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607
X-1667
.
FEDERAL RESERVE BOARD
8'J'ATF'ViENT FOR THl':! PRESS
To be released.for morning
papers se~tember 8, 1919.
The Review of
-
t~e
Month for the September Federal
Reserve Bulletin is devoted mainly to a discussion of cost of living, foreisg
exchange, foreign trade end foreign financing problems.
.£2.st of
Living~
It says:
High prices and the advancing cost of living have become
the occasion of widespread anxiety in the United StatesJ <~d recently have
becorr.e the subject of legislativn attention.
The President in an addrt3ss to
Congress on August 8, ~eclared that "the prices the people of this country are
paying for everything th.::~t it is necess::.ry for them to use in order to live
I •
are not justified by a shortage in supply 1 either present or ~respective."
The
Federal Reserve Board in a letter of the sarr1e date to the Senate Com~ittee on
Financ.e and 13al1_king ():!ublished in the .August :Bulletin)., rejected the idea that
•excessiven volUme of currency was the cause of prevalent high prices.
This
is the view which has been consistently maint;.ined by the :BoardJ the letter
being rrerely a restatement with amplified detail of the position tJ=en by the
Board on previous occasion, notably in the October, 1918, :Bulletin (p. 927),
•
where the conclusions were expressed that "the incre&se in the ciruulatian of
the Fed.;ral Reserve note hCA.s be,m in the main in response to actudl needs, .:lXld
th~t whatever inflation of prices may be said to axist can not properly be
said to have been induced by overissue of Federal Reserve notes."
In its recent
letter, particular occasion is taken by tlle :Board to point out "the ·.difficulty,
indeed the impossibility, of kee~ing in circulation an excessive volume of
Federal Reserve notes.
;
.
They are issued only us a need for them develops, and
as they become redundant in any locality they are returned to the Treasury £tt
I
1
l
Washington, or to a Federal Reserve :Bank for redanption.
Thua there can not at
808
- 2
any time be rr:ore Federal Reserve notes in circul.:<.tion th9l'l the needs of the
country at the present level of prices require, and
~s
the need abates the
volume of notes outstwding '.vill be correspondingly reduced through redemption.
The increased volume of Federal Reserve notes in circulation during the past
three
-
ye~s,
in so far as it is not the result of direct exchanges for gold
and gold certificates which have been withdrawn from circulation, is the effect
of
adv~cing
wages and prices, and not their cause."
Under the elastic note-issue system provided by the1tederal Reserve
Act, the Federal Reserve note possesses a self-regulating quality quite
auto~atic
in its operation-
While it is technically a true stateffient to say that
the Federal Reserve note when issued is issued by the Federal Reserve. Bank, th.e
greater truth in underst&nding our present monetsry machinery is missed unless
it is ~erceived thQt the occasio~ of the issue of a Federal Reserve note is
determined not,& the bank for itself but..!.£! the bank by the
question whether or not
a
community~
The
Federal Reserve note shall be issued is decided by
the business and general conn1unity in
accor~ance
with its circulation needs.
It
ia its needs rather thGn the bankfs'desire which determines the question of
issue.
Thus, then, the Federal Reserve note when issued is issued at the
instance of the community, not at the instance of the barik.
inevitably be
I r
•
~o
That this mnst
is clear from an·apvrecietion of the fact that there is no
method by which the Federe:J. Reserve
B~nks,
even should they so desire, can put
out i::llld keep out e. gre-ater quantity of notes than the convenience of the
comrrunity requires, so long as the facilities for the redemption and
of the reserve notes provided by the Federal Reserve Act are
r~tirement
~~intained,
as they
have been since the organization of the Federal Reserve System, in a state;·.ot
effective opetation.
While th~s disposing of the currency as the cause of
t.
riaing prices, the Board does not overloOk the important influence exerted by
609
- 3-
-
. credit expansion.
That the expansion of credit has be en a considerable
factor in our financial and price situation is clear; that it is a continuing
factor and one which still calls for correction' by the process of incre~singproduction and savings ::.nd by the investment of the proceeds of savings in the
absorption of Government ·bonds is equally clear.
