on call loans secured by investment securities,
which became, therefore,' frozen loans.' This resulted in a more or
less permanent prejudice against dependence upon call loans as
secondary reserves. The second and more important factor was
the creation of the Federal Reserve System. Under the terms of
the Federal Reserve Act provision is made for the rediscount of
commercial paper, but the rediscount of loans for the purpose of
carrying investment securities, other than United States Government obligations, is excluded. Consequently, in order to maintain
maximum liquidity, with suitable provision for secondary reserves
that can be immediately availed of, banks, including foreign agency
banks, now invest a greater proportion of their resources in assets
that can be realized upon at the Federal Reserve Bank. Another
changed factor in the present situation grows out of the fact that
the war and post-war conditions have rendered unavailable supplies of money which formerly came from foreign banks. Since the
summer of 1914, while total banking resources have largely increased, the volume of bank money available to the securities
market at low or normal rates has not increased proportionately,
but, on the contrary, has probably decreased. All of these circumstances explain in some measure the increased rates which have
often been required during the past year for money loaned in the
securities market.
Changed conditions are also present in the factors governing the
demand for money. Prior to the Armistice, agencies of Government were employed to restrict the issue of new securities for purposes other than those which were deemed essential for carrying
on the war. A t the same time, as the Treasury undertook to sell
large amounts of certificates of indebtedness and Liberty bonds
bearing low rates of interest, the question arose as to whether the
competition of the general investment markets might not prejudice
the success of the Government issues. In these circumstances, with
full understanding on the part of the Treasury Department, the
officers and members of the New York Stock Exchange undertook to limit transactions which would involve the increased use
of money for other purposes in consideration of which the principal banks of New York City endeavored to provide a stable
amount of money for the requirements of the security market*

282

APPENDIX

After the Armistice, these restrictions were removed and ordinary market forces reasserted themselves. The issuance of new
securities was resumed in unprecedented volume and consumed a
vast amount of capital and credit when bank credit was already
expanded by the necessity of carrying large amounts of Government securities which the investment market was not prepared to
absorb. Thus arose a further cause for the increased cost at times
of accommodation on collateral call loans. . . .
The volume of money outstanding on call is more or less constant, fluctuating only over relatively long periods, and the amount
which is loaned from day to day is but a small proportion of this
constant volume. The constant volume of outstanding call loans
bears a rate of interest which is determined daily and is known as
the 'renewal rate.' The daily borrowings, either in replacement of
loans called for payment or representing new money borrowed, are
made at rates which may or may not be the same as the renewal
rate and which frequently vary during the same day. . . .
A t a time of such heavy credit requirements as the present the
greater volume of borrowings, not only in the aggregate, but in the
day-to-day demands, naturally often results in high rates for the
money loaned. Indeed, so reluctant have the bankers been during
the past few months to supply the large demand for credit based
on securities that the occasional loaning of relatively small amounts
of money at very high rates often represents a desire, not to secure
the high rate quoted, but to prevent the rate from going very much
higher with the consequent demoralization which might result.
The operation of the law of supply and demand is equally effective in determining the rate for commercial loans and all other
borrowings. In fact, rates for commercial loans and rates for collateral call loans have a common root in the law of supply and
demand, and the conditions which affect one, in the main affect the
other, although not in like degree, as is demonstrated by the far
wider fluctuation of call rates and the higher points to which they
go. The rates for call money do not determine, and have not exerted an important influence on, the rates for commercial borrowings. It is the universal custom of the banks to satisfy first the
commercial needs of their customers. They feel an obligation to
customers, but none to those who borrow in the open market on
securities. Besides, as the resources of the banks mainly come
from the commercial customers, their own self-interest compels a
preference in favor of their commercial borrowers, since failure to
grant them reasonable accommodation would induce them to

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283

withdraw their deposits and so reduce the ability of the banks
to do business. . . .
An attempt to control the rates for call loans by the establishment of an arbitrary limit at a low level, without the ability to
modify the causes above enumerated which operate to increase
rates, would be distinctly hazardous, for the reason that up to the
point where the arbitrary rate would limit the supply of new
money, speculation and expansion might proceed unchecked and
the natural elements of correction or regulation would not obtain.
In other words, high rates act as a deterrent to overspeculation
and undue expansion of credit. On the other hand, should the
supply of money available to a fixed maximum rate become exhausted, liquidation might suddenly be forced because the demands
for additional accommodation for the consummation of commitments already made could not be met. The effect of such liquidation would be to embarrass not only investors and dealers in
securities, but frequently might affect dealers and merchants in
commodities as well. As an example of the latter, the case might
be cited of a commitment to purchase a round amount of cotton
on a certain day. Many of the houses on the cotton exchange are
also members of the stock exchange and frequently borrow very
largely on the stock exchange against investment securities to provide funds for settling their transactions in cotton. If, therefore,
when an important cotton settlement is imminent, borrowings on
securities could not be availed of, the cotton transaction could not
be consummated and a drastic liquidation through sale either of
securities or of the cotton might be required to avoid default.
Similar consequences might obtain in the cases of transactions by
members of other commodity exchanges who are also members of
the stock exchange and have recourse to the call-money market.

A P P E N D I X

A D D R E S S O F W . P. G . H A R D I N G
GOVERNOR OF THE FEDERAL RESERVE BOARD, BEFORE THE ANNUAL
CONVENTION OF THE AMERICAN FARM BUREAU FEDERATION AT
INDIANAPOLIS, DECEMBER 7, 1920

THE impression exists in the minds of many that the Federal Reserve System has adopted a policy of radical deflation and that the
farming interests have been the chief sufferers from this policy.
No such policy has ever been undertaken, and as a matter of fact
there has been during the past year an increase, and not a reduction, in the net volume of bank credit and currency. There has
been no policy looking toward a broad curtailment or deflation of
credit, but efforts have been made to correct abuses and to bring
about moderation and better judgment in the use of credits which
a year ago were being diverted into all kinds of speculative and
non-productive channels. Efforts have been made also to conserve
the resources and credit power of the member banks and of the
Federal Reserve Banks, in order that they might better respond to
the seasonal needs occasioned by the harvesting of the crops. . . .
On September 19, 1919, the total earning assets of all Federal
Reserve Banks were in round amounts $2,350,000,000, while on
January 27,1920, the total was nearly $3,300,000,000, an increase
of almost $1,000,000,000, or nearly fifty per cent within a period of
four months. There is no banking system strong enough to sustain
itself very long at so rapid a rate of expansion of credit, and while
no drastic deflation was attempted, measures were taken to regulate the credit expansion. Discount rates were advanced, and this
action was followed by a moderate amount of liquidation, the
earning assets of the Federal Reserve Banks being reduced in the
course of sixty days by about $100,000,000. B y the middle of May,
however, the total loans and investments of the Federal Reserve
Banks approached again their previous high level, and the Board
called the attention of the banks and the public to the importance
of marketing the crops of 1919 before those of 1920 were harvested,
and of reducing borrowings at the Federal Reserve Banks until the
seasonal requirements of the autumn should develop. . . .
On July 23d, just before the crop-moving demands began to be

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285

felt, the total loans and investments of the Federal Reserve Banks
had declined from the high point about $150,000,000, and stood
around $3,150,000,000. Since that date they have advanced
steadily, with occasional slight recessions, until December 3d,
when the total amount reached $3,333,792,000, as compared with
$2,933,082,000 on December 5, 1919. Federal Reserve notes in
circulation on December 3, 1920, amounted to $3,312,039,000, as
against $2,881,359,000, on December 5,1919. You will see, therefore, that as far as the Federal Reserve Banks are concerned, no
contraction of credit or currency has been had during the past
twelve months, but, on the other hand, there has been an increase
in Federal Reserve Bank credit of $400,000,000 and in currency of
$430,000,000.
You are, however, most interested in knowing to what extent
credit has been available for agricultural purposes. It will be impossible to give precise information on this point until the reports
recently called for by the Comptroller of the Currency from national banks have been tabulated and the digest made public. The
Comptroller has asked each national bank for a statement both of
direct and indirect loans to farmers. The Federal Reserve Banks
in agricultural districts have been rediscounting heavily for several
months past with Federal Reserve Banks in the industrial districts.
Three banks, the Federal Reserve Banks of Boston, Philadelphia,
and Cleveland, have advanced at times as much as $250,000,000 to
seven other Federal Reserve Banks, whose districts are largely agricultural. The total amount of bills discounted by Federal Reserve
Banks in distinctly agricultural districts is about $1,500,000,000.
Early in the season Federal Reserve Banks in these districts were
asked to estimate the proportion of their total loans directly in
support of the agricultural and live-stock interests. The estimates
for September 3, 1920, were as follows: Federal Reserve Bank of
Richmond, 27.3 per cent; Atlanta, 23.7 per cent; Chicago, 48.3 per
cent; St. Louis, 22 per cent; Minneapolis, 65.6 per cent; Kansas
City, 59.8 per cent; Dallas, 50 per cent; and San Francisco, 58.7
per cent. In some of these banks the proportion of agricultural
paper held is much greater now than on September 3d. It is certain that there has been no curtailment of agricultural credits by
the Federal Reserve Banks, and while, as I have stated, exact
figures of member bank transactions are not yet available, it seems
reasonable to assume that there has been a very large volume of
credit extended by member and non-member banks in support of
the agricultural interests.. • .

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I am a firm believer in the policy of gradual and orderly methods
of marketing our great agricultural staples. All will agree that
agriculture is a basic and fundamental industry, for upon its fruits
depend the lives of those engaged in all other industries. The farmer is a great consumer of manufactured products, and anything
that affects his buying power is soon reflected in the business of the
merchant and manufacturer. Conversely, a depression in manufacturing and other lines of business is reflected in the reduced
demand for farm products. I cannot conceive of any one questioning the fact that farming as a business must be remunerative or
production will languish. It is highly desirable that the efforts of
the farmer be supported and stimulated in every proper way, and
that he be aided in preserving the full measure of his harvests, and
that he be given an opportunity of marketing his products on
terms sufficiently profitable to warrant his staying in the business
of farming. It is well to remember, however, that, in other lines of
business, profits are not always continuous. This is also true with
respect to farm industry. The farmer, however, as a rule, has only
one turnover a year, while those engaged in other enterprises have
the advantage of more frequent turnovers. Great staple crops, the
production of which extends over a period of several months, must
meet the requirements of consumption until the next season's crops
are produced. In order to prevent possibility of shortage, it is desirable that there be a moderate surplus held over from one crop
pending the marketing of the next. It is important, however, that
the surplus held over be not too large or unwieldy, for the marketing of a crop and a half, when the ordinary requirements call for
only one crop, means a loss unless an unforeseen abnormal demand
should develop. The gradual and orderly marketing of great staple
crops is a matter of importance both to producer and consumer.
The dumping upon the market within a short period of time of a
large part of a crop, the consumption of which extends throughout
the year, means not only loss to producers, often to those who can
least afford it, but involves also a great strain upon our transportation facilities and upon the banks in providing the funds necessary
for large purchases in advance of actual requirements for consumption. The dumping of farm products promotes speculation
and often results in higher prices to the ultimate consumer.
I take this occasion to say that the members of the Federal Reserve Board have a keen sympathy for the farmers in their present
predicament and are desirous of doing everything they can legitimately and properly to help them. It is impossible, however, for

