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-L&gated in

&rapport

of the cuauon effort. I need not remind you of the cheerfulness

with abich, on the ,hole, ,,rsaricans submitted to coemodity rationing, price fixing,
and other regulatory measures as dre11 us voluntarily limiting themselves, in order
that our energies and resources might be devoted more cunpletely to the prosecution

of the ear. Frou Vie greatest manufacturing estahlishasents done to the bumbleat
homes the response is most gratifying. :be truth of the setter is, however, that
=War our cosaplex social system it is extraordinarily difficult for a people to
save currently and
the

pleas at the dispose' of

prosecution of a

&creel tr.

their government the capital needed for

.)tanciards of living urea more or less !Lod, and are
cur cc unomic relation-

less susceptible to change than in &,:ore priniltive soc ie t le a.

ships are intricate, and under a system ,are concerns Lust shod
the problem of the
one.

Finally,

extent and manner of

ountributiun to

mobilisation of a people fur Air is to an
country like
in

of publicity.

and the extent of sacrifices

state is u difficult

the

important

the United Itutes, the
a vast

required are nut bores

a profit to exist,

extent a mutter

importance of sacrifices

upon all sections immedietely

with the sate force.

Consequently, our Government had to make up t
savings by resort to bank credit.

fo

All

recall that the ,i(arcrnuent after request

big the maximum investment of current savings in
to anticipate

deficit in receipts from

Liberty bands, also asked investors

their future savings and buy bonds on the partial payment plan.

effort ass mode to encourage people to save

&eery

and complete them payments as soon as

possible* but many did not or could nut pay rapidly, and the result me a continuously

In addition to this,
its short teen notes, as mach a 60 per

thorassing amount of Liberty bonds being curried on bank. credit.
the Treasury also ourrolied large amounts on

cent. of attic& at times were lodged in toe clanks. 2ins,
pover the GcnrensJent ass uncle to

see that +.hat purchasing

obtain ay tapping the savings of the people,

it

manuf tie Lured tikrough the creation :if bank credit. &.t first si at, this looks a good




- 9 -

deal like manufacturing paper "Continentals'. or uesignats, but the vast difference
was that the credits and currency

creutod were ulaays, for any legitimate purAids convertibility could be Laintained

pose, imsediately convertible into

by reason of the fact tOat for the first tiLe the country's gold reserve was
mobilised in a single reservoir,
scattered, as it
country.

an

the Iederal Reserve 4stoL,

InsteLd of being

fomerly, mount; thousands of individual banks all over the

Wieh a centralisation of reserves pet itted them to become the basis for

a much larger creation of credit and currency than .could have mean possible under
the o.d mystaa.

Inability of the civil population to limit its consumption sufficiently
to release production fully for .ear purposes means that both the Goverment and
individuals Uocome bidders for labor and goods in the open market.

,s lung as

labor is not fully o" loved and factories are not running sat capacity the effect
of this on prices is not marked.
and every

hill

hen, however, every man has been put to work

.4 heal is humming, and increased demand con uo longer be matched by

increased produation, the off

prices and wages.

of this competitive bidding is sioply to run up

loch rise in the price and wags level creates a need for addition-

al purchasing power, Anion, wham it is supplied through the eedlum of bank credit,

tends to inflate prices, anu Ames still further.

2bis very process in itself pre-

vents full utilisation of rf;axtrara productive capacity.

:erica.' and "rages rise tam.

evenly, - noro in sons lines than in others, - and distortion of the normal relation
ships causes heavy dai,4aut and often speculation, accompanied by shortages, of the

commodities the prices of Abich are rising.

It causes shifting about of labor from

ono position to another, discontent, and strikes.

It disrupts the naooth dorkings

of industry and creates vests where the vital need is for economy.
is continued, an actual decrease in tau]. production of tea ocoure.




If the process










13

'...ven the first loan iced to be characterised by Gallatin us "more than doubtful."

ita each sextoeeding issue, the toms Sachs* sore disadvantaceous, until by 1614
the public crualt had fallen to extraordinarily lows levels.

Government bonds rent

guoted at a heavy discount, and the Tra&sury, in order to get subscriptions to nor
isu:7_al, had to promise in some canes that the amounts subscAbea vxxild be usei solely

in efense of localities furniCking the money.

The dire extremity of the national

finances as further indicated in the same year when an of
six pc,r

cent.

of warty 1;13,0)0,000

public stock brought subscriptions for only ,046,403 although the specie

price ranged as luw

as

&LI to 69.

It is only fair to re)..arX teat invasion by the enemy, the unpopularity of

the war with a lards class of the people, and the failure of Congress to rechoxter
the United Jtates bank in 1611, greatly intensified tae difficulties of the war
progress.

lhe failure of Gallatin's Jr a policy, hu5ever, as still due in lane

mere to its erroneous principle, nand contemporary critics did not hesitate to
plow, the blame there.

Both

ecretariss Cag.pbell and Dallas uho succeeded Gallatin

admitted its failure, and recommended incroused taxation.

In the curds of Dallas,

the difficulties had nut been due to "went of resources or .mot of integrity in the
nation," but "to inadequacy of our systml of taxation to form a founaution of public
credit, and the absence from our system of

the Leans 4xich are best adapted to antici-

pate, collect, mud distribute tee puelio revenue."

2hs German linance ;inister Dr. delfferich's declaration early in the recent
liar that additional taxes would Lie levied only for 'Lout interest mounded singularly

like Gallatin's

Oewenee adoption af this policy ass probably due largely

to expectations of a short war and inimmmities, and Ahen these expectations were not

realised the inevitable failure of the gam resulted.

Gemany ended the aar with

heavy issues of irredeftuble paper, the further wultipIicution end effects of ahLWe
*
eualio alebts
" Adam, - Public Jebts










- 16 was inflation, suspension of specie 'weenie, end coieeroial mod finenelal unsettlement from which it took fifteen years to recover.

our financial program in the Ara with Gerviany rested an adifferent
basis.

In the first fiscal year of the soar we raised 44,175,0')3,0JJ by taxation,

compared sith 410,700,0u0,000 by borrowing.

In the fiscal year ended June 30, 1e19,

taxes Oroueht in 344650,000,000, tend loans 412,000,000,000.

Zee lessons of other

wars Isere not forgotten and from the outset our policy WWII to raise every dollar

possible ter taxation, to print no pa2er that would not be instantly redeemable is
gold, and to distribute tne tiovernment securities to the greatest extent possible

without resort to bank credit.

It is now pretty conclusively esteolished that a properly conceived
financial progrem should be in eecordance with this policy.

?here still remains,

however, one more important problem f a* the finance sinister to settle, and that

is whether the Government, in selling its securities, shall vomit the rate of
interest to on determined .dally by the ordinary forces of an open and unregulated
money iaarket, or whether it shall adhere to a low rate policy, and depend for die-

tributian partly upon keeping money rotes low and partly upon appeals to patriotism.

Our oen plan during the most ear inclined to the latter charecter, and probably no
other phase of our financing has celled forth
one.

ore discuss ion pro end con than tnis

are critics of this me thud have argued that maintenence of cheap eoney through

low discount rates at the iederte leserve eatte tented to stimulate private enterprise unduly at a time tins the full measure of the country's resources was needed
by the Government, ant that in consequence or this competition Alut .ran saved in

interest was lost in the Mier prices the Government And to pay for @applies.

It

MA further argued that the Oovernment, uy not offering its securities at a rate
Witch would make tnoul attractive purely end solely as an investment, !tempered its

own efeorts to secure that maxima distribution outside of the banks -.etch we have




seen is so important to tae sucoeseful financial conduct of a 'sari.

I do not wish to take sides hAru with retard to our ..ar policy in this
respect.

Let me sinply point out, houever, that hindsight is better than foresight,

and then the country was fk,cing a var which promised to tLx its resources very
severely there lose much to be said for currying on borroring opPrations as cheaply
se poseible.

It IlAy be recalled, aloe, that at the tile there raa a disposition

in scrap qoArters to criticise even the rates named as too high.

In feet, it is

probably true that the great body of public sentiment wnerally favored a low rate
policy.
I 1=ve spoken tints far only of the renerol principles of financing war.
I might

gp on to discuss in detail the problems 4hich arias in applying those

principles.

'history is filled wtth interesting examples of their application rind

our 041 recent euperionce has given us a fund of knoAiedge which the Ratite minister
of any future par rill do .:ell to study.

I any of the data:led problems .ire of a

technical nature and concern tee :Inance minister rather than the soldier. keny
problems are both military and financiel in their inplicutionn, us, fur example,

the basis upon each vex contracts should be let to assure a ountinuous flow of
munitions to the points required, at the tide re(,uire, unaF,r conditions of payment

conduolve to the greatest possiale economy.

On all of tae

problems there should

be oareful study, both on the part of the financial deoart.ent of the Government

and the marmaing dcyatix/nts.

rise problime are nut ones vaich OuD be dealt with

adequately by snap judej.ent tut tail spar of the moment.

Careful advance planning is

essential to sound ear finance.

I have in mind a certain consission of one of the allied governments shish
came to tots country during tiro 4ar for the purpose, among others, of buying a le2V0
amount of arty supplies.

I shell use touts to illustrate.

Under instructions from

their goverment, they udvertiasd midair fur bids, and as a result set in motion










Eat' Matt. Of C mrse, to the extent to Ahich adrahoe estimates ure possible.

rlmeh

mar is 111104 to involve its own problem of tactics and suuipment that eaunot bs
Una of the t.,;..!e.Ateet difficulties in the umy of carrying forward an adequels

fereeees.

Timex is]

pithy to the

o required.

intpesihilikir of limiauling wen aapp road.

r part o

lately hew =AA

money will

the ancertuLnty mhioh existe on tuts score is unavoidable and

4kritoes from the chances of war.

A part, how/very is susceptible of some reduction as

es greet oar machinery for planning the industrial part of the war program.
For tAn soldier and fur the financier there is a sauna lesson tic the
experiences 3f thee ?ant.

It Is the need for the eursdtd preparation of the entire

war pima as it concerns personnel, noterita, transportation, end timl-nce.
of this body of officers at the

The presence

nr College 'conducted sneer the auspices of the

an

?lass Division of the Imola Aar le MA evidence that ths sow at leant has a full
apprecisAian of the importance of this.




CONni?aNGE OF STATISTICS DEPALTMENT
hiay 6, 1921.

SUBJECT:

The influende of the Discount -ate

Lr. Lnyder opened the meeting, saying:

By Governor Strong.

"I am sure we are very much

flattered to have the Governor with us to-day, and I am sure he is going to say
some very interesting thin,L.

.

lie are very much indebted that he should come."

(Governor Strong)

"1 understand that there are much more important matters relating
to the organization of the bank coming up later this afternoon, at this present
meeting, and I am going to try and shorten my remarks toa point where they
will not interfere with that important business, Mr. Snyder.

Furthermore,

now that the time has come for any statements I am about to make I should say
that I am appearing here in fear and trembling, because Mr. Snyder and his

able assistants in his department put such a topic before me as the influence
of the bank rate.

I am always airaid I am going to match my theory with Mr.

Snyder's.

"The original company of thirteen, as I recall the figure, that

started the Federal Reserve Bank, are the only ones tnat can go back to the
days of our discussion of what rate w s proper and would be satisfactory when
this bank was organized.

The conditions that existed at that time were

those brought on by the outbreak of the war.

We had called upon two

in the United States to meet the great crisis in credit and currency.

The

crisis in bank credit was met by issues in clearing house and loan certificates,
bearing interest.

A vast amount of credit was manufactured through the

agency of clearing house issues, and that credit was bearing interest at from
6 to 7 per cent, and I think, in some cases, higher.



In addition to that,

credit was manufactured through the agency of the Aldrich-Vreeland Association, which was organized under the "Aldrich-Vreeland Acu.s

The existence

of that gbeat mass of credit which was hearing various rates of interest
throughout the country determined our bank rate.

I thin); that the reserve

rates established were from 6 to 6 1/2 per cent, and the rate was high enough
so that it kept down he vy borrowing, at a low rate, so that 'the first busi-

ness conducted by the Federal Reserve Bank of New York at the rate level
which was established was trifling, and we were gradually able toreduce our
rates over quite a period, until finally, as I recall, we were buying bankers'

bills, - that is, acceptances - as low as 2 % in the open market.

We had,

in fact, a rate for that class of paper in New York that averaged from 2 to
3 per cent at the same time that pepmr of similar ehnracter was selling in the
London market at from P 1/2 to 3 per cent.

The rate in the London market was

as low as it was because of the American mass of credit Ihieh was artificiallzr

manufactured there.

"In discussing the influence of the bank rate, you have got to bear
in mind that the bank rate has no influence ualess you have got an acconat
on both sides.

If you have no exiting loads, you cant t,

'bring about con-

traction by an advance in rate.
"All that we were interested in c: Bing in the early days of the

Federal Reserve Bank was to earn a mare divilend of 6 per cent for the aember
banks, after paying all out' eepenses.

I might say in these days we had a

very distincv, contrast in the character of the relations of the heeerve banks
to what we have nor.

Thin is the great money market of the country where

dealings in short time paper especielly centered.

All of these bankers'

acceptances came to this market as a rule and opened up a market where the
short-time L1unicipal borrowings were generally negotiated: and consequently we

had a peculiarly advantageous position in New York which enabled us to entice
our funds.




It resulted in an arrangement between the Reserve banks by which

-

ee divided up the various benks.

I think it ia no exaggeration to say that

this has worked out to better advantage than we had expected.

ni am not going to attem2t to review the period of the war, when we
experienced all the difficulties of adjusting rates.
it is full of controversy.

It is a ;lig suAeet, and

Mr. Snyder gently sugge-ted that that would be an

interesting thing to talk about, and I ducked it.

In geheral, I think I am

safe in siting that we uade about as many mistekes - I say "ire" foe we were

simply ene body after all, the Treasury and Rsaerve banks - as could be expected, but, on i;le whole, I thi-'r

0 made fewer mistakes clean our friends on

the other side of the water made, and certainly very tower mistakes than the
enepy on the other side of the water made in financing the war.

skipping that

point, I want to come right down to the present and what is taking place now.
I -/ant to illaltrate this byr giving a few of my Observations:
"On Miey "), 1901, I halecenned to be in the Stock :&xchange, and on that

day, between 10 and 1 o'clock, we saw Northern Pacific stock advance to $1,000
a share and money landing at about 100 per cent.

There had been previously no

such complete collapse of values in wall Street as had occurred ti- at day up to

1 o'clock.

Towards the middle of the day they sent word very frankly that

their boxes were empty and they could not sand in more margins.

Our loans got

so low that if we had attmmpted to liquidate thorn the proceeds of the collateral

would have been insufficient to pay the face of the loan. In other words, if
very many of the loans had matured and the sale of the collateral took place,
it would have resulted in the complete eollapsc of Wall Stseet.

Later

plan

had resulted in the ea/e of Northern Pacific stock and Mr. Morgan and his associates -ent out word that they would not be unduly severe in the sending out of
margins, and later prices had risen to a point where the loans could be made
good and money was practically unlendable.




"The point I am trying tobring out, in telling this story, is that

4

it presents a picture of a complete collapse of values which resulted in a condition that meant insolvency.

Money was over, and money got back to normal rates

all in a period of about five hours.

In similar fashion, that is what happened in

the United States, and in fact the whole world in commodity values.
and extravagance worked out their own natural conclusion.

There are t

that some design of man or men, or poasibly the reserve banks, by advancing rates,
had brought about this state of affairs.
do not think most people do.

I do not believe it for a minute, and I

In general, I would say that no man or men had the

power to stop that great wave of speculation, and no man or men had the power to
stop the break which took place.

On the other hand, I would say that certain poli-

cies might have been adopted so that it should not have reached its extreme limits.

"Evryone now is satisfied that somathing must be done to stabilize the
values of goods, and they will be stabilized to some level.

..certain houses that

retail goods, or certaia houses that wholesale goods, or certain houses that manufacture goods, by reason of foresight or some other circumstances that gave them a
more favorable position than other competitors, may be out of debt and not have
large inventories, and are able now to 'ow- and stock up with goods that s.ra coming

along from producers, manufactured out of cheaper raw materials and by cheaper labor
than the goods and existing stocks which are being carried upon borrowed money. The
tendency among retail stores at present is to keep new goods and cheaper goods in
competition with high prices.

It is forcing dawn the selling prices of the old

ones and there are some new levels taking place from it.
ing in bank credit.

The same thin

is happed-

Put yourself in the position of any bank officer in this city

and see what happens in the daily trend of your business.

At the end of the day he

may find that he has a surplus of reserves on deposit at the Federal Reserve Bank.
That surplus is the result of a great variety of transactions in the member banks.
The member banks may have made some new loans.

I may have loans out.

The net

results of all these movements may have had some bearing on his reserves.

going on every


day.

It goes on both sides of the account.

That is

The bank which is short

);5 -

in its reserves willcome here to borroe.

In fact, the number of banks that are

borrowing from us now is, I think, more Oleu 100.

Ike soon as a bank gets in that

position where it has a credit balance at the clearing house, then it has a choice
of what to do with that credit balance;

then it goes out to seek an investment,

and, under the conditions that exist to -day, it seeks tee very best and safest

investments it can get.

The banker is a little timid just now and he is willing to debit his
competitor for good commercial paper only.

The influence of the lending bankers

that are out of debt is the influence that will bring the market rate for money
down to or below our rate.
liquidate all of our loans.

That process continued indefinitely would, of course,

If the traditional policy of fixing the rates of the

Federal Reserve Banks should prevail, I should presume we should always have our
rate a little bit above the market rate.

Of course, we should always provide for

seasonal movements, or crop making, or withdrawals of gold from the United States,
or heavy borrowings.

This process I describe is what is liquidating the loan

accounts in the reserve barks to a great extent.

I want to COMJ up to the point

of describing, or prognostigatin4 if you please, a little bit about the future.
Before referring to the future, I want to refer to another important influence on
our rates and an important rate consideration in the Reserve 'Dunk.
"'ion know that every time the Treasury of the United States puts out a

loan and places that loan, as it does, through the reserve banks and the member
banks, the first transaction is for the member hank to buy the certificate, to

make levment by credit, and then, if they can do so, to sell the certiAcate to a

customer and to the public and make a profit on the &peat.

You can see that

if the member bank can't sell the certificate of indebtedness teey can't make this
profit.

It is the thing that did the damage in 1918-1920, and the policy of the

reserve banks and Treasury Department together should be desig.:.ed to get the

largest amount of money that can be obteined for the Treasury's notes at the
lowest rates of interest any' at the largest security to the public.



You may say

6

that the rate allowed by the Treasury must be sufficiently attractive to the
public to enable the public to buy them, but sufficiently unattractive to the
basks to make it unwise for the banks to retain them, and have every stimulus
existing to sell these certificates to the public just as

promptly as persible.

"It has been necessary for the past three years to determine rates between the Treasury and the Reserve banks Which will enable the Treasury to successfully float its certificates, and at the same time to relieve the reserve
banks and its members of any Chance of loss.

On the whole it is working now and

the certificate issues are almost immediately distributed to the public when they
are offered.

"I want to refx a little hit to the future, is to whore vre might land

if all of ou: loans were paid off and we had a huge bank building and a payroll,
and doing all sorts of things for nothing, with a great big expense account and
nothing coming in

I do not think that is going to happen right away, howeve,

as we have two billion dollars going to the reserve banks now.

Let us assume that

the day is comine. when the banks of the United States are not going to find it

necessary to borrow from usthe way they do.

No banks like to borrow money. There

is not very much profit to them when they are paying 6 or 7 per cent.

"We deal principally in the Federal Reserve 3anks with three kinds of
credit instruments.

One is commercial caper, another government securities (the

gcvernmentts long loans and certificates of indebtedness) and the third aeeeptances, which principally are drawn to represent importations of goods from Europe.

"When all the commercial paper gets out and a considerable part of the
borrowings on government securities are repaid, we will be able to put our rates
down.

From personal observations while I was abroad, and a comparison of banking

methods generally, unless I am misaken, thmigh the influence of the Federal Reserve aystem, we could use this great reeervois in financing great commodities
throughout the world.



7

"For the first time in the history of the United States, we are in the
position of being a lending nation, instead of a borrowing nation.

Europe for

years is gosh to be pressed for capital to rebuild her industries and to reestablish France, and they are going as be burdened with enormous debts, and this
country has, in proportion to its wealth, a much smaller public debt than the
European nations.

It has a great mass of fluid capital, which can

employed,

I hope, and for the first time can compete with the commerce af the world in doing
a real banking business.

I should suppose we now have $500,000,000 or $600,000,000

of bills representing international transactions and commodities.
$2,500,000,000 the rate could be changed.

If we had

I do not thank I could do better than

read you a paragraph from a very able document that appears on that very matter,
a paragraph from the so-called "Cunliffe's Report."

It is from a select committee

appointed to make a report on foreign exchanges after the war, in London:
(At this point Gov. Strong read the paragraph referred to,
beg;Innirs with "The adverse condition of the exchanges was
due not merely to seasonal fluctuations, but to circumstances
pointing to ...." and ending with the sentence:
!New enterprises were therefore postponed and the demand for constructive materials and other goods was lessened.")
"The point is this:

that the Federal Reserve System, up to date, has

been engaged in a purely domestic, local war operation. We have been financing
the war fcr ourselves, to a great extent.

You can trace simpst, the entire bor-

rowings of the Federal reserve bank directly to the war.

Tee time is coming

when the American people will gradually repay this debt and the Federal Reserve
System will be free of government borrowing and then we have got to take our
position in the world, and, unless I am very much mistaken, that will come as
the result of converting a very large amount of the paper which we now have in
our vault into this paper which old Rothschild described as "salt water paper,"
because it had crossed the ocean dnd represented the payment for international
goods.

But there is one thing that we must bear in mind in connection with this,-

and Mr. Sider has notified me that he has three reservations - in connection



- 8 -

with this prognostigation.
reason beyond all others.

The reasons for this are these:

The general feeling that I have observed throughout

various oarte of the world is that the English banks arc safe banks to do
business with.

The second great reason is that they have built up the facili-

ties to do the business well, carefully, intellieently and promptly, and the
third influence is that London has had a great reservoir of fluid capital to
employ in this business.
fundamental influences.

Now our condition at present comprises just those three
We have our integrity, our character, and our ability,

just as good as that which is produced in the British Isles or elsewhere. I think,

in other words, that the character test can be met by American bankers just as
much as by any other bankers.

Next we have got, or we should have in the near

future, that great surplus, fluid bsnking capital to employ in this kind of business.

One thing we have not got in the machinery.

net-work of pipes connecting this reservoir.

We have not got that great

It takes years to create that. The

British bankers have been at it for same generations.

Ue can, however, do it

promptly enough to place cur reserves at the service of the world, and we have
got to try and do it the way the British have done it.

Vie

Valire got to try and

establish agencies here of any foreign banks that can come here aad also abroad,
and to do business in our msrk,t and berme- money.

A bank would not be worth a

dent if it just received money and did not lend it out.

We should encourage the

lending of money abroad an,' we should employ any agency ye can got here to help
us alone, thin line.

"Mr. Snyder, I guaranteed to tire this enthusiastic audience in half an
hour.

I have no tAlked for nearly 417 minutes!

Have you any points to make in

connection with this matter?

Mr. bayder remarked, in reply:

"I am sure that, now that we have the

Governor here, we would like to eek him some suestions."




9

Jr. Case was called upon by Mr. Snyder, and remarked;
pick on me?

I do my picking with the Gov :nor do'm- stairs.

him alone for the present.

"Why do you

I am going to leave

How about picking on Mr. Snyder?"

(Mr. Snyder)

"How can we become world bankers if we do not make money interest rates?
Is not that the great oostaele now to this country leecoming world bankers?
4ne;landts rates are always bettee than ours.

That is the source of their great

strength.

(Governor Strong)

*When I was in London I always used to say, with perfect good faith,

that I did not think there was very greet danger of their losing their business
so long as the opportunity for the emnlciyment of capital in this country
great.

I really think conditions have changed.

cause they are going to be
guess you think so.

:as as

I think the./ have hanged be-

it to it for capital for a time.

I think so and I

Where they are going to lose is in the enormcus demand upon

them to pay debts, and it is going to tax their reserves to the utmost to pay
debts - to pay debts to this couetry and to pay the interest due tais country.
Tuley willtake some of our investment money, if -e are willing to let them have it,

at pretty high rates, and I frankly believe that this Federal Reserve System, by
a capable adjustment of rates, will have plentIT of reserves to compete with them,

to a reasonable degree, in financing at least our own important trade.

I have

real confidence that, with the resources we have here, we can get our share of any
foreign trade we go after."

(Mr. Snyder)

"How can we get our rates down, so as to meet this competition and still
not have another big wave of inflation?

ing politics


Do you see any practical means, consider-

and everythinL; else, of mectins just that thing ?"

- 10 -

(Governor Strong)

"What I think I do see, Mr. Snyder, is this:

thAt the development to

which I referred is not going to t ke place over night, nor in a year, nor even

five yars possibly - nor even a Lager period.
did.

I would be afraid of it if it

But I can see gradually creeping into our market here those conditions

which would be most conveniently drawn for geographical reasons, because they
represent our import trade.

Where it becomes a convenience, at a competing rate,

to do business in this market, I do not see any prospect of easier money in
Europe, do you?

Think about that!"

(Mr. Case)

'Tell, Governor, London was the world's banking center before the war,
and all these bills, import and e port bills, were lar:ely financed by London.

Isn't it a fact that the world war has upset that to such an extent that she
does not seek, at the press t time, to do more than to look after her own import
and export financing, and is very glad to have diverted to this market any import

and export transaction that properly belongs here?
continually finance the world's business.

She is 3i no position to

61-,e did before the war.

We are getting

our machinery up to the point where we can compete for it mw.

(Governor Strong)

"What happened is this:

they took increasing- control of all the imports

and no one could properly import anything without a license and the great bulk of
the imports wore for account of British companies.

All supplies and all things,

in fact, were required for the army and navy, as well as the civic population. Now
the British Government paid cash, and the British treasury borrowings took place
in as an4114, in Lonlon, of this mass of bills that otherwise would have been drawn
to

represent the imports of the civic population.

The facilities to do business

still existed - like the Bank of Shanghai, and so an.
are increasing JAR in the east.




The standards of civilization

There is a greater consumption of goods.

There is

11

a great2r amount of business to go around.

We will do still more than we do now

through the foreign institutions of the world.

Certainly, if it is possible to

develop some hu.dreds of millions of bills at the present time, we will continue
to do it in the future."

(Mr. Morgan)

"Do you thin'; it would be in order to tell us what effect you think

the change in the discount rates in this country will .lave upon the movement of
gold?

Do you think conditions are sufficiently normal now?

(Governor Strong)

"Your question is a little bit like the question where the State asked
tt-i

witness whether he is still beating his wife.

rates will decline.

I am assuming that the interest

We have reduced one of our rates a little bit.

I do not

believe it is possible to answer that question, Mr. Morgan, except speculatively.
-- Turning to Mr. Snyder

-)

Did you put him up to ask that?"

(Laughter)

(Question)

"Mr. Snyder has possibly lost sight of the fact that we have two facil
ities.

We have a rediscount rata which is offered to various lines of business

which do not necessarily have to do with our foreign trade.
market purchase rate.

We have our open

We might keep our rediscount rate up to within a point

where it is now and this would enable us to advance the business and still keep
in with other lines of domestic business?

(Governor Strong)

"That opens up a field of discussion.
step Shepard Morgan's- questions.

It enable: me, first, to side

I think it is a mistake to assume that a special

rate on import bills is going to be any check to inflation or expansion

in this

country, because, eC;er all, you cane identify these dollars and insure that



-12tney are just below that type of transaction, and, even if you did, it would
release other dollars for employment in other diroctioas.

The fact is that,

according to my theory, what we dispense At the Reserve bank is credit.

L; is

not one kind of credit, because it is eerchanged for a commercial bill, or a

commercial note, or a banker's acceptance, or a government bond, but it is just
credit, and unless you meet that credit through this bank, it does not perform
its function, and i+ does not make any difference whether you ge:; it out with a
rake, or a hoe, or a spade, - it does its busteess Just the same.

You can get

at these reserves of ours with any kind of an instrument you please.

By estab-

lishing this preferantial rate we :lee able to compete in a certain line of business, it is true.

wren, Hr. Snyder, I have doubled my promised time and now everybocly
expects to leave at 5 o'clock, as they have a dance on."

(Mr. Snyder)

"I am sure we are extremely indebted to the Governor for coming here
and let us ask him questions and giving us such an illuminating prospect of
this country entering the world war.




Meeting Adjourned.

Our best thanks Goveenorlft

CONFERENCE OF STATISTICS DEPARTMENT
:;lay 6, 1921.

SUBJECT:

By Governor Strong.

The influence of the Discount :.ate

r. ,nyder opened the meeting, saying:

"I am sure we are very much

flattered to have the Governor with us to-day, and I am sure he is going to say
some very interesting things.

We are very much indebted that he should cone."

(Governor Strong)

"I understand that there are much more important matters relating
to the organization of the bank coming up later this afternoon, at this present
meeting, and I am going to try and shorten my remarks toa point where they
will not interfere with that important business, Mr. SRyder.

Furthermore,

now that the time has come for any statements I am about to make I should say
that I am appearing here in fear and trembling, because Mr. Snyder and his
able assistants in his department put such a topic before me as the influence
of the bank rate.

I am always afraid I am going to match my theory with Mr.

Enyderis.

"The original company of thirteen, as I recall the figure, that
started the Federal Reserve Bank, are the only ones that can go back to the
days of our discussion of what rate w--s proper and would be satisfactory when
this ',wank was organized.

The conditions that existed at that time were

those brought on by the outbreak of the war.

We had called upon two agencies

in the United States to meet the great crisis in cfedit and currency.

The

clearing house and loan certificates,
If
A vast amount of credit was manufactured through the

crisis in bank credit was met by issues
bearing interest.

agency of clearin,; house issues, and that credit was bearing interest at from

6 to 7 per cent, and I think, in some cases, higher.




In addition to that,

- 2 -

credit was manufactured through the agency of the Aldrich-Vreeland Association, which was organized under the "Aldrich-Vreeland Act."

The existence

of that gbeat mass of credit which was bearing various rates of interest
throughout the country determined our bank rate.

rates established were from 6 to 6 1/2 per cent

I thin4 that the reserve
and the rate was high enough

so that it kept down he ivy borrowing at.-4-lew-rft4e; so that the first busi-

ness conducted by the Federal Reserve Bank of New York at the rate level
which was established was trifling, and we were gradually able tor;duce our
rates over quite a period, until finally, as I recall, we were buying bankers'

bills, - that is, acceptances - as low as 2 % in the open market.

17e had,

in fact, a rate for that class: of paper in New York that averaged from 2 to

3 per cent at the same tine that paper of similar character was selling in the
London market at from 2 1/2 to 3 per cent.

The rate in the London market was

as low as it was because of the American mass of credit daich was artificially
manufactured there.

"In discussing the influence of the bank rate, you have got to bear
in mind that the bank rate has no influence unless you have got.-am,4keectuat

If you have no existing loans, you can't

bring about con-

traction by an advance in rate.

"All that we were interested in doing in the early days of the
Federal Reserve sank was to earn a mere dividend of 6 per cent for the member
banks, after paying all our e::penses.

I lalght

y.in these days we had a

very distinct contrast in the character of the relations of the Reserve banks
to what we have now.

This is the great money market of the country where

dealings in short time paper especially centered.

All of these bankers'

acceptances came to this market as a rule and opened up a market where the
short-time .-Lunicipal borrowings were generally negotiated and consequently we

had a peculiarly advanageous position in lieu York which enabled us to entice
our funds.



It resulted in an arrangement between the Reserve banks by which

we divided up the various Mies.

I think it is no exaggeration to say that

this has worked out to better advantage than we had expected.
"I am not going to attempt to review the period of the war, when we
experienced all the difficulties of adjusting rates.
it is full of controversy.

