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X-1155A
Release for morning papers
·"- of September 6., 1918.
1_90
Summary of addross by
Hon. W. P. G. Harding.,
Governor, Federal Reserve Board.,
At Columbus~ Ohio, September 5th.
In an address to the Ohio Bankers Association at Columbus yesterday,
Governor Harding of the Federal Reserve Board went quite fully into the
question of inflation and curtailment of nonessential credits.
Answering the charge of inflation laid by so:ne at the door of the
Federal Reserve System., he ·said:
"Since the arr.endrr.ents to the act the issue of· Federal reserve
notes outstanding has expanded greatly 1 having risen from sorrething o~r
$5001 000,000 on Juh~ 1, 1917., to slightly more than $2,.000,_ooo_.,ooo:.:.:»~.i;i.tlgt18···
. •
23, 1918.. The fact that this growing volurr.e of our paper currency ~- .·.. :
been accompanied by a continuous advance in wages and corrmodity pri"oo·s'
has been frequently conzr.ented upon and has subjected the Federal reserve
system to some urur.erited criticism. While the evils of constantly rising:
prices and inflation are beyond question., and while it is undeniable that
present prices might in ordinary circumstances be justly attributed to curremcy inflation, we should., in considering the Federal reserve not:e as a
factor in our present economic and financial situation, analyze the circumstances out of which our pres~t situation has resulted.
The outbreak of the European war in August 1914, was followed
imrr~diately by a convulsion in business and a financial crisis throughout
the world. In this countryJ relief was afforded by the issue of about
$375.,000,000 of err.ergency national bank notes, and foll~fling the establishment of the Federal reserve banks on November 16, 1914 there was a rapid
return to more normal conditiaps. The effect of purchases in this country
by belligerent nations began to be felt early in 1915 and the volurre of
these purchases increased rapidly during that and the succeeding year. As
there was no coordination in the purchases of the respective governrr.ents,
they were placed in the position of bidding against each other, and as their
needs for large quantities of raw rraterials and rranufactured goods and munitions was urgent, -- quick deliveries being desired above everything else -there w~s no restr.aint upon prices.~ Very large profits were obtained by
sellers; labor naturally derranded and obtained a part of the profits in the
shape of increased wages, and the large volume of gold which carne into the
country to pay for goods purchased,. amounting to about $1,200,000,000 durin~
these two years, affected all prices and brought about a sympathetic advance
in those articles which were not needed for shipment abroad as well as those
·which '1were ·in derrand for war purposes. There is no doubt that we ffel t
the ef!ect in 1915 and 1916 of an inflated currency~ but the inflat~on was
a gold inflation~ and it becarrB necessary~ in order to avoid tbe greater evils
X-1155 A
191
which would have resulted from a sudden ani unregulated outflow
of gold, -- a gold contraction, -- to take steps to impound the
gold in order that its use and outflow might be kept unde,r control."
In adverting to the close relation of prices, circulating
medium, deposits, ani loans and dis(l)unts of banks, the Governor
quoted the three following tables:
From the Official Bulletin of the
Bureau of Labor Statistics)
Index Number
"
II
"
u.s.
Januar,y 1914 -------------------- 100
JU~
1914 -------------------- 99
March 1917 -------------------- 155
Increase about 55;;
July
1918 -------------------- 198
Increase since March 1917, about 28%
( In thousands of dollars )
November 2,
19l4
Gold coin
$665,800
Gold certificates
913,300
Standard silver dollars 70,300
Silver certificates
482,800
Subsidiary silver
162,500
Treasur,r notes of 1890 2,400
United States notes
234,900
Federal reserve nottes -----Federal reserve bank notes -National bank notes 1,083,500 *
$3,615,500
~\360,000,000
August 1,
1917
1918
::~641,500
:.?448~ 900
1,281,900
71,000
461,500
187,900
2,000
329,700
258,400
49811000
l,85~ 0 3tJO
3~500
~678,900
689,700
77~300
353.100
2.18,900
1~800
295,.000
11,700
~;)4,449,
·Total stock of gold
in the United States 01,835,000,000
* Including
February 1 11
700
~2t912,465,116 ~3,080,767,801
" Aldrich-Vreeland currency.. "
TOTAL GROSS D,JPOSITS TOTl..L LOJ:.HS AND DISOF NATIONAL BANKS..
COUNTS ( INOLUDING
OV...aiDRAFrS ) Olt~ NATIONAL B.ANKS ..
March 5,,1917
12,958,172,000
. 8,. 720,250.000
June 29,1918
14,016.087,000
9,632,899,000
- 3-
X-:l,.l55A
192
Dwelling upon the large increase in Federal reserve notes outstandihg,
the Governor stated that those erying inflation apparently overlook the
character of the note and its cover and the fact that in increasing
in vol~
utta; it has decreased the amount ¢utstanding of gold and ~ther forms of currency and pointed out that the
figures above quoted showed that with an
increase in Federal. reserve notes between February 1, 1917 and August 1 1 1918,
of $1,596,900,000, the increase in circula.tina; rr.edium outstanding was but
$533,363,000.
