System is holding a check over the amount of paper of that kind which gets into its portfolio, and you can count on my doing everything in my power to bring that about. If the Board takes the view, on the other hand, that these credits should be discouraged and strictly limited, then it seems to me the only possible position for the New York bank is to handle these bills just the same as any others which are good, without any discrimination, because then the amount will have been so limited that they will not in any case prove a menace to the System. Personally, I do not think there is the slightest chance of any trouble arising out of credits of this kind; in fact, I think good will result, but I am exceedingly anxious to see the Board and the New York bank work in harmoney and in thorough accord.

DEAR GOVERNOR STRONG: I thank you for your letter of the 10th instant, from which it seems that we are not entirely in accord in our views as to the proper course to pursue in our financial relations with foreign countries. In spite of all the optimistic talk given out recently by our friend, Henry P. Davison, I cannot help feeling that there is danger of the war continuing to a point of absolute financial as well as physical exhaustion on the part of all participants. I think that we are treading on very dangerous ground in the matter of our credits to belligerent nations, which seem to be cumulative. Every loan is soon followed by another for a larger amount, and the $20,000,000 Brown revolving credit which we favored in August 1915 was soon followed by another issue of $25,000,000; then by the Schneider credits and then by the pending French industrial credit for $100,000,000. Our last loan to Great Britain of $300,000,000 is, I understand, soon to be followed by an unsecured loan, and I am told that our bankers are soon to have an opportunity to subscribe for a Russian loan. Of course these loans keep our export trade going in fine shape, and the greater our expansion of business the more we fear the inevitable reaction.

You may remember about twenty years ago the Tennessee Coal, Iron and Railroad Company was on the ragged edge, and that on two or three occasions it escaped receivership almost by a miracle. When I first went with the First National Bank of Birmingham I was surprised and shocked at the volume of T. C. I. paper that it had under discount for merchants and ore contractors, but when I raised the question as to the wisdom of carrying so much of that particular paper, I was told that unless these continuing credits were granted the operations of the company would cease and it would be thrown into bankruptcy, and if the company went broke the whole community, including the bank, would be broke, so the only thing to do was to "take a firm grip on the tail of the bull and run along with it." I fear that we are beginning to drift into a similar position in the matter of our foreign credits.

There is another view that I think we ought to take and that is this: The carnival of death and destruction has gone far enough. It ought to be stopped. I cannot escape the conclusion that the United States has it in its power to shorten or to prolong the war by the attitude it assumes as a banker. If we decide to finance one group of belligerent powers by giving it unsecured credits, we assume in large part a burden which another group of belligerents is carrying on its own account, and the possible complications which may come from this policy are frightful to contemplate. On the other hand, if we sell on a cash basis, our foreign trade will be confined to more reasonable limits and will fall off gradually, as the ability of foreign nations to pay diminishes. If the Federal Reserve banks and all large member banks make up their minds to lock up the excess gold that is coming to us by carrying abnormally large reserves, they would, I think, provide the best insurance against the post-war period which some of us fear so greatly. For the life of me, however, I cannot see how Europe is going to draw gold from us after the war, except by giving us good value for it, and I believe that a large stock of actual gold in our possession is certainly as good insurance

as unsecured obligations of countries who are reputed to be spending $75,000,000 a day.

I have never expressed these views publicly, and do not intend to, but the foregoing represents private opinions and convictions which have been crystallizing for several months past.

I trust that your health continues to improve, and that I may have the pleasure of hearing from you frequently during the winter.

With assurances of my appreciation of your good wishes, I remain, with kind regards,

About French credits, I regret that we do not understand each other, but evidently we do not very well. We did not make any public announcement, but it was plainly our duty to put would-be member-bank participants in the French credit on notice, inasmuch as the circular of the Bankers Trust and the Guaranty Trust was misleading. As you noticed, there is no scarcity of short loans made to European belligerent countries and as long as the country and its investors think that it is safe for them to buy these loans, we are securing just what you desire that is to say, maturing foreign credits with which we can protect ourselves if the tide should turn. These credits are increasing at such a rate and the banks and the public will be so filled with them that it certainly is not necessary to involve in these investments the ultima ratio of our country's reserve money that is, the Federal Reserve System. For foreign acceptance credits in the regular way, or even somewhat irregular, we want to open our acceptance facilities as wide as we possibly can. But there is no sense whatever in getting this acceptance market overloaded with essentially investment paper when the investment market itself is so wide open and in a fair way to be overloaded. Because other countries are at war and have to forget every rule of sound banking, we need not lose all direction and do the same. Our responsibility is even greater in this respect because we are now laying the foundation for future business methods and have a great responsiblity upon our hands in not teaching our country poor banking methods. There is no necessity for doing so and it would be nothing less than reckless.

