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Liberty Loan Publicity Committee
Temporary Headquarters, 120 Broadway, New York.

FOR RELEASE MON;
July 16, 1917.

GOV=ITT LOANS
By

Benjamin Strong, Jr.,

Governor, Federal Reserve Bank of New York,
and Chairman, Liberty Loan Committee.

"This article by Governor Strong outlines a simple scheme for ace=
lating and investing the savings of the people in government securities without
causing credit expansion.
A complicated "transfer of credits" was necessary
in meeting the payments of the first Liberty Loan.
This was handled adecivatel3
by our Federal Reserve System, but Mr. Strong's suggestions are made with a vie
to simplifying these operations in the future.
He divides bond buyers into
four groups, comprising hoarders of cash, capitalists with and without surplus
bank -balances, and wage earners.
Governor Strong lays particular emphasis on
cultivating the habit of saving among wage earners, a habit which would facilitate investment without the need of borrowing and placing a strain on the banks

sources has

ions have

he Anglo

wo months

say,

a very short

e war, require

it, as other-

to put bank-

disturbance




9

No loan of %,;2,000,000,000. can be paid for as we commonly express

it "in cash."

The amount is too large and payment must be made by compli-

cated bookkeeping operations which can be roughly described as "transfers of
credit."

To do this successfully, credit must be shifted from the account

of one bank depositor to the account of another bank depositor, from one bank
to another bank, from one part of the country to another part of the country,
and these shiftings of credit involve a temporary shifting of a certain proportion of bank cash or reserve money and therein lies the dancer.
If every purchaser of Government bonds could make payment at his
own bank and this amount be transferred by that bank to the credit of the
Government, then the credit could be disbursed by the Government in the Istom-

munity where the bank is located and no disturbance of credit whatever would
arise because no bank reserves would need to be shifted.

In a great loan

of 12,000,000,000. subscribed and paid for in varying amounts in all parts of
the country, it is inevitable that preliminary withdrawals of bank balances
from one part of the country to another will be made in aaticipation of pay-

ment and again after the funds are placed at the credit of the Government
throughout the country;

they must be gradually withdrawn to those points where

the Government has various bills to par.

The machinery of the reserve banks

proved to be ade(jlate to meet the necessity of shifting credits from one part
of the country to another.

Possibly a correct view of their function would

be to say that the7 were the chief bookkeepers of the transactions and the
books being k3pt in twelve separate places at each of the Reserve banks, the
only shifting of reserve money occasioned by the movement of credit is that

which takes place between the twelve reserve banks through the normal machinery created for that very purpose.




Look at the problem from the standpoint of the bond buyer.

There

are in this country, (exclusive of a negligible number of those who own secur-

ities of foreign origin which could be resold in foreign countries, only
four classes of people who can subscribe for Government bonds.
The first class of buyers comprises those who have hoarded actual
cash or currency in their houses or safe deposit vaults, who are induced to
buy Government bonds and who produce that cash for the purpose.

Purchases

of Government bonds by such people (of whom there are few in the United
States), have the effect of strengthening the banking position because it
brings reserve money, that is, gold, out of hiding and puts it in bank reserves where it serves as the basis of credit.

The change occasioned in

the nation's general bank account as a result is not simply to add a given

amount to the bank deposits, but to also add an equal amount, dollar for
dollar, of reserve cash.

France, prior to the war held a vast store of

gold tucked away in peasant's hiding places and the production of that gold
in response to the Government's call has immensely strengthened its banking
position.

The second class is composed of the capitalists and corporations
with balances in the bank in excess of needs.

When bonds are purchased

by a member of this class, the owner of the bank balance, Mr. X. Y. Z.,
sells or transfers that balance to the Government in exchange for a government bond.
Kr. X.

If the Government leaves the deosit with the bank which holds
account, it is simply a transfer of the balance of Mr. X.

Y.

to Mr. U. S. A.

Y.

No cash reserves shift, no loans would need to be called

and no change would take place in the balance sheet of the bank, either of
assels or liabilities.




The third class of bond buyers is that v/111311 has bank accounts

.

-4-

but has no surplus balances in bank to spare for investment in Government bonds.

Having credit at the bank, however, they are induced to

buy government bonds and borrow from the bank temporarily in order to
pay for them.

This is the least desirable buyer of Government bonds,

although a necessary one at the commencement of th war when the expected
savings of the future must be advanced to the Government.

Such a bond

buyer pays for his bond out of a bank deposit which is created by making
a loan.

The deposit so made is transferred to the credit of the United

States of America and the bonds are turned over to the bank by the buyer
to secure the bank for its loan.

By that operation, bank deposits and

bank loans are both expanded and the percentage of reserve money held by
the ban: is correspondingly reduced.

Loans of that character cannot be

avoided because earnings that are converted into savings become capital

and are ;enerally invested very promptly in securities, or property, or
improvements to property, so becoming unavailable for Government loans.
In a general banking sense, it does the country no good to have its citizens sell one kind of investment in order to make another kind of investment.

It produces no new money or credit.

All buyers of the class who

have engaged themselves to pay loans to their banks, are forced therefore
to economize in order to pay off the loans and in that way savings out of
future earnings are made available to the Government in advance of the earnings being made.

The fourth class of bond buyers and in some respects the most important in time of war,

is the great body of wage earners and sala

people who freauently have no bank account and spend about all that they
earn.




There are many millions of such in this country whose material

-5-

welfare will be improved and whose attitude toward their government will
be benefitted if they can be induced to buy bonds.
brought about?

But how can this be

Only by showing them how to cultivate the habit of saving

and this kind of saving should be developed in advance of investment so as
to avoid the necessity for borrowing also.
11.&e one industrial organization as an example, employing, say,
20,000 laborers:

If these men earn an average of 41,200. each per annum

and can each afford to save A.00. per annum, their employer could enter
into agreements with them by which, say v8. would be deducted from the

payroll of each man every month and deposited in bank for future investment.

450. apiece in six months is 41,000,000.

during the process of

setting aside and earmarking these earnings or savings, they could be

temporarily invested in short obligations of the Government, convertible
at a later date into Government long time bonds.
_permanent bank expansion arises.

By this process, no

As rapidly as savings accumulate, they

are turned over to the credit of the Government which issues its short
notes therefor and these short notes later are converted into long bonds.
The bank -Jalance which was originally the bank balance of the employer

out of which wages were paid, has through the savings process been transferred to the credit of the Government without disturbance to bank credit.

Assuming that our Government finds it necessary, say every six
months, to borrow large sums for war purposes, ha: readily might this be
accomplished if all -;lasses were induced to save in anticipation of such

investment in the bonds of their Government?

The rich man appropriates

so much of his income, the rich corporation so much of its profits, the
poor man, so much of his salary or wages.

During the period between

bond issues, these savings are turned over to the Government in installments in exchange for short notes.




-Lien the bond issue comes along, the




4
Liberty Loan Publicity Oommittee
Temporary Headquarters, 11:-1 Broadway, New York.

"

R:LEASE itOI AY
July 16, 1917.

1;01R

GOY RNIaNT LOA2
By

Benjamin strong, Jr.,
Governor, Federal Reserve Bait:: of New ?ark,

and Mairman, Liberty Loan Committee.

"This article by governor Strong outlines a simple scheme for accumulating and investing the savings of the people in government securities without
A comilicated "transfer of credits" was necessary
causing credit expansion.
in meeting the payments of the first Liberty Loan. This was handled ade!uately
by our Federal Reserve System, but Mr. Strong's suggestions are made with a view
He divides bond buyers into
to simplifying these operations in the future.
four groups, comprising hoarders of cash, capitalists with and without surplus
Governor Strong lays particular emlhasis on
bank balances, and wage earners.
cultivating the habit of saving among wage earners, a habit which would facilitate investment without the need of borrowing and placing a strain on the banks.)

bile this country with its vast material and wanking resources has

made a notable record in the foility with which large loan operations have
been conducted - the largest until recently being. tho ;:lacing of the Anclo

French bonds - it has nevertheless been apparent during the past two months
that people have not fully grasped the eignificance of a loan of, say,
42,000 ADO,ju0, the entire proceeds of which must be paid over in a very short
period, as we say, -in cash."
Government loans of this magnitude, necessitated by the war, require
a thorough examination and undi!retanding of the irinciples of credit, as other-

wise unakillfnl management of operations of that size are certain to put banking machinery out of order and disordered banking maohinory means disturbance
of business.




-2-

No loan of 42,000,000,000. can be paid for as we commonly express
it "in cash."

The amount is too large and payment must be made by compli-

onted bookkeeping operations which can be roughly described as -transfers Of
credit."

To do this suciwfully, credit must be shifted from the account

of one bank depositor to the account of another bank depositor, fro,

one bank

to another bent, from one iert of the country to another part of the country,
and these shiftino of credit involve a temporary ehiftint; of a certain proportion of bank cash or reserve mOney and therein lies the dan,e)r.

If every purdhaser of GOvermment bonds could make layment at his
own bank and this amount be tranaft,rred by that bank to the credit of the

Government, then the credit could be disbursed by the Government in the eom-

Amity whore the bank is looated and no disturbance of credit whatever would
arias because no Lenz reserves woule need to be shifted.
of

In a great loan

000,000,000. subscribed and laid for in Wiryik; amounts in all parts of

the cJuntry, It is inevitable that i:reliminary withdrawals of bank balances

from one part of the country to another will be made in eaticapation of payment and again after the funds are placed at the credit of the Government
throughout the country:

they asset be gradually withdrawn to those points where

the 4overnment has varieus bills to pope.

The machinery of the reserve banks

proved to be edeuete to meet the necessity of shifting; credits from one part.
of the country to another.

Possibly a correct view of their function could

be to say that the: were the chief bookkeepers of the transections and the

books ueing knIt in twelve se arata places at each of the Reserve Lacs, the
only shifting of reserve money occasioned by the movement of credit is that

which takes place between the twelve reserve hence threugh the normal machinery oreated for that very purpose.




-3LOW( at the problem from the standpoint of the bond buyer.

There

are in this country, (exclusive of a negligible number of those who own securities of foreign origin which .emild be resold in foreign countries), only

four clasees of people Who can subscribe for Government bonds.
The first class of buyers comprises those who have hoarded actual
Gosh or currency in their houses or safe deo:mit vaults, who are induced to
buy Government bonds and who produce that cash for the purpose.

Purchases

of Government bonds by such people (of whom there are few in the United
States), have the effect of strengthening the banking position bete:aloe it

bring° reserve money, that is, gold, out of hiding and puts it in bank reserves where it serves as the basis of cratit.

The change occasioned in

the nation's general bare,: account as a result is not simply to add a given

amount to the bank doposito, but to also add an eeual amount, dollar for
dollar, of reserve cash.

iTance prior to the war held a vast store of

trelked sway in peasant's hiding places and the production of that gold

in resIoneo to the Government's call has incensely strengthened its banking
position.

The second class is composed of the capitalists and corporations
with balances in the bank in excess of needs.

Awn bonds ere purchased

by u memoer of this class, the owner of the bank balance, Mr.

Y.

sells or transfers that balance to the Government in exchange for a government bond.
:r. X.

If the Government loaves tho dejosit with the bank which holds

account, it is simply a transfer of the balance of Mr. X. Y. .

Y.

to Ur. U. S. A.

No oash reserves shift, no loans would need to be called

and no change would take place in the balance shoot of the bar-, either of
aosels or liabilities.




The third class of bond buyers is that which has bank recounts

-4-

but has no surplus balances in bank to siAre for investment in Govern
meet bonds.

Having ()malt at tL,; bank, however, they are induced to

buy government bonds and borrow from the bank temporarily in order to
pay for them.

This is the least desirable buyer of Govern,.ent oonds,

although a necessary one at the commoneement of th.

war when the expected

savirvp of the future must be advhnced to the Government.

such a bond

buyer pays for his bond out of a bank deposit which is created by making
a loan.

The deposit so made is transferred to the credit of the United

Antes of America and the bonds are turned over to the bans by the buyer
to secure the bank for its loan.

by that oeration, bank deposits and

bank loans are both expanded and the percentage of reserve money held by
the ban

in correspondingly reduce].

Loans of that character cannot be

avoided becaune earnings that arc converted into savings become capital
and are generally invested very promptly in securities, or property, or
improvements to property, so becoming unavailable for Government loans.
In a general Larkin.; sense, it does the country no good to have its citi-

zens sell one kind of investment in order to make ahOther kind of investIt produce:, no now mon,y 9r credit.

A.1 buyers of the class who

have engaged themselvoi4 to key loans to their bans are forced thtA.efore
to economise in order to pay off the loans and in that way savinis out of
future esrnIni.;e are made available to the ;;overnment in advance of the earn-

ings being made.

The fourth class of bond buyers and in some respects the most im_i_ortant in time of war,

is the great body of wage earners and salaried

people who freluently have no bank account and spend about all that they
earn.




There arc many millions of such in this country whose material

-b-

welfare will be improved and Whose attitude towerd their government will
be benefitted if they can be induced to buy bonds.
brought about?

But how can this be

Only by showina them how to cultivate the habit of savine

and eras &Ind of saving should be developed in advance of Investment so as
to avoid the necessity for borrowing else.
Take one industrial oreaniention as an example, employing, say,
21 j00 laborers:

If these men earn an everaee of ei1,10. each per ennum

and can each afford to save 000. Ellr annum, their epployer could enter
into agreements with them by which, say ea. would be deducted from the

payroll of each man every month and deposited in bank for future investment.

450. apiece in six months is el,e00,00e.

,raring the erneess of

setting aside and earmarkinz these earnings or savines, they could be

temporarily invested in snort obligationi of the Government, convertible
at a later date into Government long time bonds.
permanent bad( expansion arises.

3y this process, no

As rapidly as savings accumulate, they

aro turned over to the credit of the Government which issues its short
notes therefor and those short notes later are converted into long bonds.
The bank balance which was orieinaleiy the bunk belence of the employer

out of which wages wore paid, has throash the savings process been transferred to the credit of the ,;overnment without disturbance to bank credit.

Assuming that our Government finds it necessary, say every six
months, to borrow large 3U55 for war purposes, ha: readily might this be
accomelished if all classes were induced to save in anticipation of such
inveetment in the bonds of their Uovernmonte

The rich man uppropriates

so much of his income, the rich corporation so much of its profits, the
poor man, so much of his salary or wages.

During the period between

bond issues, these savings are turned over to the Government in Installments in exchange for short notes.



Alen the bond issue comes along, the

-6-

short notes arc converted into lone bonds.

The whole operation has been

conducted without the use of oash or reserve money but by simply book-

keeping entries on the books of banes, which result in a graduel but

constant transfer of bane deposits representing the natiens Ravines
to the oredit of the Jovernment.
But the question will be asked, ",7111 not this enormetis transfer

of bank credit from individuals and corporations to the credit of the
Government itself cause expansion?"

If *ill not do so for these credits

are not created by ban,: borrosines but be savings.

Blending money as fast as it receives it.

The Government is

The very credit so set aside

for Government use must be instantly paid out by the eovernment for supelies, wages of soldiers and sailors and for the civil establish eats.
es soon as the credit is inscribed All the books of the bane for the use

of the Governeant, the Government checks aeainet it and turns it bank to
the very individuals, ooreorations and wage earners who have produced it.
new credit is not created but existing oredit moves faster around this
circle from the wee) earner and savor to the ,..iovennment and beck to the

producer and manufacturer, and through them to the wage earner.

The speed

with which credit moves in these operations bears a direct relation to the
"seseeding up" in the production of our farms and forests and :nines and our

manufeotaring establishments.
This country is confronted by a vast problem of finance, but

fortunately, with vast resouroes in ;old reserves and credit machinery by
whl!h these operations may be handled.

In furnishing the Government with

the orediis required, the I-:rimary necessity is ;or eeople to save and seve

in advance of the Government's requirements in order that bond buyers may
not be required to make loans to be re aid out of future savor ;s.




THE PREVENTION OF CREDIT INFLATION
THROUGH WAR LOANS BY SAVINGS
IN ADVANCE OF THE LOANS.

By Benjamin Strong, Jr.
Chairman,
Governor, Federal Reserve Bank of New York;
Liberty Loan Committee.
WHILE this country, with its vast material and banking
resources, has made a notable record in the facility
with which large loan operations have been conducted
-the largest until recently being the placing of the Anglo-French

bonds-it has nevertheless been apparent during the past two
months that people have not fully grasped the significance of a

be
loan of, say, $2,000,000,000, the entire proceeds of which must

paid over in a very short period,-i. e., as we say, "in cash". Government loans of this magnitude, necessitated by the war, require
of the principles of
a thorough examination and understanding




ILLY 21, 1917

THE ECONOMIC WORLD

77

credit, as otherwise unskilful management of operations of that Mr. U. S. A. No cash reserves shift, no loans would need to be
size are certain to put banking machinery out of order, and dis- called and no change would take place in the balance-sheet of the
bank in respect either of assets or of liabilities.
ordered banking machinery means disturbance of business.
The third class of possible bond buyers is that which has bank
No loan of $2,000,000,000 can be paid for, as we commonly express it, "in cash". The amount is too large and payment must accounts but has no surplus balances in bank to spare for investbe made by complicated bookkeeping operations which can be ment in Government bonds. Having credit at the bank, however,
roughly described as "transfers of credit". To do this success- persons of this class are induced to buy Government bonds and
fully, credit must be shifted from the account of one bank deposi- borrow from the bank temporarily in order to pay for them.
tor to the account of another bank depositor; from one bank to This is the least desirable kind of buyer of Government bonds,
another bank; from one part of the country to another part of the although a necessary one at the commencement of the war when
country;-and these shiftings of credit involve a temporary shift- the expected savings of the future must he advanced to the Goving of a certain proportion of bank cash or reserve money, and ernent. Such a bond buyer pays for his bonds out of a bank
deposit which is created by making a loan. The deposit so made
therein lies the danger.
If every purchaser of Government bonds could make payment is transferred to the credit of the United States of America and
at his own bank and the amount of the payment be transferred and the bonds are turned over to the bank by the buyer to secure
by that bank to the credit of the Government, then the credit the bank for its loan. By that operation, bank deposits and bank
could be disbursed by the Government in the community where loans are both expanded and the percentage of reserve money held
the bank is located and no disturbance of credit whatever would by the bank is correspondingly reduced. Loans of that character
arise, because no bank reserves would need to be shifted. In a cannot be avoided, because the general rule is that earnings that
great loan of $2,000,000,000, subscribed and paid for in varying are converted into savings become capital and are usually inamounts in all parts of the country, it is inevitable that prelimi- vested very promptly in securities, or in property, or in improvenary withdrawals of bank balances from one part of the country ments to property, so becoming unavailable for Government loans.
to another will be made in anticipation of payment, and again In a general banking sense, it does the country no good to have its
after the funds are placed at the credit of the Government through- citizens sell one kind of investment in order to make another kind
out the country; they must then be gradually withdrawn to those of investment. Transactions of this kind produce no new money
points where the Government has various bills to pay. The ma- or credit. Their justification is that all buyers of the class who
chinery of the Reserve Banks proved to be adequate to meet the have engaged themselves to pay loans to their banks are forced
necessity of shifting credits from one part of the country to an- thereafter to economize in order to pay off the loans; and in that
other. Possibly a correct view of their function would be to say m ay savings out of future earnings are made available to the
that they were the chief bookkeepers of the transactions; and, Government in advance of the earnings being made.
the books being kept in twelve separate places, at each of the ReThe fourth class of bond buyers-and in some respects the most
serve Bunks, the only shifting of reserve money occasioned by important of all in time of war-is the great body of wage-earners
the movement of credit is that which takes place between the and salaried people who frequently have no bank account and
twelve Reserve Banks through the normal machinery created for spend about all that they earn. There are many millions of such
that very purpose.
in this country whose material welfare will be improved and whose
But let us look at the problem from the standpoint of the bond attitude toward their Government will be benefited if they can be
buyers There are in this country, (exclusive of a negligible num- induced to buy bonds. But how can this be brought about? Only
ber of those who own securities of foreign origin which could be by showing them how to cultivate the habit of saving-and this
resold in foreign countries), only four classes of people who can kind of saving should be developed in advance of investment, so as
subscribe for Government bonds:
to avoid the necessity. for borrowing also.
The first class of buyers comprises those who have hoarded
Take as an example, one industrial organization employing,
actual cash or currency in their houses or safe deposit vaults, who say, 20,000 laborers: If these men earn an average of $1,200
are induced to buy Government bonds and who produce that cash each per annum and can each afford to save $100 per annum, their
for the purpose. Purchases of Government bonds by such people employer could enter into agreements with them by which, say,
(of whom there are few in the United States), have the effect of $8 would be deducted from the payroll of each man every month
strengthening the banking position because they bring reserve and deposited in bank for future investment. The aggregate of
money,-that is, gold,-out of hiding and put it in bank reserves $50 apiece in six months is $1,000,000. During the process of
where it serves as the basis of credit. The change occasioned setting aside and earmarking these earnings or savings, they
in the Nation's general bank account as a result is not simply to could be temporarily invested in short obligations of the Governadd a given amount to the bank deposits, but also to add an equal ment, convertible at a later date into Government long-time bonds.
amount, dollar for dollar, of reserve cash. France, prior to the By this process no permanent bank expansion arises. As rapwar, held a vast store of gold tucked away in peasants' hiding idly as savings accumulate, they are turned over to the credit of the
places and the production of that gold in response to the Gov- Government, which issues its short notes therefor; and these
ernment's call has immensely strengthened its banking posi- short notes later are converted into long bonds. The bank balance which was originally the bank balance of the employer out
tion.
The second class of potential buyers of Government bonds is of which wages were paid, has through the savings process been
composed of the capitalists and corporations with balances in the transferred to the credit of the Government without disturbance
bank in excess of their needs. When bonds are purchased by a to bank credit.
member of this class, the owner of the bank balance, Mr. X. Y. Z.,
Assuming that our Government finds it necessary, say, every
sells or transfers that balance to the Government in exchange for six months, to borrow large sums for war purposes, how readily
a Government bond. If the Government leaves the deposit with might this be accomplished if all classes were induced to save in
the bank which holds Mr. X. Y. Z.'s account, the effect of the anticipation of such investment in the bonds of their Government?
transaction is simply a transfer of the balance of Mr. X Y. Z. to The rich man appropriates so much of his income; the rich cor-