It is a big subject, and

:Jr. Snyder gently suggested that that would be an

In general, I think I am

interesting thing to talk about, and I ducked it.

safe in saying that we made about as many mistakes - I say "we" for we were
simply one body after all, the Treasury and Reserve banks - as could be expected, but, on the whole, I think we made fewer mistakes than our friends on
A,041-

the other side of the water made, and certainly waxy fewer mistakes than the
enemy on the other side of the water made in financing the war.

Skipping that

point, I want to come right down to the present and what is taking place now.
I want to illustrate this by giving a few of my observations:

"On Pay 3, 1901, I happened to be in the Stock Exchange, and on that

day, between 10 and 1 o'clock, we saw Northern Pacific stock advance to a,000
a share and money lending at about 100 per cent.

There aad been previously no

such complete collapse of values in Wall Street as had occurred that day up to
1 o'clock.

Towards the middle of the day they sent word very frankly that

their boxes were empty and they could not send in more margins.

Our loans got

so low that if we had attempted to liquidate them the proceeds of the collateral
would have been insufficient to pay the face of the loan. In other words, if
very many of th-! loans had matured and the sale of the collateral took place,

it would have resulted in the complete collapse of

Street.

Later a plan

had resulted in th,i Tale of Northern Pacific stock and Mr. Morgan and his asso-

ciates rant out word that they would not be unduly severe in the seeding out of
CARA
margin$, and later prtes had risen to a point Where the loans could be made
good and money was practically unlendable.




"The point I am trying tobring out, in telling this story, is that

I

- 4 -

it presents a picture of a complete collapse of value's which resulted in a con-

dition that meant insolvency.

Money was over, and money got back to normal rates

all in a period of about five hours.

In similar fashion, that is what happened in

the United States, and in fact the whole world in commodity values.

Speculation

There are those who say

and extravagance worked out their own natural conclusion.

that some design of man or men, or possibly the reserve banks, by advancing rates,
had brought about this state of affairs.
do not think most people do.

I do not believe it for a minute, and I

In general, I would say that no man or men had the

power to stop that great wave of speculation, and no man or men had the per to
stop the break which took place.

Cal the other hand, I would say that certain poli-

cies might have been adopted so that it should not have reached its extreme limits.
"l]vJgyone now is satisfied that something must be done to stabilize the

Certain houses that

values of goods, and they will be stabilized to some level.

retail goods, or certain houses that wholesale goods, or certain houses that manufacture goods, by reason of foresight or some other circumstances that gave them a
more favorable position than other competitors, mey be out of debt and not have
large inventories, and are able now to buy and stock up with goods that are coming
along from producers, manufactured out of cheaper raw materials and by cheaper labor
than the goods and existing stocks which are being carried upon borrowed money. The
tendency among retail stores at present is to keep new goods and cheaper goods in
competition with high prices.

It is forcing down the selling prices of the old

ones and there are some new levels taking place from it.
ing in bank credit.

The same thing is happeli-

Put yourself in the position of any bank officer in this city

and see what happens in the doily trend of your business.

At the end of the day he

may find that he has a surplus of reserves on deposit at the Federal Reserve Bank.
That surplus is the result of a great variety of transactions in the member banks.
The member banks may have made some new loans.

I may have loans out.

The net

results of all these movements may have had some bearing on his reserves.

going on every


day.

It goes on both sides of the account.

That is

The bank Which is short

5 -

In fact, the number of banks that are

in its reserves willcome here to borrow.

borrowing from us now is, I think, more than 100.

As soon as a bank gets in that

position where it has a credit balance at the clearing house, then it has a choice
of what to do with that credit balance;

then it goes out to seek an investment,

and, under the conditions that exist to-day, it seeks the very best and safest
investments it can get.
"The banker is a little timid just now and he is willing to debit his
competitor for good commercial paper only.

-fee influence of the lending bankers

that are out of debt. is the influence that will bring the market rate for money

down to or below our rate.
liquidate all of our loans.

That process continued indefinitely would, of course,

If the traditional policy of fixing the rates of the

Federal Reserve Banks should prevail, I should presume we should always have our
rate a little bit above the market rate.

Of course, we should always provide for

seasonal movements, or crop making, or withdrawals of gold from the United States,
or heavy borrowings.

This process I describe is what is liquidating the loan

accounts in the reserve banks to a great extent.

I want to coma up to the point

of describing, or prognostigatina, if you please, a little bit about the future.

Before referring to the future, I want to refer to another important influence on
our rates and an important rate consideration in the Reserve bank.

You know that every time the Treasury of the United States puts out a
loan and places that loan, as it does, through the reserve banks and the member
banks, the first transaction is for the member bank to buy the certificate, to
make payment by credit, and then, if they can do so, to sell the certificate to a
customer and to the public and make a profit on the deposit.

You can see that

if the member bank can't sell the certificate of indebtedness they can't make this
profit.

It is the thing that did the damage in 1918-1920, and the policy of the

reserve banks and Treasury Department together should be designed to get the
largest amount of money that can be obtained for the Treasury's notes at the
lowest rates of interest and at the largest security to the pUblic.



You may say

- 6 -

that the rate allowed by the Treasury must be sufficiently attractive to the
public to enable the public to buy them, but sufficiently unattractive to the
banks to make it unwise for the banks to retain them, and have evary stimulus
existing to sell these certificates to the public just as
"It

promptly as possible.

been necessary for the past three years to determine rates be-

tween the Treasury and the Reserve banks Which will enable the Treasury to successfully float its certificates, and at the same time to relieve the reserve
banks and its members of any chance of loss.

On the whole it is working now and

the certificate issues are almost immediately distributed to the public when they
are offered.

"I want to refer a little bit to the future, as to where we might land
if all of 0112 loans were paid off and we had a huge bank building and a payroll,

and doing all sorts of things for nothing, with a great big expense account and
I do not think that is going to happen right away, however,

nothing coming in.

as we have two billion dollars-going to the reserve banks now.
the day is comin

Let us assume that

when the banks of the United States are not going to find it

necessary to borrow from usthe way they do.

No banks like to borrow money. There

is not very much profit to them when they are paying 6 or 7 per cent.

"We deal principally in the Federal Reserve Banks with three kinds of
credit instruments.

6ne is commercial Japer, another government securities (the

government's long loans and certificates of indebtedness) and the third acceptances, which principally are drawn to represent importations of goods from Europe.
"When all the commercial paper gets out and a considerable part of the

borrowings on government securities are repaid, we will be able to put our rates
down.

From personal obsexyations while I was abroad, and a comparison of banking

methods generally, unless I am mistaken, through the influence of the Federal Reserve System, we could use this great reservois in financing great commodities
throughout the world.




"APor the first time in the history of the United States, we are in the

position of being a lending nation, instead of a borrowing nation.

Europe for

years is going to be pressed for capital to rebuild her industries and to reestablish France, and they are going

o be burdened with enormous debts, and this

country has, in proportion to its wealth, a much smaller public debt than the
European nations.

It has a great mass of fluid capital, which can be employed,

I hope, and for the first time can compete with the commerce of the world in doing
a real banking business.

I should suppose we now have $500,000,000 or 000,000,000

of bills representing international transactions and commodities.
$2,500,000,000 the rate could be changed.

If we had

I do not think I could do better than

read you a paragraph from a very able document that appears on that very matter,
a paragraph from the so-called "Cunliffe's Report."

It is from a select committee

appointed to make a report on foreign exchanges after the war, in London:
(At this point Gov. Strong read the paragraph referred to,
beginning with "The adverse condition of the exchanges was
due riot merely to seasonal fluctuations, but to circumstances
pointing to ...." and ending with the sentence:
"New enterprises were therefore postponed and the demand for constructive materials and other goods was lessened.")
"The point is this:

that the Federal Reserve System, up to date, has

been engaged in a purely domestic, local war operation. We have been financing
the war for ourselves, to a great extent.

You can trace almost the entire bor-

rowings of the Federal reserve bank directly to the war.

The time is coming

when the American people will gradually repay this debt and the Federal Reserve
System will be free of government borrowing and then we have got to take our
position in the weeld, and, unless I am very much mistaken, teat will come as
the result of converting a very large amount of the paper which we now have in
our vault into this paper which old Rothschild described as "salt water paper,"
because it had crossed the ocean and represented the payment for international
goods.

But there is one thing that we must bear in mind in connection with tnis,-

and Mr. Snyder has notified me that he has three reservations - in connection



The retCsons for this are these:

with this prognostigation.
reason beyond all others.

I put the first

The general feeling that I have Observed throughout

various parts of the world is that the English banks are safe banks to do
business with.

The second great reason is that they have built up the facili-

ties to do the business well, carefully, intelligently and promptly, and the
third influence is that London has had a great reservoir of fluid capital to
employ in this business.
fundamental influences.

Now our condition at present comprises just those three
We have our integrity, our character, and our ability,

just as good as that which is prcduced in the British Isles or elsewhere. I think,
in other words, that the character test can be met b.

much as by any other bankers.

American bankers just as

Next we have got, or we should have in the near

future, that great surplus, fluid banking capital to employ in this kind of business.

Une thing we have not got in the machinery.

net-work of pipes connecting this reservoir.

We have not got that great

It takes years to create that. The

British bankers have been at it for some generations.

lie can, however, do it

promptly enough to place our reserves at the service of the world, and we have
got to try and do it the nay the British have done it.

We have got to try and

establish agencies here of any foreign banks that can come here and also abroad,
and to do business in our mark:A and borrow money.

A bank would not be worth a

cent if it just received money and did not lend it out.

should encourage the

lending of money abroad and we should employ any agency we can get here to help
us along this line.

"Mr. Snyder, I guaranteed to tire this enthusiastic audience in half an
hour.

I have no talked for nearly 45 minutes. Have you any points to make in

connection with this matter?

Mr. Snyder remarked, in reply:

"I am sure that, now that we have the

Governor herd, we would like to -tsk him some .-iuestions."




9

,dr. Case was called upon by Mr. Snyder, and remarked;
pick on me?

I do my picking with the Governor down-stairs.

him alone for the present.

"Why do you

I am going to leave

How about picking on Mr. Snyder?"

(Mr. bnyder)

"How can we become world bankers if we do not make money interest rates?

Is not that the great obstacle now to this country becoming world bankers?

inlandls rates are always better than ours.

That is the source of their great

strength.

(Governor Strong)

"When I was in London I always used to say, with perfect good faith,

that I did not think there was very great danger of their losing their business
so long as the opportunity for the employment of capital in this country was as
great.

I really think conditions have changed.

I think they have changed be-

cause they are going to be put to it for capital for a time.
guess you think so.

I think so and I

,here they are going to lose is in the enormous demand upon

them to pay debts, and it is going to tax their reserves to the utmost to pay
debts - to pay debts to this country and to pay the interest due this country.

They willtake some of our investment money, if we are willing to let them have it,
at pretty high rates, and I frankly believe that this Federal Reserve System, by
a capable adjustment of rates, will have plenty of reserves to compete with them,
to a reasonable degree, in financing at least our own important trade.

I have

real confidence that, with the resources we have here, we can get our share of any
foreign trade we go after."

(Mr. Snyder)

"How can we get our rates down, so as to meet this competition and still
not have another big wave of inflatiOn?
ing politics



Do you see any practical means, consider-

and everything else, of meeting; just that thing?"

- 10 -

(Governor Strong)

"What I think I do see, Mr. Snyder, is this:

that the development to

which I referred is not going to t,ke place over night, nor in a year, nor even
five years possibly - nor even a 1..nger period.
did.

I would be afraid of it if it

But I can see gradually creeping into our market here theme conditions

which would be most conveniently drawn for geographical reasons, because they
represent our import trade.

;'here it becomes a convenience, at a competing rate,

to do business in this market, I do not see any prospect of easier money in
Europe, do you?

Think about that!"

(Mr. CaL:o)

"Well, Governor, London was the world's banking center before the war,
and all these bills, import and erport bills, were lar_ely financed by London.

Isn't it a fact that the world war has upset that to such an extent that she

does not seek, at the preset time, to do more than to look after her own import
and export financing, and is very glad to have diverted to thjsmarket any import
She is ii no position to

and export transaction that properly belongs here?
continually finance the world's business.

:=;,le did before the war.

We are getting

our machinery up to the point where we can compete for it mw.

(Gov2rnor Strong)

"What happened is this:

they took increasing control of all the imports

and no one could properly import anything without a license and the great bulk of
the imports were for account of Dritish companies.

All supplies and all things,

in fact, were required for the army an4 navy, as well as the civic population. Now
the British Government paid cash, and the British treasury borrowings took place

in advmme, in Lon-on, of this mass of bills that otherwise would have been drawn
to represent the imports of the civic population.

The f,cilities to do business

still existed - like the Bank of Shanghai, and so on.
are increasing tine in the east.




The standards of civilization

There is a greater consumption of goods.

There is

a greater amount of business to go around.

We will do still more than we do now

through the foreign institutions of the world.

Certainly, if it is possible to

develop some hundreds of millions of bills at the present time, ^rr will continue
to do it in the future."

(Mrs Uorgan)

"Do you think it would be in order to tell us what effect you think
the change in the discount rates in this country will have upon the movement of
gold?

Do you think conditions are sufficiently normal now?"

(Governor Strong)

"Your cuestion is a little bit like the ouestion where the State asked
the witness whether he is still beating his wife.
rates will decline.

I am assuming that the interest

We have reduced one of our rates a little bit.

I do not

believe it is possible to answer that Question, Mr. Morgan, except speculatively.
-- Turning to Mr. Snyder --)

:id you put him up to ask that?"

(Laughter)

(Question)

"Ur. Snyder has possibly lost sight of the fact that we have two facilities.

We have a rediscount rate which is offered to various lines of business

which do not necessarily have to do with our foreign trade.
market purchase rate.

We have our open

might keep our rediscount rate up to within a point

where it is now and this would enable us to advance the business and still keep
in with other lines of domestic business?

(Governor Strong)

"That opens up a field of discussion.
step Shepard Morgan's questions.

It enable:3 me, first, to side-

I think it is a mistake to assume that a special

rate on import bills is going tp be any check to inflation or expansion

in this

country, because, after all, you can't identify these dollars and insure that



- 12 -

they are just below that type of transaction, and, even if you did, it would
release other dollars for employment in other directiolas.

The fact is that,

according to my theory, what we dispense at the Reserve bank is credit.

It is

not one kind of credit, because it is eichanged for a commercial bill, or a
commercitl note, or a banker's acceptance, or a government bond, but it is just
credit, and unless you meet that credit through this bank, it does not perform
its function, and it does not make any difference whether you wet it out with a
rake, or a hoe, or a spade, - it sloe:

its business just the same.

You can get

at these reserves of ours with any kind of an instrument you please.

By estab-

lishing this preferential rate we are able to compete in a certain line of business, it is true.
";-;e111 Mr. Snyder, I have doubled my promised time and now everybody

expects to leave at 5 o'clock, as they have a dance on."

(Mr. Snyder)

"I am sure we are extremely indebted to the Governor for comini; here
and let us ask him questions and giving; us such an illuminating prospect of

this country entering the world war.




Meeting Adjourned.

Our best thanks Governor:"




-vv

y/
% %w

yz

Gentlemen:

I have not lately been making addresses, but when your Chairman,
Mr. Mosessohn, invited me to address your Association, I found it quite im -

possible to decline, principally because during the war I asked him to do a
job for us in our War Loan Organization, which he promptly and loyally
agreed to do.

What he did was very much better done and was of more ser-

vice to his country then anything that I am able to do for your organization
by making this brief address.

In a word, he took hold of an important

section of the War Loan Organization as its chairman, and sold four times
the auota of bonds allotted to that trade.

da.flettp5tt_

The industry which you represent is, I believe, a section of the

64R-014/
Your Chairman has asked me to tell you

largest industry in New York City.
something of prevailing business
expect.

conditions and what you may reasonably

It would indeed be a serious responsibility for one to undertake

to prophesy as to the future to such a body of men as you, who are very
much better acquainted with the details of the business which they are conducting than I can possibly be.

And it is, in fact, quite contrary to our

policy to attempt any such thing,4

/67)64/44§ti

But I am very glad to give you what we consider to be the actual
facts both as regards industry in general, and the impression we get of
your own industry from the reports that are now given to us regularly by a
number of your leading firms.
In doing this I am going to take advantage of the opportunity to
tell your Association of the system of business reporting which has been developed

by the different Federal reserve banks, and especially our own.

Perhaps it may lead to even a larger degree of cooperation from your




2

Association than we now enjoy.

As to the general industrial situation, you are fairly familiar
with the fact that there has been, within the last ton months, a steady and
a very marked improvement in most of the industries; and I think that there
is good evidence that for the most part this improvement is solid and is a
real one.

Of course I cannot say how this would apply to each of the in-

dustries.

Some of them, I have been led to believe, have been in danger

of going a little too fast; they may have given a little too large a measure of hopefulness to their orders.

So that there have been some set-

backs here and there in the last year.

But, speaking of the

majority, there is no sort of question that

conditions now are very different from what they were, let us say, no more
than a year ago.

Probably our old friend, pig iron, is still one of the

best thermometers, even if it is not a very good barometer of business; and
there we find a very rapid recovery from the extreme depression of last year,
so -that in the iron and steel industry as a whole, production is now about

double what it was a year ago, and some of the mills for special products are
row almost at the peak of production.

The textile trades, of course, have been disturbed by strikes and
latterly by the great rise in the cost of raw materials, but taken as a whole
their production has been well up towards normal, and I think the same is
true of a number of other industries.

We, of course, have had a real build-

ing boom in the last year, and are still in the midst of it; and the same is
true of the automobile industry, where production in May broke all records.
And we have evidence, moreover, that both wholesale and retail
trade in most lines is in healthy condition.
definitely.




About this I can speak quite

You know before we undertook the tusk of collecting business

3

statistics reports of trade were confined largely to the use of adjectives.
Business was said to be good or poor, improving or depressed, adjectives
which mean little when the economist attempts to analyze conditions in an

The optimist usually said business was fine; the pessimist said

industry.

business was bad.

I believe that Mr. Mosessohn, in his letter to me, said

that the garments trades were depressed at the present time.

A study of

our reports has convinced me that Mr. Mosessohn may have selected the wrong
I do not know just what adjective to use.

adjective.

Therefore,

am

going to avoid describing conditions, as we find them, in these abstract
phrases.

About twenty of the largest clothing manufacturers in New York
City, as well as in Rochester, the other great clothing center in our district, submit each month in confidence to our Statistics Department reports
of their sales or shipments.

These reports show the dollar value of their

but regretably do not show the number of garments shipped.

shipments,

We

have divided these firms into two groups, manufacturers of men's clothing
and manufacturers of women's clothing.

I believe that you are primarily

interested in the women's clothing industry, which I understand is entirely
distinct from the men's clothing trade.
Our reports show that the dollar value of May shipments by fourteen
manufacturers of women's clothing who report to us each month was 10 per cent.
greater than the dollar value of the shipments by the same firms in May, 1921.
In April shipments showed a decline of about 12 per cent., as compared with
a year ago.

The combined value of shipments during April and May, however,

was about the same as during the corresponding period last year.

There is

no doubt that your prices are somewhat lower this year than last, and poe-

dbly your profits less; but if we make allowances for these changes in prices
we find that more shirt-waists, dresses and suits have been shipped out of



4

New York this spring than were shipped last spring.

T

I eiay that your Chairman, Mr. Mosessohn, may have selected the wrong adjec-

tive when he described conditions in the garment trades as "depressed."
Turning for a moment to the men's clothing industry we find that
the shipments in April by the seven firms that report to us were 65 per cent.
greater than shipments in April last year.

This comparison is not strictly

fair because, you will recall, the men's clothing industry in this city was
in the midst of a labor controversy at this time last year.

In May of this

year shipments of men's clothing were 16 per cent. greater than the shipments
made in May, 1921.

These reports convince me that

business is now better

than it was one year ago and that the tendency is toward further improvement.
It is true that if we go back to the year 1920 we find that there
has been a decline of about 25 per cent. in the value of clothing shipments.
This, to my mind, has been due to lower prices which now prevail, and indicates a return to sounder and more stable business.

I think we will all

admit that conditions in the spring of 1920 were abnormal and, in comparing
business today with that of two years ago, due allowances must be made for
the decline in prices, declines in wages and declines in the ability of the
Public to spend with the same lavishness that characterized buying in the
spring of 1920.

I have much confidence in the accuracy of the figures which the
clothing firms submit to us each month, as we have other means of checking
these up.

In addition to the reports we receive from the wholesale trades

we also get confidential reports from the retail department stores.
reports show the dollar value of sales.

These

I believe that we now have 64 of

the largest department stores in the Second Federal Reserve District cooperating with us in the collection of this business information.




In the

5

year 1921 the total volume of sales by these stores was in the neighborhood
of $350,000,000, sufficient to make our figures representative.
Sales by these stores in April were about 2 per cent. greater than
were the sales in April, 1921.

Some of the merchants told us that this in-

crease in business was caused by the late Easter.

This, no doubt, exerted

some influence but I do not believe it was an important factor, because we
find that in May the stores again reported an increase of 4 per cent. in
sales.

Bear in mind that these figures show the dollar sales.

Again, when

we make allowance for the lower prices Which now exist, there is no question
that the stores are actually selling a great deal more merchandise this year
than they sold last year and this explains what is becoming of the clothing
that you manufacturers are constantly shipping to the stores.

Sales in May

were the largest of any May on record with the exception of May, 1920, When a
New York merchant led others in reducing prices by announcing his famous
20 ner cent. reduction sale.

In addition to our reports of sales by both wholesale and retail
firms, ws have at our disposal other data to enable us to check up business
conditions in the clothing industry.

The Bureau of Labor issues reports

Which show the consumption of wool and cotton.

These figures show that the

New England woolen mills are now running at about a normal rata and we are
told that many of them are sold up for their entire output for the fall season.
Prices are becoming firmer, indicating a growing manufacturer's demand.

Raw cotton is selling at about double what it sold for last year.

Raw wool has risen still more.

The mills are, I believe, turning out goods

with a greater confidence than for some time that a market for their output
at a fair and just Price is reasonably assured.

The wheels of industry are

turning, and gradually approaching a nearly normal rate.



Reports show that

6

employment is increasing rapidly and the officials in Washington have recentiv informed the President that the unemployment crisis had passed.

Hi01-

prices for farm products have greatly helped the rural population, again
it possible for the farmer to buy the clothing that you manufacture.

mak

Now as to the larger outlook.

country has the banking situation been on a sounder basis.

of ou
have

At hardly any period in the history

,

We now

le facilities to supply all legitimate demands for credit and those
a better organized than in the past.

facilities

Interest rates are at the

have reached since 1918.

lowest point th

\

sharply during the pas

year and all of our Liberty bonds are now selling in

the open market at a smal
I do not

w4t

Prices of

premium.

to

Business failures are on the decline.

ve the impression that in all business every-

)

thing is all that can be desired.

here are still spots on the industrial

In mot

horizon which must be cleared up.

f those industries which have

recovered from the extreme depression of the p: -:t year or more, the recover/

les have been built upon solid foundations and I v

ew the future with reason-

able optimism.

I should like to add one word about our system of thnniness report-

A

ing.

Some members of your organization probably report your sales

Others do not.

I want to take this opportunity to thank you for what you

are already doing and to ask you to continue to help us in collecting this
valuable information.

If you are willing to help--and I believe that you

will yourselves profit most from this information--I wish that you would
write me a letter saying that you will work with us.
blank to fill in each month.

We shall send you a

You may rest assured that the individual re-

ports will be held in confidence.

The aggregate figure is published in our

Monthly Review of Credit and Business Conditions.

If any of you wish to

talk over these reports I shall be glad to ask one of the men who has charge



'7

of collecting this information to call upon you personally and explain our
system in :lore detail.

This new system I believe has immense possibilities for the future
security of trade, and I am sure no organization could find a more vital interest in cooperating with us than yours.

By this means,

alone, will it be possible for you to obtain,both in your own and allied industries, a clear and reliable picture of actual conditions and tendencies.
All else is as it has been in the past, mere guess work and crude estimate.
When we have this new system fully developed, it will be possible to organize

industry tp a very high degree, and in a fashion never before possible; to GEVitai

ME-40v4419-41wi-

Amie,4 zizatoirm,

pxaorwom4 Wihrimacompetition and over- roduction; and by this means,I believe,
N

largely to do away with strikes and widespread unemployment.
shall

Probably we

never quite overcome the tendency to over-enthusiasm which is the root

of all waves of expansion, and subsequent depression; but we can go a long
way, and here I believe is the way.
I thank you for the privilege of addressing your Association; I wish
you a reasonably restrained prosperity, knowing that you and your workers
will Day very dearly if you have too much of it, and overdo it.

And I be-

speak vour cordial support of the new methods whose aim is to make business
and industry more of a science, and less of a hazard and a gamble, as it has
been So strikingly in the last three years.




WHAT LIGHT DOES THE EXPERIENCE OF THE FE')ERAL RESERVE BANKS
THROW ON THE VALUE OF DIFFUIENT VETHODS
OF MAKING THEIR CREDIT AND Discp_uNT POLICY EFFECT:T.7E?

rate of discount of',..ta.(reserva,bank regulates in general

/

w, and consequszti,ly influences increases or decreases in

edit.

But in sections where interest rates are high,

ys prevent overborrowing by member banks and some Person-

d.

*************

eing depends, among other things, upon an even flow of

of goods which, in turn, depends upon stability of condi.-

on and consumption.

level.

umption.

The most important element requir-

Sudden and wide variations in prices tend to
"rade becomes risky and speculative.

uses of price changes, none is so potent as changes in

is of credit and currency.
years ago, (expressing it inversely) wrote:
on the subject of money have agreed that
value of the circulating medium is an object

ired.

Every improvement, therefore, which can

imation of that object, by diminishing the

on, should oe adopted ****"

eases in our gold reserves have enlarged the ease of our

ased our ability to expand credit.

Regulation of the

greatly affect prices) therefore becomes our greatest

ethods shall we be guided so as to avoid undesirable

promote credit and price stability and so serve the en-

tments are not controlled by rates but by "discretion"

expansion as fully as do loans, and should be governed b:




2

system credit policy, rather than by the desire of individual reserve banks to make
earnings.

Aside theref or from our investments and gold movements, changes in the

total volume of credit are now brought about almost exclusively by our loans to member banks.

Every increase in our earning assets lays the foundation for a credit

pyramid, estimated roughly in the ratio of eleven to one.

(See Studies of W.

Persons, Harvard Review of Economic Statistics, January 1920).

P.T.

Low discount rates

which cause borrowing therefore have a cumulative effect upon credit volume and may
in turn affect prices, even though the ratio of eleven to one may not be reached.
The obverse is equally true.

High discount rates which cause repayments to reserve

banks will, in turn, influence liquidation of bank loans and deposits and retirement
of currency by the banking system as a whole in somewhat the same ratio, and likewise affect prices:

Member banks borrow from their reserve banks to restore reserves which
become deficient from a variety of closely related causes.

The f our principal

causes are
(a)

Withdrawals of deposits which reduce reserve balances.

(b)

Necessary loans to customers which expand deposits and
increase required reserves.

(c)

Currency requirements.
(Caused by general conditions
and not by specific transactions of individual member
banks.)

These three types of borrowings are forced upon member banks
and may be termed involuntary.
(d)

A fourth cause of impairment arises when member banks
are induced by a low discount rate to borrow for profit.

Theref or the ..iuestion:

Can rates be fixed so as fairly to serve business

requirements, furnish needed seasonal and other credit expansion, and still prevent
such inflation as might disturb prices and business?

In cities in the second district prevailing rates are not over 4 1/2 per
cent. and in the country 6 per cent. or less.

There is no inducement for our

city

banks and little f or the country banks to borrow at 4 per cent., except temporarily

°ending repayment of loans or sale of investment.



But in districts where country

-

3 -

banks charge as high as 12 per cent. or more, a 4 1/2 per cent. discount rate would
be ineffective as to those banks, notwithstandinr- that it might adequately regulate

botrowings by city banks of those same districts.
To illustrate:

If prevailing- interest rates are not over 5 per cent. in

the cities and city member banks hold one half of all member banks resources, a 4 1/2
per cent. rate .vould probably control their borrowings.

A 6 per cent. discount rate

would then control borrowings by banks holding three quarters of member bank resources if but one half of the remainder were realizing not over 6 per cent, but no
feasible discount rate would of itself control borrowings by the remaining 25 per
cent. which charge much higher rates.
Now, therefore, shall borrowings by such banks be regulated?

There is no

:7easible method to require such banks to pay higher rates just because they are charg-

ing high rates, and one must conclude that "discretion" must supplement the rate.
Difficulties are unavoidable in determining when regulation by rate alone
is effective, when it must be supplemented by "discretion ," and finally when a given

rate and "discretion" combined are ineffective and a rate change becomes necessary.
But the dangers arising from too great reliance upon "discretion" in granting discounts are too important to disregard.

They may be briefly summarized as .fol-

lows:

Intelligent "discretion" requires sufficient knowledge of the details of
the member bank' s business to definitely decide in each case whether borrowing is
justified or not.
fund.

Credit borrowed from a reserve bank goes into the members common

Its particular use cannot be identif ied.

paired by many transactions.

It sirnoly restores reserves im-

Loans made and paid, investments purchased and sold,

foreign exchange dealings, deposits received and withdrawn cause a surplus or deIf a surplus, the member bank pays off loans.

ficiency.

If a deficiency, it

orrows.

"Discretion" in declining to loan would imply knowledge of all th.,se transactions.



It must be an ex post facto review, otherwise the member bank must restore

reserves by calling loans or selling investments,

Only interviews with bank of -

ficers can develop knowledge of all the business that caused the deficiency of
-eserve.

Such "discretion" extended to all member banks would necessitate passing
upon every loan and investment of every member, causing annoyance, criticism of the
system, and possibly radical legislation.

Is human wisdom capable of such a task?

Such "discretion" ,:Then required should be exercised more as to the total

borrowings of a member, in relation oto its resources, condition and the general
character of its business, rather than as to any specific use of the proceeds.

ho-:

could tl7e officers of reserve banks pass upon the need for loans by members, so re-

mote that reply to inquiry by correspondence would take ten days?

The tendency to create government agencies to supervise business is increasing.

These Commissions and Boards exercise a great variety of statutory

powers, often futile.

Each is subject to the human weakness that once given power

men seek to enlarge their powers.

Reserve banks are no exception.

The writer believes that "discretionary" control over borrowings by mem-,
bers, except to a limited extent when rate control is ineffective, will develop the
esire to exercise still greater power, and that the Reserve System, instead of beini
e.

democratic smoothly-working cooperative organization, regulating the volume and

flow of credit and currency principally by adjusting its rates as conditions and public welfare require, might become a financial bureaucracy vainly attempting to dominate the banking system by methods which are obnoxious to every instinct of the American people.

In special cases and districts personal "discretion" *All bo inescap-

able, but its employment should be resisted and moderately used.

The effective

method of regulation demonstrated by long experience abroad is by the discount rate,
The rate will be effective with the great mass of banking resources and only limited

and judicious use of "discretion" will be needed, and then only in those
where general interest rates are high.
September 25, 1922.



B. S.

sections

GC' TR11011 STRONG'S


http://fraser.stlouisfed.org/
PERSONAL FILE
Federal Reserve Bank of St. Louis

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ADLRESS DELIVERED BY BENJ. STRONG
AT LUNCHEON
GIVEN BY COMMITTEE OF ONE HUNDRED
TO EXECUTIVE COUNCIL, AMERICAN BANKERS ASSOCIATION
on Tuesday, October 3, 1922
at Waldorf Astoria

When my old friend Mr. Prosser invited me to address this meeting, he
was good enough to suggest that it would be appropriate for me to cay something
about present day conditions as they affect bankers.

As almos., anything and

everything affects the banker and his business, I was reminded of the plight of
the farmer in Saratoga County, who entered a long-legged mare he owned in one of
the crack horse races.

The mare had done pretty well for him at some Country

Fair meets, but at Saratoga sae came in a bad last.

When his rife asked him mhy

the mare had not won the race, he said it was because the course was too long and
the time was too short.