I

What you say about the power of discount rates is only partly true. It is true that the higher discount rates draw money into a market for the purpose of buying bills drawn on that market. But at the same time the volume of bills drawn on the market is being strongly reduced, owing to high interest rates. know what I am talking abour because when still a banker in New York and in Germany I covered our long bills on London and used other credits whenever the interest rate in London was raised to a point where our margin against the home market was wiped out.

As to my being "reluctantly liberal" in the acceptance business you are quite right-I am a liberal constructionist for any kind of a legitimate acceptance. I have been fighting for that, as you know, against practically every member of the Board, who, in the beginning, all thought it was dangerous to permit the bankers acceptances to absorb too large a portion of the Federal Reserve Banks' funds. But I have consistently opposed any abuse of the acceptance business by the finance draft, and your point of view has been more responsible for that than anything else. I have felt all along that you do not see the dangers of having the acceptance market filled with "investment acceptances" in the same light as I do, and I feel that recent events have fully justified my fears, and all my colleagues have come around to seeing this thing more in the same light as I did a year ago. Your point of view was then that we could keep these finance drafts within proper limits. We were then dealing with the one comparatively small credit and at that time I think you would have said that you were certain

that you would only get a small portion of that. There is now over one hundred millions of these credits and we have about thirty millions of these drafts in our system. But there has been no indication that the Bank of New York of its own accord found it necessary to begin to discriminate against this paper and to state in so many words how far it wished to go. Quite the contrary, all that we have been getting from that quarter and from you are expressions to the effect that the Board was interfering with the free development of the acceptance business in trying to keep this thing within reasonable bounds. As a matter of fact, even yesterday I received a letter from Mr. Austin in which he says that he does not know how to discriminate; that New York does not know how to do it either. If that be true (and of course I think it is silly), how does New York expect to make good its plan of protecting the system from an overflow of these drafts? And, if they cannot, would not those be right who say that these bills must be absolutely excluded, because if they are not, the legitimate buxiness of the country will have to pay the price because in that case every new twenty-five, fifty, or one-hundred million dollar credit would force up the discount rate for all the legitimate bankers' acceptances of the country, which ought to be encouraged.

Think it over a little more, old man, and don't forget that we are not at war and that it is our duty to remain strong and healthy for the time after the war.

Referring to the subject again of discount rates, I believe that after the war we are going to have very high rates; first, abroad, and then in this country.I do not think that any of these credits will default, although some might have to be renewed. I believe that rather than suffer the slightest default, England and France would pledge the last scrap of available property they possess to effect renewals at any old rate. Furthermore, I am hopeful that the war is not going to last as long as some people think.

Cashier, Federal Reserve Bank, New York City:

Have always and still think personally that proposed differential is mistake. May cause trouble mentioned by Alexander as well as others. My last letter to Treman however recommended effort to meet very positive views Reserve Board because of their action last French credit, and to avoid issue. If Reserve Board decided because of our attitude to rule that renewal bills are ineligible, or if Comptroller ruled such credits ultra vires for national banks as he threatened, it would create in my opinion a serious and deplorable situation. Therefore, think it may be wise to try to restrict our purchases somewhat by higher rate as a concession to Board and temporary experiment.

Charge paid, Benj. Strong, 4100 Montview Boulevard.

BENJ. STRONG.

EXHIBIT No. 3631

[Copy]

NOVEMBER 9TH, 1916.

DEAR MR. JAY: Yours of the 6th just reaches me. I will send the articles back in a few days.

You are quite right in resisting the effort of the Board to develop discrimination in rates just now. I do wish those gentlemen would show some appreciation of the fact that war times are not peace times. Resisting the development of these finance credits will not promote drawing bills the other way around and they really should realize that. I will vote with you every time to go right ahead as we have been doing, buying these bills at the same rates as heretofore. Very sincerely yours,

PIERRE JAY, Esq.,

Federal Reserve Agent, Federal Reserve Bank, New York City. BS VCM

EXHIBIT No. 3632

[Personal]

JAMES BROWN,

59 Wall Street, New York, December 1, 1916.

DEAR BEN: Your letter of November 7th was very welcome for itself, and particularly so because of the subject.

I found it easy to read between the lines and, for the present, have made such arrangements as will obviate any embarrassment should our line at the Federal Reserve Bank of New York be full. There will always be several bidders at the Federal Reserve bank's regular rate prepared to take up any excess. I had been watching the quotations, prepared to take the necessary step when it became necessary, but your letter made me move in anticipation of the necessity. I think this was wise, and I appreciate your writing.

Now, as to your suggestion for a more radical cure. You know how loath I was to change the old custom and depart from an experience of a hundred years, which had stood many tests. To make a statement to you and yours was one thing, doing so in eleven other centers to twice as many other men is quite another. Boston and Philadelphia might not be as difficult, but I judge from your letter that these alone, while they would help, would not really meet the whole difficulty, and that for real results I would have to go farther from home. The real trouble is that the Federal Reserve Bank of New York, in its pardonable zeal to stamp the acceptance business with its approval, has consistently outbid the market instead of protecting the market, but I won't go into that now. Very truly yours,

(Signed) JAMES BROWN.

