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FILE C O P Y - JBR4RY mm -1- W w j G , u U x-3155 U ) U ^ d o a A ^ ^ - ^ f ! " ' K' V • * / In my remarks today I shall confine- rryself mainly to a discussion Of some of our domestic economic problems, re I shall endeavor to lay be- you a picture of-.conditions as they exist today and to describe some Qf< x, tne causes end events which have brought about these conditions, and w r^ A rsa tol£ ^re closing shall take occasion to discuss the inequalities <ijustment which has taken place. By way of illustration, in I was -cently by a gentleman from Oklahoma, whom I met in Kansas City, just had a shave and a haircut 1 He said that a year ago tbat hi had .1 vv as in Kansas City a shave and haircut cost hira the equivalent wh of*n he v °ne tu s h e l of corn and that yesterday his shave and haircut cost him bivalent of three bushels of corn. I iray have occasion also in thg £ Ur s e of my remarks to say something about profiteers. For some past and up to a few months ago we heard a great deal about and profiteering, ee la w ^ e • Public officials generally have denounced ring» The public has winced under i t . Sometimes the statement that the Federal Reserve System is open to the charge of profit,*, er- in v Such statements are based upon the earnings radr th'e Federal He Serve 1920 Ea nks in the year ending 1919 and more particularly in the year With respect to their paid in capital, but critics disregard the fact x-3156 tha t there are other factors besides the capital of the Federal Reserve Banks of wh i c h contribute to their earning power. the twelve Federal Reserve Banks combined during the year 1920 was about $9^,000,000, ^6rs ctS of tho ' r the or ^ of the ca Fital Federal Reserve System ; and their average surplus, accumulated * Figured against capital alone the net earnings of the Federal Reserve Banks for ' year 1920, $1^9,000,000, were 158.1$, but the ratio to combined average Pital and surplus was but 62.9^. eli e «, the i j* Ver That, however, is not a l l . upon its deposits for its earning pow^r. Every bank If banks had to depend upon capital stock and surplus alone for their earnings, banking would not y profitable and there would be v?ry few banks. Use f 0 r . . r - Joint stock companies, lOfifj Q . , nis own capital. re surplus of all banks which are mem- Provided by law and accrued profits total $iU3 ,000,000. paid * Ca The average paid in capital There would be no for an individual could as well himself The Federal Reserve Banks during the yc-ar held aervp ^ ' ae po&tP of their member banks averaging daily $ 1 , 8 3 5 , 0 0 0 , 0 0 0 . Fvery b L, ank ^ i c h is a member of the Federal Reserve System is required by lav?. tn carry its entire legal reserve with the Federal Reserve Bank of ^ istrict in the form of a collected balance, and must under the its full reserve a t ' a l l times or else be subject to penalties. If wemaintain . consider the net earnings' of the Federal Reserve Banks for the year *92o a 8 ' • re lated to the total of capital, surplus and reserve deposits, we lT fi , *d they amount to but 7 per cent. nix I OU / X-3156 There i s , however, still another very important factor contribute s to the earnings of the Federal Reserve Banks - the Federal Reserve n °tes-, obligations of the Government of the United States, which the federal Reserve Banks are permitted to have the use of under certain c °nditions. A Federal Reserve Bank can deposit with the Federal Reserve A nt of its District eligible paper which has been discounted for member bankq or otherwise acquired and receive Federal Reserve notes and put the m th n into circulation. h The law provides that a gold reserve of not less per cent must be maintained by Federal Reserve Banks against their °tes iv, A n actual circulation. at This privilege, it will be seen, adds very * y to the earning power of the Reserve Eanks and has made it possible for f-u to extend, to the member banks and through them to the public the very r ar . . • ge credit accommodations which were granted during the year 1920;- gest in the history of the System. ^ this connection, I may say that the Federal Reserve note has •itself to be an elastic form of currency, expanding and contracting With thp needs and requirements of the nation's business. The daily average arr >ount of Federal Reserve notes in circulation for all twelve Federal He g g v.., e Banks during the year 1920 was $ 3 , 1 ^ 6 , 0 0 0 , 0 0 0 . If the net earnings Of jfc^Q ">000,0C0 are considered in relation only to the average amount of ' r ° U l a t i o n outstanding, it will be seen that they were but a *0Unt on* Hie Federal Reserve Board has the power under the law to irrpose ere