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MISC. 3 B.2- 4/«7 O F F IC E C O R R E S P O N D E N C E T o _________________________________ SUBJECT: F r o m .-- -------------- S' H ^ S ' X A (/ Because of the very m ar k a b l e conditions now obtaining, In 'the United States and in the chiaf nations with which it has closest relations, tiiere are matters of unusual inport which it seems to ms it is the present business of the bankers of this country to consider with the groatest care. I mean our relations as bankers to the economic, social and, I would even add, political welfare of this country. I need not remind you as to the nature of these present conditions, nor need we delay over questions as to how they have arisen. I would dwell upon one point, and that is that, in an eoonondo sense, the four years which have elapsed since the end of the great war have been for the Itaited States without any parallel in its history. It is usual at the close of a long war that there should be a large and often precipitate decline from the higfc levels of prices which modem wars almost invariably engender. We had, following the world war, no such decline. Contrary to the widest general expectation, I* instead of a decline we had, piled high upon the enormous increases in the war, the greatest rise in prices which this country has ever known in peaee times. This was accompanied, as is almost invariably the case, by a great wave of speculative activity which swept the whole nation. Then, following this post war boom, as it has been termed, came the most drastic collapse in prices, measured in percentages, which this country has ever known; and with this collapse an unusually severe decline in pro duction and trade, in some lines probably, beyond any previous precedent. 2 But this critical depression proved as short lived as it was in tense and we have now had, from the lowest point of that depression, a re covery in the last twelve or thirteen months that is likewise probably with out a precedent in its rapidity. In many lines, at least, this is a cer tainty. Now, I have no need to remind you that in all these abnormal move ments our banks and our bankers participated to an unusually intimate degree* The post-war rise in prices and the speculative boom that went with it was accompanied by perhaps the most rapid expansion of bank loans, in peace timee, of which we have any record* I think it is clear to everyone that, in its extent, this post-war boom and this rise in prices would have been impossible without this corresponding expansion of bank loans. Without dwelling upon causes or upon extenuations, these are the certain facts. Now, gentleman, I venture to suggest to you that at the present time we stand in much the seme position as, let us say, the late summer of 1919; but with certain very vital differences. floating debt. We have not now any huge and ominous Imperative necessities for Government funds do not now exist. General interest rates have undergone an extended decline. through a period of very thorough liquidation. We have gone A large amount of bank loans has been funded and largely absorbed by investors, though not to the degree which might have been desired. \our banks have been heavy investors, especially within the present year, in Governmental and other securities, and this fact has undoubtedly been a potent factor in arresting the precipitous decline which began in the spring of 1920. \From the depths of the depression we have had not only this remarkable recovery in production and trade but an equally notable rise in wholesale prices. In times of very wide fluctuations wholesale prices are not an authentic index of the general price level, meaning by thie the 3 general level of wages, salaries, rents, and prices at retail as veil as wholesale* Nevertheless, it is clear that the broad movement of vho 1 esale prices precedes and determines the general level of all prices; and these pricas are, therefore, barometric to and in some degree prophetic of the gen eral price level. The broadest index of wholesale prices which we have is that of the Department of Labor, and I wish to point out to you that this index, within the present year, has risen already 17 points, and in percentages more than the widest variation in wholesale prices, from low to hi^i, that occurred in the five years which preceded the opening of the world war* For the month of July the rise in wholesale prices was one of the heaviest ever recorded by this index, and only a few times excesded, even in the violent activities of the war. ^At the Federal Reserve Bank we maintain an index of the twenty most important commodities, basic to all industry, and this index, which has dear ly marked the tendency of wholesale prices in advance of any other, gives now no evidence of any arrest of this movement of rising prices. I believe we must squarely face the implications of this fact* It is A. B. C. that if this tendency to advancing prices continues it must, with the rapid recovery in production and tirade, soon lead to a re newed danand for funds to finance industry. For more than a year and a half there has been a steady though, for the last tec months, very slow decline in so-called commercial loans, that is to say, loans other than those upon Government and corporate bonds and stocks. This liquidation, as I have poinjted out, has been in part achieved by the inflow of more than a billion of gold since the summer of 1920, and in part by public issues to a very con siderable degree taken by the banks themselves. It is clear that the banks 4 cannot long continue to absorb these securities, and maintain a condition of healthful balance, nor can they continue to absorb Government funds. The demands of industry and trade will soon utilize all of