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287

any banking system to provide funds for withholding all staple
crops entirely from the market for any length of time. The volume
of our great staple crops is so large and their value so great that
any efforts to valorize them by means of bank credits would inevitably result in disaster to the community in general and to the
farmer especially. Orderly marketing means marketing; it means
steady sales and steady purchases. Gradual sales make possible
the gradual liquidation of debts, and as the maturity of so many
obligations synchronizes with the marketing of staple crops, it is
probably no exaggeration to say the liquidation of a million dollars
of farmers' indebtedness means the liquidation of four or five million dollars of general debts. Your convention will no doubt
consider means of preventing in future a repetition of present
conditions. I assume that you will consider cooperative marketing,
greater diversification of crops, and the maturing of farmers' obligations over periods extending from October to March. I suggest
also that you do not overlook the importance of minor crops as a
means of giving the farmer an additional turnover. I assume also
that you will consider the processes of marketing and ascertain
why in many cases commodities which are sold by the farmer at
less than the cost of production are sold to the ultimate consumer
at high prices. . . .
I am aware also that there is much apprehension on the part of
farmers as to their current indebtedness. The present crops were
produced at abnormally high costs, and many farmers, no doubt,
have stuff on hand for which there is now no ready market, or
which cannot be sold for enough to liquidate their debts. Such a
situation calls for the closest cooperation between the farmer and
the merchant and banker with whom he deals. I have no authority
to speak for the banking business in general, but I do know that as
a rule the banker realizes that the welfare of his own institution
depends upon the prosperity of the community in which his bank
is located. The average banker is averse to foreclosures or other
drastic methods of liquidating indebtedness, except as a last resort,
and my opinion is that if the farmer will go to his banker or merchant creditor and make a frank statement of his condition, giving
additional security if available and if required, and agree to make
gradual sales of his produce as the market develops, applying the
proceeds on his indebtedness, he will be able to make arrangements
for present pressing needs and for requirements for another season.
Many farmers have had this experience in years when there has
been a crop failure. This is a year of physical plenty and the

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APPENDIX

farmers* troubles arise from price derangements. The decline in
prices of all agricultural staples has been very marked, and some
may not be salable in the present circumstances at any price.
Such commodities, of course, must be carried over for account of
some one, and they had better be carried for the account of the
producer. Other staples can be sold at a price, and gradual sales of
these staples will, in my opinion, stabilize the entire situation. The
resumption of activity on the part of woolen mills and cotton mills
will revive the demand for wool and cotton, and continued employment of labor will stimulate the demand for foodstuffs and all
other farm products. . . .
While it is true that the greater volume of our staple crops and
the larger part of our manufactured goods are consumed at home,
the maintenance of our export trade is of the greatest importance
to farmers and manufacturers, for ability to dispose of surplus
products abroad is a potent factor in the determination of the price
at which goods are sold at home. The great need of the world today is peace and revival of the industries of peace, the reestablishment of trade relations between the nations, and in my judgment
the surest means of relieving present conditions permanently lies
in the development of our foreign trade upon a basis of assured
permanency.

A P P E N D I X

LETTER
O F THE GOVERNOR OF THE FEDERAL RESERVE BOARD TO
SENATOR REED SMOOT, JULY I I , 1921
M Y DEAR S E N A T O R :

Some of the charges which have been made against the Federal
Reserve Board and against its members personally, which have
appeared in certain papers and in some public speeches, do not
appear to me to be susceptible to argumentative reply. They are
made without giving any facts to support them and show either
total ignorance of the subject on the part of the proponents or else
wanton disregard of actual facts.
Owing to the exigencies of Treasury financing, the war-time Federal Reserve rate of four per cent was not advanced until November,
1919, although after the first of July, 1919, there was a rapid advance in the market rate for money and the best grades of commercial paper sold in the open market at from seven per cent to
eight per cent. The customers of the member banks were willing
to pay full rates for accommodation, and urged upon the banks as
a reason for easy credits that they were willing to pay high rates,
and the banks in turn could rediscount with the Federal Reserve
Banks at a very substantial profit. On or about September 15,
1919, the total amount of invested assets of the Federal Reserve
Banks, including bills rediscounted for member banks, acceptances
bought in the open market, and Government obligations held,
amounted to about $2,350,000,000. An expansion of bank credits
was going on all the time at a rate which has never been equaled in
the history of the country and far in excess of any war-time
expansion. Federal Reserve Bank rates were advanced to four and
three quarters per cent early in December, 1919, but the advance
was negligible and had no effect. The latter part of January, 1920,
rates were advanced to six per cent. On January 23, 1920, the
total rediscounts and earning assets of the Federal Reserve Banks
amounted to about $3,030,000,000, an increase since September
19, 1919, of $680,000,000. The rate of expansion for that period
was nearly thirty per cent. A t the same time the reserves of the
Federal Reserve Banks had declined to about $2,090,000,000, of
which only about $2,030,000,000 were gold reserves. The pyramiding of credits was proceeding at an alarming degree, and it was

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290

evident that, if expansion should continue to proceed at such a
rapid rate, it would be merely a question of time until the credit
structure of the country would explode.
It should be noted that even after the rates were increased the
expansion of loans and currency continued in a more moderate degree. On January 16,1920, the total loans and earning assets of the
Federal Reserve Banks amounted to about $3,000,000,000. These
increased gradually and steadily until November 5th, when they
amounted to $3,400,000,000. On January 16, 1920, the volume of
Federal Reserve notes outstanding was about $2,800,000,000, and
this note issue also increased steadily until it reached the peak on
December 24, 1920, of $3,400,000,000. You will remember that
the great price reactions which took place all occurred before
November 5th or December 24th. Wholesale prices reached their
peak about the middle of May, 1920, being at that time about 272
as against 100 for the year 1913. After the middle of May, wholesale prices declined steadily, although the loans of the Federal
Reserve Banks and Federal Reserve note issues increased until
November 5 th and December 24th, respectively.
Since the close of the year 1920, there has been a marked reduction in the loans and note issues of the Federal Reserve Banks
combined, although this reduction has been by no means uniform
at all the banks. As a matter of fact, the liquidation in the New
York District has been about equal to that in all other districts
combined. The rediscounts and advances of the Federal Reserve
Bank of New York, at the close of business on June 30,1921, were
lower than they had been since July 10,1918. I would call your attention to the fact that on July 9,1920, the Federal Reserve Bank
of New York had total bills discounted and bought amounting to
$1,001,864,000, while on July 6, 1921, total bills held at the Federal Reserve Bank of New York were $461,585,000, a reduction of
$540,279,000. If comparison should be made a week earlier in each
case, it would be seen that a reduction took place of $578,695,000.
Bills held at the Federal Reserve Bank of New York increased from
June 29,1921, to July 6,1921, from $423,169,000 to $461,585,000,
a net increase for the week of $38,416,000. The detail is as follows:
Secured by United States bonds
and certificates
Commercial paper, etc.
Bills bought in open m a r k e t . . . . .
Total

July 9, 1920

July 6, 1921

$544,229,000
303I454.000
154,181,000
$1,001,864,000

$212,999,000
236,970,000
11,616,000
$461,585,000

APPENDIX
Some of those who have complained of the curtailment of credit
live in the Richmond and Atlanta Districts, and it may be interesting, therefore, to ascertain just what the Federal Reserve Banks
in those districts are doing. On July 6,1921, the Federal Reserve
Bank of Richmond had total bills on hand amounting to $105,974,000
against $110,052,000 on July 9,1920, but there was a reduction between these dates of $15,830,000 in the amount of notes secured
by Government obligations, which probably represents sales of
bonds and certificates, while loans on commercial and agricultural
paper increased from $58,344,000 on July 9,1920, to $74,280,000
on July 6, 1921.
The Federal Reserve Bank of Atlanta shows between July 9,
1920, and July 6, 1921, an apparent reduction in total loans of
about $ 17,000,000, but commercial and agricultural paper increased
from $61,611,000 on July 9, 1920, to $65,754,000 on July 6,1921.
When the difference in the value of cotton is considered, it is evident that the real amount of accommodation given is considerably
greater now than was the case a year ago. It should be noted,
however, that the decrease in the total loans of the Federal Reserve
Bank of Atlanta is not so great as it appears, for the bank on July
6, 1921, reports United States bonds and notes owned amounting
to $10,142,000, against $117,000 on July 9, 1920. This increase
represents bonds and notes purchased under resale agreement from
certain member banks which had previously been using the bonds
as collateral for loans with the Federal Reserve Bank of Atlanta,
so the actual reduction in the amount of the bank's total loans is
only about $7,000,000 instead of $17,000,000.
As your State is in the San Francisco District, some figures relating to the Federal Reserve Bank of San Francisco may be of
interest to you. The total loans of the Federal Reserve Bank of
San Francisco on July 6, 1921, amounted to $161,203,000, as
against $199,003,000 on July 9, 1920. This reduction, however,
is made up as follows: a decrease of $4,446,000 in the amount of
paper secured by Government obligations and a decrease of
$44,687,000 in the amount of bills and acceptances bought in the
open market Commercial and agricultural paper under rediscount
for member banks amounted on July 6, 1921, to $114,623,000,
against $103,290,000 on July 9, 1920, an increase in commercial,
agricultural, and live-stock loans of $ii,333»ooo.
Let us now consider the figures for the System as a whole. On
July 9, 1920, the total bills on hand at all Federal Reserve Banks
amounted to $2,934,184,000. On July 6,1921, this total amounted

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APPENDIX

to §1,832,499,000, a decrease of $1,101,685,000. The detail of this
decrease is as follows: on paper secured by Government obligations, $621,973,000 (which can be accounted for in part by Government redemptions of bonds and Treasury certificates and
private purchases for investment account); in bills bought in the
open market, $341,455,000. (While the volume of the acceptance
business has declined during the past twelve months, this decrease
is accounted for principally by the greater demand for first-class
acceptances on the part of member and non-member banks and
trust companies.) The total of agricultural, commercial, and livestock paper on hand, rediscounted for member banks, on July 6,
1921, was $1,126,986,000, as against a total of $1,265,243,000 on
July 9, 1920, a decrease of only $138,257,000, which is more than
accounted for by the decrease in the holdings of paper of this kind
by the Federal Reserve Banks of Boston, New York, and Chicago.
The Federal Reserve Board has made no suggestion whatever
that any Federal Reserve Bank should undertake to force farmers
to sell their cotton before the new crop comes in, and telegraphic
inquiry made of the Federal Reserve Banks in the cotton-producing districts shows that no such restrictions have been made by
the Federal Reserve Banks.
Recent correspondence between the Federal Reserve Bank of
Atlanta and one of its member banks shows that the Governor of
the Federal Reserve Bank calls the attention of his correspondent
bank, which writes that it has notified its customers who are borrowing on cotton to sell it and pay their notes by July 1st, to the
fact that this is a matter which the Federal Reserve Bank has
nothing to do with and that it has made no such demands.
The Comptroller's Abstract No. 130, made up from reports rendered as of April 28, 1921, shows that the total rediscounts with
the Federal Reserve Bank of Richmond by national banks in South
Carolina on that date were $12,506,000, while total loans and discounts of the South Carolina national banks on the same date,
exclusive of the amounts rediscounted, amounted to $75,208,000.
Adding these two items together, we find that the South Carolina
national banks had total loans and discounts on April 28,1921, of
$87,714,000, and of this amount they had rediscounted with the
Federal Reserve Bank $12,506,000. They had also borrowed
$6,759,000 from the Federal Reserve Bank on their own collateral
notes. The total accommodation granted to national banks in
South Carolina as of April 28,1921, was therefore $19,265,000, or
twenty-two per cent of their total loans. A t the same time the

