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WAR FINANCE AND THE FEDERAL RESERVE BANKS. A. C. Miller. Address before the Join. Conference of the WESTERN ECONOMIC SOCIET. AND THE CITY CLUB Hotel La Salle, Chicago, June 22, 1917. r>i' X-259. * We are at war, and have already taken the first steps in its financing* If all the nany succeeding siops that we shall have to take in tho field of finance and elsewhere are as successful as this first stop in our financing we shall find ourselves in fortunate circumstances. Good financing can not win a war, but modern wars can not good finance. bb won without No country within So short a time after entering upon war has ever undertaken or succeeded in placing a long-term loan of such magnitude as tho first of our war loans, the Liberty Bond Loan of $2,000,000,000. Not only has the loan been fully subscribed, but the indications aro that it is oversubscribed by perhaps as much as $1,000,000,000. It shows that tho country is alive to tho hoavy responsibility it has as sumed in ontoring tho war, and that financially it is in a stato of ex ceptional readiness. Many factors havo contributed to tho success of our first war loan, and mdriy more will be nocosSafy to tho success of the lbdns which will folio#* The banking powor of tho country ha3 novor boon more of- factively utilized in a great financial transaction than ih connection with the negotiation of the Liberty Lban. Of necessity! Sind before the development of a more complete and ade^u&te program of war finance, this loan had to be carried through as a banking operation* The banks of the country have performed a great service not only in facilitating individual subscribers to the loan and in assuming the function of distributors of Government bonds to ultimate investors, but also in offering to take a considerable part of the loan on their own account in anticiaption of future sales to their customers, and without any thought of advantage or profit to themselves. That the whole process of placing the loAh has been carried through so far with such smoothness, ease, and with so little disturbance of the money markets of the country, is due to the brilliant sagacity of the Secretary of the Treasury in planning the several steps of this collossal operation, and to the reassuring presence and ready support, at every stage of the process, of the Federal Reserve banking system. Effective use has been made of successive issues of short-term certificates of indebtedness. Pending the flotation of the Liberty Loan, these certificates were used to provide the Treasury with funds for meet ing its current disbursements, particularly in the shape of advances to the Allies. Being issued in an aggregate amount of $1,OCX),000,000 and in definite anticipation of replacement by long-term Liberty Bonds, they have done much to mitigate the pressure on the money markets by the shifting of funds incident to the negotiation of a $2,000,000,000 loan. Indeed, a con stant feature of the Treasury's policy has been the vigilant care oxercisod to seo that tho funds received by the Government in payment of its obliga tions should bo returned as promptly as possible to the money market, in order to minimize, or if possible altogether to avoid, the disturbance ordinarily incident to the transfer of funds on so huge a scale. It is remarkable that the rate for call money, which is a highly sensitive barom eter of money conditions in tho leading money market of tho country, has . at no time since the inauguration of the Liberty Loan operation shown any disquioting firmness or alarming increase, 6 being the highest rate thus far reached. The Federal Reserve Banks, as the country's foremost and most x 159 - 3 - fundamental banking agency, have naturally had an important part in facil itating the transactions growing out of our first war loan, and it is of course to bo expected that they will have much to do with the successive loan issuea which will be brought out later. Indeed, it is to be expected that their status and the range and extent of their activities may be profoundly affected by the financing both of a public and private character which will follow in the train of war conditions, should the war run on for a year or more. It is two and a half years since the Federal Reserve Banks wore set in operation* iheir activities, unti|. recently, however, have been of restricted dimensions. Established primarily for the service that they could render to tho financing of trade and industry and as a protection against tho vicissitudes of the modern credit system, their chief valuo thus far has beon to give to tho countryfs banking and businoss affairs an under tone of strength and a fooling of security, and at times to exercise a re strain! ng and prudontial effect on the course of tho country*s banking pol icies and affairs. Although no such serious responsibility as that which now confronts the nation in tho fiold of public finance could have been forcsoen by tho framers of the of tho Federal Reserve Act, provision was nevertheless, mado by which the Federal Re servo Banks could bo used as instrumentalities in support of Government finance, and we may therefore expect to see thorn becom ing moro and more, as the war goes on, a powerful auxiliary factor in the fi nancial operations of the nation. How much their position and character may be changed under the weight of the now and varied obligations which may bo imposod upon thorn by reason of tho fact that war is to become tho principal x 25& - 4 - business of the nation for a yoar or moro> is a question that cannot but be viewed with anxiety by those who have believed that these great institutions should always find their primary and normal field of activity in serving the needs of the coun try’s industrial and commercial enterprise. some day be over. For the war will If, therefore, it should result that, as a consequence of undue reliance upon the resources of the Federal Reserve System in financing the war, i$se System was transformed and its ability to assist in the recuperation of American indus try and its readjustment to the altered conditions of the