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The Commoner
JULY, 1921
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fc Instructive in this connection' likewise my letter
to the hoard of March zu, lazi.
Comprehensive statements from the Comptrol
ler of the Currency giving facts within his ofti-
I cial knowledge, and-asking attention to serious
and alarming conditions in the husineos world
were before the Federal Reserve Board, and the
I Comptroller's definite, recommendations UN
ACTED upon after forty-four days. At the ex-
I piration of that time, more than twice aa long
as is required for tne proaucuvo activities of tue
ordinary hen the board suddenly aroused, be
stirred itself and responded with demand to
know who else had read' the Comptroller's let
ter, that it might "formulate a report." Even
the gravity of the occasion could not hide the
humorous aspects of the performance.
Board Warned, in October, 1020, To Revise Poli
cies To Meet New and Changed Conditions and
Admonished as to Fearful Consequences of
Neglect.
In all seriousness, gentlemen, I am impressed
with the necessity for some amendment to the
Federal Reserve Act which will awaken the hoard
from the inertia and stiffness and concentration
on trivialities that are symptoms of "bureau
mania." The subject on which I wrote in October
last, and again in December, and which de
veloped faint reaction in February, was of vital
importance. I had begun in October to beseech
for it the board's attention. On the 18th of
that month I pointed out that the decline in
prices, facilitated by the policies of the board,
HAD BECOME TOO RAPID. I itemized some
of the appalling shrihka-ges of values, for in
stance, loss of 500 million dollars in wheat, to
which 500 million or more is to be added since
that time; from one to two billions in corn, a
billion in cotton I used these words at that
time:
"The plans and policies which have aiTed in
bringing about deflation in the great stard com
modities SHOULD BE AT ONCE TAKEN UP
FOR CONSIDERATION AND REVISED AS FAR
AS MAY BE NECESSARY TO MEET PRESENT
AND CHANGED CONDITIONS. IF THIS IS
NOT DONE SPEEDILY, I AM FEARfUL AS TO
THE CONSEQUENCES WHICH MAY ENSUE."
Three days later, on October 21, 1920, I ad
dressed a communication to the Secretary of the
Treasury, who is also the chairman of the Fed
eral Reserve Board, presenting arguments, which
seemed to me to be impelling, urging that some
constructive measures of relief be adopted to
steady the situation and ease the further shrink
age in values, which has since then taken place
with such ruinous results. In that letter I said,
in part:
"The strain upon the business fabric of the
country is, in some respects, unparalleled and
I do feel that THE TIME HAS COME FOR THE
EXERCISE OF SUCH SALUTARY AND CONr
STRUCTIVE POWERS AS MAY BE AT OUR
COMMAND.
"The situation has become m'pre aggrav
ated of late, and unless relief can be. found an in
crease in bank failures, I believe, will be inevit
able. "The revival of the War Finance Corporation
would provide, in my judgment, a much-needed
steadying influence at this time." .
My remonstrances, however, went unheeded,
but the War Finance Corporation was revived
as a result of action by congress, about Ave
months later,, and AGAINST the earnest expostu
lations Qf the chairman of the Federal Reserve
Board.
Warnings Repeated in December and Board
Again Urged to Adopt Effective Measures of
Relief.
By the end of December, two more months had
gone. Reports reaching me from all parts of the
country increased my concern. It wan then that
I wrote the letter of December 28th. In this
I reviewed, repeated, and amplified what I had
said before, adding that shrinkage of additional
billions had come since October. I tried to
demonstrate that the welfare of the world de
pended upon the welfare of this country, and that
the fate of this country, for the near future at
least, depended largely on the policies of the
Federal Reserve Board, controlling the financial
levers. In the letter of December 28th, the fol
lowing paragraphs, I think, may be interesting to
you just now:
"Since my letter to you was written, commer
cial, industral and financial conditions have be
came steadily worse and the further shrinkage
which has taken place since the middle of Octo
ber amounts to billions of dollars. -
"I fcfel more' strbngly than ever that the yel
f are. of the country calls for the adoption of
somewhat more liberal policies on the part of
the Federal Reserve Board and the Federal Re
serve Banks whose powers are now more widely
recognized and acknowledged than over before.
