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Release for ftFTERNOON papers~
Thursday, Septerrber 16,1920.
.)
Address by
Ron. Edmund Platt
Vice Gcvernor, Federal Reserve Board
before the
West Virginia Bankers Associatjon
Charleston. W.Va.
September 16, 1920.
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ADDRESS WEST VIRGINIA
~ANKER'S
ASSOCIATION
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Gentlen:en of the '!1!est Virginia Banker's Association, I em vecy glad
of the opportunity you have afforded me to visit the city of Charleston,
to learn something at first hand of your industries and your problems,
and to speak a few words to ycu about the Federal Reserve System, the
principles under which it is working and the principles Which must guide
it if it is to centinue to serve the pec:ple adequately and safely.
of course known sorr.ething in a
~enaral w~
I have
about the industries of this
great state, and have had the pleasure of the !icquaintance, and perhaps
I may say the friendship, of the Representitives of West Virginia in
House of Representatives for a number of years.
~e
You will pardon rr.e, I
am sure, if I speak in a :preliminary way of rrt:f service in Congress from
which I sc recently resigned.
63rd Congress
I came to Washington as a rr.ember of the·
in l9i3, the year of the passage of the Federal Reserve Act,
and was assigned to the Banking and Currency Committee.
.Among the merr.bets
of the committee at that time was the late Wm. G.
representative
~rown,
of the 2nd West Virginia district, always an advocate of sound banking
policies, one of the men upon whom Hon. Carter Glass, then Chairman, alwaJS
relied.
Mr. Sutherland, now one of your senators, was also among the friends
of rry first year in Congress. and later I came to know other mmmbers of
the delegation.
Recently, during the year of ~ chairmanship of the
Committee on ~anking and Curre:r:cy, one of the members of that conmittee
upon whom I could alwa,vs rely for support of sound policies was the Representative of your own city, Bon. Leonard
s.
Echols.
Speaking of other
members of the West Virginia delegation in Congress I might interject rigbt
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here a description of the very delightful trip I took to the HawaHa.<l
Islands in 1917 with George Bowers, who was Mr. Brown 1 s successor in the
2nd district.
Such a description would be much more interesting than
any talk I can give you on banking..
I might also say something about t!le
splendid apples :Bowers grows and about West Virginia ts apples in generaL
I come from an apple growing country up on the Hudson river and the subject
is mighty tempting, but wont do at this tirr.e.
West Virginia has done her part not only in the passage of the Federal
Reserve .Act but in its developnent by recent anendrnent, and I think the
Reserve System has been of great advantage to the industries and to the
banks of West Virginia.
Governor
Ha~ing
has assured me that I would .find
the menibers of the West Virginia Banker's .Association a fine lot of men,
strong supporters of the Federal Reserve System, and including ver,y few
if any knockers.
I am sure he is right. from the kindly and hospitable
reception you have given me and from what I have heard in your meetings ..
West Virginia with the exception of the Panhandle counties, belongs to the
5th or Richmond Federal Reserve District and is so divided that some of its
banks look to the Reserve Bank at Riabmond for their rediscounts and others
to the branch at Baltimore..
From these sources the bankS of West Virginia
on September 3rd had obtained loans of $1.,599,213.75·
You are, I
should judge not over extended and have been curtailing non-essential
credits as rr.uch as you could so .-'to conserve credit for the .encouragement
of essential productive enterprise in farm, ndne and factory.
Few. if any,
..
of your banks show excessive borrowings from the Reserve Bank, and if the
Richmond Reserve Bank is having sorr.e trouble keeping credit within safe
limits little of its trouble comes from West Virginia.
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Without the Federal Reserve System, or some similar central banting
system, I think we shall all agree, the war could not have been financed
on a gold
basis~
and the S7stem has very properly been described as a
wonderful success.
It has been ably administered, but we must not forget
that the System is still on trial.
It has never yet had a chance to func•
tion norm!:>lly and has only within the past year begun to be a determining
influence in the stabilization or regulation of credit.
The war thrust
upon it enormous business, of a kind not contetn];)lated when the .Act was
passed - a business based not upon self-liq,uidating commercial paper but
upon government bonds, and at rates abnormally low considering the demand.
fts the Eoard's lastreport says "In order that the member banks might carry
the burden of undigested Government securities they were obliged to rediscount with the Federal Reserve Banks and in order that such rediscounting
should not involve. them in heavy loss it was essential that as long as
the banks were lending to bond subscribers a.t coupon rates the rediscount
rate should be related to the bond rates.
The rediscount rates of the
Federal Reserve Banks. therefore, instead of being higher than the market
rates, as in theory and normal practice they should have been, were made
~
than the market rates."
This enforced departure from sound banking
principles necessarily led to enonnous expansion of credit - or infla.tion,
if you prefer that term, and the problem has been ever since how to get
away from it ..
Of course it is entirely contrary to the principles on
which the Federal Reserve Act was founded to rr.ake loam on bonds, even if
government bonds, a.t lower rates than on eOJmlercial paper, yet in some
districts we are still doing it.
.And indirectly we are issuing currency
based upon these bonds, though that was one of the very things the Federal
767
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As
much
81':
was sr.iJ.
i.:l
Congress and out, while the Federal Reserve :B:!.lls were under discuS··
sion, about providing an elastic currency which would expand and con-tract in accordance with the demands of business as about any other
feature of the bill, and the currency contemplated in the Act was to
be issued only upon the rediscounting
o~
short-time paper growing
out of actual business transactions, paper that was expected to be
self-liquidating when the transactions were completed by the sale of
goods..
