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for publication in afternoon papers of Saturday,December 28th,lrl8o



An address by
A,C. Miller .• Merrcber; Federal Reserve Board
delivered at Richmond,
Saturday morning 1 Decerr.ber 28 1 1918,
before the
Arrcerican Economic Association •


T ,·:


- 1 DU.ring the past fou.r yec:.:r·s

Tested by price




levels jn Jeadi;.,:p;






Never in its hist:lry has gold




ctu.-.;.nge o:P



i:lorewer, this t:;reat declil..e in its va:;,Q"l r,_.-

inCl. shCJrt period of time.
n:Jt been oca..ssi Jnud by



it has lost atJ·J -: :.

one-hulf .Jf its purchasinP,' power s h:ce tho twginning Jf the .t.u:.·.:>p?::;r



increase in its prJdllCt ion.

',Vhile t;1e va.l.w Jf.

g;ld has bJen falling, it;:, pr.JductiJn hi..\.6 b"er. declinir.g. (The decline fn·
the yea.r 1917 being an wiDunt equal tJ 7 per cent

of the g;ld.

)lltpu.t Yf

1916, the estimated prJdllntiJn for 1918 being 9 pel" ccmt below th...t Jf


CoDtra.ry t


proviou.s experience it is tte fall ii: its value tha+

has occasioned the fall in its prJduction..

Gold mining ha.a become u:1-purch ::.t.S 5. DP:,. except for the best situ.ated mines, because )f the dimini8h.)c·,:
power Jf tho dollar.
SJ seriJus a decline in the valle -:>f tho sta."ld<.U"d is natllrally cal·

cttla.ted to awW:cen C)ncern, Unless the decline is to be trea·i;ed as a tra.nsi-

tJ%7 phon')menon, there vnu.ld be re.JSonable grJllnd for dissatisfaction with
the continued uao of the g.Jld stund<.U"d.

Such dissatisfacti:m was voiced
even bef .Jrc 1914, booaus.e Jf the instability tho.t was exhibited byjg)ld

standard. It i.s 11-)t surprising, therefore, that h1 vio>v of the
deolino of the past f,Jur years. qllestUn shollld. have been r.J.ised ..J.S to the
desirability of the gold




at a:ny rate, unless soma mothod



viding compensation .Jgainst its fluctuo.tions sh)llld be mado a part Jf it.
Lo·.Jked a.t fr0m this p::>int Jf view the im.":ledi<:J.te

.nroblem presont-.:d


by th(} r;Jld


tho sta.bility of that

is th.:..t ot rest-)rirlg its lost v.:;.luo <O>.nd instlrilJg



is not tho only d.nxiety

tho.t has been occasio::-tod by tho<1r bch.:J.TiJr of g:Jld -


Fear has often times been expressed that the vast financial·and credit strucw
ture that has been built up on the gold basis during the last four years is
insecure because of an inadequate gold reserve, a condition which it is said
threatens to becorr.e worse with diminishing production of gold. Tne gold
standard, it is said, has been put in jeopardy beuause of the insufficient
supply of gold and heroic


must, it is said, therefore, be taken to

stimulate th3 production of gold. The particular rreasures suggested for this
purpose are the exerr,ption of gold-mining from taxation, the granting of
bounties ·to gold producers, and as a rr;uch more radical. proceeding, the diminlltion of the gold content of coins.

Gold has fallen in its purchasing pzyner, because it has shared the fate
of paper from rising prices. Prices at wholesale are up about 100
or more

per cent

in leading markets in countries nhere the gold standard still obtains.

Why are prices up, and are they destined


questions that ffiUst ba answered in undertaking to

stay up? These are obviously

the prospect of

gold. Prices began to go up in the United States about the end of 1915J partly
in consequence of heavy demands for goods for use in the belligerent
countries of Europe, and partly in consequence of the easy credit conditions


prevailed in the United States 1 and the growing abundance of money

iollo·Ning the steady inflow of gold from Europe in payment of purchases,-crade


movetrJent continued through the year 1916 1 and into the year 1917.

