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-L&gated in &rapport of the cuauon effort. I need not remind you of the cheerfulness with abich, on the ,hole, ,,rsaricans submitted to coemodity rationing, price fixing, and other regulatory measures as dre11 us voluntarily limiting themselves, in order that our energies and resources might be devoted more cunpletely to the prosecution of the ear. Frou Vie greatest manufacturing estahlishasents done to the bumbleat homes the response is most gratifying. :be truth of the setter is, however, that =War our cosaplex social system it is extraordinarily difficult for a people to save currently and the pleas at the dispose' of prosecution of a &creel tr. their government the capital needed for .)tanciards of living urea more or less !Lod, and are cur cc unomic relation- less susceptible to change than in &,:ore priniltive soc ie t le a. ships are intricate, and under a system ,are concerns Lust shod the problem of the one. Finally, of publicity. extent and manner of ountributiun to mobilisation of a people fur Air is to an in a vast country like and the extent of sacrifices state is u difficult the important the United Itutes, the required are nut bores a profit to exist, extent a mutter importance of sacrifices upon all sections immedietely with the sate force. Consequently, our Government had to make up t savings by resort to bank credit. fo All recall that the ,i(arcrnuent after request big the maximum investment of current savings in to anticipate deficit in receipts from Liberty bands, also asked investors their future savings and buy bonds on the partial payment plan. effort ass mode to encourage people to save &eery and complete them payments as soon as possible* but many did not or could nut pay rapidly, and the result me a continuously In addition to this, its short teen notes, as mach a 60 per thorassing amount of Liberty bonds being curried on bank. credit. the Treasury also ourrolied large amounts on cent. of attic& at times were lodged in toe clanks. 2ins, pover the GcnrensJent ass uncle to see that +.hat purchasing obtain ay tapping the savings of the people, it manuf tie Lured tikrough the creation :if bank credit. &.t first si at, this looks a good - 9 - deal like manufacturing paper "Continentals'. or uesignats, but the vast difference was that the credits and currency creutod were ulaays, for any legitimate purAids convertibility could be Laintained pose, imsediately convertible into by reason of the fact tOat for the first tiLe the country's gold reserve was mobilised in a single reservoir, scattered, as it country. an the Iederal Reserve 4stoL, InsteLd of being fomerly, mount; thousands of individual banks all over the Wieh a centralisation of reserves pet itted them to become the basis for a much larger creation of credit and currency than .could have mean possible under the o.d mystaa. Inability of the civil population to limit its consumption sufficiently to release production fully for .ear purposes means that both the Goverment and individuals Uocome bidders for labor and goods in the open market. ,s lung as labor is not fully o" loved and factories are not running sat capacity the effect of this on prices is not marked. and every hill hen, however, every man has been put to work .4 heal is humming, and increased demand con uo longer be matched by increased produation, the off prices and wages. of this competitive bidding is sioply to run up loch rise in the price and wags level creates a need for addition- al purchasing power, Anion, wham it is supplied through the eedlum of bank credit, tends to inflate prices, anu Ames still further. 2bis very process in itself pre- vents full utilisation of rf;axtrara productive capacity. :erica.' and "rages rise tam. evenly, - noro in sons lines than in others, - and distortion of the normal relation ships causes heavy dai,4aut and often speculation, accompanied by shortages, of the commodities the prices of Abich are rising. It causes shifting about of labor from ono position to another, discontent, and strikes. It disrupts the naooth dorkings of industry and creates vests where the vital need is for economy. is continued, an actual decrease in tau]. production of tea ocoure. If the process 13 '...ven the first loan iced to be characterised by Gallatin us "more than doubtful." ita each sextoeeding issue, the toms Sachs* sore disadvantaceous, until by 1614 the public crualt had fallen to extraordinarily lows levels. Government bonds rent guoted at a heavy discount, and the Tra&sury, in order to get subscriptions to nor isu:7_al, had to promise in some canes that the amounts subscAbea vxxild be usei solely in efense of localities furniCking the money. The dire extremity of the national finances as further indicated in the same year when an of six pc,r cent. of warty 1;13,0)0,000 public stock brought subscriptions for only ,046,403 although the specie price ranged as luw as &LI to 69. It is only fair to re)..arX teat invasion by the enemy, the unpopularity of the war with a lards class of the people, and the failure of Congress to rechoxter the United Jtates bank in 1611, greatly intensified tae difficulties of the war progress. lhe failure of Gallatin's Jr a policy, hu5ever, as still due in lane mere to its erroneous principle, nand contemporary critics did not hesitate to plow, the blame there. Both ecretariss Cag.pbell and Dallas uho succeeded Gallatin admitted its failure, and recommended incroused taxation. In the curds of Dallas, the difficulties had nut been due to "went of resources or .mot of integrity in the nation," but "to inadequacy of our systml of taxation to form a founaution of public credit, and the absence from our system of the Leans 4xich are best adapted to antici- pate, collect, mud distribute tee puelio revenue." 2hs German linance ;inister Dr. delfferich's declaration early in the recent liar that additional taxes would Lie levied only for 'Lout interest mounded singularly like Gallatin's Oewenee adoption af this policy ass probably due largely to expectations of a short war and inimmmities, and Ahen these expectations were not realised the inevitable failure of the gam resulted. Gemany ended the aar with heavy issues of irredeftuble paper, the further wultipIicution end effects of ahLWe * eualio alebts " Adam, - Public Jebts - 16 was inflation, suspension of specie 'weenie, end coieeroial mod finenelal unsettlement from which it took fifteen years to recover. our financial program in the Ara with Gerviany rested an adifferent basis. In the first fiscal year of the soar we raised 44,175,0')3,0JJ by taxation, compared sith 410,700,0u0,000 by borrowing. In the fiscal year ended June 30, 1e19, taxes Oroueht in 344650,000,000, tend loans 412,000,000,000. Zee lessons of other wars Isere not forgotten and from the outset our policy WWII to raise every dollar possible ter taxation, to print no pa2er that would not be instantly redeemable is gold, and to distribute tne tiovernment securities to the greatest extent possible without resort to bank credit. It is now pretty conclusively esteolished that a properly conceived financial progrem should be in eecordance with this policy. ?here still remains, however, one more important problem f a* the finance sinister to settle, and that is whether the Government, in selling its securities, shall vomit the rate of interest to on determined .dally by the ordinary forces of an open and unregulated money iaarket, or whether it shall adhere to a low rate policy, and depend for die- tributian partly upon keeping money rotes low and partly upon appeals to patriotism. Our oen plan during the most ear inclined to the latter charecter, and probably no other phase of our financing has celled forth one. ore discuss ion pro end con than tnis are critics of this me thud have argued that maintenence of cheap eoney through low discount rates at the iederte leserve eatte tented to stimulate private enterprise unduly at a time tins the full measure of the country's resources was needed by the Government, ant that in consequence or this competition Alut .ran saved in interest was lost in the Mier prices the Government And to pay for @applies. It MA further argued that the Oovernment, uy not offering its securities at a rate Witch would make tnoul attractive purely end solely as an investment, !tempered its own efeorts to secure that maxima distribution outside of the banks -.etch we have seen is so important to tae sucoeseful financial conduct of a 'sari. I do not wish to take sides hAru with retard to our ..ar policy in this respect. Let me sinply point out, houever, that hindsight is better than foresight, and then the country was fk,cing a var which promised to tLx its resources very severely there lose much to be said for currying on borroring opPrations as cheaply se poseible. It IlAy be recalled, aloe, that at the tile there raa a disposition in scrap qoArters to criticise even the rates named as too high. In feet, it is probably true that the great body of public sentiment wnerally favored a low rate policy. I 1=ve spoken tints far only of the renerol principles of financing war. I might gp on to discuss in detail the problems 4hich arias in applying those principles. 'history is filled wtth interesting examples of their application rind our 041 recent euperionce has given us a fund of knoAiedge which the Ratite minister of any future par rill do .:ell to study. I any of the data:led problems .ire of a technical nature and concern tee :Inance minister rather than the soldier. keny problems are both military and financiel in their inplicutionn, us, fur example, the basis upon each vex contracts should be let to assure a ountinuous flow of munitions to the points required, at the tide re(,uire, unaF,r conditions of payment conduolve to the greatest possiale economy. On all of tae problems there should be oareful study, both on the part of the financial deoart.ent of the Government and the marmaing dcyatix/nts. rise problime are nut ones vaich OuD be dealt with adequately by snap judej.ent tut tail spar of the moment. Careful advance planning is essential to sound ear finance. I have in mind a certain consission of one of the allied governments shish came to tots country during tiro 4ar for the purpose, among others, of buying a le2V0 amount of arty supplies. I shell use touts to illustrate. Under instructions from their goverment, they udvertiasd midair fur bids, and as a result set in motion Eat' Matt. Of C mrse, to the extent to Ahich adrahoe estimates ure possible. rlmeh mar is 111104 to involve its own problem of tactics and suuipment that eaunot bs Una of the t.,;..!e.Ateet difficulties in the umy of carrying forward an adequels fereeees. Timex is] pithy to the o required. intpesihilikir of limiauling wen aapp road. r part o lately hew =AA money will the ancertuLnty mhioh existe on tuts score is unavoidable and 4kritoes from the chances of war. A part, how/very is susceptible of some reduction as es greet oar machinery for planning the industrial part of the war program. For tAn soldier and fur the financier there is a sauna lesson tic the experiences 3f thee ?ant. It Is the need for the eursdtd preparation of the entire war pima as it concerns personnel, noterita, transportation, end timl-nce. of this body of officers at the The presence nr College 'conducted sneer the auspices of the an ?lass Division of the Imola Aar le MA evidence that ths sow at leant has a full apprecisAian of the importance of this. CONni?aNGE OF STATISTICS DEPALTMENT hiay 6, 1921. SUBJECT: The influende of the Discount -ate By Governor Strong. Lr. Lnyder opened the meeting, saying: "I am sure we are very much flattered to have the Governor with us to-day, and I am sure he is going to say some very interesting thin,L. . lie are very much indebted that he should come." (Governor Strong) "1 understand that there are much more important matters relating to the organization of the bank coming up later this afternoon, at this present meeting, and I am going to try and shorten my remarks toa point where they will not interfere with that important business, Mr. Snyder. Furthermore, now that the time has come for any statements I am about to make I should say that I am appearing here in fear and trembling, because Mr. Snyder and his able assistants in his department put such a topic before me as the influence of the bank rate. I am always airaid I am going to match my theory with Mr. Snyder's. "The original company of thirteen, as I recall the figure, that started the Federal Reserve Bank, are the only ones tnat can go back to the days of our discussion of what rate w s proper and would be satisfactory when this bank was organized. The conditions that existed at that time were those brought on by the outbreak of the war. We had called upon two a:encies in the United States to meet the great crisis in credit and currency. The crisis in bank credit was met by issues in clearing house and loan certificates, bearing interest. A vast amount of credit was manufactured through the agency of clearing house issues, and that credit was bearing interest at from 6 to 7 per cent, and I think, in some cases, higher. In addition to that, credit was manufactured through the agency of the Aldrich-Vreeland Association, which was organized under the "Aldrich-Vreeland Acu.s The existence of that gbeat mass of credit which was hearing various rates of interest throughout the country determined our bank rate. I thin); that the reserve rates established were from 6 to 6 1/2 per cent, and the rate was high enough so that it kept down he vy borrowing, at a low rate, so that 'the first busi- ness conducted by the Federal Reserve Bank of New York at the rate level which was established was trifling, and we were gradually able toreduce our rates over quite a period, until finally, as I recall, we were buying bankers' bills, - that is, acceptances - as low as 2 % in the open market. We had, in fact, a rate for that class of paper in New York that averaged from 2 to 3 per cent at the same time that pepmr of similar ehnracter was selling in the London market at from P 1/2 to 3 per cent. The rate in the London market was as low as it was because of the American mass of credit Ihieh was artificiallzr manufactured there. "In discussing the influence of the bank rate, you have got to bear in mind that the bank rate has no influence ualess you have got an acconat on both sides. If you have no exiting loads, you cant t, 'bring about con- traction by an advance in rate. "All that we were interested in c: Bing in the early days of the Federal Reserve Bank was to earn a mare divilend of 6 per cent for the aember banks, after paying all out' eepenses. I might say in these days we had a very distincv, contrast in the character of the relations of the heeerve banks to what we have nor. Thin is the great money market of the country where dealings in short time paper especielly centered. All of these bankers' acceptances came to this market as a rule and opened up a market where the short-time L1unicipal borrowings were generally negotiated: and consequently we had a peculiarly advantageous position in New York which enabled us to entice our funds. It resulted in an arrangement between the Reserve banks by which - ee divided up the various benks. I think it ia no exaggeration to say that this has worked out to better advantage than we had expected. ni am not going to attem2t to review the period of the war, when we experienced all the difficulties of adjusting rates. it is full of controversy. It is a ;lig suAeet, and Mr. Snyder gently sugge-ted that that would be an interesting thing to talk about, and I ducked it. In geheral, I think I am safe in siting that we uade about as many mistekes - I say "ire" foe we were simply ene body after all, the Treasury and Rsaerve banks - as could be expected, but, on i;le whole, I thi-'r 0 made fewer mistakes clean our friends on the other side of the water made, and certainly very tower mistakes than the enepy on the other side of the water made in financing the war. skipping that point, I want to come right down to the present and what is taking place now. I -/ant to illaltrate this byr giving a few of my Observations: "On Miey "), 1901, I halecenned to be in the Stock :&xchange, and on that day, between 10 and 1 o'clock, we saw Northern Pacific stock advance to $1,000 a share and money landing at about 100 per cent. There had been previously no such complete collapse of values in wall Street as had occurred ti- at day up to 1 o'clock. Towards the middle of the day they sent word very frankly that their boxes were empty and they could not sand in more margins. Our loans got so low that if we had attmmpted to liquidate thorn the proceeds of the collateral would have been insufficient to pay the face of the loan. In other words, if very many of the loans had matured and the sale of the collateral took place, it would have resulted in the complete eollapsc of Wall Stseet. Later plan had resulted in the ea/e of Northern Pacific stock and Mr. Morgan and his associates -ent out word that they would not be unduly severe in the sending out of margins, and later prices had risen to a point where the loans could be made good and money was practically unlendable. "The point I am trying tobring out, in telling this story, is that 4 it presents a picture of a complete collapse of values which resulted in a condition that meant insolvency. Money was over, and money got back to normal rates all in a period of about five hours. In similar fashion, that is what happened in the United States, and in fact the whole world in commodity values. and extravagance worked out their own natural conclusion. Speculation There are those who say that some design of man or men, or poasibly the reserve banks, by advancing rates, had brought about this state of affairs. do not think most people do. I do not believe it for a minute, and I In general, I would say that no man or men had the power to stop that great wave of speculation, and no man or men had the power to stop the break which took place. On the other hand, I would say that certain poli- cies might have been adopted so that it should not have reached its extreme limits. "Evryone now is satisfied that somathing must be done to stabilize the values of goods, and they will be stabilized to some level. ..certain houses that retail goods, or certaia houses that wholesale goods, or certain houses that manufacture goods, by reason of foresight or some other circumstances that gave them a more favorable position than other competitors, may be out of debt and not have large inventories, and are able now to 'ow- and stock up with goods that s.ra coming along from producers, manufactured out of cheaper raw materials and by cheaper labor than the goods and existing stocks which are being carried upon borrowed money. The tendency among retail stores at present is to keep new goods and cheaper goods in competition with high prices. It is forcing dawn the selling prices of the old ones and there are some new levels taking place from it. ing in bank credit. The same thin is happed- Put yourself in the position of any bank officer in this city and see what happens in the daily trend of your business. At the end of the day he may find that he has a surplus of reserves on deposit at the Federal Reserve Bank. That surplus is the result of a great variety of transactions in the member banks. The member banks may have made some new loans. I may have loans out. The net results of all these movements may have had some bearing on his reserves. going on every day. It goes on both sides of the account. That is The bank which is short );5 - in its reserves willcome here to borroe. In fact, the number of banks that are borrowing from us now is, I think, more Oleu 100. Ike soon as a bank gets in that position where it has a credit balance at the clearing house, then it has a choice of what to do with that credit balance; then it goes out to seek an investment, and, under the conditions that exist to -day, it seeks tee very best and safest investments it can get. The banker is a little timid just now and he is willing to debit his competitor for good commercial paper only. The influence of the lending bankers that are out of debt is the influence that will bring the market rate for money down to or below our rate. liquidate all of our loans. That process continued indefinitely would, of course, If the traditional policy of fixing the rates of the Federal Reserve Banks should prevail, I should presume we should always have our rate a little bit above the market rate. Of course, we should always provide for seasonal movements, or crop making, or withdrawals of gold from the United States, or heavy borrowings. This process I describe is what is liquidating the loan accounts in the reserve barks to a great extent. I want to COMJ up to the point of describing, or prognostigatin4 if you please, a little bit about the future. Before referring to the future, I want to refer to another important influence on our rates and an important rate consideration in the Reserve 'Dunk. "'ion know that every time the Treasury of the United States puts out a loan and places that loan, as it does, through the reserve banks and the member banks, the first transaction is for the member hank to buy the certificate, to make levment by credit, and then, if they can do so, to sell the certiAcate to a customer and to the public and make a profit on the &peat. You can see that if the member bank can't sell the certificate of indebtedness teey can't make this profit. It is the thing that did the damage in 1918-1920, and the policy of the reserve banks and Treasury Department together should be desig.:.ed to get the largest amount of money that can be obteined for the Treasury's notes at the lowest rates of interest any' at the largest security to the public. You may say 6 that the rate allowed by the Treasury must be sufficiently attractive to the public to enable the public to buy them, but sufficiently unattractive to the basks to make it unwise for the banks to retain them, and have every stimulus existing to sell these certificates to the public just as promptly as persible. "It has been necessary for the past three years to determine rates between the Treasury and the Reserve banks Which will enable the Treasury to successfully float its certificates, and at the same time to relieve the reserve banks and its members of any Chance of loss. On the whole it is working now and the certificate issues are almost immediately distributed to the public when they are offered. "I want to refx a little hit to the future, is to whore vre might land if all of ou: loans were paid off and we had a huge bank building and a payroll, and doing all sorts of things for nothing, with a great big expense account and nothing coming in I do not think that is going to happen right away, howeve, as we have two billion dollars going to the reserve banks now. Let us assume that the day is comine. when the banks of the United States are not going to find it necessary to borrow from usthe way they do. No banks like to borrow money. There is not very much profit to them when they are paying 6 or 7 per cent. "We deal principally in the Federal Reserve 3anks with three kinds of credit instruments. One is commercial caper, another government securities (the gcvernmentts long loans and certificates of indebtedness) and the third aeeeptances, which principally are drawn to represent importations of goods from Europe. "When all the commercial paper gets out and a considerable part of the borrowings on government securities are repaid, we will be able to put our rates down. From personal observations while I was abroad, and a comparison of banking methods generally, unless I am misaken, thmigh the influence of the Federal Reserve aystem, we could use this great reeervois in financing great commodities throughout the world. 7 "For the first time in the history of the United States, we are in the position of being a lending nation, instead of a borrowing nation. Europe for years is gosh to be pressed for capital to rebuild her industries and to reestablish France, and they are going as be burdened with enormous debts, and this country has, in proportion to its wealth, a much smaller public debt than the European nations. It has a great mass of fluid capital, which can employed, I hope, and for the first time can compete with the commerce af the world in doing a real banking business. I should suppose we now have $500,000,000 or $600,000,000 of bills representing international transactions and commodities. $2,500,000,000 the rate could be changed. If we had I do not thank I could do better than read you a paragraph from a very able document that appears on that very matter, a paragraph from the so-called "Cunliffe's Report." It is from a select committee appointed to make a report on foreign exchanges after the war, in London: (At this point Gov. Strong read the paragraph referred to, beg;Innirs with "The adverse condition of the exchanges was due not merely to seasonal fluctuations, but to circumstances pointing to ...." and ending with the sentence: !New enterprises were therefore postponed and the demand for constructive materials and other goods was lessened.") "The point is this: that the Federal Reserve System, up to date, has been engaged in a purely domestic, local war operation. We have been financing the war fcr ourselves, to a great extent. You can trace simpst, the entire bor- rowings of the Federal reserve bank directly to the war. Tee time is coming when the American people will gradually repay this debt and the Federal Reserve System will be free of government borrowing and then we have got to take our position in the world, and, unless I am very much mistaken, that will come as the result of converting a very large amount of the paper which we now have in our vault into this paper which old Rothschild described as "salt water paper," because it had crossed the ocean dnd represented the payment for international goods. But there is one thing that we must bear in mind in connection with this,- and Mr. Sider has notified me that he has three reservations - in connection - 8 - with this prognostigation. reason beyond all others. The reasons for this are these: I put the first The general feeling that I have observed throughout various oarte of the world is that the English banks arc safe banks to do business with. The second great reason is that they have built up the facili- ties to do the business well, carefully, intellieently and promptly, and the third influence is that London has had a great reservoir of fluid capital to employ in this business. fundamental influences. Now our condition at present comprises just those three We have our integrity, our character, and our ability, just as good as that which is produced in the British Isles or elsewhere. I think, in other words, that the character test can be met by American bankers just as much as by any other bankers. Next we have got, or we should have in the near future, that great surplus, fluid bsnking capital to employ in this kind of business. One thing we have not got in the machinery. net-work of pipes connecting this reservoir. We have not got that great It takes years to create that. The British bankers have been at it for same generations. Ue can, however, do it promptly enough to place cur reserves at the service of the world, and we have got to try and do it the way the British have done it. Vie Valire got to try and establish agencies here of any foreign banks that can come here aad also abroad, and to do business in our msrk,t and berme- money. A bank would not be worth a dent if it just received money and did not lend it out. We should encourage the lending of money abroad an,' we should employ any agency ye can got here to help us alone, thin line. "Mr. Snyder, I guaranteed to tire this enthusiastic audience in half an hour. I have no tAlked for nearly 417 minutes! Have you any points to make in connection with this matter? Mr. bayder remarked, in reply: "I am sure that, now that we have the Governor here, we would like to eek him some suestions." 9 Jr. Case was called upon by Mr. Snyder, and remarked; pick on me? I do my picking with the Gov :nor do'm- stairs. him alone for the present. "Why do you I am going to leave How about picking on Mr. Snyder?" (Mr. Snyder) "How can we become world bankers if we do not make money interest rates? Is not that the great oostaele now to this country leecoming world bankers? 4ne;landts rates are always bettee than ours. That is the source of their great strength. (Governor Strong) *When I was in London I always used to say, with perfect good faith, that I did not think there was very greet danger of their losing their business so long as the opportunity for the emnlciyment of capital in this country great. I really think conditions have changed. cause they are going to be guess you think so. :as as I think the./ have hanged be- it to it for capital for a time. I think so and I Where they are going to lose is in the enormcus demand upon them to pay debts, and it is going to tax their reserves to the utmost to pay debts - to pay debts to this couetry and to pay the interest due tais country. Tuley willtake some of our investment money, if -e are willing to let them have it, at pretty high rates, and I frankly believe that this Federal Reserve System, by a capable adjustment of rates, will have plentIT of reserves to compete with them, to a reasonable degree, in financing at least our own important trade. I have real confidence that, with the resources we have here, we can get our share of any foreign trade we go after." (Mr. Snyder) "How can we get our rates down, so as to meet this competition and still not have another big wave of inflation? ing politics Do you see any practical means, consider- and everythinL; else, of mectins just that thing ?" - 10 - (Governor Strong) "What I think I do see, Mr. Snyder, is this: thAt the development to which I referred is not going to t ke place over night, nor in a year, nor even five yars possibly - nor even a Lager period. did. I would be afraid of it if it But I can see gradually creeping into our market here those conditions which would be most conveniently drawn for geographical reasons, because they represent our import trade. Where it becomes a convenience, at a competing rate, to do business in this market, I do not see any prospect of easier money in Europe, do you? Think about that!" (Mr. Case) 'Tell, Governor, London was the world's banking center before the war, and all these bills, import and e port bills, were lar:ely financed by London. Isn't it a fact that the world war has upset that to such an extent that she does not seek, at the press t time, to do more than to look after her own import and export financing, and is very glad to have diverted to this market any import and export transaction that properly belongs here? continually finance the world's business. She is 3i no position to 61-,e did before the war. We are getting our machinery up to the point where we can compete for it mw. (Governor Strong) "What happened is this: they took increasing- control of all the imports and no one could properly import anything without a license and the great bulk of the imports wore for account of British companies. All supplies and all things, in fact, were required for the army and navy, as well as the civic population. Now the British Government paid cash, and the British treasury borrowings took place in as an4114, in Lonlon, of this mass of bills that otherwise would have been drawn to represent the imports of the civic population. The facilities to do business still existed - like the Bank of Shanghai, and so an. are increasing JAR in the east. The standards of civilization There is a greater consumption of goods. There is 11 a great2r amount of business to go around. We will do still more than we do now through the foreign institutions of the world. Certainly, if it is possible to develop some hu.dreds of millions of bills at the present time, we will continue to do it in the future." (Mr. Morgan) "Do you thin'; it would be in order to tell us what effect you think the change in the discount rates in this country will .lave upon the movement of gold? Do you think conditions are sufficiently normal now? (Governor Strong) "Your question is a little bit like the question where the State asked tt-i witness whether he is still beating his wife. rates will decline. I am assuming that the interest We have reduced one of our rates a little bit. I do not believe it is possible to answer that question, Mr. Morgan, except speculatively. -- Turning to Mr. Snyder -) Did you put him up to ask that?" (Laughter) (Question) "Mr. Snyder has possibly lost sight of the fact that we have two facil ities. We have a rediscount rata which is offered to various lines of business which do not necessarily have to do with our foreign trade. market purchase rate. We have our open We might keep our rediscount rate up to within a point where it is now and this would enable us to advance the business and still keep in with other lines of domestic business? (Governor Strong) "That opens up a field of discussion. step Shepard Morgan's- questions. It enable: me, first, to side I think it is a mistake to assume that a special rate on import bills is going to be any check to inflation or expansion in this country, because, eC;er all, you cane identify these dollars and insure that -12tney are just below that type of transaction, and, even if you did, it would release other dollars for employment in other diroctioas. The fact is that, according to my theory, what we dispense At the Reserve bank is credit. L; is not one kind of credit, because it is eerchanged for a commercial bill, or a commercial note, or a banker's acceptance, or a government bond, but it is just credit, and unless you meet that credit through this bank, it does not perform its function, and i+ does not make any difference whether you ge:; it out with a rake, or a hoe, or a spade, - it does its busteess Just the same. You can get at these reserves of ours with any kind of an instrument you please. By estab- lishing this preferantial rate we :lee able to compete in a certain line of business, it is true. wren, Hr. Snyder, I have doubled my promised time and now everybocly expects to leave at 5 o'clock, as they have a dance on." (Mr. Snyder) "I am sure we are extremely indebted to the Governor for coming here and let us ask him questions and giving us such an illuminating prospect of this country entering the world war. Meeting Adjourned. Our best thanks Goveenorlft CONFERENCE OF STATISTICS DEPARTMENT :;lay 6, 1921. SUBJECT: By Governor Strong. The influence of the Discount :.ate r. ,nyder opened the meeting, saying: "I am sure we are very much flattered to have the Governor with us to-day, and I am sure he is going to say some very interesting things. We are very much indebted that he should cone." (Governor Strong) "I understand that there are much more important matters relating to the organization of the bank coming up later this afternoon, at this present meeting, and I am going to try and shorten my remarks toa point where they will not interfere with that important business, Mr. SRyder. Furthermore, now that the time has come for any statements I am about to make I should say that I am appearing here in fear and trembling, because Mr. Snyder and his able assistants in his department put such a topic before me as the influence of the bank rate. I am always afraid I am going to match my theory with Mr. Enyderis. "The original company of thirteen, as I recall the figure, that started the Federal Reserve Bank, are the only ones that can go back to the days of our discussion of what rate w--s proper and would be satisfactory when this ',wank was organized. The conditions that existed at that time were those brought on by the outbreak of the war. We had called upon two agencies in the United States to meet the great crisis in cfedit and currency. The clearing house and loan certificates, If A vast amount of credit was manufactured through the crisis in bank credit was met by issues bearing interest. agency of clearin,; house issues, and that credit was bearing interest at from 6 to 7 per cent, and I think, in some cases, higher. In addition to that, - 2 - credit was manufactured through the agency of the Aldrich-Vreeland Association, which was organized under the "Aldrich-Vreeland Act." The existence of that gbeat mass of credit which was bearing various rates of interest throughout the country determined our bank rate. rates established were from 6 to 6 1/2 per cent I thin4 that the reserve and the rate was high enough so that it kept down he ivy borrowing at.-4-lew-rft4e; so that the first busi- ness conducted by the Federal Reserve Bank of New York at the rate level which was established was trifling, and we were gradually able tor;duce our rates over quite a period, until finally, as I recall, we were buying bankers' bills, - that is, acceptances - as low as 2 % in the open market. 17e had, in fact, a rate for that class: of paper in New York that averaged from 2 to 3 per cent at the same tine that paper of similar character was selling in the London market at from 2 1/2 to 3 per cent. The rate in the London market was as low as it was because of the American mass of credit daich was artificially manufactured there. "In discussing the influence of the bank rate, you have got to bear in mind that the bank rate has no influence unless you have got.-am,4keectuat If you have no existing loans, you can't bring about con- traction by an advance in rate. "All that we were interested in doing in the early days of the Federal Reserve sank was to earn a mere dividend of 6 per cent for the member banks, after paying all our e::penses. I lalght y.in these days we had a very distinct contrast in the character of the relations of the Reserve banks to what we have now. This is the great money market of the country where dealings in short time paper especially centered. All of these bankers' acceptances came to this market as a rule and opened up a market where the short-time .