frsbog_mim_v33_0174.pdf

7/17/2019 frsbog_mim_v33_0174.pdf

http://slidepdf.com/reader/full/frsbogmimv330174pdf 1/29

X-6715

THE IEDERAL RESERVE SYSTEM."

By

Paul

M.

iWafrbuxg.

Chapter

XI. The

Redis t r i e tin g Interm ezzo."

Review.

,

By C. S. Hamlin,

September, 1930 .

(References, when

n o t

otherwise indicated,

a re to Mr .

Warburg's book.)

- I -

The e s s e n t i a l f a c t s i n t h e controversy, a s a l leged by Mr. Warburg,

were a s follows:

1. On

October

20., 1915, a

Redistricting Committee

was

appointed

by the

Federal Reserve Board.

2. On

November

12 , 1915 ,

this Committee filed

a

pre l iminary

repor t to the e f fec t tha t a reduction i n t h e number of

Federal reserve banks was imperatively demanded f o r t h e

bes t in te res t s

of the

Federal Reserve System

and of th e

country.

3 . I n

th is report

th e

Committee asked instructions from

the

Board whether i t should prep are a spec i f i c p lan o f r e -

duction.

4 .

This prel imi nary rep or t

wa s se t

down

by the

Board

f o r d i s -

cussion

on

November

13 th a nd

again

on

November

15, 1915,

b u t t h e

meetings were postponed because

of the

absence

of

Secretary McAdoo.

,

5. The Board f ina l ly s e t down November 2 2 , 1 9 15 f o r t h e d i s -

cussion

of the

meri ts

of the

repor t

and a

final vote

thereon,

.

6 . A t the meeting on November 22nd, discussion of the merits

was prevented b y reason of the de l ivery to the Board o f

an

opinion

of the

Attorney General advising

th e

Board

th a t

i t h a d n o

power under

th e

Federal Reserve

Act to

reduce

th e

number

of

Federa l reserve dis t r ic ts

o r

Federal

reserve banks.....

7. The opinion of the Attorney General was obtained by the Gov-

ernor

of the

Board without

th e

a u th o r i t y

o r

knowledge

o f

t h e

Board,

,

7/17/2019 frsbog_mim_v33_0174.pdf


I 1 7 5

- 2 - X-6715

8. The opinion prevented a n y discussion of the meri ts of the

Committee rep or t, arid ne ce ss it at ed a n abandonment of

t h e

whole matter, although

a

major i ty

of the

Board

favored

t h e

Committee report

and

would have voted

accordingly ha d a vote been taken on the mer i t s .

1 - 427, 430, 436.

- I I -

M r. Warburg states a s h i s reason f o r wri tin g thi s Chapter, th at

after Senator Glass, i n 1923, and D r . H. P . W i l l i s , in 1926 , ha d l i f t -

ed a corner of the vei l regarding t h e controversy, i t hecame imperative

f o r h im to "break t h e s i l ence of th i r teen years a n d r a i s e t h e v e i l f u r -

ther so tha t t h e real facts might be known and the story freed from t h e

"hal f t ru ths

and

pervers ions"

b y

which

i t h a d

been clouded.

1 - 454.

- I l l -

M r. Warburg ' s l i f t ing of the ve i l r evea l s , - as he a l l eg es , - a

sinister combinat ion

o r

conspiracy

on the

p a r t

o f the

Pres ident

of the

United States, t h e Attorney General of the United States, th e Secretary

o f t h e Treasury, a n d t h e Governor o f the Federal Reserve Board, t o f o r e -

s t a l l d i scuss ion

on the

meri ts

of the

repor t

of the

Ee d i s t r i c t i n g Con>»

mit tee by means of an opinion of the Attorney General, obtained by the

Governor of the Federal Reserve Board, without authority from o r knowl-

edge o f the Board, advising th e Board that i t ha d no authori ty , under

t h e Federal Reserve A c t , t o reduce th e number of Federal reserve d is t r ic t s

o r

Federal reserve banks.

1 - 430.

7/17/2019 frsbog_mim_v33_0174.pdf


- 3 -

1 7 6

X-6715

- I V -

M r.

Warburg's charge

i s a

very grave

one , and to

avoid

a n y

poss ib i l i ty

of e r ro r , I shall quote h i s very words:

"Thus while

th e

Board

h ad

deferred

t h e

decis ion

out of

courtesy

to Mr .

McAdoo,

t h e

la t t e r , together wi th

t h e

Board's

Governor

a nd the

Pres iden t ,

h a d

combined, without

th e

knowledge

of the four appointive members of the Board, to f o r e s t a l l any

debate b y securing t h e opinion of the Attorney General."

1 - 430.

The

Pres ident

a nd the

Attorney General formed their judg-

ment Solely upon

t h e

evidence

6f the

Secre tary

of the

Treasury,

whose action was to be reviewed and who had Studiously avoided

hearing

t h e

views

of the

Committee,

and

upon

t h e

evidence

of the

Governor devoted

to Mr.

McAdoo

and

ac t ing

i n

accordance with

h i s

i n s t ru c t i o n s . "

1 - 43 0.

- V -

M r.

Warburg draws

a

sharp line

of

cleavage between

th e

sheep

and the

goats

i n

this controversy,

-

between those

who

favored red i s t r i c t ing ,

Called by h im the "Majori ty" , - and those who were opposed t o r e d i s t r i c t -

i n g , - t o

whom

h e

r e f e r s

a s t h e

"Minority."

He

charges that

t h e

Minority were guided solely

b y

p o l i t i c a l

considerations, while th e "Majority" acted a s non-par t isan t rus tees

of the country a t la rge .

The

following quotations from

t h e

Chapter bring

o u t

th i s l ine

of

cleavage dis t inc t ly :

I t wa s

cer ta i n , the refo re , tha t three

of the

Members

of

th e Board of seven would t r y t o block an y dras t ic readjus tment .

1 - 427.

The

remaining four,, however,

h a d

seen enough

o f th e

pe t ty

po in t

o f

view resulting from

a

twelve-headed system,

and of the

d i f f i c u l t i e s o f i t s admin is t ra t ion , t o convince them that with

7/17/2019 frsbog_mim_v33_0174.pdf


- 4 -

X-5715

I d

regard

t o

tanking standards

an d

e f f i c i e n c y

of

service

i t

would

c l e a r l y

be f o r the

b e n e f i t

of the

country

i f t h e

numbers

of the

reserve banks should

be

reduced."

1 - 427.

The

determined insis tence

on th e

crea t ion

and

preservat ion

of one

c rop" d i s t r i c t s

, . .

could hardly

b e

just if ied excfept

on

pol i t ica l grounds ." ( I ta l ics mine . )

1 - 429.

The

four

of us

considered ourselves

t h e

non-part isan

t ru s t e e s

of the

i n t e r e s t s

of the

country

a t

la rge ."

1 - 4 4 0 , 441 , .

The

other three dealt with

t h e

question from

t h e

point

of

view

of the

i n t e r e s t s

of

their Party." (I tal ics mine)

1 - 4 4 0 ,

441.

He even brings a similar charge against th e Pres ident o f t h e United

Sta tes :

I t wa s

nat ura l that

t h e

Pres iden t ,

on

this question, could

n o t dis regard t h e po l i t i ca l cons idera t ions ," ( I ta l i cs mine)

1 - 452 , 453.

M r.

