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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FOR THE PRESS SPEECH OF CHESTER C. DAVIS, . MEMBER, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM, at MONTANA BANKERS' ASSOCIATION, GLACIER NATIONAL PARK, MONTANA Friday afternoon, June 25, 1937. For release in morning newspapers of Saturday, June 26, 1937. i 2-35 PUBLIC OPINION AND THE CREDIT SYSTEM While I do not recall ever attending a meeting of the Montana Bankers' Association during the fifteen years I lived in your State, nevertheless I know so many of you that this feels like a return to home pastures to me. As is always the case in a home-coming, there ls much to talk about, - so much that a choice isn't easy. SUr o, my subject is laid out for me. To be But it would be unthinkable to toeet with this audience and .ignore the critical condition in which Armors over a considerable part of the state find themselves. Montana is a state of marvelous diversity. No general statement ^hat i s true of one section will be true of others. Qs One of its great- t assets is the courage and bull-dog tenacity of its sturdy citizenry. Tile y have been tried to the limits of human endurance by conditions °ver which, as individuals, they have .little control. A man who has made a close study of weather conditions in the n °nhern Great Plains told me the other day that this continent gives precedent under the White Man's civilization for the kind of a ^Utig which Montana ha3 suffered for the last fifteen years. Point in reviewing the record. There is Everyone in the line of responsi- bility, from Montana to Washington, is studying what can be done about n. There is no quick magic to make these problems disappear. Read- justments in types of farming are going on, and vdll have to go much They will take time. Meanwhile, the public responsibility JUN no 1SU7 " SSSBtB —O £or economic casualties cannot bo evaded. r? rj r/j—QQ It can be assumed that drouth-stricken families will bo assisted through work relief and trough grants. or Of course I am in no position to speak with authority from inside information, but I see no reason to suppose that the v ^ork relief program will not be directed toward permanent and helpful Projects in the areas affected -- small flood irrigation districts, and farm-to-market roads. wh The prospect will clear up speedily on the pending relief bill passes. Naturally, we all want to see Montana's agriculture founded on Practices that will afford reasonable stability and safety even when leather conditions are bad. The institutions of the State of Montana ar ° a ly more completely than any other state, the information which is congratulated because of their foresight in preparing, prob- Cs ^ential to development of a sound land-use program. There are stretches of Montana, plowed up within our times, which have to be assisted to return to livestock range - and that takes tin<e * In the non-irrigated general farming districts, some signifipractices have been developed which, when generally adopted, will Rl8an a of great deal to this state. I have in mind particularly the use contour dykes which hold all the rainfall on farm land so that it V>H "l -I not run off at all. Then, strip farming is being developed to Prevent soil blowing. There are definite ways in which federal and state governments cooperate to secure district-wj.de adoption of these practices. *m told that progress along this line in the Southern Dust Bowl has I Z-33 keen more rapid and has yielded better results than in the area of which Montana is a part. The experience of recent years has taught many lessons. a After 1> it isn't safe to judge a region from the top of the peak, or from tVie v bottom of the trough. No one knows what kind of weather is ahead. It i Vs best to do everything possible to get along under the weather, no ^tter what it may be. I have faith in Montana, and in the strength of her people. The V r -hit sections of the Northwest are like the man in the bottom of the > with no place to go but up - but they won't go up except through Joint effort of nation, state, and individual. ground is regained, And no matter how much the scars of late years will be with us for a long time. 1 turn somewhat reluctantly from the vital problems that must be ace <2 in fitting Montana's agriculture to meet its hazards, to the domain of. ui money and credit, which concerns you directly and to which the ti+io announced for my talk commits me. It is still much easier , to think in the old terms than to deal with the words and ideas for of ^ new to which I was transferred just one year ago today. ftien x left the Agricultural Adjustment, Administration, I felt that * wag Sa iling from a storm-tossed sea into a comparatively smooth and Protects v «« harbor. * am i^Q-i. c0lQni so sure. Sood. Pei Now that I have had a chance to survey the new scene, You want to make credit and money safely serve the So do we. But it isn't as easy as it sounds. My short ience has convinced me that the greatest difficulties have their -4roots M S the general lack of sound information in the public mind. There are certain