The whole scheme was upset by the floOd of goveznment securi-
ties, and furthermore Central Banking principles and practice being
mfamiliar to most of our business zr:en and bankers • a great many
people got the idea that Federal Reserve Bank rates should be
nently lower than market rates, so as to
~ake
per~
rediscounting attrac-
tive and profitable to the member banks and so as to make the
borrowing of money for any and all purposes easier, and many also
got the idea that Liberty bonds should be carried indefinitely at
the coupon rates.
It is not necessary for me to say to an audience
of bankers that if the Federal Reserve System sh.ould be conducted
in accordance with such ideas the final result would be a crash
such as we have never had before in the history of the country.
The
~:etem
contains the possibilities of enonnous expansion of credit,
as the war financing has demonstrated.
It remains to be seen
whether i t can be brought back to St'W.ld norm11.l conditions gradually
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and without producing a~y: 'S'e+~i~us hardship.
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We are now almost at the peak of the demand for credit and.
currency caused by the movement of crops, and it is easy to see that
a
the situation ndght have been serious had there not been/general
increase of Reserve Bank rates beginning about a year ago-
There
was some grumbling over the increase of rates on "war paper", but it
had to be made and in due time should go further, in my opinion, so
that there should be at least no preference shown to bond secured
paper.
The great issues of Liberty bonds are gradually being digest-
.
ed, going into the hands of investors who intend to hold them, and
there has been a gradual reduction of loans on "war paper" •
Apparent-
ly about $16,000,000,000 of Liberty bonds and Victory notes have been
actually paid for and are out of the banks - a really stupendous achievement, which we would not hPve thought possible a few years ago.
The
Comptroller brought this fact out in an address before the Matne Banker's Association in June.
Pccording to his figures there remained less
than two billions of these securities in the National Banks, counting
bonds on which the banks were making loans and bonds owned .by the banks,
and he estimated about an equal amount in the State banks and Trust
Companies.
Splendid as the showing of saving and absorption of Liberty
bonds has been, however, it must be realized that the four billions left
in the banks, together with the Treasury certificates, still cause a
very serious displacement of credit, Whicb can only be made good by continued steady saving and investment on the part of the people•
The
high record of bills discounted based on government obligations by the
..
800 reporting membe'r banks wa.s made in June, 1919, $1,438,000,000 and
the high mark for the present year was made on January 2nd when these
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- 6banks had loaned $1,289,000,000.
The low mark was August 20th when
these loans to individual borrowers on
to $959,000,000, a decrease for this
governrr~nt
~ear
paper had declined
of $330,000,000.
If all
tanks were included I suppose the decr9a.se would probably be twice that
figure, or about $EoO,OOO,OOO, showing what seerr.s to rr.e very gratifying
progress in the payment for bonds.
Some rart of the decline must be
• but certificates
due to the r!'duction of the ou~standing treasury certific$-tesj were
largely held by the banks themselves until their interest rates were
raised, and I suppose have not entered very largely into collateral
for loans to individual borrowers from the banks.
Federal Reserve
rediscounts, based on war paper reached their high mark on
~ay
16, 1919,
JUl.Lv .i..3J
ect $1,363,476,000 during the Victory Loan Campaign.
war
~aper
less.
rediscounts had been reduced to
1920~
On june 18th/these
~1,231,841,000
or
$631,000,000~
Since June 18th there has been some natural increase due doubt-
less to the increased demAnd for credit as the harvest progressed and
the crop moving season advanced.
The
rern8r¥~ble
thing is that the re-
duction in war loans has been 11ery much more than maderr up in increased
loans on com-nercial paper.
A yeer ago Sert. 5th, the Reserve Bank re-
discounts on commercial paper were only $212,135,000, about one eighth
of the loans on w~r paper, which then stood at $1,635,233,000.
On
September 3rd, 1920, the comnercial paper rediscounts had advanced to
$1,412,035,000, or nearly seven times as large as last year at this time,
and more than $79,000,000 greater th8n the rediscounts on war paper,
though the latter had increased more than
~100,000,000
of il,231,34l,OOO of June 13th to $1,332,892,000.
from the low mark
Comrr.ercial paper re-
discounts passed the war paper bills in the Reserve Banks for the first
time on July 30th ·~hen they reached $1,250,613,000 against 1:1,241,017,000
.
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war pa:per bills.
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They seesawed afterwards for a few weeks but the
cormnercial bills seem now to have taken the le::-d :pennanently.
It
should be added that the recent increase of a hundred million in
war pa:per loans is probably also to be considered chiefly comnercial bonds merely being used as convenient collateral.
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On the whole
the policies of the Federal Reserve Board and of
the Federal Reserve Banks seem to be working well.
In the face of
an enormous and unprecedented demand for commercial credit the reserves
have held pretty steady with only slight declines week by week. There
appears to be credit enough for all legitimate demands without encroaching on the
for
profiteering~
from the market.
le~l reserves~
but no surplus for
23rd~
or
or for holding any unusual amount of harvested crops
Though the percentage of decrease of reserves each
week has been in tenths there has
since July
speculation~
It should be
~~en
a steadl decrease each week
re~embered
that the Reserve Banks of
the crop moving sections are being sustained today chiefly by help
from the Boston and Cleveland Reserve Banks.
New York has helped
until recently 1 and Philadelphia and San Francisco still are helping
some through purchases of
acceptance~
from the West and South.