My feelings about such a discussion as was suggested by

Mr. Prosser are very similar to what the mare's must have been.
Since the outbreak of the war, writers and speakers upon nublie questions,
have set forth to us various reasons wily we might expect a breakdown of the world's

economic machinery, of what calamities - social, political and economic - were
about to ovi take the world, and in some cases just about when tails was all to
happen.

It sugaest:, a remark which I heard Mr. Morrow make upon his return from

a trip to Europe during the ear, in reply to questions as to when the we

would

and - I think he said very definitely that it would end at 4:45 on the afternoon
of February 13, 1919.

If we must prophesy, let's do it accurately and thoroughly -

and take all the risks assumed by prophets.
all.

But it is safer not to prophesy at

I do, however, wise to say a few words about some things as they are, or at

least as they appear to me, and to ask you to think about them.
chile gloomy and ominous views as to currencie.4 debts, fordign exchange,

Bolshevism, government insolvencies, and like affairs are absorbing people's attention, let me remind you of the, most important thing that appears to be taking
place.

We sometimes forget it.

The earth is still growing crops - the soil is still fertile - the sun

-2shines on it - tae rains fall upon it - and the crops are grown and harvested and
feed people.

The mines still furnish us with coal and metals.

The forests still

grow, and the oceans and rivers still give up their annual catch of fish.

A Minn

section of tre world has been injured and a small fraction of Europe has been devastated by the war, considerable property has been destroyed, and millions of
young man have been killed and maimed.

It was a calamity of awful moment, but

sad as is the plight of the sufferers, the old world still goes an producing. And
bow small the destruction when compared to the whole or the great earth, and its
capacity to eontiaue giving us all that we need if we are willing to rtork to get
it.

It is I believe a fact that since the Armistice was signed in 1918, standards

of living is the world at large have gradually shown a net improvement and especially
so in most parts of middle finfope;
sear,

Lie ships of commerce still traverse the seven

meana of transportation and coamunication in most parts of the aorld ard as

abuadaaay supplied as ever - tne world's institutions of learning are crowded with
students - seienae seams to have suffered no chick in its development - and yet we
know that something is wrong.

Surely naaurd remains the same and retains her

capacity to reward us for our labor.

I am tempted to quota from the 100 year old hymn that *evry prospect
pleases aad only man is vile* because unless I am wholly mistaken - and I believe
I am net - if there is nothing fatally wrong with nature and with the material
things of this wo-_-1d, then the trouble must be with some of the workers and possibly
with the instruments, especially what I shall call the system-, of bookkeepira;, which
they employ.

The point thnt I wish to make can be illustrated in a crude way by deswe think of wealth in terms of money, which is
simple fact:
cribing another very

representative word, enabling us to express measurement, and we think of

country in terms of dollars as the one enj oyiag the greatest national wealth.
four hundred years ago our country had greater resoarcea in th__) soil, in

3

mineral and oil deposits, in the forests and rivers, than eeist to-day because
some of those resources have sin e been consumed, and yet three hundred years ago
many of the few million Indians living in the midst of this abundance starved every
winter for lack of food.

Natural resources alone, therefore, do not make wealth.

On the other hand, there are nations in the East with populatinns in numbers and
densi'v 'I'ar exceeding our own, where poverty, famine and starvation have existed

in recent years in appalling proportions.

'hat does this all mean?

means that natural resources alone are not wealth;
wealth.

To me it

that population alone is not

Wealth, teen, must be what the earth delivers in response to the woks -

the energy - of hard working people, applied to nature with useful instruments to
It is the practice of thrift the capacity for invention that

aid their toil.
makes eealth.

The damage to the world's. economic welfare and the consequent im-

pairment of morale is due not alone to a war of four years duration, but to forty
years or more of preparation for war, in whic1.. too many of the world's wenkers were

engaged in building up military machines.
taxes.

Their priecipal product was heavier

It was misdirected energy in which millions of men were only consumers

and not equivalent producers.

And this process of arming for conflict had its

natural and usual outcome in the conflict itself, which completed in a dramatic

and tragic ray the work of destruction Which had been going on for may years in a
less obvious way.

This destruction, not of physical proper alone - Which has

been cohparatively slight - but of morale - of the spirit of =era and enterprise cannot

Wholly restored until the conditions are suitable to inspire it.

But looking at the situation more strictly with regard to material progress, there seeme to be much from which tooraw encouragement.

We know, for in-

stance, that the world is producing an increasing su pply of food stuffs;

that

the requirement for emergency feeding in various parts of the world has almost disappeared;

and that the distribution of food supplies and other eeschtiale of life,

is becoming more effective.

Even with respect to Germany, we may gain some idea

at the material progres which im being made by quoting from recent reports.

Take

- 4 -

for example German imports.

Figures published this month in the London Economist

show increases from 1,500,000 metric tons in May, 1921, in an almes', steady ratio,

until they reached 4,800,000 tons in July of this year.

I have been told within

the last few days that uaemp;oyment in Germany is now estimated at 100,000 men,
although considerable sections of industry are still working on part time.

A

dispatch from Berlin dated September 11th, states the ship movement in and out of
the Port of Hamburg for the first seven, months of this year to be 14 1/2 million

net tons, compared with 9 million tons in the corresponding period last year, 4
millions tons in 1920, and less than 1 1/2 million tons in 1919.

the improvement

in shipping in the Port of Bremen is reported to be equally striking.
exports also indicate improvement.

Reperts of

Measured by weight - as values in marks are

meaningless - they averaged in the last five months of 1921, a million and three
quarter metric tons a month against two million a month in the first seven montns
of 1922.

Figures of similar import can be reported for other countries.

Do not

understand me to imply that the recovery has been fully to pre-war conditions, nor
in fact to such standards as are essential to the well being of Europe.
has been both striking and encoura6ing.

But it

These and similar reports do emphasize,

however, that the materialwell being of the world, which can be judged in part by
the quantity of goods produced and consumed, has been improving despite the deplorable impairment of the instruments which we have heretofore cansidered almost
essential to the successful conduct of modern industry and comuerce.

What the world needs today is a reconstruction of economic machinery so
that there may be a more effective application of the energy of workers to the production and distsibutisn of the things that we need, and such a reorganization as
will insure that what is produced is fairly distributed among the workers in return
for the work done by each.

Bank notes, bank deposits, credit, foreign exchange - all of these things
are simply man devised bookkeeping instruments with which the transactions and accounts of trade are conducted, just as government loans and taxes are the instruments with which the financial business of governments are conducted.

Fluctuations

-5in the value of purchasing parer of these instruments means uncertainty as to the
value of everything, including the labor of working men, but still worse, injustice
to one or another class of people, and consequently dissatisfaction and discontent.

You have observed how quite inevitably discussion centers upon just such matters
as government debts, taxes, currencies and exchange, but the restoration of depreciated currencies, the return of foreign exchanges to par, the resumption of
gold payment, even the cancellation of government debts, the reduction of taxes,

and the balancing of budgets in consequence, will not of themselves alone increase
production one iota, any more than the creation of these enormous debts and the
printing of the currency increased production.

Onl: work will do that.

But the

object to be accomplished by a reorganization of these bookkeeping affairs is
nevertheless of prime importance.

It will help to repair shattered morale, in-

crease the incentive to acrk, to produce and to save, and replace discouragement
with hope.

It will loosen causes for dissatisfaction and social unrest, and

dispel the feeling that injustice is being suffered.

Without improved morale,

increase of produc'.ion and distribution will be slow, people will not work hope-

fully and efficiently for inadequate or uncertain return, and the standaad of

living, which means not only food and clothing, but education and healtny anjwmeat, may indeed decline.

A great variety of proposals have been advanced for dealing with these

matters, especially depreciated currencies and foeia exchanges.
Possibly a word of doubt is justified as to some oi the
shall only ref a- to those relating to the foreign exchanges.

plans, but I

They all present one

similar characteristic, which is that oome new kind of currency or instrumelts of
payment shall be created through the agency of a herr organisation with a vast

capital and gold reserve;

that these new instruments stall_, be employed for inter-

national payments and be issued against credits extended by tee organization, and
that theyshall be maintained at gold par.

Any such currency, issued against

6

credits extended to airope, could be stable in value and equivalent togold only so
It mould, in fact, be subject to the

long as it was promptly redeemed in gold.

same influences which now influence any gold movement.
immediately come to this country.

In other words, it would

There would be nothing for us to do with it

Such currency could not make our foreign payments any better

except to redeem it.

than present instruments of payment, nor could it be exported a.,;y more than gold

Once here it gould stay here.

can be exported under present conditions.

The

gold reserve would promptly be shipped to this country just as °that gold now
comes to this country.

If, on the other hand, it was not redeemedin gold, then

it would depreciste just as any other irredeemable currency depreciates and its
value as a stable international medium would disappear.

Such an organization

could do no more than our existine credit organization is now doing in extending
credit to Lurope and in maintaining an international gold currency, so lon,.; as the

currency depreciation continues in Europe and gold payment is suspended.

In fact, no one of the plans that I have seen is capable of success until
governments live withia their incomes and until the amount of taxes required to
enable governments to live within their incomes is within the capacity of those
upon whom the taxes are levied to pay them.

The penalty of an unbalanced budget

is a depreciated currency, and a depreciated exchange.
taxation is to retard enterprise and production.

The penalty of excessive

We here see the vicious circle

of currency depreciation and declining revenues, increasing expenses and taxes and
arrested or reduced production, which means a reduced capacity to pay taxes.

So

soon as public opinion enables or requires governments to reduce expenditures to
the point where bearable taxes will cover them, than further issues of currency
will cease, and not until then.

Fluctuating currency and exchange values render trade speculative and
hazardous.

They retard the development of our tra.:e with the rest of the world

and theirs with us.

how may the American bankers assist in '.3urdtpean recovery, and

by So doing how may we assist ourselVesi

I believe that no one questions the

7

generosity of the American people, nor dots is their desire to help.

It is upon

such matters as thin that we can reflecL with some profit.
The emergency of the war created conditions which resulte:!. in our receiv-

ing about a billion dollars of the world's monetary gold prior to our entering the
warp and unbalance OWIr half a billion more since the war ended.
i3 Still being increased by importations.

Our gold stock

The warring nations, Which suspended

gold payment, resorted to printing paper money and suffered currency depreciation.

Wel on the other hand, with this great store of gold, have had thrust upon us the
capacity to expand our credit and currency upon a gold basis lust as a large part
of. Europe expanded its currency i3sUOS Without adequate gold basis.

If permitted

to do 30 this gold is capable of bringing about a dangereus enlaTeementeof credit
in this country with consequences whic# might be more disturbing to our economic
welfare than if we had never received the gold.
excess of gold as a sacred trust.

We should, I believe, regard our

Of course, we shall employ. it as the basis

for the extension of all the credit that is required for the sound development of
our domestic and foreign commerce.

But it. must not, be permitted to encourage or

sustain the kind ofspcculation ,.hick adds nothing to our wealth, our welfare or

our happiness, whice would in fact only raise prices, and whice :ould eventuelly
undermine our prosperity.

It is so ample and more than ample for all of our

legitimate requirements that we need feel no misgivings as to the solidity of our
credit structure no matter what emergency may arise.

Now our benkere can probably do little to influence the policies of
foreign governments and finance ministers.

I do not believe that we can just now

successfully aid with schemes for issuing new currencies, or for stabilizingthe

exchanges until the fundamental conditions Mich I have mentioned justify that kind
of help;

but we can at least maintain ourselves in condition so that we may render

effective aid when conditions warrant our doing so and in the meantime preserve our
own economic strength unimpaired.

It is, however, my eonfident belief that gradual improvement is tlking
plaz:e in the material conditions under whion people are living abroad, notwithstanding what you may regard as evidence to the contrary.

This affords ground for

steadily increasing hope that European zovernments will be able to deal successfully
with the bookkeeping problems to Which I have referred.

More regular employment

and more comfort for the working man, gradual enlar;zemeat of the business turnover,

the subsidence of political uneasiness and distrust,

a better public understanding

of the problem of debts, taxation and currencies, and the adjustment of meals

minds and habits to new conditions of life for Which the hwan race seems to enjoy
an uaexpec ted capwity all lead me tobelieve t1 at :Mile still obscure, the foundations of public opinion upon .dich the work of repair must roil, are gradually
being laid.

If all this be true, ten indeed the day may come wham American bankers

can safely and profitah4 inter into undertdance whiCa in fact ue alone of all the
nations have the strength to mice.

We can furnish assirtame for currency and

banking reest:_blie-imeat is Europe, we can invest in their enterprises and aid in

their refunding, not alone by landing them credit - but by later returning the gold

which will be essential to mane them to help themselves.
But of paramount importance in restoring the confidence of people in
their governments, is their financial syrtems, in credit, in the purchasing po7er
of currencies and in all of those things which afford us oecurity in the value of
our labor, of what we produce, and of what we save, is the assurance we must have
that we have seen the and of devastating :vars.

ADDRESS

delivered by Benj. Strong
at

LUNCHEON
given by Committee of One Hundred
to

Executive Council, American Bankers Association
on

Tuesday, October 3, 1922

WALDORF-ASTORIA

When my old friend Mr. crosser invited me to address this meeting, he
was good enough to suggest that it would be appropriate for me to say something
about present day conditions as t hey affect bankers.

As almost anything and
everything affects the banker an

the farmer in Saratoga County, w
the crack horse razes.

The mar

Fair meets, but at Saratoga she

the mare had not won the race, h
the time was too short.

My fee

Mr. Prosser are very similar to

Since the outbreak of

have set forth to us various rea

economic machinery, of what cala

happen.
It suggests a
about to overtake the world, and
a trip to Europe during

end - I think he said ve

of February 13, 191.

and take all the risks as
all.

I do, however, wi

least as they appear to m

lhile gloomy a

Bolshevism, government in

tion, let me remind you o
place.

-rle sometimes fo

The earth is st
shines on it - the rains
feed people.

The mines

grow, and the oceans and

-

2

-

section of the world has been injured and a small fraction of Europe has been devastated by the war, considerable and maimed.
It was a calamity of awful moment, but
young men have been killed property has been destroyed, and millions of
sad as is the plight of t he sufferers,

the

old world still goes on producing.

And

how small the destruction when compared to the whole of the great earth, and its
capacity to continue giving us all that we need if we are willing to work to get
it,

It is I believe a fact that since the Armistice was signed in 1918, standards

of living in the world at large have gradually shown a net improvement and especially so in most parts of middle Europe; the ships of commerce still traverse the seven
seas - means of transportation and communication in most parts of the world are as
abundantly supplied as ever - the world' s institutions of learning are crowded with

students - science seems to have suffered no check in its development - and yet we
capacity to reward us f or our labor.
know that something is wrong.
Surely nature remains the same and retains her
I an tempted to quote from the 100 year

pleases and only man is vile" because unless I a
am not - if there is nothing fatally wrong with

of this world, then the trouble must be with som

the instruments, especially what I shall call th
employ.

The point that I wish to make can be il
cribing another very simple f act:

We think of we

simply a representative word, enabling us to expr

our own country in terms of dollars as the one en

Three or f our hundred years ago our country had g

mineral and oil deposits, in the forests and rive

some of those resources hare since been consumed,

many of the few million Indians living in the mid
winter f or lack of food.

?'a-tural resources alo

-

3

-

On the other hand, there are nations in the East with populations in numbers and
density far exceeding our own, where poverty, famine and starvation have existed me it
To
in recent years in appalling proportions.
what does this all mean?
means that natural resources alone are not wealth; that population alone is not
wealth.

Wealth, then, must be what the earth delivers in response to the work -

the energy - of hard working people, applied to nature with useful instruments to
aid their toil.
makes wealth.

It

is the practice of thrift the capacity for invention that

The damage to the World' s economic welfare and the consequent im-

pairment of morale is due not alone to a war of f our years duration, but to forty
year s or more of preparation f or war, in which too many of the world' s workers were

engaged in building up military machines.
taxes.

Their principal product was heavier

It was misdirected energy in which millions of men were only consumers

and not equivalent producers.

And this process of arming for conflict had its

natural and usual outcome in the conflict itself

,

which completed in a dramatic

and tragic way the work of destruction which had been going on for many years in a
less obvious way.

This destruction, not of physical property alone - which has

been comparatively slight

- but of morale - of the spirit of energy and enterprise -

cannot be wholly restored Until the conditions arc suitable to inspire it.
But looking at the situation more strictly with regard to material progress, there seems to be much from which to draw encouragement.

We know, for in-

stance, that the world is pr oducing an increasing supply of food stuffs; that the

requirement for emergency feeding in various parts of the world has almost disappeared; and that the distribution of food supplies and other essentials of life,
is becoming more effective.

Even with respect to Germany, we may gain some idea

of the material progress which is being made by quoting from recent reports.
f or example German imports.

Take

Figures published this month in the London Economist

show increases from 1,500,000 metric tons in May, 1921, in an almost steady ratio,
until they reached 4,800,000 tons in July of this year.

I have been told within

the last f ew days that unemployment in Germany is now estimated at 100,000 men,

- 4 -

A

although considerable sections of industry are still working on part time.

dispatch

from Berlin dated September 11th, states the ship movement in and out of

the Port of Hamburg for the first seven months of this year to be 14 1/2 million
net tons, compared with 9 million tons in the corresponding period last year, 4
millions tons in 1920

,

and less than 1 1/2 million tons in 1919.

The improvement

in shipping in the Port of Bremen is reported to be equally striking.
exports also indicate improvement.

Reports of

Measured by weight - as values in marks are

meaningless - they averaged in the last five months of 1921, a million and three
quarter metric tons a month against two million a month in the first seven months
of 1922,

Figures of similar

import can be

Do not

reported f or other countries.

understand me to imply that the recovery has been fully to pre-war conditions, nor
in f act to such standards as are essential to the well being of Europe.

has been both striking and encouraging.

These and

similar

3ut it

reports do emphasize,

however,the quantity of goods produced of the world, whichbeen improving despite the deplorthat the material well being and consumed, has can be judged in part by
able impairment of the instruments which we have heretofore considered almost
essential to the successful conduct of modern industry and commerce.
'.That the world needs to-day is a reconstruction of economic machinery so
that there may be a more effective application of the energy of .-rorkers to the pro-

duction and distribution of the things that we need, and such a reorganization as

will insure that what is produced is fairly distributed among the workers in return
f or the work done by each.

Bank notes, bank deposits, credit, foreign exchange - all of these things
are simply man devised bookkeeping instruments with which the transactions and ac-

counts of ments with conducted, financial business of governments are conducted.
trade are which the just as government loans and taxes are the instru- Fluc

in the value of purchasing power of these instruments means uncertainty as t

value of everything, including the labor of working men, but still worse, in

to one or another class of people, and consequently dissatisfaction and disc

-

5

-

You have observed how :luite inevitably discussion centers upon just such matters

as government debts, taxes, currencies and exchange, but the restoration of de-

except to redeem it.

Such currency could not make our foreign payments any better

can
than present instruments of payment, nor could it be exported any more than gold be exported

gold reserve woul

comes to this co

it would depreci

value as a stable

could do no more

credit to Europe

currency depreci

In fac

governments live

enable governmen

upon whom the tax

is a depreciated

taxation is to r

of currency depr

arrested or redu

soon as public o
the point where

cease, and not un

Fluctu
hazardous.

The

and theirs with u

by so doing how m

war, and on balance over half a P14-1-1-iern more since the war ended.

is still being increased by importations.

Our gold stock

The warring nations, which suspended

gold payment, resorted to printing paper money and suffered currency depreciation.
"ile,

on the other hand, with this great store of gold, have had thrust upon us the

capacity to expand our credit and currency upon a gold basis just as a large part
of Europe expanded its currency issues without adequate gold basis.

If permitted

to do so this gold is capable of bringing about a dangerous enlargement of credit
in this country with consequences which might be more disturbing to our economic
welfare than if we had never received the gold.
our excess of gold as a sacred trust.

ae should, I believe, regard

Of course, we shall employ it as the basis

f or the extension of all the credit that is required f or the sound development of

our domestic and foreign commerce.

But it must not be permitted to encourage or

sustain the kind of speculation which adds nothing to our wealth, our welfare
or our happiness, which would in f act only raise prices, and which would eventually
undermine our prosperity.

It

i. so ample and more than ample f or all of our

legitimate requirements that we need feel no misgivings as to the solidity of our
credit structure no matter what emergency may arise.
;tow our bankers can probably do little to influence the policies of

foreign governments and finance ministers.

I do not believe that we can just now

successf ully aid with schemes f or issuing new currencies

,

or f or stabilizing the

exchanges until the fundamental conditions which I have mentioned justify that kind
of help; but we can at least maintain ourselves in condition so that we may render
effective aid when conditions warrant our doing so and in the meantime preserve our
own economic strength unimpaired.

It is, however, my confident belief that gradual improvement is taking
place in the material conditions under which people are living abroad, notwithstanding what you may regard as evidence to the contrary.

This affords ground for

steadily increasing hope that European governments will be able to deal successfully

8

with the bookkeeping problems to which I have referred.

More regular employment

and more comf ort for the working man, gradual enlargement of the business turnover ,

the subsidence of political uneasiness and distrust, a better public understanding
of the problems of debts, taxation

and currencies, and the adjustment of men's

minds and habits to new conditions of life f or which the human race seems to enjoy

an unexpected capacity, all lead me to believe that while still obscure, the foun-

dations of public opinion upon which the work of repair must rest, are gadually
being laid.

If all this be true, then indeed the day may come when American bankers
can safely and prof itably enter into undertakings which in f act we alone of all the

nations have the strength to make

We can furnish assistance f or currency and

banking reestablishment in Europe, we can invest in their enterprises and aid in
their refunding, not alone by lending them credit - but by later returning the gold
1111

which will be essential to enable them to help themselves.
But

of paramount importance in restoring the confidence of people in

their governments, in their financial systems, in credit, in the purchasing power
of currencies and in all of those things which afford us security in the value of
our labor

of what we produce, and of what we save, is the assurance we must have

that we have seen the end of devastating wars.

ddress delivered Nov. 16, 1922 before
Rensselaer County Bankers, at, dinner at
Troy, New fork.

1

.

1.fi_pr

The opportunity for bankers to become more intimately acquainted

1111
with the detailed operations of the reserve banks have multiplied recently

QP

to such an extent that any discussion of what they do and why they do it

has become almost unnecessary.

1L-7 uLt
era bo--", 61-7 C« OA.
The literatureAie-pmgerd-te-the System

has recently been most illuminating as to the principles which have

O--?-21/n, yt l

i,.

governed the managers of the ZOodeas and as to the policies they have

adopted, and the reasons for doing so.

It seems to me, however, that

there is still one aspect of the Federal Reserve System which has not

been very fully discussed or even inquired into, - and that is - very

broadly express4-ihe position which it has come to occupy as a part of

that complicated organization which we may describe as the country's

economic machine.

All bankers know that we act as the government's fiscal agents

and about what we do in that capacity.

They know that we discount

eligible paper - issue the principal currency of the country - hold the

reserves of the member banks - collect checks - and effect the great

bulk of the domestic tranefers,00mmonly called exchange payments,

different. sections of the country.

between

Beyond this the reserve banks

perform a great variety of collateral and subordinate service for the

government, the member banks and the public.

,1441"

2

With most of these things you are familiar.

You may not,

%L.
however, have given thought - as we are now required to do - to 4Allivr

broader aspect6of the Federal Reserve System in its relation to the

economic welfare of the country as a whole.

In a general way it

can be stated that the most important function performed by the Federal

Reserve Banks in an economic sense is that of regulating the volume of
74014'441

ccoidit - and I use the word "cs.t=" in its broad sense, meaning all

types of credit instruments which perform the function of money,

including bank deposits upon which checks are drawn.

Permit me, therefore, to introduce a discussion of the

Federal Reserve System along these lines by a few words of a theoretical

character in regard to money.

For many years now economists have accepted as a general

principle that the quantity of money ia-eAlatefiee has a direct relation

-:=ammmwomwwmww.T
to the prices of everything - that is, of the things that we buy and

t)-r7;
sell, including the wages of labor aodthe salary of clerks,

rift"'

-

There are,

of course, many reservations and many modifications which apply to this

theory; for instance, the function performed by money in its relation to

prices may be either static or dynamic according to the state of mind of

3

the people.

If all of the people of the country because of fright,

distrust, political disturbance, or for one or another reason, quit

buying goods, prices for a time might even decline in the face of an

increasing volume of money, although the chances are that under a well

regulated banking system such a state of mind would result in a very

prompt reduction in the amount of money in circulation.

In other words,

4md<

160AAA4415
it would bring about a period of liquidation when losoo-ea4.deposits would
ae414,t-)

0617.14tf rff--6VEA4^; 441-e ih,..4-, iG..1 IrmeD 147),L) et AmE4t14,)

be olfrat,...--aod currency is-04,emlot.lam would oe retired.
On the other hand, without any increase ii' the quantity of money, an

optimistic outlook and a speculative state of mind might result in very

considerable advances in prices without any increase in the quantity of
tt-A,kkt.

r "PA

Lbk -b

money giving rise to it at all.

et~-vvic

-414.4,0 tar .1;4,

These illustrations volote.4o-that
LVIuviat Carmr 6-1/
Pv 71A/I/ I4v-

reservation in regard to the ouantity theory which economists refer to

C
as velocity of circulation of money.

(Illustrate by the beer story)
I,

,

Then-again conditions may arise where in fact a
A

given quantity of money

may be made to work more efficientlyif perform a greater service, in an

economic sense, than it had formerly performed, and 44is_agaia-m&y give

rise to or may-Se-44e result of advancing prices, sad-okteh-ft-eewd.i.tioc is

4

exhibited in

change in our banking loans since the establish-

ment of the Reserve System, which has in effect reduced reserve requirements

and permitted a similar amount of gold to support a larger total of deposits,

currency and loans.

I am reviewing these very obvious economic

principles in order to sum them up in a hypothetical statement which will

illustrate somewhat the new economic aspect (If the country's affairs

resulting from the organization of the reserve banks, sladlilis brief

Iffrf-Ativeu,c

statement sh4,441-4e-e4-conree-hype46e4444.1 may do so.

7W-KI
If a given quantity of goods/being produced, sold and consumed

requires the employment of a given amount of money and bank credit, then

in the long run we may say

- for purpose of illustration - that the

quantity of goods multiplied by the price of those goods would give a

figure which would be representative of the amount of credit and money

required to conduct that volume of business at that price level.

Of course,

there are an infinite number of modifying factors to be taken into account,
Illnew*

ut)- t4

so I am stating this equation only hypothetically.

But upon this

(7tAu-f

7110A

principle you will observe that if the quantity of goo ls is increased it
g$10-60

will

PlIttfmtvEiomily require an increase in the amount of money and credit

required to Gar.rit them.

A

On the other hand, with the same quantity of goods)

5

Nal`'
if the price is increased necessarily an increase in the amount of money
a<2t44.

and credit will be required.

But there is still a third possibility and

that is that there might be an increase in the quantity of money and credit

without any change in the quantity of goods, in which event the result

would be simply an increase in price.

Now please bear in mind that My

I)

-simply for purposes of illustrationrI am leaving out of account in this

equation many subordinate but nevertheless important factors, such as the

psychology of the people, the velocity of circulation, increases or de(7-2

creases in the efficiency with which money and credit are employed:

I

You

will at once observe, therefore, that Congress has created a great

organization known as the Federal Reserve System, which has in its power

the actual creation,

increase we the volume of money and
SOrt-14,1

credit, sad it has likewise the power to restrain that increase in money
swd

and credit

within certain limitations.

This to my mind is e very great

et.,-;A--gE4A7 9114c.o-c 01%-e, FWAvits.44

ti

iit

Aakig,raxe responsibility-and our reserve System, creates a situation so

different from any which has existed in our country for the last 80 or 90

years that I shall hope to interest you by elaborating upon it somewhat.

Before doing so, I must digress to the extent of pointing out wherein lies

Aux.
the difference between progress in our economic welfare - which in a broad

.4

6

sense means mmiskiwr standAci of living, which in turn means more and

k

better food and clothes and shelter, steady work, higher standards of

education,

more healthy enjoyment for all the people.

The establish-

ment of higher standards of living, which is the basis of all economic

effort and strife is brought about by .ast increased production and con,

akAv

Cu k kre-irt.-t rti

sumption of things that are necessary

the welfare Obit p

A
and intellectual of all the people.

Such an elevation o

of living or economic well being is not promoted by misdir

which results in the wasteful production of useless things

cultivation of extravagance and laziness; -that is what happ
/f-,-

A

tbert-443-4-habit-which 40 people cultivate at a time when p
ir%

sharply rising but when production of useful things is not

(Illustrate here by story of the
use of iron ore.)

This digression is intended to emphasize the fact

economic well being of the people of this country can be pr

sound direction of the affairs of the Federal Reserve Syste

other hand, that the economic well being can be undermined

unsound policies which attain no other result than to cause

advancing prices and no real advance in economic well being.

7

To return to my theme.

Under our old banking system there

was no means by which the general volume of credit of the country might

be increased beyond a given point without an impairment of the minimum

ilt4A471,VIA akiak

6+tc at4

4r"

resources required by law, unless it resulted Prom the importation of

4 ,7k4;"){2..
gold or the domestic production of gold which went into bank resources.

Of course, I leave out of account such expansion as might result from

changes in our monetary standards such as was attempted in the early 90s,

or by changes in the statutory reserve requirements for banks.

When,

under the old system, as, for instance, in the early 90s, and again in

1907, we experienced a wave of licuidtion and business depression, bank

loans and deposits were very much reduced 9:13 a result, and in consequence

surpluses of bank reserves were built up all over the country - interest

rates sharply declined - and bond values rose.

Then later, speculation

would start in the money centers - usually in the stock market - and

gradually the beginning of a new cycle of advancing prices resulted.

Likewise, at the culmination of such a cycle of advancing prices, bank

reserves would become impaired in various parts of the country, and if

any shock to confidence occurred - as it did in 1893 and again in

1907 - reserve requirements actually had to be suspended and even

8

currency payments suspended.

Such periods of advancing priceslwith all

the speculation which generally accompanies them,have in the past - whether

in this country or in other countries - always had one result:

made the markets of that ,:ountry the best selling markets.

They have

The world at

once would start to pour goods into a country where domestic prices get

out of line with world prices.

Thereupon the banking system would at once

begin to lose gold to Europe in order to pay for these goods.

That served

as a natural check to the speculation - caused interest rates to advance -

made people who were borrowing money get timid - and would usually bring

about selling of goods and price reductions so that the country was again

able to enter into till world's market as an exporter of goods,

thus

changing the international balance of payments,arre6ting the gold movement,

and restoring equilibrium again.

movements were wholly unregulated.

Under our old banking system these

We had no bank of issue as they have

in England, France, Germany and elsewhere, and no organized means of dealing

with the money market, with foreign exchanges or with gold movements.

Now

we have such an organization, but the consequences of the war have resulted

in almost universal embargoes upon the shipment of gold.

important banking country which has no such embargo.

We are the only

The consequence of

9

that is that we might indeed indulge in this country in a riot of

extravagant speculation and of extravagant personal expenditure upon

luxuries.

We could cultivate habits of idleness, quit practicing thrift,

and in fact go to almost any extreme of economic waste before it could be

possible for any of the important nations of the world to take gold from

us

in such quantities as would imperil our bank reserves at all.

Therefore,

the natural check which had operated before the war to hold us to a certain

accountability when our economic machine gets working badly has been lost
not
and we haveitonly lost the power to lose gold - so to speak - but the amount

of monetary gold which we now hold - nearly, if not quite one-half of the

entire world's supply - is so vast that we have a capacity for over-indulgence

in speculation and extravagance beyond anything ever known before in history,

either in this country or any other country.

You will, I hope, therefore,

appreciate that if the premise of my argument is sound, this instrument which

we have created Dior the control of the volume of credit must rely more upon

good sound management than would be the case under ordinary circumstances,

because the usual checks applying in a smooth and orderly world system are

no longer present.

The question at once arises as to how these policies may indeed

be controlled and directed so as to escape the penalties which I believe

10

would be inevitable were we either ignorant, or careless or wilfully wrong.