whole world of commerce which may safely bo predicted to fbllcw the close of the war, impaired, the consequences would be of the most serious character. It should also not bo overlooked that there will be many readjustments of our internal trado and indus try during ti\B war in the process of adapting our economic organ ization to the necessities of our now situation. Many industrios may be expected to experience a slackening of domand for thoir output and will need the consorving fiaro of a well administerod credit system to tide them through the poriod of the war. Ifeny othors will bo under stiff and urgent pressure rapidly to oxpand themselves to meet the intensified demands for thoir output, oc- _9 n,o casionod "by the war, and will need tho use of the Reserve Banks* credit facilities* These things may not "bulk largo in our calcu lations at the moment, .when our minds are preoccupied with ques tions of Government finance. But as tho deep disturbance which will bo wrought in our whole industrial organization, as tho war proceeds, develops, these needs will make themselves felt. Proper concern and provision for tho credit needs of our industry and trade •both during th* war and th* war ought not, therefore, to be prejudiced or foroclosod by undue or improper use of tho resources of tho Fodcral Rosorvo System, - vast and inexhaustible as they may appear to many to bo at tho momont - in tho financing of tho war. Whon the amendments which havo just passed Congress, pro viding for a groator concentration of the gold holdings of tho coun try in tho Fcdoral Reserve Banks, become offoctivo, tho twolvo Fed eral Rosorvo Banks will havo a normal crodit-londing and note-issu ing power in tho aggrogatc of about $2,000,000,000. Thus far, loss than ono-fourth of this power has boon utilized in extending accom modation to tho money markets of tho country, whether through tho member banks of tho Fodoral Rosorvo System, or otherwise through opon-carkot operations. Tho Systom possossos, thoroforo, an un- X - 259 — 6 — touched margin of lending power of some $1,500,Q0Q,000. is When it recalled that a dollar of reserve Credit extended to a member bank by a Federal Beserve Bank may multiply itself by five fold or more in the lending power of ihe irefaiber bank, it is at once apparent that the banks composing the Federal Reserve Sysietc member banks and Federal tial! credit \ 000,000. Reserve capacity for the Banks together - have a poten borrowing com unity m of sofee $7,500,** This is an enormous potential credit $0Wef*. Rut is is important that we should recognise that such power has its dangers and temptations as well as its protective strength and teassufanCe* To the expansionist it opens alluring vistas of inflation. By its wise use, however, it is capable of becoming at critical times a factor of decisive importance in the credit operations which will have to be undertaken during the period of the war - a bedrock of strong and wise finance. What the Federal Reserve Ranks can do usefully to help the financing of the country in its present crisis is one thing,; what they may find' it necessary to do against their best judgment and to the prejudice of the System*s healthy devellpment, is an other. X-259 - 1 - How much the Federal Reserve System cafi be the maker of its cwra destiny during the period of the war is at beet tfncertain* the Federal Reserve Banks are, after all, but one part, however, important a part, of our national machinery of finance, and that machinery will work to poor purpose, if any important part of it does not mesh in with other essential parts. The making of a national financial policy f.or the conduct of the w a r is m t, o in the hands of the Federal Reserve System. The System oc cupies, it is true, by reason of its control of money rates, a position of strategic strength in the general credit affairs; of the country. But the extent to which the Federal Reserve Sysfc&m will feel justified in using its powers of control to affect, the direction or alter the course of the nationfs financial pol icy will almost of necessity depend upon the extent to which its advice is sought in the shaping of our national financial poli cies, and the degree of support accorded its judgment and action by the country at large. It may well be ti]at our experience in this respect will repeat that of the leading European belliger ents, and that the banking policy of the Federal Reserve System, like that of the English, French, and German banking systems, X-259 - 8 - will be what the general financial policy of t&e Government, and nation make it. If our general policy of finance is cour ageous, ,sound, and strong, our banking policy can be sound and strong. But i f .our general financial policies are weak or vacillating, our general banking policy, and that of the Bedera! Reserve System in particular, is likely of necessity to be weak. As yet the general plan of finance for conducting the war has not been determined. Ihere is still much discus sion in and out of Congress as to the relative parts of the burden of war outlay to be assumed by taxation and by loans, discussion proceeds, the more and the more_/h.pparent it is also becoming thd; no plan for mo bilizing the financial resources of the nation on the scale of magnitude in contemplation will be adequate, which is not but tressed at every critical point, by an effective mobilization of the country's economic resources. Of necessity, the first steps in providing for Government outlays and the inmediate advances needed by our Allies, will have to be furnished by loans. The first of these, the Liberty Loan, is now being carried to completion, and in its negotiation the Federal Re serve Banks have had their necessary and important part to play. A loan of $2,000,000,000, even in a country as rich X-259 - as ours tofi 9 - prosperous in a pecuniary sense as ours has been during the past two years, is probably to be regarded as in excess of the current funds of the country immediately available for investment* Extensive banking accommodation was therefore to be presumed to be necessary, at least in the first steps of its placement* How