The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
DESIRABLE FEDERAL RESERVE POLICIES IN RELATION. T£)iX/p Q OPERATION OF THE DAWES PLAN * " .: ' HENRY M. ROBINSON AT „ . . ^5^ ■ : JOINT CONFERENCE OF BRANCH AND HEAD OFFICE' DIRECTORS FEDERAL RESERVE BANK OF SAN FRANCISCO • February 20, 1925. Each day brings a full recognition.and realization of the • fact that it behooves the people of the United States, whether in commercial or financial operations, to have a more definite, detailed, and at the same time comprehensive understanding of international conditions, political, commercial, and financial. Each day is bring ing the realization that the international relation, in the commercial and financial sense, between the civilized nations of the world is such that a definite interdependence exists, and that he who has not is bound in some way to get, and he who has, must be alive to the fact that one in desperate straits will, through some method, obtain his absolute needs at the expense of him who has. And it behooves him who has so to regulate his affairs that this action of the one who has not, in talcing his needs, shall not unduly disturb the position of him who has. Prior to the war, for a very extended period, and with ever increasing facility, international credit circulated generally, to the benefit of industry and commerce, and this flow of credit was based on the free and unhampered movement of gold. Of all the maladjustments resulting from the war, the one which has done the most to retard the reconstituting of normal world trade arose from sudden transfers of huge blocks of gold and credit, where such transfers were occasioned by war needs. '\ https://fraser.stlouisfed.org shifts Federal Reserve Bank of St. Louis 12107 The attempts to ameliorate the effects of such radical through legislation and other devices, have in turn added obstacles to the normal and natural circulation of gold and to the normal flow of international credit. It is easy, of course, to realize the fact that great obstacles are not necessary to divert the flow of gold, because its diversion is relatively easy. The obstacles created by war and by subsequent legislation diverted the flow of gold from its usual channels. The working of the law ’’bad money drives out good” , together with new tariff laws, has practically created a system of dams and channels which has diverted the movement of gold almost entirely in one direction, i,e», toward the United.States. In all of the discussions of the merits and demerits of gold as the basis of currency issues, and in turn the movement of international credit, there can be no question that the European people afe most desirous of a return to currency that has a gold basis. And of the people of Europe, the bankers are the most desirous of all that this should be There have been many rather well known financial brought about. economists who have attempted to argue that managed currency, with the issue held below the actual needs of the community, required no gold backing and the day of gold as the basis for currency had passed. These economists, as a rule, were nationals of countries where it was thought that-it ’’might be for years and might be forever” before that country would be in a position to make its currency convertible into gold, ' . * * ■ There have been several things that have developed as a re sult of conditions forced on the central banks of issue and on the people of the various European nations, and amongst other things it is probable that the central banks of Europe may not feel called upon to maintain actual gold reserve in as high a ratio as formerly, although this is not yet certain. It is clear, however, that the world has learned that the reserves may not all be in the form of a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis dead investment in gold. At any rate, there will be the disposition to carry part of such reserves in “interest bearing gold”> so long as there are securities bearing interest that are payable in gold issued in countries where such contract can be fulfilled. The past gives us outstanding examples of banks whose notes have passed current, even at a premium, where there was no redemption in gold, and such barks have operated for long periods without any gold backing for their, notes and bills, but based entirely on the world1s confidence in their management. We have, however, come to recognize that while gold backiig for currency in a reasonable ratio is most desirable, still unless the ratio is 100%, the question of management is of great importance. As the ratio of gold grows less, the import ance of the managing factor increases, although not necessarily in a direct proportion. We have seen England operating on a managed currency most successfully. We have seen Germany operating on a managed currency A dramatic example most unsuccessfully, and then again, successfully. has been given within the last two years in Germany where a sky rocketing, almost astronomical, currency inflation left Germany with a currency so deflated that it was in fact no currency. Their management, or rather mismanagement, destroyed Germany1s currency and ruined that stratum of her people that constituted the savors, i.e., investors. Almost overnight, without any attempt to obscure the facts, there was created in Germany a currency without any gold backing, based on a percentage mortgage on all property in Germany. While it was hoped that it was only a temporary measure, yet for nearly a. year Germany was able to maintain this new currency, the rentenmark, substantially at its full gold value, within the boundaries of