-
The most recent data ~vailable show that for the year ending June 30,
1919, total deposit liabilities in natione:.l banks increased by the C:il'r;oun.~ of
~1,902,356,000, or from $1~ 1 021,609,000 to $15,924,865,000, and ~hat loans and
discounts increased by the amount of $954,4J6,ooo, or from $9·,620;4o2,000 ·to
$10,574,838' ooo.
The
increase in deposits. therefore,
exceeded the increase
.
.
in loans ail4 disc.eunt s by the amount of $946,920,000, or close to 100 per cent.
The rate of increase in deposits for the year was 13.6 per cent, as against
9.92 per cent for loans :;Jld discounts.
A substmt~al portion of the incre<1.se
in deposits, it ap~ars, lll1lst therefore be . . .ccounted otherwise than by m
incredse in the cormercial 1om s.ccount of the banks.
The signi:fic;;nt change
in their resources is found in their investments in Governinent bonds and
Treasury certificates.
These increased by an amount of. $1,055,127,000, or from
$2,116,785,000 to $3,171,912,000, an increase of 49.8 per cent.
It thus appear~
that the increase of deposi.ts noted above is to a considerable extent to be
regarded as a pure credit expansion not called for by increased industrial
I
'
activity, but occasioned by the use of the b~st credit for Gov<Jrnrt.ent fi:nancinp.,
It shows once more how ffiUCh care ~ discrimin~tion must be used in interpretinf
increases in b,.nk "deposits" ane1 bamt "resources" in times like the J.Jr-3sent and
the recent past, when conditions in the financial world h~e been so highly
abnorn:.aJ.~
. The naive idea that a bank deposit normally originates by the
••
bank's dustoi.Ler mcking a deposit of cash in the b.:illk does not reveal the
X-1667
-
- 4
610
.~
substance of the situaticn in C0\:.ntries like the United States, with a
highly developed system of b,Z'k credit and its 'ltilization through the form
of the deposit d.Ccount.
The ruos t usual form in vihich bank deposits originate
is by borrowers going to a b.:.nk to seek accomr;od<:;l.tion end offering their notes
-
for discount, the bcmk
making the loan sought by the customer by op.:ming
credit or "depositn on its books in the borrower's f.::lvor ..
·'l
Normally, therefore,
what are c~lled deposits increase as loans and discounts do; in other words,
as borrowings from bariks increase. When such is not the case and the loans and
discounts do not grow in correspondence with the deposits, the cause of &xpunsion will usually be found in an increase in the investment account of the banksu
Such, in fact, has been the trend of our banking operations during recent years,
notably since our entry into the European war. It is a mistake, therefore, to
deduce from the rapid increase of bank deposits inferences as to the growth in
wealth or prosperity of the country at large. Were the growth of bank liabilities
to be invariably taken as an index of the growth of real wealth, it would have t"
be adrr}i tted that some of the recent European .belligerents, an inspection of whos0
banking sitUdtion reveals a very much more rapid growth in bank liabilities and
resources than does the -4;J.tuation of our banks, were experiencing greater presperi ty and a more r,;.pid growth of wealth than the United Stat11s. such has~ howe'!t.J'
only too obviously not been the case- Europels economic and financial condition
is serious and worst in those countries where the credit and banking situation
is most extendedp
E!rqpets Economic Situation •
The gravity of the economic and financbl sj tu?.~·
tion left Europe by the war has latterly been the subject of frequent comment fx,:m
statesaen nod business leaders
..
th~re.
The :British Chancellor o! the Exchequer (Mr. Austen Chamberlain) in pre;;;eu ~ir:
his budget last spring, called attention to "hard and inexorc:ble ec;onomic fu.c;·~s
by a
Digitized for obscured
FRASER
fictitious appearance of wealth:~. "There is," said the Ch•onr.-.el"'..m:·
..
I
61i
X-1667
-5-
• •
"between two and three times as llltlch legal te11der money in circulation as there
was before the war. The deJ:iosits at the joint--stock banks have more than doubled.
The position·of these banks, judged by every approved criterion of sound banking,
is stronger thm it. ever was before.) but the securities - British Governme;Ilt
securities standing behind the deposits, standing behind the legal tender money - ..
-
represent to a large extent not existing wealth, but wealth consumed in the
i.,
operations of the war, which it mu.st be our business to replace out of the exertion~
of the present. Both are drafts of future labor .on the future· creation of
wealth. Pending their payment they are an irnrr.ense reservoir of artificial purchasing power, and therefore
d~inishing
in effect with
e~ch
new increased
is~e.