Boston Reserve Bank is charging its own member banks
7 per
The
cent for
rediscounts of commercial paper and is loaning its surplus to Western
and Southern Reserve Banks1 which make most of their rediscounts to
member banks at 6 per cent.
That doesn't seem quite rignt.
accordance with strict business
principles~
or with economic
In
principles~
if you like that term1 the rates ought to be highest where the demand
is greatest.
Boston's surplus of credit comes partly from dull
textile plants closed down1 etc. and
~here
business~
is naturally some grumbling
•
at its high rediscount rate maintained at present largely for the
benefit of the rest of the country.
It should not be forgotton that
the regional reserve system is not exactly the same as a Central
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When considering the present situationJ
is well to bear in mind that as a result of the high
(7 per cent) Reserve Bank rate in New York and of
for speculation the stock market is
a~sorbing
cur~ailment
a billion
of loans
doll~
less
ln use
credit than last fall, and that billion d-ollars is now
financing the movement of crops 1 · and financing production generally.
Securities., including Libe·rty bonds, are at a very low point - the
only things in the
co~ry
that are really cheapJ judged
~Y
prewar
standards.
FALLING PRlCES
As I have said some of the surplus of credit in Boston which
results
is now helping Fede~l Reserve Banks in the West and South
from
dull business in manufacturing
land.and Philadelphia, and to
line~~
~ome
degree also of other districts
where there is much manufacturing.
entered upon a period of
rebelled against the ever
and the same is true of Cleve-
There is
re~djustment
evjder~e
of values.
mount5n~ pr~.ces
that we have
The people have
and have so diminished
del!B.nd for many articles, particularly clothing and shoes 1 that some
factories have been compelled to close or run on part Ume for lack
of orders for the time being.
This has been charged as due to
restriction of credit 1 but I think there is evidence ttat .the movement is deeper and more wide-spread.
There has been a decrease of
prices all over the world to some extent.
It
be~n,
I think 1 with
the collapse of the silk market in Japan in the winter and early spring.
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The big drop in raw silk was naturally followttd by a drop in wool
and in leather 1 and the ffiovement spread from one thing to another.
Cotton, though a somewhat shorter crop than usual, naturally came in
line for a cirop following wool and we hear cries from the rubber and
automobile industries and from some others.
Sugar and coffee have gone
down} and the pressure on the breakfast table has perceptibly relaxed.
All this I believe is in accordance
price
with economic laws.
recessions will go remains to be seen.
How far the
A lower range of prices
will ease up the credit situation considerably, but will at the same
time perhaps increase grumbling and criticism.
of high prices and of the high cost
We have all complained
of living and have charged inflation,
profiteering, etc., but we all like to see somebody else 1 s prices go
do·;m.
When the prices of things we ourselves sell or produce also go
do;vn -why that•s all wrong.
duction, don't you
know~
We cantt sell them below the cost of pro-
People like to find a "goat" somewhere to
blame when things go against them1 and some of them, perhaps naturally
enough, turn their criticisms against the Federal Reserve Beard or the
Federal Reserve Banks.
The war taught people to look to the Government
for everything and now-a-days when a man can't "hock" his last winter's
overcoat for as much as he thinks it ought to bring·he writes to the
Federal Reserve Board and says it is outrageous that money is so tight.
CRITICISMS OF THE FEDERAL RESERVE BOARD
There are several classes of critics of the Federal Reserve Board,
some of whom know something about banking and about economic laws and
some of whom do not.
Perhaps they may be divided roughly into three
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One class wants lower rates - cheap money -
re~rdless
of
economic laws.. or the reserve requirements of the Federal Reserve Act;
another class declares that rates
we~a
not advanced quickly enough
after the war financing was finished, and are not yet high eno\.1gh
to control credit fully; a third_class just criticises on general
principles1 perhaps mostly for political effect.
This third class is not troubled by any particular regard for
consistency or for laws of anY. kind.
The same persons have declared
that enormous inflation has been promoted by the Board and has been
the cause of high
prices - pointing to the great volume of outstandthey
ing Federal Reserve notes -and then when prices began to fall/declared
that the Board was stifling busi.ness by reft:.sing credit for production
and causing dellation. The chief stock in trade 1 however 1 of the third
of
class /critics is the charge of "profiteering". They point to the fact
that the net earnings of the Federal Reserve
B~nks 1
the excess of
earnings over current expenses, for the half year ended June 30th
totaled $68 .. 583,111 or at the yearly rate of 151.2 per cent on an
average paid-in capital of $91 1 1651 000, and that they n:ade 92 per cent
in the corresponding period li!.st 'year.
by
h~ving
Well, if you can "profiteer"
your rates or your prices too low, and when practically all
your profits go to the Government as a franchise tax_. there rray be·
something in the charge.
The Reserve Banks before the war were not
making their dividends .. as a
rule.~
and one lt.ember bank up in
my
old
Congressional District charged off its· reserve bank stock to profit
and lossJ and said it was no good as an investment.
Profits v1ere
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forced on the Reserve Banks by the war, and have been made at rates
lower
than good banking practice would have dictated - rates
whic~
attracted business instead of stablizing credit.
It is proper in this connection trat I should call attention to
the very extraordinary nature of the Federal Reserve Banks considered
as corporations.
me~ber
B~nks
The stockhclders are the member banks, but those
banks not only subscribed the capital 1 on which the Reserve
began operations 1 but furnish all the deposits from which loans
are made.
