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Cr.vcrnor
CONFIDENTIAL
August 22, 1935
FINANCIAL AMD MONETARY POLICIES OF THE ADMINISTRATION
In the early months of 1933 the forces of deflation, which had held
the country in their grip for nearly four years, had finally resulted in
an almost complete collapse of all economic activity: the banking system
had broken down, prices of commodities were ruinously low, industrial
activity had slowed down dangerously, the burden of debt was more than the
nation could bear. The nation's economic life was almost at a standstill.
It was at such a time that the present Administration came into power*
It was confronted by a choice of two ways of meeting the situation. It
could let nature take its course, let the process of deflation be completed,
let millions of people be ruined and run the risk of irreparable damage to
our national life. There were many who favored this course and thore are
many now who think that if we had pursued it we would have advanced further
toward recovery* But the cost in suffering would have been too great. Deflation had boen allowed to carr;^ the nation farther on the road to ruin than
it had ever been before* Even if we could have rebuilt,^ sounder economic
life on the ruins of the old, which is dcmbtful, there was no warrant for
sacrificing the life and happiness of millions who were certain to be victims
of the deflation for the benefit of those who might be fortunate enough to
escape unscathed*
In fact, there was no choice. The Administration could follow but one
course: to strain all its powers toward bringing about recovery, and in the
meantime to do all that was humanly possible to mitigate the distress of the
people * In broad outline, so far as financial and monetary policies were
2.
concerned, this meant to make every effort to raise prices, particularly
of farm products, and not to allow adherence to the gold fetish to stand
in the way of that accomplishment; to reduce the burden of private debt
through refinancing urban and rural mortgages at lower interest rates; to
take care of the distressed and the unemployed through relief and public
works; to finance outlays for this purpose, not by increasing the burden
of taxation, but by adding to the public debt to he repaid in prosperous
times; to rehabilitate the banking system; and to encourage business recovery through the maintenance of easy money conditions*
MONETARY POLICY
As a first move in reconstruction it was necessary to depart from
the gold standard, as most of the countries in the world had done* It
was not possible to restore the prices of agricultural commodities to a
reasonable level so long as they were linked through gold to depressed
prices in the world market* To raise prices throughout the world was not
within the Administration's power, nor was it its responsibility* To
raise them for our producers alone was possible only if the link to gold
were broken* There were other reasons for suspending gold payments:
other undertakings for recovery would have been impossible if the timid
holders of capital, whose chief concern is to protect their hoards, had
boon left free to convert them into gold and to send the gold abroad for
safekeeping* This avenue of sabotage and frustration of our efforts for
recovery had to bo closed*
The Administration boldly abandoned the gold standard*
What wore the effects on prices? JProm the stammer of 1929 to February
1933 prices of all commodities had declined by 33 per cent, "but, worse
than that, prices of farm products, the things the farmers had to sell, had
declined by 62 per cent, while prices of other commodities, including things
the farmers had to buy, had fallen by 28 per centf The farmer, on the average, had to dispose of close to twice as many of his products in order to
pay for what he heeded. This is graphically shown by the chart.
WHOLESALE PRICES
PERCENT
PER
Indexes of Bureau of Labor Statistics, 1826-100
120
120
110
110
A /"\
^
100
100
90
90
ir
/
OA
\
7U
\
\
60
I
10DITIES OTHER
FARM PRODUCT
AND FOODS
FARM PRODUCTS
V
DU .