Germany* This was accomplished largely because the sellers were the agricultural producers. They had faith in Mr» Helfrich, the economist, who had been a partisan of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis the agriculturists and who had planned and obtained the legislation for this currency, and he amongst other things, was wise enough to restrict the issue to an amount less than normal demands of business would, require. As it was the only medium of exchange, and the sellers were generally willing to accept it, it carried through a year. But credit for this result should be given, in a degree, to the wisdom and skill with which the German financial opera ■ tions were carried on. There were two committees appointed by the Reparations Commission. Committee No. 1, the so-called Dawes Committee, as you know, consisted of two delegates from each of five countries, and the Reference appointing the Committee charged it with the duty of stabilizing the German currency, equalizing the German budget, and devising some plan for the payment of reparations. The other Committee, the McKenna Committee, was charged with the duty of determining, as nearly as possible, the value of German external credits and external investments and a method of repatriating these outside holdings. Committees. I had the good fortune to work on both The McKenna Committee found that the' combined credits and investments outside of Germany had approximate value of 6 billion gold marks; that but a small part of this was in the form of liquid credit balances; and that no method for a return for any expatriated capital would be successful other than the creation of a situation in the home country which would make a return movement of expatriated capital a natural one. Tire conditions existing in Germany demonstrated, as had conditions existing in Austria, that no wholesome commercial operation could be carried on indefinitely with an unstable currency, although there might at times appear to be advantages. It was also demonstrated that no country could be certain of equilibrium in Governmental budgets with an unstable currency. The world had. come to recognize this and it was for this reason that the Reference setting up the Committee provided https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis for the stabilization of currency first and then the equalizing of the . ' . budget, I venture to take the time to go into some detail as to what was done to stabilize German currency. There was outstanding the original Reichsmark issue, in such a volume that there was no way of figuring it; but it had no real value, though by legislation they had fixed a value of 1 gold mark for 1 trillion of the Reichsmarks, ■ In addition there was outstanding about 1 billion, 500 million Rentenmarks. 1 After many discussions with Mr® Montagu Norman, the Governor of the Bank of England, Mr. McKenna, Chairman of the Midland Bank, and Sir Robert Kindersley, the latter a member of Committee No* 1, with whom I worked on the. bank problems, we reached the conclusion that the German Govern ment must obtain an external loan, the proceeds of which would be payable in gold* This loan was for two purposes, first and primarily, to furnish a gold backing for the new currency which it was proposed should be issued by a new bank, and second, to put the German Government in funds to pay the first yearfs annuity, In effect it constituted a moratorium as against collections of taxes for reparation payment, for the period of one year, or at least for eight»t enths of what Germany was required to pay the first year* The amount of the loan was fixed at net, 800 million gold marks* 440 million gold marks were taken in the United States, and of the remainder England took the equivalent of 240 million gold marks, and the rest was distributed among the other continental countries* In this transaction lies a definite demonstration of the strong feeling that exists among bankers of all classes in Europe, that the only satisfactory currency is one that has a reasonable amount of gold backing, because this loan was taken either by the central banks of issue of the European nations, or through them and on their advice* https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The proceeds were then deposited in the Reichsbank and the resulting credit? to the extent of 800 million marks / ran to the German Government for the account of the Agent General of Reparations, but in the new Reichsmark currency, provided payments on the annuity totalled 1 billion marks the first year. Against this credit, the Agent General makes drafts payable to German producers for products they have delivered under the deliveries in kind provisions of the Peace Treaty. To illustrate: France, we will say, requires from Germany coal of the value of 200 million marks during the coming year, and this is paid for by the Agent General from hi.s credit in the Reichsbank created as I have stated. ■ In connection with the discussions with relation to setting up the new Reichsbank (or rather what finally occurred, was the recondition ing and reconstituting under a new law of the old Reichsbank) the contro versy lay almost entirely between the English and the Americans as to whether the lav; should provide that the currency should be actually convertible in gold on presentation, the American position being that it should be on that basis and the English opposing. I have no doubt you know that this situation was compromised by law providing for con vertibility on a gold basis? unless all of the members qf the organiza tion committee, i.e.; Mr. Schact and Sir Robert Kindersley