7,6

THE ECONOI

poration so much of its profits; the poor man so much of his salary
or wages. During the period between bond issues, these savings
are turned over to the Government in instalments in exchange
for short notes. When the bond issue comes along, the short notes
are converted into long bonds. The whole operation has been conducted without the use of cash or reserve money, but by simple
bookkeeping entries on the books of banks, which result in a gradual but constant transfer of bank deposits representing the Nation's savings to the credit of the Government.
But the question will be asked: "Will not this enormous transfer of hank credit from individuals and corporations to the
credit of the Government itself cause expansion?" It will not do
so, for these credits are not created by bank borrowings but by
resavings. The Government is spending money as fast as it
must
ceives it. The ver; credit so set aside for Government use
be instantly paid o,.t. ry the Government for supplies, wages of
soldiers and sailors and for the civil establishments. As soon as
the credit is inscribed on the books of the bank for the use of the
Government, the Government checks against it and turns it back
to the very individuals, corporations and wage-earners who have
produced it. A new credit is not created, but existing credit moves
faster around this circle from the wage-earner and saver to the
Government and back to the producer and manufacturer, and
through them to the wage-earner. The speed with which credit
moves in these operations bears a direct relation to the "speeding
up" in the production of our farms and forests and mines and our
manufacturing establishments.
This country is confronted by a vast problem of finance, but,
fortunately, with vast resources in gold reserves and credit machinery by which these operations may be handled. In furnishing
the Government with the credits required, the primary necessity is
for people to save and save in advance of the Government's requirements, in order that bond buyers may not be required to make
loans at banks, to be repaid out of future savings.

rt-




'14 Os is

FINANCING OWE HI

I

IDI

LOANS.

The first offerinf; of our Government's bonds to pro-

vido it with funds for the prosecution of the war,

produced

,3,035,000,000 of subscriptions from over 4,000,000 subscribers,
and the loan was a success beyond perallol in the history of
,,overnmont finance,

t

The apponrent ease with which the loan was

ten and paid for must not, howevor, delude us into tho belief

tAt succeeding loans can be subscribed without equal or ;rector
eff rt and certainly not without more thorouf;h and extonsivo pro-

Para

Aion than was possible last time.
It must be made clear to our people that loans of the

marlaitiYe now required by our Government cannot be paid for in

cash, 01;, as we commonly express it, in "money" but they mast be

subscriad by transfers of bank credit to the Government in exchange foil its bonds, which credit the Government must at once

disburse,

order to avoid disordered money markets,

we commonly

n11 "money" must not be confused with credit, which is

Cash, wh'eh

also too often .confused in casual conversation with "money."
Cash is what we `carry in our pockets in order to make hand to
\hand payments ayld is what banks carry in their vaults as resorvo

in order that theiN depositors who require cash for making pay
roll and other cash\P nyments may be able to got it when flooded,
Bank credit on the other hand is what is owing by banks of deposit

to their depositors, an -Is not necessarily created by depositing

cash in banks, but is, in faCt. principally creatod by loans which
banks make to their customers, and which are entered on the books




C Ylr
-2-

of the bank as a deposit credit, owing to the borrowers, or to
those to whom the borrowers have transferred the credit by drawing checks in their favor.

If subscribers for Government bonds paid for them in
"cash", all of the cash held by the banks as reserves, would
be transferred to the Government's vaults,when payment was made,

the banks would be denuded of reserves and would be obliged to
liquidate' their loans, or they would be unable to meet the

demands of their denositors for cash.
The payment to the Government therefore of such a vast
sum as ,:12,000,000,000 must be made by transfers of bank balances

to the Government's credit so that the Government in turn may
check on these bank balances and pay the bills which it incurs
for the support of a great army and navy.

But we must not overlook the fact that bank credit
consists as a rule of two kinds of credit;

one being the liquid

or working capital employed by business men'and corporations for
business purposes, which they cannot spare without impairment of
the efficiency of their businesses, anC the other consists, of

idle capital and of the savings of people and corporations who receive salaries or earn profits, which they do not ne,,d to spend

and some part of which they can snare and turn over to the Government in exchange for the Government's bonds.

This process of

transfer of credit to the Government cannot very well exceed in
amount the total of idle capital and savinte which is not required
for business purposes, unless, of course, the effective conduct




-3-

of the busino s of the country is to beco' o imoaired by too

great a reduction of the working capital now employed in business affairs.
,J.thout enlarging upon the imperative necessity for

economy and tho creation of savings in the form of bank balances,

which may be transferred to the Government's use, it is well to
seo just what changes take place in banking affairs, when these
loans are paid for, and this may be illustrated by a brief doscri-otion of the .::n lisp system, whic' has -orovod such a striking

success during all of the three years of the var.
Practically all of the banks of '_ligland "cl.ar" their

checks (that is settle the differences between those which are
presented for payment and those that they hold for collection)
throw-h the London Clearing House, which has only sixteen members,
outside of the Lank of ..;ngland.

The membership consists of the

principal great London joint stock banks, which have many branches
throughout the :ingdom.
Bank of

They all carry reserve accounts with the

ngland, and what they receive or pay as a result of each

day's "clearings" is simply settled by a credit or debit
accounts with the Dank.

i.ji, their

When a large payment is made to the

British Government by subscribers to its loans, these subscribers
draw checks on their banks and pay them in to the Bank of lIngland.

The payment of these checks by the sixteen clearing banks transfers to the Government an immense credit on the books of the Bank
of 1ngland from tho reserve balances carried with it by these
sixteen banks.




If one hand.red million sterling is paid, it sin-

ply means that ono hundred million sterling which had formerly
stood on the books of the Bank of ingland to the credit of the

joint stoc- banks was transferred when these checks wore paid to
the credit of the British Government on tho bohkn of the Bank of
England.

:his transfor may at times so considerably impair the

reserve balances of the sixtoon banks with the Bank of England,

that they find it necossary to discount bills with the bank in
order to rostoro their reserve balances.

At onco that this groat

crodit is transferred to the British Government, the Govornnent
draws checks to pay its debts, bills for supp3iss, maturing obliLations and various items, tho chocks being payable to hundreds

and thousands of people and institutions, who arc creditors of the
Government.

These chocks arc at once deposited by tho so to whom

they are payable with their banks, Largely of course with the sixteen clearing banks, which in turn re-deposit them with the Bank of

land,

thereby restoring their reserve balances, or giving them

sufficient balances to onablo them to pay off their discounts.

It will be seen that the British Government has taken
100,000,000 pounds of

bank credit which was originally ownod by the

subscribers to its bonds.

This has been usod in payment of Gov-

ernment bills and those to whom the bills are paid immediately doposit the chocks and so return the credit to the banks from which
the credit was originally drawn; the not result of the operation
is to leave the each reserves of the banks substantially unchanged,
althaa

the government has borrowed 100,000,000 pounds and paid

100,000,000 pounds to its creditors.

One may ask why this does not;

create some inflation, or require sone liquidation, or at any rate



affect so: le considerable change in the banking position?

Why

ao not deposits sudden', shrink or suddenly expand, or why do not
the banks lose cash?

The answer in that those who subscribed for

the bones in the first instance have been saving "money," that is
saving bait: credit out of their earnings, for the purpose of sub-

scribing; they have not been wasting the money in extravagant living or by buying new houses or automobiles or luxuries.
II; is to sore such thoroughly scientific basis that our

bankirr; system must now be developed and it is only when people of

all classes are willing to economize, accumulate their savings in
banks and then transfer them to the Government in exchange for
government bonds, that we can enable our government to meet the
huge financial obligations imposed upon it by its participation in
the war.

There is a vast difference between what is possible in
_gland and what is possible in this country in handling barorin,7

transactions of such volume as those involved in war finance.

Ln

i].ngland there are less three hundred comnorcial banks; practically
all of them carry accounts wit31 the sixteen clearing br.rors in London

and those sixteen banks clear practically all ban_ checks and bills

throuh the London Clearing House, se that the balances resulting
from these clearings are settled at once place, namely o_ tho books
of the Bank of Lngland.

In this country we have nearly thirty

thousand banks, over two hundred and fifty Clearing Houses scattered
throughout the country and the twelve Fodoral Resorvo Banks are only
able at the present stage of their development to clear a moderato



-6-

proportion of the chocks drawn on the banks of the U itod States.
0112 country is of such vast extent, our banks are so numerous and

we have so many reserve centers, that the actual settlement, that
is the bookkeepin:: required in connection with these credit trans-

fers, must be planned and conducted with the greatest po'sible
skill in order to avoid disturbance of money rates and disorganization of busin:rns in various sections of the country,

a Government loan is paid for.
strated by the success wit

2hat it can be done was demon-

which the transfers involved in the

last loan were conducted.

To illustrate the difference between the operation of
the fairly simple lInglish machine above described and the more

complicated working of our system, an account of the transfers
resulting from the loan of last June is necessary:2rior to the offering being made it was known that banking institutions throughout the country carried balances with New
York banks amounting; to about

1,000,000,000 and in addition had

some hundreds of millions loaned on the Now York Stock 1:xchango.
It was full,

expected that in anticipation of making payment for

the Liberty Loan, those interior banks would draw a large part of
their balances fro

liew York, and transfer them to their respective

Reserve Banks in their own districts, so as to have funds available at home with which to pay for the bonds subscribed by their
customers.

This movement of ban: credit fro

terior had to be provided for.

:Jew York to the in-

At the sane time, inasmuck as the

greater part of the payments made by our government and by its
allies to whom loans were being made, wore to be disbursed in




New York, interior sections of the country had reason to expect
that large transfers of ban''- credit would be made from the: interior

to New York after the loan was maid for.

In order to meet these

movements of credit various expedients were employed and some were
arranged whic:_ it never becane necessary to employ.

The prelimi-

nar:: withdrawals from Now York commenced about June let and ex-

ceeded ,500,000,000.

They wore met principally by the Reserve

Bank cliscoantin:; bills and makinrr loans freely for its members,

its loan and bill accounts increasing in the first twenty-eight
minimam to

days of June from
maximum.

Lt the same time the British Government, whic-_ had con-

siderable payments to make in this country, shipped
of go3d from Canada to New York, all of which was purchased by the
Federal 1,esorve Bank of Dew York, which correspondingly increased
the reserve money in New York City rtn(1 made It so much easier for

the New York banks to meet the withdrawal of balances made by
their interior correspondents.

It

was also arranged wit'

the

Treasury Department to make certain transfers of Government deposits to New York, thereby solewhat offsetting the movement to
the interior.

The fourth expedient, a very effective one, i

never became necessary to employ.

no_ of the Reserve Banks, well

in advance of the commencement of this movement, completed all the

details of an arrangement by Which any one of the .reserve Banks
might settle debit balances owinr to any of the others, if found
neon Cary, by transferring loans an

discounted bills instead of

gold (that is its reserves) and under a simple plan by which these
bills and loans need not oven be shipped to the ban: which pur-




chased them, but could be held in trust by an officer of the
borrowing bank who had already been appointed agent of the lending bank for that purpose.
The arrangements just described facilitatedthe movement
of credit from ITow York to the interior without disturbance in

the money market, but the return of this credit to those narts
of the country from which Liberty Loan payments have been transferred to New York is a gradual process, depending upon many
factors, and brought about largely by the country's commerce
and trade.

The funds subscribed for the purchase of Liberty

bands on the Pacific slope will ultimately be largely expended
there by the Government in the construction of ships, the purchase of cattle, grain and food stuff, canned produce and the
of or products of that section.

On the Z:astern slope of the

:ockies the production of oil, sugar, grains, cattle and of the
mines will likewise find their way into the bards of our Government, or of its allies, and the proceeds of subscriptions
to the loan in that district will gradually return to that section of the country.

Iii the same way, the products of the

cotton and woolen mills, shoo factories, munition plants, etc.,
;I new :]ngland, whic. arc largely purchased by the Government,

will inevitably draw back to that section the funds that have

been temorarily transferred to the Government an- disbursed
principally in Dew York.




-8-

The twelve -eserve Banks settle balances owing between
themselves once every week and for that purpose they carry in
the noirhborhood of ,)500,000,000 of :old in Washincton, the

ownership of vhlch changes from mei: to week, accordin:, to the

amount owing by or to the respectIve banks.

It will be seen

that the machinery above described which operates by telegraph,
is simply a moans of overcanin,, the disadvantages of distances

and nail time an0 avoiding too heavy interior shipments of cash,
or reserve money.

Considering the un-f)recedented amounts of the

tbansfers of credit involved in these government transactions,
it may be considered to be a fairly effective machine and one

which can be relied upon to accomplish the objects for which it
has been created.

But after all, those who buy the bonds of our Government
are not so much interested in the details of this complicated accounting, which becomes necessary every time the Government pllces
a large loan, as they are in more specific statements of the nrobable amounts tJ be borrowed and to what extent those bo,-rowin-s

may prove a financial burden and involve sacrifice and hardship.
It is impossible for any one to state what may be the financial
requirements of our Government in connection with the war.

If

tho war continuos, we must simply expect that these requirements

will be beyond all precedent and likely beyond Ahose of our allies

in mrope.

:e must n t only finance our own armies and navy, but

as the tremendous natural resources of this country must produce




OLVAC,I,

C

-9-

a part of the supplies required to sustain the armies and home
people of our allies, we must prepare to -aloe great outlays in

the way of loans to those governments that find it necessary to
buy supplies in tAis country,

The problem is not so much to

convert the wealth of the nation so that it may be invostod in
Government loans.

Our wealth is largely fixed property.

We

must arrive at a corroct understanding of what income the capital
wealth of tho nation produces, how much of that income is absolutely essential to the comfortable support of our people and, lastly,
how much ih e.:cess of that may bo savod and turned over for. use

by the Government; it is undoubtedly a vast sum.

The capital,

wealth and income of this nation e:ceeds that of any other nation
in the world and probably that of alv: two nations in tho world, but

we are an extravagant and wasteful people.

We have lived in a land

of such abundant prosperity, that we have reckoned less on the cost

of things than we have on the profits resulting from the application
of our energies to developing our resources.

The time has now come,

however, wren this great capital wealth of the United States will not
avail us to meet our obligations incurred in the war unless we see
to it that it produces the greatest possible income and that that
income is not wasted.

Various estimates have been made as to the amount of loans
which it would be possible to place in this country.

It is stated

that as England has a wealth of less than 400,000,000,000 and can
borrow 420,000,000,000 or more, therefore this country with a
national wealth of from 4475,000,000,000 to 4225,000,000,000, should
have no difficulty in borrowing .)40,000,000,000.




But such

-10statements are rash, if they fail to take into consideration the
habits and purposes of the people.
save from 25

The Prenc

to 50;) of their incomes.

peasants aim to

How many of us, rich or

poor, can say that we are influenced by any such purpose?

In

Prance economy is hardly loss than a national institution, the
tradition of saving is so deep-rooted in the minds of the people.
T e Liberty Loan just placed brought forth a fine ez-

hibition of patriotism and self-sacrifice by those who gave freely
of their time and services without compensation, in order to ensure its success; but no effort, however energetically anplied or

intelligently directed, can be enacted to enjoy continued success, unle-s o, r people spend less than they earn, and very much

less than they earn, and employ the difference in the purchase of
government bonds.







VAS

izonora.

For throe yoarc no havo boon roadil
war tInd the noc000ity for economy.

of the =stag° of

:he daily papers and Llagazinos

r000mat the doutruotion of property, tho shortaco of various kinds
of food and supplies nnel tho necoonity for enlarging the p-oduct aro roquirod to doc troy human life abroud, or

tion

e at honn.

pport hunt=

tc

pooplo should praetioo rigid economy in order

world over

th

occasioned by tho tar.

ot the variou

to

t in .hie prosperous

of as yet
rev/

pinch

of

average unn is
in::: and cowman,.

fnot, bocouo ipperntivo

It has,

f denial; pr

-^fairs much ao =lull, buy_
he noods,cnd possibly

.t ho

to the burdonu of

with sono lack of fore

blo t f the pooplo of

eco-n in

lies

this nation disrogard the ozporionctv of our
a

the

- have sorlowL-tt advancod, but the

ill going nb

oituation which may=

country

fail to

proctiato the porilo with :Thiel. the world
At the sann tine I'm aro beir.c: ask

to the Govornmont, raid it 12 important

o

large loans

we should oonsidor

just what relation those loans boar to the problonn of mato and
oconopy, and thy succo'so in placing then is of =promo ipportanco,

both for military roacono ac well as for the nationto matorial
prool)ority and financial security.

Nose and allied quostiona

conprice the groat oconoulu sroblom of warfaro, and, au this is
o groatost war in the world's history, so the oconomic problon
the ::roateot and most 00ri012.0 that tho world has over faced.




2ho mnstage of war, asido from tho actual doutruotion

of property in the mar Sono, may bo oihibitoi by a fol./ ainplo azamplos for Ohloh, without authoritativo information, I am arbitrarily supplyinc figuros for purp000u of illustration only.
;:hon a man is oallod upon to incroauo his physical
ozorti'
an

uroasod mustago of tho tioauou of tho body roculto

oy must u

I-

hunan onuim,

oe

e moro fuel.

on

gaged in

askIntored by en increased conaumption of food.

n,:ratos uoro heat, and, oonooquantly, nnot ro-

If there aro 30,000,000 men under arms, oithor

or
fightini7:

coinc intensive training, or en-

,

M

earious act,

phymioal exort

n, th© inaroa

lo

itiec of war, all requiring unrcual
d

rrumption of food by thou° men

oorrosponds

:ort ion oxpondod ovor what

ily oanounou 4 ounces

army oonsunoo 9

of broad whoa at ho. to

=noon, tho aotivitiou

hoco 30,01

,Oi°

demand upon tho broad supplioo of the world

150,000,000 =noon per day.

will incronoo the

nu loss than

If, in tino of

re out

2 pairu of uhoou a yoar and when in tho t.,sr

6, tho world mat

produce 100,000,000 pairs of Shoos per

in oxoons of its

former production.

If 4 aeditional milts of clothoa are roquirod

ovor normal, 120,000,000 additional auits of clothes must bo prodnoed every yoar.

:ho consumption of fuel illustrates =stag() with oqual
Toro°.

In timo of peace the world'u groat navies aro,

2art,

hold in r000rvo and in part pursue aw leisurely coureo from
port to. another, at such apood and under such conditions as



one

a

-3-

roault in the rroatect possiblo economy of fuel.

:today thew

groat flootu are mobilized and are patrolling the soar at high
spood.

