Benjamin Strong Jr. to Russell Cornell Leffingwell
Title
Benjamin Strong Jr. to Russell Cornell Leffingwell
Creator
Strong, Benjamin, 1872-1928
Identifier
WWP18759
Date
1919 December 19
Description
Benjamin Strong Jr. sends Russell C. Leffingwell information on the Federal Reserve Loan rates.
Source
Benjamin Strong Jr. Papers, New York Federal Reserve Bank
Language
English
Text
Dear Russell:
You will gather from my letter to Secretary Glass that at least for a considerable period I shall be eliminated from you counsels, and I cannot leave without a word in regard to these matters of policy, concerning which we have unfortunately differed, although I do not feel so radically during the past few months.
The Federal Reserve Bank of New York now has a minimum rate of discount for every kind of borrowing by member banks with the following exceptions:
15 day advances upon certificates of indebtedness .. 4-1/2%
Discounts of bankers bills for periods up to 90 days ... 4-1/2%
Six months' agricultural paper ... 5%
There can be certainly be no objection to advancing the rate of discount for bankers bills to 4-3/4%. All of the needed stimulation to the development of that business can be tgiven by our policy in buying bills in the open market when that course seems desirable at rates below our discount rate for such paper. Assuming, therefore, that we have changed our discount rate for this paper to 4-3/4%, you will observe that we have a uniform bank rate for all kinds of borrowing with the sole exception of the rate for 15-day advances upon certificates of indebtedness. At last, after nearly five years of experience and experimentation, we are upon the eve of completing the last step in making the Federal Reserve Bank a real central bank, with a real bank rate. In fact, in a period of five years, we will have arrived at a position in banking at least as good, if not better than, that which has been reached in England after 250 years or more in experience and development. When the time comes, as I hope it will shortly, when the Treasury Department and the Reserve System as a whole can agree upon a policy which will permit of the establishment of this uniform rate of discount, I am convinced that we will have in our hands an instrument for the exercise of a reasonable control over credit expansion, and, through that, of price expansion, such as can be accomplished by no other method. This bank rate, of the character I have described, has been in my mind as the objective toward which we were working ever since our bank was organized. Its success depends upon the development in the market of an adequate volume of bills (as distinguished from commercial paper) so that the Bank, by voluntary purchases or by refraining from making purchases, can exercise a primary control over the money market which it could not possibly exercise without such a volume of paper that may be purchased, or not purchased, at will.
During all of our discussions of rates, and, in fact, before the discussions became so important as recently, I have looked at this position as the goal of all of our efforts. Now I want to ask you to consider what a curious situation has arisen, growing out of this pefrfectly natural ambition for the system
Mr. Glass, the author of the Act became Secretary of the Treasury and finally responsible for the Government’s financial policy, and, strange as it may seem, the very man who produced the Federal Reserve System felt obliged to take a position quite hostile to my own views, notwithstanding that for five years I have been doing the utmost that one could do to make this plan of Secretary Glass’s a real success. This difference of opinion is, of course, a wholly honest one, but brings to light with curious significance what has always been historically true of the relation between Government Treasuries and Central Banks in time of war, namely that the Treasury endeavors to assert a control over the policy of the central bank mpore distinctly in the interest of the Treasury than in the interest of the general business of the country. It is not an unreasonable, in fact in many instances is a necessary, development because in time of war the policy of the central bank must be considered not as an official or economic policy but a military policy and one of the agencies to win battles, rather than to develop theoretically sound banking and financial practices, such as would control in peace times. That situation was thoroughly recognized, and I may say, prompted by the New York bank during the entire period when it was necessary that the bank should have a military policy, so to speak. But now that the war is over, the time has come to abandon a policy designed for military purposes in favor of one which will better serve the interests of the country as a whole, rather than the separate interests of the Treasury alone. Unfortunately Mr. GlassCarter Glass has not agreed with my feelings about this and one of the results, I fear, has been to drive him to the view that there were some things which might have been done to deal with the credit situation by other methods than by rates, and that in some way I have led a revolt in the System, the object of which, while not openly expressed, was to assert the dominating position of the Reserve System in controlling the policy of the Treasury.
One of the consequences of this situation has, I fear, been to very much shake Mr. Glass’sCarter Glass confidence in my own judgment, and, possibly, in my own intentions. Now I am about to be away for possibly a year and I feel altogether unwilling to leave without an effort to discover exactly what is in his mind. It certainly would be unfortunate if the author of the Federal Reserve Act and one of the men who did as much as anybody else to make it a success should end a year’s association in complete discord and with complete lack of sympathy as to what has been done. I am to be in Washington for one or more days next week, probably right after Christmas, and am writing to ask if you will arrange - if in your judgment it will be wise to do so - for us to have a talk with the Carter Glass and see if before I leave we cannot remove misunderstandings. I don’t want to feel that at least in his mind the last five years’ work have been thrown away, nor, indeed, now that he is about to enter the Senate, where his influence in legislation affecting the Reserve Banks will be very great, that the result of this difference of views may lead to a decision by him to attempt some changes in the Federal Reserve Act based solely upon the experiences of the past year.
This is a matter about which I feel very strongly indeed, because if I come back to the Reserve Bank, I would like to find it there just as I left it. Won’t you drop me a line on receipt of this, telling me frankly just the way you feel about my suggestions?
