Benjamin Strong Jr. to William G. McAdoo
Title
Benjamin Strong Jr. to William G. McAdoo
Creator
Strong, Benjamin, 1872-1928
Identifier
WWP18553
Date
1917 April 9
Description
J.F.C. writes William G. McAdoo regarding a government bond issue.
Source
Benjamin Strong Jr. Papers, New York Federal Reserve Bank
Language
English
Text
My dear Mr. Secretary:
Concerning the proposed Government bond issue, which was discussed by the governors of the Federal reserve banks with you last week, we have taken occasion at this bank to confer with a few of the leading bankers in this city, including some private bankers, national bankers and trust company officers. For purposes of discussion we took as a text the memorandum on bond issues which the governors of the reserve banks prepared and of which I think Mr. Aiken has sent you a copy. In case, however, you have not received it for any reason, I am enclosing a copy herewith for ready reference.
The consensus of opinion on the points suggested in the memorandum was as follows:
1. As to amount: It was unanimously agreed that an issue of five billion dollars could not be placed at one time at any reasonable rate of interest. The majority of those conferred with felt that such a large issue could not be placed at any rate of interest at all. They were all of opinion that it would be wise, if the Government decided that four or five billion dollars should be raised by bond issues during the first year, that an announcement to that effect might be made but that the first offering for public subscription should be for one billion dollars or, at the outside, two billions.
They also were unanimously in accordance with the governors’ memorandum to the effect that the issue should be free from all taxes and should most certainly carry the privilege of conversion into any subsequent issues carrying a higher interest rate that might be brought out during the period of the war.
2. As to rate: They were all of opinion that an issue of as much as a billion dollars could not be placed at 3%. They thought that such an issue could be placed at 3 1/2% and that an issue of two billion dollars could be placed at 4%. A few of those consulted thought that two billions might be placed at 3 1/2% if there was a very able publicity campaign conducted.
3. As to price: They were all strongly of opinion that the price should be par and interest and that an issue of the size contemplated ought not to be offered to the public for tenders but should be offered for subscription at the flat rate.
4. As to terms: They were substantially in accordance with the views of the governors to the effect that the bonds should be redeemable after a certain number of years from the date of issue, with an annual retirement thereafter of a certain percentage of the total amount in order to retire the whole at a given time; or in the alternative that sufficient sinking fund provisions should be provided for. However, most of those present agreed that an annual retirement was preferable to a sinking fund.
5. As to denomination: The opinion was unanimous that the denominations should be as low as $50. and possibly as low as $20, but that if $20. bonds were to be issued, there should not be any $50. ones.
6. As to subscriptions: They agreed with the governors’ memorandum that the placing of the bonds and obtaining subscriptions should be handled through the Federal reserve banks as fiscal agents of the Government and that subscriptions should be received by all national banks, state banks, trust companies, savings banks, private bankers and post offices. They all agreed that it would be unfortunate to designate certain private bankers (to the exclusion of others) who would be included as official receivers of subscriptions, as this would tend to create hard feeling. They suggested that instead, any private banker should be authorized to receive subscriptions for the reserve banks.
They also felt strongly that a first-class ptublicity committee should be organized as promptly as possible to take charge of the advertising and that this committee should be formed of advertising, publicity men and bond distributors, most of whom should have larger experience than the publicity men of the bond houses and banks themselves.
7. Method of receiving subscription payments: The general opinion prevailed that the subscriptions should all be payable at once and not by instalments, especially if the initial offering was for a billion dollars. In any event, subscriptions in amounts of $1,000. or less should be cleaned up in one payment, even if the larger ones might be paid by instalments.
8. Deposit of proceeds: The feeling was unanimous that the bulk of the proceeds should not be transferred to the Treasury or the Federal reserve banks. Upon the question of leaving subscriptions with state banks and trust companies (not members of the Federal Reserve System) there was not a general expression of opinion, but it was clearly brought out that if it was decided that the proceeds should not be deposited with the nonmember institutions, this intention on the part of the Government should be made clear sufficiently in advance for such institutions to prepare for the shifting of their deposits.
