e:ggestion, I would do so ex Ben Strong and take my own case as an illustra

tion.

In your letter of September 4th you express the hope that in this conspiracy against Lombard Street we should never overlook the fact that the strongest influence that can be applied is rate of discount and that 22% in New York and 5% in London is an argument that few bankers can resist.

I agree, with this very pronounced qualification. Unless the rate of discount in New York is a genuine open market discount rate governed by actual money conditions, it is no argument with either bankers or merchants. Lombard Street is watching this keenly and keeps well informed. In my opinion they have so far not been worried. They know that the Federal Reserve bank is and has been the market, and I imagine have been waiting for this very moment to see us fail in the object we have set out to accomplish. This is the moment of trial We must meet the test even if in the end the difference in discount rate should not be so much in our favor.

DEAR JIM: Your special delivery letter of December 1st reached me last evening. I have read it with great care and am unable to understand exactly your point in regard to our policy.

At the meeting to which you refer, addresses were made by James H. Simpson of the Bank of Liverpool; Dr. Risser, a well-known economist of Munich; and Mr. Robert Masson of the Credit Lyonnais. The last named has just visited me here for two or three days on his western tour.

You must remember that there are various objects to be accomplished by the operations of the Reserve bank and the means employed to accomplish them sometimes appear to be in conflict. Let me point out some of the difficulties:

1st. We must maintain steady rates;

2nd. We must make our rates as uniform as possible, without great discrimination between various classes of bills;

3rd. We must encourage the development of dollar acceptances by maintaining rates which compare favorably with those of London;

4th. We must make the bill holdings of the Reserve banks their principal source of income and sufficient to cover expenses and the greater part of their dividend requirements;

5th. We must accumulate our portfolio now so that if necessary we can tighten up at times by withdrawing from the market;

6th. We must avoid antagonizing member banks by keeping our rates too low;

7th. We must protect the New York market against a great flood of funds of the other Reserve banks and can only do so by giving reasonable consideration to the view of the banks for which we are acting.

I think you will realize that there is food for thought in endeavoring to meet all the considerations above listed. On one point, we have encountered difficulty and are certain to encounter the same difficulty for years to come. Our call money market is still the criterion of rates. Any little bulge in the stock exchange money market may create a tendency to throw a large volume of bills into the Reserve banks. Not desiring to discriminate against any particular bill such a development becomes embarrassing when the amount of bills offered of any one acceptor exceeds the amount which we reasonably should carry.

I gather from your letter rather indirectly that you think the way to avoid that situation is to advance our rate for all bills. I am not at all sure that you are right. Personally, I have not felt that any of the New York accepting institutions or firms are accepting too many bills under present conditions and that the Reserve banks as a whole, so long as the volume is as restricted as it now is, should have no difficulty in meeting any situation which might arise resulting in a bulge in call money rates. The difficulty is increased, however, if we are unable to distribute all the bills purchased among all Reserve banks. I refer particularly to bills of those private bankers who are unwilling to give the necessary information so that their bills are freely taken by all twelve of the reserve banks.

Of course, reading between the lines, I gather that something has occurred to disturb you in this matter or you would not have written me as you have. Please do not hesitate to take it up frankly with the officers of the bank.

Many of our difficulties would be avoided and the development of a real outside market for bills would be greatly facilitated if the New York banks would abandon their practice of guaranteeing discount on renewal bills drawn under finance credits and would also abandon the practice of buying their own paper. This would throw a much larger volume of bills on the market and develop not only volume but a rate that is more actual than apparent. Your house is one of the few which has dealt with this matter in the right way.

I see no reason to anticipate any material advance in rates by the Reserve banks at the moment. Their investment account is not large enough yet to earn their dividends in full and the recent announcement or warning by the Reserve Board is certain in my opinion to result in larger gold imports with the likelihood of considerably lower rates by or after the end of the year. Why, therefore, should we advance our rates?

I hope you also appreciate the difficulty which we encounter in dealing with bills in a market where endorsements are not naturally and automatically added to bills by their passing through the hands of the bill and discount houses which are in the habit of endorsing and which have large responsibility.