"Look behind .the count!3r and you 'see a different picture. We have sold one
·thousand million of our foreign investments, losing the equivalent power to draw
l.
on the wealth created in foreign countries. we have incurred debt to the extent
of r,. 1,300,000,000, but the position of our debtors forbids us to count upon their
claims for large immediate relief. Ultimately and· gradually that relief will, we
h()I)e, mature,· but we can not count upon
i~
for irr.iitediate purposes. In yec;.rs to
come .a considerable part of our production must be devoted to paying our foreign
.creditors a part, and a large part, making good the wastage and arrears of. war.
OUr roads, our railways, and in a lesser degree - still, in some degree - our
machinery suffer from the absence during these past years of the ordinary upkeep
and development. Houses, which were short before the war,
arrears.
Alar~
are
now hopelessly· in
part of the production of the next- I don•t·know whether I ·
should say few years - a large part of the production of the coming year - both
the production of labor and of
capit~
-will be needed to
~~e
good
t~ose
losses
and to pa;y the new liabilities that we have incurred.
"I
••
ask
the committee therefore to be under no ndsapprehension as to the
magnitude of the task which lies before us. Again I repeat that there is
need for national and individual.
econo~.
urger.~
Nothing but the unity of all class9s 1
•
. ..
612
-6comparable to that which we have
s~en
X-1667
:ln thP- yP.ars of war, will enable us to face "
the years of difficulty wb.ich rm.:.st follow at the conclusion of so great a crisis."
More recently the British
Pre~er
(Mr. Lloyd-George), in an &ddress to the
House of Comrr.ons on .Augu.st 19th, in speaking about the financial situation, laid
-
. particular s tres·s on the serious magnitude of England's adverse trade balance.
.
.
According to his statement, that balance already 3l'nOu,nts to $4,000,000,000 and
threatens to reach $5,000,000,000 if Great :Britain continues in its present course.
Before the war the adverse balance amounted, for a ·series of years, to an average
of $750,000,000. This then presented no difficulty oecause of England's large
overseas investments, the full magnitude of which hgve only recently beco~~ public •
.
•
..
..
-
~he
61.3.
x-16ti7
-7-
entire amount at prE:lsent accruing from foreign sources is
esti.JLated at
about $5Qu,000,000• an amount JUst about sufi'icient to }lay tbe intere.st u:pon her
foreign obligations. Engl<.Jldls
iruLu.edi~te
prablen. is the reduction o:t' the adverse
balance .. "We ruust bridge th~ chasm or at the bottom of it is ruin•" said LloydGeorge.
11
We are building a teUil?orary bridge by p·orrmwing; not only state borrowing,
but traders
1
borrowing, for raw waterial, food, etc4, that will only <Ad to tse
catastrophe. In every direction we are
spe~ing
more, and we are earning less; we
ar~ consux..ing ware, and we are producing less. These are facts; it can not last."
In every line, except asriculture, according to the Prewier 1s stater..ent, British
.output is less ..
Mr, Asquith,
fo~er
British Premier, discussing the
econ~ic
situation in o.
speech delivered before the Free Trade Union recently, usked:"Whut is the real
remedy against high prices and of the individual hardships which the war has brought?
First and foremost, public economy •
production
**
*•
* *·
The prirue economic need e:.t this moment of
duction should be increased until the
~imum
heme in the dowestic sphere is not only
. the international
TRPDE BALANCES.
The next thing is increased and better
output is
eq~lly
~nd.
obt~ined.
is that pro-
What is true at
;rue but mor.G significantly true in
sphere~"
The "adverse" tro.de balance com}llained of in England is ruost
manifest in her relations with the United States, On our side it has given rise to
a situation which is conventionally described as
because of the large excess of goods exported
~~
~bove
"fuvorable" bulonce of trade
those imported,
le~ving
a
resulting balance of indebtedness to be wet. Looking ut the w.atter fro.w t;tle point
of view of the ordinary Awerican consur.uer, however, the effect of such u "fu.vora.ble 11
balance of trade is far t'ror.a favorable for hiLl. Whatever 'econ<lluic and financial
Justification there may be for the Vtlst quantities of merchanciise the United. Sto.tea
l
has been sending to Europe, p~nt for which, looking at the trunsa.ction from the
point
of view of
the nation u.s a whole, is to be tuade sot.~eti.u.e in the future when
l
.. .,. . ,_.,.,
, ...,"•·-,---~r···-··--~-·~,.,...........,-~-~--1
~-
---"""J''i!6""!!"'!'14"!l'!!I"'!'·Jii
IJ-.