The general feeling was that the institutions with whom the deposits were left or made should not be required to pay interest on them, as this would, as a practical matter, compel them to make use of the funds in order to earn their interest charges, which would have a deterimental effect on the general situtation; and furthermore, that if no interest were charged on the balances, the efforts of the institutions to obtain subscriptions might be increased. There was some criticism of the governors’ suggestion to the effect that deposits in the other institutions be made by the Federal reserve banks, the general opinion being that such a provision would cause an unnecessary complication and that the deposits might be made with the institutions or left with them direct by the Government, instead of having it made by the reserve banks.
The feeling was very strongly expressed that it would be far better to have a comparatively small initial issue at an attractive rate, so that the bonds would be quickly taken by the ultimate investors and go to a slight premium, which would have a very stimulating effect up further issues. It was also suggested that the initial issue might be accompanied by an official statement to the effect that further issues would be forthcoming as the Government requirements might dicatate. One advantage which this method would bring about was stated to be that a good deal of hesitation would be felt by many investors in committing themselves to large subscriptions of Government bonds before they knew what the taxation programme of the Government was to be, as the matter of taxation would very direct bearing upon the disposition of many investors with respect to making large commitments. In this connection it was pointed out that the prevalent rumors concerning the possibility of general very heavy increases in many forms of taxation had begun to have an effect upon both investors and business men, who were in a state of uncertainty as to how seriously their holdings and incomes might be affected.
With respect to the size of the issue, I think there was a general sentiment that an initial offering of more than two billion dollars would necessitate a violent readjustment in the values of existing securities and would thus add another obstable in the way of placing the loan.
One more reason advanced against such a large initial offering was the fact that there was no existing adtmosphere which had aroused the country, such as great loss of life among our fighting force or Zepplin or other attacks on United States soil, so that the people had not been worked up to carry a large floatation along on a wave of enthusiam.
I hope that these suggestions may prove of some assistance to you.
As this conference was arranged whole on the initiative of Mr. Jay and myself, we took great pains to indicate to those with whom we talked that we were acting on our own initiative and not at all at the request or suggestion of yourself or anyone else in the Government, and that we desired their suggestions and advice for our own guidance in making recommendations as to how any bond issue might best be handled, and naturally the matter was treated in an extremely confidential manner.
Secretary.
Concerning the proposed Government bond issue, which was discussed by the governors of the Federal reserve banks with you last week, we have taken occasion at this bank to confer with a few of the leading bankers in this city, including some private bankers, national bankers and trust company officers. For purposes of discussion we took as a text the memorandum on bond issues which the governors of the reserve banks prepared and of which I think Mr. Aiken has sent you a copy. In case, however, you have not received it for any reason, I am enclosing a copy herewith for ready reference.
The consensus of opinion on the points suggested in the memorandum was as follows:
1. As to amount: It was unanimously agreed that an issue of five billion dollars could not be placed at one time at any reasonable rate of interest. The majority of those conferred with felt that such a large issue could not be placed at any rate of interest at all. They were all of opinion that it would be wise, if the Government decided that four or five billion dollars should be raised by bond issues during the first year, that an announcement to that effect might be made but that the first offering for public subscription should be for one billion dollars or, at the outside, two billions.
They also were unanimously in accordance with the governors’ memorandum to the effect that the issue should be free from all taxes and should most certainly carry the privilege of conversion into any subsequent issues carrying a higher interest rate that might be brought out during the period of the war.
2. As to rate: They were all of opinion that an issue of as much as a billion dollars could not be placed at 3%. They thought that such an issue could be placed at 3 1/2% and that an issue of two billion dollars could be placed at 4%. A few of those consulted thought that two billions might be placed at 3 1/2% if there was a very able publicity campaign conducted.
3. As to price: They were all strongly of opinion that the price should be par and interest and that an issue of the size contemplated ought not to be offered to the public for tenders but should be offered for subscription at the flat rate.
4. As to terms: They were substantially in accordance with the views of the governors to the effect that the bonds should be redeemable after a certain number of years from the date of issue, with an annual retirement thereafter of a certain percentage of the total amount in order to retire the whole at a given time; or in the alternative that sufficient sinking fund provisions should be provided for. However, most of those present agreed that an annual retirement was preferable to a sinking fund.
