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CQNFEftEHCE OF STATISTICS DHPAJBTMfflT ilay 6, 1921. SOBJBCT: The lnflnande of the Discount R a t a ......... Mr. Sayder opened the Besting, saying: By Governor Strong. *1 am sore we are vary much flattered to have the Governor with us to-day, and I an rare he is going to say some vary interesting things. Ve are vary onich indebted that he should come*11 (Governor Strong) "I understand that there are much more important natters relating to the organisation of the bank coming up later this afternoon, at this present ■eating, and I am going to try and shorten ay remarks toa point where they will not interfere with that important business, Mr. Snyder. Furthermore, now that the time has come for any statements I an about to sake Z should say that I am appearing here in fear and trembling, because Mr. Sqydar and his able assistants in his department put such a topic before me as the influence of the bank rate. I am always afraid I am going to match ay theory with Mr. Icyder's. "The original compary of thirteen, as I recall the figure, that started the Federal Beserve Bank, are the only ones that can go back to the days of our discussion of what rate was proper and would be satisfactory when this bank was organized. The conditions that existed at that time were those brought an by the outbreak of the war. Ve had called upon two agencies in the United States to meet the great crisis in credit and currency. The crisis in bank credit was met by issues in clearing house and loan certificates, bearing Interest. A vast amount of credit was manufactured through the agency of clearing house issues, and that credit was bearing interest at from 6 to 7 per cant, and I think, in some eases, higher* In addition to that, - 2 credit was manufactured through the agency of the Aldrich-Vreeland Associa tion, which was organized mider the *Aldrich-Vreeland Act** Tha existence of that g&eat mass of credit which was bearding various rates of interest throughout the country determined our bank rate. I thlnfc that the reserve rates established ware from 6 to 6 l/Z per cent, and the rate was high enough so that it kept down heavy borrowing at a low rate, so that the first busi ness conducted by the Federal Reserve Bank of New York at the rate level which was established was trifling, and we were gradually able toreduce our rates over quite a period, until finally, as I recall, we were buying bankers' bills, - that i s , acceptances - as low as Z % in the open market* We had, in fact, a rate for that class of paper in Hew York that averaged frcn 2 to S per cent at the same time that paper of similar character was selling in the London market at froa ? 1/2 to 5 per cent. The rate in the London market was as low as it was because of the American mass of credit ,shich was artificially manufactured there. "In discussing tha influence of the bank rate, you have got to bear in mind that the bank rate has no influence uoless you have got an account on both sides. If you have no existing loans, you canTt jbring about con traction by an advance in rate. ■All that we were intare3tad in doing in the early days of the Federal Reserve Bank was to earn a mere dividend of 6 per cent for the member banks, after paying all ouf expenses. I might say in these days we had a very distinct contrast in the character of the relations of the He3erve banks to what we have now. This is the great money market of the country where dealings in short time paper especially centered. A H of these bankers' acceptances came to tills market as a rule and opened up a market where the short-time Municipal borrowings were generally negotiated and consequently we had a peculiarly advantageous position in Hew York «h$ch enabled us to entice our funds. It resulted in an arrangement between the Eeserve banks by whlck we divided up the various banks. I think it la no exaggeration to 8ay that this has worked out to better advantage than we had expactad. *1 aa not going to attempt to revie* the period of the war, ■siien we export®ced all the difficulties of adjusting rates* it is full of controversy. It is a bife subject, and Ur* Snyder gently suggested that that would be an interesting thing to talk about, and I chicked it* In gefaeral, I think I aa safe in spying that we aade about as many mistakes - I say •je " for we were sinply one bodjjr after a ll, the Treasury and Reserve banks - as could be ex pected, but, on the *hole, I think we aade fewer mistakes than our friaods an the other side of the water aade, and certainly very fewer mistakes than the enengr on the other side of the water aade in financing the war* Skipping that point, I want to cone right damn to the pres ant and nhat is taking place now* I want to i&lAdtrate this by giving a few of ay observational •On Hay 9, 1901, I happened to be in the Stock Exchange, and oa that day, between 10 a$d 1 o’ clock, we saw Northern Pacific stock advance to $1,000 a share and money lending at about 100 per cent. There had been previously no such complete collapse of values in Wall Street as had occurred that day up to 1 o* clock. Towards tile middle of the day they sent word vexy frankly that their boxes were empty and they could not send in aore aarglns* Our loans got so low that I f we had attempted to liquidate them the proceeds of the collateral would have been insufficient to pay the faco of the loan* In other words, i f very aany of the loans had Matured and the sale of the collateral took place, it would have resulted in the complete collapse of Wall StBeat. Later a plan had resulted In the sale of lorthexn Pacific stock and Kr* Morgan and his asso ciates sent out word that they would not be unduly severe in the sending oat ht aargins, and later prtes had risen to a point i&ere the loans could be aade good and mon^y was practically unlandable* "The