Suppose the stockholders of one of your banks were the only
I
depositors, how would you reckon the profits of tbe institution?
Richmond Reserve
B~nk
The
during the first half of the fiscal year made a
profit of $2,610,000 or 113.6 per cent based on its paid-in capital
alone -which averaged $4,622,000 during the six months ending June
30th.
&sed on capital and surplus, $12,6891 000, it's current net
earnings were at the rate of 41.4 per cent.
Based on its capital
and reserve balances - and these reserve balances were all furnished
by the stockholders - the earnings were at the rate of only S.l per
cent, or based on combined paid-in capital 1 surplus and reserve
balances the rate was 7.2 per cent.- not such a very impressive
figure~
but higher than the average rate for the whole 12 Reserve Banks 1 which
was 6.4 per cent.
On either of the last two bases of reckoning the
highest percentages were made by the Philadelphia and Atlanta Reserve
Banks.
You will perhaps say that if the Richmond Reserve Bank makes
S.l per cent on its capital and reserve balances -which you furnish -
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you ought to have a la!"ger return than 6 per r-ent on the r.a:p:ite.J. 1 b"L.:t
this bn.ngs ·up a question which ;: shall not discuss toCLa.y. l .i.Ht:coc.u.::ed
a bill in the last session of Congress that would have allowed. extra
dividends of not to exceed three per cent from Reserve Banks that had
accunn.uated the full 100 per cent reserve 1 but I should add that my
position as a member of Congress on such measures must not be understood as necessarily indicating my position as a member of the Federal
Reserve Board.
You remember that Salmon P. Chase as Secretary of the
Treasury issued greenbacks which later as Chief Justice of the Supreme
Court he declared unconstitutional.
It is very important that there
should be no motive for running the ReserVe
making a profit..
safeguarded.
Bank~
fot the
~urpo~
of
An extra. div:i.dend bill if passed sl'lould be carefully
Lower rates than these at present prevailing would prob-
ably bring larger profits by attracting more business 1 but the Reserve
Banks have the custody of your reserves - of the reserves of the banks
of the country, and those reserves must be conserved if the System is to
be zramged with safety.
There must be no inducement for the expansion
of credit merely for the sake of profit.
The first class of critics of the Federalr Reserve Board mentioned
above deserve some attention as well. as the last class - the class
that wants cheap money 1 regardless of laws} economic or statutory.
A very well known United States Senator has recently contributed an
article to an industrial journal} published in Baltimore 1 in which he
urges that the Reserve Bank rates should be lowered to where they were
before the warJ
~r
at least during the war. In one part of the article
he says that the policy of the Board has had the effect of nbreaking
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down the price of securities" - which is tantamount to saying that
speculation in Wall Street has been checked - in another p.iace he
says that "there is no sense whatever in retiring credits which are
employed in
production"~
Well, obviously if you should open the
flood gates of credit for speculation the price of securities would
advance} but such an advance at this time would absorb credit
moving the crops and in productive enterprises.
needed in
The policy of the
Beard has been throughout to conserve credit for production and
orderly marketing.
Reserve Bank rates must be fixed with ·, the
purpose of maintaining safe reserves - the reserves required by law otherwise we . should have such inflation and speculation as could end
only in disaster.
The Senator urges Chambers of Commerce throughout
the country to pass resolutions in favor of lower rates.
Chambers of
Commerce are composed of business men and bankers and it will be
interesting to see what response they make.
They are not as a rule
inflationists and I shall be surprised i f they do not recognize the
necessity of the application of sound principles - of
sound conditions of
credit~
~aintaining
They know that the banks have been meet-
ing all demands for credit for sound productive
enterprise, and have
been curtailing credit only for speculation or for nonesseniiala. They
know that with reserves lower than they should be., and with loans
outstanding far greater than ever before in the history of the country
there has been no nretirement of credits which are employed in production", where conditions were sound.
Personally, I can't help having some doubt whether all has been
done that could be done to curtail speculative and other unnecessa.ry
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- 15 credlts.
The enormous expansion of all bank loans since the end of
the war and the fact 1 already
on commercial paper have
about
$1J3001 0001 000~
stated~
< increase~
that Fede.ral Reserve Bank loans
nearly seven fold in a
or
makes it hard to believe that all that additional
credit can possibly be used in useful productive
enterprise~
there is no evidence of restriction 1 in these figures 1 but
evidence to the
year~
Certainly
strong
cont~ry.
The total loans of the Federal Reserve Ba.l;\ks are at their highest
now - higher than at any time during the war 1 the highest in the history
of the System.
All previous records of "total bills on hand" were
passed in the statement of August 27th 1 and
on September lOth.
time on the 3rd.
a~in
on September
3rd~
and
They passed three billion dollars for the first
The figures are so high1 in
fact~
that they seem to
constitute strong prima facie evidence of undue expansion.
This brings me to some consideration of the criticisms of the
second class of critics
rr~ntioned
above, critics who include some of
the leading students of economics and a few of the leading bankers of
the country.
They maintain that the rates of the Reserve Banks were
not advanced soon enough after the war, and some of them maintain that
they are not yet high enough in all districts to give the necessary
check to dangerousf\" expansion.
these criticisms are useful.
I am personally of the opinion that
The hindsight of these college professors
and bankers is often :better than their foresight 1 and like the rest of
.
us they frequently find it easier to point out mistakes long after they
occur than at the time.