Comrnentin~
upon the figures generally, the Governor said:
"There is of course a direct relation between the deposits and
loans of the banks, the normal condition bein; that they move up or down
together. It should be rerr~mbered that the use of Federal reserve notes
has never anticipated an increase in .:deposits of loans of the banks except .
in so far as notes zr.a.y
have been used in :l)xchange for r;old.. Increased
loans of member banks, which create additional deposit liability, Jresult in
.rediscounts at Federal reser1e banks and the issue of Federal reserve notes
follows the rediscounting of eJ.igible paper. The Federal reserve note 1 there•
fore, does not initiate expansion. It is rrarely an incidAnt of an expansionwhich has already taken place. It is true 1 how·Erver, that the rra.chinery which
·m.s been provided for the issue of Federal reserve notGa and the knowled;e
on the ;part of the n:ember banks that Federal reserve noi.rJs are available if
needed has undoubtedly encouraged discountin~ at local banks- But the provision of the act as to eli;ibility of paper which rray be rediscounted by
the Federal reserve banks are rigid, and have been strictly enforced by the
Federal Reserve Board. Member banks have been repeatedly and consistently
advised to keep themselves in liquid condition and to confina their loans as
far as possible to short time commercial paper issued for essential purposes,
in order to maintain themselves in position to cooperate with the Treasury
in the unparalleled financial operations which war requirerrsnts have forced
i~ to undertake.
The Federal Reserve Board has had constantly in mind the dangers
of inflation. ~hila it has devoted itself assiduously to building up the
gold holdings of the Federal reserve banks it has, in per.mitting the issuance
of Federal reserve notes, always insisted that they be used as sparin~ly as
possible, with the double purpose of rr.a.intaining the strength of the banks·
and of avoiding redundancy. While the Federal reserve note is a direct
obligation of the Govermr.ent, the safegw.a.rds and limitations thrown around
it by law give it many of the characteristics of a bank note.
Federal reserve notes should not be confused with Federal reserve
bank notes, of which there were in circulation on Au;ust 23rd, $16,864,000-.
Thesse notes are direct obligations of the Federal reserve banks and are
similar in their cb&racter to national bank notes. These notes are being
is~ed in small denominations to take the place of silver certifi~tes which
have been retired for the purpose of releasing s.ilver dollars to be rrelted
X-1155 A
for export to foreign countries. The amount of silver which may
be used in this way is limited to $35o.oootooo. The issue of
these notes is thus limited to this amount and as they mere~
replace silver as withdrawn, they have no effect upon the volume
of eirculation outstanding.''
Governor Harding dealt with the difficulties of controlling
loans through the medium of discount rates, saying:
11 The Board does not believe that
in the existing
situation marked advances in rates would be advisable in view of
the obvious necessity of avoiding any poHcy likely to disturb the
financial operations of the Treasury. The needs of those industries
and commercial enterprises which are directly contribu.tor,y to the
conduct of the war must be su.ppli ed. at all ha.sards, and a drastic
advance .in discount rates would not reduce the financial requirements
of such concerns. but would merely impose an added cost upon the people."
and went on to say that the Board:
"llelieves that the exercise of discriminating judgmm t on
the part of the banks throughout the country in making their loans
will be more effective in co~~teracting any tendency toward credit
expansion than an advance :in rates would be. The suggestion has been
made by the Board that the Federal reserve banks organize local groups
of leading bankers ani businees men, to discuss ways and means of
bringing about the result desired."
He was very emphatic, however, in cautioning against unscientific
discrimination in the control of credits, saying:
"lt is exceedingly difficult to lay down any fixed and
definite ru.les to govern in distinguishing between essential and nonessential credits. A loan might be desired for wbat appears at first
glance to be a non-essential purpose, and yet failure to obtain the
_credit might create a condition which might indirectly have a distinctly
harmful effect upon the ability of productive enterprises in the
c~mmunity to obtain credit. In the same way, in the larger centers.
refusal by banks as a group to lend on standard securities would
seriously impair the liqu.idi ty of' investments and would force liquidation
which might disturb ver.y seriously the whole financial situation. It
is tmportant to avoid sharp ani radical readjustments of credit and
wherever possible lines of credit should be reduced without .undue
hardship to the borrower or without causing a shock which would render
the granting of necessary credits more difficult.
193
1_94
X-1155 A
-5-
It would seem that those interests and enterprises
obviously catering to extravagances and luxuries shcuJ.d be
considered first .. Upcn jnvestigation it may develop that industries
of this kind neecl not be closed dovvn, nor thejLr labor throvv.n
out of employment,. but th'lt they can be g:~adu.::.lly diverted to
essential li:n.es of p:eoduction and distribu.t ~.:n:: • .Existu:ug high
prilfes are creating an addAd strai;l on the f:i.nancial resources
of the country and are contribut1ng ennrmously to the cost of
the war. It is p: obably impossHle to effect any reduction in
the prices of necessary materials and commcdi ties or in the
compensation of t;hmse engaged :i.n prociucing them, but there are
two means, and the employment of both will be necessa:cy, of
retarding a further advance. One is by curtailing cred:tts which
are not necessary and by diverting such port~.on of these credits
as may be needed into productive channels; and the other is to
increase the production of the raw materials and manufactured
articles which are needed in our military and 11aval operations
and which are essential for the sustenance and necessary comfort
of the people.
In times like these, high prices and high wages do not
always increase productionv We see too frequently a disposition
to accept as ample the returns from limited production and from
fewer working days to the week. We have now 1,5oo.ooo men on the
shell scarred fields of France. and their deeds of valor have
already thrilled the allied world. Soon this number will grow to
3,000,000, then to 4,000,000, thus assuring com;Jlete and glorious
victo:ey- and the perpetuation of that heritage of liberty for which
our forefathers fouglit; and those millions of us who are unable
to t:ike our places at the front, 'but who must remain behind to do
that work which is :necessary td sustain the natJ.cn at home9 and to
maintain our fighting heroes in France, should stra:Ln every nerve
to fUrnish all that is necessary, in gold, credit, services and
goods. The war must be won by force o:r arrr:s abroad~ SUJ.._)Olted
by greater production, eco:nomy and thrift at homo. ' 1
X-1155
195
FROM AN ADDRESS OF W. P,. G. HARDING •
GOVERNOR OF THE FEDE...tL\1 RESERVE BOA.RD,
BEFORE THE CONVENTION OF mE OHIO
BANKERS ASSOCIATION AT COLUMBUS, OHIO,
THURSDAY, SPE~ER 5, 1918.
