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Released, for Duplication
Sunday morning, March 17, 1?29,
and. net earlier.

MARCH 16, 1929.


M r . toastmaster and members of- the Commercial
Club of Cincinnati:
I am most grateful for the opportunity to visit
your delightful city and I am particularly pleased to be
with you this evening and to have the privilege of speaking
before you.

The situation is such at the present time that

some of my intimate friends have suggested that I guard my
language carefully so that excerpts from my talk can not
be misinterpreted.

This I have attempted to do, but at the

same time, I am going to attempt to get across to you concisely the present credit situation as I see it.

Credit is a great invisible commodity which plays
an important part in our everyday life.

Economists, statis-

ticians, and others tell us it is based upon gold, and their
statement is correct as far as it goes.

It has been my

however, that the big factor in the credit

structure is confidence, and industry and energy contribute
in no small way toward maintaining confidence.
credit is synthetic - manufactured if you will.

In other words,
Gold is one

element, but confidence is the predominant ingredient.
Tonight I expect to touch upon the volume of bank
credit only incidentally and confine myself c h i e f l y to the
subject that I believe is uppermost in all of our minds at the
moment, and that is the cost of credit.
The credit world is composed, as I see it, of borrowers, lenders, and bankers who are the middlemen.



are interested in low rates and lenders are interested in
high rates.

Inasmuch as "bankers are "borrowers from their

depositors and lenders to their borrowers, they are opposed both to abnormally low rates of interest and to
abnormally high rates.

Their interest lies chiefly in a

continuous smooth operation of the credit machinery.
During recent years we have experienced both
low and high rates.

From 1S20 to 1924 there was a large

import movement of gold into this country, which permitted
an unusually large expansion of credit in all lines.


this unusual opportunity for manufacturing credit, it was
brought into existence and pyramiding continued in great
volume until 1927, even though our gold holdings were not
increased in any appreciable amount between 1924 and 1927.
Money rates during this period were at a low level.
In 1927 an export movement of gold started and
continued until June, 1928, resulting in a total net reduction in our gold holdings of approximately $500,000,000.
Therefore in June, 1928, we found ourselves supporting a
greatly increased credit structure with $500,000,000 less
gold than we had in 1924.

The loss of gold compelled member

banks to plug up the holes in their reserves by borrowing
from the Federal Reserve System.

When banks borrow from the

System, tradition enters into the picture and because of the
eagerness of individual "banks to get out of debt, credit becomes less easily obtainable and rates begin to firm.


fore, since August 1927, when this export movement of gold



started, there was a gradual tightening of credit and a firming
of rates.

At first it was not appreciable, but at the present

time I think we are all cognizant that rates are much higher
for all kinds of credit than they were in August of 1527.
For six years or more there has been an unusual
demand for a form of credit that can properly be termed
speculative; in fact, the unusually high rates that prevail
in that field make it evident that the demand has pressed
hard on the supply, as measured by the willingness of the
banks to lend for these purposes.

However, when the funds

were not forthcoming from the banks> which are the regular
distributors of credit, the speculator made, the rate so
attractive that corporations and individuals, both foreign
and domestic, supplied the funds.

The unusual demand for

this particular form of credit has had an effect upon the cost
of all other forms of credit, so that practically all lines of
commerce and industry have been affected to a certain degree,
although from all I can observe at this time, the increased
rates to commerce and business have not so far been a deterrent to active operation.
Generally speaking, the rates to the speculater have
been increased from a minimum of 3-1/2$ to a maximum of as
high as 15$.

The open market commercial rate, which enjoys the

advantage of several markets, has risen from 4$ to 5-3/4$ and

Bills which finance the distribution of commodities, have

risen from 3-l/8 to 5-3/8$ and 5-1/2$. Rates charged by banks




over-the-counter borrowing by customers have also

advanced by between 1$ and 1 - 1 T h e

intermediate credit

banks are paying about if, more to float their debentures,
which of course, is passed on to.-the borrowers, and livestock loan companies have had to pay from Vf> to 2$ more,
which also, to a more or less degree, is passed on to the

Those who have resorted to long-time investment

credit and have financed their affairs through bonds, have
also been required to pay a higher rate, depending upon the
character of their business.
From the banker's point of view, he has had to
pay higher rates to his depositors, and what he has gained
by higher rates through his discount wicket, no doubt will
be largely offset, in the last analysis by the higher cost
of his deposits, by what he has lost in the depreciation
of his bond account, and by losses that invariably develop
during a period of expansion, although not usually discovered
until periods of depression.
There are many people in the United States who
feel that, because of some power that I am frank to confess
is unknown to the Federal Reserve Board, low rates could be
maintained to

commerce and industry indefinitely, even

though the speculator pays higher rates.

