The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
-·
219
X-1214
THE NATION!\L BANKS IN WAR TIME, -
THEIR PROBLEMS .AND WORK.
FROM AN ADDRESS OF W.P.G.HARDING.,
GOVERNOR OF THE FEDERAL RESERVE BOABD,
BEFORE THE NATIONAL BANK SECTION OF
THE AMERICAN BANKERS ASSOCIATION AT
CHICAGO, ILL., WEDNESDAY., SEPTEMBER
25,1918.
"
FOR RELEASE IN MORNING PAPER§ OF
THURSDAY. SEPTJil.mER 26th.
In these stirring
t~es
our
tho~ts
are constantly with our
sons and brothers who are in the fighting lines in France., or who
are keeping watch upon the high seas. We are thrilled by the ac..
counts of their military prowess., our hearts are gladdened_by their
constant advance
a~inst
a fonnidable enemy and we are inspired by
their courage and unswerving determination to overcome the enemy.
Within a short while there will be more than two million ~n in
•
khaki on the other side to support the gallant troops of Englan4.,
France, Belgium., Italy
~d
Greece, and the Czecho-Slovaks, in their
battles to free the world from the curse of Geman militarism and
autocracy;
X-I2I4
,
220
I
J·
-2-
8lJd we know that their mwbers will be steadily increased until tl:e
fUll f'l"llition of our hopes and aspirations shall have been attained.
But humn activities in this great war are not confined to the military :trants;
the battle lines are not alone in Siberia, in the
Balkan PeninSilla, in northern Italy, in Lorraine, Picardy and Flan6ers, bu.t they extEnd tl:roughout the civilized world.
There is an
American front, mazmed by millions of' men .and women who constitute
t.be great home guard, and
whO
must fUrnish tl:e nnmitions and supplies
and the t~a.nsportation facilities tor those who are actually E..vp~«.
to the Sb.ot and snell and poisonous vapors of' the enany-.
w·ithout
the work which is being done at home, am which must be carried on
in constantly increasing measure, tl's efforts of' our soldiers and
sailors could not be lang exerted.
Important sectors of' our hOI!B front are held by the bankers
ot
.America, 'VIho are on the financial f'i r.il18 line, am. i.t is of' t mir
work and of' tll9 ir problems which I wish to SJBak today.
~e
national banks of' the .united States have in other times and in other
wars proved their loyal v and efficiency.
1n tact they were bo m
in tlJe midst of' the convulsions of' a country torn by civil war and
their creation is due to the desperate needs ot the nation in those
dreadtal dqs.
Through tlle establisbrelii ot the national ba.nk:i:og system not
XI2!4
-3-
only was a market afforded for United States bonds. but facilities
were provided for the issuance of a national cuiTency capable of
circulating without discount in all sections of the
country~
So
rapid:W did the national banking system grow that in 1865. shortly
after the close of the Civil War, there were 1517 national banks,
having aggregate assets of $1,359,867,074, included in which were
United States bonds to serure circulation of $272,634,200. and about
·$75,000,000 government bonds held as investments.
In 1898, when we· were at war with Spain, consciousness of our
banking strength undoubtedly had much to do with the ease with which
$200,000,000 of 3% bonds were sold to the :1ublic at a substantial
premium;
but the national banks coordinated under the FGderal
resexve systan are now
eng:~.ged
in the most stupendous work they
have ever undertaken, and in according to tre national 'tanks their
meed of praise, I do not wish to slur nor underestimate the importa.nce of the work which has been done. by the state banks, savings
'tanks and t ru.s t companies as well.
There is no quest ion, howeve:r.",
that through the operation of the Federal Reserve system the vast
fiscal undertakings of the government have been successfully carried
out thus far without any undue disturbance to our finar.c ial structUI" e
and without a money panic o:f prisms of any kind.