The caption or short title of the Federal Reserve Act defines
it as ..An aet to prtvide for the establisb.ment sf Fed.era.l reserve
banks.. to furnish an elastic currenoy, t~ aff~ rd. means r.f rediacounti~
visi~n
C$mm&rcial paper, to establish a
m~re
effective super-
ef banking in t}?.e United States, and for other :purpeses."
It is eVident therefore, that two of the principal objects •f the
act are
{l)
To tumish an elastic ou:r:rency, and
(2}
To afferd means of discounting a001mercial paper.
Section 16 prevides that the elastic currency referred tt,
namely, Federal reserve notes, may be "issued at the di scretitn r;f
....
196
the Federal flqsel've :&og,rd fo!'
Federal reserve banks
*
t~e p..:.rpos~
*
*
a.m.
c:f making advances to
fo1• no othar purposes."
That the relationship between the c1:rrenoy a.t."1ihorized and the re-
discounting of cornmerc'l.al pa.19r is a close one, is clear, for the
reason that SeC!tion 16 a.s originl'llly enacted prnvicled that a.p.plications of the Federal P.eserve agent for Federal reserve notes
.
must l:e a.coo.nied with a tender of collateral in amount equal to
the awn of Federal reserve netes applied t•or and that the collateral
security thus offered shall be notes and bills accepted for redisoOQnt
~er
the provisions of section 13, which section relates
not to open market transactions, but entirely to eligible notes,
bills and acceptances which may be discounted by a Fede::al reserve
bank
~er ~cif!ed
terms and conditions.
In.addition to requir-
ing the pledge of 100% of discounted }:ap&r, Federal reserve banks
were also obliged to mintain reserves in gold al'¥1 lawful money of
not lass than 40 per centum against their Federal reserve notes in
actual circulation and not offsbt by gold or lawful money deposited
with the Federal Beserve agent.
Unter a strictmcQnstruction of this section, it would have been
difficult, if not impossible, for the Fo:...eral reserve banks to
mobili..m in their own vaults the gold holdings of the country, since
the extent to which Federal reserve notes could be is sued depended
entirely upon the amount of commercial paper held under discCIWlt bf
197
these ba.llks, and in as muoh as they ar.e required to maintain a 40%
gold reserve against Federal reseMe no tvs, they could not acquire
gold in exchange for Federal reserve notes, unless the notes were
first issued aSJ,inst an equal amou:nt of commercial paper.
It was,
therefore, necessary to resort to the expedient 0: first issuing
notes against lOO% cormnercial paper and of subsequently pnmitting the
Federal reserve banks to deposit gold in order. to reduce their
liability against such notes and thereafter to issue additional
'.
'
notes against commercial
:pa.J;er which was released by this process.
It was also difficult to mobilize the gold in the Federal
reserve bank, because of the fact that section 19 of the act, as
originally passed, required mEmber banks to maintain only a part ot
their required reserves with the Federal reserve banks, the balance
being held. in gold or lawful money in their vaults, or carried with
correspondent
b~s.
In order to enable the Federal reserve 'tanks more effectively
to control the country•s gold which was widely diffused, being used
..
for purposes of circulation and held in the vaults of manber and
non-member banks, and to be in posit ion at the same time to is me
notes in such
vol'q~D3
as might be necessary to
sup~
an adequate
circulating medium, Congress amended the act on JUne 21, 1917 by
providing that all of the lawful resenes of member l:anka be kept
1_98
-3 A-
tel
depsait with the Federal reserve banka and tba.t Federal
reserve notes might be issued to the reserve banks wi theut
limit asa.inst deposits .of eold or gold certificates. an;y gold
thus obta.imd to be caw1ted as part of the
which the reserve banks
4C%
gtlld reserve
199
-4-
are obliged to hold against outstanding
reserve notes-
F~d~ral
Thus the new method penni ts tho dilution of
~;;ld
with corm;crcial
paper and requires only 60% of paper in add.ition to 40% of gold as
against 100% of papor and 40% of gold
onactrnont.
a~
provided in the original
Tho effect of thcso amondnJents has been to add
enormously to the gold holdings of the several Federal
res~rve
. banks and to enlarge the discounting poner of the reserve
syst~rn.
The right to issue Federal roservo notes against deposits· of gold
has been availed of very froaly, and gold r0ccived in th0 course
of the daily transactions of the banks has been retained and payments have baen mado in reserve notes instead of in gold.
This
practice has boon urgod repeatedly upon the rcservo banks and also
upon rt.ernber and
non-memb~r
banks, which have boen asked to trans-
for their gold as it acc\.U!lllatos to the Federal reservo banks, tho
argument being that in tho vaults of the ros3rve banks gold is
available as a basis either of
n~w
note isau0s, or as a moans of
extending their loaning facilitios, while in circulation or
dis~
tributed among tho 25,000 or moro commercial banks of tho country
it is oi no moro value than any oth0r fonm of currency.
Sinco tho arrenaments to th3 act tho issue of Federal reserve
notos outstanding has expanded greatly, having rispn from something
over $500,000,000 on June 1 1 1917, to slightly moro than $2,000,000,000
on August 23,1918.