-Lunicipal borrowings were generally negotiated and consequently we had a peculiarly advanageous position in lieu York which enabled us to entice our funds. It resulted in an arrangement between the Reserve banks by which we divided up the various Mies. I think it is no exaggeration to say that this has worked out to better advantage than we had expected. "I am not going to attempt to review the period of the war, when we experienced all the difficulties of adjusting rates. it is full of controversy. It is a big subject, and :Jr. Snyder gently suggested that that would be an In general, I think I am interesting thing to talk about, and I ducked it. safe in saying that we made about as many mistakes - I say "we" for we were simply one body after all, the Treasury and Reserve banks - as could be expected, but, on the whole, I think we made fewer mistakes than our friends on A,041- the other side of the water made, and certainly waxy fewer mistakes than the enemy on the other side of the water made in financing the war. Skipping that point, I want to come right down to the present and what is taking place now. I want to illustrate this by giving a few of my observations: "On Pay 3, 1901, I happened to be in the Stock Exchange, and on that day, between 10 and 1 o'clock, we saw Northern Pacific stock advance to a,000 a share and money lending at about 100 per cent. There aad been previously no such complete collapse of values in Wall Street as had occurred that day up to 1 o'clock. Towards the middle of the day they sent word very frankly that their boxes were empty and they could not send in more margins. Our loans got so low that if we had attempted to liquidate them the proceeds of the collateral would have been insufficient to pay the face of the loan. In other words, if very many of th-! loans had matured and the sale of the collateral took place, it would have resulted in the complete collapse of Street. Later a plan had resulted in th,i Tale of Northern Pacific stock and Mr. Morgan and his asso- ciates rant out word that they would not be unduly severe in the seeding out of CARA margin$, and later prtes had risen to a point Where the loans could be made good and money was practically unlendable. "The point I am trying tobring out, in telling this story, is that I - 4 - it presents a picture of a complete collapse of value's which resulted in a con- dition that meant insolvency. Money was over, and money got back to normal rates all in a period of about five hours. In similar fashion, that is what happened in the United States, and in fact the whole world in commodity values. Speculation There are those who say and extravagance worked out their own natural conclusion. that some design of man or men, or possibly the reserve banks, by advancing rates, had brought about this state of affairs. do not think most people do. I do not believe it for a minute, and I In general, I would say that no man or men had the power to stop that great wave of speculation, and no man or men had the per to stop the break which took place. Cal the other hand, I would say that certain poli- cies might have been adopted so that it should not have reached its extreme limits. "l]vJgyone now is satisfied that something must be done to stabilize the Certain houses that values of goods, and they will be stabilized to some level. retail goods, or certain houses that wholesale goods, or certain houses that manufacture goods, by reason of foresight or some other circumstances that gave them a more favorable position than other competitors, mey be out of debt and not have large inventories, and are able now to buy and stock up with goods that are coming along from producers, manufactured out of cheaper raw materials and by cheaper labor than the goods and existing stocks which are being carried upon borrowed money. The tendency among retail stores at present is to keep new goods and cheaper goods in competition with high prices. It is forcing down the selling prices of the old ones and there are some new levels taking place from it. ing in bank credit. The same thing is happeli- Put yourself in the position of any bank officer in this city and see what happens in the doily trend of your business. At the end of the day he may find that he has a surplus of reserves on deposit at the Federal Reserve Bank. That surplus is the result of a great variety of transactions in the member banks. The member banks may have made some new loans. I may have loans out. The net results of all these movements may have had some bearing on his reserves. going on every day. It goes on both sides of the account. That is The bank Which is short 5 - In fact, the number of banks that are in its reserves willcome here to borrow. borrowing from us now is, I think, more than 100. As soon as a bank gets in that position where it has a credit balance at the clearing house, then it has a choice of what to do with that credit balance; then it goes out to seek an investment, and, under the conditions that exist to-day, it seeks the very best and safest investments it can get. "The banker is a little timid just now and he is willing to debit his competitor for good commercial paper only. -fee influence of the lending bankers that are out of debt. is the influence that will bring the market rate for money down to or below our rate. liquidate all of our loans. That process continued indefinitely would, of course, If the traditional policy of fixing the rates of the Federal Reserve Banks should prevail, I should presume we should always have our rate a little bit above the market rate. Of course, we should always provide for seasonal movements, or crop making, or withdrawals of gold from the United States, or heavy borrowings. This process I describe is what is liquidating the loan accounts in the reserve banks to a great extent. I want to coma up to the point of describing, or prognostigatina, if you please, a little bit about the future. Before referring to the future, I want to refer to another important influence on our rates and an important rate consideration in the Reserve bank. You know that every time the Treasury of the United States puts out a loan and places that loan, as it does, through the reserve banks and the member banks, the first transaction is for the member bank to buy the certificate, to make payment by credit, and then, if they can do so, to sell the certificate to a customer and to the public and make a profit on the deposit. You can see that if the member bank can't sell the certificate of indebtedness they can't make this profit. It is the thing that did the damage in 1918-1920, and the policy of the reserve banks and Treasury Department together should be designed to get the largest amount of money that can be obtained for the Treasury's notes at the lowest rates of interest and at the largest security to the pUblic. You may say - 6 - that the rate allowed by the Treasury must be sufficiently attractive to the public to enable the public to buy them, but sufficiently unattractive to the banks to make it unwise for the banks to retain them, and have evary stimulus existing to sell these certificates to the public just as "It promptly as possible. been necessary for the past three years to determine rates be- tween the Treasury and the Reserve banks Which will enable the Treasury to successfully float its certificates, and at the same time to relieve the reserve banks and its members of any chance of loss. On the whole it is working now and the certificate issues are almost immediately distributed to the public when they are offered. "I want to refer a little bit to the future, as to where we might land if all of 0112 loans were paid off and we had a huge bank building and a payroll, and doing all sorts of things for nothing, with a great big expense account and I do not think that is going to happen right away, however, nothing coming in. as we have two billion dollars-going to the reserve banks now. the day is comin Let us assume that when the banks of the United States are not going to find it necessary to borrow from usthe way they do. No banks like to borrow money. There is not very much profit to them when they are paying 6 or 7 per cent. "We deal principally in the Federal Reserve Banks with three kinds of credit instruments. 6ne is commercial Japer, another government securities (the government's long loans and certificates of indebtedness) and the third acceptances, which principally are drawn to represent importations of goods from Europe. "When all the commercial paper gets out and a considerable part of the borrowings on government securities are repaid, we will be able to put our rates down. From personal obsexyations while I was abroad, and a comparison of banking methods generally, unless I am mistaken, through the influence of the Federal Reserve System, we could use this great reservois in financing great commodities throughout the world. "APor the first time in the history of the United States, we are in the position of being a lending nation, instead of a borrowing nation. Europe for years is going to be pressed for capital to rebuild her industries and to reestablish France, and they are going o be burdened with enormous debts, and this country has, in proportion to its wealth, a much smaller public debt than the European nations. It has a great mass of fluid capital, which can be employed, I hope, and for the first time can compete with the commerce of the world in doing a real banking business. I should suppose we now have $500,000,000 or 000,000,000 of bills representing international transactions and commodities. $2,500,000,000 the rate could be changed. If we had I do not think I could do better than read you a paragraph from a very able document that appears on that very matter, a paragraph from the so-called "Cunliffe's Report." It is from a select committee appointed to make a report on foreign exchanges after the war, in London: (At this point Gov. Strong read the paragraph referred to, beginning with "The adverse condition of the exchanges was due riot merely to seasonal fluctuations, but to circumstances pointing to ...." and ending with the sentence: "New enterprises were therefore postponed and the demand for constructive materials and other goods was lessened.") "The point is this: that the Federal Reserve System, up to date, has been engaged in a purely domestic, local war operation. We have been financing the war for ourselves, to a great extent. You can trace almost the entire bor- rowings of the Federal reserve bank directly to the war. The time is coming when the American people will gradually repay this debt and the Federal Reserve System will be free of government borrowing and then we have got to take our position in the weeld, and, unless I am very much mistaken, teat will come as the result of converting a very large amount of the paper which we now have in our vault into this paper which old Rothschild described as "salt water paper," because it had crossed the ocean and represented the payment for international goods. But there is one thing that we must bear in mind in connection with tnis,- and Mr. Snyder has notified me that he has three reservations - in connection The retCsons for this are these: with this prognostigation. reason beyond all others. I put the first The general feeling that I have Observed throughout various parts of the world is that the English banks are safe banks to do business with. The second great reason is that they have built up the facili- ties to do the business well, carefully, intelligently and promptly, and the third influence is that London has had a great reservoir of fluid capital to employ in this business. fundamental influences. Now our condition at present comprises just those three We have our integrity, our character, and our ability, just as good as that which is prcduced in the British Isles or elsewhere. I think, in other words, that the character test can be met b. much as by any other bankers. American bankers just as Next we have got, or we should have in the near future, that great surplus, fluid banking capital to employ in this kind of business. Une thing we have not got in the machinery. net-work of pipes connecting this reservoir. We have not got that great It takes years to create that. The British bankers have been at it for some generations. lie can, however, do it promptly enough to place our reserves at the service of the world, and we have got to try and do it the nay the British have done it. We have got to try and establish agencies here of any foreign banks that can come here and also abroad, and to do business in our mark:A and borrow money. A bank would not be worth a cent if it just received money and did not lend it out. should encourage the lending of money abroad and we should employ any agency we can get here to help us along this line. "Mr. Snyder, I guaranteed to tire this enthusiastic audience in half an hour. I have no talked for nearly 45 minutes. Have you any points to make in connection with this matter? Mr. Snyder remarked, in reply: "I am sure that, now that we have the Governor herd, we would like to -tsk him some .-iuestions." 9 ,dr. Case was called upon by Mr. Snyder, and remarked; pick on me? I do my picking with the Governor down-stairs. him alone for the present. "Why do you I am going to leave How about picking on Mr. Snyder?" (Mr. bnyder) "How can we become world bankers if we do not make money interest rates? Is not that the great obstacle now to this country becoming world bankers? inlandls rates are always better than ours. That is the source of their great strength. (Governor Strong) "When I was in London I always used to say, with perfect good faith, that I did not think there was very great danger of their losing their business so long as the opportunity for the employment of capital in this country was as great. I really think conditions have changed. I think they have changed be- cause they are going to be put to it for capital for a time. guess you think so. I think so and I ,here they are going to lose is in the enormous demand upon them to pay debts, and it is going to tax their reserves to the utmost to pay debts - to pay debts to this country and to pay the interest due this country. They willtake some of our investment money, if we are willing to let them have it, at pretty high rates, and I frankly believe that this Federal Reserve System, by a capable adjustment of rates, will have plenty of reserves to compete with them, to a reasonable degree, in financing at least our own important trade. I have real confidence that, with the resources we have here, we can get our share of any foreign trade we go after." (Mr. Snyder) "How can we get our rates down, so as to meet this competition and still not have another big wave of inflatiOn? ing politics Do you see any practical means, consider- and everything else, of meeting; just that thing?" - 10 - (Governor Strong) "What I think I do see, Mr. Snyder, is this: that the development to which I referred is not going to t,ke place over night, nor in a year, nor even five years possibly - nor even a 1..nger period. did. I would be afraid of it if it But I can see gradually creeping into our market here theme conditions which would be most conveniently drawn for geographical reasons, because they represent our import trade. ;'here it becomes a convenience, at a competing rate, to do business in this market, I do not see any prospect of easier money in Europe, do you? Think about that!" (Mr. CaL:o) "Well, Governor, London was the world's banking center before the war, and all these bills, import and erport bills, were lar_ely financed by London. Isn't it a fact that the world war has upset that to such an extent that she does not seek, at the preset time, to do more than to look after her own import and export financing, and is very glad to have diverted to thjsmarket any import She is ii no position to and export transaction that properly belongs here? continually finance the world's business. :=;,le did before the war. We are getting our machinery up to the point where we can compete for it mw. (Gov2rnor Strong) "What happened is this: they took increasing control of all the imports and no one could properly import anything without a license and the great bulk of the imports were for account of Dritish companies. All supplies and all things, in fact, were required for the army an4 navy, as well as the civic population. Now the British Government paid cash, and the British treasury borrowings took place in advmme, in Lon-on, of this mass of bills that otherwise would have been drawn to represent the imports of the civic population. The f,cilities to do business still existed - like the Bank of Shanghai, and so on. are increasing tine in the east. The standards of civilization There is a greater consumption of goods. There is a greater amount of business to go around. We will do still more than we do now through the foreign institutions of the world. Certainly, if it is possible to develop some hundreds of millions of bills at the present time, ^rr will continue to do it in the future." (Mrs Uorgan) "Do you think it would be in order to tell us what effect you think the change in the discount rates in this country will have upon the movement of gold? Do you think conditions are sufficiently normal now?" (Governor Strong) "Your cuestion is a little bit like the ouestion where the State asked the witness whether he is still beating his wife. rates will decline. I am assuming that the interest We have reduced one of our rates a little bit. I do not believe it is possible to answer that Question, Mr. Morgan, except speculatively. -- Turning to Mr. Snyder --) :id you put him up to ask that?" (Laughter) (Question) "Ur. Snyder has possibly lost sight of the fact that we have two facilities. We have a rediscount rate which is offered to various lines of business which do not necessarily have to do with our foreign trade. market purchase rate. We have our open might keep our rediscount rate up to within a point where it is now and this would enable us to advance the business and still keep in with other lines of domestic business? (Governor Strong) "That opens up a field of discussion. step Shepard Morgan's questions. It enable:3 me, first, to side- I think it is a mistake to assume that a special rate on import bills is going tp be any check to inflation or expansion in this country, because, after all, you can't identify these dollars and insure that - 12 - they are just below that type of transaction, and, even if you did, it would release other dollars for employment in other directiolas. The fact is that, according to my theory, what we dispense at the Reserve bank is credit. It is not one kind of credit, because it is eichanged for a commercial bill, or a commercitl note, or a banker's acceptance, or a government bond, but it is just credit, and unless you meet that credit through this bank, it does not perform its function, and it does not make any difference whether you wet it out with a rake, or a hoe, or a spade, - it sloe: its business just the same. You can get at these reserves of ours with any kind of an instrument you please. By estab- lishing this preferential rate we are able to compete in a certain line of business, it is true. ";-;e111 Mr. Snyder, I have doubled my promised time and now everybody expects to leave at 5 o'clock, as they have a dance on." (Mr. Snyder) "I am sure we are extremely indebted to the Governor for comini; here and let us ask him questions and giving; us such an illuminating prospect of this country entering the world war. Meeting Adjourned. Our best thanks Governor:" -vv y/ % %w yz Gentlemen: I have not lately been making addresses, but when your Chairman, Mr. Mosessohn, invited me to address your Association, I found it quite im - possible to decline, principally because during the war I asked him to do a job for us in our War Loan Organization, which he promptly and loyally agreed to do. What he did was very much better done and was of more ser- vice to his country then anything that I am able to do for your organization by making this brief address. In a word, he took hold of an important section of the War Loan Organization as its chairman, and sold four times the auota of bonds allotted to that trade. da.flettp5tt_ The industry which you represent is, I believe, a section of the 64R-014/ Your Chairman has asked me to tell you largest industry in New York City. something of prevailing business expect. conditions and what you may reasonably It would indeed be a serious responsibility for one to undertake to prophesy as to the future to such a body of men as you, who are very much better acquainted with the details of the business which they are conducting than I can possibly be. And it is, in fact, quite contrary to our policy to attempt any such thing,4 /67)64/44§ti But I am very glad to give you what we consider to be the actual facts both as regards industry in general, and the impression we get of your own industry from the reports that are now given to us regularly by a number of your leading firms. In doing this I am going to take advantage of the opportunity to tell your Association of the system of business reporting which has been developed by the different Federal reserve banks, and especially our own. Perhaps it may lead to even a larger degree of cooperation from your 2 Association than we now enjoy. As to the general industrial situation, you are fairly familiar with the fact that there has been, within the last ton months, a steady and a very marked improvement in most of the industries; and I think that there is good evidence that for the most part this improvement is solid and is a real one. Of course I cannot say how this would apply to each of the in- dustries. Some of them, I have been led to believe, have been in danger of going a little too fast; they may have given a little too large a measure of hopefulness to their orders. So that there have been some set- backs here and there in the last year. But, speaking of the majority, there is no sort of question that conditions now are very different from what they were, let us say, no more than a year ago. Probably our old friend, pig iron, is still one of the best thermometers, even if it is not a very good barometer of business; and there we find a very rapid recovery from the extreme depression of last year, so -that in the iron and steel industry as a whole, production is now about double what it was a year ago, and some of the mills for special products are row almost at the peak of production. The textile trades, of course, have been disturbed by strikes and latterly by the great rise in the cost of raw materials, but taken as a whole their production has been well up towards normal, and I think the same is true of a number of other industries. We, of course, have had a real build- ing boom in the last year, and are still in the midst of it; and the same is true of the automobile industry, where production in May broke all records. And we have evidence, moreover, that both wholesale and retail trade in most lines is in healthy condition. definitely. About this I can speak quite You know before we undertook the tusk of collecting business 3 statistics reports of trade were confined largely to the use of adjectives. Business was said to be good or poor, improving or depressed, adjectives which mean little when the economist attempts to analyze conditions in an The optimist usually said business was fine; the pessimist said industry. business was bad. I believe that Mr. Mosessohn, in his letter to me, said that the garments trades were depressed at the present time. A study of our reports has convinced me that Mr. Mosessohn may have selected the wrong I do not know just what adjective to use. adjective. Therefore, am going to avoid describing conditions, as we find them, in these abstract phrases. About twenty of the largest clothing manufacturers in New York City, as well as in Rochester, the other great clothing center in our district, submit each month in confidence to our Statistics Department reports of their sales or shipments. These reports show the dollar value of their but regretably do not show the number of garments shipped. shipments, We have divided these firms into two groups, manufacturers of men's clothing and manufacturers of women's clothing. I believe that you are primarily interested in the women's clothing industry, which I understand is entirely distinct from the men's clothing trade. Our reports show that the dollar value of May shipments by fourteen manufacturers of women's clothing who report to us each month was 10 per cent. greater than the dollar value of the shipments by the same firms in May, 1921. In April shipments showed a decline of about 12 per cent., as compared with a year ago. The combined value of shipments during April and May, however, was about the same as during the corresponding period last year. There is no doubt that your prices are somewhat lower this year than last, and poe- dbly your profits less; but if we make allowances for these changes in prices we find that more shirt-waists, dresses and suits have been shipped out of 4 New York this spring than were shipped last spring. That is the reason why I eiay that your Chairman, Mr. Mosessohn, may have selected the wrong adjec- tive when he described conditions in the garment trades as "depressed." Turning for a moment to the men's clothing industry we find that the shipments in April by the seven firms that report to us were 65 per cent. greater than shipments in April last year. This comparison is not strictly fair because, you will recall, the men's clothing industry in this city was in the midst of a labor controversy at this time last year. In May of this year shipments of men's clothing were 16 per cent. greater than the shipments made in May, 1921. These reports convince me that business is now better than it was one year ago and that the tendency is toward further improvement. It is true that if we go back to the year 1920 we find that there has been a decline of about 25 per cent. in the value of clothing shipments. This, to my mind, has been due to lower prices which now prevail, and indicates a return to sounder and more stable business. I think we will all admit that conditions in the spring of 1920 were abnormal and, in comparing business today with that of two years ago, due allowances must be made for the decline in prices, declines in wages and declines in the ability of the Public to spend with the same lavishness that characterized buying in the spring of 1920. I have much confidence in the accuracy of the figures which the clothing firms submit to us each month, as we have other means of checking these up. In addition to the reports we receive from the wholesale trades we also get confidential reports from the retail department stores. reports show the dollar value of sales. These I believe that we now have 64 of the largest department stores in the Second Federal Reserve District cooperating with us in the collection of this business information. In the 5 year 1921 the total volume of sales by these stores was in the neighborhood of $350,000,000, sufficient to make our figures representative. Sales by these stores in April were about 2 per cent. greater than were the sales in April, 1921. Some of the merchants told us that this in- crease in business was caused by the late Easter. This, no doubt, exerted some influence but I do not believe it was an important factor, because we find that in May the stores again reported an increase of 4 per cent. in sales. Bear in mind that these figures show the dollar sales. Again, when we make allowance for the lower prices Which now exist, there is no question that the stores are actually selling a great deal more merchandise this year than they sold last year and this explains what is becoming of the clothing that you manufacturers are constantly shipping to the stores. Sales in May were the largest of any May on record with the exception of May, 1920, When a New York merchant led others in reducing prices by announcing his famous 20 ner cent. reduction sale. In addition to our reports of sales by both wholesale and retail firms, ws have at our disposal other data to enable us to check up business conditions in the clothing industry. The Bureau of Labor issues reports Which show the consumption of wool and cotton. These figures show that the New England woolen mills are now running at about a normal rata and we are told that many of them are sold up for their entire output for the fall season. Prices are becoming firmer, indicating a growing manufacturer's demand. Raw cotton is selling at about double what it sold for last year. Raw wool has risen still more. The mills are, I believe, turning out goods with a greater confidence than for some time that a market for their output at a fair and just Price is reasonably assured. The wheels of industry are turning, and gradually approaching a nearly normal rate. Reports show that 6 employment is increasing rapidly and the officials in Washington have recentiv informed the President that the unemployment crisis had passed. Hi01- prices for farm products have greatly helped the rural population, again it possible for the farmer to buy the clothing that you manufacture. mak Now as to the larger outlook. country has the banking situation been on a sounder basis. of ou have At hardly any period in the history , We now le facilities to supply all legitimate demands for credit and those a better organized than in the past. facilities have reached since 1918. lowest point th \ sharply during the pas w4t Prices of securities nave risen year and all of our Liberty bonds are now selling in the open market at a smal I do not Interest rates are at the premium. to Business failures are on the decline. ve the impression that in all business every- ) thing is all that can be desired. here are still spots on the industrial In mot horizon which must be cleared up. f those industries which have recovered from the extreme depression of the p: -:t year or more, the recover/ les have been built upon solid foundations and I v ew the future with reason- able optimism. I should like to add one word about our system of thnniness report- A ing. Some members of your organization probably report your sales Others do not. I want to take this opportunity to thank you for what you are already doing and to ask you to continue to help us in collecting this valuable information. If you are willing to help--and I believe that you will yourselves profit most from this information--I wish that you would write me a letter saying that you will work with us. blank to fill in each month. We shall send you a You may rest assured that the individual re- ports will be held in confidence. The aggregate figure is published in our Monthly Review of Credit and Business Conditions. If any of you wish to talk over these reports I shall be glad to ask one of the men who has charge '7 of collecting this information to call upon you personally and explain our system in :lore detail. This new system I believe has immense possibilities for the future security of trade, and I am sure no organization could find a more vital interest in cooperating with us than yours. By this means, and I think in this alone, will it be possible for you to obtain,both in your own and allied industries, a clear and reliable picture of actual conditions and tendencies. All else is as it has been in the past, mere guess work and crude estimate. When we have this new system fully developed, it will be possible to organize industry tp a very high degree, and in a fashion never before possible; to GEVitai ME-40v4419-41wi- Amie,4 zizatoirm, pxaorwom4 Wihrimacompetition and over- roduction; and by this means,I believe, N largely to do away with strikes and widespread unemployment. shall Probably we never quite overcome the tendency to over-enthusiasm which is the root of all waves of expansion, and subsequent depression; but we can go a long way, and here I believe is the way. I thank you for the privilege of addressing your Association; I wish you a reasonably restrained prosperity, knowing that you and your workers will Day very dearly if you have too much of it, and overdo it. And I be- speak vour cordial support of the new methods whose aim is to make business and industry more of a science, and less of a hazard and a gamble, as it has been So strikingly in the last three years. WHAT LIGHT DOES THE EXPERIENCE OF THE FE')ERAL RESERVE BANKS THROW ON THE VALUE OF DIFFUIENT VETHODS OF MAKING THEIR CREDIT AND Discp_uNT POLICY EFFECT:T.7E? rate of discount of',..ta.(reserva,bank regulates in general / w, and consequszti,ly influences increases or decreases in edit. But in sections where interest rates are high, ys prevent overborrowing by member banks and some Person- d. ************* eing depends, among other things, upon an even flow of of goods which, in turn, depends upon stability of condi.- on and consumption. level. umption. The most important element requir- Sudden and wide variations in prices tend to "rade becomes risky and speculative. uses of price changes, none is so potent as changes in is of credit and currency. years ago, (expressing it inversely) wrote: on the subject of money have agreed that value of the circulating medium is an object ired. Every improvement, therefore, which can imation of that object, by diminishing the on, should oe adopted ****" eases in our gold reserves have enlarged the ease of our ased our ability to expand credit. Regulation of the greatly affect prices) therefore becomes our greatest ethods shall we be guided so as to avoid undesirable promote credit and price stability and so serve the en- tments are not controlled by rates but by "discretion" expansion as fully as do loans, and should be governed b: 2 system credit policy, rather than by the desire of individual reserve banks to make earnings. Aside theref or from our investments and gold movements, changes in the total volume of credit are now brought about almost exclusively by our loans to member banks. Every increase in our earning assets lays the foundation for a credit pyramid, estimated roughly in the ratio of eleven to one. (See Studies of W. Persons, Harvard Review of Economic Statistics, January 1920). P.T. Low discount rates which cause borrowing therefore have a cumulative effect upon credit volume and may in turn affect prices, even though the ratio of eleven to one may not be reached. The obverse is equally true. High discount rates which cause repayments to reserve banks will, in turn, influence liquidation of bank loans and deposits and retirement of currency by the banking system as a whole in somewhat the same ratio, and likewise affect prices: Member banks borrow from their reserve banks to restore reserves which become deficient from a variety of closely related causes. The f our principal causes are (a) Withdrawals of deposits which reduce reserve balances. (b) Necessary loans to customers which expand deposits and increase required reserves. (c) Currency requirements. (Caused by general conditions and not by specific transactions of individual member banks.) These three types of borrowings are forced upon member banks and may be termed involuntary. (d) A fourth cause of impairment arises when member banks are induced by a low discount rate to borrow for profit. Theref or the ..iuestion: Can rates be fixed so as fairly to serve business requirements, furnish needed seasonal and other credit expansion, and still prevent such inflation as might disturb prices and business? In cities in the second district prevailing rates are not over 4 1/2 per cent. and in the country 6 per cent. or less. There is no inducement for our city banks and little f or the country banks to borrow at 4 per cent., except temporarily °ending repayment of loans or sale of investment. But in districts where country - 3 - banks charge as high as 12 per cent. or more, a 4 1/2 per cent. discount rate would be ineffective as to those banks, notwithstandinr- that it might adequately regulate botrowings by city banks of those same districts. To illustrate: If prevailing- interest rates are not over 5 per cent. in the cities and city member banks hold one half of all member banks resources, a 4 1/2 per cent. rate .vould probably control their borrowings. A 6 per cent. discount rate would then control borrowings by banks holding three quarters of member bank resources if but one half of the remainder were realizing not over 6 per cent, but no feasible discount rate would of itself control borrowings by the remaining 25 per cent. which charge much higher rates. Now, therefore, shall borrowings by such banks be regulated? There is no :7easible method to require such banks to pay higher rates just because they are charg- ing high rates, and one must conclude that "discretion" must supplement the rate. Difficulties are unavoidable in determining when regulation by rate alone is effective, when it must be supplemented by "discretion ," and finally when a given rate and "discretion" combined are ineffective and a rate change becomes necessary. But the dangers arising from too great reliance upon "discretion" in granting discounts are too important to disregard. They may be briefly summarized as .fol- lows: Intelligent "discretion" requires sufficient knowledge of the details of the member bank' s business to definitely decide in each case whether borrowing is justified or not. fund. Credit borrowed from a reserve bank goes into the members common Its particular use cannot be identif ied. paired by many transactions. It sirnoly restores reserves im- Loans made and paid, investments purchased and sold, foreign exchange dealings, deposits received and withdrawn cause a surplus or deIf a surplus, the member bank pays off loans. ficiency. If a deficiency, it orrows. "Discretion" in declining to loan would imply knowledge of all th.,se transactions. It must be an ex post facto review, otherwise the member bank must restore reserves by calling loans or selling investments, Only interviews with bank of - ficers can develop knowledge of all the business that caused the deficiency of -eserve. Such "discretion" extended to all member banks would necessitate passing upon every loan and investment of every member, causing annoyance, criticism of the system, and possibly radical legislation. Is human wisdom capable of such a task? Such "discretion" ,:Then required should be exercised more as to the total borrowings of a member, in relation oto its resources, condition and the general character of its business, rather than as to any specific use of the proceeds. ho-: could tl7e officers of reserve banks pass upon the need for loans by members, so re- mote that reply to inquiry by correspondence would take ten days? The tendency to create government agencies to supervise business is increasing. These Commissions and Boards exercise a great variety of statutory powers, often futile. Each is subject to the human weakness that once given power men seek to enlarge their powers. Reserve banks are no exception. The writer believes that "discretionary" control over borrowings by mem-, bers, except to a limited extent when rate control is ineffective, will develop the esire to exercise still greater power, and that the Reserve System, instead of beini e. democratic smoothly-working cooperative organization, regulating the volume and flow of credit and currency principally by adjusting its rates as conditions and public welfare require, might become a financial bureaucracy vainly attempting to dominate the banking system by methods which are obnoxious to every instinct of the American people. In special cases and districts personal "discretion" *All bo inescap- able, but its employment should be resisted and moderately used. The effective method of regulation demonstrated by long experience abroad is by the discount rate, The rate will be effective with the great mass of banking resources and only limited and judicious use of "discretion" will be needed, and then only in those where general interest rates are high. September 25, 1922. B. S. sections GC' TR11011 STRONG'S http://fraser.stlouisfed.org/ PERSONAL FILE Federal Reserve Bank of St. Louis ae airtz er-r di . tS"cih kwri 44 of ate. 