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~·
FEDERAL
HESERV:E
BOARD
ST ATE~4ENT FOR THE PRESS
X-1791
Release for :r.10rning pApers,
Janu<:cry 3, 1~20.
AN ADDRESS BY Vl.P .G. HARDING,, GOVERNOR OF THE 'FEDERAL RESERVE
BOARD, DELIVERED 1\T BOSTON, TU.NSDJ.Y, JANUARY 6, lj20,
BEFORE THE M.ASSACHUSETTS BANKERS 1 ASSOCIATION.
**************
The historian der·ls with the past, but the active mr.n of affairs
lives in the present nnd directs his vision toward the future.
Yet
it frequently happens th~t in order to arrive nt a thorough understanding
of present conditions and to interpret the significence of the shadows
which coming events are said to cast before them, it is necessary for
the business man to review the .past, or at least the recent past, in order
to draw logical conclusions from the
se~uence
of events.
We are living todi1.y in extraott.dinary times wnen lights and shadows
present contrasts more marked than we have ever seen 'Lefore.
In sume
localities qnd to some individuals the scene is illuminated with the
radiant intensity of a July sun nt noonday, w1,ile in other· places and to
other peoples it is enveloped in t11e murk;r darkness of an arc tic midnight.
We realize that such conditions nre unusual and transitory) for extremes
so violent cannot continue indefinitely.
In our own country we question
the permanence of the lurid prosperity enJoyed by some while so raa.ny
others are struggling with adverse conditions;
there is no La.sis for the hope
th~t
t~d
in our world relations
this country can prosper long vvhen
other great nE\tiuns i=.<re plunged intu tlle depths of deJ?rePsion, poverty
and famine.
More than sixty yenrs ngo Abraham Lincoln said that this
natiun could not exist half slave and half free 1 that it must be all one
90
I
91
L-1791
or the other.
So also neither this country nor the world can continue
to live'half in the glaring
st~light
and half in utter dorkness.
cennot, of c G1J:rse, lt;:k for 1:'.r.:\·-Tetsa1 S'...:nshine, but
vo~e
We
should undertc.ke
to soften the contrast now existing. taking pains to accomplish the
result by diffusion of light rather than by extension of the shadows.
To the superficial observer who considers only large figures and
volun1e of business, gross profits '3.nd demmd for services and goods,
it appears that the people of this country have never experienced such
exuberant prosperity.
Prices and wages hi1ve never bean so high, opportunity
tq work so abundant, demand for goods so great and bank deposits so large
as now; but with all the conditions present which are usually regarded as
concomitants of
prosperity, there is a wide-spread feeling of unrest,
of dissatisfaction with the present, and of apprehensivp for the future,
There is general complaint that while there has be.;;n no approach to uniformity
in rE•tes of increase of personal incomes there has teen a sweeping and universal advance in prices of necessities as well as luxuries uffecting all,
and resulting in deprivations and hardships to a very numerous unorganized
intermediate class whose earnings and incomes have remained practically
stationary.
The high cost of living therefore has become the subJect of universal
proposed
interest rnd concern nnd various methods have te~n
·
fer its reductio•~
·In considering the problem it is well to review briefly the course of events
during
t~e
past five years in order that we may understand clearly tue causes
that have led to present conditions and ty analysis be able better to reach
conclusions as to the proper corrective¥
There can be no doubt that the world war is directly resp•nsible
for many of the successive advPJ:lces which have taken
of
~illions
of men from productive
oper~tion~ ~d
p~ce.
their
'.Phe wi tfulrawal
conv~rsion
into
-3- .
92
X-1791
•
fighting units. and the expenditure of billions of dollars in processes
of waste end destruction created an abnormal and urgent demand for supplies
of all kinds, not only for the necessities which ere required in times
of peace and war alike, but also for arms, tounitions and all sorts of
military and naval equipment.
