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Government and Business

ADDRESS
BY

HON. PAUL M. WARBURG
BEFORE THE

COM MERCIAL CLUB OF CHICAGO




APRIL 7, 1917




Government and Business
It is about twenty-four years since I came
to the United States for the first time, and, taking
things in the sequence of their true importance, I
came to see Chicago first and New York afterwards^
— incidentally coming from Japan. I have since
been a frequent visitor to this wonderful city, and
every time I have come back I have been impressed
anew with its continued growth as one of our most
important centers of commerce and as a leader in
civic thought. One of my visits here stands out with
particular clearness in my memory. That is when I
came here in April, 1911, delegated by a convention
of Chambers of Commerce and Boards of Trade, in
order to assist in the formation of a business men’s
league for the promotion of financial reform, a
movement at that time still in its swaddling clothes.
This work was taken up by a group of your lead­
ing citizens with the intelligence and energy charac­
teristic of your city, and if our country was able to
pass through the last three years without any finan­
cial disturbance, strong enough to meet the phenom­
enal requirements made upon us, and if today we find
ourselves fully prepared to carry the still greater
burdens that public interest may require us to shoul­
der, these men may feel that they have done their full
share in bringing about this happy result. For with­
out the comprehensive campaign of education pre­
ceding the enactment of the Federal Reserve Act so




2
far-reaching a reform could not have been carried
out in proper time. I am particularly grateful for
being accorded this privilege of addressing the busi­
ness men of Chicago, because it gives me a welcome
opportunity of paying tribute to the part played by
your citizens in this epoch-making work of monetary
reform.
Those of us who know the Bible remember the
chapter on the Tower of Babel. The story of the
world’s first skyscraper is the parable of the conceit
and downfall of mankind. Confident in his ability
to overcome any difficulty, man undertook to build a
tower that would reach to the skies— and the world
fell into general confusion. That is the world’s con­
dition today.
And those of us who know the old Greek tragedies
can not help feeling that three hundred million
people are drawn into this world contest by forces
stronger than they; a power akin to the Fate that the
Greeks held to be superior even to the gods; the
cumulative effects and consequences of dynastic and
racial feuds of generations and of inevitable economic
developments.
The great calamity that has befallen Europe would,
indeed, awaken in us nothing but a feeling of utter
despair of the ultimate ability of the human race to
rise from its aboriginal level, were it not for the con­
fidence that out of this struggle there will come to
the world a greater liberty of man and a loftier un­
derstanding of human rights; and furthermore for
the redeeming thought that it is the profound belief
in the sacred mission of their respective races that
makes gentle and peaceful individuals willing, for
the greater glory and advantage of their tribes, to




3
endure and to inflict untold hardships and cruel suf­
fering.
R a c e T h o u g h t F o r e ig n t o O u r C o u n t r y

In the latter respect our own problems and ideals
differ from those of Europe. The race thought is
foreign to our country as a motive for making war.
The United States is not a one-race country; all the
tribes of the world have brought to these shores that
which is most characteristic in their strain, and
merged it into the composite type of the citizen of the
new world. When the United States goes to war,
it can never be a race war; it. must be a war for
a principle, for liberty or for human rights. It can
never be a war by a race against a race; but a war by
people holding to one principle against people hold­
ing to another. Our greatest contribution to the
world’s development is that we are giving the livingproof that common aims and ideals can be stronger
than racial differences. When the die is cast there
can be only one duty for any citizen, and that is to
stand loyally by the flag of his country. But that duty
is doubly strong with us, where any hesitation in that
respect would shake the fundamental thought of the
Union—-which is: that its citizens must shake off the
smaller racial or sectional thought and subordinate
it to the larger duty of loyalty and allegiance to the
principles of liberty, justice and equality upon which
the United States is founded. That does not mean
that we should cease to love the people who were near
and dear to us in the old countries where our ances­
tors’, or even our own cradle stood, or that we should
forget that every one of these old races has given us




4
some great contribution towards the higher develop­
ment of our own country. During our Civil War
many a brave man continued to love his brother, even
though he found himself forced to fight him on the
field of battle. But this tragic conflict of affections
could not shake his loyalty to the cause he had es­
poused. And so it must and will be with us. When
our country goes to war it has a right to expect and
demand of all its citizens a willingness to serve and
to suffer and to die. No matter what this may entail
for any of us, about our whole-hearted and unques­
tioning allegiance to our flag, about our unhesitating
readiness to stand by our President and to do our
duty, there can be no possible doubt.
F in a n c ia l