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293

total reserves carried by all national banks in South Carolina with
the Federal Reserve Bank of Richmond amounted to $3,829,000.
Deducting the loans to State member banks, $2,285,000, the
loans of the Federal Reserve Bank of Richmond to national banks
in South Carolina on June 30,1921, amounted to $18,820,000, and
the total loans to all member banks in South Carolina on June 30,
1921, by the Federal Reserve Bank of Richmond amounted to
$21,105,000, against $17,316,000 on June 30, 1920, and yet the
Federal Reserve Bank of Richmond is charged with restricting
loans in South Carolina. I may add that the Federal Reserve
Banks of Richmond and Atlanta were both heavy borrowers during the latter half of 1920 from other Federal Reserve Banks, and
the Federal Reserve Bank of Richmond has recently shown loans
as high as $25,000,000 from the Federal Reserve Bank of New
York. It is worthy of note also that the Federal Reserve Bank of
Richmond has never had the progressive rate and has never had a
higher rate than six per cent. The legal rate of interest in South
Carolina is eight per cent. So you can see that there is a margin
of profit to member banks in that State of two full points, or
thirty-three and a third per cent, in their rediscount transactions
with the Federal Reserve Bank.
In conclusion, I wish to say that the attitude of the Federal
Reserve Board toward agriculture has been greatly misunderstood
and grossly misrepresented. The Board has always advocated as
liberal a policy as possible, consistent with the terms of the Federal
Reserve Act and with reasonable banking prudence toward agriculture, which it recognizes as the basic industry of the country
and the foundation upon which all other industries necessarily
rest. The trouble is that the loans made by the member and nonmember banks throughout the country are not well distributed
and in a number of cases have not been judiciously made. Something over a third of all member banks are not borrowing from the
Federal Reserve Banks at all, and of the two thirds which are
borrowing, more than one half are borrowing very large amounts.
Many of these banks have extended themselves so far that they
do not feel warranted in making any new loans, regardless of the
disposition of the Federal Reserve Banks to rediscount the paper.
They do not want their names on any more paper than they already have. They do not like the idea of increasing their contingent liability. In view of the fact that the twelve Federal Reserve
Banks are independent bodies corporate and are controlled and
directed each by its own board of directors, subject only to the

294

APPENDIX

general supervision of the Federal Reserve Board, whose authority
with respect to discount is confined principally to defining eligible
paper in accordance with the terms of section 13 of the Federal
Reserve Act, it seems to me that the statement which many, both
in Congress and on the outside, urge be issued by the Federal
Reserve Board, stating that the Federal Reserve Banks will adopt
certain policies in connection with the rediscounting of agricultural
paper, would have to be made by the Federal Reserve Banks
themselves. The Federal Reserve Board has no power to interfere
with the discretion given or the responsibility imposed by law
upon the directors of a Federal Reserve Bank with respect to
passing upon the merits of eligible paper offered for discount.
Congress did not establish a central bank in this country. It
established twelve banks under the general supervision of the
Federal Reserve Board, which does not exercise banking functions.
These functions are exercised exclusively by the Federal Reserve
Banks. The Board has taken up repeatedly with the various Federal Reserve Banks complaints of a general nature regarding the
restriction of agricultural credits and the banks have always made
a good showing of what they have done for agriculture. Very few
specific cases have been brought to the attention of the Board
where eligible agricultural paper has been refused for rediscount,
and in those cases it seems that the management of the Federal
Reserve Banks have justified themselves in the refusal.
In some agricultural States there was two years ago, unfortunately, great speculation in farm lands, and member and
non-member banks in those localities loaded themselves with a
large volume of real estate mortgages, which paper is not eligible
for discount under the terms of the Federal Reserve Act, and many
of them have sustained losses in deposits. In the present circumstances, they are endeavoring to work out from under the tremendous load which they ought never to have taken on, and do not
feel able or else are indisposed to extend accommodations for agricultural purposes which ordinarily they would be glad to do. In
almost every State, however, there are a number of ultra-conservative banks which have strong reserves which are not borrowing,
and which ought to do their part in assisting agriculture at the
present time.
In the present condition of the country it seems to me that the
strong position of the Federal Reserve Banks should be a source of
comfort rather than the cause of so much reckless criticism. The
Federal Reserve Banks cannot be expected to encourage their

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295

member banks to make loans to the public on the basis of values
which obtained eighteen months ago. The inability of any banking system to maintain values in the face of a world-wide decline
is evidenced by the plight of the banks in Cuba, which were
heavily loaded up with loans on sugar at high prices. Surely, the
return of better conditions in this country would not be expedited
by having American banks in the same condition that Cuban
banks are to-day.
B y way of summary, let me state that, while the Federal Reserve
Act imposes a general limitation upon the maturity of paper eligible for discount of three months, it is provided in section 13
'that notes, drafts, and bills drawn or issued for agricultural purposes or based on live stock and having a maturity not exceeding
six months, exclusive of days of grace, may be discounted in an
amount to be limited to a percentage of the assets of the Federal
Reserve Bank, to be ascertained and fixed by the Federal Reserve
Board. 1 Had the Board been unfriendly to agriculture, as many
of its critics claim it has been, it could easily have limited the
amount of six months1 agricultural paper which could be discounted by a Federal Reserve Bank to a very small percentage of
its total assets. But in order to offer the fullest possible accommodations to agriculture, the Board more than five years ago fixed
this percentage at ninety-nine per cent and has never changed it.
It has already been pointed out that the decrease of more than
$1,100,000,000 which has taken place in the loans and earning
assets of the Federal Reserve Banks is represented mainly by a
reduction in loans secured by Government obligations and by bills
and acceptances bought in the open market. The actual reduction
in commercial, agricultural, and live-stock paper, rediscounted for
member banks, from July9,1920, to July 6,192i,was$i38,257,000.
This reduction is more than accounted for by the decrease of paper
rediscounted by Federal Reserve Banks in Boston, New York, and
Chicago. The bank liquidation which has taken place has been
mainly in financial and industrial centers, and the figures of the
Federal Reserve Banks do not indicate that there has during the
past twelve months been any decrease in Federal Reserve accommodations to banks in the agricultural and live-stock districts,
but, on the contrary, there has been a considerable increase, as
you will see from the official statements enclosed herewith.

A P P E N D I X

E X C E R P T S FROM T H E R E P O R T ON C R E D I T
BY THE CONGRESSIONAL JOINT COMMISSION OF AGRICULTURAL
INQUIRY, JANUARY, 1922, AND THE MINORITY OPINION OF
OGDEN L . MILLS

THE Commission has also carefully considered the policy of the
Federal Reserve Banks and the Federal Reserve Board during the
period of the recent crisis, with special reference to the effect of
the policy adopted upon agriculture.
The regulation of the volume of credit and currency within the
Federal Reserve System is accomplished in part by the automatic
operation of the System and in part by the discount policy of the
various Federal Reserve Banks.
The discount rates of Federal Reserve Banks in accordance with
the policy of banks of issue, in almost all of the countries, having
a central banking system, should normally be slightly above the
rates carried by the class of paper to which they apply, in order
that the lending power of the Federal Reserve Banks may be preserved for times of financial stringency and crisis and in order that
this lending power shall not be depleted by member banks borrowing from them for purposes of profit only. The rates of the Federal
Reserve Banks were for the most part above going rates on prime
commercial paper from the beginning of the operations of the
Federal Reserve Banks to the date of our entrance into the World
War. With our entrance into the World War, the rate policy of
the Federal Reserve Banks was subordinated to the requirements
of the Treasury and the Treasury policy of borrowing the funds
necessary for the conduct of the war at rates of interest below the
market rate, and discount rates thereafter were below the market
rates on the character of paper to which they applied.
The cost of the war could not be paid out of collection of current
taxes; it was necessary to provide for immediate payments by
means of the expansion or manufacture of credit. This manufacture of credit necessitated the use of the lending power of the
Federal Reserve Banks through loans to member banks at a rate
of interest below the rate carried by the bond and certificate of
indebtedness issues of the Government. This policy induced large
borrowings on the part of member banks from Federal Reserve

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297

Banks and larger expansion of loans and discounts of the member
banks. . . .
In the early part of 1919, following a short period of price deflation and business contraction, the question of increasing the discount rates of the Federal Reserve Banks in the direction of the
sounder policy of maintaining these rates above the going rates for
commercial paper and above rates on Government bonds and
certificates of indebtedness, arose. A t this time the Government
was considering the flotation of the Victory loan, which it was then
thought would involve $6,000,000,000. The Treasury Department
was unwilling to undertake the flotation of the Victory loan at a
rate of interest comparable with commercial rates on account of
the possible effect which that action would have upon existing
issues of private securities and its possible effect in requiring the
refunding of the issues of Government bonds already floated.
The discount policy of the Federal Reserve Banks was again
subordinated to the Treasury policy in securing its credit requirements, although at this time the tendency toward expansion,
speculation, and extravagance was beginning to be apparent.
This was clearly the time for a policy of advancing the discount
rates of the Federal Reserve Banks with a view of curtailing the expansion, speculation, and extravagance which was then beginning.
It is the opinion of the Commission that a policy of restriction of
loans and discounts by advancesin the discount rates of the Federal
Reserve Banks could and should have been adopted in the early
part of 1919, notwithstanding the difficulties which the Treasury
Department anticipated in floating the Victory loan if such a policy
were adopted. 1
It is also the opinion of the Commission that had this policy been
adopted in the early part of 1919 much of the expansion, speculation, and extravagance which characterized the post-war period
could have been avoided.
The Commission also believes that had such a policy been adopted
in 1919 the difficulties, hardships, and losses which occurred in
1920-21 as a result of the process of deflation and liquidation would
have been diminished.
No action in the direction of restriction of expansion, inflation,
and speculation by increases in discount rates was taken by the
Federal Reserve Banks or the Federal Reserve Board until December, 1919, when slight advances were made in discount rates,
* T h e Commission appears to have overlooked the possible effect of the
Overman A c t , had the Board undertaken to upset the policies of the Treasury.