'Prices steadily continued to rhe~ They have gone on rising since Ne entered
the >111ar 1 being now about 100 por cent above the June 1914 level for wholesale,



73 per cent for retail prices •

Not until much patient 'ind exhaustive investigation has been


can it

be determined, with anything like satisfactory accuracy 1 to what extent the
great rise of prices, which has taken place in the last four years 1 is to
be explained by relative shortage of leading materials and corrrnodities, and
to what extent it is due to the artificial abundance of money. No doubt., both
factors have been at work, and the high prices whic!l have prevailed are partly
to be regarded as indicating "scarcity values" and partly as indicating
inflated prices • Tile scarcity prices will 1 no doubt 1 correct themselves and
disappear as industry returns to a


condition. Inflated prices, how-

ever; present a more difficult position. Their corrective rrust be sought
mainly in a diminution in the volume of purchasing power# and rr.ust come in
the united States trainly in the liquidation of war business and war borrowings.
The expansion of circulating bank-deposit credit in the United States
during the past fcur years may be conservatively estirrated at from 40-50
per cent. The amount of securities issued by the Government in the process
of negotiating ..thJ great war loans - in the form of bonds and certificates
of indebtedness - nhich there is good reason for believing have not yet been
absorbed by permanent investrrent, may be estirrated at between five to six
billions of dollars.
A considerable part of our expanded credit and currency structure is
therefore undoubtadly to be accounted for by the large volume of war set

curities being carried by or in the banks. It is the considerable addition
to the volume of our currency and circulating bank credit thus occasioned that


explains much of the rise ofprices that we have been experiencing.
In the United States prices are gold prices 1 all of our paper currency
being interchangeable with gold, and therefore, at a parity with gold. In
part 1 gold prices have risen because of the


of gold, our stock

having been increased by rrore th:m one thousand millions of dollars since 1914 ..



But it is not the direct, but the indirect effect of this gold that has sus~

tained the upward flight of prices~ It is the great volurre of circulating credit
and currency based upon it that has put or kept prices up.

Are prices to be kept up; can they be kept up, and will tl.ey be kept up ?
The fate of gold and the gold standard will depend rrainly upon the answers
given to these questions. More than this, the character of the whole post-war


period, and the nature and length of the l'eadjustrnents which it is admitted tn1st
be worked out, will depend upon these answers.
Gold will not recover its lost purchasing power until prices decline.
Financial, credit and business relationships, which have been thrown into
confusion by reason of the rist in prices will not be straightened out until
the price situation is rectified. But the price situation will not be rectified


until the expansion of our currency and credit attributabla .. to the buying of
war sJcurities on creii t has been JlirdnatJdJ .:;.nd the volurre of credit and
curroncy has onco rrore bean brought back to a normal economic volume - that
is to say, a volurre corresponding to


needs of industry and trade for the

production and exchange of goods at norrral values.





The only reason for doubting whether the existing gold stock of the

Western countries is sufficient to hold out the expectation that

the rronetary practices associated with ·an effective gold standard can soon
be resumed, is the doubt as to what the attitude of th3 leading countries
of the con:rr.ercial world will be toward a continuance of the present inflated
price structure. The whole corrrrercial world is on an inflated basis. THe
situation is worse in some countries than in others; in sorre the inflation
is a gold inflation, in others, it is a paper inflation, but in all a situatim
has been produced, either by reason of the abundance of gold or tha abundance


and credit currency, that calls for nuch the same sort of general

treatment, unless the present inflated level of prices is to be continued
by acquiesence of the leading countries. It is doubtful whether any one
country could move very far or very rapidly


affecting others in ways

that would probably be regarded as detrirnental and inimical. The problem is 1
therefore, an international or ·norld problem and the sarr:e n:a.y, be said of
the problem of gold. Gold will not recover its lost value until the present
inflated prices disappear. Action by any one country, however, in proceeding
to rectify its price situation would probably do much to focus international
attention on the problem and to suggest the advisability of taking similar
action. Indead, the recent reports of the British Comroittee on





