themselves to advance the money to the foreign borrowers at five and one-half per cent per annum, plus acceptance commission of one-fourth per cent for each three months. In view of widely circulated press statements that these acceptances will be eligible for rediscount or purchase by Federal Reserve banks, Board deems it its duty to point out that banking prudence and obligations toward general commercial interests of the country require that Federal Reserve banks should not acquire acceptances of this character beyond a conservative amount. This view is consistent with the Board's policy in the past, and while it wishes, through all legitimate means, to promote the development of the American acceptace market and to further the growth of our export trade, and while it wishes to avoid any attitude of interference with the powers of member banks in this respect, Board feels nevertheless that it should be clearly understood that these acceptances which represent obligations for cash advances aggregating a very arge amount, by the acceptors for eighteen months, cannot properly be regarded as paper self-liquidating within a period of ninety days. If offered in excessive amounts, Federal Reserve banks may be obliged to discriminate against or to exclude entirely acceptances of this character. Board feels that prospective acceptors should have a clear understanding of this. Pencilled notation in margin: "Guaranty-Bankers-Bonbright."] EXHIBIT No. 3604 [Copy of telegram] DENVER, COLO., October 24, 1916. PIERRE JAY, Federal Reserve Bank, Equitable Building, New York. Wire received late. Announcement only justified for purpose of correcting newspaper statements provided bills not eligible. If eligible, will be understood Board is expressing opinion that State and National banks are doing unsafe business. Board not justified in expressing any opinion so long as member barks not violating law. Will simply confirm conviction in New York that membership will impose unreasonable interference with business of State banks. Public statement of Reserve bank's policy unnecessary and same object can be accomplished by private conference with managers. Don't let our bank be responsible for any announcement. Board should recognize war conditions Justify transactions not usually necessary. York 1308. 4100 Montview Boulevard. BENJ. STRONG. EXHIBIT No. 3605 [Excerpt of letter] FEDERAL RESERVE BOARD, MY DEAR STRONG I suppose he (Jay) is all up in the air today about the attitude which the Board found it necessary to take with reference to the one-hundred million dollar credit to be negotiated by the Guaranty Trust, the Bankers Trust and Bonbright. When we discussed the first credits of this kind, you remember I pointed out the dangers of opening the door in this way, but finally you urged us not to close the door and to leave it to the discretion of the New York bank to discriminate at the proper moment if the thing should outgrow safe proportions. I am sorry that you were not here last week, because not only do I believe that you might have seen the thing coming, but I also think that you would have been the first to recognize that it was time to protect the System. I inclose herewith a copy of the telegram which we sent Jay and the other Federal Reserve agents. The point is this: Since the Brown credit there have been two or three new eredits, with which you are familiar, bringing the total of these acceptances up to about fifty millions. Then with this new credit of one hundred millionsninety-day bills to be renewed five time sand a definite agreement on the aprt of the seceptors to advance the money at 5%% and 4% acceptance commission for three months, secured by French Government bonds, made payable in dollars so as to coincide with the maturity of the eighteen months' credit. The Board in its considerations disregarded entirely the question of whether or not this was a French Government credit, but considered only the question of whether or not it was safe for the Federal Reserve banks to have the impression go out that they would stand ready to hold the bag for $100,000,000 of these bills. There was unanimity in the Board that we could not take the responsibility of standing "pat." As a matter of fact, these are eighteen months' cash advances made by the accepting bank to the French borrower, who has no interest whatever in the rediscounting of these acceptances. He draws upon the American bank as a matter of accommodation so as to enable this American bank in its convenience to soak the Federal Reserve System. Whenever money is easy, the accepting banks will carry their own acceptances, but when a sharp turn will come, there may be $150,000,000 of acceptances falling down upon the Federal Reserve System, and probably more, because if we do not call a halt now there is no doubt that similar credits will follow. The vicious part of it is that, while I should be delighted to see this country accept $500,000,000 to finance foreign trade, I should want it to be accepted in a way that puts the burden of the discount operation upon the foreigners, so that in case we find ourselves obliged to protect ourselves