The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Should exports be restricted as a means of reducing the present high cost of living? HONORABLE W . P. G. HARDING Governor, Federal Reserve PUBLISHED Board BY FEDERAL RESERVE BANK PHILADELPHIA A n address delivered before t h e Convention of the W e s t V i r g i n i a Bankers' Association at W h i t e S u l p h u r Springs, September 12, 1919 Should exports be restricted as a means of reducing the present h i g h cost of living ? HONORABLE W . P . G. HARDING Governor, Federal Reserve Board T H E h i g h cost of l i v i n g , w h i c h is the m o s t serious p r o b l e m c o n f r o n t i n g the A m e r i c a n people at t h e present t i m e , is n o t m e r e l y a local question n o r a n a t i o n a l one, b u t is a w o r l d w i d e condition. W h i l e various factors have c o n t r i b u t e d t o the e x i s t i n g situation, its f u n d a m e n t a l cause is b e i n g better understood every day, and the principles w h i c h m u s t g o v e r n the a p p l i c a t i o n of the o n l y effective r e m e d y are b e c o m i n g more clearly defined. W h i l e the g r a t i f i c a t i o n of a general desire to possess m o r e of the c o m f o r t s and l u x u r i e s of life a n d the demand for m o r e hours of leisure and recreation has u n d o u b t e d l y c o n t r i b u t e d to h i g h e r costs, i t is recognized t h a t the p r i m a r y cause of the great advance i n prices and wages d u r i n g the past f o u r a n d a half years is the t e r r i b l e d e s t r u c t i o n of life and p r o p e r t y and the consumpt i o n of l i q u i d w e a l t h occasioned b y the w o r l d w a r . T h e r e has been a vast expansion of credits n o t o n l y i n t h i s c o u n t r y b u t t h r o u g h o u t the c i v i l i z e d w o r l d , and w o r k e r s have manifested since the suspension of hostilities a desire t o relax f r o m the r i g o r s of the w a r - t i m e regime, f r o m drastic economies and d e p r i v a t i o n , and t h e y are at the same t i m e d e m a n d i n g shorter w o r k i n g hours and m o r e pay. Because of t h i s and of the i m p a i r m e n t of p r o d u c t i v e capacity, there has been a c u r t a i l m e n t of p r o d u c t i o n and h i g h e r costs i n the processes of d i s t r i b u t i o n , w h i c h have d r i v e n prices up to a h i g h e r level t h a n was reached d u r i n g the closing m o n t h s of the w a r . M u c h has been said about the reduced purchasing p o w e r of the dollar, and a c c o r d i n g t o the index figures f r e q u e n t l y r e f e r r e d t o b y economists, i t is clear t h a t w h e n expressed i n t e r m s of staple articles of commerce the value of the dollar is o n l y about half w h a t i t was five years ago. B u t 3 i t is true, nevertheless, t h a t i n t e r m s of the currency of m a n y f o r e i g n countries, i n c l u d i n g a l l of the recent belligerents, the value of t h e dollar has increased, and w h i l e a drastic c o n t r a c t i o n of c u r r e n c y and credit w o u l d no d o u b t be f o l l o w e d b y a r e d u c t i o n i n the price level, as expressed i n t e r m s of dollars, i t is c e r t a i n t h a t a l o w e r price level b r o u g h t about i n t h i s m a n n e r w o u l d be accompanied b y decreased p r o d u c t i o n . A drastic change w o u l d , moreover, u n d o u b t e d l y result i n m u c h financial distress and i n a grave economic situation, and i n seeking a r e m e d y for present h i g h prices we should bear i n m i n d t h a t before a n d after the entrance of t h i s c o u n t r y i n t o the w a r there was an u r g e n t need o n the p a r t of t h e g o v e r n m e n t s of the allied w o r l d for goods of a l l k i n d s f o r quick d e l i v e r y and i n large v o l u m e and t h a t price was a m i n o r consideration. T h e r e was also c o m p e t i t i o n between t h i s b u y i n g b y g o v e r n m e n t s and p u r chases b y p r i v a t e i n d i v i d u a l s , w h o failed t o contract t h e i r expenditures at a rate commensurate w i t h the g r o w i n g expenditures of the v a r i o u s governments. W e are n o w passing t h r o u g h a p e r i o d of general relaxation f r o m the w a r - t i m e regime of personal economy, w h i c h has resulted i n an increased demand f o r commodities b y i n d i v i d u a l s w h o r e s t r