| ^ V ^
M
J
70
60
f
J
Art
80
50
40
30
30
1929
1930
1931
1932
1933
1934
The gap between agricultural prices and other prices was enormous aaft
it made it impossible for farmers to btiy what they had to have for thenh*
selves and their families and to pay the charges on their debts* This gap
began to close in the spring of 1933* I* was closed, moreover, not by
bringing other prices down to the level of farm prices, but by having all
prices go -up, with farm prices inereasing faster than others, so that by
this year they are all at about the same level in relation to the base
year - 1926* The level may still not be satisfactory to everyone, but the
improvement is striking*
There were other factors beside our gold policy that helped bring
about this readjustment: there were the operations of the Agricult-ural
Adjustment Administration, there was the drought, there was the increased
demand for products caused by the economic revival* But the initial move
and an important sustaining factor throughout the period was the readjustment between the gold value of the dollar and of other currencies*
By the beginning of 193^ it became apparent that this currency adjustment had been accomplished, first, by letting the dollar seek its level,
later, by forcing it down somewhat by gold purchases at home and abroad* At
the end of January 193^ the Gold Reserve Act was passed and the dollar was
stabilized by proclamation at 59 per cent of its previous gold content*
Since that time gold has been permitted to move freely in and out of the
country in response to the needs of trade, but private hoarding of gold has
been prohibited. And in returning to the practical operation of the gold
standard, discretion has been retained for further changes in the gold content of the dollar if the national interest should demand it*
We have restored gold to power but its autocracy is now limited by a
constitution, so that another economic collapse will not be necessary if
the interests of the people should at any time demand another change*
As a part of the country's monetary policy, the Congress and the
Administration decided to raise the price of silver to a better relationship to gold and to aim at "broadening ~>&vx • monetary "base "by adding to
it in the coiarse of time stafficient silver to constitute at its monetary
value one-fourth of the total metallic reserve. Largely as a result of
this policy silver prices have advanced from 26 cents an ounce in the
early part of 1933 to 65 cents in Atjgust of this year*
LIGHTENING OF THE DEBT BUEDEN
In addition to maiding it easier for debtors to pay their debt charges
by raising the prices of their products, a policy of refinancing debt at
lower interest rates was vigorously pursued.
The Farm Credit Administration has refinanced over $1,600,000,000 of
farm debts at lower interest rates which reduced total interest charges on
these loans by about one-fourth. From a total of $1,600,000,000 in April
1933» total loans by the different agencies of the Farm Credit Administration have increased to $3,300,000,000 at the present time. Measures have
also been taken for deferring and postponing payments on principal in many
cases where this was necessary for the protection of both the farmers and
their creditors. In cases of particular distress and injustice it has
been found possible to write down the principal of the debt by a substantial amount, and in other cases to bring about an equitable settlement between debtors and creditors without foreclos-ures.
Similar relief has been extended to home owners in urban areas. The
Home Owners1 Loan Corporation has refinanced $2,700,000,006 of mortgages
on homes at a rate of 5 P©* cent, representing a reduction from previous
6.
rates of "between 1 and 3 V0T cent &&&
in
J&aay cases more* It also has
financed modernization and repairs of the mortgaged properties, surely
a constructive -undertaking. The so refinanced mortgages have represented
the borrowings of small homo owners, as is apparent from the fact that
the loans avorage only about $3»000 per home.
Permanent provision for sounder, more equitable, and cheaper financing
of homes has been made by tho establishment of the Federal Housing Administration. This organization provides machinery for insuring mortgages in
order to iarprove conditions in the mortgage market and arranges easy financing for the modernization of homes. These activities contribute to the revival of building activity which is so necessary for recovery.
In addition to the relief for debtors, which was accomplished by reducing debt and lowering interest charges, a great deal was done to protect
creditors where it was in the public interest and to strengthen the financial structure of many important enterprises whose continuous functioning
was essential to the countryfs economic life* lhat was done for the banks
is discussed in some detail later*
In addition, the Reconstruction Finance
Corporation, which had been organized in 1932, but whose activities were
greatly expanded by this Administration, made large loans to insurance companies, to mortgage-loan companies, to railroads, and to the Commodity
Credit Corporation*
FINANCING THE RECOVERY
In its efforts to relieve distress, to provide work for the unemployed,
and to reduce the burden of debt, the Administration was under the necessity
greatly to increase tho Government's expenditures* It chose to do this
during the depression chiefly by increasing the Government debt#
This
policy is sound, not only because it leaves the burden of payment for
times when it can be borne more easily out of an enlarged national income,
but also because by borrowing the Administration has put into operation
forces that have contributed to increased fraying power of the people, and
have provided an important impetus to revival in business which is now
apparent on all sides* That it has not weakened the credit of the Government is apparent from the unprecendentedly low rates of interest at which
Government securities are absorbed*
The total interest-bearing debt of the Government increased from
$20,600,000,000 in Febrtiary 1933 to $27,900,000,000 in July 1935* As
against this increase of $7,300»OOOtO°0 ia *ke interest-bearing debt,
however, there was an increase of $1,600,000,000 in the Treasuryfs
available cash balance, of $1,800,000,000 in gold held for the Exchange
Stabilization fund, and of about $2,000,000,000 in the Governments
interest in assets held by Government lending agencies« The net debt of
the Government, therefore, increased by only $2,000,000,000* The largest
single factor offsetting the increase in the gross debt has been the increment of $2,800,000,000 resulting from the revaluation of the dollar,
an increment a part of which has been used in debt reduction and the bulk
of which is available for that purpose whenever circumstances make it
desirable.