wh of that 3 t charge on that portion of the Federal Reserve note circulation *ch i not covered, dollar for dollar, by gold, d -termined by the Federal Reserve Board. the rate to be charged It is not mandatory, but -4- x-3156 °Ptlottal with the Board whether or not U shall make such a charge and H has always "been the Board's policy in order not to discourage the free c irculation of needed currency to refrain i'rcm imposing sucn a charge- No j u s t i c e is done to the government because in the final analysis, the net e arning s of the Reserve Banks after the payment of the 6$ dividend required ^y law, go to the Government, for after the "banks have acemulated a surplus of 0f in their subscribed capital they can retain only 10$ of their net earn- Ss and must pay the other'90$ to the Government as a franchise tax. the first day of last January, On the Federal Reserve Banks paid more than *k.OOO,OCO into the Treasury of the United States a-, a franchise tax. the Federal Reserve Board imposed an interest charge against tha Federal Reserve Banks on the uncovered portion of their note circulation, ear le the net ning s might very well have been reduced to the extent of 50 or 60 li0l Had rail- *s, but even in such an event the Government would not have been benefited c a u s e the amount which the banks would have had to pay under the inposition of such a charge would have been paid in to the Treasury month by month il *stead of being paid in as a franchise tax at the end of the year. . The Fe Cu < W a l Reserve Banks have accumulated a reserve for franchise rrent Gove 9ar year tax for the of nearly $140,000,000, and the sum that they will pay to the nnnent as a franchise tax at the end of the year w i l l no doubt be larger the amount paid at the close of the year 1920,- not because of greater n i n g S | for the earnings w i l l be less - but because of smaller te&ACtions f ° r account of surplus. e am.i n ? s of the Federal Reserve Banks total $ 5 , 2 1 8 , 0 0 0 , 0 0 0 , f e r Seen The item®- I have enumerated as contributing to the and i f we? con- $ 1 1 ^ , 0 0 0 , 0 0 0 of net earnings in relation to that total, that thev are but 2 . 9 per cent. I ask you i s that it w i l l b<£ When X-3156 Federal Reserve Act was framed care was taken that the stockholding member banks should not profiteer, for the Act provides that their divi®nds are limited to fflStyV v ' is no matter what the profits of the Reserve Bank The charge has been made, however, that the Government itself Profiteering and the foregoing facts have been called to your attention in order to refute that charge, before discussing present conditions, ights in vSGrve the financial history of this country as seen by the Federal Boan I8th f I wish to point out some high * from the first of January, 1919 up to last Wednesday night, the United States entered the World War, our Government became Principal employer of labor, the chief borrower of money, and the great* c °nsumer of goods• .All of our activities were readjusted with a view W i s h i n g the services, material, and the credits necessary for the winnin 8 of tile war and our people willingly submitted to restrictions and regu- W °ns which would be plainly out of place in ordinary times of peace- With the s i ^ . sning of the Armistice on November 11, 1918, the war was ended from a *Ultarv w ^Uion * he standpoint but not in a financial sense, because we had about two rae n in France and an equal number in the training camps at heme, D tpn °ps abroad had to be brought back demobilized and disbanded, and the Qieji ~ rroitted to return to their accustomed avocations• The business and * of the country had to readjust itself again - this time to a peace ~b~ basis. to X-31$b The Government had large stocks of supplies on hand which had be disposed of and also a large undetermined liability which had to ascertained and arranged for. So in the early months of I919 the Victory Loan was floated and even with the proceeds of that loan in hand the Government still had outstanding a large floating debt, Treasury Certificates of Indebtedness, amounting to about represented 000, COO, 000 ^hich amount, however, has been reduced from time to time and now stands at a coi siderably smaller figure, During the year 1919 the impression prevailed that there was a w °rld-wide shortage of good3, The people of the Old World and in America deprived themselves during the War of most luxuries and of many of the ne c e s s i t i e s of l i f e . we r e They had subscribed heavily for bonds and . saving and paying for them. Our Government issued obligations Counting to over twenty-five billions of dollars within a period of i & h t e Q n months. ilB r 0 is The normal investment