Warburg then portrays

th e

ro l e

he

played

i n t h e

controversy:

I t w as my

duty

t o

approach

t h e

problem from

a

non-part isan

a n d non-po l i t i ca l po in t o f view, - with th e sole thought i n mind

of what t h e b e s t i n t e r e s t s of the country, a s a whole, required."

1 - 4 5 2 ,

453.

This calm, ju di ci al juxt apos it io n

of the

a t t i t u d e

of the

Pres ident ,

t h e Attorney General, th e Secre tary of the Treasury a nd the Governor of

th e

Board, as

e

a g a i n s t

th e

pure al truism

of Mr.

Warburg,

i s

ce r ta in ly

worthy

o f a

Shakespeare

- V I -

The writer proposes to " l i f t t h e v e i l " - to u se Mr. Warburg's

metaphor,

-

even further than

he ha s

done,

and to

show

how

grotesquely

absurd

a r e t h e

charges

of

conspiracy hurled against

th e

P re s id e n t ,

the

7/17/2019 frsbog_mim_v33_0174.pdf


1 7 8

5 X 6715

Attorney General*

t h e

Secretary

of the

Treasury,

a n d t h e

Governor

of the

Fede

r a l

Reserve Board.

- V I I -

M r. Warburg refers "briefly to the pre l iminary report of the Com-

mittee filed November

12, 1915, and of two

meetings held

on

November

1 3 t h

a n d November 15 th by th e Board t o discuss i t . He coht&iits himself with

t h e

hare statement that these

tw o

meetings were postponed until

Nov-

ember 22nd because of Mr. McAdoo's absence.

1 - 4 3 0 , 431,436#

He

further quotes

t h e

Redistricting Committee, which stated

i n i t s

repor t of December 2 , 191 5:

"Your Committee desires t o repeat that a t no time h a d there

been

a

discuss ion

of the

Committee's original report

of

November

1 3 t h , o r o f t h e

revised report

of

November

1 7 ,

1915."

1 - 430

From th e above one would naturally b e l e d t o be l ieve tha t , a t t he

above meetings,

t h e

Board

h a d

convened

b u t h a d

immediately adjourned

t o

November 22nd, because

of the

absence

of Mr.

McAdoo.

Why, i t may b e asked, does M r. Warburg thus gr ac ef u ll y gl i de over

t h e

meeting

of

November 15th?

Was

there

no

"discussion"

a t

that meeting,

o f the

pre l iminary

r e -

por t of November 12th?

The

f a c t

i s

t h a t

a t

that meeting

of

November

1 5 t h t h e

pre l iminary

repor t was discussed, br ief ly perhaps a s t o i t s mer i t s , b u t a t great

length a s to i t s demeri ts , and moreover i t was one of th e most earnest

a n d

vehement discussions ever held

i n t h e

Board.

7/17/2019 frsbog_mim_v33_0174.pdf


- 6 -

X-6715

k

1

'

The discussion occupied a whole da y , - "From morn t i l l noon, frcm

noon t i l l dewey

e v e , - t h e

Board sitting both

i n t h e

morning

and in the

af ternoon.

Ho f ina l vote was taken, however, because o f the absence of Secretary

McAdoo,

a n d

because

a t the end of the day

there

was no

r e p or t l e f t

to be

acted upon, - a s wil l appear later.

I t was

pointed

ou t by the

minority, during

th e

discussion, that

the

Committee report

i n

effect s tated that because

of the

weakness

of one-

ha l f

o f t h e

Federal reserve banks

th e

System would prove

a

f a i l u r e

and

tha t

a

reduction

of the

number

of

Federal reserve banks from twelve

t o

e igh t

o r

nine

was

imperative

f o r t h e

good

of t he

System

and of t h e

country

The minori ty fu rt he r st at ed th at such a startling conclusion would

cause uneasiness

a n d

lack

of

confidence

i n t h e

System throughout

the

country; that this conclusion should have been supported

b y a

statement

of the f a c t s an d f igures on which th e conclusion was based; t ha t no such

f a c t s

o r

figures were contained

i n t h e

report .

The

minority then requested

th e

Committee

t o

f i l e

a

supplemental

report giving these facts a n d f i g u re s a n d tha t one week be allowed the

minority

t o

study

t h e

report

a s

thus supplemented.

A

formal motion

o r

re so lu t ion

was

made

to

t h i s e f f e c t ,

but was

strongly opposed

b y t h e

Committee, which opposition

w as

later explained

b y t h e

Committee

i n i t s

report

of

December

2 , 191 5, as

follows:

The fac t tha t t h e request of two members of the Board

f o r

another prel iminary report

i n

writ ing

a s to the

reasons

f o r i t s

recommendations was opposed

by the

Committee,

w a s ,

a s explained b y t h e Committee, solely because i t des i red t o

have

th e

report discussed

on i t s

merits without delay

and a t

that time

l a y

before

th e

Board

a l l t h e

f a c t s

a nd

f igures

i t

h a d co ll ec te d. Such a course was in consonance with o ur usual

p ra c t i c e . "

1 - 435.

7/17/2019 frsbog_mim_v33_0174.pdf


: 180

7

X 6715

The writer knows of no such practice of the Federal Reserve Board a nd i s

very confident that t h e attempt of a Committee to withhold th e f a c t s a n d f i g -

ures on which i t s r epor t i s "based from t h e r e po r t i t s e l f , and to present them

only when

t h e

repor t

i s

before

t h e

main body

f o r

immediate vote, would

n o t be

sustained

by any

deliberative body known

t o

Anglo-saxon procedure.

The charge was freely made during th e discussion that th e minori ty was

-

t ry ing

to

obstruct

t h e

proceedings

and

delay

a

f ina l vote .

The

minori ty,

how-

ever, pointed

o u t

t ha t

a

delay

of one

week

i n

which

t o

study

t h e

f a c t s

and

f i gu res

on

which

t h e

repor t

was

based,

was not an

unreasonable request

i n

view

of the

radical changes

i n t h e

Federal Reserve

A c t

recommended

b y t h e

Committee.

The

motion that

t h e

Committee report

t h e

f a c t s

a n d

figures upon which

i t s

conclusions were based

and

that

one

week's time

b e

allowed

t h e

"minority"

t o

study t h e report thus supplemented, was f i n a l l y pu t t o t he vote and was de-

fea ted by a vote o f four to two.

3

Diary,

p . 102, 103, 107.

The wri t er bel ieves i t apparent from th e above that any lack of discus-

sion o f t he meri ts of the Committee's report a t this meeting was due not to

th e minority bu t t o t he act ion of the major i ty i n defeating this motion.

Fina l ly ,

a s a

climax

o f a

weary

day of

d i scuss ion ,

t h e

Committee itself

announced that

i t

would withdraw

i t s

repor t

an d

would later f i le another,

t o

which th e Board consented.

3 Diary, p . 112 , 113 .

At the next meeting of the Board, on November 17 , 1915, one of th e

"major i ty" s tated that he was s a t i s f i e d t h a t t h e preliminary report contained

statements which might give

a

false impression,

an d

tha t

t h e

c r i t i c i s m

of the

minori ty

was , to a

ce r t a in ex t en t , j u s t i f i ed .

3

Diary,

p . 112 .

7/17/2019 frsbog_mim_v33_0174.pdf


- 8 - X-6715 - * - 8 1

Evidently th e discussion held on November 15 th ha d made a decided im -

press ion

on the

Committee

On tha t da y , - November 17 , 1915 , the Committee prepared a supplementary

report eliminating some h u t n o t a l l o f t h e mat t e r s c r i t i c i sed b y t h e minority.