"It is my Btrong belief that it is within the
power of the Federal Reserve Board at this
time, BY THE ADOPTION OF NEW, WISE,
LIBERAL AND SOUND POLICIES AND THE
ANNOUNCEMENT OF SUCH POLICIES TO IN
STILL A FEELING OF CONFIDENCE AND
HOPE AND TO CHECK THE SPIRIT OF DE
MORALIZATION WHICH, UNLESS ARRESTED
IN TIME, MAY LEAD TO DISASTER.
"Events, developments and conditions warn
us to remember that a stoppage too sudden may
be disastrous as an explosion, that an unyield
ing barrier thrust into the path of a runaway
machine may only hasten wreckage and assure a
smash which skilfully regulated guidance might
prevent.
"Two months of actual experience which have
elapsed since my letter to you October 18, 1920,
was written tend to intensifly rather than dimin
ish my fears for the immediate future. I am as
confident of the safety and development of
American business, society and government its
'the most enthusiastic optimist, but it is our part
to strain every nerve and apply resource of la
bor, thought and self-sacrificing patriotism to
avert an interval of disaster, or to make it brief
and easy as may be possible.
Treasury in Previous Years Met Crisis Resource
fully and Prevented Disaster by 'Swift, Con
structive Action.
' In that same letter I had reminded the board
of the constructive work of Secretary McAdoo
in previous crises in the following language:
"During the past several years I have seen
many occasions where the action of the treasury
department has distinctly prevented financial
panics.
"I have witnessed other occasions wh'ere the
mediation and timely action of the treasury de
partment has ameliorated many serious and
dangerous situations and has been an important
factor in checking grave losses to the business
interests of the country. ,
"At other times the same influence has been
exerted to aid directly in the stimulation and
encouragement of our commercial and indus
trial' interests.
"The part which the treasury took in the
formation of the cotton pool In 1914 is one illus
tration. Another illustration was the action
of the treasury in organizing the War Risk
Bureau, which made possible the continuance of
our export trade in the early days of the war
when cargo insurance was unobtainable else
where. "The action of the treasury in making prac
ticable the emergency currency law and in facili
tating and expediting the issuance of that cur
rency in the summer and autumn of 1914 averted
a financial catastrophe and prevented chaos.
These illustrations could be multiplied if need
be, but. you are doubtless as familiar with them
as I am."
Board Urged To Restrain Profiteering by Mem
ber Banks Borrowing From Reserve Banks at
4 per cent to 7 Per Cent, and Lending To
Customers at 20 Per Cent to 200 Per cent.
The excessive rates which were being exacted
by member banks to which the Reserve Bank of
New York was in some instances lending lavish
ly, were also alluded to in the same letter, as
follows:
"MEMBER BANKS SHOULD BE GIVEN. TO
UNDERSTAND THAT THE BOARD DISAP
PROVES AND WILL NOT COUNTENANCE THE
'EXCESSIVE RATES WHICH HAVE BEEN IN
VOGUE IN NEW YORK AND WHICH ARE
HIGHER THAN THE RATES CHARGED BY
BANKS IN ANY OTHER COUNTRY IN THE
WORLD. SUCH RATES, IN MY OPINION,
HAVE BEEN VERY DAMAGING TO THE COM
MERCIAL AND FINANCIAL INTERESTS OF
THE COUNTRY, and I submit that it would
be well for the board to establish regulations
-to prevent the 'Reserve Banks from lending
money to member banks at six per cent to be
passed on to customers at extortionate rates.
The effect of such a regulation, I believe, would
be most helpful and salutary.
"The records of this office show numerous in
stances of banks which have GOTTEN LARGE
SUMS OF MONEY FROM THE RESERVE
BANKS to be loaned in Wall Street for the pur
pose of PROFITING BY THE DIFFERENCE IN
interest rates
"The official reports also show that in addition
to the money .which the, New York banks were
lending on call in New York for account. of their
correspondents and customers, the national
banks in New York oity this time last year had
on deposit to the credit of their correspondent
banks in all" parts of the country approximately
900 MILLION DOLLARS MORE, while thG total
sum which the Now York National banka were
lending, directly and indirectly, to all othor
banks throughout the country was considerably
LESS THAN ONE-FOURTH OF THAT SUM.