much of the $2,000,- 000,000 loan is being taken by the ultimate invester, and how much by the banks and other intermediate agencies, is not yet known* It may be assumed, however, that a consid erable part of it will be some time in finding lodgment in the hands of the permanent invester, and that this amount, together with much that has nominally been taken by investers, will have required the banking assistance* extension of some temporary In these circumstances, it has been the policy of the Federal Reserve Banks to give to their members and to the banks of the country generally, and through them to their customers, who were subscribing to the Liberty Loan, credit facilities on liberal terms- The Eederal Reserve Banks have been authorized to make prefer ential rates of 3% upon 15-day paper of member banks, and 3-1/2 % ( the rate carried by Liberty Loan bonds) to the banks - member, non-member, and savings - and to their cus tomers, who are borrowing on their 90-day x-259 -10- notes for* the purpose of effecting payment of their bond subscription* authorized The Federal Reserve Board'has also a special one^day rate, as low as 2$, i i x order to enable the banks in the country’s greatest financial centers to prevent undesirable in the market for call money. disturbances For under conditions like the present, the state of the call money market has a very definite influence upon the general finan cial situation. The marked effect which these policies have had in promoting a spirit of confidence among the banks of the country and the people generally in taking hold of the Liberty Loan, cannot be doubted, in view of the unprecedented success of this whole vast opera tion. Whether these liberal policies will beget a false sense of security and excessive reliance upon banking credit, and especially upon the resources of the Federal Reserve System, to finance the war loans of the Government it is too early to say. Banks can, perhaps, safely undertake the financing of wars of ordinary financial magnitude, but a war calling for expenditures and advances estimated, as they are by the Secretary of the Treasury, at $10,000,000,000 for the first year, clearly calls for more fundamental financial provision than can be provided by the banks of this or any other country. Indeed, rich and power ful both in a financial and an economic sense as the United States is, it cannot hut awaken earnest solicitude how we should best proceed in undertaking to finance a war that is to cost $10,000,000,000 a year. The wealth of the United States was estimaipi o d before the war at about $180,000,000,000. - It is now estimated as high as $2 2 5,0 0 0,0 0 0,0 0 9/ andsome o r n ie venture to place it as high as $250,000,000,000. If we take the Iasi named figure, it is three times the estimated wealth 6f Great Britain or Germany, and the inference has been hastily drawn by some that we, there fore, as a people possess three times the contribuiive capacity of Great Britain or Germany, which have been the heaviest spenders among the European belligerents. Such comparisons, however, are apt to be misleading. It is not so much the assessed wealth of a country, but its realizable wealth that counts in war time as an index of financing capacity, and there are great dif ferences between countries with regard to the propor tion of their total wealth on which they can realize for the purposes of war financing - England, among the present belligerents, being manifestly far the most fortunately circumstanced in this respect. of far more importance even than realisable But wealth x-259 -Is- as an index of a nation's financial or contributive capacity, is current income or the current product of industry, especially for a country which has to he taken hy itself and do all its financing from within, and without external assistance - for such is the position of the United States. We shall have to pay as we go, out of our own unaided resources; that is, out of current income or the current product of industry. How much of our current income and pro duct is to he regarded as effective income - that is, as made up of things available for Government use is the question that must he answered in attempting to estimate the financial and contrihutive capacity of the nation for war purposes. By effective income is meant that portion of the total gross income of the nation which is in excess of a reasonable and pro per provision for the living requirements of the people. It is that excess which, in war time, is to he regarded as the nation's available or spare income - that is, the income that can he spared or withheld from individ ual consumption and turned over for the use of the Government. Obviously the wider this margim of sur plus or disposable income,.the greater the effective financial strength of a country. x-259 *13 - What, t e t is our effective incoine? hf, Ou r gross annual income was estimated "before J the war at $30,000,000,600. The growth of our indust rial and productive power and the rise of prices which have gone on apace during the past two years are esti mated to have carried our gross national income up to from $35,000,000,000 to $U0,000, 000, 000. I the f latter figure may he taken as approximately correct, it is clear that the expenditures in contemplation for the war ($10,000,000,000) will absorb about onefourth of our gross national income, and call for a considerable addition to the annual savings of the nation. How much this amount is in excess of the present annual savings or investment fund of the American people - that is, the proportion of its in come annually set aside and withheld from consump tion - can only be conjectured; but our present actual savings fund is almost certainly less by one—half, than the amount which it is proposed to raise for the purposes of the war. It was competently estimated that the annual savings fund of Great Britain before the war amounted to $2,000,000,000. It is doubtful whether ours amounts to more than twice as much as Great Britain's, but even if we take an optimistic view of the situation and allow that ours may amount X-259 -1Uto as much as $5,000,000,000, i