point I an trying tobzing oat, in telling this sfeory, is ttat -4 t it presents a picture of a complete collapse of valuis which resulted in a con dition that meant insolvency. Monoy was over, and money got back to normal rates all in a period of about five hours. In similar fashion, that is what happened in the United States, and in fact the whole world in coaaodity valnes. and extravagance worked oat their own natural conclusion. Speculation There are those who say that 3ooe defeigh of man or men, or paesibly the reserve banks, by advancing rates, had brought about this state of affairs. do not think most people do. I do not believe it for a minute, and I In general, I would say that no man or men had the power to stop that great wave of speculation, and no man or men had the power to stop the break which took place. On the other hand, I would say that certain poli cies might have been adopted so that it should not have readied its extrsae limits. "Evaiyone now is satisfied that something must be done to stabilize the values of goods* and they will be stabilized to some level. Cartain houses that retail goods, or certain houses that wholesale goods, or certain houses that manu facture goods, by reason of foresight or some other circumstances that gave them a more favorable posit ion than other competitors, may be out of debt and not have large inventories, and are able now to biqr and stock up with goods that are coming along from producers, manufactured out of cheaper raw materials and by cheaper labor than the goods and existing stocks which are being carried upon borrowed money. The tendency among retail stores at present is to keep new goods and cheaper goods in competition with high prices. It is forcing down the sailing prices of ths old ones and there are some new levels taking place from it . ing in bank credit. The same thing is happen Put yourself in the position of any bank officer in this city and see what happens in the daily trend of your business. At the end of the day he may find that he has a surplus of reserves on deposit at the Federal Reserve Bank. That surplus is the result of a great variety of transactions in the member banks. The member banka may have made some new loans. I may have loans out. The net results of all these movements may have had some bearing on his reserves. going on every day. It goes on both sides of the account. That is The bank ifcich is short in Its reserves willcome here to borrow. In fact, the number of banks that are borrowing from us now i s , I think, more than 100* is soon as a bank gets in that position where it has a credit balance at the clearing house, then it has a choice of what to do with that credit balance; than it goes out to seek an investment, and, under the conditions that exist to-day, it seeks the very best and safest investments it can get* ’The banker is a little timid just now and he is willing to debit his competitor for good commercial paper only. The influence of the lending bankers that are out of debt is the influence that will bring the market rate for mon^ down to or below our rate* liquidate all of our loans* That process continued indefinitely would, of course, I f the traditional policy of fixing the rates of the Federal Reserve Banks should prevail, I should presume we should always have our rate a little bit above the market rate. Of course, we should always provide for seasonal movements, or crop making, or withdrawals of gold from the United States, or hea-vy borrowings. This process I describe is what is liquidating the loan accounts in the reserve banks to a great extent* I want to coma up to the point of describing, or prognostigating, i f you please, a little bit about the future. Before referring to the future, I want to refer to another important influence an our rates and an important rate consideration in the Reserve bank. "You know that every time the Treasury of the United States puts out a loan and places that loan, as it does, through the reserve bonks and the member banks, the first transaction is for the member bank to buy the certificate, to make payment by credit, and then, if they can do so, to sell the certificate to a customer and to the public and make a profit on the deposit. You can see that if the member bank can't sell the certificate of Indebtedness they can't make this profit* It is the thing that did the damage in 1918-1920, and the policy of the reserve banks and TrtAPUiy Departsait together should be designed to get the largest amount of money that can be obtained for the Treasuzy1s notes at the lowest rates of interest and at tho largest security to tha ptfblic. You may say -6 that the rate allowed by the Treasury must be sufficiently attractive to the public to enable the public to biy then, but sufficiently unattractive to the banks to make it unwise for the banks to retain them, and have every stimulus existing to sell these certificates to the public just as promptly as possible* "It has been necessary for the past three years to determine rates be tween the Treasury and the Reserve banks i&ich will enable the Treasury to suc cessfully float its certificates, and at the same time to relieve the reserve banks and its members of any chance of loss. On the whole it is working now and the certificate Issues are almost immediately distributed to the public when they are offered* "I want to refer a little bit to the future, is to whore we might land if all of our loans were paid off and we had a huge bank building and a payroll, and doing all sorts of things for nothing, with a gre&t big expense account and nothing coming ift. I do not think that is going to happen right away, however, as we have two billion dollars going to the reserve banks now* Let us assume that the day is coming whan the banks of the United States are not going to find it necessary to borrow from