This report also, however,

was

s i l e n t

a s to the

e s s en t i a l f a c t s

and

f igures

upon which i t s conclusion was based.

The

Committee justified this omission

a s

follows;

The problem i s preeminently one f o r the exercise of general

judgment

as to

what will make

f o r t h e

most effect ive organizat ion

of the Federal Reserve Banking System, and your Committee does n o t ,

therefore , th ink i t necessary t o develop a t length o r i n de ta i l

t h e

reasons which have weighed with

i t s

individual members, each

of whom h a s reached h i s conclusion i n h i s own wa y . (I tal ics mine)

Would

i t n o t

have been fairer

t o t h e

minori ty

t o

have

t h e

Committee's

f a c t s and f igu res so t ha t they al so could reach th e i r conclusion i n thei r

own way?

1 - 771.

The

Committee report

of

November

17, 1915

cont inued; -

"Attent ion may, however, b e cal led t o some of the considerat ions

i n

favor

of a

reduct ion

i n t h e

number

of

d i s t r i c t s . "

1 - 771.

The Committee then enumerates t h e general considerat ions o f economy of

operation, embarrassment

i n

de aling with weak un i t s , si mp li ci ty

i n

check

c lear ing an d co l l e c t i o n an d g r ea t e r ab i l i t y to meet severe tests which may

come when the wa r i s over.

1 - 767.

I t i s very signif icant , however, a s above st a te d, tha t no mention i s

made

by Mr.

Warburg

of the

d iscuss ion

or of the

contents

of the

f i r s t

p r e -

liminary report which was discussed in the Board, a s above stated, on

November 15, 1915.

7/17/2019 frsbog_mim_v33_0174.pdf


- 9 -

X-6715

The supplemental report of Nov. 17, 1915, is r e f e r r e d to by him '

merely i n a foot note on page 440 although i t i s p r in t ed i n f u l l i n

appendix 2 9 a t page 767 .

Throughout

th e

chapter, ignoring

th e

pre l iminary repor t s ,

e x -

cept ing

as to the

foot note above mentioned,

Mr.

Warburg quotes

as a

j u s t i f i c a t i o n of th e Committee's position t h e Committee report made

on Dec. 2 , 1915 , long af te r th e r ed i s t r i c t i ng d i spu t e h ad been d i s -

posed of by the Board. A copy of t h i s l a t t e r r epor t i s p r in t ed on

page

43 1 . •

- V I I I -

One r e s u l t of the discussion i n t h e Board on November 1 5 t h , n o t

here tofore poin ted o u t , should here be mentioned.

I t

w i l l

b e

remembered that

i n i t s

prel iminary report ,

the Com-

mit tee h ad i n effect expressed th e conviction that one ye ar 's operati on

of the System h a d convinced i t tha t a reduct ion in t h e number of Fed-

eral reserve hanks was imperat ive, and tha t i f n o t reduced, th e System

might prove to be a f a i l u r e . -

I n rendering t h e f ina l repor t of December 2 , 1915 , however, the

Committee reversed itself and s ta ted tha t t h e System h ad already

brought immeasurable benefits t o t h e country, an d . . . . . whether with

twelve hanks o r eight banks will prove of ines t imable va lue ." ( I t a l i cs

mine)

1 — 434 .

—IX—

Before considering th e final meeting of the Board held on

7/17/2019 frsbog_mim_v33_0174.pdf


- 10 - X-6715 ^

November

22 , 1915 , a t

which

t h e

Governor presented

t h e

l e t t e r

of the

Pres id en t

and the

opinion

of the

Attorney General,

i t may no t be out

of p lace to r e f e r b r i e f l y t o c e r t a i n i n t e r e s t i n g a nd s ign i f ican t even ts

which transpired Just before that meeting.

-X~

I n i t s

f in a l r ep o r t

of

December

2 , 1915 , t he

Committee stated

th a t

i t

d e lay ed f i l in g

i t s

p re l iminary rep or t ,

-

which

w as

discussed,

a s

above shown

on

November

1 5 t h , - i n

order

t o

give

Mr.

Harding

a n

opportunity to show i t t o Secretary McAdoo t o obtain any suggestions

h e might care t o make, b u t that as Mr. Harding could n o t confer with

h i m ,

because

of

i l l n e s s ,

th e

Committee finally filed

i t s

prel iminary

rep o r t

on

Saturday, November

13 , a nd i t w a s s e t

down

f o r

discussion

by t he Board on November 15, 1915.

1 - 435, 436.

Although Mr. Harding d i d n o t have a personal interview with

Secretary McAdoo,

h e d i d

communicate with

him

through

M r.

Williams,

a s will later appear*

L e t u s

" l i f t

t h e

v e i l "

a

l i t t l e fu r th e r

a nd s e e

what

I s

disclosed*

M r. Williams, t h e Comptroller of the Currency, and an ex -o f f i c io

member of the Board, told th e wr i t er tha t on Friday, November 1 2 t h ,

Mr.

Harding called

on him and had a

talk with

h i m ,

later reduced

t o

wri t in g

and

approved

by Mr.

Harding; that

Mr,

Harding told

him

that

t h e

Committee would report

i n

favor

of

r e d i s t r i c t i n g

and

desired

thei r repor t

t o be

sent

to the

P res id en t ,

and

that unless

t h e

President

personal ly requested t h e Committee t o withhold i t s r e p o r t , t h e Committee

7/17/2019 frsbog_mim_v33_0174.pdf


- 11 -

X-6715

would, vote t o p u t i t through, but tha t i f t h e Pres ident d i d s o request ,

t h e

Committee would

l a y i t o n t h e

table

f o r t h e

present .

3 Diairy, p . 95 .

This was c e r t a i n l y a somewhat extraordinary ultimatum t o deliver

t o the

Pres ident

of the

United States

I

The wr i t e r h a s a lso a copy of a l e t t e r f rom Mr. Williams t o

Secretary McAdoo enclosing

th e

memorandum, above referred

t o , o f h i s

conversation with M r. Harding, which memorandum, Mr. Williams said

was

duly examined

a n d

approved

by Mr.

Harding.

3

Diary,

p . 96 .

I n t h i s l e t t e r , M r. Williams told Secretary McAdoo that M r. Harding

asked

him to s ay

t h a t

on the

occasion

o f h i s

ca l l

on the

Secre tary

two or

three evenings before,

h e

carried with

him a

copy

of the

Committee

r e -

port together with

a map

showing

t h e

proposed redis t r ic t ing, wi th

p e r -

mission from

t h e

Committee

to

leave

i t

with

h im , -

Secretary McAdoo

-

f o r h i s information; that he , - Mr . Harding, - says he now ha s i t on

h i s

desk,

a nd

wi l l send

i t t o

Secretary McAdoo should

h e

care

t o s e e

i t

before

i t i s

submitted

to the

Board next week.

Mr. Williams also told th e writer that Governor Harding told him

tha t

t h e

plan

and map

r e f e r r e d

t o i n t h e

memorandum, abolished

the Fe d-

eral Eeserve District o f Boston, merging i t with t h e Federal Reserve

D i s t r i c t

of New

York.

3 Diary, p . 121 , 139 .

The

above statement

i s

confirmed

by Dr .

