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2 LOAMS. The first offering of our Government’s bonds to pro vide it with funds for the prosecution of the war, produced v3,035,000,000 of subscriptions from over 4,000,000 subscribers, and the loan was a success beyond parallel in the history of weramont finance* The apponront esse with which the loan was nan and paid for must not, however, delude us into tho belief djet succeeding loans can be subscribed without equal or greater effV"t 0 1 1 certainly not without more thorou^i and extensivo pro1, para^lon than was possible last time. \ It must be made clear to our people that loans of the now required by our Government cannot be paid for in cash, o > 08 we oocEionly express it, in "money" but they must be i» subscribed ^ change toi, transfers of bank oredit to the Government in ex ^ondn t which oredit the Government most at once disburse, £P order to avoid disordered money markets. Cash, wh oh we corconly d f H "money” must not bo confased with oredit, which is also too oftenloonfase& *n casual conversation with "money.M Gash is what we ^ arrJ In our pockets in order to make hand to r pnyments »**\la what batiks carry in their vaults ra resorve in order that theiff depositors who require cash for making pay roll rnd other cash\pfy®Bnts i be able to got it whon needed, t Bfi f credit on the o^her hand is what is owinc by banks of deposit rr to their depositors, and'ls not necessarily created by depositing cash in banks, but is, in fact, principally creetod by loans which >mTivq m i y to their customers, and which are entered on the books ni of the bank as a deposit oredit, owing to the borrowers, or to those to whom the borrowers have transferred the oredit by draw ing oheoks in their favor. If subscribers for Government bonds paid for then in "cash", all of the oash held by the banks as reserves, would be transferred to the Government's vaults,when payment was made, the banks would be denuded of reserves and would be obliged to liquidate their loam, or they would be unable to meet the demands of their depositors for oash. The payment to the Government therefore of such a vast stun as $2,000,000,000 must be made by transfers of bank balances to the Government's oredit so that the Government in turn may check on these bank balanoes and pay the bills whioh it incurs for the support of a great a m y and navy. But we must not overlook the fact that bank oredit oonsists as a rule of two kinds of oredit; one being the liquid or working capital employed by business men'and corporations for business purposes, whioh they oannot spare without impairment of the efficiency of their businesses, and the other oonsists^ of idle capital and of the savings of people and corporations who re ceive salaries or earn profits, whioh they do not neod to spend and some part of whioh they can spare and turn over to the Gov ernment in exchange for the Government's bonds. This process of transfer of credit to the Government oannot very well exceed in amount the total of idle capital and savings whioh is not required for business purposes, unless, of course, the effective conduct ■3 “ of the business of the ooontry is to beaorne impaired by too great a reduction of the working capital now employed In basinesa affairs. Without enlarging upon the imperative neeessity for economy and the creation of savings in the form of balances, which nay be transferred to the Government*s use, it is veil to see just what changes take plaoe in banking affairs, when these loans are paid for, and this may be illustrated by a brief de scription of the English system, whioli has proved suoh a striking success during all of the three years of the war* Practically all of the banks of England "clear" their checks (that is settle the differences between those which are presented for payment and those that they hold for collection) through the London Clearing House, which has only sixteen members, outside of the Bank of England. The membership consists of the principal great London joint stock banks, which have many branches throughout the Kingdom. They all oarry reserve accounts with the Bank of England, and what they receive or pay as a result of each dayTs "clearings" is singly settled by a credit or debit in their accounts with the Bank. When a large payment is made to the British Government by subscribers to its loans, these subscribers draw oheoks on their banks and pay them in to the Bank of England* She payment of these oheoks by the sixteen clearing banks trans fers to the Government an immense credit on the books of the Bank of England from the reserve balances oarried with it by these sixteen banks. If one l u < r d million sterling is paid. It sim o|Le ply mean* that one hundred million sterling which had formerly stood on the hooks of the Bank of England to the credit of the joint stock banks was transferred when these checks wore paid to the credit of the British Government on the boKks of the Bank of England. This transfer may at times so considerably inqpair the reserve balances of the sixteen hanks with the of Bngland, that they find it necessary to disoount hills vith the hank in order to restore their reserve balances. At once that this great credit is transferred to the British Government, the Government dra r checks to pay its dohts, bills for supplies, maturing obli is gations and various items, the checks being payable to hundreds and thousands of people and institutions, who are creditors of the Government* These oheoks are at once deposited by those to whom they c r payable vith their banks, largely of oourse with the six ue teen clearing banks, which in turn re-deposit them