the funds available. I think it is clear, likewise, that beyond this the banks inevitably wiU/be called upon to finance a higher level of commodity prices. And this, gentlemen, I need not point out to you is the beginning of the vicious circle. The banker understands clearly enough the simple mechanism by which prices rise and fall; but this mechanism is not clearly understood by the laity and is the occasion, as I believe, for a very large part of that unrest, social discontent, ill feeling, and violent propaganda which has been so much in evidence since the war closed. The mechanism, as we know, is simply this: his If trade becomes unusually brisk, and the retailer finds/nerdiandise slipping from his shelves, he is promptly alert to see that it is replenished in order that he may serve his elastomers and conserve his trade. Now, in such tines he usually finds that others in his line are doing exactly the seme; with the result that deliveries are retarded. Jobbers' stocks are quickly reduced and the mills must be speeded up to meet the increased demand. To obtain quickened deliveries the retailer may offer or the wholesaler and the jobber may may suggest a alight premium for preference orders; or, simpler still, the jobbers first to fell the effect of this demand may advance their p ri ces • At the same time they make increased demands upon the mills, and here again the pressure is not upon a single mill but upon all, with the re- , suit of an unusual demand for labor. And if this demand for goods is sus tained the result is the offering of hitgier wages in order to attract more hands to the mills. So the producer finds his costs advancing and increasee his prises, and this increase must be passed along to ths retailer and by 5 hlo to the ccnauning public. in it, There is no mystery about it/ and, as you gentleman very well know, extraordinarily little of^his "conscience!ass profiteering” of which w* heard so much in and after tho war. Now, it is equally d e a r that this unusual demand for goods will soon come to an end, first by the natural check of advancing prices but more distinctly by the consequent reduction in the purchasing power of the public at large, unless there be a corresponding increase in this purchasing power. But this latter is impossible in our present-day money and credit economy, without an exactly equivalent increase in the outstanding volume of money and credit— for all practical purposes in the amount of actual currency in cir culation and of bank credit extended by banks* Without considering activating causes, which is perhaps a barren waste of time, it is clear, and there is practically no one to deny, that in the final analysis the limiting factor in a continuing rise in the general price level is, for all practical purposes in this country, the total amount now of bank credit. Fbr us the actual amount of the currency is/a very minor although still an important item. It is perfectly clear that the movement of the cotton crop, from the cotton plantation through the mills and the shops to the final consumers of cotton goods, cannot be financed,as it must be financed, with the same amount of credit, vdth cotton at 20 or 30 or 40 cents per pound ae against, say, 10 or 12 oents. Our vast wheat crop will require, roughly, twice the amount of credit to be moved from the farms through the mills and the stores to the ultimate buyer, at $2 a bushel, than it would at $ 1 a bushel* Special causes may operate and do operate to produce the widest oscillation in the prices of individual commodities, or even of great groups 6 of coonoditiea, like the products of the fame. But it is clear that a general advance in the level of all prices, or even in the larger nunber of prices, cannot take place without a corresponding increase in the nation's purchasing pover. You cannot sell the total of the nation's product valued, let us say, in 1913 at 25 billions, at, let us say, 50 to 60 billions in 1918, with but a moderate increase in the actual quantity of goods exchanged, without a corresponding increase in the total of funds avail able for these 'purchases* could be achieved. fixed. We simply have no mechanism by which this miracle The business habits of our people are more or less The average turnover of goods from year to year appears to change but little. The only thing that can and apparently does change is the total of circulating currency and the total of bank loans. Now, if all this be reasonably true, and it seene to me incontro vertible in the li;£rt of the experience of the last ton years, if not through out all known economic history, then, gentlemen, it seams to me that, as an association of bankers in charge of the actual financing of the nation's at this time mere than ever business, we musy consider our relation to and responsibility towards the general welfare of the whole people. j_I do not need to remind you that the present situation is radical^and vitally different from that which ob tains in what we may oall ordinary or normal times. In normal or ordin ary times the banker has little to consider beyond the oondition of hie own portfolio, the atataments of his customers, and the general banking position. In times of crisis, such as have been characteristic with such curious regular ity in our business life, the banker has, indeed, then a far wider responsibility 7 tegawaWAfe and that is his dxrby towards the comunity and, in a consider able degree, towards all other banks. It seems to me that ye have now a mush deaper responsibility, partly engendered by the steadily advancing importance of the banker in all our business and economic affairs, his increasingly vital economic function, but directly precipitated by the extraordinary condition which now subsists. |^Never before in the history of this country did we ever, in the space of eighteen months or of twice or three times that period, im port, as we did just preceding our entry into the war, a billion dollars of epld. Uever before, in the history of this country, in the space of about a year, or in two or three or four times that period, did we ever suffer a loss of more than 400 millions of gold as in 1919-'30. And never before in the history of this country, in peace times, did we ever import a second billion of gold, as we have done within the last two years. conditions which have brought to us this huge and profitless accession of gold. a time when, of all times, And it has come to us at it was least needed and perhaps most dangerous. 