fundamentals in money and credit policy which must e understood before public opinion can exert its influence .in the di- c t i o n of orderly and uninterrupted progress. In the last analysis Public opinion controls the policies of a democracy. Occasionally a friend asks me, "Well, what are you doing now?" 1 tell him I am connected with the Federal Reserve System. Usually he re sponda with a blank look, and that part of the conversation ends lamely Wlth his asking, "Well, how do you like being a banker?" It isn't strange that the Federal Reserve System is a thing of mystSry ' live in a complex world. We haven't much time to spend in s tudy of a subject not plainly seen as a part of our daily life and inerest - while a thing remains a mystery, it is easy for it to be- ° m e a n object of some suspicion - especially when a persuasive voice tell q ' us we ought to be suspicious. The fact that only 66 out of Montana's 117 operating banks are emb °rs of the Federal Reserve System tempts me to open up and talk you about its functions. 01 That subject, however, will have to wait another opportunity, and a better qualified speaker. If I spoke ° n it> T am afraid the main point I want to drive home here today would be i0c,x s tem t. But before I state that main point, there is one announcement Privileged to make, which concerns primarily a Federal Reserve Sysmatter. The Board of Directors of the Federal Reserve Bank of Minneapolis, -5- £-33 with the approval of the Board of Governors at Washington, has taken Ste P s looking toward the construction of a new building in Helena which adequately, and I hope permanently, house the activities of the Helena Branch Bank which serves this state. The central thought I want to engrave on your minds is this. Iaws Qnd The rules under which the vital functions of money, credit and bank- ln g are carried on are written by the Congress and the several legislatn s » In the long run, Congresses are responsive to public opinion. e t how can public opinion exert constructive force in a field in which the rc is so little general understanding rand thought? And what are the of the United States - the bankers of Montana - doing about it? ago a distinguished member of your profession, in an addfggg°One .so year your annual convention, urged bankers to inform their depositors "in re gard to money, credit, and the elements of sound public finance ^ n which rests to so great a degree the banking structure." I am in enti 6 agreement with that advice, even though J. totally disagree with inclusions which the distinguished speaker wished you to carry to y Ur ° ' depositors. ma y be wrong, but it has seemed to me that many if not most great Ss of bankers in this country are addressed by men whose chief COnCCm seems to be to get us back to the status quo ante. The depression from which we which T , are emerging paints the condition want you to see as the background for my discussion. a Surely the n incurable optimist who believes our problems are settled, or -6Can Z--35 be settled, without continued action by people through their govern- ®ent, perhaps along unprecedented lines. Surely the man cannot read les-f s °ns of history who believes all will be well if we of the United States °ari o n l y ^ n the clock back to the feverish late »twenties. We live in an unfinished house, to which we are constantly adding, ° r from i shed • pQ.gg which we are taking away. The chances are it will never be finT -Ln a democracy, the people themselves select the architects and ,, their changing plans. My point is that the people of a democracy must hm ^ve complete light while the building to meet changing conditions §0eg /w otherwise, the plans will be those demanded by articulate and f luential men who, even though sincere, may have been hopelessly misled d del uded upon vital issues. is no indictment of their sincerity if they reflect the views Of ^ -5 economic group and their associates, or if they merely repeat clo gmas and Condi eyries theories that have been dinned into their ears in former days tions were vastly different from those of today. As Mr. » "the British economist, has said, "Practical men who believe es to be quite exempt from any intellectual influence are usually slaves of SO me defunct economist." Particularly, men are likely to believe that all is best in this best of worlds and that the sum total of the self-interest of individuals Compo , S a society must work for the greatest good of the greatest number. What We e ^ NUst all learn firmly is that the so-called doctrine of laissez- » which may work for a rough measure of justice and public welfare tg society with an unexplored frontier, does not work advantageously your -7a highly organized society. Z--35 There all the frontiers are internal frontiers, and the good of the greatest number can be attained only by e surrender of that portion of individualism that is inconsistent with Btead y Progress of the group. We are not very far removed from the day when disease and pestilence regarded as acts of God, which only the godless would seek to avert eliminate. Many of us appear to be in the same attitude of mind yet y