S e r v ic e

This duty may be performed in many ways. It
may be personal service with the colors. It may be
organizing and placing at the disposal of the Govern­
ment the various industries of the country, or the in­
vestors’ prompt response to offerings of loans issued
in the interest of the cause.
Under the particular circumstances in which we
enter the war the financial aid that our country will
be able to render will be one of our most important
contributions, and I have no doubt that in whatever
way our Government will finally decide to appeal to
the American investor he will respond with an
alacrity and in a spirit that will astound the world.
It is a profound satisfaction to all of us to know
that never before was this country financially as
strong and as well prepared as it is today. During
the last three years our gold holdings have increased




5

by 57 per cent from $1,900,000,000 to about $3,000,000,000. In addition, as you are well aware, we have
improved our position as against other nations by
repurchasing our own securities and making foreign
loans to an amount approaching $5,000,000,000.
W h a t B a n k in g R e f o r m H a s D o n e

Moreover, by the establishment of our Federal
Reserve System we have organized this enormous
strength. We have brought into effective coordina­
tion a large portion of the country’s banking reserves.
We have regulated and brought about a general un­
derstanding of modern methods of rediscounting.
We have created a new wide market for bankers’ ac­
ceptances, so that our member banks now have an
easy means of recourse to the Federal Reserve
Banks in case the}' wish to replenish their reserves.
We have established fiscal agency relations with
the Government and perfected an instrument which
may prove of great value in placing future is­
sues of our Government securities. Not so much by
investing their own funds, except when dealing with
short maturities, but by acting as a medium of distri­
bution, the Federal Reserve Banks may play a most
important part in facilitating the participation of all
sections of the country in receiving the payments for
subscriptions and adjusting any drastic dislocation of
funds that might arise through heavy payments by
the banks to the Treasury.
We have available a vast supply of notes of un­
doubted solidity ready to be issued whenever there
may be a demand; and, through the inter-district, gold clearing fund, we have established ma­
chinery for the freest exchange of balances between




6

the various parts of the country.* Not by any
stretch of imagination could we perceive the possi­
bility of a gold premium between the various Amer­
ican centers or a currency famine as in years gone
by. About our power to take care of ourselves there
can be no doubt. But in view of the unpar­
alleled demands that may be made upon us both dur­
ing the war and after the conclusion of peace de­
mands which it may be our highest national interest
and duty to satisfy— we should not neglect to perfect
our financial machinery to such a degree as to give it
the greatest possible strength.
A m e n d in g t h e R e se r v e A c t

For this reason the Federal Reserve Board has
again recommended to Congress amendments having
for their object a still further concentration in the
Federal Reserve Banks of gold held in scattered bank
reserves and a more liberal substitution of Federal
Reserve notes for our present rigid 100 per cent gold
certificate circulation.
One billion dollars, one-third of the gold holding
of the United States, is at present “ unaccounted
for” ; you and I carry it in our pockets, it is in the
tills of the baker, the grocer and dry goods store.
We all would just as leave take Federal Reserve
notes— our Government’s absolute obligation secured
at present by practically 100 per cent of gold and all
the assets of the Federal Reserve Banks. It is as
apparent that it would increase our strength enor­
mously if we could add to our organized reserves a
^Instead of shipping currency from one district to another we have
transferred ownership of gold by book entries averaging about one billion
dollars a month for the more recent period. Our clearing per day amounts
now to about $100,000,000.




7
substantial portion of this wasted gold, as it is obvi­
ous that it would be nothing short of a crime wil­
fully to withhold from our country at this time so
vital an addition to its power of offense and defense.
Unfortunately, in the general tie-up of all legis­
lative work at the end of the preceding session,
Congress was unable to pass the desired legis­
lation. It is most essential for the best inter­
est of the country that prompt action be taken
by tlie present Congress and it is most desirable that
public opinion assist the committees on banking and
currency in securing early and favorable considera­
tion of these amendments, which will enable us
promptly to complete our financial mobilization.
G overnm ent

and

B u s in e s s

When many months ago I accepted your flatter­
ing invitation and selected “ Government and Busi­
ness” as the topic for my address, I did not
anticipate that between then and now conditions
would take so serious a turn that the relation of Gov­
ernment and Business in times of peace would hardly
be of interest to my audience. But just because at
this present juncture we see so plainly to how great
an extent a country’s fate depends upon its railroads,
its shipping, its industries, and its finances, and just
because we perceive so clearly how essential it is
to secure consistent development and preparation in
times of peace, it may be worth while to stop and
analyze the gradual growth in importance of the in­
terrelation of Government and Business. We may
well ask ourselves: “ Has government activity in bus­
iness— generally called regulation— come to stay?”
“ Is its future scope going to increase or decrease?”




