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CONFIDENTIAL
NUnber of Copies 140
CopyNo. 0
WAR FINANCE
By
Mr. Benjamin Strong,
Governor, Federal Reserve Bank.
Lecture delivered at the
General Staff College,
Wash in^tyn, D. C.»
April ll, 1C2X
STTPLY COITRSRNO.51-.
In talking over with you the financial aide of war, my mind
runs ineviifably to the financial history of the late war, and the
fashion in which this resembled, or differed, from previous wars,
of which we have full knowledge. Without particularizing, I have
formed a profound impression that from generation to generation',
so far as. we can discover, the nations, and the financial heads
o f the nations, learn little, and remember less.
While we are proud of our own achievement in financing this
great war, on the other hand, we realize some of our mistakes, find
we realize, even more clearly, the mistakes of others, because they
happen to have been greater than ours, and we must attribute these
mistakes principally to the little that has been learned of the his
tory jof war finance of past years. It seems as though that history
had been pretty well blotted out in the minds of the present genera
tion*
There is, however, one notable exception in the financial his
tory of warfare, all the more remarkable because it occurred over
100 years ago* Without desiring to contribute to the common tendency
of attributing to Napoleon, the qualities of a demigod, I should point
out the-striking fact that Napoleon fought his great wars, practically
fought the civilized world, for 19 years with sound money. In th6se
same wars, England abandoned sound money, issued paper money which
became irredeemable, and stayed uppn an unsound paper basis for a
period of 21 years. France’s prompt economis recovery from the effects
of the Napoleonic wars is common knowledgec
When we observe the chaos in finance which has paralyzed Russia,
and is demoralizing Austria and Poland, and to a somewhat less extent
Germany, and then consider that in the Napoleonic wars, France stood
out against the rest of Europe for a period five times as long as did
Germany in the late war, I think you will agree that a sound financial
policy must have had something to do wvih this remarkable feat*
Commenting upon this period, the late Ex-Ambassador Andrew D*
White has the following to say;
"When Bonapai’te took the consulship, the con
dition of fiscal affairs was appalling. The govern
ment was bankrupt; am immense debt was unpaid. The
further collection of taxes seemed impossible; the
assessments were in hopeless confusion. War was
going on in the East, on the Rhine, and in Italy, and
civil war in La Vendee. All the armies had long been
unpaid, and the largest loan that cou’rd for the mo
ment be effected was for" a sum hardly meeting the
expenses of the government for a single day*
"At the first cabinet council, Bonaparte was
asked what he intended to do. He replied, 'I will
pay cash or pay nothing.* From this time he con
ducted all his operations on this basis. He arranged
the assessments, funded the debt, and made payments
in cash: nnd from this time - during all the campaigns
of MarengO; Auster'litzj Jena, Eylau, Friedland, down
to the Peace of Tilsit in 1807 » there was but one
suspension of specie payment, "ind this only for a few
days o
•'When the first great European coalition was formed
again at the Empire,, Napoleon was h*»rd pressed financially,
alia it was proposed to resort to paper money; but he
wrote to his minister, 'While J live I will never re
sort to irredeemable paper.5 He never did, and France*under this determination, commanded all the gold she
.needed. When Waterloo came, with the invasion of
the Allies: with war on her own soil, with a change of
dynasty, and with heavy expenses for war and indemnities,
France, on a specie basis, experienced no-severe finan
cial distress»"
We cannot assume thart this policy was distinctly of Napoleon
creation* It may have been the prodduct of his time and his personal
experience, or on the other hand* experience ^drawn from the desperate
period of the French Revolution. As a young man, and even later as a
General,, Napoleon hnd himself received hi6 pay in a depreciated currpncy
of constantly reduced purchasing power, and it may be fair to attribute
to his microscopic v-1 ^ 0 :1 , as. a military man, a more just appreciation *
of the importance whish finance plays in successful warfare, than is true
of Finance Minister?; wh” have nothlag to do directly with the feeding
and maintenance of annisiu
. Our own history, from the days of the Continental Congress until
after the conclusion o f the Civil War, contains an unbroken record of
unsound finance, in which we experimented with every expedient which
has been condemned
bistory and experience. France, during the Revolu
tionary period,. had eufx'eied from vast issues of paper money, commonly
called ."assignats ** W e . during our revolutionary period issued our
famous Continental cv..-r&ncy* A s Washingtcn phrased it, it took a cart
load of the stuff .to buy a pair of shoes. You are doubtless familiar
with the iact that the wurti£Lessi.-*ss >;.f th:!.s paper money gave rise to the
phrase, "not worth- a continental »•* I ehnl „ i
later to our own
Civil VJar experiences in finance in contrast ivith those of the past war?
With this brief suggestion, indicating my belief that a finance polic
in war is too important to be overlooked as an essential part of a well
planned military program, I want to ask you to revise what may have been
your previous ifieas of the position of a Finance Minister in time of
war. Look at war finance as a problem in production of goods and
employment of labort and consider that the Finance Minister, and those
serving him are simply the bookkeepers who are charged with the respon
sibility of making bookkeeping records of transactions in goods and labor.