2housands of now motor trucks are convoying aumunItton

and aupnlioc in vast quantities at high speed; thousand° of now

noroplanos are also ammuntag apeollno.
donand for fool,

Tic inoronso in the

oth coal and ell, growing out of those onlarged
laced an imancnno strain upon the capacity of the

activitios, 11

uoo coal and oil.
ho sa.:710 fauhion the motels roquirod for war par-

posou are

(". consumed nt a

war broke

o hit:tort° unknown.

or was poruanantly w-ztod or last;

on and all tho various

old ooppm. roc

appliauoos in whic

were sorappod and the

longer sorvlooablo,
.

of tons of copper are beint,

nod,
the

20any thousands

-o dostroyed so

that they aro no:, rocoverablo

all the

war Which n000uoitato the uso of this

other notalz

oonsuned in ha
quantition that the
action in =OP. y oqual
2hoao many but 'siblo
of are

d

on the world's

orual tines, and uunuod

ure that would be ap-

t uuot bo borne in nind

ago of roods of may
which are now being

gerent nations for use

tly, tie world faoom



Until the

°mato of
o being

-4-

two problems:

First to increase production and to reduce peace-

ful consumption of foods and materials required for war purposes;
and, Second, to furnish the governments at war with the necessary
credits, that is banking funds, to enable them to pay for these
goods which are being in a sense wasted, because their consumption does not result in the production of other goods required
for sustaining human life or for affording customary pleasures.
The situation is, of course, the more serious because

at the same time that the war tremendously increases demands for
the production of goods, these 30,000,000 men have been taken out

of agricultural, industrial and commercial occupations and, consequently, the number of human beings available for producing
goods has been correspondingly reduced.

Various means must therefore be employed to enable our
government to furnish our own armies and those of our allies with
the supplies which they require, and to provide which necessitates

our placing at the disposal of the government vast sums of money
or credit as they are needed.

The principal means possible may

be briefly summed up as follows:
1.

The deficiency in labor caused'by the withdrawal

of man from normal occupations must be made up by supplying other
labor, - that is men who have not worked in the past, also women
and even children,
2,

Increased production must be stimulated by the

employment of labor saving devices and by cooperation among producers, so as to bring about greater efficiency and economy in
the application of labor, and thereby increase the output even




e

though at higher costs.
3.

Economy must be,prooticed by pooplo at hono in the

consumption of tho so things, particularly food, whioh are noodoft

abroad for war purposon.
4.

2ho purchase of artiolon of luxury- that in thing

which simply affo d pleasure - must be uurtailod or discontinued
in ordor that la.' t now engaged in producing such articlon may bo
reloacod fo

oon,-

botl.

5.

.,,.loyl.tont in producing nom things whiuh are °n-

or war purposos and for Gusto in human life.

t a

by ovoryono

f7rr-,11,Ao of earnings over ax-

luont, thus enabling it to

'onsoc may be t

navy

pay and curtain

amploy throe pos-

_zed in war

A govornuent

ciblo moans for turniWain,

r all, a rathor

inanoo

2ho probloil

simplo one.

it be practicod

onorn1 oconomy of oxpenditure

i

if with n

uar purposes

mirht confisoate the goods roqu

It

on:

.1

y

nothia!): to the ownerc or produeorn; this was the moans ...loyed
oc:-Itnrion ago t feudal Europo and man u

collection.

Or it Elklit levy taxes,

ocuivalonti

pay

a tax

.'or credit,

ana uoo the funds to produced to pay war bills.

Or it might oven

raglan) Ito oitizons to lord it their Raids, giving to tho lend era it

obligations paynblo at future dates.
2o a oortain extent, all throe means are nor/ beinz em-

ployed by all the govornmonts at Aar.
figuren, ii:untrating this pr000ns:-

2_,

use certain arbitrary

1 i our Govornmont mot Inv°

twelve bkaion dollars for ono yenes conduct of the war, it
night produce or save too billion aollnrs thoroof by arbitrarily



fimin- the prioor3 of the c:oodo '.31.1oh it buys oculowhat bolow tho

aatunl markot value of ',hose cods.

Thin in a partial confine°,

tion of goods produced by the farrior and maxtufactiL'or and is in

the nature of a tax upon the country's production.

zxvornuent

than might nay to its oitizons - "':;o will now roquiro you to fur-

nish un ton bill

n dollars; two billions payabl

an taxoc, thnt

is to say by co e''knoation'of your funds, for obis' we will Give
nothing it

- and for the remaining eight billionn it
its oitisons -

w -

oo will not roc uiro you to furnish

in roturn, but we amply
to t

extent of your moans, to turn

aver oight bill

ornnont, for which in return

wo will civet you

torost."

future date, with in-

Zhc; Governl

onourh during the porio,

o outstanding to on-

t

dblo it to pay the intorent

p

is to say to pot asido a nufloi

pal; that

t ovary yoar

rotiromant of the principal of the bond

so that tho

the
tr1

would

have boon retired at Lnturity.
Viewing the problem o

war

weakam;i0;.ny

in its

broadont nano, it will be soon that tho Covornmont requires
oortain goods for was purposes, the Goods required must L: rgely
rooult from ti production in excloan of the amount normally pro-

duos&

to produoo thou() ;roods not only mot output be increased,

oonsumption nt hone must be f-oaroased.

Although th000 goods

will be wasted by the amiss and navies, they must novortL.ele:m
be pain for by tho government.



Payment by tho rmvorniaont will bo

'Li N.

A1.

-7-

possible only if the people of the country economize so generally
that they will be able to provide the government with sufficient
credit so that it may purchase this vast store of goods, which is
to be promptly destroyed.

It will be observed that in the nresent, as in past wars,
the greater part of the credit required by the Government is that

which it asks its citizens to contribute voluntarily by purchasing
government bonds, which is simply another way of saying that the

government asks its citizens to set aside a proportion of their
earnings and invest what they save in government bonds.

Should

the people of our country fail to voluntarily furnish the government with funds, the consequences would naturally be fatal to the
successful prosecution of the war, unless the government thought
best to employ the other two means;

that is arbitrary confiscation

and taxation, exclusively for financing its war operations.

Such

a policy would disorganize the business of the country by rendering
much of its apriaultural, industrial and commercial -ctivities unprofitable.

This would simply be restraining rather than stimu-

lating the country's productive capacity at a time when Lroduct ion

must be tremendously increased.
If democratic institutions, such as the people of this
country value and enjoy, are to endure, in other words if this war
is to be promptly and decisively won, our people must either freely
furnish the government with the funds that it requires or they

must submit to a surrender of that democratic freedom for which
their fathers fought, and permit the government to commandeer goods
and credit as it may be needed;




there is no middle ground.

UNDERAL RESERVE: BANK

OF NEW YfiRK

C `err
FINANCING GOVERNMENT LOANS.

The first offeringef our Government's bonds to provide it with funds for the prosecution of the war,

produced

:,4:3,035,000,000 of subscriptions from over 4,000,000 subscribers,

and the loan was a success beyond parallel in the history of
government finance.

The appearent ease with which the loan was

taken and paid for must not, however, delude us into the belief
that succeeding loans can be subscribed without equal or greater

effort and certainly not without more thorough and extensive pre.

paration than was possible last time.
It must be made clear to our people that loans of the

magnitude now required by our Government cannot be paid for in
cash, or, as we commonly express it, in "money" but they must be
subscribed by transfers of bank credit to the Government in exchange for its bonds, which credit the Government must at once
disburse, in order to avoid disordered money markets,

Cash, wh'ch

we commonly call "money" must not be confused with credit, which is
also too often conrUsed in casual conversation with "money."
Cash is what we carry in our pockets in order to make hand to

hand payments and is'what banks carry in their vaults as reserve
in order that their depositors who reouire cash for making pay
roll and other cash payments may be able to get it when needed.
Bank credit on the other hand is what is owing by banks of deposit
to their depositors, and is not necessarily created by depositily;

cash in banks, but is, in fact, principally created by loans which
banks make to their customers, and which are entered on the books




a

C relt

FEDERAL1RESERVE BANK
'
OF NEW YORK

-2-

of the bank as a deposit credit, owing to the borrowers, or to
those to whom the borrowers have transferred the credit by drawing checks in their favor.

If subscribers for Government bonds raid for them in
"cash", all of the cash held by the banks as reserves, would
be transferred to the Government's vaults;lhen payment was made,

the banks would be denuded of reserves and would be obliGed to

liquidat their loans, or they would be unable to meet the
demands of their der ositors for cash.

The payment to the Government therefore of such a vast
sum as cg2,000,000,000 must be made by transfers of bank balances

to the Government's credit so that the Government in turn may
cheek on these bank balances and pay the bills which it incurs
for the sup7ort of a great army and navy.
But we must not overlook the fact that bank credit
consists as a rule of two kinds of credit;

one being the liquid

or working capital employed by business men and corporations for
business purposes, which they cannot spare without imr_irment of
the efficiency of their businesses, anC: the other consists of

idle capital and of the savings of people and corporations who receive salaries or earn profits, which they do not ne'd to spend
and some part of which they can spare and turn over to the Gov-

ernment in exchare for the Government's bonds.

This process of

transfer of credit to the Government cannot very well exceed in
amount the total of idle capital and savings which is not required
for business purposes, unless, of course, the effective conduct




-3--

of the bu.oinecn of tho country is to beco_o impaired by too

great a reduotion of the working capital now employed in busineon affairs.

Without enlarging upon tho imporative nocossity for
oroation of savings in tho foru of bank balanoon,

octane

fozrod to the Govornmentw. _ uso, it is well to

may bo t
30

a take place in banking affairs, when these

just what

log

sari:

are paid fo

and thin may be iLlustratod by a brief do-

whioT has provod suoh a striking

on of tho

snow:inn d

years of the rinr.

inr

of .4ngland nol-_Arn their

Praot

are

°hooka (that is

old for colloction)

presented for paythroucch tho London CletxLe-

sixteen uembern,

iso,

consists of the

ontsido of the Bank of_

principal groat London joint stock
throwhout the ::ingdan.

w

have many branches

..ley all carry reeo

---2,77-ith

the

-;ngland, an0 what thou- rocoivo orA y au a rouuli, of oaoh
do ,.-. "oloarinre is .:imply nottlod by lfro!rodit or debit

amounts with the Dank.
Britis

thoir

Whon a large paynont is made to the

Governmont by sabseribers to its loans, those enbacribors

draw ohoc:isa on their banks awl pay then in to the

The paiment of these Choo;:s by the sixtoon oloariar banks trans..-

fere to the Govornmont an iminnao orodit on the boo_ ts of tho Bank
of 1:mcland fron the resorie balanoou carried wit': it by these

oixteon banks.



If one Imam& millions sterling is paid, it sin-




affoot collo oonaiciorcblo change in the barking pooition?

do not deposit, ouddenlw shrin:: or auddonly expand, or why do not
the bt.Inkm lose audit`l

o anawor in that th000 who uubooribed for

tho bonds in tho first inutanoo have boon saving "money," that is
savin7 ban_: orodi

scribing; they

out of their oarnincs, for tho purpose of sub-

vo not been wasting the nonoy in extravagant liv(7 now hon000 or automobilos or luxnrioS.

to oo_o ouoh theronchlz; scientific basis that our

nlurlt

bankin7 eyu

all olazsou

2a

11

bo dovn
to c

pod and it le on1;" won poop]n of
onizo, aocumulato their aavinco in

bnnkn and then

rnmont in exdhango for
vornment to moot the

covornment bonds,

huge financial oblian

y itc participation in

on2

tho war.

2horo is a vast a:i
uountry in handl

transactions of ouch volum au those Li, avod in war hundrod
thoro aro loco threw Anna°.




In
%,

all oi them oarry a000anto with the oixtoon

it.:#0

and thou.:* eixtoon ban:co olear praotioally all ba
throu.' h tho Longion Cloaria- Haase, so that

:6110

ba

iron thoso cloarings aro oettlod at one plaoo, n
of the Bank of :.;r

lend.

In this oountry wo havo

thousand banks, ovor two hundred and fifty °latr

throuOtoat tho ocuntry and tho tvelvo Yoderel Ro
ablo at the w000nt otacc o.

their development to

proportion of tho ohooiz drawn on tho bnmAs of tho U itod antes.
Ouf country iu of suo7. vult artant, our Main are uc nworous and

wo havu so uany reserve cantors, that the actual sottloment, thnt
is ;;Lo bookkoopirk rociuirod in connection with those arodit transfers, mutt be plannod ana conducted with the greatest po.2,siblo

skill in order t
sation of bun

avoid disturbance of money ratoo and diuorGmai=

in varionu Emotio ns. of tho country,

can is paid for.

a C;ovo

otratod by

o sucooss

last loan

Ivory tine

:Int it can be done was demon-

o conduotod.

whicL the transfore involved i:i the

ronco between th

the fairly amp

deaeribod and the moro

complioated woxl

ro-ultinc fr

operation of

t of the transfor

the l

of

n

,Apt June

wcs knom that bank-

Prior to th,-) crifo

3aunti

inp: institutions throughout
York beanie: amounting to about

0A1,000 and in a

1

.ohlo bandrod:1 of millionc loaned on

It was flaiy c=peotod that in anticinat
tho Libor*, loan, thono interior benkn .7o
their balancer; fro

os with New

rri,

tion had
`nahange.

_ymont for

argo part of

Lev York, and transior them tu their rospootivo

-:ouorve Banks in their own districts, so as to have funds avail-

able at home with which to pay for tho bonds subscribad by their
cuotomars.

Ills movement of bai

terior had to bo provided for.

groator part of the

pay:lantn

aredit fro

1-.07, York to the in-

At tho aano tiro, inasmuch as the

made by our govornment and by its

allies to whom loans more boing made), were to be disbureod in



4

,

Bow York. interior (motions of the country had roason to aspect
that large tranafors of banerodit would be irndo fro:-.1 the interior

In order to moot those

to Now York attar the loan was paid for.

movements of credit various expodionts were employed and some wore
The prolimi-

it never beam:Jo necessary to employ.

arranged whio

nar,7 withdrawals -*

New York commenced about Juno 1st and ex-

(seeded ,500 00

They were net principally by the -ooerve

0.

bills and making loans freely for its members,
ill acoounts increasin; in the first twenty -oight

prininnM to .1a)litt._62-6,/§r
maxi mum.

ritiui Gavernment, ethic :. had con-

th

eikterable pail=

shipped

,

of golt'groei C

,

ork, whic

Federal :osorro Bank

e31 wns purohasod by tho

all of

.ospellLingly incroased

co

it so mine). oC,Sier for

the roeorvo monoy in Lau IC,-

the Low York banks t

mado by

meet

their interior corrospondents.
Treasury Dopartmont to :lake certain

t2*

the

a-s also arrauc-

posits to Lou York, thereby saieWhat of
the interior.

Aiar- the 0 ortent to

the fourth azpeddent. a ve

never booamo ncoossary to employ.

do-

fere of i1170.L

ttglas0

L!

0110,

11:

4.43:. of tho rAmerve Banks, well

is advanoo of tho oormenoemont of this movement, eamplotod all the
detail: of an armagenont by vihic7,. any one of the 2esorve Banks

mi-ht eettlo debit balanooa owing to any of

othors. if found

nooeseary, by 'bran:Igoe:ring loans am!' discounted bills inutead of

;old (that is Ito roorves) and linear a simple plan by which these

bills and loans need not oven be ohippod to the bank whioh pur


chased than, but could be hold, in trust by
an officer of the

borrowing bank vho had alroady boon appointed Amid of tho landing bank for that purpose.

ho arrnngouonts just dosoribod faoilitatodtho movemont
of credit from how York to the interior without
disturbanao in
the money mark
but tho roturn of this crodit to these oarto
,

of the oann

from which Libort;

paymonts havo boon trans-

York is a gradual process, depending upon
factors, and trade.

browilt
The

about largely by the country's

=boor

bonds on th

=Ay

cora:lore°

for tho purchase Jf TAborty

ultimately be largely expandod

;hero by tho

ion of chips, tho pur-

so of oattlo,

od prokuoo and tho

ot_ar products of that oo

torn slope of the

_ookios the production of

and of the

arose will likowioo find the

tho

o

=fluent, or of its allios, and tha p
to the loan in that dietriot will

gr s

tion of the ooantry.

way,

In the no

x Gov-

tie=
return t

tint soo-

f tho

cotton and woolen mills, shoo factorioo, munition plant°, oto.,
of Low .4n0and, Alio: are largely purchased by the Covornuent,

will inevitably draw back to that coot ion_ the funds that have
been temporarily tranoferred to the C:ovornment an- disbursod
principally in Ilea York4




-8-

telvo .:40orvo Danlzt settlo balanoos owing botwcon

thomsolves onoo ovory nook and for that purp000 they carry in
the neighborhood of ..300,000,000 of

in ;:ashington, the

owneriip of which ohangoz fraa wook to wook, acoording to the
amount owing

to tho reopootrve ban.? c,

It will bo soon

ory above doocribed which cv.oratou by tolograph,

thnt the

man of ovcroomil,: the disadvantagos of distan000

y

and mil

40 tzlil avoiding too hoavy interior :11ipments of cash,

the unpr000dontod amountz of tho

or resol

in these

ftanfiforo

ISOV eminent

transaot ions ,

lootivo Llachino aila one

It may bo co
Which aura be rel

on

lc objootc for which it

has boon created.

3ut after all, th
are not co much interacted

.ails of this

counting, which boo:lone:3 ncoo;sary eve j ti719 the Go

a lnrgo loon, az they arc in moro op,
bable amounts t.) be borronod and to w

may prove

ific otatomon

=tent

finanoial burden and involve c

mplioatod acrnmant photos
of the probof.-rowingo

co and hardship,

It is Iwo :1131110 for any one to state nhat may bo tho financial

roquiraaautc of our Govornmont in connection with tho war.

If

tho war continuos, we must simply expect that these requiromonts

will bo boyand all pr000dont and likoly beyond those of our allies
in ;Inropo.

o mat n t only: finance our can armies and =my, but

as the tremendous natural rosourooc of th1




country must produce

U)EP.AL RESERVE BANK
OF NE.11 YORK

'a

part of the supplies required to sustain the armies and Ilome

people of our allies, we must prepare to ::ake great outlays in

the way of loans to those governments that find it necessary to

buy supplies in tds country.

The problem is not so much to

convert the wealth of the nation so that it may be invested in
Government loans.

Our wealth is largely fixed property.

We

must arrive at a correct understanding of what income the capital

wealth of the nation produces, how much of that income is absolutely essential to the comfortable support of our people and, lastly,
how much in excess of that may be saved and turned over for use
by the Government; it is undoubtedly a vast sum.

The capital,

wealth and income of this nation e.(ceeds that of any other nation

in the world and probably that of any two nations in the world, but
we are an extravagant and wasteful people.

We have lived in a land

of such abundant prosperity, that we have reckoned less on the cost
of things than we have on the profits resulting from the application
of our energies to developing our resources.

The time has now come,

however, wren this great capital wealth of the United States will not
avail us to meet our obligations incurred in the war unless we see
to it that it produces the greatest possible income and that that
income is not wasted.

Various estimates have been made as to the amount of loans
which it would be possible to place in this country.

It is stated

that as England has a wealth of less than 4100,000,000,000 and can

borrow 420,000,000,000 or more, therefore this country with

a

national wealth of from 4175,000,000,000 to 4225,000,000,000, should
have no difficulty in borrowing 440,000,000,000.




But such

I
-10-.

statements aro rash, if they fail to talc) into ooncidoration

habits and puaToses of the pooplo.

`ho Prenc

sav%:1 from EV; to WI, of thoir incomns.

pocks:ants atzl to

How many of us, rich or

poor, can ay that wo aro influancod by an-: sudh purpose?

1:1Enee economy I
tradition of u

,

t to

Ia

hardly loss than a nrtlonal LIctitatisa, the

*

i

,

so doep-rootod in the mind a of the people,

borty Loan just placed beought forth a Pimo oz-

h

on o

of thet:

-Jat riotisu aLd self-saurifico by those Who gave frooly
,,? and sorviooc without oomnonsation, in ardor to en-

'-

sure itu _, ,cos

I

no off

,

hovrovor onorgetioally applied or

o orrocotod to enjoy continued sue-

intolligont y

they earn. and very much

coos,

lace than thoy oa
3.arernuont




.n0

to

the Sif

onoo in tho purdhaso of




ADDRESS
BY

BENJAUIN STRONG
GOVERNOR OF T} FEDERAL RESERVE BANK
OF NEU YORK
at the

LUNCHEON
of

THE BOND CLUB OF NEU YORK
held at

THE BANKERS' CLUB
September 14, 1917.

MR. STRONG:

This meeting is to me the visibly manifestation of
the consciousness is growing that

what is taking place all over the country:

we are at war, and with that consciousness is developing a sense of personal
responsibility in the mind of each citizen.