5. As to denomination: The opinion was unanimous that the denominations should be as low as $50. and possibly as low as $20, but that if $20. bonds were to be issued, there should not be any $50. ones.
6. As to subscriptions: They agreed with the governors’ memorandum that the placing of the bonds and obtaining subscriptions should be handled through the Federal reserve banks as fiscal agents of the Government and that subscriptions should be received by all national banks, state banks, trust companies, savings banks, private bankers and post offices. They all agreed that it would be unfortunate to designate certain private bankers (to the exclusion of others) who would be included as official receivers of subscriptions, as this would tend to create hard feeling. They suggested that instead, any private banker should be authorized to receive subscriptions for the reserve banks.
They also felt strongly that a first-class ptublicity committee should be organized as promptly as possible to take charge of the advertising and that this committee should be formed of advertising, publicity men and bond distributors, most of whom should have larger experience than the publicity men of the bond houses and banks themselves.
7. Method of receiving subscription payments: The general opinion prevailed that the subscriptions should all be payable at once and not by instalments, especially if the initial offering was for a billion dollars. In any event, subscriptions in amounts of $1,000. or less should be cleaned up in one payment, even if the larger ones might be paid by instalments.
8. Deposit of proceeds: The feeling was unanimous that the bulk of the proceeds should not be transferred to the Treasury or the Federal reserve banks. Upon the question of leaving subscriptions with state banks and trust companies (not members of the Federal Reserve System) there was not a general expression of opinion, but it was clearly brought out that if it was decided that the proceeds should not be deposited with the nonmember institutions, this intention on the part of the Government should be made clear sufficiently in advance for such institutions to prepare for the shifting of their deposits.
The general feeling was that the institutions with whom the deposits were left or made should not be required to pay interest on them, as this would, as a practical matter, compel them to make use of the funds in order to earn their interest charges, which would have a deterimental effect on the general situtation; and furthermore, that if no interest were charged on the balances, the efforts of the institutions to obtain subscriptions might be increased. There was some criticism of the governors’ suggestion to the effect that deposits in the other institutions be made by the Federal reserve banks, the general opinion being that such a provision would cause an unnecessary complication and that the deposits might be made with the institutions or left with them direct by the Government, instead of having it made by the reserve banks.
The feeling was very strongly expressed that it would be far better to have a comparatively small initial issue at an attractive rate, so that the bonds would be quickly taken by the ultimate investors and go to a slight premium, which would have a very stimulating effect up further issues. It was also suggested that the initial issue might be accompanied by an official statement to the effect that further issues would be forthcoming as the Government requirements might dicatate. One advantage which this method would bring about was stated to be that a good deal of hesitation would be felt by many investors in committing themselves to large subscriptions of Government bonds before they knew what the taxation programme of the Government was to be, as the matter of taxation would very direct bearing upon the disposition of many investors with respect to making large commitments. In this connection it was pointed out that the prevalent rumors concerning the possibility of general very heavy increases in many forms of taxation had begun to have an effect upon both investors and business men, who were in a state of uncertainty as to how seriously their holdings and incomes might be affected.
With respect to the size of the issue, I think there was a general sentiment that an initial offering of more than two billion dollars would necessitate a violent readjustment in the values of existing securities and would thus add another obstable in the way of placing the loan.
One more reason advanced against such a large initial offering was the fact that there was no existing adtmosphere which had aroused the country, such as great loss of life among our fighting force or Zepplin or other attacks on United States soil, so that the people had not been worked up to carry a large floatation along on a wave of enthusiam.
I hope that these suggestions may prove of some assistance to you.
As this conference was arranged whole on the initiative of Mr. Jay and myself, we took great pains to indicate to those with whom we talked that we were acting on our own initiative and not at all at the request or suggestion of yourself or anyone else in the Government, and that we desired their suggestions and advice for our own guidance in making recommendations as to how any bond issue might best be handled, and naturally the matter was treated in an extremely confidential manner.
Secretary.
Original Format
Letter
To
McAdoo, W. G. (William Gibbs), 1863-1941
Files
Collection
Citation
Strong, Benjamin, 1872-1928, “Benjamin Strong Jr. to William G. McAdoo,” 1917 April 9, WWP18553, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.