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STRONG AT LUNCHEON GIVEN BY COMMITTEE OF ONE HUNDRED TO EXECUTIVE COUNCIL, AMERICAN BANKERS ASSOCIATION on Tuesday, October 3, 1922 at Waldorf Astoria When my old friend Mr. Prosser invited me to address this meeting, he was good enough to suggest that it would be appropriate for me to cay something about present day conditions as they affect bankers. As almos., anything and everything affects the banker and his business, I was reminded of the plight of the farmer in Saratoga County, who entered a long-legged mare he owned in one of the crack horse races. The mare had done pretty well for him at some Country Fair meets, but at Saratoga sae came in a bad last. When his rife asked him mhy the mare had not won the race, he said it was because the course was too long and the time was too short. My feelings about such a discussion as was suggested by Mr. Prosser are very similar to what the mare's must have been. Since the outbreak of the war, writers and speakers upon nublie questions, have set forth to us various reasons wily we might expect a breakdown of the world's economic machinery, of what calamities - social, political and economic - were about to ovi take the world, and in some cases just about when tails was all to happen. It sugaest:, a remark which I heard Mr. Morrow make upon his return from a trip to Europe during the ear, in reply to questions as to when the we would and - I think he said very definitely that it would end at 4:45 on the afternoon of February 13, 1919. If we must prophesy, let's do it accurately and thoroughly - and take all the risks assumed by prophets. all. But it is safer not to prophesy at I do, however, wise to say a few words about some things as they are, or at least as they appear to me, and to ask you to think about them. chile gloomy and ominous views as to currencie.4 debts, fordign exchange, Bolshevism, government insolvencies, and like affairs are absorbing people's attention, let me remind you of the, most important thing that appears to be taking place. We sometimes forget it. The earth is still growing crops - the soil is still fertile - the sun -2shines on it - tae rains fall upon it - and the crops are grown and harvested and feed people. The mines still furnish us with coal and metals. The forests still grow, and the oceans and rivers still give up their annual catch of fish. A Minn section of tre world has been injured and a small fraction of Europe has been devastated by the war, considerable property has been destroyed, and millions of young man have been killed and maimed. It was a calamity of awful moment, but sad as is the plight of the sufferers, the old world still goes an producing. And bow small the destruction when compared to the whole or the great earth, and its capacity to eontiaue giving us all that we need if we are willing to rtork to get it. It is I believe a fact that since the Armistice was signed in 1918, standards of living is the world at large have gradually shown a net improvement and especially so in most parts of middle finfope; sear, Lie ships of commerce still traverse the seven meana of transportation and coamunication in most parts of the aorld ard as abuadaaay supplied as ever - tne world's institutions of learning are crowded with students - seienae seams to have suffered no chick in its development - and yet we know that something is wrong. Surely naaurd remains the same and retains her capacity to reward us for our labor. I am tempted to quota from the 100 year old hymn that *evry prospect pleases aad only man is vile* because unless I am wholly mistaken - and I believe I am net - if there is nothing fatally wrong with nature and with the material things of this wo-_-1d, then the trouble must be with some of the workers and possibly with the instruments, especially what I shall call the system-, of bookkeepira;, which they employ. The point thnt I wish to make can be illustrated in a crude way by deswe think of wealth in terms of money, which is simpleanother fact: very cribing representative word, enabling us to express measurement, and we think of country in terms of dollars as the one enj oyiag the greatest national wealth. four hundred years ago our country had greater resoarcea in th__) soil, in 3 mineral and oil deposits, in the forests and rivers, than eeist to-day because some of those resources have sin e been consumed, and yet three hundred years ago many of the few million Indians living in the midst of this abundance starved every winter for lack of food. Natural resources alone, therefore, do not make wealth. On the other hand, there are nations in the East with populatinns in numbers and densi'v 'I'ar exceeding our own, where poverty, famine and starvation have existed in recent years in appalling proportions. 'hat does this all mean? means that natural resources alone are not wealth; wealth. To me it that population alone is not Wealth, teen, must be what the earth delivers in response to the woks - the energy - of hard working people, applied to nature with useful instruments to It is the practice of thrift the capacity for invention that aid their toil. makes eealth. The damage to the world's. economic welfare and the consequent im- pairment of morale is due not alone to a war of four years duration, but to forty years or more of preparation for war, in whic1.. too many of the world's wenkers were engaged in building up military machines. taxes. Their priecipal product was heavier It was misdirected energy in which millions of men were only consumers and not equivalent producers. And this process of arming for conflict had its natural and usual outcome in the conflict itself, which completed in a dramatic and tragic ray the work of destruction Which had been going on for may years in a less obvious way. This destruction, not of physical proper alone - Which has been cohparatively slight - but of morale - of the spirit of =era and enterprise cannot Wholly restored until the conditions are suitable to inspire it. But looking at the situation more strictly with regard to material progress, there seeme to be much from which tooraw encouragement. We know, for in- stance, that the world is producing an increasing su pply of food stuffs; that the requirement for emergency feeding in various parts of the world has almost disappeared; and that the distribution of food supplies and other eeschtiale of life, is becoming more effective. Even with respect to Germany, we may gain some idea at the material progres which im being made by quoting from recent reports. Take - 4 - for example German imports. Figures published this month in the London Economist show increases from 1,500,000 metric tons in May, 1921, in an almes', steady ratio, until they reached 4,800,000 tons in July of this year. I have been told within the last few days that uaemp;oyment in Germany is now estimated at 100,000 men, although considerable sections of industry are still working on part time. A dispatch from Berlin dated September 11th, states the ship movement in and out of the Port of Hamburg for the first seven, months of this year to be 14 1/2 million net tons, compared with 9 million tons in the corresponding period last year, 4 millions tons in 1920, and less than 1 1/2 million tons in 1919. the improvement in shipping in the Port of Bremen is reported to be equally striking. exports also indicate improvement. Reperts of Measured by weight - as values in marks are meaningless - they averaged in the last five months of 1921, a million and three quarter metric tons a month against two million a month in the first seven montns of 1922. Figures of similar import can be reported for other countries. Do not understand me to imply that the recovery has been fully to pre-war conditions, nor in fact to such standards as are essential to the well being of Europe. has been both striking and encoura6ing. But it These and similar reports do emphasize, however, that the materialwell being of the world, which can be judged in part by the quantity of goods produced and consumed, has been improving despite the deplorable impairment of the instruments which we have heretofore cansidered almost essential to the successful conduct of modern industry and comuerce. What the world needs today is a reconstruction of economic machinery so that there may be a more effective application of the energy of workers to the production and distsibutisn of the things that we need, and such a reorganization as will insure that what is produced is fairly distributed among the workers in return for the work done by each. Bank notes, bank deposits, credit, foreign exchange - all of these things are simply man devised bookkeeping instruments with which the transactions and accounts of trade are conducted, just as government loans and taxes are the instruments with which the financial business of governments are conducted. Fluctuations -5in the value of purchasing parer of these instruments means uncertainty as to the value of everything, including the labor of working men, but still worse, injustice to one or another class of people, and consequently dissatisfaction and discontent. You have observed how quite inevitably discussion centers upon just such matters as government debts, taxes, currencies and exchange, but the restoration of depreciated currencies, the return of foreign exchanges to par, the resumption of gold payment, even the cancellation of government debts, the reduction of taxes, and the balancing of budgets in consequence, will not of themselves alone increase production one iota, any more than the creation of these enormous debts and the printing of the currency increased production. Onl: work will do that. But the object to be accomplished by a reorganization of these bookkeeping affairs is nevertheless of prime importance. It will help to repair shattered morale, in- crease the incentive to acrk, to produce and to save, and replace discouragement with hope. It will loosen causes for dissatisfaction and social unrest, and dispel the feeling that injustice is being suffered. Without improved morale, increase of produc'.ion and distribution will be slow, people will not work hope- fully and efficiently for inadequate or uncertain return, and the standaad of living, which means not only food and clothing, but education and healtny anjwmeat, may indeed decline. A great variety of proposals have been advanced for dealing with these matters, especially depreciated currencies and foeia exchanges. Possibly a word of doubt is justified as to some oi the shall only ref a- to those relating to the foreign exchanges. plans, but I They all present one similar characteristic, which is that oome new kind of currency or instrumelts of payment shall be created through the agency of a herr organisation with a vast capital and gold reserve; that these new instruments stall_, be employed for inter- national payments and be issued against credits extended by tee organization, and that theyshall be maintained at gold par. Any such currency, issued against 6 credits extended to airope, could be stable in value and equivalent togold only so It mould, in fact, be subject to the long as it was promptly redeemed in gold. same influences which now influence any gold movement. immediately come to this country. In other words, it would There would be nothing for us to do with it Such currency could not make our foreign payments any better except to redeem it. than present instruments of payment, nor could it be exported a.,;y more than gold Once here it gould stay here. can be exported under present conditions. The gold reserve would promptly be shipped to this country just as °that gold now comes to this country. If, on the other hand, it was not redeemedin gold, then it would depreciste just as any other irredeemable currency depreciates and its value as a stable international medium would disappear. Such an organization could do no more than our existine credit organization is now doing in extending credit to Lurope and in maintaining an international gold currency, so lon,.; as the currency depreciation continues in Europe and gold payment is suspended. In fact, no one of the plans that I have seen is capable of success until governments live withia their incomes and until the amount of taxes required to enable governments to live within their incomes is within the capacity of those upon whom the taxes are levied to pay them. The penalty of an unbalanced budget is a depreciated currency, and a depreciated exchange. taxation is to retard enterprise and production. The penalty of excessive We here see the vicious circle of currency depreciation and declining revenues, increasing expenses and taxes and arrested or reduced production, which means a reduced capacity to pay taxes. So soon as public opinion enables or requires governments to reduce expenditures to the point where bearable taxes will cover them, than further issues of currency will cease, and not until then. Fluctuating currency and exchange values render trade speculative and hazardous. They retard the development of our tra.:e with the rest of the world and theirs with us. how may the American bankers assist in '.3urdtpean recovery, and by So doing how may we assist ourselVesi I believe that no one questions the 7 generosity of the American people, nor dots is their desire to help. It is upon such matters as thin that we can reflecL with some profit. The emergency of the war created conditions which resulte:!. in our receiv- ing about a billion dollars of the world's monetary gold prior to our entering the warp and unbalance OWIr half a billion more since the war ended. i3 Still being increased by importations. Our gold stock The warring nations, Which suspended gold payment, resorted to printing paper money and suffered currency depreciation. Wel on the other hand, with this great store of gold, have had thrust upon us the capacity to expand our credit and currency upon a gold basis lust as a large part of. Europe expanded its currency i3sUOS Without adequate gold basis. If permitted to do 30 this gold is capable of bringing about a dangereus enlaTeementeof credit in this country with consequences whic# might be more disturbing to our economic welfare than if we had never received the gold. excess of gold as a sacred trust. We should, I believe, regard our Of course, we shall employ. it as the basis for the extension of all the credit that is required for the sound development of our domestic and foreign commerce. But it. must not, be permitted to encourage or sustain the kind ofspcculation ,.hick adds nothing to our wealth, our welfare or our happiness, whice would in fact only raise prices, and whice :ould eventuelly undermine our prosperity. It is so ample and more than ample for all of our legitimate requirements that we need feel no misgivings as to the solidity of our credit structure no matter what emergency may arise. Now our benkere can probably do little to influence the policies of foreign governments and finance ministers. I do not believe that we can just now successfully aid with schemes for issuing new currencies, or for stabilizingthe exchanges until the fundamental conditions Mich I have mentioned justify that kind of help; but we can at least maintain ourselves in condition so that we may render effective aid when conditions warrant our doing so and in the meantime preserve our own economic strength unimpaired. It is, however, my eonfident belief that gradual improvement is tlking plaz:e in the material conditions under whion people are living abroad, notwithstanding what you may regard as evidence to the contrary. This affords ground for steadily increasing hope that European zovernments will be able to deal successfully with the bookkeeping problems to Which I have referred. More regular employment and more comfort for the working man, gradual enlar;zemeat of the business turnover, the subsidence of political uneasiness and distrust, a better public understanding of the problem of debts, taxation and currencies, and the adjustment of meals minds and habits to new conditions of life for Which the hwan race seems to enjoy an uaexpec ted capwity all lead me tobelieve t1 at :Mile still obscure, the foundations of public opinion upon .dich the work of repair must roil, are gradually being laid. If all this be true, ten indeed the day may come wham American bankers can safely and profitah4 inter into undertdance whiCa in fact ue alone of all the nations have the strength to mice. We can furnish assirtame for currency and banking reest:_blie-imeat is Europe, we can invest in their enterprises and aid in their refunding, not alone by landing them credit - but by later returning the gold which will be essential to mane them to help themselves. But of paramount importance in restoring the confidence of people in their governments, is their financial syrtems, in credit, in the purchasing po7er of currencies and in all of those things which afford us oecurity in the value of our labor, of what we produce, and of what we save, is the assurance we must have that we have seen the and of devastating :vars. ADDRESS delivered by Benj. Strong at LUNCHEON given by Committee of One Hundred to Executive Council, American Bankers Association on Tuesday, October 3, 1922 WALDORF-ASTORIA When my old friend Mr. crosser invited me to address this meeting, he was good enough to suggest that it would be appropriate for me to say something about present day conditions as t hey affect bankers. As almost anythingaffects and everything the banker an the farmer in Saratoga County, w the crack horse razes. The mar Fair meets, but at Saratoga she the mare had not won the race, h the time was too short. My fee Mr. Prosser are very similar to Since the outbreak of have set forth to us various rea economic machinery, of what cala happen. It suggests a about to overtake the world, and a trip to Europe during end - I think he said ve of February 13, 191. and take all the risks as all. I do, however, wi least as they appear to m lhile gloomy a Bolshevism, government in tion, let me remind you o place. -rle sometimes fo The earth is st shines on it - the rains feed people. The mines grow, and the oceans and - 2 - section of the world has been injured and a small fraction of Europe has been devastated by the property has been destroyed, andofmillions of It was a calamity awful moment, but young men war, have considerable been killed and maimed. sad as is the plight of t he sufferers, the old world still goes on producing. And how small the destruction when compared to the whole of the great earth, and its capacity to continue giving us all that we need if we are willing to work to get it, It is I believe a fact that since the Armistice was signed in 1918, standards of living in the world at large have gradually shown a net improvement and especially so in most parts of middle Europe; the ships of commerce still traverse the seven seas - means of transportation and communication in most parts of the world are as abundantly supplied as ever - the world' s institutions of learning are crowded with students - science seems to have suffered no check in its development - and yet we capacity to reward us f or our labor. know that something is wrong. Surely nature remains the same and retains her I an tempted to quote from the 100 year pleases and only man is vile" because unless I a am not - if there is nothing fatally wrong with of this world, then the trouble must be with som the instruments, especially what I shall call th employ. The point that I wish to make can be il cribing another very simple f act: We think of we simply a representative word, enabling us to expr our own country in terms of dollars as the one en Three or f our hundred years ago our country had g mineral and oil deposits, in the forests and rive some of those resources hare since been consumed, many of the few million Indians living in the mid winter f or lack of food. ?'a-tural resources alo - 3 - On the other hand, there are nations in the East with populations in numbers and density far exceeding our own, where poverty, famine and starvation have existed To me it in recent years in appalling proportions. what does this all mean? means that natural resources alone are not wealth; that population alone is not wealth. Wealth, then, must be what the earth delivers in response to the work - the energy - of hard working people, applied to nature with useful instruments to aid their toil. makes wealth. It is the practice of thrift the capacity for invention that The damage to the World' s economic welfare and the consequent im- pairment of morale is due not alone to a war of f our years duration, but to forty year s or more of preparation f or war, in which too many of the world' s workers were engaged in building up military machines. taxes. Their principal product was heavier It was misdirected energy in which millions of men were only consumers and not equivalent producers. And this process of arming for conflict had its natural and usual outcome in the conflict itself , which completed in a dramatic and tragic way the work of destruction which had been going on for many years in a less obvious way. This destruction, not of physical property alone - which has been comparatively slight - but of morale - of the spirit of energy and enterprise - cannot be wholly restored Until the conditions arc suitable to inspire it. But looking at the situation more strictly with regard to material progress, there seems to be much from which to draw encouragement. We know, for in- stance, that the world is pr oducing an increasing supply of food stuffs; that the requirement for emergency feeding in various parts of the world has almost disappeared; and that the distribution of food supplies and other essentials of life, is becoming more effective. Even with respect to Germany, we may gain some idea of the material progress which is being made by quoting from recent reports. f or example German imports. Take Figures published this month in the London Economist show increases from 1,500,000 metric tons in May, 1921, in an almost steady ratio, until they reached 4,800,000 tons in July of this year. I have been told within the last f ew days that unemployment in Germany is now estimated at 100,000 men, - 4 - A although considerable sections of industry are still working on part time. dispatch from Berlin dated September 11th, states the ship movement in and out of the Port of Hamburg for the first seven months of this year to be 14 1/2 million net tons, compared with 9 million tons in the corresponding period last year, 4 millions tons in 1920 , and less than 1 1/2 million tons in 1919. The improvement in shipping in the Port of Bremen is reported to be equally striking. exports also indicate improvement. Reports of Measured by weight - as values in marks are meaningless - they averaged in the last five months of 1921, a million and three quarter metric tons a month against two million a month in the first seven months of 1922, Figures of similar import can be Do not reported f or other countries. understand me to imply that the recovery has been fully to pre-war conditions, nor in f act to such standards as are essential to the well being of Europe. has been both striking and encouraging. These and similar 3ut it reports do emphasize, however,the that the material well being of world, which can improving be judged despite in part the by deplorquantity of goods produced andthe consumed, has been able impairment of the instruments which we have heretofore considered almost essential to the successful conduct of modern industry and commerce. '.That the world needs to-day is a reconstruction of economic machinery so that there may be a more effective application of the energy of .-rorkers to the pro- duction and distribution of the things that we need, and such a reorganization as will insure that what is produced is fairly distributed among the workers in return f or the work done by each. Bank notes, bank deposits, credit, foreign exchange - all of these things are simply man devised bookkeeping instruments with which the transactions and ac- which the financial business of governments counts of ments trade with are conducted, just as government loans and taxesare areconducted. the instru- Fluc in the value of purchasing power of these instruments means uncertainty as t value of everything, including the labor of working men, but still worse, in to one or another class of people, and consequently dissatisfaction and disc - 5 - You have observed how :luite inevitably discussion centers upon just such matters as government debts, taxes, currencies and exchange, but the restoration of de- except to redeem it. Such currency could not make our foreign payments any better can be exported than present instruments of payment, nor could it be exported any more than gold gold reserve woul comes to this co it would depreci value as a stable could do no more credit to Europe currency depreci In fac governments live enable governmen upon whom the tax is a depreciated taxation is to r of currency depr arrested or redu soon as public o the point where cease, and not un Fluctu hazardous. The and theirs with u by so doing how m war, and on balance over half a P14-1-1-iern more since the war ended. is still being increased by importations. Our gold stock The warring nations, which suspended gold payment, resorted to printing paper money and suffered currency depreciation. "ile, on the other hand, with this great store of gold, have had thrust upon us the capacity to expand our credit and currency upon a gold basis just as a large part of Europe expanded its currency issues without adequate gold basis. If permitted to do so this gold is capable of bringing about a dangerous enlargement of credit in this country with consequences which might be more disturbing to our economic welfare than if we had never received the gold. our excess of gold as a sacred trust. ae should, I believe, regard Of course, we shall employ it as the basis f or the extension of all the credit that is required f or the sound development of our domestic and foreign commerce. But it must not be permitted to encourage or sustain the kind of speculation which adds nothing to our wealth, our welfare or our happiness, which would in f act only raise prices, and which would eventually undermine our prosperity. It i. so ample and more than ample f or all of our legitimate requirements that we need feel no misgivings as to the solidity of our credit structure no matter what emergency may arise. ;tow our bankers can probably do little to influence the policies of foreign governments and finance ministers. I do not believe that we can just now successf ully aid with schemes f or issuing new currencies , or f or stabilizing the exchanges until the fundamental conditions which I have mentioned justify that kind of help; but we can at least maintain ourselves in condition so that we may render effective aid when conditions warrant our doing so and in the meantime preserve our own economic strength unimpaired. It is, however, my confident belief that gradual improvement is taking place in the material conditions under which people are living abroad, notwithstanding what you may regard as evidence to the contrary. This affords ground for steadily increasing hope that European governments will be able to deal successfully 8 with the bookkeeping problems to which I have referred. More regular employment and more comf ort for the working man, gradual enlargement of the business turnover , the subsidence of political uneasiness and distrust, a better public understanding of the problems of debts, taxation and currencies, and the adjustment of men's minds and habits to new conditions of life f or which the human race seems to enjoy an unexpected capacity, all lead me to believe that while still obscure, the foun- dations of public opinion upon which the work of repair must rest, are gadually being laid. If all this be true, then indeed the day may come when American bankers can safely and prof itably enter into undertakings which in f act we alone of all the nations have the strength to make We can furnish assistance f or currency and banking reestablishment in Europe, we can invest in their enterprises and aid in their refunding, not alone by lending them credit - but by later returning the gold 1111 which will be essential to enable them to help themselves. But of paramount importance in restoring the confidence of people in their governments, in their financial systems, in credit, in the purchasing power of currencies and in all of those things which afford us security in the value of our labor of what we produce, and of what we save, is the assurance we must have that we have seen the end of devastating wars. ddress delivered Nov. 16, 1922 before Rensselaer County Bankers, at, dinner at Troy, New fork. 1 . 1.fi_pr The opportunity for bankers to become more intimately acquainted 1111 with the detailed operations of the reserve banks have multiplied recently QP to such an extent that any discussion of what they do and why they do it has become almost unnecessary. 1L-7 uLt era bo--", 61-7 C« OA. The literatureAie-pmgerd-te-the System has recently been most illuminating as to the principles which have O--?-21/n, yt l i,. governed the managers of the ZOodeas and as to the policies they have adopted, and the reasons for doing so. It seems to me, however, that there is still one aspect of the Federal Reserve System which has not been very fully discussed or even inquired into, - and that is - very broadly express4-ihe position which it has come to occupy as a part of that complicated organization which we may describe as the country's economic machine. All bankers know that we act as the government's fiscal agents and about what we do in that capacity. They know that we discount eligible paper - issue the principal currency of the country - hold the reserves of the member banks - collect checks - and effect the great bulk of the domestic tranefers,00mmonly called exchange payments, different. sections of the country. between Beyond this the reserve banks perform a great variety of collateral and subordinate service for the government, the member banks and the public. ,1441" 2 With most of these things you are familiar. You may not, %L. however, have given thought - as we are now required to do - to 4Allivr broader aspect6of the Federal Reserve System in its relation to the economic welfare of the country as a whole. In a general way it can be stated that the most important function performed by the Federal Reserve Banks in an economic sense is that of regulating the volume of 74014'441 ccoidit - and I use the word "cs.t=" in its broad sense, meaning all types of credit instruments which perform the function of money, including bank deposits upon which checks are drawn. Permit me, therefore, to introduce a discussion of the Federal Reserve System along these lines by a few words of a theoretical character in regard to money. For many years now economists have accepted as a general principle that the quantity of money ia-eAlatefiee has a direct relation -:=ammmwomwwmww.T to the prices of everything - that is, of the things that we buy and t)-r7; sell, including the wages of labor aodthe salary of clerks, rift"' - There are, of course, many reservations and many modifications which apply to this theory; for instance, the function performed by money in its relation to prices may be either static or dynamic according to the state of mind of 3 the people. If all of the people of the country because of fright, distrust, political disturbance, or for one or another reason, quit buying goods, prices for a time might even decline in the face of an increasing volume of money, although the chances are that under a well regulated banking system such a state of mind would result in a very prompt reduction in the amount of money in circulation. In other words, 4md< 160AAA4415 it would bring about a period of liquidation when losoo-ea4.deposits would ae414,t-) 0617.14tf rff--6VEA4^; 441-e ih,..4-, iG..1 IrmeD 147),L) et AmE4t14,) be olfrat,...--aod currency is-04,emlot.lam would oe retired. On the other hand, without any increase ii' the quantity of money, an optimistic outlook and a speculative state of mind might result in very considerable advances in prices without any increase in the quantity of tt-A,kkt. r "PA Lbk -b money giving rise to it at all. et~-vvic -414.4,0 tar .1;4, These illustrations volote.4o-that LVIuviat Carmr 6-1/ Pv 71A/I/ I4v- reservation in regard to the ouantity theory which economists refer to C as velocity of circulation of money. (Illustrate by the beer story) I, , Then-again conditions may arise where in fact a A given quantity of money may be made to work more efficientlyif perform a greater service, in an economic sense, than it had formerly performed, and 44is_agaia-m&y give rise to or may-Se-44e result of advancing prices, sad-okteh-ft-eewd.i.tioc is 4 exhibited in change in our banking loans since the establish- ment of the Reserve System, which has in effect reduced reserve requirements and permitted a similar amount of gold to support a larger total of deposits, currency and loans. I am reviewing these very obvious economic principles in order to sum them up in a hypothetical statement which will illustrate somewhat the new economic aspect (If the country's affairs resulting from the organization of the reserve banks, sladlilis brief Iffrf-Ativeu,c statement sh4,441-4e-e4-conree-hype46e4444.1 may do so. 7W-KI If a given quantity of goods/being produced, sold and consumed requires the employment of a given amount of money and bank credit, then in the long run we may say - for purpose of illustration - that the quantity of goods multiplied by the price of those goods would give a figure which would be representative of the amount of credit and money required to conduct that volume of business at that price level. Of course, there are an infinite number of modifying factors to be taken into account, Illnew* ut)- t4 so I am stating this equation only hypothetically. But upon this (7tAu-f 7110A principle you will observe that if the quantity of goo ls is increased it g$10-60 will PlIttfmtvEiomily require an increase in the amount of money and credit required to Gar.rit them. A On the other hand, with the same quantity of goods) 5 Nal`' if the price is increased necessarily an increase in the amount of money a<2t44. and credit will be required. But there is still a third possibility and that is that there might be an increase in the quantity of money and credit without any change in the quantity of goods, in which event the result would be simply an increase in price. Now please bear in mind that My I) -simply for purposes of illustrationrI am leaving out of account in this equation many subordinate but nevertheless important factors, such as the psychology of the people, the velocity of circulation, increases or de(7-2 creases in the efficiency with which money and credit are employed: I You will at once observe, therefore, that Congress has created a great organization known as the Federal Reserve System, which has in its power the actual creation, increase we the volume of money and SOrt-14,1 credit, sad swd it has likewise the power to restrain that increase in money and credit within certain limitations. This to my mind is e very great et.,-;A--gE4A7 9114c.o-c 01%-e, FWAvits.44 ti iit Aakig,raxe responsibility-and our reserve System, creates a situation so different from any which has existed in our country for the last 80 or 90 years that I shall hope to interest you by elaborating upon it somewhat. Before doing so, I must digress to the extent of pointing out wherein lies Aux. the difference between progress in our economic welfare - which in a broad .4 6 sense means mmiskiwr standAci of living, which in turn means more and k better food and clothes and shelter, steady work, higher standards of education, more healthy enjoyment for all the people. The establish- ment of higher standards of living, which is the basis of all economic effort and strife is brought about by .ast increased production and con, akAv Cu k kre-irt.-t rti sumption of things that are necessary the welfare Obit p A and intellectual of all the people. Such an elevation o of living or economic well being is not promoted by misdir which results in the wasteful production of useless things cultivation of extravagance and laziness; -that is what happ /f-,- A tbert-443-4-habit-which 40 people cultivate at a time when p ir% sharply rising but when production of useful things is not (Illustrate here by story of the use of iron ore.) This digression is intended to emphasize the fact economic well being of the people of this country can be pr sound direction of the affairs of the Federal Reserve Syste other hand, that the economic well being can be undermined unsound policies which attain no other result than to cause advancing prices and no real advance in economic well being. 