At the risk of going over elementary ground, with which you are thoroughly
familiar, permit me to summarize by illustration, the great problem of the
•
3-
freduction of goods, and the nobiliz«tl«n «f labor for the purpose of
conducting war. In a rather narrow sense, and for the purpose of
thiB argument, I would like to divide all goods produced by labor into
three general classes. The Glass ification is narrow and not very
exact, but useful for purpose of illustration» The classes, I will'
call:
1 m
Productive#
2. Useful*
3* Wasteful and Useless*
The illustration will be in the employment of, say, 1,000 tons
of ore, which is taken from the ground, goes through all of the.
processes ef smelting and fabrication, and erection in the form of a
Corliss engine., which is opefeatftd in furnishing power for the manufacture
of sewing machines, or for the spinning of cotton fabric. Here we
have one illestration of the most productive employment, of a product
• f labor and of the material employed. Falling within the second class,
useful but not productive, 1 st us suppose that this 1,000 tons of ore
is converted into a beautiful monument, illustrating some important
event in the history of the nation* It is not productive, but it is
distinctly jtaeful, in that it is4 to some extent, educational} it has
an aesthetic value, and gives enjoyment to those who look at it. The
economist recognizes that the employment of labor and material in
ways which provide simply healthy aesthetic enjoyment, isuseful, al
though it may not be distinctly productive*.*■As illustrating the third
class, let us suppose that thie monument proved to be an ugly, grotesque
affair, which people went out of their way to fevoid seeing* •Certainly,
this would be neither a productive nor useful employment of material
and labor. In the narrow classification, which S am employing, it
would be wasteful and useless* But, here we come to the fallacy se
frequently deluding to even thoughtful people, in regard to this form
of production*
They say at onoe that those who are employed in pro
ducing this ugly monstrosity, nevertheless earn wages which enable them
to support themselves and their families. That argument is wholly
fallacious, and is demonstrated to be so, by reduction and absurdum.
Suppose all of the people of the world became infected ’vith eome strange
madness, whioh led men to lay down their tools, and devote their
energies solely to the production of useless and ugly articles of
ornament? The world would shortly atarve, there would be no food,
elotltia# or housing for anybody.
This rather fantastic illustration is intended -to lead me to
the point of stating, definitely, that in a narrow economic sense, the
labor employed and the goods produced in waging war serve just as
wasteful and useless a purpose as was the case with this ugly monument*
To be sure, in a political and social sense, warfare may be useful and
necessary for the protection of people in the enjoyment of their liberty,
and even in their freedom to produce useful and productive things, but
in a narrow economic sense, 1 think we must accept the doctrine that
the goods produced and consumed in warfare are in the main, and at the
moment of use, sheer waste. But it goes even further than that; war*,
fare net only destroys things, but it calls for the production of an
4increased quantity of goods in order that they may be destroyed. Simple
illustrations are. in clothes, food, fuel, etc» Men taken from Sedentary
employment and put into the field for drilling,«rtianeuvering and fighting,
wear out clothes and ahoefc faster, and actually eat more food, than when
employed in peaceful occupations * A great' war" fleet patroling the oceans
at high speed* consumear'tfcre' /uel in time of war' th'ah in time of peace
when anchored'in port, or proceeding*'lei&iiii'ely-from one port,to another,
so it goes through much of the actual operation of armies, that not only
must goods be destroyed, without "productive^results, but an increased
quantity of goods must he .produced ^f'qr'this ^'destructive occupation.
Theoretically, this demand for war supplied*in larger quantity, and of
different kinds, than that required in peace time could be met were
society so highly qrgani,zed that the civil pojjulatibrt 'could be promptly
induced,-or required, ?$o £9 redu.ce thei^ 'demands' foif goods andkffcr ser»
'vices of labor, that..ft, sttJf^ignt,,y^ijime of. goods1 and a’sufficient
supply'of. labor.wwld released to support the opSratifcns of armies.
No system-of government, in.. jfact no. ec'pritiirfi'c'Vystem, has yet been
dfevised which wo.uld cause,.a civii population of the’ 'c&intry to immediately
fe’
duce demands for-gocjds;/^ .the ppipf wh'ere aVfcfe'6: cduld be Adequately
supplied without -some,fdncyrease in production. Were 'that' sbj- ’war.- finance
Would be no problem. •,l*ook %t this, from another' point of viei!^ Were it
possible for a governments at. war to levy contribution’from labor and pro
ducers, so eqitably and justly, .that each would contribute’his fair share
of the goods to be consumed-by armies in t*®1® of war, again, war loans
and war taxes would disappear,*.-. The manufacturer of spades, for-example,
woul'd-turn over, without pay,:i10 $ or soflje.percentage, of‘his pro'duotion.
The same5with the- farmer OTd.the-, spinner, each turning out' so much in
goods ih lieu of the.'payment, of..tax.es, pr the purchftsV of -war Toens. Nor
is' this suggestion so■fantastic -as it. appears, when;Sft'fs recalled that
in the Middle*Ages, under despotic f.orajs. of governments o'r more recently,
in the day's of'the feudal; sy.etsni), warfare was coridycted almost exactly
by this taethod?; The King called his .^nights and S4r3ns-to arms’, each
bringing v/ith him-So many men --at arm?,.tirjd;.e^c^ furnishing so much of the
required supplies;
■>
....^
‘
’ Under our modern economic system, howpver/jrian's labor, and the
product of his'labor, belongs to himself* ^jfiat war destroys in goods,
ar wastes in- l'abor, must be furnished during the wai{'period, and the only
way in which the government can. ^et control.of, this product is by process
of law, that is, by conscription in thje c.ase .,o.f labpr, an<l ’by taxation
.or borrowing in the case of goods or materials, wfiat cahrfot*’be paid for
at once out of taxes collected’during .the war.period, must be paid for
out of the fruits of the Energy of labor and out. of the profits on goods,
produced by later generations. We are.approaching the point ih this
argument where the Finance Minister As called upon to keep the books.
