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INTEREST RATES. R E M A R K S H O N . R O B E R T L. O W E N , OF OKLAHO MA , AND HIS LETTER TO THE PRESIDENT, T he S enate of the U nited S tates, February 16, 1920. Mr. OWEN. Mr. President, before tbe war Belgium for 50 years had a 3 per cent rate of interest per annum. It was a fair rate. France had a 3 per cent rate, and even small sums were loaned by the Bank » f France at 3 per cent. United States bonds with currency privilege, bearing 2 per cent, sold at par before the war. London during the war has loaned money to merchants on acceptances at 3^ per cent. The manufacturers, merchants, and business men of the United States are entitled to stable, moderate interest rates. They have this right interfered with by. the violent fluctua tions authorized and practiced in New York and Boston on stock-exchange collateral loans. The call-loan rates are arbi trarily fixed from low rates to 30 per cent, and a bull market or a bear market follows, o f course, as cause and effect. The high rate is fixed avowedly to check speculation, but speculation can be otherwise checked by raising the margins a n d declining to loan beyond a reasonable proportion o f the bank’s resources and by limiting the loans of the Federal re serve bank to banks which persist in this harmful nolicy. These high rates on call loans on the stock exchange has seriously affected the interest rates in our vast commercial business, and even the Federal Reserve Board has raised the rates of the Federal reserve banks to 6 per cent for member banks, which means 7 and 8 per cent for the customers o f the member banks. Against this destructive policy, which adds to the high cost of living, I protest. I have written a letter to the President, which I ask to submit for the R e c o r d without reading. There being no objection, the letter was ordered to be printed in the R e c o r d , as follow s: F ebruary 13, 1920. Subject: Interest rates. The President . The White House. My D ear M r. P resident : I deem It my duty to call yom attention and the attention of your administration to the itn portance of moderate interest rates and stability therein it, the United States and the important part which the influence otf the Government can exert in accomplishing these ends through the Treasury Department, the Comptroller of the Currency* and the Federal Reserve Board. Before the Great War Belgium had a fixed, stable rate of 3 per cent for 50 years, and the rate in France was practically the 104074— 20459 I same, and United States Government bonds with the circula tion privilege were sold at and above par when they bore only i per cent interest. During the World War London merchants have enjoyed a per cent rate on acceptances. Our manufacturers, our merchants, our business men are entitled to reliable, stable, reasonable rates o f interest The productive and distributive processes so essential to re store the equilibrium of the world depend upon such rates in order to function most efficiently. I call your attention to the unreasonable manner in which the interest rates on the stock collateral loans in New York have been fluctuating from normal to 25 and 30 per cent, with tlie most unhappy consequences upon interest rates, injuriously affecting our commercial business throughout the United States. I he Federal Reserve Board has been induced to raise the rate of discount of the Federal reserve banks to a high point as a supposed check on the extraordinary speculation which has been taking place on the stock exchange. These artificially unreasonable high rates of interest charged by the banks in the central cities on stock collateral call loans ha\e had the effect of drawing to these cities from different parts of the country funds which ought to be exclusively used in commerce, and this process went to a point where recently the amount of stock collateral exchange loans on call or short time reached a volume in New York City of $1,900,000 000 withdrawing for speculative purposes these credits which should be used in the industrial and commercial life of the country. c The investing and speculating public has been attracted to the stock exchange by the policy of narrow margins and low rates of interest; but after the public has taken on these sr^ulaiiv^ purchases the interest rates are raised to a high point and the margins are increased from 10 per cent to 20 and 30 per cent f e “»Ct ing» ° Ut the people wh°. the language oo ff /h thei day, can’t hold on.” 6 6 These loans, which were $1,900,000,000 00 days ago have now been reduced to $1 ,000 ,000 ,000 , and the stock market hms gone through a very severe depreciation; and this is the second*unheaval o f this kind within two months. I inclose an exhibit showing the violent fluctuations which have taken place / trary to a wise public policy, to the ruin of many w e X 2 5 foolish speculators; but, above all, to the injury of the manufacturers, merchants, and business men who are entitled to have stable, moderate interest rates. lo na' e The manufacturers, merchants, and business men are entitled o stability. They can not otherwise transact the b u s in g of the country with safety; and in their name and on their belnlf I respectfully and very earnestly insist that the Government shall establish a policy which will give stability to interest 2 t rateseVeUt ***** Vi° lent fluctuations, and lead to lower inter- toTnsw?re: qUeSti° n be 88ked’ How can be done? I venture Jhe influence o f the Comptroller o f the Currency and of the Federal Reserve Board be e x e r t e d t o u i r e « l?,nltation upon loans made by member banks o r i w n t , . 