and all of the foreign members of the Board of the new German bank? with the excep tion of one, should agree that, for the present, it should not be legally forced to go on a convertible basis. basis. But, in practice, it is on a gold Holland has also reached the point where its currency is con vertible at par. Sweden and Switzerland and England too, are rapidly approaching a point where it looks not only probable, but practically certain, that they will go on a gold basis. lem is as great as that of any other nation. Our interest in this prob For every reason the stabilization of gold makes for a greater fluidity in commercial movements https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis and transactions in the flow of international credit, which is so necessary in a business world that has lost a considerable portion of its capital, or at any rate, has not created during the last nine years additional capital which under normal conditions would have been created, and especially because of our real excess of gold reserves, the value of which could be seriously affected if it were found that unbacked currency could be con tinued as a basis for commercial operations. ■ ■ The Federal Reserve System of this country has come to be looked upon, even in European countries, as the most desirable form of a bank of issue that we could have* Because of the control by the System of such immense reserves of gold, its power for good or evil in the world has come to be realized as paramount, and the future of the world1s commercial prosperity hinges very largely on the question of whether our Federal Reserve Banking System is operated with high intelligence and high pur** pose, and to that end there are ever continuing discussions as to what the Federal Reserve Baric might do to assist in a general stabilization so necessary throughout the world. Because the free movement of gold is a precedent necessity for international credit, there are evidences that our Federal Reserve System has been carrying on discussions with the Bank of England people, looking to some support of the Bank of England1s policy if it takes the direction of the stabilization of sterling on a gold basis. One of the methods about which there has been seme discussion is the purchase of foreign short-time bills in the London market, through the Bank of England, and with its guaranty. Some of the economists insist that this would not necessarily mean a movement of gold toward England, but all agree that it would tend to stop the flow of gold toward this country and give other countries a better opportunity to purchase gold. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ?. I am one of those who helieve that there would he some flow of gold resulting from the purchases of such short-time hills, if the quantity were considerable and if the quantity were maintained; that is to say, if the Federal Reserve Banks should purchase $500,000,000 of foreign bills in the next four or five months, I would venture the opinion that they should not make such purchases unless they intended to maintain a reserve of such bills in their pouch of about that size, except as the movements ran either too rapidly or too strongly, or both, against us, in which case, maturing bills could be allowed to run off. If it is true that the foreign banks of issue, through their ”earning gold” have ear-marked in this country gold in considerable amount, these bills would prove a cushion against any sudden movement in quantity because of such ear-marking. Then again, these bills would furnish ammunition for stabilizing conditions in the same sense that the purchase of bonds by the System last Spring was intended to furnish ammunition to stabilize conditions at the right time, and some of us are convinced that this is the correct method. ' Through the purchase of these foreign bills, endorsed by the Bank of England, we would go to school in international finance, a thing which we need. It would be reducing the dangers of loss to the minimum while we are getting our schooling, Its tendency would certainly be to stop the movement of gold toward us and it would probably move some gold toward England and the other countries needing it. Unfortunately New York banks engaged in open market transactions in foreign bills and investments, in considerable amounts because of high rates, are opposed to competition that would thus be set up by the Federal Reserve Banking System. It is my belief that in the long run these very banks would, be greatly benefitted if the Federal Reserve Baric were to follow this plan. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The amount could be better judged by the people of the Federal Reserve Bank of New York than by those of us who are not in close contact, but it should bear some . relation to the surplus income of this country from outside its boundaries after giving proper allowance to the invisible exports, the investment abroadj and the short-time loans made direct to other countries, which have been very considerable in the last few months. ■ To summarize, I would say that the Federal Reserve System, which has been of such very great benefit in the financial life of this country, and which I believe has been the only thing that has saved us during the war and shortly thereafter, is again in a position where, by the use of its power in a wise way, it may not only save the dis tressed nations abroad, but incidentally save us from the menace of the excess gold and generally bring about a condition that will mean improvement throughout the world. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ,9„ .