My dear Senator
I hope you will not feel burdened by my letters. This one, which is quite personal and private, may indeed require no reply, and is rather intended to prepare your mind for a talk when opportunity occurs rather than to ask for a reply now. It is written with great hesitation, and would not be justified had I any personal interest to serve, – in fact any interest other than the welfare of the Federal Reserve System.The recent resignation of our Mr. Jay, and Mr. McGarrah‘s appointment in his place, has afforded the opportunity for some inspired public discussion of the whole scheme of management of the Federal reserve banks. Some of this, in the form of news articles, notably in the Wall Street Journal, and recently in the Whaley–Eaton Service, is of a general tenor to indicate that in the minds of some of my associates in Washington it is intended, now that the charters of the Federal reserve banks have been extended, to make a general change in the method of control and management of the Reserve system in the direction of a great centralization of authority in the Federal Reserve Board and a more centralized direction of the operations and policies of the Federal reserve banks through the Federal reserve agents.This troubles me a great deal. I am able to view it freed from any possible personal interest, because I cannot escape the conclusion that my own connection with the System is approaching its end, if for no other reason than because of the hazard to my health which I do not feel will be justified for much longer.We are the only country which has a system of banks of issue where a central management and direction is not located in the country’s political capital. In every instance in other countries, the management is in the financial capital and in the center of its economic activities. To meet various requirements of our own situation, such as the size of the country, its varied economic characteristics in the different sections, and in order to avoid too great concentration in New York, a regional system was adopted. The reasons for this are obvious and have, as you know, become completely convincing to me. In order that these twelve banks might operate with reasonable harmony and with a common purpose and policy, a supervisory body was created with carefully defined powers, just as the powers of the Reserve banks themselves are carefully defined. But, of course, the most exact definition would still leave a considerable debatable ground for differences of view as to the extent to which centralized authority was intended in the Board and as to the extent to which the Reserve banks should be autonomous and their directors responsible. The present situation, I believe, is partly the outgrowth of circumstances which could not be avoided, that is, the difficulties of definition to which I have referred, the difficulties of supervision at a distance by a body which conducts no business and must rely upon reports from a distance, etc. But to a very large extent our difficulties, if such exist, are due to the fact that the Federal Reserve Act was written without any possibility that its authors could anticipate that a world war would give rise to a situation unique in the history of the world; where, in fact, responsibilities would be thrown upon the Reserve banks far beyond anything imagined twelve years ago.As I stated before the House Committee on Banking and Currency last year, it is astonishing that the provisions of the Federal Reserve Act, written without anticipation of war, should have been so nearly adapted to meet the present complicated system Situation as they are.hock of the war, and with one half of the world’s monetary gold in its possession, and being the creditor of most of the world, can avoid the discharge of these responsibilties without, on the one hand, meriting the odium of our fellow sufferers in the war, and on the other hand, being chargeable with neglect of the best interests of our own countrymen who are dependent upon stable conditions abroad for the development and maintenance of the markets where we sell most of our surplus produce. The question in my mind, and a very serious one, is whether if any such development as seems to be forecast by these articles should occur, can we expect under such conditions to satisfactorily discharge these obligations? Will the people of our country be contented with a gradual centralization, not only of the powers of supervision but of the executive management and operation of the System in any body located in Washington, so far from the scene of actual operations.Frankly, I can sympathize a good deal with the position of these gentlemen. It would indeed require men of most unusual breadth of vision who would be willing to confine their activities under the conditions which have existed in recent years strictly to supervision and advice, without endeavoring to extend their authority to the point of requiring that their approval be obtained to an increasing extent in all undertakings both great and small in which the System as a whole is engaged. After all, they have a responsibility and they cannot sit by inactive and unresponsive to the development of these unusual conditions and of programs devised to meet them. It would require men of unusual perspicacity to be able to sit in review and pass upon these questions, difficult, technical and complicated as they are, as advisers rather than as deciders. And yet, on the other hand, the need for prompt and wise decisions, for a forward-looking policy and for a willingness to take responsibility courageously is more apparent in the System to-day than it ever has been since its organization.My conception of the way the system should function in the broader fields of policy has always been rather different from that of the Federal Reserve Board. It has seemed to me possible that frequehnt meetings and exchanges of views should