EXHIBIT No. 3615 [Copy] NOVEMBER 10, 1916. DEAR STRONG: Mrs. Warburg and I were delighted to receive your last letterWe were particularly pleased with the announcement that you had put on five pounds additional weight, which is the best you have done yet. Keep it up, old man, it is worth while. I suppose you have been just as much up in the air as everybody has been here concerning the presidential election. I have never seen people as intensely keyed up as during these last few days. Even my philosophical wife, who as a rule does not take any interest in politics, was all excitement. Everything is settled now, and I think, or the whole, settled for the best. While I was in New York for voting purposes I had a chat with Jay, Curtis, and Kenzel. We have now about close to $30,000,000 of those French acceptances out of a total of $80,000,000, and I suggested that the bank carry out the suggestion of the board of increasing the rate for these acceptances by an eight or a quarter percent. Aiken writes me that they have about enough of these acceptances, and asks if they should turn them over to other banks or increase the rate there. I answered him that I thought the other banks had about enough too. I do not think we want to be dogmatic about this matter and if the banks got a couple of millions more or less from time to time that would not make any difference, but I think there ought to be some limit which should constitute the maximum towards which the banks should try to work so that whenever they see they are getting above that maximum they will try to fight it with a small differential in the rate against these bills as distinct from normal bills. This was the understanding, as correctly stated by you, upon which the matter was left in the discretion of the Federal Reserve Banks-particularly that of New York—and I cannot see why there should be now any hesitation in carrying this understanding into effect. The Federal Reserve System can be developed successfully only either by the board's undertaking to run the thing from Washington by strict regulations and directions (a development which I would consider extremely unfortunate and undesirable) or by the board's indicating general policies, provided there is a ready cooperation on the part of the banks in carrying out such general policy when it is laid down by the board; or it will be the Federal Reserve Bank of New York that will run the whole show, a process which some of the other Federal Reserve banks certainly would not submit to, and, if they did, would lead to an energetic protest on the part of the country and possibly to new legislation adverse to any such development; or, if neither of these three alternatives should take place, there would be chaos. The second alternative is the only one that can lead the system to success, but, if that is to succeed, there must be a better understanding on the part of the boards of the various Federal Reserve banks that they are carrying out the policy, but that they are not the whole Federal Reserve System and are only a part of it. As it is, each board tries to be the whole thing, and the patience of the Federal Reserve Board, or of those members who try to work this thing out, is taxed to a degree which, in the long run, is unbearable. Here we have Boston establishing a special rate for domestic accpetances of 3% to 4%. I have been writing Curtiss and Aiken consistently for weeks now that the bankers' acceptance rate of 2% to 4% is wide enough to include domestic acceptances (even if Boston insists upon differentiating in favor of acceptances based on importation and exportation) but neither Curtiss nor Aiken so far has been in a position to persuade the Boston directors to fall in with this view. Of course, we have the power simply to force this question by revoking our permission to have this special quotation for domestic acceptances or by otherwise "determining" their discount rates; but that is the very thing that I am trying to avoid. We find similar difficulties in Atlanta, where the board considers a "banker's acceptance" what never should be a banker's acceptance, and tries to beat the rules and regulations of the Board; or in Chicago, where the Board does not agree with the general policy of the Federal Reserve Board of issuing Federal Reserve notes freely without consideration of the expense; and so it goes; in New York, where Messrs. Palmer, Thompson, Starek, Towne and other "trained bankers" know so much better than yours truly. And so do, after all, Kenzel and Curtiss. I dislike to see this growing tendency of knowing better. Take the question of these unfortunate French acceptances. I am more convinced than ever that the real sound thought concerning the development of this business is not yet thoroughly understood. I am amazed every now and then Even at the dense ignorance in those who are cracked up to be the best experts. in talking with Mr. Kent (whom I respect very highly and for whose sincerity of purpose I have great admiration), when he was presenting his case, I had a strong feeling that he was in the same position that I would be in were I trying to be an expert baseball player. No matter how hard I tried, to a trained Ameriran ere it would always remain easily visible that I had not grown up to that kind of a game, and that is the same thing that occurs to me when I hear the way our American bank officers, large and small, discuss the question of bankers' acceptances. It is new to them. I am confident that, after a few years of further training we can get this thing properly understood and assimilated, but we will not succeed if we simply accept their whims and their desire of getting the most out of this thing and permit the way of the easiest approach to guide the development of this new business. Take the French railroad companies' acceptance credits: Only a few days ago I secured the details from New York. They are in a much better condition than the Brown and Bonbright credits. That they are in such good shape is not, I believe, due to the American bankers but it is due to the fact that the French borrowers insisted upon having them in this shape. In these credits there is no ofligation at all on the part of the acceptor to discount the acceptance at a given rate. There is a definite purchase of railroad material and a definite number of renewals, and, while the acceptors have the privilege of discounting for the French drawers at % above the prevailing discount rate of the Federal Reserve hanks, there is no obligation on the part of the acceptor nor any understanding to carry this whole cash advance at 6%% for eighteen months. The theory that the acceptor should, by contract, be the one to make the cash advance is a rotten one. If we had been kept properly advised of this phase of the proposition we could have steered the thing right. Having received only the most meager details, f any at all, from New York concerning these foreign credits we could not steer them until the four thousand circulars of the Guaranty Trust and the Bankers Trust went out and we had to take notice. It is a pretty poor campaign