Their criticisms o:ftel:l fail also to taka into
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consideration practical difficulties, but on the whole, as an
abstract proposition, I agree with them that conditions would
probably be better today, if the check to expansion had been
started by a somewhat earlier increase :of rates after the war.
I agree with them also that Reserve Bank rates should be higher
than they are today in some of the districts where the demand for
credit is greatest and where legal rates of interest are 7J 8, and
even 10 per cent, as in the 6th Federal Reserve District, and in
several others.
sidered.
Practical difficulties, however,have to bee con-
Some people, and some banks, got themselves pretty badly
overloaded with Liberty bonds through patriotic motives, and must
be given more time to work out.
The habits engendered during the
war can't be thrown off at once, and people must be given time to
understand what the purposes of the Federal Reserve System are and
what the principles are which must guide it.
If we can succeed in
keeping the reserves of the System within safe limits without
a~in
raising rates, it may be better to do so.
One thing I want to say as e. new n:ember of the Federal Reserve
Board, though I am sure it is not necessary to say it to this audience.
There is absolutely no politics in the administration of the affairs
of the Board.
I was in close
touch with the Board for considerably
more than a year as Chairnan of the Committee on Banking and Currency
of the House of Representatives and in frequent consultation with
Governor Harding with regard to proposed amendments
Reserve Act.
to the Federal
You don•t need to be told that I am a Republican and
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that I shot1.l.d. have scentd ptrt"). szmsb.p 1o:nz c>go :i.f th'3re had l:>P.en a.r.y,.
If the time ever comes when the Federal Reserve Board yields to
partisan pressure and fixes its policies with relation to their
influence on elections, rather than the security and soundness of
the banking system of the country - then there will be danger ahead.
I do not believe such a time ever will come.
I do not believe the
policies of the system today would be appreciably different if
Mr. Hughes had been elected President four years ago instead of
Mr .. Wilson.
The Federal
I,
Reser~e
Act may not be 100 per cent perfect) but
it works well and needs only such minor amendments as suggest themselves from its administration from time to time.
No changes will
be nade in its main features for many years 1 i f ever, in my opinion)
unless Socialists or some other radical or destructive party should
gain control of the country - which I don 1 t expect will happen in
my time or in
yours~
9/10/20
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Release for AFTERNOON papers,
Thursday, September 16, 1920,
Summary of
Address by
Ron. Edmund Platt,
Vice Governor, Fedetal Reserve Board
before the
West Virginia Bar$ers Association
Charleston,
Septembet 16,
w.
Va.
1920.
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•
Addressing ~he West Virginia Bankers Association today,
Hon. E~d Platt, VJ.ce Governor of the ]'ederal Reserve Board,
took occasion to answer so~e of the criticisms tbat have recently
been made of the administration of the Federal Reserve System.
Although but recently appointed a rr:.ember of the Board, Mr. Platt
has for years been in close touCh with its work. He was elected
to Congress from New York in 1913 (the year of the pass~g~ of the
Fede:al Reserve .Act) and was ass~gned to the Banldng a..YJ.d Currency
Co~ttee which gave such exhaustive consideration to the large
number of bills from which the Federal Reserve Act was evolved.
When the Republicans attained a majority of the House he was
chosen Chairman of the Committee and served as Sllch up to the
date of his appointment to the Board. As he is the only Republican
member of the Board, his remarks are of peculiar interest at this
juncture.
He said:
"On the whole, the policies of the Federal Reserve Board
and of the Federal Reserve Banks seem to be working well. In the
face of an enormous and unprecedented demand for comrr.ercial credit
the reserves have held pretty steady wi-th only slight declines
week by week. There a-ppears to be credit enough for all legi timate demands wi th011t encroaching on the legal reserves. but no
surplus for speculation, or for profiteering, or for holding any
v.nusual amount of harvested crops from the market. Though the
percentage of decrease of reserves each week has been in tenths
there }lae been a s~d~ decrease each week since July 2_3rd. It
should be remembered that the Reserve Banks of the crOp n:oving
sections are being sustained today chiefly by help from the Boston
and Cleveland Reserve Banks. New York has helped until recently,
and Philadelphia and San Francisco still are helping some thr,ou.gh
purchases of acceptances from the West and South. The Boston
Reserve Bank is charging its own member banks 7 per cent for rediscounts of coiDir.ercial paper and is loatling its surplus to
Western and Southern Reserve Banks, which make most of their
rediscO'Illlts to member banks at 6 per cent. That doesn't seem
cpi te right. In accordance with strict business principles, or
with economic principles, if you like that term, the rates ought
to be highest where the demand is greatest. Boston's SUI'l'lus of
credit comes partly from dnll business, textile plants closed
down, etc. and there is naturally some grumbling at its high
rediscount rate maintained at present largely for the benefit
of the rest of the country. It should rDt be forgotten that the
regional reserve system is not exactly the same as a Central
~eserve Bank with branches. When considering the present situation,
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furtherrrore, it is well to bear in mind that as a result of the
high (7 per cent) Reserve Bank rate in New York and of curtailment
of loans for speculation the stock market is absorbing a. billion
dollars less credit than last fall, and that billion dollars is
n~w in use fjnancing the rr.ovement of crops, and financing produc . .
tlon generally.
Securities, including Liberty bonds are at a
very low point - the only things in the count.q that ~re really'
cheap, judged by pre-war standards.