I think it may be said that there are two

chief

reliances to which we must

look - and hardly any of importance outside of those two:

The first is a sound helpftl and constructive point of view with regard to

the Reserve System by those who own it - that is,the member banks

.

They must be vigilant to see that these banks are well managed.

They

must scrutinize their reports and their statements.

They must examine

carefully the qualifications of the men who are proposed for directors and

they must indeed satisfy themselves that the directors choose competent

officers.

Here I believe lies the most direct responsibility as to the

policies of the System.

The other safeguard is an intelligent public

opinion generally which, on the one hand, will not tolerate a political

domination or misuse of the System, and, on the other hand, will not

consent to its becoming, through its financial power, a super-government.

I do not refer to this situation as one which may be regarded as

permanent, for if it were, no one would be more prompt than I in advocating

that the general structure of the System should indeed be changed.

world is going to recover its economic equilibrium.

This

It will be a slow

process, but it is now under way, despite the gloomy predictions of those

11

prophets of disaster who are always with us no matter how affairs may be

going.

During this period, however, when the gold standard and free gold'

payments have been suspended, human wisdom, sound intelligence, and the

highest type of integrity must bee substitutokfloisome of the automatic

checks which normally work.

I have left to the conclusion the real point that I wish to make.

It is quite possible, due to mistaken notions of unenlightened people, that

policies might be forced upon the Reserve System to bring about a deliberate

expansion of credit.

You have read of the many proposals just to issue

Federal reserve notes without any particular regard as to how it is done, to

whom the notes should be issued, or what the effect would be.

You have

heard numerous proposals that we should make credit cheap, and although much

lees frequently expressed, I think there are many bankers in this country who

still hold the view that if any money can be made by borrowing at the

Reserve Bank, it is good easy money and advantage should be taken of it.

It is just such doctrine as this that would lead - if unrestrained - to

an increase in the amount of money and credit in the country that I have

earlier referred to, without its being in response to an increase in

production and consumption of goods.

That in turn would lead to

speculative advances in the prices of everything which in turn would

12

increase the cost of living and again lead to strikes and all of the die_

orders which result from the sense of injustice which such a policy of

inflation always brings about.

Behind the Federal Reserve System as a bulwark stands, I believe,

first, the sound and helpful and constructive friendship and confidence of

moet of the bankers of the country.

Behind that stands the confidence and

respect in general of most of the business interests of the country.

is e-14r

ese circles of protection lies the enemy,

and the enemy consists in

body - how treat we cannot estimate - that would have the Reserve Banks

acture credit and print money-just as we did during the Civil War, -

the mistaken notion that that will make prosperity.

Outside

IN

Zrfon
alma
Naoty

initgi.

Ui?

fort
.1 kir
411cm

CUSS

MIKIS

..
Trod, N. 'Y., Noy.

1922

Money and Prosperity. that
delusions
One of the popular the belief that
is
it is hard to remove country has the
money a
In addressthe more
greater is its prosperity.
Rensselaer County
ing the bankers of Strong, the dielast night Benjamin of the Federal
Governor
tinguishedBank of New York. imReserve
necessity, in the interest
pressed the
of combating
its inaccuof sound economics,
by exposing education"
of
this delusion
was
"campaign
racy. The a one, by the way, ae sub-just such controvert anJ to
to
in
necessary Bryan "16 to 1" slogan the
present by
vert the
easier at
1896-is made
results of the money
appalling
As the stock of
almost
their purinflation in Europe.
increases, in even a
rubles and marksdecreases

chasing power That is always the
greater mtio. the quantity ofitsmoney
bank
result when
currency,
of a country-itS
credit-increases
its
the
deposits and the commodities,
than
faster

pa- speculation -a-na- wan ILK nal-mawso persons of small and limited
means. Yet it is hard to stop the
cry of the inflationists and of the
dicon ten ted generally for "more

money", as it a man's, or a country's,
wealth were increased by adding to
the number of his promises td pay.

The war unsettled the established
forms of adjustment by which exchanges of gold iv.utomatically settled

the temporary differences caused by
price inflation. Thus it becomes more
necessary that periods of ..:.znaway
fluctuations

in

price

Rho:1111d

-

be

avoided, and, as one of the 'elements
producing such violent changes is
monetary inflation, the public should
It- warned against padding of the rim,,-.3, to give a balloonlike impression
wealth.
The Federal Reserve Bank has been

inestimable worth as a stabilizer
financial values, and its officers
the officers eat its member banks

doing the people a good service
.1-5,/i ustifyingpublie confidence
showing the folly of leaping from
id foundations Kto an airy void.
ticidentally, the banks of Remise'. County are tobe commended for
.ir part in providing tile bullvaril
-tound sense and appropriate action

preserve the integrity of the nii-

it

and its currency.

Rensselaer'

tnty banks answered nobly every
1
k

%,

of the government during the

period for assistance in negoring the popular loans which were
,ntial to keep Uncle Sam in bustt We old stand. These banks,
fiscal agents of the community,
steady the progress of finanietions but also make poscntire system of production
:'

ik,..ange of products in whlig.
.J

c.

JiLLP%

es

nrtirloc of nrio
ing and prospering life, of whi
primary wealth money is the measu
of value.
h_l_ineyitable result of money
,

Ration without a corresponding
crease in real "goods" is an advan
in prices, with its usual by-produ

ADDRESS BY BENJ. STRONG
DELIVEIAED NOV. 16, 1322,

BEFORE RENSSELAER COUNTY
BANKELS, at dinner at
Troy, New York.

The opportunity for bankers to become more intilaatey acquainted with
the detailed operations of the reserve barn:s have multiplied recently to such an

extent that any discussion of what they do and why they do it has become almost
unnecessary.

The literature both from within and without the System has recently

been most illuminating as to the principles which have governed the managers of
the organization and as to the policies they have adoptec2.1 and the reasons for

It seems to me, however, that there is still one aspect of the Fed-

doing so.

dral Reserve System which has not been very fully discussed or even inquired
into, - and that is - very broadly expressed - the position Which it has come to
occupy as a part of that complicated organization which we may describe as the
country's economic machine.

All bankers know that we act as the government's fiscal agents and about
what we do in that capacity.
th

They know that we discount eligible paper - issue

principal currency of the country - hold the reserves of the member banks -

collect checks - and effect the great bulk of the domestic transfers, commonly
called exchange payments, between different sections of the country.

Beyond this

the reserve banks perform a great variety of collateral and subordinate service
for tho government, the member banks and the public.
With most of these things you are familiar.

Youmay not, however, have

given thought - as we are now required to do - to some of the broader aspects of
the Federal Reserve System in its relation to the economic welfare of the country
as a whole.

In a general way it can be stated that the most important function

perfo.med bythe Federal reserve banks in an economic sense is that of regulating
the volume of "money" - and I use the word "money" in its brold sense, meaning all
types of credit instruments which perform the function of money, including bank
deposits upon Which checks are drawn.
Permit me, therefore, to introduce a discussion of the Federal Reserve

- 2 -

System along these lines by a few words of a theoretical character in regard to
money.

For many years now economfalts have accepted as a general principle that

the quantity of "money" has a direct relation to the prices of everything - that
is, of the things that we buy and sell, including the wages of labor, the salary
of clerks, rents, etc.

There are, of course, many reservations and many modifica-

tions which apply to this theory;

for instance, the function performed by money

in its relation to prices may be either static or dynamic according to the state
of mind of the people.

If all of the people of the country because of fright,

distrust, political disturbance, or for one or another reason, quit buying goods,

prices fora time might even decline in the face of an increasing volume of money,
although the chances are that under a well regulated banking system such a state
of mind would result in a very prompt reduction in the amount of money in circulation. In other words, it would bring about a period of liquidation when bank
deposits and currency would be applied to paying off loans, so that deposits and
loans would be reduced and would be retired.

On the other hand, without any in-

crease in the Quantity of mohey, an optimistic outlook and a speculative state of
mind might result in very considerable advances in prices without any increase in
the quantity of money giving rise to it at all.

Then that happens, however, the

quantity or efficiency of money must increase or price advances will usually be
arrested.

These illustrations must allow for that reservation in rerd to the

absolute or narrow quantity theory which economists refer to as velocity of circulation of money.
(Illustrate by the beer story)

The conditions which may arise where in fact a given cluantity of money may be made

to work more efficiently and perform a greater service, in an economic sense, than
it had formerly performed, and so give rise to or result from advancing prices, is
exhibited in the change in our banking loans since the establishment of the Reserve

System, which has in effect reduced reserve resuirements and permitted a similar

amount of gold tosupport a larger total of deposits, currency and loans.

I am

reviewing these very obvious economic principles in order to sum them up in a
rather hypothetical statement which will illustrate somewhat the new economic
aspect of the country's affairs resulting from the organiz::tion of the reserve
banks.

This brief hypothetical statement may do so.

If a given quantity of goods that is being produced, sold and consumed
reouires the employment of a given amount of money and bank credit, then in the
long run we may say - for purpose of illustration - that the quantity of goods
multiplied by the price of those goods would give a figure which would be representative of the amount of credit and money required to conduct that volume of
business at that price level.

Of course, there are an infinite number of modify-

ing factors to be taken into account, so I am stating this equation only hypothetically in its batest forms.

But upon this principle you will observe that if

the nuantity of goods is being much increased it will soon require an increase in

the amount of money and credit required to prouce and distribute them.

On the

other hand, with the same quantity of goods, if the price is much increased necessarily an increase in the amount of money and credit will again be required.

But

there is still a third possibility and that is that there might be an increase in
the quantity of money and credit without any change in the quantity of goods, in
which event the result would be simply an increase in price.
mind that my equation is for purposes of illustration.

Now please bear in

I am leaving out of account

in this equation many subordinate but nevertheless important factors, such as the
psychology of the people, the velocity of circulation, ihcreases or decreases in
the efficiency with which money and credit are employed.

You will at once observe, therefore, that Congress has created a great
organization known as the Federal Reserve Eystem, which has in its power the actual

creation of an increase in the volume of money an credit, but it has likewise the
power somewhat to restrain that increase in money and credit within certain limitations.

This to my mind is the greatest responsibility and a very grave one

4

resting upon our Reserve System, and creates a situation so different from any
which has existed in our countryfor the last 30 or 90 years that I shall hope
to interest you by elaborating upon it somewhat.

Before doing so, I must,digrees
6-&

41

to the extent of.pointing out wherein lies the difference between rea1)progress
in our economic welfare - which in a broad sense means improved standards of
living, which in turn means more and better food and clothes and shelter, steady
work, higher standards of education, more healthy enjoyment for all the people.

The establishment of higher standards of living) which is the basis of all economic effort and strife is brought about by increased production and consumption
of things that are necessary for and which promote the welfare, physical, moral
and intellectual of all the people.

Such an elevation of the standard of living

or economic well being is not promoted by misdirected effort which results in the
wasteful production of useless things and in the cultivation of habits of extravagance and laziness; - that is what happens to the people, - those are the habits
which people cultivate at a time when prices are sharply rising but when the production of useful things is not increased.
(Illustrate here by story of the
use of iron ore.)

This digression is intended to emphasize the fact that the economic well
being of the people of this country can be promoted by a sound direction of the
affairs of the Federal Reserve System, and, on the other hand, that the economic
well being can be undermined and impaired by unsound policies which attain no
other reiult than to cause specul-tion, advancing prices and no real adva'nce in
economic well being.

To return to my theme.

Under our old banking system there was no means

by which the general vo,ume of credit of the country might be increased beynnd a
given point without an impairment of the minimum re,erves which banks are required
by law to maintain, unless it resulted from the importation of gold or the domestic
production of gold which went into bank resources.

Of course, I leave out of

- 5 -

account such expansion as might result from changes in our monetary standards such
as was attempted in the early 90s, or by changes in the statutory reserve requirements for banks.

When, under the old system, as, for instance, in the early 90s,

and again in 1907, we experienced a wave of liquidation and business depression,

bank loans and deposits were very much reduced as a result, and in consequence
surpluses of bank reserves were built up all over the country - interest rates
sharply declined - and bond values road.

Then later, speculation would start in

the money centers - usually in the stock market - and gradually the bej..nning of

a new cycle of advancing prices resulted.

Likewise, at the culmination of such a

cycle of advancing prices, bank reserves would become impaired in various parts of
the country, and if any shock to confidence occurred - as it did in 1893 and again

in 1907 - reserve requirements actually had to be suspended and even currency payments suspended.

iuch periods of advancing prices, with all the speculation

which generally accompanies them, have in the past - whetherbn this country or in
other countries - always had one result:
try the best selling markets.

They have made the markets of that coun

The world at once would start to pour goods into a

country where domestic prices get out of line with world prices.

Thereupon the

banking system would at once begin to lose gold to Europe in order to pay for
these goods.

That served as a natural check to the speculation - caused interest

rates to advance - made people who were borrowina money get timid - and would
usually bring about selling of goods and price reductions so that the country was
again able to enter into the world's market as an exporter of goods, thus changing the international balance of payments, arresting the gold movement, and
restoring equilibrium again.
wholly unregulated.

Under our old banking system these movements were

We had no bank of issue as they have in England, France,

Germany and elsewhere, and no organized means of dealing with the money market,
with foreign exchanges or with gold movements.

Nov we have such an organization,

but the consequences of the war nave resulted in almost universal embargoes upon
the shipment of gold.

We are the only important banking country which has no such

embargo.

The consequence of that is that we might indeed indulge in this country

in a riot of extravagant speculation and of extravagant personal expenditure upon
luxuries.

could cultivate habits of idleness, quie practicing thrift, and in

fact go to almost any extreme of economic waste before it could be possible for
any of the important nations of the world to take gold from us in such quantities
as would imperil our bank reserves at all.

Therefore, the natural check which had

operated before the war to hold us to a certain accountability when our economic
machine gets working badly has been lost and we have not only lost the poeer to
lose gold - so to speak - but the amount of monetary gold Which we now hold nearly if not quite one-half of the entire world's supply - is so vast that we have
a capacity for over-undulgence in speculation and extravagance beyond anything over
known before in history, either in this country or any other country.

You will, I

hope, therefore, appreciate that if the premise of my argumant is sound, this
instrument which we have created for the control of the volume of credit must rely
more upon good sound management than would be the case under ordinary circumstances,
because the usual checks applying in a smooth and orderly world system are no
longer present.

The qUestion at once arises as to how these policies may indeed be controlled and directed so as to escape the penalties which I believe would be inevitable were vie either ignorant, or careless or wilfully wrong.

I think it may be

said that there are two chief reliances to which we must look - and hardly any of
importance outside of those two:

The first is a sound helpful and constructive point of view with regard
to the Reserve System by thosd who own it - that is, the member banks.

be vigilant to see that these banks are well managed.
reports and their statements.

They must

They must scrutinize their

They must examine carefully the qualifications of

the men who are proppsed for directors and they must indeed satisfy themselves
that the directors choose competent officers.

Here I believe lies the most direct

'responsibility as to the policies of the System.

The other safeguard is an

- 7 --

intelligent public opinion generally which, on the one hand, will not tolerate

a politcal domination or misuse of the Eystem, and, on the other hand, will not
consent to its becoming, through its financial power, a supe-government.
I do not refer to this situation as one which may be regarded as permanent, for if it were, no one would be more prompt than I in advocating that
the general structure of the System should indeed be changed.
going to recover its economic eouilibrium.

This world is

It will be a slow process, but it is

now under way, despite the gloomy predictions of those prophets of disaster who
are always with us no matter how affairs may be going.

During this period,

however, when the gold standard and free gold payments have been suspended, human
wisdom, sound intelligence, and the highest type of integrity must be substituted
for some of the automatic checks which normally work.

I have left to the conc:usion the real point that I wish to make. It
is quite possible,

to mistaken notions of unenlightened people, that policies

might be forced upon the Reserve System to bring about a deliberate exeansion of
credit.

You have read of the many proposals just to issue Federal reserve notes

without any particular regard as to how it is done, to whom the notes should be
issued, or what the effect would be.

You have heard numerous proposals that we

should make credit cheap, and although much less frequently expressed, I think
there are many bankers in this country who still hold the view that if any money
can be made by borrowing at the Reserve bank, it is good easy money and advantage
should be taken of it.

It is just such doctrine as this that would lead - if

unrestrained - to an increase in the :moult of money and credit in the country
that I have earlier referred to, without its being in response to an increase in
production and consumption of goods.

That in turn would lead to/speculative ad-

vances in the priCeSOf everything which in turn would increase the cost of living
and a;a±n le-n.(3 to strikes and all of the disorders vrhichresult from the sense of

injustice which such a policy of inflation always brings about.
Dehind the Federal Reserve System as a bulwark stands, I believe, first,

- 8 -

the sound and helpful and constructive friendship and confidence of most of the
bankers of the country.

Behind that stands the confidence and respect in general

of most of the business interests of the country.

Outside of these circles of

protection lies the enemy, and the enemy is ignorance, and the enemy consists in
that body - how great we cannot estimate - that would have the Reserve banks manufgcture credit an. Print money - just as we did during the Civil
mistaken notion that that will make prosperity.

r, - under the

I

Address made before Students
of Graduate College, Harvard University,
Cambridge, Massachusetts.

Tuesday, November 28, 1922.

Since the Federal Reserve Thanks were established, and, in recent years in
increasin-, quantity, the reports of the System have been so complete and have de-

scribed the operations in such detail that students of banking require hardly more
than the official reports to gain a fairly complete knowledee of the business conducted by the System.

Fven those who have not studied this literature understand that the
Reserve Banks hold the banking- reserves of the country;
for their member banks;

that they discount paper

that they invest in bills or bankers acceptances and in the

securities of the United States Soveiument;

that they issue and redeem the princi-

pal currency of the country and distribute the metallic money coined by the mints;
that they collect checks and practically all other types of instruments of payment
for their members;

effect the settlement of the domestic exchanges;

and, in their

capacity as fiscal agents of the Treasury, borrow all the money required for the
Treasury's operations;
ues;

handle the Government debt;

receive on deposit the reven-

and pay checks drawn by the disbursinr. officers.

It is important that this business be visualized as to volume an well as
character.

Bearine in mind that the Federal Reserve Bank of New York does about

40% of the business of the whole System, its transactions for the ten months of this
year were briefly as follows:
practically all gold;
for its members;

It held an average of a,150,000,000 of reserves,

discounted 46,000 pieces of paper aggregating

5,200,000,000

purchased 81,000 acceptances for itself and for other Reserve ranks

and for member banks and foreien banks aggregating i':1,150,000,000;

and for account

of all Reserve and other banks and of the Government and foreign banks purchased and
sold $2,400,000,000 of Government and other securities;

315,000,000 pieces of paper currency aggregating
average of 26 tons of coin;

it counted and handled

2,000,000,000 and handled a daily

collected 118,300,000 checks, notes, drafts, coupons and

other negotiable instruments aggregating

51,000,000,000;

and effected payments by

teleeraph, over the 15,000 miles of telegraph wires which the System now operates,

2

aggregatin- :::'17,600,000,000.

Its transactions for the Treasury as the government's

fiscal agent were of too great a volume and variety to express briefly in figures.

These figures are recounted for the purpose of emphasizing the character
and extent of the contact of the Reserve System with the credit and currency operations of the country and, consequently, the significance of the functions which the
Reserve Banks exercise.

As to the System's policies and the purposes which inspired them, there is
now an extensive literature in the shape of critical books, magazine articles and
public addresses.

It would be but repetition for me to go over ground so fully dis-

cussed by so many competent students and critics.

There is, however, one function of the Reserve System the importance of
which cannot be over-emphasized and which I have determined to discuss tonight because it is, in fact, the heart of the System upon which the operation of every
other part depends.

I refer to the entirely new element which was superimposed up-

on our banking System in 1914 by the establishment of the Reserve Banks, Which were
given the power to influence or to regulate or to control the volume of credit,
Every other function exercised by the Reserve flanks sinks into insignificance along
side of the far reaching importance of this major function.

'ithout rerard to the views which you may entertain as to the various
theories in regard to the purchasing power of money, or what may be more popularly
described as the quantity theory of money, there is hardly anyone who is familiar
with these matters who will not agree that no influence upon prices is so great in
the long run as is the influence of considerable changes in the quantity of money, -

by which I mean not only metal coins and paper money, but bank deposits upon which
checks ray be drawn.

The Reserve Act did in fact, whether by conscious design of

its authors, or not, bring about an almost revolutionary change in three important
particulars in bank credit which may in turn have had an important relation to

prices.

(1)

The Let originally reduced the reserve requirements of the national

banks, and, subsequently. in 1917, reduced them again.

The effect of this was to

make reserve money more efficient in that it .as permitted to sustain a larger volume of loans and deposits than previously had been permitted.

(2)

By conferring

the so-called clearing house functions upon the Reserve Banks, it speeded up the
whole System of payments;

checks are collected and paid more promptly;

the course

of currency, shipments throughout the country has been greatly shortened and currency
passes more promptly to points of redemption;

and the country-wide clearing house,

known as the Gold Settlement Fund, operated on the basis of daily telegraph settlements, has ,neatly shortened the length of time required to effect settlement of
the entire domestic exchanges of the country.

(3)

But the most important change,

s I have stated, is that conferring the power upon the Reserve Banks to actually
permit or influence changes in the volume of money which serves as bank reserves
or circulates as currency.

My thesis, therefore, is addressed solely to this ques-

tion of the regulation of the volume of credit and to make clear what a change has
taken place because of the granting of this power.

Let me refresh your memory as to how credit matters operated prior to
1914:

Practically all of the commercial banks and trust companies of the country

were subject to various statutory limits as to the minimum amounts of cash and redeposited reserve which they were required to carry.

Except by legislative change

in reserve requirements, there was no possibility of increasing the supply of reserve money beyond what arose through cold production or gold imports, neither
could the supply of reserve money be contracted unless gold was exported.

So it may

be generally stated that the total reserves of all the banks was incapable of contraction except by paying it out to the public or exporting it;

and equally incap-

able of expansion unlessredeposited by the public or unless gold flowed into the
country from abroad or was produced from the mines.
not percentage.

Bear in mind I say total and

This had serious consequences in its relation to that mysterious

4

phenomenon which is nos being so carefully investigated and which we call the busiAt one extreme of the

ness (or, as I would prefer to call it, the credit) cycle.

deficient bank re-

cycle the reserves of the banks regularly became impaired.

serves we were liable to see rates for "speculative" money advance to 1004 or even

more at times, and the charge for credit to merchants and manufacturers became a
severe burden upon production and distribution.
cussion cap would start an explosion.

In such a situation almost any per-

In 1893-5 deficient revenues of the Government

and an unfavorable trade balance which resulted in gold exports, coming at a time
when there was agitation for a change in our monetary laws led to great uneasiness.
The reserves of the Now York Clearing House banks showed shortages from
Fear developed that the Treasury would not have sufficient gold

to

ill

qq'

to meet its obligations and finally the crash came on

.

(date) resulting

in the New York banks, and banks generally throughout the country, suspending currency payments;

very largely suspending cash settlements between themselves for

checks sent for collection not only through the local Clearing House but throughout
the country.

that time a total of $

4

'Clearing House loan certifi-

1

cates were issued.

Much the same thing happened in 1907, when

after a period of deficient
the extended con01-

to C

banking reserves running-. from .c:`

tion of a number of New York City banks caused alarm and general suspensions of like
character to those of the early 90's throughout the country.
high as

currency went to

premium;

Call money loaned as

and the domestic exchanges again

were frozen.

Then again at the other extreme of the cycle, after a period of liquidation, surslus reserves poured into the money centers.

After this same liquidation

in the early 90's the New Y,11-1: Clearing House banks at one time showed surplus

reserves of 0

.

And bear in mind that at that time the total re-

quired reserves of the New York Clearing House banks were but
now are.

Money then loaned at less than 1%.

% of what they

And the same occurrence was witnessed

5

after the liquidation of 1907 when tho surplus reserves of the New York City
Clearing House banks rose to Y

11 000 (110

While under the conditions first described, every bank

as seeking to

withdraw loans, under the conditions last described, the banks were forcing money
into the market.

Money would become almost unloanable and the temptation to the

speculator and his kind was extreme.

I, personally, recall making loans on the

New York Stock Exchange at 3/4 of 1%.
These extreme credit conditions arose because there was no stretch.

When the period of surplus reserves arose funds poured into the speculative markets.

nhen the period of deficient reserves arrived all the banks sought to con-

tract their loans to make good their reserves and we witnessed the extremes of
speculation and of business embarrassment.

There was neither control of the vol-

ume of credit, nor modoratinr influence as to rates of interest.

And, finally,

there was no control over the movements of gold in and out of the country.

I re-

call the Governor of the Sank of England telling me in 1916 that one of the most
menacing influences on their reserve position was the possibility of a gold movement to America or from innerica as a result of our erratic money market, which no

influence that they could exert was capable of stemmin;

of their regarding our

so-called free gold market as one of the worst renaces to the stability of their
own credit position.

I have refreshed your memory as to the conditions which prevailed under
the old System in order to bring out in contrast the extent to which it differs
from present conditions.

As things are now, when a period of business expansion

arrives, whether it be an annual and seasonal one, or whether it be due to a series
of favorable crops at home and bad harvests abroad, - in other words whether it be
the short cycle of seasons or the long cycle of periods of years, - such expansion,

whatever its cause, can now be easily financed because of the power of the Federal
Reserve System to furnish the required reserve money as needed and thereby permit

6

the member banks in turn and in larger volume to increase their loans and discounts,
and, correspondingly, their deposits.

But now we come to one er two grave fallacies in regard to the Reserve
System.

I fear there are many people who still hold to the notion that some mys-

terious influence or process will operate when this enlarged volume of credit is no
longer needed so that it will be induced, without any compulsion or persuasion, canplacently to walk back to the Reserve Bank and surrender itself for cancellation.
And possibly another fallacy still prevails among those who believe that because of
certain very exacting requirements of the Federal Reserve Act, and the regulations
of the Reserve Board, as to the type of loan which the Reserve Banks nay make, or
the character of the paper which they may discount, that there is some control exercised by the Reserve System as to the uses to which the credit so extended by the
Practical experience

Reserve Banks shall be applied by the borrowing member bank.

in the operation of the Reserve System seems to have disclosed something of importance as to the way credit is extended;
it is no longer needed;

as to the way that credit is retired when

and as to the impossibility of control of the use that

shall be made of it while it is in existence.

First as to the extension of credit, which may be described as normal or
seasonal or necessary and legitimate.

Practically the only motive which impels a

member bank to borrow from the Reserve Bank is to make rood an existing, or expected, impairment of its reserve.

I think you may accept my statement that this

is true, but let me give one illustration.

Every member bank

is required by law

to maintain a certain minimum reserve on deposit with its Reserve Bank and if it
fails to do so it is subject to an interest penalty upon the amount of the impairment considerably higher than the regular rate of discount of the Reserve Bank.
This reserve in some cities is figured as a weekly averei'e and in the rest of the
country as the average of a fortni7ht.

Every member bank mist report its reserve

position and submit to penalty if the average is impaired.

Now, in practice, the

way this works is very simple, and I shall use the case of a large New York City

7

bank to illustrate:

Early in the morning it sends its exchanges through the

Clearing house and, as the result, it has to pay out reserve money or receives surplus reserve money according to whether it is debtor or creditor.
day it has deposits made and withdrawn;
paid;

it buys and sells securities;

to customers.

Throughout the

it makes new loans and has old loans re-

and foreign exchange and furnishes currency

And as the result of these and other transactions, at some hour of

the day the member bank must make up what it calls its"position."

If its reserve

has become impaired as the result of the day's business it borrows from us to make
good its reserve.

If the day's transactions give rise to a surplus reserve with us,

the proper thing for the member bank to do would be to at once repay any funds which
it had already borrowed from the Reserve Bank, although it may not do so.

The chances

are that if it does not do so it will be because it has an opportunity to employ the
funds in some more profitable way than in paying off the Reserve Bank, - that is to
sriy it can lend the money at a higher rate than the rate which it pays us upon its

loan, namely our discount rate.

You will observe that in every case, and practically every day, the member
bank, in gauging its reserve position, must of necessity determine whether it shall
borrow, and if so how much, or whether it shall repay borrowings already made, and
if so how much, and the alternative to borrowin7cr repaying is either withdrawing
loans from the market in some form, if it is short, or making additional loans, if
it is over, without recourse to the Reserve Bank in either case.

Now, in the long

run, it is my belief that the greatest influence upon the member bank in adjusting
its daily position is the influence of profit or loss;

that while it may regularly

borrow to make good impaired reserves, it will repay its borrowings at the earliest
possible moment unless the inducement of profit leads it to continue borrowing and
to employ any surplus that arises in fresh loans.

It may, therefore, be safely

stated that as business expands for seasonal reasons or for any other reason, member

banks will borrow from the Reserve Banks to make god deficient reserves caused by

8

the expansion of their loans, provided the rate at the Reserve Bank is not so high
as to make that borrowing too costly.

But, on the other hand, if borrowing, at the

Reserve Bank is profitable beyond a certain point, there will be strong, temptation

to use surplus reserves when they arise for the making of additional loans rather
than for repaying the reserve Bank.

I shall discuss the question of rate control later, but I wish first to
emphasize this important fact:

Reserve Ranks is ex post facto.

Practically all borrowing by member banks from the
The condition which gave rise to the need for bor-

rowing had already came into existence before the application to borrow from the
Reserve Bank was made, and experience has shown that large borrowings in New York
City have in the past usually been explained by the member bank as caused by the
borrowing operation of the Treasury, by seasonal demands, but more frequently because of the withdrawal of deposits.

Now as to the limitations which the Federal Reserve act seeks to impose as
to the character of paper which a Reserve Bank may discount.

hen a member bank's

reserve balance is impaired, it borrows to make it good, and it is quite impossible
to determine to what particular purpose the money no borrowed may have been applied.
The

Tt is simply the net reserve deficiency caused by a great mass of transactions.

borrowing member bank selects the paper which it brings to the Reserve Bank for discount not with re-ard to the rate which it bears, but with regard to various elements
of conv3nience, that is the denomination of the paper, its maturity, whether it is in
form to be easily and inexpensively delivered physically to the Reserve Bank or not,
and it -lakes little difference to the borrowing bank what transactions may have caused

the impairment of its reserve, because the paper which it discounts with the Reserve
Bank may have no relation whatever to the impairment that has arisen.

To specify

more exactly, because this is an important point, suppose a member bank's reserve
became impaired solely because on a riven day it had made a number of loans on the
stock exchalve;

it mi-ht then came to us with commercial paper which it had

9

discounted two months before and which had no relation whatever to the transactions
of the day;

and with the proceeds of the discount make eeed the impairment.

If it

was the design of the authors of the Federal Reserve Act to prevent these funds so
advanced by Federal 'Reserve Ranks from beine loaned on the stock exchanee or to non-

member state banks or in any other type of ineligible loan, there would be only one
way to prevent the funds being so used, and that is by preventing the member banks
from making any ineligible loans whatsoever, or deny it loans if it had.
fact, during the peak o

And, in

the period of expansion I believe the amount of paper which

had been discounted with the Federal Reserve '3anks equalled only about 14, of the
loans and discounts of the member banks.

The member banks undoubtedly had a very

much larger amount of eligible paper than indicated by this small percentage, but,
beyond that, a great mass of ineligible loans, and surely it cannot be claimed that
the provisions of the Act, which specify so exactly what paper is eligible, can possibly have exercised any influence upon the application of the proceeds of these
loans by the member banks.

I have enlarged upon this point so as to brine out this fact: - that the
expansion of the loan account of the Federal :reserve Ranks, which as you knowliir-

nishes the foundation for a much greater expansion of loans and deposits of the
commercial banks, can be brought about as the result of any expansion in the banking
position of the country, no matter what may be its cause.

The eligible paper we

discount is simply the vehicle through which the credit of the 'eserve System is
conveyed to the members.

But the definition of eligibility does not effect the

slightest control over the use to which the proceeds are applied.

