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THE ECONOMIC STAGE and the BANKER’S ROLE ADDRESS BY Charles E. Mitchell President THE NATIONAL CITY BANK OF NEW YORK THE NATIONAL CITY COMPANY Chairman of the Board INTERNATIONAL BANKING CORPORATION Before the AMERICAN BANKERS’ ASSOCIATION CONVENTION https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ATLANTIC CITY Tuesday3 September 25, 1923 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Economic Stage and the Banker’s Role HE American Bankers’ Association convenes this year with business conditions of the moment the most favorable the country has known since our entry into the great war, and I do not except the periods during or those immediately following the war. Everyone of business judgment recognizes and in fact knew at the time, that the conditions of those years were abnormal, that we were not on a sound and permanent basis, and that sooner or later a settle ment day was coming. The crisis of 1920 and 1921 was severe—in fact, perhaps, the most severe in the history of the business world, because practically all the world had shared in the conditions that led up to it and was involved in the collapse. In our own coun try the fall of prices was without a precedent, because the state of inflation had been more general and the disorganization of world trade and industry greater than ever before known. As the war temporarily increased the dependence of Europe upon this country, so the expansion of our production to meet the temporary needs of Europe made us more dependent upon European markets than we had been before, and the ordeal of readjustment was inevitable. The manner in which the United States passed through this ordeal, put its losses behind it, and regained prosperity is something over which we may feel profound satisfaction. Our productive powers T https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 are intact; they are functioning efficiently; and our banking and financial system is equal to any demands that may be laid upon it. If we look for the explanation of this wonderful demonstration of the inherent strength and recupera tive powers of the United States, we will find at least ninety per cent, within our own borders. The growth of our population, the natural, irresistible impulse of our people to business and to progress, and the diversity of our resources which makes us so nearly self-supporting, account for the revival of industry and trade. We are wont to pass over too lightly the tendency in this country towards growth and improvement. Who would have thought when the war ended, for instance, but that the enlargement of our iron and steel industries, built up to supply war demands, would have been far more than sufficient to meet the requirements of our country for a decade to come? Yet, iron and steel production this year has been practically at capacity. Generally speaking, our leading lines of manufacture have been surpass ing the records of war time production. The fact is that our industries are so diversified that they sup port each other, forming a great circle of exchanges within themselves, and if kept in balance, there is almost no limit to their development. Increasing Economic Independence. In the past five years we have been gradually break ing away from economic dependence upon the outside world. Before the war, we were largely dependent upon Europe for a market for our agricultural prod ucts, but our margin of surplus in these products is now comparatively small. We no longer depend upon https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 Europe for capital, but are able to supply capital to them and other countries, and in so doing, markets are opened for our manufactures. We have bemoaned the fact that farm prices were low as against higher commodity prices. The economic law is gradually taking care of this discrepancy. Our industrial growth means the growth of an industrial population and an increasing consumption of farm products at home. The demand for labor in the mills, mines, and factories draws upon the farms so long as farm prices are lower than in the industrial field, cuts down farm production, and at the same time increases the demand for products from the farm, and gradu ally, but assuredly, the restoration of the balance between agriculture and industry asserts itself. The time has come to take account of the ability of this country to establish an equilibrium, with the center of gravity within itself. Adjustments Come Quickly. We continue to have a reasonable amount of export trade. • The opportunities for trade outside of the disturbed areas of Europe are so great that our dependence upon the latter is comparatively slight, and yet business with those disturbed areas continues in moderate volume. We take from them little that is essential to us, but what they take from us is vital to them. The disturbance of European trade results in developments elsewhere in the world. If Germany, for example, imports less of raw materials, it follows that she will export less of finished goods and that other countries, the United States among them, will manufacture and export more. The cutting out of any country, in whole or in part, from the circle of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 world trade, occasions a shock and a temporary break in the circulation of products—just as the loss of a limb from the human body causes a shock to the entire system—but just as blood circulation will again establish itself, so world trade will be resumed through new connections and eventually be as vigor ous as before. Thus, for instance, we see that while in 1913 the share of the United States in all the imports of Latin-America was 25 per cent—in 1921, the latest year for which figures are available, it was 45 per cent, and in the seven months of this year ending with July, our exports to Latin-American countries increased over what they were in the corre sponding months of 1922 by a gain of 21 per cent. In those seven months our total exports to countries outside of Europe aggregated $1,172,000,000; and, mark