Mr. Jay reported briefly the tenor of the replies received from the circular letter sent out by the bank on the subject of the curtailment of credit, and it was understood that the officers would take advantage of Mr. Frew's suggestion that if any specific banks which were overextended were brought to the attention of the New York Clearing House committee, that committee would be glad to exert its influence in remedying the condition.

GOV. STRONG. We have also had a table prepared which compares the total borrowings from each Federal reserve bank to the total basic discount line of all banks in the corresponding district for the dates June 10, 1920; October 9, 1920; February 10, 1921; and June 15, 1921 (see pp. 695 and 696), as follows [reading]:

Percentage relation of total borrowings from each Federal reserve bank to total basic discount line of all banks in the corresponding district.

GOV. STRONG. I have also a similar table showing percentage of basic discount line borrowed by the five largest borrowers in each Federal reserve district on October 15, 1919; February 16, 1920: June 15, 1920; October 15, 1920; February 15, 1921; and June 15, 1921, which is as follows [reading]:

Average percentage of basic discount line borrowed by 5 largest borrowers in each Federal reserve district on dates specified below.

[Sources: Records of the various Federal Reserve Banks.]

Gov. STRONG. Mr. Chairman, I have really concluded the discussion of all the matters covered by the preliminary preparation that we had made, down to the point of discussing what might be considered constructive suggestions. But before taking up that part of the discussion I would like to say that on three points I have not felt quite satisfied that what I have stated has fairly presented to the commission what can be no more than my personal opinion. And the questions which have been addressed to me by the members of the commission indicate that they are seeking an opinion on those three points. They have not been brought together, and if you will permit me to state them, I will then ask you if you care to continue the discussion along that line.

Now, those inquiries indicated that the members of the commission desire to ascertain, first, whether, by an earlier advance of the discount rates of the Federal reserve banks the expansion of loans and deposits could have been arrested in any way beyond what they were.

Second, whether, failing to advance rates earlier, other measures were taken to arrest this increase in the loan account, which we call expansion, and what is considered to be a consequent advance in prices during the period of 1919, and the first three or four months of 1920.

And, third, the decline in prices having occurred, whether a reduction in the discount rates of the banks would have afforded any relief to the situation, and whether they would have been justified by conditions.

Now, in thinking over the whole subject of our discussion, it seemed to me that it was boiled down to those three points upon which the commission especially desired information. I am frank to say that I do not think it is possible to give such information. One can only state an opinion about those matters, and if it would be of any value, I will endeavor to express my personal opinion and discuss it.

The CHAIRMAN. I think the three propositions that you have suggested, Governor, are the three propositions in which the commission is interested, and I think the commission would be very glad to have your personal view with respect to those propositions. Representative TEN EYCK. I would say that these three are not the only propositions that we are interested in, however.

The CHAIRMAN. No.

Representative TEN EYCK. Before he leaves the stand, I would like to have him give me some information as regards the extending of the short time loans.

The CHAIRMAN. I think Gov. Strong intends to follow this by suggesting constructive remedies for this situation.

Gov. STRONG. I do.

Representative TEN EYCK. Very well; that is fine.

Gov. STRONG. Will you please remember now that I am expressing my personal opinion, and upon a subject upon which personal opinions vary widely?

I believe, if it had been possible, it would have been desirable for the Federal reserve system to have advanced its rates at some point in the period between January and March, 1919, which you wilĮ recall I described as the period of decline in prices which occurred

after the turn of the year after the armistice-you will notice on the chart, that price declines are common in all four countries, Italy, France, England, and the United States, although less pronounced in the United States, probably, than in any other. (See also opposite page.)

At that time, when these questions of policy were being discussed, the Treasury was faced with a situation which seemed to

Department of Labor index for the United States; Statist index for England; index of the Bulletin de ia Statistique general for France; and the index of Prof. Bachi for Italy.