It distresses me to be absent at a time when so much of importance is going on, but reports I get from the office really satisfy me that their policy is careful and conservative and one which I believe in the end will bring results.

Thank you very much for writing me. I await your other letters with interest. With warm regards,

Faithfully yours,

JAMES BROWN, Esq.,

59 Wall Street, New York City.

BS/VCM

EXHIBIT No. 3635

BENJ. STRONG, Esq.,

JAMES BROWN, 59 Wall Street, New York, December 10, 1916. [Personal]

4100 Montview Boulevard, Denver, Colorado.

DEAR BEN: I received you letter of December 4th, in answer to mine of December 1st, very promptly, and I was glad to get it. Since I wrote you will have seen from the papers that the situation is changed; the money market has eased, as I felt it would, and Friday afternoon the Federal Reserve bank discount rate was raised to 3 and 3% %. I was glad that the rate was not changed until after the money market eased. I can assure you, however, that there were many in high places who thought the rate should have been jumped as soon as call money became scarce, but I advised against this, and evidently others felt as I did.

You say that something must have disturbed me to make me write you as I did. You are quite correct in this, but it was nothing of a personal nature or in any way connected with my firm's business. I was disturbed, and still am disturbed, about the lack of a real, open market for acceptances, and, frankly, your letter does not give me the satisfactory explanations I hoped you would give as to why such a market had not been encouraged by the Federal Reserve bank.

I recognize the difficulties of your situation, and perhaps the best way to show where I differ with you is to take your difficulties one by one and comment on them.

I agree that you must maintain steady rates, but I believe that the rate maintained should be based more nearly on the rate for commercial paper than on the call money rate.

I agree to your second proposition.

I agree to the third also, except that I do not believe it good policy to maintain rates which compare favorably with those of London if in doing so the Federal Reserve bank has to be the only buyer.

With your fourth 1 do not agree, and cannot quite follow your reasoning. It may be necessary from a political point of view, and because the Federal Reserve bank is a quasi-government institution, that it is wise to make sufficient income to cover expenses and dividend requirements, but from a broad point of view, if, in order to do so, the bank takes all the bills from the market at rates that are

unremunerative for other buyers, it seems to me it weakens its power to come in and relieve the market at the time of a flurry in money.

Your fifth reason I do not follow. It would seem to me as if the way to tighten , that is, to put on the brakes, would be to raise your rate, i. e., lower your bid to a point where the market takes the bills instead of their being brought to the Federal Reserve bank, because then banks and institutions would buy them in preference to putting money out at the call rate, which, under the circumstances you describe, would undoubtedly be very low, and, as the process went on, and the banks continued to invest in bills, the call rate and bill rate would draw nearer together If, on the other hand, you intended to follow this method when you spoke of withdrawing from the market, we are in accord. Quite the opposite was proposed last week, namely, maintaining the rate and ceasing to buy bills. Your sixth I do not follow at all. If any antagonism from the member banks were possible, you certainly must have created it during the last two years, for your rate has been so low that they could not afford to do business on the same basis.

With your seventh I agree.

To sum up, my dear Ben, I want the United States to come out of this war with a broad, real, open-discount market. I want, in other words, that banks and trust companies, and even individuals, should get into the habit of investing a certain part of their funds in acceptances, just as they now invest part of them in call money and part in commercial paper. I feel that to bring this about the earning power from invesment in acceptances must, for some time, be attractive, and that brokers must be encouraged to deal in acceptances between institutions. I do not believe that this can be brought about if the Federal Reserve bank is a continual buyer at rates that are not attractive to institutions, and that no matter how much we may wish to have the disparity between New York and London rates appear favorable to this market we fail in accomplishing our purpose unless the rate is a real, open market rate, at which millions of dollars of acceptances can be turned over without the aid of the Federal Reserve bank.

My complaint is that after two years of experience very little progress has been made in this direction, and my wish is that the creation of a broad, outside market should be the special object of the Federal Reserve bank for the next twelve months irrespective of profit for itself, and I believe that no step can be taken which will go further toward insuring the continuance of the dollar acceptance after the war than the creation of an outside market for acceptances.

