Benjamin Strong Jr. Correspondence
Title
Benjamin Strong Jr. Correspondence
Creator
Strong, Benjamin, 1872-1928
Identifier
WWP18754
Date
1919 November 3
Description
Memo regarding the discount rates of the New York Federal Reserve Bank.
Source
Benjamin Strong Jr. Papers, New York Federal Reserve Bank
Language
English
Text
Federal Reserve
Bank of New York
Correspondence
From: Benj. Strong.
Subject: Rates of Discount
The attached papers relate to the discussion preceding the advance in rates of discount by the Federal Reserve Bank of New York, authorized at the directors’ meeting held on Monday, November 3, 1919. They include, among other papers, the statement which was proposed to the Board and which was rejected in favor of the briefer one also attached. Mr. Leffingwell strongly favored the original statement, but agreed to the short one, as did the Federal Reserve Board, with a slight change og language suggested by Mr. Strauss.
The history of the discussion of the rate change goes back to my first visit to Washington on returning from Europethe last of September, and really prior to that, to the date of an informal, personal letter which I wrote to Mr. Leffingwell from Lake George on February 6, 1919, indicating that the time had come or was comm when a change in the Reserve Bank rate policy would be absolutely necessary for the business of the country.
It has been the writer’s theory right along that during the period of expanding Government borrowing it would be necessary for the Federal Reserve Bank to increase the available supply of credit by large accomodation to member banks, otherwise subscribers to the Government’s loans would be unable to get accommodation of their own banks and, consequently, unable to subscribe. This was based upon the belief, which I believe has been general among students of the subject, that the Government’s requirements for loans were, and would continue to be during a large part of the war, in excess of the amount of credit created by savings, which would be available, first to pay taxes, second for Government loans, and third to finance the enlargement of our industrial and agricultural production and transportation.
The necessary corollary of this theory was that when the Government’s borrowing was reduced, or even when the time arrived when the volume of its outstanding loans would be reduced, then a check should be imposed upon the employment of the facilities of the Reserve Banks by increases in discount rates.
In June and July the Government’s expenditures still exceeded its revenues and the program of somewhat expanded borrowing was still in operation. In August, at the time of the then governors’ conference and of Mr. Leffingwell’sRussell C. Leffingwell visit to meet the members of the Liberty Loan Committee in New York, it had developed that the Government’s revenues would shortly overtake its expenditures and that the Department’s program anticipated the possibility, or even the certainty, of reducing outstanding loans by $500,000,000 on the 15th of September. This proved to be the case because on that date the gross debt was reduced toby$400,000,000 and Government bank balances increased $100,000,000. That was the time, (or in August,) when rates should have been advanced, but Mr. Leffingwell’sRussell C. Leffingwell program, which had many elements of strength and merit, was in general adopted and no rate change made by the Reserve Banks. I certainly cannot assume that I would have held any different opinion had I been here. Nevertheless, this was tantamount to the release of $500,000,000 of credit to the money markets, and subsequent to that date the loans of the Reserve Banks have increased an additional $400,000,000 and we have added to our reserve about $150,000,000 of gold received from Germany.
In view of these facts, which gradually developed following my first visit to Washington on the 28th of September, I have been regularly urging upon the Treasury Department the necessity for increasing discount rates. This finally bore fruit in a meeting of all governors available on short call, that is to say, all but the governors of the Dallas and San Francisco banks, the latter represented, however, by Mr. Perrin; in five separate visits to Washington; and the fullest possible discussion of the matter with the Secretary of the Treasury, Mr. Leffingwell and the Federal Reserve Board. And, after an exchange of views with the governors of the Reserve Banks on October 28th, and after holding meetings of our directors on Wednesday, October 29th, Thursday, October 30th and Monday, November 3d, there was finally adopted at the meeting of the directors today (Monday, November 3, 1919) a schedule of rate changes, for announcement this afternoon, as shown in the attached circular. The statement for the press is that authorized by the Board, after an hour’s discussion.