Wi l l i s

who

to ld

th e

writer

t h a t , a t M r . Warburg's request, he had delimited t h e d i s t r i c t s in a

d r a f t

o f

report given

him by Mr.

Warburg,

and

that this draft merged

7/17/2019 frsbog_mim_v33_0174.pdf


X-6715

l g

Boston with

New

York.

3

Diary,

p . 1&7%

Mr* Williams al so said l a t e r t hat Mr. Harding told h i m h e h a d r e -

por ted h i s talk with h im to the Committee and that none of them ha d

dissen ted . Later , Mr. Harding repeated this t o t h e Board.

3 Diary, p . 108, 138, 139.

The above statements of Mr. Harding seem completely inconsistent

with what Mr. Warburg states i n h i s book, - tha t th e Committee agreed

tha t no plan should be considered which might increase t h e power of the

Federal Reserve Bank

of Hew

York,

a nd h i s

further statement that

no

s p ec i f i c p l an

o f

reduct ion

was

formulated

by any

Committee.

1 - 427, 438.

These l a t t e r s tatements of Mr. Warburg a r e p l a i n an d unequivocal,

y e t i t i s i n t e r e s t i n g t o note that on December 15, 1915, in response

t o a request o f the Board, t h e Committee filed a memorandum giving a

general review

o f i t s

work,

and

annexed

to

t h i s memorandum

o r

produced

a t t h e

same time with

i t ,

several plans

and

maps,

one of

which

c o n -

so l ida ted th e Boston with the Hew York S i s t r i c t

The Committee stated, i n t h e memorandum, that while t h e plan which

merged Boston with Hew York was t he most advisable, y e t i n view of the

sentiment of the country i t d i d n o t contemplate merging Boston and Hew

York,

an d

expressed

th e

hope that Boston

may

succeed

i n

proving

i t s

a b i l i t y to a c t a s a n independent and se l f -su ppor t ing cen t re .

3 Diary, p. 154-A (Loose leaf.)

7/17/2019 frsbog_mim_v33_0174.pdf


- 13 ~ X-6715 1 8 6

Clearly everyone today will admit that Boston h a s proved i t s ab i l i t y

t o a c t a s a Federal reserve centre,, h u t that i s n o t t h e reason f o r quoting

t h e above. The reason i s that although M r. Warburg, a s above quoted, said

t h e Committee h a d agreed no t to increase fur ther th e power of New York,

ye t i t ha d one

plan before

i t

which would ma te ri al ly inc rea se

i t s

power

a nd , a s

shown

by Mr.

Williams,

a s

quoted above,

Mr.

Harding admitted

tha t th e plan which he was holding f o r Secretary McAdoo's inspection a s

th e p lan of the Committee - ( I ta l ics mine) - was the plan which abolished

Boston a s a Federal reserve d is t r ic t and Federal reserve bank, an d merged

i t with Hew York

I t i s evident that such a merger would have enormously increased

t h e power of the Federal Reserve Bank of New York.

I t should also b e remembered that Mr. Harding told Mr. Williams

tha t

he had

repor ted

t o h i s

colleagues

on the

Committee

h i s

conversation

with

Mr.

Williams

i n

which

h e

s ta ted that

th e

Committee's plan

i n

fact

merged t h e Federal Reserve District of Boston i n that of New York. .

3 Diary, p . 108, 121, 139 '

While

i t may

well

be

that

th e

Committee

h a d n o t

formally voted

a t

this

time

to

adopt

th e

plan abolishing Boston,

y e t t h e

fact that

M r.

Harding

to ld M r. Williams that th e Committee plan d id abolish Boston would c e r -

tainly warrant anxiety and apprehension a t even t h e p o s s i b i l i t y t h at New

York's power might

be

increased ,

i n

s p i t e

of Mr.

Warburg's statement

t o

th e

contrary, above quoted.

- X I -

The wri ter furthermore was informed by Dr . W i l l i s , th e then Secretary

of the Board, that Mr. Harding, on Saturday, November 20 , 191 5, - two

7/17/2019 frsbog_mim_v33_0174.pdf


- 14 -

X-6715

days before t h e final meeting of the Board on November 22 , 1915 , came

to him and

asked

h im to a c t a s a n

intermediary between

th e

Committee

and

Secretary McAdoo, telling

h i m , ,

from

man t o man,

tha t

he was

w i l l -

i n g t o compromise a s follows: - The Committee to l a y on the t ab le the

r e d i s t r i c t i n g r e p o r t

a n d

Secretary McAdoo

to

y ie ld

on

certain disputed

questions a s to open market powers a n d c lear ings ; th e Secretary further

t o

direct Comptroller Williams

t o

remove

Mr.

Starek,

th e

National Bank

Examiner

a t New

York,

an d

also

t o

order

him to

fu rn is h, hence fo rt h,

copies

of the

"yellow sheets" attached

t o t h e

Bank Examiner's reports

t o t h e

Federal Reserve Agents, which

th e

Comptroller

up to

this time

h a d

declined

t o

fu rn i sh ,

3 Diary, 106 , 116 .

D r . Wil li s rep ort ed thi s conversation t o Secretary McAdoo immediate-

l y , a n d h e agreed t o meet Governor Harding on Sunday th e following day#

3 Diary, p . 116 .

Pr ior t o this meeting, Secretary McAdoo told th e wr i t e r h e should

never agree

t o

compromise

on

those

or any

other l ines ,

an d

l a t e r ,

on

Sunday, after

th e

interview, told

t h e

wri te r tha t

Mr.

Harding

d i d n o t

a sk h im to

compromise,

b u t

to ld

him

unequivocal ly th at

he

should vote

t o

dismiss

t h e

whole matter

a t t h e

meeting

o f the

Board

on

Monday,

- a s

will la ter appear.

3

Diary,

116, 117,

Whether

or not Mr .

Warburg knew

of

t hi s conv ersat ion between

Mr.

Harding,

D r .

Wi l l i s

an d

Secretary McAdoo,

i n

which

a

compromise

was

suggested,

th e

writer does

n o t

claim

to be

informed,

b u t i f h o

knew

o f

7/17/2019 frsbog_mim_v33_0174.pdf


- 15 - X-6715 | g g

t h e ultimatum to the President, above mentioned, or of the suggest ion of

M r. Harding, o r e i t h e r of them, i t cer ta in ly p laced h im , - t he non-

p a r t i s an t r u s t ee o f the country

l

s i n t e r e s t s , " a s he f e l i c i tous ly ca l l ed

h imse l f , - in a deci dedl y anomalous po s it io n. Perha ps, however, he may

have reached th e conclusion that th e o ther ma tt er s, quoted above, r e p -

r esen ted t h e "greater good" an d jus t i f ied dropping t h e r e d i s t r i e t i n g

p lan

- X I I -

We can now

take

u p t h e

question

of the

submission

t o t h e

Board

by

t h e Governor o f the opinion of th e Attorney General, which M r. Warburg

charges was brought about b y a combination to fo res t a l l deba te , oi> th e

p a r t of the P res iden t of the United States, t h e Secretary o f the Treasury,

t h e Attorney General, a nd the Governor o f the Federal Reserve Board.