Tho fact that this
gr~Ning
currency has been accompanied by a continuous
volUme of our papor
200
-5advanco in wages and con-modity prices has bc:m frequently cOl!ll'.ontcd
upon and has subjected the Fodoral reserve sygtem to sorr.o unmerited
criticism.. Half-truths arc often the most dan2:crous falsehoods,
and while tho ovils of constantly
r~sing
prices and inflation are
boyond question, and v<hile it is undeniable that presont prices
might in ordinary
inflation,
Wt)
circuw~tancos
.1l:e11ld.
be justly attributed to currency
in considering the Federal rcsorve note as
a factor in our prosont oconomic and financial situation, analyzG
the circumstances out
of
which our present situation has rosul ted.
The outbreak of the Europoan war in August 1914 1 v..as
followed immediately by a convulsion in business and a financial
crisis throughout tho world. In this country,relicf was afforded
by the
is~c
of about $375,000,000 of omorgoncy national bank notes,
and following tho ostablishn-cnt of tho Fodcral reserve banks on
Novombor 16,1914 thcrJ was a rapid return to more normal conditions.
The effect of purchases in this country by bolligorent nations
began to be folt early in 1915 and tho volurre of those purchases
increased rapidly during that and the succeeding year.
As thoro
was no co-ordination in tho purchases of the respective governments,
thoy woro placed in the position of bidding against each other,
and as their needs for large quantities of raw material and manufactured goods and munitions was urgont, -- quick delivoriGs being
dosired above everything olso -
there was no restraint upon prices.
-6-
201
Very iarge profits woro obtained ·by sollers; labor naturally
demanded and obtained a part of the profit;; in tho shape of increased
wages~
and the large volurrD of gold ;rhich cane into the
country to pay .:for goods purchased, amounting to about
$1,3001 000 1 000 during these tvvo years.J af facted all priGes and
brought about a sympathetic advance in thoso articles which were
not noeded for shipment abroad as woll as those -nhich were in deIT~d
for war purposes.
There is no doubt that we felt tho effect
in 1915 and 1916 of an inflated currency, but tho inflation was a
gold inflation, and it became necessary, in order to avoid the
greater evils which .vould have resulted from a sudden and unregulated outflan of gold 1
--
a gold contraction, -- to take staps to
impound tho gold in ordor that its use and outflow might bo kept
'I.Uldcr control,
11ilhen this country ontered the war in April 1917, prices had
already advancod from the lo-n poj.nt in 1914 to a greahr Gxtent
than thay have sinco advanced1 index figures being as follows:
( From tho Official Bulletin of thJ U.. S ..
Bureau of Labor Statistics)
Index Number
"
~
"
n
January 1914 ----------------------· 100
1914 ----------------------- 99
July
~~rch
1917 ----------------------- 155
Increase about 55%
July
1918 ----------------------- 198
Increase since March 1917 1 about 28%
202.
-7-
Attention is called to a comparative
statcme~t sh~ving
outside the Treasury and the Federal reserve banks aS' of
money
November
a,
1914, just prior to the opening of tho Federal reserve banksi on
February
1~
1917, tho date of our broak with Germany; and on August 1,
1918, the 1atost date for which accurate figures are available:
(In thousands of dollars)
November
l9d-4
a,
February l,
1917
August 1,
l918
Gold coin
$665,800
$641Jooo
$4481 900
Gold certificates
913,300
1,281J900
498;000
701 300
71 1 000
77 1 300
Standard silver dollars
Sil vcr co rtificate s
48a,80Q
461, 500
353 ~100
Subsidiary silver
162,500
187;900
218,900
Troasury notes of 1890
2i400
2,000
11 aoo
United States notes
a34,900
329,700
295;000
Federal resetva notes
~-----258 1 400
1,855,300
P'edora1 resctvo bank fiotos .... _.... _.......
3,~90
11~700
National batik notas
. ·i•083;PCO
ifSa.9~
... 6S~!.zoo ··
$ ;Gl51 soo
$3/J a,a
$4.;44 ;7oo
!nc1uding $360,000,000 n Aldrich-Vreeland curr<mcy. 11
*
*
and tho total stock of gold in tho United States on these dates is
estinatod at
November 2,
1914
$1,835,000,000
rospoctivoly.
FJbruary 1,
1917
$a,912,465,ll6
August 1,
1918
$3,080,767,801
..
~,:.
203
While tbe amount of Federal reserve notes i.tl circulati6.'.ri
increased between February 1., 1917 am August 1 .. 1916 by abf:Ut
$l.59,,tOO,Ot9, there was a decrease, during the same period, in
gold and gold certificates, represented by the increased holdings
in gold of the Federal resenra banks, of about a
billi~n
dollars,
and there has been a slight decrease in the volume outstatding
in tther for.ms of currency, so that the net increase in
lat1on between these two dates has been
$533,363,~0..
circu~
As coll1-
pared with November 2 1 1914 the t'iep:res fer August l, 1918 slww
an increase of
$834,3e.o,•o6~
On makl..ng allcwance for the
Aldrich-Vreeland notes outstanding on November 1, 1914,
($36S,~OO,OOO)
culati~n
wh1oh haVe all been retired, the increase in oir-
e.utstanding has been $1 ,l94,bOO ,e.o, just about equal
to our gain in gtld d1.1!'1ng that peried..
In the meantime there
has been since the fall of 191-4 a very large increase in the de-
pasits and in the loans and discounts of the national banks am
of the state banks and tnzst companies.
ll comparative statement
of these items as shown by the abstract ·td reports of .na.tiinal
ballks •n the dates called by the Comptr&ler which are nearest h
the dates used in ma.ld.llg the comparison ef cireulatien fiUtstaZ'lding,
follews:
-9-
201
TOTAL GROm3 DEPOOITS
OF NATIONAL BANKS ..