you, there was little difficulty in paying for those products, for their exports to us in the same months aggregated $1,680,000,000; that is, they sold to us $500,000,000 worth of products in excess of what we sold to them. Moreover, those importations were only in small part manufactures; they were raw material or food products, either non-competitive with our products or required in addition thereto. It has long been our custom to settle adverse balances in South America, Asia, and elsewhere by means of our credit balances in Europe, the latter making payment for the most part in manufactures. With the decline of European trade, we have been doing more business with the rest of the world direct. We are enjoying in this country today a real state of prosperity, and we should be cognizant of it and instill so far as we are able a spirit of confidence throughout Business America that will extend the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 life of the prosperous period. I am not arguing that permanent prosperity is assured to us. That can no more be true of any people than of any individual. I would urge, however, a recognition that we have emerged from the earthquake of war and the tidal wave of depression that inevitably followed. So far as American business as a whole is concerned, the war is over and is paid for. The great body of indebtedness owing on that account from foreign countries represents commodities sold years ago, and while I am not advocating the wiping out of that indebtedness, I say that if we never got a penny of it, we would be no worse off than now. All that is behind us. Let us appreciate and enjoy and prolong as we can the prosperity of the present. Efficiency Will Overcome Competition. But while we do enjoy the present, let us not be unmindful of the difficulties American business must meet in the next few years when conditions the world over, and especially in Europe, become stabilized and their business and trade become active. Our prob lems of the future will arise, not from a diminishing trade by other countries, but from their recovery and reappearance as competitors, and we need to prepare ourselves for the inevitable competition of other coun tries, and especially European countries, in all markets of the world, including our own. Foreign competition is not altogether without its benefits, for it acts to stabilize the price level, to restrain the ten dency to inflation, and to keep industry in touch with production costs abroad, but, to say the least, it is trying. I am not afraid of the ability of this country to compete in the long run and to secure an ample https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 share of world trade, provided that we now recognize that that competition is coming, that it is going to be vigorous, and that to meet it we must loosen every restraint to American industrial development to the end that in this country there may be an efficiency which will overcome a higher standard of living and still make us able to do business on the world’s price level. We want enterprise relieved of the fearful penalties to which it is now subjected. We want a revision of the present income surtaxes that dam the natural flow of wealth in the channels of wealth producing enterprise and divert it into tax exempt investments that mean state and municipal non-productive development and waste. We want economy in Government expenditures that will bring relief from taxation as fast as it can be given. • We want the oppressive hand of the Government taken off of business, and freedom given to individual enterprise. We want the Government out of the shipping busi ness where, at enormous cost it has been proven, at least, that such oppressive measures as the Seamen’s Act prevent any profitable operation of an American merchant marine—and we want the Government out of every other business because every experiment in Government management demonstrates its disqualifi cations in that field. • We want to see a chance given to our railroads, which constitute the very arteries through which commerce must flow. We want recognition given to the fact that these railroads, although laboring under great difficulties, have been handling the largest vol- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 ume of traffic in the history of the country in a most efficient manner. You and I know that the railroads cannot go on indefinitely financing for the purchase of equipment and the improvement of their service through borrowing 98% cents of their requirements and obtaining 1% cents from stockholders, which is the record of the past four and one-half years. You and I know that railroad credit must be so restored that a portion of new capital requirements may always be met by the sale of stock, and to do this railroads must be allowed to earn profits that will give their stocks a standing high enough to attract new money in a competitive market. I view it as one of the most important conditions for the future that the guarantees contained in the Esch-Cummins Railroad Act shall be maintained. We want, above all, an ever increasing economic understanding of the difficulties we must overcome. ■ Our Gold Stock. There are certain conditions often regarded as favorable which will actually work to our disad vantage under the stress of competition. One of them is our excessive accumulation of gold which is . growing from month to month. Every banker is familiar with the fact that any increase of gold re serves tends to increase the expansion of credit, that a general expansion of credit produces higher prices, and that higher prices will weaken our position in world competition. The economists and financiers of Europe, as you well know, are confidently waiting for this influence to turn the balance of trade against the United States, start a flow of gold from our cof fers to Europe, and produce the hoped-for industrial https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 revival over there. We have a very real problem on our hands, gentlemen, in determining how to accom