Production could not keep pace with demand
notwithstanding reduced consumption end rigid economies on the part of
civilian
populations,
The world was drained of its tangible liquid
wealth as represented by raw materials and manufactured goods; in many
countries currencies were inflated, mld everywhere there was credit
expansion on a vast scale.
Industry was diverted into the r.1ost essential
channels, and building operations and construction work generally were
suspended except where necessary for the production, stor<lge rnd transportation of war materie-L
When hostilities terminated upon the signing of the armistice nearly
fourteen months ago 7 the world had teen deprived of the productive power
~epresented
by perhaps fifteen million men who had lost their lives or
permanently
who had become/disabled. It was deficient in supplies of fooclstuffs, fuel
and textiles, and its manufacturing capacity and transportation
were greatly impaired.
faci~ities
Millions of :people found themselves homeless, not
only in the war stricken areas but also in countries whose soil remained
untouched ty invooing armies 1 for normal building operations were four
years in arrears.
The belligerent nations staggered vnder a stupendous
burden of debt, which had been inc1·eased during the war by the equivalent
of more than two hundred billions of dollurs, most of which hau beGn
expended in destructive energy involving uneconomic conswnption of goods.
The largest country and. great granary of Europe was torn oy revolution,
anarchy
~
civil war) and the populations of other European countries,
many of them crippled by loss of man power, oy la.ck of domestic animals
93
.X...l73l
,•
and a.gricul~ural implements and by the imp$irment of p:.-oductive capaeity
generally and the loss of their foreign markets, were una.ble to supply
their domestic requirements.
They were
obli~d
therefore to turn appealing
eyes to the Far East, to Colonial possessions, and across the Atlantic to
North and South America.
By reason of its stronger financial position and greater aLility to
produce foodstuffs, raw staples and manufactured articles, these appeals
have been made in larger part to the United States.
The assurances given
by our Government of its humanitarian ~lses in entering the war, and
the financial aid extended through loans from the Treasur;r amounting to
ten billlons of dollars have also served to focus tb.e eyes of all Europeans
upon tbe United States as the most dependable source of suppl;r for Europe's
wants.•
UnfOI'tUne.tely the trend of events in this co-untry during the year
131~
was not altogether satisfactory.
'
.
Following a period of waiting ond hesitation
thrift
during the early part of the year, the policies of
-, . and economy, of
self-denial and conservation which during the war proved so effective were
soon discarded, and the pent up··energies of a people which bad subrogated
so finely all pleasures, ambitions <;Qd impulses to the task of winning the
war were released and found expression in activities of every Kind.
In
many instances these activities were commendable for they were devoted to the
eonstructiQ work of bringing the industries of the country baek from a. war
to a J)eaee basis, but advantage was taken of the ease w1 th which credit could
be obtained, to avail of speculatiVe opportunities for profit.
became rampant in
al~
Speculation
sections of the country ::nd individuals everyNbere gave
free rein to extravagant tendencies hitherto restrained ..
M•a.ncina prices served to stimulate rather thr;n to check demand, alld
-5-
94-
X-1791
the evident necessity for conserving e-ssential cor.m1odi ties known
to be scarce failed to curtail consumption.
As the yec.:r pro--
gressed bank loans and. deposits increased, and reserves declined.
Frequent warnings issued uy the Federal Reserve Board had only
a temporary effect;
dangero-us tendencies developed into
dangerous situation 1
and corrective measures were applied,
conceded to have been
neces~ary
time were denounced by sorr.e who
l:i.
now
salutary,
but which at the
ought
tu nave known tetter as a
[tnd
conspiracy against the prosperity of the
country~
Meanwhile it tecrute evident that those who had predicted that
the year wuuld witness a marked falling off in our exports, because
of the decline in the cash purchasing po.ver of European nations and
their inability to secure credits as indicated by the
spec-
tacular drop in the exchanges of most European countries, h:J.d
r~ached
preu:ature conclusions, for the total value Qf exports from the
United States during the year ljl::J has exceeded imports l-y at
leas~
four billions of dollars.
