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FEDERAL RESERVE BOARD STATEMENT FOR THE PRESS For release in morning papers, Saturday, November 24, 1928. Address delivered "by Governor Roy A. Young, "before the Annual Dinner Meeting of the Academy of P o l i t i c a l Science, on Friday, November 23, 1928, a t the Hotel As t o r , New York City. X-6184 ? 348 In the eighteenth century Frederick the Great, who knew whereof he spoke, said that there were three things necessary for war: f i r s t - money; second - money, and t h i r d - money. This statement made more than two hundred years ago i s even more completely true at the present time. Changes in methods of doing "business, however, have changed the character of money which was then primarily specie, and now consists l a r g e l y of hank c r e d i t . The fundamental importance of money and, therefore, of "banks to the prosecution of wars makes "banks carry the chief f i n a n c i a l "burden of the struggles, and central "banks which conduct t h e i r "business primarily with reference to the public i n t e r e s t f e e l the s t r a i n of war even more than do commercial hanks. I t i s the central "bank that supplies to the government whatever currency i t may need during periods of war i n f l a t i o n , and central "bank reserves in times of war are put a t the disposal of the nation and, t h e r e f o r e , become one of the stakes whose f a t e depends on the fortunes of war. The t e r r i b l e experiences of the struggles of 1914-1918 have demonstrated that the soundness of monetary conditions cannot withstand the onslaught of war. Central hanks at the present time, t h e r e f o r e , are i n t e r e s t e d in main- t a i n i n g peace and for that purpose of maintaining i n t e r n a t i o n a l goodwill. As a matter of f a c t , cooperation between the central hanks r a t h e r than mutual jealousies, has characterized the post-war period. The United States, f o r example, has come to the assistance of a l l the p r i n c i p a l central hanks when they have undertaken the reconstruction of t h e i r currencies, and a l l the important hanks of issue have joined together in supporting the endeavors of smaller countries to r e e s t a b l i s h t h e i r currencies on a sound basis• When Belgium s t a b i l i z e d her currency there were fourteen or f i f t e e n central banks t h a t l e n t t h e i r support to the undertaking and the same was true a t the time X-6184 ~2~ of s t a b i l i z a t i o n in I t a l y and in Poland. This cooperation between central "banks towards a common end has contributed to the establishment of mutual respect and understanding which w i l l be h e l p f u l in finding solutions to int e r n a t i o n a l f i n a n c i a l problems long before they can develop into causes of misunderstanding or f r i c t i o n , to say nothing of war. In playing i t s p a r t in the world's monetary reconstruction, the Federal reserve system has been placed in a p o s i t i o n that has enabled i t to render more valuable assistance to other countries than could at t h i s time be rendered by any other central banking system. As a consequence of the war, the United States has 40 per cent, or more, of the world's monetary gold stock,* and also has larger f o r e i g n investments than any other country in the world. In these circumstances, the Federal reserve eastern has r e a l i z e d that cooperation with other countries towards the reestablishment of sound monetary conditions is not merely an act of international comity, but i s also e s s e n t i a l in the int e r e s t s of t h i s country i t s e l f . Sound money conditions abroad enable American producers to supply the needs of t h e i r foreign customers without running the hazards a r i s i n g from unstable foreign exchanges. They also increase and s t a b i l i z e the buying power of foreign countries and thus contribute to the a b i l i t y of these countries to purchase our goods# In these post war days, the United States can no longer remain economically aloof from the a f f a i r s of the world. Her foreign trade amounts to close to $10,000,000,000 a year; her foreign investments aggregate no l e s s than $25,000,000,000, and her f i n a n c i a l and commercial r e l a t i o n s with the outside world have become a much greater f a c t o r in national prosperity than they were f i f t e e n or twenty years ago. Sound domestic credit policy, therefore, as well as the desire to be of service i n world reconstruction, have caused the Federal reserve system, in formulating R X-6184 —3-* i t s c r e d i t p o l i c i e s , to take into consideration the e f f e c t that