If you agree with me that economy by* the civil population of the
nation at war wili not certainly pt once be adequate to release the
required labor' and goods for war pfurposes, we must then assume that the
nation at war bec'omes a bidder for goods in competition with the civil
population* Military necessity.recognizes, no.economic laws when the
winning or losing of battles depends upon the speed with which prcdudtion of war material in adequate qu'intity can be effected* The toar orga
nize tion not Only bids for goods and labor in competition with its own
civil population, but in competition with other governments that ire at
war, and even with other depsrtments of its own government. We know
that is is the 5 or 10$ surplus or 5 or 10$ shortage of any kind .-of pro
duction which determines the price for the entire amount produced. So
when the war demand for goods arises, failing a system df direct confiscation and conscription of goods and labor, which is adequate and just, and
is distributed fairly, failing n system which induces or requires economy
by the civil population, we find the old rules of competition engaged in
fnarking up prices. As prices advance, the cost of labor advances* The
Finance Minister, being the bookkeeper, id engaged in raising taxes and
placing loans to meet demands for goods, at a constantly increasing level
of cost, and as payments .are made for these goods, extravagance and waste •
develop* ‘The classical theory of the influence upon prices exerted by the
quantity of money, or of purchasing medium in circulation, begins to operate.
We shortly get into the position where the "dig is chasing his tail.1'
Higher prices induce higher wages, which cause expansion in credit
'ind currency, which again,raises prices and wages, and so this endless
oircle is gradually being enlarged ivith all of the consequent evils ef
inflation, expansion, extravagance and waste. 6ne may well ask; hew
can this all Be avoided? It is, unfortunately, necessary to admit that
the,experience of the last war demonstrates that these evils are not
to be wholly escaped; that.in war the choice of a policy by the Finance
Minister is usually a choice of evils, rather than the selection of an
ideal policy; and that the best that he can do is to mitigate a situation
which cannot be fully controlled. Admitting, therefore, t M t produc
tion must be somewhat increased, and that some bidding up of prices of
goods, and wages of labor, is unescapable, the question is, how this
increase can be best financed, first, out of the savings of the present,
and second, by anticipating the savings of the future. I think 1 can
best illustrate how these difficulties of production of goods and employ
ment of labor may be dealt with in a financial sense: by specific refer
ence to the polipy of our government in this war, in contrast with the
experiences of the Civil Ylfar. When the. Civil War started in April 1861,
the finances of the United States Government were in excellent condition,
its bonds were in keen demand, it had a very snail funded debt, and ample
revenues# V/ithin eight months, specie payments had been suspended, the
country was in the throes of financial disorder, and Secretary Chase had
paid as high as 12$ per annum for temporary loans. Before long, the
expedient of printing fiat money was resorted to, I think, reluctantly,
on his part, but with that curious complacence on the part of Congress
in financial matters, which has characterized the acts ef legislative
bodies in time of war, for generations. -It seems as though legislators
regarded paper money, as a specie of "painless denistry'' in war finance,
wl’.ich. might be employed without fear of serious consequence. V i e paid
a penalty for unsound Civil War finance which it took 15 years from which
to recover. We saw gold selling in terms of paper money at 280$, prices
Referring first to methods ofi taxation, the subject is so Snvolved,
opinions upon taxation differ so widely, and have produced so much controversey, that it would take too ling in the present discussion te refer
to that matter beyond the briefest outline* The important principles
to be borne in mind are; first; thatltax revenues, in order to avoid
the imposition of hardship upon the poor, must be calleoted by direct
taxation measured in proportion to the means of the tax-payer, and second,
that the amount to be collected by taxes should not exceed that sum which
the nation can pay, without crippling industry, and stifling enterprise*
In other words, without curtailing production- As to the first principle
it is easily illustrated; if a tax were, imposed upon bread, meat and other
essential foods, and upon simple articles of clothing, and upon house rents,
the burden imposed upon the working class would be outrageously unjust.
The proportion of earnings of the laboring man expended on these necessi
ties of life is very great; with a man of large income, the proportion
is trifling. It is a form of direct taxation, with all the evils of in
direct taxation, which disregards the capacity of the individual to'pay
the taxes* This same objection exists in most forms of indirect taxa
tion, including the much discussed "tax upon sales.” Probably the most
just method of levying a direct tax is that found in the graduated income
tax. One of the defects of the scheme of taxation devised by Congress
in the early’days of the war, was the fact that it was overlapping, or
duplicating, that it had a cumulative effect. It taxed the profits o f
capital where engaged in industry and commerce, and then taxed the
income of those who received the residue of profits of commerce and
industry, after the original war and excess profits taxes had been o»l»
lectedi In some caae9, but not in all cases, these taxes probably did.
have some effect toward restraining enterprise and production, but not •
nearly so great, in my opJnion, as had frequently been claimed* With these
few words on the tremendously important $Mbject of taxation, let. us turn
to the question of loans.