i c t e d t h e i r purchases d u r i n g the w a r b u t w h o are n o w b u y i n g i n c o m p e t i t i o n w i t h e x p o r t demand. A c c r u e d incomes and wages have led to a heavy d e m a n d for articles n o t of p r i m e necessity, w i t h the result t h a t labor and m a t e r i a l have been d i v e r t e d f r o m essentials t o non-essentials. T h e increased v o l u m e of credits i n t h i s c o u n t r y is the inevitable result of the financial operations of our G o v e r n m e n t , w h i c h was called u p o n t o make vast expenditures for the maintenance of its o w n m i l i t a r y and n a v a l establishments a n d t o extend assistance to the governments associated w i t h i t i n the w a r . F r o m the first of A p r i l , 1917, to the first of A u g u s t , 1919 the interest-bearing indebtedness of the U n i t e d States increased b y about t w e n t y f o u r and one-half b i l l i o n dollars, an a m o u n t g r e a t l y i n excess of the n o r m a l savings of the people, and the success of the financial operations of the T r e a s u r y was due t o the p a t r i o t i c support g i v e n b y all classes of citizens w h o were 4 w i l l i n g t o anticipate t h e i r f u t u r e savings b y b o r r o w i n g f r o m the banks, and also b y the a b i l i t y and w i l l i n g n e s s of the banks t o make the loans. These expanded credits, however, should be reduced as r a p i d l y as possible o u t of c u r r e n t savings, and the most effective r e m e d y for present conditions, w h e t h e r v i e w e d f r o m an economic or financial standpoint, is t o w o r k and save. Reasonable economies should be exercised i n order t h a t m o n e y , goods and services m a y be devoted to the l i q u i d a t i o n of debt a n d the satisf a c t i o n of demand f o r necessities r a t h e r t h a n t o indulgence i n extravagances and luxuries. Increased p r o d u c t i o n of essential articles is necessary, and i t is m o s t i m p o r t a n t t h a t there be no i n t e r r u p t i o n i n the process of p r o d u c t i o n and distribution. O u r exports increased e n o r m o u s l y d u r i n g the w a r period, and because of the c o n t i n u a l rise i n prices t h e i r value, as expressed i n dollars, increased i n greater p r o p o r t i o n t h a n the v o l u m e of goods sent abroad. I n M a y , 1917, the G o v e r n m e n t of the U n i t e d States began t o make loans t o its co-belligerents. T h e t o t a l a m o u n t of these loans w i l l soon reach t e n b i l l i o n dollars, w h i c h , unless the l a w s are amended, w i l l be the u l t i m a t e and final l i m i t . Because of the financial aid g i v e n b y the p u b l i c treasury, our e x p o r t p r o b l e m s d u r i n g t h e w a r p e r i o d w e r e l i m i t e d t o the product i o n and t r a n s p o r t a t i o n of the goods, and the b u r d e n of financing was borne b y the n a t i o n as a w h o l e . W i t h the e x h a u s t i o n of G o v e r n m e n t credits, the question of financing exports has become one of p r i m e importance, and i n cons i d e r i n g the p r o b l e m w e should first of a l l reconcile ourselves t o the idea t h a t i t is neither practicable nor desirable to e x p o r t t o E u r o p e a n countries, at least, on as large a scale as w e have done f o r the past three or f o u r years. I t is n o t practicable f o r the reason t h a t these countries are unable t o settle i n cash for so large an adverse trade balance, nor can w e continue t o extend t h e m credits for so large an a m o u n t . I t is not desirable, because w i t h the l i m i t a t i o n s u p o n our p r o d u c t i o n w e could n o t continue i n d e f i n i t e l y t o send so large a v o l u m e of goods t o E u r o p e w i t h o u t causing a scarcity at home, w h i c h w o u l d result i n 5 even h i g h e r prices a n d more u n s e t t l e d labor conditions t h a n those w h i c h are n o w g i v i n g us so m u c h concern. T h e w a r has levied an enormous t a x u p o n the resources of a l l E u r o p e a n countries, and there is n o t h i n g t o show for the vast sums, expended b y the belligerents, w h i c h have gone up i n smoke. I t is necessary t h a t these countries should henceforth conserve t h e i r resources i n order t h a t t h e y m a y r e h a b i l i t a t e themselves as r a p i d l y as possible, give e m p l