Going a step further, this means that the eeserve Banks will be subject
to demands upon them, expressed to be sure in the form of eligible paper but which
may have had their origin in any sort of expansive development, stock speculation,
real estate speculation, crop movine, buildin- operation, foreign bond issues, or
anything, else.

Such an influence can arise throueh the borrowings not only of the

10

United States Oovernment in the market, but, indirectly, through borrowings of all
kinds which have the effect of impairing reserves.
Now goin, still one step further, let me emphasize the contrast between
the conditions which prevailed in the old System and those which have now arisen.
I have pointed out how, in the extremes of the trade cycle we have on the one hand
impaired reserves and very high interest rates and on the other hand surplus reserves
and very low interest rates.

That condition has now quite disappeared.

In actual

operation, when the reserves of the member banks become impaired they promptly borrow and they do not have to scramble around among their customers or on the stock
exchange to call loans so as to make good the impairment.

So, on the other hand,

when they have surplus reserves they are generally inclined to repay what they may
have already borrowed from us rather than make new loans, provided, of course, our
rates are properly adjusted to market rates, and they will continue to do so unless
borrowing from the Reserve Bank becomes so profitable as to be a temptation.

Now you will observe that under the old System we experienced these periods
of reserve deficiency and extremely high rates for money and reserve surpluses and
extremely low rates for money, but under the present System all that has changed.

Broadly speaking, there is no surplus reserve in the hands of the banks, whether
members of the System or not.

When business expansion or new loans cause impaired

reserves the member banks borrow from us;
or another, they repay to us.

when surplus reserves arise for one reason

The consequence of this is, of course, that we have

no such extraordinarily high or low interest rates as sometimes obtained.

The funds

flow in and out of the Reserve Bank day by day as sort of a leveling off process,
so to speak.

Now in a banking System where 10,000 banks, which represent over 55%

of the banking deposits of the country, have convenient access to a source of borrowin- such as the Reserve Banks, what are the possibilities that this borrowing
may net beyond control;

that the volume of credit may become dangerously enlarged

and that in consequence we may be guilty of furnishing credit which might only result in marking up prices without any increase in production, with all of the

injustices which are sure to result?
The chances of such a development can only be understood if one is
familiar with credit conditions in allparts of the country.

They could well he

expressed in the form of a map upon which current local rates of interest throughout the country would be expressed as maps are shaded to indicate ::cuntain ranges
and their peaks.

It would be found that ever a large part of the south, consid-

erable portions of the middle west, and generally throughout the Rocky Mountain
re-ion interest rates are not only high, but in many cases as high as 12%.

Not

only do the usury laws of some states permit banks to lend money as high as 10% or

12% but in practice a very large number of the smaller banks throughout the country in states which permit hill rates make practically all of their loans at rates
ranging all the way from

to 12%, and there are many banks that charge even

higher rates by various round about methods.

But the rate difficulty becomes more

acute when it is realized that even within one Federal Reserve district of large
area like Kansas City or San Francisco, there may be sections where rates as high
as 12% are charged, but, on the contrary, in the money centers, especially in the
city where the Reserve Rank is located, the rates may be little if any higher than
those prevailing in New York City.

Bearing in mind, however, that a member bank may be impelled to borrow
not only because deposits are withdrawn but equally because it haE made loans, in
all of those sections where the loaning rate is much higher than the Reserve Bank
rate the temptation will naturally be ever present to expand leans indefinitely so
long as the Reserve Bank is in a position to lend.

This situation, which prevails

in some parts of the country, is quite different from that in New York City, where
the vast bulk of bank loans are made at a fairly uniform rate and wnere it is possible for the Reserve Bank, by an adjustment of its rate, to exert some restraint
upon the extent to which its members borrow from it.

12

Deferrim7 until later any further discussion of methods of control of
borrowinr, which means control of the volume of credit, let me now rei:er to what

appears to me to be the most perplexing difficulty in the exercise of such control as may be possible through the discount rate.

It is a condition which has

arisen as a result of the war and it is appropriate to introduce this part of the
discussion by quoting, from the report made by the British Committee on Currency and
Foreign Exchange, frequently called the Cunliffe report, as follows:

"Whenever before the war the bank's reserves were being
depleted, the rate of discount was raised. This, as we have already explained, by reacting upon the rates for money generally,
acted as a check which operated in two ways. On the one hand,
raised money rates tended directly to attract gold by lessening
the demands for loans for business purposes, they tended to check
expenditures and so to lower prices in this country, with the result that imports were discouraged and exports encouraged, and
the exchanges thereby turned in our favor. Unless this twofold
check is kept in working order the thole currency system will be
imperilled. To maintain the connection between a gold drain and
a rise in the rate of discount is essential."
Various influences were set in motion by the war which have resulted in
our receiving over $2,000,000,000, in Fold in excess of what we held before the
war started, giving us now a total gold stock of about
nearly $3,100,000,000 is held by the Reserve Banks.

3,800,000,000 of which

This is roughly a billion and

three-quarters in excess of what the minimum legal reserve requirements of the
Federal Reserve Act would now require us to hold against our present deposit and
note liabilities.

Under the provisions of the Federal Reserve Act as originally

passed by Congress, the Federal Reserve Banks, when all of the reserves had been
paid in, would have had a loaning power of roughly $

'with

this enormous mass of gold now in our hands, we have a lending power at present
in excess of the billion and one-quarter of loans and investments now made of
roughly

~4 i400,e0op

.

.Had there been no war there would have been no

disturbance to the foreign exchanges.- V:ith the foreim exchanges fluctuating
within the gold shipping points any considerable expansion of credit in this

iv

country which caused prices to sharply advance would very probably have been
penalized by a gold export movement.

With the exchanges as they now are, that

is with the dollar at a premium practically the world over, gold cannot be exported, certainly not in large quantity except after such a period of expansion
and rising prices in this country as would entail a veritable orgy of speculation;

such a debauch in credit, in fact, as would reduce the purchasing power of the
dollar progressively first possibly to the level of the currencies of the neutral
countries, then to sterling, then to the franc, etc.

And this brings me to the

point which is of such importance to the management of the Reserve System.

Before the war, as is set out in the Cunliffe report, a lare gold export movement was the visible and convincing evidence, not only to the management
of the bank of issue, but to the country generally, that the bank rate must be
raised.

To be sure other conditions than a gold movement could well justify in-

creasing the rate of discount of the bank of issue, but a large gold export movement,Euch, for instance, as we suffered in the early 90's, which even impaired the
gold reserves of the '-',overnment of the United 3tatcs, would require little argu-

ment or explanation to convince the country that the bank of issue must take steps
to protect the gold reserve.

As we are now situated, it is true that we may from time to time lose
small amounts of gold to those countries where the currency has not been greatly
depreciates.

have recently shipped some gold to Canada and it was a natural

movement because the Canadian exchange had gone to a premium and dollars to a
discount as the result of a large loan which the Canadien y'overnmert floated in
this country.

And from tile to time the currents of trade and the balance of

international payments may indeed result in small amounts of our excessive gold

holdings being withdrawn, but, with the currencies of most of the trading and
banking nations of the world so much depreciated below ours -- ranging from 107,
in the case of eterlin

to the vanishing point in the case of Germany, Austria

14

and Russia --- it seems altogether unlikely that any considerable amount of our
surplus gold will be taken fran us.

Other than such a debauch of expansion as I

have described, the only possibilities of early losses in gold that I can see
would be through radical changes in the monetary laws of those nations whose currencies are greatly depreciated, implying, of course, the balancinp of their
governmental revenues and expenditures.

In the absence of the possibility, I may say even the remote possibility, of any such movement and in the face of the conditions which I have described
as to interest rates in different sections of the country, what should be the policy
of the Federal Reserve System in exercising this (Unction which is of such supreme
importance of repulating or influencing the volume of credit.

This brings us in fact to those important questions of policy in which
human judgment plays so large a part.

Various sug-estions as to the policy of the

Reserve System have been advanced by critics and students.

They all seem to lead

back to the two methods of repulation of credit volume which are, after all, fundamental.

One may be described as the exercise of discretion by each Reserve Bank

as to the amount which it is willing cur which it thinks wise to lend to borrowing
members.

The other is the exercise of such influence er control as is possible

through the fixing of the discount rate.

It might at first seem that these two

methods of regulation were in conflict with each other, but they are in fact both
necessary and complementary;

both have advantages and limitations.

In a general way it is my opinion, although others may differ from me,
that, so long as present conditions exist, rate regulation will operate effectively
in the long' run as to the great mass of American bank credit, that is as to those

banks Which hold the principal amount of deposits and loans, provided the rates
are wisely established by all of the Reserve Banks, and especially by those Reserve
Banks which are located In the larger cities of the east.

It is in those centers

that interest rates are lowest ani most stable and where the range is narrowest

15

between minimum an:' maximum rates;

but in the sections of the country more remote

from the money centers, where interest rates are higher, as was earlier described,

the exorcise of a wise discretion by the management of the Reserve Bank is imperative, otherwise the facilities of the Reserve Systen might be abused by member
banks borrowing excessively for profit.

Let me describe same of the difficulties of exercising discretion.

First,

The

the discretion, as I have earlier described, must be exercised ex post facto.

transactions riving rise to impaired reserves by the borrowing members have already
occurred when the borrowing from the Reserve Bank is desired.

Applying discretion

to the borrowings of members under these circumstances really means that all one
can do is to scold them.

If the funds are not advanced to make good the reserve,

then indeed the reserve balance is used by the member just the some only the penalty
rate is higher.

In the course of time that bank would restore its reserve because

the law would prevent its paying dividends or sulking new loans until it is restored.

That type of scolding, however, generally causes irritation.
A second difficulty is geographical.

How can discretion be exercised in

the case of applications for loans by member banks so remote that even the mail
takes four days one way?

A third difficulty arises as to the basis upon which discretion shall be
Who is to judge as to whether the transactions which cause the reserve

exercised.

impairment were justified or unjustified?

A loss of deposits, theoretically, would

always justify borrowing, but if the impairment arises because of loans made how is
a judgment possible as to any one loan without judging equally of all loans made by a
member bank?

Fourth, even assuming that such judgment were possible, who shall say how
much each member bank shall be permitted to borrow without exceedinr- the bounds of
prudence?

Is it fair to assume that a member bank should liquidate once a year, or

16

twice a year, so that its borrowing requirements are seasonal only, or should we
admit that a certain amount of borrowing from the Reserve Banks may be permanent?
Section 4 of the Act provides that a Reserve Bank shall "extend to each member bank
such discounts, advancements and accommodations as may be safely and reasonably made
with due regard for the claims and demands of other member banks."

Much difficulty

will be experienced by the bank managers of any one district in making these nice
decisions as to its own district members only, but, extending this to all the managers of the twelve Reserve Banks, with the 10,000 members with which they must deal,

it would indeed appear to be impossible to exercise such discretion with universal
justice.

Indeed it may well be that in the absence of a Branch Banking System the

Federal Reserve System will be the vehicle for furnishing a certain amount of credit
permanently to those remote sections of the country where interest rates are high
and where liquid capital is deficient.

A fifth difficulty appears to arise as to the regulation of the total
amount of credit for the whole banking system, as distinguished from the total
which any one member may be allowed to borrow.

Obvicusly the twelve Reserve Banks

cannot work out such a nice mathematical arrangement of credit as would serve the
requirements of all the banking ,yrstem and work smoothly, because these requirements

vary greatly at different seasons of the year and in different sections.

A sixth difficulty is at once obvious were the System to assume responsibility for declining loans to members which made it necessary for those members to
decline loans to customers.

It has always seemed to me that the primary responsi-

bility far any loan made by a bank to its customer should rest with the officers
and directors of that bank and that the Reserve Bank should never assume that
responsibility nor be willing to accept the consequences of exercising it.
And a seventh and last difficulty, although this may not indeed be all
of them, is one which I regard as more serious than any of the others, - the exercise of powers conferred by the Reserve Act upon the Reserve Banks by this rule

17

of personal discretion, I fear, would develop inevitably in time a bureaucratic

attitude of mind on the part of the managers of the Reserve Banks which would be
unfortunate indeed for the welfare of the whole banking System.
petite for more power.

Power excites ap-

Bankers in time would rebel and the public would rebel.

Now, on the other hand, it must be admitted that if a member bank is able
to loan all of its funds at 10;', or at 12%, and if it is payin- as hi7h as 5

inter-

est upon its deposits, and has the opportunity to discount paper at its Reserve Bank
at 4 1/2:), the temptation to make the additional profit by enlor-ing its business

and discounting freely cannot well be escaped.

or can the Reserve Bank charge

that member bank a rate which would operate as a restraint to its borrowing without

char-ing a like rate to member banks in its own city or in the money centres of its
district which would put the resources of the Reserve Bank entirely beyond the reach
of most, if not all, of the large banks of the district.

Therefore, however

dif-

ficult may be the exercise of discretion, in some Reserve districts that would appear
for the present to be the only means of exercising a regulatory influence.
On the other hand, let us see how the rate will operate.

I think one

should look upon the credit structure of the country as an inverted pyramid at the
base of which is a foundatior, of bricks of gold which enjoy the peculiar power of

sustaining each its own proportion of the entire inverted pyramid.
of gold are the bank reserves held by the Reserve Bank.

Those bricks

If one brick is taken out

of the base, the series or stones resting upon it, representing the volume of credit
sustained by that reserve brick, must, inevitably, come down.
added, by so much the pyramid is very shortly enlarged.

And if a brick is

If the Reserve Dank rate

is so law as to be an inducement to borrowing additional tiers of bricks will be
laid at the foundation and the pyramid will be by so much enlarged;

and the re-

verse is equally true if the rate does not induce borrowing, - the size of the
pyramid may be kept unchanged, or even reduced,

18

A rate control of the volume of credit has a variety of advantages.
is that it is democratic.

One

It applies to all alike and it requires little, if any,

expostulation and remonstrance to make it effective.

It must be admitted that an

advance in the discount rates by the Reserve Ranks will not necessarily influence
promptly the mountain peaks of high interest rates in some sections.
doubt whether it is necessary that it should do so.

But I rather

Althourh not capable of sta-

tistical support, I think the statement may be hazarded from past experience that a
rate which is effective in checkin

borrowin- in the money centers, or even in re-

clueing borrowing, will indirectly be an influence in all sections of the country.

It certainly has the effect of what I might describe as "driving borrowers back
home."

It is customary for many concerns which do a large business to borrow in

the cheapest money markets, no matter where their offices and business may be located.

If New York, for instance, should advance discount rates and member banks in

turn advanced rates to their customers, a certain number of these out-of-town bor-

rowers would 70 to their local banks for their loans if the rates thero are satisfactory so as to onablo the borrower to pay off in New York.

This process I believe

would be found, could it be anLlyzed, to be many times repeated, so that the effect
of rate changes in the twelve Reserve cities is not confined alone to those cities
but extends throughout the country.

Another point frequently overlooked in regard to the effect of the rate is
duo to lack of understanding of the way in which borrowin7 from the Reserve Rank
originates, - that is through impaired reserves.

Every bank knows about what its

loanable funds cost it on the average and about what it receives on all of the money
which it is loaning.

It knows about what its expenses and overhead amount to and the

difference is its profit.

When a bank's reserve becomes impaired so that it must

borrow, it does not pick out a particular piece of paper which it has discounted at

a higher rate of interest and then rediscount that paper at the Reserve Rank rate
and figure that it is making a profit, but it is much more liable to see whether

19

the borrowin- from the Reserve Rank at the Reserve sank rate involves in point of
fact an absolute loss, or whether it may not be less expensive to reduce loans or
sell investments and avoid borrowings.

Expressing it differently, the rate at

which a Reserve Bank lends to its member bank has no particular relation to the
rate which a member bank receives on any of its transactions, but it has a relation
to the average of all rates received by the member bank and the average cost of all
of its loanable funds.

And from this I have always concluded what I firmly believe

to be the fact, that a Reserve Bank rate in order to be effective in restraining undue borrowing, does not necessarily need to be n penalty rate, that is to say a rate
fixed so high that there will be no differential in favor of the borrowing bank on
am: paper which it may have taken from its customers, even the highest rate paper.
But an effective rate will likely be somewhere within the range between the average
cost of all its loanable funds, including overhead, and the average that it receives

upon all of its earning assets, with due allowance, of course, for loss of interest
on reserves.

The chief advantage of rate control, however, is in the way it serves more

definitely to regulate tho total volume of credit as distinguished from the total
amount of loans to any one individual member bank.

T would regard the determination

of the amount to be loaned to an individual member bank as a credit matter to be
determined just as any loan would be determined by any bank to any customer.

But,

on the other hand, I would regard the rate policy of the rederal Reserve System as
a national credit policy more directly related to regulating the volume of credit
in the country so as to maintain stable credit conditions.

Tinally, however, we must recognize that there are many people who believe
that more money, and cheap money, lawns prosperity and happiness.
an advance of discount rates may at times be difficult to explain.

Tc those people
It is on that

account that the absence of natural movements of gold is most unfortunate;

and it

is for that reason, as well as for many others, that the world will be better off

20

by a prompt return to the gold standard and free gold payments.
Permit me now to make a brief resume of this long argument:

The Reserve

Banks have been given the power to create reserve balances and to a large extent
to regulate the volume of credit.

That volume of credit expands in response to ex

post facto borrowing by member banks;

the mass of their transactions causing the

borrowing having already occurred, there is no means by which the Reserve Bank can
control the use which is made of the funds which it loans to its members.

Credit

so borrowed from the Reserve Banks is less likely to return for cancellation when
no longer legitimately required if discount rates are too low, and a high discount
rate will operate to induce its return.

The present banking System has created a

situation where there is no surplus of bankin;: reserves in the country, and where

there is not likely to be a deficiency.
percentage of the Reserve Banks.

The real reserve barometer is the reserve

The impulse which will lead the Reserve :'ystem

to change rates must for the present largely arise from general conditions, and it
cannot be expected that the impulse to advance rates will be (-Ivan by gold exports
for a long time to come.

Therefore, the regulation of the volume of credit which

is the chief function of the Reserve System must bo effected by a combination of
rate changes and due caution as to members' borrowin s.

The Federal Reserve System has always impressed me as being essentially
a social institution.

It is not a super-Government, it is simply the creature of C

Congress, brought into being in response to a public demand.

It was not created

only to serve the banker, the farmer, the manufacturer, nor the merchant, nor the
Treasury of the United States.
guiding influence is not profit.
to the Government.

It was brought into being to serve them all.

Its

Practically all its receipts over expenses go

For same the service it performs is direct, for others it is

indirect, but is not less definite nor any less important.

It needs and asks that

it be given the benefit of intelligent study and enlightened criticism.

Its

future depends upon its own good behaviour and upon its success in winning and
holding the confidence of the public.

Increasing quantity reports for students

Generally understood that Reserve Banks hold all reserves
Discount paper
Invest in bills and U. S. securities
Issue and redeem paper currency
Distribute metallic money
Collect checks and instruments of payment
Settle Domestic Exchanges
As fiscal agents Borrow
Handle Debt
Receive Revenues
Pay disbursing officers checks
Important to visualize volume New York Bank 40%

10 montitsyermactielomIlgsorar
000 gold
Aggregate 4 5,200,000,000
Discounts - 46,000 pieces
Aggregate
Acceptances 31,000 pieces
1,150,000,000
government and other securities
purchased and sold
2,400,000,000
Currency counted 315,000,000 pieces;
2,000,000,000
Coin, daily - 26 tons
51,000,000,000
Checks, notes, etc., 113,300,000 pcs.;
Telegraphic payments (15,000 miles)
17,600,000,000

Treasury Transactions too great volume and variety
Figures emphasized contact with credit and currency
Significance of functions
Policies and purposes inspired in extensive literature
Repetition of competent students and critics to discuss
One function heart of system;

operation other parts depend

New element in power to influence, regulate or control volume
Other functions insignificance

Thatever views purchasing power -- quantity theory -- influence
upon prices of considerable changes in quantity;
paper money;

metal coins,

bank deposits.

Revolutionary changes of Act -- relation tc, prices
1.

Reduced reserve requirements
Original and 1917

2.

Clearing House functions
Speeding payments check collections
Shortening currency shipments and redemptions

2

Gold Settlement Fund
Daily telegraphic settlements
Less time settling domestic exchanges
3,

Most important power to permit or influence change in volume
Bank Reserves
Currency

Thesis solely regulation volume - change due to new development

Beer Story
Refresh memory credit matter prior 1914
All banks statutory minimum reserve
Except legislationne possible increase reserve money except gold
production; imports
Nor contraction unless exported
Contraction by paying out or exporting
Expansion redepositing or importing
Bear in mind total and not percentage
This had serious consequences -- business or credit cycle
speculative rates 100%; merchants and
One extreme - impaired;
manufacturers burden; percussion cap
Early 90's Deficient revenues
Unfavorable Trade Balance

Gold :wort,
Monetary agitation
Unoasiness
Clearing House reserves short 06,500,000
Fear Treasury default gold payment
Crash November 1390 - June 1803
New York, and banks generally, suspending currency
payments;
also cash settlements for collections
1890 16,645,000
throughout country
Clearing House Certificates 1893 $41,490,000
1907 same -

Deficient Reserves
Extended condition certain Nei York City Banks
Alarm
Some development as early 90's

Call money 12%
Currency 4% premium
Domestic Exchanges frozen
Other extreme of cycle - liquidation;

surplus reserves in !Toney centers

Early 90's
Surplus Z111,600,000
Required reserve 1/4 of present
Toney below 1;7

1907 same -

Surplus V1,000,000 June 1908
First condition banks calling loans
Last described conditions forcing money
noney unloanable
Temptation speculator beyond resistance
Personally recaI13/4 of 1;4J

Extreme credit conditions because no stretch
Period of surplus funds poured into speculation
Period of deficient banks withdrew causing extremes
Speculation
1.
Embarrassment
2.
Nc control of volume; no moderating influence rates; no influence gold movements.
Governor Bank of England 1916 menacing influence to their reserve position
our unregulated gold movement

Refreshing memory old conditions contrast with present conditions
Business expansion arrives natural and seasonal, or series Food crops vs had abroad
Either short or long cycle
Whatever cause Reserve System finances
Manufacture reserve money
correspondingly deposits
Members increase loans and discounts larr-er volume;

One or two fallacies
1.
2.

Notion mysterious influence credit walk back surrender for cancellation
Exacting requirements type of loan, character of paper
Cannot control use of proceeds

Practical experience throws light upon
1.
2.
3.

Way credit extended
Way retired when not needed
Impossibility to control use

First extension of normal, seasonal, necessary, legitimate credit
Motive only impaired reserves
Illustration Minimum reserve impaired
Interest penalty
Weekly; fortnightly average
Regular report
Way borrowing works simple
Illustrate New York City bank Morning exchaaes; debtor or creditor; we settle balance
Deposits made and withdrawn
New loans made and old paid
Buy and sell securities and exchange
Furnish currency

4

Makes up "position"
Reserve impaired - borrow
If surplus - should pay
May not do so because opportunity for profit; loan higher rate
Member always watching
If mutt borrow - how much
If can repay - how much
Which is most profitable
Greatest influence profit and loss
Regularly borrow but always repay unless profit induces otherwise
Business expansion - borrowin7 will increase if rate not too high
if level too low, credit will not come back

Discuss rate control later
Emphasize borrowing ex post facto
Conditions already existing,
Explanation usually Treasury, seasonal demands, loss of deposits
Limitations on eli7ible paper Reserve impaired, member borrewb
Cannot determine proceeds applied
Amount simply net deficiency
Borrower selects paper not for rate, but convenience
Denomination
Maturity
Easily delivered
Discounted paper no relation to transactions causin:- impairment
Illustrate Stock Excham-e Loans Commercial paper discounted two months before; no relation to
transactions
Proceeds makes rood reserve
If design of authors prevent funds stock exchan-e or other ineligible
only way prohibit any such loans
Peak of expansion 14%
Member banks held much larger amount
Also large amount ineligible
No possibility to influence application
Enlarged upon point to emphasize
Expansion Reserve Bank loans foundation greater expansion
Result from any cause
Eligible paper simply vehicle
Definition effects no control over use
Step further Reserve Banks feel demand expressed eligible paper
Origin in expansion stock speculation, real estate, crops,
building, Treasury, anything impairing reserves
Step still further Contrast old and new situation
Old Extremes;
impaired reserves high interest;
low interest

surplus reserves

5

That largely disappeared
Now No scrambling to call, but borrowing
When surplus, repaying
Broadly speaking no surplus, everything over swept into us
Consequence, no very high or very low rates
Funds flow in and out of Reserve Lanka
Leveling process
10,000 banks 55;.; of resources

Convenient access
Possibilities gettinr beyond control
Volume of credit dangerously enlarged
Mark up prices with no increased production
Injustice such development
Must understand credit conditions throur-hout country
Could be expressed in map
Variations in rates in sections
Usury laws
Rates from 8% to 1274
Difficulties within district between cities and country
Need for borrowing not only deposit withdrawals, but new loans
Temptation in high rate sections extreme
Very different from New York City and money centers, - rates more uniform

Defer further discussion of control until later
Another perplexing difficulty
Condition resulting wholly from war
Cunliffe Report "Whenever before the war the bank's reserves were being
depleted, the rate of discount was raised. This, as we
have already explained, by reacting upon the rates for
money generally, acted as a check which operated in two
ways. On the one hand, raised money rates tended directly
to attract gold by lessening the demands for loans for
business purposes, they tended to check expenditures and
so to lower prices in this country, with the result that
imports were discouraged and exports encouraged, and the
exchanges thereby turned in our favor. Unless this twofold check is kept in working order the whole currency
system will be imperiled. To maintain the connection between a gold drain and a rise in the rate of discount is
essential."
Influence of war - Received 2,000,000,000 gold
.:stock
3,800,000,000
Reserve Banks
3,100,000,000
Excess over minimum
requirements - - - - 1,340,000,000
us oririnally constituted lending power w900,000,000
Mass of cold, excess reserves,
further lending power
4,400,000,000

6

If normal exchan-e rates within gold shippin point
Expansion
Price advances
Gold exports
With exchanges now premium
No large gold exports
Orgy of speculation
Price advances
Reduced purchasing power of dollar progressively
Neutral countries
Sterling
Franc
Etc., etc.
This bring to the point Gold exports visible and convincing evidence
Other conditions might justify rate increase
Large gold exports es in 90's convincing
United States gold reserves imperiled
No argument needod
Small losses now possible
Canadian shipments
Currents of trade and balances of payments could draw some gold
Discounts Sterling 10%
Vanishing point, Germany, Austria, Russia
Large exports unlikely
Only large possibility change of monetary laws, balanced budgets
Absence of gold movements and great rate differences how regulate?
Questions of policy of human judgment

Various policies suggested
All suggest two plans which are fundamental 1.
Discretion
Rates
2.
Do not conflict - complementary
Toth have advantages and limitations
My opinion rate regulation most effective under present conditions with
great mass if rates wisely established, especially in large cities, where
interest rates lowest, most stable and narrowest range.
More remote sections; personal judgment and discretion
Difficulties of discretion Ex post facto; transactions already occurred
1.
Scolding
If loan declined penalty applies
Loans called
Scolding causes irritation
2.

Geographical -- distances from bank

7

3.

who shall judge
Basis of discretion;
Loss of deposits justify
How about now loans

4.

If judgment possible, who shall decide limitations of prudence
Should members liquidate periodically, or
Should any borrowing be continuous
Section 4 provides that Federal Reserve Bank shall
"extend to each member bank such discounts,
advancements and accommodations as may be safely
and reasonably made with due regard for the
claims and demands of other member banks"
Difficult makin, nice decisions within district
Much greater in all 12 districts
Difficult exercising universal judgment
Possibly permanent credit to hi "h rate sections

5.

Regulation total amount credit
2tatheratical arrangement impossible
Requirements vary in seasons and sections

6.

Responsibility declining loans causing. members to recline customers
Responsibility rests upon member bank directors and officers
Consequences to System too serious

7.

Possibly net all difficultieF,.

Power exciten appetite fcr more power
Bureaucratic
Autocratic developments
Bankers and Public rebel
Rate Control Members rates 10:. and 12;10
57,, on deposits

Reserve Bank rate 4 1/2%
Temptation to member
Restraining rate would penalize city banks
Discretion seems only possible plan
See how rate operates Inverted pyramid
Rate control has variety of advantages
Democratic
Applies to all
Little expostulation or remonstrance
But will not influence mountain peaks
Will apply to great bulk
Without statistical support influence extends back
Drives borrowers home
Describe how it operates
Difference between effective and penalty rate
Each bank known cost of funds; return on funds
Rate on particular piece of paper discounted not controlling
No relation between two rates
Effective rate might be somewhat below penalty rate
Probably somewhere within range of average cost, including
overhead, and average of earning rate

8

Chief advantage Of rate control
Regulates total volume of credit, distinguished from total
individual borrowings
Individual bank line credit matter
Rate policy is national; designed to regulate total volume
and promote stability
.iany people believe more money, cheap money means prosperity
and happiness
Impossible to explain advances of rates
Absence natural movements gold unfortunate
Prompt return to gold standard and gold payment

Resume:

Power to create reserve balance and
Considerably regulate volume
Expansion ex post facto; transactions have already occurred
Cannot control application of proceeds
Credit unlikely to return if rates too low
High rate induces return
Under present System no surplus
Also no deficiency
Reserve barometer is reserve bank percentage
Impulse to change rates, general conditions
Gold exports not likely
Regulation of volume chief function
Effected by rate changes and due caution individual borrowings
Federal Reserve System social institution - not super-government
Creature of Congress
Public demanded it
Not created banker, farmer, manufacturer, merchant, Treasury
Serves all
Guiding influence not profit
Surplus earnings to Government
Some service direct
Others indirect
Intelligent study and enlightened criticism
Future depends on good behavior - winning and holding confidence

MISC. 3

I

FEDERAL RESERVE BANK

GOM 4-20

OF NEW YORK

OFFICE CORRESPONDENCE
To

!dr. Strong

FROM

192_

DATE

Statistics Department

SUBJECT:

The Federal Reserve Act was amended on June 21, 1917 and for purposes of calculatinr. the lendinr power of the Reserve Bnnks under the requirements of the Act prior to that time we have taken the fir.ures for June 15,
1917.

The followin
power then and now:

table answers the questions on conparative
June 15,
1917

I;ovember 22,
1922

21,080,000,000
1,050,000,000

'3,220,000,000
3,090,000,000

Reserve Required

550,000,000

1,580,000,000

Excess ±toserves

530,00C,000

1,640,000,000

Additional Lendinr. Power

1,400,000,000

4,400,000,000

Total Lendinr Power

2,800,000,000

3,600,000,000

Total Reserves
Gold reserves

la.

At what time in the early 90's (when the endless chain was workinr,) were the
Revenues of the Treasury deficient?

In the fourth quarter of the fiscal year of 1891 and in two quarters
of 1892.
b.

When wao the period of unfavors:,le trade 'Jalances?

Fiscal year 1388 - 028,000,000
1889 3,000,000
1893 - 19,000,000 (but for the last six months of this year
the unfavorable balance was 469,000,000.)
c.

.then were we exporting gold and how much?
:access of exports over imports fiscal years as follows:

1889
1890
1891
1892
1893
1894
1895
1896
d.

- 050,000,000
4,000,000
- 68,000,000
500,000
- 88,000,000
5,000,000
- 30,000,000
- 79,000,000

On what dates and for what amounts in the early 90's were the reserves
of the :`ow York Clearing House banks impaired?
1890

33rd week
34
35
36
37

42
43
45
46
49
e.

"

TM

1393

600,000
2,500,000
500,000
1,400,000
3,200,000
300,000
100,000
2,500,000
900,000
2,400,000

fI

tl

When did the actual crash cane that resulted in the issuing of Clearing
House Loan certificates?
November 11, 1890

f.

27th week : 5,100,000
28
4,300,000
it
29
1,300,000
30
4,300,000
31
4,000,000
32
16,500,000
33
11,600,000
34
6,800,000
35
1,500,000

June 1393

What was the total amount of certificates issued in the early 90's?
Total issue New York Clearing House banks in 1890 - ;;16,045,000
tt
It
n
"
1393 - 41,490,000
119

2

2a.