Assuning that a 3ound aad adequate system of taxation, which provides
the maximum revenue, without unjustified burden upon any class of.people,
and without restraining pT*odi!ctio:i, is adopted, there will nevertheless^
and inevitably, in such a war as we have just experienced, arise the
need for borrowing to meet war expenses in excess of what can be provided
from taxes. The effect of a loan under those circumstances is simply to
postpone the levying of taxes to a later date, father than to impose
them during the war period. It is anticipating the profits of future .
production in ord^r that the government1iR^^%8ef^¥ from people of means
the necessary purchasing power whereby to pay for the services of labor
and to acquire the goods required for wa: . It is taking a share of the
profits realized from future production and spending them immediately.
It would be unprofitable here to dis'uss the various theories as to the
kind of borrowing which should be employed, thmt is to say, whether long or
short time bonds, or perpetual annuities, or otherwise, and what the various
terms of such borrowings should be, except as to a few of the most essen
tial points; first, as to tax exemption. Herein lies an evil, unfortunately,
nat vfoolly fescaped in eur own reoent record, which is 'almost as dangerous
in its social effects as is the "painless denistry” of fiat money in its
economic effects* A government which borrows money for war purposes is
asking those of lerge means is g-iva up nothing, but rather tierlend their
credit to the ■govfefeinent ifl the expectation of full repayment with
reasonable interest. It' ie fibt euoh- an act 'of confiscation as is taxa»tion. If, in addition, that man of large means is giV*&, exemption ffrom
taxation v.pon chs income ffrom the'bonds'which'he purchases., the opportunity
is afforded to him,;and to’all those of"-!vis Class, to escape the real
financial burner* ef the war, by Enabling him to:convert a large part
of his - p r e p s ? i y into wholly tax •ex'enpt -securities., and so escape his .just .
burden o-’ tnxa?* It i'a distinctly class legislation which terJ.s to threw
the. greater shwe' of:tao bcrdea ofw a r coet*. upon the pdoc'6 it gives
an advantage tj these wlv; enjoy ihScmes which they do not earn ovex* those
who get their
fi-o-'i gainful fcedapRtions, and, in my opinion, is
wholly viciov.s cad ansavrj.* Tha ibext-principle’to observe, is to avoid
employing bank (.vecJ.t far wsr loansj and:seek to'place £.1 bond issues ih
the hands of the iscvea c^ng ^ablic, i n bonds of as long maturity as may be
justified by the cirrjaa-vtanceis o'? the war,, and the government *is existing
debt and /revenues > The employment of bank credit, that is, either
direct borrowings, or 'indirect borrowings by the government from banks, is
a fora s i . inflation f.ecord only in its inflationary effects to the print
ing of fiat money* X do not wish to be dogmatic in this statement, and
will only point out that to the'excent tiwit taak loans are expanded through
these war borrowings, j-.;et to thtt extent prices have risen Or will rite*
the cost cf living ii'icroafjSf and the 'whole economic-situation' becomedisorder ad and clls^r6s.:i.».;ssuf> One of the misfortunes of our ‘firiancial
progrten during this v a t lay .in the tact- that wa were called"upon'to'
1
finance -aye on’
ry our own vmi effort, but' *i considerable- share'of"that of
our ‘associate*:/’ .!•'•• soenv. b-nrowing money by our Treasury .ia aiftount-S far in
exfcess of th;e s.w:.&5 3w t : a n i . - i . f of the country, even after a ifiaxinua ofrevenue had bees rcali.zeA from taxes • On that account, after people had
invested the loarbura of their <ru-rent saringa in irar loans, we had to
ask them to anticipate tbs savings <»f the future by subscribing for loans
which they could net at once pay for in full. We even 'exhausted this
resource and it bficaa6 necasaary far-tr.S Treasury to fcoirow money directly
from the•commercial banka ?>f the’country upon its c-wn 'Short notes* It
was in this lacte/ particular- tnat $he economists cf the country attacked
the Treasury pregma, not realizing iii nnst cases, that the policy of the
Treasury was one of the consaquencss of the competition-' t® which I
have earlier referred,-which had the effect cf’raising prices* rather *'
than being the cav.se of- u n increase in prices, as argued ’ b y thrse who
adhere too slaviphly to the quantity theory ci monoy. in ^-inaral terms,
what happened with v.a duri/jg the War was' thci the Treasury >;-a3 chasing
rising prices by raising increasing amounts of•taxes, se&Litg constantly
increasing amounts of bonis, and finally ■m.ifer •the pressure of necessity,
borrowing increasing aiaouate from the bant e •
» Had tiaa goods required
been forthcoming, witbe.’t competitionr either as the'result of voluntary
eeonony, or as the result of some form ef conscription af material and
labor, prices would not have risen,'and'the material's required for war
would have been furnished, and the-amount ef borrowings'W3uld have been
moderate and withir* the cay«city of th* ?.nve3ti*»g public to absorb without
8« greatly anticipating future savings* Tv?-v,he-extent that the goods ta be
purchased and destroyed in. the war effort cannot be met oijt of current
savings, we must, inevitably, in some form suffer inflation of the
currency and thereby add.to the tendency of rising prices* I wish I
might illustrate witft exactness this insidious and dangerous process of
inflation. It is almost impossible to express it in words and figures
without a chart tQ illustrate the process, and I shall ask you to accept
my.statement, unsupported by a. mathematical illustration, that inflation,
and all its evils, is ,.the invariable accompaniment of a war which cannot
be wjholly conducted without,increased production and competitive buying.