o y m e n t t o t h e i r idle populations, and w o r k t h e m selves back t o a self-sustaining basis. T h e g o v e r n m e n t s of these countries are d o i n g a l l i n t h e i r p o w e r t o discourage a d e m a n d for l u x u r i e s a n d t o prevent e x t r a v a g a n t expenditures, and i t is evident t h a t t h e y do n o t r e g a r d a severe decline i n t h e i r exchanges as an u n m i x e d evil. L o w exchange rates i n the b e l l i g e r e n t countries increase autom a t i c a l l y the cost of a l l goods i m p o r t e d i n t o these countries and operate to reduce consumption. T h e p o u n d sterling, w h i c h has been for centuries the c o m m e r c i a l u n i t of value t h r o u g h o u t the w o r l d , was pegged d u r i n g the w a r and up t o a few m o n t h s ago at a discount of about t w o per c e n t ; t h a t is t o say, t h e B r i t i s h Governm e n t , o u t of loans made t o i t b y the U n i t e d States Government, b o u g h t s t e r l i n g b i l l s at a fixed rate of $4.76-7/16 per pound. B u t the B r i t i s h G o v e r n m e n t is no longer m a k i n g any a t t e m p t to stabilize s t e r l i n g exchange, and since its supp o r t has been w i t h d r a w n s t e r l i n g b i l l s have f a l l e n r a p i d l y . T h e y have been quoted as l o w as $4.12, and on a recent date t h e cable rate i n N e w Y o r k was $ 4 . 1 5 ^ . T h e rate f o r s i g h t a n d t i m e b i l l s is, of course, l o w e r t h a n the rate f o r cable transfers. A s the par value of the p o u n d s t e r l i n g is $4,866, the present rate means t h a t there is a depreciation of 71c on every p o u n d sterling. Consequently, if an A m e r ican e x p o r t e r ships goods to L i v e r p o o l a n d d r a w s s t e r l i n g b i l l s against the s h i p m e n t i n the c u s t o m a r y w a y f o r , say, £10,000 s t e r l i n g and wishes t o convert his b i l l s i n t o dollars, he w o u l d receive, n o t $48,666, as he w o u l d under n o r m a l conditions w i t h the p o u n d s t e r l i n g on a p a r i t y w i t h the dollar, b u t he w o u l d receive o n l y $41,550. T h i s difference of $7,116 represents a loss i n exchange w i t h o u t reference 6 t o ocean f r e i g h t rates and insurance, and this loss m u s t be borne either b y the producer of the goods, the exporter, or b y the consumer on the other side. I f borne b y the consumer i t w i l l t e n d t o b r i n g about economies a n d reduce the a m o u n t of goods consumed. I f borne b y the exporter, t h e loss w i l l be i m m e d i a t e l y t r a n s f e r r e d t o the producer i n the shape of a l o w e r price p a i d f o r his goods. T h e same observations a p p l y t o shipments made to France and I t a l y , and w i l l a p p l y t o the Germanic countries as soon as trade relations w i t h those countries shall have been reestablished. E x c h a n g e rates are far more demoralized i n all these countries t h a n t h e y are i n E n g l a n d . F o r instance, F r e n c h francs, of w h i c h n o r m a l l y 5.18 make a dollar, have declined t o a p o i n t w h e r e there are r e q u i r e d about 8.32 francs t o be the equivalent of a d o l l a r . This means t h a t on e v e r y purchase made b y a F r e n c h m a n i n t e r m s of dollars he m u s t pay 3.14 francs, or about 60c, additional, or, stated i n another w a y , the A m e r i c a n dollar is at a p r e m i u m of 60 per cent i n France. T h e I t a l i a n l i r e is n o r m a l l y w o r t h the same as a franc, b u t instead of 5.18 l i r e b e i n g equivalent t o a dollar, 9.72 l i r e are required, so t h a t the I t a l i a n purchaser of A m e r i c a n goods has to pay 4.54 l i r e a d d i t i o n a l on each dollar's w o r t h of goods he buys. T h i s is equivalent t o a p r e m i u m of n e a r l y 90 per cent on each dollar. T h e G e r m a n m a r k , n o r m a l l y w o r t h about 24c, w a s r e c e n t l y quoted at 4.35 cents. Consequently, the G e r m a n w h o b u y s goods i n t e r m s of dollars w i l l pay i n exchange n e a r l y six times w h a t he w o u l d have h a d t o pay before the war. I do n o t w i s h t o be understood as m i n i m i z i n g the i m portance of m a i n t a i n i n g and e x t e n d i n g our l e g i t i m a t e e x p o r t trade, b u t I w i s h to p o i n t out t h a t i n dealing w i t h E u r o p e other considerations