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110 FEDERAL PE3*RVE BOARD STATEMENT FOR THE PRESS Released f o r p u b l i c a t i o n , Tuesday morning, January 18, 1$21. ADDRESS BY W. P . G. HARDING, GOVERNOR OF THE FEDERAL RESERVE BOARD, AT THE ANNUAL DINNER OF GROUP VIII OF THE N W YORK STATE BANKERS' ASSOCIATION, E N W YORK CITY, JANUARY 17, 1921. E "WORKING BACK TO NORMAL" The s u b j e c t of my remarks t o n i g h t i s ''Working Back t o Normal n . I t had been suggested t h a t i t be " G e t t i n g Back t o Uormal", but t h e s u b s t i t u t i o n of t h e word "Working" was made d e l i b e r a t e l y i n o r d e r t o give p r o p e r s t r e s s t o t h e means by which a r e t u r n t o normal c o n d i t i o n s may be accomplished. I t should be c l e a r l y understood a t t h e o u t s e t t h a t we can not get back t o normal by a mere s t r o k e of good f o r t u n e . While t r u t h i s . s t r a n g e r t h a n f i c t i o n , we a r e not l i v i n g i n f a i r y - l a n d and we can n o t summon by r u b b i n g A l a d d i n ' s Lamp some good genie and have him b r i n g c o n d i t i o n s back t o what we t h i n k they ought t o be. A r e t u r n t o normal, which under t h e most f a v o r a b l e c i r c u m s t a n c e s w i l l be a slow and gradual p r o c e s s , i n volves work - hard work of every d e s c r i p t i o n - and c a l l s f o r t h e b e s t e f f o r t s of t h o s e who manage t h e commercial and i n d u s t r i a l e n t e r p r i s e s of the c o u n t r y , t h e i n t e l l i g e n t guidance of t h o s e who d i r e c t t h e use of c a p i t a l and c r e d i t , t h e p r o d u c t i v e e n e r g i e s of t h o s e whose c o n t r i b u t i o n i s manual l a b o r , and f u l l c o o p e r a t i o n a l l a l o n g t h e l i n e . s u b s t i t u t e f o r work h a s e v e r been d e v i s e d . No s a t i s f a c t o r y - £ - x-3025 While working back t o n o r n u l , we may p e r h a p s have time t o c o n s i d e r j u s t what normal c o n d i t i o n s a r e . They a r e c o n d i t i o n s which have e x i s t e d i n t h e p a s t and which we hope w i l l e x i s t i n t h e f u t u r e , but which n e v e r exist in the present, The term i s r e l a t i v e r a t h e r t h a n a b s o l u t e , and "normal t i m e s " can p r o p e r l y be d e f i n e d a s a p e r i o d when c o n d i t i o n s p r e v a i l which t h e g e n e r a l community has become accustomed t o and which i t a c c e p t s w i t h o u t any unusual degree of d i s s a t i s f a c t i o n . I n such t i m e s the r e l a t i o n s t o each o t h e r of a l l t h e v a r i o u s elements which e n t e r i n t o everyday l i f e a r e f i x e d more d e f i n i t e l y t h a n i s t h e case i n d i s t i n c t l y abnormal times, -when t h e s e r e l a t i o n s h i p s become u n s t a b l e and a p r o p e r sense of p r o portion is lacking. As a n example, we nay now r e g a r d t h e year 1913 a s & p e r i o d of n o r m a l i t y or "tiormalcy", i f you p r e f e r , althoughmany of us perhaps would not have a d m i t t e d i t a t t h e t i m e . Conversely we a r e a l l pr epar ed t o a g r e e , I t h i n k , t h a t t i m e s were not normal i n the y e a r s 1919 and 1920,although t h e r e may be some who f a i l e d t o r e c o g n i z e t h e f a c t while t h o s e y e a r s were p a s s i n g . I n c o n s i d e r i n g how we nay work back, t o normal, or more p r o p e r l y how we can p r o g r e s s toward normal c o n d i t i o n s , f o r we can not r e