regarding attempts to control and minimise the harmful effects of the ^siness cycle. Speaking historically, I believe that has nearly always been the "kitude of governments. Quite recently Mr. Keynes, whom I quoted a foment a the go, introduced a series of articles in THE TIMES of London on subject of "How to Avoid Another Slump," by saying: "This means that all of us - politicians, bankers, industrialists and economists - are faced with a scientific problem which we have never tried to solve before. I emphasize that point. Not only have we never solved it; we have never tried to. Not once. The booms then "the slumps of the past have neither been courted nor contrived against." Today w e ape asking ourselves* Is it not possible that we can so shape ou u r xuture course and so direct our policy that the government will s erve ±n eflect to counterbalance the cycles which private enterprise, 0 itself, has inevitably generated in the past and undoubtedly will ™ generate with increasing intensity in the future unless we -8- Z--35 devise better methods of managing our broad economic problems? n Is it °t necessary to have the government prepared to check speculative in- flation and to intervene as an offset if deflation threatens in the future? When business was local and commerce small in volume, the cycles spent themselves before too much momentum gathered on the swing toward the top or to the bottom. Now that agriculture, finance, commerce, and industry are closely interwoven and in delicate balance, these cycles assume different proportions. There comes to my mind Victor Hugo's vivid story of the battle between men and the cannon that had broken loose in the ship hold during a storm at sea. With each lurch and sway the cannon gathered more de- °tructive momentum until it threatened to batter the ship to pieces. Men °aptured and chained it. The main economic problem of our generation is to devise a system ^herein the flow of money will be steady and uninterrupted, increasing °nly in proportion to our ability to produce more goods. I have re- ma rked elsewhere that farmers, perhaps more than any other class, suf- * e r from the alternation of floods and drouths in the money flow - in th e u Ps and downs of the business cycle. But what cycles have done to r} depositors and stockholders of banks is appalling. From 1921 to bank suspensions tied up $1,565,000,000 of depositors' money, froir i 1929, through the bank holiday, tied up an additional $3,600,000,000, w bile altogether more than 11,000 banks went to the wall. Vast swings ° V e r which individual bankers had little or no control created this havoc. -9- Z--35 Banks went under which had administered their affairs wisely according to all existing standards, whose responsible leaders thought, at least, b ^ ©en making good loans and avoiding bad ones. When these swings arc under way the individual banker is about as Potent to influence or direct them as a toad under the farmer's harrow. •r-minded men will agree that, while many bank failures were caused by poor m management, the banker is not responsible in every case for the fail • 111,6 of his bank. To quote from an American economist who works for ederal Reserve System, "In an economy like ours, where nine-tenths money i s in the form of bank deposits,***a drop in the national of ^Cow 6 j to less than one-half of its normal level must inevitably result ijj 4-v e ^ destruction of a considerable part of the value of bank assets, since the bank's liabilities are not thereby reduced, the total value sir the assets would no longer equal the total of their deposit liabilities. With f u l 1 recognition of the fact that a part of our banking trouble oni mismanagement and speculation, it is nevertheless certain that m ajor part of the catastrophe, particularly after 1929, ,was not due _ to management alone and in many banks was not due to mismanagement at hut represented the effect on the banks of a collapse in the value National wealth and income." A*,a jagain, further on, "Management, no matter how prudent, could ^t ^ Sav e a bank in a community whose income had been destroyed. And that particularly true of a bank which has served the needs of its comi t y ad aequately when the skies were clear. that The answer is, therefore, som e of the banks that have survived are not banks at all, but pawn -10s hops or open market investment houses. Z--35 But there are others which have Se rved their communities conscientiously and generously and have been Managed wisely, and have survived. We congratulate them, but it is Plobable that their survival has been due in part to the element of n • There never has been a battle in which all the participants killed, and those who have survived have not always nor necessarily een the bravest or the strongest. They may not only "be the ones who & n awa y but they may also be the ones whom the enemy fire happened to niiss.'i all know what happened after 1929. It was not due either to wickedness or greed or blindness of the bankers as a class, but they, k® all the rest of us, were overtaken by supposedly natural forces which ^scriminately destroyed the prudent