You will gather from my letter to Secretary Glass that at least for a considerable period I shall be eliminated from you counsels, and I cannot leave without a word in regard to these matters of policy, concerning which we have unfortunately differed, although I do not feel so radically during the past few months.
The Federal Reserve Bank of New York now has a minimum rate of discount for every kind of borrowing by member banks with the following exceptions:
15 day advances upon certificates of indebtedness .. 4-1/2%
Discounts of bankers bills for periods up to 90 days ... 4-1/2%
Six months' agricultural paper ... 5%
There can be certainly be no objection to advancing the rate of discount for bankers bills to 4-3/4%. All of the needed stimulation to the development of that business can be tgiven by our policy in buying bills in the open market when that course seems desirable at rates below our discount rate for such paper. Assuming, therefore, that we have changed our discount rate for this paper to 4-3/4%, you will observe that we have a uniform bank rate for all kinds of borrowing with the sole exception of the rate for 15-day advances upon certificates of indebtedness. At last, after nearly five years of experience and experimentation, we are upon the eve of completing the last step in making the Federal Reserve Bank a real central bank, with a real bank rate. In fact, in a period of five years, we will have arrived at a position in banking at least as good, if not better than, that which has been reached in England after 250 years or more in experience and development. When the time comes, as I hope it will shortly, when the Treasury Department and the Reserve System as a whole can agree upon a policy which will permit of the establishment of this uniform rate of discount, I am convinced that we will have in our hands an instrument for the exercise of a reasonable control over credit expansion, and, through that, of price expansion, such as can be accomplished by no other method. This bank rate, of the character I have described, has been in my mind as the objective toward which we were working ever since our bank was organized. Its success depends upon the development in the market of an adequate volume of bills (as distinguished from commercial paper) so that the Bank, by voluntary purchases or by refraining from making purchases, can exercise a primary control over the money market which it could not possibly exercise without such a volume of paper that may be purchased, or not purchased, at will.
During all of our discussions of rates, and, in fact, before the discussions became so important as recently, I have looked at this position as the goal of all of our efforts. Now I want to ask you to consider what a curious situation has arisen, growing out of this pefrfectly natural ambition for the system
Mr. Glass, the author of the Act became Secretary of the Treasury and finally responsible for the Government’s financial policy, and, strange as it may seem, the very man who produced the Federal Reserve System felt obliged to take a position quite hostile to my own views, notwithstanding that for five years I have been doing the utmost that one could do to make this plan of Secretary Glass’s a real success. This difference of opinion is, of course, a wholly honest one, but brings to light with curious significance what has always been historically true of the relation between Government Treasuries and Central Banks in time of war, namely that the Treasury endeavors to assert a control over the policy of the central bank mpore distinctly in the interest of the Treasury than in the interest of the general business of the country. It is not an unreasonable, in fact in many instances is a necessary, development because in time of war the policy of the central bank must be considered not as an official or economic policy but a military policy and one of the agencies to win battles, rather than to develop theoretically sound banking and financial practices, such as would control in peace times. That situation was thoroughly recognized, and I may say, prompted by the New York bank during the entire period when it was necessary that the bank should have a military policy, so to speak. But now that the war is over, the time has come to abandon a policy designed for military purposes in favor of one which will better serve the interests of the country as a whole, rather than the separate interests of the Treasury alone. Unfortunately Mr. GlassCarter Glass has not agreed with my feelings about this and one of the results, I fear, has been to drive him to the view that there were some things which might have been done to deal with the credit situation by other methods than by rates, and that in some way I have led a revolt in the System, the object of which, while not openly expressed, was to assert the dominating position of the Reserve System in controlling the policy of the Treasury.
One of the consequences of this situation has, I fear, been to very much shake Mr. Glass’sCarter Glass confidence in my own judgment, and, possibly, in my own intentions. Now I am about to be away for possibly a year and I feel altogether unwilling to leave without an effort to discover exactly what is in his mind. It certainly would be unfortunate if the author of the Federal Reserve Act and one of the men who did as much as anybody else to make it a success should end a year’s association in complete discord and with complete lack of sympathy as to what has been done. I am to be in Washington for one or more days next week, probably right after Christmas, and am writing to ask if you will arrange - if in your judgment it will be wise to do so - for us to have a talk with the Carter Glass and see if before I leave we cannot remove misunderstandings. I don’t want to feel that at least in his mind the last five years’ work have been thrown away, nor, indeed, now that he is about to enter the Senate, where his influence in legislation affecting the Reserve Banks will be very great, that the result of this difference of views may lead to a decision by him to attempt some changes in the Federal Reserve Act based solely upon the experiences of the past year.
This is a matter about which I feel very strongly indeed, because if I come back to the Reserve Bank, I would like to find it there just as I left it. Won’t you drop me a line on receipt of this, telling me frankly just the way you feel about my suggestions?
Original Format
Letter
To
Leffingwell, R. C. (Russell Cornell), 1878-1960
Files
Collection
Citation
Strong, Benjamin, 1872-1928, “Benjamin Strong Jr. to Russell Cornell Leffingwell,” 1919 December 19, WWP18759, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.