t r a c e our s t e p s and follow the p a t h which l e d us away from normalcy, i t i s well t o review b r i e f l y t h e c i r c u m s t a n c e s which rou "" about e x i s t i n g conditions. The u n d e r l y i n g cause was, of course, t h e world war, which had been r a g i n g f o r two y e a r s and a half when America e n t e r e d . Early i n t h e year 1 9 1 5 , a l l t h e b e l l i g e r e n t c o u n t r i e s began t o look toward t h e United S t a t e s , the g r e a t e s t of t h e n e u t r a l powers, a s t h e s t o r e h o u s e from which t o draw f o o d s t u f f s , s u p p l i e s and munitions- The demands were i n s i s t e n t , quick d e l i v e r i e s t h e main o b j e c t , and p r i c e s were a secondary c o n s i d e r a t i o n . These g r e a t demands accompanied by c o n s t a n t l y a d v a n c i n g p r i c e s n a t u r a l l y s t i m u l a t e d American i n d u s t r y and i n p a r t payment f o r goods purchased from us, -3- x-3025 we r e c e i v e d d u r i n g t h e y e a r s 1915 and 1916 $1,200,000,000 of gold, t h e b a s i c money of t h e w o r l d . This g r e a t i n f l u x of gold broadened our c r e d i t base and made p o s s i b l e t h e expansion which f o l l o w e d . The United S t a t e s e n t e r e d t h e war on A p r i l 6, 1917, and s h o r t l y t h e r e a f t e r t h e Federal Reserve Act was amended by a b r o g a t i n g a requirement t h a t a p a r t of the member b a n k s ' l a w f u l r e s e r v e s be f a r r i e d i n gold o r l a w f u l money i n t h e i r own v a u l t s and p r o v i d i n g i n s t e a d t h a t t h e e n t i r e l a w f u l r e s e r v e of each member bank should be c a r r i e d a s a c r e d i t upon t h e books of the Federal Reserve Bank of i t s D i s t r i c t , This l e g i s l a t i o n , t o g e t h e r w i t h tua changes i n t h e n o t e i s s u e p r o v i s i o n s , made a t t h e same time v a s t l y i n creased t h e l e n d i n g power of t h e Federal Reserve Banks and tza.de i t p o s s i b l e * o r them t o cooperate e f f e c t i v e l y w i t h t h e Treasury i n t h e f l o t a t i o n and d i s t r i b u t i o n of t h e enormous l o a n s which were r e q u i r e d t o meet t h e n e c e s s i t i e s of t h e Government. During the war c o n d i t i o n s became more and more abnormal but t h e changes were a c c e p t e d c h e e r f u l l y and a s a m a t t e r of c o u r s e . I t was e v i d e n t , however, t h a t t h e p u b l i c had begun t o l o s e i t s sense of p r o p o r t i o n and i t was observed t h a t many were speaking of b i l l i o n s a s g l i b l y a s they had formerly spoken of m i l l i o n s or even t h o u s a n d s . Following t h e a r m i s t i c e t h e r e came a l u l l and a p e r i o d of u n c e r t a i n t y and h e s i t a t i o n . Many were of t h e o p i n i o n t h a t r e a c t i o n would s e t i n a t once, j u s t a s i t did immediately a f t e r t h e c l o s e of t h e C i v i l War. But a l t h o u g h t h e war was ended from a m i l i t a r y s t a n d p o i n t , i t was not c l o s e d i n a f i n a n c i a l sense u n t i l our t r o o p s had been brought back ho$e and disbanded, 113 3a x-3025 and u n t i l t h e enormous f l o a t i n g l i a b i l i t i e s of t h e Government were a s c e r t a i n e d and provided f o r . S h o r t l y a f t e r t h e f l o t a t i o n of t h e Victory Loan t h e r e ensued a p e r i o d of boom t i m e s , which extended w e l l i n t o t h e year 1920. P r i c e s and wages c o n s t a n t l y