298

APPENDIX

followed in January by more radical advances and by further
increases during the remainder of 1920.
In the meantime there began and continued a period of expansion, extravagance, and speculation, the like of which has never
before been seen in this country or perhaps in the world.
This era of expansion, speculation, and extravagance resulted in
the making of a large volume of debts which was reflected in large
increases in the borrowings of the member banks from Federal
Reserve Banks. When finally the Federal Reserve Banks and the
Federal Reserve Board adopted the policy of restriction of expansion of loans and discounts and of speculation and extravagance,
loans and discounts, currency and prices had reached such a point
that deflation was a process accompanied by perpendicular and
very material declines of prices accompanied by great losses and
hardship upon banks, communities, and individuals alike.
The reserves of individual Reserve Banks and of the System as
a whole began to dwindle rapidly. In some of the Reserve Banks
the reserves fell as low as nine per cent, and at one time it is said
that the reserves of one of the banks were entirely exhausted. The
tremendous drain upon the credit resources of the country brought
about the overextension of many of the banks of the country, and
with some of these banks loans and discounts had advanced to a
point where the banks were utterly unable to loan additional funds
to their customers without rendering themselves in great danger
of insolvency.
From 1915 to 1920 the ratio of loans and discounts of national
banks to capital and surplus had increased from 3.8 to I to 4.5 to
I, and in many instances capital and surplus would not permit of
further expansion of loans and discounts of banks without endangering the interests of depositors and stockholders alike. The
policy of the Federal Reserve Banks, therefore, during this period
underwent a change. Discount rates were raised, particularly upon
certificates of indebtedness and Government bonds, resulting in
the liquidation of this class of paper by the member banks and the
freeing of the funds invested in them for other purposes.
With the exhaustion of the credits of European Governments in
this country, the purchasing power of Europe in our markets began
to fail. This resulted in a sharp decline in exports, particularly of
farm products. The exhaustion of credit and capital, coupled with
the decline in exports, gave the first impetus to the decline in
prices. With the beginning of this decline the forces of reaction
and depression began to operate. Goods were thrown on the

APPENDIX

299

market, orders were cancelled, the buyer's strike developed, unemployment ensued, and complete industrial depression followed.
As the purchasing power of the domestic population diminished
and unemployment began, more and more goods began to congest
the channels of commerce and more and more credit was required
to carry these goods until they could be marketed. It was necessary, by a high level of discount rates, to keep these credit requirements in such a relation to the prices of goods that bank failures
would not result and a financial crash increase the inevitable
industrial depression resulting from declining prices.
As the pressure of liquidation developed, there began to be demands on the part of the public for amelioration of the policy of the
Federal Reserve Banks with respect to discount rates, based upon
the assumption that lower discount rates and freer money would
arrest the tide of liquidation and reduce the hardships of those who
are compelled to sell in a declining market. The Commission believes that a policy of lower discount rates and greater liberality
in extending credits could have been adopted in the latter part of
1920 and the early months of 1921, and that such a policy would
have retarded the process of liquidation and thus spread the losses
incident to the inevitable decline of prices to a lower level over a
longer period, and that the adoption of such a policy at that time
would have been advisable.*
About one third of the banks at this period were greatly overextended, and it was the position of the Federal Reserve Board
that a policy of cheap money at this time, coupled with an invitation to them to further extend themselves and the ratio of loans
and discounts to capital, might have resulted in bank failure
involving the industrial and commercial institutions and that the
Federal Reserve Board and the Federal Reserve Banks were confronted with a choice between continuing the high discount rates
and the consequent pressure and hardship upon the commercial
and agricultural industries of the country, on the one hand, and a
policy of lower discount rates involving a possible financial crisis
in the midst of an industrial crisis. The Federal Reserve Banks,
with the approval of the Federal Reserve Board, took the first
choice, and discount rates were continued upon practically the
same level as before.
It seems probable that a change in the policy of the Federal
1 Federal Reserve B a n k rates were generally below current discount rates
in 1920 and 1921, and were reduced in April, 1921. T h e dangerous expansion
of bank loans is admitted in the preceding paragraphs.

300

APPENDIX

Reserve System with reference to discount rates would have accomplished a reversal in part of the psychological and economic
factors which at this time were moving in the direction of lower
prices, and at the same time would have tended to induce on the
part of banks a more liberal attitude toward furnishing additional
credit.
It is without doubt true that the pressure of discount rates and
of liquidation in the agricultural sections of the country resulted
in great hardship, loss, and sacrifice among the agricultural population of the country. The hardships, sacrifices, and losses of the
period, however, were not confined to agricultural sections.
The pressure was greater upon the agricultural sections because
of the peculiar conditions surrounding the marketing of agricultural
crops, and as a result of the fact that the crops of 1920 had been
produced at costs greater than those applicable to any other crops
in the history of the country. These hardships were also greater
because the prices of agricultural commodities declined to a greater
degree and with greater rapidity than the prices of other commodities. The investigation of the Commission shows that liquidation of bank loans and discounts in the agricultural sections of
the country was less than in the industrial sections, and in fact
that but little actual liquidation of loans and discounts had taken
place in the agricultural sections of the country as a whole up to
May, 1921. . . .
It was also contended before the Commission that high rates for
call money on the stock exchange during this period brought a
withdrawal of funds, sorely needed by industry and agriculture
during this period, of New York for purposes of stock speculation.
The rates for call money in New York during the period from
January, 1920, to June, 1921, were continuously below ten per
cent, with the exception of the period from January to March,
1920.
Beginning with November, 1919, and continuously throughout
1920 and the first half of 1921, the loans of New York banks made
on the stock exchange for out-of-town correspondents, as well as
the balances of country banks with New Y o r k banks, continuously
declined, and an examination of the clearings of the Federal
Reserve Bank of New York through the gold settlement fund
shows a continuous flow of money on ordinary transactions from
the Federal Reserve Bank of New York to other Federal Reserve
Banks during this period. The very great demands for money by
industry and agriculture resulted in withdrawal of funds from

APPENDIX

301

New York, causing higher interest rates instead of the demands
of the stock exchange resulting in a withdrawal of funds from the
banks serving industry and agriculture.
A t this time the total expenditures of the Government for
ordinary and war purposes from the beginning of the war had
reached a total of $27,806,546,698.23, of which $6,933,524,926.13
had been raised by taxation. In view of the enormous drain on the
resources of the country, in credit, savings, and current production
for war purposes, a further bond issue could not be floated without added inflation or manufacture of credit, which could only
be accomplished through the medium of the Federal Reserve
System.
Again, inasmuch as a willingness on the part of the Federal
Reserve Banks to furnish the money necessary to carry the bonds
to the member banks at a rate of interest lower than the rate
carried by the bonds was thought by the officials of the Treasury
Department to be essential to the success of the issue, a policy of
raising the discount rates in advance of the flotation of the Victory
loan might have greatly diminished the success of that loan, if,
indeed, it had not compelled its failure.1
A policy of higher discount rates could have been adopted by
the Federal Reserve Banks, notwithstanding the flotation of the
Victory loan, if the Treasury Department had been willing to float
this loan at a rate of interest high enough to permit an increase in
the rediscount rate. Great difficulties were foreseen by the Treasury Department in this undertaking. If the Victory loan had been
floated by the Treasury Department on a basis of an interest rate
comparable with current rates on other taxable investments, or on
certificates of indebtedness, which at that time was about four and
a quarter per cent or on commercial borrowings, which at that
time was about five and a half per cent, the pressure already felt
a t that time by the Treasury Department to refund the prior
issues of Government bonds on the basis of a high interest rate on
the Victory loan issue would have greatly increased and possibly
been irresistible. In addition, the flotation of the Victory loan at
this time on the basis of a high interest rate would have had a tendency to ultimately increase interest rates all along the line, and
to depreciate the value of the bonds previously issued at the lower
rates of interest. Again, it might have resulted in precipitating a
* See address of the Honorable R . C . Leffingwell, Assistant Secretary of the
Treasury, before the A c a d e m y of Political Science at N e w Y o r k , April 30,
1920, anie, page 257.

302

APPENDIX

liquidation of large amounts of securities other than Government
bonds, and the depreciation of vast quantities of general securities
held by savings banks, trust companies, insurance companies, etc.
Thus, the advantages of the high discount rates, which might have
been used to prevent speculation and inflation during this period,
yielded to the apprehensions of the Treasury Department.
The Commission is of the opinion that the difficulties anticipated
by the Treasury Department should not have controlled in this
period and that the discount policy of the Federal Reserve Board
and the Federal Reserve Banks should not have yielded to the
apprehension of the Treasury Department,
The Commission believes that had discount rates been raised by
the Federal Reserve Banks promptly and progressively beginning
with the spring of 1919, much of the inflation, expansion, speculation, and extravagance which characterized the following twelve
months or more might have been greatly retarded, if not wholly
prevented.
Loans and discounts of member banks and of Federal Reserve
Banks continued to expand in spite of the policy of direct remonstrance and repeated warnings of the Federal Reserve Board and
the Federal Reserve Banks. Y e t no action m the direction of
restriction of expansion, inflation, and speculation by increases in
discount rates was taken by the Federal Reserve Banks or the
Federal Reserve Board until December, 1919, when slight advances
were made. These advances were followed in January by more
radical increases and b y further advances during the remainder
of 1920.
In the meantime expansion, inflation, extravagance, and speculation continued and prices soared to previously unheard-of levels.
Sharp advances in discount rates at the beginning of this period
would not only h a w served as a warning to banks and their customers, but would also have served to check the forces, both
economic and psychological, that were combining to produce an
era of expansion, inflation, speculation, extravagance, and high
prices unparalleled in the history of this country, or perhaps in
any other.
It does not, of course, follow that deflation must be equivalent
to inflation, but it is altogether probable, if it is not wholly certain,
that had a sound policy been adopted by the Federal Reserve
Board and the Federal Reserve Banks at the beginning of this
period the processes of liquidation would have been less precipitous and the decline less abrupt and the attendant hardships and

APPENDIX

303

losses upon banks, communities, and individuals correspondingly
diminished.
[Representative Ogden L. Mills, a member of the Commission,
filed a minority opinion as follows:]
I concur in the report with one exception. I cannot agree with
the statement that late in the year 1920 'a change in the policy of
the Federal Reserve System with reference to discount rates would
have accomplished a reversal in part of the psychological and economic factors which at this time were moving in the direction of
lower prices.' Such a suggestion is out of harmony with the balance of the report and inconsistent with the facts brought out by
our investigation.
Higher rediscount rates charged by Federal Reserve Banks did
not produce the break in prices, and it is inconceivable that their
reduction could have counteracted the economic forces that were
leading to inevitable deflation:
(1) Federal rediscount rates were below market rates throughout
the year 1920.
(2) There are some 28,210 banks in the United States, only 9840
of which are members of the Federal Reserve System. Any number
of these banks are to a great extent free from competition, and
charge rates largely the product of local custom and local circumstances. For instance, what efficacy can the decrease in the rediscount rate of a Federal Reserve Bank from seven to six per cent
have on a Western or Southwestern bank charging eight, ten, or
twelve per cent? Furthermore, it must be obvious that rediscount
rates can only be effective in the restriction of loans and discount
against a bank which was borrowing from its Reserve Bank. And
by no means were even all member banks borrowing. For example,
in September, 1920, in the New York District there were 454 nonborrowing banks, as against 323 borrowing ones.
(3) In so far as agricultural counties were concerned, far from
receiving less credit from the Federal Reserve Banks during the
period referred to, the figures show that from May 4, 1920, to
April 28, 1921, rediscounts by banks in the agricultural counties with the Federal Reserve Banks actually increased 56.6 per
cent.
Incidentally, it may be noted that during the same period borrowings from Federal Reserve Banks in non-agricultural counties
decreased 28.5 per cent. If the statement which I question be true,
it would seem to follow that a lower rediscount rate would have