L~~
tke economic and financial circur.ustances of tb.o irnporting nationa of Europe are
more satisfe.ctory, the iiJU1ediate present effect of it in~ lines of industry
is to curtail the supplies ava).lable for the AWericE>.n consumer and thereby to
be.come a factor of considerable iwportance in our price level. To the_ extent' that
the J,D:.erican consumer, or u sufficient percentuge of .Americun consumers, do not
voluntarily reduce consuwption by amounts sufficient to release for the use of the
Europe~
consumer the great quantities of goods which are being sent oversea, .there
results in the American
~arket
competition between the European demand and the
American demand, the,inevitnble effect of wh&ch is to drive up
~rices ond
to induce
the speculation which rising prices usually occasion. "Buying in competition with
export den.and" uno.oubtedly has been a lllaJOr cause of rising pr-ices in the post- .
war period in the United States. For the fiscal yecr ending June 3U 1 l919J the
exports froc. the united States amounted to $7,225 1 100,000, and
~:IJOrts
amounted to
$3,095t900.000, leaving therefore nn excess of exports amounting to $4,129,200,000
as a~ainst ~2,974Jooo,ooo for the fiscal year 1918, ~d $3 1630t700,000 for the
fiscal year 1917. It is noteworthy not only that the figures of our
our net exports for the year
1919
e~ortS
Wld
o..re the highest ever attained, but also that the
valw:e of our exports showed with little interruption an increase through the
fiscal year. attaining its highest point in June, the l~t month of t.he fiscal
year, when our total exports amounted to $918,300 1 000- Elsewhere in the current
number of the Bulletin are presented details of our export trode, showing its
(
•.
cOIUposition by leading group'i of conm:odities und their vol'U1,4e by quantity as well
\·
as by value. lt appears that the greatest increase in our exports for the fiscu.l
1·
year 1319; as couilared with the preceding year, was in the groups "Foodstuffs"
prepared and
over
••
6~ :r~r
unpreparea~
cent.
Exports in these groups showed un increaSe in value of
Baccn, hams, und lard showed nn increase in value of. about 85
per cent compared with the preceding year, una un increase of hlore than
60
per
cent in qUEIZltity. The gr<?Ull "IvJu.nui'o.ctures ready for consWl,Ption," which const.itutes
.j,
-9~
the 1argest single group for hoth years 1918
t;l1c\
l919, shows an increase for the
latter year of 9 .. 1 per cent, notwHhstanding that the item "Explosives" showed o.
decrease of over
$25o,ooo.ooo
in
1919
as cawpa~ed with
1918.
V!hether our export tro.de will keep up anyt{ting like the 1919 volume during
the current fiscal year (July, the first wonth of the yee.:r, shows a falling off
-
of exports by
$348,169,000),
seems dov.btf~l, but it seems hi~~ probable that it
will maintain a volume so far in excess of the normal ratio of our exports to
total production in prewar days tho.t it will be a factor of moment in the domestic
price situation and in living eosts. As long as circumstances
w~e
it necessary
or advisable for the Uriited Stutes to sell a large volurue of merchandise to
Europe on credit, there wust be shortages of supp~ in the domestic mar~t unless
industry is ke:pt in a state of high activity and <.tll hands ·r.re at work to increase
output. Unless this is done resulting shortages will wean reduced consuruption to
•
I~
615
x-1667
be met either by voluntary saving on the part af the consuwers, or
saving through the process of high or even
perh~:ps
co~ulsory
rising prices.
The whole situation is one that can be wet, as pointed out b;y the
BoC~.Td ~;~.
month ago, only ii the doctrine "work 2..nd save" is taken to heart by every class
in the Nation and made its guiding principle
unt~l
the trying conditions left by
the war are finally surmounted. "Only by keeping the cost of production on its
present level, by increasing production L'Jld by rigid economy nnd saving on the
..
part of the people can we hope for large decrenses in the burdensome cost of
living which now weighs us down.J" said the President in his oda.ress to the co\.mt-r-y
on August
25.