power of this country was es- ated to be about six billion, dollars a year and it had become neces- y» therefore, to expand credit. People were encouraged to buy bonds, oake notes at the banks in order to carry them, the member banks counting the notes with the Federal Reserve Banks, and this together the burden which abnormal values placed upon our credit structure, caused &reat expansion of credit, ^ages advanced. Wa Prices advanced and with raw materials advancing ges advancing, the cost of production was greatly increased. wa war tor But s such an urgent world-wide demand for goods that even in Europe - n and debt ridden - a very active demand for American supplies of aix 1 • ^nd half sprang up. Our large e x p o r t a t i o n to Europe during the first * the year I 9 1 9 were financed very largely out of the unused -7- x ~3l5b Glance of the $ 1 0 , 0 . 0 , 0 0 0 , 0 0 0 fund which Congress authorized our ^0vernment to lend to those nations which were associated with us in the War * There remained over $ 2 , 5 0 0 , 0 0 0 , 0 0 0 still unexpended and available w hen the Armistice was signed, and our large exportation to Europe during °st of the year of 191S were paid for largely out of funds advanced by °Ur Treasury. About the middle of September, 1919, various influences ware at T 0l ' % which all combined, gave a tremendous impetus to production and to Co «wierce and business generally. This impetus at first was justified, but the situation was soon affected by speculation, and dangerous tendencies Sloped. . In the Fall of 1919 there was manifest a great wave of speculation. ** v/ as not confined co any particular section, but it swept over the °Untry everywhere and over all countries. 0f People who had commodities kinds to sell were in no hurry to place them on the market. saw week by week prices rise and rise again, and they saw that as They they and took t M lJ1 is as a guarantee of the stability of prices, prices rose/costs Of Production advanced also. stocks of goods in anticipation of future requirements, and many were in no hurry to dispose of their goods at a reasonable profit, 0| be Merchants thought it advisable to lay in em °ause it seemed that the longer they held their stocks the more valuable the y w a ould become. l i v e to those dangers. S1 v/arni a But there were dangers in the situation and not a few Many, however, failed to sense them. There gns all over the world that a reaction was coming. After frequent to which little heed was given, the Federal Reserve System took ct i 0n adv * The discount rates of the Federal Reserve Banks which had been anced first to and Ujfc were during the latter part of January X-315& advanced to 67^, The final advance to 7y> did not come until about the 1st of June, 1920. These rates were less, however, than current market rates, and the banks having the 7/- rate have recently reduced it, to some and others to 6fr. On the 19th of September, I919, the earning assets of the Federal Reserve Banks amounted to about $2,350,000, 0C0. By January 2}, 9^0, during a period of four months, they had increased by nearly one , billion d o n a r s . Char What would have been the result if those who had £® of the administration of the Federal Reserve Banks had sat supinely by and permitted this rate of expansion to continue? If no restraining measures had been taken, if no warning signals had been ^ 1 V e n > it is probable that this rapid and reckless pace might have continued for perhaps two or tnree months longer, when a collapse would have been inevitable. It was highly desirable that nothing should k 0 done of a sensational nature but/Vrfe^ unavoidable reaction should be controlled and made as gradual and orderly as possible. a<iv The effect of anced discount rates of the Federal Reserve Banks *vas msrely to Slow down the rate of expansion. There was no curtailment of credit. on the part of the Federal Reserve Banks, nor was there any contraction * the currency- As a matter of fact the loans and invested assets of x ne Federal Reserve Banks increased from the middle of January, 192-0 ^ t i l the 5th of November 1920, a steady and gradual increase all the ^ along by about $400, 000,0C0. The volume of Federal Reserve notes r 1 circulation increased during the same period, from January 16, 1920 1° December 24, 1920, from $ 2 , 8 0 0 , 0 0 0 , 0 0 0 to $3,400,000, 0C0, so that ^ U r ing the most acute period of readjustment, when the sharpest reactions era taking place, there was going on all the time a steady and gradual x i pansion both in Federal Reserve note issues and loans - $400,000,000 de ^ 0 a n s a n d $600,000,000 in currency. A great many people have been ceived into thinking that the drastic reactions