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Reloaoed for publication in the morning papers of Wednesday, November 10th* 1925, X-4-451 Speaking "before the Commercial Club of Boston Tuesday evening, November 17th, on the operation of the Federal Reserve System, Mr. A. C. Miller, member of the Federal Reserve Board, took occasion to point out how the scope, influence and importances of the Federal Reserve System under present credit and business conditions had increased since the establishment of the System eleven years ago. "Originally conceived as a system of elastic bank noto issues and reserve credits to overcome the disabilities from which our banking system formorly suffered because of the rigid provisions governing reserves and restricting noto issues, the Federal Reserve Banks, by forco of tho unprecedented conditions growing out of the World War that have shaped their development along broader lines almost from tho day of their establishment, have had to form a larger conception of their function in the country's crodit and economic system - one best to be dofined to bo to steady crodit a conditions, to give at all times a firm basis of strength and health to tho countiy's credit organization so far as it lies in tho power of the Federal Reserve, and through the wise and intelligent oxcrcise of this function to givo steadiness, stability and strength to underlying business conditions. It is more widely recognized now than ever before what a vital and shaping influence credit is thro-ugh- Xr-44-51 - out the whole economic system. 2 - The good functioning of trade, agriculture and industry, experience has demonstrated, can be greatly aided by good functioning of the Federal Reserve System. She good functioning of the Federal Reserve System moans that the current productive industry of the country shall be at all times supplied with-all the crodit it needs from tho Federal Resorvo Bonks to meet its legitimate operating requirements on the lowest terms consistent with economic safety. extended argumont. This statement needs no But tho American public does not yet fully under- stand that at times when industry and trade through excessive optimism speculative enthusiasm are getting into a state of feverish activity they must not get tho credit facilities of the Federal Reservo Banks too easy terms - tkra-i is, on terms so low as to encourage needless borrowing and invite inflationary developments. While crodit wisely °xtended can do much in a healthful way to stimulato, tho dangers of overstimulation can never safoly bo lost sight of." '•This, briofly statod, "continued Mr. Miller, "is tho it Philosophy of variable discount rates." "There is a prejudice of long standing in the United States" Si ^id Mr. Miller "against variable discount rates. This prejudice con- stitutes one of the difficulties in the administration of the Federal Reserve Banks. The discount rates of Central banks are made to be moved, is well understood in England, whore tho Bank of England for cades has omployed tho changeable discount rate with marvelous effect X-4451 in giving stability to tho British banking and crodit system. The banking and businoss public there, before tho World War, understood I very accurately the basis of the Bank of England's discount policy and the meaning of changes of the Bank's official rates. There re- suited from this a cooperation botwoen tho Bank and the businoss public, ^ho success of the British banking and credit system was largely duo to thi3 intelligent cooperation." "We may expect that in time a similar situation will exist in the United States, As the Federal Reserve System itself more fully works °ut its guiding and operating principles and as these come to be understood and accepted by the business public, we may expect to see the prejudice against changes of discount rate and other methods of credit control overcome and the good functioning'of tho Federal Reserve System promoted by intelligent cooperation botwc3n tho Federal Rcsorve Banks and tho genoral business public." tllis Mr. Miller expressed tho fjar, however, that "until result is attained we are likely to suffer from hesitant or tardy action in the matter of Federal Heserve discount policy." "Time is of the essence of success in matters of credit and currency regulation by Central or Heserve banks. There are times on an upward trend of industry when the intervention of the Fedoral Reserve ystem by suitable discount policy con stimulate a forward movement in industry by maintaining a low rate; and later on by on advance of rate re strain the speculative extension of industry and thus serve to maintain a gooa condition of activity and prosperity. The function of rate policy 1 is thus at timos to accelcrato the flow of reserve credit by a rate that i invites "borrowing and. at other timos to retard it by a rate that discourages undue resort to the facilities of the Federal Reserve Banks. On a downward ' , | trend of industry when the thing most to he feared is hasty liquidation under the pressure or fear of monetary stringency, Federal Reserve Banks through their rate policy.can do much to mako the inevitable liquidation gradual and orderly by lowering the terms upon which their credit is made available. "Action by the Federal Reserve Banks on the all important otters of discount policy and open market operations to be competent ^at, of course, be based upon insight into the economic factors governing the state and trend of industry, trade and credit. Without such ^owledge . there can bo no real conviction and, consequently, no real Policy. But more than conviction is necessary to make Federal Reserve action effective. and be prompt. Such action when taken must be rightly timed Hesitation and dolay are tho deadly causes of m iscarriage and failure in the matter of central banking administratiqn. They have besot central banking administration in all countries. To overcome them must bo a primary concorn in the development °ur Federal Reserve System, high degree of initiative As yet our System essential to its "most This is in part due to tho complex character 0r ganization t and the resulting wide of lacks that effective operation. of