The events leading up to t he request b y t h e Governor f o r t h e

Attorney General

1

s opinion were a s follows:

Jus t p r io r t o t h e meeting of November 15 , 1915 , the Governor heard

i n d i r ec t l y t h a t t h e Committee was consulting with J . P . Cotton, E s q . , -

who had acted i n several matters a s special Counsel o f the Board, - as

t o t h e Board's power. I n t h e d iscuss ion o f the prel iminary repor t , a s

t h e wr i t e r r e ca l l s , t h e Committee made some reference to this fact*

3 Diary, p . 89 , 92 .

On November 1 5 t h , ju s t p r i o r t o t h e meeting, th e Governor prepared

a formal resolution asking th e Committee whether i t h a d sought a n

opinion from any one other than from M r. E l l i o t t , th e General Counsel

of the

Board, with relat ion

t o i t s

power

t o

reduce

t h e

number

of the


3 Diary, p . 100 , 101 .

7/17/2019 frsbog_mim_v33_0174.pdf


- 16 - X-6715

On November 16 , 19 15, Mr . Williams wrote t o t h e Committee asking

i t t o produce Mr. Cotton's opinion.

3 Diary, p . 109 .

Late on Saturday afternoon, November 20 , 191 5 , the Committee gave

t h e wr i t e r a copy of Mr. Cotton's opinion, dated November 19 , 1 915 , i n

which h e advised t h e Committee that th e Board h a d power t o reduce the

number

of the


M r.

E l l i o t t ,

i t

should

be

remembered,

h ad

previously advised

the

Board that i t ha d no such power.

According t o t h e wr i t e r ' s r e co l l e c t i o n , no authori ty from t h e

Board h a d been obtained by the Committee t o secure this opinion from

M r.

Cotton.

In any

event ,

t h e

fact remained that

a t t h e

meeting

o f the

Board

s e t f o r November 2 2 , Monday, - only a few hours d is ta n t , - when i t

was expected that a final vote would b e taken , th er e would have been

befo re th e Board tw o rad ica l ly c onf l ic t ing opin ions a s to the power

of the Board, - tha t of Mr. E l l i o t t , th e General Counsel, a n d that of

M r.

Cotton,

t h e

special Counsel,

Such confl ict

of

opinion,

i t

must

be

evident, would have plunged

t h e Board into hopeless confusion, and an opinion from th e Attorney

General

was

abso lu te ly necessary

to

s e t t l e

th e

question

of

power once

f o r a l l .

The Governor would have called a special meeting of the Board to

obtain a formal vote requesting such an opinion, bu t i t was l a t e

Saturday afternoon a nd the Board members had separated s o t h a t a

7/17/2019 frsbog_mim_v33_0174.pdf


1 9 0

- 17 - X-6715

meeting on Sunday would n o t have been p rac t icab le . The Governor f e l t

t h a t i t w a s t h e i n t e n t i o n of what M r. Warburg describes a s t h e major i ty"

t o f o r c e a vo te on Monday, a n d i t th er ef or e , seemed impera t ive t o

a s k

t h e Attorney General f o r a n opinion.

Ord inar i ly , under t h e p r a c t i c e o f t h e Board, a reques t o f three

members

f o r a n

op in ion

o f t h e

Attorney General upon

a n y

impo rtan t ques-

tion would b e acted upon favorably b y t h e Board almost a s a mat te r o f

course , without quest ion. Had th e Board voted adversely upon such a

r e q u e s t , t h e S e c re t a ry o f t h e Treasury, a s Chairman o f t h e Federa l R e -

serve Board, under exis t ing law and p r ac t i ce , cou ld have , of h i s own

v o l i t i o n , c a l l e d u po n t h e Attorney General f o r a n opinion; or any

member o f t h e Board could a t a n y time request t h e P re s id e n t t o c a l l

f o r

such

a n

opinion.

Under those circumstances, t h e Governor, late on that Saturday

evening explained t h e s i t u a t io n o v e r t h e te lephone t o S e c re t a ry Mc~

Adoo,

who

t o l d

h im

t h a t

he had a

copy

of Mr.

Cotton 's opinion

and

f u r t h e r , - what h e d i d n o t know before, - t h a t t h e Attorney General

* %

h a d

been engaged

i n

s tudying

t h e

ques t ion

o f t h e

Board's power

f o r

some time, a t h i s re qu es t. Se cr et ar y McAdoo f ur t h er sa id th at t h e

President wished t h e Governor t o w r i t e h im a l e t t e r r e q ue s t in g h im to

o b ta in an d forward a n opinion o f t h e Attorney General.

The Governor acc or din gl y, a ddres sed a l e t t e r t o t h e Pres iden t

s t a t i n g th a t , b o th i n h i s c a p a c i t y a s Governor and as a member of the

Board, h e would b e g re a t ly h e lp e d i f a n opinion o f t h e At to rney G e n -

eral could b e secured.

7/17/2019 frsbog_mim_v33_0174.pdf


191

- 18 - X-6715

The l e t t e r w as s e a t t o t h e P re s id e n t on Sunday, November 21 , 1915 ,

and on Monday, November 2 ind , j u s t "before t h e Board meeting, a l e t t e r

from t h e P re s id e n t was rece ived by th e Governor, together with a copy

o f t h e Attorney General 's opinion, which t h e Governor a t once laid b e -

f o r e

t h e

Board.

This opinion negatived

a n y

power

i n t h e

Board

a n d

t h u s s e t t l e d

t h e

conf l ic t be tween

t h e

opinions

o f t h e

General

a n d

special Counsel

of the

Board.

To sum u p : - The Board h a d secured a n opinion from i t s General

Counsel;

t h e

Redis tr ic t ing Committee , without

a n y

au thor i ty f rom

the

Board, h a d secured a n opinion from t h e Special Counsel; a n d t h e S e c -

r e t a r y o f t h e Treasury , of h is own v o l i t i o n , h a d c a l l e d f o r a n opinion

from

t h e

Attorney General .

The two

former confl ic t ing opinions would

have been before t h e Board a t i t s meeting of November 22nd. I t w a s

a b so lu t e ly n e c e s sa ry

f o r t h e

Board

t o

have also

t h e

opinion

of the

Attorney General upon

t h e

same subject, asked

f o r

i n fo rma l ly

b y t h e

S e c r e t a r y o f t h e Treasury, a n d i n asking f o r th i s op in ion , a t t h e s u g -

g e s t i o n o f t h e P r e s i d e n t , on Sunday, t h e 2 1 s t o f November, t h e G o v -

ernor mere ly an t ic ipa ted

by one day

what

t h e

Board

a s a

matter

o f

course , o r t h e S e c r e t a r y of the Treasury in h i s own r i gh t , would

have done

o n t h e

nex t

d a y .

T hi s a n t i c i p a to ry a c t i o n

of the

Governor,

moreover,

a s i t

tu rned

o u t ,

made

i t

p o s s i b l e

f o r t h e

Board

t o

have

t h e

Attorney General ' s opinion before

i t

when

i t m e t t h e

next

day

a n d

thus saved

t h e

n e c e s s i t y

of

fu r t he r postponement

of the

meeting

t o awai t i t s r e c e i p t .

7/17/2019 frsbog_mim_v33_0174.pdf


- 19 - X-6715

The Redistricting Committee seemed t o f e e l tha t the re shou ld have

"been

a

formal hear ing

a t

which each sid e could have pr es en te d

i t s

case

b e f o r e t h e At torney General . Ho such op po rtu nit y, however, was a f f o r ded

t h e

Minority when

t h e

Committee asked

f o r M r .

Cot ton 's opinion.

1 - 436 .

The Committee, however, forgot that t h e only question "before t h e

Attorney General was one of law, and t h a t t h e l a t t e r h a d b e f o r e h im

t h e

opinion

of Mr.