7 To return to my theme. Under our old banking system there was no means by which the general volume of credit of the country might be increased beyond a given point without an impairment of the minimum ilt4A471,VIA akiak 6+tc at4 4r" resources required by law, unless it resulted Prom the importation of 4 ,7k4;"){2.. gold or the domestic production of gold which went into bank resources. Of course, I leave out of account such expansion as might result from changes in our monetary standards such as was attempted in the early 90s, or by changes in the statutory reserve requirements for banks. When, under the old system, as, for instance, in the early 90s, and again in 1907, we experienced a wave of licuidtion and business depression, bank loans and deposits were very much reduced 9:13 a result, and in consequence surpluses of bank reserves were built up all over the country - interest rates sharply declined - and bond values rose. Then later, speculation would start in the money centers - usually in the stock market - and gradually the beginning of a new cycle of advancing prices resulted. Likewise, at the culmination of such a cycle of advancing prices, bank reserves would become impaired in various parts of the country, and if any shock to confidence occurred - as it did in 1893 and again in 1907 - reserve requirements actually had to be suspended and even 8 currency payments suspended. Such periods of advancing priceslwith all the speculation which generally accompanies them,have in the past - whether in this country or in other countries - always had one result: made the markets of that ,:ountry the best selling markets. They have The world at once would start to pour goods into a country where domestic prices get out of line with world prices. Thereupon the banking system would at once begin to lose gold to Europe in order to pay for these goods. That served as a natural check to the speculation - caused interest rates to advance - made people who were borrowing money get timid - and would usually bring about selling of goods and price reductions so that the country was again able to enter into till world's market as an exporter of goods, thus changing the international balance of payments,arre6ting the gold movement, and restoring equilibrium again. movements were wholly unregulated. Under our old banking system these We had no bank of issue as they have in England, France, Germany and elsewhere, and no organized means of dealing with the money market, with foreign exchanges or with gold movements. Now we have such an organization, but the consequences of the war have resulted in almost universal embargoes upon the shipment of gold. important banking country which has no such embargo. We are the only The consequence of 9 that is that we might indeed indulge in this country in a riot of extravagant speculation and of extravagant personal expenditure upon luxuries. We could cultivate habits of idleness, quit practicing thrift, and in fact go to almost any extreme of economic waste before it could be possible for any of the important nations of the world to take gold from us in such quantities as would imperil our bank reserves at all. Therefore, the natural check which had operated before the war to hold us to a certain accountability when our economic machine gets working badly has been lost not and we haveitonly lost the power to lose gold - so to speak - but the amount of monetary gold which we now hold - nearly, if not quite one-half of the entire world's supply - is so vast that we have a capacity for over-indulgence in speculation and extravagance beyond anything ever known before in history, either in this country or any other country. You will, I hope, therefore, appreciate that if the premise of my argument is sound, this instrument which we have created Dior the control of the volume of credit must rely more upon good sound management than would be the case under ordinary circumstances, because the usual checks applying in a smooth and orderly world system are no longer present. The question at once arises as to how these policies may indeed be controlled and directed so as to escape the penalties which I believe 10 would be inevitable were we either ignorant, or careless or wilfully wrong. I think it may be said that there are two chief reliances to which we must look - and hardly any of importance outside of those two: The first is a sound helpftl and constructive point of view with regard to the Reserve System by those who own it - that is,the member banks . They must be vigilant to see that these banks are well managed. They must scrutinize their reports and their statements. They must examine carefully the qualifications of the men who are proposed for directors and they must indeed satisfy themselves that the directors choose competent officers. Here I believe lies the most direct responsibility as to the policies of the System. The other safeguard is an intelligent public opinion generally which, on the one hand, will not tolerate a political domination or misuse of the System, and, on the other hand, will not consent to its becoming, through its financial power, a super-government. I do not refer to this situation as one which may be regarded as permanent, for if it were, no one would be more prompt than I in advocating that the general structure of the System should indeed be changed. world is going to recover its economic equilibrium. This It will be a slow process, but it is now under way, despite the gloomy predictions of those 11 prophets of disaster who are always with us no matter how affairs may be going. During this period, however, when the gold standard and free gold' payments have been suspended, human wisdom, sound intelligence, and the highest type of integrity must bee substitutokfloisome of the automatic checks which normally work. I have left to the conclusion the real point that I wish to make. It is quite possible, due to mistaken notions of unenlightened people, that policies might be forced upon the Reserve System to bring about a deliberate expansion of credit. You have read of the many proposals just to issue Federal reserve notes without any particular regard as to how it is done, to whom the notes should be issued, or what the effect would be. You have heard numerous proposals that we should make credit cheap, and although much lees frequently expressed, I think there are many bankers in this country who still hold the view that if any money can be made by borrowing at the Reserve Bank, it is good easy money and advantage should be taken of it. It is just such doctrine as this that would lead - if unrestrained - to an increase in the amount of money and credit in the country that I have earlier referred to, without its being in response to an increase in production and consumption of goods. That in turn would lead to speculative advances in the prices of everything which in turn would 12 increase the cost of living and again lead to strikes and all of the die_ orders which result from the sense of injustice which such a policy of inflation always brings about. Behind the Federal Reserve System as a bulwark stands, I believe, first, the sound and helpful and constructive friendship and confidence of moet of the bankers of the country. Behind that stands the confidence and respect in general of most of the business interests of the country. is e-14r ese circles of protection lies the enemy, and the enemy consists in body - how treat we cannot estimate - that would have the Reserve Banks acture credit and print money-just as we did during the Civil War, - the mistaken notion that that will make prosperity. Outside IN Zrfon alma Naoty initgi. Ui? fort .1 kir 411cm CUSS MIKIS .. Trod, N. 'Y., Noy. 1922 Money and Prosperity. that delusions One of the popularis the belief that remove has the it is hard to money a country In addressthe more greater is its prosperity. Rensselaer County ing the bankers of Strong, the dieFederal last night Benjamin Governor of the tinguishedBank of New York. imReserve necessity, in the interest pressed the of combating its inaccuof sound economics, by exposing education" of this delusion was "campaign racy. The a one, by the way, ae sub-just such controvert anJ to to in necessary Bryan "16 to 1" slogan the present by vert the easier at money 1896-is made results of thestock of appalling As the almost their purinflation in Europe. increases, a rubles and marksdecreases in even the chasing power That is always greater mtio. the quantity ofitsmoney bank result when currency, of a country-itSits credit-increases the deposits and the commodities, than faster pa- speculation -a-na- wan ILK nal-mawso persons of small and limited means. Yet it is hard to stop the cry of the inflationists and of the dicon ten ted generally for "more money", as it a man's, or a country's, wealth were increased by adding to the number of his promises td pay. The war unsettled the established forms of adjustment by which exchanges of gold iv.utomatically settled the temporary differences caused by price inflation. Thus it becomes more necessary that periods of ..:.znaway fluctuations in price Rho:1111d - be avoided, and, as one of the 'elements producing such violent changes is monetary inflation, the public should It- warned against padding of the rim,,-.3, to give a balloonlike impression wealth. The Federal Reserve Bank has been inestimable worth as a stabilizer financial values, and its officers the officers eat its member banks doing the people a good service .1-5,/i ustifyingpublie confidence showing the folly of leaping from id foundations Kto an airy void. ticidentally, the banks of Remise'. County are tobe commended for .ir part in providing tile bullvaril -tound sense and appropriate action preserve the integrity of the nii- it and its currency. Rensselaer' tnty banks answered nobly every 1 k %, of the government during the period for assistance in negoring the popular loans which were ,ntial to keep Uncle Sam in bustt We old stand. These banks, fiscal agents of the community, steady the progress of finanietions but also make poscntire system of production :' ik,..ange of products in whlig. .J c. JiLLP% es nrtirloc of nrio ing and prospering life, of whi primary wealth money is the measu of value. h_l_ineyitable result of money , Ration without a corresponding crease in real "goods" is an advan in prices, with its usual by-produ ADDRESS BY BENJ. STRONG DELIVEIAED NOV. 16, 1322, BEFORE RENSSELAER COUNTY BANKELS, at dinner at Troy, New York. The opportunity for bankers to become more intilaatey acquainted with the detailed operations of the reserve barn:s have multiplied recently to such an extent that any discussion of what they do and why they do it has become almost unnecessary. The literature both from within and without the System has recently been most illuminating as to the principles which have governed the managers of the organization and as to the policies they have adoptec2.1 and the reasons for It seems to me, however, that there is still one aspect of the Fed- doing so. dral Reserve System which has not been very fully discussed or even inquired into, - and that is - very broadly expressed - the position Which it has come to occupy as a part of that complicated organization which we may describe as the country's economic machine. All bankers know that we act as the government's fiscal agents and about what we do in that capacity. th They know that we discount eligible paper - issue principal currency of the country - hold the reserves of the member banks - collect checks - and effect the great bulk of the domestic transfers, commonly called exchange payments, between different sections of the country. Beyond this the reserve banks perform a great variety of collateral and subordinate service for tho government, the member banks and the public. With most of these things you are familiar. Youmay not, however, have given thought - as we are now required to do - to some of the broader aspects of the Federal Reserve System in its relation to the economic welfare of the country as a whole. In a general way it can be stated that the most important function perfo.med bythe Federal reserve banks in an economic sense is that of regulating the volume of "money" - and I use the word "money" in its brold sense, meaning all types of credit instruments which perform the function of money, including bank deposits upon Which checks are drawn. Permit me, therefore, to introduce a discussion of the Federal Reserve - 2 - System along these lines by a few words of a theoretical character in regard to money. For many years now economfalts have accepted as a general principle that the quantity of "money" has a direct relation to the prices of everything - that is, of the things that we buy and sell, including the wages of labor, the salary of clerks, rents, etc. There are, of course, many reservations and many modifica- tions which apply to this theory; for instance, the function performed by money in its relation to prices may be either static or dynamic according to the state of mind of the people. If all of the people of the country because of fright, distrust, political disturbance, or for one or another reason, quit buying goods, prices fora time might even decline in the face of an increasing volume of money, although the chances are that under a well regulated banking system such a state of mind would result in a very prompt reduction in the amount of money in circulation. In other words, it would bring about a period of liquidation when bank deposits and currency would be applied to paying off loans, so that deposits and loans would be reduced and would be retired. On the other hand, without any in- crease in the Quantity of mohey, an optimistic outlook and a speculative state of mind might result in very considerable advances in prices without any increase in the quantity of money giving rise to it at all. Then that happens, however, the quantity or efficiency of money must increase or price advances will usually be arrested. These illustrations must allow for that reservation in rerd to the absolute or narrow quantity theory which economists refer to as velocity of circulation of money. (Illustrate by the beer story) The conditions which may arise where in fact a given cluantity of money may be made to work more efficiently and perform a greater service, in an economic sense, than it had formerly performed, and so give rise to or result from advancing prices, is exhibited in the change in our banking loans since the establishment of the Reserve System, which has in effect reduced reserve resuirements and permitted a similar amount of gold tosupport a larger total of deposits, currency and loans. I am reviewing these very obvious economic principles in order to sum them up in a rather hypothetical statement which will illustrate somewhat the new economic aspect of the country's affairs resulting from the organiz::tion of the reserve banks. This brief hypothetical statement may do so. If a given quantity of goods that is being produced, sold and consumed reouires the employment of a given amount of money and bank credit, then in the long run we may say - for purpose of illustration - that the quantity of goods multiplied by the price of those goods would give a figure which would be representative of the amount of credit and money required to conduct that volume of business at that price level. Of course, there are an infinite number of modify- ing factors to be taken into account, so I am stating this equation only hypothetically in its batest forms. But upon this principle you will observe that if the nuantity of goods is being much increased it will soon require an increase in the amount of money and credit required to prouce and distribute them. On the other hand, with the same quantity of goods, if the price is much increased necessarily an increase in the amount of money and credit will again be required. But there is still a third possibility and that is that there might be an increase in the quantity of money and credit without any change in the quantity of goods, in which event the result would be simply an increase in price. mind that my equation is for purposes of illustration. Now please bear in I am leaving out of account in this equation many subordinate but nevertheless important factors, such as the psychology of the people, the velocity of circulation, ihcreases or decreases in the efficiency with which money and credit are employed. You will at once observe, therefore, that Congress has created a great organization known as the Federal Reserve Eystem, which has in its power the actual creation of an increase in the volume of money an credit, but it has likewise the power somewhat to restrain that increase in money and credit within certain limitations. This to my mind is the greatest responsibility and a very grave one 4 resting upon our Reserve System, and creates a situation so different from any which has existed in our countryfor the last 30 or 90 years that I shall hope to interest you by elaborating upon it somewhat. Before doing so, I must,digrees 6-& 41 to the extent of.pointing out wherein lies the difference between rea1)progress in our economic welfare - which in a broad sense means improved standards of living, which in turn means more and better food and clothes and shelter, steady work, higher standards of education, more healthy enjoyment for all the people. The establishment of higher standards of living) which is the basis of all economic effort and strife is brought about by increased production and consumption of things that are necessary for and which promote the welfare, physical, moral and intellectual of all the people. Such an elevation of the standard of living or economic well being is not promoted by misdirected effort which results in the wasteful production of useless things and in the cultivation of habits of extravagance and laziness; - that is what happens to the people, - those are the habits which people cultivate at a time when prices are sharply rising but when the production of useful things is not increased. (Illustrate here by story of the use of iron ore.) This digression is intended to emphasize the fact that the economic well being of the people of this country can be promoted by a sound direction of the affairs of the Federal Reserve System, and, on the other hand, that the economic well being can be undermined and impaired by unsound policies which attain no other reiult than to cause specul-tion, advancing prices and no real adva'nce in economic well being. To return to my theme. Under our old banking system there was no means by which the general vo,ume of credit of the country might be increased beynnd a given point without an impairment of the minimum re,erves which banks are required by law to maintain, unless it resulted from the importation of gold or the domestic production of gold which went into bank resources. Of course, I leave out of - 5 - account such expansion as might result from changes in our monetary standards such as was attempted in the early 90s, or by changes in the statutory reserve requirements for banks. When, under the old system, as, for instance, in the early 90s, and again in 1907, we experienced a wave of liquidation and business depression, bank loans and deposits were very much reduced as a result, and in consequence surpluses of bank reserves were built up all over the country - interest rates sharply declined - and bond values road. Then later, speculation would start in the money centers - usually in the stock market - and gradually the bej..nning of a new cycle of advancing prices resulted. Likewise, at the culmination of such a cycle of advancing prices, bank reserves would become impaired in various parts of the country, and if any shock to confidence occurred - as it did in 1893 and again in 1907 - reserve requirements actually had to be suspended and even currency payments suspended. iuch periods of advancing prices, with all the speculation which generally accompanies them, have in the past - whetherbn this country or in other countries - always had one result: try the best selling markets. They have made the markets of that coun The world at once would start to pour goods into a country where domestic prices get out of line with world prices. Thereupon the banking system would at once begin to lose gold to Europe in order to pay for these goods. That served as a natural check to the speculation - caused interest rates to advance - made people who were borrowina money get timid - and would usually bring about selling of goods and price reductions so that the country was again able to enter into the world's market as an exporter of goods, thus changing the international balance of payments, arresting the gold movement, and restoring equilibrium again. wholly unregulated. Under our old banking system these movements were We had no bank of issue as they have in England, France, Germany and elsewhere, and no organized means of dealing with the money market, with foreign exchanges or with gold movements. Nov we have such an organization, but the consequences of the war nave resulted in almost universal embargoes upon the shipment of gold. We are the only important banking country which has no such embargo. The consequence of that is that we might indeed indulge in this country in a riot of extravagant speculation and of extravagant personal expenditure upon luxuries. could cultivate habits of idleness, quie practicing thrift, and in fact go to almost any extreme of economic waste before it could be possible for any of the important nations of the world to take gold from us in such quantities as would imperil our bank reserves at all. Therefore, the natural check which had operated before the war to hold us to a certain accountability when our economic machine gets working badly has been lost and we have not only lost the poeer to lose gold - so to speak - but the amount of monetary gold Which we now hold nearly if not quite one-half of the entire world's supply - is so vast that we have a capacity for over-undulgence in speculation and extravagance beyond anything over known before in history, either in this country or any other country. You will, I hope, therefore, appreciate that if the premise of my argumant is sound, this instrument which we have created for the control of the volume of credit must rely more upon good sound management than would be the case under ordinary circumstances, because the usual checks applying in a smooth and orderly world system are no longer present. The qUestion at once arises as to how these policies may indeed be controlled and directed so as to escape the penalties which I believe would be inevitable were vie either ignorant, or careless or wilfully wrong. I think it may be said that there are two chief reliances to which we must look - and hardly any of importance outside of those two: The first is a sound helpful and constructive point of view with regard to the Reserve System by thosd who own it - that is, the member banks. be vigilant to see that these banks are well managed. reports and their statements. They must They must scrutinize their They must examine carefully the qualifications of the men who are proppsed for directors and they must indeed satisfy themselves that the directors choose competent officers. Here I believe lies the most direct 'responsibility as to the policies of the System. The other safeguard is an - 7 -- intelligent public opinion generally which, on the one hand, will not tolerate a politcal domination or misuse of the Eystem, and, on the other hand, will not consent to its becoming, through its financial power, a supe-government. I do not refer to this situation as one which may be regarded as permanent, for if it were, no one would be more prompt than I in advocating that the general structure of the System should indeed be changed. going to recover its economic eouilibrium. This world is It will be a slow process, but it is now under way, despite the gloomy predictions of those prophets of disaster who are always with us no matter how affairs may be going. During this period, however, when the gold standard and free gold payments have been suspended, human wisdom, sound intelligence, and the highest type of integrity must be substituted for some of the automatic checks which normally work. I have left to the conc:usion the real point that I wish to make. It is quite possible, to mistaken notions of unenlightened people, that policies might be forced upon the Reserve System to bring about a deliberate exeansion of credit. You have read of the many proposals just to issue Federal reserve notes without any particular regard as to how it is done, to whom the notes should be issued, or what the effect would be. You have heard numerous proposals that we should make credit cheap, and although much less frequently expressed, I think there are many bankers in this country who still hold the view that if any money can be made by borrowing at the Reserve bank, it is good easy money and advantage should be taken of it. It is just such doctrine as this that would lead - if unrestrained - to an increase in the :moult of money and credit in the country that I have earlier referred to, without its being in response to an increase in production and consumption of goods. That in turn would lead to/speculative ad- vances in the priCeSOf everything which in turn would increase the cost of living and a;a±n le-n.(3 to strikes and all of the disorders vrhichresult from the sense of injustice which such a policy of inflation always brings about. Dehind the Federal Reserve System as a bulwark stands, I believe, first, - 8 - the sound and helpful and constructive friendship and confidence of most of the bankers of the country. Behind that stands the confidence and respect in general of most of the business interests of the country. Outside of these circles of protection lies the enemy, and the enemy is ignorance, and the enemy consists in that body - how great we cannot estimate - that would have the Reserve banks manufgcture credit an. Print money - just as we did during the Civil mistaken notion that that will make prosperity. r, - under the I Address made before Students of Graduate College, Harvard University, Cambridge, Massachusetts. Tuesday, November 28, 1922. Since the Federal Reserve Thanks were established, and, in recent years in increasin-, quantity, the reports of the System have been so complete and have de- scribed the operations in such detail that students of banking require hardly more than the official reports to gain a fairly complete knowledee of the business conducted by the System. Fven those who have not studied this literature understand that the Reserve Banks hold the banking- reserves of the country; for their member banks; that they discount paper that they invest in bills or bankers acceptances and in the securities of the United States Soveiument; that they issue and redeem the princi- pal currency of the country and distribute the metallic money coined by the mints; that they collect checks and practically all other types of instruments of payment for their members; effect the settlement of the domestic exchanges; and, in their capacity as fiscal agents of the Treasury, borrow all the money required for the Treasury's operations; ues; handle the Government debt; receive on deposit the reven- and pay checks drawn by the disbursinr. officers. It is important that this business be visualized as to volume an well as character. Bearine in mind that the Federal Reserve Bank of New York does about 40% of the business of the whole System, its transactions for the ten months of this year were briefly as follows: practically all gold; for its members; It held an average of a,150,000,000 of reserves, discounted 46,000 pieces of paper aggregating 5,200,000,000 purchased 81,000 acceptances for itself and for other Reserve ranks and for member banks and foreien banks aggregating i':1,150,000,000; and for account of all Reserve and other banks and of the Government and foreign banks purchased and sold $2,400,000,000 of Government and other securities; 315,000,000 pieces of paper currency aggregating average of 26 tons of coin; it counted and handled 2,000,000,000 and handled a daily collected 118,300,000 checks, notes, drafts, coupons and other negotiable instruments aggregating 51,000,000,000; and effected payments by teleeraph, over the 15,000 miles of telegraph wires which the System now operates, 2 aggregatin- :::'17,600,000,000. Its transactions for the Treasury as the government's fiscal agent were of too great a volume and variety to express briefly in figures. These figures are recounted for the purpose of emphasizing the character and extent of the contact of the Reserve System with the credit and currency operations of the country and, consequently, the significance of the functions which the Reserve Banks exercise. As to the System's policies and the purposes which inspired them, there is now an extensive literature in the shape of critical books, magazine articles and public addresses. It would be but repetition for me to go over ground so fully dis- cussed by so many competent students and critics. There is, however, one function of the Reserve System the importance of which cannot be over-emphasized and which I have determined to discuss tonight because it is, in fact, the heart of the System upon which the operation of every other part depends. I refer to the entirely new element which was superimposed up- on our banking System in 1914 by the establishment of the Reserve Banks, Which were given the power to influence or to regulate or to control the volume of credit, Every other function exercised by the Reserve flanks sinks into insignificance along side of the far reaching importance of this major function. 'ithout rerard to the views which you may entertain as to the various theories in regard to the purchasing power of money, or what may be more popularly described as the quantity theory of money, there is hardly anyone who is familiar with these matters who will not agree that no influence upon prices is so great in the long run as is the influence of considerable changes in the quantity of money, - by which I mean not only metal coins and paper money, but bank deposits upon which checks ray be drawn. The Reserve Act did in fact, whether by conscious design of its authors, or not, bring about an almost revolutionary change in three important particulars in bank credit which may in turn have had an important relation to prices. (1) The Let originally reduced the reserve requirements of the national banks, and, subsequently. in 1917, reduced them again. The effect of this was to make reserve money more efficient in that it .as permitted to sustain a larger volume of loans and deposits than previously had been permitted. (2) By conferring the so-called clearing house functions upon the Reserve Banks, it speeded up the whole System of payments; checks are collected and paid more promptly; the course of currency, shipments throughout the country has been greatly shortened and currency passes more promptly to points of redemption; and the country-wide clearing house, known as the Gold Settlement Fund, operated on the basis of daily telegraph settlements, has ,neatly shortened the length of time required to effect settlement of the entire domestic exchanges of the country. (3) But the most important change, s I have stated, is that conferring the power upon the Reserve Banks to actually permit or influence changes in the volume of money which serves as bank reserves or circulates as currency. My thesis, therefore, is addressed solely to this ques- tion of the regulation of the volume of credit and to make clear what a change has taken place because of the granting of this power. Let me refresh your memory as to how credit matters operated prior to 1914: Practically all of the commercial banks and trust companies of the country were subject to various statutory limits as to the minimum amounts of cash and redeposited reserve which they were required to carry. Except by legislative change in reserve requirements, there was no possibility of increasing the supply of reserve money beyond what arose through cold production or gold imports, neither could the supply of reserve money be contracted unless gold was exported. So it may be generally stated that the total reserves of all the banks was incapable of contraction except by paying it out to the public or exporting it; and equally incap- able of expansion unlessredeposited by the public or unless gold flowed into the country from abroad or was produced from the mines. not percentage. Bear in mind I say total and This had serious consequences in its relation to that mysterious 4 phenomenon which is nos being so carefully investigated and which we call the busiAt one extreme of the ness (or, as I would prefer to call it, the credit) cycle. deficient bank re- cycle the reserves of the banks regularly became impaired. serves we were liable to see rates for "speculative" money advance to 1004 or even more at times, and the charge for credit to merchants and manufacturers became a severe burden upon production and distribution. cussion cap would start an explosion. In such a situation almost any per- In 1893-5 deficient revenues of the Government and an unfavorable trade balance which resulted in gold exports, coming at a time when there was agitation for a change in our monetary laws led to great uneasiness. The reserves of the Now York Clearing House banks showed shortages from Fear developed that the Treasury would not have sufficient gold to ill qq' to meet its obligations and finally the crash came on . (date) resulting in the New York banks, and banks generally throughout the country, suspending currency payments; very largely suspending cash settlements between themselves for checks sent for collection not only through the local Clearing House but throughout the country. that time a total of $ 4 'Clearing House loan certifi- 1 cates were issued. Much the same thing happened in 1907, when after a period of deficient the extended con01- to C banking reserves running-. from .c:` tion of a number of New York City banks caused alarm and general suspensions of like character to those of the early 90's throughout the country. high as currency went to premium; Call money loaned as and the domestic exchanges again were frozen. Then again at the other extreme of the cycle, after a period of liquidation, surslus reserves poured into the money centers. After this same liquidation in the early 90's the New Y,11-1: Clearing House banks at one time showed surplus reserves of 0 . And bear in mind that at that time the total re- quired reserves of the New York Clearing House banks were but now are. Money then loaned at less than 1%. % of what they And the same occurrence was witnessed 5 after the liquidation of 1907 when tho surplus reserves of the New York City Clearing House banks rose to Y 11 000 (110 While under the conditions first described, every bank as seeking to withdraw loans, under the conditions last described, the banks were forcing money into the market. Money would become almost unloanable and the temptation to the speculator and his kind was extreme. I, personally, recall making loans on the New York Stock Exchange at 3/4 of 1%. These extreme credit conditions arose because there was no stretch. When the period of surplus reserves arose funds poured into the speculative markets. nhen the period of deficient reserves arrived all the banks sought to con- tract their loans to make good their reserves and we witnessed the extremes of speculation and of business embarrassment. There was neither control of the vol- ume of credit, nor modoratinr influence as to rates of interest. And, finally, there was no control over the movements of gold in and out of the country. I re- call the Governor of the Sank of England telling me in 1916 that one of the most menacing influences on their reserve position was the possibility of a gold movement to America or from innerica as a result of our erratic money market, which no influence that they could exert was capable of stemmin; of their regarding our so-called free gold market as one of the worst renaces to the stability of their own credit position. I have refreshed your memory as to the conditions which prevailed under the old System in order to bring out in contrast the extent to which it differs from present conditions. As things are now, when a period of business expansion arrives, whether it be an annual and seasonal one, or whether it be due to a series of favorable crops at home and bad harvests abroad, - in other words whether it be the short cycle of seasons or the long cycle of periods of years, - such expansion, whatever its cause, can now be easily financed because of the power of the Federal Reserve System to furnish the required reserve money as needed and thereby permit 6 the member banks in turn and in larger volume to increase their loans and discounts, and, correspondingly, their deposits. But now we come to one er two grave fallacies in regard to the Reserve System. I fear there are many people who still hold to the notion that some mys- terious influence or process will operate when this enlarged volume of credit is no longer needed so that it will be induced, without any compulsion or persuasion, canplacently to walk back to the Reserve Bank and surrender itself for cancellation. And possibly another fallacy still prevails among those who believe that because of certain very exacting requirements of the Federal Reserve Act, and the regulations of the Reserve Board, as to the type of loan which the Reserve Banks nay make, or the character of the paper which they may discount, that there is some control exercised by the Reserve System as to the uses to which the credit so extended by the Practical experience Reserve Banks shall be applied by the borrowing member bank. in the operation of the Reserve System seems to have disclosed something of importance as to the way credit is extended; it is no longer needed; as to the way that credit is retired when and as to the impossibility of control of the use that shall be made of it while it is in existence. First as to the extension of credit, which may be described as normal or seasonal or necessary and legitimate. Practically the only motive which impels a member bank to borrow from the Reserve Bank is to make rood an existing, or expected, impairment of its reserve. I think you may accept my statement that this is true, but let me give one illustration. Every member bank is required by law to maintain a certain minimum reserve on deposit with its Reserve Bank and if it fails to do so it is subject to an interest penalty upon the amount of the impairment considerably higher than the regular rate of discount of the Reserve Bank. This reserve in some cities is figured as a weekly averei'e and in the rest of the country as the average of a fortni7ht. Every member bank mist report its reserve position and submit to penalty if the average is impaired. Now, in practice, the way this works is very simple, and I shall use the case of a large New York City 7 bank to illustrate: Early in the morning it sends its exchanges through the Clearing house and, as the result, it has to pay out reserve money or receives surplus reserve money according to whether it is debtor or creditor. day it has deposits made and withdrawn; paid; it buys and sells securities; to customers. Throughout the it makes new loans and has old loans re- and foreign exchange and furnishes currency And as the result of these and other transactions, at some hour of the day the member bank must make up what it calls its"position." If its reserve has become impaired as the result of the day's business it borrows from us to make good its reserve. If the day's transactions give rise to a surplus reserve with us, the proper thing for the member bank to do would be to at once repay any funds which it had already borrowed from the Reserve Bank, although it may not do so. The chances are that if it does not do so it will be because it has an opportunity to employ the funds in some more profitable way than in paying off the Reserve Bank, - that is to sriy it can lend the money at a higher rate than the rate which it pays us upon its loan, namely our discount rate. You will observe that in every case, and practically every day, the member bank, in gauging its reserve position, must of necessity determine whether it shall borrow, and if so how much, or whether it shall repay borrowings already made, and if so how much, and the alternative to borrowin7cr repaying is either withdrawing loans from the market in some form, if it is short, or making additional loans, if it is over, without recourse to the Reserve Bank in either case. Now, in the long run, it is my belief that the greatest influence upon the member bank in adjusting its daily position is the influence of profit or loss; that while it may regularly borrow to make good impaired reserves, it will repay its borrowings at the earliest possible moment unless the inducement of profit leads it to continue borrowing and to employ any surplus that arises in fresh loans. It may, therefore, be safely stated that as business expands for seasonal reasons or for any other reason, member banks will borrow from the Reserve Banks to make god deficient reserves caused by 8 the expansion of their loans, provided the rate at the Reserve Bank is not so high as to make that borrowing too costly. But, on the other hand, if borrowing, at the Reserve Bank is profitable beyond a certain point, there will be strong, temptation to use surplus reserves when they arise for the making of additional loans rather than for repaying the reserve Bank. I shall discuss the question of rate control later, but I wish first to emphasize this important fact: Reserve Ranks is ex post facto. Practically all borrowing by member banks from the The condition which gave rise to the need for bor- rowing had already came into existence before the application to borrow from the Reserve Bank was made, and experience has shown that large borrowings in New York City have in the past usually been explained by the member bank as caused by the borrowing operation of the Treasury, by seasonal demands, but more frequently because of the withdrawal of deposits. Now as to the limitations which the Federal Reserve act seeks to impose as to the character of paper which a Reserve Bank may discount. hen a member bank's reserve balance is impaired, it borrows to make it good, and it is quite impossible to determine to what particular purpose the money no borrowed may have been applied. The Tt is simply the net reserve deficiency caused by a great mass of transactions. borrowing member bank selects the paper which it brings to the Reserve Bank for discount not with re-ard to the rate which it bears, but with