8 At the present time the total of banking loans and investments in the United States is roughly double to that preceding the war. The average of all commodity prices at wholesale, on the Department of Labor index, is now but 55 per cent, above the 1913. If we combine all the indices we have of the averages of wages, retail prices, security prices, rents, the average cost of living and the like, it is certain that the average of all prices, the general price level, can scarcely be more than 75 per cent, above the pre-war level, if it be so high as that. It would seem therefore that the present volume of our currency and bank credit should be more than completely adequate to the full financ ing and carrying on of all our industry and trade, even at a high pitch of activity. We now know, definitely and conclusively, that the total of the nation's physical product of goods, the total of all crops and coal and iron and lumber, with all the immense machinery for transporta tion, manufacture and distribution which these require - can increase but very slowly from year to year, and only with the increase of population and economic and industrial efficiency^ and by ingenious invention. \The average rate of this increase of the whole product of the nation we now know to be very close, throughout the last half century and more to 3$- per cent per annua; and this increase can rarely be greatly augmented save momentarily in the change from very slack to very active times^ and through an unusually abundant yield of the soil. And at con stant general price levels the normal credit and banking requirements of industry and trade can grow only at a slightly higher rate. |^Any increase in the credit volume beyond this point can in time mean only a rise in the general price level. This rise will be reflected first in the average prices of the great basic commodities, next in the general average of all commodities at wholesale, than in prices at retail, then in wages, salaries, 9 rents and security prices^ ^ These seem to be the unequivocal facts which recent research and the experience of the last 50 years have established. The thing that I now wish to bring to your attention is, I be lieve , almost the most vital of all. It is simply that any undue and needless expansion of bank loans and banking credit and of the cur rency as well, can take place now only through the mediuaa of the Federal Reserve banks. * The resources of the member banks 0f the Federal Reserve System now constitute about two-thirds of the resources of all the commercial banks, excluding the savings banks, of the country. Neither in these member banks, nor in the 20,000 or 21,000 chiefly smaller banks which still re main outside of the Federal Reserve System, are there any considerable cash reserves upon which to posit any notable expansion of credits. Practically speaking the banks of the nation now keep in cash only needful till money and very little more. any large cash reserves as heretofore. They no longer carry Practically speaking, the entire monetary reserve of the nation is now deposited with the Federal Reserve Banks. This means that no notable expansion is now possible without drawing upon this central reserve. To expend their loans and to obtain the needful currency which in the long run will accompany any con siderable expansion,the member banks of the system must rediscount at the Federal Reserve banks, in order first to increase their required reserves, and secondly to obtain the needful supply of additional currency required. Beyond very modeet proportions therefore the control of the financial situation is today to an unusual and, I would say unexpected degree in the hands of the Federal Reserve banks, Nov I have no need to remind you gentlemen that the Federal Reserve System waa established as a vast cooperative institution, not merely for the safety and increased efficiency of the banks, but for of— the public good and for the good of the whole nation. firiv requires for its working the active cooperation and the friendly support of the CW et. ^ larger part of the banks of the country. There was no compulsion that any bank should be a mamber of this system. Any national bank that wished to decline this support could give up its charter as a national bank. But, on the contrary, practically every national bank has remained in the system and in addition more than 1600 of the most important state banks and trust companies which were eligible have become members. This vast cooperative organization, with resources now exceeding 3 -2 billions, was not created as a source of additional profit, but for mutual protection and for the public welfare. The Federal Reserve banks were aMatod to hold the reserve and not to be a source of profits at all. As you know, all of their net earnings beyond the 6 per cent on the modest amount the member banks contribute as capital, and a small allowance for surplus, goes entirely to the Government. Into the hands of a Governmental body is given the final eupervision and control of the system. And that body is appointed