Source of information: For the United States, Monthly Labor Review; for foreign countries, Division of Analysis and Research of the Federal Reserve Board.

us to be controlling. That is to say, it had a very large loan to face; the largest that had yet been asked from the country, as then estimated. In the spring of 1919 it appeared that the amount of the Victory loan might be $6,000,000,000. And not only that, but the postwar expenditures of this great war machine that had been set up by the Government made its expenditures still in excess of its revenues. In other words, the volume of Government borrowing was increasing.

By referring to the tables that I have already submitted (see pp. 688-690), showing the relation between the total expenditures of the Government during this entire period since the 6th of April, 1917, to the revenues of the Government, it will be seen that the revenues did not actually overtake expenditures until about July, August, or September, of 1919. I refer to that because, while the war was over and the pressure for relaxation of control was very great, the same influence was operating, as regards Government finance, as was operating during the war. It was, in fact, one of the controlling influences which seemed to make it impossible to reduce the rates, and it should be also

Wholesale price index of the Department of Labor and cost of living index of the National Industrial Conference Board. Figures for July, 1914-100 per cent.

Source of information: Monthly Labor Review, National Industrial Conference Board.

borne in mind that at that period the Treasury was still a very large borrower upon short certificates of indebtedness, then being sold to the banks, and rate increases necessarily would have elevated the whole rate level on the Government's borrowings.

Representative TEN EYCK. These certificates of indebtedness were what the Government sold to obtain money in between the bond issues?

Gov. STRONG. In between the permanent loans, and until the time when revenues overtook expenditures. Assuming, therefore, for the

purpose of this discussion that it was impossible to make rate increases in the spring of 1919, the management of the Federal reserve system was confronted with the necessity of taking other measures than that afforded by rate control-and those are the measures which we discussed at great length on Monday and Tuesdaythrough what we describe in discussing the matter among ourselves direct action," as distinguished from "rate action."

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I want to enlarge upon the argument on that point by emphasizing to the commission that the application of rate control is universal, democratic, and applies everywhere and requires no argument; it does not need to be expounded at bankers' meetings. It is a fact. It operates directly and evenly upon every borrower.

Abandoning rate control as impossible, you then introduce the element of human error, because it is quite impossible for the management of this system, dealing with 10,000 member banks, to reach them all. They are the only ones that we reach directly, and there are 20,000 banks we do not reach, because they are not members. It must be borne in mind that considering the human element, there is also the exaggeration of the chance of error, because if you can not control by rate, then you have to deal individually with the people who are abusing, if you please, the system. That I regard as having been done as effectively as such an imperfect method could enable it to be done. I never considered that it was possible to make it effective. The widest possible propaganda and the widest educational work could not make it entirely effective.

The CHAIRMAN. Did this particular policy begin to apply in 1919? GOV. STRONG. In New York it was applied during the autumn of 1918. I can not speak in detail for the other reserve banks especially, because I was unable to attend the conferences of the officers of those banks during 1920, but I have no doubt from my general knowledge of the system that that type of control was undertaken in all the districts. The last meeting that I attended, in December, 1919, I think it was, would have indicated that.

The CHAIRMAN. As I understand, this policy of direct control took the form, on the part of the Federal reserve banks, to induce the member banks to exercise discretion and control, particularly to limiting the so-called nonessential loans and speculative loans?

Gov. STRONG. Yes, sir. Now, this is the way in which this problem was attacked in New York, and I think it was common to the system.

Mr. Chairman, this letter and circular which I have here is of so much importance to this discussion that I think I ought to read it at this particular point. This is a letter addressed by the chairman of the board of the Federal reserve bank of New York, who, as you know, is the Federal reserve agent, to every bank in our district. This was written on August 23, 1918, indicating how early it was necessary to apply this control in New York as a substitute for rate control. This relates to the direct control. [Reading:]

AUGUST 23, 1918.

DEAR SIR: The Federal Reserve Board wrote you on July 6 relative to the necessity of conserving credit in order to furnish the Government the increasing volume of credit it requires to finance the war, and the directors of this bank have instructed its officers to discuss the subject further with every bank in the district.