and to raise the discount rate we could force back the foreigner to use acceptance credits in his own country. However, whenever, as in this instance, the acceptor takes the entire burden of the financing, we might raise our discount rate to 20% and we would be hitting only our own banks without being able to retransfer the burden to the other side of the water. That is unscientific, rotten, and dangerous financing, and while Mr. Kent, in a letter addressed to Mr. Jay, thought he was doing wonderful pioneer work in educating our banks to use the acceptance facilities, I think that it is mighty poor educating; in all of which I am certain that you and I are in accord. This kind of eighteen months' borrowing on such a scale as that proposed ought to appeal to the investment market, but should not be dumped on the discount market. If that policy should be permitted, these finances credits would ultimately dictate the discount rates to the detriment of the normal business of the country, and it would be "putting the cart before horse." Of course, we would not want to interfere at all with the member banks' right to accept for this kind of transaction; but we want would-be acceptors to understand the situation before they commit themselves. You know that I am s liberal constructionist and that I made a pretty arduous fight in order to secure for banks the right to accept for renewals; but when I see how foolish the banks are and at once abuse their privileges, I can understand how Government officials gradually turn into strict constructionists. What you say about the Comptroller's statements is quite in line with my own thought about the subject. As a matter of fact, I wrote the Comptroller at once when his latest statement was published that I did not agree with his conclusions, but his answer was that he did not agree with mine. His point of view is plainly to analyze the figures which he gets, not from the point of view of safety for the Federal Reserve System, but in order to find material from a political point of view to boost the benefits of the System. It is most regrettable and is one of the things that we shall have to take up with Congress during the next session. DEAR WARBURG: It was really very good of you to telegraph me after your conference with Jay and Curtis in regard to the French credit. They doubtless explained the views which I had expressed to them about an announcement, so I felt repaid. But in connection with these matters, I always have in mind the great importance to the country as a whole of the existence of a large volume of these bills, even though in the form of finance bills, as an offset later on to the demands for gold. It is the best protection we will have when the war is over. It was something of a shock to learn that the Syndicate managers sent out errculars stating that the bills would be eligible, particularly if they did so without authority, and in that connection, I want to refresh your memory of my own atti1.de with both Mr. Brown and Mr. Kent as well as Bonbright & Company in gard to the earlier credits. I told them in each case that we considered it our duty to make clear the meaning of the law and the regulations issued by the Board so that their transactions could be made to conform to them if they wanted the bills to be eligible in character. On the other hand, that we would take no tart in the negotiations, would make no pledges to buy the bills and if we did buy *tem, the amount would be governed by our own rules and requirements. Furthermore, that we would not favor the Federal Reserve Bank investing in bills by irect purchase, that in each instance they would find and make a market for the paper and if we in our own discretion determined to buy any of it, we would do so the regular way in the open market and not as one of the primary parties. The ect of this attitude requires no explanation. The same attitude maintained in connection with this credit would have left us with perfect freedom of action and while, of course, the reserve banks have held a considerable amount of this paper, they have not held too much by any means, cons dering the high character and credit of the acceptors. It seems to me that any announcement of our attitude towards any specific credit could readily be construed as a reflection upon the propriety or goodness of that transaction and, furthermore, might embarass us later if occasion arose to elange our policy. Then again, it seems to me we cannot expect in these war nes that commercial credits will take the form most acceptable in times of peace. Our exports must be paid for and the machinery of our banking system Zould be adjusted to meet the unusual demand, both in amount and character, that grows out of our huge foreign business. I was not aware that an announce Lent had been made officially by the syndicate managers and think that was a Estake, if they did it without authority. I do not need to tell you that the rather vigorous opinions which I hold on this matter have no relation whatever to my former affiliations nor to any political sympathy. I would feel just the same about German credits or any other