these p o l i c i e s may have on the reestablishment and maintenance of the i n t e r n a t i o n a l gold standard. The course of c r e d i t developments in the United S t a t e s since the middle of 1937 i l l u s t r a t e s the manner in which foreign conditions may enter into the on consideration/which Federal reserve policy i s "based and i t w i l l "be of i n t e r e s t to review "briefly events during t h i s period. ditions i n Europe were extremely t i g h t . In the summer of 1927 credit con- Of the great countries England, though on the gold standard for over two years, was struggling under the handicap of a serious economic depression; France and I t a l y had maintained stable the value of t h e i r currencies, "but had not yet established a d e f i n i t e legal r e l a t i o n s h i p between t h e i r monetary u n i t s and gold. Autumn was approaching, when foreign countries import the l a r g e s t volume of American products, and when t h e i r exchanges are under the severest pressure for making payments to the United S t a t e s . I t appeared as though i t would be impossible f o r European countries to pass through the period of autumn s t r a i n without e i t h e r losing gold, which they could i l l a f f o r d , or tightening i n t e r e s t r a t e s , which would f u r t h e r delay the recovery of trade and industry. and industry were showing signs of recession. In the United States trade Commodity p r i c e s had been de- clining f o r about two years; the temper of the business community was cautious, though the stock exchange was active and the volume of c r e d i t i t employed was large and growing. After c a r e f u l l y canvassing the s i t u a t i o n the Federal r e - serve system reached the conclusion that i t s influence should be exerted towards easier money conditions in t h i s country, which would encourage business a t home and simultaneously would a s s i s t the foreign countries to pass safely through a period which otherwise might endanger the maintenance of the gold standard. Although the system r e a l i z e d that easy money in t h i s country might •v X-6184 % 1 -4"be an enc-ourageiaent to f u r t h e r stock exchange a c t i v i t y , nevertheless i t determined that t h i s would he the l e s s e r of two e v i l s and decided to adopt a p o l i c y of easing the money market. In carrying out t h i s plaii discount r a t e s a t a l l the twelve Federal reserve banks were reduced from 4 to 3 l / 2 per cent in August and September and the system also purchased a moderate amount of Government s e c u r i t i e s . By thus placing funds at the disposal of member banks the reserve banks enabled them to reduce t h e i r indebtedness a t the reserve banks and to put themselves i n a p o s i t i o n of granting loans to t h e i r customers a t r e l a t i v e l y low r a t e s . This policy had a good e f f e c t on business in the United States and p a r t i c u l a r l y on the volume of a g r i c u l t u r a l exports. At the same time, i t not only obviated the necessity f o r foreign countries of shipping gold to the United S t a t e s , but brought about a reversal in the d i r e c t i o n of gold movements, so that gold began to move in large volume out of the United S t a t e s . Owing to the lower r a t e s of i n t e r e s t in t h i s country a p a r t of the financing, which would normally have been done in England and on the Continent, was done in the United S t a t e s . Also surplus funds, which always flow to the most p r o f i t a b l e market, were moved from the United States to Europe thus f u r t h e r r e l i e v i n g the tension. S t e r l i n g exchange advanced sharply and the Bank of England was able to maintain i t s discount r a t e without losing gold. The gold movement, which began at that time and i n the aggregate amounted to about $500,000,000, has been an important f a c t o r in strengthening the r e serve p o s i t i o n of European central banks. I t a l y and France have now l e g a l l y s t a b i l i z e d t h e i r currencies, and f i n a n c i a l conditions have been so much strengthened by t h i s autumn that the firm money policy adopted by the reserve system with reference to domestic conditions has caused no embarrassment to foreign countries. :* *52 X-6184 -5In the autumn of 1927/ when the gold movement f i r s t began, the Federal reserve system, in pursuance of i t s policy of easier money, purchased Government s e c u r i t i e s to o f f s e t the e f f e c t s of gold exports on the money market, hut when the period of greatest s t r a i n was passed i t discontinued t h i s process and since t h a t time exports