8
“ Can modern business succeed without it?” “ What
is the attitude of business toward government and
government toward business, and what should it
be'?” These are large questions which it would be
interesting to discuss in the light of the past, present
and future, but we can not do more than dwell to­
night upon the most essential phases of the problem.
Some of the chief economic changes brought about
in Europe during the past century have been: The
transformation of nations from political entities into
political and economic units; the evolution from
mainly agrarian into industrial States; from decen­
tralized, self-contained, and self-supporting individ­
ual activity, to strictly specialized vocation. This
development has brought about wholesale produc­
tion on the part of the individual and community,
depending upon broad national and international
markets both for the sale of excess products and for
the purchase of many articles, of necessity and lux­
ury. It has resulted in making every country depen­
dent upon the goods of others.
When Napoleon I overran Europe, a little over
one hundred years ago, England was the only indus­
trial or manufacturing country. Germany was then
a multitude of small, separate, agrarian states, a
country of “ poets and thinkers.” When Napoleon
closed the continent against England he cut off the
latter’s trade in such articles as cotton and woolen
goods, steel, coal and glass, just as Germany has
been deprived today of her foreign trade. But he
could never have thought that, in so doing, he might
be subjecting to famine a large continent which at
that time was essentially agrarian and entirely selfsupporting with respect to foodstuffs.




9
Prussia’s defeat at the hands of Napoleon
brought forth in that country the theory of
“ a people in arms.” Since then, universal service
has gradually been adopted by all the leading nations
on the European continent, and at the same time
most of them have become, to a greater or less degree,
industrial countries. These two evolutions have been
most important factors in the making of modern
history.
W h a t I n d u s t r ia l E x p a n s io n M e a n s

Industrial development enables a nation to sustain
within its boundaries a larger population than it
can support by its own agricultural products, pro­
vided it can trade with countries that have a surplus
of such foodstuffs. Larger population and taxing
power means, in turn, the possibility of creating
greater armies. But industrial countries are vulner­
able if they can be cut off from other nations which
supply them with raw materials essential for their
daily life.
Here we have in a nutshell the European problem,
as it lay at the root of the present world catastrophe,
and we see the importance of the part played by busi­
ness in this connection. Given the wicked division of
Europe into two armed camps, of fairly equal power,
it is obvious that each side must have watched with
the greatest concern any change in any of these three
important items: population, wealth and ocean con­
trol. Wealth is all the more important because the
efficiency of modern armies and navies is dependent
upon the most modern and ample equipment, a de­
pendence which in turn resolves into a question of
financial endurance.




10
Modern warfare has since developed the fact that
defeat or victory depend upon the degree of speed
and efficiency with which unheard-of quantities of
ammunition and instruments of war can be supplied.
And a country’s ability quickly to organize and mobi­
lize its industries has become a most essential factor
in the struggle of the nations.
G o v e r n m e n t ’s I n t e r e s t i n

B u s in e s s

This explains why European governments, in
questions of commerce and production, have long
ceased to be simply regulators of business, and have
become active promoters of business, and at times
have even become partners in it, or themselves pro­
ducers.
Not on account of the welfare of the individuals
concerned, but on account of the national importance
of these subjects, governments are vitally interested
in proper tariffs and commercial treaties. Railroad­
ing and shipping are likewise objects of the care of
government— not merely because of their strategic
importance, but because of the bearing that efficient
transportation has upon a country’s development and
its ability to compete with other nations.
In railroading and shipping we find in the world
today all kinds of government influence, from state
subventions and control of tariffs, to joint partner­
ship between private capital and government, and
complete government ownership and operation.
In a similar manner, we see governments actively
promoting agriculture and new industries, we see
them organizing their industries into aggressive syn­
dicates (and cartels), and we see a growing tendency




11
on the part of almost all countries to control and
develop their own natural resources. At present we
see in Europe governments operating factories and
regulating almost every phase of demand and supply
to a degree never before known. We have seen some
governments at work to develop new markets by ac­
quiring and operating new colonies.
We have seen in Europe during the last twenty
years a growth of control by governments of the
national power to save and invest in foreign coun­
tries. Foreign loans were directed by governments
to points where they were to produce business for
the lending nation, or where they were to assist polit­
ically allied countries, or where— through finan­
cial aid rendered— other countries were to be drawn
into closer commercial and political relations. Loans
granted to China, Russia, Turkey and the Balkan
States, are illustrations of such a policy.
We all fervently hope that the end of the war will
bring about conditions enabling all powers to reduce
armaments, thus lessening the urgent necessity for
governments to secure increased revenues for the
sake of maintaining large armies and navies. On
the other hand, the debts of the leading powers of
Europe have increased at such an unparalleled rate
that what seemed an unbearable military burden in
the past will appear small as compared with the finan­
cial burden of the future.
I f we take the average for the three years preced­
ing the war, we find that England, France and Ger­
many together spent annually for their armies and
navies about $1,000,000,000. Their combined debt
service for 1914 amounted to about $430,000,000.
Their annual interest charge, without amortization,




