Benjamin Strong Jr. to William Jennings Bryan
Title
Benjamin Strong Jr. to William Jennings Bryan
Creator
Strong, Benjamin, 1872-1928
Identifier
WWP18453
Date
1914 August 2
Description
Benjamin Strong Jr. writes to William Jennings Bryan about the situation regarding credit extended to American traveller’s in Europe.
Source
Benjamin Strong Jr. Papers, New York Federal Reserve Bank
Language
English
Text
My dear Mr. Secretary:
It has not been possible until the present time for me to write, as I had hoped to do, making some explanation of the urgency which developed in regard to the protection of travelers’ credits held by our countrymen in Europe, and furthermore of the reasons for my assuming that no effective measures for their protection could be undertaken without cooperation of our Government.
Travelers’ Cheques and Letters of Credit which are issued by American banking institutions and bankers total many millions in the course of one season; some institutions which make sales as high as $30,000,000 or $40,000,000 annually have outstanding at one time from $5,000,000 to $15,000,000 of these credits which may be cashed at the election and convenience of the travelers in any part of the world. The banks which issue them are unable to anticipate in what volume they may be cashed at any given point, and they are accordingly issued under banking contracts, by the terms of which the foreign institutions which make the payments on the credits receive reimbursement by drawing drafts on London at the rate of exchange current at that place on the day the drawing is made. Without this method of London reimbursement it would be necessary for the banks issuing these credits to carry very large balances in a great many cities, the total being far in excess of the total credit outstanding, and naturally the business would be unprofitable, as it would absorb too much capital if conducted on that basis.
As soon as the crisis in foreign exchange occurred and it became known that London reimbursement was likely to be disarranged and possibly be absolutely discontinued, it was apparent that those banks on the Continent which were in the habit of employing London reimbursement under these contracts might in many cases discontinue cashing cheques. In order, therefore, to meet this situation (quite unprecedented in the history of banking) two methods of procedure only were possible; one was to ship gold directly to all points where travelers were congregating and would be without funds, and the other, to establish banking credits at these points, through the agency of the United States Government, which would enable the local banks to make payments on cheques and drafts.
The procedure which has been followed of shipping gold to London as the base from which these credits might be established at different points on the Continent, has, I believe, been effective in relieving a situation which might otherwise have become so distressing as to have caused intense suffering on the part of our citizens in Europe. In fact, the mere knowledge that a shipment of gold was being made in a United States war vessel had an instant effect in releasing money to our travelers even before special credits had been established. It has been possible in some places to establish credits against reiumbursement out of the gold shipped to London, and in other places, against deposits in New York, muscch more readily than would have been the case had a mere promise of a gold shipment been held out to these foreign banks.
Prior to the writer’s first trip to Washington, when he had the pleasure of meeting you, a number of the leading institutions and firms in New York were asked to make verbal commitments to furnish gold for the purpose of protecting these credits and insuring relief payments under such plan as might be developed. The response to this appeal was an immediate pledge of about $7,000,000, which could have been largely increased had it been required, as some thirty-four firms and institutions have now participated in the fund. All of this fund was contributed with a view to cordial cooperation with the Government in relief plans.
The bankers who participated in this fund realized that although there are probably hundreds of institutions in the United States issuing letters of credit and travelers’ cheques, it would be impossible to secure their cooperation in relief plans of this character in time to make them effective, and they therefore furnished the fund, not, as has been once stated, for the protection of their own credits, but for the protection of all American credits issued by responsible concerns, irrespective of whether those firms were contributors to the fund or not. Subsequent developments have disclosed the fact that a large number, if not all of the ten original contributors who practically underwrote the funds, were in little, if any need of taking measures of this character for the protection of their own credits, as the larger institutions, better known abroad, had much less difficulty in making direct financial arrangements.
We will, of course, hear of many cases of hardship, and possibly many complaints, but the course pursued has, I believe, reduced these to a bare minimum, and a continuance of the policy of opening credits where necesssary, either against deposits made in New York, as will probably be necessary in some cases, or against the gold which has been shipped to London, will gradually furnish all travelers who have credits with means of paying absolutely necessary expenses and obtaining transportation home.
It now seems apparent that the three great objects to be accomplished, namely, to relieve the distress of our friends abroad; to demonstrate the ability of our Government to afford relief to its citizens in such a crisis as the present one, and to protect the credits of American institutions which were obliged to meet the obligations of their clients in Europe, are all in the way of accomplishment, and in behalf of many of the bankers in this city, who have felt a grave responsibility in this matter, I now beg to convey to you our warm thanks for your hearty cooperation and the repeated evidence of your confidence in our plans and purposes.