For three years the burden of supporting the Federal Reserve
X-1214
-4-
aystem was borne almost entirely by tho national
banks~
-all through
those timec; whor, n:ar1y of the banks could not percoiVe that any subdantial benefit would be likely to enure from membership, and when
stock in the Federal Reserve banks was 1 ooked upon as a dead investment, Even a year ago, five months .:dter the United States had entered the war, there were only 86 non-national banks 'Nhich were mernbcrs of the Federal Reserve system. It is gratifying to note however 1
that hence£ orth the responsibilities and privileges of tnmxbership will
be shared by the state institutions which are nov11 coming over in
con;:;tantly increasing numbers and that today about 750 state banks
and tr.J.st companies are n:embers.,
~vith
total resources of nearly six
and three quarters billions of dollars.
ThJ problems of the AmBrican banker have always been rr.ore
~lex
co~
and difficult than those of banks in other countries and their
work is more varied and
exacting~
This is due 1 in part 1 to our wide
expanse of territory and to the amount of.pioneering which has to
be done incident to the building up
It is due also to the fact
~nd
developiT~nt
of a new country.
that the spirit of American institutions
derrar.do:: independence of action and that the tendency in this country
.
'
has been toward· a large number of independent banking units 1 most
of them of srr.a.ll and moderate capital 1 rather than toward a compact
group of highly capitalized banks conducting their operations throughout
the
223
X-1214
-5-
country through the medium of
coor&Lnating this large
uu.m:~.Jer
bJ."ar~.cbes.
~
need of some means Of
of jn:iependen.t banks, of reserving a
portion of the :lr resources for the cor::m.uli defense of the f
front, the necessity for
provid~
ina~ial
a ffiore elastic currency which
could eX:pand and contract in acoordauce with business requirements,
ana o:t establishing a. broad cliecount market, are some of the causes
whiCh led to tlle establisllnent of the Federal Reserve system.
. not
nw
It is
intention, however, to attempt to discuss your routine work
or your ever-, da.v problems, btl t I Wish instead to touch upon some
of those questions which confront you, and those militant d?ties
which are imposed upon you, in your work ot holding the financial
trenches in the great battle now raging tor li-berty and civilization.
The Liberty Loan organizations are about to be:gin the campaign
for tile fourth Liberty Loan.
The success of this campaign depends
upon tm cooperation of the banks, - not upon a half-hearted or complacent acquiesence on their part in the plans adopted, btl t upon
tmir active, incessant and a.ggressi ve coopera.t ion, given in a
genuine American spil'i t worthy of the cause for vmich the loan is to
be raised.
For weeks past most ot you have been taking your
allotments o:t Treasuy Certificates of Indebtedness which are issued
in anticipation of this loan, just as ym have done in tm case of·
the certificates which anticipated previous loa.:ns.
In order to meet
X-I2I4
224
your allotments you. have been obliged no doubt to reduce your
regular discount l!oos and to decline to take paper whif:h, in ordinary
circurnst~:m..?ue,
r...ave made
it:po-~sirle
quirementB and you
wcuJd. l:crre been attractive to
Bu.+, you
:ro~.t.
fur tl1e goverrun6nt to meet its financial re-
also -provided mea.m, to the extent of cer-
h!i'VB
tificates held, of ta.nng care of the pa;ymen..ts that you will be
C'.a.lled upon to ma.ke
f<Jl'
tlle J...iberty Bondg vvhich.. will be subscl'ibed
for by your customerse
·The opinion and a<lvioe Of every gocd
l:aliker on financial mtters is coustantly being scugi:'t;
your in..
fluence is grea·t, and yo·ar value as an ed!lcationa.l force is inoal· ·
\.
cu1ab1e.