Notwithstanding this fact, the movement
heavily
uutgu
of gold fer the year was •
against us, the net
having been
$27&,723,000, up to Decenber 20th, or taking into consideration the
balance of the gold received from Gern.-my for fovdstuffs nnd held in
London for future ship:r.::;ent to this country or for use atroad., the net
has been
December 20th,
$147 40},000.
1
In additicn to this there heve te0n, to
net exports of silver Dir;ounting to $145,<:'20,000.
Vi1hile the value of rnw materials arid of monufactu.red. orticles
produced. during the year wa5 the greatest in tn.e history of tho:: c ountryr
95
X-1791
-6-
the physical volume proved to te smaller than for any year since 191S~
During tb.e last f:cw we ~ks it has become increasingly avident that
active
st~ps
must be taken if our exports are tote maintained, es-
pecially tu European countries, in anything like their :rresent vol'Wl!~"
The fact tb.a.t V>e l;l.ave had a favorable tr'3.de balance of four tillions
uf dvllars accvrnpa.nieu by a large net loss of precious metals shews
conclusively tbat exporters have either
t~on
payment in
fcrei~
currencies vr that they. have accun::ulated credits in foreisn tc.mks ..
Just hvw these credits ho.ve teen a.rromgeli it is impussib le to trace fully
or even measuratly, but it is very protable that a lar5e part of the
financial burd.en has beRn tbrovm d.irec tly or indirectly upun .AJ;;eric:m
tanks.
There. is nv reason, however, to -lUestion the security of bank
loans f vr t.tle:re is an abundance ..,f priu:e collateral avai lGtb le inc lu.:dng
more than twenty billions of dollars of United States Governi:lent bonds ..
It is
hi~hly
important, however, that e-ll long credits granted in
connection with exports be kept out vf the banks, whose: policy should
be to maintain themselves in a liquid condition.
Apart from the locns
which the War Finance Corporation is authorized to :rcak,;.;, there is nu
provisiun for Govc:rnrr;ent aid in
finF.~UCin,; exports~
Th~;;
fund. of ten
billions of dollars which Congress authorized to be advnnced to foreign
e5overn:r,ents associated with us in the war has been :pra.c tic~lly exha.usted, ·
~r~
barring a possibility that fer hum@nitarian reasons, in order to
prevent actual starvation a further ad:vance of two or three hund.red
million dollars mure may be perni tted 1 there seems to be no
ex:pe.c t t1lat any more large lo<:llls by
will be autborized.
~he Governr:1~mt
to
for financing ex.pcr ts
Such a policy would rr.ean either more tn.x.ation Dr
rr1ore bonds; it wou.ld me£0. a return to wartime r.c.ethod.s of
we have tUl"fled
r~ason
our backs upon such
~ethods
fir><Jn~il'..g
and. are directing
O'U'
after
st-eps
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..
X-1791
96
towards the metllods and poJ:',;.;ies of peace financing; it would rr:.ean that
funds belonging tO all the people would be applied in time of peace to
the more direct benefit of exporters and of those who produce goods for
export ..
Without discussing at this time the eff3ct of credit and currency
expansion~
it is evident that decreased physical volume of production,
higher prices of raw materials. and higher operating costs, coupled with
increased domestic consumption and heavier movement of exports, have
made higher costs of living inevitable.
As regards the responsibility
of the comn:ercial banks of the country, of the Federal Reserve Banks, a.J.d
of the Federal Reserve Board for present conditions, and as to the policy
that should be adopted in the futt\re, much can be said..
it be understood that there is as wide a
and
pro~er
differer~e
But first let
between war financing
banking policies in time of peace as there is between martial
and civil law.
The story of our wa:r financing will constitute a brilliant chapter
in the country ts
histo:r:y~
wt.ile the Fede:a.'al Reserve ]nnks and the
roomber and non-memb'=lr banks are entitled to the greatest pra:i.se for
their most effective cooperation, neither they nur the Federal Reserve
13oarcl are responsible for the policies and methods adopted in fj.nancing
the war and deserve neither :prnise nor blame for thew. Respons 4.bili ty
witb
for these methuds and policies rests ·
the Pres:iclent 1 the Congress,
and the Secret"'-rY of the 'l'l.'easury, who autbu:c5.7.-ed and
tu them the
~opted
them. cmd
results shuuld be creiited.