12
on the basis of their present funded indebtedness,
amounts to about $2,180,000,000 per annum, or more
than twice the amount formerly spent for armies and
navies.
I n c re a se d G o v e r n m e n t I n t e r e st

The consequence will be that the future business
activities of governments, in scope and intensity,
will not be decreased, but will be increased. It
will have to be their concern to rebuild their coun­
try’s trade, to bring it back into conformity with the
normal requirements of nations at peace, to secure
larger revenue from a weakened people, to reduce to
a minimum imports for the purpose of unproductive
consumption, and to increase to the maximum the ex­
porting power of the nation. Every country in the
world has learned during the last three years the
necessity of developing its own resources and of be­
coming less dependent upon other countries for its
normal requirements. There will be a tendency, I
believe, on the part of most of the leading nations,
even after the establishment of peace, to keep their
trade balances under government control by restrict­
ing importations, particularly of luxuries, by regu­
lating home consumption and by bringing about the
lowest possible cost of production on the broadest
possible basis of organized cooperation. I have no
doubt that government monopolies will be established
for the production of many important articles. Ex­
change of goods between countries, once the short­
ages of raw materials and finished products have
been met, will, to my mind, be decreased in volume,
rather than increased, as compared with pre-war




13
times. And wherever purchasing power exists there
will be the keenest kind of organized competition to
secure the contracts for the goods required.
I have outlined these conditions at such length in
order to ask the question: “ In the face of the ultra­
organization to be expected of other countries, can
we afford to believe that when peace is restored we
can meet this competition, or hold our own, unless we
likewise systematize or organize our individual ef­
forts?”
Furthermore, if in Europe it is necessary to have
governments take an active part in organizing indus­
tries and banking, may we assume that it can be done
without government regulation in a country which by
law and sentiment much more than Europe is op­
posed to extensive combinations in industries and
banking %
R e g u l a t io n in t h e U n it e d S t a t e s

W e are all in accord, I believe, in thinking that, if
at all possible, the operation of industries by party
governments in the United States should be avoided.
Where regulation is required and where regulation
borders on the field of operation, it is best exercised
through non-partisan government bodies. Leaving
aside the councils and commissions organized for the
purpose of dealing with emergency situations, we
have bodies of that kind in the Interstate Commerce
Commission, the Federal Reserve Board, the Fed­
eral Trade Commission, the United States Shipping
Board, and the Tariff Board. The task of govern­
ment regulation is as complex as it is ungrateful. It
is largely a judicial function. Those charged with




14
it must hear the producer and the consumer, the
shipper and the carrier, the borrower and the lender,
and find a course that is fair to all, at the same time
taking into consideration the larger question of the
interests of the entire country in its national and in­
ternational aspects. In addition, the problem of the
producer and the shipper must be dealt with from
the two-fold point of view of capital and of labor.
Foreign governments which own and operate coal
mines, and thereby regulate the price of fuel, are in­
terested in securing large revenue resulting from a
combination of high prices for coal and low cost of
production. At the same time, however, they have
to consider the millions of individual consumers, the
manufacturer, who must be able to compete in the
world market, and finally the miner, who is entitled
to reasonable wages. Efficient government regula­
tion must conscientiously weigh all these aspects with
fairness towards all, with malice towards none. It
can not please all sides; it probably will invariably
displease some party involved in the question, or even
all. But the test of its work does not lie in praise
or blame. There is only one standard to be applied,
and that is : “ Has its work been fair, and, first of
all, has it been constructive?”
T h e A t t it u d e o f B u s in e s s

When by reduction of rates and improvement of
service, excessive dividends on watered railroad stock
are cut, no harm is done; provided the country at
large profits from such action. If, however, by going
to an extreme in this direction the corporation’s
credit is impaired, and its ability to grow and expand