When did the Associated Clearin- House Banks' reserves become deficient in
1907 and for w1::-t amounts and on what dates?

1907 Oct. 26
Nov.

2
9

16
27
30

Dec.

7

14

21
23
1908 Jan. 4
b.

1,200,000
38,800,000
51,900,000
53,700,000
54,100,000 (maximum)
53,000,000
46,200,000
400100,000
31,300,000
20,200,000
surplus

Hot hirll did call money loan?
125%

c.

What was the premium on currency at the time of the 1907 panic?
_reached 4 per cent three times in November.

3a.

After the liquidation in the early 90's the Clearing House banks developed
enormous surpluses and, as I recall, money loaned belor one per cent.
When did this surplus reach its maximum and how much was it?

January-February 1894 Maximum el11,600,000, first week February
b.

The some occurred in 1907 or 1903:
was it?

when did the surplus arise and how much

Began January, 1908 and reached maximum, 01,000,000 last week of June.
c.

In the early 90's when this meat surplus reserve arose what was the total
required reserves of the associated banks, as distinguished from the reserve they actually had, and what percentage is that compared to the
required reserves of the New York Clearing House banks today?
Average required for year 1894 was t138,300,000
Avera "o reuired reel: ending November 18, 1922 was k1511,000,000
per cent 1894 to 1922 is 27.

4.

What percentage of the banking deposits of the country are represented by the
10,000 banks which are members of the deserve system?
About 55 per cent (June 30, 1921).

5.

Am I correci. in my belief that prior to the war our total gold stock was
31,800,0 0,000 and that today it is 3,800,000,000, so that our net increase
is about $2,000,000,000? (This should be taken from the Treasury statements
or the Assay Office reports.)
31,891,000,000 in 1914 (June 30) and 0,902,000,00C in 2iavemb...r 1922.

3

S.

Under the original terms of the Federal Reserve Act, how much could the
:;eserve 'Janke have loaned without gettin,:- below the minimum reserve,

i. e., after they had received payment of all the capital and reserve
deposits contemplated to be paid in as the Act originally stated?
(This should not be confUsed with tho condition after later amendments
to the Let)
(On Tune 10, 1917) about :;3,000,000,000.
7.

iliat additional lending power have we now by reason of our surplus reserve?
In other words, how much can we loan without getting below the legal minimum reserve? I refer to the whole Reserve 3ystem in both sets of f: runes,
and allowance must be made in some arbitrar-; way for the effect of the note
issues which would inevitably accompany such expansion.
Over ;34,390,000,000.

-2111

and other negotiable instruments aggregating t5(080,6151,,6Q0.1VP"and

effected payments by telegraph, over the 15,000 miles of telegraph wires
which the System nowoperates, aggregating $17,464,450$80.3111r-

Its trans-

of
actions for the Treasury as the Government's fiscal agent were/too great a

volume and variety to express briefly in figures.

These figures are recounted for the purpose of emphasizing the
character and extent of the contact of the Reserve System with the credit and
currency operations of the country and, consequently, the significance of the
functions which the Reserve Banks exercise.
As to the System's policies and the purposes which inspired them,

there is now an extensive literature in the shape of critical books, magazine
articles and public addresses.

It-pb;41tbe but repetition for me to go over

ground so fully discussed by so many competent students and critics.

There is, however, one function of the Reserve System the importance
of which cannot be over-emphasized and which I have determined to discuss
tonight because it is, in fact, the heart of the System upon which the
operation of every other part depends.

I refer to the entirely new element

which was superimposed upon our banking system in 1914 by the establishment

of the Reserve Banks, which were given the power to influence or to regulate or to control the volume of credit.

Every other function exercised

by the Reserve Banks sinks into insignificance along side of the far
reaching importance of this major function.

Without regard to the views which you may entertain as to the
various theories in regard to the purchasing power of money, or what may be

more popularly described as the quantity theory of money, there is hardly
anyone who is familiar with these matters who will not agree that no
influence upon prices is so great in the long run as is the influence of
considerable changes in the quantity of money, - by which I mean not only

-3-

metal coins and paper money, but bank deposits upon which checks may be
The Reserve Act did in fact, whether by conscious design of its
00-tautral
e important particular.
authors, or not, bring about vevolutioaart change in t

drawn.

A

Za.a

in tiara-calatiaabatmacla credit

"eq.\ ?Am) la Zeal

Alt

(We: frt..

(4111

:re'

prices.T The Act originally reduced the

A
reserve re-mirements of the national banks, and, subsequently in 1917, reduced ti
again.

The effect of this was to make reserve money more efficient in that it

was permitted to sustain a larger volume of loans and deposits then
A

previously had been permitted. - By conferring the so-called clearing house
functions Upon the Reserve Banks, it speeded up the whole system of payments;
checks are collected and paid more promptly;

the course of currency shipments

throughout the country has been greatly shortened and currency passes more
promptly to points of redemption;

and the country-wide clearing house, known

as the Gold Settlement Fund, operated on the basis of daily telegraph settlements, has 4

shortened the length of time rsquired to effect settlement

of the entire domestic exchanges of the country.

But the most important

changei:as I have stated, is that conferring the power upon the Reserve Banks

Aavu Ito

Actu-A ir-44-4411to

to actually permit or influence 1,009 changelin the volume of money

My

thesis, therefore, is addressed solely to this question of the regulation of
the volume of credit and to make clear what a change has taken place because
of the granting of this power.

4201

Let me refresh your memory as to how credit matters operated prior

)

to 1914:

Practically all of the commercial banks and trust companies of the

country were subject to various statutory limits as to the minimum amounts of
cash and redeposited reserve which they were required to carry.

Except

by legislative change in reserve requirements, there was no possibility of
increasing the supply of reserve money beyond what arose through gold pro-

duction or gold imports, neither could the supply of reserve money be contracted unless gold was exported.

So it may be generally stated thet the

r
-4-

total reserves of all the banks was incapable of contraction except by paying
it out to the public or exporting it;
redeposited by the public or unless
f fot ht 0141%4

or was produced from the mines.

and equally incapable of expansion unless
old flowed into the country from abroad

,21.611dAl

LC-Glaqk

)

This had serious consequences in its relation

to that mysterious phenomenon which is now being so carefully investigated and
which we call the business (or, as I would prefer to call it, the credit) cycle.
At one extreme of the cycle the reserves of the banks regularly became impaired.

With deficient bank reserves we were liable to see rates for "speculative"
money advance to 100% or even more at times, an

the charge for credit to

merchants and manufacturers became a severe burden upon production and distribution.

In such a situation almost any percussion cap would start an explosion.

In 1895-5 deficient revenues of the Government,..w an unfavorable trade.balance

which resulted in gold exports, iDcoming at a time when there was agitation for a
change in our monetary laws led to great uneasiness.

The reserves of the New

York Clearing House banks showed shortages from t

to t

Fear developed that the Treasury would not have sufficient gold to meet its
obligations and finally the crash came on ---------- (date) resulting in the

New York bags, and banks generals throughout the country, suspending currency
payments;

very largely suspending cash settlements between themselves for

checks sent for collection not only through the local Clearing House but
throughout the country.

At that time a total of t

Clearing

House loan certificates were issued.

Much the same thing happened in 1907, when, after a period of

deficient banking reserves running from t

to t

the extended condition of a number of New York City banks caused alarm and

general suspensions of like character to those of the early 90e throughout

the country.

premium;

Call money loaned as high as

__%;

currency went to

and the domestic exchanges again were frozen.

Then again at the other extreme of the cycle, after a period of

-5-

liq uidation, surplus reserves poured into the money centers.

After this same

liquidation in the early 90s the NewYork Clearing House banks at one time showed
And beer in mind that at that time the

surplus reserves of t

total required reserves of the New York Clearing House banks were but
of what they now are.

Money then loaned at less than 1%.

And the same

occurrence was witnessed After the liquidation of 1907 when the surplus reserves
of the New York City Clearing House banks rose to t
While under the conditions first described, every bank was seeking
to withdraw loans, under the conditions last described, the banks were forcing
money into the market.

Money would become litavalay unloanable and the

temptation to the speculator and his kind was exe44...efi--*eydaed---rst+i-mtanc.e.

I,

personally, recall making loans on the New York Stock Exchange at 3/4 of 1%.

These extreme credit conditions arose because there was no stretch.
When the period of surplus reserves arose funds poured into the speculative
markets.

When the period of deficient reserves arrived all the banks sought

to contract their loans to make good their reserves and we witnessed the extremes
of s peculation and of business embarrassment.

There was neither lief control of

the volume of credit, nor moderating influence as to rates of interest. A nd,
finally, there was no control over the movements of gold in and out of the
country.

I recall the Governor of the Bank of England tellin' me in 1916 that

one of the most menacing influences on their reserve position was the possibility of a gold movement to America or from America, as a result of our erratic

money market, which no influence that they could exert was capable of stemming;

of their regarding our so-called free gold market as one of the worst menaces
to the stability of their own credit position.

I have refreshed your memory as to the conditions which prevailed under
the old system in order to bring out in contrast the extent to which it
differe from present conditions.

As things are now, when a period of busi-

ness expansion arrives, whether it he an annual and seasonal one, or whether
it be due to a series of favorable crops at home and bad harvests abroad, in other fords whether it be the short cycle of seasons or the long cycle

of periods of years,-suc4xpansion, whatever its case. can now be easily

-8-

financed because of the power of the Federal Reserve S stem to furnish the
required reserve money as needed and thereby permit the member banks in turn
and in larger volume to increase their loans and discounts, and, correspondingly,
their deposits.

the Reserve System.

I fear there are many people who still hold to the notion

that some mysterious influence or process will operate when this enlarged volume
of credit is no longer needed so that it will he induced, without any com-

pulsion or persuasion, tkomplacently walk back to the Peserve Bank and eurreader itself for cancellation.

And possibly another fallacy still prevails

among those who believe that because of certain very exacting requirements
of tae Federal Reserve Act, and the regulations of the Reserve Board, as to the

type of loan Ach the Reserve Banks may make, or the character of the paper
which they may discount, that there is some control exercised by the Reserve
System as to the uses to which the credit so extended by the Peserve Banks shall
be applied by the borrowing member bank.

hest

7actical

experience in the

CAW'
operation of the Reserve System seems to have disclosedi
as to

( retired when it is
is

l of the use that

y be described as

tically the only

serve Bank is to

serve.

But now we come to one or two grave fallacies in regard to

I think you

ve one illustration.

imum reserve on

it is subject to an

iderably higher than

is reserve in some

f the country as the

its reserve position

jet; flT

tt Cf

-7-

-841/

therefore, be safely stated that as business expands for seasonal reason'or
for any other reason, member banks will borrow from the Reserve Banks to make
good deficient reserves caused by the expansion of their loans, provided the rate
atthe Reserve Bank is not so high ns to make that borrowing too costly.

But,

on the other hand, if borrowing at the Reserve Bank is profitable beyond a certain
point, there will be strong temptation to use surplus reserves when they arise
for the making of additional loans rather than for repaying the Reserve Bank.

I shall discuss the question of rate control later, but first lomt
to emphasize this important fact:p

Practically all borrowing by member banks

from the Reserve Banks is ex post facto.

The condition which gave rise to the

need for Borrowing had already come into existence before the application to
borrow from the Reserve Bank was made, and experience has shown that large borrowings in New York City have in the past usually been explained by the member bank
as caused by the borrowing operation of the Treasury, by seasonal demands, but
more frequently because of the withdrawal of deposits.

Now as to the limitations which the Federal Reserve Act seeks to impose
as to the character of paper which a Reserve Bank may discount.

When %member

bank's reserve balance is impaired, it borrows to make it good, and it is quite
impossible to determine to what particular purpose the money so borro*ed may have
been applied.

It is simply the net reserve deeiciency caused by a

great mass of transactions.

The borrowing member bank selects the paper which

it brings to the Reserve Bank for discount not with regard to the rate which it
bears, but with regard to various elements of convenience, that is the denomination
of the paper, its maturity, whether it is in form to be easily and inexpensively
delivered physically to the Reserve Bank or not, and it makes little difference to
the borrowing bank what transactions may have caused the impairment of its
reserve, because the paper which it discounts with the Reserve Bank may have no
relation whatever to the impairment that has arisen.

To specify more

exactly, because this is an important point, suppose a member hank's reserve
became impaired solely because on a given day it had made a number of loans on the

-9-

stock exchange;

it might then come to us with commercial paper which it

had discounted two months before and which had no relation whatever to the
transactions of the day;
impairment.

and with the proceeds of the discount make good the

If it was the design of the authors of the Federal Reserve Act to
'64tAwr;

r-OA

prevent these advancenrby Federal Reserve Banks from being loaned on the stock
exchange or to nonmember state banks or *fon any other type of ineligible
loan, there would be only one way to prevent the funds being so used, and that
is by preventing the member banks from making any ineligible loans whatsoever,
or deny it loans if it had.

And, in fact, during the peak of the period of

expansion I believe the &mount of paper which had been discounted with the
Federal Reserve Banks equalled only about 14% of the loans and discounts of the
much
The member banks undoubtedly had a very /larger amount of eligible
member banks.
paper than indicated by this small percentage, but, beyond that, a great mass
of ineligible loans, and surely it cannot be claimed that the provisions of the
Act, which specify so

is eligible,

possibly have exercised

any inn uence upon the application of the proceeds of these loans by the member
banks.

I have enlarged upon this point so as to bring out this fact:-

that

the expansion of the loan account of the Federal Reserve banks, which as you

know furnishes the foundation for a much greater expansion of loans and deposits

ofgommercial banks, can be brought about as the result of any expansion in the
banking position of the country, no matter what may be its cause.

The eligible

paper we discount is simply the vehicle through which the credit of the Reserve
System is conveyed to the members.

But the definition of eligibility does not

effect the slightest control over the use to which the proceeds are applied.

Going a step further, this means that the Reserve °anks will be subject
to demands upon them, expressed to be sure in the form of eligible papet but
et4liArk.

which may have had their origin in any sort of development, stock speculation,

411

real estate speculation, crop moving, building operations, foregin bond
issues, or anything else.

Such an influence can arise through the borrowinws

not only of the UnitedStates Government in the market, but., indirectly, through

the borrowings of all kinds which have the effect of impairing reserves.

Now going still one step further, let me emphasize the contrast between
the conditions which prevailed in the old system and those which have

no4arisen.

I have pointed out how, in the extremes of the trade cycle we have on the one
hand impaired reserves and very high interest rates and on the other hand surplus
reserves and very low interest rates.

That condition has now quite disappeared.

In actual operation, when the reserves of the member banks become impaired they
promptly borrow and they do not have to scramble around among their customers
or on the stock exchange to call loans so as to make good the impairment.

So,

on the other hand, when they have surplus reserves they are generally inclined
to reps; what they may have already borrowed from us rather than make new loans,

provided, of course, our rates are properly adjusted to market riles, and they
will continue to do so unless borrowing from the Feserve Dank becomes so
profitable as to be a temptation.

1

Now you will observe that under the old

system we experienced these periods of reserve deficiency and extremely hign
rates for money and reserve surpluses and extremely low rates for money, but
under the present system all that has changed.

Broadly speaking, there is no

surplus reserve in the hands of the vemier banks, aerr-lipia...fblia,g
r
ejlaWarn.

JeN.- V4.-

When business expansion or new loans cause impaired reserves the

member banks borrow from us;

when surplus reserves arise for one reason or

The consequence of this is
A.
have no such extraordinarly high or low interest rates,
another, they repay to us.

of course, that we

The funds flow in and

out of the Reserve Bank day by day as sort of a leveling off process, so to speak.

-12-

in all of those sections where the loaning rate is much higher than the Reserve

Reserve Act as originally passed by Congress, the Federal Reserve Baks,

when all of the reserves had been paid in, would have had a loaning power
With this enormous mass of gold now in our

of roughly t

hands, we have a lending power at present in excess of the billion and oneHad

quarter oP loans and investments now made of roughly t

there been no war there would have been no disturbance to the foreign exchanges.

With the foreign exchanges fluctuating within the gold shipping points any considerable expansion of credit in this country which caused prices to sharply
advance would very probably have been penalized by a gold export movement.

With

the exchanges as they now are, that is with the dollar at a premium practically
the world over,

gold cannot be exported, certainly not in large quantity except

after such a period of expansion and rising prices in this country as would

t W

e a veritable orgy of speculation;

such a debauch in credit, in fact,

as would reduce the purchasing power of the dollar progressively first possibly
to the level of the currencies of the neutral countries, then to sterling, then
to the franc, etc.

And this brings me to the point which is of such importance

to the management of the Reserve System.

Before the war, as is set out in the Cunliffe report, a large gold
export movement was the visible and convincing evidence, not only to the
management of the bank of issue, but to the country generally, that the bank
rate must be raised.

To be sure other conditions than 9 gold movement could

well justify increesing the rate of discount of the bank of issue, but

a large

gold export movement, such, for instnce, as we suffered in the early 90s, which
even impaired the gold reserves of the Government of the United States, would
relLire little argument or explanation to convince the country that the bnni,
of iveue mu

tike steps to protect Lhe gold reserve.

As we are now situated, it is true that we may from time to time
lose small amounts of gold to those countries where the currency %as not been

-14-

-15-

In a §eneraltay it is my dPinion, although others may differ

-17-

-18-

bricks will be laid at the foundation and the pyramid will be by E.0 mucL

enlarged;and the revereels equally true if the rate does not induce borrowing, -

the size of the pyramid may be kept unchanged) ay

gnu,
f

A rate control of the volume of credit has a variety of advantages.
One is that it is democratic.

It applies to all alike and it requires little,

if any, expostulation end remonstrance to make it effective.

It must be

admitted that en advance in the discount rates by the Reserve Banks will not
necessarily influence promptly the mountah peaks of high interest rates in Qae- .plalwvt.
liaam44 sections.
so.

But I rather doubt whether it is necessary that it should do

Although notiOkpable of statistical support, I think the statement may be

hazarded from past experience that a rate which is effective in checking borrowing
in the money centers, or even in reducing borrowing, will indirectly be an
influence in all sections of the country.

It certainly has the effect of what
It is customary for many

I might descrihe as "driving borrowers back home."

conceits which do a large business to borrow in the cheapest money markets, no
matter where their offices and business may be located.

If New York, for

instance, should advance discount rates and member banks in turn advanced tates
to their customers, a certain number of these out-o

town borrowers would go

irfdu,
to their loca 1 banks for their loans if the rates are satisfactory so as to
enable the borrower to pay off in New York.

This process I believe would be

found, could it be analyzed, to be many times repeated, so that the effect of
rate changes in the twelve Reserve cities is not confined alone to those cities
but extends throughout the country.

Another point frequently overlooked in regard to the effect of the rate
is due to lack of understanding of the way in which borrowing from the Reserve Bank
originates, - that is through impaired reserves.

itsmaxpexamsxandxonntkeichmaantxtmx

Every bank knows about what

its loanable funds cost it on the average
is

and about what it receives on all of the money which it/loaning.

It knows

about what its expenses and overhead amount to and the difference is its profit.
When a bank's reserve becomes impaired so that it must borrow, it does not

pick out a particular piece of paper which it has discounted at a higher

-19t/4

-20-

and it is for that reason, as well as for maq other

a. prompt return to the gold standard and fr

off

Permit me now to make a brief resume of t

Banks have been given the power to create reserve

That volume of credit expa

the volume of credit.

facto borrowing by member banks; the mass of their

having already occurred, there is no means by whic

the use Which is made of the funds wfich it loans t

from the Reserve Bahks is lees likely to return fo

legitimately required if discount rates are too lo

The present b

will operate to induce its return.
situation where there is no

t.

surlus-of'bankin

end where there is not likely to be adeficiency.
reserve percentage of the Reserve Banks.

The impu

fYr 4r1L PilitaWdfSystem to change rates mustAlargely arise from
expected that the impulse to advance rates will be
long time to come..

Therefore, the regulation of

the chief functionjof the Reserve System must be ef
ckAo- glotAO.Aryt.

and peredhel-dieeretten as to members' borrowings

has always impressed me as being essentially a soci

super-Government, it is simply the creature of Con
response to a public demand.

It was not created

the farmer, the manufacturer, no)the merchant, nor
States.

It was brought into being to serve them al

performs is direct, for others it is indirect, but oe

nor any less important.

It needs and asks that

intelligent study and enlightened criticism.

Its

good behaviour and upon its successinMiaaing_and_h
public.

\;7

-2-

-3-

A7RA1 6be

-4--

-5-

-6-

tet-e

-7-

-8-

Difficulties of discretion -

-9-

0

frIr °1144r
Describe how it operates
Difference between effective and penalty rate
Each bank knows cost of funds; return on funds
Rate on particular piece of paper discounted not controlling
No relation between two rates
Effective rate might be somewhat below penalty rate
Probably somewhere within range of average cost, including
overhead, and average of earning rate.
Chief advantage of rate control
Reguletes total volume of credit, distinguished from total
individual borrowings
Individual bank line credit matter
Rate policy ie national;
designed to regulate total volume
and promote sta_ility
Many people believe more money, cheap money means prosperity
and happiness
Impossible to explain advances of rates
Absence natural movements gold unfortunate
Prompt return to gold standard and gold papent
f

r;
(ill (dAlf") )

Resume:
Power to create reserve balance and
Considerably regulate volume

Expansion ex post facto; transactions have already occurred
Cannot control application of proceeds
Credit unlikely to return if rates too low
High rate induces return
'd-A-1()._
Under present system no surplus
Also no deficiency
Reserve barometer is deserve bank percentage
Impulse to changel-leneral conditions
Gold exports not likely
Regulation of volume chief function
Eff ted by rate changes and due caution individual borrowings
e eral Reserve System social institution - not super-government
reature of Congress
Public Demanded it
Not created banker, farmer, mandfacturer, merchant, Treasury
Serves all
Guiding influence not profit
Surplus earnings to Government
Some service direct
Others indirect
Intelligent study and enlightened criticism
Future depends on good behavior- winning and holding. confidence.

la.

At what time in the early 90s (when the endlesR chain was working) were
the Revenues of the Treasury deficient!
In the fourth quarter of the fiscal year of 1891 and in two quarters
of 1892.

b.

When was the period of unfavorable trade balances?
Fiscal year 1888 - $28,000,000
3,000,000
1889 19,000,000 (but for the last six months of this year
1893 the unfavorable balance was $59,000,000.)

c.

Then were we exporting gold and how much!
Excess of exports over imports fiscal yearn as follows:
1389 - $50,000,000
4,000,000
1890 68,000,000
1891 500,000
88,000,000
5,000,000
30,000,000
1896 -_ 79,000,000
1892
1893
1894
1895

d.

On what dates and for what amounts in the early 90s were the reserves
of the New York Clearing House banks impaired?
1390
33rd week
34
35

n

36

II

37
42
43
45
46

n

49
e.

-

n

It

II
II
n
11

1893
$

28
29
30
31
32

500,000
1,400,000
3,200,000
200,000
100,000
2,500,000
900,000
2,400,000

33

34
35

If
n
ft

n

It
of

10

$ 5,100,000
4,200,000
1,300,000.

4,300,000
4,000,000
16,500,000
11,800,000
6,800,000
1,500,000

When did the actual crash come that resulted in the issue of Clearing
House Loan certificates?
November 11, 1890

f.

27th week

600,000
2,500,000

June 1693

what was the total amount of certificates issued in the early 90s?

Total issue New York Clearing House banks in 1890 - $16,645,000
" 1393 - 41,490,000
ft

S
2a.

When did the Associated Clearing House Banks' reserves become deficient
in 1907 and for what amounts and on that dates?
1907

Oct. 26
Nov.
2
9

16
23

30

Dec.

7

14
21
28

1908
b.

Jan.

4

61,200,000
38,800,000
51,900,000
53,700,000
54,100,000 (maximum)
53,000,000
46,200,000
40,100,000
31,800,000
20,200,000
surplus

How high did, call money loan?
125%

c.

What was the premium on currency at the time of the 1907 panic?
Reached 4 per cent. three times in November.

3a.

After the liquidation in the early 90s the Clearing House banks
developed enormous surpluses and, as I recall, money loaned below
When did this surplus reach its maximum and how much
one per cent.
as it?
January-February 1894

b.

The same occurred in 1907 or 1908:
much was it?

Maximum $111,600,000, first week February.

when did the surplus arise and how

Begun January, 1908 and reached maximum, 671,000,000 last reek of June.
c.

In the early 90s when this great surplus reserve arose whet was the
total required reserves of the associated banks, as distinguished from
the reserve they actually had, and what percentage is that compared to
the required reserves of the New York Clearing House banks today?
Average required for year 1894 was 6138,300,000
Average required week ending November 18, 1922 was $511,000,000.
per cent. 1894 to 1922 is 27.

4.

What percentage of the banking deposits of the country are represented
by the 10,000 banks which are members of the Reserve system?
About 55 per cent. (June 30, 1921)

S

-2

).

Am I correct in my belief that prior to the war our total gold stock was
.U,800,0002000 and that today it is 13,8001000,000, so that our net
increase is about t2,000,000,000?

(This should be taken from the

Treasury statements or the Assay Office reports)
(June 30)

$ l,891,000,000 in 1914/and 3,902,0001000 in
NoveraJr 1922.

6.

Under the original terms of the Federal Reser \e Act, how much could the
Reserve Ranks have loaned without getting below the minimum reserve,
i.e. after they had received payment of all the capital and reserve
deposits contemplated to be paid in as the Act originally stated?
(This should not be confused with the corditicn after later amendments
to the Act)

(On June 15, 1917) about 13,000,000,000.

7,

What additional lending power have we now by reuson of our surplus reserve!
In other mrds, how much can vie loan without getting below the

legal minima reserve?

I refer to the whole RPserve System in both

for
sets of figures, and allowance must be rude in some arbitrary way
such
the effect of the note issues which would inevitably accompany

expansion.)

Over 14,390,000,000.

MISC. 3.1

1101v1-42:1

1111111,1

FEDERAL RESE

OF NEW YORK

OFFICE CORRESPONDENCE

DATE

192

SUBJECT:
FROM

S tat-i-st-i-cs Depi.

The Federal Reserve Act was amended On June 21, 1917 and for purposes
of calculating the leading power of the Reserve Banks under the requirements of the Act prior to that time we have taken the figures fer June
15, 1917.

The following table answers the questions on comparative lending power
then and now:

June 15, 1917

Total

Reserves
Gold reserves

Yovember 22,1922

:1,080,000,000
1,050,000,000

.,3,220,000,000

Reserve Required

5E,000,000

1,580,000,000

Excess Reserves

E30,000,000

1,640,000,000

Additional Lending Power

1,40(4000,000

4,400,000,000

Total Lending Power

2,800,000,000

0,600,000,000

3,090,000,000

-e

amssaleass up LABOR_ OD ye
1.

It is plain that throe out the iiiddle ,Aele, that is to say the
period be teem t hr3 fall of the lianan :inpi re and the barbaric lavas i one on

the one hind and the Ind of the Tudors, the age of Louis XIV and f or some
oCrantriee the irezach -.evolution an the other, the ordinery man, free% free

tenant to serf, wan bound to the soil in some degree in all Auropoun lands.
His range of def:undo:toy mitt vary according as the power from which his

tenure xis derived was the Orown, the Clatroh or some intervening Lard of

the ksuer, tut the s aryl= duo was mac:VA:any the

:me, lab or of sort sort

whether agricultural or military, ecessuted as the ;care went on into maw
payments or the it equivale nt

'4. J. Ashley, eacnatmict Victory and Theory."

Vol. 1, pegs 41.

Alatost all the labour upon the demesne was furnishea by the villeyn

tenants, who contributed ploughs, oxen and men for the bailiff's disposal.
Long af te r commutati on of services had larp,'e ly tekert dace, the lords re toned
the right to assistanoe in all the more important prCOOOstilli, ploughing, re ap-

In 3, threshing, carting."
Jerfs worked three and four days

tee k from Ifioharelmas till aufmst

on their lord's land at field labor, and wore called in also at harvest tie.
41C:6 then, w.-6a no in

lord the Church and the a to to could eaat the

same labor from those holding from them.

Italy as well as

-..11131.ead.

This held good f or erenec, Germany,

The labor obligation was our:muted for payment in

money or in geode gradually, the fcrudal ten.,re had t vele largely done away with
in '..nglund by the Tudor period, in :Pran CIO by the eighteenth oentury, in ",ermany

by the time of the 14'renoh 1).evolution; but t

have survived down to modern

tine's, as in working on the rods to p.iy off taxes, and in jury auty.
See articles in ittlgraVe"s Dia ti =wry of

labour, prestation, pre dial aervioe.

tioel ..actietly on L:orge, forces

The feudal tenantry in -elw,131d was obliged to give forty ors a year
of mill tory se rvi oe

It was :..art of the work of the cantinentul tenants as

well, and the foot a alAiers, elso were the less important portion of the forces,
were formed from them,

Thu tradi ti ems of lreeoe, loam, and the lc Mani o

tribes were that every lean was (*lilac( to fi eat for his ocnntry or his people,
&WI if this ideal was not enforoeti in feudal times, it was because fighting

oases to be looked uJen as a !Jrivilege of the higher olassee: the lords, their
at fondants, and the eree teneuta could uee herses and Emour, wh.ile the villeyns
and uerfte fete-Int on foot, when required: in time it 60001161 more practical to

lords and to the cities to leave tlem at thtir work enfi to hire trained, ;Irefessional soldiers, reeroenaries.
In t2eIrlemagns's empire, the forms wore unpaid. and had to :rovide
their own °quirt/but and food.

/

All were called out in the levtSe fiweerale,

their obligation being to fight for their king, for their lord am for the
right to hold their land. bltder the mane to in ?maw, military services were
unpaid, after them a paid soldiery was employee. Under Louis XIV there wes
in fact no getter:Al service:, volunteers, meroenarius zind drafted men forming

the anew, but in theory the reserves, the arrire-ban, and, for the ci ties,
the milice 8 bourgeoises, inoltuled every :rasa.

Aimee theory tioal condi time

of obligations to serve, whether with labor or -4 th military service, were
aeoep ted throughout turoA; the revolts against them of peasants, of religious sects, and later of Meal unwilling to eerye in the army, w urw cu a8411

by came form or other of oparession or 'illuse its applying them or from their

being revived after many years of disuse.
For the French army see: " armee a travers lea ages," 'Datums tit 1 i ve re d

before the war =liege by a. Larissa, C. V. Langlois arid others.

In rIrance the armies of the lievolution and of Napoleon were raised
chiefly by consort %tion; the SLAB promos was applied to the German and Austrian
armies fonnee to 0 1313 ova Napoleon.

By the time the war broke out
males in

oomixtlsory for all

Germany, ?ranee and Italy, as it s till is; the assumption there is

every man has had military training.
tween 17 and 60 not
Britain

military service was

in the are was

that

In Germany during the war, every men be-

obliged to work in

war industries.

in Great

efforts were made for sane years before the war to subs ti tut e A ane

thing

like general military training for the militia. (Sir Ian Hamilton in "Compulsory
Se rvios" ).

,;ith the outbreak

of the war the conscript ion was

introdwed and.

In 1915 Lloyd George advooate.i consoript ing labor for war work too.
in

ar Goya rnmen t of

the

British >mini ors" says

it was voted down;

also.

in Canada

In

it

B.

reserve foroe, which was

South Africa it was

impossible; in Australia

was put through with

Encyclopedia Bri tannioa - Militia,

Oaasoription.

th

that conscription was not needeL

into a

in New Zealand beoause all men were organized
called upon for labor

A.

difficulty in 1917.

4
11

I

F 1 :LING

Governments in 4urope from the beginnings have exercised the right
of fixing prices for commodities and for labor.

The records of prices we

have back of the eighteenth century are almost utholly of prices fixed by the
authorities, from Diocletian down.
Code of Haumarabi.

The rates for wages are fixed in the

In :6ngland the Statute of Labourers, 23 1Zward III,

compelled man to work and determines the rate of compensLtion, and subsequent statutes maintainec the practice;

in iaizabeth's time the juk.tices of

the peace were =powered to sot the wages and retained the powur till near
the end of George IIi's reign.