As I said before, I am sure that you and I are both working toward the same end. You may be traveling a different road to accomplish the purpose. I wish you would set out your plan and arguments. It is quite possible that in the end your way may the the best, and I am open to conviction.

Very truly yours,

(Signed) JAMES BROWN.

EXHIBIT No. 3636

NOVEMBER 20TH, 1916.

DEAR GOVERNOR HARDING: Your letter of November 16th has just reached me and I greatly appreciate the frank statement of your views.

We are really not as far apart as seems to be the case. I do favor a limitation upon the amount of finance paper purchased by Federal Reserve banks. On the the other hand, I think the imposition of any restraint generally upon the extenson of credit by citizens or banking institutions of the United States to belligerent countries abroad should be not only a serious blow to our own domestic affairs, but a calamity of the greatest magnitude to the civilization of the world. Of course, we do not want to make bad loans and I do not share your view that these loans may not be paid. I think every one of them will be paid. There are hundreds of millions of people in the world to be fed and clothed and sheltered, and the business of the world is going on after the war notwithstanding the inevitable readjustments that the war will involve.

We must not lose sight of the fact that England has not issued one loan in which the Government has engaged itself to exempt the holder from paying any amount of taxes which the necessities of the Government may require it to impose upon the holders of its own bonds. England will not repudiate, even if it has to tax a half, three-quarters or, even all the interest on its domestic debt. To a great extent, that is true also in France.

I do not like to hazard a guess as to what kind of difficulties will arise when the war ends. There seems to be so many possibilities of difficulties that prophe

cies are almost certain to discredit the prophet. But I have in a considerable measure eliminated from the category of dangers, any strong probability that these credits now being extended to England, France and their banking institutions will default. What I think is much more likely is that they may need to renew them in this country at a time when we have ourselves absorbed the lending capacity created by gold imports and when that day comes, England and France may be confronted with the necessity of not only paying unheard of rates for Government loans, but also pledge collateral for the security of the loans, which as yet they would not contemplate for a moment.

What you say about the duration of the war is my own sentiment exactly. It ought to be stopped. No outside influence can stop it, except our Government represented by President Wilson. I believe personally that Germany has been ready and willing to stop fighting for a year past, but is unable to do so because unable or unwilling to face the consequences of the admission involved in the terms of peace which she must accept that she has been wrong from the start and must accept punishment for wrong-doing. The effect upon the German people is what the German Government fears. Only the intervention of a third party can break such a deadlock except, of course, complete annihilation, which is too appalling to consider. I, personally, believe that peace sentiment is stronger to-day than at any time during the whole war.

Whether you and I believe or do not believe that we are going to face serious problems growing out of the war, everybody without exception should agree that serious problems are possible and it is the duty of the Federal Reserve System to prepare for them. As I recently wrote Warburg, the most effective preparation beyond all doubt is to clear up our hodge podge currency and get the country on an actual gold basis with a great mass of free gold held by the Reserve banks. You have written me frankly and I know you will not mind my stating quite as frankly my own conviction that the most important duty now confronting yourself and your associates is to convince the President and Congress that we must get rid of our greenbacks, our national bank notes, take the burden of redemption off the Treasury, put it on the Federal Reserve banks and put them in position to actually redeem in gold every dollar of paper money in circulation in this country by enabling them to gather together a thousand million dollars or thereabouts in excess of their required reserves.

Mr. Wilson is proud of his constructive achievements. None of them would approach this in importance to the country at this time. I am amazed that he being a student of these matters, has not seen it long ago and prepared a message to go to Congress with an urgent recommendation, to complete the work started by the Federal Reserve Act.