t i s c le a r th at the fin a n c in g o f the war co n fro n ts ug w ith the problem of c o n v e rtin g an a d d it io n a l $5,000,000,000 o f the g r o s s income of the American people in to sa v in g s to be turned over fo r the v.se of the Government. The undertaking may well seem stupendous and to involve for many classes of the consuming pub lic very drastic revisions of their customary mode of living. The more the situation is pondered, how ever, the clearer it becomes that we cannot success fully undertake the financing of the war except by putting it o ' a foundation of economic concrete by n the practice of thrift on a scale which has not been our national habit for many decades. There are no mysteries in sound finance; no short-cut and easy me thods by which we can make something out of nothing. We shall be dealing in self-deception, therefore, if we attempt to avoid facing the fact that the war, on the scale which is projected, will call for a di version of about one-fourth of the annual incomeor let it be stated more fundamentally, one fourth of the annual productive power of the nation - from individual use to Government use. Thus stated, it is clear that saving on a scale of unprecedented in tensity will be an essential preliminary under any x-259 - 15 - effective scheme of national finance we may adopt,, and the question, which is much discussed, as to whether taxation or loans should, he our chief re liance, or the proportions in which the two should he combined, gets its chief meaning from the effect that the one or the other, or any given combination of the two, may he expected to have either in stimulating or in forcing national thrift and the growth of our annual savings* The danger of the loan policy is that by deluding itself with a notion that it is putting the burden on to the future, it will, through resort to fatuous and easy expedients, put the burden both on the present and on the future. This will happen if the loan policy, failing to induce a commensurate increase in the savings fund of the nation, degener ates, through the abuse of banking credit, into inflation — raising prices against the great body Of consumers as well as against the Government, thus needlessly augmenting the public debt, and increasing the cost of living just as taxes would. The policy of financing war by loans, therefore, will be but a frag ile a i deceptive and costly support unless every id x-253 36 - . dollar obtained by the Government is matched by a dollar of spending power relinquished by the commun ity; in other words, will fail and develop into inflation unless the dollars which are subscribed to the bonds of the Gove nament are real dollars, the re.sult of real savings and of real retrenchment. The danger to be feared in undertaking to finance our war by credit is that sophistry and financial leger demain may lead us to attempt to carry the operation through as of an operation in banking finance instead as an operation in saving and investment. The doctrine is already current in the country, with the sanction of some leading bankers, that our war cannot be financed except by credit expansion running to the limits of inflation. Being dealers in banking credit, they naturally take the view that the expan sion of credit in question will properly have to be an inflation of banking credit; for this is the new and most recent form of inflacion which the gigantic war in Europe has been bringing to the front as a de vice in war finance. Inflation as an expedient of public finance has long been practiced, although it has never had the sanction and approval of those whose business it has been to lay down canons of finance rather ■& »259 ~17~ than ta engage in the practice of finanea* The record of our own great wars and the records of the groat wars of other nations in modern times show pretty uniformly that timidity in facing the seriotts realities of war finance has usually developed a situation from which escape was finally sought through the desperate and costly expedient of Govern ment currency inflation* Such was our disastrous experience in the Civil War* when resort was taken to the greenback currency, which was nothing but a device of inflationism, and some $500,000,000 thereby added to the cost of the warwhich might have been avoided had the Government’s finan cial operation been maintained on a strong and healthy basis - to say nothing of the demoralisation wrought in business and the hardships and iniquities inflictod upon the groat body of defenseless working men and consumers. Clear and specific as the teachings of that experience are to those who can learn from history, it will remain for this war to demonstrate whether or not the lesson has been fully taken to heart* Inflation is full of seductive potentialities to the pundits of paper finance* Even if wo do not avowedly repeat the costly mistakes of our Civil War by ventures in the field of Government currency inflation, we may yet reach a similar result and land the community in a similar plight through the more subtle and less vulgar process of banking inflation. X 259-18The average business man, end even the majority of bankers, have been very slow to appreciate the fact that in such a country as ours, with a highly organized system of mobile banking credits, banking credit is 'ie most common form of purchasing medium used by the busi ness community. When an ordinary commercial bank opens a credit on behalf of any of its customers for $10,000, it creates by a stroke of the pen an addition to the supply of the purchasing media of the country of $10,000 less discount, just as unmistakably as if it had issued $10,000 in bank notes or had paid out any of the other forms of conventionally recognized currency or money. Banking credits which originate in connection with actual operations in industry or commerce, and which are protected against over over-extension by effective reserve requirements, are of course a highly desirable substitute for currency in a community which is habit uated to modern banking practices. The superior con venience of the check as against the bank note as a form