Yalgrave Dictionary of Political Economy, Labour Statutes.

In tide of war every Luropean Goverment has undertaken to fix
prices.

In the late war Germany at once fixed prices and rationed out food.

In Great Britain the Government through the -linistry of

control prices from the start;
Living -ct of 1915;

undertook to

New /.euland regulated prices by the Cost of

Alustralia controlled prices in general and appointed the

Food ,Ajustment Board in 1916;

Canada appointed the Food Controller in 1917,

followed by the Food Board in 1918;

South Africa only enforced food control

after the war ended.
A:. B. Keith, der Government of the British Dominions.

For the United States the fixing of prices is uealt with by
iditchell, "History of Prices during the 41r" and P.

Garrett,

C.

"Govornaezit

Control of i'rices," Bulletins 1 and 3 of the -al. Industries Board's publications.

Lewis H. Haney, "Price Fixing in the United States during the .iar" and

Simon Litman, "Prices and Price Control in Great Britain and the United States."

- 5 -

Mx. Garrett says that the President was finally responsible for all
"Congress did not grant to the President or t o arnj other agency authori ty to

work out a programme of general price regulation during the war"....

The

President deemed it necessary himself to become in reality a minister of price
controls ....

The whole body of regulations relating to prices, whether spe-

cifically alloyed by legislative enactment or set up loosely under war powers,
took their final administrative authority from the President.
Prof. Mitchell says,

"The Government's efforts to control prices met

with wide spread support among business men and consumers.

Patriotism and the

pressure of public opinion supported a vigorous policy of positive reauction
of prices in many lines, and c f "pegging" prices in many others.

Conservation

of food, of fuel and of miscellaneous goods was effected in considerable measure
by voluntary effort, by systematic reorganlzation of trade practices, by Government rationing, mid by control over imports

The whole country achieved a

nearer approach to rational direction of its energies than had ever been attempted
before."
Mr. Litman gives a very brief history of price control in the past, with h

a fuller account of what was done in the French Revolution, to back up his views
from time immemorial

that price control was never successful.

He shows

Governments have tried to handle prices.

he goes fully with equally severe

criticism, into all that was done in Great Britain, and the United States to
control prices in the late war.
Mr. Haney says:

"The price fixing agencies were so numerous, and the

arrangements made often so informal( that an exhaustive treatment of the subject

would be well nigh impossible.
"Prices were more or less formally fixed by various departments or
branches of the United States Government for at least 110 important products,

each of Which required a separate

price-fixing operation."

Is enumerates the hgenciee:

°engross, the 2resident, war

Industries

Board (trice fixing oommittee), U. S. Food Administration, U. S. Fuel Administration, war Trade Board, Federal Trade Commission, U. 3. Shipping Board (Dnergenoy
!lest Corporation), International Nitrate fareoutive Ccmuittee, U. 3. Shipping

Board, rood .Purohase Board, Army and nvy departments, Appraisal Boards of

the

Army and the Navy, U. 3. Railroad A,Istinistraticm.

"?rice fixing, in war time, is a necessary evil.... The evils may be
reduced to suoh a Miniatill that, in war time, the advantages o-itveigh the disadvantages.

On the hole, it is our opinion, that such was the case in the

United States, but that the balance in favor of the 'rice fixing was, cn aocotait

of the way in

which it wan done, much slighter than it should have been."

A feeling of loyalty

much

9

t o the nation, or s owe subs ti tute therefor, made puss ible

that would be difficult or impossible in time of peace."

Bendelari
taqstioal Department
December 7, 1922.

glad

I am glad to be the guest of your association

guest

accept

and to be able to accept your invitation to address

realize

this meeting.

precious

opportunity
restricted
second-hand
intimately

familiarly

average farmer
perplexing

But you realize that a New York banker

probably knows precious little about farming.

His

opi,ortunity to learn of farming conditions is much

restricted, and most of the information which comes to
him in regard to the farmer's problems is second-hand.
So you will not expect me to discuss intimately and
familiarly the difficult problems of farm economy.
On the other hand, I suppose the average farmer lilcewise

knows quite as little about the many perplexing problems
of the New York banker, which largely have to do with

trade

industry

the financing of the vast trade and industry of our
country;

foreign

and in these difficult days the even more

perplexing task of financing the country's foreign trade.

New York does, however, produce a breed of
breed

farmer with which you are little familiar.
them are to be found in and about Wall Street.

Many of
We call

Wall Street

The difference between a farmer

them agriculturists.
agriculturist

and an agriculturist
works hard
country
ood time

is this:

-

A farmer works hard

on his farm all the year in order to make enough money
to enable him to go to the city and have a good time;
an agriculturist

works hard in the city all the year

works hard
city

in order to ;Jake enough money to run a farm where he can

go and have a good time.

-2-

Having had no experience with either kind of

no experience
observations

farming, I must content m;,self with a few observations

which have some bearing, I believe, upon the problems
with which you are nova very much perplexed and by which

perplexed

man

distressed

farmers are very much distressed.

.40i4107\

A few years ago when poor health n
abandoning work for a period, I made e trip through the
Far East.

Japan etc

During some months of travel in Japan, China,

Talaya, Burma, India, end the Dutch Indies, a large pert
farm districts

of my time was spent in farming districts.

One thing

that struck me most, I think, was the great similarity

similarity

in much that re sew.

Consider Java, which is probably

Consider Java

the richest of all of the Eastern farming countries, both
richest

in fertility of soil and in the natural advantages of an
climate

eouable climate with Abundant rainfall.

rainfall

hundreds of miles one sees the Javanese farmer, his wife

hundreds

There for

miles
and his children clorking in the paddy fields ahere rice

paddy

irrigation
patches

is grown by irrigation.

Vhat one describes as a field

is really a series of patches of land, frequently but a
fraction of the size of this room, often running up the

volcano
banked
basin cf mud

slope of a volcano, eAch patch carefully banked by hand to
retain the water which is supplied by irrigation;
is little more than a basin of mud.

-

it

When one sees a

plough, it is being drawn cith leisurely dignity by a
water buffalo

bare-foot

huge water buffalo.

The work in fact is done almost

entirely by bare- footod Javanese, both men and women, who

-3-

ankles in mud

work over their ankles in said and water dith simple

hand tools

hand implements.

crui,

rice

transplanted
operation
bent hack
poking
toil

hardiest

crop is rice, whic-1 starts its growth in a. seed bed and

is transplanted from there - every plant - by hand into

sheaves

That operation alone, where for hours on end

the paddy.

the farmer and his wife and children stand with bent back

in a pool of mud, poking these little sprouts into the

ground, is a species of toil that would try the soul of
the hardiest American farmer.
When the harveGt comes, these people go into the

harvest
knives

As you know, their principal cereal

fields with small knives and cut simply the tots of the
stalks by hand, bind them up in little sheaves and carry,

them home on their heads.
1 - 2 garments
loin cloth
sarong

houses

Their clothing consists of

one or two light cotton garments.

The man frequently

works dressed only in a loin cloth, and the woman dressed
in a short skirt, or sarong, and loose jacket.

The homes

where they raise and support large families of children,
consist )f one or at the most two room huts.

The walls

mats

are built of loosely woven mats made of strips of bamboo

thatched

or palm fibre, and the roofs are thatched eith palm leaves
or rice strait.

ClOOTS

no furniture

The doors and windows are simply openings

without glass or shutters.

There is no furniture,

frequently no stove, and no cooking utensils to speak of.
The family equipment usually consists of but little more
pot

cooking

than an earthenware or copper pot in which the food is
boiled.

The cooking is frequently done out in the road

-4-

road

meal

in froat of the house, where the family gathers around

the fire, and the mw11, consisting of rice mixed with
some vegetables and possibly some chicken and eggs, is

pilaf

prepared in a sort of stew or pilaf.

Not infrequently

I have seen the family meal served by the simple method
banana leaf

each member pulling a broad leaf from a banana palm,
scooping out his share of the meal from the pot and eating
it with his fingers, sitting on the ground.

planting

During the

planting and harves!-, season mhen the village is working

harvest

in the fields, the meal is quite possibly furnished from

travelling

one or more travelling restaurants, and is cooked alongside

restaurant

of the road, where one sees a good part of the farming

community gathered in groups, eating this simple meal such
se I have described,
100 years
jungle

Deendels

About a hundred years ago, this Island of Jay
was an almost impenetrable jungle.

Under one of the

early Governors - Daendels - a rather brutal system of
enforcer! native labor brought about the clearing of the

roads

jungle and the building of a great system of roads.

At

that time I believe the Island had a native population in
4 million

the neighborhood of four millions.

To-day, the Island

has a population of 36 millions, and practically all are
engaged in agriculture, principally the raising of rice,
rice, tea

coffee, sugar
Not unlike India
320 million

sugar, tea and coffee.

Now the conditions are not unlike

this in other parts of the East.

India with its population

of 320 millions is engaged largely in just such agriculture.

-5-

Indian peasant

The life of the Indian peasant farmer so far as I could
observe was not unlike that of the Javanese peasant

standard living

farmer, with possibly a slightly higher standard of living.
I have not been in Russia, but from what I have read, one
conceives that conditions there ,,,re not unlike those in
India, Chinn n.nd Java.

East irrigated
painstaking toil

draw water

agricultar,1

Practically the whole of the

rat is irrigated.

With the most painstaking

toil the peasant farmer in India irrigates his little farm
with water drawn from a deep well in a bucket or the skin
of a buffalo, drawn by a windlass operated by a bullock.

25 3/4 million

Although 25 3/4 million acreas of land in the hill country
are irrigated by the Indian Government irrigation works,

vast plains

the vast plains of India are cultivated by small peasant
farmers, and the success of his crop depends largely upon

monsoon
primitive

give picture

the seasonal rainfall, called the monsoon, and upon this
primitive method of irrigation.

This I hope will give some picture of those less

less fortunate

fortunate farmers in other lands with whom the American

compete

farmer does and must °ornate,. When I say compete, I use

broadest term

the word in the broadest term because the work of the

area limited

farmer is principally to feed the world.

The area of

distribution of what he produces is limited by a great
frontiers

variety of factors.

tlis frontiers may expand and contract

according to relative costs of production and transportation,
surplus

but broadly speaking, any nation with a surplus of farm
production is in competition with every other nation with a

-6-

surplus of farm production.

while the surplus rice

Burma

of Burma assists in feeding the hundreds of millions in

Ind

India, the surplus wheat from India and Southern Russia

LE.

Mediterranean

competes in lediterranean ports Ath American wheat.
Later on I shall refer to the importance of these/

refer later
competition

competitive markets;

but now let us compare what I have

described eith our own situation.
puzzled

I have been deeply

puzzled to explain the meaning of some of the figures

figures

published by our Government in regard to our farming
industry.

According to the Year Book of the Department

Year 3ool,-

of Agriculture, I find that the value of all of our farm
crops, excluding animal products, in the last two years
before the war was as follov,s:
1913

-

$6,133 zillions

1914

-

$6,112. millions

If roughly the same values were produced in
1911 - 1912
25 billion

1911 and 1912, the total value of the crops of the four
years immediately preceding the war was about

25 billions.

From the same source, and again excluding animals, I find
that the value of all the crops of the country for the
1917 - 1920

four years

*55 billions

$55 billions;

1917 to 1920, inclusive, was in round figures

that is to say, in the four years subsequent

to our entering the war the total value of all the crops
30 billions

in the United States was

30 billions in excess of the

value of all of the crops in the four years immediately
What became

prior to the outbreak of the war..

great treasure?

that became of this

-7-

We can roughly assume that this enlarged value could
principally have been disposed of in three ways:
1..

For payment of debts.

2.

For increased cost of production and for improvements.

3.

In a better standard of living for the farmers.
Now as to payment of debts.

I find further

in the bulletins of the Department of Agriculture that the

total of bank loans to farmers as of December 30, 1920, was

bank loans

estimated at over 1'3,800 millions, and the total of
$3,800

mortgage $8,500
enormous enhancement

mortgage loans exceeded 8,500 millions, and that notwithstanding the enormous enhancement in the value of the crops
of the four preceding years, these figures represent the

largest amount

largest amount of credit ever employed by the American farmer,
and in nict the census shows that between 1910 and 1920,

doubled
- 1920

the debts of American farmers aere about doubled.
As to increased production cost.

Our investigations

would indicate that only a part of this could have been
absorbed in increased cost of labor, fertilizer, and other
operating supplies.

I shall not attempt to enlarge upon

what is not capable of more exact estimate, beyond saying
that the experience of each farmer can be relied upon to
indicate what his farm and his labor is capable of producing
at any given price level.
standard of living

cannot help

And finally as to the farmer's standard of living.
I cannot help but believe from these figures and from what
I have personally observed that for provident farmers it

provident farmei.

has generally and greatly improved throughout the years.

Without burdening you with a further statistical
Without
statistical
assume

discussion of this matter, which I confess puzzles me a
good deal, may it not be safe to assume that this great
value produced from the American farms is, in fact,

expressive
possibilities

expressive in large degree of the possibilities of improved
standards of living in this country.

Julius Barnes
20 years

We note - as Mr.

Julius H. Barnes has recently explained - that while in
the first 20 years of this century the population of the

United States has increased 40 per cent., the number of
40 per cent.
4 per cent.

persons engaged in agriculture has increased only 4 per cent.,

whereas the farm production during this period increased from
corn 35 per cent.
hogs 68 per cent.
smal] est per

35 per cent. in the case of corn, to as high as 68 per cent.
in the case of hogs.

In other words, in this country, where

we got possibly the smallest production per acre planted,

acre planted

and the largest production per capita of farm population,
largest per capita
farm population
we are in fact developing agriculture under conditions which
developing agric.
promote

do promote the highest standards of living that are possible
for farmers in any part of the world.

must be product
efficiency

And this standard of

living must be the product of a higher efficiency applied to
our abundant natural resources.
Some of these questions I think are often approached

questions
approached

without an appreciation of the fundamental facts as to what

prosperity, wealth
happiness

makes prosperity, wealth and happiness.

For instance,

consider only thFt such a thing as famine is unknown in this

famine

country to-day, nor has it been since our Republic was
founded.

Yet there was a. time when famine was not only not

not uncommon
normal

uncommon but was almost the normal condition in North America

-9-

200 - 300 years

every .winter.

Only two or three hundred years ago, our

ago

natural reacurces

country possessed natural resources vastly in excess of
what we now have, because since it has become settled we

drawn heavil,

have drawn heavily upon the stores of our fertile soil,
our coal, iron, oil, timber, an 14 ther things that we have

taken out of the ground;
few hundred
thousand Indiana
died

and yet but two or three centuries

ago, the few hundred thousand Indians living in this country
in the midst of this vast abundance, often suffered and
died from lack of food.

It is not, therefore, simply the

natural resources of a country that make wealth and economic
contentment and a high standard of wellbeing.

Nor can it be population alone in conjunction with
population alone

natural resources which makes wealth, for we have seen in
denvel; loiulated
exhaustirg
hack-breblin6

the densely populated regions of the East the farmer extracting by exhausting and back-breaking toil only a miserable
and precarious living from lands as rich in natural resources

mtural resources
as our own.

What makes wealth is the application of the energies
What makes tealth
and ingenuity of a people of higher intelligence to the
development

development and use of these natural resources, to their

exploitation

exploitation by methods devised by inventive genius and

inventive

through the conversion of the things produced into the means

increasing krod-

of again increasing production.

notion
rai&eb standard
no country

That alone is what raises

the standard of living, and no country is capable of attaining a high standard of living no matter what its population
or its natural resources unless its people are willing to

tork and save

work and to save.

-10-

Now I apprehend that it is precisely this vhich

apprehend

precisely

has provided for the American farmer the advantages of

advantages

of association with his

education, and the enjoyment
degree

Be assured
Javanese

fellowbeings to a degree unattainable in any other
agricultural country in the world.

Javanese farmer, like the Chinese or the Hindu, has no
automobile;

banana and cocoanut
couple garments
no shoes
auto, radio
Victrols, phone
movies,education

Be assured that the

his house garden usually consists of a few

banana and cocoanut palms;

his clothing a couple of simple

he wears no shoes;

linen garments;

no radio equipment, no movies;

he has no VictrolF,

his opportunities for

education are small.

But in this country, and I fear in like degree in
setback

the East, agriculture has had a temporary setback.

It

can scarcely be, it must not be allowed to be, permanent.
Scarcely
must not

These things that the American firmer enjoys, including

things enjoys

possibly more important than any Aher, the opportunity to
education
entitled
assured
so for

educate his children, are the things to which he is entitled,

and in the enjoyment of which he must be assured so far as
the laws of nature under which re live in this country are
capable of assuring them to him.
There ar

momentary
difficulties

momentary difficulties.

I would like

to speak of one of the greatest difficulties with which the
A,

speak

farmer has been confronted, by quoting a few very simple

qucting
figures:

In the Survey of Current Business issued by the

Department of Commerce for November, you will find on page
111, a tabulatioa of cereal exports which includes barley,

Flour and meal are converted

corn, oats, rye and wheat.

into equivalent bushels of the grains.

The monthly

average exports of these grains for the year 1913 was

From 1913 to 1921 the monthly

20 3/4 million bushels.

average varied from 14 millions in 1914 - the low figure to 46 millions in 1921 - the high figure - and I imagine
In the last throe years, the

the record high figure.
figure has been
1920

-

35 million bushels

1921

-

46 million bushels

and so far for the year 1922 - 43 million bushels..

The months of August and September of this year were 60 and
61 million bushels respectively, and those figures have
only twice been exceeded in the last three years, being

90 million bushels in August 1921 and 68 million bushels in
Now compare these monthly average figures

September 1921.

of quantities of exports of the five cereals named, with
the figures of values of exports of grain and grain products
for the same periods as reported by the Department of
Commerce.

I believe they closely relate to the quantities

I have iuoted.
1913

-

$17 millions

1920

-

90 millions

1921

-

62 millions

1922

-

4471f,0011?"/tttt

I

-12-

It is obvious that mhile exports have been

obvious

pretty well maintained in quantity, the varying return
quantity

upon these farm exports has been caused by the price.
1Tice

another figure

Now let me refer to another figure.

On page six of the

same publication, you will find that throughout the years
1916 to 1921, down in fact to February of 1921, the chart
of prices shots a very close correspondence in the index

numbers of the prices of "all commodities" and of "wholesale
food prices".

In February of 1922, for the first time,

however, a considerable divergence began to appear;

the

prices of "all commodities" advancing some 15 points in
the index number above ",Atolesale food prices".

In other

words, prices of articles the farmer had to buy advanced
out of proportion to prices of articles he had to sell.

But this is a situation which never has, and I believe WI
inherently cannot long continue.

Ve now have in this

country a tremendous urban and industrial population twice that now of the farm population.

It seems to me

inconceivable that this vast army of urban and factory
workers can be prosperous and the farmer not share this
prosperity in the fullest degree.
Now to sum up, it seems clear that:
FIRST -

We seem able to compete with farmers

in other countries where standards of living are far below
our own.
SECOND -

not declining.

The quantities of our food exports are

Last year, one of great depression, they

were, I believe, the highest on record.

-13-

THIRD -

The enormous increase in the crop

values of recent years has been unprecedented and could
scarcely long continue.

FOURTH -

That increase did not result in a

reduction of the total of the farm debt.
FIFTH -

That the farmer needs stable prices and

a proper relation of prices between what he consumes and
what he produces.
The farmer
two individuals
consumer

The farmer like every other member of our industrial
organization is, in an economic sense, two individuals.
a consumer he is interested in having prices low;

As

as a

producer

producer he is interested in having prices high.

planting

the planting season when the farmer is employing labor to

During

plough and plant his fields, when he is buying fertilizer,

repairing his fences and his buildings, then he is, in
current phrase, a deflationist;

that ia, he would like to

current phrase
deflationist
prices low

see prices low.

harvest

and moving to the elevator or the concentration point, he

inflationist
prices high

is an inflationist;

In the fall when his crop is harvested

he would like to see prices high.

Now obviously any system which attempted to insure that the
ystem

farmer or any other man in his capacity as a consumer should
get the advantage of low prices, while at the same time in
his capacity asaAIroducer getting the advantage of high prices,

futile
fantastic

would be futile and fantastic.

No such system is possible.

I think you will agree with me without the slightest
farmer needs

reservation that what the farmer needs as well as every

capitalist

other business man, whether he be a capitalist or a common

laborer

-14-

largest attainable
stable prices

violent fluctuation

laborer, is the largest attainable measure of stable prices.

When I say this I mean not only that, in general, prices
shall not be subject to violent fluctuation but that the

prices of different things so far as is possible in this
relation

reasonable
certainty
labor etc

imperfect world, run in their normal and natural relation
with each other.

If the farmer knows with reasonable

certainty what his cost for the season is to be in labor and
fertilizer, in supplies, in the gasoline for his tractor or
car, in the wire for his fences, in the cattle that he may

reasonably
violent fall

buy to fatten, and he can be reasonably assured also that
there will be no violent fall in the price of the crop that
he produces, ,whether it be cattle, hogs, corn, -iheat or

bring into play
two elements

incentive

cotton, he can then bring into play the two elements which
are essential to success in business, whether farming or
manufacturing or what not.

He can work with the incentive

of a reasonably certain reKardi-that is, margin of profit, intelligence

kind crop
due regard

and he can apply his intelligence to the determination of
what kind of a crop to grow with due regard to the advantages
or limitations of the soil, the climate, of accessibility to
market, and all of the other factors which should influence
his judgment on this important point.

It is a reasonable

assurance as to stability of prices in both of his capacities
as a consumer .nd producer which he requires in order to be
assured of just regard for his toil and for the ingenuity
with which he plans his work.

great problem
approached fairly
many elements

Now this great problem of prices must be approached

fairly if we are to discuss it with any profit, with a clear
unlerz tanding that there are many elements ehich enter into

the making of the prices of things.

Obviously, one of the

-15-

quantity

most important is the quantity of a crop in relation to

demand

the demand.

state of mind

mind of the public generally, whether it is in the mood

Hardly less in importance is the state of

to buy, so to speak, or whether in a mood to sell;

or

as the economists describe it, whether it is a seller's
market, or a buyer's market;
seller's

and changing cost of production,

buyer's

changing cost

transportation

what influences

changing rates of transportation cost, and H great number of
other factors must be taken into account in arriving at a
judgment as to what it is that influences prices to move
either upward or downward.
You will, however, agree with me that one of the
important elements, although far from being the only controlling
element, is credit, which can be expressed in various ways,
but let us call it the purchasing power of money.

By the

purchasing power of money I include of course the relation
between the quantity of money and the quantity of goods,
which influences the purchasing power.

By money I mean not

only metal coins and paper currency Alich pass from hand to

hand, but principally bank deposits upon which checks may
be drawn; in other words, bank credit.

If, therefore,

stable prices are desirable and if the quantity of credit

exerts any influence upon prices,as I believe it does, what
should he the objective 4f of a banking policy?

It seems

to me that it should be about as follows:
On the one hand, it should insure that there is
sufficient money and credit available to conduct the

business of the nation and to finance not only the seasonal
increases in demand but the annual or normal increase in
volume which throughout long periods is fairly constant.

-16-

On the other hand, there should be no such excessive or
artificial supplies of money and credit as

will simply

permit the marking up of prices when there is no increase
in business or production to warrant an increase in the
volume of money and credit.

On this point I think I should

state to you viithout reservation the views that. I personally

hold in regard to this important matter,and while I cannot
speak for any member of the Federal Reserve System except

the New York Reserve Bank, I may say that I have never heard
views expressed that differ greatly from those which I now
desire to express as my own.

I believe that it should be the policy of the

Federal Reserve System, by the employment of the various
means at its command, to maintain the volume of credit and
currency in this country at such a level so that, to the
extent that the volume has any influence upon prices, it
cRn not possibly become the means for either promoting
speculative advances in prices, or of a depression of
prices.

You must not understand from what I say that I

assume that the power of price fixing rests or should rest
with any one.

It does not.

combination of many influences.

Price changes result from a
So far as the influence

of credit is a factor in prices, I am frank to say that I

think our policy should be to avoid any development which
would promote or encourage simply price expansion or price
contraction.

We should aim to keep the credit volume

enual to the country's needs, and not in excess of its needs,

-17-

and then price readjustments, as between the various
classes of commodities, will take place with the least
possible disturbance to agriculture or to any other
It seems to me that some such policy will

industry.

permit of that readjustment of the values of the various

classes of commodities to which Ne must look in order that
the farmer may again enjoy that proper balance between the
cost of what he consumes and the price he realizes for what
he produces.

When that happy time comes, and I believe

confidently that it is coming, and when that margin of
profit presents the opportunity of doing so, I sincerely
need to
trust that the American farmer, as a class, hill feel less
anxiety as to borrowing money, and better able to direct his
efforts toward repaying what he owes.

3111,......11.111V
Now as to credit and the influences which directly
bear upon its administration by the Federal Reserve System.
One especial

reason at this time why the relationship of

credit and prices must be particularly considered or is

extremely important, is that one of the most important
influences that normally restrains undue fluctuation of
prices is not now in operation.

Before the war when the

credit machinery of the world was working normally, if the
price level of any country got out of line with world prices,

in other words, if for one or another reason prices advanced
to a point where that country became a good selling market,
the balance of trade turned against it;

its exchange

became depressed, and if the development went far enough,
that country .could have heavy payments to make abroad and

-18-

This loss of gold impaired bank

would likely lose gold.

The banks of the country then were naturally

reserves.

forced to raise their discount rates to protect their
remaining reserves.

The advance in the discount rate

usually brought about two developments;

it attracted funds

to that market and it induced people rho were carrying goods,
possibly for speculation, or people who had swollen inventories,
to sell them.

This reduced the prices of goods, enabled

the country to resume exports in competition with the rest
of the 4orld, checked excessive imports, arrested the outflow
of gold, and frequently caused gold to flow in.

Under the conditions of to-day, caused entirely by
We

the war, dollars are at a premium the world around.

could indulge ins riot of speculation in this country which
would put prices to very high levels, and with a few exceptions,

hardly any nation in the world would be in position to withdraw
large amounts of our gold.

And even then our gold holdings

are so great that we could still lost a large amount without
suffering serious impairment of reserves.

With this

situation as it is, and having regard to the interests of the
whole country, there is every possible inducement for the

Federal Reserve System to adopt and to execute, so far as it
may, a policy of stabilization in every direction;

to avoid

encouragement to unhealthy speculationton the one hand, and
to encourage the return of stable values, on the other hand.

There may indeed be little that we can do beyond what I have
described and that is to keep the credit volume at a reasonably
steady level, but sufficient to meet the seasonal needs of
business, and its normal annual growth.

-19-

Now more specifically, as to farm credit, I

specifically
farm credit

varioue projects
production marketing

would like to refer in a very general way to various
projects which are designed to assist the farming community
in the production and orderly marketing of the crops.

A

AIPII

variety proposals

great variety of measures have been proposed to th

and I have no doubt that they have been carefully
familiar
3 or 4 points

by your organization and that you are fully famili

There are three or four point

of their details.

connection with these proposals that I would like
candidly

with you quite candidly and I shall ask you to giv
special consideration,.

FIRST -

First

In my opinion, any new legislat

be designed to very greatly enlarge the membership
enlarged membership

banks of the country in the Federal Reserve System.
first essential

me say earnestly that I believe this to be a first
to the administration

conserving reservoir

of credit in the interest o

The Reserve System is the conserving reservoir of c

That credit must be applied throughout the various
water or fertilizer

of the country exactly as water or fertilizer, is
the soil.

No farmer can expect to make a crop if

pile in corner

is fertilized by piling a heap of fertilizer on on

even distribution

of his field.

It must have a fairly even distrib

and so too with water.

Now look at the condition

look et conditions

membership in the System which exist to-day.

In

area known as the Mississippi Basin, with the exce

the States of Iowa, Illinois, Indiana, Alabama, Ok

Texas, and extending east, south of the Mason-Dixo

the Atlantic Seaboard, there is no State where mor

-20-

25 per cent. of the banks are members of the Reserve
System.

Missouri and Mississippi have only 10 per cant.

and the percentages vary as follows:
North and South Dakota 22 per cent.
24
!
"
Minnesota
"
19 "
Wisconsin
17
Nebraska
"
Kansas
20
"
Missouri
10
Arkansas
24
"
If
Louisiana
19
Mississippi
"
10 "
Tennessee
20
"
"
Kentucky
"
24
"
North Carolina
16 "
"
South Carolina
"
22 "
Georgia
23
Florida
25
"
"
II

11

fl

II

,,

11

I,

II

The exceptions that I mention have the following
percentages:

Iowa
Illinois
Indiana
Alabama
Oklahoma
Texas

`'.7

per cent.

30
30

"

"

"

"

35

n

39
49

"

"

"

"

West of this section there is only one State which
has more than 50 per cent. of its banks members of the
System, and that is Idaho which has 60 per cent.

The

percentage of membership in these western States varies
from 50 per cent. in the case of California to 30 per cent.
in the case of Arizona.

Broadly speaking, therefore, in

about one-half of the agricultural sections of this country,
less than 25 per cent. of the banks are members of the Federal

Reserve System, and as to the other one-half, between 25 and
50 per cent. are members.

Now in the East, there is a very

-21-

different situation.

In my own State, New York, 72 per

cent. of the banks are members of the Reserve System, and
from this percentage, it runs to
51 per cent in Connecticut
62
"
"
"
Pennsylvania
"
New Jersey
70 "
42
"
Delaware
71 "
"
Massachusetts
61
"
"
Rhode Island
"
55
Maine
56 "
"
Vermont
"
69
"
New Hampshire
If distributing

If you were distributing liquid fertilizer on

liquid fertilizer

your farm, you would not consider that you were doing a

5p to 90 per cent.

very effective operation if from 50 to 90 per cent. of the
outlets of your sprinkler were clogged.

inflLence noticeable

One of the particular

influences of the Federal Reserve System is noticeable to us
now in this way.

Since last year the great bulk of the

loans of the Federal reserve banks have been repaid by their
City banks

members.

Most of the banks of the large cities which were

at one time heavy borrowers have almost entirely paid off
what they owe.

2303 country banks

But do you realize that not many months %go

there were still 2300 banks - nearly 25 per cent. of our
members - which were borrowing from the Reserve banks, and
these were almost entirely banks in the rural communities?
It has been so right in New York State.

N. Y. State
4th or 5th

realize that New York is the fourth or fifth largest agricultural
producer of all the States.

city repaid

You may not

The banks in our large cities

have repaid most of what they owed to the Federal reserve bank.

Until within the last month or two almost all that we were

-22-

lending was to the country bankers and largely to those
in the farming communities.

Might not the situation have been very different

situation different
twice as many

indeed had there been twice as many country banks in direct
contact with the Federal reserve banks and thereby enjoying
the security and protection they afford, not only for
themselves, but for the farmers and business men they serve?
One of the difficulties of our banking system,

difficulty

and one which I apprehend there will be great difficulty in
insufficient

remedying, is that there is not a sufficiently direct contact

contact

between the different elements in the banking system, so

elements

that the capital supplies in the richer communities can be
drawn upon for credit by the less developed communities where
credit is needed.

Of course, a system of branch banking

branch banking

might accomplish this, but a system of branch banking extending
over an area so wide as that of our country would be most
difficult to manage and would hardly be adaptable to our
conditions.

network

No one wishes to see a comparatively small

number of banks extending a network of branches throughout
the entire United States.

In default of that possibility

default

is it not reasonable to take some steps to bring a larger
larger membership

number of the country banks into the Federal Reserve System,
and in part to remedy the difficulty by that means?

But

one-third if the banks of the country are now members of the
two-thirds

System.

If we had two-thirds of the banks in the System,

I believe this distribution of credit would be sufficiently
effective

effective to meet all reasonable needs.

-23-

SECOND -

carefully consider

Now as to another point which I believe
It is frequently proposed

you should consider with care.

that the Federal Reserve Act be amended so that agricultural
longer maturity

paper of longer maturity than six months might be eligible
for rediscount at Reserve banks.

sure

accomplish

I would ask you to be sure

that this proposal if adopted would accomplish what is desired.