While the public debt has increased materially in the past two years,
the Government's actual carrying charges on the debt have increased very
little "because of the decline in interest rates. The average rate of interest on the Government debt declined from 3«^ P e *
cen
* ia February 1933
to 2.7 per cent in June 1935 and consequently interest payments increased
by o n l y / p e r cent although the debt itself increased by 31* P©r cent*
Some indication of how our situation compares with that of other courw
tries in this respect is shown by the fact that the present interest payments constitute about 1 1 / 2 per cent of our greatly reduced national income
in 193^ and less than 1 per cent of a normal income for this country, as
against an interest cost for the British public debt of 5 3-/2 per cent of the
normal national income of the United Kingdom*
The comparison remains favorable to the United States, even if based on
the debts of all governmental units, including local governments, which have
a larger volume of debt in this country than in England* When all of these
debts are taken into consideration, interest payments on these debts t
3 per centoiOTU^natioiial income, as compared with 7 periceflt
A considerable part of the increase in the public debt has been purchased by the banks of the country, which have had abundant funds resulting
from the easy credit policy of the Federal Reserve System and from gold
imports with a relatively small opportunity for using these funds in other
channels*
Financing Government e^asditures through bank debt, within limits,
is the most desirable way in a depression, because it is a way that does
not use up existing funds but instead creates new money available for expenditures by the people* When the banks buy United States Government
obligations they pay for them in effect by giving the Government credit
on their books; when the Government disburses these credits it passes the
funds on to the public* The large growth of deposits in the past two years
9.
has reflected to a large extent this process of United States Government
security purchases "by the "banks and the slib sequent expenditure of the
funds by the Government•
Deposits are now nearly as large as in 1929 and the fact that "business activity is still at a lower level is reflected in a smaller use of
their deposits "by depositors. With the revival of "business, which is
clearly under way, this so-called velocity of deposits will increase; the
deposits are there to use, and they will be used when it will "become
profitable to check against them*
The table following shows the increase in the past two years in Government security holdings of banks:
Bank Holdings &f Government Securities
(In millions of dollars)
December 31 > 19*32
June 29.
Federal Reserve banks
1,855
2,^33
Member banks
6.5*10
9,871
8,395
12,30*1
Total
It may be observed, incidentally, that the proportion of the banks 1
earning assets that is in the form of Government securities is about ko
per cent in this country and about the same in England.
BANKING- POLICY
On March kf 1933> practically all the banks in the country were
closed* ill leading exchanges ceased operations and business in general
was practically at a standstill•
10*
On March 6 the President issued a proclamation declaring a nation-wide
tank holiday to continue throtgh the four days ending Thursday, March 9*
An important purpose of this action was to attack the problem of bank
failures comprehensively "by reviewing at one time the condition of all
banks and by reopening only such banks as could meet all demands upon
them* This procedure was intended both to assure more equitable treatment as between the depositors who were making withdrawals and those who
were not, and to restore confidence in the banking situation as a whole*
At the same time the President called a special session of Congress
to enact such legislation as might be needed for the reopening of banks*
3?h? Emergency Banking Act
On March 9, 1933, Congress assembled, and on the same day an emergency banking law was passed and signed by the President. It provided
that when necessary for the conservation of the assets of a national
"bank the Comptroller of the Currency might place the bank in the hands
of a conservator, whose powers differ from those of a receiver in that
he is not under the same obligation to liquidate the assets as promptly
as possible, a process that had contributed to the continued decline in
the value of bank assets in general and had undermined other banks*
The act also authorized the issuance and sale of preferred stock by
national banks and the purchase of such stock by the Reconstruction
Finance Corporation*
Rehabilitation
General rehabilitation of the banking structure began with the
adoption and promulgation of the plan for reopening the banks after the
"banking holiday* A vital element in carrying this plan into effect was
XX.