BankS are the
g~oat
distrlbuti.ng agennl.es tllrougb.
vbi,~h.,
the bonds pass into the ha.ni.s of the ptlblic ani .1. t 1 s desirable,
wbareger practicable, th.at the bonds should be placed with t.'!:Js
cu. stomern of bar...k:S, and with tl:..ose who are not
tllan taken for investment by the banks
pected, of
C('IJ)."Se,
depo~d. t JX'B,
thanselve~ ..
ra i;her
BJ.t it is ex-
that balkS will do tbei:r .t"ull part :tn. :;:>lao:~ng
tm bonds in the r..a.ni.s of the public~ by crm.t~.r.u~r~ the~ p.ra.cti.ce
of lending freely ag3inst bonrls as se011ri ~-,
~J.:.ill6 i.:.1 t:;.:rn
vr.m.
tm Fed.eral Resene bankS fb r such assl stance as Ti'ay be needeCI.•
Th9 Liberty Lc..an is ess~tia.J.ly a pGp'\llar loan..
since tm first has fUll exemptittn from income taxes.
no
issue
The second,
225
•
-7-
third and fourth lema therefore,
~
a hi3ler retum in the hanis of'
men of moderate meaJDS than t my do wben held by the millio:ca.ire.
The
discaant rates at Federal Reserve bankS are so adjusted as to amble banks
....
.to lelld at approxlma.tely the rate borne by the bonaD, with a small
dlargin o.f profit.
Previous issues have been widely distributed, and
eaCh issue has shown a larger number Of subscribel's tban the preced.il'lg
one, the number in tm case of the third Liberty Loan being more than
1'7,000,000.
The Comptroller of the Currency is au.thor.i
v
for the state-
ment that of tm total aillOUnt of bonds issued u;p to this time only 4%
':.
were held on Jane 29th as investments by. the national bankS, or 2.29% ct
their resources, wl:l1le they were carrying at the sane time loans secured
by Libex-ty Bo!lds amounting to $475,000,000, or 2.56% of' their resources.
The
~Federal
Reserve Board, fran the time wllen it beeame evident
that this country would be forced into tm war. has spared no pains to
fortify the poSition of the Federal Reserve banks, in t'rder to enable
tmm to met all legitimte demalds which
~ be m~e
upon theul and to
render the greatest an.>unt of assistance to the member bavlrw in tm :tJerf'ormemce of 1heir war timB duties to tlle govemment.
U:Pf'n the recom-
mendation of the Federal Reserve Board, Congress amended the Federal Re1,.
seiVe Act in several important particula.rs on June -'::1, 1317.
The effect
of these anendments has been to bring into the system a large number Of
state banks, besides enabling the Federal' Beserve banks more effectivel.J'
to control the country's gold which had been widely dif'f'Used, having been
226
X·IZI4.
-aused for purposes of circulation and held in vaults of IDel'Inber alld
110n-member banks.
As you know; all the lawful reserves of' member
banlts are now kept on deposit with the Federal Reserve banks~ and as
Federal Reserve notes nla.Y be issued without limit against deposits
of gold or gold certifica~s, t:OO gold holdings or the Federal Reserve
been
bankS have/augmented to an amount exceeding ¥2,000,ooo,ooo, and the
disca:mting power or the Reserve banks has thereby been greatly increased.
Both the manber and non-member banks hava been urged re-
peatedl,- to transfer their gold as it accwnulates to the Federal Reserve banl«J, and the appeal has not been in vain, for the response
has been very general and gratifYing.
In the vaul. ts of the Reserve
. bankS gold is available eitlEr as a basis of new note issues or as
a means of extending their loaning facilities, while in circulation
or di stribll. ted among the 25,000 or more commercial banks, it is of
no more value than any other form of currency.
There still remains
in circulation and in bank vaults however, about $900,000,000 in
gold certificates and coin. most of which can be deposited and should
be dep,os.ited, t.ll:dr place to be taken as far as necessary by Federal
Reserve notes.