plish a redistribution of this gold without going through the usual round of credit inflation, rise of adverse trade balances, falling prices, and credit dis turbance. The symptoms of last spring were alarm ing, but the good sense of the business community averted the danger for the time being. That danger will, however, continue to over-hang as long as gold continues to flow into our already abundant reserves. We are in a position where, with such national debt payments as are being made to us, favorable trade balances have a real element of peril in them, and yet, at the same time, we are not wanting unfavorable balances that would signify industrial depression. We are in a dilemma, the chief difficulty of which is in maintaining price equilibrium and at the same time maintaining trade equilibrium. The discussions have been so widespread that I am sure that there is no business man who does not understand that the indebtedness of foreign govern ments to the Government of the United States, to the extent that payments are made thereon, is a factor having a bearing upon the trade situation. Every payment involves the creation of credits in this coun try which can be accomplished only by shipping gold or goods to us. The appearance of a government in the exchange markets as a buyer of exchange on the United States means competition for means of pay ment here, and involves higher exchange rates and consequent higher prices on Ameircan products to foreign customers. These conditions arising out of unbalanced international relationships caused by the war, serious as they are, constitute no reason why we https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 10 should not go on with regular business and with full confidence, but they do call for the watchful attention of bankers and business men. They emphasize the importance of the development of a super-efficient commercial condition throughout the country that we may overcome the obstacles which American trade must inevitably meet. They emphasize the need of a greater degree of harmony in industry and a greater understanding of the advantages to both the em ployer and wage-earner of that production efficiency which is at once the guarantee of low costs, of com mand over markets, and of wages of high purchasing power. ' ■ ' Banking Efficiency. . If weight be given to your words and mine as those of bankers in urging this doctrine upon business men and legislators, it is essential that we recognize that “those who live in glass houses should not throw stones,” by which I mean that while calling for a higher efficiency elsewhere, we should see to it that a higher efficiency exists in the banking structure of the United States. It is our responsibility to place the business of banking in this country upon a plane paralleled by that in no other, and this can be accom plished only as you and I as executives in our indi vidual institutions administer with understanding, with conservatism, and. with courage. . It is a great opportunity that we have each year in these conventions, of exchanging views, of letting each other know something of the problems that we are individually meeting, and how we are answering them, and if I may be permitted to do so, I would like to take this opportunity of telling you some of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis n the things we have been thinking about lately in our institution. One of these is the question of reserves against contingencies. The business of commercial banking is, by its very character, a business of risk. There is scarcely an operation that we perform in which risk is not inherent and continuing, and so long as this is so, it cannot be conservative to carry the oper ating profits of a month to the Surplus and Undivided Profits accounts until some measure be taken of the risk of that month’s business and a reserve directly applied for it. It has been an interesting study to us to measure that risk and to feel our way toward obtaining a standard yardstick for it. Unlike the insurance companies, we have no actuarial table to turn to. The losses sustained by the banking institu tions of the country over a given period, even if this information were available, would serve as no more than an index because of the differential arising out of dissimilar policies and management. But it has seemed to us that under sound administration, *a bank that is taking reasonable risks in its endeavor to assist commercial development, will find that the risk increases with the degree of inflation existing, and decreases with the degree of deflation existing. How, then, can one determine the measure of nor mality, and what yardstick can be applied to deter mine inflation or deflation? Now, in our institution,, we have made an assumption which is subject to change, for experience may show it to be very wrong, that conditions are normal when the member banks of the country are borrowing from or discounting at the Federal Reserve Banks in the amount of $500, 000,000, and that discounting above or below that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12 figure reflects a condition of inflation or deflation. On the theory, then, that the risk of banking varies as these borrowings increase or decrease, we are establishing a reserve for losses or contingencies, set aside monthly against current earnings, and based upon the bank’s average commercial loans and dis counts, increasing our percentage so applied for each unit of $100,000,000 increase or decrease above or below the normal figure of member bank borrowings. Now if it be a sound principle that the business of commercial banking involves a risk that will inevit ably be met, I wonder if it is not an opportune ques tion for the division of the American Bankers’ Asso ciation having to do with taxation to raise with the Federal authorities as to whether commercial banks should be called upon to pay full taxes upon current operating profits, or whether it is not in the iriterest of conservatism that banks be allowed to set up cur rent reserves against current operations, paying