of remittance and payment is altogether obvious, and explains the well-established preference of the American business community for it* Hor is it liable to the *X-259abuse of inflation as long as the hanking credit which is circulated by means of the check is bottomed upon genuine, that is to say productive, operations in industry and trade, resulting in an increased supply of goods. Inflation takes place whenever the supply of the purchasing media is in creased more rapidly than the supply of goods produced and to be exchanged. Prices then rise# Their rise is inevitable under the operation of the general law of de mand and supply, to which the value of money is no ex ception but rather the most exact case. The power to purchase and pay is the pov.er to bid, and when the supply of the means of purchase and payment- no matter what their forms, whether gold certificates, bank notes, Fed eral reserve notes, or bank deposit-credits circulated by means of checks- outruns the increase in the supply of goods available for purchase, there will be increased bid ding for the gnods, with the inevitable resultant of in creased prices. The evidence and the meausre of a state of inflation proceeding from inflation of money, currency, or credit, is the rise of prices* When, therefore, banking credits are opened for any oth^r purpose than to facilitate transactions which result in an increase in the production and supply of goods, banking credit is being used to lay the foundation of inflation'* -X-259- -20We have a marked advance of prices in this country since the beginning of the European estimated at U5 war* The rise is Wo have also had in the same time an increase in the supply of the country’s purchasing media, consisting of money, currency, and most of all* hanking credits, of some $5 *5 0 0 ,0 0 0 ,0 0 0 , or An examination of the resources of the hanks of tho country so far as that is possible, indicates moreover, that a very considerable volume (U5^) of the hanking credits created since the beginning of the European war in 191^ is offset by socuritics of an investment, not a commercial, character- consisting largely of Government obligations* That is to say, a large part of the new banking credit which has. been created in tho past two and half years has not boon used to finance tho increased production of goods, but to finance the transfer of ownership and uso of a part of the existing production to the hands of borrowing Governments* Tho conclusion is irresistible that inflation has been in progress to a marked degree in this country during tho past two years and a half; and that the steady forward march of prices which has cramped and pinched the average consumer has boon caused, for tho most part, by the rapid expansion of banking crodit and currency without a commensurate expansion of nroductiVc industry* -X-259-20«u The same process., only in a vastly intensified degree, has been going on in the belligerent countries of Europe and has given rise repeatedly to the gravest expressions of solic itude by those who are engaged in looking through the tissues of paper finance to the inexorable economic facts. All of the belligerent countries of Europe, in one degree or another, have undertaken to finance the war by borrowing, with infla tion results that, for the most o; them, make a tragic record of hardship, for t e masses and needless augmentations of the h, nations1 debts, and will leave behind, at the close of the war, and for the next generation a heritage of unspeakable financial confusion. Inflationism may not be the ultimate term in weak or bad finance, and situations and conditions may from time to time present themselves to us which will make a d^grow of' temporary inflation unavoidable* But inflation is so nearly always bad, and so nearly always avoidable - if ther^ be but will and courage enough on the part of th^ community and its governors is that it/ pretty nearly an ultimate test X-259 - 21 - of the character and workings of a country1s credit and finan cial system. I repeat, therefore, that if our loan policy through an undue reliance upon banking credit, degenerates" into inflationism, it means that the loan policy is failing, and therefore that the system of undertaking to induce the people to save for the use of the Government - in brief, the voluntary system of finance - must give way to some other more rigorous method or system - the.system of compulsion or financial draft. That nay mean either (l), taxation car ried to the limit, that is, conscriptive taxation, as some al ready propose, or (2), conscriptive borrowing - a less drastic form of financial draft - as the only acceptable alternatives to inflation. For let it not for a moment be overlooked that in flation, in its effects, amounts |o conscriptive taxation of the masses. It is,indeed, one of the worst and the mcst un equal forms of taxation, because it taxes men not upon what they have or earn, but upon what they need or consume. The only difference, for the masses between thi§ kind of disguised and concealed taxation and taxes which are levied and collected openly, is that in the case of the latter the Government gets the revenue', while in the former case it borrows it, and those * 2 . •2 to whom it is eventually repaid are not those, for the most . part, who have been mulcted for it. Inflation, therefore, produced a situation akin to double taxation in that the great mass of the consuming public is hard-hit, by the rise of prices induced by the degenerated borrowing policy, and later has to be taxed in order to produce the revenue requi site to sustain the interest charge on the debt contracted and to repay the principal. The active business and speculative classes can usually take care of themselves in the midst of the confusion produced by inflation, and recoup themselves for their increasing outlays. Indeed, inflation frequently makes for an artificial condition of business prosperity. That is why war times are frequently spoken of in terms of enthusiasm by the class of business adventurers- But it is a prosperity that is dear-bought and at the expense of the great body of plain-living