advanced, bank l o a n s and de- p o s i t s i n c r e a s e d by l e a p s and bounds, s p e c u l a t i o n became rampant, and t h e removal of a l l war time r e s t r i c t i o n s give f r e e r e i n t o t h e e x e r c i s e of i n d i v i d u a l judgment, or sad t o say, i n many c a s e s , l a c k of judgment# Warnings went unhaeded and t h e s p i r i t of optimism was so g r e a t t h a t many who a d m i t t e d t h a t r e a c t i o n and r e a d j u s t m e n t must come, deluded themselves into the belief that a f f e c t i n g themselves. r e a c t i o n would merely hold o t h e r s i n check w i t h o u t The high cost of l i v i n g became a b u r n i n g i s s u e u n t i l f i n a l l y t h e l o n g - s u f f e r i n g consumer r e b e l l e d . 114 x-30?5 -4- The p r o c e s s of r e a d j u s t m e n t s e t i n almost s i m u l t a n e o u s l y i n a l l c o u n t r i e s of t h e w o r l d . I t i s e v i d e n t now t h a t the r e a d j u s t m e n t s which have t a k e n p l a c e were i n e v i t a b l e and unavoidable and i n view of world wide c o n d i t i o n s could n o t have been long d e f e r r e d i n t h i s c o u n t r y , no m a t t e r what e x p e d i e n t s might have b e e n r e s o r t e d t o . Great wars have i n v a r i a b l y caused g r e a t expansion, and the r e c e n t war was no e x c e p t i o n . P e r i o d s of g r e a t expansion have always been f o l l o w e d b y p e r i o d s of r e a c t i o n and the r e a c t i o n i s u s u a l l y most s e v e r e where e x p a n s i o n has been g r e a t e s t . The r e a d j u s t m e n t s which have taken p l a c e i n t h i s c o u n t r y s i n c e l a s t s p r i n g have been p a i n f u l , p a p e r p r o f i t s have been wiped out and i n many c a s e s those who have produced goods and commodities a t a h i g h c o s t f i n d themselves unable t o o b t a i n c o s t of p r o d u c t i o n f o r thein, and a r e thus f a c e d w i t h l o s s of accumulated p r o f i t s . These con- d i t i o n s have been w i d e - s p r e a d ; they have a f f e c t e d e v e r y A c t i o n of the c o u n t r y and i t i s n o t u n n a t u r a l t h a t d u r i n g r e c e n t months the s p i r i t of pessimism should have run amuck j u s t as i n the months p r e c e d i n g the s p i r i t of optimism exceeded a l l r e a s o n a b l e bounds. I have always been impressed b y t h e p h i l o s o p h y of an old s a y i n g which, I b e l i e v e , i s one of the many b i t s of wisdom a t t r i b u t e d to Confucious - "Things a r e n e v e r as good o r as bad as t h e y seem." While t h i s p h i l o s o p h y i s too o f t e n overlooked i n boom t i m e s , i t should always be taken t o h e a r t i n t h e p e r i o d s of r e a c t i o n which f o l l o w . I am sure t h a t we have a l l h e a r d more p e s s i m i s t i c t a l k d u r i n g the l a s t s i x months t h a n we u s u a l l y h e a r i n t e n y e a r s , and i f I may be p e r m i t t e d t o use an overworked term, the " P s y c h o l o g i c a l e f f e c t " of p u b l i c s e n t i ment h a s much t o do w i t h molding a c t u a l c o n d i t i o n s . 