TOTAL LOANS .AND DISCOUNTS ( INCLUDING
OVF,RDRAlt''l' 8) C'F NA-
TIONAL BAFKS.
October
31;1~14
M:trch 5,.1917
12,9 58,172,000
8.,720,250,000
Juno 29,1918
14,016,087,000
9,632,899.,.000
The exact
figur~s
for th:; state banks and trust companies
aro not availabl,3, but th3ir addition wo':.lld mako a total sorr.3thing
mor3 than double the figuros for tho national banks alone. It is
~vidont,
therefore, that the deposits of
m~mb0r
and
non~~mb0r
banks wore increased i rom Octob::;r 30.,1914 to Juno 29,1918 1 by
Thoro is of course a dir0ct relation bvtw.:;cn th.:; d.:;posits and
loans of tho banks, the
no~al
condition
boin~
that thoy movo up
or down together .. It should bi!l tomcmborod that thD uso of Fod-
oral rcserv.:; notes has never anticipated an
incrcas~
in deposits
or loans of tho banks except in so far as notes may have b.:J:Jn used
in oxchane-o for gold. Increased loans of momb0r banks, which
creato additional deposit liability, rosult in r~discounts at
Fedoral rosorvo banks and tho issuo of Fodaral rosorvo notJs follows
tho rodiscounting of Jligiblo pap:>r. Th8 Fodcral rosorvo note
thoroforc, doos not initiate oxpansion. It b morJly an incident
-10-
of an expansion which has already takon placo;
over~
It is true how-
that the machinery 11hich has b0on providod for the issuo
of Federal reserve notes and the knowledge en tho part of the momher banks that Federal rascrvo notos are available if noodsd
has undoubtedly encouraged discounting at local banks.
But tho
provisions .of the act as to c;ligibility of papr.?r which nay bo rediscounted by tho Federal rosorve banks arc rigid, and have boon
strictly enforced by tho Federal Reserve Board.
Mombor banks
havo been repeatedly and consistently a·dvised to keep themselves
in liquid condition and to confinJ their loans as far as possible
to short time
c~rcial
paper issued for essential purposes, in
order to maintain themselves in position to coopJrate .vi th tho
Treasury in the
unpara.ll~led iir.~ancial
operations which war require-
ments have forcod it to undortako.
On July 6th tho Federal Reserve Board addressed a letter to
all tho banks and trust conpanies in tho United States, calling
attention to tho necessity for a gradual, but consistent curtail•
ment of non-essential credits and urging that the banks exorcise
a roa$onable discretion in restricting credits which aro cloarly
not neodod for the prosecution of tho war or for tho health and
necessary comfort of tho public.
In this lottor th0 Board called
attention t·o thG fact that in order to prose cutG tho war
205
206
-11-
successfully, thv Govvr.nmont is compoll0d to issue obligations to
provide for its largo expenditures which involvo waste and destruction rather than a porrrancnt addition to the national
~alth.
War is inexorable in its d:mands., and any financial plan which involves tho cxpJndituro of $24.,000,000 1 000 a year,. unless based
entirely upon taxation of a confiscatory character, necessarily
forces expansion of credits and is apt to cause an advance in tho
prico of nocossitios. Abnormal demands by tho Government,
unavoidablo a]ld necessary in tho
prose~.-;;
circumstances, must bo
countoractJd by increased production and by a groator economy
on tho part of tho civilian population which rr.ust docroaso, by
combined effort, tho normal waste incident to domestic lifo and
business pursuits.
Tho Fodv ral Rose rvo Board has had constantly in mind tho
dangers of inflation. \lli'hilv it has devoted itself assiduously to
ruilding up tho gold holdings of tho Fodoral reserve banks it has,
in permitting tho issuanco of Fvdoral rosorvo notes., always insisted
that they bo usod as sparingly as possible, -..vith tho double
purpose of maintaining tho strength of tho banks and of avoiding
redundancy. While tho Fodo:ra.l reserve note is a direct obligation
of tho Government, tho safeguards and limitations thrown around
it by law give it many of
th~
characteristics of a bank
not~.
-13-
207
It is not a legal tondor 1 but is rocciv·:~Hc by all national and
rr.cmbor 'banks and Federal ros'::rve banks a:1d is roc(;ivablc for all
taxes, custozroS and other publ.i.c duos; it br:;a rs
,1.
distinctive
lottcr and serial numbor indicating tho Fr::.dcral rosvrvo bani
through which it is issued, and cannot bo paid out by any other
Federal reserve bank under ponalty of a tax of ton por centum
!~eo
upon thJ
value of notos so paid out. It is
in gOld on demand at th0 Traasury or in gold cr
rodoon~ble
lawf~l
money at any
Federal rc,scrvc bank, and is a first and paramount lien upon the
assets of the issuing banl<", which is reqnired to -rraintai.n a resorvo
in gold of not l3ss than forty per centum against the total of its
Federal rosorvo notos in actual circulation•
~
The cons ol ida t•,'\
statement of all Federal reserve banks
as of August 23rd shows that thore vvcro $2,032.,83'7 ,000 of Federal
resorvo notos in actual circulation on that dato. Tho actual
gold reserves hold by those banks on the san::o date amountGd to
$2 7 003 1 051-tOOO ...After setting aside the
against
deposits~
reserve roq_uircd. by law
the ratio of gold reserves to Federal rosorvo
notes in actual circrulation, was 73.7%, the notos being otherwise
socurod by eligible
pap~r
and acceptances discounted or acquired
by the banks .. !'ederd.1 reserve notos should not bo confused with
Federal roservo bank notes 1 of which thor:;, wore in
circulatior.~
August 23rd 1 $16,864,.000. 1'hese notes arc diroct obligations of
on
208
the Federal reserve banks and are similar in their character to
national bank notes.