No great war bas been f:i.nan-;ed entirely by taxativn: ani inva:riably
resort has been hod to expcd.icnts such as ).rc:':lat.iun of currency or abnormal expansion of credi.ts; and sometimes to
·bo~·h..
Wa.rs vvi th us have
always caused higher taxat iCin, and during the ci vi 1 wa:r recourse was had
also both to credit expansion through bond issues and to currency inflatiun.
''·r.·
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'
X-1791
•
Irredeemable paper money was issued to defray current expenses, and as
this currency was made a legal tender for all debts and dues, it was in
effect a forced popular loan without interest.
tt proved to be a very
expensive currency, however, because of its effett Upon prices, and not
until nearly fifteen years after the end of the war din it circulate on
a parity with gold.
in 1894,
The legal tehdet notes
we~e
a disturbing factor again
189, arid isj6• becaUse ot theit repeated redemptions in goid and
immediate reissue, and were described as an endless chain.
'!'he policy adopted by the Secretary of the Treasury in financing the
.requirements of the Government during the war with Germany excluded the
issue of uncovered paper money, and provided for sales of interest-bearing
obligations, consisting of short time certificates of indebte4nets, and
bonds of various maturities, which could not be used directly to secure
circulating notes, although indirectly through the Federnl Reserve
Ban~s
they were used to some extent as a basis for circulation.
In the clearly defined
'
limit~tiQns
prescribed in Section 13 of the
Federal Reserve Act, in the description of the kinds of paper eligible for
rediscount by
Feder~l
Reserve Banks, a special exception is
of bonds and notes of the Governn:ent of the United States.
period of actual war,
de~ds ~e
~de
in favor
During the
upon the Treasury were greatly in
excess of curr8nt receipts from taxation. ana the offerings of bonds
within a comparatively short time amounted to far more than the investment capacity of the
country~
In order to insure the success of the re-
spective bond issues it was necessary to anticipate the investment capacity
i:
97
~·
X-1791
-9-
of the public as represented by future incomes and savings.
Banks, manufacturing concerns,
busin~ss
houses and individuals
were urged therefore to subscribe· for bonds without regard to
their immediate ability to pay for them, and an effective appeal
was made to the·patriotic impulses of the people to borrow
heavily from bnnks upon the security of bvnds, and as a special
inducement preferential rates were established for such loans and
easy terms of payment were
promised~
The inevitable result was a great expansion of credit, which
was reflected not only in the statements of
indi~~ual
also in the position of the Fecieral Reserve Banks.
ti~e,
banks, but
.At the same
no opportunity was lost to impress upon the public the
necessity. for increPsed pro-iuction anci reducei consueytion, for
thrift and rigid economy.
fs long
!'l.S
the
Wr:tr
WI:\S
1n progress anci.
its issue in cloubt, appeals of this kind were far mox·e effective
th£-.n couH be expected c.fter the war hal been brought to a successful
conclusion, after the tension had been relieved and a period of
reaction
~cl
relaxation had set.in.
The end of e. world war in a military sense does not
· s;mchronize
with its termination from a financial point of view, and abnormal
expenJitures incident to war cannot be curtailed
tha suspension of hostilities.
iffiffie~iately
upon
I'he armistice was signed.
shortly after the flotation of the Fwurth Liberty Loanr
many months in ad.vance of popular expectation. The liabilities cf our
98
(
X-1791
-KlO-
Government were greatly in excess of the amounts which had boen
raised by taxation end by the sale of bonds;
there was·
aver~
large floating debt in the furro of Treasury certificates of indebtedness besides heavy unascertained liabilities of various
kinds.