BS.MSB
Bank of New York
Correspondence
From: Benj. Strong.
Subject: Rates of Discount
The attached papers relate to the discussion preceding the advance in rates of discount by the Federal Reserve Bank of New York, authorized at the directors’ meeting held on Monday, November 3, 1919. They include, among other papers, the statement which was proposed to the Board and which was rejected in favor of the briefer one also attached. Mr. Leffingwell strongly favored the original statement, but agreed to the short one, as did the Federal Reserve Board, with a slight change og language suggested by Mr. Strauss.
The history of the discussion of the rate change goes back to my first visit to Washington on returning from Europethe last of September, and really prior to that, to the date of an informal, personal letter which I wrote to Mr. Leffingwell from Lake George on February 6, 1919, indicating that the time had come or was comm when a change in the Reserve Bank rate policy would be absolutely necessary for the business of the country.
It has been the writer’s theory right along that during the period of expanding Government borrowing it would be necessary for the Federal Reserve Bank to increase the available supply of credit by large accomodation to member banks, otherwise subscribers to the Government’s loans would be unable to get accommodation of their own banks and, consequently, unable to subscribe. This was based upon the belief, which I believe has been general among students of the subject, that the Government’s requirements for loans were, and would continue to be during a large part of the war, in excess of the amount of credit created by savings, which would be available, first to pay taxes, second for Government loans, and third to finance the enlargement of our industrial and agricultural production and transportation.
The necessary corollary of this theory was that when the Government’s borrowing was reduced, or even when the time arrived when the volume of its outstanding loans would be reduced, then a check should be imposed upon the employment of the facilities of the Reserve Banks by increases in discount rates.
In June and July the Government’s expenditures still exceeded its revenues and the program of somewhat expanded borrowing was still in operation. In August, at the time of the then governors’ conference and of Mr. Leffingwell’sRussell C. Leffingwell visit to meet the members of the Liberty Loan Committee in New York, it had developed that the Government’s revenues would shortly overtake its expenditures and that the Department’s program anticipated the possibility, or even the certainty, of reducing outstanding loans by $500,000,000 on the 15th of September. This proved to be the case because on that date the gross debt was reduced toby$400,000,000 and Government bank balances increased $100,000,000. That was the time, (or in August,) when rates should have been advanced, but Mr. Leffingwell’sRussell C. Leffingwell program, which had many elements of strength and merit, was in general adopted and no rate change made by the Reserve Banks. I certainly cannot assume that I would have held any different opinion had I been here. Nevertheless, this was tantamount to the release of $500,000,000 of credit to the money markets, and subsequent to that date the loans of the Reserve Banks have increased an additional $400,000,000 and we have added to our reserve about $150,000,000 of gold received from Germany.
In view of these facts, which gradually developed following my first visit to Washington on the 28th of September, I have been regularly urging upon the Treasury Department the necessity for increasing discount rates. This finally bore fruit in a meeting of all governors available on short call, that is to say, all but the governors of the Dallas and San Francisco banks, the latter represented, however, by Mr. Perrin; in five separate visits to Washington; and the fullest possible discussion of the matter with the Secretary of the Treasury, Mr. Leffingwell and the Federal Reserve Board. And, after an exchange of views with the governors of the Reserve Banks on October 28th, and after holding meetings of our directors on Wednesday, October 29th, Thursday, October 30th and Monday, November 3d, there was finally adopted at the meeting of the directors today (Monday, November 3, 1919) a schedule of rate changes, for announcement this afternoon, as shown in the attached circular. The statement for the press is that authorized by the Board, after an hour’s discussion.
BS.MSB
Original Format
Letter
Files
Collection
Citation
Strong, Benjamin, 1872-1928, “Benjamin Strong Jr. Correspondence,” 1919 November 3, WWP18754, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.