The discharge of that responsi-

bility can only be effected by organization, and without invitation, without
than the consciousness that we have a responsibility, we
are organizing to discharge it.

Your organization we look upon as an adjunct of the Federal Reserve
Bank of this city, and I would like to say a few words about the particular
functions which this bank(performs

__enerally) in the Government's financial

transactions in connection with the war.4here are three:
One isrdenerali..kty supervise the selling of the Government's obligati3ns.

For that work of course the Reserve banks were not equipped and they

could not be equipped without the assistance of the bond men and of the bankers it wouldn't have been possible without the help of you men - we had to rely
upon the voluntary organizations which were created and which did the work so
effectively when the last issue was sold.

you know the work in detail - I

won't enlarge upon that feature of it.
Our supervision of it is indirect, is through committees, which at
this time I think are organized along lines that will cut out a great deal of
lost motion and make it easier for all of us.

The second function (and in some ways a more important one from our
standpoint) is to conduct the financing of these payments that have to be made
when the instalments become payable.

We are too apt to consider that when

the Government places a loan, amounting to thousands of millions of dollars,
that we are handling money.

je are not handling money, we are handling credit.

These Government loans are simply the instruments through which the Government




-that the Govfinds it possible to buy goods and services, and to the extent
be inernment borrows money for that purpose, the iroduction of goods has to

creased over normal production and consequently the mills have to work faster,
the farms have to produce more wheat and cereals)

everything has to move fast-

er, and ol:v-', element in the problem is to make credit move faster.

You might say that the Reserve banks in a sense are the bookkeepers
in this transaction.

They must see that this great tide of credit flows from

its original owners, the subscribers to the bonds, through the subscribing
banks, into the Reserve banks to the credit of the Government, out again into
the depositary banks, when it is finally distributed by the Government and ultimately flows back where it came from, to those very people who are producing
these very goods that the Government is buying out of this great credit fund.
To do that successfully, to conduct this so-called bookkeeping operation successfully, very extensive machinery has to be devised.
Our experience in the last loan has thrown a good deal of light upon
the problem.

I think you will all agree that, considering the magnitude of

these transections,(for the Reserve banks now have borrowed for the Government
a total of nearly three and one half billion dollars since the war started, ) they

have been conducted with reasonable success and without great disturbance of
money conditions.

If the Reserve banks can continue to do that, our function

as bookkeepers will be successfully performed.
The third function is that of the Government's fiscal agent in a direct
sense in handling the Government's funds.

It is now eighty years since the Gov-

ernment had a true fiscal agent, and I think it is no exaggeration to say that
these transactions could not be conducted with our complicated banking machinery,
7,000 banks to be dealt with in the United States, without the employment
of a machine of this character, and the Government is fortunate in having had a




-3-

Reserve System to employ for managing these great ,overnment transactions.
This function of handling the Government's deposits, which is conducted, of
course, under the direction of the Secretary of the Treasury, has been going
on for some time, but its magnitude and importance has only developed in the
I think the Reserve banks have handled practically all of

last few months.

the money that has been paid in from the proceeds of the certificates of indebtedness and the issue of two thousand million Liberty Loan bonds without
any of it going directly into the Treasury of the United States, as Didid in
Had it been paid into the treasury of the United States, we

former years.

would certainly have had money market convulsions that would have pitziavoed
business in this country.

In that sense again, however, the Reserve banks

are simply bookkeepers.

You are going to be confronted, in handling this next issue of bonds,
statements

many banters that they hesitate about putting in very large

subscriptions for bonds for fear that the payment of these subscriptions to
the Reserve banks will reduce their deposits too seriously.

I think the bank-

ers who make that statement overlook one very important thing;

that the pay-

ment which they make ispfirst, simply a credit entry on their books in favor
of the Government;

that it is then transfered temporarily to the Reserve banks,

and under the plan which has operated aucces:Jfully, and will, I believe in the

future, it is disbursed almost simultaneously and soon must return where it
came from.

The difficulty which the country banker fears particularly is that

that credit may not flow back to his particular locality promptly enough to
enable him to meet his various engagements;

but we must remember that every

part of the United states is producing goods that directly or indirectly are
entering i::to war purposes.




Take the Pacific coast:

they are starting to build immense numbers

-4they are shipping timber to the East;

of ships on their seaboard;
shipping vast amounts of oil;

they are

they are enlarging constantly the area of dis-

they are shipping grain, cattle and the products

tribution of their sugar;

of their l_ines, not necessarily directly to the Government, but indirectly

they are filling the vacuum that is created by the draft of the Government
on sections that are nearer the Atlantic seaboard.

As payment for their pro-

ducts gradually progresseiithroughout the year that credit automatically flows
back to that very section which has subscribed to these bonds.

I anticipate

no difficulty whatever so long as we have the Reserve ban{ machinery to fall
I)

back on, or the bookkeeper to fall back on, during the interval between the
time when the subscriber pays for the bonds and the time when the Government's
disbursement of the money effects its return to the section it came from originally.

I have already said more than I intended to say, but I want to conclude tith one word suggested by 1.1.r. Vanderlip's remarks.

He spoke ahout the

difficulty of compensation for the work that was being done by this organization
and by many others, in assisting the Government in financial and other matters.
I look at it in this way:

it would certainly be presumptuous of me or of any

officer of the Reserve banks, or possibly for any officer of the Government, to
say "thank you" for that work.
can people.

If thanks are due, they are due from the Ameri-

You are acting for them, for all of them, but as a reward - and I

have seen evidence of it, as all who have been to L;urope since the war started

have seen - there are millions of anxious, careworn penile there who have their
eyes turned toward this country;

they are looking to us for help.

Our entrace

into the war is interpreted by those millions of people as the harbinger of some
brighter day that is going to dawn, and if you gentlemen want your meward, your
real reward, you will find it by searching the hearts of those careworn people
that need help.



ADDRESS BY BENJAMIN STRONG
GOVE1140i1 OF THE FEDERAL RESERVE BANK OF NEW YORK
at the Luncheon of
THE BOND CLUE- OF NEW YORK
Held at The Bankers Club, September 14, 1917.

Mr. Strong:

This meeting is to me the visible manifestation of what

is taking place all over the country:

the consciousness is growing that we are

at war, and with that consciousness is developing a sense of personal responsibility in the mind of each citizen.

The discharge of that responsibility can

only be effected by organization, and without invitation, without any more stimulation than the consciousness that we have a responsibility, we are organizing
to discharge it.

Your organization we look upon as an adjunct of the Federal Reserve Dank
of this city, and I would like to say a few words about the particular functions
which this bank performs generally in the Government's financial transactions in
connection with the war - there are three.

One is generally to supervise the selling of the Government's obligations.

For that work of course the Reserve banks were not equipped and they could

not be equipped without the assistance of the bond men and of the bankers - it
wouldn't have been possible without the help of you men - we had to rely upon the
voluntary organizations which were created and Which did the work so effectively
when the last issue was sold.

You know the work in detail - I won't enlarge upon

that feature of it.

Our supervision of it is indirect, is through committees, which at this
time I think are organized along lines that will cut out a great deal of lost
motion and make it easier for all of us.

The second function (and in some ways a more important one from our
standpoint) is to conduct the financing of these payments that have to be made
when the instalments become payable.

We are too apt to consider that when the

Government places a loan amounting to thousands of millions of dollars, that we
are handling money.



We are not handling money, we are handling credit.

These

Government loans are simply the instruments through which the Government finds
it possible to buy goods and services, and to the extent that the Government
borrows money for that purpose, the production of goods has to be increased over
normal production and consequently the mills have to work faster, the farms have

to produce mom wheat and cereals;

everything has to move faster, and one element

in the problem is to make credit move faster.

You might say that the Reserve banks in a sense are the bookkeepers in
this transaction.

They must see that this great tide of credit flows from its
into

original owners, the subscribers to the bonds, through the sub scribing banks,

the Reserve banks, to the credit of the Government out aLain into the depositary banks,

when it is finally distributed by the Government and ultimately flows back where it
came from, to those very people who are producing these very goods that the Government is buying out of this great credit fund.

To do that successfully, to

conduct this so called bookkeeping operation successfully, very extensive machinery
has to be devised.

Our experience in the last loan has thrown a good deal of light upon the
problem.

I think you will all agree that, considering the magnitude of these

transactions, for the Reserve banks now having borrowed for the Government a total
of nearly three and one half billion dollars since the war started, they have been
conducted with reasonable success and without great disturbance of money conditions.

If the reserve banks can continue to do that, our function as bookkeepers will be
successfully performed.

The third function is that of the Government's fiscal agent in a direct
sense in handling the Government's funds.

It is now eighty years since the Gov-

ernment had a true fiscal agent, and I think it is no exaggeration to say that
these transactions could not be conducted with our complicated banking machinery,

with 27,000 banks to be dealt with in the United States. without the employmaat
of a machine of that character, and the Government is fortunate in having had a
Reserve System



to employ for managing these great Government transactions.

This

- 3 -

function of handling the Government's deposits, which is conducted,

of course,

under the direction of the Secretary of the Treasury, has been going on for some
time, but its magnitude and importance has only developed in the last few months.

I think the Reserve banks have handled practically all of the money that has been
paid in from the proceeds of the certificatds of indebtedness and the issue of
two thousand million Liberty Loan bonds without any of it going directly into the
Had it been paid into

treasury of the United States, as it did in former years.

the treasury of the United States, we would certainly have had money mLrket convulsions that would have paralyzed business in this country.

In that sense again

however, the Reserve banks are simply bookkeepers.
You are going to be confronted, in handling this next issue of bonds,

with statements by many bankers that they hesitate about putting in very large
subscriptions for bonds for fear that the payment of these subscriptions to the
Reserve banks will reduce their deposits too seriously.
make that statement overlook one very important thing:

I think the bankers who
that the payment which

they make is first simply a credit entry on their books in favor of the Government;

that it is thentransferred temporarily to the Reserve banks, and under the plan
which has operated successfully, and will, I believe in the future, it is disbursed almost simultaneously and soon must return where it came from.

The diffi-

culty which the country banker fears particularly is that that credit may not

flow back to his particularilocality promptly enough to enable him to meet his
various engagements;

but we must remember that every part of the United States

is producing goods that directly or indirectly are entering into war purposes.
Take the Pacific coast:
ships on their seaboard;
timber to the East;

they are starting to build immense numbers of

they are shipping timber to the East;

they are shipping vast amounts of oil;

constantly the area of distribution of their sugar;

they are enlarging

they are shipping grain,

cattle and the products of their mines, not necessarily directly to the Government,



they

- 4 -

but indirectly they are filling the vacuum that is created by the draft of the
Government on sections that are nearer the Atlantic seaboard.

As payment for

their products gradually progresses throughout the year that credit automatically
flows back to that very section which has subscribed to these bonds.

I anticipate

no difficulty whatever so long as we have the Reserve bank machinery to fall back
on, or the bookkeeper to fall back on, during the interval between the time when
the subscriber pays for the bonds and the time when the Government's disbursement
of the money effects its return to the section it came from originally.

I have already said more than I intended to say, but I wmt to conclude
with one word suggested by Mr. Vanderlipts remarks.

He spoke about the difficulty

of compensation for the wait that was being done by this organization and by many
others, in assisting the Government in financial and other matters.
in this way:

it would certainly be presumptuous of me or of the Government, to

say "thank you" for that work.
people.

I look at it

If thanks are due, they are due from the American

You are acting for them, for all of them, but as a reward - and I have seen

evidence of it, as all who have been to

urope since the war started have seen -

there are millions of anxious, care :torn people there who have their eyes turned

toard this country;

they are looking to us for help.

Our entrance into the war

is'interpreted by those millions of people as the harbinger of some brighter day
that is going to dawn, and if you gentlemen want your reward, yoir real reward, you
will find it by searching the hearts of those careworn people that need help.







ADDRESS

by
MIL BENJALIN 31.7RONG

GOVERNOR OF ast: FEDER,LL RESERVE BANK
OF NE4 YORK

at the
LUNOI:r&ON

of
.TIE BOND CLUB 0? NE4 YORK

held. at
THS BAN:CERS1 CLUB

September 14, 1917.

MR. STRONG:

This meeting is to me the visible manifesta-

tion of what is taking place all over the country:

the conscious-

ness is growing that we are at war, and with that consciousness is

developing a sense of personal responsibility in the mind of each
citizen.

The discharge of that responsibility can only be effected

by organization, and without invitation, without any more stimulation
than the consciousness that we have a responsibility, we are organizing to discharge it.

Your organization we look upon as an adjunct of the Federal
Reserve Bank of this city, and I would like to say a few words
about the particular function$

his bank

/21,.

generally in the

Government's financial transactions in connection with the war there are three.

One is generally to supervise the selling of the GovernmentTs
obligations.

For that work of course the Reserve Banks were not

equipped and they could not be equipped without the assistance of
the bond men and of the bankers - it wouldn't have been possible for

laab ik
114*0 help you

men - we had to rely upon the voluntary organizations

which were created and which lid the work so effectively when the
last issue was sold.

You know the work in detail

large upon that feature

-

I won't en-

f it.
r

Our supervision

it it is indirect, is through committees,

which at tllis time I think are organized along lines that will out

out a great deal of lost motion and make it easier for all of ue.
The second function (and in some ways a more important one

from our standpoint) is to conduct the financing of these payments
that have to be made when the installments become payable.
too apt to consider that when the Government

Ne are

places a loam

amounting to thousands of millions of dollars, that we are handling
money.

fie are not handling money, we are handling credit.

Mese

Government loans are simply the instruments through which the
Government finds it possible to buy goods and services, and to the



1

extent that the Government borrows money for that purpose, the

production of goods has to be increased over normal production and

cosequently the mills have to work faster, the farms have to
produce more wheat and cereals; everything has to move faster, and
one element in the problem is to make credit move faster.
You might say that the Reserve Banks in a sense are the
They must see that this great

bookkeepers in this transaction.

tide of credit flows from its original owners, the subscribers to

the bonds, through the subscribing banks, into the Reserve Banks\
to the credit of t4e ,Government, out again into the deposit4ry

iCeAro
banks, ele41.-eo it is distributed by the Government ultimately backA

where it came from, to those very people who are producing these
very goods that the Government is buying out of this great credit
fund.

To do that successfully, to conduct this so called book-

keeping operation successfully, very extensive machinery has to
be devised.

Our experience in the last loan has thrown a good deal of
light upon the problem.

I think you will all agree that, con-

sidering the magnitude of these transactions, the Reserve Banks
now having borrowed for the Government a total of nearly three

and one half billion dollars since the war started, they have been

conducted with reasonol>e success and without great disturbance of
money conditions,

milledif

the Reserve Banks can continue to do that,

our function ae bookkeepers will be successfully performed.
The third function

s ;that of the Government's fiscal agent
ec

in a direct sense in plimagingi the Government's funds.

It is now

eighty years since the government had a true fiscal agent, and I
think it is no exaggeration to say that these transactions could

not be conducted with our complicated banking machinery, with 27,07

banks to be dealt with in the United Stags, without the employmen
of a machine of this character, and the zawAry is fortunate-1w
biltrErerent---ftmee in having had a Reserve System to

-paappoee-of managing these great Government transactions;



/11

This

function ofA

g the Government3deposits, which is conducted,

of course, under the direction of the Secretary of the Treasury,
has been going on for some time, but its magnitude and importance
I think the Reserve

has only developed in the last few months.

Banks have handled practically all of the money that has been
paid in from the proceeds of the certificates of indebtedness and
the issue of two thousand million Liberty Loan bonds without any

of it going directly into the treasury of the United States, as
it did in former yecre.

Had it been paid into the treasury of the

United States, we wctild certainly have had money market convulsions

that would have paralyzed business in this country.

In that sense

aggin the Reserve Banks are simply bookkeepers.
You are going to be confronted, in handling this next issue

of bonds, with Of statementSby many banker, that they hesitate
ftir

about putting in very large subscriptions aiebonds for fear that

I/4.

payment of these subscriptions to the Reserve Banks will reduce
I think

their deposits too seriously144-erratIV-InInr/r170-1ft.

"Saw

the bankers who make that statement overlook one very important
'113,

-,Q1;4/211-1

thing: that paymenAploithey make is ererelsrr.----dfkte-f'trelr-petyme.nt
credit on their booke---wirttir-fr-rtng-to the Government;

*hem it is transferred temporarily to the Reserve Banks, and under
the plan which has operated successfully., and will
cut,
the future, it is disbursed almost simultaneously,

believe in
t tetvut-

14- (lug_

irtnt;

The difficulty

which the country banker fears particularly is that that ornait
may not flow back to his particular locality promptly enough to
enable him to meet his various engagements; but we must remember
that every part of the United States is producing-eiseee goods that

directly or indirectly are entering into war purposes.
ITake the Pacific coast: they are starting
,

t

;,t

filAt

build irzrnenee

Y

titles of ships on time seaboard, there;

they are shipping timber

to the East; they are shipping vast amounts of oil; they are enlarging constantly the area of distribution of their sugar; they




4 -

are shipping grain, cattle and the products of their mines, not
necessarily directly to the Government, but indirectly they are
filling the vacuum that is created by the draft of the Government
on sections that are nearer the Atlantic seaboard, KiloAs payment for
their product5gradually progresses throughout the year,..Juuth--eeateen
whaAr-tfii)',-ere-pre4weed that credit automatically flows back to 4,J7--11,0401-r-#4

./pviittmcse section, which halg subscribed to these bonds.

I anticipate

no difficulty whatever so long as we have the Reserve Bank
machinery to fall back on, or the bookkeeper to fall back on, be-

6

atUukt45,

boom the interval

91#91.4

the subscriber pays for the bonds and the
F"- Cif e IT

Mom-

time the lovernmenttdisbur

r /a/WIA-L.

t
the money en4 lt-getImIWek to the

eV-

section it came from originally.

I have already said more than I intended to eay, but I want
to conclude with one word suggested by aJoimatlallag-titet Mr.Vanderlip
ketu-ou,e,ot

He spoke about the difficulty of compensation for the work
that was being done by this organization and by many others, in
assisting the Government in financial and other matters.
at it in this way:

I look

it would be certainly presumptuous of me or of

any officer of the Reserve Banks, or possibly for any officer of
the Government, to say "thank you" for that work.

due, they are due from the American people.

If thanks are

You are acting for

them, for all of them, but as a reward - and I have seen evidence
of it, as all who have been to Burope since the war started have
seen - there are millions of anxious, careworn people there who
have their eyes turned toward this country; they are looking to us
for help.

Our entrance into the war is interpreted by those

millions of people as the harbinger of some brighter day that is
going to dawn, and if you gentlemen want your reward, your real
reward, you will find it by searching the hearts of those careworn
people that need




A Reserve B
414$ ghtrIttNe.
Ape,

2

1.14

"Ir

FILE 04
ADDRESS DELIVERED BY BENJAMIN STRONG AT THE AMERICAN BANKERS
PPS.

.4%bncancIpm,

AtA?

cf.4

ASSOCIATION, ATLANTIC CITY, SEPTEMBER 28, 1917.
4.1,811014.1114W44:0010044Cra,K.Ang.
,

,

a,a.a.e.

.Ori/617t
invitation which yoUr officers were good enough

me to address this Convention was accompanied by

n that I should say something about the relations
Reserve System to government financing.

But

sent sons to France, find it difficult to dis-

n terms of dollars.

Some of us have just said

ys who are leaving their homes to make the supreme

their country .

They are our real investment in

return on that investment will not be valued in

est, but in the consciousness that it has aLain

hN.d.th.

t our form of government

4414itst'tut 4s4+0--

citizens that generous altruism which is our

nal tradition.

ook to these armies of the best the nation has

he victories which can only be won by individual

y look to us for the support which must be accord-

sonal self-denial.




AO

- 2 -

The great military organization now being created is
only one part of the fighting machine with which we must equip ourselves if the sacrifice of sons and husbands is not to be in vain.
The first army to be mobilized is the army which must shape and control the economic activities of the American people, 30 as to produce material for conducting warfare.

Our battles can be won only

by turning over to our government as rapiuly as needed billions of
dollars of credit, which must be drawn from the earnings and economies of the people of the country.
The general character of the financial organization needei icat{9

6.01.cLo

ed for the wor ^had been determined by statutes already enacted
before our entrance into the war.

Congress hal;for many years

provided .by law that government bonds should be sold by popular

subscription without deduction of bankers commissions, and in

December, 1913, when the Federal Reserve Act became law the Secretary of the Treasury was authorized to appoint the Federal Reserve Banks to act as the Government's Fiscal Agents.