It became necessary for the Treasury to float another
great popular loan, and notwithstanding the fears expressed by many
that an appeal to :patriotic motives in tiiLe of peace would not
meet with an ade-1uate response. the car;n:paign £or tbe Victory Loan,
the last appeal of the Treasury to the generous
irr~ulses
of the
.Arr.ericen people, proved to be an un.:tualified success ani tb.e loan
was oversubscribed •
.As a logtcal sequence the loan accounts of the banks generally
were greatly increased <.md more so oecc..use currJi,t::rcial dem;::.nd.s were
not restricted as they had
fro~
be~n
during the war period.
Receipts
the Victury Loan, however, were nvt sufficient tv li{uidate
entirely the liabilities of the Treasury. Ril<i a large fluG!ting
debt represented by nearly fuur billivns vf dollars uf Tra2.sury
certificates still remained to be cared for..
to cuntinue the wartime banking :;::olicies
r~re;jsury
had cumple ted. its
plan~
It was deen:ed necessary
until
~uch
for the periuc\isal
time as the
rei.lUC tiun
thlo in:iebteill1e::;c, 1:mJ. its refunJ.ing from time tu tirr.e
t 'lA
p2-ywsnts were
mac:te.
a~
uf
q_u.,.rterly
99
100.
-11-
x~1791
A few weeks ago the Secretary of the Treasury advised the
Feder~l
Reserve Board that the plans of t:1e Treasury had. reached
a stage where they would not 1)e ir.uperiled by resurqption on .the
part of the Board of its statutory
rates.
po;~rs
to
reb~late
discount
It 'vould be vvell
Revisions were made iw.;.edia.tely.
therefore for the tanks a:nd the pu1Jlic to understand that
financins have definitely lapsed and determined.
Henceforth
especial consideration .vill 1Je Given to the industrial and
coranercial
require~ents
of the country, and everythin;; possible
will be done to restore the J.:'roper balance bet·,;.rec:n the
credit and the volume of ,:;oods.
~~e
volur~Je
of
The pror:ess will nP-c..essarily
a .;ra.du.a.l one, and can ·Je corrpleted. c.nly when ··. v0ry
erable redell!Jtions of bonds have 'ceen made,
a.r:.d
consid-
~he re~::ainder
thorou;hly atsorbed by the pulllic.
Our
~.;anking
system is therefore passing thl'.'ou.gh a transition
period, inte~ediate betv~en that of war finance and a st~ge regarded as normal according to pre-war stando.rds.
Owin;; to the
necessity in the r.ieanv;hile of a.idtn;; in the financing of Europe,
it is probable that several ye<;.rs will elapse before an icie;:.l relationship between goods and credit can
conditions restored.
established and normal
During this transition period there should
be an effective control of credits,
~e
f
1_01.
..
X-1791
-12-
gradual liq_uidotion, and such temporary expansion only as rne..y be
necessary to meet seasonal re~uirements or emergencies,
There should
be a less lavish but more efficient use of capital and credit, extravagance
should be discouraged in every way possible, ~nd the production of essential
commodities increased.
It is important that the
~orld
should get ba<:k to work,
but in order to provide steady emplOYL~nt for the people of our own country
e:ven, it is necessary that there should be a sustained delllEUld for the prvducts of our fields and factories) mines and forestsr and in order to J~i~
tain this steady demand it is necessary to provide markets abroW. for our
surplus production.
~order for the populatio~of European countries to get
back tu wor·k and to produce tb.e things needed for their own support F.nd f0r
. exchP..nge with other nations, thus restoring tran'i.uillity to a war-torn wurld,
it· is necessary· thDt we should send ther:r; the raw materials, cuy..u,10dities and
e"luipment which they need so urgently...
In order to send curJl.'l10dities to
Europe we must have commodities available» for we crum1ot send
we consume here.
~bruad
With every appeal to aid Eurupe nttention should be
what
c~lled
that we may have an ade•luate exportable surplus ..