319

APPENDIX

tended primarily to maintain industrial prices to the further
disadvantage of the farmer.
(4) Finally, while it cannot be conclusively proved that credit
stringency was not an initial contributing factor to price deflation,
there is no evidence to show that it was. B y this I do not mean to
state that once prices started to drop, it was not the cause of much
hardship and, in many cases, of increased losses. Quite the contrary. It was. But I do not believe that increased interest rates
and contracting credit were the primary causes of the sharp price
deflation which characterized the second half of the year 1920.
(a) The price peak of the all commodities index was reached in
May, 1920, while loans of all reporting banks and discounts of
Federal Reserve Banks did not reach their maximum until October,
and currency issues until January, 1921.
In so far as the following agricultural commodities are concerned,
prices reached their peak as early as 1919, and declined rapidly
thereafter some months before Federal Bank discount rates were
materially raised or any credit stringency felt: hogs, bacon, cattle,
mutton dressed, and butter. There was in practically every one of
these cases a direct relationship between the peak of the export
trade and the price peak. Thus, the peak of hog exports was
reached in June and the price peak in July; and the same is true of
bacon. The cattle export peak was reached in August, 1919, and
the price peak in November. The cotton export peak was reached
in April, 1920, and the price peak the same month. The export
peak of the total farm index was reached in March, 1920, and the
price peak in April of that year.
If a careful study be made of chapter 5 of Part I of this report,
numerous instances will be found in which a relationship can be
shown between the peak of production and consumption and the
peak of prices. But no such relationship can be established between increased discount rates and the drop in the price of any
single commodity.
(b) Agricultural prices broke more sharply than any other, and
yet from May, 1920, to May, 1921, the liquidation of loans in agricultural counties was relatively much less than in industrial
counties.
(c) Interest charges as an element of expense in the cost of production and marketing must not be exaggerated. They are usually
a small percentage of the total outlay, which is largely accounted
for by the cost of labor, material, transportation, and distribution.
(d) The price-deflation movement was world-wide. The crisis

APPENDIX

320

began in Japan late in 1919. The price-level of all commodities
began to decline in the United Kingdom in April, 1920; in France
and Italy, in M a y ; in the United States, Germany, India, and
Canada, in June; in Sweden, in July; in the Netherlands, in
August; and in Australia, in September.
I may add, in conclusion, that I think it desirable to present this
minority opinion, because of the view apparently held by a considerable number of people that the increase in the discount rates
of the Federal Reserve Banks was one of the primary causes of the
sharp break in prices which occurred during the second half of
1920 and which so disastrously affected the agricultural communities. Such a view inevitably leads to the conclusion that the
Federal Reserve Board and Banks constitute an agency by means
of which prices may be raised or lowered. This opinion is so contrary to economic facts and to the purposes of the Federal Reserve
System that any expression of opinion which seems to support it,
even indirectly, should not be permitted to pass unchallenged.

A P P E N D I X

R E P L Y OF FEDERAL RESERVE BOARD TO
S E N A T E R E S O L U T I O N 308
FEDERAL RESERVE BOARD
WASHINGTON, J u l y 8, 1922
SIR:

The Federal Reserve Board transmits herewith letters from the
Federal Reserve Banks of Philadelphia, Richmond, and St. Louis,
in reply to Senate Resolution 308. Replies from the other banks
will be forwarded as soon as received.
In transmitting this correspondence, the Board trusts that it
may, without impropriety, avail itself of the opportunity to invite
the attention of the Senate to certain matters which have a direct
bearing upon the subject of the inquiry.
The corporate powers of the Federal Reserve Banks are defined
in section 4 of the Federal Reserve Act, which provides, inter alia,
that 4 Every Federal Reserve Bank shall be conducted under the
supervision and control of a board of directors' and that such
directors 'shall perform the duties usually appertaining to the
office of directors of banking associations and all such duties as
are prescribed by law.'
The banking business is one which rests peculiarly upon the
foundation of confidence. While true in the case of any bank, this
is particularly true with respect to a Federal Reserve Bank which
is the sole custodian of the legal reserves of its member banks and
the instrumentality through which is issued the country's fiduciary
currency. Anything which tends to undermine public confidence
in a bank, and in a Reserve Bank particularly, impairs its ability
to perform its functions, and unless counteracted may defeat entirely the purposes of its organization. Therefore, those charged
with the administration of a bank have the right, and are impressed
with the duty, of using all legitimate means, when necessary, to
protect its good name and to prevent any impairment of public
confidence.
Criticisms of policy cannot be objected to and have always been
welcomed by the Federal Reserve Board, which has never imputed
to itself infallibility of judgment. The Board has been charged
with the administration of a new and untried law and has from,the
beginning been confronted with a series of difficult and unprecedented situations. When criticism is based upon the solid founda-

APPENDIX

307

tion of fact, and understanding of the Federal Reserve Act and of
banking principles, it is useful; it is helpful to those charged with
the duties of administration. To the Federal Reserve Board it has
appeared, however, that for the past two years much that has
been said under the guise of criticism of policy has not been intended to help, but to discredit, the management of the Federal
Reserve System through attacks upon the integrity and purpose
of members of the Federal Reserve Board and of officers and
directors of Federal Reserve Banks.
These attacks have been so repeatedly made and have had such
publicity as to justify the suspicion that they are part of a concerted movement against the Federal Reserve System. The patience and forbearance with which members of the Federal Reserve
Board and officers and directors of Federal Reserve Banks have
borne these repeated attacks, many of them personally abusive,
have been cited as an admission of the truth of charges made and
have tended to raise in the minds of some, who endorse the principles of the Federal Reserve Act, but who had no means of informing themselves as to facts, a question as to whether there may not
have been some foundation for the charge that members of the
Federal Reserve Board and officers and directors of Federal Reserve
Banks have been incapable and corrupt.
Beginning last summer, insinuations and charges which had been
made on the outside were repeated and amplified on the floor of
the Senate of the United States, not merely once or twice, but at
frequent intervals up to the present time. This circumstance has
caused a great amount of correspondence with persons asking for
information, and Board members, as well as officers and directors
of Federal Reserve Banks, have had occasion frequently to consider whether there were any means which might appropriately be
employed to inform the public as to the operation of the Federal
Reserve Banks and the character of their management.
Respecting the constitutional prerogatives of the members of
the Senate, care has been taken to make no criticism of any member thereof in any reply to letters of inquiry. This circumstance
also has been construed as an admission of the truth of charges so
frequently made on the floor of the Senate, some of which would
have been resented as libelous but for the constitutional immunity
above referred to.
Many quotations could be made from statements which have
been printed in the 'Congressional Record* during the past twelve
months, which are misleading and untrue, but their insertion

308

APPENDIX

would unduly extend this communication. The Board has seen
nothing to indicate that those who made these statements have
ever corrected them.
Last January the junior Senator from Virginia, who was Chairman of the Banking and Currency Committee of the House of
Representatives which reported the bill creating the Federal Reserve System, and who was afterwards Secretary of the Treasury
and ex-officio Chairman of the Federal Reserve Board, made a
speech on the floor of the Senate, in which he discussed at length
the operation of the Federal Reserve Banks and the attitude of the
Federal Reserve Board during the recent period of economic reaction and financial stress. The speech was delivered during parts
of two days. A brief report of it appeared in the daily papers and
requests followed for complete copies of the speech. Officers of
Federal Reserve Banks, who for several months had felt themselves obliged to maintain silence while their motives and integrity
were being assailed, deemed it not improper to avail themselves of
the opportunity then presented to give to their correspondents
and to others in their respective communities who had evinced an
interest or who were supposed to be interested in the economic
questions dealt with, information which would enable them to
draw their own conclusions.
The speech was a public document. Having been delivered on
the floor of the Senate and having been published in the 1 Congressional Record,' the Federal Reserve Board felt that there could be
no impropriety in the distribution of copies by the Federal Reserve
Banks. The speech dealt so comprehensively with charges and
statements which had been made in the same place and printed in
the same publication that the Board believed it should be given
wide publicity. Having been informed that copies might be obtained from the Public Printer if ordered promptly, it was decided
that the Governor should send to each Federal Reserve Bank the
following telegram:
January 18, 1922
Think Senator Glass's great speech defending Federal Reserve System
should be widely and promptly circulated. Government Printing Office
will print special copies of it Friday 20th and additional orders should be
given to-morrow. Printing Office estimates cost of copies at from five to
seven cents each.1 Please wire promptly how many copies your bank
wishes.
HARDING
This estimate of cost was too high. In view of the great demand for the
speech and the large number of copies printed, the cost per copy to each
Federal Reserve B a n k was approximately one and three quarters cents.
1

APPENDIX

309

The Federal Reserve Board assumes responsibility for commending this speech to the Federal Reserve Banks for circulation.
Neither the Board nor the Federal Reserve Banks regarded the
speech as being an attack upon any Senator and they were not
interested in it from that point of view. This speech was and is
regarded by the Board as a fair presentation of facts. It was commended to the banks for circulation because it was an answer
made in the Senate Chamber to charges which had been made on
the floor of the Senate. It is a clear exposition of the policies,
functions and operations of the Federal Reserve System during a
critical period and is an important contribution to current economic
discussion.
Respectfully
(Signed)
\V. P. G. HARDING

Governor

T H E PRESIDENT OF THE SENATE

I N D E X
Acceptance credits, for foreign accounts, proposed, 63, 64; statement
given by the Board to the press concerning, 64, 65.
Adams, A. D., Chairman of the Committee on Federal Legislation, at
hearing on increasing membership
of Board, 240.
After-War Readjustment, address of
A. C . Miller on, 134-38.
Agricultural Credit Act, 222.
Agriculture, inquiry by Joint Commission in interest of, 218-24; movement for farmer member of Board,
238-43.
Aldrich-Vreeland Act, 15, 16.
American Bankers' Association, opposition of, to par clearance system,
56.57.
American Farm Bureau Federation,
address of Governor Harding before
Convention of, 189, 284-88.
Anderson^ Representative Sydney, of
the agricultural Commission, 218;
letter of Governor Harding to, suggesting investigation of charges
made against members of the Board,
224; urges Governor Harding's reappointment, 239.
Argentina, exchange agreement with,
Armistice, signing of, 134.
Atkeson, Thomas C. t of the National
Grange, at hearing on increasing
membership of Board, 240.
Attorney-General, opinions rendered
b y , regarding powers of Board, 36,
37; opinions rendered by, as regards
exchange charges, 54, 55.
Augusta, Georgia, address of J. S.
Williams at, July 14, 1921, 209,
219.
Balfour, Arthur, visits America as representative of English Government,
89.
Baltimore, petition that Reserve Bank
be located at, 34, 37.
B a n k of England, 197-99*
Banking and Currency Committee of
the Senate, investigates question of
reducing volume of currency, 150.