These two

rewriaccro-c,
brief lerrevfts4i.pite in our statutes, supplemented by the patriotism

and energy of American bankers and their aids, are all that was
required to lay the foundation for an organization which I believe can be relied upo_ to furnish credit at a minimum cost just



- 3 CUtO7ICSAD
as rapidly as the government can raise armines and the country can

produce supplies.

AVEL

-geerertarr-MeAeie4a-tttrttstkw__tbat zzilaurtpiala-feetettati7In he
A/ 7trz,o

ao4id build up a machine for war finance which werattibrinasinto
A

cooperation in one great army, the bankers, the press and a multi-

tude of other organizations not ordinarily related to the financial
operations of the government, but so coordinated that their ser-

vices 4tte supplement those of the Treasury Department and of its
fiscal agencies.

Each reserve bank was advised of its appointment as fiscal

agent and directed to proceed with the development of the machinery
needed to place the first Liberty Loan on May 3rd, 1917.

While the

organizations were different in each district, the main characteristics were the same.

Committees were appointed to cooperate with

the reserve banks and upon these committees - largely composed of
bankers - there devolved

the duty of sub -dividing each Federal re-

serve district into sub-districts and even smaller divisions so that

ultimately in the Federal Reserve District of New York (and I be-

WV/
lieve practically all the others), we had committees or representtatives actively at work in every city and town within a few weeks
of the day we were tola to start.




In conjunction with the committee

0

- 4 -

irtecca1A-9
appointed to actually sell bonds, publicity -eltleatirrrwere cre- I
ated in all parts of the country, which had particular charms of
news, publicity, advertising, public speaking, distributing posters
and managing a great variety of other activities aimed to educate

the people of the country to the importance of saving and of buying
the bonds of the government.

Most of you are familiar with the way in which this matter
was handled.

Notice was necessarily so short that it was an almost

71Vta.
superhuman task to cover the ;round adequately between the Apet of

May and the middle of June.

Plans made so hastily cannot be expect-

ed always to work smoothly, nor did they when the first loan was
placed.

But much of the difficulty was due to a general lack of

appreciation on all hands of the

Liagnitude of the task.

Many bank,

ers expected the bonds to be delivered immediately upon payment
others failed to realize what a magnificent response would result
from this offering and were inadequately equipped with clerks to
hai_dle the subscriptions;
c

\

still others failed to take into ac-

count that the placing of a loan for the government must be handled

OW 14/

il#CS

aO

by most precise methods requiring accurate reports which must be fil-

ed on time.

We have learned how to do it better hereafter.

What-

,,;72m1 f.6

ever friction and difficulties may have developed in the course of

VGA4ttffzio



- 5 -

the campaign, nothing can really mar the magnificence of the resuonse.

During the last few days before the subscriptions closed, when we
were handling in the Federal Reserve Bank of New York alone some
thousands of telegrams and telephone calls each day, we could feel

the impending rush of subscriptions as one would sense the approach
of a storm.

Nor need we be ashamed to admit that at the close,

the flood of subscriptions was completely beyond the handling capacity of even some of the largest and best, organized banking instituions
in the district.

It is stated that there were four million subscribers to
the loan.

I believe this underestimates the actual number of sub-

scribers at least

A

25'/;.

In the Second Federal Reserve District,

,

we have delivered 1,931,666 full paid interim certificates which in

number equals about 10 of the population of the district.

If less

than one-half of this proportion prevails throughout the country,
it would indicate at least five million subscribers, - a response

which makes this first war loan an achievement of the first rank in
government finance.

The record in the City of AoAlester indicates

what is passible in the whole country.
population of about 25u, u00 people
subscribers.




I am told that with their

they had no less than 61,000

Such a response by the whole country would produce

25,000,000 subscribers fLer-eb-e&v.eiliime4441.en.

Every detail of the last loan has been completed in the
Second District with the exception of deliveries of the permanent
bonds.

I think the same will be true in all Districts.

Naturally,

those who may decide to convert bonus of the first issue into

bonds of the second issue will prefer not to require of us the
expense and labor of two deliveries.

The permanellt bonds are

rapidly being prepared and I know that I am only expressing the

wish of the Secretary of the Treasury, as well as the officers of
all the reserve banks in asking that the bankers through whom these
made, cooperate with us in conducting

subscritions

this complicated operation of ma:Eine deliveries.

Such complaint as had arisen regarding deliveries of

bonus fails to tae into account the enormous physical labor involved.

The requisitions for boncls bye. reserve banks called for

a total of 8,782,000 pieces, which would require 20,000,000 sheets
of paper weighing 237-1/2 tons.

In the Second District alone we

have handled 4,005,657 is44ipeee--4-iiii-is.ww.laos inter im certificates) Cu..

Oren 7o

)..tett(e

CL4-cat

19

,etoo A deiZetalo

,

DeFtett,?0

To indicate the amount of labor involved in placing these

government loans, the clerical force of our bank has increased from
100 to about 600 people in a few months.



The Publicitz, Division

- 7 -

of the Liberty Loan Committee employes about 100 people in addition_
and the Committee Organization of the Second Federal Reserve Dis-

Wiatt

41-iet

trict now embraces 44g4.414-i5,000 individuals and will greatly ex-

ceed that number when all appointments are made.
The actual machinery for selling the government's bonds,
keeping proper records of their issue and making deliveries is not,
however, the most inliortant part of the government's financial
operations.

Of much greater importance, is the problem of so ar-

ranging this huge financial operation that it may be conducted without disturbance to money markets and, consequently, causing a disorganization of business.

Of this,

I should like to speak partic-

ularly from the standpoint of the Federal Reserve Bank of Hew York

and of the New York money market, atj 69060 Ithautra.
New York is the country's central money market.

From it

radiate the principal currents of credit, so that an accurate view
of the New York position is illuminating as to the whole country.

Were I asked to state in the fewest words the functions
of the Reserve System in relation to government financing,

I would

say that the reserve banks keep the books of bank reserves and of
government credits for the entire country.
run the general ledger.



In a banking sense they

Present conditions afford. the first

- 8opportunity for you to judge whether they do it well or not, and
it is desirable that you should have the facts se that you may
judge in this matter, because the confidemc, that is based upon

understanding of, and belief in, our banking system at this time
is essential to success - without it we shall fail, with it,
we must succeed.

The amount of banking accommodation required in any wellorganized country may be said roughly to correspond to the volume of
the country's business.

As business increases, bank loans and de-

posits increase in somewhat like proportion.

As business declines,

liquidation takes place, bank loans and deposits go down and the pro-

portion of reserve to deposits increases.

As an illustration of

this formula, take our on experience in the past few years.

When

the war broke out, after a short period of disturbed business, we
flooded with gold.
were flooded with war orders, and at the same time

Business became increasingly active.

Bank deposits and loans in-

creased along with a rapid increase in our gold reserves.

The pro-

duction of our mills had to be speeded up to meet these increasing

demanusrso at the same time, the circulation of credit had to be
speeded up to finance the increased trade.

Now our government has

entered the war, and is making further demands upon our productive




- 9 -

The volume of these demands may be guaged - roughly, it

capacity.

is true but still with a fundamental accuracy - by the amount of

the borrowings and increased tax collections of the government, and
we must again speed up the machine of credit to keep pace with the
machinery of production.

The reserve banks form the center or hub

of this credit machine, and I will briefly describe how the conduct
of their operations is actually accelerated when the pressure is
applied.

When the government makes an offering of securities,
whether of long term bonds or short term notes,

the banks of the

country immediately realize that their customers or clients will
subscribe to the offering, and that they, (the banks), will be called upon to make the payment o
localities.

the subscriptions in their respective

Banks located outside of New York City, practically all

of which have money on deposit there, prepare for this by drawing
on their New York balances or calling in their New York loans, and
withdrawing these credit balances to the interior.

As a rule they

do not take cash but take credit on the books of the reserve bank of
their district or of their local reserve agent.

first sin of the wheel.

This is the

The Federal Reserve Bank of New York

receives from the other eleven reserve banks a vast sum of New



-10-

York exchange for collection and remittance in advance of each
loan being placed.

It must settle with the other reserve banks

'every 2hursday through the Gold Settlement Fund maintained in
dashington.

This results in a pull on the reserves of all the

banks in liew York City.

The checks we collect from them reduce

their reserve balances at the Federal Reserve Bank of New York
and cause the wide fluctuation in excess reserves shown by the
New York Clearing House statement.

To meet this drain the member

banks in New York come to the Federal Reserve Bank and borrow money
in one form or another.
to recoup their reserves.

Sometimes other means can also be employed
For example, at the time of the last loan,

the Federal Reserve Bank of New York purchased from the British Govcrnment tirl20,000,000 of gold in a period of two weeks, and in addition

received payment in gold of certain international obligations amounting to over ,A0,000,000 which matured on June 20th.

All of this gold

icutat
came to the Federal Reserve Bank of New York but was for the credit of
/.

a large number of New York banking institutions.

Their reserves were

immediately built up and, to that extent, the drain was offset.

A further means of relieving the loss is to offset it by
transfers of government de.osits from those sections of the ccuntry

which have drawn so heavily on New York that their on reserves have



been increased to an amount unnecessarily large.

These transfers

are accomplished by telegraph through the Gold Settlement Fund,

and start currents flowing in the opposite direction, so that the
movements between New York and each of the other Federal reserve
districts largely offset each other, leaving only net amounts to
be transferred.

Still another method has been provided for achieving the
desired result with a minimum of delay.

Every Federal reserve bank

has adopted a resolution authorizing its officers to rediscount its
portfolio with an;)

other Federal Reserve bank.

This procedure is

authorized by Section 11 of the Reserve Act which gives the Federal
Reserve Board, upon the affirmative vote of five members, the power
to require such rediscounts, and authorizes the Reserve Board to
fix the rates.

At first this appears to be in the nature of a bor-

rowing operation, but in point of fact it is

ea,J.Iw not so at all.

The Federal reserve bank, in this case, New Yor'6, which loses its
reserves through the Gold Settlement Fund, is t/Tmally simply paying

out to the other reserve banks the reserve money which has been
deposited with it by its own member banks whose accounts are depleted
by these drafts from the interior.

The reserve accounts of the
filtWiet
members in New 1:ork are restored by the New York bank
discounting




-12-

7A-441/1"6""°
tp*-paper.

If any considerable amount of reserves is moved to

the other reserve banks and the amount of these discounts becomes
sufficient to impair the reserve position of the Federal Reserve

Ant
Bank of New York, then is can simply turnover its portfolio igir
;169.1at

ed.

to those reserve banks which are correspondingly strengthen,
40 0.4haa/
Expressed differently, instead of settling balances through

the Gold Settlement Fund with gold, we would in that case settle

our debit balances by the use of paper out of our portfolio, apportioning it with due regard to the reserve position of each of
the other reserve banks.

This nlan for speedy and almost automatic
though

transfers of credit

in the future it may become a resource of vast strength.

This explanation seems necessary to make clear that the
normal function of the Reserve System expressly authorized by the
statute and very wisely provided with regard to just such a situa,
tion is simply being exercised for the benefit of the member banks
as a whole.

The statute provides for the cooperative use of re/\

serves and credit facilities of the twelve reserve banks in time of
emergency so that their combined strength may be as effective as
though they were one bank instead of twelve.
To return to our chronology:




The next step in these

-13#C4r0/0111114t
finalazIa,1 operations, after the subscriptions are closed/ is their

actuid payment into the reserve banks by the banking institutions
of the country.

The preliminary readjustment of credit to enable
Afiat

them to do so, you will observe, has already taken place.

gilt pay-

ments as made are credited to the government on the books of the
reserve banks, in some cases actually, in other cases only constructively.

Where actual payments are made, the reserve banks,

acting as fiscal agents of the government, at once redeposit

E 40

-payfile+t4fil with the national and state banks where they originate.

Where the payment is constructive, it simply means that the bank
subscribing
originally subscribing (

(ee.to

)

for

b-r etz- ci<401/1.0

the government seeurities,Knstead of making a remittance to its
reserve bank, merely credits the government on its books with the
amount to be remitted, having previously furnished the governrneat
with collateral.

At this stage the government has

itoolstebily thousandsx of accounts on the books of banks throughout

the country.

It is now in position to make disbursements either

for its own purchases or for loans to the allied nations.

But

as these payments must principally be made in New York at the present
time, it becomes necessary for the reserve banks gradually to with

draw these deposits and shift them through the Gold Settlement Fund



-14to New York.

Then a new set of entries must be made in what we may

call the general ledger.

The deposits in other districts are drawn

down and remitted to New York through the Gold Settlement rund.

As

this may reduce the reserves of the banks that held the government
deposits throuLhout the country, the reserve banks of those districts

must stand prepared to discount per for them to the extent necessary
to make good the reduced reserves.

This was done in a small way when

the last loan was placed, and is being done to some extent, although

vex moderately, to-day as a result of withdrawals of deposits now
arising from sales of certificates of indebtedness.

As thepOrfunds

are withdrawn to New York from the interior reserve banks they are
Ce-natelpt-PYje
immediately disbursed by the government in 1,iew York and increase the

de,osits and reserves of the New York banks,ganweaay.

The New York

banks can then repay the advances which they have received from the

61-12:00v
Federal Reserve Bank of New York which builds up its reserve.

A

It can

then in suer repay to other reserve banks any paper which it previously mi,ht have delivered to them if rediscount trLtnsactions had taken

place between Reserve Banks. Gradually the whole set of entries arisin. from the preliminary withdrawals from New York will have been
reversed and canceled as a result of the ultimate disbursements of
the covernment.

The reserve bangs have stepped into the breach sim-

ply to make some temporary advances.



They have provided the machinery

-15-

ft

to move a great mass of credits rapidly from one part of the country
to another and back again.

In a sense the placing of these huge gov-

ernment loans is like moving a crop.

When we have a large crop, the

credit machinery must move faster.

These large gov

ings make it necessary to speed up the credit machine, and that is
exactly what the Reserve System is doing.

The figures of the Gold Settlement Fund illustrate what
is being done:

Gross Clearings, 3 months, ending June 30, 1916
3

Balances Paid:

April
May
June
Total

"

1916

421,756,000
42,994,000
28.723,000
493,473,000

June 30, 1917

4832,299,000
5.101,317.000

1917

475,519,000
219,263,000
217,648,000
4512,430,000

But I think I am correct in assuming that you are more interested in a still

later stage of this operation.

It appears as

.though at this point the ultimate. effect of subscriptions to govern-

ment loans, the withdrawal of their proceeds to New York and their
disbursement in New York by the government has resulted in a permanent loss of de,osits
the interior.

by the banks of

The fears many bankers have expressed to me on this

score would in some sections appear superficially to be well



ar

I

-16-

athinir

(att.' -

6r; eitqa\A\-61AA

grounded, but the effect will not be permanen) If it were so,
that section of the country which suffered a permanent loss of de/a.

posits would suffer permanently a corresponding contraction of sav/.
.4101.1414e
errOICLA

ings realized from its productive capacity whether it was in man
ufactured goods, food stuffs, the products of mines or of forests,
or what not.

This great credit fund being expended by the govern-

ment, with the exception cf the pay of soldiers abroad and of negligible purchases abroad, is being expended in this country in the

purchase of materials of great variety, and the amounts loaned to
our allies are almost entirely being spent hare as well.

It means

that in all sections of the country these credits must inevitably move

back to their points of origin, directly or indirectly through government purchases.

New ships, oil and coal, and products of mills,

mines and forests in every part of the country now go to the government and each pulls back a share of this great fund.

Even those sec-

tions which do not directly receive government contracts indirectly
receive the benefit.

Purchases of materials of various kinds in one

part of the country either develop demands for raw materials or create
a vacuum of goods which must be supplied or replaced from other
sections.

The intricate commerce of the country is so interwoven

that it is difficult to exactly trace these movements, but the




-17-

result is inevitable, and in those sections where this movement does
not reach, it means that prod.:.ction and savings have been arrested,

since the amount subscribed in any locality for loans to the govern-

ment is measured by the amount which that locality saves out of the
profits on what it produces.
It must be admitted that our agricultural products, which

re one of the chief instrumentalities for bringing about this readjustment, are in the main marketed at one short season of the year.
In the interval, withdrawals of bank credit from those sections of the

country will leave a vacuum somewhat longer than in manufacturing
sections where production and marketing are continuous the year
around.

But when crops are moved and paid for this credit will move

back inevitably to the agricultural sections so long as profitable
, e)
'2

roduced there.

o

)4D CO, (pop,

C1011 OlVa Frttg

2000, o oo ova,

4PAut. ALcumi

9.2.5V.000,o40

refer to this particularly and emphatically because of

,sr.
e71.44,4A1

which some bankers entertain which might induce them to%tirctqz

eir best efforts from assisting the government in placing --.0(
4%6
The last word of assurance on that point, very pro -0.6.'
an.

come from the

t

reserve baa2;s, for during the interval be. \

arketing of one harvest and the next, when balks in the

l sections must both finaace the farmers and assist in

he government, res.rves must be bridged by reaso_iable



Y,

-1d-

accommodation at the reserve banks.
are for.

That is what the reserve banks

They expect to be used, and no time like the present will

ever arise in our history when this use of our new banking system
will be so important to every citizen.
-Coes.

attock -

Mt& a Etc- Speaking of these matters from the standpoint of the

reserve banks themselves, I fear you may have heard careless discussion of their possible intention to attempt arbitrary control
of these money matters.
that is self-control.

Only one kind of control is required, and
The reserve banks should not be expected to

tie up their reserves in permanent financing for the government or
anybody else.

Their function is to make these temporary loans dur-

ing periods of strain, whether occasioned by war and government
financing, by domestic difficulties, or by a

other cause.

The

exercise of self-control in these matters means that the reserve
banks will see to it that the expansion which they afford to our

banking system is that temporary expansion which is represented by
a portfolio containing self-liquidating bills and loans which mature within a reasonably short time and which Congress has wisely
fixed at ninety days and no longer.

I think I may use the experience of the Federal Reserve Bank of New York to illustrate this point.

On the first

of June, the discounts and loans of that bulk, all maturing



4

-19-

within ninety days, amounted to 437,000,000 and its investments,

which included 420,000,000 of short term certificates of the
government amounted to 429,000,000.

At about that time the in-

terior drafts which I have mentioned bei,an to come in, and during
411-8/kR_

the month of Junwe were obliged to settle debit balances to the
interior reserve ban'zs aggregating about 4550,000,000.

During that

short period our discounts rose from 437,000,000 on June 1st to
4252,000,000 on June 19th.

Of this 4252,000,000 of discounts

4173,000,000 matured within fifteen days,
4 19,000,000 matured within thirty days,

4 29,000,000 matured within sixty days, and
4 31,000,000 matured within ninety days.

By August 15th, our discounts had been reduced to
462,000,000 without any increase in rates being employed to force
the reduction.

In other words, in two months we liquidated

4190,000,000 of paper taken from member banks with practically no
disturbance to the money market.

On September 19th, our total dis-

Ogg(
counts amount

to 487,000,000 of which

429,000,000 matured within fifteen days,
417,000,000 matured within thirty days,

420,000,000 matured within sixty das,
421,000,000 matured within ninety days.



and

-20-

Our investments totaled 48,900,000 of which only
/\.

41,300,000 consisted cf long time bonds of the government, purchased
att.

under statutory provisions of the'Act, and .,g,600,000 short term
/\

U. S. Treasury certificates of indebtedness.
With thj.s liquidation automatically accomplished it leaves

&Lax/

Calek

us son September 19th with .,1658,000,000 of reserve, practically all

A

gold, being 89% of our netts deposit and note liabilities.

The whole

Reserve System on September 14th held ;1;1,415,000,000 of cash, prac-

tically all gold, as reserve against the liabilities of the whole system.

With this magnificent foundation upon which to rest our govern-

ment's banking transactions, how can things go wrong?

There is no

occasion for timidity on the part of our bmikers in putting the full
weight of their influence, their energies and their resources behind

1kthe government in the conduct of the war.

ea(

getak nqfeu;
co:iclusion,

Administration's financial policy.
no uncertain voice.

14,1A

XAttA5

14464)

I wish to say a Levi words in regard to the

On this subject history speaks in

I wish you would reap, as I have, the record of

the last one hundred and fifty years of financial operations in
war time of certain European governments.

You will then realize

that any finance minister who has the courage to impose taxes at
the outbreak of a war heavy enough to pay bond interest, to rapid-

ly amortize bond issues when peace comes, and to pay a share of



-21-

war expenses, will have a minimum of difficulty in borrowing money.