m u s t g o v e r n t h a n mere p r o f i t and v o l u m e of business. E u r o p e m u s t have the e q u i p m e n t a n d t h e goods w h i c h are necessary t o restore its p r o d u c t i v e capacity and t o b r i n g i t back t o a self-sustaining basis, and as the adverse exchange rates reflect its i n a b i l i t y t o pay i n g o l d or t o offset its i m p o r t s b y exports i t f o l l o w s t h a t 7 t e m p o r a r y credits on a v e r y large scale m u s t be p r o v i d e d . O r d i n a r y b a n k i n g credits w i l l n o t avail, f o r these credits cannot w e l l be extended beyond six m o n t h s , a period m a n i f e s t l y too short f o r the r e s t o r a t i o n of m o r e n o r m a l rates of exchange. L o n g e r credits are required, r u n n i n g f r o m one t o three years, w h i c h cannot p r o p e r l y be extended b y the c o m m e r c i a l banks, w h i c h have large deposit l i a b i l i t i e s payable on demand. These credits m u s t be extended w i t h a definite object i n v i e w — t h e r e h a b i l i t a t i o n of the countries t o w h i c h t h e y are extended—and the A m e r i c a n people should cooperate w i t h the g o v e r n m e n t s of these countries i n p r e v e n t i n g large purchases of l u x u r i e s o n credit. T h e credits g r a n t e d should be used f o r the purchase of essential articles necessary for the preservation of life and the r e s t o r a t i o n of a n o r m a l capacity f o r p r o d u c t i o n . Suppose a large f a r m e r or m a n u f a c t u r e r , a good m o r a l r i s k , has become i n v o l v e d i n financial difficulties a n d t h a t he has applied t o a g r o u p of bankers t o w h o m he is already i n d e b t e d f o r an extension and f o r some f u r t h e r advances i n order t o enable h i m t o w o r k back t o solid g r o u n d . A n y banker p a r t i c i p a t i n g i n t h i s a d d i t i o n a l credit w o u l d expect the b o r r o w e r t o a p p l y the a m o u n t t o the necessities of his business, and if he should d i v e r t the proceeds t o the p u r chase of expensive j e w e l r y , automobiles and pianolas, he w o u l d become the object of j u s t i n d i g n a t i o n and could expect no leniency at the hands of h i s creditors. I t happens t h a t the necessary m a t e r i a l and supplies of w h i c h E u r o p e stands i n need at the present t i m e come w i t h i n the class of commodities of w h i c h w e n o r m a l l y produce a surplus available for export. W e should endeavor t o increase our p r o d u c t i o n of these articles a n d t o send t h e m over w i t h o u t s t i n t up t o the l i m i t of the credits p r o vided, b u t w e should neither encourage nor p e r m i t , as far as our p o w e r lies, these people already so h e a v i l y i n our debt t o become f u r t h e r indebted t o us f o r the purchase of non-essentials and l u x u r i e s . T h e field is broad, and w e should n o t neglect our opport u n i t y t o extend our trade t o those m o r e f o r t u n a t e countries 8 w h i c h have relied h i t h e r t o m a i n l y u p o n E u r o p e f o r t h e i r finer goods. Some of the E u r o p e a n neutrals, such as Spain, the Netherlands, a n d the Scandinavian countries, are able t o pay i n cash f o r the goods t h e y b u y , and i n the O r i e n t , Japan is prepared t o pay cash. T h e S o u t h A m e r i c a n countries are about t o enter u p o n an era of great p r o s p e r i t y , a n d t h e i r m a r k e t s offer a most a t t r a c t i v e outlet for o u r m o r e expensive articles of manufacture. W e should, therefore, be prepared t o sell t o any n a t i o n any goods f o r w h i c h t h a t n a t i o n m a y be able t o pay i n cash, b u t the p o i n t I w i s h t o emphasize is t h i s : W h e r e w e sell on credit we should exercise a wise discretion as to the character of the articles sold. I a m aware t h a t m a n y exporters believe t h a t the G o v e r n m e n t of the U n i t e d States should continue f o r a w h i l e longer its w a r - t i m e p o l i c y of e x t e n d i n g credits t o the nations l a t e l y associated w i t h us i n the w a r i n order t h a t w e m a y have a ready m a r k e t i n those countries f o r our goods. I t h i n k , h o w e v e r , t h a t t h e sooner t h i s idea is abandoned the better, f o r I see no i n d i c a t i o n of a w i l l i n g n