our distribution Federal Reserve of authority ' ' i -5iV X-446i >and responsibility for it3 management. But it is also due to the fact that tho largor economic and credit problems with which the Federal Reserve System is callod on to deal are lacking in tho definiteness of character which makes for definiteness of action. The processes of inflation with which our Federal Reserve System, like other central banking systems, is called upon at times to cope are insidious in their character. tion does not announce its coming in advance. full-fledged. It begins as expansion. Infla- It is not born It becomes inflation when expansion lias gone beyond the li£it of economic safety, that is when further additions to the country's supply of credit can not be digested by the body economic in alimenting productive industry. The excess goes to feed the appetito for speculation, and that appetite, more than most appetites, grows by what it feeds on. Thus inflation makes rapidly for more inflation unless its incipient stage is clearly perceived by those responsible for the maintenance of a healthy credit and business situation and subjected to appropriate restraining influence." Turning to the present situation in the United States Mr. Miller pointed out the various evidences of the high state of activity of the country's productive industry and trade. "We are in the midst of a very considerable industrial expansion with many of the factors that make for prosperity gaining in momentum. Production, trade, employment and payroll X-4451 - S disbursements are all in rn/itarially greater volume than a year ago. There can be no doubting that we arc already in an era of prosperity. The year 1925 has brought a great many new constructive factors into play in our economic situation. Of these, the nost important is the recovery, even though not yet comploto, of agriculture. Of very great importance also is the marked economic recovery of Europe in the past two years. The leading industries of Western Europe bid fair before long to be on a normal basis of productivity. Our export trade will benefit. The atmosphere of the world at large, moreover, has become more conducive to economic adventure by reason of the settlement of many of the perplexing economic and political problems left at the end of the war. Among these, of particular interest to the United States aro the Dawes Plan of reparation payments and the progress made in arranging funding terms of debts owed to the United States. since the close of the war. The outlook has never been so bright TTnether the prosperity which beckons is to be short-lived or of long duration will dopend largely upon the wisdom and skill with which we handle ourselves in the United States. The business community of the United States learned sev- eral groat lessons from tho disastrous crisis and depression of 1^20-1922. It has dcvolopcd in recont years a capacity for eco- nomic self-government that should ,30 far toward insuring preservation of business sanity and tho avoidance of tho extravagances and « ,; -?- X-4451 excesses that inovitably culminate in prosperity "booms.- Tho Foderal Reserve also has a vory groat responsibility for the maintenance of sound conditions to the extent at least that this can bo helped or accomplished by maintaining the credit situation healthy. "The floating supply of credit in the United States has never boon so large as at tho present time and never eo much in excess of curront and prospective requirements of commerce, agriculture and industry. Tho principal factors that have contributed to this result are (l) tho large influx of gold in recent years; (2) economy in the use of credit resulting from the smaller volume of credit required for carrying inventories bo* cause of improved transportation conditions and the promptness with which plant facilities in all leading lines of industry are able to respond to increased demands for their products; (3) the thawing out, largely as a rosult of improved agricul- tural conditions in this and the last crop season, of credits that becamo frozen after tho crisis of 1920; rapid seasonal liquidation this autumn. and, finally, to Those factors ac- count for the comparatively slight growth in the volume of credit taken for commercial uses from the banks of the country in the course of the last year. The great growth'in tho loan account of the banks of the country has not "been in the commercial loan account "but in the collateral loan account. And the great growth in this "branch of banking operations in due mainly to the huge volume of credit absorbed by the call market in the country's great speculative center since the opening of the year. w • This condition, along ith the considerable volume of credit absorbed by land speculation in some part3 of the country and spoculativo building operations constitute the danger spots in our present situation. Thero is evidence that a section of the public is losing its bearings and boing drawn into the arena of thoughtless speculation. Cheaper and more abundant credit than tho country has ever known on so extensive a scale are giving them aid and encouragement. of It is time for a halt lest a speculative frame mind should be engendered which ml git in time invade the field of le gitimata trade and industry. "It is not the duty of the Federal Reserve System to under- take to regulate stock or othor speculation or .to interfere unnecessarily ln the affairs of their mombcr banks. But it is well to recall that the federal Reserve System was not established to provide a life preserverJ 0r - the speculator. commerce-. It was set up as an aid to industry, agriculture and It is a system of liquid productive credits. The use of ^oderal Reserve credit for speculative or investment purposes is precluded ^ specific provisions of tho Federal Reserve Act. It is clear, there- fore, that no bank has a proper status as an applicant for Reserve Bank ac commodation, which is supplying credit for speculative uses. du It is the ty of the Federal Reserve Banks to hold true to tho course plotted for them in the fundamental provisions of the Federal Reserve Act J*
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