which took place last ummer and fall resulted directly from some decree of some arbritrary Power. -9- x-3i 56 I want ou to know that the reaction which took place w a s n ° t decreed by any Governmental Board or by any group of banks. w as decreed by the people themselves, by the greatest of all forces - popular sentiment, chases, becaffe a It people began to reduce the volume of their pur- more economical and discriminating, and there resulted condition which is sometimes called the "buyers strike". prices began to decline about the middle of May 1920. Wholesale The wholesale * > r i c e index number on January 1 , 1919 was 203 as compared with the wh °lesale price index number of 100 for 1913. By the middle of May, » the wholesale price index number reached 272 and stands new at ^50. n s It is interesting in this connection to note again that g 1920 when wholesale prices were falling there was practically teady increase in the volume of Federal reserve notes in circulation, end in •••v Atl the loans and invested assets of the Federal Reserve Banks. The first manifestation of the changing condition was the creak ln the silk market in March 1920. This precipitated a financial crisis in Y Japan, involving the suspension of many banks in that empire. Nsx t w e had the break in the wool market about the middle of May, 1920, ®*8ed primarily by an excessive supply of raw wool. The War Depart- ftfent hoH i a w the -Large amounts of wool on hand, accumulated for war purposes hich it had no need. I t undertook to sell at public auction in at wo ° l market of Boston. The sales were not satisfactory. cry* Br i t i s h Government brought in wool from Australia and other ^dencies and attempted to sell it in the same way. Regular importa- tions O-p wool were coming in from theCArgentine, e stern wool c l i p was ready for market. ^bout the sarr.e tine ~10" x-3156 Meanwhile it was evident that public opinion all Wor l d had undergone a change. to For a whiie back, people did not seem care particularly what prices they paid. The riain iae& w?.s to get ^liveries, Market. tllat and you will remember we had what is known as a sellers' jt was experienced in all business, purchasers had an idea there was a real shortage of almost everything and in some cases there were actual shortages. % over the 511(1 sh But after all this cuestion of surplus °rtage is merely a relative one. Vfe may learn what the supply of a commodity is; tained 0r that can be ascer- estimated with approximate accuracy, but no main can state in just what the demand for consumption i s going to be,, because ^ that il s a matter which depends largely upon sentiment. It is almost possible to say what things and how much people are going to require or wh are a t they need, for while a 01 great many things peocle have become accustomed to which they u ) actual human needs are very simple, there • as absolutely necessary- than Vp e really needs, Many a man, I presume, has more clothing and the depression in the textile trade was due to ^y,^ that people realized that they could do without new clothes and tha+ • m large measure brought about the demoralization of the wool Market The retailers found, that they had l i t t l e or no demand for Woolen goods, and the tailors were not doing the usual business. 1 Piaced h They order goods from the mills or they cancelled orders already 1 The mills found, in the new circumstances, that thev had acple - ies of raw wool and the wool merchants called in their buyers from the *re<5, and the price of wool drorced from about 72 cents a pound down t0 or 20 cents. -11- X-3156 Two or three months later the same experience vvas undergone in e cotton market. ffi0st Of a l l American products, cotton i s probably the one ^pendent upon foreign markets and is most quickly affected by E d i t i o n s abroad. People who were engaged in the sugar trade imagined tVi 4. there was a great shortage in sugar. 0cket6d Tou will remember how sugar up to 25 or 26 cents a pound. There seemed to be a shortage sugar, but there was much held off the market in order to be sold out g adual rf l y at high prices, and then a situation developed, which seems ectly natural now when we look backward. ion In view of the deprecia- of foreign exchange, all other nations which produced sugar, * r a cted by the high price at which sugar could be sold in our market, dipped sugar here and a great many nations which were not producers su ^ r but merely consumers, shipped sugar to us in order to get dollar e *change — in other words, they were perfectly willing to de- themselves of sugar in order to get things they needed or desired toore. Cori vnsequently along in September there was a collapse in the su^ar ^rket, during all this time the Federal Reserve Banks maintained their re serves but they did it by means of inter-bank rediccounting. The re W0r< $26*7 3 8 Federal Reserve BanjfS at one time which were borrowing -»000 from four Federal Reserve Banks. V/e had no financial panic, the rv e s of the Federal Reserve Banks were maintained in accordance With th 6 l&w, and there never was a time when the Federal Reserve note Hot redeemable r*^ in gold as required by law. However, since the first of January of this year there has been & r adual change for the better in the position of the Federal Reserve Sy st * T he loans and earning assets of the 12 Federal Reserve Banks -12- X-31$b test Wednesday night were $2,314,000,000, a decline frcm the high point on October 15, 1920 of $1,108,000,000, in circulation were $2,767,000,000, $637, 000,000, Federal Reserve notes a decline since Christmas of total cash reserves have increased f rom&2 ,249, 000, CGO °n December 30 to $2,549, 000, OuO. The Federal Reserve Banks are strong; they hold today a gold reserve larger than that ever held by any central banking institution in any country, an amount equal to more than one-fourth the entire known gold supply of the world. The invested assets and leans of the Federal Reserve Banks haVQ ThQ Fe now declined to a point where they stood in September, 1^19- y are about $300,000,000 less than their cash reserves; and deral Reserve notes outstanding have declined to an amount only about an $200,000, 000 greater than the total cash reserves. Now, when y bank has more cash on hand than it has loans, it is in a pretty stro * g position. The Federal Reserve Banks, which are the ultimate financial bulwark of all member barks and through them of the public are now in cL Position better than ever before to extend to all legitimate business the assistance needed and in addition to having the ability, have the ls There are now no credit restrictions whatever. position to do so. Ws w mu st meet changed conditions. Vie have a strong reserve. V.'e have h-. j experience and business is readjusting itself to the new levels. There has been no change in principle in the policy of thy Fed er a i Reserve System. There nas naver been any change in the underly* principles of the Federal Reserve Syste.n and I hope there never will because the broad policies of the Federal Reserve System are based -13u . X-3156 Pon the fundamental principles of sound finance inking. and legitimate While there has b.sen no change in the principles of the Federal Reserve System, varying conditions from time to time, however, ne cessarily bring about changes in measures and methods of applying Policies. One thing that i s holding back a revival of business is the disproportion and lack of uniformity in the readjustment process which 18 taking place. There are some things, certain basic raw materials for instance, prices for which are very low, belo* the pre-war levels and t)e f low cost of production, but there are other elements which igure in production and distribution which are still high, which have not hflA > oen j readjusted, so that somewhere in tne process of distribution kotween the primary producer and the ultimate consumer, -back. 0 there is a The ultimate consumer is noc getting prices in proportion ^bat the primary producer is paid. One problem of the business mdustria.1 world today is to iron out a l l these inconsistencies and i«+ tne proper relationship between one class of goods and anotner cla S s ~ * Soods and between goods and services be restored, seems to me that this is one of the most important of our Pr®sentu a domestic economic problems. I take it that one problem of any down Nanufart, ^v-turer or producer i s to get his costs/in order that he may be abi e t 0 Offer hi3 products at figures attractive to buyers, for the tellersi , n&rket has now been replaced by the buyers 1 market. 15 e ^Qment • Tne m nard lines, and the farmer, as we know, is a most important e constitutes a large percentage of our population. He is w n the Principal producer of the necessities Us life, upon which the t r i a l world depends for sustenance, and he i s also the principal x-3156 c °nsumsr of manufactured goods of every kind. %enever any circunv stances arise which impair the purchasing power of the farmer, the efc /felt in commercial and industrial centers everywhere. The reduction of over a billion dollars during the last four or months in loans and investments of the Federal Reserve Banks has resultliquidation in the larger cities, in the financial centers and in the anUf>acturin g centers. In no appreciable degree has liquidation taken place ttia agricultural districts. The Federal Reserve Act provides that sll discounted with the Federal Reserve Banks must have a maturity of not lotlggp XV nan 90 days, except agricultural paper or paper based on livestock, have a maturity as long as six months- The Federal Reserve Banks ar tying the first of May of this year $230,000,000 of agricultural liVeofA 1 paper, of maturities from three to six tenths. On the first stock ^ they were carrying .