credits and I only wish that it were possible for these matters to take such shape that suggestion of discrimination could not possibly be made. As the Federal reserve banks are handling practically all the bills originating with the German banks in South America that are offered to us, I have no fears on that score if any one attempts to make charges of discrimination, but unfortunately, as you know, the German banks seem to be unable or unwilling to negotiate direct credits in this country. There is something in it, if I may say so, but not very much. The importance to this country of negotiating credits of all characters abroad just now cannot be xaggerated and I think Warburg is inclined to advance arguments in opposition which would apply in times of peace but are minor considerations in such times as the present. Sincerely yours, (Signed) BENJ. STRONG. Equitable Building, New York City, J. F. CURTIS, Esq., EXHIBIT No. 3608 [Excerpt of letter] FEDERAL RESERVE BANK OF NRW YORK, MY DEAR GOVERNOR: With reference to the new French export credit, I received your various telegrams in Washington yesterday but was somewhat mystified by the last sentence of your original telegram, which when first delivered to me read as follows: "Important should not conclude argument with revealing all correspondence and memorandum in our files on this subject." The telegraph company repeated this sentence so as to read: "Important should not conclude argument with reviewing all corre spondence and memorandum in our files on this subject." But we I assumed that what you really said was, "without reviewing, etc." did not go over the whole story from our files with the board, although Mr. Jay and I did to refresh our memories of what had taken place in the past so as to be able to make a clear statement to them. The history of this matter is about as follows: A week ago Thursday Kent invited Jay and myself to lunch and told us that he had been working on this credit for about six or eight months and that they were about to get their syndicate arranged and conclude the contract. He said there would be about sixty high-class manufacturing and commercial concerns in France that would draw on the American banking syndicate. He didn't show us any contract and, in fact, indicated that matters hadn't quite progressed that far. It appears that on the same afternoon he called in various newspaper men ard told them the negotiations in confidence, with the understanding that it was not to be published until he gave the word to them all simultaneously to release it. However, with its customary disregard of little matters of that sort, "the New York American" promptly published the story on Friday morning, which forced the hand of the managers of the syndicate, i. e., the Bankers Trust, the Guaranty Trust, and Bonbright & Co., who then with much haste sent out their circular to about four thousand banks inviting them to participate in the syndicate. circular was not shown to any of us over here. This On Saturday morning the members of the Federal Reserve Board, who were in Washington, felt much upset about the published newspaper articles concerning the credit on the ground that the managers apparently had made statements which might lead people to believe that the Federal Reserve banks would hold the bag" and purchase all the acceptances under the credit which might be thrown on the market. They got in touch with Mr. Jay, who got in touch with Kent, who tried to stop the circulars from going out but found they were already in the mail. Without notifying us of their intentions, the Board sent a telegram to each of the Federal Reserve agents, indicating that these acceptances were not very desirable, and that the Reserve banks should not buy them in large quantities, and that the persons who might join the syndicate should be advised of this fact. As soon as we received the telegram, which was on Monday, we called them up at the Board and got hold of Warburg, I think, who told us the Board were considering making a published statement for the newspapers in connection with the matter. We urged them not to do this on the ground that such statement would have two inevitable results: 1. Kill the credit "dead as a doornail,” and 2. Lead to a newspaper controversy with bankers as to whether the Board or the trust companies were in the right. That night Jay and I jumped on a train and went to Washington and had a conference lasting about two hours and a half with Messrs. Harding, Delano, and Warburg, at the end of which it was agreed that the best way to handle it was to have the trust companies include in the next letter which they were to write to those who desired to participate a statement to the effect that, in order to avoid misunderstanding, they wished to advise the participants that, while the acceptances were eligible for purchase by the Federal Reserve banks, it was understood to be the policy of the Federal Reserve Board not to encourage large purchases of this class of acceptance which had the renewal provisions included in the contract. It was also understood that Governor Harding, who is to make a speech here in New