usthe way they do. Ho banks like to borrow money* There is not very much profit to then when they are paying 6 or 7 per cent* ■We deal principally in the Federal Beserve Banks with three kinds of credit instruments* One is commercial.paper, another government securities (the government's long loans and certificates of indebtedness) and the third accep tances, which principally are drami to represent importations of goods from Europe* "When all the commercial paper gets out and a considerable part of the borrowings on government securities are repaid, we will be able to put our rates dom . From personal observations while 1 was abroad, and a comparison of banking methods generally, unless I am mistaken, through the influence of the Federal Re serve System, we could use this great reeervois in financing great ccaaodities throughout the world* ■For the first time in the history of the United States, ve are in the position of being a lending natiog, instead of a borrowing nation. Europe for years is gafag to be pressed for capital to rebuild her industries and to re establish France, and they are going to be burdened with enormous debts, and this country has, in proportion to its wealth, a ouch smaller public debt than the European nations* It has a great mass of fluid capital, which can be anployed, 1 hope, and for the first time can compete with the eomerce at the world in doing a real banking business* X should suppose we now have #500,000,000 or $600,000,000 of bills representing international transactions and commodities. #2,500,000,000 the rate could be changed* I f we had Z do not think I could do better than read you a paragraph from a very able document that appears on that very matter, a paragraph from the so-called "Ounliffe's Report." It is from a select committee appointed to make a report an foreign exchanges after the war, in London: (At this point Gov* Strong read tho paragraph referred to, beginning with "The adverse condition of the exchanges Was due not merely to seasonal fluctuations, but to circumstances pointing to . . . . n and ending with the sentences *New enter prises were therefore postponed and the demand for construc tive materials and other goods was lessened**) "The point is this: that the Federal Recarve System, up to date, has been engaged in a purely donestic, local war operation. We have been financing the war fcr ourselves, to a great extent. Tou can trace almpst the entire bor rowings of the Federal reserve bank directly to the war. The time is coning when the American people will gradually repay this debt and the Federal Reserve System will be free of government borrowing and then we have got to take our position in the world, and, unless I an very much mi?taken, that will come as the result of converting a very large amount of the paper which we now have in our vault into this paper which old Rothschild described as "salt water paper," because it had crossed the ocean And represented the payment for international goods. But there is one thing that we mist bear in mind in connection with this,- and Mr* Snyder has notified me that he ha.- three reservations - in connection with this prognostigation. reason beyond all others* The reasons for this are theses 1 put the first The general feeling that 1 have observed throughout various par$s of the world is that the English banks aro safe banks to do business with* The second great reason is that they have built up the facili ties to do the business well, carefully, Intelligently and promptly, and the third influence is that London has had a great reservoir of fluid capital to «nplcy in this business. fundamental influences* How our condition at present cooprises just those three We have our integrity, our character, and our ability, just as good as that which is produced in the British Isles or elsewhere. I think, in other words, that the character test can be met by American bankers just as ouch as by any other bankers. Next we have got, or we should have in tile near future, that great surplus, fluid banking capital to esploy in this Mmi of busi ness. One thing we have not gob in the oachinezy* net-woxk of pipes connecting this reservoir. Wo have not got that great It takes years to create that* The British bankers have been at it for some generations. We con, however, do it promptly enough to place our reserves at the service of tha world, and we have got to try and do it the way the British have done i t . Ve iiave got to tzy establidi agencies here of any foreign banks that can coma horc and also abroad, and to do business Jji out aarkrt and borrcr money. A benk would not be worth a dant if it just received money and did not lend it out. We should encourage the landing of money abroad and we should employ any agency we can got hare to help us along this line. ■Mr, Snyder, I /marant'sed to tire -this enthusiastic audicnca in hftlf an hour. I have no talked for nearly 4E minutes# Have you any points to make in connection with this matter? Mr* ^lydar remarked, in reply: "I am sore that, now that we have the Governor here, wa would like to ask him soma questions** -9 Ur, Oasa was called upon by Mr. Snyder, and reaaxfcedj pick an me? I do ^ picking with the Governor do^n—stairs. Mm alone for the present. ■Why do you I am going to leave How about picking on Ur. Skjyder?" (Mr. ^toyder) "How can wa become world bankers if we do not make money interest rates? Is not that the great obstacle now to this country becoming world bankers? England* s rates are always better than oars. Th&t is the source of their great strength. (Governor Strong) ■When I was in London I always us^d to say, with perfect good faith, that I did not think there was vary grest danger of their losing their business so long as the opportunity for the employment of capital in this country was as great. I really think conditions have changed, I think the/ have changed be cause they* are going to be put to it for capital for a time. guess you think so. I think so and I Where they are going to lose is in ths enormous daaand upon them to pay debts, and it is going to tax their reserves to the utmost to pay debts - to pay debts to this country and to pay the interest due this country. Th^r willtake some of our investment money, i f we are willing to let them have it, at pretty high rates, and I frankly bali*ve that this Federal Reserve System, by a capable adjustment of rates, will have plentjr of reserves to coapete with than, to a reasonable degree, in financing at least our own important trade. I have real confidence that, with the resources we have here, we can get our share of any foreign trade we go after.