along with the imprudent, the good S with the bad bankers. Of course, the banker always vras and, I pre- > Always will be an ideal scapegoat. He is supposed to know something about 'noney, and in about every depression that I ever heard of the first conviction that rises out of the disaster is that it is the money Chanism that has gone wrong. If we are going to convict anybody for past money and banking Sl Hasheo -llet's line up the rest of the defendants along with the bankers. Sec ond thought, that's too much of a job. I imagine most everyone to toove under his own power would have his place in the panel. ratp At 4* if we are going to get anywhere, we will have to admit for na- tional state governments share of guilt. To homesteader hold the banking syst alone responsible wouldtheir be like saying that the and -11- Z--35 the settler were alone guilty of the radical transformation which changed the permanent grass ranges in vast areas to hazardous annual crops, with° u t adequate knowledge of the risks ahead of the new undertakings. Surely ost of us were equally guilty. The national government with its home- stead. laws; the states and railroads with their high-pressure land settlement drives; the chambers of commerce down to the individual - they a11 took a hand. So it has been in banking. in The fever to get new banks chartered this or that system developed a competition in laxity which couldn1t SCa Pe disaster. Even today, there is such diffusion of public responsuch lack of unity, such diversity of regulation in the Amer- icari banking system that it falls far short of the workable ideal. These Public shortcomings for which bankers as individuals and in the mass ft n °t alone responsible. ^ Yet in the situation there is enough of dan- the viewpoint of private bank ownership and operation to chal- en 6e the bankers to insist on and lead in progressive and intelligent if another crisis finds the American banking system disorganized a ineffective, the American citizenry, inherently conservative though undoubtedly is, may nevertheless seize a short cut. Certainly public at such a time will have scant patience with past timidity and of bankers, and with petty bickerings for power among official Experience of the past few years has shown that great coordinated ^ c i G S ) when searches for the causes of disunity and incompetence. ^tiofinl aQ -L effort is possible if it is backed by mass thinking. The wor Of ,na t i s accomplished depends, as do all enduring efforts of a -12- Z--35 democracy, upon intelligent understanding among the masses of the people. * had some experience, during two and one-half years in the Agricultural Adjustment Administration, with such a national effort. I know that its f °rce a n d vitality, its appeal to Congress as the law-making body, if wOU please, sprang from dissemination of economic facts upon which men as ed their thinking. Recent observations have made me wish that some c °mparable educational force existed in the field of banking, money and is clear to me that we are in a period of far-reaching change -and v °iution in our money and credit policies, and in the agencies that are °ncerned with them. What is done will affect vitally every man, woman Chi 1 a XJ a - °f the nation. ^ Our experiences of the early !twonties, and the early 'thirties, are still fresh in our minds. Yet it has Gune d to me that in this field there is almost a total lack of the genial w •wiiormation which is essential to clear and unprejudiced thinking, ofor out' thinking about money goes back day currency one form another, usually with fixed valueto inthe gold orwhen silver, conGci the medium of exchange. Today about 95 percent of our business °ettled by bank checks. The banker who extends credit creates money n entry on his books or on the books of another bank - money that can ^ U d a ur nouse, pay for making a crop, or .run a business or a railroad. It wa ges of labor, or buys raw material for a factor}'-, similarly, when banks restrict credit or when banks fail, they cause ^ ^traction of our bank currency, of our money, just as truly as though government collected bank notes and destroyed them. This is why credit -IS- Z-53 L °ntrol must be exercised, by a public body representing the interests of the whole nation. The power to create and destroy money is a gigantic power and a heavy responsibility. No thread of common policy runs through the banks th« + possess this power. Nearly two-thirds of them in number are not Ambers of the Federal Reserve System, although 86 percent of the volUlTle o f checking accounts is carried by System banks. The more than >000 banks are chartered, supervised or examined by at least 51 sepGra te and distinct authorities. There are many questions about which people ought to be thinking. Wh a t x s fche function of gold in the future monetary system? Shall we Pin our faith to gold or some other metal or combination of metals automatic regulator of our money system? Or is the world gQinp. + r\ as a Sort 5 bo move still farther in the direction of what is called managed - that is, managed by human agencies rather than by theoretically be takatic