The domestic denwnd has been competing with expurt demc.nds, and tb.e
result has been that prices have been bid up on both foreign und QO~estic
consumers,
By some means or other credits have thus far been arranged
which have enabled shipments of goods to Europe to be made but for more
·
or direct
than a year there has be~n no systematic/curtailment of domestic consumption
'-
in order tu provide a surplus for export.
1.02
l} -
Tha resu.l t has been tba.t to the extent that our cons1Jrll)tion has been restrictiiQ. cit
has be~n accomplished through competition and constant advances
of prices. Had shipments to Europe been accompanied by corresponding
voluntary curtailment of const111ption at home 1 prices would not have been
forced u;p and from the resulting s.;.:vings the.re v;ould have been accumulat-.
ed a c~pita1 fund av~il~ble directly or indirectly for the purphase of
whatever Europe may
h~ve
had to sell in order to finance her irr.ports.
During the vvar the popular response to a:ppec.ls for conservation and
saving was magnificent.
~ne
reaction, however,
~s
been correspondingly
violent. :md a systematic ca.rqpaign of educ:J.tion may be necessary to
arouse our people. to the consciousness that vre may after all be living
in a fool's pa:r.:~.dise .sond that ha.td work, economy and liberal inve&tment
in foreign securities are necesscry if we wish to m::..ke our present apparent pr:psperity real and perrrD.nent-
The bill introduced Gmd sponsored several monthl ago by S8na.tor
Edge, of Hew Jersey, is novv .;.
"Edge Act".
l~w
o..nd will be known for all time as the
It is a gre;;;..t piece of constructive legislation and :Pro- ·
vides for the incor-_f>oration of associations under~ der:::J.l charter a.nd
under Government supervision to
eign banking or in such
eng~ge
either in international or for-
fi~cial ~erations
as may be necessary to pro-
mote exports of goods from the United States. The
E~ge
law affords
opportunity to all exporters, producers and manufacturers to
~
coope~ate,
to extend their connections a.bro«.d, to invest in foreign securities of
v .... rious kinds, and to offer their own o·bligations, specifically secil.red
•
.
:103
14 -
...
by their foreign collateral, to .American inv0stors. If oparm a way for
private financing of exports on long tirr~, not by the b~nks, but through
the investment market. The development of our foreign tr<:,de under the
Edge Act may be slow, and probably will be. At first, perho.ps, shipments
of only the most essent:ial o.rticles will be fimnced by cotlporations orgmized under the Act, but this rr.ay be really desiro.ble, far in view of
the present wave of extrJ.vas::tnce which is sweeping all over the world,
trJoughout Europe as well as i\merica, it is best that the stimulus for
production be concentrJ.ted upon essentials and that s:1les on credit be confined to such articles.
The sale of
1'orei~;n
secUl'i ties, either directly or indirectly,
through corporations ope:.atine; under the new law will create, of course,
additioml dem::mds Ufon
c~pit:::.l
and crodit.
time \i"l"hen there will be other ur ;e'1t d.err,ands.
Tlti.s demand is cominc:; at a
1"1:le g:reo.t railroad sys~em s
''1/~.1:1.
of the country 1 soon to be retm:ned to their owners>
large amounts.
States as a
The :problems ah.eJ.d vf us a.re
~tion ~s
sC1.'f'8:i'trJ<Ji.L;',
reached the years of maturity,
f3.iled even in its infancy and during the period of
meet successfully e7iTY issue
~d
to overcome every
require very
but the United
~nd
i~·S
it has never
ea.:cly youth to
obst~cle
and
d~ser~
As a sturdy siant it turned the scales to victory in the war in whiCh we
a.re still
technic.J.lly.en~;:'.ged
thing of the pa.st.
but which. let us hope, will soon be a
It is necessary only to h:we the people of this
country understa.nd· the n3.ture of the J?roolem; confronting them 3Xld the
need for their :;Jro:per solution, for our n::.tion:.t1 spirit when once
aroused is invincible.
@FedFRASER