^10 c ,0C0,0CC of such paper and on the first ' °f >f ay loin ' they were carrying only $?S f C)C0,000. federal Reserve Banks have done a great deal to which so many other industries depend. year 1920 Through rediscounts for ^ s tney extended credits to farmers and livestock men during the a 80TRe sustain our basic Peopi -P gg re gating three times the amount extended in h e The idea that • have that the Federal Reserve Banks have been pressing the farmer en Vlew Urelv coy erroneous. The Federal Reserve System is not operated with the er c i n g , pressing or oppressing anybody. It is designed to be the S a f ee t .y valve of business. It is the final reservoir of credit to be ^sorted to in time of need and as such must be neither clogged nor de~ f et6 *- Th. « ° U o w i n ae System has stood the tests of war and of the readjustment period 8 &nd it finds itself now in a stronger position than it has occupied * C e the 1fi dotation of the Third Liberty Loan. X-3156 -15- The cash reserves of the twelve Federal Reserve Banks last Wednesday nl ght, v a y Tber lgth> , 0 0 0 , 0 0 0 as against * 2 , 0 8 0 , 0 0 0 , 0 0 0 a year ago. were e is nothing as far as the hanking position of the country is concerned, &s reflected "by the Federal Reserve Bank statements that causes any other fee H n g than one of confidence. 1 e optimist- Pessimist is with us and he has his uses, but the main fault I have to find is stand before you today as a conservative and constructive wit no Vas h the pessimist is that he operates at the wrong time. The present time for the pessimist,- the time for him to have gotten in his work in the Fall of 1919. 1 look for batter conditions in the not distant future. w s have still At* sv-ning Up process to. go through with. Things that are too low trust ^ther rige to the level of those things that are higher, t>lat a r e or those things too high must come down to a lower level, or perhaps there w i l l an average and we w i l l r ach some 1-vel half way between. 1 Part the think that we havo passed through the most of the readjustment period. trying and dangerous If wo can a l l get together and aid orderly processes of production and distribution and get the pub- U c of the idea that things will go lower and lower indefinitely, th0 *we w i n get some stability into the situation. The public has a deal of buying power left and buying power begets buying power. en one important industry resumes, In rel others automatically revive. the changed conditions resulting from the war we occupy a new * t i o n s h i p to the world. We are no longer a debtor nation as we were in *hen we owed the rest of the world about $ 4 , 0 0 0 , 0 0 0 , 0 0 0 . WOr1 a * 1 * great creditor nation today. °coun t ol advances m d 0 by our We are the The world owes us $ 1 0 , 0 0 0 , 0 0 0 , 0 0 0 on Government and owes us perhaps two b i l l i o n X-3156 (tt impo ssible to ascertain th^ exact amount) on private account. lt is certain, however, that the United States today is a great Cre <iitor nfiM ation. In order to maintain our rate of production, we must push our fore* gn trade. J J We produce more cotton, more foodstuffs, more of a great 11 ®iiy th* §>s than we need for our own use. *ith the world. fetter and We must reach out and do business We must buy things from other nations which they can produce more cheaply then we can, and exchange commodities with them- If deterrri ine to do business with end for ourselves alone, it seems to me instable thafttf we must then reduce our production to meet merely .American re- * know of no royal road back to business revivals Working back to normal test our patience and energy, but the process will be expedited if we sound principles which have stood the tests of the ages - T>t us giv w© ® and talm 1 • 11 vo and 1st livo; ana Do content with moderate profits. ^ s a n o and reasonable - lot us cast aside those speculative * * r i c h quick • , idoas which were so prevalent oightoon months ago and Ldt nd givo good value or service for what Us g9t tur to 0 ard wo *~k and solid business - them in due courso wo shall *i to mora ordorly and normal conditions, and can develop not j 0 and hec+i m c sounds nd prosperity such as was rscontly oxporioncod, but a wore enduring era of good times than wo havo ever had colore.
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