gold or some other disembodied mechanism? What steps shall 014 ap to bring unity into the banking system, and with what agency sliall public responsibility be placed? to Soncies 1 e What can be done credit as available to the farmer and the small business man, us reasonable terms, as to the large urban borrowers? Have we adequate steps to avoid future waves of bank failures and finan^ "^uidation? What is the inter-relation ship of our banks and other invQga r is with the public debt? Should the government abandon the almost ^versnl ,ja J- practice of issuing interest-bearing bonds when it borrows on » and turn to the issuance of non-interest bearing notes in their -14- Z--35 1 could add to these questions indefinitely and so could any of y ^u t • I would not attempt to answer them to your satisfaction even if ere were no limits to my time and your patience. I assure you that the questions are not unimportant or remote. Every one of them is in tliQ f>r foreground or background of public consideration today. * say there's no time for answers here. e m Perhaps a little comment order, evcin at the risk of drawing out this afternoon's pro- unduly, i don't mind your looking at your watches as this talk G g S 011 > but as Sir Jooiah Stamp once told an audience, I would feel hurt if x started holding them to your ears to see if they had stopped o• 0?le very common belief which to me seems a delusion is that transfUsj. °n v ast quantities of new cm-rency into the bloodstream of this tfould quicken the patient's pulse and speedily make him well. The us > though perhaps superficial comment is that, in March 1933, at e Slackest hour of the depression, the quantity of money :in circulation 0 largest in our country's history - over seven and a half billions. w > compared with four and a half billion average for the four years +0 f 1929 inclusive. No matter how much currency is issued, only so 1+ 11 ---- as is convenient for purposes of business will ordinarily stay ^dilation. The rest moves into banks and finds its way into banking j,9fi erves. It is what happens from that point on that counts. Exc GsSiv. y banking reserves that are used for undue and dangerous expansion C;c, edif + - ^ I or unwise inflation - may indeed quicken the patient's pulse m make him feel well for a time, but surely none of us, for the sake the first effects, wants to risk what must inevitably follow when the Psndulum has swung the other way. One other comment. We hear a lot of talk about the nature of the Reserve System. SG3?Ve Here's the way it looks to me: The Federal Re- System was created as a national instrument in which certain powers *rif,luence and, to a degree, control credit conditions and policies aVe ^ e e n vested. As such a national instrument, it seems reasonable assume that the general public interest must be paramount in determinaof System policy even if at times it may seem to run counter to r ivate banking interest. One thing seems clear: - the policies of such National instrument should never be dominated either by private or by Pai? Usan interests. ¥ou may not like all the things that are being said these days credit and money and banking, but I hope you will agree with me that i+ 4 1 ls a healthy thing to have discussion going on. Perhaps much that it ir, u Sa id strikes you as biased or incorrect. Let it be a challenge to pr ovoke you, both to think things through yourself, and to help moke a v ^•ovoke y< ^ a b l e ln xi-u-u-, your community the basic facts which alone will aid public °Ptni( to choose that which is true, from that which is not true. In ri conclusion, let me remind you that history has not yet answered the gi ocmy prophecy uttered by Lord Macaulay nearly a century ago who L ^Ust ' nave long been convinced that institutions purely democratic So °ner or later, destroy liberty, or civilization, or both." Nor, other hand, the conclusions of a present-day Englishman, John -16- 2-33 s trachey, that the capitalistic system carries within itself the seeds of its own destruction. Certainly I do not come before you today with the answers. Nor do T want to echo the customary crop of commencement address in which Members of the older and aging generation pretend to inspire the youth to rl do better the tasks we have done all too poorly. We live in a swiftly changing world. Governments will play an in- re asingly important role in assisting their citizens to make adjust- ^ts. This will be true of money and credit, as well as of other c °nomic and social factors. In determining what government can do, ^ e all~inportant thing is the attitude of those to whom you delegate its P 0w ers. If they sit tight and inflexible, eyes glued to the past, whiie +u ^ne vast mechanism of this country ensnarls, another and more ser-i ious e *plosion may occur. If they combine intelligent understanding with existing means as changing conditions or experience indicate; Se - the willingness to act; if they use, change, discard, or supPi then government may assist its people to direct the nation's boundless Grnen t a ei> gies along the road of orderly progress.
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