Foreign Exchqnge Situation.
Closely associated with the moveruent of ov.r
c..t:~.\"'J. ~
trada noted o.bove, have been the further •md considerable declinP.s in the values
of foreign currencies in terms ot' the dollar, which have given rise to consid.cr•;;,\:.:.<:
• t
discussion of the probable effects of such declines. These declines are :priLunri l'·
l_ ~ue
that
to the fact
:foreign countries hu.ve large :po.yn.ents to M:Ke in d.olli;;.:>-:t;; t:n
616
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x-1667
the United States at a tiwe when they rxe not sending us commodity
e~orts
of
corresponding value to their in.9,.iorts from us to l;rovio.e the exch:::mge requisite to
J?CJ.Y for their p;:uerican purchc:..ses. Otherwise stated 1 the decline in the value of •
-
foreign currencies, when exchonged for dollars, makes more expensive payments in
doll<.~rs
by countries having available for such purpose only their own currencies ..
current discussion of these conditions too frequently treats the
~roblem
of the
foreign exch~ges and our export trade separately fr~ the provlem of domestic
trade. It is too frequently assumed by those complaining of the f~ll of foreign
exchanges that trade on the scale of our recent e.x;ports is a thing desir.:ible in
itself and. to be kept up by keeping up the value of foreign currencies in the
~eric<~ r~rket. But when the export trade is considered in connection with the
dou.estic trade it becomes clear, as already pointed out, t:j;rat the source of much
•
of the difficulty presented by the existing situation"' is the continued. competition
of the ex:r;,ort deru<md c.nd the howe deruand. The stn.te of the foreign exch<:lnges merely
reflects tpa state of international trade. The correction of the exchange situation
so much cow~lained of by t~ose who look ~t the watter frow the exclusive standpoint
of the eXfort interest, \"Jill, therefore, only find. its natural and peruanent solution through a reduction of our exports and an increase of our imports until
they reach a point of approxi~te equilibrium,
l
• <-
617
- 11Corr0ctivo effect of fallini; i;Xchangc.
It s.10uld bo understood that a de-
cline in i3Xchange op;:;ratcs as a corr.;ctiv0 to th0 situation which has brought ahO.l 1 ·
th.:;: decline • by checking exports and s tirnulatin(; i.a:ports.
Viewed,
~he ref ore,
pure·
ly frow our own dor.:.cs tic s tandpcint, the falling cxch.om.go ratos aro· beginning .:11A
rcad,y to relieve tho prcs.:::nt "-bnormal and difficult si tu.:ltion.
•
-
•
The large voluwc of
exports during the past few i.•Onths has boon rcndorod possible by advances from tho
United States Treasury to the govcrnrucnts associat0d wi k, us in the war.
These .:1d-
vanccs nave amounted, from the date of the ar-.wistice to ..\ugust 31, to $2,177, 09~2!.2·
~~0rc is some danger also that tho present abnormal situation may undergo a more
violant chango in the future when Europoan countries shall have stocked up on commoditi~s
and our domestic consumers have bratified the rnood of reaction from war
economy, and we may then oxporionco an abrupt falling off in exports so groat as to
em barT ass some of our indus tries which anticipated their natural growth under the
intensified stimulus of war concli tions-
Such a condition can be Cl.Vcrtcd throug,.'-1
·,
timely action by the industries involved, which should be considering the steps
necessary to correct such a situation in case it should arise.
'n1.e fact remains,
however, that tho pr~s~mt relationship of CJ!tlrts to imports - the volume of one
being very lar~e and the other co•:Iparati vely suall - is unhealthy and scrioMly
disadvanta.;cous to this country, looking at tho situation,.purcly froLl our domestic
point of view.
Looking at tho m:att..;r from anot1.1cr angle, it. is evident that Europoan countries find. it difficult in tho present circumstances to make purchases in this
country, but tho outstanding fact is that thcs.c countri0s h-:wJ not seen fit so far
to adopt any cffccti vc m.:;asuros for tha correction of existing rates of exchange.