In mobilizing the gold of the country into the
vaults of the Federal Reserve bankS, it is not the intent ion to increase the volune of loans
these are war times,
am
~eyond
•
t:!B a!DOWlt actually required, but
al\V inability on the part of Federal Reserve
227
k-1214
-9-
ba:t'lks t 0 respol:X'I. to legi titaa'fe denands made Upon them WOllld be dis-
lt is clear that in proportion as the gold holdings of
tm Fedet"al Reserve bankS are increased, the abilitY' of such
'bat:iks
to extend. accommodation to other bankS or to issue notes is enlarged.
As reserve holdings are curtailed, the leming power of
the banks is correspppdtng]¥ reduced.
The national banks of the country can render good service at
this time by informing the people in t.be ir respeoti ve
comrnunit~es
of the absolute falsity of th'l statements which have been made occasionally aid which appear to be tl:e result of a deliberate propaga.IIda, that it is the intention of the govermnent to canf'i scate
bank deposits.
Such a statement is absurd upon 1 ts face, but is
well calculated to alarm the ignorant, and,
•
altho~
it has been
denied and denounced in the strongest te:nns by the Secretary of the
Treasu.ry alJd other high authorities, it is evident, from the proportion of the monq
~id
out every week in payrolls which does not
return to the banks, that large amounts in the aggregate are being
hoarded or ca.rri ed upon their persons by workmen who are now recei v.ing unusually high wages.
Banks should give especial attention
to the problem of bringing into sight any money hoarded in their
conmunities, and should urge its inves1ment in war savings stamps or
i
•
X-121-t
-10-
Liberty Bonds,. as well as the establisilnent of bank accountsu
There
is gucd reason to teJ.ie,..e that the pre'3e!'t is an oppcx-tune time, in
industrial col'tlOun:.t ies ospacially, :for organizing
sy~;-~ematic
ca.l"!l-
paign.s for ·hring:"ng ccnceaJ ed n:oney :.nt o the vaults of tha b3n.k.1 9 or
for effecting 5.ts excha!"l.ge fo:.:- government ob.1igatbns.
One of the most jmpC'r·:;ant runctio:ns of any banlc: is the granting
of credits.
This is a. power which should be exercf.sed with protl.e10e
and di scret5.on in any c5. rcumstances, bt.1 t under present conditione tl: ere
are many new atld pel"'pJ.exing features t,o be considered.
mount business of th5..s
co~nt:zy
As the pg.ra-
at present is war, and as the govern-
mentis the largest purchaser o£ all esse:.1tial commodities, it is
clear that tb.e l:srJrs of the country shot,_ld do their part, not only in
aiding the government to ohta5.n the funds and credlts needed 1 but
tha-t they sl.ould so readjt.wt their own lending operations as to contribt:!.te most effectively toward supplying the government with necessary al."ticles al'ld cOJ'Ilmodities.
Therefore the questicn of' credit
conservation has been a vital one for months past.
,
Na.r expendi tu.res
are essentially different from any which are ordinarily made in t5.mes
of peace.
Instead of contributing toward a perma..11ent addition to
the national wealth, the large ];ayments which the government is making
for the maintenance and equipment of our military and naval establishmenta involve waste ani .destruction, -
inevitable concomitants of wa.r ..
229
x-IZI4
-11...
'l'his process necessarily tends to inflation. which,
t~ether
wi 1h
'
concentrated demand and the need f<r quick deliveries, brings about
rapid advances in the price of necessities,.
lnf ini ties such as are
dealt with in higher ma.themati cs, have no place in tbe arithmetic of
wqr finaneing, even though the figures run into the billions.
•
'l'he
supply of credit, of goods, am of man power is limited, and as far
· as possible tbese resources should be conserved and set aside for tbe
use
of
the govermnent, whose abnoxmal demands -
!nevi table a.n:i neces-
sary in the present circumstances --must be counteracted by greater
econaJtV on the part of our civilian pop.llation, wbose efforts should
be
directed tonard decreasing the nolDlal.waste incident to our·
business pursuits and to our ever;, dq lite.
Credit extended for non-essential purposes involves the use of
labor, Of transpo.rtation, ot material 9 am of reserves ••him ought to
be k!ept free for purposes of the government.