I do not wish to burden,you*with a mass of figures, relating to the
financing of the war, save for the purpose of illustrating the points
which I have tried to make dear. The Federal Reserve Bank of New Yofk,
which had to.carry the heaviest part of the burden of raising this money,
actually sold, $64234,000,000 of war bonds of the five loans, which was
nearly 30$ of the totfij.,,'and which represented 12,373,672, separate
subscriptions♦» It also, raised in the short loans, to which I have .re-,
referred $2,500,000,.000Ao. $$3,000,000,000 principally through the sale
of certificates .ip>;fche-banks, of the Second Federal Reserve. District;, this
being, in fact* a.rr.eV©lyal,credit 6f constantly increasing volume. But,
6ur. effort was dirftpted; from the .beginning, toward eff.ec.ting the widest
possible distributibh of the long-time loans .to actual investors, .and
only where,imperative that we should do so0 did we invite investors, to
borrow money in order..
subscribe. f)f the mimey raised on ,short cer
tificates in the early, days of the war , no less than 80/£ of the amount
outstanding was at- times owned by the commercial benks* The efforts which
we have continuously made to secure a distribution of these certificates
to the investing public has now reduced the percentage to very small,pro^
portions in oui* district J.probably not more thnr. 4$ to 10$ of the cer
tificates outstanding are awned by -.banks.* The amount of bonds and,
certificates held by the banks is constantly being reduced. .It 'is .a
part of the process ct deflation now, in full swing.
A most inter.est.ing feature of th.q financing.of the wet'r was'thq
machinery employed to.raise the.money.*, Few .people realize that.Reorgani
zation was .created which.meant thao for every soldier in France\ even’at
the maximum .strength, of our army., there wag one person in .the war loan
organization raising money at home. It is estimated that over two
million people we;re mobiliz.ed. in .this great effqrt, and the organization
of which I was the,.head, in.,New York, was estimated to comprise about
200,000 people, operating.under the direcxion of about 3,500 committees,
created and or^anis/ad very much along the lines cf the organisation of a
great army. The..whol§ .was presided oyer by a committee of 14 men, wh^
did no more tfrian to, direct policies thro^gh^a staff of officers assigned
to duties just;as.'specific as those applying to a military organiza
tion.
To illustrate the.exactness.with whicfcuthis work was per
formed; out of the .expense^ .and dis’ljijrsem^ntg.'aggregating about
112,000,000,-. when the'accounts were wbuiidi up, it was found that only
$2,700 had been spept in such a way that i^ could not be reimbursed
under the rather exacting requirements .of th<3.Treasury Department, and of
the Federal *udit» The entire expense of sale and administration of the
-10debtj both long and short-time, ^mounted to something like l/20th of
1 % of the amount of money raised.
To illustrate the efforts to observe
sound procedure in distributing bonds to investors, our organization in
■New York devised a plan for selling bonds by installments to poor peopJr
and wage earners, which was operated during the last three loans, and '
which resulted in no less than 2,500,000 subscriptions, of which 90$
were paid in full by the subscribers* It necessitated the employment
of an organization at one time of 450 people to run these 2,500,000
accounts, and strange to say, it resulted in a profit through interest
mnd other adjustments, of something like $350,000 to the Federal Treasury
after allowing for all expenses.
This discussion would not be complete without a few words upon
the relation which should be sustained between the army organization and
the finance organization. Summarizing the lessons in .finance in the
last war; as to the relatione between the two branches of the govern
ment, it should be definitely understood as an established fact in
connection with war, that no sound system of war finance in possible,
unless the methods of mobilizing industry, of conscripting labor, and of
purchasing materials required for. war, are based upon a sound understand
ing of war finance, and cf the dangers of. unregulated competitive buying,
without regard to the effect of that policy upon the financial program.
With all due respect to the ability of the personnel of the army, they
should not be concerned with the financing of war, but they should be
profoundly impressed with the difficulties of financing the war unless
the program for producing the instruments of war are based upon sound
principles. Without that, this bookkeeper, whom we call the Finance
Minister, is helplessly engaged in making entries upon the books of the
nation, which .are simply a record of bad judgment and bad methods. This
applies in so many directions, with which you are familiar, that I shall
not enlarge upon the subject in any detail. It applies to the restraint
by rationing, or otherwise, upon civil consumption of goods. It applies
to the operation of practically the entire system of transportation and
communication of the country, bath land and water. It applies, particularly,
to the means employed in converting existing plants into war industry,
rather than toduplicating plants, to become useless after the war ends*
It applies to the method of selection of men for the army, with a view
to maintaining production, without impairment of efficiency. It applies
to limiting the use of bank credit only to those purposes which are
essential to maintain the health and energy of the people, and the
prosecution of the war, and no other purpose. As to the distinctly
fiftancial program, we have learned that the direct taxes, graduated
according to the ability of the citizen to pay taxes, is the soundest
and fairest method raising war revenue. We have learned that government
.borrowings should seek to impound the savings of the people and not to
employ bank credit. We have learned that economy in interest rates
is a false economy, which makes it necessary to look to bank loans
•rather than to investment funds, for needed borrowings. We have learned
that short loans must only be employed where the market for long loans is
actually exhausted. We have learned that tax exempt bonds cost the govern
ment more in revenue than it can save in interest, and place an unjust
burden on the poor. Possibly more important than any other lesson,
we have learned that a sound system of 'junking and tlFHnce in time
of wnr necessitates a non-political banking system, which will respond.,
to the need's 61 war finance* without being subservient, to those who
advocate unsound finaneini policies*
In''cftnclufcion* I venture, with some hesitations toexprese the
opinion that preparation for w
by this country cjm be jiiade more
effective by thfe preparation of-plans for organizing for, war .than ’by .,
training and maintaining a- large 'any in ^ticipation. olj.war. By this
I wean a ’>ell studded pr&grara of conscription based up cn past experience,
n well-studied1 program of production and tp.an^prtntionliaeed upon past,
experience* find as a 'complepient 'to- •such- preparation a,w.ell s^dikd pro
gram' of finance worked out in such detail, -and upon such sound \ines*
that the machinery fbr financing these 'strictly war.efforts can.he
*«fet up immediately th*t th’e menace*of war arises*
r
«
• *
s »
”
»,
•I am informed that at the. conclusion of-such a .tai.k as this, it
sometimes becomes pro'fitable to nddress questions, to ..the.speaker *. I
am in a frame of mirid'to answer any questions: that I can-'and.tp tell you
frankly inf oase you- ask me questions thit I m * unable, to./answer*.