As I have said, some of the surplus of credit in Boston
which is now helping Federal Reserve Banks in the We~t and South
results from dull business in manufacturing lines, and the same
is true of Cleveland and Philadelphia, and to some degree also of
other districts where there is much manu.facturi.-"lg. There is evidence that we have entered upon a period of readjustn:ent of values.
The people have rebelled against the ever mounting prices and have
so diminished demand for many articles, particularly clothing and
shoes, that some factories have been compelled to close or run
on part time for lack of orders fot the time being. This has been
charged as due to restriction of credit, but I think there ·is evidence that the moveffiertt is deeper and more wide-spread. There has
been a decrease of prices all bver the world to some extent. It
began, I think, with the collapse Qf the silk market in Japan in
the winter and early spring. The big drop in taw silk was naturally followed by a drop in wool and in leather, and the movement
spread from one thing to another. How far the price recessions will
go remains to be seen. A lower range of prices will ease u~ the
credit situation considerably, but will at the same time perhaps
increase grumbling and criticism. We have all complained of high
:prices and of the high cost of living and have charged inflation,
profi tearing, etc., but we all like to see somebody else 1 s prices .
go down.
When the prices of things we ourselves sell or produce
also go down -why, that's all wrong! 'We cantt sell them below
the cost of production, dontt you know.' People like to find a
"goat" somewhere to blame when things go against them, and sorr~
of them, perhaps naturally enough turn their criticisms against
the Federal Reserve Board or the Federal Reserve Banks. The wa:t
taught people to loOk to the Government for everything and now-adays when a man canlt "hockn his last winter•s overcoat for as
much as he thinks it ought to bring he writes to the F. R•. Board
and saye- it is outrageous that money is so tight.
Without the Federal Reserve System, or some similar
central banking system, I think we shall all agree, the war could
not have been financed on a. gold basis, and the system has - very
:properly been described as a wonderful success. It has been ably
administered, but we must not forget that the system is still on
trial. It has never yet had a chance to function normally and has
only within the past year begun to be a determini~g influence in
the stabilization or regulation of credit. The war thrust upon it
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- 3 enormous business, of a kind not contemplated when. the Act was
passed - a business based not u.pon self-liquidating corrnr.ercial
paper but upon governrner.Lt. bonds, and at rates a,".)normally low con.sidering the dereand. As the Bcardts last report says "In order
that the n:ember banks might carry the b1U'den of undlgested
Government securities they we't"e obliged to rediscow:.t w:i. th the
Federal neserve B<:,nks and. :::.:n order that such redis~?.:~:-:.·~:.5 . '1g should
not involve them in heavy loss it was essential that as long
as the banks were lm'ldil:lg to bond subscribers at coupon rates the
rediscount rate sbould be related to the bo:1d. :ts,tes. The rediscount rates of the Federal Reserve Batiks, therefore, instead of
being h;_g:Qer than the ma't"ket rates. as in theory and normal
practice they should have been, were made 12"& than the market
rates." This enforced departure from sound banking principles
necessarily led to enormous expansion of credit .. or :infla.t:i..on,
if you :prefer that term, and i;he problem has been eve.,· sir..ce hOw
to get away from it. Of course it is entirely contrru·y to the
principles on which the Federal Reserve .Act was found1.:Jd to make
loans on bonds, aven if gove:c:ament bends, at lower raiies t.han on
com:nercial paper, yet in some districts we azoe still doing it.
Andirtiirectly we are issuing currency based upon t.hose bonds,
though that was one of the vexy things the 1'ed:3:i.~al Reserve .Act
was expected to put a stop to. The c,Jrre:acy contemplated i,n the
Act was to be issv.ed only vl)on the :redis~cv.nti'1g of short-time
paper growing out of actual ·ov.siness transs:::tions, paper that was
expected to be self-li (irtidat:l..r.g when the t.rar,sar.tions were completed by the sale of goods. The w!1ole scher.:e was upset by the
flood of governrrent sect::ri t:i.es, and flU'thermore central ban'king
principles and p:-actice being ~n.familiar to most of our business
men and bankers, a great many people got the idea tha·i:; FecleJ.•al
Reserve Bank rates shuuld be :pe:rrr;ar.e:;.1.tly lo·Ner than market rates,
so as to make rediscO\.'l1t.in.g Sil:.t.raeUve and profitable to the rr.ember banks and so as to make the bo;,.·::.-ow:ir..g cf money for any and all
purposes easier, and mar..y also got the idea that Mbe!'ty bonds
should be carried indei':i.ni tely at the coi.l"pon ra·!;es. It is not
necessary for me to sa~,. to a."'l au.(l:tence of bar.ikers thai; if tl1e
Federal Reserve System sh011ld be cond~1cted in accordance wHh such
ideas the final res·,J.l t wou.J.d be a crash s·ach as we have never had
before in the history of the country.
We are now alrrost at the peak of the demand for credit
and currency caused by the rr.ovement of crops, and it is ea~y to
see that the situation might have been sed.ous had there not been
a general increase of F.eserve Bank 1•ates begl!ming about a year ago.
