Benjamin Strong Jr. to William G. McAdoo




Benjamin Strong Jr. writes William G. McAdoo regarding the issuance of Federal Reserve notes.


Benjamin Strong Jr. Papers, New York Federal Reserve Bank




Denver, Colorado,

Dear Mr. Secretary:
In elaboration in my letter of December 11th last, I am below suggesting in detail the matters relating to our currency to which my letter had reference and which I believe should be the subject of further legislation by Congress at an early date. I am writing you separately on the subject of a “Budget”, as suggested by your letter just received. Some of the various points mentioned below have already been the subject of correspondence with members of the Federal Reserve Board, and are covered by bills now before Congress.
After more than two years’ practical experience with the Federal Reserve Banks in operation, I believe it has been thoroughly demonstrated that the following additional legislation is needed.
1. The entire issue of United States notes (greenbacks) should be retired at once, the Federal Reserve Banks assuming their redemption, so as to gradually substitute in circulation Federal Reserve notes (not Federal Reserve bank notes). In consideration of their assuming this obligation they should receive from the government the entire amount of the present Trust fund (say $153,000,000) of gold and in addition government bonds for $193,000,000, bearing a rate of interest which would enable the Reserve Banks to gradually sell them, but so long as held by Reserve banks, the government to receive a tax which would reduce the net cost to the government to say 1-1/2%. Thesebondsonly to be used as security for Federal Reserve Notes.
2. The Reserve banks should be authorized to issue Federal Reserve notes directly and freely against gold and the gold so obtained should count as an asset and the notes issued as liabilities of the Reserve Banks. This subject has been thoroughly threshed out by the Reserve Board, but for some reason Congress fails to appreciate, not only the wisdom but the absolute necessity for this change in the law.
3. Congress should provide for the redemption at face value and the recoinage at the expense of the government of all gold coin now in circulation which is abraded below the limit of tolerance, and demonetize any gold coin which is not presented within a prescribed period, so as to force its immediate redemption. If the Reserve Banks were made the agencies for receiving this gold, they could pay for at least a part of it by issues of Federal Reserve notes and correspondingly increase their gold holdings.
4. The present practice of the New York Sub-Treasury and Assay Office of receiving gold from responsible depositors for assay and coinage and paying atonce 99% of the assumed value thereof should be discontinued and all depositors of gold should be forced to await at least the assay office return, and possibly the Mint return, before receiving payment. Coincident with this change of policy, the Reserve Bank should offer to purchase all gold under an arrangement substantially similqar to that now conducted by the Sub-Treasury and Assay Office at New York, under which they pay 99% of the assumed value at once. This would put the Federal Reserve Banks in the same relation to the American gold market as that now occupied by the Bank of England in the English gold market. It would make dealings in gold for cash purely banking transactions and leave the Mint, as it should be, a government institution for the conversion of gold bullion into gold coin for any depositor who preferred to deposit his gold and await its actual minting.
5. The law prescribing the denominations of gold certificates should be modified at least to the extent that the determination of denominations shall rest with the Secretary of the Treasury, or jointly with the Secretary of the Treasury and the Federal Reserve Board. This would enable the gradual retirement of gold certificates of denominations of say less than $100, until such time as both the Reserve Banks and the National Banks had largely increased their gold stock, but would not deprive the Secretary of the Treasury of the power to resume the issue of small denomination gold certificates to such extent as became necessary in order that the country be not entirely denuded of gold circulation, which I regard as a desirable and necessary element in the hand to hand circulation of the country.
6. The issue of small denomination silver certificates, particuarly in $1.00, $2.00 and $5.00 denominations, should be increased as rapidly as these denominations can be absorbed in general circulation. I am aware that it has been the policy of the Treasury Department to endeavor to meet the constantly increasing demand for small bills, and that an order has lately been made providing for the issue of small denomination United States notes; - but, as I believe that all the United States notes should be retired, the demand for small bills must in that event necessarily be furnished entirely in the form of silver certificates.
7. Provision should be made for a more rapid retirement of National Bank notes, with considerable discretion resting in the Federal Reserve Board as to the the progress of the retirement. My theory is that the demand for currency at the present time is so great by reason of unusual business activity, that efforts should now be directed principally to impounding imported gold, which counts as bank reserve, rather than in contracting other existing currency which does not count as reserve; but that the means should be at hand for the later retirement of National bank notes in large volume, coincident with the inevitable subsidence of business and a resulting redundancy in our currency. The legislation should be undertaken now, but possibly the operation not commenced until business slackens.
8. The operations of the Federal Reserve Banks will require them to accumulate a considerable stack of United States standard gold bars. Provision should be made by executive order for waiving remelting charges in favor of Federal Reserve Banks which enter into necessary undertakings with the government to protect the government against any loss in that respect. This matter is fully covered in a letter which I recently wrote to Governor Harding, copy of which is enclosed herewith.
9. While not bearing directly on the currency, I think the provisions of the Clayton Act should be modified so as to eliminate the present absolute prohibition in regard to private banks serving as bank directors. Some modification of this Act is necessary before it is possible to induce many of the larger Trust Companies to become members of the Federal Reserve System, and I think it can be shown that the objects sought by the Clayton Act have already been fully accomplished and could not now be defeated by some modification in this respect.
The suggestions made above are only those of considerable importance and I appreciate the difficulties which must be encountered in securing the adoption of a program as extensive as the one suggested. Nevertheless, all of these I regard as important measures, looking to the financial preparedness of this country against any possible emergency; in fact of sufficient importance to justify their being brought to the attention of Congress by the President to the extent that legislation is required.
I beg to remain,
Respectfully yours,

Original Format





Strong, Benjamin, 1872-1928 , “Benjamin Strong Jr. to William G. McAdoo,” 1917 February 19, WWP18541, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.