Minist3rs of several. of these countriGs have lookod with coL.1placcncy upon the de~
cline in exchange which tends to limit purcr~scs here.
This decline makes it pos-
sible for tho countries affected to leave their comwcrce unrestrictedwithout dangcr of having their nationals
ovcrb~
in our markets.
618
-12'!here are many factors constantly at work which can not
·oe fully enumerated
v
or oven traced, which tend to correct the declin-:; of oxchange, and some are alroaJ,:·
operating to that end and they will tund to operate ::uore effectively with every
successive decline, but it should be borne in. ;:;:;inci that \'.ihili; declining cxcha.•·1.t;o
operates to set in oo.tion certain corrcctivo factors, after a.>1 exchange rate has
had its decline and is oscillating moderately around a lower stabilized base tho
In other
tendency is for all factors to adjust thousclves about the now base.
words, a declining rate of
oxch~ge
tends to produce certain effects, while a rate
of exchange which has experienced a decline and is more or less stable at a lower
level produces these effects in a uuch
~aller
degroo.
The tendency of a declining
rate of cxchan6o for the currency of any country is to sti@Ulate exports
country and to curtail i:nports;
fro~
that
a declining rate offers residents of tho country
involved a heavy prouiuw on the sale of their foreign securities in countries in
whose favor the exchange rate is running.
powerful
ar~~0nt
This premi1.:rm is in many countries a uorc
with the private holder of foreign securities than any government
requisition can be;
it tends to wake foreign creditors to whow money is
~uo
in
currency of the debtor country leave the funds on deposit pending a more favorable
tirJ.e for their transfer to the creditor country;
the debtor country to borrow abroad and romit
as any
~provcocnt
it stimulates the nationals of
th~ pro~oeds
home for domestic use,
in cxchango will afford a profit at the ttno
of.~epaymcnt.
Those arc a few of the corrective factors.
Providing for foreign demands..
From the best infomation available it ap-
pears that the pro'bablo dcraands of foreign nations upon this country for rcconstruction purposes have been greatly overestimated in the public prints.
It is p3rhaps
not unn2.tural in a situation where distressed. peoples feel they must draw for thoir
ncGds on a limited fund of CaJ?i tal that they should cs timate their requirements
very liberally or olso they LJ.aJ7 not
oo
sufficiently supplied.
For
many
reasons it
appears that tho need~ of Europe should bo su:ppliGd throug}l the private ini tiativc
of foreign manufacturers.
merchants, and bankers dealing with similar American
L·.grou1Js •and not
,
619
X-1.66~
. . 13-
through tho concerted efforts of the govcrru,.mts concerned.
From the standpoint of tho bo::rowin;; country alraady burdened wi tb an •.mor··
mous public d.e.bt, money borrowed by private indi vi duc:.ls for usc in their ·ovm businoss will be
c~~ondcd
more
car~fully
and judiciously and better provision will be
made for its ropayr.u.cnt than would bo the cas;;: i f the woncy should bo borrowed
cy
• governments, whJrc othor than purely economic conditions uay influence the c.xpcndi-·
.. tur.;;.
It has be0n well said that where r.1onoy is borrowed for reconstruction pur-
poses by governments tho tondcncy has been to establish bread lines instead of wood
yards;
in other words, to subsidize uncmploTwent rathor than to create
From the viewpoint of the lending country; i. e., the tnitcd States:
cmploy-~ont.
after cam-
plcting its own war financing the ability of our Govcrnwent to assist foreign
Gov-
crnwJnts without vast inflation and consequGnt danger to our ovv.n credit is preble• matic~
!Jll,:; i,worican pcopla have subscri bcd.libc.;rally to war loanst but there is
nothing to indicate that when they shall have closed the account by doing tr.oir part
in such financing as rcnains to be dono to liquidate the war bills they will be inclined to buy any considerable at:tounts of bonds of this Government for the pur:posc
of further financing Europe.
The coz:tpl0tc stabilization of f!)rCid'l exchange could be effcct3d only through
unli.r:ri. ted :1civanccs to for0i91 countries, advances against which those countries will
draw as their needs require,
.N:. drafts arc drawn and sold abroad, tho proceeds in
,tforeign currency would go to the Governments concerned and bocor:lc availabl.:; for tbe
purposes of those Governments.