The records of the British Government in the Eapoleonic Wars, the
Crimean War and even so recently as the hoer War, demonstrate, by
the mistakes disclosed, this fundamental principle of war finaace.
But we do not need to turn to .t:urope for examples on this subject.

The history of the financial operations of our own government in
hour
the Civil ,far is eLtirely adequate to justify the policy be ink pursued.

Within little more than six months of the outbreak of our

Civil War our banks suspended specie payment.

-C4244-t was

1.14/r..-e,

borrowing money from the banks in 1861 at ruinous rates of interest,

was driven to the diastrous ex)edient of issuing
fiat money.

In 166-,

v-:-11mel,it placed its irelaiis. at rates, which

on a gold basis produced a value of about 965 of par value for bonds
bearing high rates of interest.

The funds realized from loans plac-

ed by the government in 1863 produced on a gold basis as low as 64 1/2,,,

of par value, and in 1864, as low as 41 1/2.
On the other hand the clear war revenues from taxes in
1862 were but 452,000,000; in 1863,

113,000,000, whereas, in 1866,

after the close of the war, the revenue legislation then in force
produced the enormous total for those days of 4556,000,000.

It is

obvious that the failure to support the government's credit early




-22-

A

in the war by adequate tax revenues undoubtedly was one reason for
the unfortunate later indulgence in every variety of unsound financial expedient, the effects of some of which have dogged our steps
for nearly fifty years.
ITQ4./.-1.e4-44e compare the present tax program with these

past experiences.

'Their uissimilarity is so striking as to be al-

most startling; and is one of the most hopeful auguries for the success of our whole financial undertaking.

Personally, I rejoice that

the officers of our government have the courage to face the criticism
on the one hand of those who believe the program of taxation is too

heavy; on the other hand of those radicals who think it is not heavy
enough.

Not enough taxes means declining credit, too much taxes

means declining industries.

The only danger in exacting heavy

taxes on profits and incomes is the danger of not allowing sufficient
profit inducement to the industries of the country to stimulate production.

I confidently believe that our country can pay all the

taxes required to maintain its credit and to support all the borrowings needed for the period of the war, without crippling its
vital industries, and that those who now cry calamity

simply be-

cause they uon't want to pay heavy taxes will some day see and
acIalowledge their error.




But our Congress must be careful not to

0

-23-

destroy the income sources which produce taxes.

Industries which

must expand to meet war conditions, need earnings for plants and
inventories which may be useless when war ceases, and yet they must
be built.

To take all their income will retwad new construction.

Those of us who have sent our boys to France are bejmninc
to realize what the war is.

Our part in it and the motive behind it

will be an imperishable glory for this gr:at nation.

But we must

not lose our boys and lose the war for lack of money, nor must we
fail in providing the money simply because our financial army is
inadequately equipped.

I am convinced that the only important

weakness in our financial organization is the lack of State bank
membership in the Federal Reserve System.

One half of our finan-

cial army is equipped with modern machinery by membership in the
System.

The other half, equally

patriotic, is ineffectively armed.

You will recall the disastrous results to the Russian Armies in the
early days of the war when large numbers were sent to the front without
arms and ammunition.

Don't let us fail of our duty fo

strength we can only enjoy if we are united.

It may indeed rest with

you state bank men to determine what shall happen to our boys and they must come home victorious.




Ito

0,11,

Canadian Savings Banks:
Dec. 31,
"

31,

"

31,
31,
31,

"

Var.

1913,
1914,
1915,
1916,
1917,

Savings Departments
Savings Deposits, $624692,000
662,840,000
720,990,000
845,000,000
888, 765, 000

Postal Savings Banks and other savings banks which include two large banks in Montreal
Dec. 31,
31,
31,
31,

"
"
"

Mar. 31,

and Quebed:

$97,620,000
94,600,000
92,200,000
93,930,000
94,000,000

1913,
1914,
1915,
1916,
1917,

New York State Savings Deposits J;ly 1, 1917,
$1,991,469,126.

Amount deposited durin7 year not including dividends
$503,048,924

credited was

Amount withdrawn during year,

468,850,758

United Kingdom of Croat Britain:

Total amount in postal savings banks
Dec. 31,
"
"

31,
31,

Trustee Savings Banks,
lov. 20, 1913,
"
20,1914,
"




15,

2187,248,167
190, 532, 208
186,327,584

7913.
1914,
1915,

1915,

Great Britain:

254,258,000
53,943,000
51,412,000




ADDRESS DELIVERED BY BENJAMIN STRONG
AT THE AMERICAN BANKERS' ASSOCIATION
ATLANTIC CITY, SEPTEMBER 28, 1917.

ADDRESS DELIVERED BY BENJAMIN STRONG AT THE AMERICAN BANKERS'
ASSOCIATION, ATLANTIC CITY, SEPTEMBER 28, 1917.

The invitation which your officers were good enough to
extend to me to address this Convention was accompanied by the sugges-

tion that I should say something about the relations of the Federal
Reserve System to government financing.




to France, have sent sons
But those whofind it difficult to d

Some of us have just said good-by

homes to make the supreme sacrifi
real investment in the war.

Our

be valued in rates of interest, b

again been shown that our form of

develop in our citizens that gene
national tradition.

We look to these armies

-offer for the victories which ca

They look to us for the support w
personal self-denial.

The great military orga
one part of the fighting machine

if the sacrifice of sons and husb

first army to be mobilized is the

the economic activities of the Am
material for conducting warfare.

turning over to our government as
dollars of credit, which must to

3of the people of the country.

The general chazacter of the financial organization needed
for the work had been determined by statutes already enacted before
our entrance into the war.

Congress had for many years provided by

law that government bonds should be sold by popular subscription
without deduction of bankers commissionc, and in December 1913,
when the Federal Reserve Act became law the Secretary of the Treasury
was authorized to appoint the Federal Reserve Banks to act as the
Government's Fiscal Agents.

These two brief paragraphs in our

statutes, supplemented by the patriotism and energy of American
bankers and their aids, are all that was required to lay the foundation for an organization which I believe can be relied upon to furnish credit at a minimum cost just as rapidly as the government can
raise armies and the country can produce supplies.
Secretary McAdoo

foresaw that upon this foundation he

could build up a machine for war finance which would bring into
co-operation in one great army, the bankers, the press and a multitude of other organizations not ordinarily related to the financial
operations of the government, but so co-ordinated that their services
would supplement those of the Treasury Department und of its fiscal
agencies.

Each reserve bank was advised of its appoinment as fiscal
agent and directed to proceed with the development Of the machinery
needed to place the first Liberty Loan on May 3rd. 1917.

While the

organizations were different in each district, the main characteristics were the same.



Committees were appointed to co-operate with

- 4 -

the reserve banks and upon these committees - largely composed of
bankers - there developed the duty of sub-dividing each Federal
reserve district into sub-districts and even smaller divisions so
that ultimately in the Federal Reserve District of New York (and I
believe practically all the others), we had committees or representatives actively at work in every city and town within a few weeks
of the day we were told to start.

In conjunction with the commit-

tees appointed to actually sell bonds, publicity organizations were
created in all parts of the country, which had particular charge
of news, publicity, advertising, public speaking, distributing
posters and managing a great variety of other activities aimed to
educate the people of the country to the importance of saving and
of buying the bonds of the government.

Most of you are familiar with the way in which this
matter was handled.

Notice was necessarily so short that it was

an almost superhuman task to cover the ground adequately between
the first of May and the middle of June.

Plans made so hastily

cannot be expected always to work smoothly, nor did they when the
first loan was placed.

But much of the difficulty was due to a

general lack of appreciation on all hands of the magnitude of the
task.

Many bankers expected the bonds to be delivered immediately

upon payment; others failed to realize what a magnificent response
would result from this offering and were inadequately equipped with
clerks to handle the subscriptions; still others failed to take
into account that the placing of a loan for the government must be
handled by most precise methods requiring accurate reports which



- 5 -

must be filed on time.
after.

We have learned how to do it better here-

Whatever friction nothing can really mar the magnificence

of the response.

During the last few days before the subscriptions

closed, when we were handling in the Federal Reserve Bank of New
York alone some thousands of telegrams and telephone calls each day,

we could feel the impending rush of subscriptions as one would sense
the approach of a storm.

Nor need we be ashamed to admit that at

the close, the flood of subscriptions was completely beyond the

handling capacity of even some of the largest and best organized
banking institutions in the district.
It is stated that there were four million subscribers to
the loan.

I believe this underestimates the actual number of sub-

scribers by at least 25%.

In the Second Federal Reserve District,

we have delivered 1,931,666 full paid interim certificates which in
number equals about 14% of the population of the district.

If less

than one-half of this proportion prevails throughout the country, it
would indicate at least five million subscribers, - a response which
makes this first war loan an achievement of the first rank in government finance.

The record in the City of Rochester indicates what is

possible in the whole country.

I am told that with their population

of about 250,000 people they had no less than 61,000 subscribers.

Such a response by the whole country would produce 25,000,000 subscribers for a government loan.

Every detail of the last loan has been completed in the
Second District with the exception of deliveries of the permanent
bonds.



I think the same will be true in all Districts.

Naturally,

















































ADDRESS DELIVERED BY BENJAMIN STRONG
AT THE AMERICAN BANKERS' ASSOCIATION
ATLANTIC CITY, SEPTEMBER 28, 1917.

ADDRESS DELIVERED BY BENJAMIN STRONG AT THE AMERICAN BANKERS,
ASSOCIATION, ATLANTIC CITY, SEPTEMBER 28, 1917.

The invitation which your officers were good enough to
extend to me to address this Convention was accompanied by the sugges-

tion that I should say something about the relations of the Federal
Reserve System to government financing.

But those who have sent sons

to France, find it difficult to discuss the war in terms of dollars.
Some of us have just said good-bye to boys who are leaving their
homes to make the supreme sacrifice for their country.
real investment in the war.

They are our

Our return on that investment will not

be valued in rates of interest, but in the consciousness that it has
again been shown that our form of government and our institutions
develop in our citizens that generous altruism which is our proudest
national tradition.

We look to these armies of the best the nation has to
-offer for the victories which can only be won by individual heroism.

They look to us for the support which must be accorded through
personal self-denial.

The great military organization now being created is only
one part of the fighting machine with which we must equip ourselves
if the sacrifice of sons and husbands is not to be in vain.

The

first army to be mobilized is the army which must shape and control
the economic activities of the American people, so as to produce
material for conducting warfare.

Our battles can be won only by

turning over to our government as rapidly as needed billions of
dollars of credit, which must to drawn from the earnings and economic












S

- 6 -

those who may decide to cotvert bonds of the first issue into bonds
of the second issue will prefer not to require of us the expense
and labor of two deliveries.

The permanent bonds are rapidly being

prepared and I know that I am only expressing the wish of the
Secretary of the Treasury, as well as the officers of all the reserve
banks in asking that the bankers through whom these subscriptions
were originally made, cooperate with us in conducting this complicated operation of making deliveries.

Such complaint as has arisen regarding deliveries of
bonds fails to take into account the enormous physical labor involved
The requisitions for bonds by the reserve banks called for a total
of 8,782,000 pieces, which would require 20,000,000 sheets of paper
weighing 2372 tons.

In the Second District we have handled 4,005,657

pieces in issuing interim certificates alone.
To indicate the amount of labor involved in placing these
government bonds, the clerical force of our bank has increased from
100 to about 600 people in a few months.

The Publicity Division

of the Liberty Loan Committee employs about 100 people in addition
and the Committee Organization of the Second Federal Reserve District now embraces about 15,000 individuals and will greatly exceed
that number when all appointments are made.
The actual machinery for selling the government's bonds,

keeping proper records of their issue and making deliveries is
not, however, the most important part of the government's financial
operations.

Of much greater importance, is the problem of so

arranging this huge financial operation that it may be conducted






S

S

- 8 -

were flooded with war orders, and at the same time flooded with
gold.

Business became increasingly active.

Bank deposits and loans

increased along with a rapid increase in our gold reserves.

The

production of our mills had to be speeded up to meet these increasing demands, so at the same time, the circulation of credit had to
be speeded up to finance and increased trade.

Now our government

has entered the war, and is making further demands upon our productive capacity.

The volume of these demands may be gauged - roughly,

it is true but still with a fundamental accuracy - by the amount of
the borrowings and increased tax collections of the government, and
we must again speed up the machine of credit to keep pace with the
machinery of production.

The reserve banks form the center of hub

of this credit machine, and I will briefly describe how the conduct
of their operations is actually accelerated when the pressure is
applied.

When the government makes an offering of securities,
whether of long term bonds or short term notes, the banks of the
country immediately realize that their customers or clients will
subscribe to the offering, and that they, (the banks), will be
called upon to make the payment on the subscriptions in their respective localities.

Banks located outside of New York City, practi-

cally all of which have money on deposit there, prepare far this by

drawing on their New York balance or calling in their New York loans
and withdrawing these credit balances to the interior.

As a rule

they do not take cash but take credit on the books of the reserve
tank of their district or of their local reserve agent.



This is

- 9 -

the first spin of the wheel.

The Federal Reserve Bank of New York

receives from the other eleven reserve barks a vast sum of New York
exchange for collection and remittance in advance of each loan being placed.

It must settle with, the other reserve banks every

Thursday through the Gold Settlement ..rund maintained in Washington.

This results in a pull on the reserves of all the banks in New York
City.

The checks we collect from them reduce their reserve balance

at the Federal Reserve Bank of New York and cause the wide fluctuation in excess reserves shown by the New York Clearing House statement.

To meet this drain the member banks in New York come to the

Federal Reserve Bank and borrow money in one form or another.
times other means can also be employed re-coup their reserves.

SomeFor

example, at the time of the last loan, the Federal Reserve Bank of
New York purchased from the British Government $120,000,000 of gold
in a period of two weeks, and in addition received payment in gold
of certain international obligations amounting to over $50,000,000
which matured on June 20th.

All of this gold came to the Federal

Reserve Bank of New York but was for the credit of a large number
of New York banking institutions.

Their reserves were immediately

built up and, to that extent, the drain was offset.

A further means of relieving the loss is to offset it by
transfers of government deposits from these sections of the country
which have drawn so heavily on New York that their own reserves have
been increased to an amount unnecessarily large.

These transfers

are accomplished by telegraph through the Gold Settlement Fund, and
start currents flowing in the opposite direction, so that the move





- 11 -

regard to the reserve position of each of the other reserve banks.
This plan for speedy and almost automatic transfers of credit has not
yet been put into operation, though in the future it may become a
resource of vast strength.

This explanation seems necessary to make clear that the
normal function of the Reserve System expressly authorized by the
statute and very wisely providol with regard to just such a situation
is simply being exercised for the benefit of the member banks as a
whole.

The statute provides for the cooperative use of reserves

and credit facilities of the twelve reserve banks in time of emergency so that their combined strength may be as effective as though
they were one bank instead of twelve.

To return to our chronology; the next step in these
financial operations, after the subscriptions are closed is their
actual payment into the reserve banks by the banking institutions
of the country.

The preliminary readjustment of credit to enable

them to do so, you will observe, has already taken place.

The

payments as made are credited to the government on the books of the
reserve banks, in some cases actually, in other cases only constructively.

"here actual payments are made, the reserve banks,

acting as fiscal agents of the government, at once redeposit these
payments with the national and state banks where they originate.

Where the payment is constructive, it simply means that the bank
originally subscribing (either for itself or its customers) for
the government securities, instead of making a remittance to its

reserve tank, merely credits the government on its books with the

































ADDRESS DELIVERED BY BENJAMIN STRONG
AT THE AMERICAN BANKERS' ASSOCIATION
ATLANTIC CITY, SEPTEMBER 28, 1917.

ADDRESS DELIVERED BY BENJAMIN STRONG AT THE AMERICAN BANKERS'
ASSOCIATION, ATLANTIC CITY, SEPTEMBER 28, 1917.

The invitation which your officers were good enough to
extend to me to address this Convention was accompanied by the sugges-

tion that I should say something about the relations of the Federal
Reserve System to government financing.

at those who have sent sons

to France, find it difficult to discuss the. war in terms of dollars.

Some of us have just said good-bye to boys who are leaving their
homes to make the supreme sacrifice for their country.
real investment in the war.

They are our

Our return on that investment will not

be valued in rates of interest, but in the consciousness that it has
again been shown that our form of government and our institutions
develop in our citizens that generous altruism which is our proudest
national tradition.

We look to these armies of the best the nation has to
-offer for the victories which can only be won by individual heroism.

They look to us for the support which must be accorded through
personal self-denial.

The great military organization now being created is only
one part of the fighting machine with which we must equip ourselves
if the sacrifice of sons and husbands is not to be in vain.

The

first army to be mobilized is the army which must shape and control
the economic activities of the American people, so as to produce
material for conducting warfare.

Our battles can be won only by

turning over to our government as rapidly as needed billions of
dollars of credit, which must to drawn from the earnings and economie



3 -

of the people of the country.

The general character of the financial organization needed
for the work had been determined by statutes already enacted before
our entrance into the way:.

Congress had for many years provided by

law that government bonds should be sold by popular subscription
without deduction of bankers commission°, and in December 1913,
when the Federal Reserve Act became law the Secretary of the Treasury
was authorized to appoint the Federal Reserve Banks to act as the
Government's Fiscal Agents.

These two brief paragraphs in our

statutes, supplemented by the patriotism and erergy of. American

bankers and their aids, are all that was required to lay
tion for an organization which I believe can be relied upon to furnish credit at a minimum cost just as rapidly as the government can
raise armies and the country can produce supplies.
Secretary McAdoo

foresaw that upon this foundation he

could build up a machine for war finance which would bring into
co-operation in one great army, the bankers, the press and a multitude of other organizations not ordinarily related to the financial
operations of the government, but so co-ordinated that their services
would supplement those of the Treasury DepartLent t.nd of its fiscal
agencies.

Each reserve bank was advised of its appointment as fiscal
agent and directed to proceed with the development of the machinery
needed to place the first Liberty Loan on May 3rd. 1917.

While the

organizations were different in each district, the main characteristics were the same.



Committees were appointed to co-operate with




- 5 -

must be filed on time.
after.

We have learned how to do it better here-

Whatever friction nothing can really mar the magnificence

of the response.

During the last few days before the subscriptions

closed, when we were handling in the Federal Reserve Bank of New
York alone some thousands of telegrams and telephone calls each day,

we could feel the impending rush of subscriptions as one would sense
the approach of a storm.

Nor need we be ashamed to admit that at

the close, the flood of subscriptions was completely beyond the
handling capacity of even some of the largest and best organized
banking institutions in the district.
It is stated that there were four million subscribers to
the loan.

I believe this underestimates the actual number of sub-

scribers by at least 25%.

In the Second Federal Reserve District,

we have delivered 1,931,666 full paid interim certificates which in
number equals about 14% of the population of the district.

If less

than one-half of this proportion prevails throughout the country, it
would indicate at least five million subscribers, - a response which
makes this first war loan an achievement of the first rank in governLent finance.

The record in the City of Rochester indicates what is

possible in the whole country.

I am told that with their population

of about 250,000 people they had no less than 61,000 subscribers.

Such a response by the whole country would produce 25,000,000 subscribers for a government loan.

Every detail of the last loan has been completed in the
Second District with the exception of deliveries of the permanent
bonds.



I think the same will be true in all Districts.

Naturally,

- 6 -

those who may decide to coLvert bondS of the first issue into bonds
of the second issue will prefer not to require of us the expense
and labor of two deliveries.

The permanent bonds are rapidly being

prepared and I know that I am only expressing the wish of the
Secretary of the Treasury, as well as the officers of all the resein,,-

banks in asking that the bankers through whom these subscriptions
were originally made, cooperate with us in conducting this complicated operation of making deliveries.

Such complaint as has arisen regarding deliveries of
bonds fails to take into account the enormous physical labor involved
The requisitions for bonds by the reserve banks called for a total
of 8,782,000 pieces, which would require 20,000,000 sheets of paper
weighing 2372 tons.

In the Second District we have handled 4,005,657

pieces in issuing interim certificates alone.
To indicate the amount of labor involved in placing these
government bonds, the clerical force of our bank has increased from
100 to about 600 people in a few months.

The Publicity Division

of the Liberty Loan Committee employs about 100 people in addition
and the Committee Organization of the Second Federal Reserve District now embraces about 15,000 individuals and will greatly exceed
that number when all appointments are made.
The actual machinery for selling the government's bonds,

keeping proper records of their issue and making deliveries is
not, however, the most important part of the government's financial
operations.

