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

Vholesale 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 as "direct action," as distinguished from "rate action."

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.

That circular was sent to every Federal reserve bank in the United States, I believe. [Continuing reading:]

While no general rules or program for the conservation of credit can be laid down, the duty of each bank is to do its share in securing the desired results, acting reasonably and judiciously, in such ways as its own conditions make practicable and as will spare borrowers undue embarrassment. We have no doubt that, like most bankers, you have already made some progress toward conserving credit, and our directors wish to supplement the Federal Reserve Board's letter by asking you now to take up this necessary work systematically and conscientiously.

Saving of credit by banks, in order to help the situation as a whole, must be the result of saving on the part of borrowers. Shifting loans from one institution to another, or sales of collateral which merely throw the burden upon other shoulders, save no credit. Credit conservation can only be accomplished by business or personal economies, and requires cooperation between banks and their borrowers and education of borrowers by their banks.

Producers, manufacturers, and merchants may do their part and reduce their credit requirements by not overbuying; by carrying as small stocks as practicable, by postponing new construction, or expansion of their business, by effecting business

economies.

Individuals may do their part by studying their personal expenses and effecting economies which will enable them gradually to pay off their loans.

May we suggest that you make a careful analysis of your loans and lines of discount in order to determine definitely what credit now in use is not directly connected with Government financing, or the production or distribution of things necessary to maintain the health and efficiency of our armed forces and our civilian population. While the majority of bank loans will prove to be for these purposes, most institutions also have a considerable volume of loans to individuals made for other purposes, many of them of long standing. It is to loans of this character, as well as to the less necessary commercial borrowings, that credit conservation should first be applied. New commercial lines or new loans to acquire or improve property, or for nonproductive purposes, will rarely be justified unless they are to aid directly in the prosecution of the war. A spirit of saving in the use of credit will naturally lead the banks themselves to exercise restraint in offering new or additional lines of credit in competing for business. A frank discussion of the principles and the necessity of credit conservation with a borrower will usually gain his cooperation, and where a borrower is asked to reduce a loan having securities or commodities as collateral, emphasis should be laid on the necessity of gradual and steady reduction by personal economies rather than by selling the collateral.

Several of our member banks, wishing to discuss the matter with their borrowers have asked us to prepare a brief statement on the subject. We have prepared such a statement, which banks, if they so desire, may either use as a form letter or inclose with a letter of their own. We shall be glad to furnish either statement in any quantity to any bank in the district. Copies are herewith inclosed.

Will you be so good as to acknowledge this letter, advising us what you are doing or are willing to do in order to save credit and giving us your views as to the best method of accomplishing the necessary results? We suggest that one most effective step would be for all the banks in your city or county to reach an agreement for common action. Whenever this bank can properly assist, you may count upon our cooperation.

Very truly, yours,

PIERRE JAY, Chairman Board of Directors.

Then there were inclosed two forms for the banks to use, and I may say that thousands of them were distributed to the banks in the district, and by the banks were distributed to their customers. The circulars are as follows [reading]:

(NOTE. This is a letter which a bank, if it so desires, may send to its borrowers or its depositors. Copies of this letter will be furnished free of charge in any quantity to any bank in the district with its letterhead and the name of the signing officer printed upon it, in accordance with instructions furnished by such bank.)

To our depositors:

FIRST NATIONAL BANK, Blankville, N. Y., August 23, 1918.

Nothing is more vital to the winning of the war than credit. The Government often has to borrow immense sums, temporarily, and the banks must stand ready at all times to lend the Government what it needs. The ability of the banks to lend is not unlimited. It is just as necessary for them to conserve their lending power as it is to conserve coal, food, steel, and other commodities for which the war brings abnormal demands. Those who are producing, manufacturing, or distributing things needed to prosecute the war or maintain the health and efficiency of the civilian population, will be able to obtain the credit to which their needs and their standing entitle them; but new loans will rarely be justified unless they are to aid directly in the prosecution of the war, and every bank has been asked by the Government to request all its borrowers to keep their demands for credit down to the very minimum.

Patriotic citizens, whether in business or not, will want to cooperate with this necessary Government policy.

The way for producers, manufacturers, and merchants to do their share and reduce their credit requirements is:

By not overbuying.

By carrying as small stocks as practicable.

By postponing new construction or expansion of their business.

By effecting business economies.

The way for individuals to do their share and reduce their loans is to study their personal expenses and effect economies.

Borrowers whose loans are secured by Government bonds or other collateral, should remember that reduction of loans by selling collateral is not helpful, since it usually merely shifts the burden to other shoulders.

The banks are asked to save their credit, which means that their customers must use less of it. The saving of credit is an integral part of the great saving policy which the war requires the Government to adopt, and every man, woman and child to support to the utmost. Saving to reduce loans is a patriotic service only second in importance to saving to buy Liberty bonds and war savings stamps. Both help to transfer to the Government the ability to command the labor and materials of which President Wilson has said the Allies are in such desperate need. Both also help to accumulate for the saver a purchasing power which he may need when the war is over. We are asked by the Government to send this message to our depositors, and we ask for your cordial cooperation with this necessary Government policy.

Very truly, yours,

JOHN JONES, President.

(NOTE. This is a statement which a bank, if it so desires, may send to its borrowers or its depositors, accompanied by a supporting letter of its own. Copies of this statement will be furnished free of charge in any quantity to any bank in the district.) To bank depositors:

Nothing is more vital to the winning of the war than credit.

The Government often has to borrow immense sums, temporarily, and the banks must stand ready at all times to lend the Government what it needs. The ability of the banks to lend is not unlimited. It is just as necessary for them to conserve their lending power as it is to conserve coal, food, steel, and other commodities for which the war brings abnormal demands. Those who are producing, manufacturing or distributing things needed to prosecute the war or maintain the health and efficiency of the civilian population, will be able to obtain the credit to which their needs and their standing entitle them; but new loans will rarely be justified unless they are to aid directly in the prosecution of the war, and every bank has been asked by the Government to request all its borrowers to keep their demands for credit down to the very minimum.

Patriotic citizens, whether in business or not, will want to cooperate with this necessary Government policy.

The way for producers, manufacturers, and merchants to do their share and reduce their credit requirements is:

By not overbuying.

By carrying as small stocks as practicable.

By postponing new construction or expansion of their business.

By effecting business economies.

The way for individuals to do their share and reduce their loans is to study their personal expenses and effect economies.