With cordial regards, believe me,
BENJAMIN STRONG, JR.
President.
It has not been possible until the present time for me to write, as I had hoped to do, making some explanation of the urgency which developed in regard to the protection of travelers’ credits held by our countrymen in Europe, and furthermore of the reasons for my assuming that no effective measures for their protection could be undertaken without cooperation of our Government.
Travelers’ Cheques and Letters of Credit which are issued by American banking institutions and bankers total many millions in the course of one season; some institutions which make sales as high as $30,000,000 or $40,000,000 annually have outstanding at one time from $5,000,000 to $15,000,000 of these credits which may be cashed at the election and convenience of the travelers in any part of the world. The banks which issue them are unable to anticipate in what volume they may be cashed at any given point, and they are accordingly issued under banking contracts, by the terms of which the foreign institutions which make the payments on the credits receive reimbursement by drawing drafts on London at the rate of exchange current at that place on the day the drawing is made. Without this method of London reimbursement it would be necessary for the banks issuing these credits to carry very large balances in a great many cities, the total being far in excess of the total credit outstanding, and naturally the business would be unprofitable, as it would absorb too much capital if conducted on that basis.
As soon as the crisis in foreign exchange occurred and it became known that London reimbursement was likely to be disarranged and possibly be absolutely discontinued, it was apparent that those banks on the Continent which were in the habit of employing London reimbursement under these contracts might in many cases discontinue cashing cheques. In order, therefore, to meet this situation (quite unprecedented in the history of banking) two methods of procedure only were possible; one was to ship gold directly to all points where travelers were congregating and would be without funds, and the other, to establish banking credits at these points, through the agency of the United States Government, which would enable the local banks to make payments on cheques and drafts.
The procedure which has been followed of shipping gold to London as the base from which these credits might be established at different points on the Continent, has, I believe, been effective in relieving a situation which might otherwise have become so distressing as to have caused intense suffering on the part of our citizens in Europe. In fact, the mere knowledge that a shipment of gold was being made in a United States war vessel had an instant effect in releasing money to our travelers even before special credits had been established. It has been possible in some places to establish credits against reiumbursement out of the gold shipped to London, and in other places, against deposits in New York, muscch more readily than would have been the case had a mere promise of a gold shipment been held out to these foreign banks.
Prior to the writer’s first trip to Washington, when he had the pleasure of meeting you, a number of the leading institutions and firms in New York were asked to make verbal commitments to furnish gold for the purpose of protecting these credits and insuring relief payments under such plan as might be developed. The response to this appeal was an immediate pledge of about $7,000,000, which could have been largely increased had it been required, as some thirty-four firms and institutions have now participated in the fund. All of this fund was contributed with a view to cordial cooperation with the Government in relief plans.
The bankers who participated in this fund realized that although there are probably hundreds of institutions in the United States issuing letters of credit and travelers’ cheques, it would be impossible to secure their cooperation in relief plans of this character in time to make them effective, and they therefore furnished the fund, not, as has been once stated, for the protection of their own credits, but for the protection of all American credits issued by responsible concerns, irrespective of whether those firms were contributors to the fund or not. Subsequent developments have disclosed the fact that a large number, if not all of the ten original contributors who practically underwrote the funds, were in little, if any need of taking measures of this character for the protection of their own credits, as the larger institutions, better known abroad, had much less difficulty in making direct financial arrangements.
We will, of course, hear of many cases of hardship, and possibly many complaints, but the course pursued has, I believe, reduced these to a bare minimum, and a continuance of the policy of opening credits where necesssary, either against deposits made in New York, as will probably be necessary in some cases, or against the gold which has been shipped to London, will gradually furnish all travelers who have credits with means of paying absolutely necessary expenses and obtaining transportation home.
It now seems apparent that the three great objects to be accomplished, namely, to relieve the distress of our friends abroad; to demonstrate the ability of our Government to afford relief to its citizens in such a crisis as the present one, and to protect the credits of American institutions which were obliged to meet the obligations of their clients in Europe, are all in the way of accomplishment, and in behalf of many of the bankers in this city, who have felt a grave responsibility in this matter, I now beg to convey to you our warm thanks for your hearty cooperation and the repeated evidence of your confidence in our plans and purposes.
With cordial regards, believe me,
BENJAMIN STRONG, JR.
President.
Original Format
Letter
To
Bryan, William Jennings, 1860-1925
Files
Collection
Citation
Strong, Benjamin, 1872-1928, “Benjamin Strong Jr. to William Jennings Bryan,” 1914 August 2, WWP18453, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.