QTTESTION:
I should like to ask the question in the matter of financing
a great war, is it!fixed in the mind of financiers, as .toywiything like"
the- definite proportion, say in the- beginning ofra war* which should be
raised first by taxation, second by loans?
ANSV/ER:
.„
I can only answer by referring to the scxperieijce in this last*war and particularly the-experience-in, Great Britain* You know the
oarfe’andprecision with tfhioh’the budget is prepared by .the Earliaipent.
in Great Britain'in time of peace. TJhen this w*ir started- there•wjis ,n$
possibility’of preparing a ’budget. •.Mr, McKenna was .Chancellor, I thii|.k|.,
in. 1910, .two years after the w
started, when the first budget in
of money was submitted to the parliament, so that
the outset, for
both the war and n w y departments a budget bill passed with the provision
that there -as appropriated for*the.purpose of. war, the sum of dne
hundred pounds w d ’ such further amount ns'might .be required 1. this was.
the famous blank check •drawn* in favor. of the, Gh^n’
pelior of. the.Fxohequer*.
I really feel that the progf'ftzH of division -between; thes$, two sources'
of revenue, that is taxation and loans, has to be determined by some under
standing'of the magnitude of the war at its outset and whether it is to.
bs a naval war or <•; lrmd war*". Our experience would^ipdicAte- that the
sound pr6gr*qn would be to raise .every dollar'that *h& natioj^can.-pay by
•taxation rather than by loans. T do not think tfytt a general' proportion
could be fixed. The war with Spain was financed largely by. taxation tod
we had, as I recall, only one loan of £ 200,000,000*
QUESTION;
•
t/ould the Fin wee ffinister need from the Amy- an estimate, in
dollars and cents 'is to what might be needed, in say the first t velve
*12^5
months?
That would be necessarily inaccuratet
ANSWER:
I suppose such an estimate could not be made* Certainly
it could not have been made in the Inst war. It would be desirable if
it could be made and would be a great help to the Minister of
laying out his program. I may throw a little light on that by telling
what was done during the last war. It was found that the appropriations
made by Congress were no guide, since they represented simply the curve
of the rate at whieh the money was authorized to be Bpent, After some
months' experience it was shown that the rate of expenditute was constantly
increasing, that is, the machinery of the country was being speeded up to
provide the goods and men for the war effort and it was found that the
rate of increase was approximately $100 ,000,000 a month* I think it
was in February or March, 1918 that it was estimated that during the
summer of 1918 it would be necessary to raise loans at the rate of $750,000,
000 a month, and it worked out almost exactly at that figure but it did
not last at that rate as ling as we expected* I think that after six
weeks at that rate, the program wag reduced to $500,000,000. I very much
doubt whether the A m y could so organize its scheme of purchasing and
of mobilization and transportation so as to know at what rate the money
would actually be required*
QUESTION;
Hay I aek to 'vhat extent do you consider that price-fixing in the
beginning of war would be feasible and to what extent would it remove
the difficulty of financing the war?
ANSWER?
That is a matter whiclp has been investigated a little at
the bank and while I have not the figures in mind, I think it is shown
that, in general, the production of those articles on which prices were
not fixed increased in volume more than those for which the prices were
fixed* I think experience Bhows that it did not work very well during
the war.
QUESTION:
Would it be too much to ask you to give your opinion of the
present financial problem of paying our short time notes, the Victory
notes, and raising the #7,000,000,000 we need, in the next few years}
should that be done by taxation or by new loans!
ANSWER:
That is a subject which is now being studied. We have maturing
between the present time and May 20, 1923, in round figures, seven and
one«half billion dollar**, which includes the Victory Loan* That comprises,
roughly, between two and two and one-half billions of floating debt,
something over &250,00C,0t)0 of notee issued under the Pitman ^ct, as well
as W ar Saving Certificates and the Victory Notes. During the war, with
this organization to which I have referred and with the war enthusiasm
at fever heat, almost impossible things could be done in raising money.