York next Wednesday evening, would make a general statement of the position of the Board with respect to acceptances of this character without mentioning any particular credit by name. We also urged upon those members of the Board to send another telegram to each Federal Reserve agent dieating that their first telegram was sent for his private information and not for publication, which, I think, was done but I am not sure. On Wednesday we received word from Mr. McKay of Chicago that his executive committee had voted that the proposed acceptances were not eligible for purchase by Federal Reserve banks and that, therefore, we would kindly refrain from buying any for their account. Naturally, this action was quite a body blow for the undertaking as the Chicago bank was advising all its member banks who ared that the acceptances were not eligible. The same was true in Boston, except that after first advising member banks that they were not eligible they changed around and later advised them that they were eligible. While in Washington, we gathered from conversations with Delano and Harding that the Comptroller was very much wrought up over the newspaper articles about the credit and was very anxious to have a counter-statement issued y the Board or by himself, and, apparently, all of the members of the Board except Delano were much exercised over the situation, he having said that when be returned to Washington on that Monday he found them in a great state of excitement. Harding told me when we were alone together that Willis was very Euch excited about it and had almost given the whole matter to the press with a statement before they had held him up, and he also told me that his own view was that it should be managed without publicity and thought that the plan of av.ng the trust companies issue a supplemental explanatory letter, coupled with speech, was the correct way of handling it. Jay and I left Washington on Tesday afternoon, thinking it was all settled, with various suggested forms for s supplemental letter to be submitted to Kent. On Wednesday Kent and his riates went over the draft of statement and changed it somewhat and subted what they thought would be appropriate, which was forwarded to the Bard. On Thursday the Board met again and decided that the Kent draft would not meet the situation, and, apparently, the Comptroller at that point became convinced that the whole matter was illegal so far as national banks were Ancerned, apparently on the ground that national banks have not the right to mbine an agreement to renew acceptances for a period of eighteen months plus an agreement to advance the funds themselves, if necessary. I do not know what provision of law prevents this and have not yet discovered what one he thinks prevents it, but, anyway, it raised a new complication and so it was sugested that Kent and Hemphill go to Washington for a conference yesterday Friday together with Cotton, Jay, and myself. So the pilgrimage was undertasen once more, Mr. Jay having been there on Thursday anyway to attend a Leeting of the executive committee of the Federal Reserve agents' conference. On Friday morning Jay and I had a long talk with Cotton, Elliott, and Harrio", all of whom apparently had got it into their heads that the combination of the two undertakings of the national banks was in some way in violation of the provision that they should not make acceptances to run for more than six months. I argued this for about an hour and a half, at the close of which Harrison said be had come round; Cotton was looking at the ceiling with his feet on the desk, In an atmosphere of coma; and Elliott had disappeared with the papers to look something over. At two o'clock Kent and Hemphill arrived and at half past two we all went to the board room and had a meeting with the Board, at which they were all present except McAdoo and Hamlin. Harding started off by saying that the Board had made up its mind that a statement must be made and they Wodd give opportunity to the trust companies to make a statement to the prospective participants of the general nature of one which he read aloud, or the Bard would issue a public statement. There ensued a debate lasting for about three hours in which the following statements were made: Warburg said he didn't believe in the credit anyway, that it was on the wrong Las's and ought not to be encouraged. Hemphill said that the Board had already practically killed it,that it could not how amount to more than fifty millions, and that all the subscriptions they had received so far totaled only eighteen millions. He asked Harding whether there Ay misstatements of fact in their circular and suggested that they take up the facts stated in order: 1. Were the bills eligible or not. To my amazement Mr. Harding did not answer this question directly, but ote of the members of the Board (I have forgotten which) said that it was a matter under consideration. Miller suggested that, while the bills were eligible, they were not eligible, his point apparently being that, while they were eligible as a matter of law, they were not eligible as a matter of prudent banking. I suggested |