Foreign Exchanges After the War and of the Committee on Finaneial Facilities
of Trade After the War show that the matter is having the studied attention
of the most competent authorities in Great Britain and that there is
unanimity in the opinion that the restoration



an effective gold standard



is one of the best forres of protection


a further increase of in-

flation. And., it may be added, it is one of the best remedies for the inflation
which already exists.
If policies and views in our o·v'V!l and other leading comneccial countries

run in favor of reducing price levels by a process of liquidation and
contraction., there is nothing at all to fear frorr. the present


production of gold. The restoration of the gold standard and the rr.onete.ry
practices associated ·Nith it in the leading gold standard countries could
soon be resumed, thus restoring gold to the exercise of its important prewar function.

na~~ly 1

that of regulating through its international flow 1

price levels in the different countries in accordance with international
conditions of dem.nd and supply, a function which has been pretty rmch in
abeyance throughout the last four years. But even if only moderate progress
should be made in liquidation of war




of the present in-

flation in the Western world be continued, there is nothing in the present

production of gold that need


concern, least of all in the

United States.
Much as I believe that the permanent economic interest of the United
States and of the nations with which we have been associated require that
the inflationism produced by the war should be cured by a diminution of
banking liabilities, I still believe that the supply of gold possessed and
controlled by them is large enough to supply a banking reserve adequate to
rmintain an affective gold


if the supply be redistributed,. and

providing some of the DDnetary practices begun during the war, which have
resulted in a great economy in the use of gold, be continued and the light
thrown by the experience of the war upon the ability of a given unit of



metallic reserve to sustain a rruch larger volume of credit than was assumed
in pre-war days, tray be taken as a guide in the



Follaning the classic exarrple of England, the gold standard countries
pretty generally pursued the policy of


a considerable volurre of

gold coin in actual circulation.' No gold standard without a gold currency'
represented the orthodox view. During the war the policy of concentrating the
gold scattered in the channels of circulation and the pockets of the people
into great reserve institutions has been


followed with the

results that are reflected in th3 vast increase in the gold holdings of our: ·
Federal Reserve Banks and uany of the central banks in other countries at a
rate far in excess of the annual output of gold from the mines.

Gold hold-

ings of the .vorld' s fifteen principal banks of issue increased from


in July 1914 to $6,258JC:C,OOO in Noverr,ber 1918, a gain of

taken from the mines during this period.
for rrany years to


It does not seerr; probabl§J that,.

if ever 1 there will be a return to the



of rraintaining a large body of gold in circulation. The gold 1 which has been
concentrated in the great reserve and note-issuing banks, is likely to be
kept there. The gold standard will henceforth be disassociated from a widespread us:.; of gold in circulation. The problem of naintaining an effective
gold standard, therefore, becollies more than ever a problem of banking, and

especially one of the uanagemant of the resorve.
Considering the great importance of the subject and the length


- 0 -

and variety of the experience. it is surprising how little there is that

can be called a science of banking reserves.

Not only has there been

great diversity or pra<ltice <:m1ong 1e.:1ding gold sta.ndi:lrd countries with
reference to reserves but there

h~s ~so

been more or less diversity of

opinion on the subject in eooh of the principal countries.

More thm:l

that, i f we the fifteen yeurs preceding tbe outbreak of the war
with earlier periods of simiL.l.r length, we find thut there w..1s a marked
tendency of reserve ratios to rise with the incrc< in the production of
gold since the beginning of the century.

More and more have the great banks
become repositories of gold. a large part of the new gold taken frJmjmines
having fou.nd its way into the bar.ks there constituting more .:>r lqss of a.
dead asset.