1 1 5 -5- • x-3025 While d i s c l a i m i n g any a u t h o r i t y t o speak f o r the banking community g e n e r a l l y , and r e f l e c t i n g only i m p r e s s i o n s gained f r o m o b s e r v a t i o n , I f e e l t h a t whatever the shortcomings of the banks may have been i n f a i l i n g to check expansion d u r i n g the times when a s p e c u l a t i v e s p i r i t was r i f e , t h e y have, redeemed themselves by t h e i r a t t i t u d e and conduct d u r i n g the p a s t s i x months. We have h e a r d much complaint of c o n s t a n t and d r a s t i c d e f l a t i o n , whlah some a l l e g e has b e e n the cause of the d e p r e s s i o n , b u t f r o m the p e r i o d i c a l r e p o r t s of the n a t i o n a l banks and the weekly r e p o r t s of the F e d e r a l Reserve Banks, i t i s e v i d e n t t h a t the d e f l a t i o n which has taken p l a c e has n o t been a d e f l a t i o n of c r e d i t or c u r r e n c y . The banks of t h e c o u n t r y have, g e n e r a l l y s p e a k i n g , responded t o the u r g e n t needs of those dependent upon them f o r c r e d i t accommodation and while e x e r c i s i n g c a r e and d i s c r e t i o n i n making new l o a n s , have not r e s o r t e d t o p r e c i p i t a t e o r d r a s t i c means of forcing collections. The member banks have r e c e i v e d ample accommodations a t t h e F e d e r a l Reserve Banks which have i n t u r n extended accommodations to each o t h e r . There has been no d e f l a t i o n f o r the sake of d e f l a t i o n , b u t expansion d u r i n g the y e a r j u s t c l o s e d was checked. From September, 1919 to J a n u a r y , 1920, a p e r i o d of s c a r c e l y more ttran f o u r months, loans to member banks and t o t a l investments of a l l F e d e r a l Reserve Banks rose from #2,350,000,000 t o $31300,000,000, an i n c r e a s e of almost a b i l l i o n d o l l a r s or n e a r l y f i f t y p e r c e n t . As shown g r a p h i c a l l y on the c h a r t t h i s r e p r e s e n t s an ascending angle of c r e d i t of about 45 d e g r e e s . Firm measures to r e s t r a i n f u r t h e r expansion were adopted i n J a n u a r y , 1920 and the ascending angle of c r e d i t from J a n u a r y 27th t o November 5 t h , 1920, when l o a n s of the F e d e r a l Reserve Banks reached t h e i r peak was reduced t o about 2 d e g r e e s . Since November 5 t h the l o a n s and note i s s u e s of the F e d e r a l Reserve Banks have been reduced i n amounts which might be regarded as normal i n o r d i n a r y • x-3025 c i r c u m s t a n c e s , and the r e s e r v e s of the twelve Banks combined, a r e now kofo as compared w i t h 45$ a y e a r ago. Our p r e s e n t "banking system h a s been put t o t h e s e v e r e s t t e s t s d u r i n g t h e p a s t f o u r y e a r s and h a s met them a l l . I t h a s shown i t s a b i l i t y t o extend c r e d i t s i n e v e r - i n c r e a s i n g volume i n o r d e r t o meet the requirements of a g r e a t producing c o u n t r y i n time of war, and d u r i n g the p a s t y e a r has shown i t a b i l i t y t o absorb the shock and p r e v e n t a money p a n i c , such as h e r e t o f o r e h a s always occurred i n times a f t e r p e r i o d s of undue o r e x t r a o r dinary expansion. The r e a d j u s t m e n t s which have taken p l a c e i n t h i s c o u n t r y , p a i n f u l as they may have been* have been a t t e n d e d with l e s s p r i v a t i o n , l e s s unemployment and have b e e n l e s s severe than i n o t h e r c o u n t r i e s where the expansion of bank c r e d i t and c u r r e n c y had been p r o p o r t i o n a t e l y g r e a t e r , and the p r o s p e c t f o r r e v i v a l i s a l s o f a r b e t t e r h e r e than e l s e w h e r e . I n working b a b k t o normal, an important s t e p h a s been taken i n the recovery of a normal s t a t e of mind i n b u s i n e s s , of a b e t t e r sense of p