Banks. See Federal Reserve banks,
National banks, State banks.
Beet-growers, the question of extending credit to, 132-34.
Bills, discounted and bought in open
market, in 1920, table of, 184; discounted and bought in open market,
on December 26, 1919, and on December 30, 1920, compared, 194.
Blackett, Sir Basil P., discusses exchange situation, 18, 19.
British Treasury bills, statement of
Board concerning sales of, 65-69;
withdrawn from American market,
69. .
Broderick, J. A., appointed Secretary
of the Board, 130.
Cablegrams, 99.
Call-money rates, statement of Board
regarding, 161, 162, 280-83.
Campbell, Milo D., appointed member
of the Board, 247; death, 247.
Capital, flight of, 198.
Capital Issues Committee, voluntary
committee of the Board, 107; appointed by law, 108; membership of,
120; dissolved, 121, 134.
Capper, Senator, leader of the F a r m
Bloc, 218.
Checks, the problem of establishing a
clearing and collection system of, 38,
39, 51; method of collecting, prior to
December 23, 1913, 49-51; in transit, 51; opposition to par clearance
system of, 5 1 - 5 7 ; legislation and
litigation regarding collection of,
57-59; exchange charges in their
origin justified, 60; exchange charges
under present conditions unjustified,
60; opponents of par clearance of,
Amendment in A c t proposed by, 79.
C i t y banks and country banks, 49-51.
Clayton A c t , the, 30.
Clearing system. See Checks.
Cleveland, Grover, President, his steps
to restore gold reserve, 200.
Collection account, 50.
Commodities, staple, table of monthly
quotations on, 1920, 184, 185.
Commodity paper regulation, 45, 46.
Comptroller of the Currency, his atti-

312

INDEX

tude toward the Federal Reserve
Board, 5 - 7 , 10-13; applications of
national banks to be made to, 6, 7.
Corn, monthly quotations on, in 1920,
table of, 184, 185.
Cotton, confusion in market caused
b y breaking out of the World War,
17, 1 9 - 2 1 ; problem of marketing in
1920, 21; suggestions for relief of
1914 market, 21, 24; letter of Secretary M c A d o o to Robert L . Henry
relative to relief of 1914 situation,
21-24; loan fund, 24, 25; imported
into Germany, 40; declared contraband b y Great Britain, 40-43; price
of, 42; steps taken b y Board in 1915
for orderly marketing of, 44-46;
monthly quotations in 1920, table
of, 184,185; conference of the Board
with representatives of growers of,
187, 188.
Cotton factors, as regards rediscounting notes of, 189-91.
Cotton, Joseph P., consulting counsel
of the Board, 35.
Counties, transfer of, t o other dis
tricts, 38.
Country banks and city banks, 49-51.
Crawford, Sir Richard, commercial
advisor of the British Embassy, 42.
Credit, extension of, to
financially
sound foreign countries advised b y
H. P. Davison, 65; Board aims to
restrain undue expansion of, 75; the
question of the rationing of, 107;
hearing before Committee of Senate
on bill to provide, 108-19; judicious
curtailment of, for non-essential
purposes, urged b y the Board, 12426, 147, 149, 166, 167, 169; investigation of, b y Joint Commission of
Agricultural Inquiry, 220-23, 296„ 305.
Credits, revolving, 4 1 ; acceptance, for
foreign accounts, proposed, 63, 64;
acceptance, statement given b y the
Board to the press concerning, 64,
65; beet-sugar and live-stock, 1 3 2 34-

Crissinger, D . R . , appointed C o m p troller of the Currency, 215; farm
owner, 241; appointed Governor of
the Board, 247.
Crops, of year 1919, marketing of,
158-60.
Cunliffe, Lord, Governor of the B a n k
of England, visits America as representative of English Government,
89.

Cunningham, E . H. f appointed member of the Board, 247.
Currency, emergency, authorized, 16,
18; question of reducing volume of,
I50-55.
Dallas, Federal Reserve B a n k of, experience of, 76-78.
Davison, H. P., of J. P . Morgan &
Company, advises credits to financially sound foreign governments,
65.
Dawes, Henry M. f appointed Comptroller of the Currency, 247; resigns
as Comptroller, 247.
Dealers, voluntary and patriotic cooperation of, 99.
Deflation, Board never in favor of,
1 6 6 , 1 6 7 ; alleged to have taken place
in 1920, 183; Board denounced for
having caused, 191; Senator Owen
protests against indiscriminate, 196,
197.
Delano, Frederick A., appointed member of Board, 5; member of Industrial Relations Commission, 5; ViceGovernor of Board, 5; his view as
to number of districts, 35, 36; member of committee on redisricting,
36; appointed to the Capital Issues
Committee, 120; retirement from
Board, 127.
Diplomatic corps, a t Washington, 39.
Discount rates, policy of Board regarding, 145-49* 252-55; advance
in, advocated b y some members of
Board, 156; attitude of Treasury on
question of advance of, 156-58; advances made in, 158, 160; pressure
exerted for lower, 164,193, 195; progressive, permitted b y amendment
to Federal Reserve A c t , 164, 165;
possibility of advance in, intimated,
1 6 9 , 1 7 8 , 1 7 9 ; advance in, asked for,
1 7 1 ; advance in, made by some
Banks, 182; and commodity priced,
184, 185, 254, 255; reduction in,
urged b y political leaders, 187; the
fixing of, b y law, proposed, 192; discussion of reasons for not lowering,
197-200, 212; in first months of
Harding adminstration,
216-18;
progressive, discontinued, 2 1 6 - 1 8 ;
Governor M c K e l v i e appeals t o
Board to permit reduction of, in
case of Federal Reserve Bank of
K a n s a s C i t y , 224-28; principles
which govern, 228-31; further reduction of, 236.

INDEX
Drafts, drawn against shipment of
munitions and war material, decision of the Board with regard to,
4i-

313

to Constitution in matter of appointments, 186j amended as re*
gards rediscounting of cotton factors notes, 190, 191; amended by
Agricultural
Credit
Act,
222;
amended to limit amount to be spent
Edward VII, King, anecdote concernfor
building
purposes
by
Reserve
ing, 44.
Banks, 238.
Elliott, M. C., acting Secretary of
Federal Reserve Agent, the, appointed
Federal Board, 5.
by Board, 8, 29; relation to Federal
Embargo, advocated in consequence
Reserve Banks, 28-31; his salary,
of War, 40-43.
29; his duties, 30; as Chairman of
Exchange, situation at beginning of
board of directors, 30, 3 1 ; gold acWorld War, 17, 18; American, at a
cumulated with, 77.
discount in some countries during
the War, 100-02; of Allied countries, Federal Reserve Agents' fund, 47.
declines in the United States, 105. Federal Reserve Banks, directors of1 8,
See Foreign Exchange.
26, 29, 30; organization of, begun,
26-28, 3 1 ; relation of Federal ReExchange charges, opposition to aboliserve Agents to, 28-31; bodies cortion of, 39. See Checks.
porate, 29; powers of, 29; permissible operations, defined by the
Fairfield County, Connecticut, transBoard, 31-33; cities designated by
ferred to New York District, 38.
Organization Board, 34, 35; proviFarm Bloc, 2x8.
sion for establishment of branches
Farm Loan Board, a Treasury bureau,
of, 35; the Board without power to
8.
abolish, 35-37; and par clearance
Federal Advisory Council, conference
system, 52-60; in 1916, held strong
with Board on May 18,1920,171-80.
reserves, 61; conferences of GoverFederal Intermediate Credit Banks,
nors of, 62, 63; put in strong posi222.
tion in anticipation of War, 70; adFederal Reserve Act, changes in, revised to discontinue purchase of
commended by Secretary McAdoo,
municipal warrants, 70; Treasury
8-10; section relating to organizacertificates of indebtedness taken by,
tion of the Board, 10-13; its object,
87, 88; allotments of First Liberty
14; the result of many compromises,
Loan bonds made through, 90;
14; section continuing Aldrich-Vreebanks organized into bond-distribland Law, 15; amended to permit
uting agencies by, 91; in the PittTreasurer of United States to carry
man Act, 122; permitted by Federal
account to credit of Board, 48;
Reserve Act to accumulate larger
amended as regards bank reserves,
surplus funds, 140-43; advances
5 1 , 7 2 - 7 5 , 7 9 , 8 0 , 8 2 ; amended, June,
made by, in discount rates, 158,
1917, as regards accounts for collec160,182; allowed to adopt graduated
tion and exchange purposes, 54;
scale of rates, 164, 165; rediscountamended to induce State banks and
ing between, 182,183; table showing
trust companies to enter System,
position of, on December 30, 1920,
72-74, 82; amended as regards issue
as compared with position on Deof Federal Reserve notes, 75, 77, 79,
cember 26, 19191 193~95*» inherent
80, 82; amendment proposed by
strength of, improved, 195; rates of,
opponents of par clearance of checks,
in first months of Harding adminis79; amendment concerning note
tration, 2 1 6 - 1 8 ; rediscount prinissue not an emergency measure and
ciples of, 228-31; salaries paid their
should be permanent, 80, 81; effect
officers and employees, 232-34, 236;
of amendment relating to note isbuildings owned by, 234; manner of
sues, 85-87; amended to permit
appointment or election of directors
Federal Reserve Banks to accumuof, 234, 235; further reduction of
late larger surplus funds, I40^43
rates of, 236; copies of Senator
amended as regards two-year limitaGlass's address sent out by, 237;
tion restriction, 143, 144; amendamendment limiting amount to be
ment permitting graduated scale of
spent for building purposes by, 238.
rates, 164,165; amended to conform

314

INDEX

Federal Reserve Board, appointment
of members of, 2 - 5 ; organization of,
5; offices in Treasury building, 5;
attitude of Comptroller of the Currency toward, 5 - 7 , 10-13; application of State banks for admission to
Federal Reserve System to be made
to, 6; attitude of Secretary of the
Treasury toward, 7 - 1 3 ; three 'Class
C directors appointed b y , 8f 26;
Federal Reserve Agent appointed
b y , 8,29; its power of levying assessment upon Federal Reserve Banks,
8, 9; amounts of its annual assessments, 9; its accounts subject to
Government audit, 9, 10; amendment of Federal Reserve A c t relative to appointment of members of,
favored by Secretary M c A d o o , 10;
section of A c t relative to organization of, 10-13; by-laws of, 13; presiding officer of, 13; its task, 15;
world conditions confronting, at beginning of career, 15; forms gold exchange fund, 18, 19; forms cotton
loan fund, 24, 25; organizes Reserve
Banks, 26, 3 1 ; some of the primary
problems of, 26-28; policy of, outlined, 31-33; changes lines of Federal Reserve districts, 34-38; without power to abolish districts or
banks, 35-37; has power of reasonable readjustment in boundary lines
of districts, 37; deals with problem
concerning establishment of check
clearing and collection system, 38,
39, 5 1 ; war embargo advocated
before, 40, 4 1 ; its decision with regard to munitions and war materials,
41; steps taken by, in 1915, for orderly marketing of cotton, 44-46;
establishes gold fund, 46-48; new
Governor and Vice-Governor of, 61,
62; changes in organization of, 62;
supervision of f over conferences of
Federal Reserve Banks, 63; issues
press statement concerning acceptance credits for foreign accounts,
64,65; statement concerning sales of
British Treasury bills, 65-69; proposes amendments to A c t t o induce
State banks and trust companies to
enter the System, 70-74; first phases
of its gold policy, 74, 75; recommends amendment to A c t regarding
reserves, 74, 75; tries to prevent inflation, 75, 78, 166; suggests amendment to A c t permitting issue of Federal Reserve notes, 7 5 ; and First |