regard to various elements of conv3nience, that is the denomination of the paper, its maturity, whether it is in form to be easily and inexpensively delivered physically to the Reserve Bank or not, and it -lakes little difference to the borrowing bank what transactions may have caused the impairment of its reserve, because the paper which it discounts with the Reserve Bank may have no relation whatever to the impairment that has arisen. To specify more exactly, because this is an important point, suppose a member bank's reserve became impaired solely because on a riven day it had made a number of loans on the stock exchalve; it mi-ht then came to us with commercial paper which it had 9 discounted two months before and which had no relation whatever to the transactions of the day; and with the proceeds of the discount make eeed the impairment. If it was the design of the authors of the Federal Reserve Act to prevent these funds so advanced by Federal 'Reserve Ranks from beine loaned on the stock exchanee or to non- member state banks or in any other type of ineligible loan, there would be only one way to prevent the funds being so used, and that is by preventing the member banks from making any ineligible loans whatsoever, or deny it loans if it had. fact, during the peak o And, in the period of expansion I believe the amount of paper which had been discounted with the Federal Reserve '3anks equalled only about 14, of the loans and discounts of the member banks. The member banks undoubtedly had a very much larger amount of eligible paper than indicated by this small percentage, but, beyond that, a great mass of ineligible loans, and surely it cannot be claimed that the provisions of the Act, which specify so exactly what paper is eligible, can possibly have exercised any influence upon the application of the proceeds of these loans by the member banks. I have enlarged upon this point so as to brine out this fact: - that the expansion of the loan account of the Federal :reserve Ranks, which as you knowliir- nishes the foundation for a much greater expansion of loans and deposits of the commercial banks, can be brought about as the result of any expansion in the banking position of the country, no matter what may be its cause. The eligible paper we discount is simply the vehicle through which the credit of the 'eserve System is conveyed to the members. But the definition of eligibility does not effect the slightest control over the use to which the proceeds are applied. Going a step further, this means that the eeserve Banks will be subject to demands upon them, expressed to be sure in the form of eligible paper but which may have had their origin in any sort of expansive development, stock speculation, real estate speculation, crop movine, buildin- operation, foreign bond issues, or anything, else. Such an influence can arise throueh the borrowings not only of the 10 United States Oovernment in the market, but, indirectly, through borrowings of all kinds which have the effect of impairing reserves. Now goin, still one step further, let me emphasize the contrast between the conditions which prevailed in the old System and those which have now arisen. I have pointed out how, in the extremes of the trade cycle we have on the one hand impaired reserves and very high interest rates and on the other hand surplus reserves and very low interest rates. That condition has now quite disappeared. In actual operation, when the reserves of the member banks become impaired they promptly borrow and they do not have to scramble around among their customers or on the stock exchange to call loans so as to make good the impairment. So, on the other hand, when they have surplus reserves they are generally inclined to repay what they may have already borrowed from us rather than make new loans, provided, of course, our rates are properly adjusted to market rates, and they will continue to do so unless borrowing from the Reserve Bank becomes so profitable as to be a temptation. Now you will observe that under the old System we experienced these periods of reserve deficiency and extremely high rates for money and reserve surpluses and extremely low rates for money, but under the present System all that has changed. Broadly speaking, there is no surplus reserve in the hands of the banks, whether members of the System or not. When business expansion or new loans cause impaired reserves the member banks borrow from us; or another, they repay to us. when surplus reserves arise for one reason The consequence of this is, of course, that we have no such extraordinarily high or low interest rates as sometimes obtained. The funds flow in and out of the Reserve Bank day by day as sort of a leveling off process, so to speak. Now in a banking System where 10,000 banks, which represent over 55% of the banking deposits of the country, have convenient access to a source of borrowin- such as the Reserve Banks, what are the possibilities that this borrowing may net beyond control; that the volume of credit may become dangerously enlarged and that in consequence we may be guilty of furnishing credit which might only result in marking up prices without any increase in production, with all of the injustices which are sure to result? The chances of such a development can only be understood if one is familiar with credit conditions in allparts of the country. They could well he expressed in the form of a map upon which current local rates of interest throughout the country would be expressed as maps are shaded to indicate ::cuntain ranges and their peaks. It would be found that ever a large part of the south, consid- erable portions of the middle west, and generally throughout the Rocky Mountain re-ion interest rates are not only high, but in many cases as high as 12%. Not only do the usury laws of some states permit banks to lend money as high as 10% or 12% but in practice a very large number of the smaller banks throughout the country in states which permit hill rates make practically all of their loans at rates ranging all the way from to 12%, and there are many banks that charge even higher rates by various round about methods. But the rate difficulty becomes more acute when it is realized that even within one Federal Reserve district of large area like Kansas City or San Francisco, there may be sections where rates as high as 12% are charged, but, on the contrary, in the money centers, especially in the city where the Reserve Rank is located, the rates may be little if any higher than those prevailing in New York City. Bearing in mind, however, that a member bank may be impelled to borrow not only because deposits are withdrawn but equally because it haE made loans, in all of those sections where the loaning rate is much higher than the Reserve Bank rate the temptation will naturally be ever present to expand leans indefinitely so long as the Reserve Bank is in a position to lend. This situation, which prevails in some parts of the country, is quite different from that in New York City, where the vast bulk of bank loans are made at a fairly uniform rate and wnere it is possible for the Reserve Bank, by an adjustment of its rate, to exert some restraint upon the extent to which its members borrow from it. 12 Deferrim7 until later any further discussion of methods of control of borrowinr, which means control of the volume of credit, let me now rei:er to what appears to me to be the most perplexing difficulty in the exercise of such control as may be possible through the discount rate. It is a condition which has arisen as a result of the war and it is appropriate to introduce this part of the discussion by quoting, from the report made by the British Committee on Currency and Foreign Exchange, frequently called the Cunliffe report, as follows: "Whenever before the war the bank's reserves were being depleted, the rate of discount was raised. This, as we have already explained, by reacting upon the rates for money generally, acted as a check which operated in two ways. On the one hand, raised money rates tended directly to attract gold by lessening the demands for loans for business purposes, they tended to check expenditures and so to lower prices in this country, with the result that imports were discouraged and exports encouraged, and the exchanges thereby turned in our favor. Unless this twofold check is kept in working order the thole currency system will be imperilled. To maintain the connection between a gold drain and a rise in the rate of discount is essential." Various influences were set in motion by the war which have resulted in our receiving over $2,000,000,000, in Fold in excess of what we held before the war started, giving us now a total gold stock of about nearly $3,100,000,000 is held by the Reserve Banks. 3,800,000,000 of which This is roughly a billion and three-quarters in excess of what the minimum legal reserve requirements of the Federal Reserve Act would now require us to hold against our present deposit and note liabilities. Under the provisions of the Federal Reserve Act as originally passed by Congress, the Federal Reserve Banks, when all of the reserves had been paid in, would have had a loaning power of roughly $ 'with this enormous mass of gold now in our hands, we have a lending power at present in excess of the billion and one-quarter of loans and investments now made of roughly ~4 i400,e0op . .Had there been no war there would have been no disturbance to the foreign exchanges.- V:ith the foreim exchanges fluctuating within the gold shipping points any considerable expansion of credit in this iv country which caused prices to sharply advance would very probably have been penalized by a gold export movement. With the exchanges as they now are, that is with the dollar at a premium practically the world over, gold cannot be exported, certainly not in large quantity except after such a period of expansion and rising prices in this country as would entail a veritable orgy of speculation; such a debauch in credit, in fact, as would reduce the purchasing power of the dollar progressively first possibly to the level of the currencies of the neutral countries, then to sterling, then to the franc, etc. And this brings me to the point which is of such importance to the management of the Reserve System. Before the war, as is set out in the Cunliffe report, a lare gold export movement was the visible and convincing evidence, not only to the management of the bank of issue, but to the country generally, that the bank rate must be raised. To be sure other conditions than a gold movement could well justify in- creasing the rate of discount of the bank of issue, but a large gold export movement,Euch, for instance, as we suffered in the early 90's, which even impaired the gold reserves of the '-',overnment of the United 3tatcs, would require little argu- ment or explanation to convince the country that the bank of issue must take steps to protect the gold reserve. As we are now situated, it is true that we may from time to time lose small amounts of gold to those countries where the currency has not been greatly depreciates. have recently shipped some gold to Canada and it was a natural movement because the Canadian exchange had gone to a premium and dollars to a discount as the result of a large loan which the Canadien y'overnmert floated in this country. And from tile to time the currents of trade and the balance of international payments may indeed result in small amounts of our excessive gold holdings being withdrawn, but, with the currencies of most of the trading and banking nations of the world so much depreciated below ours -- ranging from 107, in the case of eterlin to the vanishing point in the case of Germany, Austria 14 and Russia --- it seems altogether unlikely that any considerable amount of our surplus gold will be taken fran us. Other than such a debauch of expansion as I have described, the only possibilities of early losses in gold that I can see would be through radical changes in the monetary laws of those nations whose currencies are greatly depreciated, implying, of course, the balancinp of their governmental revenues and expenditures. In the absence of the possibility, I may say even the remote possibility, of any such movement and in the face of the conditions which I have described as to interest rates in different sections of the country, what should be the policy of the Federal Reserve System in exercising this (Unction which is of such supreme importance of repulating or influencing the volume of credit. This brings us in fact to those important questions of policy in which human judgment plays so large a part. Various sug-estions as to the policy of the Reserve System have been advanced by critics and students. They all seem to lead back to the two methods of repulation of credit volume which are, after all, fundamental. One may be described as the exercise of discretion by each Reserve Bank as to the amount which it is willing cur which it thinks wise to lend to borrowing members. The other is the exercise of such influence er control as is possible through the fixing of the discount rate. It might at first seem that these two methods of regulation were in conflict with each other, but they are in fact both necessary and complementary; both have advantages and limitations. In a general way it is my opinion, although others may differ from me, that, so long as present conditions exist, rate regulation will operate effectively in the long' run as to the great mass of American bank credit, that is as to those banks Which hold the principal amount of deposits and loans, provided the rates are wisely established by all of the Reserve Banks, and especially by those Reserve Banks which are located In the larger cities of the east. It is in those centers that interest rates are lowest ani most stable and where the range is narrowest 15 between minimum an:' maximum rates; but in the sections of the country more remote from the money centers, where interest rates are higher, as was earlier described, the exorcise of a wise discretion by the management of the Reserve Bank is imperative, otherwise the facilities of the Reserve Systen might be abused by member banks borrowing excessively for profit. Let me describe same of the difficulties of exercising discretion. First, The the discretion, as I have earlier described, must be exercised ex post facto. transactions riving rise to impaired reserves by the borrowing members have already occurred when the borrowing from the Reserve Bank is desired. Applying discretion to the borrowings of members under these circumstances really means that all one can do is to scold them. If the funds are not advanced to make good the reserve, then indeed the reserve balance is used by the member just the some only the penalty rate is higher. In the course of time that bank would restore its reserve because the law would prevent its paying dividends or sulking new loans until it is restored. That type of scolding, however, generally causes irritation. A second difficulty is geographical. How can discretion be exercised in the case of applications for loans by member banks so remote that even the mail takes four days one way? A third difficulty arises as to the basis upon which discretion shall be Who is to judge as to whether the transactions which cause the reserve exercised. impairment were justified or unjustified? A loss of deposits, theoretically, would always justify borrowing, but if the impairment arises because of loans made how is a judgment possible as to any one loan without judging equally of all loans made by a member bank? Fourth, even assuming that such judgment were possible, who shall say how much each member bank shall be permitted to borrow without exceedinr- the bounds of prudence? Is it fair to assume that a member bank should liquidate once a year, or 16 twice a year, so that its borrowing requirements are seasonal only, or should we admit that a certain amount of borrowing from the Reserve Banks may be permanent? Section 4 of the Act provides that a Reserve Bank shall "extend to each member bank such discounts, advancements and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks." Much difficulty will be experienced by the bank managers of any one district in making these nice decisions as to its own district members only, but, extending this to all the managers of the twelve Reserve Banks, with the 10,000 members with which they must deal, it would indeed appear to be impossible to exercise such discretion with universal justice. Indeed it may well be that in the absence of a Branch Banking System the Federal Reserve System will be the vehicle for furnishing a certain amount of credit permanently to those remote sections of the country where interest rates are high and where liquid capital is deficient. A fifth difficulty appears to arise as to the regulation of the total amount of credit for the whole banking system, as distinguished from the total which any one member may be allowed to borrow. Obvicusly the twelve Reserve Banks cannot work out such a nice mathematical arrangement of credit as would serve the requirements of all the banking ,yrstem and work smoothly, because these requirements vary greatly at different seasons of the year and in different sections. A sixth difficulty is at once obvious were the System to assume responsibility for declining loans to members which made it necessary for those members to decline loans to customers. It has always seemed to me that the primary responsi- bility far any loan made by a bank to its customer should rest with the officers and directors of that bank and that the Reserve Bank should never assume that responsibility nor be willing to accept the consequences of exercising it. And a seventh and last difficulty, although this may not indeed be all of them, is one which I regard as more serious than any of the others, - the exercise of powers conferred by the Reserve Act upon the Reserve Banks by this rule 17 of personal discretion, I fear, would develop inevitably in time a bureaucratic attitude of mind on the part of the managers of the Reserve Banks which would be unfortunate indeed for the welfare of the whole banking System. petite for more power. Power excites ap- Bankers in time would rebel and the public would rebel. Now, on the other hand, it must be admitted that if a member bank is able to loan all of its funds at 10;', or at 12%, and if it is payin- as hi7h as 5 inter- est upon its deposits, and has the opportunity to discount paper at its Reserve Bank at 4 1/2:), the temptation to make the additional profit by enlor-ing its business and discounting freely cannot well be escaped. or can the Reserve Bank charge that member bank a rate which would operate as a restraint to its borrowing without char-ing a like rate to member banks in its own city or in the money centres of its district which would put the resources of the Reserve Bank entirely beyond the reach of most, if not all, of the large banks of the district. Therefore, however dif- ficult may be the exercise of discretion, in some Reserve districts that would appear for the present to be the only means of exercising a regulatory influence. On the other hand, let us see how the rate will operate. I think one should look upon the credit structure of the country as an inverted pyramid at the base of which is a foundatior, of bricks of gold which enjoy the peculiar power of sustaining each its own proportion of the entire inverted pyramid. of gold are the bank reserves held by the Reserve Bank. Those bricks If one brick is taken out of the base, the series or stones resting upon it, representing the volume of credit sustained by that reserve brick, must, inevitably, come down. added, by so much the pyramid is very shortly enlarged. And if a brick is If the Reserve Dank rate is so law as to be an inducement to borrowing additional tiers of bricks will be laid at the foundation and the pyramid will be by so much enlarged; and the re- verse is equally true if the rate does not induce borrowing, - the size of the pyramid may be kept unchanged, or even reduced, 18 A rate control of the volume of credit has a variety of advantages. is that it is democratic. One It applies to all alike and it requires little, if any, expostulation and remonstrance to make it effective. It must be admitted that an advance in the discount rates by the Reserve Ranks will not necessarily influence promptly the mountain peaks of high interest rates in some sections. doubt whether it is necessary that it should do so. But I rather Althourh not capable of sta- tistical support, I think the statement may be hazarded from past experience that a rate which is effective in checkin borrowin- in the money centers, or even in re- clueing borrowing, will indirectly be an influence in all sections of the country. It certainly has the effect of what I might describe as "driving borrowers back home." It is customary for many concerns which do a large business to borrow in the cheapest money markets, no matter where their offices and business may be located. If New York, for instance, should advance discount rates and member banks in turn advanced rates to their customers, a certain number of these out-of-town bor- rowers would 70 to their local banks for their loans if the rates thero are satisfactory so as to onablo the borrower to pay off in New York. This process I believe would be found, could it be anLlyzed, to be many times repeated, so that the effect of rate changes in the twelve Reserve cities is not confined alone to those cities but extends throughout the country. Another point frequently overlooked in regard to the effect of the rate is duo to lack of understanding of the way in which borrowin7 from the Reserve Rank originates, - that is through impaired reserves. Every bank knows about what its loanable funds cost it on the average and about what it receives on all of the money which it is loaning. It knows about what its expenses and overhead amount to and the difference is its profit. When a bank's reserve becomes impaired so that it must borrow, it does not pick out a particular piece of paper which it has discounted at a higher rate of interest and then rediscount that paper at the Reserve Rank rate and figure that it is making a profit, but it is much more liable to see whether 19 the borrowin- from the Reserve Rank at the Reserve sank rate involves in point of fact an absolute loss, or whether it may not be less expensive to reduce loans or sell investments and avoid borrowings. Expressing it differently, the rate at which a Reserve Bank lends to its member bank has no particular relation to the rate which a member bank receives on any of its transactions, but it has a relation to the average of all rates received by the member bank and the average cost of all of its loanable funds. And from this I have always concluded what I firmly believe to be the fact, that a Reserve Bank rate in order to be effective in restraining undue borrowing, does not necessarily need to be n penalty rate, that is to say a rate fixed so high that there will be no differential in favor of the borrowing bank on am: paper which it may have taken from its customers, even the highest rate paper. But an effective rate will likely be somewhere within the range between the average cost of all its loanable funds, including overhead, and the average that it receives upon all of its earning assets, with due allowance, of course, for loss of interest on reserves. The chief advantage of rate control, however, is in the way it serves more definitely to regulate tho total volume of credit as distinguished from the total amount of loans to any one individual member bank. T would regard the determination of the amount to be loaned to an individual member bank as a credit matter to be determined just as any loan would be determined by any bank to any customer. But, on the other hand, I would regard the rate policy of the rederal Reserve System as a national credit policy more directly related to regulating the volume of credit in the country so as to maintain stable credit conditions. Tinally, however, we must recognize that there are many people who believe that more money, and cheap money, lawns prosperity and happiness. an advance of discount rates may at times be difficult to explain. Tc those people It is on that account that the absence of natural movements of gold is most unfortunate; and it is for that reason, as well as for many others, that the world will be better off 20 by a prompt return to the gold standard and free gold payments. Permit me now to make a brief resume of this long argument: The Reserve Banks have been given the power to create reserve balances and to a large extent to regulate the volume of credit. That volume of credit expands in response to ex post facto borrowing by member banks; the mass of their transactions causing the borrowing having already occurred, there is no means by which the Reserve Bank can control the use which is made of the funds which it loans to its members. Credit so borrowed from the Reserve Banks is less likely to return for cancellation when no longer legitimately required if discount rates are too low, and a high discount rate will operate to induce its return. The present banking System has created a situation where there is no surplus of bankin;: reserves in the country, and where there is not likely to be a deficiency. percentage of the Reserve Banks. The real reserve barometer is the reserve The impulse which will lead the Reserve :'ystem to change rates must for the present largely arise from general conditions, and it cannot be expected that the impulse to advance rates will be (-Ivan by gold exports for a long time to come. Therefore, the regulation of the volume of credit which is the chief function of the Reserve System must bo effected by a combination of rate changes and due caution as to members' borrowin s. The Federal Reserve System has always impressed me as being essentially a social institution. It is not a super-Government, it is simply the creature of C Congress, brought into being in response to a public demand. It was not created only to serve the banker, the farmer, the manufacturer, nor the merchant, nor the Treasury of the United States. guiding influence is not profit. to the Government. It was brought into being to serve them all. Its Practically all its receipts over expenses go For same the service it performs is direct, for others it is indirect, but is not less definite nor any less important. It needs and asks that it be given the benefit of intelligent study and enlightened criticism. Its future depends upon its own good behaviour and upon its success in winning and holding the confidence of the public. Increasing quantity reports for students Generally understood that Reserve Banks hold all reserves Discount paper Invest in bills and U. S. securities Issue and redeem paper currency Distribute metallic money Collect checks and instruments of payment Settle Domestic Exchanges As fiscal agents Borrow Handle Debt Receive Revenues Pay disbursing officers checks Important to visualize volume New York Bank 40% 10 montitsyermactielomIlgsorar 000 gold Aggregate 4 5,200,000,000 Discounts - 46,000 pieces Aggregate Acceptances 31,000 pieces 1,150,000,000 government and other securities purchased and sold 2,400,000,000 Currency counted 315,000,000 pieces; 2,000,000,000 Coin, daily - 26 tons 51,000,000,000 Checks, notes, etc., 113,300,000 pcs.; Telegraphic payments (15,000 miles) 17,600,000,000 Treasury Transactions too great volume and variety Figures emphasized contact with credit and currency Significance of functions Policies and purposes inspired in extensive literature Repetition of competent students and critics to discuss One function heart of system; operation other parts depend New element in power to influence, regulate or control volume Other functions insignificance Thatever views purchasing power -- quantity theory -- influence upon prices of considerable changes in quantity; paper money; metal coins, bank deposits. Revolutionary changes of Act -- relation tc, prices 1. Reduced reserve requirements Original and 1917 2. Clearing House functions Speeding payments check collections Shortening currency shipments and redemptions 2 Gold Settlement Fund Daily telegraphic settlements Less time settling domestic exchanges 3, Most important power to permit or influence change in volume Bank Reserves Currency Thesis solely regulation volume - change due to new development Beer Story Refresh memory credit matter prior 1914 All banks statutory minimum reserve Except legislationne possible increase reserve money except gold production; imports Nor contraction unless exported Contraction by paying out or exporting Expansion redepositing or importing Bear in mind total and not percentage This had serious consequences -- business or credit cycle speculative rates 100%; merchants and One extreme - impaired; manufacturers burden; percussion cap Early 90's Deficient revenues Unfavorable Trade Balance Gold :wort, Monetary agitation Unoasiness Clearing House reserves short 06,500,000 Fear Treasury default gold payment Crash November 1390 - June 1803 New York, and banks generally, suspending currency payments; also cash settlements for collections 1890 16,645,000 throughout country Clearing House Certificates 1893 $41,490,000 1907 same - Deficient Reserves Extended condition certain Nei York City Banks Alarm Some development as early 90's Call money 12% Currency 4% premium Domestic Exchanges frozen Other extreme of cycle - liquidation; surplus reserves in !Toney centers Early 90's Surplus Z111,600,000 Required reserve 1/4 of present Toney below 1;7 1907 same - Surplus V1,000,000 June 1908 First condition banks calling loans Last described conditions forcing money noney unloanable Temptation speculator beyond resistance Personally recaI13/4 of 1;4J Extreme credit conditions because no stretch Period of surplus funds poured into speculation Period of deficient banks withdrew causing extremes Speculation 1. Embarrassment 2. Nc control of volume; no moderating influence rates; no influence gold movements. Governor Bank of England 1916 menacing influence to their reserve position our unregulated gold movement Refreshing memory old conditions contrast with present conditions Business expansion arrives natural and seasonal, or series Food crops vs had abroad Either short or long cycle Whatever cause Reserve System finances Manufacture reserve money correspondingly deposits Members increase loans and discounts larr-er volume; One or two fallacies 1. 2. Notion mysterious influence credit walk back surrender for cancellation Exacting requirements type of loan, character of paper Cannot control use of proceeds Practical experience throws light upon 1. 2. 3. Way credit extended Way retired when not needed Impossibility to control use First extension of normal, seasonal, necessary, legitimate credit Motive only impaired reserves Illustration Minimum reserve impaired Interest penalty Weekly; fortnightly average Regular report Way borrowing works simple Illustrate New York City bank Morning exchaaes; debtor or creditor; we settle balance Deposits made and withdrawn New loans made and old paid Buy and sell securities and exchange Furnish currency 4 Makes up "position" Reserve impaired - borrow If surplus - should pay May not do so because opportunity for profit; loan higher rate Member always watching If mutt borrow - how much If can repay - how much Which is most profitable Greatest influence profit and loss Regularly borrow but always repay unless profit induces otherwise Business expansion - borrowin7 will increase if rate not too high if level too low, credit will not come back Discuss rate control later Emphasize borrowing ex post facto Conditions already existing, Explanation usually Treasury, seasonal demands, loss of deposits Limitations on eli7ible paper Reserve impaired, member borrewb Cannot determine proceeds applied Amount simply net deficiency Borrower selects paper not for rate, but convenience Denomination Maturity Easily delivered Discounted paper no relation to transactions causin:- impairment Illustrate Stock Excham-e Loans Commercial paper discounted two months before; no relation to transactions Proceeds makes rood reserve If design of authors prevent funds stock exchan-e or other ineligible only way prohibit any such loans Peak of expansion 14% Member banks held much larger amount Also large amount ineligible No possibility to influence application Enlarged upon point to emphasize Expansion Reserve Bank loans foundation greater expansion Result from any cause Eligible paper simply vehicle Definition effects no control over use Step further Reserve Banks feel demand expressed eligible paper Origin in expansion stock speculation, real estate, crops, building, Treasury, anything impairing reserves Step still further Contrast old and new situation Old Extremes; impaired reserves high interest; low interest surplus reserves 5 That largely disappeared Now No scrambling to call, but borrowing When surplus, repaying Broadly speaking no surplus, everything over swept into us Consequence, no very high or very low rates Funds flow in and out of Reserve Lanka Leveling process 10,000 banks 55;.; of resources Convenient access Possibilities gettinr beyond control Volume of credit dangerously enlarged Mark up prices with no increased production Injustice such development Must understand credit conditions throur-hout country Could be expressed in map Variations in rates in sections Usury laws Rates from 8% to 1274 Difficulties within district between cities and country Need for borrowing not only deposit withdrawals, but new loans Temptation in high rate sections extreme Very different from New York City and money centers, - rates more uniform Defer further discussion of control until later Another perplexing difficulty Condition resulting wholly from war Cunliffe Report "Whenever before the war the bank's reserves were being depleted, the rate of discount was raised. This, as we have already explained, by reacting upon the rates for money generally, acted as a check which operated in two ways. On the one hand, raised money rates tended directly to attract gold by lessening the demands for loans for business purposes, they tended to check expenditures and so to lower prices in this country, with the result that imports were discouraged and exports encouraged, and the exchanges thereby turned in our favor. Unless this twofold check is kept in working order the whole currency system will be imperiled. To maintain the connection between a gold drain and a rise in the rate of discount is essential." Influence of war - Received 2,000,000,000 gold .:stock 3,800,000,000 Reserve Banks 3,100,000,000 Excess over minimum requirements - - - - 1,340,000,000 us oririnally constituted lending power w900,000,000 Mass of cold, excess reserves, further lending power 4,400,000,000 6 If normal exchan-e rates within gold shippin point Expansion Price advances Gold exports With exchanges now premium No large gold exports Orgy of speculation Price advances Reduced purchasing power of dollar progressively Neutral countries Sterling Franc Etc., etc. This bring to the point Gold exports visible and convincing evidence Other conditions might justify rate increase Large gold exports es in 90's convincing United States gold reserves imperiled No argument needod Small losses now possible Canadian shipments Currents of trade and balances of payments could draw some gold Discounts Sterling 10% Vanishing point, Germany, Austria, Russia Large exports unlikely Only large possibility change of monetary laws, balanced budgets Absence of gold movements and great rate differences how regulate? Questions of policy of human judgment Various policies suggested All suggest two plans which are fundamental 1. Discretion Rates 2. Do not conflict - complementary Toth have advantages and limitations My opinion rate regulation most effective under present conditions with great mass if rates wisely established, especially in large cities, where interest rates lowest, most stable and narrowest range. More remote sections; personal judgment and discretion Difficulties of discretion Ex post facto; transactions already occurred 1. Scolding If loan declined penalty applies Loans called Scolding causes irritation 2. Geographical -- distances from bank 7 3. who shall judge Basis of discretion; Loss of deposits justify How about now loans 4. If judgment possible, who shall decide limitations of prudence Should members liquidate periodically, or Should any borrowing be continuous Section 4 provides that Federal Reserve Bank shall "extend to each member bank such discounts, advancements and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks" Difficult makin, nice decisions within district Much greater in all 12 districts Difficult exercising universal judgment Possibly permanent credit to hi "h rate sections 5. Regulation total amount credit 2tatheratical arrangement impossible Requirements vary in seasons and sections 6. Responsibility declining loans causing. members to recline customers Responsibility rests upon member bank directors and officers Consequences to System too serious 7. Possibly net all difficultieF,. Power exciten appetite fcr more power Bureaucratic Autocratic developments Bankers and Public rebel Rate Control Members rates 10:. and 12;10 57,, on deposits Reserve Bank rate 4 1/2% Temptation to member Restraining rate would penalize city banks Discretion seems only possible plan See how rate operates Inverted pyramid Rate control has variety of advantages Democratic Applies to all Little expostulation or remonstrance But will not influence mountain peaks Will apply to great bulk Without statistical support influence extends back Drives borrowers home Describe how it operates Difference between effective and penalty rate Each bank known cost of funds; return on funds Rate on particular piece of paper discounted not controlling No relation between two rates Effective rate might be somewhat below penalty rate Probably somewhere within range of average cost, including overhead, and average of earning rate 8 Chief advantage Of rate control Regulates total volume of credit, distinguished from total individual borrowings Individual bank line credit matter Rate policy is national; designed to regulate total volume and promote stability .iany people believe more money, cheap money means prosperity and happiness Impossible to explain advances of rates Absence natural movements gold unfortunate Prompt return to gold standard and gold payment Resume: Power to create reserve balance and Considerably regulate volume Expansion ex post facto; transactions have already occurred Cannot control application of proceeds Credit unlikely to return if rates too low High rate induces return Under present System no surplus Also no deficiency Reserve barometer is reserve bank percentage Impulse to change rates, general conditions Gold exports not likely Regulation of volume chief function Effected by rate changes and due caution individual borrowings Federal Reserve System social institution - not super-government Creature of Congress Public demanded it Not created banker, farmer, manufacturer, merchant, Treasury Serves all Guiding influence not profit Surplus earnings to Government Some service direct Others indirect Intelligent study and enlightened criticism Future depends on good behavior - winning and holding confidence MISC. 3 I FEDERAL RESERVE BANK GOM 4-20 OF NEW YORK OFFICE CORRESPONDENCE To !dr. Strong FROM Statistics Department 192_ DATE SUBJECT: The Federal Reserve Act was amended on June 21, 1917 and for purposes of calculatinr. the lendinr power of the Reserve Bnnks under the requirements of the Act prior to that time we have taken the fir.ures for June 15, 1917. The followin power then and now: table answers the questions on conparative June 15, 1917 I;ovember 22, 1922 21,080,000,000 1,050,000,000 '3,220,000,000 3,090,000,000 Reserve Required 550,000,000 1,580,000,000 Excess ±toserves 530,00C,000 1,640,000,000 Additional Lendinr. Power 1,400,000,000 4,400,000,000 Total Lendinr Power 2,800,000,000 3,600,000,000 Total Reserves Gold reserves la. At what time in the early 90's (when the endless chain was workinr,) were the Revenues of the Treasury deficient? In the fourth quarter of the fiscal year of 1891 and in two quarters of 1892. b. When wao the period of unfavors:,le trade 'Jalances? Fiscal year 1388 - 028,000,000 1889 3,000,000 1893 - 19,000,000 (but for the last six months of this year the unfavorable balance was 469,000,000.) c. .then were we exporting gold and how much? :access of exports over imports fiscal years as follows: 1889 1890 1891 1892 1893 1894 1895 1896 d. - 050,000,000 4,000,000 - 68,000,000 500,000 - 88,000,000 5,000,000 - 30,000,000 - 79,000,000 On what dates and for what amounts in the early 90's were the reserves of the :`ow York Clearing House banks impaired? 