15

is thereby destroyed, regulation proves a failure.
The carrier, by exacting extortionate rates, may hurt
its own interests because it is bound to weaken or
even destroy the shipper, or drive him away to other
lines. Conversely, the shipper, by securing exces­
sively low rates, may destroy the railroad’s ability
to serve him well, or to serve him at all. But these
two conflicting interests, themselves often engaged
in a life and death struggle with their own competi­
tors, can not take any but a strictly selfish view, and
there must be a power to intervene between them,
protecting them from each other, and safeguarding
the public interest. Without governmental bodies of
this nature, which take a judicial and at the same
time constructive point of view, the only remaining
solution would be government ownership and oper­
ation.
All this is so obvious that I feel like apologizing
for taking your time in stating it : but if it is obvious
that these bodies perform functions of the very high­
est importance in regulating transportation and
finance, in developing equitable tariffs, and in seek­
ing to develop ways and means by which our indus­
tries may organize for joint and effective competi­
tion in foreign fields, why, then, if this is so obvious,
does business look upon the work of these bodies,
generally with apathy, and frequently with ill-disguised animosity'?
I believe there are four main reasons:
First: We are a highly individualistic people; we
cherish our personal liberty and naturally resent any
kind of compulsory regulation as bothersome and un­
necessary interference;




16
Second: There is a strong belief amongst Ameri­
can business men that they “ know better,” and that
any Government requirement or regulation is bound
to be theoretical rather than practical; extreme and
destructive rather than helpful;
Third: It is natural that those should be dissatis­
fied who in the past had a larger piece of pie than
was due them, which had consequently to be cut by
government interference;
And, finally, it is equally natural that those should
be dissatisfied whose slice, small in the past, has been
increased by the government, but who now feel re­
sentment that they can not have the whole pie to
themselves.
W e need not lose much time over the last two
classes, but we may devote some thought to the first
and second.
D em ocracy

and

P e r so n a l L ib e r t y

True democracy can not resent self-imposed regu­
lation as an infringement on personal liberty; it
would be that only if it were imposed by others. We
willingly accept police regulations as measures
adopted by ourselves for our own personal safety.
Why, then, should we revolt against regulation that
deals with the much larger question of national pro­
tection %
Putting the question in this way is to answer it:
“ Because, in our daily life, we value our personal
interest higher than that of the country.”
These last months have brought us face to face
with problems of extreme gravity. Their redeem­
ing feature has been that they have awakened in




17
us the willingness to consider our country first, and
to place our personal comfort and interest where they
belong— in the second row. But our lesson would be
only half learned if we did not begin to apply it in
peace as well as in times of stress or war.
As to the second charge that these boards are
largely filled by men stronger in theory than in
practice, I believe that in thinking of them many of
you have in mind Bernard Shaw’s sarcastic remark,
“ He who can, does. He who can not, teaches.”
But, gentlemen, when you consider the tremendous
scope of influence the Government is bound to
exercise in the future business life and growth of
nations, when you bear in mind that with the rapid
changes of heads of departments and in our legisla­
tive bodies, these non-partisan boards and commis­
sions may become the strongest elements of economic
stability and expert knowledge, you will agree that
these government boards will not be positions for
“ teachers,” but, indeed, for real “ doers.”
E x pert T a le n t N e c e ssa ry

Do not overlook, gentlemen, that these boards will
have to act as buffers and balance wheels, not only
between the various business interests involved, but
also between emotional and changing factional gov­
ernment influence on the one side and the needs of
quiet and steady economic evolution on the other.
Capital and labor, farmer and manufacturer, ship­
per and carrier, all have their spokesmen in Con­
gress, often representing as one-sided a class view as
the classes themselves. To understand all parties to
the controversy, to combine the business man’s point




18
of view, as well as the farmer’s, with the more de­
tached conception of a non-partisan, expert govern­
ment body; to arrive at the judicial and national
point of view; to discover the proper middle course
conducive to the best interests of the entire country;
to prevent harmful over-regulation in either direc­
tion ; to overcome mutual distrust, prejudice and sus­
picion of all parties concerned, is a task deserving of
the best talents and the strongest characters of the
nation.
The scope of government regulation in business
matters all over the world will not decrease but
rather increase in the next 25 years. Modern states
can no longer succeed without it. For us it is no
more the question of whether we shall or shall not
have government regulation, or promotion, in cer­
tain branches of our business life. The problem is
to find its most efficacious form. Unless we do, we
shall fail to hold our own. For us, the question is
only shall it be a non-partisan, expert regulation or
one changing with changes in party government.
That democracy is the ideal form of government, I
do not doubt. But Europe’s recent history has borne
out the experiences of 2,000 years ago: that, in the
hours of greatest need, democracy is often not the
most efficient form of government. That is why in
the old Republic of Rome, in times of war, recourse
was invariably taken to temporary dictatorships, and
that is why, for certain branches of government, we
now see this form of administration again adopted
in Europe. Democracy is government by the people.
It is the most self-respecting form of government.
But, being the expression of the ever changing will
of the masses, it is lacking in stability of policy, and