Liberty Loan, 89, 90; issues regulations governing administrative procedure with regard to exportation of
coin, bullion, and currency, 93; applications for shipment considered
b y , 93-9S; foreign exchange considered b y , 95; establishes in New
Y o r k a Division of Foreign Exchange, 97; licenses for gold exportations granted by, 98; has no power
to establish foreign branches, 104;
authorized to have only correspondents and agencies in foreign countries, 104; did not feel justified in establishing foreign agencies during
the War, 104, 105; confers with
Clearing House Committee and
Clearing House Banks in N e w Y o r k
t o meet advance in rate of interest,
106, 107; Capital Issues Committee
of, 107; practice of, in recommending securities, 118; under the Overman A c t , 123; judicious curtailment of credit for non-essential purposes urged by, 124-26, 147, 149,
166, 167, 169; retirement of Mr.
Delano from, 127; retirement of
M r . Warburg from, 127-30; retirement of Dr. Willis from, 130; J. A .
Broderick appointed Secretary of,
130; Henry A . Moehlenpah appointed member of, 130; difficulty at
one time in finding men to accept
membership on, 130-32; Albert
Strauss appointed member of, 132;
discount rate policy of, 145-49, 25255; replies to question concerning advisability of reducing volume of currency, 150-55; advance in discount
rates advocated b y some members
of, 156; approves advances made in
discount rates, 158, 160; statement
of, regarding call-money
rates,
161, 162, 280-83; suggests graduated scale of rates, 164; never in
favor of policy of deflation, 1 6 6 , 1 6 7 ;
excerpt from Annual Report of, of
year 1 9 1 9 , 1 6 6 , 1 6 7 ; conference with
bankers on January 6, 1920, 169,
170, 179; conference on M a y 18,
1920 ('the great conspiracy,' 'the
crime of 1920'), 171-^80; letter to
Senate in response to resolution of
Senator McCormick, 180, 181; Edmund Plate appointed member of,
181, 182; approves advance in discount rates made b y some Banks,
182; consents t o rediscounting between Federal Reserve Banks, 183;

INDEX
D . C . Wills appointed member of,
186; conference with representatives
of cotton-growers, 187, 188; receives
requests regarding rediscounting of
cotton factors' notes, 189-91; denounced for having caused deflation,
191; opposed to bill fixing rate of interest and discount, 192; pressure
exerted upon, for reduction of discount rates, 193; letter of Senator
Owen to, discussed, 195-200; its
reasons for not lowering discount
rates, 197-200, 212; letter of Mr.
Williams of December 28,1920, to,
with criticisms and suggestions, 20002; Mr. Williams continues to attack, 204, 209; answer of, to Mr.
Williams, 204-09; Mr. Williams invites members of, to be his guests,
2 1 1 ; John R . Mitchell appointed
member of, 215; propaganda to discredit, 218; requests investigation,
219; investigation of, referred to
agricultural Commission, 219; its efforts to restrict expansion, inflation,
speculation, and extravagance during 1919, 223; denounced in Senate,
223, 224; discount rates not initiated
b.y» 2 3o; submits to Senate information concerning salaries of officers
and employees of Federal Reserve
Banks, and also concerning the
buildings of the Banks, 232-34;
salaries of officers and employees of
Federal Reserve Banks must be
approved b y , 233, 236; method
of appointment of members of, 235;
reply to Senate Resolution 308,
237, 306-09; movement for farmer
member of, 238-43; Governorship
of, no sinecure, 239; bill to increase
number of appointive members from
five to six, hearing on, 239-43; passage of bill to increase membership
of, 244; as constituted at time of
Governor Harding's retirement, 247;
routine work of, 247; character of
criticism of, 247, 248; policy as regards buildings, 248-50; the gold
policy of, 251, 252; open-market
policy of, 251.
Federal Reserve System, efforts made
t o induce State banks and Trust
companies to enter, 70-74, 82; appeal for entrance of State banks and
trust companies into, 82-84; many
State banks and trust companies
enter, 85; its after-War service, 195;
complimentary remarks on, in

315

Comptroller Williams's annual report of February 7, 1921, 209, 210:
defended in Senate b y Senator
Glass, 237.
Federal Reserve districts, lines of,
changed b y the Board, 34-38; apportioned b y Organization Committee, 34, 35; the Board without
power to abolish, 35—37; reasonable
readjustment of, within the power
of the Board, 37.
Federal Reserve notes, A c t amended
as regards, 75, 77, 79, 80, 82; impossible to issue large amounts of, in
early days of System, 76; method of
obtaining, from Agent, 97; outstanding on January 26, 1917, 77;
amendment concerning, not an
emergency measure and should be
permanent, 80, 81; effect of amendment relating to issues of, 85-87;
in circulation in 1920, table of, 184;
on December 26, 1919, and on
December 30, 1920, compared, 194;
outstanding in 1920-21, 199.
First Liberty Loan, 89, 90.
Foreign exchange, Division of, established in New York, 97; regulations
covering transactions in, 98; regulations of Division of, 99; business of,
cheerfully carried out by banks, 99;
purpose of the restriction placed
upon 99, 100. See Exchange.
Funk, Representative, member of the
Joint Commission of Agricultural
Inquiry, 218.
Glass, Carter, Secretary of the Treasury, his Victory note bill, 139, 140;
appointed ad interim Senator from
Virginia, 160; resigns as Secretary of
the Treasury, 160; expresses hope
that Federal Reserve Banks will not
place too much reliance on increased
rates, 168; copy of Comptroller
Williams's letter of December 28,
1920, received b y , 204; defends
Federal Reserve System in Senate,
237.
Gold, first phases of the Board's policy
regarding, 74, 75; accumulated with
Agent as collateral for notes, 77~79I
amount of reserves of, to be held by
Reserve Banks, 79; reserves of, of
member banks, 163; brought into Reserve Banks as result of amendment
relating to issues of notes, 87; withdrawn from United States, 91, 92;
executive order restricting export of,

331

INDEX

Anderson of the Joint Commission,
92, 93; applications for shipment of,
suggesting investigation of charges,
passed upon by Board, 93-95. 9 8 ;
224;
correspondence with Governor
one case of application for shipment
M c K e l v i e of Nebraska, 224-28;
of, described, 95-97; amplification
letter to President Harding on
of order restricting export of, 98;
member of Reserve B a n k of Chithe purpose of the restriction placed
cago, 235; resolutions urging his reupon the exportation of, 99, 100;
appointment, 239; disapproves of
removal of embargo on t 149; rebill to increase membership of
serves and deposits on December 26,
Board, 240, 242; attacked in the
1919, and on December 20, 1920,
Senate, 245, 246; retires from
194; reserves in 1920-21,199; policy
Board, 247.
of Federal Reserve System in regard
to, 251, 252.
Harding, Warren G., President, becomes President, 215; first month of
Gold exchange fund, 18, 19.
his administration, 215, 216; letter
Gold fund, established b y Board, 4 6 to Governor Harding on member of
48.
Reserve B a n k of Chicago, 235.
Great Britain, declares cotton contraband, 40-43; sterling exchange main- Harrison, Senator, member ( of the
Joint Commission of Agricultural
tained by, 101.
Inquiry, 218.
Gronna, Senator, discusses Victory
Hefiin, Senator, speech of Comptroller
Note Bill, 143.
Williams delivered by, 209; his resolution concerning mailing of Senator
Hamlin, Charles S., appointed member
Glass's address defending the Fedof Board, 4, 5; Assistant Secretary
eral Reserve System, 237; accuses
of the Treasury, 4; Governor of
Governor Harding in the Senate,
Board, 5; appointed member of
246.
Board for full term of ten years, 61;
accompanies Lord Cunliffe on visit Henry, Robert L . , his suggestion for
to cities, 89; appointed to the
relief of cotton market, 21.
Capital Issues Committee, 120.
High Cost of Living, 149, 180.
Harding, Governor W . P . G . , inter- Holland, American exchange in, during
view with Colonel House, 1, 2; apthe War, 102.
pointed member of Federal Reserve House, Colonel E . M . , interview with
Board, 2 - 5 ; his view as to number of
Governor Harding, 1, 2.
districts, 35, 36; member of com- Houston, D a v i d F., becomes Secretary
mittee on redistricting, 36; interof the Treasury, 160; on W a r Fiview with Sir Cecil Spring-Rice, 42,
nance Corporation, 1 9 1 ; succeeded
43; his advice as regards declaration
as Treasurer b y Andrew W . Mellon,
of embargo on cotton, 43; desig215.
nated to succeed Hamlin as G o v ernor of the Board, 6 1 ; speaks before India, gold shipments to, 93.
Committee of Senate on bill to pro- Inflation, effort to avoid, 7 5 , 7 8 , 166;
vide credits for industries, 108, 1 1 4 in the War, 118, 119; Treasury
16; of the W a r Finance Corporation,
methods of financing the W a r , in
120; resigns from W a r Finance Correlation to, 252, 253, 257-79.
poration, 120; address before Con- Interbank r e d i s c o u n t s g, 45.
ference of M a y 18, 1920, 172-75; Interest, advance in rate of, 106, 107,
blamed for cotton situation, 188;
169; proposed t o fix maximum rate
addresses annual meeting of Amerof, 192; Senator Owen appeals for
ican F a r m Bureau Federation, 189,
lower rates of, 196.
284-88; congratulated b y Comp- Investments, on December 26, 1919,
troller Williams on his birthday
and on December 30, 1920, comanniversary, 2 1 1 ; communication
pared, 194.
with President Wilson, 213, 214;
reply to letter of Senator Smoot, James, George R . , appointed member
219, 289-95; witness before Joint
of the Board, 247.
Commission, of Agricultural In- Japan, panic in, owing t o falling off of
vestigation, 219; denounced in
demand in silks in United States,
Senate, 223; letter t o Chairman

163.

INDEX
Jersey C i t y , N e w Jersey, transferred
to New Y o r k District, 38.
Joffre, M., visits America as representative of French Government, 89.
Joint Commission of Agricultural Inquiry, personnel of, 218; duties of,
218; investigation of Board referred
to, 219; hearings before, 219, 220;
its report, 220-23, 253, 296-305.
Jones, Thomas D., nominated for
membership of Federal Reserve
Board, 4; his corporate connections,
4; withdraws name, 4.
Kansas, Federal Reserve B a n k of,
Governor M c K e l v i e ' s correspondence with Governor Harding concerning discount rates of, 224-28;
effective functioning of, 231.
K e n t , Fred J., director of Division of
Foreign Exchange in New Y o r k , 97.
Kenyon, Senator, leader of the Farm
Bloc, 218; on bill to increase membership of Board, 245.
L a Follette, Senator Robert M . , discusses Victory Note Bill, 143.
Labor's National Peace Council, plea
before the Board, concerning exportation of war material and munitions,
40.
Leffingwell, Russell C . , Assistant
Secretary of the Treasury, on cause
of depreciation of Liberty bonds,
157 J opposes advance in discount
rates, 157, 158; address on Treasury
policies, 252, 253, 257-79.
Lenroot, Senator, member of the Joint
Commission of Agricultural Inquiry, 218.
Leonard, C . M . , of the W a r Finance
Corporation, 120.
Liberty bonds, cause of their depreciation, 157.
Liberty Loan, First, 89, 90; later campaigns, 94; rates of interest determined by Secretary of the Treasury,
94.
Licenses, for permitting gold exportation s, 98.
Live-stock credits, 132-34.
Lon^-term loans, 41.
Louisiana, parishes of, changed to
A t l a n t a District, 38.