Of much greater importance, is the problem of so

arranging this huge financial operation that it may be conducted



- 7 -

without disturbance to money markets, and consequently, causing a
dis-organization of business.

Of this, I should like to speak

particularly from the standpoint of the Federal Reserve Bank of
New York and of the New York money market.
New York is the country's central money market.

From it

radiate the principal currents of credit, so that an accurate view

of the New York position is illummating as to the whole country.
Were I asked to state in the fewest words the functions
of the Reserve System in relation to government financing, I would
say that the reserve banks keep the books of. bank reserves and of

government credits for the entire country.
run the general ledger.

In a banking sense they

Present conditions afford the first

opportunity for you to judge whether they do it well or not, and it
is desirable that you should have the facts so that you may judge
in this matter, because the confidence that is based upon understanding of, and belief in, our banking system at this time is
essential to success - without it we shall fail - with it, we must
succeed.

The amount of banking accomodation required in any wellorganized country nay be said roughly to correspond to the volume
of the country's business.

As business increases, bank loans and

deposits increase in somewhat like proportion.

As tusiness declines,

liquidation takes place. bank loans and deposits go down and the
proportion of reserve to deposits increases.
this formula, take our own experience in the past few years.

As an
When

the war broke out, after a short period of disturbed business, we













































7ao
3

:7,7:T.ED BY BEIT,T,

sar

STRUNG

crrr, 1:71,PTKan 2E, 1S17

w:Ach 7:411r officers were ,;cod enough -1

was accompanied by the suggestion that
,f:

sent
-o11:1-::

or

ie

to F12X-Ce

1.1.

1

tacild z.:

serve 3.yster.., to r-o7erL,-.7,.:.4.

fly,d. it

i:;.tfloalt to Cecaan

some of us have ,;us'i; said good lye to bogs who are leaviui;

:tomes to make the supreme sacrifice for their country




o

Our
ment in the war
They are our real inveg return on that

but in the oonsciousness tha

and our institutions deve

;1.1(3h is our proudest national tradi

We look to these armies of
which oar. an1;:r be won by
c.

-4,1ch must be accorded thro

ine great military organisa

Ck3 f5hting .m.:iehine with which we
.112,31c13 is not to be in vain,.

control the economic a

:.latorial for conducting warf
,vcr to

j..overnment as rapidly a

1..:et be drawn from the earnings
genrtrol

charoter.

of t

sty totes alre

s.

i 13.v r

>:

2rovided

11:z --,',^esri2t1J)12 withpTA deduc

:46 1,),ral aesorve

became l

7c:Lsrll :lev.rve Bank

Alt

nese two brief p.aregrephs in our statutes, supplerLented

the latrictle,..:

of American bankers and their aids, are all that was required to lay t:le:
.!

for an organization which I believe can be relied upon to furnish credit. at

t

I

cost just as rapidly as the government can raise armies and the country can 1*,oCca:,,
supplies.

Secretary McAdoo foresaw that upon this foundation he could build up a
ilacnine for war finance which would bring into cooperation in one great army, the
ban:,r.ers, the press and a multitude of other organisations not ordinarily related to

tile financial operations of the government, but so co-ordinated that their services

would supplement those of the Treasury Department and of its fiscal agencies.
Each reserve bank was advised of its appointment as fiscal agent and aireo.t-

to proceed with the development of the mceinery needed to place the first Liberty
Loin on Lay 3rd, 1 17.

While the organisations were different in each district, the

main characteristics were the earns.

Committees were appointed to cooperate with the

reserve banks and upon these committees -. largely composed of bankers - there devol-

ved the duty of sub-dividing each Federal reserve district into sUh-distriots and even
s-ff:aller divisions so that ultimately in the Federal Reserve District of New York (and

I believe practically all the others), we had committees or representatives actively
ut work in every 01.17 and town within t'le few weeks of the day we were told to xi.trt,

in conjunction with the committees appointed to actually sell bonds, publicity
g....-;;i2tic.ns were created in all perts of the country, which had particular c.

or-;e

ubiicity, advertising, public spealzing, distributing posters and
voziety of other activities aimed to educate the people of the countr;:
tml?ort::.11p of saving and of buying the bonds of the government.

of you are

Ictioe was neoessaril

with the way in which this r::tter was

so short that it was an almost superhumtln task to c

J.::.,3q..A3/y between tno first of ._Lay ...nil the middle of June,

cliot be e):peoted




:a

to work e:000th7.:i, our did tiia

Plans

ft-




IP




ti.s lowest Tords

i ask,31 to sttii

I rould say th7tt

:star:: ir relation to :;overn.-rent fill:.ncin,

the bucks of bank resel.es

ti

of i:x7ornmezt crelite for i;:se mtire

?resent oondittAis

`'inking sense they run the general ledger

fort

0111.ortuility for you to judge whether t:41: do it well or not, v.nd it is ,lar,lblo %t

y4 should have the feats so that :row,

judce ft this matter bescss

th:lt in 'based upen understanding of, and belief in, our bankint7 systv.
it, we ihall fail, with it, vie

ssential to euecesA

1-if

The amount of banking accorc.i.iodation required in any

14a; be said roughly to correspond to the volume of the co.untry Li

incroases, bank loans and deDosits increase
declines, liquidation tuies

Jo somewhat like la.k,
1 ;1.7)

pie...), bank loa_is and deposits v-o

T-194rVe to deloeite inoiases,

As an illustration of this fomulz-,
broke

txlerierct
lyLislitase

,pst few :ears.

;Viler. the war aut, after a short iorl(A: cf

we were flooded with war orders, and at the CiiizoS

incroasingl- active.

nailoss

r:l.16 increase Ia (Air 6-old reserve_

ti%el fL2.Jcia

alor,

Bank deposits Ind loans
The prod-AsticAn at our mills 11:id

weet t%ese increasing demands, so at the sa;!.e time, the oirouluti:,n of i:realt

'Go olleeed up to finance the inoreased trade°

Vow our Government 7;-38

2 uaking further du:lands uLnr. 0112 prociuctive capocity

The volune of to

L7aacea - roughly, it is tits) but still with a fundAr:ental aucurac,;
IL,11 tt:rrowings and increased tax collections of the government, and T*,

spc 'i

mst

ul the machine of credit to keep race with the nachinery of rroduct.lc.

2isrvo 1-Junks form the center or hub of this credit machine, and I will t:::er,

conduct of theirsperations is Ictually doceleruted wbon t..Then the govelir_t rakes a
bonds or s.ort told: nctet3




offerinE of securities, w,etnin

tlie bunks of rho ccqnty7

Yff":r4,--

+he
-.1Aside of

in.

th..t

:

the 5-.11.1scri,t1Qns

Yoet Ca', .crn.e!ti7all.

resleo-,17,1

X71 of

:rep.A-7f, fur the by drLwin:: en neir Nov vork 'elances cr calltr.

d withf.mwIn

tesF, credit bala:.ces to the interior

(-311 br..t take credit or. the books of the reserve

oeerve agent-

This is the first spin of the wheel

in

LI.

their
The FeierLA Ties,

Fer York receives f:.al the :ther Oeven reserve banks a vast sum of New
for cullection and remittance in advance of each lon.n being plzoea

aside

IL mr.lot

.;,ith the other reserve banks evezy Thursda7 throuc:1 the gold Settle-ent FL.nd

.:_antained in Washington,

3so York Cit:'

This results in a pull on the reserves of all the bilks

The checks we collect frov they!. red..:ce their reserve bulnc31:

at

7aserve Bank of New York and cause the wide fluctuation in slzcssa

y the 7:e'./ York Clearing House state rent,

..;Tr York come to the Federal Reserve

To meet this drain the rember

Bank and borrow money in one form or L_%Dth!,r.

otetimes other means can also be emplo:ed to recoup their reserves.

Fcr

le tilvi of the last loan, the Federal Reserve Bank of New York purch,..oto. 1Y,

ritish :lovorn:ent $120,000,000 of gold in a period of two weeks,

in

alved r.ayment in gold of certain international f2ligotions ame..2ntin:! t,

ieh matured or June 20th,

..11 of this gold came to the Federal Ree-

'.;n: "but m.s for the credit of a large umber of New York bankint;

2:;:7il7oe rre imedlotely built up anki, to that extent, the drain wan

A. further means of relieving the less is to offset it by
aepesitefraw r.t,ese sections of the country which have lmwn
cir tr.,11

,-cecrvas have beer inoreased to an amount unnect..;:..ril,
z..,1c,Lri.liLhea by 1 sle6r.Lph thr-1L;h t-lo Gold Settlu-aLt

ots



lh

Oireetica, so that the Movements between

.1(

1

4.

,t

tr.0

:0

t21:

'!;'Jieral reserve districts largelj offset ,E,C11

transferred,

7.A2 t.

Still another method has been provided for achieving the desil.ed
.t.1-11:rum of delay:

Every

!

Federal reserve bank has adopted a resolution -uthl

e to rediscount its lortfolio with any other Federal reserve bank

T1.1.,

Cl4ction 11 of the Eeser7e ;,ct which -ivba the redorz.l.
v1)te

f five meZbors

hoard to fix

-4-xo

.Le

the fewer tc require such re::.it;c,.

first tis uppea_c!,

1%.:tAls

a born.rgind opertion, Iv: in

of 1,:;t it

7',7,zsr..it bank, in this case, New York, whie

=

,

J.c

t.

loses its

_.17.tleL.emt Fund, is usually simplzi paying out to ths other reserve banks the
':.1,i311

.t..)ei deposited with it bj its awn member banks whcse accounts

1.1as

b; the drafts from the interior.

:t)cl

_4.5 restore:: by the rew York

rediscounting their 1.3Ulics-f%

>,171Q.1-::lat to impar ti t

the

bank s

I.csitlor of the Federal aseiy,:..

TjlJ turn over its ,'ortfc,3.1.0 in
4trongthened

pi.rt

t2a.oso

ro

Fapressed differently, instead 3f sattiin,..;

L:ottle:aent Fhl with gold

WO

o:ft,' is that

case settle

o'.1.r.

of our .-,:ftfolio, appyrtion,nis it with dua reear: to

oter 7rosol.ve t
9




:.ct

in

Tne reserve accounts 6f the

is ;;:oe.. to the oLher re;orve

-

-1cs

-flan for

:QSZ'

speedy and Ll.:.ost

.'et be e-r. put iota

ir t.ho

.-Itt-.z.rF.

it :1_1;

-

171.-

for to

COC;2,3fa




I._

up its 111.,.',/e

It can then in turn repay to .:,ther reserro b:.nks

walch it previously might. 7..va folivered to the
place between Reserve ?tanks

if reliscount trarsactione 11.4 takcIn

Gradually the whole set fqP entries ariatnp; from the 'Ire

liminary withdrawis fror 1Zew York will have been reversed and oanoelled is

r=%E:alt or

The rese vs banks have ste,ved info

tie Alamate disburser:Ants of the Government
treah simply to make some temi;orary advances.

;They LIve providd the ma(ninery to

)174 a great mass of credits rapidly from orle prt of the ccuntr: to unother ayiu 1):".

In . sense the placing of these :ug, government loans is 11X1 m-dving a crtl
have a larse crop, the credit machinery roust move faster,

These large 4-:vvel-n

:,:fnt borrowings make it necessary to speed up the credit machine, and that

exactly

"fleserve System is doing.

The figures of the Gold Settlement Fund illustrate what is being dons

Grose Clearings, 3 months, ending June 30
"

Balances raid:
22'11

May
Judie

Totwl

1916

4632,Z99,000.

.4.101.:317A00

Jnne 30, 1917

"

1217.

1$2.31

; 75,519,000219,263.000

421,7E5,000
42,994,000
28,723.000
493,473,000

111.6.00430
$512,430,000

But I think I um correct in assuming that you are more interested in a stir,
--Ir stage of this operation

It appears 45 though at this point the ultimate effect

of 6ubscriitions to government loans, the withdrawal Of their prooeedsto Bev York and
i,tir disbursement in Now York by the government, has resulted in a 1)ermanent loss of

osite g.rd censoluently of reserves by the banks of the interior
_cdr3

oxpreesed to ;,1,4

d..).11,7

IL 's:Yme sections ap:ear superficially

e well ErJ4ndad, but the effect will not be para.nertt



The fears m:xts.'

If it

ac, .that lost' ,n of

or-

ra7:14iment loss of deposta

ontrat,

-

fr,L, 1t

:f

:3tffs. the ,.irodacts of vines or of fon,!..

.t

AiiendeO b;/ the Euvornment, 1,i1t1-1
:.7

,

zt."ruc.d,

the ay:.-ti:A

Is Line

1

mnterials of great vriety, &l the
0

retry th6ne cr




Laing spent hera as well

tt

I

It means that in al:1

:.1,1-01-2:,'.5,":3
Ldvitbly move back to their points of oriEin,
Z`cU,t_;7";

L

NEW7

ship

ari f-2r, ats
every part of the Gomatry now go
3 back share of thls treat fund, Even those sectio
recoivo the benefit,

damand

thc

.1

sul:y1

e

L,

(.,f

t

the or.11-:
tTh?

it

er)

o'r reflc:tcad

-Ar.tar-wwi-F3n that it is

1n97itabla

nd in those secti

Icroduction and saving have been

la any looalfty C..)r loans tc the government is measure
1.

-

eay..?

i:ro fits or. what it produces_

It .!-:Bt to admitted. 1...at our agricultural products, w

about Lis rd;iustment, are in th
tho iear

c-duntr;.,

t'n1; interval, withdrawle of bank

v4.ouum somewhat longer than In

:-9ttaotion and r:al'etin:, are continuous the year &round.
fc'c

roff,table

of vla fc-z4:
beca.,t5e inevitably to the a
1..,t

-,:xc,iuoed there-




,M=M._._

dar

$173000.000 matured within fifteen days,
$ 19 000,000 matured within thirty days,
$ 29,0009000 matured within sixty da,,:e, and

$ 31,000.000 matured within ninety days
B: ;,.:gust 15th, our discounts had been reduced to 062,000,00C without any
cra

:;.,1

in v-tes being errloyeed to force the reduction,

In other words, in

11.%,uidated V50,000,000 of paper taken from member barks with 1rantically no di::
t..lilarce to the money market.

On September 19th, our tots: discounts amounted to

of which

,C;:.

$29_000,000 matured within 15 days,
;17,000 000 matured within 30 days,

g20A00,000 natured within 60 days,
4:21,000,000 matured within 90 days, and
Our investments totaled ,i;;6_900,000 of which only $1,300,000 consisted of lonit,

time bonds of the government, purchased under statutory nrovisions of the :_ct, an
,60:),000 short term U

Sc. Treasury certificates of indebtedness,

7ith this liquidation automatically accomplished it leaves us on Septe::ritil 4656.000,000 of reserve., practically all gold, being 69% of our new deposit

The whole Reserve System on September 14th held 41,415,000,000 of

liabilities

pIL,;,tically all cold, as reserve against the liabilities of the whole system

fc;=lation upon which to rest our government a bunking transactic,LL,
wicnir

There is Lc occasion for timidity on the part of our tanker:;
thoir ene:.gies and their resx;-ces

frail wolL,ht of

th

(,:ondt. of tile
cc.T..;h1i1,,,n,




I wi23.1

On this

say a few xords
i3;,;jal,:a In no

,11c:(2vtl_,.:_;

V:Aca

ilkAVG,

huEdroci ar.d fifty ;ears Qf finz-c11 61,6rfiurig

tite reoord of ta 13t

ti7nA of the L:eztain European goveraments,

You will then realize that

::113

--Jni2tor wno has tho courage to impose taxes at the outbreak of a war heavy enoogh to

,y bond interest, to rapidly amortize bond issued when peace cones, an6 to
!' expenses, will have a minimum of difficulty in borrowing money.

The reco=de cf

11::tish Government in tho rapoleonic liars, the Crimean War and even as recerAl: J3 r

Boer liar, demonstrate, by the mistakes disclosed. this fundamental prinoiple cf

BO we do not need to turn to Europe for examoles on this subject.

The histov: of

111;&ncial operations of our own government in the Civil War is entirely adequate
polioy being pursued,

Within little more than six mouths of the ont11-:.

c;or banks suspended specie payment.

Our government was borrowing money fron.

1561 ut ruinous rates of interest, and only too soon was driven to the diSL13t1'c,11S
:,/,alatIt of issuing fiat money,

in 1662, the goverment placed its loan 3t

6.o1d basis produced a value of about 98% of par value for bonds beari4g 17.16,1

the funds realized from loans placed by the government in 1863 produced

interest

gold basis as low as 6411% of par value, and in 1064, as law as 47Z4,

On the other hand the clear war revenues from taxes in 1662 were but 4.52,Y
in 1063, t113 000,000, whereas, in 1866, after the close of the war, the revenue
than in force produced the enormous total for those days of N::568,000,000,

It is :1)7L

that the failure to support the government's credit early in the war byindequote Loc
venues undoubtedly was one reason for the unfortunate later indulgence in eveoL:

unsound financial expedient, the effects of some of which have dogged our sted fcr
fift,, dears

Now, let us compare 41-

*RN.

dissinilo.rity is so striking

aogurie.; for the seccess of our whole fimthe officers of our government have the ooluaLu

..111/1=11

beliee..4.11.
the prograan of taxiition is too heavy; an the othe



-




ADDRESS DELIVERED BY 3ENJAMIN STRONG
AT THE AMERICAN BANKERS' ASSOCIATION
ATLANTIC CITY, SEPTEMBER 28, 1917.

The invitation which your officers were good enough to extend to me to
address this Convention was accompanied by the suggestion that I should say something about the relations of the Federal Reserve System to government financing.
But those who have sent sons to France, find it difficelt to discuss the war in
terms of dollars.

Some of us have just said good-bye to bays who are leaving their

homes to make the supreme sacrifice for their country.
ment in the war.

They are our real invest-

Our return on that investment will not be valued in rates of

interest, but in the conscioudness that it has again been shown that our form of
government and our institutions develop in our citizens that generous altruism
-hich is our proudest national tradition.

We look to these armies of the best the nation has to offer for the victories which can only be won by individual heroism.

They look to us for the sup-

port which must be accorded through personal self-denial.
The great military organizatiannow b_aing created is only one part of the

fighting machine with which we must equip ourselves if the sacrifice of sons and
husbands is not to be in vain.

The first army to be mobilized is the army which

must shape and cant ol the economic activities of the American people, so as to
produce material for conducting warfare.

Our battles can be won only by turning

over to our government as rapidly as needed billions of dollars of credit, which
must be drawn from the earnings and economies of the people of the country.
The general character of the financial organization needed for the work
had been determined by statutes already enacted before our entreace into the war.
Congtess had for many years provided by law that government bonds should be sold
by popular subscription without deduction of b nkers commissions, and in December
1913, when the Federal Reserve Act became law the Secretary of the Treasury was
authorized to appoint the Federal Reserve Banks to act as the Government's Fiscal
Agents.

These two brief paragraphs in our statutes, supplemented by the patriot-

ism
 and energy


of American bankers and their aids, are all that fins required to lay

the foundation for an organization which I believe can be relied ueon to furnish
credit at a minimum cost just as rapidly as the Government can raise armies and
the country can produce supplies.

Secretary McAdoo foresaw that upon this foundation he could build up a
machine for war finance weich would bring into cooperation in one great army, the
bankers, the press and a multitude of other orgamiz-tions not ordinarily related

to the financial operations of the goverment, but so coordinated that their services
would supplement those of the Treasury Department and of its fiscal agenciee.
Each reserve bank was advised of its appointment as fiscal agent and
directed to proceed with the development of the machinery needed to place the
first Liberty Loan on May 3, 1917.

While the orgenizations wore different in

each district, the main characteristics were the same.

Committees were appointed

to cooperate with the reserve banks and upon these committees - lareely composed
of bankers - there developed tee duty of sub-dividing each Federal reserve district
into sub -districts and even smaller divisions so that ultimately in the Federal

Reserve District of New York (and I believ practically all the others), we had
committees or representatives actively at work in every city and town within a few
weeks of the day we %ere told to start.

In cenjunction with the committees ap-

pointed to actually sell bonds, publicity organisations were created in all parts
of the country, which had particular charge of news, publicity, advertising, public

speaking, distributing posters and managing a great variety of other activities
aimed to educate the people of the country to the importance of saving and of buying the bonds of the Government.

Most of you are familiar with the way in which this matter was handled.
Notice was necessarily so short that it was an almost superhuman task tocover the
ground adequately between the first of May and the middle of June.