'·
Unrestricted credit
means unnecessa.17 competition with t:m government, and tends to impede ani del"' its operation. and. needlessly advances prices.
At a.
ti~
wl:En tlle suprane business of the c0tmt17 is war, it
is idle to talk of business as uma.l, far our acCilstomed bc.s iness
and JSrsana.l habits cannot in many cases be continued without interfering with the government's wolit and 1he consequent infliction of
serious injul'J' upon the nation.·
banker -
Uncle Sa, at this time, is a world
he ·ts extEnding c~dits in lar~ anounts to foreign
.
230
••
. .-12-
.
..
)
.countries associated with him in the war and his pawer to contime
to plq the part of "tmcle" in the fmamial sense dependS upon the
exte1;1t ot his resources in mn,. {J)OdS and gold, and the avoidance
of wmeoeesaxy credit.
Needless recourse to :tJJe facilities
Federfd Reserve 'ba.nlm weake:as proportiom tel~
his
ot the
gold resene, and
this gold reserve is the fi~ial ba.Okbcme of civilization.
A:q
waste of the raw materials am DBUuf'a.ctu.red praiucts of the cam't:l'y
adds to our f'ina:acial. burde:as by increasing the amount whidl we mwrt
.
impart from other countries, and such waste at 1he sane time .re-
.
f
dllces the volume of @POds which should be· available for expo.rt purthe best means ot paying for il:Jt>orted commodities.
poses The
mere~
tar sighted 'ballker does not content hiDI3elf by cCDtierlDg
present pl"'blEIIB, but he 1ums h1s eJ&s to the
~mre
and en-
deavors to lUt the veil in order that he f!83 see the shadow of
coming eV"ents aJ;ld maJce his plalls aocordingty.
Many
thougbt:fb.l
<
J-
bankers feel, t.h.8refore, that the preserv$tion of our economic
strength is of the greatest importance in Jl1Lk:ll7g provision for _that
period ·ot readjustment mich will follow inevitably the re-establishmrnJt of peace.
L
By refra.iniiS from bayitlg luxuries and by restrictiDg
the use of moessi ties to the actual requlra:nents of health and
reasonable comf'ort, a resel"'''e purchasing po.ver can be created which
X....I2 I4
-13-
will be of the great est value in bridging over our industries during
the period of react ion ar.i reconstructicn which will follow the war,
teate~
when "swords will be
:1.r.to plow
~lloil:t"es••
aud ivlars will give
place to Mercu.ry and Cel·es.
An inteili gent s.nd pru:lent use of credit will be an important
factor in strengtllerling the national resources during the periOd of
the war, in aidil'lg its successflll prosecution, besides maintaining
our economic strength for the ti.n'lffi when our ai'm.ies will return to the
employ.ments of peace.
It is important, however, that a wise dis-
creti on. should be exercised and t
mt
t.be re should be a care:f'Ul dis-
crimination between essential. less essential, and non-essential
credits.
It is difficult to suggest any fixed and definite mle to
govem in distinguishing between tmse various classes of credits.
A loan might be desired for what appears at first glance to be a.
non-essential purpose., and yet failure to obtain tlB credit might
~
create a. condition whiCh might ind.irectly have a distinctly ha.rmtul
effect upon the ability of productive enterprises in the community
to obtain credit ..
It is important, tlerefore, that bank officers
should inform tb.emsel ves a.s to tlle ultimate use to which the
proceeds of a proposed loan will be diverted.
Present conditions
h-1214
-14-
fully justi ~ the banks in taking such s taps as may be neoessa.ry to
restrain
speoulatio~
but': at tho Rame time., a general refusal to
maJse loans on good seCilri ty wo·u.ld seriously impair the liquid1. ty of
investments and would :force liquidaticn which might disturb ve:ey"
seriously tbe wholA Einancial situation.