people„ It would be a monstrous wrong if, in financing our present war, we should pursue methods that would land us in a sea of inflation in which, the great body of the American people, who are called upon to con tribute the blood of their sons to the war, were made the vic tims of a careless or iniquitous financial policy. In w arn in g thus e m p h a tic a lly a g a in s t the dangers to our whole •ponouy that will ffellow the financing of our war by an inflation of banking credit, I would not for a moment wish to be understood as implying that the war could be fi nanced without the extensive cooperation of banking ins.itutions and our system of banking credit. Loans in such amounts as the Government will place cannot be raised to any important extent out of past savings, for those have already been crys tallized into fixed fores of investment. Bor can they come entirely out of inmediately present savings. some degree anticipate future savings. They must in We have just completed the negotiation of our first war loan of $&,000,000,000. Our ordinary savings may be at the rate of $4QQ,000,000 a month, and if this has already been increased by one-half (it will have to be doubled in order properly to finance the war) it will have yielded, in the months during wbich the negotiation of the Liberty Loan is being carried to completion barely enough to effect the payment of the loan. In those circum stances^ it was clearly necessary that the great financial in stitutions of the country should make advances, either to their customers in aid of the payment of their subscriptions to Liberty bonds, or directly to the; Government in payment of their own subscriptions, in the expectation that they could X-259 - 24 - subsequently place the bonds so acquired with the investing public. H o t long a tine might reasonably be allowed Liberty Loan subscribers who have sought accommodation from the'r banks in order to complete their subscriptions, tb take up these loans, or how long a title should be Allowed the banks which have made direct subscriptions in order to work off their bonds on the saving and investing public, in other words, how far we might safely go in anticipating future savings, is a question upon which opinions may well differ. Competent opinion ia England, where a similar problem has had to be faced in connection with their great $5> 000, QOO, 000 war loan, has assumed that a year is the normal limit beyond which banking accommodation should not be extended in carrying buyers of Government loans. Our situation and circumstances are prob*- ably more favorable to a shortening of this process. Ehgland1 ^ whole trade and industry have been seriously dislocated by the war. Her producing power has been much impaired, and therefore the source on which her saving power has to operatehas been much diminished. Ours is a contrary situation. never come ®o near We have, as a nation, realizing our full productive capacity; our potential savings fund, therefore, never been so large; and the circumstances seldom so favorable for the rapid conversion of potential savings of wealth into actual savings. Moreover, the stream out of which savings are to be made is a pretty con- X-.153 — 25 — tinuous flow in this country, A much shorter period of time than what has "been thought necessary in England in order to assist the anticipation of future savings would, therefore, seem to be necessary in this country, and 't seems doubtful to me whether, as situation, more than a statement of the normal six months should, on the average, be allowed in which to take Up credit extended to individuals in order to enable them to buy Government bonds, and they should be pressed hard to complete their prepayments of borrowed funds in four months, if we are to avoid the danger of inflation. The banks ought to be put under pressure to work off their own bonds, that they do not as a matter of banking policy mean to hold as a part of their permanent investments, within a period of not more than from four to Six months. Otherwise they will not be in a position satis factorily to assume their obligations in connection with the subsequent loans which will be placed by the Government under a program of providing $10,000,000,000 a year, or over $800,000,000 a month. But when all is said, and every reasonable and proper provision for the legitimate use of the banking and credit machinery of the country is made, in order to mobil ize the nation's money savings, let us not make the mistake — 2-£x*“ ' of supposing that the saving ent exigency is merely X-255 which is called for in the pres— a saving of dollars. It is a saving of the productive power of the conmunity from the service of private consumption for the service of public needs which is called for, said the saving of money is of consequence only so far as it results both in a transfer and in an iflCfease of the effective industrial power of the nation for Government use. Taxation, and even loans which are bottomed upon real money savings can at best only provide the Government with buying power. But the Government will need more than buying power in order proper.'y to finance the war. As the war goes on, it will become clearer that this is a war of econ omic strength and resources, and that victory will lie with the nations which are best able to diminish the processes of econ omic waste and best able to resist the processes of economic exhaustion. More than buying power will, therefore, be needed for the effective prosecution of the war and its successful issue, no matter how orthodox and carefully guarded in a fi nancial sense, the methods of providing the Government with the needed buying buying power are. Napoleon summed up his experience as the greatest soldier of his age in the statement ”An army marches on its belly." B ® experience of the present X-259 - 27 - war is every day reinforcing the doctrine that a successful army is carried on the hack of industry. It cannot: therefore be too emphasized, in the discussion of plans for the mobili zation of the financial resources of the country, that, much as the Government will need buying power, it will