There was some gr1.1II1blin3 over the increase of ra·i;es on "wa:r. paper",
but it had to be made and in due time shculd. go fnrther, in my
opinion, so that there sho·,ud be at least nc preference shown to
bond secured -paper. The great issues of L:tbert.y bonds are gro.dually being digested, going into the hands of investors who intend
to hold them, and there has been a gradual reduction of loans on
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- 4"war paper". Apparently about $16, 000,000,000 of Liberty bonds
and Victory notes have been actually paid for and are out of the
banks - a re~lly stupendous achievement, whichwe would not have .
thought possible a few years ago. The Comptroller of the Currency
brought out this fact in an address before the MaiQe Banker 1 s
Association in June. According to his figures, there remained
less than two billions of these securities in the National B~s,
counting bonds on which the banks were n:aking loo.ns and bonds
owned by the banks, and he estimated about an equal amount in the
State Banks and Trust Companies. Splendid as the showing, of saving
and absorption of Liberty bonds has been, however, it must be
realized that the four billions left in the banks, together with
the Treasury certificates, still cause a very serious displacement
of credit, which can only be made good by continued steady saving .
and investment on the part of the people~ The high record of . .
bills discounted based on government obligitions by the 800 reporting member banks was made in June., 1919, $1., 438.~ 0001 000 and the
high mark for the present year was made· on January 2nd when these
banks had loaned $1,289,000,000.
The low mark vias August 20th, ·
when these loans to individual borrowers on government paper ~d
declined to $959, 000,. 000, a decre3.se for this ye3.r of $330,000,000.
If all banks were included I suppose the decrease would prob3.bly .
be twice th3.t figure, or about $6001 000,000, showing what seems to
me very gratifying progress in the payment for bonds.. Some part
of the decl.ine must be due to the reduction of the outstanding ·
Treasury certificates, but certificates were l3.rgely.held by the
banks themselves until their interest rates were raisedJ and I
suppose ~ve not entered very largely into collateral for lo~s
to individual borrowers from.the banks. Feder~l Reserve rediscounts~ b~sed on war paper reached their high mark on May 16, 1919.,
at $1,863,476.,000 during the Victory loan Cl.mpaign. On June 18th
these war paper rediscounts had been reduced to $1,231,841JOOO
or $631,000.,000 less.
The remarkable thing is that the reduction
in war loans h3.s been very much more than made up in incre3.sed
lo3.ns on commercial paper.. A year ago, on September 5, the Reserve
Bank rediscounts on commercial paper were only $2121 185,000, about
one-eighth of the loans on war· paper., which then sto.od a.t
$1,635.,233,000.
On September 3rd the commercial paper rediscounts
had advanced to $1,412,~5,000, or nearly seven times as large as
last year at this time, and more than $79s000,000 greater than the
rediscounts on war paper, though the latter had increased more than
$100,000,000 from the low mark of $1,231,841,000 of June loth to.·
$1,332,892,000. Commercial paper re-discounts passed the war paper
bills in the Reserve Banks for the first time on July 30th when
they reached $1 1 250.,613., 000 agp.inst $1,241., 017., 000 war paper bills ..
They seesawed afterwards for a few weeks but the commercial bills
seem nov• to have taken the lead peru:a.nently. It should be added
that the recent increase of a hundred million in war paper 1oans
1s prob3.bly also to be considered chiefly commercial - bonds merely
being used as convenient coll3.teral-
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Mr. Platt divided the present critics of the Board
into classes, as follows:
said:
(a)
Those desiring lower rates - cheap money regardless of economic laws or the reserve
requirements of the Federal Reserve Act;
(b)
Those declaring that the discount rates of
Federal Reserve Banks were not advanced
quickly enough after the \Var financing was
finished and are not yet high enough fully
to control credit;
(c)
Those who just criticize on general"principles -perhaps mostly for political effect.
Dealing particularly with the last rrentioned class, he
"This third class is not troubled by any particular regard
for consistency or for laws of any kind. The sarrs persons have
declared that enormous inflation has been promoted by the Board
and has been the cause of high prices - pointing to the great
volume of outstanding Federal Reserve notes - and then when prices
began to fall they declared that the Board was stifling business,
refusing credit for production and causing deflation.
The chief
stock in trade, however, of the third class of critics is the
charge of aprofiteering.n They point to the fact that the net
earnings of the 12 Federal Reserve B~~s, the excess of earnings
over current expenses, for the half year ended June 30th totaled
$68,583,111 or at the yearly rate of 151.2 per cent on an average
paid-in capital of $91,165,000, and that they made 92 per cent in
the•corresponding period last year.
Well, if you can "profiteer"
by having your rates or your prices too low, and when practically
all your profits go to the goverrur:ent as a franchise tax, there
may be so:rr:ething in the charge.
The Reserve Banks before the war
were not making their dividends, e.s a rule, and one rr:ember bank
u-p in my old Congressional District charged off its Reserve l3ank
stock to profit and loss, and said it was no good as an investrrent.
Profits were forced on the Reserve Banks by the war, and have been ·
made at rates lower than good banking -practice would have dictated rates which attracted business instead of stabiiizing credit.n
In this connection, Mr. Platt called attention to the extraordinary nature of Federal Reserve Banks as corporations~ their
entire capital, surplus and reserve fu.~ds being contributed solely
by their stockholders - the member banks. Taking for example the
Federal Reserve Bank of Richmond, he showed that while the bank
made the first half of the year a profit of 113.6 per cent on its
-paid-in ca-pital, that profit was hut 7.2 per cent on combined
ca-pital, surplus and reserve balances. He stated that this matter
of -profits raised a question that he did not care to discuss today.