E l l i o t t ,

a n d

a l so tha t

of Mr .

Cotton,

-

presumably

sent with t h e other papers by Mr. E l l i o t t .

5 Diary, p . 1 4 6 .

The Committee stated that i f t h e At torney General h a d known that

branches would have been subs t i tuted f o r a l l Federal reserve banks

abo l i s hed ,

h i s

opinion might have been di f ferent ,

b u t t h e

w r i t e r

r e -

c a l l s no r e f e r e n c e i n M r . Cot ton 's opinion o r i n t h e pre l iminary repor t

o f t h e Committee t o this argument . I f i t was i n Mr . Cotton's mind, h e

ev i den t l y a t t ached

n o

importance

t o i t .

M r. Warburg, however, i n ef fec t c l a ims tha t t h e a d d i t i o n t o t h e

B o a r d ' s f i l e s

o f t h e

At torney Gen era l ' s opinion bes ide those

o f the

General a n d Sp ec ia l Counsel o f the Board , cons t i tu ted a combination o r

conspi racy t o suppress d i scuss ion As well might one claim that a d e -

c i s i o n

o f the

Supreme Court

o f the

Uni ted States that

a

claimant

h a d

in law no cause o f act ion should b e c h a r a c t e r i z e d a s a combination o r

conspi racy o f the J u s t i c e s o f that Court t o f o r e s t a l l d i s c u s s i o n

Th e wr i t e r be l i ev es t ha t t h e above statement o f facts wil l effect**

ua l l y d i s pos e of Mr. Warburg's charges of combination o r conspi racy t o

7/17/2019 frsbog_mim_v33_0174.pdf


- 20 *

X-6715

suppress d i scuss ion a n d th at t hi s myth wi l l vanish int o th in a i r .

- x n i -

As a ma t t e r of fact , however , t h e whole question o f r e d i s t r i c t i n g

h a d i n e f fec t been d isposed o f p r i o r t o t h e r e c e i p t o f t h e Attorney

General 's opinioi i .

M r. Warburg, over a n d over aga in , s ta tes tha t a m a j o r i t y of four

members

o f t h e

Board favored cutting down

t h e

number

o f

Federal reserve

banks , a n d p l a i n l y s eeks t o have i t imp lie d t ha t th ey would have so

voted

b u t f o r t h e

Attorney General 's opinion.

1 - 438.

This s ta tement may have been true a t o n e t ime , b u t i t w a s n o t t rue

o n t h e morning of November 22nd, t h e da te o f t h e f ina l meet ing .

On Sunday, November 2 l s t , a s above stated, Secretary McAdoo told

t h e

w r i t e r t h a t

M r.

Harding

h a d

t o l d

h im

e a r l i e r

i n t h e d a y

t h a t

h e

h a d become sa t i s f ied tha t a n y a t tempt t o c u t down t h e number of Federal

reserve banks would b e r e s i s t e d i n t h e cou r t s a n d l ead t o long drawn

o u t l i t iga t ion which would b e mos t in jur ious t o t h e Federal Deserve

System, an d t h a t h e h a d determined t o vo t e t o d i smiss t h e '-hole matter.

3

Diary',

p . 1 1 7 ,

Senator Hoke Smith h a d p rev iou s ly t o ld t h e w r i t e r o f a s imi l a r

conversa t ion wi th

M r.

Harding.

3 Diary , p . M 5 .

Thus Mr, Warburg ' s major i ty o f four h a d dwindled t o a mino r i t y o f

t h r ee .

7/17/2019 frsbog_mim_v33_0174.pdf


- 33, - X-6715

The

w r i t e r

w as

f ar ther informed,

o n t h e

very "best au th or i t y, tha t

one

other member

of Mr*

Warburg

* s

"Major i ty"

h a d

reached

t h e

same

c o n -

c l us i on .

Perhaps these members h a d l ea r ned o f the informal ac t i on o f the Federal

Adrisory Council

i n

unanimous opposit ion

t o a n y

cutting down

o f

Federal

reserve "banks a t t h e present t ime.

3

Diary ,

p . 1 1 4 .

Thus, i f a f in a l , vote h a d "been taken on November 22nd, - wholly

apar t f rom t h e At torney General

1

s opin ion , - t h e Committee report

would have been defeated

by a

vote

of

f i v e

to two and the

whole

m a t -

t e r would have pa sse d in to o bl iv io n.

- X I V -

I t

s hou l d f u r t he r

b e

p o i n t e d

o u t

that al though

M r.

Warburg,

i n

h i s book, over a n d over again expresses h i s convic t ion tha t t h e

number

of

Federal reserve banks should

b e

reduced

f o r t h e

good

o f t he

System and o f th e count ry , y e t h e took a v e r y d i f f e r e n t p o s i t i o n i n

addresses made

b y h i m a t

about that time

and

l a t e r ,

a s t h e

fol lowing

quotations wil l show:

In an

address de l ivered

a t

Char lot te , Nor th Carol ina,

on

November

23 , 1915 , - only one day a f t e r t h e f i n a l d i s p o s i t i o n b y t h e Board o f

t h e

r e d i s t r i c t i n g r e p o r t ,

i n

reviewing

t h e

f i r s t y e a r ' s o p e r a t i o n

o f

t h e

Federal Reserve System,

Mr.

Warburg said:

I am looking back upon t h e f i r s t year wi th f u l l

s a t i s f a c t i o n . " ( I t a l i c s mine )

Again, i n t h e same address h e s a i d : .

7/17/2019 frsbog_mim_v33_0174.pdf


22 X 6715

I t was a

d i f f i c u l t p r o b l e m

t o

wr i t e

so

i n t r i c a t e

a

l aw as the

Federal Eeserve Act*

I t i s a

very remarkable

achievement t o have p u t upon t h e books a statute which

h a s brought in to l i fe a system which h a s proved i t se l f

ent i re ly workable a n d succes s fu l*" ( I ta l i cs mine)

2 - 35 0 , 35 1 .

As one of the Committee, h e a l so repor ted t o t h e Board on

December 2 , 1 9 1 5 , t h a t t h e Fe der al Reserve System whether wi th

twelve "banks o r e ig h t "banks w i l l prov e of inest imable value."

( I ta l ics mine)

1 - 434 .

I t h a s

also been claimed that

Mr.

Warburg's demand

f o r

reducing

t h e number of Federal reserve banks i s incons is ten t wi th h i s o f t r e -

peated recommendation that a p o r t i o n of t he p a i d - i n c a p i t a l b e r e -

tu rned

b y t h e


t o t h e

member bank stockholders*

.

I f strong enough t o b e ab le t o r e tu rn pa r t of t h e i r pa id - in ca p i t a l ,

surely they were strong enough t o exis t without t h e n e c e s s i t y o f

merging some

o f

them with re l a t iv el y s t rong er banks.

M r. Warburg makes t h i s recommendation un eq ui vo ca ll y i n h i s a d -

dress a t S t . Paul, Minn. , on October 2 2 , 1 9 1 5 , - j u s t one month b e -

fo re

t h e

Board meeting

o f

November

22, 1915

(2-310) ;

an d

a l so

i n

h i s address a t At lan t ic Ci ty on June 9 , 1916 (2 - 4 32 ) .