r o p o r t i o n and i n the r e s t o r a t i o n of s a n e r and sounder j u d g m e n t s . Many s i g n s are i n evidence t h a t the c o u n t r y now a p p r e c i a t e s the f a c t t h a t i n o r d e r to prospe i t must produce, t h a t i n o r d e r to c o n t i n u e p r o d u c t i o n i t must s e l l , and i n o r d e r t o s e l l i t must buy. There a r e produced i n t h i s c o u n t r y e v e r y y e a r goods pnd commodities i n volume i n e x c e s s of domestic requirements and i n many c a s e s q u a n t i t y p r o d u c t i o n i s e s s e n t i a l t o economical p r o d u c t i o n . I n o r d e r t o d i s p o s e of our s u r p l u s p r o d u c t s we must s e l l them t o f o r e i g a c o u n t r i e s and i n t h e p r e s e n t p o s t u r e of world a f f a i r s , i t i s out of the q u e s t i o n f o r f o r e i g n c o u n t r i e s t o pay f o r goods purchased h e r e i n the u s u a l manner. We must buy t h e i r goods i f we e x p e c t them t o p a y f o r ours and pending r e s t o r a t i o n of t h e normal p r o d u c t i v e a c t i v i t i e s of the world and of Europe p a r t i c u l a r l y , where t h o s e a c t i v i t i e s have been most c u r t a i l e d , i t i s n e c e s s a r y t h a t we should d e v i s e 6a new means of f i n a n c i n g our f o r e i g n t r a d e . X-3025 I t i s of v i t a l importance t o us t h a t our t r a d e w i t h Europe be continued and i t i s of s c a r c e l y l e s s importance t h a t the t r a d e r e l a t i o n s h i p s of o t h e r c o u n t r i e s w i t h Europe be m a i n t a i n e d . Otherwise t h e r e w i l l be a c o n s t a n t tendency toward t h e accumulation h e r e of goods, - p r i n c i p a l l y raw m a t e r i a l s - from t h o s e c o u n t r i e s which have been i n the h a b i t of s e l l i n g t o Europe but which now, on account of E u r o p e ' s i n a b i l i t y t o pay and t h e i r own i n a b i l i t y t o extend c r e d i t , a r e s h i p p i n g t o t h e United S t a t e s i n order t o s e l l f o r cash. V » x-3025 X s h a l l n o t presume to d i s c u s s b e f o r e a body so much more f a m i l i a r with the s u b j e c t than I am, the movements of f o r e i g n exchanges during the p a s t y e a r . I t i s a m a t t e r of common knowledge t h a t they have f l u c t u - ate d v i o l e n t l y , with the general tendency downward, and t h a t t r a n s a c t i o n s i n f o r e i g n exchange, handled i n the u s u a l manner, have been a t t e n d ed with the g r e a t e s t r i s k s . I n the p r e s e n t circumstances, i t would be vain to expect to f i n a n c e our exports to Europe by means of s h o r t - t i m e bankers' c r e d i t s . Several months a f t e r the a r m i s t i c e , e x p o r t s to Europe were s u s t a i n e d p a r t l y by reason of the p r e s e n c e of l a r g e b o d i e s of our t r o o p s , and a f t e r t h e i r r e t u r n by use of the remainder of the c r e d i t s which had been extended during the war to o t h e r c o u n t r i e s a s s o c i a t e d with u s i n the war. The War Finance Corporation h a s been r e v i v e d and, s u b j e c t to the r e s t r i c t i o n s imposed by the Act c r e a t i n g i t , i t i s a u t h o r i z e d to extend c r e d i t s i n e x p o r t t r a n s a c t i o n s , b u t i t i s e v i d e n t t h a t new agencies mast be r e s o r t e d to i n order to f u r n i s h Europe with l o n g - t i m e c r e d i t , which i s so e s s e n t i a l f o r h e r r e h a b i l i t a t i o n and f o r h e r