1890 33rd week 34 35 36 37 42 43 45 46 49 e. " TM 1393 600,000 2,500,000 500,000 1,400,000 3,200,000 300,000 100,000 2,500,000 900,000 2,400,000 fI tl When did the actual crash cane that resulted in the issuing of Clearing House Loan certificates? November 11, 1890 f. 27th week : 5,100,000 28 4,300,000 it 29 1,300,000 30 4,300,000 31 4,000,000 32 16,500,000 33 11,600,000 34 6,800,000 35 1,500,000 June 1393 What was the total amount of certificates issued in the early 90's? Total issue New York Clearing House banks in 1890 - ;;16,045,000 tt It n " 1393 - 41,490,000 119 2 2a. When did the Associated Clearin- House Banks' reserves become deficient in 1907 and for w1::-t amounts and on what dates? 1907 Oct. 26 Nov. 2 9 16 27 30 Dec. 7 14 21 23 1908 Jan. 4 b. 1,200,000 38,800,000 51,900,000 53,700,000 54,100,000 (maximum) 53,000,000 46,200,000 400100,000 31,300,000 20,200,000 surplus Hot hirll did call money loan? 125% c. What was the premium on currency at the time of the 1907 panic? _reached 4 per cent three times in November. 3a. After the liquidation in the early 90's the Clearing House banks developed enormous surpluses and, as I recall, money loaned belor one per cent. When did this surplus reach its maximum and how much was it? January-February 1894 Maximum el11,600,000, first week February b. The some occurred in 1907 or 1903: was it? when did the surplus arise and how much Began January, 1908 and reached maximum, 01,000,000 last week of June. c. In the early 90's when this meat surplus reserve arose what was the total required reserves of the associated banks, as distinguished from the reserve they actually had, and what percentage is that compared to the required reserves of the New York Clearing House banks today? Average required for year 1894 was t138,300,000 Avera "o reuired reel: ending November 18, 1922 was k1511,000,000 per cent 1894 to 1922 is 27. 4. What percentage of the banking deposits of the country are represented by the 10,000 banks which are members of the deserve system? About 55 per cent (June 30, 1921). 5. Am I correci. in my belief that prior to the war our total gold stock was 31,800,0 0,000 and that today it is 3,800,000,000, so that our net increase is about $2,000,000,000? (This should be taken from the Treasury statements or the Assay Office reports.) 31,891,000,000 in 1914 (June 30) and 0,902,000,00C in 2iavemb...r 1922. 3 S. Under the original terms of the Federal Reserve Act, how much could the :;eserve 'Janke have loaned without gettin,:- below the minimum reserve, i. e., after they had received payment of all the capital and reserve deposits contemplated to be paid in as the Act originally stated? (This should not be confUsed with tho condition after later amendments to the Let) (On Tune 10, 1917) about :;3,000,000,000. 7. iliat additional lending power have we now by reason of our surplus reserve? In other words, how much can we loan without getting below the legal minimum reserve? I refer to the whole Reserve 3ystem in both sets of f: runes, and allowance must be made in some arbitrar-; way for the effect of the note issues which would inevitably accompany such expansion. Over ;34,390,000,000. -2111 and other negotiable instruments aggregating t5(080,6151,,6Q0.1VP"and effected payments by telegraph, over the 15,000 miles of telegraph wires which the System nowoperates, aggregating $17,464,450$80.3111r- Its trans- of actions for the Treasury as the Government's fiscal agent were/too great a volume and variety to express briefly in figures. These figures are recounted for the purpose of emphasizing the character and extent of the contact of the Reserve System with the credit and currency operations of the country and, consequently, the significance of the functions which the Reserve Banks exercise. As to the System's policies and the purposes which inspired them, there is now an extensive literature in the shape of critical books, magazine articles and public addresses. It-pb;41tbe but repetition for me to go over ground so fully discussed by so many competent students and critics. There is, however, one function of the Reserve System the importance of which cannot be over-emphasized and which I have determined to discuss tonight because it is, in fact, the heart of the System upon which the operation of every other part depends. I refer to the entirely new element which was superimposed upon our banking system in 1914 by the establishment of the Reserve Banks, which were given the power to influence or to regulate or to control the volume of credit. Every other function exercised by the Reserve Banks sinks into insignificance along side of the far reaching importance of this major function. Without regard to the views which you may entertain as to the various theories in regard to the purchasing power of money, or what may be more popularly described as the quantity theory of money, there is hardly anyone who is familiar with these matters who will not agree that no influence upon prices is so great in the long run as is the influence of considerable changes in the quantity of money, - by which I mean not only -3- metal coins and paper money, but bank deposits upon which checks may be The Reserve Act did in fact, whether by conscious design of its 00-tautral e important particular. authors, or not, bring about vevolutioaart change in t drawn. A Za.a in tiara-calatiaabatmacla credit "eq.\ ?Am) la Zeal Alt (We: frt.. (4111 :re' prices.T The Act originally reduced the A reserve re-mirements of the national banks, and, subsequently in 1917, reduced ti again. The effect of this was to make reserve money more efficient in that it was permitted to sustain a larger volume of loans and deposits then A previously had been permitted. - By conferring the so-called clearing house functions Upon the Reserve Banks, it speeded up the whole system of payments; checks are collected and paid more promptly; the course of currency shipments throughout the country has been greatly shortened and currency passes more promptly to points of redemption; and the country-wide clearing house, known as the Gold Settlement Fund, operated on the basis of daily telegraph settlements, has 4 shortened the length of time rsquired to effect settlement of the entire domestic exchanges of the country. But the most important changei:as I have stated, is that conferring the power upon the Reserve Banks Aavu Ito Actu-A ir-44-4411to to actually permit or influence 1,009 changelin the volume of money My thesis, therefore, is addressed solely to this question of the regulation of the volume of credit and to make clear what a change has taken place because of the granting of this power. 4201 Let me refresh your memory as to how credit matters operated prior ) to 1914: Practically all of the commercial banks and trust companies of the country were subject to various statutory limits as to the minimum amounts of cash and redeposited reserve which they were required to carry. Except by legislative change in reserve requirements, there was no possibility of increasing the supply of reserve money beyond what arose through gold pro- duction or gold imports, neither could the supply of reserve money be contracted unless gold was exported. So it may be generally stated thet the r -4- total reserves of all the banks was incapable of contraction except by paying it out to the public or exporting it; redeposited by the public or unless f fot ht 0141%4 or was produced from the mines. and equally incapable of expansion unless old flowed into the country from abroad ,21.611dAl LC-Glaqk ) This had serious consequences in its relation to that mysterious phenomenon which is now being so carefully investigated and which we call the business (or, as I would prefer to call it, the credit) cycle. At one extreme of the cycle the reserves of the banks regularly became impaired. With deficient bank reserves we were liable to see rates for "speculative" money advance to 100% or even more at times, an the charge for credit to merchants and manufacturers became a severe burden upon production and distribution. In such a situation almost any percussion cap would start an explosion. In 1895-5 deficient revenues of the Government,..w an unfavorable trade.balance which resulted in gold exports, iDcoming at a time when there was agitation for a change in our monetary laws led to great uneasiness. The reserves of the New York Clearing House banks showed shortages from t to t Fear developed that the Treasury would not have sufficient gold to meet its obligations and finally the crash came on ---------- (date) resulting in the New York bags, and banks generals throughout the country, suspending currency payments; very largely suspending cash settlements between themselves for checks sent for collection not only through the local Clearing House but throughout the country. At that time a total of t Clearing House loan certificates were issued. Much the same thing happened in 1907, when, after a period of deficient banking reserves running from t to t the extended condition of a number of New York City banks caused alarm and general suspensions of like character to those of the early 90e throughout the country. premium; Call money loaned as high as __%; currency went to and the domestic exchanges again were frozen. Then again at the other extreme of the cycle, after a period of -5- liq uidation, surplus reserves poured into the money centers. After this same liquidation in the early 90s the NewYork Clearing House banks at one time showed And beer in mind that at that time the surplus reserves of t total required reserves of the New York Clearing House banks were but of what they now are. Money then loaned at less than 1%. And the same occurrence was witnessed After the liquidation of 1907 when the surplus reserves of the New York City Clearing House banks rose to t While under the conditions first described, every bank was seeking to withdraw loans, under the conditions last described, the banks were forcing money into the market. Money would become litavalay unloanable and the temptation to the speculator and his kind was exe44...efi--*eydaed---rst+i-mtanc.e. I, personally, recall making loans on the New York Stock Exchange at 3/4 of 1%. These extreme credit conditions arose because there was no stretch. When the period of surplus reserves arose funds poured into the speculative markets. When the period of deficient reserves arrived all the banks sought to contract their loans to make good their reserves and we witnessed the extremes of s peculation and of business embarrassment. There was neither lief control of the volume of credit, nor moderating influence as to rates of interest. A nd, finally, there was no control over the movements of gold in and out of the country. I recall the Governor of the Bank of England tellin' me in 1916 that one of the most menacing influences on their reserve position was the possibility of a gold movement to America or from America, as a result of our erratic money market, which no influence that they could exert was capable of stemming; of their regarding our so-called free gold market as one of the worst menaces to the stability of their own credit position. I have refreshed your memory as to the conditions which prevailed under the old system in order to bring out in contrast the extent to which it differe from present conditions. As things are now, when a period of busi- ness expansion arrives, whether it he an annual and seasonal one, or whether it be due to a series of favorable crops at home and bad harvests abroad, in other fords whether it be the short cycle of seasons or the long cycle of periods of years,-suc4xpansion, whatever its case. can now be easily -8- financed because of the power of the Federal Reserve S stem to furnish the required reserve money as needed and thereby permit the member banks in turn and in larger volume to increase their loans and discounts, and, correspondingly, their deposits. the Reserve System. I fear there are many people who still hold to the notion that some mysterious influence or process will operate when this enlarged volume of credit is no longer needed so that it will he induced, without any com- pulsion or persuasion, tkomplacently walk back to the Peserve Bank and eurreader itself for cancellation. And possibly another fallacy still prevails among those who believe that because of certain very exacting requirements of tae Federal Reserve Act, and the regulations of the Reserve Board, as to the type of loan Ach the Reserve Banks may make, or the character of the paper which they may discount, that there is some control exercised by the Reserve System as to the uses to which the credit so extended by the Peserve Banks shall be applied by the borrowing member bank. hest 7actical experience in the CAW' operation as to of the Reserve System seems to have disclosedi (is retired when it is l of the use that y be described as tically the only serve Bank is to serve. But now we come to one or two grave fallacies in regard to I think you ve one illustration. imum reserve on it is subject to an iderably higher than is reserve in some f the country as the its reserve position jet; flT tt Cf -7- -841/ therefore, be safely stated that as business expands for seasonal reason'or for any other reason, member banks will borrow from the Reserve Banks to make good deficient reserves caused by the expansion of their loans, provided the rate atthe Reserve Bank is not so high ns to make that borrowing too costly. But, on the other hand, if borrowing at the Reserve Bank is profitable beyond a certain point, there will be strong temptation to use surplus reserves when they arise for the making of additional loans rather than for repaying the Reserve Bank. I shall discuss the question of rate control later, but first lomt to emphasize this important fact:p Practically all borrowing by member banks from the Reserve Banks is ex post facto. The condition which gave rise to the need for Borrowing had already come into existence before the application to borrow from the Reserve Bank was made, and experience has shown that large borrowings in New York City have in the past usually been explained by the member bank as caused by the borrowing operation of the Treasury, by seasonal demands, but more frequently because of the withdrawal of deposits. Now as to the limitations which the Federal Reserve Act seeks to impose as to the character of paper which a Reserve Bank may discount. When %member bank's reserve balance is impaired, it borrows to make it good, and it is quite impossible to determine to what particular purpose the money so borro*ed may have been applied. It is simply the net reserve deeiciency caused by a great mass of transactions. The borrowing member bank selects the paper which it brings to the Reserve Bank for discount not with regard to the rate which it bears, but with regard to various elements of convenience, that is the denomination of the paper, its maturity, whether it is in form to be easily and inexpensively delivered physically to the Reserve Bank or not, and it makes little difference to the borrowing bank what transactions may have caused the impairment of its reserve, because the paper which it discounts with the Reserve Bank may have no relation whatever to the impairment that has arisen. To specify more exactly, because this is an important point, suppose a member hank's reserve became impaired solely because on a given day it had made a number of loans on the -9- stock exchange; it might then come to us with commercial paper which it had discounted two months before and which had no relation whatever to the transactions of the day; impairment. and with the proceeds of the discount make good the If it was the design of the authors of the Federal Reserve Act to '64tAwr; r-OA prevent these advancenrby Federal Reserve Banks from being loaned on the stock exchange or to nonmember state banks or *fon any other type of ineligible loan, there would be only one way to prevent the funds being so used, and that is by preventing the member banks from making any ineligible loans whatsoever, or deny it loans if it had. And, in fact, during the peak of the period of expansion I believe the &mount of paper which had been discounted with the Federal Reserve Banks equalled only about 14% of the loans and discounts of the much The member banks undoubtedly had a very /larger amount of eligible member banks. paper than indicated by this small percentage, but, beyond that, a great mass of ineligible loans, and surely it cannot be claimed that the provisions of the Act, which specify so is eligible, possibly have exercised any inn uence upon the application of the proceeds of these loans by the member banks. I have enlarged upon this point so as to bring out this fact:- that the expansion of the loan account of the Federal Reserve banks, which as you know furnishes the foundation for a much greater expansion of loans and deposits ofgommercial banks, can be brought about as the result of any expansion in the banking position of the country, no matter what may be its cause. The eligible paper we discount is simply the vehicle through which the credit of the Reserve System is conveyed to the members. But the definition of eligibility does not effect the slightest control over the use to which the proceeds are applied. Going a step further, this means that the Reserve °anks will be subject to demands upon them, expressed to be sure in the form of eligible papet but et4liArk. which may have had their origin in any sort of development, stock speculation, 411 real estate speculation, crop moving, building operations, foregin bond issues, or anything else. Such an influence can arise through the borrowinws not only of the UnitedStates Government in the market, but., indirectly, through the borrowings of all kinds which have the effect of impairing reserves. Now going still one step further, let me emphasize the contrast between the conditions which prevailed in the old system and those which have no4arisen. I have pointed out how, in the extremes of the trade cycle we have on the one hand impaired reserves and very high interest rates and on the other hand surplus reserves and very low interest rates. That condition has now quite disappeared. In actual operation, when the reserves of the member banks become impaired they promptly borrow and they do not have to scramble around among their customers or on the stock exchange to call loans so as to make good the impairment. So, on the other hand, when they have surplus reserves they are generally inclined to reps; what they may have already borrowed from us rather than make new loans, provided, of course, our rates are properly adjusted to market riles, and they will continue to do so unless borrowing from the Feserve Dank becomes so profitable as to be a temptation. 1 Now you will observe that under the old system we experienced these periods of reserve deficiency and extremely hign rates for money and reserve surpluses and extremely low rates for money, but under the present system all that has changed. Broadly speaking, there is no surplus reserve in the hands of the vemier banks, aerr-lipia...fblia,g r ejlaWarn. JeN.- V4.- When business expansion or new loans cause impaired reserves the member banks borrow from us; when surplus reserves arise for one reason or The consequence of this is A. have no such extraordinarly high or low interest rates, another, they repay to us. of course, that we The funds flow in and out of the Reserve Bank day by day as sort of a leveling off process, so to speak. -12- in all of those sections where the loaning rate is much higher than the Reserve Reserve Act as originally passed by Congress, the Federal Reserve Baks, when all of the reserves had been paid in, would have had a loaning power With this enormous mass of gold now in our of roughly t hands, we have a lending power at present in excess of the billion and oneHad quarter oP loans and investments now made of roughly t there been no war there would have been no disturbance to the foreign exchanges. With the foreign exchanges fluctuating within the gold shipping points any considerable expansion of credit in this country which caused prices to sharply advance would very probably have been penalized by a gold export movement. With the exchanges as they now are, that is with the dollar at a premium practically the world over, gold cannot be exported, certainly not in large quantity except after such a period of expansion and rising prices in this country as would t W e a veritable orgy of speculation; such a debauch in credit, in fact, as would reduce the purchasing power of the dollar progressively first possibly to the level of the currencies of the neutral countries, then to sterling, then to the franc, etc. And this brings me to the point which is of such importance to the management of the Reserve System. Before the war, as is set out in the Cunliffe report, a large gold export movement was the visible and convincing evidence, not only to the management of the bank of issue, but to the country generally, that the bank rate must be raised. To be sure other conditions than 9 gold movement could well justify increesing the rate of discount of the bank of issue, but a large gold export movement, such, for instnce, as we suffered in the early 90s, which even impaired the gold reserves of the Government of the United States, would relLire little argument or explanation to convince the country that the bnni, of iveue mu tike steps to protect Lhe gold reserve. As we are now situated, it is true that we may from time to time lose small amounts of gold to those countries where the currency %as not been -14- -15- In a §eneraltay it is my dPinion, although others may differ -17- -18- bricks will be laid at the foundation and the pyramid will be by E.0 mucL enlarged;and the revereels equally true if the rate does not induce borrowing, - the size of the pyramid may be kept unchanged) ay gnu, f A rate control of the volume of credit has a variety of advantages. One is that it is democratic. It applies to all alike and it requires little, if any, expostulation end remonstrance to make it effective. It must be admitted that en advance in the discount rates by the Reserve Banks will not necessarily influence promptly the mountah peaks of high interest rates in Qae- .plalwvt. liaam44 sections. so. But I rather doubt whether it is necessary that it should do Although notiOkpable of statistical support, I think the statement may be hazarded from past experience that a rate which is effective in checking borrowing in the money centers, or even in reducing borrowing, will indirectly be an influence in all sections of the country. It certainly has the effect of what It is customary for many I might descrihe as "driving borrowers back home." conceits which do a large business to borrow in the cheapest money markets, no matter where their offices and business may be located. If New York, for instance, should advance discount rates and member banks in turn advanced tates to their customers, a certain number of these out-o town borrowers would go irfdu, to their loca 1 banks for their loans if the rates are satisfactory so as to enable the borrower to pay off in New York. This process I believe would be found, could it be analyzed, to be many times repeated, so that the effect of rate changes in the twelve Reserve cities is not confined alone to those cities but extends throughout the country. Another point frequently overlooked in regard to the effect of the rate is due to lack of understanding of the way in which borrowing from the Reserve Bank originates, - that is through impaired reserves. itsmaxpexamsxandxonntkeichmaantxtmx Every bank knows about what its loanable funds cost it on the average is and about what it receives on all of the money which it/loaning. It knows about what its expenses and overhead amount to and the difference is its profit. When a bank's reserve becomes impaired so that it must borrow, it does not pick out a particular piece of paper which it has discounted at a higher -19t/4 -20- and it is for that reason, as well as for maq other a. prompt return to the gold standard and fr off Permit me now to make a brief resume of t Banks have been given the power to create reserve That volume of credit expa the volume of credit. facto borrowing by member banks; the mass of their having already occurred, there is no means by whic the use Which is made of the funds wfich it loans t from the Reserve Bahks is lees likely to return fo legitimately required if discount rates are too lo The present b will operate to induce its return. situation where there is no t. surlus-of'bankin end where there is not likely to be adeficiency. reserve percentage of the Reserve Banks. The impu fYr 4r1L PilitaWdfSystem to change rates mustAlargely arise from expected that the impulse to advance rates will be long time to come.. Therefore, the regulation of the chief functionjof the Reserve System must be ef ckAo- glotAO.Aryt. and peredhel-dieeretten as to members' borrowings has always impressed me as being essentially a soci super-Government, it is simply the creature of Con response to a public demand. It was not created the farmer, the manufacturer, no)the merchant, nor States. It was brought into being to serve them al performs is direct, for others it is indirect, but oe nor any less important. It needs and asks that intelligent study and enlightened criticism. Its good behaviour and upon its successinMiaaing_and_h public. \;7 -2- -3- A7RA1 6be -4-- -5- -6- tet-e -7- -8- Difficulties of discretion - -9- 0 frIr °1144r Describe how it operates Difference between effective and penalty rate Each bank knows cost of funds; return on funds Rate on particular piece of paper discounted not controlling No relation between two rates Effective rate might be somewhat below penalty rate Probably somewhere within range of average cost, including overhead, and average of earning rate. Chief advantage of rate control Reguletes total volume of credit, distinguished from total individual borrowings Individual bank line credit matter Rate policy ie national; designed to regulate total volume and promote sta_ility Many people believe more money, cheap money means prosperity and happiness Impossible to explain advances of rates Absence natural movements gold unfortunate Prompt return to gold standard and gold papent f r; (ill (dAlf") ) Resume: Power to create reserve balance and Considerably regulate volume Expansion ex post facto; transactions have already occurred Cannot control application of proceeds Credit unlikely to return if rates too low High rate induces return 'd-A-1()._ Under present system no surplus Also no deficiency Reserve barometer is deserve bank percentage Impulse to changel-leneral conditions Gold exports not likely Regulation of volume chief function Eff ted by rate changes and due caution individual borrowings e eral Reserve System social institution - not super-government reature of Congress Public Demanded it Not created banker, farmer, mandfacturer, merchant, Treasury Serves all Guiding influence not profit Surplus earnings to Government Some service direct Others indirect Intelligent study and enlightened criticism Future depends on good behavior- winning and holding. confidence. la. At what time in the early 90s (when the endlesR chain was working) were the Revenues of the Treasury deficient! In the fourth quarter of the fiscal year of 1891 and in two quarters of 1892. b. When was the period of unfavorable trade balances? Fiscal year 1888 - $28,000,000 3,000,000 1889 19,000,000 (but for the last six months of this year 1893 the unfavorable balance was $59,000,000.) c. Then were we exporting gold and how much! Excess of exports over imports fiscal yearn as follows: 1389 - $50,000,000 4,000,000 1890 68,000,000 1891 500,000 88,000,000 5,000,000 30,000,000 1896 -_ 79,000,000 1892 1893 1894 1895 d. On what dates and for what amounts in the early 90s were the reserves of the New York Clearing House banks impaired? 1390 33rd week 34 35 n 36 II 37 42 43 45 46 n 49 e. - n It II II n 11 1893 $ 28 29 30 31 32 500,000 1,400,000 3,200,000 200,000 100,000 2,500,000 900,000 2,400,000 33 34 35 If n ft n It of 10 $ 5,100,000 4,200,000 1,300,000. 4,300,000 4,000,000 16,500,000 11,800,000 6,800,000 1,500,000 When did the actual crash come that resulted in the issue of Clearing House Loan certificates? November 11, 1890 f. 27th week 600,000 2,500,000 June 1693 what was the total amount of certificates issued in the early 90s? Total issue New York Clearing House banks in 1890 - $16,645,000 " 1393 - 41,490,000 ft S 2a. When did the Associated Clearing House Banks' reserves become deficient in 1907 and for what amounts and on that dates? 1907 Oct. 26 Nov. 2 9 16 23 30 Dec. 7 14 21 28 1908 b. Jan. 4 61,200,000 38,800,000 51,900,000 53,700,000 54,100,000 (maximum) 53,000,000 46,200,000 40,100,000 31,800,000 20,200,000 surplus How high did, call money loan? 125% c. What was the premium on currency at the time of the 1907 panic? Reached 4 per cent. three times in November. 3a. After the liquidation in the early 90s the Clearing House banks developed enormous surpluses and, as I recall, money loaned below When did this surplus reach its maximum and how much one per cent. as it? January-February 1894 b. The same occurred in 1907 or 1908: much was it? Maximum $111,600,000, first week February. when did the surplus arise and how Begun January, 1908 and reached maximum, 671,000,000 last reek of June. c. In the early 90s when this great surplus reserve arose whet was the total required reserves of the associated banks, as distinguished from the reserve they actually had, and what percentage is that compared to the required reserves of the New York Clearing House banks today? Average required for year 1894 was 6138,300,000 Average required week ending November 18, 1922 was $511,000,000. per cent. 1894 to 1922 is 27. 4. What percentage of the banking deposits of the country are represented by the 10,000 banks which are members of the Reserve system? About 55 per cent. (June 30, 1921) S -2 ). Am I correct in my belief that prior to the war our total gold stock was .U,800,0002000 and that today it is 13,8001000,000, so that our net increase is about t2,000,000,000? (This should be taken from the Treasury statements or the Assay Office reports) (June 30) $ l,891,000,000 in 1914/and 3,902,0001000 in NoveraJr 1922. 6. Under the original terms of the Federal Reser \e Act, how much could the Reserve Ranks have loaned without getting below the minimum reserve, i.e. after they had received payment of all the capital and reserve deposits contemplated to be paid in as the Act originally stated? (This should not be confused with the corditicn after later amendments to the Act) (On June 15, 1917) about 13,000,000,000. 7, What additional lending power have we now by reuson of our surplus reserve! In other mrds, how much can vie loan without getting below the legal minima reserve? I refer to the whole RPserve System in both for sets of figures, and allowance must be rude in some arbitrary way such the effect of the note issues which would inevitably accompany expansion.) Over 14,390,000,000. MISC. 3.1 1101v1-42:1 1111111,1 FEDERAL RESE OF NEW YORK OFFICE CORRESPONDENCE DATE 192 SUBJECT: FROM S tat-i-st-i-cs Depi. The Federal Reserve Act was amended On June 21, 1917 and for purposes of calculating the leading power of the Reserve Banks under the requirements of the Act prior to that time we have taken the figures fer June 15, 1917. The following table answers the questions on comparative lending power then and now: June 15, 1917 Total Reserves Gold reserves Yovember 22,1922 :1,080,000,000 1,050,000,000 .,3,220,000,000 Reserve Required 5E,000,000 1,580,000,000 Excess Reserves E30,000,000 1,640,000,000 Additional Lending Power 1,40(4000,000 4,400,000,000 Total Lending Power 2,800,000,000 0,600,000,000 3,090,000,000 -e amssaleass up LABOR_ OD ye 1. It is plain that throe out the iiiddle ,Aele, that is to say the period be teem t hr3 fall of the lianan :inpi re and the barbaric lavas i one on the one hind and the Ind of the Tudors, the age of Louis XIV and f or some oCrantriee the irezach -.evolution an the other, the ordinery man, free% free tenant to serf, wan bound to the soil in some degree in all Auropoun lands. His range of def:undo:toy mitt vary according as the power from which his tenure xis derived was the Orown, the Clatroh or some intervening Lard of the ksuer, tut the s aryl= duo was mac:VA:any the :me, lab or of sort sort whether agricultural or military, ecessuted as the ;care went on into maw payments or the it equivale nt '4. J. Ashley, eacnatmict Victory and Theory." Vol. 1, pegs 41. Alatost all the labour upon the demesne was furnishea by the villeyn tenants, who contributed ploughs, oxen and men for the bailiff's disposal. Long af te r commutati on of services had larp,'e ly tekert dace, the lords re toned the right to assistanoe in all the more important prCOOOstilli, ploughing, re ap- In 3, threshing, carting." Jerfs worked three and four days tee k from Ifioharelmas till aufmst on their lord's land at field labor, and wore called in also at harvest tie. 41C:6 then, w.-6a no in lord the Church and the a to to could eaat the same labor from those holding from them. Italy as well as -..11131.ead. This held good f or erenec, Germany, The labor obligation was our:muted for payment in money or in geode gradually, the fcrudal ten.,re had t vele largely done away with in '..nglund by the Tudor period, in :Pran CIO by the eighteenth oentury, in ",ermany by the time of the 14'renoh 1).evolution; but t have survived down to modern tine's, as in working on the rods to p.iy off taxes, and in jury auty. See articles in ittlgraVe"s Dia ti =wry of labour, prestation, pre dial aervioe. tioel ..actietly on L:orge, forces The feudal tenantry in -elw,131d was obliged to give forty ors a year of mill tory se rvi oe It was :..art of the work of the cantinentul tenants as well, and the foot a alAiers, elso were the less important portion of the forces, were formed from them, Thu tradi ti ems of lreeoe, loam, and the lc Mani o tribes were that every lean was (*lilac( to fi eat for his ocnntry or his people, &WI if this ideal was not enforoeti in feudal times, it was because fighting oases to be looked uJen as a !Jrivilege of the higher olassee: the lords, their at fondants, and the eree teneuta could uee herses and Emour, wh.ile the villeyns and uerfte fete-Int on foot, when required: in time it 60001161 more practical to lords and to the cities to leave tlem at thtir work enfi to hire trained, ;Irefessional soldiers, reeroenaries. In t2eIrlemagns's empire, the forms wore unpaid. and had to :rovide their own °quirt/but and food. / All were called out in the levtSe fiweerale, their obligation being to fight for their king, for their lord am for the right to hold their land. bltder the mane to in ?maw, military services were unpaid, after them a paid soldiery was employee. Under Louis XIV there wes in fact no getter:Al service:, volunteers, meroenarius zind drafted men forming the anew, but in theory the reserves, the arrire-ban, and, for the ci ties, the milice 8 bourgeoises, inoltuled every :rasa. Aimee theory tioal condi time of obligations to serve, whether with labor or -4 th military service, were aeoep ted throughout turoA; the revolts against them of peasants, of religious sects, and later of Meal unwilling to eerye in the army, w urw cu a8411 by came form or other of oparession or 'illuse its applying them or from their being revived after many years of disuse. For the French army see: " armee a travers lea ages," 'Datums tit 1 i ve re d before the war =liege by a. Larissa, C. V. Langlois arid others. In rIrance the armies of the lievolution and of Napoleon were raised chiefly by consort %tion; the SLAB promos was applied to the German and Austrian armies fonnee to 0 1313 ova Napoleon. By the time the war broke out males in oomixtlsory for all Germany, ?ranee and Italy, as it s till is; the assumption there is every man has had military training. tween 17 and 60 not Britain military service was in the are was that In Germany during the war, every men be- obliged to work in war industries. in Great efforts were made for sane years before the war to subs ti tut e A ane thing like general military training for the militia. (Sir Ian Hamilton in "Compulsory Se rvios" ). ,;ith the outbreak of the war the conscript ion was introdwed and. In 1915 Lloyd George advooate.i consoript ing labor for war work too. in ar Goya rnmen t of the British >mini ors" says it was voted down; also. in Canada In it B. reserve foroe, which was South Africa it was impossible; in Australia was put through with Encyclopedia Bri tannioa - Militia, Oaasoription. th that conscription was not needeL into a in New Zealand beoause all men were organized called upon for labor A. difficulty in 1917. 