EXHIBIT No. 3633

JAMES BROWN,

59 Wall Street, New York, December 1, 1916. DEAR BEN: You will recall that at the dinner of the New York branch of the American Bankers Association three or four winters ago a speech was made by Simpson, of the Bank of Liverpool, on the Bank of England and the English Discount Market; by Boison, of the Credit Lyonnais, on the Bank of France and the French Discount Market; and another by, I think, Dr. Kreise, re Germany. Incidentally, Boison is out West now studying our situation, and I think will be attached to the French Finance Commission later on.

Well, I am going to attempt to describe to you, from the point of view of an outsider, what I think has taken place since dollar acceptances first appeared in this market in any quantity; why I think the policy of the Federal Reserve Bank of New York was right at first; where I think it has erred since; and how I think it is possible to correct its error and take its true position without creating distrust and spoiling the great good it did in the beginning, so that at the first American Bankers Association dinner after the war you will be able to describe the successful creation of a real discount market in the United States.

Remember, I am writing without inside knowledge and can only judge by what I can see in the market. Remember, also, that I know you have a broad discount market for dollar acceptances at heart just as sincerely as I have, and what we both want is to build for the future to the best of our ability.

When the banks in New York first began to accept the Federal Reserve Bank of New York was a keen bidder for bills and went out of its way to show its approval of the business by buying freely. Call money was a drug at 2% and under, and your minimum rate stood at 2% for a long time. It was wise to give the business a good start, but I think it was unwise to keep your bid so high for such a long time, even after the money market drew away from you.

The banks could not afford to buy bills in competition with you, because, to work out their reserves, they had to average better than 2%, and so bought commercial paper and made stock exchange time loans, and many of them kept their own acceptances on the theory that they were making the guaranteed rate of discount that was generally prevalent instead of only the difference between that rate and what the acceptances would sell for. The result was inevitable — as bills came into the market they all went to you as practically the only and the highest bidder. Your portfolio got larger and larger, and finally you began to try to correct the position by lowering your bids. The first change did not, I believe, bring results, and I doubt if your present rate of 22-4 has done so either, because in the meantime money rates had hardened generally and you were still about on a parity with call money. Finally, in November, it seemed to me as if you held about 70% of the estimated outstanding acceptances in this country.

Very naturally, as your lines are fixed by your own capital without regard to the relative value of the acceptance (I think I am right in this), you began to appreciate the embarrassment to you and to the acceptor of being obliged to refuse to buy, specially because you knew there was no outside market at anything near your rates. Unfortunately for the very proper moves you were making to withdraw from "the market" the two United Kingdom loans decreased the surplus of the New York banks, both call and time money shot up, and you still remained in the position of outbidding the market when you did not want bills. On top of all this, and as far as the public is concerned without warning, out comes the Federal Reserve Board's elaborate notice advising against all foreign unsecured loans, acceptances, Treasury bills, etc. The notice was susceptible of any interpretation that anyone wanted to read into it.

The picture I have drawn may not be strictly accurate as to rates and dates, but I think it is near enough to the truth to provide a setting for my moral. What the dollar acceptance market needs now is an anchor to windward. This situation has been brought about first by your own position and by the announcement of a new policy of the Federal Reserve Board.

Don't change your rates. Don't let anyone think either here or abroad (the latter would be fatal) that a flurry in call money disturbs you in the least. Don't let the public suspect that you now wish to discriminate against bills under renewal credits that were issued with your express approval. Keep on buying whether you like it or not. If anyone is near his line, get Mr. Treman to send for him and tell him so privately. Give him a chance to take any excess up from the Federal Reserve bank or arrange to have it done for his account.

I may be wrong, but I think the rise in call money rates is sentimental and temporary. We may, and I expect will, have a 3% to 4% rate until after the turn of the year, but after that lower rates again. When that time comes you can begin to correct your position, but not until then. Even then it must be done gradually. In other words, you must draw away so slowly that the banks begin to hold acceptances without realizing why they have become attractive, and before they realize it they will have taken the market away from you, and you will be relieved. It may take six months to arrive at this result; you may succeed in three. Without some unforeseen occurrence I think you will. When the Federal R. B. does, it will, in my opinion, hold the strongest position in the world and be prepared to exercise its true function, namely, of keeping rates down in time of stress by relieving the market of its acceptances for the time being.

I did not go into this fully with Mr. Treman on Tuesday, but I advised him very strongly not to change his rates at present. He knows nothing of the above suggestion for taking care of excess lines. I would not have thought of doing so without consulting you, first, because that point may not have been reached yet, and, second, because there may be other reasons that I, on the outside, know nothing about that would make my plan unwise. I leave you to follow this up, or to ask me to do so. If you should telegraph me to make the