Benjamin Strong Jr. to the Editor of The New York Times

Benjamin Strong Jr. to the Editor of The New York Times

Strong, Benjamin, 1872-1928

WWP18416

1913 October 27

A report on congressional reaction to the proposed Federal Reserve Act.

Benjamin Strong Jr. Papers, New York Federal Reserve Bank

English

To the Editor of the New York Times.

The statement from Chairman Glass, of the Committee on Banking and Currency, published in your columns this morning, seems to miss or avoid the point as to the principal features of the plan for currency legislation submitted to the Senate Committee by Mr. Vanderlip last week. The principal features at variance with those of the House Bill are:-
1. As to management: Mr. Vanderlip proposes a Board of seven directors appointed by the President, with the advice and consent of the Senate, with terms of fourteen years each, a director retiring every two years, and with no ex-officio administration members; which would seem to assure continuity of management, independent of political or partisan control. The Owen-GlassCarter Glass Bill provides for a Board of seven, three of whom are officers of the Government, and subject to change by each new President; at least one of the four to be appointed, probably two, and possibly all four would also be within the appointment of every President. This would certainly assure a partisan and political board of control.
2. As to note issues: Mr. Vanderlip proposes that these be issued by a central bank. The Owen-GlassCarter Glass Bill provides that they shall be issued by, and be the obligation of, the United States Government. Nothing can be added to the arguments which have been made in opposition to any plan for the Government to lend greenbacks to the banks against collateral to be provided. The function of the Government must be that recognized by all civilized countries:- the coinage of metal money of a fixed standard of weight and fineness and the protection of its citizens, thereby, from the imposition of fraudulent standards of value. The function of the bank should be to issue a credit instrument redeemable in coin of the standard established and protected by the Government. If a Committee of Congress today arbitrarily fixes 100% of discounted paper, with a 33 1/3% gold reserve as safe protection, how do we know that ten years hence they may not decide that Municipal and State Bonds, or Real Estate Mortgages, or any kind of bonds, or even stocks, may afford adequate protection or how do we know but what they will be satisfied with a 10% gold reserve, or none at all? The greatest safeguard against either an over issue of all the people. They will daily decide whether a bank note is adequately protected by collateral, and whether it will be redeemed in gold on presentation. Therein lies the greatest responsibility of the management, and consequently the greatest insurance to the public that the parity of the note of the bank with gold will be maintained.
3. Mr. Vanderlip proposes one institution, with branches.; the GlassCarter Glass-Owen Bill 12 separate institutions. These two proposals must be considered in connection with the difficulty heretofore considered unsurmountable of fixing a uniform discount rate. The experience of the Bank of France peculiarly illustrates the advantage of a uniform and stable rate of discount. Sentiment in this country would favor such a condition; practical considerations seem to render it impossible. Mr. Vanderlip’s plan, however, as contrasted with the GlassCarter Glass-Owen plan, seems to afford a satisfactory solution of this difficulty, and one far better than an ineffective tax applied to the earnings of the institution, which in large part would go to the Government; a tax which would not afford any check upon expansion. The restraint must be applied to the borrower and expressed in the discount rate, but should not be made to penalize institutions which have not over-borrowed and which should not to be required to pay higher rates because of the over-borrowing of others in their district. Mr. Vanderlip’s plan, providing for one institution, with branches, with a uniform minimum discount rate applying to a small percentage of the total amount, which a bank is authorized to re-discount and progressively increasing as amounts in excess of such original percentage are increased, appears to solve the knottiest practical problem in monetary legislation. The “sur-tax” is applied to each institution as its borrowings increase, and will be effective in either checking its borrowings or forcing it to a cheaper money market. This is as it should be.
Mr. Glass’s statement above referred to misses the point in each case. He does, however, raise one point which merits serious consideration. If a plan, embodying as few radical changes as does this one, results in delay in the passage of currency legislation, it is the best evidence that the bill under consideration is not accepted as sound, and should not be passed.

Letter

New York Times