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13-
.We raised over $6,000,000,‘000 in one loan but I think it is of very
cjoujytful wisdom to expect that the people of this country would refund
in pne^operation
vast ao' issue as four and one quarter billion, which
t w*(3 .tlje araourrt;of ,the /Victory issue*
I should hope that Congress) under
‘ the leadership of the, Secretary of Treasury, would be disposed to look
at that subject conservatively and begin soon to redeem the Victory Losn
in small amounts and so spread the maturity over "the period, between
19.23 and 1927. Ultimately,•these note issues must be refunded, they
cannot be kept outstanding ^o’rfeVer* Again, if- the nation’s'' finances are to
be kept in a defensive condition with' regard to' the possibility of .a
future, war,. ray own belief da that-a certain %ciurt of refunding could be
conducted during the next three, four or five years and as much as
possible,-of the floating-d-ebt should be paid off out' of taxes.
QUESTION:
We have now something like ft2,200,000*000 in gold reserve* "lie
policy has been defined a(J to ;extending' foreign oredit* The nation#
h^Ve,not the purchasing .go&6r tnow-and therefore'it must be done on credit,
tyoixld it be a sound busings ^policy for the government to finance credit
or'corporations extending.-credit with the ideA of releasing our products
and.getting the profit oft them or ‘would it be a better pBlicy to allow that
to take the natural trend>of•the commercial procefirS?
AWSWBRt
:•
,
I expect that is a question which we are going to hear' discussed up
at .,the Capitol pretty soon.- J. would like to answer'that generally if I
may.. V f e all have ourtheoriefi'. about trade and 'in' this country we have
a particular theory about, .trade, whioh I believb is a product of the .
many years during which our trade -was developed under the protective
tariff;. It has led to a .-delusion, people eeem to■feel that a nation .gets
rich out of its export trade. That is riot a fact; a nation does not get
rich out of its .export-trade alone; it gets rich out of trade, by exchanging
the. products of the soil anti of the labor of its people for products which
other nations produce. If we fexpsct to continue any such foreign trade ns
we built up during the war, which created debts 'that have not been paid
yet.and won-'t be paid for generations} it seenis that this country would
be taking a position- similar- to--that-of the country storekeeper who: invited
people of the village to com6 and buy from hia Without limit and pay when
they pleased. He would last as "long as his bank account lasted and *it the
end of that tim§ .he would probably be bankrupt’and would-bankrupt many
of his customers.
Consider the trade of nations as the trade of one business establish?*
mertt. -Rules .thart--tipply'to .th'flt storek'eepera^bus'ineBs fire no different from
the rul.-es whidi must-apply to the nations' asr a 'whole*',I shoUld look with
regret upon a policy by-this country Of exchanging our feonraodities for.
pieces of paper of uncertain payment. I:'fear "there are a great many
people who think, we ar© going to get rich- by exchanging these-good things
that we produced in the United States for paper, What we want to get in
exchange for what we export are two things— one,/T oelieye in the long run
it will be. the p^iacipai thing we will' get, — will bp goods and, failing
the goods, ’ve want to. get- good pieces of paper’. We have so much gold now
3
* %
upon which we are advancing, money in New York that it cannot be assayed
as fast as we take it in. It would appear that those who are buying goods
from us in Europe have reached the limit under the.present economio and
political conditions of what they can buy and pay for -with pieces of paper
alone. I should suppose that within a reasonable period now we will discover
that trade arrangements cannot be effected with nations that are not solvent
even to enable them to buy goods that are essential, with the expectation
that ultimately we will be able to collect the debt. How is the ex3.siing
debt to be paid except by'goods? The Allied nations owe us $>10,000,000,000
which is more than all the monetary gold that exists in the world* And besides,
we have more than one-ouarter of the monetary gold of the world right.now*
I cannot for the life offme see h«w we may expect them to pay what they,
already owe and make a .still greater debt for further goods unless we admit
we must get something in exchange, that is, something they can produce to a
better advantage than we can and which we need in the development of our
own country*
When I was recently traveling by steamer ,from the Island of Kin Shu
a Japanese boy came up to me on. the deck, said he assumed I was an American
and wanted to know whether I.would talk with him. a little while, When I
expressed a willingness, with a certain Oriental, shrewdness, he said
he had four companions and would like to bring them up for a chat also*
After talkingfor an hour or more,_he asked me if I would express an opinion
of the Japanese policy in China. I said I might be able to do so but I
had been very hospitably received in Japan and it might necessitate my
saying unkind things about their policy in China which I did not want to
do, but would try and answer by askigg them some questions* I asked him
what Japan wanted in China. He gave the.perfectly correct answer that
J'tpan was over-populated and now had to build up. industry in Japan in order
to create things for export 90 as, to extend their foreign trade and
support their growing population.