Reserve ratios in leading banking systems seldom ran so

u.niforml.y high as d11ring the period

· 1900-1914; indeed. they were so .high

.:1s probably to be reg..1rded from an econvmic point of view


in excess of

reasmnable requ.irements.
The contingencies


which a banking reserve


gold was re-

quired in pre-war times muy be set down as three:
(1) To maintain the parity of internal circulation with gold
by freely proYiding gold to meet a foreign drain;

( 2) The psychological function of inspiring confidence in the
strength, st.:1bility ~d aafety of a country's financial
and credit system;
(3) To provide <.1 store :)f pu.rohasing
n;.l.t ionu.l 0mergency, such as war.


f·:>r in times of

Of these functions, the first is by far the most important from
a bdl'llring and economic st.:1ndpoint •. lt bo mainly by its ;.l.bility
to provide gold f. J:r meeting .md thereby correcting o.n :.1dverse balance
of trade th<::.t the udequacy of the



reserves must le tested.

reserve C.:ll"ried in o:ny country
It is of course through the





the amount of its ~~~i~g ·reserve -·flowing out and;~ ·
flowing in and· incre.~sip:~ when the .-...! ·is f;,.tvoro.bla diminishing when the balance is &clve·t·a~: ..; that the gener.ll price level

medium of

ch~ges in

<._ .

in gold standard countries is kept in proper relation to the world level

o£ gold prioest -prices falling us an ad?erse balance is in·process of
correction through an olltflow of gold and ri-sing as a favorable balance is
in process 'through a.n inflow.

Loo.king ut the muttel' of

of view of the price level and of


from the


of the volume of a
. .
·country's credit and banking currency to What is necessary to maintain

·prices at their proper economic level. this may·be describ~d as the .most
important economic function of a nation's banking reserve4

the world and the new gold as it comes from the
· process of distrib·ation and re.dlstributian.



The gold of

is constantly in

It is thas that the inter-

national pric~ level is·Mairitained or reatored in accordance with the
underlying conditions gove:rnirig the

·supply· of the different coQntries.
. economic



of internatio'nal demand and

As su.oh~ the gold reserve is an

of the first ~ortanoe,

It is a method of testing

· the. character and Volume of a country~ S ·Credit and currency and



· ~t from getting·oat of line·with its economic reqairements, particularly
in relation to ·world conditions-

As· regards this


of a regalatar,

it seems obvious that it is not the a.bsoiuta level of the reserve ratio·

that is significant but the variations. in it which telke plac-e..


. .'

The declim

of an absolutely low reserve .ratio will serve just as well to indicate o.n
undae growth of·


liabilities · ··as the decline of a higher one •


Indeed there is much warrnat,


in view of recent war


.jastify the opinio·n t~a.t a res?rve· of ~odera.te height i.s u.- mora sensitive

indicator and


greuter height ..




of.banking operations·thah one of


- 10 1Nith respect to the function of providing gold to meet foreign dem.:mds,
it is the <lbsolute quantity of gold held under b.:mking control, ru.ther th<.J.n
the reserve r;J.t io, thc.t counts.

The concentri..l.tion, therefore, of the bulk

0f the st'Jck e>f monot3l"y gold in c.:.ll tho leading cou.ntrics under b<.J.nking

control mou.ns a great extension of the


mobilization of gold - the loss of a given

f)r the international
from a large reservoir of

gold bu.lking us a lessor loss than from a


the reserve ratio

in first instance higher th:..m

in the former.

in the la.tter c..l.Se


reserve, even

The gold strength, for ex.znplo, of the Feclero.l Reserve

System internationally considered is to


found in our holdings of more

tha.n two thousand millions, quite irrespective of who.t the reserve percentage of the system


a. whole might be.


loss of what in pre-war dcys

would huvo been considered a. very serious can now be fu.ced with
eq uo.nimi ty.
With respect to the national emergency function of the reserve th~t

is, mUking provision by the
against the



contingencies of

of something like a national


will depend in the future upon the basis on which

are to:- po .re-ordered o.s



?Olitics - much
G<.ffdrs of tho vrorld

result of tho :po.::J.Ce settlorent.