the public confidence created "by the President's radio address on March 12
in which he gave the people the assurance that the banks reopened would be
able to meet every legitimate call and that the Government was determined
not to have "another epidemic of bank failures«u
In accord with the Governments announced policyf the Secretary of
the Treasury licensed during the first three days after the bankiag holiday ^,507 national banks and 571 State member banks, or about 75 per cent
of all member banks of the Federal Reserve Systenu By April 12, State
banking authorities had licensed approximately 7t*4OO nonmember banks, or
about 71 per cent of the total number of such banks*
Increase of deposits
After the banking holiday in March 19331 **t500 banks with deposits
of about $^,200,000,000 were reported as not licensed to conduct an un~
restricted business• The situation was dealt with rapidly• Many of the
unlicensed banks, after receiving new capital* were reopened, while others
were merged with active institutions* In some cases the best assets and a
proportionate amount of deposits were drawn into newly chartered institutions and the old banks were placed directly in liquidation*
As the accompanying table shows, deposits in unlicensed banks were
reduced to $1,000,000,000 by the end of 1933 and a year later had been
reduced to negligible proportions*
In the two and one-half years following the banking crisis deposits
in active commercial banks increased by $10,000,000,000 or more than 30
per cent* Including mutual savings banks whose deposits aggregate about
$10,000,000,000, all bank deposits amount at the present time to more
than $50,000,000,000, which compares with $55,000,000,000 in June 1929*
12 •
Nirober and Deposits of Licensed and
Unlicensed Banks. Exclusive of Mat'ual Savings Banks
Bate
Licensed tanks
Deposits
(000,000
Number
omitted)
Unlicensed tanks
Deposits
(000,000
Number
omitted)
April 12, 1933
12,S19
30,932
December 30, 1933
lk,$Vk
32,230
1.769
December 3L 193^
15*370
39»91O
158
June 29, 1935
15,too
1*1,200
61+
3.978
1,025
Loans to. closed banks
Another method to ease the situation was through advances by the Reconstruction Finance Corporation to depositors of closed banks* Shis
method did much to relieve distress and to reestablish more normal activity
of business* Depositors were given access to a part of their deposits which
previously had been completely tied up* Authorization of loans for advances
to depositors aggregated $1,000,000,000 between the end of March 1933 and
July 31, 1935.
Recapitallzat ion of banks
In order to rehabilitate the banking structure and to prepare banks
for participation in the insurance fund, which was established in 1933t the
Government determined in the course of the summer of 1933 to make liberal
use of the authority possessed by the Reconstruction Finance Corporation to
make investment in the capital of "banks*
13.
During the first few nonths following the banking crisis, this power
was utilized chiefly in connection with bank reorganization for the pur~
pose of extending essential banking services to communities that lacked
such services, hut during the summer of 1933
a
broader program was adopted*
The results of this program were becoming apparent in the last two months
of the year* Many of the strongest metropd&tan banks cooperated in the
program, enlarging their capitalization by taking Reconstruction Finance
Corporation funds* By the end of the year 1933 applications for additional
capital had been received from about 5,000 banks, more than one-third of
all active banks, and commitments with respect to capital investments aggregated $81*2.000,000.