need some thing far more potent and fundamental than buying power. It will need arm power, tool power* nature power; - and.brain yower and will power to organize and vitalize and direct these. Nature power we have in unlimited abundance. Our present prob lem is to combine with it the undeveloped potentialities of our arm power, our brain power, our saving power, and our will power; the power to do, and the power to do without - the power to do, that means producing more, and the power to do without, that means saving more. Can we, then, reorganize our life during the period of the war so as to increase the productive power of the nation and so to increase our savings as to provide a quarter of this productive power for the use of the Government? We can if we will, but only by an heroic exercise of our national will to en force the necessary economic sacrifices and saving. To make our saving effective, we must find and impose upon ourselves a sub stitute for the English blockade of Germany and the German sub marine blockade of England in forcing economy and saving. have been told upon trustworthy authority that when I the policy of the submarine warfare against England was under discussion x-a.5 - m. - in Berlin, one: of the most eminent of Germany*s economic strat egists argued vigorously against it, not on the ground of its violation of the established rules of international practice, but on the ground that it would help England hurt her. more than it would "Keep the submarine away from England’s shores and England will eat herself into-bankruptcy quicker than the sub marine can bring her to starvation." So I believe it is coming to be recognized, by those who appreciate that this war is an economic endurance contest, that England’s blockade of Germany has been one of Germany’s greatest aids in the financing of her war. It has forced the most rigid sort of economy, and through bringing the whole na tion appreciably near the point of starvation, has led them to accept the most drastic control of living that the world has ever seen, and so has measurably offset for the great mass of the people the terrible and iniquitous injuries that would otherwise have been inflicted upon them by the financial poli cy of inflation which Germany has followed in this war. Those who are puzzled because of the scanty use that has been made in Germany of war taxation to finance the war - her whole re liance being placed substantially upon loans - have here, I believe, the explanation of this strange phenomenon. It shows that inflation can only be absorbed on an empty stomach X-2.59. - 29 and where ’ 'rationing”' is established as a supplementary pro cess of public finance. We must of our own choice impose a "blockade upon ourselves against the seductions of luxuries and the tempta tions to waste. That means we must save, save, save. More than this, we must study how to make our saving most effect ive. Effective saving in war time means much more than simply cutting down the number of dollars which we spend and turning them over to the Government for its use. as taxation lendings Savings of dollars is good as far as it goes, but it is a mere beginning and does not go far enough. Much, In many instances very much, depends upon what I economize in the process- of making my savings. Some economies are much more effective than others, and the test of effective saving must be whether that which I refrain from consuming, in the process of saving dollars, results- in leaving unused Equivalent value of the kinds of commodities which the Government needs. Suppose my income is $10,000 a year, and that my family and myself have been in the habit of spending all of it. We now decide to economize to the extent of $1,000 in order to subscribe to the bonds of the Government. X-259 . * ** 3Q - How can we make that saving most effective; that is, most effect ive when tested by what it enables the Government to get in the way of needed articles and service? If my family cuts down its consumption of plain food - beef, bacon, beans, potatoes, etc.; plain clothing, gasolene, fuel, transportation, domestic service, etc., all of these, things that the Government needs for the war my family^ saving is very much more effective than if it simply nut down the purchase of expensive dress, a box at the opera, an annuity to an aged relative, a contribution to a school or club, etc. In either case, I am putting the Government in possession of the buying power of a thousand dollars which I had previously been accustomed to spend. But in the former, in addition to hand ing over to the Government one thousand of dollars, I am leaving on the shelves of shopkeepers, etc., one thousand dollars worth of goods and services of the kind which the Government wants and needs, and which it can buy with the $1,000 I have turned over to it. My saving has been effective because I have gone with out the use of goods and services which it is important for the Government to have, and turned over with which it can buy them. to the Government $1,000 In the second case, where my fam ily economizes on costly dress, fancy foods, and other products of the luxury trades which get their value not so much from the quantity of labor it takes to produce them as from the rarity of X-259 - S I skilly Ilf saving of a thousand dollars is not nearly so ef fty fective as in the fonr.er case in turning over to the Govern ment a commensurate value of the kind of commodities or the kind of labor it requires. Saving luxuries doubtless accomplishes s&mething, but much less than is frequently supposed. If I am in the habit of spending $100 a ye^r for a suit, of evening clothes^ and decide, in view of the war, to forego that expenditure and turn over the $100 to the Government in payment of a subscrip tion for a bond, what have I turned over in the way of effec tive industrial power? The $100 which the suit of evening clothes costs, represents, after all, a comparatively moderate amount of labor and a comparatively moderate amount of mater ial. The high cost of the suit to me is mainly for the skill, the taste, and workmanship of the designer. Perhaps I .pay «a