Plans made so

hastily cannot be expected always to work smoothly, nor did they when the first
loan was placed.




But much of the difficulty was due to a general lack of appreciation

on all hands of the magnitude of the bask.
be delivered immediately upon payment;

Many bankers expected the bonds to

others failed to realize What a magnif-

icent response would result from this offering and weee inadequately equipped
with clerks to handle the subscriptions;

still others failed to take into ac-

count that the placing of a loan for the government must be handled by most pre
else methods requiring accurate reports which must be filed an time.
learned how to do it better hereafter.
the maghificehce of the response.

We have

Whatever friction nothing can really mar

During the last few days before the subscrip-

tions closed, When we were handling in the Federal Reserve Bank of New York alone
some thousands of telegrams and telephone calls each day, we could feel the
Nor

impending rush of subscriptions as one would sense the approach of a storm.
need we be ashamed to admit that at the close, the flood of subscriptions was
completely beyond the handling capacity of even some of the largest and best
organized banking institutions in the district.
It is stated that there were four million subscribers to the loan.

I believe this underestimates the actual number of subscribers by at least 25%.

In the second Federal Reserve District, we have delivered 1,931,666 1111 paid
interim certificates Which in number equals about 14% of the population of the
district.

If less than one half of this proportion prevails throughout the

country, it would indicate at least five million subscribers, - a response which
makes this first war loan an achievement, of the first reek in government finance.

The record in the City of Rochester indicates what is possiele in the whole ccuntry.

I am told that with their population of about 250,000 people they had no

less than 61,000 subscribers.

Such a response by the whole couhtry -would produce

25,000,000 subscribers for a government loan.

Every detail of the last loan has been completed in tne Second District
with the exception of deliveries of the permanent bonds.
true in all Districts.

I think the same will be

Naturally, those who may decide to convert bonds of the

first issue into bonds of the second issue will prefer not to require of us the




expense and labor of two deliveries.

The permanent bonds are rapidly being pre-

pared and I know that I am only expressing the wish of the Secretary of the Treasury
as well as the officers of all the reserve banks in asking that the benkars through
whom these subscriptions were originally made, cooperate with us in conducting this
complicated operation of making deliv eries.

:such complaint as has arisen regarding deliveries of bonds fails to take

into account the enormous physical labor involved.

The requisitions for bonds by

the reserve banks called for a total of 8,782,000 pieces, which would require
20,000,000 sheets of paper weighing 237 1/2 teas.

In the second district we have

handled 4,005,657 pieces in issuing interim certificates alone.
To indicate the amount of labor involved in placing these government

bonds, the clerical force of our bank has increaed from 100 to about 600 people
in a few months.

The Publicity Division of the Liberty Loan Committee employs

about 100 people in addition and the Committee Organization of the Second Bederal
Reserve District now embraces about 15,000 individuals and will greatly exceed
that number when all appointments are made.

The actual machinery for selling the government's bonds, keeping proper
records of their issue and making deliveries is not, however, the most important
part of the government's financial operations.

Of much greater importance, is

the poblem of so arran-lng this huge financial operation that it may be conducted
without disturbance to money markets, and consequently, causing a disorganization
of business.

Of this, I should like to speak particulafly from the standpoint of

the Federal Reserve Bank of New York and of the New York money market.
New York is the country's central money market.

principal currents of credit, sothat an accurate view of the New York position
is illuminating as to the whole country.

Were I asked to state in the fewest words the functions of the Reserve
System in relation to government financing, I would say that the reserve banks



From it r

keep the books of bank reserves and of government credits for the entire country.
In a banking sense they run the general ledger.

Present conditions afford the

first opportuni4- for you to judge whether they do it well or not, and it is desirable that you should have the facts so that you may judge in this matter, because the confidence that is based upon understanding of, and belief inl our
banging system at this tims is essential to success - without it we shall fail, with it, we must succeed.
The amount of banking accommodation required in any well- organised
country may be said roughly to correspond to the volume of the countrydes business.

As business increases, bank loans and deposits increase in somewhat le9ce proportion.

As business declines, liquidation takes place, bank loans and deposits go

down and the proportion of reserve tc deposits increases.

As an illustration of

this formula, take our own eeperilInce in the past few years.

When the war broke

out, after a short period of disturbed business, we were flooded with war orders,
and at the same time flooded with gold.

Business became increasingly ac

Bank deposits and loans increased along with a rapid increase in our gold reserves.
The production of our mills had to be speeded up to meet these increasing demands,
so at the same time, the circulation of c_edit had to be speeded up to finance
end increased trade.

Now our government has entered the war, and is making further

demands upon our productive capacity.

The volume of these demands may be gauged -

roughly, it in true but still with a fundamental accuracy - by the amount of the
borrowings and increased tax collections of the government, and we must again
speed up the machine of credit to keep pace with the machinery of production.

The reserve banks form the center or hub of this credit machine, and I will
briefly describe how the conduct of their operations is actually accelerated when
the pressure is applied.

When ;he government makes an offering of securities, whether of long
term or short term notes, the banks of the country immediately realize that their
customers or clients will subscribe to the offering, and that they, (the benke)



will be called upon to make the payment en the subscriptions in their respective
localities.

Banks located outside of New York City, practically all of which

have money on deposit there, prepare for this by drawing on their New York balance

or calling in thdr New York loans and withdrawing these credit balances to the
interior.

As a rule they do not take cash but take credit on the bue4s of the

reserve bank

of their district or of their local reserve agent.

first spin of the wheel.

This is the

The Federal Reserve Bank of New York receives from the

other eleven reserve banks a vast sum of New York exchange for collection and
remittance in advance of each loan being placed.

It must settle with the other

reserve banks every Thursday through the Gold Settlement Flied maintained in Wash()
ington.

This results in a pull on the reserves of all the banks in New Yoidk City.

The checks we collect from them reduce their reserve balance at the Federal Re
serve Bank of New York and cause the ride fluctuation in excess reserves shown by
the New York Clearing House star.ement.

To meet tais drain the member banks in New

York come to the Federal. Reserve Beak and borrow money in one foam or :another.

Sometimes other means can also be employed re-coup their reserves.

For example,

at the time of the last loan, the Federal Reserve Bank of New York purchased from
the British Government $120,000,000 of gold in a period of two weeks, and in af]di-

tion received payment in gold of certain international obligations amounting to
over $50,000,000 WiaLch macui-ed on June 20th.

All of leis gold came to the Federal

Reserve Bank of New York but was for the credit of a large number of New York
banking institutions.

Their reserves were inuddiately bull, up and, to that

extent, the drain was offset.

A further means of voile-v-121g the loss is t-A, offset it by transfers of
glvernmeat deposits from these seclions of the country which have drawn so heavily

on New York that their own reserves have been increased to an amount unnecessarily
large.

These transfers are accomplished by telegraph through the Gold Settlement

Fund, and start currents flowing in the opposite liecction, 60 that the movements
between New York and each of the other Federal reserve districts largely offset




each other, leaving only net amounts to be transferred.
Still another method has been provided for achieving the desired result
with a minimum of delay:

Every Federal Reserve Bank has adopted a resolution

authorizing its officers to rediscount its portfolio with any other Federal reserve bank.

This procedure is au5horized by Section 11 of the Reserve Act which

gives the Federal Reserve Hoard, upon the affirmative vote of five members, the
power to require sach rediscounts, and authorizes the Reserve Board to fix the
rates.

At first this appears to be in th_ nature of a borrowing operation, but

in point of fact it is really not so at all.
case, New York, whic

The Federal reserve bank, in this

loses its reserves through the Gold Settlement Fund, is

usually simply paying out to the other reserve banks the reserve money which has
been deposited with it by its own member banks whole accounts are depleted by
these drafts from the interior.

The reserve accounts of the members in New York

are restored by the New York bank redieeounting th it paper.

If any considerable

amount of reserves is moved to the other reserve banks and the amount of these
discounts becomes sufficient to iepair the reserve position of the Federal Reserve Bank of New Yoe*, then it can simply turn over its portfolio in part to
those reserve banks which are correspondingly strengthened.

Expressed differ-

ently instead of settling belaacee through the Gold Settlement Fund with gold,

we would in that case settle our debit balances by the use of paper out of our
portfolio, apportioning it with due regard
the other reserve banks.

woke reserve position of each of

This plan for speedy and almost automatic transfers

of credit has not yet been put into operation, though in th

future it may become

a resource of vas.:. strength.

This explanation seems necessary to make clear that the Lionel' function

of the Reserve System expressly authorized by the statute and very wisely provided with regerd to just such a situation is simply being exercised for the
benefit of the member banks as a whole.

tive use


The statute provides for th

coopera-

of reserves and credit facilities of the twelve reserve banks in time

8

of emergency so that their combined strength may be as effective as though they
were one bank instead of twelve.
To return to our chronology;

the next step in these financial opera-

tions, after the subscriptions are closed is their actual payment into the reserve
banks by the banking inetitutioas of the country.

The ereliminare readjustment

of credit eo --suable them to do so, you will observe, has already teken place. The

payments as made are credited to the government on the books of the reserve banks,
in eeme cases actually, in other cases only constructively.

Where a

are ma e, the reserve banks, acting as fiscal agent: of the government, at once
redeposit these payments with the national and stale ben'ei where they originate.

Where the payment is constructive, it simply means thet the bank originally subscribing (either for iteelZ or its custoaers) for the government securities,
instead of making a remittance to In re esrve bank, merely credits the government

on its books with the amount to be remitted, having previously furnished the
government with collas-leal.

At this staee the government has hundrels, and possi-

bly thous ands, of accounts on the books or banks throughout the country.

no

It is

in position to make disbursements either feau its onn purchases or

to the allied nations.

But as these payments must principally be made in New

Yore at the present time, it becomes necessary for the reserve banks gradually
to withdraw these deposits and shif
New Yoek.
ledger.

them through the Gold Settlement Fund to

Then a new set of entries must be made in that we may cell the general
The deposits in other districts are drawn down and remitted to New York

through the Gold Settlement raid.

As this may reduce the reserves of the banks

that held the government deposits throughout the country, the reserve banks of
those districts must stand prepared to discount the paper for them to the extent
nedessary to make good the reduced reserves.

This was done in a small way when

the last loan was placed, and is being done to some extent, although very moderately, to-day as a result of withdrawals of deposits now arising from sales of
certificates



of indebtedness.

As these funds are withdrawn to New York from the

- 9 -

interior reserve banks they are immediately disbursed by the government in New
York and increase the deposits and reserves of the New York banks generally.

The

New York banks can they repay the advances which they hive received from the
Feddral Reserve Bank of New York Which builds up its reserve.

It can then in

turn repay to other reserve banks any paper Which it previously might have delivered to them if rediscount; transactions had taken place between Reserve Banks.

Gradually the whole set of entries arising from the preliminary withdrawals from
New York will have been reversed and can.,:elled as a result of the ultimate dis-

bursements of the Government.

The resele banks have stepped into the breach

simply to make some temporary advances.

They have provided the machinery to move

a great mass of credits rapidly from one part of the country to another and back
again.
crop.

In a sense the placing of these huge government loans is like moving a
When we have a lar,;e crop, the credit machinery must more faster.

These

large government borrowings make it necessary to speed up the credit machine, and
that is exactly what the Reserve System is doing.

The figures of the Gold Settlemmt Fund illustrate what is being donel
Gross Clearings, 3 months, ending June 30, 1916,
$832,299,000
3
"
June 30, 191745,101,317,000
Balances Paid:

1916

1917

April

21,756,000

$ 75,519,000

May

42,994,000

219,263,000

tune

28,723,000

217,648,000

$ 93,473,000

$512,430,000

Total

But I think I am correct in assuming that you are more interested in a
still later stage of thistoperation.

It appears as though at this point the

ultimate effect of subscriptions to government loans, the withdrawal of their

proceeds to New York and their disbursement in New YoAby the goverament, has
resulted in a permanent loss of deposits, and consequently of reserves by the
banks of the interior.

The fears many bankers have expressed to me on this score


http://fraser.stlouisfed.org/
would in some sections appear saper.ficiallv to be well 7-rounded but the Afforo-.
Federal Reserve Bank of St. Louis

- 10 -

will not be permanent.

If it were so, that section of the country which suffered

a permanent loss of depoc.l.ts would suffer permanently a corresponding contrection

of savings realized from its productive capacity whether it was in manufactured
goods, food stuffs, the products of mines or of forests, or what not.

This great

credit fund being expended by the government, with the exception of the pay of
soldiers abroad and of negligible purchases abroadois being expended in this
country in the purchase of mate. ials of gr.:at variety, and the amounts loaned to

our allies are almost entirely being spent here as well.

It means tha

sections of the country these credits must inevitably move back to their points
of origin, directly or indirectly throuja government purchases.

Ne7 ships, oil

!end coal, and products of mills, mines and forests in every part of the country

now go to the government and each pulls back a share of this great fund.

Even

these sections which do not directly receive government contracts indirectly receive the benefit.

Purchases of materials of various kinds in one part of the

country either develop demands for raw materials or create a vacuum of goods
which must be

.812

lied or replaced from other sections.

The intricate commerce

of the country is so interwoven that it is difficult to exactly trace thee movements, but the result is inevitable, and in those sections where this movement does
not reach, it means that production and saving have been arrested, since the amount
subscribed in any locality for loans to the government is measured by the amount
which that locality saves out of the profits on what it produces.

It must be admitted that our agricultural products, Which are one or the
chief instrumentalities for bringing about this readjustment, are in the main marketed at one short season of the year.

In the interval, withdrawals of bank credit

from those sections of the country will leave vacuum somewhat longer than in menu,-

facturing sectixs where production and marketing are continuous the year around.

But when crops are moved and paid for this credit will move back inevitably to the
agricultural sections so long as profitable crops are proeuced thdre.




I refer to this particularly and emphatically because of the fears which

some bankers entertain which might induce them to withhold their best efforts
from assisting

the government in placing the next loan.

The last work of

assurance on that point, very properly must come from the reserve banks, for
during the interval between the marketing of one harvest and the next, when
banks in the agricultural sections must both finance the farmers and assist in
financing the government, reserves must be bridged by reasonable accommodation
at the reserve banks.

be used, and nc

That is what the reserve banks are for.

They expect to

like the present will ever arise in our history when this

use of our new banking system will be so important to every citizen.
Speaking of these matters from the standpoint of tae reserve banks
themselves, I fear you may have heard careless discussion of their possible intention to attempt arbitrary control of these money matters.
control is required, and that is self-control.

Only one kind of

The reserve banks should not be

expected to tie up their reserves in permanent financing for the government or
anybody else.

Their function is to make these temporary loans during periods

of strain, whether occasioned by war and government financing, by domestic
difficulties, or by any other cause.

The exercise of self-control in these

matters means that the reserve banks will see to it that the expansion which they
afford to our banking system is that temporary expansion which is represented by
a portfolio containing self-liquidating bills and loans which mature within a
reasonably short time and which Congress has wisely fixed at ninety days and no
longer.

I thinly I may use the experience of the Federal Reserve Bank of New York

to illustrate this point.

On the first of June, the discounts and loans of that

bank, all maturing within ninety days, amounted to $37,000,000 and its investments,

which included $20,000,000 of short term certificates of the government amounted
to $29,000,000.

At about that time the interior drafts which I have mentioned

began to come in, and during the month of June we were obliged to settle debit
balances to the interior reserve banks aggregating about $550,000,000.




During

- 12 -

that shsrt period our discaants rose from $.77,000,000 on June 1st to $252,000,000
on JuJe 19th.

Of this $252,000,000 of discounts
,tf173,000,000 matured within fifteen dye,

0 19,000,000 matured within thirty days,
t 29,000,000 matured within. sixty days and

$ 31,000,000 matured within ninety days.

By August 15th, our discounts had been reduced to $82,000,000 without
any increase in rates being employed to force the reduction.

In other words, in

two months we liquidated :190,000,000 of paper taken from member banks with pracGin September 19, our total discounts

tically no disturbance to the money market.

amounted to $87,000,000 of which
$ 29,000,000 matured within 15
$ 17,000,000

7)0 days

20,000,000

eo days

$' 21,000,000

90 days

Our investments totaled teseococc of which only $1,300,000 consisted
of long time bonds of the government, purchased under statutor7 provision of the

Act and 02,6000C0short term U. S. Treasury certificates of indebtedness.
Tith this liquidation automatically accomplished it loaves us on September 19th with $658,000,000 cf reserve, prIctically all gold, being 89% of our
net deposit and note liabilities.

The whole Reserve System on September 14th

held 0.,415,000.000 of cash, practically all gold, as reserve azainst thc liabilities of the whole system.

With this magnificent foundaticn uponwhich to rest

our government's banking transactions, how can things go wrong?

There is no

occasion for timidity on the part of our bankers in putting tho full weiptt of
their influences, their energies and their resources behind the government in the
conduct of the war.

In conclusion, I wish to say a few words in regard to the Administration's financial



policy.

On this subject history speaks in no uncertain voice.

I wish yourmuld read, as I have, the record of the last one hundred and fifty
years of financiel operations in war time of certain European govaramants.

You

will then realize that and finance minister who has the courage to impose taxes
at the outbreak of a war heavy enough to pay band interest, to rapidly Amortize
band issues rha) peace comas, and to pay a share of war expenses,
minimum of difficulty in borroeing money.

have a

The records of thaBritish Government

in the Napoleonic Were, the Crimean War end even so recently as the Hoer War,
demonstrate, by the mistakes disclosed, thie fandameutal principle of war finance.

nut Te do not need to turn to Europe for examples on this subject.

The history

of the financial operations of our oen government in the Civil War is entirely
adequate to justife the policy being pumzued.

Within little more than six months

of the outbreak of obr Civil war our ban'-:s suspended specie pkeeent.

Our govern-

ment was borrowine money from the bankc in 1861 at ruinous rates of interest, and
only too soon was driven to the disastrous expedient of issuing flat money.

In

1862, the government placed its loans at rates, which on a gold basis produced a
value of about 95% of par value for bonds bearing hiet rates of interest.

The

funds realized f} em loans placed by the government in 1983 produced cn a gold

basis as low as 64 1/2% of par value, and in 19E4, as low as 41 1/2%.
On the other hand the _leer war revenues from taxes in 1862 were but
$52,000,000;

in 1863, $113,000,000, whereas, in 1866, after the close of the war,

the rdvenue legislation then in force produced the enormous total for those days
of $558,000,000.

It is obvious that the failure to suppe-rt the government's

credit early in the ever by adequate tax revenues undoubtedly was one reason for

the unfortunate later indulgence in every variety of unsound financial expedient,

the effects of sane of which have dogged our steps for newly fifty years.
Nov, let us comeare the resent tax program with these past experiences.
Their dissimilarity is so striking as to be almost etn-tling;

and is one of the

most hopeful auguries for the success of our whole finenciel undertaking. Pe-aonglly,

I
rejoice that


the officers of our government have the courage to face the criticism

- 14 -

on the cue hand of those Who believe the program of taxation is too heavy;
the other hand of those radicals who thin -e it is not heavy enough.

on

Not enough

texas means declining credit, too much taxes mans declining industries.

The

only danger in exacting heavy taxes on profits and incomes is the danger of not
allowing sufficient profit inducement to the industries of the country to stimulate production.

I confidently beliefe that our country can pay all the taxes

required to maintain its credit and to support all the borrowings needed for the
period of the war, without crippling its vital industries, and that those who now
cry calamity simply because they don't want to pay heavy taxes will some day see
and acknowledge their error.

Lut our Congress must be careful not to destroy the

income sources which produce taxes.

Industries which must expand to meet war

conditions, need earnings for plants and inventories which may be useless When war
ceases, and yet they must be built.

To take all their income will retard new

construction.

Those of ue who hale sent our boys to France are beginning to realize
what the war is.

Our part in it and the motive behind it will be an imperishable

glory for this great nation.

But we must not lose our boys and lose the war for

lack of money, nor must we fail in providing the mousy simply because our financial
army is inadequately equipped.

I am convinced that the only important a(eakees in

our financial organization is the lack of state bank meMborship in the Federal
Reserve System.

aae half of our financial army is eauipped with modern machinery

by membership in the aystaa.

The other khaki, equally patriotic, is ineffectively

You will recall the disastrous results to the Russian Armies in the early

armed.

days of the war When large numbers were sent to the front without arms and ammunition.

Doet let us fail our duty for leek of the strength we can only enjoy if we

are united.

It may indeed rest Atli you state bank men to determine what shall

happen to our boys and they must coma home victorious.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102