of gold have been permitted to exert t h e i r i n f l u ence on c r e d i t conditions in t h i s country. Speculation on the stock exchange continued, and i n view of a rapid expansion of loans on s e c u r i t i e s with only a moderate demand f o r c r e d i t from trade and industry, the Federal reserve system not only permitted the gold exports to operate as a tightening influence on c r e d i t conditions, "but also exerted i t s influence in other ways toward firmer money conditions. Beginning in January the reserve banks sold a large amount of Government s e c u r i t i e s , and early in the year began gradually to advance discount r a t e s from 3 l / 2 per cent to a level of 5 per cent a t eight of the reserve banks and 4 l / 2 per cent at the remaining four banks. Because of the l o s s of gold and of the system's firm money policy, together with a growth in the early p a r t of the year in the volume of bank c r e d i t , money conditions became increasingly firm and i n t e r e s t r a t e s in the autumn of t h i s year have been higher than at any time since 1921. These firm conditions i n the money market have r e s u l t e d in discontinuance of the outward gold movement, and in f a c t , since the middle of the summer there have been gold imports amounting to nearly $50,000,000. The advance in money r a t e s has been f e l t p a r t i c u l a r l y "by dealers in s e c u r i t i e s , as the c a l l r a t e has f r e quently been as high as 8 per cent t h i s autumn. The growth in the volume of bank c r e d i t , which had been very rapid i n the early p a r t of the year, slowed down in the l a t e spring and a f t e r considerable f l u c t u a t i o n s was not as high i n November as i n May. The decline has been in the banks 1 investments and in loans on s e c u r i t i e s , which include loans to brokers and dealers? Brokers 1 -6* X-6184 loans by tanks, as distinguished from those "by corporations and others, are smaller now than i n the middle of May. Commercial loans, on the other hand, continue to increase and the demands of "business i n connection with autumn trade expansion and the marketing of crops were met "by the "banks without difficulty. I t i s true that the cost of c r e d i t to industry advanced somewhatt "but the advance was much l e s s than the r i s e in the cost of c r e d i t to traders i n s e c u r i t i e s , and the advance in money r a t e s appears not to have had any "bad e f f e c t s on "business conditions. Inquiries made "by the Federal Reserve Board on t h i s point have "brought i n r e p l i e s from a l l Federal Keserve "banks to the e f f e c t that business conditions have not "been unfavorably a f f e c t e d by higher i n t e r e s t r a t e s , and the l a t e s t business r e p o r t s indicate continued and growing p r o s p e r i t y . This story of reserve bank policy during the past year, which I have given i n some d e t a i l , brings out the manner in which conditions abroad have been taken into consideration i n the system's deliberations about i t s credit p o l i c i e s , and the way these p o l i c i e s have worked out. I t shows that condi- tions abroad have become an important f a c t o r in the domestic and credit s i t u a t i o n in the United States and as such receive consideration in the formulation of credit p o l i c i e s . The need of keeping informed on foreign conditions has brought about the necessity of broadening the system's sources of information, and f o r t h i s reason the system has p a r t i c i p a t e d in i n t e r n a t i o n a l conferences of business economists. 'Last spring i t sent delegates to a conference of central bank economists held i n P a r i s , and at t h i s moment i t i s represented a t a conference of business s t a t i s t i c i a n s in Geneva# The conclusion that I have reached during the year that I have been with the Federal Reserve Board, i s that p a r t i c i p a t i o n in world a f f a i r s i s a matter of enlightened s e l f - i n t e r e s t for the United S t a t e s . I f e e l confident T' " < 5 4 X-6134 -7... that a similar a t t i t u d e towards i n t e r n a t i o n a l cooperation p r e v a i l s among the a u t h o r i t i e s of the p r i n c i p a l European central banks. The mutual respect and confidence which have developed as a r e s u l t of j o i n t undertakings "by the central "banks and the consideration shown "by them f o r each o t h e r ' s orohlems and d i f f i c u l t i e s augur well f o r the maintenance of cordial r e l a t i o n s "between nations; in other words, peace and world p r o s p e r i t y .
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