4 11 I F 1 :LING Governments in 4urope from the beginnings have exercised the right of fixing prices for commodities and for labor. The records of prices we have back of the eighteenth century are almost utholly of prices fixed by the authorities, from Diocletian down. Code of Haumarabi. The rates for wages are fixed in the In :6ngland the Statute of Labourers, 23 1Zward III, compelled man to work and determines the rate of compensLtion, and subsequent statutes maintainec the practice; in iaizabeth's time the juk.tices of the peace were =powered to sot the wages and retained the powur till near the end of George IIi's reign. Yalgrave Dictionary of Political Economy, Labour Statutes. In tide of war every Luropean Goverment has undertaken to fix prices. In the late war Germany at once fixed prices and rationed out food. In Great Britain the Government through the -linistry of control prices from the start; Living -ct of 1915; undertook to New /.euland regulated prices by the Cost of Alustralia controlled prices in general and appointed the Food ,Ajustment Board in 1916; Canada appointed the Food Controller in 1917, followed by the Food Board in 1918; South Africa only enforced food control after the war ended. A:. B. Keith, der Government of the British Dominions. For the United States the fixing of prices is uealt with by iditchell, "History of Prices during the 41r" and P. Garrett, C. "Govornaezit Control of i'rices," Bulletins 1 and 3 of the -al. Industries Board's publications. Lewis H. Haney, "Price Fixing in the United States during the .iar" and Simon Litman, "Prices and Price Control in Great Britain and the United States." - 5 - Mx. Garrett says that the President was finally responsible for all "Congress did not grant to the President or t o arnj other agency authori ty to work out a programme of general price regulation during the war".... The President deemed it necessary himself to become in reality a minister of price controls .... The whole body of regulations relating to prices, whether spe- cifically alloyed by legislative enactment or set up loosely under war powers, took their final administrative authority from the President. Prof. Mitchell says, "The Government's efforts to control prices met with wide spread support among business men and consumers. Patriotism and the pressure of public opinion supported a vigorous policy of positive reauction of prices in many lines, and c f "pegging" prices in many others. Conservation of food, of fuel and of miscellaneous goods was effected in considerable measure by voluntary effort, by systematic reorganlzation of trade practices, by Government rationing, mid by control over imports The whole country achieved a nearer approach to rational direction of its energies than had ever been attempted before." Mr. Litman gives a very brief history of price control in the past, with h a fuller account of what was done in the French Revolution, to back up his views from time immemorial that price control was never successful. He shows Governments have tried to handle prices. he goes fully with equally severe criticism, into all that was done in Great Britain, and the United States to control prices in the late war. Mr. Haney says: "The price fixing agencies were so numerous, and the arrangements made often so informal( that an exhaustive treatment of the subject would be well nigh impossible. "Prices were more or less formally fixed by various departments or branches of the United States Government for at least 110 important products, each of Which required a separate price-fixing operation." Is enumerates the hgenciee: °engross, the 2resident, war Industries Board (trice fixing oommittee), U. S. Food Administration, U. S. Fuel Administration, war Trade Board, Federal Trade Commission, U. 3. Shipping Board (Dnergenoy !lest Corporation), International Nitrate fareoutive Ccmuittee, U. 3. Shipping Board, rood .Purohase Board, Army and nvy departments, Appraisal Boards of the Army and the Navy, U. 3. Railroad A,Istinistraticm. "?rice fixing, in war time, is a necessary evil.... The evils may be reduced to suoh a Miniatill that, in war time, the advantages o-itveigh the disadvantages. On the hole, it is our opinion, that such was the case in the United States, but that the balance in favor of the 'rice fixing was, cn aocotait of the way in which it wan done, much slighter than it should have been." A feeling of loyalty much 9 t o the nation, or s owe subs ti tute therefor, made puss ible that would be difficult or impossible in time of peace." Bendelari taqstioal Department December 7, 1922. glad I am glad to be the guest of your association guest accept and to be able to accept your invitation to address realize this meeting. precious opportunity restricted second-hand intimately familiarly average farmer perplexing But you realize that a New York banker probably knows precious little about farming. His opi,ortunity to learn of farming conditions is much restricted, and most of the information which comes to him in regard to the farmer's problems is second-hand. So you will not expect me to discuss intimately and familiarly the difficult problems of farm economy. On the other hand, I suppose the average farmer lilcewise knows quite as little about the many perplexing problems of the New York banker, which largely have to do with trade industry the financing of the vast trade and industry of our country; foreign and in these difficult days the even more perplexing task of financing the country's foreign trade. New York does, however, produce a breed of breed farmer with which you are little familiar. them are to be found in and about Wall Street. Many of We call Wall Street The difference between a farmer them agriculturists. agriculturist and an agriculturist works hard country ood time is this: - A farmer works hard on his farm all the year in order to make enough money to enable him to go to the city and have a good time; an agriculturist works hard in the city all the year works hard city in order to ;Jake enough money to run a farm where he can go and have a good time. -2- Having had no experience with either kind of no experience observations farming, I must content m;,self with a few observations which have some bearing, I believe, upon the problems with which you are nova very much perplexed and by which perplexed man distressed farmers are very much distressed. .40i4107\ A few years ago when poor health n abandoning work for a period, I made e trip through the Far East. Japan etc During some months of travel in Japan, China, Talaya, Burma, India, end the Dutch Indies, a large pert farm districts of my time was spent in farming districts. One thing that struck me most, I think, was the great similarity similarity in much that re sew. Consider Java, which is probably Consider Java the richest of all of the Eastern farming countries, both richest in fertility of soil and in the natural advantages of an climate eouable climate with Abundant rainfall. rainfall hundreds of miles one sees the Javanese farmer, his wife hundreds There for miles and his children clorking in the paddy fields ahere rice paddy irrigation patches is grown by irrigation. Vhat one describes as a field is really a series of patches of land, frequently but a fraction of the size of this room, often running up the volcano banked basin cf mud slope of a volcano, eAch patch carefully banked by hand to retain the water which is supplied by irrigation; is little more than a basin of mud. - it When one sees a plough, it is being drawn cith leisurely dignity by a water buffalo bare-foot huge water buffalo. The work in fact is done almost entirely by bare- footod Javanese, both men and women, who -3- ankles in mud work over their ankles in said and water dith simple hand tools hand implements. crui, rice transplanted operation bent hack poking toil hardiest crop is rice, whic-1 starts its growth in a. seed bed and is transplanted from there - every plant - by hand into sheaves That operation alone, where for hours on end the paddy. the farmer and his wife and children stand with bent back in a pool of mud, poking these little sprouts into the ground, is a species of toil that would try the soul of the hardiest American farmer. When the harveGt comes, these people go into the harvest knives As you know, their principal cereal fields with small knives and cut simply the tots of the stalks by hand, bind them up in little sheaves and carry, them home on their heads. 1 - 2 garments loin cloth sarong houses Their clothing consists of one or two light cotton garments. The man frequently works dressed only in a loin cloth, and the woman dressed in a short skirt, or sarong, and loose jacket. The homes where they raise and support large families of children, consist )f one or at the most two room huts. The walls mats are built of loosely woven mats made of strips of bamboo thatched or palm fibre, and the roofs are thatched eith palm leaves or rice strait. ClOOTS no furniture The doors and windows are simply openings without glass or shutters. There is no furniture, frequently no stove, and no cooking utensils to speak of. The family equipment usually consists of but little more pot cooking than an earthenware or copper pot in which the food is boiled. The cooking is frequently done out in the road -4- road meal in froat of the house, where the family gathers around the fire, and the mw11, consisting of rice mixed with some vegetables and possibly some chicken and eggs, is pilaf prepared in a sort of stew or pilaf. Not infrequently I have seen the family meal served by the simple method banana leaf each member pulling a broad leaf from a banana palm, scooping out his share of the meal from the pot and eating it with his fingers, sitting on the ground. planting During the planting and harves!-, season mhen the village is working harvest in the fields, the meal is quite possibly furnished from travelling one or more travelling restaurants, and is cooked alongside restaurant of the road, where one sees a good part of the farming community gathered in groups, eating this simple meal such se I have described, 100 years jungle Deendels About a hundred years ago, this Island of Jay was an almost impenetrable jungle. Under one of the early Governors - Daendels - a rather brutal system of enforcer! native labor brought about the clearing of the roads jungle and the building of a great system of roads. At that time I believe the Island had a native population in 4 million the neighborhood of four millions. To-day, the Island has a population of 36 millions, and practically all are engaged in agriculture, principally the raising of rice, rice, tea coffee, sugar Not unlike India 320 million sugar, tea and coffee. Now the conditions are not unlike this in other parts of the East. India with its population of 320 millions is engaged largely in just such agriculture. -5- Indian peasant The life of the Indian peasant farmer so far as I could observe was not unlike that of the Javanese peasant standard living farmer, with possibly a slightly higher standard of living. I have not been in Russia, but from what I have read, one conceives that conditions there ,,,re not unlike those in India, Chinn n.nd Java. East irrigated painstaking toil draw water agricultar,1 Practically the whole of the rat is irrigated. With the most painstaking toil the peasant farmer in India irrigates his little farm with water drawn from a deep well in a bucket or the skin of a buffalo, drawn by a windlass operated by a bullock. 25 3/4 million Although 25 3/4 million acreas of land in the hill country are irrigated by the Indian Government irrigation works, vast plains the vast plains of India are cultivated by small peasant farmers, and the success of his crop depends largely upon monsoon primitive give picture the seasonal rainfall, called the monsoon, and upon this primitive method of irrigation. This I hope will give some picture of those less less fortunate fortunate farmers in other lands with whom the American compete farmer does and must °ornate,. When I say compete, I use broadest term the word in the broadest term because the work of the area limited farmer is principally to feed the world. The area of distribution of what he produces is limited by a great frontiers variety of factors. tlis frontiers may expand and contract according to relative costs of production and transportation, surplus but broadly speaking, any nation with a surplus of farm production is in competition with every other nation with a -6- surplus of farm production. while the surplus rice Burma of Burma assists in feeding the hundreds of millions in Ind India, the surplus wheat from India and Southern Russia LE. Mediterranean competes in lediterranean ports Ath American wheat. Later on I shall refer to the importance of these/ refer later competition competitive markets; but now let us compare what I have described eith our own situation. puzzled I have been deeply puzzled to explain the meaning of some of the figures figures published by our Government in regard to our farming industry. According to the Year Book of the Department Year 3ool,- of Agriculture, I find that the value of all of our farm crops, excluding animal products, in the last two years before the war was as follov,s: 1913 - $6,133 zillions 1914 - $6,112. millions If roughly the same values were produced in 1911 - 1912 25 billion 1911 and 1912, the total value of the crops of the four years immediately preceding the war was about 25 billions. From the same source, and again excluding animals, I find that the value of all the crops of the country for the 1917 - 1920 four years *55 billions $55 billions; 1917 to 1920, inclusive, was in round figures that is to say, in the four years subsequent to our entering the war the total value of all the crops 30 billions in the United States was 30 billions in excess of the value of all of the crops in the four years immediately What became prior to the outbreak of the war.. great treasure? that became of this -7- We can roughly assume that this enlarged value could principally have been disposed of in three ways: 1.. For payment of debts. 2. For increased cost of production and for improvements. 3. In a better standard of living for the farmers. Now as to payment of debts. I find further in the bulletins of the Department of Agriculture that the total of bank loans to farmers as of December 30, 1920, was bank loans estimated at over 1'3,800 millions, and the total of $3,800 mortgage $8,500 enormous enhancement mortgage loans exceeded 8,500 millions, and that notwithstanding the enormous enhancement in the value of the crops of the four preceding years, these figures represent the largest amount largest amount of credit ever employed by the American farmer, and in nict the census shows that between 1910 and 1920, doubled - 1920 the debts of American farmers aere about doubled. As to increased production cost. Our investigations would indicate that only a part of this could have been absorbed in increased cost of labor, fertilizer, and other operating supplies. I shall not attempt to enlarge upon what is not capable of more exact estimate, beyond saying that the experience of each farmer can be relied upon to indicate what his farm and his labor is capable of producing at any given price level. standard of living cannot help And finally as to the farmer's standard of living. I cannot help but believe from these figures and from what I have personally observed that for provident farmers it provident farmei. has generally and greatly improved throughout the years. Without burdening you with a further statistical Without statistical assume discussion of this matter, which I confess puzzles me a good deal, may it not be safe to assume that this great value produced from the American farms is, in fact, expressive possibilities expressive in large degree of the possibilities of improved standards of living in this country. Julius Barnes 20 years We note - as Mr. Julius H. Barnes has recently explained - that while in the first 20 years of this century the population of the United States has increased 40 per cent., the number of 40 per cent. 4 per cent. persons engaged in agriculture has increased only 4 per cent., whereas the farm production during this period increased from corn 35 per cent. hogs 68 per cent. smal] est per 35 per cent. in the case of corn, to as high as 68 per cent. in the case of hogs. In other words, in this country, where we got possibly the smallest production per acre planted, acre planted and the largest production per capita of farm population, largest per capita farm population we are in fact developing agriculture under conditions which developing agric. promote do promote the highest standards of living that are possible for farmers in any part of the world. must be product efficiency And this standard of living must be the product of a higher efficiency applied to our abundant natural resources. Some of these questions I think are often approached questions approached without an appreciation of the fundamental facts as to what prosperity, wealth happiness makes prosperity, wealth and happiness. For instance, consider only thFt such a thing as famine is unknown in this famine country to-day, nor has it been since our Republic was founded. Yet there was a. time when famine was not only not not uncommon normal uncommon but was almost the normal condition in North America -9- 200 - 300 years every .winter. Only two or three hundred years ago, our ago natural reacurces country possessed natural resources vastly in excess of what we now have, because since it has become settled we drawn heavil, have drawn heavily upon the stores of our fertile soil, our coal, iron, oil, timber, an 14 ther things that we have taken out of the ground; few hundred thousand Indiana died and yet but two or three centuries ago, the few hundred thousand Indians living in this country in the midst of this vast abundance, often suffered and died from lack of food. It is not, therefore, simply the natural resources of a country that make wealth and economic contentment and a high standard of wellbeing. Nor can it be population alone in conjunction with population alone natural resources which makes wealth, for we have seen in denvel; loiulated exhaustirg hack-breblin6 the densely populated regions of the East the farmer extracting by exhausting and back-breaking toil only a miserable and precarious living from lands as rich in natural resources mtural resources as our own. What makes wealth is the application of the energies What makes tealth and ingenuity of a people of higher intelligence to the development development and use of these natural resources, to their exploitation exploitation by methods devised by inventive genius and inventive through the conversion of the things produced into the means increasing krod- of again increasing production. notion rai&eb standard no country That alone is what raises the standard of living, and no country is capable of attaining a high standard of living no matter what its population or its natural resources unless its people are willing to tork and save work and to save. -10- Now I apprehend that it is precisely this vhich apprehend precisely has provided for the American farmer the advantages of advantages of association with his education, and the enjoyment degree Be assured Javanese fellowbeings to a degree unattainable in any other agricultural country in the world. Javanese farmer, like the Chinese or the Hindu, has no automobile; banana and cocoanut couple garments no shoes auto, radio Victrols, phone movies,education Be assured that the his house garden usually consists of a few banana and cocoanut palms; his clothing a couple of simple he wears no shoes; linen garments; no radio equipment, no movies; he has no VictrolF, his opportunities for education are small. But in this country, and I fear in like degree in setback the East, agriculture has had a temporary setback. It can scarcely be, it must not be allowed to be, permanent. Scarcely must not These things that the American firmer enjoys, including things enjoys possibly more important than any Aher, the opportunity to education entitled assured so for educate his children, are the things to which he is entitled, and in the enjoyment of which he must be assured so far as the laws of nature under which re live in this country are capable of assuring them to him. There ar momentary difficulties momentary difficulties. I would like to speak of one of the greatest difficulties with which the A, speak farmer has been confronted, by quoting a few very simple qucting figures: In the Survey of Current Business issued by the Department of Commerce for November, you will find on page 111, a tabulatioa of cereal exports which includes barley, Flour and meal are converted corn, oats, rye and wheat. into equivalent bushels of the grains. The monthly average exports of these grains for the year 1913 was From 1913 to 1921 the monthly 20 3/4 million bushels. average varied from 14 millions in 1914 - the low figure to 46 millions in 1921 - the high figure - and I imagine In the last throe years, the the record high figure. figure has been 1920 - 35 million bushels 1921 - 46 million bushels and so far for the year 1922 - 43 million bushels.. The months of August and September of this year were 60 and 61 million bushels respectively, and those figures have only twice been exceeded in the last three years, being 90 million bushels in August 1921 and 68 million bushels in Now compare these monthly average figures September 1921. of quantities of exports of the five cereals named, with the figures of values of exports of grain and grain products for the same periods as reported by the Department of Commerce. I believe they closely relate to the quantities I have iuoted. 1913 - $17 millions 1920 - 90 millions 1921 - 62 millions 1922 - 4471f,0011?"/tttt I -12- It is obvious that mhile exports have been obvious pretty well maintained in quantity, the varying return quantity upon these farm exports has been caused by the price. 1Tice another figure Now let me refer to another figure. On page six of the same publication, you will find that throughout the years 1916 to 1921, down in fact to February of 1921, the chart of prices shots a very close correspondence in the index numbers of the prices of "all commodities" and of "wholesale food prices". In February of 1922, for the first time, however, a considerable divergence began to appear; the prices of "all commodities" advancing some 15 points in the index number above ",Atolesale food prices". In other words, prices of articles the farmer had to buy advanced out of proportion to prices of articles he had to sell. But this is a situation which never has, and I believe WI inherently cannot long continue. Ve now have in this country a tremendous urban and industrial population twice that now of the farm population. It seems to me inconceivable that this vast army of urban and factory workers can be prosperous and the farmer not share this prosperity in the fullest degree. Now to sum up, it seems clear that: FIRST - We seem able to compete with farmers in other countries where standards of living are far below our own. SECOND - not declining. The quantities of our food exports are Last year, one of great depression, they were, I believe, the highest on record. -13- THIRD - The enormous increase in the crop values of recent years has been unprecedented and could scarcely long continue. FOURTH - That increase did not result in a reduction of the total of the farm debt. FIFTH - That the farmer needs stable prices and a proper relation of prices between what he consumes and what he produces. The farmer two individuals consumer The farmer like every other member of our industrial organization is, in an economic sense, two individuals. a consumer he is interested in having prices low; As as a producer producer he is interested in having prices high. planting the planting season when the farmer is employing labor to During plough and plant his fields, when he is buying fertilizer, repairing his fences and his buildings, then he is, in current phrase, a deflationist; that ia, he would like to current phrase deflationist prices low see prices low. harvest and moving to the elevator or the concentration point, he inflationist prices high is an inflationist; In the fall when his crop is harvested he would like to see prices high. Now obviously any system which attempted to insure that the ystem farmer or any other man in his capacity as a consumer should get the advantage of low prices, while at the same time in his capacity asaAIroducer getting the advantage of high prices, futile fantastic would be futile and fantastic. No such system is possible. I think you will agree with me without the slightest farmer needs reservation that what the farmer needs as well as every capitalist other business man, whether he be a capitalist or a common laborer -14- largest attainable stable prices violent fluctuation laborer, is the largest attainable measure of stable prices. When I say this I mean not only that, in general, prices shall not be subject to violent fluctuation but that the prices of different things so far as is possible in this relation reasonable certainty labor etc imperfect world, run in their normal and natural relation with each other. If the farmer knows with reasonable certainty what his cost for the season is to be in labor and fertilizer, in supplies, in the gasoline for his tractor or car, in the wire for his fences, in the cattle that he may reasonably violent fall buy to fatten, and he can be reasonably assured also that there will be no violent fall in the price of the crop that he produces, ,whether it be cattle, hogs, corn, -iheat or bring into play two elements incentive cotton, he can then bring into play the two elements which are essential to success in business, whether farming or manufacturing or what not. He can work with the incentive of a reasonably certain reKardi-that is, margin of profit, intelligence kind crop due regard and he can apply his intelligence to the determination of what kind of a crop to grow with due regard to the advantages or limitations of the soil, the climate, of accessibility to market, and all of the other factors which should influence his judgment on this important point. It is a reasonable assurance as to stability of prices in both of his capacities as a consumer .nd producer which he requires in order to be assured of just regard for his toil and for the ingenuity with which he plans his work. great problem approached fairly many elements Now this great problem of prices must be approached fairly if we are to discuss it with any profit, with a clear unlerz tanding that there are many elements ehich enter into the making of the prices of things. Obviously, one of the -15- quantity most important is the quantity of a crop in relation to demand the demand. state of mind mind of the public generally, whether it is in the mood Hardly less in importance is the state of to buy, so to speak, or whether in a mood to sell; or as the economists describe it, whether it is a seller's market, or a buyer's market; seller's and changing cost of production, buyer's changing cost transportation what influences changing rates of transportation cost, and H great number of other factors must be taken into account in arriving at a judgment as to what it is that influences prices to move either upward or downward. You will, however, agree with me that one of the important elements, although far from being the only controlling element, is credit, which can be expressed in various ways, but let us call it the purchasing power of money. By the purchasing power of money I include of course the relation between the quantity of money and the quantity of goods, which influences the purchasing power. By money I mean not only metal coins and paper currency Alich pass from hand to hand, but principally bank deposits upon which checks may be drawn; in other words, bank credit. If, therefore, stable prices are desirable and if the quantity of credit exerts any influence upon prices,as I believe it does, what should he the objective 4f of a banking policy? It seems to me that it should be about as follows: On the one hand, it should insure that there is sufficient money and credit available to conduct the business of the nation and to finance not only the seasonal increases in demand but the annual or normal increase in volume which throughout long periods is fairly constant. -16- On the other hand, there should be no such excessive or artificial supplies of money and credit as will simply permit the marking up of prices when there is no increase in business or production to warrant an increase in the volume of money and credit. On this point I think I should state to you viithout reservation the views that. I personally hold in regard to this important matter,and while I cannot speak for any member of the Federal Reserve System except the New York Reserve Bank, I may say that I have never heard views expressed that differ greatly from those which I now desire to express as my own. I believe that it should be the policy of the Federal Reserve System, by the employment of the various means at its command, to maintain the volume of credit and currency in this country at such a level so that, to the extent that the volume has any influence upon prices, it cRn not possibly become the means for either promoting speculative advances in prices, or of a depression of prices. You must not understand from what I say that I assume that the power of price fixing rests or should rest with any one. It does not. combination of many influences. Price changes result from a So far as the influence of credit is a factor in prices, I am frank to say that I think our policy should be to avoid any development which would promote or encourage simply price expansion or price contraction. We should aim to keep the credit volume enual to the country's needs, and not in excess of its needs, -17- and then price readjustments, as between the various classes of commodities, will take place with the least possible disturbance to agriculture or to any other It seems to me that some such policy will industry. permit of that readjustment of the values of the various classes of commodities to which Ne must look in order that the farmer may again enjoy that proper balance between the cost of what he consumes and the price he realizes for what he produces. When that happy time comes, and I believe confidently that it is coming, and when that margin of profit presents the opportunity of doing so, I sincerely need to trust that the American farmer, as a class, hill feel less anxiety as to borrowing money, and better able to direct his efforts toward repaying what he owes. 3111,......11.111V Now as to credit and the influences which directly bear upon its administration by the Federal Reserve System. One especial reason at this time why the relationship of credit and prices must be particularly considered or is extremely important, is that one of the most important influences that normally restrains undue fluctuation of prices is not now in operation. Before the war when the credit machinery of the world was working normally, if the price level of any country got out of line with world prices, in other words, if for one or another reason prices advanced to a point where that country became a good selling market, the balance of trade turned against it; its exchange became depressed, and if the development went far enough, that country .could have heavy payments to make abroad and -18- This loss of gold impaired bank would likely lose gold. The banks of the country then were naturally reserves. forced to raise their discount rates to protect their remaining reserves. The advance in the discount rate usually brought about two developments; it attracted funds to that market and it induced people rho were carrying goods, possibly for speculation, or people who had swollen inventories, to sell them. This reduced the prices of goods, enabled the country to resume exports in competition with the rest of the 4orld, checked excessive imports, arrested the outflow of gold, and frequently caused gold to flow in. Under the conditions of to-day, caused entirely by We the war, dollars are at a premium the world around. could indulge ins riot of speculation in this country which would put prices to very high levels, and with a few exceptions, hardly any nation in the world would be in position to withdraw large amounts of our gold. And even then our gold holdings are so great that we could still lost a large amount without suffering serious impairment of reserves. With this situation as it is, and having regard to the interests of the whole country, there is every possible inducement for the Federal Reserve System to adopt and to execute, so far as it may, a policy of stabilization in every direction; to avoid encouragement to unhealthy speculationton the one hand, and to encourage the return of stable values, on the other hand. There may indeed be little that we can do beyond what I have described and that is to keep the credit volume at a reasonably steady level, but sufficient to meet the seasonal needs of business, and its normal annual growth. -19- Now more specifically, as to farm credit, I specifically farm credit varioue projects production marketing would like to refer in a very general way to various projects which are designed to assist the farming community in the production and orderly marketing of the crops. A AIPII variety proposals great variety of measures have been proposed to th and I have no doubt that they have been carefully familiar 3 or 4 points by your organization and that you are fully famili There are three or four point of their details. connection with these proposals that I would like candidly with you quite candidly and I shall ask you to giv special consideration,. FIRST - First In my opinion, any new legislat be designed to very greatly enlarge the membership enlarged membership banks of the country in the Federal Reserve System. first essential me say earnestly that I believe this to be a first to the administration conserving reservoir of credit in the interest o The Reserve System is the conserving reservoir of c That credit must be applied throughout the various water or fertilizer of the country exactly as water or fertilizer, is the soil. No farmer can expect to make a crop if pile in corner is fertilized by piling a heap of fertilizer on on even distribution of his field. It must have a fairly even distrib and so too with water. Now look at the condition look et conditions membership in the System which exist to-day. In area known as the Mississippi Basin, with the exce the States of Iowa, Illinois, Indiana, Alabama, Ok Texas, and extending east, south of the Mason-Dixo the Atlantic Seaboard, there is no State where mor -20- 25 per cent. of the banks are members of the Reserve System. Missouri and Mississippi have only 10 per cant. and the percentages vary as follows: North and South Dakota 22 per cent. 24 ! " Minnesota " 19 " Wisconsin 17 Nebraska " Kansas 20 " Missouri 10 Arkansas 24 " If Louisiana 19 Mississippi " 10 " Tennessee 20 " " Kentucky " 24 " North Carolina 16 " " South Carolina " 22 " Georgia 23 Florida 25 " " II 11 fl II ,, 11 I, II The exceptions that I mention have the following percentages: Iowa Illinois Indiana Alabama Oklahoma Texas `'.7 per cent. 30 30 " " " " 35 n 39 49 " " " " West of this section there is only one State which has more than 50 per cent. of its banks members of the System, and that is Idaho which has 60 per cent. The percentage of membership in these western States varies from 50 per cent. in the case of California to 30 per cent. in the case of Arizona. Broadly speaking, therefore, in about one-half of the agricultural sections of this country, less than 25 per cent. of the banks are members of the Federal Reserve System, and as to the other one-half, between 25 and 50 per cent. are members. Now in the East, there is a very -21- different situation. In my own State, New York, 72 per cent. of the banks are members of the Reserve System, and from this percentage, it runs to 51 per cent in Connecticut 62 " " " Pennsylvania " New Jersey 70 " 42 " Delaware 71 " " Massachusetts 61 " " Rhode Island " 55 Maine 56 " " Vermont " 69 " New Hampshire If distributing If you were distributing liquid fertilizer on liquid fertilizer your farm, you would not consider that you were doing a 5p to 90 per cent. very effective operation if from 50 to 90 per cent. of the outlets of your sprinkler were clogged. inflLence noticeable One of the particular influences of the Federal Reserve System is noticeable to us now in this way. Since last year the great bulk of the loans of the Federal reserve banks have been repaid by their City banks members. Most of the banks of the large cities which were at one time heavy borrowers have almost entirely paid off what they owe. 2303 country banks But do you realize that not many months %go there were still 2300 banks - nearly 25 per cent. of our members - which were borrowing from the Reserve banks, and these were almost entirely banks in the rural communities? It has been so right in New York State. N. Y. State 4th or 5th realize that New York is the fourth or fifth largest agricultural producer of all the States. city repaid You may not The banks in our large cities have repaid most of what they owed to the Federal reserve bank. Until within the last month or two almost all that we were -22- lending was to the country bankers and largely to those in the farming communities. Might not the situation have been very different situation different twice as many indeed had there been twice as many country banks in direct contact with the Federal reserve banks and thereby enjoying the security and protection they afford, not only for themselves, but for the farmers and business men they serve? One of the difficulties of our banking system, difficulty and one which I apprehend there will be great difficulty in insufficient remedying, is that there is not a sufficiently direct contact contact between the different elements in the banking system, so elements that the capital supplies in the richer communities can be drawn upon for credit by the less developed communities where credit is needed. Of course, a system of branch banking branch banking might accomplish this, but a system of branch banking extending over an area so wide as that of our country would be most difficult to manage and would hardly be adaptable to our conditions. network No one wishes to see a comparatively small number of banks extending a network of branches throughout the entire United States. In default of that possibility default is it not reasonable to take some steps to bring a larger larger membership number of the country banks into the Federal Reserve System, and in part to remedy the difficulty by that means? But one-third if the banks of the country are now members of the two-thirds System. If we had two-thirds of the banks in the System, I believe this distribution of credit would be sufficiently effective effective to meet all reasonable needs. -23- SECOND - carefully consider Now as to another point which I believe It is frequently proposed you should consider with care. that the Federal Reserve Act be amended so that agricultural longer maturity paper of longer maturity than six months might be eligible for rediscount at Reserve banks. sure accomplish I would ask you to be sure that this proposal if adopted would accomplish what is desired. Personally, I cannot see that any very great injury, in probably no injury fact possibly no injury at all, would result to the Reserve System from extending the maturity of eligible agricultural paper say from six months to nine months; but I believe this proposal overlooks some important influences which overlooks influences control this type of credit. personal experience I must ask you to review such personal experience as you may have had in borrowing money so as to judge whether there is not considerable basis for the following! statement: There are two reasons why the president or cashier two reasons of a country bank does not like to lend money for nine months or a year or longer to his farmer customer or for even two or three years to a cattle breeder. middleman One reason is that he is simply the agent or middleman for receiving deposits from one class of customers and lending them to another class. check 30 days Most of those deposits can be withdrawn by check or upon thirty days notice. No prudent banker likes to commit himself beyond a moderate amount for loans that run fi mos. 3 years demand deposits from six months to as long as three years, when his own obligations are payable upon demand. It is not prudent -24- other simple The other influence is a simple one, known banking. to every