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The Commoner
XOU 21, NO. 7
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partook of a surfeit last year. Tho gain in
prices may have been fantastic and largely on
paper, but tho loss, coming bo swiftly, produces
vory real distress for hosts of good people, in
cluding women and children. Wo can not euro
or palliate destitution by philosophizing or ex
plaining or proving that it comes obedient to the
laws of political economy."
Warnings and Remonstrances, Given Time and
Again, Pass Unheeded by Board, With Dirc-
fnl Consequences.
's FOURTEEN MONTHS havo elapsed since my
tetter to tho board of January 28, 1920, with
roforonco to which, in a letter ao tho governor
of. the board of February 19, 1921, concerning
the .unequal distribution of the funds of the
system and tho large loans which were being
extended to certain favored member institu
tions, I had said:
"I pointed out to you that the New York Re
sorvo Bank was, AT THAT TIME (January,
1920), loudlng an amount nearly six times its
own Capital, that is to say, SIX TIMES THE
CAPITAL OF the Reserve Bank of New York
to ONE member institution, .and I
sbowod you that the money which tho New
York Reserve Bank had loaned to one
borrower on Dccomber 31, 1919, amounted to
nearly TWICE AS MUCH as the aggregate
,amount of loans and discounts which the Fed
eral Reserve Bank of DALLAS was lending at
.hat time to ALL of its member banks in that
groat district, embracing tho entire state of
Texas and part of the states of Louisiana, Okla
homa, Now Mexico and, Arizona.
"It appoars that In order to make the3e huge
Joans to those institutions the New York Fed
eral Reserve Bank, had found it desirable to re
tlscount or borrow about the time of my letter
to you of January 28, 1920, over $118,000,000
from SEVEN other Federal Reserve Banks, in
cluding among others, the Reserve Banks of
DALLAS, CHICAGO and ATLANTA, WHOSE
RESOURCES AVAILABLE FOR THEIR OWN
MEMBER BANKS WERE TO THAT EXTENT
LESSENED."
SIX MONTHS have now passed since I took ,
the liberty of giving my warning of October last
to the Secretary of the Treasury and to the
board, and of urging so earnestly a revision of
policies.
FOUR MONTHS have gone since I supple
mented that warning in an earnest and elabor
ate presentation of the situation. The suffer
ng. throughout the country had meanwhile be
come greatly intensified. In that subsequent Iet
er I had advocated reduction of interest rates
xnd increased extension of cred!t for urgent
'msiness needs to the" lim'ts cons'stent with
rudence and the equitable distribution of our
available resources.
Instances illustrative of the widespread distress
n the west and south, and in tho,east ns well, and
argument for such a policy of forbearance and
consideration for borrowing banks, as would en
able them to give like treatment to individuals,
was drawn as strong as my ability-permitted.
It seemed to me something was wrong some
where and somehow, when with an actual
shrinkage in values of our commodities within
a year of twelve to eighteen billion dollars,
FOUR OR FIVE favored member banks in New
York City were borrowing from the govern
ment's reservoir of money and credit as much as
FOUR OR FIVE THOUSAND member banks in
the west and south were borrowing from five
Federal Reserve Banks, embracing in their re
spective districts twenty-one great states.
"Average1 Rates Charced Arc Dwluslve, Some
Gorged, Others Starved.
The board, with its knowledge of these huge
1oans to certa'n New Yrk cHv banks, claims
there was, "ON AN AVERAGE," no restric
tion of credit, etc.; but again it must be pointed
out that it is a poor consolation to starving
families to be assured that taking into, consid
eration food wasted, in riotous living and luxury
the "AVERAGE" amount consumed in their
community is fair. Of such "AVERAGES" as
these we may well exclaim. "What crimes are
committed in thy name!" The purpose of the
Federal Reserve Act is not to secure satisfactory
"AVERAGES" we already had tolerably good
"averages" but to secure A FAIR DISTRI
BUTION AND EQUITABLE ALLOTMENTS TO
EACH AND EVERY ONE.