At the end of last July, the Reconstruction Finance Corporation had
investments aggregating $900,000,000 in the capital structure of about
7,000 banks*
Deposit insurance
The plan for the insurance of deposits, included in the Banking Act
of 19331 approved June 16, introduced an important element into the
process of rehabilitating the "banking structure and a new feature of safety
for depositors, particularly-for small depositors.
When the insurance of deposits, ujador the Federal Deposit Insurance
Corporation, came into effect on January 1, 193^t 12,6l7 banks were members
of the fund. By tho act of June 16, 193^» the temporary plan was extended
to operate from July 1, 193 *+# through June 30, 1935 • *>ut provision was made
to insure each depositor during this period up to $5»000« JMatual savings
*—^
ih.
tanks which continued membership were given the option of covering their
deposits up to $2,500 or up to $5,000# \
It was reported that on October l t 193^, *& per cent of the total
deposit liability of insured banks and 98> per cent of the 51,2^5,000
depositors in these insured barks were fully protected under the provisions of the law*
It is estimated that at the end of last July there were about 15fS00
active banks in the country of which 1^,279 were participating in deposit
insurance* Of these, 6,^08 were members of the Federal Reserve System.
Bank suspensions
Reflecting the stability given the banking structure through the
Federal insurance of bank deposits and the recapitalization of "banks,
bank suspensions in recent months have been at lower levels than at any
time in the last fifteen years*
EASY MONSr FOLICr
Throughout the period from the spring of 1933 *&e Federal Reserve
System has continued to pursue a policy of monetary ease, which it had
begun actively in the spring of 1932, when emergency legislation had
made it possible to relax its eligibility requirements in exigent cases
and to use United States Government obligations as collateral for Federal
Reserve notes•
In March 1933 the volume of money technically known as in circulation
was at an unprecedented level owing to the collapse of confidence in banks
and the hoarding of currency• When the banks were reopened after the
Presidents radio speech, currency began to be redeposited in the banks in
15.
large volume and by the end of July the money withdrawn during the panic
had all been returned to the banks. It is "beginning with that date that
the credit policy of the Federal Beserve System during this Administration
can best be considered*
From July to November 1933 the Federal .Reserve banks purchased
$iJ00,000f000 of United States Government securities carrying the total to
over $2,^400,000,000• A part of the funds released in this way was added
to the excess reserves of member banks* Excess reserves moan that banks
have funds which thoy are not required by law to keep idle and which are,
therefore, available for the extension of credit* By the autumn of 1933
the member banks had $200,000,000 of such idle reserves* Since that time
they have increased still further: they are now in excess of $2,500,000,000, notwithstanding the fact that the banks1 deposits, and consequently
the reserves that they are required by law to keep, also increased considerably .
This increase in reserves, over and above the security purchases by
the Federal Sesorve banks, has represented largely tho offects of tho
inflow of gold from abroad and, to a minor extent, of the issuance of
silver certificates by tho Treasury* Thoro has been an inflow of gold
from abroad, which has amounted to $1,900,000,000 sinco this Administration camo into offico, reflecting to a largo extent tho return flow of
American funds from abroad and tho flight of foreign funds to this
country* This movement of funds shows clearly the confidence that both
Americans and foreigners have in the dollar, that is, in tho monetary
and financial conditions ifi this country*
16.
In view of the rapid growth of reserves throtigh gold imports, the
Federal Reserve System after the autttmn of 1933 Ai* not pursue further
its policy of open-market p-urchases, but allowed the gold inflow to have
its full effect on bank reserves. It also contributed to monetary ease
by reducing the discount rates to 1 l/2 per cent in New York and not more
than 2 per cent at aay other Reserve bank, and by reducing the maximum
rate to be paid on time deposits to 2 l/2 per cent.
As a consequence, money rates everywhere wont down. For example,
open-market rates on acceptances declined to 1/8 per cent; yields on
high-grade corporate bonds declined from k 3/U to 3 3/U per cent and
yields on Treasury bonds from 3 « ^ *o 2.60 per cent. The effects of
these low rates on Treasury financing have already been mentioned*
Recently they have led to a large volume of refunding by corporations,
which is another step in the reduction of the burden of debtf
Another activity of the Reserve banks to help in recovery has been
the granting of some $100,000,000 of credits for working capital tp industrial concerns, an activity that was authorized by a special act of
Congress in
MEW BAMKING LEGISLATION
Experience has demonstrated that our banking administration was not
woll adapted to the needs of the country under nodern conditions.