be had, and policies arrived at as the result of conference and agreement. Once those policies are adopted, their execution should be entrusted absolutely to the Reserve banks and to their responsible directors and officers. Frequent reports and interchange of views will always be necessary. But I cannot see anything but disaster for the system if such cooperation should evolve into an absolute centralization of authority.While I have endeavored to keep in touch with this development as well as I could during recent months it has not been possible for me to discuss matters with the Federal Reserve Board. My general impression is that there are differences of opinion in the Board, possibly as many opinions as there are members of the Board. My outstanding reaction, however, is one of alarm lest this development might indeed end in a situation for the Federal Reserve System exactly the reverse from that which was intended by Congress. Certainly it was not intended that we should have a central bank, nor was it intended that we should have a politically-managed system of central banks. It is fair to say that it was even more distinctly not intended that the Federal Reserve Bank of New York should run the System. On the other hand there seems to be clear intention expressed in the Act that in certain of the activities of the Reserve banks there is need for a certain amount of central management of operations, such as the business conducted in Europe and probably open market transactions in the country’s central money market. These functions have been performed satisfactorily by the banks, as should be the case. Apprehending the development of a feeling that there was too much centralization in New York it has been my effort from the beginning to dispel this fear by having all transactions undertaken by the New York bank in behalf of other Reserve banks supervised by committees of the governors of the Reserve banks. Not pone transaction is ever undertaken unless every Reserve bank which participates in it has first an opportunity to pass upon it after it has been discussed and approved by a committee of five governors. No purchase or sale of securities, no transaction abroad, no new connectoion with a foreign bank, no transactions in bills, are undertaken except under the supervision of that committee and after submission to all Reserve banks. The issue which will arise in the System, probably when I am no longer connected with it, will not be as between the Federal Reserve Bank of New York and other Reserve banks, for it is my conviction that there is complete harmony between all the Reserve banks as the result of the procedure which we have pursued. The issue is certain to be between the Reserve banks as a whole on the one hand and the Reserve Board on the other. Nor do I believe that there will ever be an issue between the Reserve System and the Treasury Department. While there have been differences of view, the Treasury Department does not undertake to control the Reserve System in any matter. I should say that the Secretary of the Treasury is open to the charge that he is influenced in his financial operations more by the advice of the Reserve banks than the Reserve banks are liable to the charge that they are influenced by any action or wish of the Secretary. The precedents which have now been established in fiscal agency matters are to my mind admirable in every respect. The test of the Reserve System and the country’s continued satisfaction with it will, I believe, lie at the point which I have mentioned, in a gradually growing tension between the Board and the Banks, resulting from the drift towards centralization in conflict with the maintenance of the status of autonomy contemplated by the statute.The charters of the Federal reserve banks have now been extended. The organizations have been pretty well perfected. The only important organiztation matter yet to be dealt with is the passage of the bill authorizing the establishment of a pension system for the employes which, as you know, is designed to protect the banks from deterioration of personnel which has been a growing tendency in the last few years. The onyly special oeperations of importance as a matter of policy still to be accomplished will relate to the resumption of gold payment in France, Italy and Poland in case we are asked to render assistance.The conduct of the fiscal agency business of the country has been perfected to a point where, I believe, the Treasury is served as well as it is possible to be, the best evidence of that being the operations of March 15 just passed which were about as complicated and of as great magnitude as any which we have yet handled. On the whole, I feel that Congress is well satisfied with what the Reserve System is doing. It is perfectly natural with this record that those of us who have been associated with the System since the start would wish to see the present scheme continued and no radical changes undertaken.This letter is, therefore, written frankly with a desire to obtain an expression of your personal views, not only as to the situaintimations which have appeared in the press with which you are doubtless familiar, but more particularly with my personal attitude.rer than is reasonably necessary to feel that I can safely hand it over as a sacred trust to my successor, whoever he may be. But I should be greatly disturbed in doing so if I felt that it was to be at a turning point in the affairs of the System, when new schemes of operation were to be attempted, when a tendency an effort towards centralization is to be undertaken, and when possibly the results of the work of the past twelve years may be placed in jeopardy.Do you feel willing to give me the benefit of your views and advice? Of course, I must ask you to hold this letter as a confidential and personal communication.
With kindest regards, believe me,
Sincerely yours,
Benjamin Strong Jr.