not by the shareholders, the member banks, but by the president of the nation. It was never in the conception of those who, for more than a generation labored to perfect and secure the passage of the act creating the Federal Reserve System, that this system should become an engine of needless expansion of credit, with all the demoralizing and dierupting industrial and social consequences which such an expansion invariably entails. I nay add that probably not one of the long and distinguished line of those who labored towards the creation of this system ever dreamed of the curious situation which has been precipitated upon us, in consequence first of the war, and secondly of the abandonment of the gold standard, by the chief commercial nations of Europe. The repercussion from the Europ- •an situation and our j4ii pesitiun of vast natural resources hare presented us with a problem such as the banking fraternity and the economic minds of this nation have never faced before. j I think it may be added that no other great commercial nation could supply us with any precedent for our present guidance. But the nations of Europe in the war and after the war, not merely the actual participants but the neutral nations which did not participate, and the new nations #iich hare been created out of the old, with no debts and no burdens, have abundantly and overwhelmingly supplied us with the proof that we cannot increase the real wealth of a people by fictitious additions to the money supply. f If we could do that, than all that would be necessary would be to chop our own paper dollars and our gold dollars in two, to double the product of our machines and of ths 40,000,000 of our people gainfully employed. All this every sane man knew long ago. It is so clear now that he who runs may read. Biit it is not so clear, I think I may say, even to many of our bankers and our publicists and our statesmen that it makes no substantial difference whether we increase the purchasing power of our people by ex cessive expansion of bank credit than as though we printed billions of paper money as have Russia, and Poland, and Germany and other states. fect is essentially the eame. The ef This is the fact which mint become a part of the consciousness of all enlightened opinion in America. l _ 2 -must so become because of the peculiar and unusual conditions of banking devel opment in this country. In other great nations like Eh gland and 0er> 12. many and France and the rest, banking is carried on largely through the agenci^^of a email number of great joint stock banks, with large numbers of branches throughout the several countries; powerful central bank. 30,000 Si this country usually also with a as you know, « m n individual banks^locally owned, locally managed, locally controlled, accustomed but little to cooperation or even to very wide mutual consideration. Of this enormous total of 30,000 banks, more than 20,000 of them are outside even of the cooperative influences which were created in the new Federal Reserve System. And in turn the support and maintenance of that system itself is dependent upon nearly 10,000 individual banks, scat tered through every state of the union, and with widely varying interests, associations and prejudices. In other lands the influence of a relatively small number of experiences men, usually men of distinguished ability and training, is pre-potent. In this country nothing of the sort exists. from that between the different banks So 13 there is oftan a vide divergence of policies and view and often-a real feel ing of antagonism. The so-called country banks have likewise a certain jealousy of the largo banks in the larger cities, and these in turn something of the same sort of feeling towards the great banks of Chicago and New York. And there is always with us the universal apprehension of the supposed in fluence of Wall Street and the "money power.” I need not remind you that Thomas Paine and Thogas J ef ferson were writing a@iinst this sane money power wan in those far days, and this sort of writing has never ceased from that time to this, Reserve Banka is t agitation against the imagined policies of the Federal but a part of a feeling that is as old as the oldeet bank in this country. The second Bank of the United States certainly, and probably to a large extent likewise the first Bank of the Unitad States, had its career terminated by the antagonism and jealousy of the State Banks which were than springing up in such extraordinary number, laying then the foundations for that powerful prejudice against any form of a central bank which for threequarters of a century prevented in this country the adoption of a sound bank ing and currency system. Wide and steadfast cooperation between even ^large portion of the 30,000 banks of the United States is, tharefore, an extremely difficult matter. I will even add that I have found in my experience, even among Member Banka of the System, a certain prejudice, and almost a feeling of antagonism, towards the Federal Reserve Banks. And yet there never was a time in the history of the country, it seeme to me, when a solidarity of policy and purpose( and that policy and purpose one of enlightenment and high public present time. 14 anti amen of the Executive Council, it is my deep belief that your body and the Association of /marican I-ankers has before it no more important function than the achievement of such a solidarity of policy and purpose, to the end that, in so far as our banks say be a contributing factor, the pro foundly agitating instability of our economic conditions growing out of the war and its consequences may a®a.in be reduced, as in the five years just pre ceding the war, t0 the no ratal and utmost minimum.
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