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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they must be gradually withdrawn to those points where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 salaried
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
every time
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
oy must u
I-
hunan onuim,
oe
e moro fuel.
on
gaged in
uroasod mustago of tho tioauou of tho body roculto
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,
the
20any thousands
-o dostroyed so
all the
war Which n000uoitato the uso of this
other notalz
oonsuned
in ha
=OP. y
quantition
that the
action in
oqual
d
nod,
that they aro no:, rocoverablo
2hoao
of many
are but 'siblo
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
Anna°.
transactions of ouch volum au those
war hundrod
thoro Li,
aro avod
loco in
threw
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
o conduotod.
:Int it can be done was demon-
whicL the transfore involved i:i the
ronco between th
the fairly amp
operation of
deaeribod and the moro
complioated woxl
ro-ultinc fr
Ivory tine
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.
a-s also arrauc-
Treasury Dopartmont to :lake certain
t2*
posits to Lou York, thereby saieWhat of
the interior.
do-
fere of i1170.L
Aiar- the 0 ortent to
the fourth azpeddent. a ve
never booamo ncoossary to employ.
the
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 shipping
they are enlarging
they are shipping grain,
cattle and the products of their mines, not necessarily directly to the Government,
- 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
Ape,414$ ghtrIttNe.
2
1.14
"Ir
FILE 04
ADDRESS DELIVERED BY BENJAMIN STRONG AT THE AMERICAN BANKERS
PPS.
.4%bncancIpm,
AtA?
cf.4
ASSOCIATION,
4.1,811014.1114W44:0010044Cra,K.Ang.
ATLANTIC CITY, SEPTEMBER 28, 1917.
,
,
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.
credit machinery must move faster.
When we have a large crop, the
These large government borrow-
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/.
errOICLA.4101.1414e
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 for lack of the
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 Chartered Banks:
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 those
France,
difficult
to d
But
whofind
haveitsent
sons
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.
As an illustration of
this formula, take our own experience in the past few years.
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 return on that
mentare
in our
the real
war inveg
They
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
Z`cU,t_;7"; points of oriEin,
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:to the a
beca.,t5e inevitably
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.
From it radiate the
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
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 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 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 actual plyments
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 for loans
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
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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
inBank
some
sections
appear saper.ficiallv to be well 7-rounded but the Afforo-.
Federal
Reserve
of St.
Louis
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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 that in all
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
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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
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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.
@FedFRASER