Thoy !llla.Y be issUed against any bond of the
United States whieh has the circulation privlloge, against
!reasury one year notes and against Treasury certificates of
indebtedhess..
tl8nt
When iseuod against a 2~ obligation of the Govem-
thoy aro taxed at tho rato of ~ per annum, and. if issu~d
~inst Gove~at
obligatians bearing a higher rate, the tax is
inoreased. correspbndingly•
fheso notes a.re being issued in small
denbxniha.tio:rls to t~ke the plaee of sdvek' cetti.t:lcates which ha.io
been t-etited Undor
~he
Act of April 8; 1918 for the plirpose Of h•
leasing si1ver dollats to bo br~kers Up ~d melted for export to
India and other
ma.~ be
f~teiga
countries.
~o
amount of silver which
used in this wa.y is limited to $350,000,000.
The issue
of these notes is thus limited to this amount and as they Uleroly
replace silver as vrithclrawn, thay havo no effe-ct upon the volume
of circula.tion outstanding,
Tho Federal reserve note should. not be
cont~ed
with fiat
issues of other tms, nor is it a. bond '"~:·ourrency.
Its
issue is carefully sa.foguarded, and while a. gra.dua.l increase in
the volUillO outstanding will no doubt be nocessa.rr tor somotillle to
co~. t~s
testing one )base of its elastic quality. there is ao
209
-14-
doubt that whonovcr the
re~irGmcnts
of tho country per.mit, it will
provo its flexibility by its contraction or by the increase of gold
reserve against it to a point •moro it will more nearly approxirrate
a gold cortificato. It was originally intended that tho Fodoral
rosorvo note
s~porsodo
in tho courso of twenty years, tho
nat:~~l
bank note. Provision was nade in tho Fod,oral Reserve Act for
tho purchase by
th~
Fodoral reserve banks of tho bonds securing
national bank notes and for the rosale of tho bonds to tho Treasury
for cancellation. This process _was well under way when it was interrupted by tho war, but tho increase in national bank note circulation has boon slight, -only about $11,000,000 since February,
1917 .. Contraction. of Federal roservo noto circulation, in so far
as it is secured by oligibl3
~per,
will bG natural and autorratic
as tho discount opo:mtions of tho banks are reduced, but tm note
is in no sonso an OlfOrgoncy currency, for it is and ·rlJ.l ronain
our principal circulating
rr~dium,
its domtnanco in this respect
increasing as tho remaining $900,000,000 of gold which is outsido
of tho Treasury and tho F"cdoral rosorvo banks are absorbed by
tho rosorvc banks.
Ever since tho ostablishmont of tho Federal rosorvo banks
tho Board has ondoavorod persistJntly and consistently to incroaso
thJ
ag~rogato
gold holdings of the banks. Sinco the entry of tho
210
-15United Statos into the war, tho nocossity for such an effort
has boon omphasizod, wr~lo tho inclination of tho public and of
the banks to coopsrato has bc0n rrarkcd. Moro than $2,000,000,000
of gold and gold certificates have bocn
withdr~·m
from birculation
and transforrod into tho vaults of tho Fodoral rcsorvo banks, but
as already stated, thoro still rorrains in circulation and in bank
vaults about $900,000,000 of gold
cortifi~atos
and coin, most of
which can be dopositod and should bo deposited, their place to bo
taken as far as necessary by
Fodor~l
rosorvo notos. It is tho
intention of tho Board in tho futuro, as in tho pastJ to watch
closely tho loaning bporations of tho banks, and it is not its
purpose in mobilizing tho gold of tho country into the vaults of
tho Federal resorvo banks, to incroaso tho volume of loans beyond
thJ amount actually required, but thoso aro war timos, and any
inability on tho part of Fodoral rosorvc banks to respond to
logitin:ato dorrands xrado upon thJm v;ould bo disastrous. It is clear
that
m proportion
as tho gold holdings of tho Fodoral r0sorvo banks
aro increased, tho ability of such banks to extend needed accommOdation
to othor banks or to issuo notJs is onlargod. As
aro curtailod,
th~
ros~rvc
holdings
lending ponor of tho banks is corraspondingly
roducod. As member banks arc no longJr roquirod to carry rcsorvos
.211
-16-
•f lawful money in their own vaults, it follows that gold held by
them is of no more value than arv othezo form of currency, and every
dollar of gold that is hoarded by individuals is withdrawn, not only
from reserve use, but also from dlrcUl.atlon;
the community.
I.
ani is a net loss to
The effect of hoarding therefore, is to imiBir the
ability of the Board to provide the strongest possible gold cover
for our growing volume of Federal reserve notes and deposits, -and deposits will necessari]¥ continue to increase during the con--
tinuance of the war.
It is desirable in the existing circum-
stances to have every dollar Of gold in the Federal reserve banks,
letting the circulatillC. medium consist of currency based on gold.
Money of every kind, whether gold or silver, should be deposited
in bank and used, but no_t hoarded.
SUrrender to the Federal reserve
banks of gold coin and gold certificates and abstention from hoarding means an increase in the volume of bank credit available for
the camnunity and increased ability to finance the war and the necessary requirements of business ..