"The important thing is to find and apply
proper romedies. Perhaps there has never been
a time when the business and industrial inter
ests of the country wore more deoply dependent
on a sound, wiso and courageous administration' .
of our banking and financial system than at '
the present moment."
Reserve. Banks Should Now Reduce Rates to O
I'd Cent Maximum.
In the same lotter among the measures and
changes in policy Avhich I urged upon the board
wero the following:
First, reduction in the rate of Interest
charged by Federal Reserve Banks on the loans
to member banks secured by Liberty Bonds
from 6 per cent to 7 per cent to a uniform of,
say, 4 per cent, as is was clear that the policy
ofsthe Reserve Banks towards loans on Liberty
Bonds, besides working hardships on borrowers
was depressing the market valuo of the bonds
and the credit of the government.
Second, suspension or modification of the
"progressive" rate in the three Federal Reserve
districts where it still prevailed, to 6 per cent
per annum. Instances can be cited where banka
had been charged 20 per cent, 30 per cent and
40 per cent, and inpno exceptional case as high
as 87U per cent. I brought to the attention of
the board specific instances of suffering, and
the lack of money and credit scarcity In many
different sections of the country, and said:
"Such facts and conditions as have been
brought so vividly before us can not be met with
theories or removed by explanations and should
not be dealt with by vague surmises and prom
ises or unconsidered experiments. THEY DE
MAND DEFINITE "AND ENERGETIC ACTION,
EVEN IF PRECEDENT MUST BE DISRE
GARDED, ACCEPTED RULES SUSPENDED
OR WAIVED AND NEW PLANS AND METH
ODS DEVISED.
"The people have entrusted their welfare and
Interests to those of us who have been honored
with public office of any degree and in any de
partment of the government, supposing us to b
fitted for our task by knowledge, intellect and
character. Our plain duty is to act as prompt
ly and as independently of usual habits of
thought as may be necessary to FIND AND APr
PLY REMEDY.
Inequalities in Loans Granted by Ifcscrvo Banks,,
Some Got Lavish Loans, Others Denied Credit.
"While there appears to be this scarcity of
money, and of credit Jn the groat agricultural
and producing sections of the west and north
west, and in the south and southwest, we find
that indivdual banks in New York city are bor
rowing from the Reserve System, in a number
of cases, more than 100 million dollars EACH
and sometimes as much as 145 MILLION DOL
LARS IS LOANED THERE TO A SINGLE
BANK TWICE AS MUCH as the TOTAL
LOANS some of the- Reserve Banks have been
lending recently to all the member banks in
their districts
"THE INEQUALITIES AND INJUSTICE IN
THE DISTRIBUTION OF THESE FUNDS BE
COME APPARENT WHEN WE ANALYZE
THE USES WHICH BIG FAVORED BANKS
IN THE EAST SOMETIMES MAKE TO THE
MONEY THEY BORROW FROM THE RE
SERVE SYSTEM."
A few weeks later, on January 17, 1921, in
again urging the board to some constructive ac--tion
for the relief of the situation, conditions in
many parts of the country have become still
more desperate, I said:
"I cannot see that any former expansion of
value, however artificial or exaggerated, would
make an excuse for us if we aided In, or BY
INACTION ALLOWED SUCH RAPID AND EX
TREME SHRINKAGES AS WOULD MEAN
GENERAL COLLAPSE AND RUIN. Perhaps
the supreme test and finest achievement of
statesmanship is in saving the people from the
worst consequences of their own mistakes. In
this present situation the vast majority of those
on whom the ruin would fall are those in no way
responsible for the conditions that caused it.
- "I do not think we would prove ourselves fit
for the important work entrusted to us If we
stood content to remind, thousands suffering .
from hunger and cold that some profiteers and
speculators and a few o'thers produced .and many
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