In order to remedy this condition the Administration proposed the
Banking Bill of 1935 which after proloaged consideration in the House
and in the Senate becane law on August mmmm%
17*
This law marks a great advance in our monetary administration because
it recognizes that monetary policies are a national, and not a regional or
private concern, and consequently concentrates responsibility in these
matters on the Board of Governors of the Federal Reserve System in Washington,
The new law also removes some of the restrictions which had limited
the kind of paper on which the Reserve banks could make advances to mombor
"banks. The removal of those restrictions will not only enable tho Reserve
banks to be of greator service to thoir monbor banks in timos of depression,
but it is hoped that it will givo the member banks greater courage in neet~
ing the needs of their connunities for long-tine as woll as short~tino 6rodit,
Authority for the nation's banks to nake loans on real estate has also been
liberalized —• and it is hoped that this will encourage the banks to contribute nore to the revival of building activityt which is essential to recovery*
With the adoption of the Banking Act of 1935» together with the authority
to restrain speculation under tho Bankiag Act of 19331 and the control of
security markets and nargin requirements tinder the Securities Acts of 1933
and 193^ ~~ we are in a better position than wo evor have boon to prevent
disastrous expansion and contraction of credit and to moderate the boons
and depressions in the countryfs business *
ASB uo*icw.t y o u c m o» rra
1.
?•
3.
*•
J«
Jtederotl l i a t f l t iMMFi
Federal b« ••!"?• Board
?«d#r&l Xfepoflt Ts$urr*nc® Ctorcoration
£«er«tarjr of th« ?r«fttury
Se«r«tary of th# Treasury
1933
193**
I93U
193?-3*5 ( f i s c a l y«er)
I933-3** ( f i s c a l p i t ? )
7.
S.
$•
10,
11.
Fari-A Credit l i i U l r t f f i i l t a
F»m Cr#dll Admifiiitrr 5 tioji
F«d«r^l ftea lo&a Bask ^oerd
?fcd«ral .Home Io«a Psa^' Board
Fuderai Housiag ^d»inl«trfttl-.:-n
1933
193^
1933
lf)l
^
I?.
I},
F«dai«l .^s«rv« Bulletin
littoral "M.«t*nr» B^lletla
*hm« 193=)
Ht0M% l#JJ
on BaaJcin^ Bill of 1935 ^J 'k>Y®rnnt- of Federal -';e*erv« Board
of :?fe^t«fBt?nfep b#for# Hou*e of
tatemsat before Uaittd 1
Addr«t»ie* and awHt&£es of the >"reffid*nt dealing with ftMHMlal
N
gm to Cong
3« ;;;sdio address
to Q0&er*t« and xaoutive Order
I® Coagrefs
6.
T.
9«
10*
wadio address
^•«ta^e to Ti»&k®rs'
ia*:a to Cot
l^«
y#«fj%^? t o
1?5#
^tsamg© to
9i 1933
10, IfJJ
13, 1933
April 3/1933"
April IJi 1913
Mttf 7,, 1933
July 1rf 1 9 3 v
.Jttljr J?**. 1933
Jentem^er S. IJJ
October ??\ 1931
Addrtttos and ac****** of th« Pr«fld»at d«aling vitb riaanclnl topic*
(continue)
ibi
17.
ttes§*gt to
^ftdio address
befort
30v 1
t 193!*
J«nw»ry U, 1955
April P8 t 1935
A«toelotion
?0.
.
to Coagrvtt
to
to
AAdrtit* to Stftt* Dlrcotori o f Federal
Publics
June
9.
t
?6.
imdio
X93U
13.
Addrets by Comptroller oi thu O
if.
i&eorpts frow «ddr»«t bi?ioro
Aitoolfttlon
Iiaaic»r»»
. If35
@FedFRASER