19
continuity in office of trained men. It furthermore
abhors autocratic power vested in single individuals.
It believes in checking one power by another, and
each man by other men, and, therefore, vests au­
thority in groups rather than in individuals. These
are conditions which can not be avoided. But
whether democracy will prove itself capable, how­
ever, of dealing effectively, fairly and promptly with
the intricate economic problems of the modern state
will largely depend upon our ability to develop to
their proper degree permanent and capable expert
boards and commissions, assuring that measure of
stability and reasonable promptness in action with­
out which healthy progress can not be made.
But, gentlemen, in order to achieve that result,
such boards must find an attitude of sympathy and
support on the part of the country.
“ S uprem e

C o u r ts”

of

B u s in e s s

Business men must feel toward these boards as
lawyers do toward the Supreme Court. Just as any
lawyer might be expected to give up a highly remun­
erative practice in order to accept a call to the Su­
preme Bench, so the Government must feel that it is
entitled to ask ‘ he best business minds to serve on a
t
supreme bench, if you please, of transportation,
banking or trade. It is true that being a member of
these boards entails sacrifices of a material and, what
is more, of a personal nature; but, if in England,
Prance and Germany the flower of the nation always
stands ready to serve its government, why should
our country find its citizens less ready to follow its
call ? Men are willing to serve their country if they




20
feel that the sacrifice involved is commensurate with
the result to be achieved and if they can count upon
the confidence, the sympathy and the support of the
people. How much have business, railroad and
banking done in this respect to enhance the
attractiveness of these government positions %
Have they tried to do everything in their power to
help in the public work and to promote a sympa­
thetic understanding? Or have many done the best
they could to belittle it; to lament unnecessary gov­
ernment interference and to discourage those
charged with the duty of carrying into effect the
people’s will?
Personally, I have no reason to complain, but
speaking by and large about the general attitude of
the public, I am certain that you will bear me out
when I say that it has not been what it should be for
the best interests of the country. It ought to be
clear beyond a doubt— particularly for you business
men— that the more capable the men serving on these
boards, the better for all concerned; that the higher
the estimation the country places on the work of
these boards, the more the country realizes the im­
portance of having the ablest men serve it, the greater
will be the chance of securing and retaining for these
boards the services of leaders in their respective call­
ings ; that the more capable the various interests show
themselves of taking a large and cooperative point of
view, the greater will be the justification for the Gov­
ernment to fill these boards in a larger measure from
their own ranks instead of seeking them elsewhere.
Men who join such commissions or boards do not
want empty compliments or praise. There is but one
possible compensation to which they aspire, and that




21
is success in their efforts. I f the public is interested
in their efforts; if it trusts them and wishes them to
prevail, their battle is half won. Intelligent under­
standing and a sympathetic and cooperative attitude
is all that they require.
May I tax your patience by illustrating these con­
ditions in speaking to you of some problems of the
Federal Reserve Board?
A p a t h e t ic B u s in e s s M e n

I have mentioned to you the important amend­
ments we are trying to secure; amendments in the
adoption of which every American citizen is inter­
ested and nobody more than the business men. For
almost three years the Board has been striving to­
wards the perfection of this greater financial mobili­
zation. How many business men have followed the
work of the Board; how many have raised a hand in
its support? How many realize that what really
caused the fatal delay in acting upon this legislation
was, as we have reasons to believe, a side issue bear­
ing no relation to the proposed amendments ? It was
the question of whether there should be added to the
amendments the right to make certain exchange
charges, abolished by the Federal Reserve Act, but
which a large number of small country banks want to
see restored. Time does not permit me to go into the
merits of the case, even though it offers a character­
istic illustration of problems requiring governmental
regulation.
Whether or not these charges should be permitted
or refused is a matter for Congress to decide, but it
does not seem reasonable that vital legislation should




22
be withheld or delayed at this time 011 account of an
issue which ought to be settled independently upon
its own merits.
I have mentioned this incident because I have been
wondering at the apathy of business men and, in a
similar manner, it has been a source of surprise to
me that, apparently, they have not yet fully realized
that the entrance of the State banks and trust com­
panies into the Federal Reserve System is their con­
cern.
S t a t e B a n k in g I n s t it u t io n s

The exchange problem would not offer so much
difficulty if it were not that the member banks feel it
a hardship that they should be asked to provide the
entire system of protection for the country while the
State institutions not only do not contribute their
share but, in addition, are free to make exchange
charges and to conduct their business as they please.
The State banks and trust companies, not counting
the savings banks, have deposits of about 9y2 billion
dollars, and outside of the System carry cash in their
vaults amounting to $600,000,000. A large portion
of this cash ought to be added to the general reserve
power of our country.
If some of the directors or presidents of State
banks or trust companies were asked by their neigh­
bors to join in paying for a watchman to patrol the
neighborhood of their private residences, would any
of them say: “ Why should I? As long as you, Mr.
Neighbor, pay the watchman for your house, I am
protected anyhow without my paying for it.”
I know that a great many of the leading State
bankers of the country are very sensitive as to this