Once the Reserve banks can get this gold in hand, my concern for the future is reduced to an absolute minimum. Without that, and risking all the dangers of prophecy, we permit ourselves to remain in a position where persistent and long-continued adverse exchanges might force again suspension of specie payment. You say you cannot see how Europe is going to get our gold without giving value. They will get it by requiring the rest of the world to pay all the debts now due to England, Germany and France and by flooding the rest of the world not protected by high tariff, with their goods. In order to meet these debts to Europe and pay for those goods, South American countries, Eastern countries, and Colonial governments the world over will borrow in New York and check on us in favor of London, Paris, and Berlin. We do not have to import goods or make direct loans to belligerents. We only have to finance their own debtors to bring about this result.

Essays could be written on this subject and I do not propose to inflict you, but as stated above, my conviction is that we should get our gold in hand and that we cannot do it too promptly.

I would be glad to have you consider this letter quite personally and hope you will understand my having written you a little more definitely and positively than I have been willing to write to any of your associates.

I am getting along first rate but suffer from the irksomeness of this banishment. I am also constantly conscious of the consideration shown me by members of the Reserve Board and frequently think that I ought to insist upon resigning so that you might have an active head for the New York bank.

DEAR FISCHER: The contracts for the first $50,000,000 and the option on the second $50,000,000 will go forward on Saturday's boat, and I am hurrying to get a line off to you today which you should receive a day or two earlier.

I need not express again my keen regret that we could not arrange to have you so placed as to do all of the work in connection with the French merchants, but I imagine you have made a satisfactory arrangement with Phillips.

We

The contract provides really only one thing for your house as the "American agents" to do, viz: receive and deposit the $10,000,000 neutral bonds; although there will be other things, of course, that must arise during the transaction. do not yet know whether you or Mr. Phillips will handle the drafts, etc, but I assume from the position taken by Mr. Sabin and Mr. Breton in insisting that the work be left in Mr. Phillips' hands; and the habit of the Guaranty people to take all they can get; that Phillips will do it.

The contract simply provides that the French merchants are to deliver the drafts to us, Bonbright, in New York. This was insisted upon by the lawyers to insure delivery here at the French merchants' risk, so that the obligations of transport, etc., would be on them and not on us.

On the other hand, you are named in the contract as the American agents, and will ret perhaps as much advertising, if less work, that through some other arrangement.

The contract will follow closely the lines of the Schneider agreement, varying only according to the difference in the understanding and to make some point perhaps clearer.

As to the second instalment: the market has absorbed large amounts of acceptances, as you know, and the banks are carrying large amounts of the various foreign issues. The action of the Federal Reserve Board, already described, must have its effect. We could not expect to accomplish the second instalment without at first having a definite understanding with the Federal Reserve Board which may, upon further study, take our view that this operation is of great advantage to American trade and commerce and to American banks, and that they support and assist instead of limiting the participations of Reserve member banks.

In view of your cable 32, you will be interested in knowing what may be apparent when you receive the names and amounts of American acceptors, viz: that in order to close the first instalment promptly a large balance unsubscribed by other American banks was subscribed in equal proportions by Bankers Trust, Garanty Trust, and Morgans. I have tried to express this in our cable No. 72. Morgans did not actively participate in arranging the snydicate or in securing Participations from other banks, but approved the operation and encouraged it, and when it came to the point of closin, willingly took their one-third of the remsining responsibilities. So while, to use your own language, they were not largely instrumental" in making the syndicate succeed at least in the way of getting in other participants, they were largely instrumental in accomplishing the full $50,000,000 without delay. If they had not come in for a very large participation, either the Bankers Trust and the Guaranty Trust alone would have had to subscribe for larger amounts, which they might not have been willing to do, or we must have taken longer time to get the full $50,000,000, or we must have closed the syndicate for a less amount. So their action was of the first mportance, and as in all other cases, we have found them helpful, constructive, and patriotic.

In the early negotiations we explained to the Guaranty people, as the Bankers already knew, that we, Bonbright New York, did not desire to take any of the acceptances; there is a serious legal question as to whether we have the right to participate in such an operation in view of the character of our incorporation and our legal powers; the Bankers people have always understood this and have Lever expected or asked us to take acceptances in any of the Schneider credits. We established this position early. When this matter was first taken up with the Guaranty they were, I think, quite willing that we should not be one of the acceptors, as it gave them a better position; and Mr. Kent explained the advan