164674— 20459 Danks or banks engaged in 1 3 in t e r s t a t e c o m m e r c e , s o t h a t o n ly a r e a s o n a b le p e r c e n ta g e o f th e d e p o s its o f s u c h b a n k s s h a ll b e p e r m itte d to b e u s e d f o r th e a c c o m m o d a tio n pu rp oses. of th o se w ho are b u y in g sto c k s fo r s p e c u la t iv e Second. That a margin of not less than 25 per cent shall be required in such transactions. T h ir d . T h a t an in te r e s t r a t e n o t e x c e e d in g 8 p e r c e n t s h a ll b e p e r m i t t e d in s u c h t r a n s a c t i o n s . F o u r t h . T h a t th e r e s e r v e b o a r d s h a ll c h a r g e a s p e c ia l r a t e o t in te r e s t to th o s e b a n k s w h o a r e u s in g th e a c c o m m o d a tio n s o f t h e d i s c o u n t p r i v i l e g e s w i t h t h e r e s e r v e b a n k s in e x c e s s o f t h e i r r ig h t fu l p r o p o r tio n a te p a r t o f s u c h a c c o m m o d a tio n , so t h a t th e n o r m a l d is c o u n t r a te s o f th e F e d e r a l r e s e r v e b a n k s s h a ll n o t e x c e e d 4 p e r c e n t, b u t th e s p e c ia l r a t e f o r b a n k s d e s ir in g to u s e m o re th a n th e ir r ig h tfu l p r o p o r tio n o f th e r e s e r v e s w ith th e r e s e r v e m in k s s h a l l b e a t a p r o g r e s s i v e l y h i g h e r r a t e . I n th is w a y b a n k s th a t p u t u p L ib e r ty b o n d s fo r th e p u rp o se o f g e ttin g m o ie th a n th e ir p r o p o r tio n a te p a r t a n d te n d in g t h is m o n e y o u t o n v e r y h i g h r a t e s o f i n t e r e s t w i l l f in d i t l e s s p r o f i t a b l e t o e n g a g e in s u c h a p o l i c y . ° l th e F e ^ r a l r e s e r v e b a n k o f R ic h m o n d , 15 days and under. Member banks: Secured by United States certificate of debt Secured by Liberty bonds Secured by eligible paper ................................ RedSeouiUs:by Customers’ notes— ^ o Y a t i o n bonds. E S h y u ;S v S” „ ' r r“ “ t" TJ n s s t a s " Pin“ ‘» Commercial paper....... Agricultural or live-stock paper.' i»n*: 16 to 90 days. 91 days to 6 months. Per cent. 4i 5* 6 7 Per cent. Per cent. 4i 51 7 6 6 6 4i 51 7 6 6 6 6 ., , . L ujcse uiswuui rates mat eugiuie papei unit is, the notes of manufacturers, merchants, and business men engaged in production and distribution—would be com pelled to pay around 8 per cent if the member bank is permitted any margin over and above what they themselves have to pay the reserve bank. This is true even on trade acceptances, which in London have a rate of 3$ per cent. In other words, our manu facturers, merchants, and business men engaged in production and distribution are compelled to pay by this policy twice as much as they do in London, charging the interest, o f course, upon the cost of the goods, and thus raising the cost of living. Against this policy I enter my resolute and solemn protest. I heartily approve the evident purpose of the Federal Reserve Board to reduce the excessive speculative loans on the stock market and divert such credits to the benefit o f commerce; but this can be accomplished without raising the rate o f interest by requiring larger collateral margins and by limiting stock col lateral loans to a reasonable part of the reserves of the member banks, and all loans to a proportionate part of the reserves with the Federal reserve banks. 164674— 20459 L IB E R T Y LOAN AND VICTO RY LOAN BONDS. When the American people were engaged in the war the Treas ury Department organized Liberty and Victory loan drives, and every citizen was urged to buy these bonds; if necessary to sell his property and buv the bonds; to borrow money and buy the bonds. The bonds were sold at par. It was a patriotic duty to buy the bonds, but the high rates o f interest which have resulted from the unrestrained speculation on the stock exchange, and the high rates of interest which the reserve banks have estab lished, have had the effect of having these bonds appear as a poor investment, and these bonds have shrunk so that in the case of the bonds, which have not the nontaxable feature, have fallen off in value almost 10 per cent, inducing many persons who are poor and who borrowed money to carry these bonds to sell them at a loss, and many more will be induced to sell them at a loss, contrary to a wise and just public policy. If the normal discount rate of the Federal reserve banks were nut at 4 per cent and the banks were discouraged from abusing the privileges o f the reserve banks for stock-speculative pur poses in the manner which I have pointed out, these bonds would come back to par, and they should be brought back to n^x- The people who bought these bonds ought not to suffer a loss and the credit of the United States ought to be preserved by the policy which I have taken the liberty to suggest to you and to your administration. . . . . The result of these speculative stock loans has been such that the New York Federal reserve bank has had its reserve very seriously impaired, so that the New York reserve bank has been borrowing money on a large scale from other reserve banks who do not suffer from this strain. There is no adequate reason why the rates of the reserve banks should not be uniform ; why they ought to be higher in one part of the country and lower in another part of the country. The loans are a s reliable in one part of the country as in another, and every part of the country is entitled to a uniform rate. The high cost of living demands for its solution stability in interest rates in order to encourage production and distribu tion, and to reduce the high cost of living demands a moderate rate o f interest. The Federal reserve banks were not established a s money making institutions, but for the purpose of gi\ing stability and a reasonable stable interest to the productive enterprises of the Nation. . . The Federal reserve banks last year made a profit o f about 100 per cent of their capital, but this in no wpy measures the added expense on the cost of living, because the high rate of interest charged bv the Federal reserve banks is reflected upon loans and discounts of other banks, running into the billions, since it affects the interest rates in all parts of the country. I regard this matter as a matter of national importance, and I would not feel that I had discharged my duty to the country if I had failed to call your attention to it in these explicit terms. Yours, very respectfully, R o b e r t L. O w e n . 164674— 20459 W A SH IN G T O N : G O VERN M EN T P R IN T IN G O F F IC E I 1*20
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