Personally, I cannot see that any very great injury, in
probably no injury

fact possibly no injury at all, would result to the Reserve
System from extending the maturity of eligible agricultural
paper say from six months to nine months;

but I believe

this proposal overlooks some important influences which
overlooks influences

control this type of credit.
personal experience

I must ask you to review such

personal experience as you may have had in borrowing money
so as to judge whether there is not considerable basis for
the following! statement:

There are two reasons why the president or cashier

two reasons

of a country bank does not like to lend money for nine months
or a year or longer to his farmer customer or for even two
or three years to a cattle breeder.
middleman

One reason is that he

is simply the agent or middleman for receiving deposits

from one class of customers and lending them to another
class.

check

30 days

Most of those deposits can be withdrawn by check

or upon thirty days notice.

No prudent banker likes to

commit himself beyond a moderate amount for loans that run
fi mos.

3 years

demand deposits

from six months to as long as three years, when his own
obligations are payable upon demand.

It is not prudent

-24-

other simple

The other influence is a simple one, known

banking.

to every banker.

hazards inherent

Farming is an industry in which certain

hazards are inherent which are possibly greater than applying
to many other industries.

The cashier of the banT' wishes

to have the farmer's note mature at sufficiently frequent

nature

intervals so that he may be in position to meet changing
do not believe

Now personally I do not believe that simply

conditions.

a provision which will give the member bank the right to
discount paper at the Reserve ban'
inducement,

which has a maturity of

more than six months will be a sufficient inducement to him
to 'ale the longer time bank loans that the farmers, possibly

justified expecting

with every justification, believe

that they are entitled to

receive.

Practically all commercial banks have the right

to make loans now for any length of time that good judgment

no legal

permits.

The reasons why they do not do so are those that

reasons Etated
I have stated.

But even if the country banker were induced

to mae longer time loans simply becsuse he gained greeter
protection not
induce.

protection in doing so in the event of heavy deposit

withdrawals because he is able to discount this paper at the

Reserve Ban, he would not want to discount long time paper
anyway.

borrow

Banks as a rule do not borrow money nor should

profit

they he induced to borrow money from the Reserve banl, simply

increHse business

for profit or to permanently enlarge their business.

The

inducement to borrow is to take care of the needs of their
customers' needs

customers, and when they do borrow they prefer to ')orrow for

the shortest possible time.

To discount a note running for

-25-

commit borrowing

nine months or more commits the borrowing bank to a long
time borrowing which it would prefer as a rule not to make.
And furthermore, you must bear in mind that this remedy,

only 1/3 anyway

even if it were effective, would apply to only one-third of
the banks of the country-

My suggestion is that a certain

proportion of these farm credits, especially those relating
to the business of the stock men, should be furnished by
investment funds

attracting investment funds.

You know that banks throughout

the United States generally, and in the East particularly,
banks buy securities
are large investors in securities.
short maturity

hold securities of reasonably short maturity, and it is wise
that they should.

always surplus

They often prefer to

They are purchased by those banks which

always have a surplus cf funds over whet their borrowing
customers require.

If by some method, the long time credit

requirements of the farmer, and especially of the cattle man,

can be met by some such method as this, it will in a measure
read this

avoid the difficulty which I have described as inherent in
many country banks.
Third

familiar

THIRD -

The third point is one with which ever

one of you is familiar.

To the extent that it is possible,

it seems to me that the credit needs of the farmers should
be r,et by the employment of existing agencies rather than

existing agencies
by creating; new agencies which for many years would be too

remote from the actual borrower to afford him the imediate
close contact

facilities and the close contact which present organizations
can afford if properly organized.

character

mortgage loans

One of the principal

elements in credit is the character of the borrower.

A

mortgage loan of course requires time for negotiation and

--26

the borrower is allowed a long time for repayment.
time

He can

make an application and send it a considerable distance to
some lending office, such as e. Farm Loan Bank;

it can then

be investigated and after a lapse of time, after the farm is
inspection

inspected and the title examined, the loan nay be made.

title

But then the farmer needs credit for his turnover, he can'ot
turnover credit

wait in order to go through this elaborate operation.

He

should be able to go to the local institution where his

promptly

character, farm
record

character and credit and the general record of his farm is
known.

In a word, the farmer, and especially the stock man,
intermediate
bank credit

needs a type of credit which in maturity is intermediate

between the loan which he now gets at his local bank and the
long time mortgage loan which he obtains possibly through

farm loan

For this type of credit I believe

the farm loan system.

his interests will be better served by appealing to the

I am wholly in sympathy with efforts

investment market

investment market.

sympathy

towards making this possible, but the point I wish tc make

commercial banks

is that existing agencies, - the commercial banks and the

farm loan system

farm loan system, - should be used so far as practicable
but facilities provided which will enable them to furnish
services which heretofore have not been possible for them

read

to afford.

FOURTH -

And final y there comes the question of

finally
cost

the cost of this credit.

I am perfectly aware that in

sane sections of the country where the usury laws permit,
familiar
and possibly in some cases there the laws do not permit,

the farmers pre charged 3, 10 and 1? per cent. and sometimes

-27-

My conception of a proper system of

even more.

conception

agricultural credit is that tvo elements are essential.

One is that a sufficient and reasonable amount of credit
sufficient and
reasonable

should be available when needed, and the other that the
cost of the credit should not be excessive.

.

But, on the

not excessive cost

ther hand, I do not think that it is always fair to charge
not fair
country banks

the country banks with too much responsibility for these
interest rates.

Primarily they arise from the lack of

lack credit
adequate credit and a. demand in excess of the supply.
demand

The

best opinion I can express upon this subject is that any
best opinion

means employed for developing agricultural credit facilities
read

will go a long way gradually to eliminate some of these very
high interest rates, if the three points I have mentioned are
adequately dealt with.

Wembership by more banks in the

Federal Reserve System will help more than anything else to
do it.

But let me point out what would be the effect of
point out

drawing upon investment funds for these loans with intermediate
effect

drawing investment
:11.,300,00o

maturity.

Every mi]'ion dollars of such loans negotiated

in the form of debentures or other obligationsrunning for a
year or more which fcund lodgment with Eastern investors or
banks which had surplus funds to invest,tould place a fund of
investment money at, the disposal of the community where the

relieve burden

original loan was made, and would relieve the local banks of
the burden of a Pillion dollars of loans which they are now

release

carrying and would release that amount of credit for other
employment.

West and South

It would draw to the West and South the type

-28-

of investment money which is needed for this intermediate
agricultural financing;
lower rates

reduction of local rrtes.
Now I have been discussing in a very general and

discussing
general
informal

reconcile

foolish things
transform

gradually this would effect a

informal way some of the things which it seems to me to be
more important in dealing with this matter of farm credit.

The question is how to reconcile all the various views, how
to prevent foolish things being done and at the same time to
transform the various discussions which you and others are
having into some concrete action-

Let me trke the liberty

of making a suggestion entirely upon my own responsibility.
Joint Comm.

You know that as a result of the Hearings of the Joint

Commission of Agricultural Inquiry last sumer, certain
legislation is proposedWar Finance

I have been told that the officers

of the: War Finance Corporr,tion are advocating certain aeasures.

I bereve that more than one Senator has introduced or is
Senators

proposing to introduce bills in the Senate to deal with this
subject.

The measures with which I am familiar bring

machinery

into play by one or another method, the machinery and resources
of the Federal Reserve System and Farm Loan system.
or two cases they

In one

rovide for Federal appropriations.

They

Fed. appropriation
have a direct bearing turon work and investigations of great
Dept.Agriculture.

importance being conducted by the Department of Agriculture.
It seems to me, if I were a member of your organization,

if a member

that I would be inclined to take steps, possibly even going
to President Earding with the proposal, to bring together the
President Harding

representatives of,these various interests, including
representatives

representatives of your own organization and ether similar

-29-

organizations, have all of these plans examined and
disease

competent men

discussed by competent men who are able to put forward each
his own point of view and that these men, all of whom in
my opinion are honestly seeking a wise solution of these

wisdom

matters, should in their wisdom be able to reconcile

differences of view and produce a plan which will meet the
need _)f the occasion and meet the views of people of sound

Once that plan is prepared then

judgment in the country.
sound judgment

let's all get behind it, ask Congress t. put it through and
once prepared

ask the President to approve it.

After this most informal talk you may wish to ask

after informal

me with every justification in what way the Federal Reserve

System proposes to assist in the solution of the problem
what do

of agricultural credit.

I can express only my own opinion

and that of my associates in New York.

I think there are

my own opinion
two principal things that we can do.

';+e can endeavor by

our policies, es I have already- described, to maintain as

stable credit conditions in this country as are possible,

(C;14102)
rea

by employing such means as we com and.

Further than that

we can, if means can be found to do so, enlarge the membership
of the Federal Reserve System, as it should be, to cover all

parts of this country with the facilities of the System and

credit which we furnish.

bring atwut a more even and equable distribution of the
We can serve all of the banks of

the country that are entitled to membership just as readily
and efficiently as we can serve one-third of the banks of
the country which are now members.

-30-

In conclusion, I must thank you for your

A
thanke

courtesy in inviting me to this meeting and for the
i:atience with which you have listened to this talk.

I can assure you that the members of this organization
will always be welcome at our office in New York.

We

welcome

will be glad to tel
toll shout

you all that we know about the

operation of the Federal Fesorve Bank and of the System,

and we will esteem it a privilege to make any contribution
privilege

that will promote a sound solution of the problems with
which you are now dealing and the successful treatment
contribution

of which are essential to the welfare of the most
responsible and important element in the economic life
of this country.

PRICES
4 .

c3

Opinions upon the important subject of prices and price movements too frequent-

ly arise from the personal experiences or selfish interests of the individual.
Laboring men, salaried clerks, teachers, all those in fact having small incomes,

think of prices in terms of the cost of the necessities of life, - food, clothes, lodging,
etc;

the manufacturer in terms of market prices for the materials he buys and the goods

he sells;

the speculator in terms of fluctuating prices of stocks, bonds and commodities

that are actively dealt in;
grows;

the farmer in terms of prices he may realize for what he

the banker, these days, in terms of index numbers of price changes which are

variously built up from price averages of from, say, twenty to possibly two hundred or
.three hundred important articles.

But after all this is a narrow view of "prices".

It only comprehends limited

and specially selected subjects of experience or inquiry and exposition.

The general

price level is a much more comprehensive and complicated affair, some elements of which
reach our pocket books by courses so devious as net to be directly felt, nor, in fact,
to influence our views very much.

There are, of course, rents and interest, the prices of such services as
insurance, transportation, lighting and heating, education, medical and dental treatment,
lawyers fees, license fees and all sorts of brokerage charges;

then we have taxes,

and the cost of su,port of public institutions in great variety, - churches, hospitals,
libraries and the like;

even club dues, theatre and circus tickets.

All these march

up to the price bookkeeper and demand their respective places in the sum total of the
general price level.

The extent to which all these and many other things and services are within
the reach of people generally, the extent to which the incomes of the greater number
of all the people make the enjoyment of all these things possible, is in fact quite
largely the measure of what we cal] the standard of living, or, as I would prefer to express it, is one of the important measures of the moral/, intellectual and physical wellbeing of the people cf a country.

All

There are however two distinct points cf outstanding importance to keep in
mind in considering prices;

one is this general price level and its changes;

the other

is the variation in the relative prices of different things or different classes of things,
which may take place at the same time, including wages and salaries.

This discussion

has mostly to do with the general price level.

The movement of the general price level is a composition of all price changes
which in total elevates or lowers prices as a whole, but as prices nowadays are al] measured
by a common standard, - "money" - it has seemed to some convenient to speak of changes in
the general price level as a change in the purchasing power of money, and those folks, I
fear, at times cause confusion in the discussion.

Cn the other hand, there must be considered

those puzzling and annoying changes in the prices of, a few or even many things
ea-Lt

a k width, att.,e

tri

ich, while
tt

404.

not materially changing the general level of prices, do, however, cause hardships to many
A
people.

Only now, or quite recently, we have been hearing the bitter and quite natural
complaint of the wheat growers that their crop is being sold at so low a price as to cause
actual loss, and, at identically the same time, all

the executive and legal majesty of this

CAW,'
great Government of ours 1,k being addressed to learn ing why raw sugar, another farm produce,
WilLi

021.2 selling at so high a price, and hunting for a cul prit, if there 4/\ one, in order to
14
punish him.

Few indeed stop to consider that the human race is economically divid)d into
two parts, - producers and consumers - and that the division extends into the individual
himself.

The wheat farmer now complains as a producer that his wheat sells at a loss, and

as a consumer he growls that his sugar, and other things as well, cost, him too muc-1.

while this may be offset as to a whole nation by the profit and consequent satisfaction of
the sugar grower who gets a big price for his sugar and buys his flower cheap, of course
it does the individual wheat farmer no good whatever.
etie.t

It is our habit in this country to hunt for the guilty party when thingsAoccur
that harm or annoy us, punish him if we can, and, in any event, to pass a law at once to
prevent the injury occurring again.

For centuries the world has been puzzling over this

price affair and trying to "fix it" by laws and by economic systems and even by changes

-3-

of political systems; often with clash of arms and blood shed.

"Fixing prices" has

always failed in the end, just as fixing the blame usually fails, because such events are
so much beyond complete control, however they may seem to be quite easy enough to "fix."
In the first place, before we come to "fixing" prices, we must first decide
what prices are to be fixed;

next, in the interest of which of our individual capacities

and of wNat classes of our population are they to be "fixed" - consumer or producer in other words are prices to be put down or up; and last, how are we going to do it.

To

arrive at any policy we must first consider causes of price changes to see whether they are
by their very nature capable of being wholly or partly controlled.

We may find that they

may be somewhat influenced, but riot wholly controlled, and that what we really need and
want is a reasonably stable general price level.

Viewing price changes in the light of recent occurrences, few will disagree that
some of the most important and fundamental causes are the following 1.

2.

Inflated issues cf all forms of money and credit instruments

3.

Increased or diminished crops by reason of weather and of social
and political conditions w.14 the efficiency of transportation
k14"
systems

4.

Crop destroying parasites and insects

5.

Epidemic and pestilence

6.

Conflagrations, earthquakes, and like unavoidable calamities

7.

/

War and political disturbances

New gold and silver discoveries or mine exhaustion, and
consequent enlarged or reduced production.

Gijr

.6.

The state of mind of the public - whether in the mood to
buy or to sell, to go "long" of goods or "short" of goods;
to "spend" or to "save";
to "stock up" or "sell out"
to "strike" or to "work".
;

9.

10.

Government fiscal policy
And many others of less importance in effect upon general
price movements.

Now let us be honest with each other and ourselves and admit that of all the
causes listed, only the second and ninth are really capable of any prompt and real
control, and even those are too frequently subject to those varying moods or waves of
public olinion which so regularly find expression also as in number eight.

-4-

arose when the three

And can it be matter for surprise that price
diebto- P 4 do euVAR

7,4 l Aft,- 1

greatest of all causes for price changes a&aee-at.apeoe-klip the world's greatest and most

devastating war, - the greatest flood of credit instruments ever knownrmand the greatest
disturbances to crop production and distribution ever recorded.

So when the banker is charged with all responsibility for price changes, let
us also recall that weather and the crops, war and politics, the humor of the public
Lt4 etrilrTeitlake0e2

and other things also exert important and frequentlyeigt44*044ing impulses upon prices.

Laws cannot be passed to control the weather, orrboll wevil, or earthquakes, and, while
some day a league, or a world court, or disarmament, or higher intelligence and morality
generally may eliminate war, so far it has not been done.
It would exceed the limits of space in this article to consider price regulation beyond what is suggested in number two, which means credit control, and there is
little need for wasting space upon a discussion of the other influences listed, as none
of them, excepting number nine, is capable of much, if any, control.

Nor need space

be devoted to discussing price changes other than the "general price level" for to select
any particular class to benefit and

o injury by a selective price control would

be abhorrent to our American ideas of justice and equity, - at least some of us live to
think so.

Many people have recently stated that as prices are affected by the volume
of money and credit, just let us regulate that and then the job is done.

They turn to

the roderal heserveSystem to do it, and overlook that the banking system can do but a
part of the job and at times possibly only

8,

minor part.

It has seemed to the writer, although realizing that others differ from this
view, (and they are personal and quite unofficial anyway) that when Congress created
the neserve Banks it intended that they should influence, and to some limited extent
actually regulate, the volume of credit.
reasonably clear and explicit in the Act.

The powers to do so and the means provided are
But nowhere from the caption to the repeal

clause does one discover any purpose in the mind of Congress that a group of men, or
of banks, or both, were to be clothed with the power and responsibility of fixing prices, either of any specific thing or group of things, or even the general level of prices.

-5-

Such a power of attorney never has and I hope never will to granted to boards or to
banks in this country.

Human beings, even Americans, have riot yet been elevated,

intellectually or morally, to that God-like perfection of infallability of wisdom and
goodness, so as to stand the strain and perform the duties of such a position.
But there are possibilities of throwing scme light upon that part of the price
problem which is involved with the credit policy of a banking system, and the views here
expressed, which, as stated, are purely personal, may be worth passing thought, especially
as they distinctly disclaim any hope cr expectation or fear that the responsibility for
fixing pricss can or will be placed upon the heserve System.
If, as is now universally admitted, prices are influenced to advance or to
decline by increas,

or decreases in the total of "money" in circulation, - and as money

I include coins and paper money which pass from hand to hand and bank deposits which pass
by checks, - tben that part of our price problem involved with credit or money is
comprehended within the tcrms of the jederal heserve Act, which created the means of
regulating credit volume, within certain limitations.

That being so, as the writer

personally maintains, then the task of the system is to maintain a reasonably stable
volume of money and credit, with due allowances for seasonal fluctuations in demand,
for normal annual growth in the contry's development, business and population, and wit'n

such allowance as may be imposed by those great cycles of prosperity and depression which
we would all like to see "squared" but which never yet have been.

First let us see what has been done in that respect by the FederalReserve System.
The total volume of credit., supplied to the banks of the country and through them to the

public, is found by taking the total earning assets of all the Reserve Banks combined.
Since the conclusion of t,,4e liquidation which started in 1920, it will be found that the earn-

r. (twu

ing assets have varied from the low point of $1,024,679,000 on August 9, 1922, to a maximum
of $1,339,420,000 on January 3, 1923, and at the present time (April 18, 1923) amount to
$1,158,957,000.

The average for the whole period has been $1,165,782,000 and the highest

monthly average has been $1,288,464,000 in December and the lowest has been $1,040,860,000
in August, 1922.

This is a remarkable record of credit stability, so far as the bank of

reserve deposit and currency issue is concerned, and would leave little to be desired were

it not for two other important factors.

Those are gold imports, and the conversion of

demand into time deposits.

The former requires considerable space, but the latter can be die etched with the
bare assertion that the present inducement to convert demand into time deposits, arising
from a reserve of only 3% reciuired for time deposits, whereas demand deposits require 7%,

10% and 13% according to the location of the bank, has already caused and will continue t o
cause a certain amount of inflation of bank loans and deposits.

The amount cannot be

accurately stated.

Gold imports and our large gold reserves on the other hand are an imposing
problem, and one which must be faced.

From the end of 1920 to the present time, we have

imported $942,543,000 net of gold and our domestic production has been $111,500,000; and
out of this arts and manufacturers have consumed and devitalized perhaps half of this
latter.

The net addition to our gold stock regularly goes into the banking system by

one or another channel, and the amount of this addition would be theoretically capable
of producing an increase of bank deposits generally of around $10,000,000,000.'

In this

period the actual net increase of bank deposits has in fact been much less than half of
this &mount.

That is one aspect of the gold problem, and one in which the means of offsetting
and controlling expansion and price changes are not as effective as some people may
mistakenly think.

To a limited extent they can be offset by a reduction of Reserve

Bank earning assets, which has the effect of reducing the reserves of member banks,
exactly as gold imports increase them.
Then the gold problem has another side.

This gold either goes into the

reserves of the Reserve Banks or goes into circulation as gold certificates and by the
same amount disFiaces reserve notes.
Reserve Ranks are enlarged.

In both cases the Reserve percentages of the

Some may ask "what harm does that do?" and the reply is

that it need do no harm if a misguided public opinion does not forge the Reserve Banks
to permit these large reserves to be the foundation for credit expansion, which simply
is another way of saying for a larger volume of money, which in turn means more changes
in the general price level, so far as increased volume of money and credit influences
prices.

-7-

This is really the story in a nut shell, and possibly needs further elaboration
on one point only.

It is not quite so simple a point as one would like it to be when

trying to elucidate it.

Befcre the war, the gold banking reserves of the world were in what might be
termed a state of equipoise.

They had become distributed among banks throughout the world

as the result of natural and quite free exchanges of goods, services, credits and other
like transactions, and the ultimate settlement of the net differences in debits and credits
between countries by actual shipments of gold coin and bars.
When war came, embargoes were laid upon gold shipments;

trade became deranged

and all sorts of disorders arose in the exchanges, currency systems and Government loan
operations of the nations.

The significant thing for us was a huge increase in our exports,

so great as to enable us as a nation to pay what we owed abroad, lend large sums in
addition, and even then it was necessary for these foreign countries to ship us a billion
of gold besides.

The equipoise was destroyed.

We received and hold more gold than we

need; more than is good for us; and more than we can expect always to keep.

In fact,

over a third of the world's known supply of monetary gold is now in our hands.
Before the war one of the chief guides and influences in moving the banks of
issue to raise and lower their discount rates

as the state of their gold reserves, -

whether they were a large or small percentage of their note issues and deposits.

Here

are we with a mass of gold in the Aeserve Banks so vast that it amounts to 75% of all tee
deposits and outstanding notes of the twelve Reserve Banks.
The notes could be wholly
about
paid off in gold and still leave enough to serve as/ 42% reserve for the deposits of the

Reserve Banks; a reserve percentage even then larger than they had for both notes and
deposits at the peak of expansion in 1920.

But as to prices which is the subject me are
1

ZA-ext..4

discussing, the important thing to observe is that if the ,Leserve Banks expand,. their
loans to a point *hare the reserves stood at 43%, - about the legal minimum, - instead of

75% as at present, we would lend three and three-quarters billions in excess of what we
are now loaning, and this addition to banking reserves of all the banks of the country
would enable them in turn to expand loans and deposits by something like fifteen or
sixteen billions.

-8So the reserve percentage is a bad and dangerous guide to a lending policy.

But it pill then be asked, "What shall be the guide if not the reserve percentage" and
a chorus of answers will come back, - "Prices," or "An index number," and we again get
around to the point tvhere, for the moment, some people think that prices should be the

guide, which comes close indeed to thinking that the Reserve System can and should fix
prices.

Here is a way to distinguish.

Just as credit is one of the influences upon the

price level, so the price level should be one of the influences in guiding a credit policy.
There are other influences which affect prices, and so must there be other influences
which affect a credit policy.

Here are a few briefly suggested -

Is labor fully employed

Are stocks of goods increasing or decreasing
Is production up to the country's capacity
Are transportation facilities fully taxed
Is speculation creeping into the productive and
distributive processes
Are orders and repeat orders being booked much ahead
Are bills being promptly paid

Are people spending wastefully
Is credit expanding

Are market rates above or below Reserve Bank rates.

What this country and the world needs is stability, - social, political and
economic;

stable thoughts, habits and methods.

The contribution to be made by our
Its

banking system just now can be but a part, though a helpful one, toward stability.

best policy is to supply enough credit and not too much, - enough for ligitimate enterprise, but not enough to satisfy those who want simply cheap and limitless supplies of
credit regardless of the consequences they are too blind to perceive.
How much that supply should he will be vastly difficult to determine until
the free play of international markets and exchanges and credit and gold payment is
restored.

It is slowly but surely coming and meantime it will be well for us to avoid

those rushes to extremes, - such as price control itself is, - and, at least in our

-0banking policy, just io the bast we can to avoid excesses.

Economics

stupid su*ect

3sgehot - slithers

-

Speakers

"Just good Enough"

,Opportunities multiplied

Literature re policies- and reasons

Know we hold reserves,

discount,

issue currency, collect checks,
settle exchanges,

Fiscal Agents.

Few stop to think position in
economic machine

importHnt, function - Fegulate

volume money

Chief influence upon prices of Foods,

euteark

salaries, rents, etc.

Fx,3mple '-)IT equation -

qusntity ;700(IF /r Prices = Tctn1 money

All money, currency, bank credit.

Increase goods, same prices = More credit

Same quantity :fools & hither prices : More credit

But

Increase credit, no increce

=

Higher prices
Beer story

3

Economic well being
requires stability

Violent price changes
do injustice

See Europe - Germany

InflP.tion c=ruses speculation

extravagance - waste

Economic viaste possibly

principle product of inflation

Iron ore illustration

Long introduction to the point

1

iii

1

-7

Now conflitionr ,vholly different

gold pgyments suspended

i.k1f a:onetry 7old here'

comin

ill exchAft;es ric_ount 4itt ours

If we inflte prices r,dvfince

I.xchanEe c:iscount prevents lots of

Huje res(:rvo7.

r=msin uneistrubed

A.ny3y until i. rice ,idwince

untle,

of

ili

June 11, 1924.

(For the Twenty-fifth Anniversary Issue of the Japanese-American)

Your anniversary is an appropriate time forrecalling the remarkable
changes which have taken place during the past quarter century in the internal
affairs of Japan and in her relations to other countries.

This brief period

has seen the completion of the process, begun only half a century earlier, of
transforming Japan from a feudal state into a mad ern world power.

Perhaps no

other country has seen such far-reaching political and economic changes in so
short a time.

In the field of government, the formal abolition of the feudal system
in 1871 was followed by the adoption of a constitution in many ways resembling
those of Western Europe.

Along with this has come an extension of the fran-

chise and an advance toward responsible parliamentary government.

Progress in

intellectual and educational affairs has followed the introduction of a complete

system of public instruction on Occidental lines, with universal compulsory
nri ,ary education as a foundation, and culminating in the universities which

have been under great pressure to accommodate the numbers who apply for admission.
Japanese scholarship has revealed great power of assimilation and is
already making contributions of importance in many fields.
Changes in economic organization have been ecually import,nt.

In the

old order, the country was chiefly self-sufficient and there was little foreign
trade.

Its main industries were agriculture and fishing.

The opening of Japan

to world commerce through the visit of Commodore Perry introduced a new era.

The insular character of the country, the nearness to the Asiatic continent, and
the limited area of tillable land were all factors impelling it towards development into a great industrial and commercial nation, exchanging its manufactured
products abroad for raw materials.

2

The growth of manufacturing and trade has been reflected in the rise
of great industrial centers and the creation of a remarkable system of transportation, including railways, ports, and a mercantile marine.

Banking, cur-

re cy, insurance, and other parts of the financial structure have been greatly
strengthened.

1:lodernizing of the economic structure has made possible a rapid

increase in the country's wealth, and a general gain in the standard of living.
;hile the accomplishments of the people of Japan have been unicue in

history, there remains one field of endeavor in which much can still be accomplished to make modern Japan a well balanced organization for economic and
social well being.

The transformation of the nation from so largely aLricultural

to equally important industrial development should not neglect the need for corresponding social readjustments suitable to the needs and happiness of an industeial population gathered in large cities, as distinguished from an agricultural
population scattered throughout the islands.

The social life of city dwellers

depends just as greatly for happiness and health upon sound social institutions
as does industrial welfare upon the development of well organized industrial
plants.

The enlargement of opportunity for the people of Japan to enjoy healthy,

stimulating social intercourse through religious, athletic, musical, educational
and other organizations is a necessary accompaniment of the creation of city life.

Possibly here is where the giant strides of Japan towards world success have outdistanced the collateral development towards social and community advancement.

In the rise of Japan to her position as a world power, her relations
with the United States have been particularly close.

America's early part in

opanin_; Japan to world commerce, her traditionally friendly attitude which must

not be impaired, the interchange of tourists and students, and the uniform
courtesy with which American visitors are treated by the Japanese, have all made
for friendship and understanding.

For many years the United States have been

Ja-Dan's best customer, buying chiefly its silk and selling in return large cuan-

titles of raw cotton, iron and steel, and machinery.

An increasing proportion

of Japan's foreign financing has been supplied by the United States, and the two
countries have undoubtedly been drawn closer together by tne assistance given at
the time of the recent earthquake.

Notwithstanding some occasions making for misunderstanding in recent
years, responsible opinion in both nations desire: mutual understanding and adjustment of differences, and hopes heartily for a continuation toe the friendship
between the two countries.

June 11, 1924.

Japanese-American)
(For the Twenty-fiath Aanivelsary Issue of the

the remarkable
lour anniversary is an ap7ropriate time forrecellirne
century in the internal
changes which have taken place during the past quarter

affairs of Japan and in her relations to other countries.

Ills brief period

of
has seen the completion of the process, begun only half a century earlier,

transforming Japan from a feudal state into a maiern world pcerer.

Perhaps ne

other country has seen such far-reaching political and economic eheageo in so
short a time.

In the field of government, the formal abolition of the feudal system
in 1871 was followed by the adoption of a constitution in many ways resembling
those of Western Zurope.

Along with this has come an extension of the fran-

chise and an advance toward responsible parliamentary government.

Progress in

intellectual and educational affairs has followed the introduction of a complete

system of public instruction as Occidental lines, with universal compulsory
primary education as a foundation, and culminating in the universities which
have been under great pressure to accommodate the nnmhers who apply for admission.
Japanese scholarship has revealed great power of assimilation and is
already making contributions of importance in many fields.
Cbnnges in economic organization have been equally importint.

In the

old order, the country was chiefly self-sufficient and there was little foreign
trade.

Its main industries were agriculture and fishing.

The opening; of Japan

to world commerce through the visit of Commodore Perry introduced a new era.

The insular character of the country, the nearness to the Asiatic continent, and

the limited area of tillable land wee all factors impelling it towards development into a great industrial and commercial nation, exchanging its manufactured
products abroad for raw materials.

The growth of manufacturing and trade has been reflected in the rise
of great industrial centers and the creation of a reaarkable system of transportation, including railways, ports, and a mercantile marine.

Banking, cur-

re cy, insurance, and other parts of the financial structure have been greatly
strengthened.

Modernizing of the economic structure has made possible a rapid

increase in the country's wealth, and a general gain in the standard of living.

While the accomplisnmants of the people of Japan have been unique in
history, there remains one field of endeavor in which much can still be accom-

plished to mak; modem Japan a well balanced organization for economic and
social well being.

The transformation of tee nation from so lareely a ricultural

to equally important industrial development should not neglect the need for carrespoading social readjustments suitable to the needs and happiness of an indueteial population gathered ie large cities, as distinguished from an agricultural
population scattered throughout the island::.

The social life of cite dwellers

depends just as greatly for iw4pinoss and heelth upon sound social institutions
as does industrial welfare upon the development of well organized industrial
plants.

The enlareemont of opportunity for the people of Japan to eajoy healthy

stimulating social Intercourse through religious, athletic, musical, educational
and other organizations is a necessary accompaniment of the creation of city life.
Possibly here is where

the giant strides of Japan towards world success have out-

distanced the collateral development towards social and community advancement.
In the rise of Japan to her position as a eorld poeer, her relations
with the United States have been particularly close.

America's early part in

opening Japan to world commerce, her traditionally friendly attitude which must
not be iepaired, the interchange of tourists and students, and the uniform
courtesy with which American visitors are treated by the Japanese, have all made
for friendship and understanding.

For many years the United States have been

Japan's best customer, buying chiefly its silk and sellin, in return large quantities of raw cotton, iron and steel, and machinery.

An increasing proportion

- 3 -

of Japan's foreiga financing has been supplied by the United States,

and the two

countries have undoubt-2dly been dramn closer together by the assistance given at

the time of the recent earthquake.
Notwithstanding some occasions making for misunderstanding i i racent
years, responsible opinion in both nations desires mutusi under,-standing and ad-

justment of differencer. and hopes hen.rtily for a continuation of the friendship
between the two countries.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102