$500,000,000 From Other Sections, Enticed by
Fancy Interest Rates, for Loans in Witfl Street
I was further painfully impressed by the
evidences of the official records that at the be
ginlng of August, 1920, in crop moving time
the national banks in New York city were lend
ing for correspondents on so-called Wall Street"
loans for ttock speculations and Poiib, more
than $500,000,000 COAXED FROM BANKS
EVERYWHERE IN THE COUNTRY by the
high rates speculators would pay. This was more
than the Federal Reserve Banks of Minneapolis,
St. Louis, Kansas City, Dallas and Atlanta were
lending to their 4,000 or more member banks.
This document, my letter of December s a,
1920, to the board, was long, elaborate, care
fully prepared. I tried to make the statements
of conditions, as I saw them from my inside
view, vivid and energetic and the suggestions
for improvement clear. The reaction I got, after
forty-four days, was that I had written some
thing, not to be acted upon but to bo reported on
when the board knew how many persons had
seen my letter, and what their names were. The
board was to determine, not how to DO some
thing, but, perhaps, how to formulate reasons for
NOT doing it. "Whatever was required to be
done," says Dickens, "The CIRCUMLOCUTION
OFFICE was beforehand with all the public de
partments in the art of perceiving how NOT to.
do it."
Board Says Shrinkage in Values "Somewhat
Annlogus to Puncturing Balloon To Let Out
Gas." Comptroller Replies Sensible men
Bring Down Balloon by Careful Handling of
Valve Ropes and Ballast.
After a preliminary Incubation of two weeks,
the governor of the board had also written me
in a general way on January 13 th, some com
ments on my letter of December 28th, defensive
ot board poLcies and the status quo, but with
out acting upon the recommendations in my let
ter, and ho stated that the views expressed in his
letter were 'also those of other members of the
board. He impressed me as being rather more
intent on rasping me, if possible, than on acting
to meet the unhappy conditions existing, but did
remark that the process of deflation was "some
what analogus" to what takes place "when a
balloon is punctured and the gas escapes." Tak
ing this as a text, I urged that sensible men
bring down balloons by careful handling of valve
ropes and ballast, not by driving a hole in the
bag and precipitating collapse and destruction.
That had been the gist of my entire complaint
and plea. It was impossible so far as my ex
perience went, to fasten the minds of the board
on that point. -I NEVER HAVE, TO THIS DAY,
SECURED A DEFINITE DENIAL OF ANY MA
TERIAL STATEMENTS I HAVE MADE OR A
SOLID REASON FOR OPPOSING ANY OF THE
SUGGESTIONS OR RECOMMENDATIONS I
VENTURED TO OFFER.
While in the earlier period the board was very
helpful in facilitating an orderly decline, its
subsequent obtuse refusal to recognize changed
conditions, and to revise its policies accordingly
though fully warned and urged to do so, has in
my opinion, to use the board governor's simile
been "somewhat analogous" to puncturing a bal
loon and producing a ruinous and needless crash,
which wise management could have averted
This was no fault of tho Federal Reserve Act'
but of its administration, for without the Fed
eral Reserve System conditions would be in
finitely worse than they are, despite its faulty
administration. The most perfect machine which
genius- can invent, or ingenuity construct, may
be ruined by ignorance and mismanagement.
Wise Exercise of Powers by Reserve Board Could
Have Made Shrinkage More Uniform and
Gradual and Saved Country "From Much of
the Distress and Ruin Through which We
Have Been Dragged."
All this has been cited to illustrate tho need
of some action by congress in the interest of
mSl tUu 11aborlnS men, and the business
men of the whole country, to make the vastly
important Federal Reserve Board a more elas
tic more initiative, sympathetic and responsive
body than it is; to put it in more direct contact
with the public, and to fix its responsibly
There is no time or need here to consider details
o such legislation. Among our 532 members
of congress there is brain power enough to de
vise simple remedies for an obvious situation I
believe firmly that the BOARD BY ITS POWER
TO REGULATE AND INCREASE OR REiSS
THE SUPPLIES OF FUNDS AND THE INTER
EST CHARGES FOR MONEY C(TO HVff
SAVED US FROM A FALL SO PRECIPITATE
AND SMASHING, AND FROM MUCH (W 4tS
DISTRESS AND RUIN THRO&OHraoHE
HAVE BEEN DRAGGED. IT COUin Saw
MADE THE SHRINKAGE OP vB 2mS
GRADUAL AND UNIFORM INSTFAn n?4t?