continuance as a p o t e n t i a l buyer i n the w o r l d ' s markets. Of c o u r s e , the p o l i t i c a l s t a b i l i z a t i o n of Europe i s most d e s i r a b l e , b u t t h i s r e s u l t w i l l be b e t t e r a s s u r e d as h e r economic and f i n a n c i a l r e h a b i l i t a t i o n develops. The s i t u a t i o n , t h e r e f o r e , i s one which c a l l s f o r both l o n g term c r e d i t s and investments in European s e c u r i t i e s as means of supplementing o r d i n ary banking a c t i v i t i e s . The law, commonly known as the "Edge l e t " , which a u t h o r i z e s the i n c o r p o r a t i o n of f o r e i g n t r a d e f i n a n c i n g c o r p o r a t i o n s , under F e d e r a l 119 .8- X-3025 s u p e r v i s i o n , was designed to meet t h i s end. One c o r p o r a t i o n with a comparatively small c a p i t a l h a s been i n o p e r a t i o n f o r s e v e r a l months p a s t and a n o t h e r with a c a p i t a l of $6,000,000 h a s r e c e n t l y t e e n o r g a n i z e d , w i t h h e a d q u a r t e r s i n New Orleans, and a u t h o r i z e d to b e g i n b u s i n e s s . Another and l a r g e r c o r p o r a t i o n , nationwide i n i t s scope, i s i n pro- c e s s of o r g a n i z a t i o n , and should t h e s e p i o n e e r s prove t h a t the o p e r a t i o n s which they propose to engage i n can be conducted s u c c e s s f u l l y , o t h e r c o r p o r a t i o n s w i l l d o u b t l e s s be o r g a n i z e d as the o c c a s i o n a r i s e s . We should keep t h i s thought c l e a r l y iti mind, t h a t our problems i n working back to normal a r e n o t domestic problems merely, b u t they are problems connected with the working back to normal of a w a r - t o r n world. Europe cannot work back t o normal without the h e l p of America, and America cannot become normal u n l e s s and u n t i l the normalcy of Europe i s i n some measure r e s t o r e d , and u n t i l the r e s t o r a t i o n h a s proceeded f a r enough t o j u s t i f y the conclusion t h a t i t w i l l e v e n t u a l l y be completed. I t i s u s e l e s s to attempt t o d i s c u s s i n d e t a i l i n an a f t e r - dinner speech, which ought t o be of moderate l e n g t h , the problems which must be met and the d i f f i c u l t i e s which must be overcome i n working back to normal, b u t p r e s e n t c o n d i t i o n s , I t h i n k , j u s t i f y some c o n c l u s i o n s vdiich ought t o encourage and h e a r t e n u s a l l . Our b a n k i n g p o s i t i o n i s sound and s t r o n g e r than i t h a s been f o r many months,- and the b u s i n e s s community, which h a s been f i r s t o v e r - e x h i l a r a t e d and t h e n u n d u l y d e p r e s s ed, h a s r e c o v e r e d i t s normal s t a t e of mind. doubtedly approves of working back t o normal. t h e r e may have been, h a s been p a s s e d . P u b l i c s e n t i m e n t today u n Whatever danger of c r i s i s The gloomy f o r e b o d i n g s which -9- X-3025 many f e l t a y e a r ago because of the knowledge t h a t r e a d j u s t m e n t s were impending, have given way, i n the a s s u r a n c e t h a t the most t r y ing and c r i t i c a l s t a g e of t h e r e a d j u s t m e n t p e r i o d i s s a f e l y o v e r , to a f e e l i n g of c o n s e r v a t i v e optimism, renewed courage and r e s t o r e d confidence. I n such a s p i r i t l e t u s a l l work t o g e t h e r t o make the new year one of c o n s t r u c t i v e achievement. Washington, D. C., J a n u a r y 17, 1921.
@FedFRASER