This process would ;ivc those Governments power to
draw on this country indefini tc ar:aounts for unspecified or unclisclosGd purposes, and
to moot those drafts our Govei"!1Llcnt would have to sell additional obligations to its
own ci tizons.
Thus, to the extent of tho ere d.i ts Jxtcnd.c d., the burdJn of foro ign
war debts would bo transferred to the shoulders of tho hroorican people, offset, of
·course, by such repayr,.1onts on account of interest or principal as the foraign Q-ov....
crnmon ts r.1igh t ua.ke fror.1 t:irac to tiwe;
but even if ultUnatcly fully offset
'
our
m~•
- 14-
620
"Gov"'G~ont obligations must still in the first instance bo markct-~d.
Existing machinery.
Th0r0 is no reason to doubt that private initiative,.
su:p:plcmontcd by such facilities as Govcrnrw.cnta1 agcnci~s aro authorized to make
under existing law, can deal vffoctivoly wi t..li the: present situation.
Facili tics
arc providod by the Webb-Pomerene .Act and by tho liar Finance Corporation act as
amended.
Manufacturers can combine to fona export companies, putting in as capi-
tal such su:.1s. as they arc severally willing to devote to th3 export business, and
these corporations can borrow from the War Finance Corporation sums based upon
their financial standing..
The rcsponsi bili ty o'f the interest directly concerned
is essential to prevent reCkless business, and unloss we propose to burden our people gonerally for tho purpose of
s~bsidizing
exports, those whoso products are to
be sold and who reap the advantago of such sales ought, with the aid abovo out-
line d., to be prepared to finance their own sales.
Pending legislation Md safeguards.
uation and thv purposes to be achieved-
Such arc the fundamentals of the si ~
As for providing the machinery for achicv-
ing those aims, certain things remain to be done, and legislation covering these
points is now pending in Congress, notably the Edgo bill, which provides Fcdoral
charters for corporations principally engaged in foroign transactions and financing,
and another bill, amGndatory of section 25 of the Federal Reserve .Act, which permits national banks to invest
t
of such
5 per cent of their capital and surplus
in the stock
corporations~
Credits cxtcnicd abroad and foreign securities purchased must in ncarly.all
cases run for periods beyond the limitations of ordinary banking credits, and banking resourcus can be safely utilized to a limited extent only in giving the accour.1odations now noedcd abroad.
Appeal uust bo wade to those who arc in a position to
purchase sccuri tics for inv()str::l.Jnt and pay for them with funds accuwulatcd to their
• crodi t in bank.
Such purchases reduce bank deposits and as the proceeds arc
present
circumstances,
x;.ost likely to
oo
,
under
applied directly or indirectly to t..1.e re-
·~
.
621
X-1667
- 15-
dQction of bmllc loans, they tend to strengthen tho percentage of bank reserves.
\
The fact that many banks and trust ccmpanics have investwcnt dcpartn:&cnts and deal
in socuritios through th,;sc dcpartrnc:nts tends to obscure this distinction.
Somo
confusion results also froo1 tho difference bohvcon the British and Aoorican usc· of
tho t:::rw "trust company. n
In Gr.;.; at Britain a trust company is an invos tmcn t cor-
poration issuing its d.:>bcntuNs to tho investing public and holding in trust for
tho dob5ntun holders the securities which it purchases ..
With us a trust company
is practically a banking institution holding deposits which must be paid on demand
or on reasonable notice.
Looking to the soundness of tho Jo;;;rican banking system, which is at all
times concornod in pros-:orving tho liquidity of tho banks; it is of first :ioportancc
that proscnt conditions and their boaring on tho banking situation should bo fully.
und::;rstood by the public and that our banking institutions be not loadod with slow
crcdi ts and with investment securities .of liui ted uarkotabili ty..
It oust not bo
forgotten that any issue of Uhitod States Government securities beyond tho abilit,y
or willingness of the inv0sting public to absorb vvillmGan that the obligations
will go, not into th;:; hands of investors, but must bo carrivd by tho banks either
as invostm.)nts or as loans, thus expanding still further an already expanded volumo of crodi t, which it should be the ai;.:a of thG banking cowmuni ty to r;;ducc grad-
ually to moro normal limits.
•
@FedFRASER