It seems proper, in this connection, in view of the general
imp~ssion
that because of its power to control discount rates the
Board can reg1.1late the volume of rediscounted paxsr, to say something
re~rding
the discount policy of the Board..
During
the year
1915 and for the greater part of 1916, owing to the abnormal ease
21_2
-17-
of the money Jiarket, there. was
.
-
m t ·11t tle resol"t to the discount
faoiiiti.es of the Federal resen-e banks•
During this period the
deposits of zoomber and non...zoomber banks were increasing by leaps
and bounds, and. the banks as ~ rule were able to take care of the
legitimate needs of customers ani to make large purchases of
mercial paper
w~tho~t ~s~ng
c~
tl:le .ir eradi t either with correspondent
banJts or with the Federal reserve banks.
In such circumstances,
it is clear tha. t the Bpard' s control owr disccu.nt rates was merely
nomi:pal.
:Reserve
b~k
rates were low, in conformity with the
gene:fal trend of the money market, and even by
e~i~
ill open
market operations the Federal reserve b~ round. it diftlduit td
..
.
'( .
invest a suff!cie~ t por~ioil of ~hefl'. rht\4l1 to enable them ·tb tneijt
.
in :tU11 thelr
have
.
di~def!d._·~~~~~~ements.
·'
Higmr rates would of course
brought in even a smaller volume of business.
Late in t4e
year 1916, rates began to stiffen and the volume of discounts with
the Federal reserve banks showed a tendency to increase, but
t~
banks generally still held a surplWi of' :tU~s and any drastic
adV~Ce in Federal l"eseHe dl SCOWlt rates WO'l~d not have materia,ll.J
affected t)le, money
market~
After our entrance into the .war the whole situa.tl9~ ~dal'W'e~t
a :radical ol:!ange.
The
President,.
~n
an address to
Apr-il 2, 1?17, pledged the entire rese11re,es of the
s'Ueoessful. conduct of the war, am \W!\l'
\leoaJJ~e
the
Co~ sa
natio~
t-P
OJ:l
t~
paraino~~ W$~ss
of tho country • .Ail issue of 'h·e;.:;.sv..ry c::.rtLfL;c:.t:;:; anrwuncod
immodiatcly,. was i
oll<J'J'v~d
l:y- U:r.:, fil'Bt LS"<.'. 1·ti bond ='-"-mp-::dgn, tho
a.vc:JWod purpose of Nhich ,,\0\'1 to
of bonds bearing
3t%
~ccuro su.bt~~C:-1_.,;
int·:-1·oot~ It wa.o aprc--C.Jnt thZLt thin issuo
would 'co followed by othor':$ .. and it
\'/"ds
rrcr..5
fo$tly t.h·) duty of
tho Board to support th:. financial ;?lar. of tho
twolve months about
i.:·tL::" to $2,000,000,000
$10,000,ooo .. ooo
~Crt'lasury .•
Qi bc:Jds ~-vcro sold
Wi tl1in
by
tho
Govornmont, and since April 1917, there has bc.:;n cutstanding
an avorago
of a. bout $1,000,000 1 000 of Treasury c:Jriif icatc>s.., issued in anti-
cipation of tax()s or of tho proco:;d3 of bond eaj_os ..
VJ.ndful of the o!foct which high intor.::st .ra tcs on
Gov~rnmsnt
obligations would have upon invostmcnt socuritios ?.nd the rn<'Jnoy
n:arbt as a wholo.t it has
Troasury to
ftol~ rat~s
boc:~n
tho aim of tho S;.1C!'ot."'-ry of tho
daNn to tho lowest possiblo
level~
and it
is now his announced purpose to ma.int<dn as a. maxircum a rate of
41%
t~n Treasury certificatJs and 4-fj. on Liborly bon~s .. In thGso
circumstancos,. tho Fodora.l Rosorvo Board
ha~
fcl t t.ba.t it
should
diroct tho policios of tho system so a.s to insure prompt a.cca:a.IJOdatio.n to banks whoso customers might require assistanco., oithor
in providing for cOtr.morcial don:a.nds caused by incrc.asod business
•cti:vit1os, or in making
·~heir
banks Which bought bends
~or
thoir o·rm accou .... -1:. It was doomed
that .thoro should bo no
. blJOrtattt
and tlat
paym:mts !or bonds, as woll as to
int::~rcst
diGturban"l~, in th~ DID!loy mrkot
rat..:.:s should bo bpt as
t'l.~e...dy
normal and. froll
from fluctuation as possible. Thoroforc th.:.• Hc-ar.d, l;ofo:ro tho
subscriptions to tho tin~t !..ibcrty o~a issu~ wero cl~d.,
ostablishod a prcicrJntial rato •£ dise 1JUnt for nttos of member
..-
banks socurod. by Govarn.ment obliga.tiona;, whoth<J.:r
'bonds., and, ·in order
furth~r
~ortifica.tos
or
to assist tho Ti."'a.sury in disposing
of bonds, the Board authorizod Fodera!