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He said. however:
•1 introduced a bill in the last session of Congress
that wOUld have allowed extra .dividends of not to exceed three
per cent from reserve banks that had acC1llW.lated the full 100
per cent reserve, but I should add that D\Y position as a member
of Congress on such measures must not be understood as necessarily indicating my position as a member of the Federal Beserve Board. You remember that Salmon P. Chase, as Secretary
of the Treasury, issued greenbacks which later• as Chief Justice
of the Suprerr.e Court, he declared unconstitutional. It is very
important that there should be no motive for running the Reserve
Ballks for the J?Wl>Os~ of making a profit. An extra dividend
bill, i f pas~ed, should be earef'Ul.ly safeguarded. Lower rates
than_ those at present prevailing would probably bring larger
prof1 ts by attracting more business~ but the Reserve Banks have
the custody of y0'\11" reserves ... of the reserves o£ the banks of
the country, and those resettes Dl\l.§t be cgnserved if tQe ,$utem
.!s to be managed with &afetzw There mU.st b@, no. insblcemen~ .for
the expansion of credj t merely for the sake pf profit. "
As to the critics classified as those' desiring pap
money, Mr-. Platt said:
"A very well known United States Senator has reeently
contributed an article to an industrial journal. published in .
Bal tirnore, in which he urged that the R$serve Bank rates should
be lowered to Where they were
before the war, or at
lea.st dtU"ing the war~ In one part of the article he says that
the policy of the Board has had the en:ect of "breaking down the
prtce of securities" - which is tant~t to saying that speculation in Wall Street has. been checked - in anothel' place he
says that "there is no sense whatever in retiring credits which
are employed in production. "
Well, obviously if you should open the flood gates
o£ credit for speculation the price of securities would advance,
but such an advance at this time would absorb credit needed
in moving the crops and in productive enterprises. 'the policy
of the Board has been throughout to conserve credit for production and orderly marketing. leserve Bank rates mu.st be fixed
with the purpose of maintaining sate reserves - the reserves
recpired by law - otherwise we should have such inflation and
speculation as could only end in disaster. 'l'he Senator urges
Chambers of Col'tllllerce throughout the country to pass resolutions
in favor o£ lower rates. Chambers of Coumerce are cgq>osed
ot business rten and batke:rs who are not as a rule inflationists
and I shall be surprised if they do not recognize the necessity
of the application of sound principles - of maintaining sound
conditions of credit. They know that the banks have been
meeting all demands for credit .for so~d producti~e enterprise.
.. ,
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and have been curtailing credit only for speculation or for nonessentials. They know that with reserves lower than they should
be, and with loans outstanding far greater than ever before in
the history of the country there has been no "retirenant of credits
which are ~loyed in production," where the conditions were sound.
Personally I can 1 t help having some doubt whether all
has been done· that could be done to curtail speculative and other
unnecessary credits. The enormous expansion of all bank loans
since the end of the war and the fact, already stated, that Federal
Reserve Bank loans on commercial paper have increased nearly seven
fold in a year, or about $1,300,000,000, makes 1 t hard to believe
that all that additional credit can possibly be used in useful
productive enterprise. Certainly there is no evidence of restriction, in these figures, but strong evidence to the contrary.
The total loans of the Federal Reserve Banks are at their
hiAAest now - higher than at any time during the war, the highest
in the history of the &,rstem. All previous records of "total. bills
on hand 11 were passed in the statement of August 27th, and again on
September 3rd, and on September lOth. They passed tb£ee billion
dollars for the first time on the 3rd. The figures are so high,
in fact, that they seem to constitute strong prima facie evidence
of undue expansion.
This brings me to some consideration of the criticisms of
the second class of critics mentioned above, critics who include
some of the leading students of econondcs·and a few of the·leading
bankers of the country. They maintain that the rates of the Reserve Banks were not advanced soon enough after the war, and some
of them maintain that they are not yet high enough in all di stri.ct's
to give the necessary check. to dangerous expansion. I am personally
of the opinion that these criticisms are useful. The hindsight
of these college professors and bankers is often better 'than their
foresight, and l~e the rest of us they frequently find it easier
to point out mistakes long after they occur than at tlu~ tirr..e. Their
criticisms often fail also to take into consideration practical
difficulties, but I agree with them that conditions would probably
be better today,· if the check to expansion. had been started by a
somewhat earlier increase of rates after the wa.r. I agree with them
also that Reserve Bank rates should be higher than they are today
in some of the districts where the demand for credit is greatest
and where legal rates of interest are 7, 8 and even 10 per cent,
as in the sixth Federal Reserve District and in several others.
Practical difficulties, however, have to be considered. Some
people, and some banks, got themselves pretty badly overloaded
with Liberty bonds through patriotic xootives, and mu.st be giv~n
more time to work out. The habits engendered during the war
can1 t be thrown off at once, and people must be given time to
under stand what the purposes of the Federal Reserve System are
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and what the principles are which IllllSt guide it. If we can
succeed in keeping the reserves of the System within sate limits
without again raising rates., it ma;y be better to do so.
Concluding his address, Mr. Platt stated emphatically:
"There is absolutely no politics in the administration
of the affairs of the Board. If the time ever comes when the
Board yields to partisan pressure and fixes its policies with
relation to their influence on elections, rather than the se ...
curity and soundness of the banking system of the country then there will be danger ahead. I do not believe such a time
ever will come. I do not believe the policies of the System
today would be appreciably different if Mr. HUghe$ had been
elected President four years ago instead of Mr. Wilson.
The Federal ReseM'e Act may not be 100 per cent perfect,
but it works well and needs only such minor amendments as suggest themselves from its administration from time to time. No
changes will be made in its main features for many years, if ever,.
in my opinion, unless Socialists or sane other radical or destructive party should gain control of the country.w
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