23
situation. They do not feel happy about it and have
made up their minds that it is the proper thing for
them to come in. They would much rather be in the
position of paying their share of the watchman’s
salary. They furthermore know that every depositor
in a member bank contributes his share to
the stronger protection and to the greater credit
power of the country, and that their depositors will
awaken to a realization of the importance of this con­
dition. They know that in case of a real strain sav­
ings banks, trust companies and State banks indi­
rectly will have to depend upon the strength of the
Federal Reserve System others maintain for them.
Some of them, doing a large acceptance busi­
ness, profit every day from the acceptance market
created by the Federal Reserve System, a market
that has enabled the American dollar acceptance to
take its place along with the Sterling, Franc and
Mark bills in all parts of the world. But they know
that entering the system means certain sacrifices in
earnings, and, maybe, the loss of some interlocking
directors.
Yet, if that is their contribution
to the rise of America’s banking system and to
the safety and better growth of our economic edifice'
they ought to be willing to pay that price. They
know it and they will do it ; but the trust company
president thinks of his competitor— “ will he come
in'? If he will, I will.”
While still a banker in New York, I once tried to
get into a subway train during the rush hours. I
forced my way into a crowded car, but with another
man was caught between the automatic doors which
would not close behind us. My fellow sufferer began




24
to yell at the top of his lungs: “ Isn’t there anybody
to push us in?” Well, a guard came and pushed us
in. It looks to me as if there were enough in the
present situation to push the State banks and trust
companies in. This is a time when beyond a doubt
public interest must prevail over individual advan­
tage.
T h e B u r d e n o n 7500 B a n k s
Early training in banking in Europe has incul­
cated in me an aversion to banking by regulation
when, by intelligent voluntary action of the banks, the
same result can be achieved. But in Washington I
am constantly met with the view that without com­
pulsion it is impossible in the United States to make
any headway. I have been unwilling to surrender to
that point of view. I liked to think of the Federal
Reserve system as of a club which the strongest and
best banks consider it an honor to join, and not as of
a “ club” to swing over the heads of the banks in
order to coerce them into sound banking cooperation.
It is a most satisfactory fact that in almost every
important city some leading State institutions have
come in voluntarily, and I hope that 011 that same
plan the majority of the strong State institutions
will soon follow.
The stipulations prescribed by the Board for State
bank and trust company membership are most liberal
and, as a matter of fact, more favorable than those
governing national banks. The Board’s policy has
been not to restrict member State institutions in the
exercise of legitimate banking powers, granted to
them by their respective states, but rather to try to
enlarge the powers of national banks where they find




25
themselves at an unnecessary disadvantage against
their non-member competitors.
The present condition of having 7,500 hanks carry
the burden for 27,000 is unfair both to the member
banks and the best interests of the country. The
strong non-member banks who, knowing the facts, do
not remove this inequality will, in time, force the
Government to do its duty in adjusting the matter.
But if Congress finally should be forced to swing
“ the big stick,” they will be the ones to complain
most loudly about the “ nuisance and unfairness” of
governmental compulsory regulation.
B a n k in g R e g u l a t io n N e c e s s a r y

Under a highly developed system of branch bank­
ing, there are in England 259 joint stock banks, in
Canada 21, in Germany about 350. We have about
30,000. It is obvious, therefore, that leadership and
direction by Government agencies is even more neces­
sary with us than in Europe. We have adopted from
Europe the principle of cooperative protection in
banking and we ought to accept from them also the
loyal spirit in which they cooperate with their lead­
ers. The people, the banks and the press are mindful
of the fact that farmer and manufacturer, borrower
and lender, of necessity can not take an unselfish
point of view; that no matter how profoundly they
believe they have given due regard to the country’s
general interests, most of them are so busy with their
own affairs that they have not even had the time to
consider the problem from any but their own angle.
The central bank’s actions must, of course, bear care­
ful analysis and healthy public discussion. But the