I n a l e t t e r t o Senator Glass, however, dated February 2 9 , 1 9 1 5 ,

h e qualified this recommendation, favoring a temporary return of t he

p a i d - i n c a p i t a l o f some o f t h e Federal reserve banks.

This recommendation was based on the f ea r t ha t f a i l u r e t o p a y

dividends might hurt

t h e

p r e s t i g e

o f t h e

Federal reserve banks,

and

7/17/2019 frsbog_mim_v33_0174.pdf


196

2 3

X 6715

acco rd in g ly

h e

favored paying back

a

p a r t

of the

pai d - i n ca p i ta l , thus

reducing th e n e c e s s i t y f o r earn ings .

I n connection with t h e above le t ter t o Senator Glass, i t i s s i g -

n i f i c a n t t o p o i n t o u t t h a t , up t o June 30 , 1916 , t he only hanks which

h a d declared dividends were t h e Federal Reserve Banks of At l an t a , Dal las ,

a n d Richmond, - fol lowed by Kansas Cit y i n Ju ly - while t h e r e l a t i v e l y

strong banks, excepting only Chicago, d i d n o t begin t o declare dividends

u n t i l much l a t e r , almost

a t t he e nd o f t he

year

1916 .

Thus

t h e

p r e s t i g e

o f t he

Fed er al Reser ve System which

Mr.

Warburg

was

t ry in g

t o

p r o t e c t

b y

re tu rn ing par t

o f t he

p a i d - i n c a p i t a l

of the

Federal reserve banks,

w as

being

i n

fact maintained

b y

some

o f t h e

relatively weak banks which Mr. Warburg wished t o e l imin a te .

Another in teres t ing fac t t o note i s th a t t h e Federal Advisory

Council, on ITovember 18 , 1915, - t h e day a f t e r t h e d i scu ss io n i n t h e

Board on the Committee 's prel iminary report , - voted i n favor o f r e -

tu rn ing two- th i rds o f t he p a i d - i n c a p i t a l o f a l l o f t h e Federal r e -

serve banks t o t he member bank stockholders.

3 Diary , p . 110 .

The Federal Advisory Council consists of bankers representing

t h e twe lv e Fed era l r e se rv e d i s t r i c t s , a nd t he above vote was an

impress ive t r ibu te

t o t h e

soundness

a n d

successfu l opera t ion

o f

th e twelve Federal reserve banks, an d u t t e r ly in co n s i s t en t w ith

M r. Warburg

1

s claim that t h e number o f Federal reserve banks should

be reduced.

7/17/2019 frsbog_mim_v33_0174.pdf


- 2 4 -

X-6715

To cap the c l imax, t h e Federal Advisory Council, o n t h e same

d a t e ,

-

November

1 6 , 1 9 1 5 ,

in for mal ly cons idered

t h e

ques t ion

o f r e -

ducing

t h e

number

o f

Federal reserve "banks,

a n d

while many thought

i t could wis ely b e done, y e t i t unanimously was o f t he opinion that

i t

should

n o t b e

undertaken

a t t h e

present t ime.

3 Diary, p . 1 1 4 .

-XV-

M r.

Warburg goes

o u t o f h i s w ay t o

drag

i n t h e

quest ion

of

r o t a t i o n

o f t h e

o f f i c e

o f

Governor.

He

charges

t h e

then Governor

with subserviency

t o

Secretary McAdoo,

a n d

s t a t e s t h a t

t h e

independ-

ence

a n d

p r e s t i g e

o f t h e

Board make

i t

impera t ive tha t

one of the

other four appointive members should b e t h e next Governor.

1 - 445 .

Apparent ly

t h e

bare suspicion that

t h e

Governor

was in

harmony

wi th t h e views o f t h e P re s iden t o f t h e Uni ted S ta tes a n d t h e Secre ta ry

o f t h e

Treasury

was a

s u f f i c i e n t b a s i s

f o r t h e

demand that

h e

should

be

d i sp l aced

a n d h i s

pl a c e f i l l e d

by one of the

"Major i ty . "

The

fac t a l so tha t

a n y

member

o f t h e

Board should

b e

e i t h e r

a

p r e s e n t

o r

fo rmer o f f i ce r

o f t h e

United States, seems

t o

have almost

i n f u r i a t e d M r. Warburg; a n d y e t , n o t long before , i n o u t l i n i n g t h e

p r i n c i p l e s

o f a

modified Central Bank

o f

I s s u e ,

h e

favored

a

cen t ra l

body

a t

Washington (corresponding

t o t h e

Federal Reserve Board)

t o

c o n s i s t ,

i n

p a r t ,

o f t h e

Sec re t a ry

o f t h e

Treasury,

t h e

Comptroller

o f t h e Currency, t h e Treasurer o f t h e Uni ted S ta tes , a n d ( i t a l i c s

7/17/2019 frsbog_mim_v33_0174.pdf


1 9 8

- 25 -

X-6715

w o

mine)

s i x

members

o f

Congress1

2 - 7 7 .

M r. Warburg outlines t h e e f f o r t s h e made t o f o r c e t h e P re s iden t

t o

provide

f o r

r o t a t i o n

i n t h e

o f f i c e

o f

Governor,

a n d

e v i d e n t l y

b e -

l i e v e s

i t w a s

through

h i s

i n s i s t e n c y t h a t

t h e

then Governor

w a s n o t

redesignated, a l though reappointed

f o r a

ten-year term.

The

wr i t e r t akes

a

languid in te res t on ly

i n

this mat ter*

b u t

would present

t h e

fol lo wing br ie f s ta tement

o f t h e

f a c t s .

M r.

Warburg states that

tw o

appointive members

o f t h e

Board

h a d

a n in te rv iew wi th t h e P re s iden t a n d s t rongly urged t h e n e c e s s i t y o f

r o t a t i o n i n t h e o f f i c e o f Governor.

1 - 445 .

This meeting took place during

t h e

week prior

t o

June

1 9 , 1 9 1 6 .

3

Diary,

p . 2 3 3 .

M r. Warburg al so s t at es th at h e interviewed Secretary McAdoo

a n d gave h im a memorandum o n t h e same subject on August 3 , 191 6 ,

1 — 4 4 5 .

The

w r i t e r w i l l

n o t

under take

t o

express

a n y

opinion

a s t o t h e

e f f e c t on the P r e s i d e n t a n d Secretary McAdoo of Mr . Warburg's attempt

t o

f o r c e r o t a t i o n

i n t h e

o f f i c e

o f

Governor,

b u t

wil l merely point

o u t o n e re as o n, s u f f i c i e n t a t l e a s t f o r h i m s e l f , w hy h e wa s n o t r e -

des igna t ed a s Governor, v i z . - t h a t on Monday, June 1 9 t h , a n d again

on June 30th, h e informed Secretary McAdoo that while h e would b e glad

t o b e reappoin ted fo r a new ten-year term, h e p e r s o n a l l y had no des i re

t o b e

r edes igna t ed

a s

Governor,

a n d

begged

h i m n o t t o

h e s i t a t e

t o

drop

h i s

name

i n

that connect ion,

a n d

even suggested another member

f o r

Governor,

7/17/2019 frsbog_mim_v33_0174.pdf


1 9 9

2 6

X 6715

i n response to Mr . McA&oo's question.