I want to remind

you that there are approximately 27,GCC bankers in the United
States, and in the conduct of their own institutions they
operate as independent units, and while from what I have been
able to observe, they take care of local needs, when they have


funds to employ outside of their own community and are offered call loans at rates from 3 to

above credit based

upon production and distribution, obviously, they extend
that credit Which brings the best rates, all other things
being equal.

This forces the commercial borrower to make

his ofier more attractive, with the result that in the
course of time everyone pays higher rates.

While up to

the present time commerce and industry have enjoyed lower
rates than the speculator, this process of lifting may go
to a point where it will become a serious deterrent to
business, and it is that phase of the present situation
with which the Federal Reserve System most concerns itself.
ITor is this problem a local one.

It is not alone

of national but of international significance.

High rates

have drawn credit and gold from many quarters of the globe
to satisfy the appetite of the speculative borrower.


foreign banks of issue have already had to raise their
rates to protect their own position.

If this continues

others will no doubt have to follow, and those countries
will go through the experience of lifting rates around
a circle until they may get to a point where they will not
only have a bad effect on the trade of the foreign countries, but would seriously interfere with the exports of
this country.

It is needless for me to go into details

and remind you what will happen to our own people and
our own industries if our exports, particularly of agricultural products, do not flow freely because of lack of

-6- or "because of the cost of it.

To put it baldly, the

final cost may not "be reckoned in terms of interest charges
alone but may involve the impairment of the prosperity cf
our commerce and industry.
Many remedies for the present situation have been

One solution suggested is that the System should

reduce rates and buy Government securities in an effort to
ease the situation to such an extent that lower rates will
be available to commerce and. industry.

However, the ad-

vocates of such a plan apparently overlook the fact that
any such procedure at this time would result in an invitation to the speculator to proceed at an even more rapid
rate than in the past.
Another solution offered is that we do nothing
and let "nature take its course".

There are many prominent

men in the .United States who feel that the System, for the
past year, has in fact, followed that course.

However, when

I remind them that the System has taken approximately $700,000,000 out of the market by failure to offset gold exports
and by the sale of a substantial amount of Government securities, and has raised the discount rates on three
occasions, I think they will have to agree that the System
has done a great deal* in fact, if any such procedure had
been suggested in August of 1927, I am afraid the originator of the idea would have been branded as a panic producer.
There are others who believe that the System is able
to earmark its credit in such a manner that it can, by some

X - 62 70
- 7 -

wonderful formula, brand the credit it releases and confine
its use to approved purposes, "but anyone

with practical

hanking experience knows that this is impossible, except
for what the System may he ahle to accomplish through the
cooperation of the "banking and business interests.

It was

in an effort to enlist this cooperation that the Federal
Reserve Board issued its public statement on February 7.
Another group believes that the System should
resort to the orthodox and traditional method of correction
by a rediscount rate which they think will accomplish the
results desired.

In making such a suggestion, however, they

overlook the fact that high money rates may not deter the
speculator when he is optimistic, but, if they continue
long, may seriously depress trade and industry. It is for
this reason that the System believes that it should first
use every effort to accomplish the desired results by other
means, though it may be compelled in the end to resort to
higher discount rates.
Now Mr. Businessman, Mr. Banker, and M r . Speculator, I believe as a citizen of the United States, I would
have been remiss in my duty as a public official if I had
not this evening painted this picture to you as I see it.
This is not a problem alone for the Federal Reserve System
or the banks, but for all of us, and I feel justified in
making a strong appeal to you to give it serious consideration.
There is no occasion to become unduly excited,



because we must recognize the fact that the changed methods
of financing business have developed very rapidly.


business through shares or bonds can be on a sound basis and
when it is sound is entitled to credit, but it is not entitled
to all the credit or to an unreasonable proportion of the total.
It seems to me that it would be the part of prudence
for all who are lenders to see first that business gets credit
at reasonable rates and let the others get what is left.
In conclusion, let me remind you that credit is not
a mechanical contraption, but a human institution.

In solving

the problem that is before us experience and judgment must
play the leading parts.
big factors.

Reflection and cooperation will be

In other words, my friends, just a little

application of the remedy that has always been so successful
in the past - just a little "hoss cense".