26
first impulse abroad is to follow the men they have
placed in charge, to stand by them and to take it for
granted that the obvious is not likely to have escaped
their attention, and that the only object in view is to
be fair to all and to do the best for their country.
More than in Europe it is necessary with us that
our banks shall not consider the Federal Reserve
System as an unwelcome and bothersome leash from
which some day they still hope to escape. The Fed­
eral Reserve Act provides for a joint administration
by Government 011 the one hand and banking and
business on the other. The more the banking and busi­
ness communities realize that Government regula­
tion in banking is indispensable and has come to stay,
the more they substitute for a critical attitude a
spirit of active cooperation, the more they begin to
recognize their duties and privileges as half-partners
in the administration, the more they make it their
business to perfect the machinery which has been
established for their own protection, helping instead
of hindering those who try to make it a success, the
happier and the safer will they be and the better it
will be for all. Let them be clear about it that
our people will never permit this Federal Re­
serve System, or any other similar system, to be run
by the banks alone without the check and regulation
of the Government, just as little as the country would
permit the Government to run such a system without
the counter-check of the cooperation of the banking
and business communities. You may say that this
marriage between Government and business is not
wedlock based upon love at first sight. But no mat­
ter whether it was love, reason, or necessity that
brought it about, there can be no divorce. And inas­




27
much as they must live together, the only wise course
is to pull together and let the common interest act as
the strong bond uniting them.
And, now, coming back from these illustrations
taken from my own field of activity, permit me in
closing to recapitulate the thoughts that I have tried
to convey.
C o n c l u sio n

The modern state is as much an economic as it is a
political unit. There are millions of individual en­
terprises apparently self-centered and independent,
but, as a matter of fact, all dependent upon each
other. There is not one in the conduct of which,
directly or indirectly, the State is not interested.
There is not one which, by exaggerating the single
and selfish point of view, might not do harm to others
and affect the well being of the whole. Whenever the
fair middle course, essential for the greatest pros­
perity and comfort of all, can not be established and
adhered to by common understanding between con­
tending parties, Government has to step in as a
regulating factor. If this regulation is to bring
about the best results, it must not be exclusively
preventive of abuses or destructive of old business
practices, but it must be, at the same time, construc­
tive. Government must not regulate only. It must
also promote.
In the state of the future, particularly in Europe
after the war, the most efficient Government
promotion of industries in many lines will be held
to exist in actual government ownership and opera­
tion. More than ever before will states become, solid
industrial and financial unions effectively organized




28
for world competition driven by the necessity of per­
fecting a system of the greatest efficiency, economy
and thrift in order to be able to meet the incredible
burdens created by the war.
Such is the future of the world in which we shall
have to maintain our own position, and it requires,
011 our part, thorough organization and steady lead­
ership. Under our democratic system this can not be
furnished by changing party governments, but can
only be provided by fairly permanent, non-partisan
and expert bodies. These bodies must combine the
judicial point of view with that of active and con­
structive business minds. They must be able to act
as expert advisers alike to Congress and the indus­
tries concerned. They must break down suspicion
and prejudice of Government against business and
of business against Government. They must stand
for the interest of all against the exaction or aggres­
sion of any single individual or group, be it called
capital or labor, carrier or shipper, lender or bor­
rower, Republican or Democrat.
Our ability to handle effectually the great economic
problems of the future will depend largely upon de­
veloping boards and commissions of sufficient expert
knowledge and independence of character. This will
be possible only if both Government and the people
fully appreciate the importance of such bodies, so
that the country may find its ablest sons willing to
render public service worthy of the personal sacri­
fices it entails.
I believe that the dark clouds of sorrow and suffer­
ing which for three long years have shrouded the
world will before long show us their “ silver lining.”
We shall see it in the greater political liberty and




29
safety coining to millions in Europe. W e shall per­
ceive it in the chastening that will come to some and
the awakening in others to the deeper realization of
the things most essential in life. To us it will bring,
I believe, a keener appreciation of the individual’s
duty towards his country, not alone to his country in
stress, but also to his country in its peaceful endeav­
ors. It will develop a better understanding of our
common problems, and with a proper estimation of
their importance there will come a greater willing­
ness on the part of all to serve the country either
by taking a more active share in its government or
by readier and more intelligent subordination of our
own work or comfort to the larger public interest.
This broader conception of genuiune citizenship
will perceive in government regulation not unwel­
come and arbitrary restraint to be resented by lib­
erty-loving men, but self-imposed rules established
for mutual advantage and protection.
Aristotle, in defining the essential characteristics
of liberty, said: “ It is to govern and in turn to be
governed,” and this thought has lost nothing of its
force even though 2,000 years have passed since it
was expressed.
Liberty without government is anarchy.
Government without cooperation of the governed
is autocracy.
To govern and in turn to be governed is the only
form of true liberty.
In this conception there is nobody governing and
nobody governed. We all govern and serve alike and
together. We all serve one master; the only master
that no liberty-loving man need be ashamed to serve—
we serve our country.