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FEDERAL RESERVE BANK O F DALLAS January 9, 1920. CURTAILMENT of loans for speculative purposes. to all banks and trust companies OF THE ELEVENTH FEDERAL RESERVE DISTRICT: The year before us w ill develop a new phase in our fin a n cia l situ ation . The Government has actually begun a gradual retirement of i t s war d eb t, but the problems ahead of us, although d ifferen t are no less important than those of the past; in many respects they w i l l , perhaps, require more s k illfu l handling. In view of the close rela tion of the Federal Reserve Bank of Dallas to the fin an cial support of the banks of it s D is t r ic t , we believe that the follow ing presentation of the more important fa cto rs underlying the situation w ill be of value in shaping fin a n cia l p o lic ie s fo r the future along sound economic lin e s . Mainly due to war conditions and the necessity for aiding our Government in carrying through i t s great program of war finance, there has arisen and s t i l l e x ists a tremendous and unpar a lleled expansion of cred its* However, it is not possible for us to overlook the fact that there are other contributing causes to the present condition of in fla tio n , which is nation wide. Incomes generally have advanced m aterially during the last two years, and the p rin cip les of economy inculcated during war time have been gen era lly relaxed, with the resu lt that there has been created an in creased demand for commodities by individuals who re stricte d th eir purchases during the war, but who are now buying freely in competi tion with export demand* This risin g scale of income has led to the purchase of luxuries rather than n e ce s s itie s and to the diver sion of labor and m aterial from essen tia ls to n on -essentials. It is becoming evident, a ls o , that the extravagance of in dividuals, and the indiscrim inate granting of cre d its by some banks for investments and speculative purposes have caused the re sources of the Federal Reserve Banks to be used, by an in direct pro cess, fo r purposes other than those intended or authorized by law. It was the intent of the framers of the Federal Re serve Act to provide, through the Federal Reserve Banks, a source from which funds might be obtained to meet unexpected or s t r ic t ly seasonable demands which the resources of th eir member banks might be temporarily unable to supply* It was not contemplated that the Reserve banks should be looked upon as inexhaustible reservoirs of loanable funds, or that th eir assistance be obtained, even in d ire ct ly , for the financing of speculative en terprises, or for investment. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) -2- Governor Harding of the Federal Reserve Board has sounded an unmistakable note of timely warning to the banks of the country when he urges them to r e s tr ic t th e ir loans to those borrowers requiring funds for a g ricu ltu ra l, commercial and in du strial a c t iv it ie s . The e ffe ct of th is warning has already been fe lt in the speculative stock markets of the East, as an Associated Press report of January 7th states that the New York Exchange witnessed on that day a very heavy sellin g movement, with abrupt declines in p rices of leading speculative stock s, notwithstanding extremely easy rates fo r c a ll money. The only way in which the existin g situation may be met s a t is fa c t o r ily , and further dangerous in fla tio n be avoided, is for our banks, one and a l l , to realize fu lly the gravity of our pre sent credit condition, and to make th e ir advances to th eir customers in accordance with sound and prudent banking judgment* On December 31st Governor Harding addressed a message to the Governors of the Federal Reserve Banks which was so timely and pertinent, and which so ably discussed the necessity for cred it conservation and the part to be taken by our banks in i t s accomplishment that we desire to quote it in papi as follow s: - The Federal reserve banks should, take advantage of the fact that the Government has actu ally begun a retirement of the war debt, to strengthen th eir position very m aterially, thus making progress toward a normal situation --— ■*. The Federal reserve banks should maintain a strong p osition in order to meet legitim ate demands* This can only be done by eliminating demands of questionable propriety. There is much discussion of America as the w orld's financi.nl center and many conditions favor our aspirations to that p o s itio n , out we shall not be able to attain or to retain it simply because of our re sources. We must strengthen our fin a n cia l p osition in order xo meet ^ probable c a lls and drains. As the only free gold market, we are losing large amounts of gold p rin cip a lly to orien tal countries such as Japan, China .and India. Thus far th is drain has been largely cutset by re ceip ts of German gold, but we must look to orderly liquidation to o f f set further demands upon us. So far .as orderly liquidation ^is accom panied by lower p r ic e s , commodity exports w ill be stimulaxea and gold exports to countries receiving our commodities w ill be cu rta iled . ^ 0L" stantly advancing p rices lead to uneconomical production and may stim ulate the expansion of our productive f a c i l i t i e s beyond our power consume or to export in normal tim es. But, at the. moment, underpro duction and over consumption are the real menace, resulting con tinuous rise of p rices and making it more d i f f i c u l t , tnrough snvin0 , to accumulate ca p ita l for foreign investment. Calls for aid in ^ne restoration of Europe should carry with them an appeal to economize in our own consumption, in order that there may be av aila ble, not only commodities for export, but also funds for foreign loans and invest ments to supply means of payment.” It should be thoroughly understood that the resources of the Federal Reserve System w ill continue to be at the disposal of commerce and industry, and that the Federal Reserve Banks in the future, -3- as in the past, w ill continue to take care of the legitim ate and rea sonable requirements of business and agricu ltu re. However, it w ill be the p olicy of the Federal Reserve Bank of Dallas to determine not only the e l i g i b i l i t y of paper o ffe re d , but, as far as p o ssib le , to determine also whether the purpose which prompts requests for accommodation is in actual conformity with the s p ir it of the law and with the p rin cip le s of conservative credit judgment. The banks of th is D is t r ic t , both member and non-member, should ca refu lly analyze the necessity for each loan made by them, and do th eir best to discourage the seeking of accommodations which have not to do d ire c tly with legitim ate production, or which are not sought as a means of supporting commercial, in du strial or agricu ltu ral enterprises which are v it a lly essen tia l to the common good. I f such a p olicy is not universally adopted and f o l lowed, it is conceivable that many banks may find th e ir resources so completely tie d up in loans made either for speculation or mves ment that they are unable to take care of the legitim ate seasonable demands of th eir customers when those needs a rise . It w ill be d i f f i c u lt , i f not im possible, for such banks to liquidate^ loans of the character mentioned, and certain ly they would not be able m redis count such paper with the Federal Reserve Bank * I f an appeal fc>r aid from other banks should be of no a v a il, there would be^ le ft on y the embarrassing alternative of stating the situation to the cus omer seeking accommodation, with an explanation of the causes leading o it, It i s our sincere hope that we w ill be given tne clo^e and constant co-operation of a l l banks in the Eleventh Disora-ct in cur e ffo r t s looking toward the establishment of that conservative credit p olicy which is so urgently necessary. The resources of the Federal Reserve System are not unlim ited, i f used d ire c tly or m i rectly for purposes not contemplated by the Act, and it wi -e nec essary that the present expansion of credit be sharply c h e ^ _ it resu lts in wide spread injury to our business and our j-eop R esp e ctfu lly , 2075 Governor -
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