good deal vfor the fashionable label that goes tinder the collar or the magnificent rooms into which I am ushered in the procesSi of relieving price me of $100 for a suit of clothes. In brief, the which I pay is made up largely of what the economists call "prestige value"; that is to say, in the instance chosen, I am paying the extravagant orice for dress rather than for clothing, paying the high price net to get comfortable protec tion for my body in the cold winter evenings, but to get some thing which gives me a feeling of correctness - style, fit, fashion, etc. X-25C > - 32 If these illustrations are suggestive, they point to the Conclusion that we must put intelligence and discrimination into our economies if they are to be made effective savings. The test we must apply how many dollars have we saved, but is not merely how much productive power and material have we released for the use of the Gov ernment and those industries which are producing the kinds of things the Government requires. Indeed, not only must we put intelligence and discrimination into our economies and saving, but we must do it with something of a religious zeal. The man who saves most effectively for his Govern ment will be the man who, in the course of his daily life, says, "Here is something the Government can use as well if not better than 1 can. ' and consumed it. Ordinarily I would have bought it I am not yoing to buy it now. . to leave it for the use of the Government. needs are more important than my desires." I am going The Government^ Thus, while we must, press our economies in all directions, we must recog nize that it is not the man who saves upon his costly ex travagances, but the man wh«, in addition, saves upon the basic materials or necessities of life,whose dollars count most when they reach the hands of the Government. It is no part of my present purpose to discuss the economic value, in war time, of the doctrine of "Busi- : &-2Z0 ~ 33 - ness, as usualn, but I believe certain inferences are clear from the preceding analysis. Much business will be speeded up during the war and its condition will be one of unusual activity* Other business cannot be as usual, if we are to pursue a program of effective national thrift, and public opinion should not permit it to be so. As we go along, and the necessities of the war become more exacting, we shall learn how to reorganize the industrial and consumptive econ omy of the whole nation and every class in the nation, so as to make it contribute most to the Efficiency of the na tion, as a nation that is organized for the business of con ducting the war. Ihe health and working efficiency of the nation must not be allowed to suffer impairment; but when a reasonable allowance is made for these ends, the nation*s needs must take the right of way as against the desires and wants of its individual members, even though some business languishes here and there, and i^ not ”as usual, . In brief, f economic and industrial principles rather than "business"1 or "money-makingW principles must be our guide in reshaping our economic organization for the business of war. No plan of finance, therefore, which is conceived simply in terns of dollars, however real the dollars be, unless also conceived in terms of the goods and productive power thereby set free for public use, can hope to succeed in the fact of the pres- X- 259 34 enfc national exigency. Hew spuch tore serious, therefore, will b© our national self-deception if, by a process of credit-mongering, the dollars which are turned over to the » Government are not real dollars, the results Of acts of saving, but more or less fictitious dollars, created by acts of inflation. Saving will never be as easy for the nation as during the period of this war, if we know why we are in this war. The war and all that it implies in the way of high and chivalrous national endeavor should be our sub stitute for our customary luxuries and individual the war. during This is a time for national, not individual, in dulgences. We can afford to be generous in a national in dulgence of the character wnich has carried us into this war. Indeed, when we consider the vast consequences for civilization and the democratic principle that hang on the issue of the war, we cannot afford to be other than gener ous in support of the cause which we hold true and dear, even though it involves the severest self-denial for us as individuals. Wars, it has been said, except those waged in na tional defense, are luxuries-. If ours is such a war, it rep resents a luxury that has become an imperative necessity. We are not fighting a war of defense, but unless we put into the X5 -2 .9 *—35 " prose cution of our war a will that is ablate with passion, it may become a war of defense. We are fighting a war in defense of our principles; the sane principles for which the fathers .gave their blood. From one point of view such a fight nay be a luxury, from the other point of view it is a necessi ty. But whether it be regarded as the one or the other, it ■means that for the time being we must give generously of our substance and devotion as well as of our lives, as for a thing that we cherish as more than life. War against the Imperial. German Government "to make the world safe for democracy'1 means to me, primarily, war to break the stubborn will of the most stiff-necked, iron-blooded oligarchy that, since the breakdown of feudalism in Europe, has ever taken possession of the life and destiny of a powerful and docile people, and sought to impose its will upon them and through them upon the world. Drunk with power, and with a will that is mad with lust for dominion, the will of the Junker oli garchy of Prussia must be broken. But it will not be, unless wo match its will with a will of our own as strong for the things we know to be right as theirs is for the things we know to be wrong. It is a big and difficult, but heroic and noble, enterprise on which we have entered. for munitions, it calls for money. It calls for men, it calls But more than these, it calls for will power, for this is a war of wills.
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