banker. hazards inherent Farming is an industry in which certain hazards are inherent which are possibly greater than applying to many other industries. The cashier of the banT' wishes to have the farmer's note mature at sufficiently frequent nature intervals so that he may be in position to meet changing do not believe Now personally I do not believe that simply conditions. a provision which will give the member bank the right to discount paper at the Reserve ban' inducement, which has a maturity of more than six months will be a sufficient inducement to him to 'ale the longer time bank loans that the farmers, possibly justified expecting with every justification, believe that they are entitled to receive. Practically all commercial banks have the right to make loans now for any length of time that good judgment no legal permits. The reasons why they do not do so are those that reasons Etated I have stated. But even if the country banker were induced to mae longer time loans simply becsuse he gained greeter protection not induce. protection in doing so in the event of heavy deposit withdrawals because he is able to discount this paper at the Reserve Ban, he would not want to discount long time paper anyway. borrow Banks as a rule do not borrow money nor should profit they he induced to borrow money from the Reserve banl, simply increHse business for profit or to permanently enlarge their business. The inducement to borrow is to take care of the needs of their customers' needs customers, and when they do borrow they prefer to ')orrow for the shortest possible time. To discount a note running for -25- commit borrowing nine months or more commits the borrowing bank to a long time borrowing which it would prefer as a rule not to make. And furthermore, you must bear in mind that this remedy, only 1/3 anyway even if it were effective, would apply to only one-third of the banks of the country- My suggestion is that a certain proportion of these farm credits, especially those relating to the business of the stock men, should be furnished by investment funds attracting investment funds. You know that banks throughout the United States generally, and in the East particularly, banks buy securities are large investors in securities. short maturity hold securities of reasonably short maturity, and it is wise that they should. always surplus They often prefer to They are purchased by those banks which always have a surplus cf funds over whet their borrowing customers require. If by some method, the long time credit requirements of the farmer, and especially of the cattle man, can be met by some such method as this, it will in a measure read this avoid the difficulty which I have described as inherent in many country banks. Third familiar THIRD - The third point is one with which ever one of you is familiar. To the extent that it is possible, it seems to me that the credit needs of the farmers should be r,et by the employment of existing agencies rather than existing agencies by creating; new agencies which for many years would be too remote from the actual borrower to afford him the imediate close contact facilities and the close contact which present organizations can afford if properly organized. character mortgage loans One of the principal elements in credit is the character of the borrower. A mortgage loan of course requires time for negotiation and --26 the borrower is allowed a long time for repayment. time He can make an application and send it a considerable distance to some lending office, such as e. Farm Loan Bank; it can then be investigated and after a lapse of time, after the farm is inspection inspected and the title examined, the loan nay be made. title But then the farmer needs credit for his turnover, he can'ot turnover credit wait in order to go through this elaborate operation. He should be able to go to the local institution where his promptly character, farm record character and credit and the general record of his farm is known. In a word, the farmer, and especially the stock man, intermediate bank credit needs a type of credit which in maturity is intermediate between the loan which he now gets at his local bank and the long time mortgage loan which he obtains possibly through farm loan For this type of credit I believe the farm loan system. his interests will be better served by appealing to the I am wholly in sympathy with efforts investment market investment market. sympathy towards making this possible, but the point I wish tc make commercial banks is that existing agencies, - the commercial banks and the farm loan system farm loan system, - should be used so far as practicable but facilities provided which will enable them to furnish services which heretofore have not been possible for them read to afford. FOURTH - And final y there comes the question of finally cost the cost of this credit. I am perfectly aware that in sane sections of the country where the usury laws permit, familiar and possibly in some cases there the laws do not permit, the farmers pre charged 3, 10 and 1? per cent. and sometimes -27- My conception of a proper system of even more. conception agricultural credit is that tvo elements are essential. One is that a sufficient and reasonable amount of credit sufficient and reasonable should be available when needed, and the other that the cost of the credit should not be excessive. . But, on the not excessive cost ther hand, I do not think that it is always fair to charge not fair country banks the country banks with too much responsibility for these interest rates. Primarily they arise from the lack of lack credit adequate credit and a. demand in excess of the supply. demand The best opinion I can express upon this subject is that any best opinion means employed for developing agricultural credit facilities read will go a long way gradually to eliminate some of these very high interest rates, if the three points I have mentioned are adequately dealt with. Wembership by more banks in the Federal Reserve System will help more than anything else to do it. But let me point out what would be the effect of point out drawing upon investment funds for these loans with intermediate effect drawing investment :11.,300,00o maturity. Every mi]'ion dollars of such loans negotiated in the form of debentures or other obligationsrunning for a year or more which fcund lodgment with Eastern investors or banks which had surplus funds to invest,tould place a fund of investment money at, the disposal of the community where the relieve burden original loan was made, and would relieve the local banks of the burden of a Pillion dollars of loans which they are now release carrying and would release that amount of credit for other employment. West and South It would draw to the West and South the type -28- of investment money which is needed for this intermediate agricultural financing; lower rates reduction of local rrtes. Now I have been discussing in a very general and discussing general informal reconcile foolish things transform gradually this would effect a informal way some of the things which it seems to me to be more important in dealing with this matter of farm credit. The question is how to reconcile all the various views, how to prevent foolish things being done and at the same time to transform the various discussions which you and others are having into some concrete action- Let me trke the liberty of making a suggestion entirely upon my own responsibility. Joint Comm. You know that as a result of the Hearings of the Joint Commission of Agricultural Inquiry last sumer, certain legislation is proposedWar Finance I have been told that the officers of the: War Finance Corporr,tion are advocating certain aeasures. I bereve that more than one Senator has introduced or is Senators proposing to introduce bills in the Senate to deal with this subject. The measures with which I am familiar bring machinery into play by one or another method, the machinery and resources of the Federal Reserve System and Farm Loan system. or two cases they In one rovide for Federal appropriations. They Fed. appropriation have a direct bearing turon work and investigations of great Dept.Agriculture. importance being conducted by the Department of Agriculture. It seems to me, if I were a member of your organization, if a member that I would be inclined to take steps, possibly even going to President Earding with the proposal, to bring together the President Harding representatives of,these various interests, including representatives representatives of your own organization and ether similar -29- organizations, have all of these plans examined and disease competent men discussed by competent men who are able to put forward each his own point of view and that these men, all of whom in my opinion are honestly seeking a wise solution of these wisdom matters, should in their wisdom be able to reconcile differences of view and produce a plan which will meet the need _)f the occasion and meet the views of people of sound Once that plan is prepared then judgment in the country. sound judgment let's all get behind it, ask Congress t. put it through and once prepared ask the President to approve it. After this most informal talk you may wish to ask after informal me with every justification in what way the Federal Reserve System proposes to assist in the solution of the problem what do of agricultural credit. I can express only my own opinion and that of my associates in New York. I think there are my own opinion two principal things that we can do. ';+e can endeavor by our policies, es I have already- described, to maintain as stable credit conditions in this country as are possible, (C;14102) rea by employing such means as we com and. Further than that we can, if means can be found to do so, enlarge the membership of the Federal Reserve System, as it should be, to cover all parts of this country with the facilities of the System and credit which we furnish. bring atwut a more even and equable distribution of the We can serve all of the banks of the country that are entitled to membership just as readily and efficiently as we can serve one-third of the banks of the country which are now members. -30- In conclusion, I must thank you for your A thanke courtesy in inviting me to this meeting and for the i:atience with which you have listened to this talk. I can assure you that the members of this organization will always be welcome at our office in New York. We welcome will be glad to tel toll shout you all that we know about the operation of the Federal Fesorve Bank and of the System, and we will esteem it a privilege to make any contribution privilege that will promote a sound solution of the problems with which you are now dealing and the successful treatment contribution of which are essential to the welfare of the most responsible and important element in the economic life of this country. PRICES 4 . c3 Opinions upon the important subject of prices and price movements too frequent- ly arise from the personal experiences or selfish interests of the individual. Laboring men, salaried clerks, teachers, all those in fact having small incomes, think of prices in terms of the cost of the necessities of life, - food, clothes, lodging, etc; the manufacturer in terms of market prices for the materials he buys and the goods he sells; the speculator in terms of fluctuating prices of stocks, bonds and commodities that are actively dealt in; grows; the farmer in terms of prices he may realize for what he the banker, these days, in terms of index numbers of price changes which are variously built up from price averages of from, say, twenty to possibly two hundred or .three hundred important articles. But after all this is a narrow view of "prices". It only comprehends limited and specially selected subjects of experience or inquiry and exposition. The general price level is a much more comprehensive and complicated affair, some elements of which reach our pocket books by courses so devious as net to be directly felt, nor, in fact, to influence our views very much. There are, of course, rents and interest, the prices of such services as insurance, transportation, lighting and heating, education, medical and dental treatment, lawyers fees, license fees and all sorts of brokerage charges; then we have taxes, and the cost of su,port of public institutions in great variety, - churches, hospitals, libraries and the like; even club dues, theatre and circus tickets. All these march up to the price bookkeeper and demand their respective places in the sum total of the general price level. The extent to which all these and many other things and services are within the reach of people generally, the extent to which the incomes of the greater number of all the people make the enjoyment of all these things possible, is in fact quite largely the measure of what we cal] the standard of living, or, as I would prefer to express it, is one of the important measures of the moral/, intellectual and physical wellbeing of the people cf a country. All There are however two distinct points cf outstanding importance to keep in mind in considering prices; one is this general price level and its changes; the other is the variation in the relative prices of different things or different classes of things, which may take place at the same time, including wages and salaries. This discussion has mostly to do with the general price level. The movement of the general price level is a composition of all price changes which in total elevates or lowers prices as a whole, but as prices nowadays are al] measured by a common standard, - "money" - it has seemed to some convenient to speak of changes in the general price level as a change in the purchasing power of money, and those folks, I fear, at times cause confusion in the discussion. Cn the other hand, there must be considered those puzzling and annoying changes in the prices of, a few or even many things ea-Lt a k width, att.,e tri ich, while tt 404. not materially changing the general level of prices, do, however, cause hardships to many A people. Only now, or quite recently, we have been hearing the bitter and quite natural complaint of the wheat growers that their crop is being sold at so low a price as to cause actual loss, and, at identically the same time, all the executive and legal majesty of this CAW,' great Government of ours 1,k being addressed to learn ing why raw sugar, another farm produce, WilLi 021.2 selling at so high a price, and hunting for a cul prit, if there 4/\ 14 one, in order to punish him. Few indeed stop to consider that the human race is economically divid)d into two parts, - producers and consumers - and that the division extends into the individual himself. The wheat farmer now complains as a producer that his wheat sells at a loss, and as a consumer he growls that his sugar, and other things as well, cost, him too muc-1. while this may be offset as to a whole nation by the profit and consequent satisfaction of the sugar grower who gets a big price for his sugar and buys his flower cheap, of course it does the individual wheat farmer no good whatever. etie.t It is our habit in this country to hunt for the guilty party when thingsAoccur that harm or annoy us, punish him if we can, and, in any event, to pass a law at once to prevent the injury occurring again. For centuries the world has been puzzling over this price affair and trying to "fix it" by laws and by economic systems and even by changes -3- of political systems; often with clash of arms and blood shed. "Fixing prices" has always failed in the end, just as fixing the blame usually fails, because such events are so much beyond complete control, however they may seem to be quite easy enough to "fix." In the first place, before we come to "fixing" prices, we must first decide what prices are to be fixed; next, in the interest of which of our individual capacities and of wNat classes of our population are they to be "fixed" - consumer or producer in other words are prices to be put down or up; and last, how are we going to do it. To arrive at any policy we must first consider causes of price changes to see whether they are by their very nature capable of being wholly or partly controlled. We may find that they may be somewhat influenced, but riot wholly controlled, and that what we really need and want is a reasonably stable general price level. Viewing price changes in the light of recent occurrences, few will disagree that some of the most important and fundamental causes are the following - / 1. War and political disturbances 2. Inflated issues cf all forms of money and credit instruments 3. Increased or diminished crops by reason of weather and of social and political conditions w.14 the efficiency of transportation k14" systems 4. Crop destroying parasites and insects 5. Epidemic and pestilence 6. Conflagrations, earthquakes, and like unavoidable calamities 7. New gold and silver discoveries or mine exhaustion, and consequent enlarged or reduced production. Gijr .6. The state of mind of the public - whether in the mood to buy or to sell, to go "long" of goods or "short" of goods; to "spend" or to "save"; to "stock up" or "sell out" to "strike" or to "work". ; 9. 10. Government fiscal policy And many others of less importance in effect upon general price movements. Now let us be honest with each other and ourselves and admit that of all the causes listed, only the second and ninth are really capable of any prompt and real control, and even those are too frequently subject to those varying moods or waves of public olinion which so regularly find expression also as in number eight. -4- arose when the three And can it be matter for surprise that price diebto- P 4 do euVAR 7,4 l Aft,- 1 greatest of all causes for price changes a&aee-at.apeoe-klip the world's greatest and most devastating war, - the greatest flood of credit instruments ever knownrmand the greatest disturbances to crop production and distribution ever recorded. So when the banker is charged with all responsibility for price changes, let us also recall that weather and the crops, war and politics, the humor of the public Lt4 etrilrTeitlake0e2 and other things also exert important and frequentlyeigt44*044ing impulses upon prices. Laws cannot be passed to control the weather, orrboll wevil, or earthquakes, and, while some day a league, or a world court, or disarmament, or higher intelligence and morality generally may eliminate war, so far it has not been done. It would exceed the limits of space in this article to consider price regulation beyond what is suggested in number two, which means credit control, and there is little need for wasting space upon a discussion of the other influences listed, as none of them, excepting number nine, is capable of much, if any, control. Nor need space be devoted to discussing price changes other than the "general price level" for to select any particular class to benefit and o injury by a selective price control would be abhorrent to our American ideas of justice and equity, - at least some of us live to think so. Many people have recently stated that as prices are affected by the volume of money and credit, just let us regulate that and then the job is done. They turn to the roderal heserveSystem to do it, and overlook that the banking system can do but a part of the job and at times possibly only 8, minor part. It has seemed to the writer, although realizing that others differ from this view, (and they are personal and quite unofficial anyway) that when Congress created the neserve Banks it intended that they should influence, and to some limited extent actually regulate, the volume of credit. reasonably clear and explicit in the Act. The powers to do so and the means provided are But nowhere from the caption to the repeal clause does one discover any purpose in the mind of Congress that a group of men, or of banks, or both, were to be clothed with the power and responsibility of fixing prices, either of any specific thing or group of things, or even the general level of prices. -5- Such a power of attorney never has and I hope never will to granted to boards or to banks in this country. Human beings, even Americans, have riot yet been elevated, intellectually or morally, to that God-like perfection of infallability of wisdom and goodness, so as to stand the strain and perform the duties of such a position. But there are possibilities of throwing scme light upon that part of the price problem which is involved with the credit policy of a banking system, and the views here expressed, which, as stated, are purely personal, may be worth passing thought, especially as they distinctly disclaim any hope cr expectation or fear that the responsibility for fixing pricss can or will be placed upon the heserve System. If, as is now universally admitted, prices are influenced to advance or to decline by increas, or decreases in the total of "money" in circulation, - and as money I include coins and paper money which pass from hand to hand and bank deposits which pass by checks, - tben that part of our price problem involved with credit or money is comprehended within the tcrms of the jederal heserve Act, which created the means of regulating credit volume, within certain limitations. That being so, as the writer personally maintains, then the task of the system is to maintain a reasonably stable volume of money and credit, with due allowances for seasonal fluctuations in demand, for normal annual growth in the contry's development, business and population, and wit'n such allowance as may be imposed by those great cycles of prosperity and depression which we would all like to see "squared" but which never yet have been. First let us see what has been done in that respect by the FederalReserve System. The total volume of credit., supplied to the banks of the country and through them to the public, is found by taking the total earning assets of all the Reserve Banks combined. Since the conclusion of t,,4e liquidation which started in 1920, it will be found that the earn- r. (twu ing assets have varied from the low point of $1,024,679,000 on August 9, 1922, to a maximum of $1,339,420,000 on January 3, 1923, and at the present time (April 18, 1923) amount to $1,158,957,000. The average for the whole period has been $1,165,782,000 and the highest monthly average has been $1,288,464,000 in December and the lowest has been $1,040,860,000 in August, 1922. This is a remarkable record of credit stability, so far as the bank of reserve deposit and currency issue is concerned, and would leave little to be desired were it not for two other important factors. Those are gold imports, and the conversion of demand into time deposits. The former requires considerable space, but the latter can be die etched with the bare assertion that the present inducement to convert demand into time deposits, arising from a reserve of only 3% reciuired for time deposits, whereas demand deposits require 7%, 10% and 13% according to the location of the bank, has already caused and will continue t o cause a certain amount of inflation of bank loans and deposits. The amount cannot be accurately stated. Gold imports and our large gold reserves on the other hand are an imposing problem, and one which must be faced. From the end of 1920 to the present time, we have imported $942,543,000 net of gold and our domestic production has been $111,500,000; and out of this arts and manufacturers have consumed and devitalized perhaps half of this latter. The net addition to our gold stock regularly goes into the banking system by one or another channel, and the amount of this addition would be theoretically capable of producing an increase of bank deposits generally of around $10,000,000,000.' In this period the actual net increase of bank deposits has in fact been much less than half of this &mount. That is one aspect of the gold problem, and one in which the means of offsetting and controlling expansion and price changes are not as effective as some people may mistakenly think. To a limited extent they can be offset by a reduction of Reserve Bank earning assets, which has the effect of reducing the reserves of member banks, exactly as gold imports increase them. Then the gold problem has another side. This gold either goes into the reserves of the Reserve Banks or goes into circulation as gold certificates and by the same amount disFiaces reserve notes. Reserve Ranks are enlarged. In both cases the Reserve percentages of the Some may ask "what harm does that do?" and the reply is that it need do no harm if a misguided public opinion does not forge the Reserve Banks to permit these large reserves to be the foundation for credit expansion, which simply is another way of saying for a larger volume of money, which in turn means more changes in the general price level, so far as increased volume of money and credit influences prices. -7- This is really the story in a nut shell, and possibly needs further elaboration on one point only. It is not quite so simple a point as one would like it to be when trying to elucidate it. Befcre the war, the gold banking reserves of the world were in what might be termed a state of equipoise. They had become distributed among banks throughout the world as the result of natural and quite free exchanges of goods, services, credits and other like transactions, and the ultimate settlement of the net differences in debits and credits between countries by actual shipments of gold coin and bars. When war came, embargoes were laid upon gold shipments; trade became deranged and all sorts of disorders arose in the exchanges, currency systems and Government loan operations of the nations. The significant thing for us was a huge increase in our exports, so great as to enable us as a nation to pay what we owed abroad, lend large sums in addition, and even then it was necessary for these foreign countries to ship us a billion of gold besides. The equipoise was destroyed. We received and hold more gold than we need; more than is good for us; and more than we can expect always to keep. In fact, over a third of the world's known supply of monetary gold is now in our hands. Before the war one of the chief guides and influences in moving the banks of issue to raise and lower their discount rates as the state of their gold reserves, - whether they were a large or small percentage of their note issues and deposits. Here are we with a mass of gold in the Aeserve Banks so vast that it amounts to 75% of all tee deposits and outstanding notes of the twelve Reserve Banks. The notes could be wholly about paid off in gold and still leave enough to serve as/ 42% reserve for the deposits of the Reserve Banks; a reserve percentage even then larger than they had for both notes and deposits at the peak of expansion in 1920. But as to prices which is the subject me are 1 ZA-ext..4 discussing, the important thing to observe is that if the ,Leserve Banks expand,. their loans to a point *hare the reserves stood at 43%, - about the legal minimum, - instead of 75% as at present, we would lend three and three-quarters billions in excess of what we are now loaning, and this addition to banking reserves of all the banks of the country would enable them in turn to expand loans and deposits by something like fifteen or sixteen billions. -8So the reserve percentage is a bad and dangerous guide to a lending policy. But it pill then be asked, "What shall be the guide if not the reserve percentage" and a chorus of answers will come back, - "Prices," or "An index number," and we again get around to the point tvhere, for the moment, some people think that prices should be the guide, which comes close indeed to thinking that the Reserve System can and should fix prices. Here is a way to distinguish. Just as credit is one of the influences upon the price level, so the price level should be one of the influences in guiding a credit policy. There are other influences which affect prices, and so must there be other influences which affect a credit policy. Here are a few briefly suggested - Is labor fully employed Are stocks of goods increasing or decreasing Is production up to the country's capacity Are transportation facilities fully taxed Is speculation creeping into the productive and distributive processes Are orders and repeat orders being booked much ahead Are bills being promptly paid Are people spending wastefully Is credit expanding Are market rates above or below Reserve Bank rates. What this country and the world needs is stability, - social, political and economic; stable thoughts, habits and methods. The contribution to be made by our Its banking system just now can be but a part, though a helpful one, toward stability. best policy is to supply enough credit and not too much, - enough for ligitimate enterprise, but not enough to satisfy those who want simply cheap and limitless supplies of credit regardless of the consequences they are too blind to perceive. How much that supply should he will be vastly difficult to determine until the free play of international markets and exchanges and credit and gold payment is restored. It is slowly but surely coming and meantime it will be well for us to avoid those rushes to extremes, - such as price control itself is, - and, at least in our -0banking policy, just io the bast we can to avoid excesses. Economics stupid su*ect 3sgehot - slithers - Speakers "Just good Enough" ,Opportunities multiplied Literature re policies- and reasons Know we hold reserves, discount, issue currency, collect checks, settle exchanges, Fiscal Agents. Few stop to think position in economic machine importHnt, function - Fegulate volume money Chief influence upon prices of Foods, euteark salaries, rents, etc. Fx,3mple '-)IT equation - qusntity ;700(IF /r Prices = Tctn1 money All money, currency, bank credit. Increase goods, same prices = More credit Same quantity :fools & hither prices : More credit But Increase credit, no increce = Higher prices Beer story 3 Economic well being requires stability Violent price changes do injustice See Europe - Germany InflP.tion c=ruses speculation extravagance - waste Economic viaste possibly principle product of inflation Iron ore illustration Long introduction to the point 1 iii 1 -7 Now conflitionr ,vholly different gold pgyments suspended i.k1f a:onetry 7old here' comin ill exchAft;es ric_ount 4itt ours If we inflte prices r,dvfince I.xchanEe c:iscount prevents lots of Huje res(:rvo7. r=msin uneistrubed A.ny3y until i. rice ,idwince untle, of ili June 11, 1924. (For the Twenty-fifth Anniversary Issue of the Japanese-American) Your anniversary is an appropriate time forrecalling the remarkable changes which have taken place during the past quarter century in the internal affairs of Japan and in her relations to other countries. This brief period has seen the completion of the process, begun only half a century earlier, of transforming Japan from a feudal state into a mad ern world power. Perhaps no other country has seen such far-reaching political and economic changes in so short a time. In the field of government, the formal abolition of the feudal system in 1871 was followed by the adoption of a constitution in many ways resembling those of Western Europe. Along with this has come an extension of the fran- chise and an advance toward responsible parliamentary government. Progress in intellectual and educational affairs has followed the introduction of a complete system of public instruction on Occidental lines, with universal compulsory nri ,ary education as a foundation, and culminating in the universities which have been under great pressure to accommodate the numbers who apply for admission. Japanese scholarship has revealed great power of assimilation and is already making contributions of importance in many fields. Changes in economic organization have been ecually import,nt. In the old order, the country was chiefly self-sufficient and there was little foreign trade. Its main industries were agriculture and fishing. The opening of Japan to world commerce through the visit of Commodore Perry introduced a new era. The insular character of the country, the nearness to the Asiatic continent, and the limited area of tillable land were all factors impelling it towards development into a great industrial and commercial nation, exchanging its manufactured products abroad for raw materials. 2 The growth of manufacturing and trade has been reflected in the rise of great industrial centers and the creation of a remarkable system of transportation, including railways, ports, and a mercantile marine. Banking, cur- re cy, insurance, and other parts of the financial structure have been greatly strengthened. 1:lodernizing of the economic structure has made possible a rapid increase in the country's wealth, and a general gain in the standard of living. ;hile the accomplishments of the people of Japan have been unicue in history, there remains one field of endeavor in which much can still be accomplished to make modern Japan a well balanced organization for economic and social well being. The transformation of the nation from so largely aLricultural to equally important industrial development should not neglect the need for corresponding social readjustments suitable to the needs and happiness of an industeial population gathered in large cities, as distinguished from an agricultural population scattered throughout the islands. The social life of city dwellers depends just as greatly for happiness and health upon sound social institutions as does industrial welfare upon the development of well organized industrial plants. The enlargement of opportunity for the people of Japan to enjoy healthy, stimulating social intercourse through religious, athletic, musical, educational and other organizations is a necessary accompaniment of the creation of city life. Possibly here is where the giant strides of Japan towards world success have outdistanced the collateral development towards social and community advancement. In the rise of Japan to her position as a world power, her relations with the United States have been particularly close. America's early part in opanin_; Japan to world commerce, her traditionally friendly attitude which must not be impaired, the interchange of tourists and students, and the uniform courtesy with which American visitors are treated by the Japanese, have all made for friendship and understanding. For many years the United States have been Ja-Dan's best customer, buying chiefly its silk and selling in return large cuan- titles of raw cotton, iron and steel, and machinery. An increasing proportion of Japan's foreign financing has been supplied by the United States, and the two countries have undoubtedly been drawn closer together by tne assistance given at the time of the recent earthquake. Notwithstanding some occasions making for misunderstanding in recent years, responsible opinion in both nations desire: mutual understanding and adjustment of differences, and hopes heartily for a continuation toe the friendship between the two countries. June 11, 1924. Japanese-American) (For the Twenty-fiath Aanivelsary Issue of the the remarkable lour anniversary is an ap7ropriate time forrecellirne century in the internal changes which have taken place during the past quarter affairs of Japan and in her relations to other countries. Ills brief period of has seen the completion of the process, begun only half a century earlier, transforming Japan from a feudal state into a maiern world pcerer. Perhaps ne other country has seen such far-reaching political and economic eheageo in so short a time. In the field of government, the formal abolition of the feudal system in 1871 was followed by the adoption of a constitution in many ways resembling those of Western Zurope. Along with this has come an extension of the fran- chise and an advance toward responsible parliamentary government. Progress in intellectual and educational affairs has followed the introduction of a complete system of public instruction as Occidental lines, with universal compulsory primary education as a foundation, and culminating in the universities which have been under great pressure to accommodate the nnmhers who apply for admission. Japanese scholarship has revealed great power of assimilation and is already making contributions of importance in many fields. Cbnnges in economic organization have been equally importint. In the old order, the country was chiefly self-sufficient and there was little foreign trade. Its main industries were agriculture and fishing. The opening; of Japan to world commerce through the visit of Commodore Perry introduced a new era. The insular character of the country, the nearness to the Asiatic continent, and the limited area of tillable land wee all factors impelling it towards development into a great industrial and commercial nation, exchanging its manufactured products abroad for raw materials. The growth of manufacturing and trade has been reflected in the rise of great industrial centers and the creation of a reaarkable system of transportation, including railways, ports, and a mercantile marine. Banking, cur- re cy, insurance, and other parts of the financial structure have been greatly strengthened. Modernizing of the economic structure has made possible a rapid increase in the country's wealth, and a general gain in the standard of living. While the accomplisnmants of the people of Japan have been unique in history, there remains one field of endeavor in which much can still be accom- plished to mak; modem Japan a well balanced organization for economic and social well being. The transformation of tee nation from so lareely a ricultural to equally important industrial development should not neglect the need for carrespoading social readjustments suitable to the needs and happiness of an indueteial population gathered ie large cities, as distinguished from an agricultural population scattered throughout the island::. The social life of cite dwellers depends just as greatly for iw4pinoss and heelth upon sound social institutions as does industrial welfare upon the development of well organized industrial plants. The enlareemont of opportunity for the people of Japan to eajoy healthy stimulating social Intercourse through religious, athletic, musical, educational and other organizations is a necessary accompaniment of the creation of city life. Possibly here is where the giant strides of Japan towards world success have out- distanced the collateral development towards social and community advancement. In the rise of Japan to her position as a eorld poeer, her relations with the United States have been particularly close. America's early part in opening Japan to world commerce, her traditionally friendly attitude which must not be iepaired, the interchange of tourists and students, and the uniform courtesy with which American visitors are treated by the Japanese, have all made for friendship and understanding. For many years the United States have been Japan's best customer, buying chiefly its silk and sellin, in return large quantities of raw cotton, iron and steel, and machinery. An increasing proportion - 3 - of Japan's foreiga financing has been supplied by the United States, and the two countries have undoubt-2dly been dramn closer together by the assistance given at the time of the recent earthquake. Notwithstanding some occasions making for misunderstanding i i racent years, responsible opinion in both nations desires mutusi under,-standing and ad- justment of differencer. and hopes hen.rtily for a continuation of the friendship between the two countries.