It is important to avoJ.d
Sharp and radiCal readjUStmCDtS of Credit am v4lerever pOSSible lines
should be reduced withcut undue hardship to the borrower or without
causing a shook whi.ch wonld render the granting of neoessa.ry credits
more difficult.
The problen of non-essential credits is, however, not entirely
one for the consideration of the banks.
Tbe question will be de-
termined :for them iii many instances· by the Capital Issu.es Oo:ami'ttee
and by other governmental bodies such as the War Ir.ld.wstt:ies Board,
which has large powers in the determ:lna.tion of the
oha~acter
and
quantity of procmotion and of priorities in tbe deliver.,v of materials
alld gOOds.
In normal times great entezprises and large developnents are tl:llle
result of credits previously arranged by bmkers, but the military
necessities of today have clanged the order so ·that in many cases d.evelopnents are predetermined, and bank credits are adjusted to
conditions inStead of creating tlsm, thus bec,oming an e:r:rect instead
232
kal2I4
-15-
ot a,..,.,..
Your problans gentlemen. are by no means confined to
piacing pr()pei" i"eatrictio:ns upon li0n.""6sse:llt.ia:i or 1ess esaeutiai
oredi,ta, but they inciude means ot sus taii'ling thrdtlgh adequate credits.
the vast number ot enterprises and imustr.i. es whose operations are
essential or contributo17 to the concmot ot the war and to the health
and necessary comfort of the public.
.•
to the govel'!lmelllt, you are being
ot the
~mrcantile
c~led
In addition to direct advances
upon to furBish funds for use.
ca:mmmity and tb r the Plyrolls of mining and. manu-
facturing aud transportation ccmpanies, and :f'or the prodaction and
•
move.R~nt of crops and livestock.
In these operations ya1 will find
your membership in the Federal Reserve systEm of the greatest value•
tor not only can yen redi. scount freely with your Federal Reserve banks
the notes which represent your loans in most of these transactions,
I
but ~ can effect through ttese banka such exchange transfers as ~
mav desire and ca.u call upon tl:em to send you any currency tha.t you
may need.
Shipnent s :trt'Jn Beserv e ba:nks or branches can reach most of
you within tweaty-tour hours, and in order to
tacil~tate
your trans-
act ions ani to eteourage a freer movement of dom sti c exchange,
serioas consideration is norB be il'Jg givm to having the Federal Reserve
banks absorb all costs illc:lden.t to transfers 01t currency tar nember
bankS, "Both from and to Federal Reserve bankS.
You have also recourse
to the War FinaDCe Corporation. which is authorized to make advances
233
234
-16-
~
bmlm, mnkers, or tl'U.st companies, and to savtngs banks, upon terms
and oomitions set forth in Secti.ons 'I and 8 ot the war Fina.nce Cor-
pora.tion Act.
Your attention is directed to
our supplies
Of
tm
great importance ot increasing
food stuffs, Of cotton and wool, of coal, ani of all
ma.nu:tactured artloJ.es Of an essential.
Cbaract~r. and
it is hoped
that
you will extend your credit lines with thiS object in view as fa.:t' as
JIB1 be consistent with the principles ot s'OU.lld banking a:od business
piUdenoe.
While it is desirable that you should rana.in free to exthe security of loans and
ercise your own discretion as regardsftbe cieta.ils of your business, it
is necessary nevertheless, tlBt we shoUld all work .to getm r in carrying out a general policy.
The exigencies of the times require that
banking policy must be detennined in Washi!l8t0n to a greater extent
than would nol'm'llly be the case, but evezy confidence is felt that
the splendid patriotism which has been manifestOO. in the past by
continue to
national bankers in the hour of the nation's peril, willjbe exhibited
toda.l' when our cauntr:f is engaged in the greatest war of all history.
and that through your cordial and ef:fecti ve cooperation complete
victory will crown our military
}
lasting and llmeric m peace.
undert~ings,
to be followed by a
@FedFRASER