3 Diary, p . 2 3 5 , 2 4 0 .

On

Ju ly

2 1 , 1 9 1 6 , t h e

writer informed

one

member

o f th e

Committee

who had

seen

t h e

P re s iden t ,

of

this conclusion, adding that

he was now

merely a d i s i n t e r e s t e d s p e c t a t o r a n d would loyally support whomsoever

t h e President might designate*

3 Diary, p . 2 4 6 .

Some light

on

this mat ter

may

a l so

be

thrown

b y a

quotation from

a

l e t t e r se nt

t o t h e

w r i t e r

b y

President Wilson

on

August

10 , 1916 ;

. . . I c a n n o t

send

you a

note

a t

t h i s pa r t i cu l a r

time without expressing my g r a t i t u d e a n d apprec ia -

t i on

f o r t h e

generous

a n d

p u b l i c - s p i r i t e d a t t i t u d e

you have taken i n t h e mat ter o f the Governorship

of the

Federal Reserve Board,

a s

repor ted

to me

by Mr.

McAdoo...."

(S igned) Woodrow Wilson .

M r. Warburg makes another interesting statement, - tha t Mr. Delano

was no t

redes igna ted

a s

Vice Governor

b u t w a s

s a c r i f i c e d

i n

order

t o

save appearances f o r t h e Governor."

1 - 4 53 .

That

t h e

w r i t e r

d i d n o t

consider "appearances saved"

f o r

himself

b y t h e

f a i l u r e

t o

redes igna te

M r.

Delano

a s

Vice Governor would seem

t o

appear from

t h e

fac t tha t

on

June

19 , 1916 (3

Diary,

p . 2 3 5 ) , o n

June

30 ,

1916 (3

Diary,

p . 2 4 0 ) , a n d

even

a s

l a t e

a s

August

9 , 1916 (3

Diary,

p .

270 ) he suggested t o Secretary McAdoo t h e a d v i s a b i l i t y of des igna t ing Mr.

Delano a s Governor o f t h e Board

As to why Mr. Warburg was designated a s Vice Governor i n p l ace o f

Mr.

7/17/2019 frsbog_mim_v33_0174.pdf


mm 7

: 200

X 6715

Delano,

t h e

w r i t e r

has no

reco l lec t ion , tou t

h e i s

s a t i s f i e d t h a t

the

des igna t ion of Mr. Warburg a s Vice Governor sprang from no d e s i r e t o

"save appearances" f o r t h e wr i t e r .

• - XVI -

I n summing u p th i s unfor tuna te cont roversy , t h e writer would

p o i n t

o u t

t ha t

t h e

three members referred

to toy Mr.

Warburg

as th e

"Minori ty" h a d a l l h a d much to do with th e p r e p a r a t i o n a n d f i n a l

d r a f t of t he Federal Reserve A c t , - t h e writer having "been charged '

toy Secretary McAdoo with t h e duty o f examining c r i t i ca l ly a l l changes

i n t h e "bill a s passed toy the House, suggested toy the Senate Committee.

Naturally these three members of t he Board would require cogent reasons

f o r

such

a

radical change

i n t h e

Federal Reserve

Act as was

demanded

toy the Redistricting Committee o f t h e Board , espec ia l ly a f te r the

experience

of

only

one

yea r ' s opera t ion

of t he

System.

These three members were perfectly familiar with Mr. Warburg

1

s

determined b u t f r u i t l e s s e f f o r t s , w hi le the Ac t was pending i n Congress,

t o l i m i t th e number of Federal reserve banks t o f o u r , o r t o s i x a s a

maximum. They c o r d i a l l y acc ept ed t h e w i l l of Congress i n f i x i n g the

number a t between eight a n d twe lve . While t h e writer would have p r e -

ferred beginning with a smaller number than twelve, Federal reserve

banks,

h e

loya l ly accepted

t h e

dec i s ion

of t he

Reserve Bank Organization

Committee, consisting of t he Sec re t a ry of t he Treasury, th e Comptroller

o f t h e Currency, a n d t h e Secre ta ry o f Agr i cu l tu r e , Mr. Houston, i n

f i x i n g th e number a t twelve. The th ree of us were firm i n t h e

7/17/2019 frsbog_mim_v33_0174.pdf


2 8

; 201

X 6715

conviction, however, that

110

reduct ion

i n t h e

number should

b e

made,

- even assuming t h e Board h a d t h e necessary power, - un l e s s a n d u n t i l

t h e

r e s u l t

o f

exper ience

i n t h e

workings

o f t he

System clearly

dem-

ons t r a t ed t ha t a r educ t i on i n number was absolu te ly necessary f o r t h e

good

o f t he

System

and of the

count ry. They f e l t th at

t h e

r e p o r t

o f

t h e

Redistrict ing Committee revealed

n o

such ne ce ss it y. They f e l t

t h a t a n y at tempt t o reduce t h e number o f Federal reserve "banks would

be

r e s i s t e d

i n t h e

cour t s

an d

would cause confusion, uncertainty,

a n d l ack o f confidence i n t h e Federal Reserve System, - a r e s u l t

s p e c i a l l y

t o he

avoided

a t

th a t time when

t h e

world

war was

raging

i n

Europe. Their fe el in g i n t he mat ter was also confirmed b y t h e knowledge

t h a t t h e members o f t h e Federal Advisory Council, - on November 1 6 , t h e

d a y

fol lowing

t h e

d i scuss ion

i n t h e

Board al ready referred

t o , -

a f t e r

i n -

formal dis cus sio n, were unanimously aga ins t

a n y

at tempt

t o

reduce

t h e

number

o f


a t t h e

pr ese nt t ime.

Final ly* one member o f t he Committee and one other member of the

Boar d, whatever th e i r former views

may

have bee n, rea che d

t h e c o n -

c lus ion tha t

a

r educ t i on

o f t he

number

o f

Federal reserve banks should

n o t b e undertaken a t that t ime.

Thus,

a s

once before s tated,

i f a

f i na l vo t e

h a d

been taken

a t

th e

meeting

o f t h e

Board

on

November

2 2 , 1 9 1 5 ,

wholly apart from

t he

adverse opinion

o f t he

Attorney General,

t h e

Redist r ic t ing Commit tee 's

r epor t

i n

favor

o f

reduct ion

i n t h e

number

o f


would have been defeated b y t h e decis ive vote of f i v e to two, and

7/17/2019 frsbog_mim_v33_0174.pdf


202

29 X 6715

M r.

Warburg's "Majority"

o f

four

wo Id

have dwindled into

a

feeb le

•Minori ty" o f two*

-XVII-

The wr i t e r b e l i e v es th a t b y t h u s " l i f t i n g t h e v e i l * a t t h e point

where

M r.

Warburg ceased

t o

l i f t

i t , h e h a s

exploded

t h e

myth

of a

combination o r consp i racy on the p a r t of the P res id en t and o th e r o f f i ce r s

of t he United States t o suppress debate i n t h e Board; a n d h e i s f i rmly

o f t h e opinion that t h e subsequent marvellous work of the twelve Federal

reserve banks i n bear ing on th ei r shou lders , l ik e At l as , t h e c red i t

burdens o f t he whole world dating an d s ince t h e w a r , will have convinced

t h e

most skeptical that

th e

f a i l u r e

of the

a t tempt

t o

reduce

t h e

numbet

o f t h e Federal reserve banks h a s enured t o t he b e n e f i t n o t only of the

System b u t , a s w e l l , t o t he b e n e f i t o f t he en t i re peop le o f t h e United

S t a t e s .

frsbog_mim_v33_0174.pdf

Documents

Transcript of frsbog_mim_v33_0174.pdf