rosorv~
banka to discount
!or non-mombGr banks 'Upon the cndorsomont of a. member bank• notes
socurod by GovGrnmont o.bligations# whothor rrado bY non-mombor
banks thomSolvos or by thoir cust~~rs, whon th~ proco~ds had b3en
or were to bo
u~o4
for tho pu.tposo of carrying Treasury
e~rtificates
or Uoitod Stato, bonjs. f.ho Board, tho.roforoJ distin!UiEhod botwoon
comtll&rcia.l
loans and loans made upon tho oecurity of Govcrl'lll'lcnt
....._
tbligatiar.us, by giving a. pl'$ferentia.l in favot" of
tr.~
lattor. The
pol11)f of tho Board has thus tar boon justifiod by rosul t~. 'l'ho bonds
nro wldoly distribUted
larg~r
-..nd
each subsoquont issue h.'.:l ':!hO'Wl'l a
numbor of subseribcrs than tho procooding one, tha number of
subscr1bere ta tho third Liborty loan boing moro than 17,000;000
Only 4~ of tho total amount of bonds issuod up to this timo wore
215
held on June 29th as investments by tho national banks~ or 2.29%
of thoir rcsourcos., while thoy wor3 carry lng lc;ans secured by
Liberty bonds amounting to $457,000 1 000, or .~.56% of their resources. As the rates on Gover.rnnont obligations were advanced,
the preferential ratos on paper secured by these obligations
wore increased correspondingly at tho Federal reserve banks. So
that instead of a rate of frQm 3 to 3~% as first established,
rates at tho banks aro now ranging from
4 to 4i%
on paper so-
curod by Governmont issuo·i:?~ with a rr.axim.lm rate ~f
odnrmorcial paper and
5!-%
5!%
on 90 day
on 6 months agricultural paper.
The Board docs not boliovo that in tho existing situation
markod advances in rates would be advisable in view of tho obvious
nocessity of avoiding any policy likely to disturb the financial
operations of th0 Treasury. The needs of those industries and
commorcial ontorpriscs which aro directly contributory to the
conduct of tho war must bo supplied at all hazards, al'ld a drastic
advanco in discount ratGs would not reduco tho financial requirements of such concorns, but would merely impose an added cost upon
thv people.
In its lottor of July
6th~
to which reference has already
been uadG,. the Board called attention to thJ importance of a wise
discrimination botwocn essential and non-ossontial cr::Jdits. It
.'
216
believes that the ex6rcise of disct'!miaat:..r.g
of the banks throughout the e cuntry
more effective in
~o,·.n·cf)racting
iit
j1JM.gm~:~nt
on the part
naldng the il' loans will be
any tender:cy toward eredi t ex-
pansion tha11 an a.dva.t:ce in rates wouJti b9..
The suggestion bas
been made by the Board that the Fe:leral ras9rve banks organi.ze.
'c;
each in its own district, local grcups compr:. sing leading bankers
and business men, in order to disC!lss ways
~nd
means of bringillg
about the result desjretl.•
It is exceeuingly difficult.· to lay down any fixed and
definitE'
l'Uldt:~
to goverr.i in distinguishi:'lg '?etwee:':l essential
non-essent!al credits.
A loan
mi~t
am
'tle deajrd<.i iorwhat appears
at first glance to be a non-essent5.al J-Ur.pcs€·., and yet failure
to obtain the credit might create a cond':.ti:Jn 71hich eight indirectly
have a distinctly harmful effect upon t:'le
':1.
Llilit'J c:: prodUctive
enterprises in the cOJDIJlU.:li cy- to obtain cred..it.
-.:n ":he same WS¥,
in the larger centers 1 refUsal by banks as a group to lend on
standard securities would seriously impair the liquidity of _in-
vestments arxl would ftJrce liquidation which might disturb very
seriously t.'le whole financial situa. tion.
It is important to
avoid sharp and radical. rea.rl.jus1ments of c:-edit and wherever
possible lines should be reduced wi tlluUt undue hardship to the
borrower or without
,
.
~ausing
a shook mich would render the granting
217
....
-22-
of necessary credits more difficult.
It would seem that those interests and enterprises obviously
catering to extravagances and luxuries should be considered first.
Upon investigation 1 t may develop that industries of this kind
need not be closed down, nor their labor thrown out of employmentf
but that they can be gradually diverted to esser-tial lines o£
production and distributionA
Existing high prices are creating
an added strain on the f inancfa.l ·resources of the country and are
contributing enormous]¥ to the cost of the war.
It is probably
impossible to effect any reduction in the prices of necessary
materials and commodities or in the compensation of those engaged
in producing them, but there are two
means~
and the ell!ployment
of both will be necessary; of retarding a further advance.
One
is by curtailing credits which are riot ne~&SS<UW 8.1;4 by dHrert:ing
such portion of these credits as mao be needed lnt o productive
channels;
and the other is to increase the production of the raw
materials ani manufactured articles which are needed in our
military and naval operations and which are essential for the
su.stenance and racessary comfort of the people.
In times like these, high prices ar..d high wages do not alwa.vs
in,crease production.
We see too fre<Flently a d:iLsposition to
. ••
2iS
accopt as amplo tho returns from limitJd 1-·roduction and from !_(,wet
working days to the wGok.
We havo now 1 1 500,000 men on tho shell
scarred fields of France 1 and their deods of valor havo alroady
thrilled tho allied world.
3~000,000,
then to
Soon this number will grow to
4,.ooo,ooo,
thus assuring complete and glorious
victory and the perpetuation of that heritage of lib;:;rty for which
our forefathers fought to give Usi and those millions of us who
arJ unable to tako our places at tho front, but who must romain
bohind to do that work which is nocossary to sustain tho·nation
at horre, and to
~aintain
our fighting heroes in France, should
strain every nerve to furnish all that is necessary, in gold,
crcdi t., services and goods, and we should not overlook or slur
tho fourth Cornrr.andmont, -- that Divino injunction to Moses,
whoroin wo are directed not merely to r·ost on tho sevonth day 1 but
arc sharply reminded of our prosont duty in tho comrrand 1 "Six days
shalt thou labor and do all that thou hast to do. n
The war
must bo won by forco of arms abroad, supported by grcator
production, economy and thrift at homo.
,,
@FedFRASER