their taxes upon the net figure. It seems to me the Govern ment has it in its hands to thus foster a conservative movement in bank operation. Bank Buildings. And, again, in this regard, let me speak of the item of bank buildings and fixtures, which item, as shown by the reports of the Comptroller of the Currency for the year 1922, for all national and state instituttions, runs to the enormous figure of $1,079,000,000, an item equivalent to nearly one-sixth of the com bined items of capital, surplus, and undivided profits. The bank buildings of the United States represent probably the highest development in American archi tecture. They are costly structures. But it is sound https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 that the banks of this country should be housed in buildings that psychologically stimulate the feeling of strength and stability in the minds of the people and lure thereby into channels of usefulness currency that might otherwise go into hiding. The outlay is justified. And yet, is it not slightly inconsistent that banking institutions whose liabilities are quicker than those of any other division of commerce should carry with slow depreciation an item of this character, of such unusual size, and which is recognizedly the slowest of all assets? I am wondering whether we should not all be depreciating our bank buildings more rapidly and whether our Government should not perhaps be fostering such a conservative develop ment by permitting, or, perhaps even forcing us, through tax regulations, to a more rapid depreciation plan than we are now following. Another problem to which I personally feel there may be directed profitable discussion is that of the degree of liquidity properly to be maintained by our banking institutions, and how to measure it. Cash, discountable paper, Government obligations, and in large measure, deposits with the Federal Reserve Bank, are unquestionably liquid assets. Brokers’ de mand loans are quick, and a percentage, at least, of the market value of the Bond Account is quick, and, of course, a part, differing in every institution, of the loans and discounts that are not eligible for re-dis count, are quick. But to what degree of liquidity should we be working? I feel that each executive should carefully analyze the situation of his own institution in this regard, and that we should be help ful to one another in determining the ratios in respect to this important subject that spell sound banking. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 14 Remuneration. The subject of bank officers’ remuneration is one that has been of marked interest to me. If the banking profession is to prove inviting to the best commercial minds of the country, it must obviously compete in remuneration with the rewards that come to leaders in other commercial enterprises. The opportunities of gaining an insight into commercial developments and of knowing something of the profitable nature there of, which are inherent in the bank executive’s posi tion, and the possibilities of becoming privately inter ested financially in profitable enterprises through acquaintance, have presented an allurement to men to enter the banking profession. But these very opportunities, when exercised, have resulted in not a few cases in a lowering of the standard of the profes sion, for personal interest is bound to cloud the judg ment of the bank executive. His interests should be first and foremost those of his bank. His thought and his every endeavor should be in the creation of the height of economical administration and service to his customers, regardless of personal interest. His compensation should be through, rather than by vir tue of, his position. And so thinking, we have in our institution established a plan by which, out of the balance of current earnings, after establishing re serves covering the risk in current business, and after allowing for liberal interest on the capital in use, as represented in the items of capital, surplus and un divided profits, a percentage is each month set up in a management fund for periodical distribution to those officers who have contributed most effectively to the bank’s development and profitable progress, and for recognition of significant achievement. Our plan is https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 15 in its experimental stage, but I am confident that while resulting in a direct benefit to the bank execu tives, it will react in the higher efficiency of the institution and in larger returns to the shareholders. I speak of these problems as samples of those that we have pondered over in our institution and a free discussion of which in such a convention as this, may send us back home thinking more deeply on how to increase the efficiency of banking in this country to the point where our word on efficiency among our clients may be more deeply respected, more rigidly followed. The bankers of every country are regarded as advisors. In one way or another, they meet and wrestle with the problems of varied industries. They see the economic picture in more completeness than can the man in a single trade. They have a compre hensive view of the movement of goods. It is their business to measure wealth. They will ever be appealed to for advice. Let us, as bank executives, deserve the confidence that the public will inevitably place in us, and let us be so diligent in our study of the times that our advice may be sane and sound. And let us, as we return to our homes, impress upon the many within our influence that we have emerged from the eddies of the war into the calm harbor of the moment through which we can safely sail with out fear of storm, but let us warn that we are headed for the open sea where, if our ship would safely sail, we must be prepared for the powerful rollers of world competition, and that now, in this period of calm, is the time for us to see that the ship is freed of bar nacles that retard its progress, that it is caulked and made ready, and that the crew is trained for service. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 16