of education that these two trust companies are making when they send a circular to every $25,000 or $100,000 bank asking it to accept for this kind of transaction with that kind of a cash obligation. It spoils them for all future business and draws into the acceptance business concerns which should never enter that market. I am mentioning this only because if we had been dealt with in a proper spirit instead of being dealt with at arm's length we might have directed this whole thing right and the tangle might have been avoided. The few times that I have had an opportunity of discussing these foreign credits with you or with Jay I was met constantly with the attitude "that that is how the business is being done" and, because it is being done that way, the Board ought to sanction it; and that if we did not do it we would ruin the country's business. While it would have been well possible, with a little bit of patience and understanding, to steer this thing right from the start. When I was in New York, Curtis showed me a letter which you had written about our ruling in connection with the Mechanics & Metals' application to accept finance drafts drawn from London and Paris. I am enclosing copy of my reply to Jay. I am burdening you with all this and write to you at such length and with such frankness because I want you to look at this thing in a little bit more from my point of view. Of course, we want the conscientious advice and cooperation of all the guiding spirits of the Federal Reserve banks, but I think that that cooperation ought to be given with the realization that, after all, there must be one uniform policy and that if there is too much obstruction at all twelve points and insistence that everybody wants to have it just his own way the system cannot be carried on successfully. Instead of taking the attitude that everything because it comes from Washington must be "ridiculous", there ought to be some realization that, after all, there is something to be said for the more detached point of view. While it is true that we are not as much in actual touch with business as can be the Federal Reserve banks, we have the advantage, on the other hand, of not being subconsciously subject to the pressure brought to bear by the banking community at large to have the system run under the policy which best responds to the desire of business to make money and nothing but money. I think a central bank in this country would be a misfortune at this time, though later generations may enjoy such a system with safety. But I have moments when I think this Federal Reserve System is going to kill conscientious members of the Federal Reserve Board. Not only is there the difficulty that, unlike the European practice whereby the management of the central bank is carried on practically by one or two men, the Board in itself has to exhaust itself by trying to have seven men agree upon a policy, but, after this process has been completed, the torture begins all over again by endeavoring to have this policy percolate in the twelve bank boards. If the development of the Federal Reserve System is not to lead to a more ruthless cracking of the whip on the part of the Board, or an increase of its functions and powers (which I believe Congress would not hesitate a minute to grant if we asked for it) I think the boards of directors of the Federal Reserve banks must realize that readier cooperation with the Board is their duty and that they should stop fussing with policies and the interpretation of legislation and attend to the routine business upon a common plan and upon common principles. (Concluded in handwriting.) EXHIBIT No. 3616 DEAR GOVERNOR STRONG: FEDERAL RESERVE BANK OF NEW YORK, October 30, 1916. When I get home I hope to write you a little about the history of the last week which has been a series of misfortunes. I think, however, that in view of the fact that the telegram sent by the Board without my knowledge to the Federal Reserve agents has practically killed the market for the credit, the amount they are going to place is going to be relatively so small that the Board is not going to make them send out any second notice explaining the position of the Reserve System towards this kind of credit, but is going to simply ignore the matter. Mr. Harding, is going to speak here on Wednesday night before the American Institute of Banking, and in the course of his address is going to discuss the development of acceptances and the discount market, and will bring out in a most general way, I understand, the views of the Board concerning the different classes of acceptances. When I left on Saturday noon that was the program, but the adoption of it was laid over until this morning when Mr. Hamlin and Secretary McAdoo would be back, and no one can tell what the outcome will be. I am afraid you have had a most unhappy week of it, and you may have been even more unhappy than I because I felt that there was a good deal to be said for the Board's point of view, although I did not believe in the least in the way they went about it. The telegram to the Reserve agents did the trick and I was not consulted about this, therefore I could only appear as a critic after the fact which is not a position from which one ever makes much headway. Acceptances-District #2-Continued National banks Sept. 12, Nov. 17, 1916 American Exchange Nat'l Bank, New York City. National Bank, New York City. cal National Bank, New York City. Tizens Central National Bank, New York City. 4. & Iron National Bank, New York City.. Fast River National Bank, New York City. Purbeli National Bank, New York City. Hover National Bank, New York City. porters & Traders National Bank, New York City. ng National Bank, New York City. ety National Bank, New York City. Market & Fulton National Bank, New York City. Mrębali's & Metals National Bank, New York City. Merciants National Bank, New York City. Nya. Bank of Commerce, New York City. abuar : National Bank, New York City. G Exchange National Bank, New York City. Fit Bridgeport National Bank, Bridgeport, Conn. Manufacturers & Traders Nat'l Bank, Buffalo, N. Y. Tri National Bank, Buffalo, N. Y.. Et National Bank, Forestville, N. Y. Fost National Bank, Lyndhurst, N. J. non National Bank, Newark, N. J. Mr. Delano. Memorandum for the Board: EXHIBIT No. 3618 JUNE 20, 1916. Of a total of $55,000,000 acceptances held by all Federal Reserve banks, $17,000,000 are drawn by French bankers, on account of the so-called Brown credit. I append a memorandum furnished me today by our division of reports and statistics. PAUL M. WARBURG. Bankers' acceptances, based upon miscellaneous exports to Europe drawn by French bankers and held by each Federal Reserve bank Division of Reports & Statistics, Federal Reserve Board, June 20, 1916. (To Mr. Jay, from E. R. Kenzel) JUNE 23, 1916. Subject: Acceptances under Brown Bros. and Bonbright credits held by the Federal Reserve Bank of New York and the other Federal Reserve banks at the close of business June 22, 1916 This is less than half of the acceptances outstanding under these three credits, which now amount to $45,000,000. ERK/PE |