I asked him how they were going to
pay for the things they wanted from China and he said they would probably
pay money. I then pointed out that all the money in Japan would be
exhausted in a shortf.time
that- plan and suggested to him that possibly
a way to pay for those things was to ship them other.' things in exchange*
He saw that right away* I explained that what Japan needs is the friendship
of China so that they .can trade with them, whereas. China was new boycotting
Japanese goods so making it impossible for Japan to trade with China. That
is exactly what’we need today - the friendship of the nations of the world
so that we can trade with them* At the present time we need about ten or
twelve billion more <jif their goodp than they need of ours*
QUESTION:
I nm getting worried about this gold*. Some lecturers say that
we want to get all the gold c f - the world and about the time I think we
are doing pretty well, I read the papers and see that to-o much gold is
being imported and that there should be some scheme for stopping it# I
am up in the. air as to whether we should have gold, or not*
ANSWER:
Before the war broke out we had about -$1,800,r
0Q0.,000 of monet<|?y
gold in the United States which acted.as a reserve for bank credit* We t
increased that by many hundreds of million's before our declaration of war*
The effect of that accession of gold in th6 United States was .to create an
immense expansion' in currency and bank credit, As 1 stated before, it is
impossible to explain that process of expansion Satisfactorily Without
a chart, but the consequence of the increase was an increase o;f about
70$ in prices. That is the penalty we pay for importing gold unless’we have
a policy to offset the importing o f gold. The effect I refer to" is
the increasing of bank loan's and the raising of prices. It is shown by
the fact that commercial banks ’which make loans for the support of the
country's business may increase their loans, say in the ratio of three, four,
five of six times the amount that their reserve is increased by gold imports.
Every time v»e import a million dollars of gold we lny the foundation for
building up a pyramid of credit of some millions and with that we stimulate
trade and increase prices. We have, since the first part of January, rpceived
at the port of New York about $150,000,000 to $200,00.0,000 in gold. It
goes to our bank and is then gradually distributed throughout the country
to the other reserve banks. , It al'so increases the capacity of the asntber
banks of the country to inccease their lo^n accounts unless that, is regulated
or controlled by the Reserve Bank. We regulate it principally by the rate we
charge for credit which at present is pretty high - seven per cent. Gold
is like a thermometer. As you see the amount of gold increase you see the - *
delicate instrument which we c^ll the reserve ratio rise in the reserve banks.
Your partioular attention is directed to the fact that conditions have
now arisen in which men are led to believe that they can make money easily
if they are allowed to engage in speculations v'hich they could not in fact
engage in were the credit not available to enable them to do so. The
existence of the gold in the country has some effect in increasing prices
because that gold is paid for by the'Reserve B*nk by a check which is the
same as credit. It increases the credit' fund of the country by lOC^S of the
gold imported. But if we alsp reduce our rates, then the amount of credit
might expand 2,. 3, 4 or 5 times in volume, compared to the volume of gold
imported because it would be profitable for people to do more business on
credit.
QUESTION:
You use the expression "Minister of Finance".
mind the Secretary of Treasury?
Do you have in
ANSWER!
Yes, I use the "Minister of Finanoe" because it is, in more common'
use.
QUESTION;
Then you believe that, he is the one that should start in now tf>
prepare plans for 'financing possible w4rs that you spioke o f in your
paper.
ANSWER;
I would feel so if the Secretary of the Treasury under this adminis
tration had fr'd the experience of previous Secretaries of the Treasury; but
under our government, with the changes taking place as a result of the
election, we get an almost completely new personnel and the men who now hold
or will hold responsible positions in the Treasury have not had the experiences
-16of the years 1917-1918 to enable them prepare a program. My thdught -would
be that those who directed the operation of raising money during the w*tr
ortd those who studied and laid out the program for taxation and loans should
be called upon while their memories are fresh to fey out and prepare a
theoretical program, in “which v i e would take advantage of our experience and
particularly, take advanta-ge of our mistakes, which are quite obvious. 1
suppose there are a dozen, fifteen or twenty men who know the subject from the
ground up now as we have never knfcwfe it before. We should take the opportunity
to get their experience reduced to a program, from a military point of v5e*/r
QUESTION:
When you were speaking that thought occurred to me. The railroad
man comes in - m i . says we should take advantage of thf* experiences of the
war; the Council of National Defense man arid the f?nance man say the same
thing* Can you tell us'how we can go to work to bring this about? I safe
it is very important, a national tshing* Could you QfHer some suggestion by
which the military man might be'iabie to produce sorge #e suits in that line?
ANSWER;
It seems to me there-, -nre two ways. ©«e is to get the President to
see the Secretary of War and Secretary, of tl&$.Treasury and request thosf
two cabinet officers to see that' the heads of the War Iioto organizations fres*-"
pare such a p r o a m . Another way would be -t<».cut out all red tape and go
rigjht to the men who raised the money and get them to do it* I can tell you
now that in the bank in New York - and I think in apple-pie order as far
as I c«n)dieeover - m have an account in the most accurate detail of every
dollar thrift was raised •?.nd of every penny that was spent to raise it* We have
bound cOpie's. of our records and skeletons of the organization of the district.
We have what we call a "plan book” which describes how towns were to be
i
organized; we have the maps that were used, finance is a rather hazy sort
of thing to the ordinary person and you would be surprised to learn of the
exacting details of organization which were,required in organizing for this
effort. We took the military maps, prepared by the Amy, of our district
on which m had every house noted, a red line put around to show the geo
graphical limits of a given committee and they were required to see every
person withip that limitation. In a vast country like this it required a
big Sffort which had % b be done scientifically or there would have been
a great waste of effort. That has all been done once and generally with every
success* I feel it is a loss to the nation to have those men pass out and
die or disappear with knowledge such as this in their heads without putting
it in c. dSptanent of s o m e kind with exhibits attached, telling the story of
their e^:ii?4enoe».fth!Sir siuepeases and failures. ’I think if it were submitted
to the right people, as though this' nation might become involved in war say
in six months, the whole scheme and principles and outline of procedure
relating to the financing of the war could be laid out in three or four
months very effectively.
@FedFRASER