If the Le:.:gue

of Uations, tho ruduction ·Jf armaments and th~ like bccJmo re<.J.litios, then
the u.ccumuluti;)n of ho<.l.l"ds of gold under the impulse of n<J.t ional fe<:U's
:>r a.mbitL:ms must be suffered t) go tho w'u.y of oth131' outworn practices.
Thu.s will the functions Jf b<.mking reserves ba reducod more ne..1rly to t.he
:purely economic requirements Wld reserves which been th)ught t) bo
inadequate be qQite adequate.

- 11 -

As r0gards the vague


is mainly one of psychology.

to be adequate.

of inspiring public CJnfidenoe, the

A r~serve is ad$quate if it is thought

The events of the last four years have thrown the matter

of the importance of a banking reserve from the psychological standpoint
into a diminishing perspective.

Not the least of the remarkable financial

by-products of the war has been the ease with which popular expectations,
confidence and practices have adjusted themselves to t.Iv substitution of
fiduciar.y notes for gold currency.

That the spirit af patriotic fervor

in war times has had much to do in inducing this change of attit"de is

The fd.Ct that, even in c_ountries which suspended specie

payment, there has been no premium on gold or discount on paper.has also
had much tJ do with breeding a spirit of indifference.
unlikely that a permanent impression has


It seems not

made upon monetary habits

a .result of the war, which will give to the large reserve as a means

of inspiring corifidence in tho integrity and solidity )f a country's
fi.nancial system, a steadily diminishing importance,

Suggestion and

od1.1cati:m. have· ni1.1ch t.) do with this s·Jrt Jf matter. ·Just as prejudice,
ignorcmce and habit had much to do -,vith reserve ideo.s and pro.ct ices before
the European War, now that a definite break: with the past h:.l.S been made
new ideas and m;Jro economical. practices will stand a better chunco of

A conaiderable revisi.)n )f monetary and reserve pr<.l.Ctices

seems n-Jt o.n llnlikely result of the fin.;mcial experience of the w:J.r.
and the immediate :ncces:3ities of the after-war sitlla.t1on.






: :':



The United States is in an exceptional position for taking the
initiative in revising banking practices along more econon:ical and ra·cional
(1) because of our assured creditor position:

(2) because of our unprecedonted

gold position;

(3) because of our great banking and financial strength.

We are a creditor nation. to the extent 1 if not at the moment at no
distant tin:0 in the future 1 of five hundred million dollars a year. We have
increasGd our stock of gold since the beginning of the Eu!'opean War by fully
50 per cent. At th;:; sarr,e tin;e by the Federal Reserve Act 1 we have reorganized

our banking reserve in such a way as greatly to econorr.ize its use 1 rraking
our banking position as a vvhole one of far greater strength and safety than
ever before. More than two thousand millions of gold concentrated in the hands
of the Federal Reserve Banks constitutes the greatest gold reservoir the
world has ever known.
We are 1 therefore 1 in a roatchles3 position to assume the function of a
free-gold rrarket, a function v'thich th.:; ·Norld in the process of econon:ic
readjustment and recovery cvill sorely need. There rr.ust sorr,ewhere be a rrarket
in .vhich claims can be cashed in gold ,vith a. certainty that gold will be

forthcoming for foreign shipment.

~batever ~ight

be said in justification

the embargo on gold shipments} which the United States in comr.on with the

other belligerent nations 1 have practiced as a rratter of admitted military
necessity) the embargo should be lifted at the earliest practicable moment that is) as soon as our international financial relationships are such that
wejno longer under tha necessity of taking care of adverse balances of the



nations Nith Nhich Ne have been associated in the war arising out of their
trade with neutral countries.
We lll,.ls:t deal with our great gold .stock in a spirit of liberality.
We have far more gold than we need to do our money and banking work. The
surplus was obtained from other countries largely because of their
necessities. They need it back in order to effect the restoration ·
of their finances, more particularly to insure the resumption and main\

tenance of gold payments. We should not hesitate to part ·Ni th much of
it if we could have the as3uranee that the countries receiving it wquld
proce3d to lift their embargoes and restrictions and deal in the future
with gold in the spirit of the

new international reciprocity Which is

expected to be one of the consequences of the war.