with the Sank of ISngland, thereby restoring their reserve balances, or giving thus sufficient balances to enable them to pay off their discounts. It will be seen that the British Government has taken 100.000.000 pounds of bank credit which was originally owned by the subscribers to its bonds* Shis has bean used in payment of Gov ernment bills and those to whom the bills are paid immediately de posit the oheoks and so return the credit to the banka from which the credit was originally drawn; the net result of the operation is to leave the cash reserves of the banks substantially unchanged, although the government has borrowed 100,000,000 pounds and paid 100.000.000 pounds to its creditors. One may ask why this does neb oreate some inflation, or require some liquidation, or at any rate - 5 *» affect soma considerable change In tho banking position? Why do not deposits suddenly shrink or suddenly expand, or why do not the banks lose cash? She answer is that those who subscribed for the bonds in the first instance have been saving; "money*" that is saving bank oredit out of their earnings, for the purpose of sub scribing ; they have not been wasting the money in extravagsnt liv ing or by buying new bouses or autaaoblles or luxuries. It is to some suoh thoroughly scientific basis that our banking system most sow be developed and it is coaly when people of all Glasses are willing to economise, aooumolate their savings In banks and then transfer them to the Government In exchange for government bonds, that we can enable our government to meet the huge financial obligations imposed upon it by Its participation In the war. There is a vast difference between what is possible in England and what is possible in this country in handling banking transactions of suoh volume as those Involved In war finance. In langimdi there are lees three hundred commercial banks; practically all of them carry accounts with the sixteen clearing banks In London and these sixteen banks clear practically all bank checks and bills through the London Clearing House, so that the balances resulting from these clearings are settled at onoe place, namely on the books of the Bank of England. In this country we have nearly thirty thousand banks, over two hundred and fifty Clearing louses scattered throu^umt the country and the twelve federal Reserre Banks are only able at the present stage of their development to olear a moderate "6" proportion of the oheoks dram on the banks of the United States* Oar country is of suoh vast extent, oar banka are so numerous and we hare so many reserve oenters, that the actual settlement, that la the bookfeaseping required in connection with these credit trans fers, mst be planned and oonftaated with the greatest possible skill in order to avoid disturbance of money rates and disorgaa i~ sation of bosiness in various sections of the country, every tins a Government loan is paid for. That it can be done was deaonstrated by the saooess with which the transfers involved in the last loan wars oonduoted* So illustrate the differenoe between the operation of the fairly staple English machine above described and the sore complicated worfcLng of our system, an account of the transfers resulting from the loan of last Juno is necessary:Prior to the offering being made it was known that bank* ing institutions throughout the ooantry carried balances with Hew York banks amounting to about §1,000,000,000 and in addition had some handrods of millions loaned on the Sow York Stock Exchange* It was fully expected that in anticipation of making payment for the liberty Loan, these Interior banks would draw a large part of their balances from Hew York, and transfer them to their respective Beserre Bnnfew in their own districts, so as to have fonds avail able at home with which to pay for the bonds subscribed by their customers* Shis movement of bank oredit from Hew York to the in terior had to be provided for* At the same time, inasmuch as the greater part of the payments made by oar gore&adnt and by Its allies to whoa loans were being made, were to be disbursed in Hew York, Interior sections of the country had reason to «cpeot that large transfers of hank credit would he made from the interior to Hew York after the loan was paid for# In order to meet these movements of oredit various expedients were employed and some were arranged which it never heoene necessary to employ* The prelimi nary withdrawals from Hew York commenced about June 1st and ex ceeded v500,000,000* They were met principally " y the Reserve b Bank discounting bills and making loans freely for its members, its loan and bill accounts increasing in the first twenty-eight days of June from o minimum to _________ maximum. At the same time the British Government, whioh. had considerable payments to make in this country, shipped & of gold trm Canada to Hew York, all of which was purchased by the Federal Reserve Bank of Hew York, which correspondingly increased the reserve money in lew York City and mate it bo much easier for the H * York banks to meet the withdrawal of balances made by fr their interior correspondents. It was also arranged with the Treasury Department to make certain transfers of Government de posits to Hew York, thereby somewhat offsetting the movement to the interior* 2 h fourth expedient, a very effective one, it !e never became necessary to f u p o . Each of the Reserve Banks, well lzly in advanoo of the commencement of this movoaent, completed all the details of an arrangement by which any one of tho Reserve Banks might settle debit balances owing to any of tho others* if found necessary, by transferring loans and discounted bills instead of gold (that is its reserves) and under a simple plan by which these Mils and loans need not even be shipped to the bank which par-* -7*- obased than, but could be held in trust by an officer of the borrowing bank who had already been appointed agent of the lend ing bank for that purpose• She arrangements just described facilitatedthe movement of oredit from Hew York to the interior without disturbance in the soney market, but the return of this oredit to those parts of the country from whioh Liberty Loan payments have been trans ferred to Hew York is a gradual process, depending upon many factors, and brought about largely by the country’s commerco and trade* The funds subscribed for the purchase of Liberty hoods on the Pacific slope will ultimately be largely expended there by the Government in the construction of ships* the pur chase of cattle, grain and food stuff, canned produce and the other products of that section* On the Eastern slope of the Hookies the production of oil, sugar, grains, oattle and of the nines will likewise find their way into the hands of our Gov ernment, or of its allies, and the proceeds of subscriptions to the loai in that district will gradually return to that sec tion of the country. In the same way, the products of the cotton and woolen mills, shoe factories, munition plants, etc,, of Sew I&gland, whioh are largely purchased by the Government, will inevitably draw back to that seotion the funds that have been temporarily transferred to the Government and disbursed principally in fl w York* e -8 The twelve Reserve Baziks settle balances owing between themselves once every week end for that purpose they carry in the neighborhood of $500,000,000 of gold in Washington, the ownership of which changes from week to week, aooording to the amount owing by or to the respective banks• It will be seen that the machinery above described which operates by telegraph, is simply a scans of overcoming the disadvantages of distances and mail time and avoiding too heavy interior shipments of cash, or reserve money* Considering the unprecedented amounts of the transfers of evedit involved in these government transactions, it may be considered to be a fairly effective machine and one whioh oan be relied upon to accomplish the objects for which it has been created. Bat after all, those who buy the bonds of our Government are not so maoh interested in the details of this complicated ac counting, whioh becomes neoeosary every time the Government pjteoes a large loan, as they are in more specific statements of the pro bable amounts to bo borrowed and to what extent these borrowings may prove a financial harden and involve sacrifice and hardship* It is impossible for any one to state what may be the financial requirements of our Government in connection with the war* If the war ecratlnues, we mast simply expect that these requirements will be beyond all precedent and likely beyond those of oar allies in Europe. We mast not only finance our own armies and navy, but as the tremendous natural resources of this country mast produce ■ 8* a part Of tho supplies required to sustain the armies and home people of our allies, we mast prepare to nate great outlays In the way of loans to those governments that find it necessary to buy supplies in tils country, The problem is not so much to convert the wealth of the nation so that it may l e invested in i Government loans. Our wealth Is largely fixed property. We must arrive at a oorrect understanding of what incone the capital wealth of tho nation produces, how much of that income is absolute ly essential to the comfortable support of our people and, lastly, how much ih e.roess of that may bo saved a t turned over for'use ni by the Government; it is undoubtedly a vast sum. She capital, wealth and income of this nation exceeds that of any other nation in the world and probably that of any two nations in tho world, but we are an extravagant and wasteful people. V have lived in a land /e of such abundant prosperity, that we have reckoned less on the cost of things than we have on tho profits resulting fron the application of our energies to developing our resources. The time has now come, however, w;»n this great oapltal wealth of tho United States will not avail us to meet our obligations incurred in the war unless we see to it that it produces the greatest possible incora and that that income is not wasted. Various estimates have been made as to the amount of loans which it would be possible to place in this country. It is stated that as England has a wealth of less than $100,000,000,000 and can borrow #20,000,000,000 or more, therefore this country with a national wealth of from $175,000,000,000 to $225,000,000,000, should have no difficulty in borrowing #40,000,000,000. But suoh - 10- statements are rash, if they fail to take into consideration the habits and purposes of the people, The French peasants aim to save from 26$ to 50$ of their incomes. How many of us, rioh or poor, can say that we are influenced by any such purpose? In Trance economy is hardly less than a national icstlimMen, the tradition of saving is so deep-rooted in the minds of the people* She liberty Loan just placed brought forth a £Uio ex hibition of patriotism and self-sacrifioe by those who gavo freely of their time and services without condensation, in order to en sure its success; but no effort, however energetically applied or intelligently directed, oan he expected to enjoy continued suc cess, unless our people spend less than they earn, and very much less than they earn* and employ the difference in the purchase of government bonds*
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