* (Mr. Snyder) "How can we get our rates down, so as to meet this competition and still not have another big wave of inflation? Do you see aqjr practical means, consider ing politics and everything else, of meeting Just that thing?* - 10 - (Governor Strong) "What I +-Mnir x do see, Mr. Efaydar, is this: that the developaent to which I referred is not going to t Ofce place over night, nor in a year, nor even five years possibly - nor even a longer period. did. I would be afraid of it if it But I can see gradually creeping into our market bare thorns conditions which would be most conveniently drawn for geographical reasons, because they represent our import trade* Where it becomes a convenience, at a competing rate, to do business in this market, 1 do not see any prospect of easier money in Europe, do you? Think about thatI" (Hr. Case) "Well, Governor, London was the world's banking center before the war, and all these bills, iaport and ecport bills, were largely financed by London* Isn't it a fact that the world war has upset that to such an extent that she does not seek, at the prese t time, to do more than to look after her own import and export financing, and is very glad to have diverted to this market any import and export transaction that properly belongs here? continually finance the world's business. She is Jot no position to She did before the war* We are getting our machinery up to the point where we can compete for it row* (Governor Strong) "What happened is this: they took increasing control of all the imports and no one could prqperly import anything without a license and the great bulk of the imports wire for account of British companies. All supplies and all things, in fact, were required for the a n y and navy, as well as the civic population* How the British Government paid cash, and the British treasury borrowings took place in adiftBM, in London, of this mass of bills that otherwise would have been drawn to represent the imports of the civic population. The facilities to do business still existed — like the Bank of Shanghai, and so on* are Increasing fcfca in the east* The standards of civilisation There is a greater consumption of goods* There i i - li ft greater aarount of business to go around. We will do still more than we do sow through the foreign institutions of the world* Certainly, i f it is possible to Sevelop some hundreds of millions of bills at the present tine, we gill continue to do it in the future.® (Hr* Morgan) ■Do you think it would be in order to tall us what effect you tJHwif the change in the discount rates in this country will have upon the moveasnt of gold? Do you think conditions are sufficiently normal now?* (Governor Strong) ■Tour question is a little bit like the question where the State asked the witness whether he is still beating his wife* rates will decline. I as assuming that the interest Ve have reduced one of our rates a little bit. I do not believe it is possible to answer that question, Ur. Morgan, except speculatively. — Turning to Mr. Snyder — ) Did you put him up to ask that?" (Laughter) (Question) "Mr* Snyder has possibly lost sight of the fact that we h aw two facil ities. We have a rediscount rate which is offered to various lines of business which do not necessarily have to do with our foreign trade. market purchase rate. We have our open We might keep our rediscount rate up to within a point where it is now and this would enable us to advance the business and still keep in with other lines of domestic business? (Governor Strong) "That opens up a field of discussion. step Shepard Morgan’ s' questions. It enables ma, first, to side I think it is a aistake to assume that a special rate on import bills is going tp be any check to inflation or expansion in this country) because, after ally you can’ k identify these dollars and insure that - 12 they ard just below that type of transaction, and, eyan i f you did, it would release other dollars for employment in other directions* The fact is that, according to ny theory, what we dispense at the Beserve bank is credit* not one kind of credit, because it Is exchanged for a co m m ercial b i l l , It is or a commercial note, or & banker’ s acceptance, or a government band, but it ife Just credit, and unless you meet that credit through this bank, it does not perform its function, and it does not make an y difference whether you get it out wifch a rake, or a hoe, or a spade, - it doe? its business ju,st the same. You can get at these reserves of ours with any kind of an instrument you please. By estab lishing this preferential rate we ase able to compete in a certain line of busi ness, it is true. "Veil, Ur* Snyder, I have doubled ny promised time and now eveiybody expects to leave at 5 o’ clock, as they have a dance an** (Mr* Ssyder) "I am sure we are extremely indebted to the Governor for casing here and let us ask him questions and giving as such an <n.m <n*«ng prospect of this country entering the world war* Maotftng A d jo u rn e d . Our best thanks Governor!*
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