317

come political organizations, 8; desirous that the Board should be a
Treasury bureau, 8; believed in
Cabinet supervision of all agencies
of the Federal Government, 8; desired change in law authorizing the
Board to levy assessments on Federal Reserve Banks, 8, 9; amendment of Federal Reserve A c t relative to appointment of members of
the Board favored b y , 10; urges
amendment of
Aldrich-Vreeland
A c t , 16; addresses bankers August
2, 1914, 18; letter to Robert L .
Henry on relief of cotton market of
1914, 21-24; insists on organization
of Reserve Banks, 26; gives approval of press statement of Board
relative to acceptance credits for
foreign accounts, 64; takes measures to finance the War, 89, 90;
his plan for establishment of W a r
Finance Corporation and Capital
Issues Committee, 108; his bill t o
provide credit, 108; his remarks on
bill before Senate Committee, 108-

Mc^ormick, Senator, resolution offered b y , 180.
Mcintosh, J. W . , appointed Comptroller of the Currency, 247.
McKellar, Senator, of Tennessee, introduces bill concerning rediscounting of cotton factors' bills, 190.
M c K e l v i e , Governor, correspondence
with Governor Harding, 224-28,
231.
McLean, Angus W. f of the W a r Finance Corporation, 120.
McLean, Senator, Senate resolution of,
219; letter of Governor Harding to,
246.
M c N a r y , Senator, member of the
Joint Commission of Agricultural
Inquiry, 218.
Mellon, Andrew W . , becomes Secretary of the Treasury, 215; his first
statement to the banks, 216; . a n d
question of Governor Harding's reappointment, 238, 239; disapproves
of bill to increase membership of
Board, 240, 241.
Mexico, applications for shipment of
gold into, 93, 94.
Meyer, Eugene, Jr., of the W a r Finance Corporation, 120.
Martin, Senator, of Virginia, death,
Miller, Adolph C., appointed member
160.
of Board, 4, 5; Assistant to t h e
M c A d o o , William G., 3; not desirous of
Secretary of the Interior and Prohaving Federal Reserve B a n k s be-

333

INDEX

fessor of Economics at the University of California, 4; his view as to
number of districts, 35; chairman of
Board's Bulletin Committee, 130;
address of, on After-War Readjustment, 134-38; his point of view in
his address, 139; address before Conference of May 18, 1920, 175-77*
Miller, Governor, of the Federal Reserve Bank of Kansas City, 220.
Mills, Ogden L., member of the Joint
Commission of Agricultural Inquiry,
218; minority report of, as member
of Joint Commission of Agricultural
Inquiry, 303-05.
Mitchell, John R., appointed member
of Board, 215; resigns from Board,
247.
Moehlenpah, Henry A., appointed
member of the Board, 130; retirement of, from the Board, 186. #
Morgan, J. P., and Company, attitude
concerning British Treasury bills,
65, 69.
Munitions, decision of the Board with
regard to, 41.
Myers, Senator, 150.
National Agricultural Credit Corporations, 222.
National Bank Act, 49.
National bank notes, increases in circulation of, permitted by AldrichVreeland Act, 16, 18.
National banks, applications of, for
charter, to be made to Comptroller
of the Currency, 6, 7; sometimes
granted^ charters against recommendations of officials of Federal
Reserve Banks, 7; reports of examinations of, 7; under AldrichVreeland Act, 15, 16; methods of
collecting checks, 49, see Checks;
as regards reserves of, 72-74.
Nebraska, Governor McKelvie's correspondence with Governor Harding, 224-28; banks of, 231.
Neutrality proclamation, 39.
New York, Federal Reserve Bank of,
its building, 249, 250.
New York Clearing-House, action in
view of increase in rates of interest,
106, 107, 169.
Newark, New Jersey, transferred to
New York District, 38.
Norris, Senator, on bill to increase
membership of Board, 244.
North Carolina, legislation in, concerning collection of checks, 58, 59.

NorthclifFe, Lord, visits America as
representative of English Government, 89.
Norway, American exchange in, during the War, 102.
Notes. See Federal Reserve notes.
Oklahoma, counties of, changed to
Kansas City District, 38.
Olney, Richard, declines appointment
to Federal Reserve Board, 3.
Omaha, branch bank established at,
38.
Open-market operations of Federal
Reserve Banks, 32, 33.
Open-market policy of the Board, 251.
Overman Act, the, 123, 223.
Owen, Senator, 79, 143; his efforts on
behalf of importer of olive oil, 9597; his criticism of the Board, 102,
103; insisted that the Board establish foreign branches, 103; pressure
exerted by, for lower discount rates,
164; letter of, to the Board, discussed,
195-200.
Paish, Sir George, discusses exchange
situation, 18, 19.
Par clearance system, 51-60. See
Checks.
Pittman Act, the, 121, 122.
Pittsburgh, petition that Reserve
Bank be located at, 34, 37.
Piatt, Edmund, appointed member of
the Board, 181; acting Governor of
the Board, 247.
Prices, advances in, 144, 149; reaction
in, 163, 165, 166, 180; protests
against high, 170, 180; of commodities, and discount rates, 184, 185,
254» 255; decline in, 191.
Propaganda work, at the beginning of
the World War, 40, 42.
Public interest, the decisive factor in
Board's decisions concerning exportation of gold and foreign exchange, 100.
Rates, discount. See Discount rates.
Rates, call-money, statement of Board
regarding, 161 f 162, 280-83.
Rediscount functions of Federal Reserve Banks, 228-31.
Rediscounting, between Federal Reserve Banks, 182, 183; of cotton
factors* notes, 189-91.
Rediscounts, on December 26, 1919,
and on December 30, 1920, compared, 194.

INDEX
Reserve balances, fictitious, Si. See
Checks.
Reserve Bank Organization Committee, Comptroller of the Currency
made a member of, 6; b^-laws
framed by, 13; its duties in designating Federal Reserve cities and apportioning districts, 34, 35.
Reserves, amendments in Act concerning, 72-75, 79, 80, 82. See Gold.
Revolving credits, 41.
Robinson, Senator, member of the
Joint Commission of Agricultural
Inquiry, 218.
Rupees, provision for exchange of, 93.

319

reserves of 72-74; appeal to, to enter
the System, 82-84; effect of appeal
to, 85.
Strauss, Albert, appointed member of
the Board, 132; resigns from Board,
182.

Strong, Governor, of the Federal Reserve Bank of New York, witness
before Joint Commission of Agricultural Inquiry, 220.
Sumners, Representative, member of
the Joint Commission of Agricultural Inquiry, 218:
Supreme Court of the United States,
opinions regarding collection of
checks, 58, 59.
Senate Resolution 308, 237; reply of Surplus funds, increase in amount of
Federal Reserve Board to, 306-09.
accumulation of, allowed by amendSherman, Senator, discusses Victory
ment of Federal Reserve Act, 140Note Bill, 143.
43.
Short-term loans, 41.
Sweden, American exchange in, during
Silver, movement of, after entry of
the War, 102.
United States into the War, 93.
Switzerland, American exchange in,
Silver, Gray, Legislative Agent of the
during the War, 102.
American Farm Bureau Federation,
at hearing on increasing member- Ten Eyck, Representative, member of
^ ship of Board, 240.
the Joint Commission of Agricultural Inquiry, 218.
Silver coinage, bill relating to (Pittman Act), passed in 1918, 121-23.
Treasury, the, attitude on a question
Smith, Senator, resolution of, 238.
of advance of discount rates, 15658; financing, bearing of, on money
Smoot, Senator, letter of, to Governor
market, 213; policies during the
Harding, and reply thereto, 219,
War, 257-79.
289-95.
Social amenities, at Washington, as Treasury, Secretary of the, attitude
toward the Federal Reserve Board,
affected by the World War, 39.
7-13; Chairman of War Finance
Spain, American exchange in, during
Corporation, 120. See Glass, Housthe War, 1 0 1 , 102.
ton, McAdoo, Mellon.
Speculation, tendency toward, after
the War, 144; efforts of Board to Treasury Building, offices of Federal
Reserve Board in, 5.
restrict, 223.
Spring-Rice, Sir Cecil, announces de- Treasury certificates of indebtedness,
taken by Federal Reserve Banks,
cision for embargo on cotton, 42,43;
8 7 , 88.
character of, 43; a good raconteur,
43, 44; anecdote told by, concerning Trust companies, methods of collecting checks, 49, see Checks; efforts
King Edward VII, 44.
made to induce them to enter the
State banks, applications of, for enSystem, 70; objections of, to entertrance to Federal Reserve System, to
ing System, 70, 71; as regards volbe made to Federal Reserve Board,
untary withdrawal from System,
6; sometimes became members of
70-72; as regards dual supervision
System without consent of the
of, 71, 72; amendment to induce
Board, 7; methods of collecting
them to enter System, 72-74, 82; as
checks, 49, see Checks; efforts made
regards reserves of, 72-74; appeal
to induce them to enter the System,
to, to enter the System, 82-84; ef70; objections of, toenteringSystem,
fect of appeal to, 85.
70, 71; as regards voluntary withdrawal from System, 70-72; as reVictory
Loan, bill passed by Congress,
gards dual supervision of, 71, 72;
140, 143; success of, 148, 149; vote
amendment to induce them to enter
on, 2 5 3 .
the System, 72-74» 82; as regards

320

INDEX

Viviani, M., visits America as representative of French Government, 89.
Wade, Festus J., suggests cotton loan
fund, 24.
Wallace, Mr., Secretary of Agriculture, at hearing on increasing membership of Board, 24.0-42.
War Finance Corporation, established,
108-19; capital of, 120; membership of, 120; its services, 120, 121;
resumes activities, 191, 192.
War Industries Board, dissolved, 134.
War material, decision of the Board
with regard to, 41.
War Trade Board, dissolved, 134.
Warburg, Paul M., appointed member
of Federal Reserve Board, 4, 5; his
banking connections, 4; suggestion
of, relative to gold exchange fund,
18; his view as to number of districts, 35, 36; member of committee
on redisricting, 36; designated ViceGovernor of the Board, 62; speaks
before Committee of Senate on bill
to provide credits for industries,
108,116-18; retirement from Board,
127-30.
West Virginia, counties of, changed to
Cleveland District, 38.
Wheat, market in 1923, 21; monthly
quotations on, in 1920, table of,
184, 185.
Wheeler, Harry A., declines appointment to Federal Reserve Board, 3.
Williams, John Skelton, appointed to
the Capital Issues Committee, 120;
address before Conference of May
18, 1920, 177, 178; Comptroller of
the Currency, objection in Senate to
confirmation of his reoomination,
201; letter of December 28,1920, to
the Board, criticising and suggesting, 202-04; continues to attack the
Board, 204, 209; answer of the

Board to, 204-09: address at
Augusta, Georgia, July 14, 1921,
209,2x9; quotations from his annual
report of February 21, 1921, 210;
congratulates Governor Harding on
birthday anniversary, 211; invites
Federal Reserve Board members to
be his guests, 211; unaccountable
change in his views, 211-13; resignation of, 215; witness before Joint
Commission of Agricultural Inquiry,
2x9.
Willis, Dr. H. Parker, Secretary of
Federal Reserve Board, 5; retires
from the Board, 130.
Wilson, Woodrow, President, his appeal to Governor Harding to accept
appointment to Federal Reserve
Board, 3; makes additions to
Board's statement concerning sales
of British Treasury bills, 66, 68;
appeal to State banks and trust
companies to enter the System, 8284; issues order restricting export of
gold, 92, 93; amplification of order restricting export of gold, 98;
letter to Mr. Warburg on latter's
withdrawal from the Board, 129,
130; communication with Governor
Harding, 213, 214.
Wills, D. C., appointed member of the
Board, 186; succeeded by John R.
Mitchell, 215.
Wisconsin, counties of, changed to
Chicago District, 38.
World War, the, breaking out of, 15;
disturbances in the commodity
markets caused by, 15-25; effect of,
on social and diplomatic life at
Washington, 39, 40; entry of United
States into, 69, 82; immediate effect
of entry of United States into, 91;
economic effects of, 106; Treasury
methods of financing, in relation to
inflation, 252, 253, 257-79.

Full text of The Formative Period of the Federal Reserve System : (During the World Crisis)

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