LENT AND SPORADIC. COULD HAVE 2"
ED STRONGLY TO KEEP THE niCm.ATING
CURRENTS OF COMMERCE AT MORE Pvr '
FLOW, SO THAT THE LOSSES OF EAn
PRODUCER MIGHT BE OFFSET BY REAnv
ABLE REDUCTION IN THE COST OF WhS
HE "MUST CONSUME, WHAT
Lord Leverhulme Declares "Too Rapid Deflation"
Has Brought Stagnation and Uncmnlovmr,,.
These views and apprehensions, which t
six months, to constructive action and to a re!
vision of Its policy Of contraction before it wal
too late, were snarea oy aoie and clear-tuink
ing men far and wide. The fatal consequencps
of its folly or Inertia, or both, have been far
reaching. Lord Leverhulme, one of the lam
est and most successful manufacturers hi the
British Empire, a man of broad vision whose in
terests are worldwide, recently declared in an
interview, as reported in our newspapers, that
"THE PROCESS OF TOO RAPID DEPL
TION IS UNDOUBTEDLY THE CAUSE OP THE
PRESENT UNEMPLOYMENT AND TIUDE
STAGNATION."
Continuing the interviewer said:
"The prices of commodities rose to tho ex
treme limit during the war,. and their reduction
was a prime necessity, but the fall has been too
sudden for adjustment. The deflation has been
accomplished through the banks calling in loans
which were used to finance stocks at high prices,
and the effect of the forced realization of these
stocks has been to drive down prices of com
modities below the cost of production.
"Under these circumstances manufacturers
are not likely to go on producing at a loss, and
have consequently been compelled to shut down
their factories."
Our country being now the principal creditor
nation of the world, its financial policies, as is
clearly recognized, have a, world-wide effect.
Need For Wise Counsel, Experience, Knowledge
of Business, Courage and Sympathy with
Pnblic Needs. . ,.".
We learn by experience, and -should provide
that the Federal Reserve OBoard of tho future
shall have less of the characteristics of the
automatic bureau and more of. the activities and
spirit of the wide-awake business man. I be
lieve it desirable from the standpoint of the pub
lic, and of the commercial interests of tho coun
try that the membership of the board should in
clude at least one man of wide business experi
ence, outside of banking; The six members at
the time of my resignation included, in addition
to the Comptroller of the Currency, two college
professors, two bankers, a lawyer and a news
paper man from Poughkeepsie. A Chicago
business 'man of signal ability and exemplary
character whose counsel would have been t)f
great value, especially in our recent experiences,
was refused by the Senate when nominated by
tho President several years ago.
Enlightened Statesmanship Shown, by Bank of
France in Lessening Violence of Crisis.
The enlightened statesmanship with which the
management of the great Bank of France met
this world crisis and tempered its strain and
shock for its people may be Judged by a state
ment made by the governor of. the Bank of
France in his recently published annual report,
Tn referring to the existing financial and commer
cial crises, he said:
"We have welcomed,. whether by means of re
discount or by direct discount? all paper whose
creation responded to the legitimate needs of
commerce and production. By this liberal policy,
to which we have remained and always will re
main faithful, we expect to support with all pow
er tho activit'es of widely varying business en
terprises which in France are' needed to lessen
the violence of the crisis."
In striking contrast was the plan discussed by
an "important official" of the Federal Reservo
bank-of Now York, with a heartlessness w'fich
even amazed Wall Street, and of which 1 shall
speak again presently, which -called for "PUT
TING ON STILL MORE PRESSURE, THUS
CLEANING UP THE AFTER-WAR MESS IN A
HURRY AND GETTING IT OVER," though it
should involve "many fprced failures"; but the
important official" referred to complacently
concluded that it seemed best to stick to tho
present set course without increasing or reduc
ing pressure-, "despite the criticism" which it
was admitted was "heard FROM ALL QUAR
TERS FOR LOWER INTEREST RATES AND
WITHDRAWAL OF PRESSURE TO FORCE
PAYMENT OF OUTSTANDING LOANS."
As is natural and proper, I 'offer my sugges
tions of what congress should do.chiefly within
Continued; on .$age&14
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