e s s on the p a r t of the Congress of the U n i t e d States t o g r a n t f u r t h e r credits, nor do I believe t h a t i t is for the best interest of our c o u n t r y t h a t w a r policies be continued i n times of peace. O u r G o v e r n m e n t is the people's g o v e r n m e n t , a n d its revenues are derived e n t i r e l y f r o m the people. I t can raise m o n e y o n l y b y taxes levied u p o n the people or b y the sale of interest-bearing obligations, w h i c h m u s t be subscribed for b y the people, and e v e n t u a l l y p a i d b y the people. W h i l e i t is t r u e t h a t the maintenance and development of our export trade affects the p r o s p e r i t y of the people as a w h o l e , i t is also true, nevertheless, t h a t a c o m p a r a t i v e l y s m a l l p o r t i o n of the people are m o r e d i r e c t l y concerned and benefited t h a n are the masses of the people. T h e r e is an abundance of w e a l t h i n t h i s c o u n t r y , there is p l e n t y of o r g a n i z i n g a b i l i t y a n d no lack of business acumen, and I t h i n k t h a t w e should reach the conclusion as speedily as possible t h a t the development of our f o r e i g n trade, apart f r o m such i n c i d e n t a l assistance as the Governm e n t m a y p r o p e r l y give, is a m a t t e r for p r i v a t e i n i t i a t i v e and i n d i v i d u a l enterprise. 9 W h i l e the l i q u i d w e a l t h of E u r o p e has been g r e a t l y reduced because of the drains made u p o n i t b y the w a r , the fixed w e a l t h and m a t e r i a l resources are n o t v i t a l l y affected. I have no d o u b t t h a t even i n those countries w h i c h suffered m o s t there are a b u n d a n t resources t o secure any credits w h i c h m a y be needed for the purchase of necessary articles, and our G o v e r n m e n t is o f f e r i n g ample facilities t o those d e s i r i n g t o arrange t o send t o E u r o p e the t h i n g s most needed. W h i l e t h e direct credits w h i c h t h i s G o v e r n m e n t m a y g r a n t to f o r e i g n g o v e r n m e n t s are l i m i t e d t o an aggregate of ten b i l l i o n dollars, of w h i c h o n l y a f e w h u n d r e d m i l l i o n s r e m a i n unused, the W a r Finance Corporation, the stock of w h i c h is o w n e d b y the U n i t e d States T r e a s u r y , is empowered t o make advances up t o one b i l l i o n dollars t o assist export transactions. N a t i o n a l banks h a v i n g a capit a l and surplus of not less t h a n one m i l l i o n dollars are authorized, under regulations prescribed b y the Federal Reserve Board, t o subscribe to the extent of t e n per cent of t h e i r capital and surplus to the c a p i t a l stock of banks or corporations organized under the l a w s of the U n i t e d States, or of any State thereof, and p r i n c i p a l l y engaged i n f o r e i g n b a n k i n g , and a b i l l has r e c e n t l y passed b o t h Houses of Congress and is n o w i n the hands of the President w h i c h w i l l p e r m i t any n a t i o n a l bank, regardless of its size, t o subscribe to the extent of five per cent of its capital and surplus to the capital stock of corporations p r i n c i p a l l y engaged i n such financial operations as m a y be necessary t o p r o m o t e the e x p o r t of goods, wares and merchandise f r o m the U n i t e d States or any of its dependencies. A n o t h e r measure, k n o w n as the " E d g e B i l l , " w h i c h has already passed the Senate and has gone t o the House, authorizes the Federal i n c o r p o r a t i o n , under the supervision of the Federal Reserve Board, of banks a n d corporations engaged p r i n c i p a l l y i n f o r e i g n b a n k i n g or i n financing exports. O u r s h i p p i n g facilities have been g r e a t l y increased; an A m e r i can merchant m a r i n e has been established, and our goods can be sent to the f o u r corners of the earth, t h r o u g h o u t a l l the seven seas, i n A m e r i c a n b o t t o m s under the protecti n g aegis of the A m e r i c a n flag. 10 T h e o p p o r t u n i t y is o u r s — a n o p p o r t u n i t y greater t h a n we ever dreamed o f — t o become a p o w e r f u l factor i n w o r l d f i n a n c i n g and w o r l d trade. Surely w e w i l l grasp t h i s opport u n i t y . W e m u s t take advantage of the w o r l d - w i d e demand for the products of our fields, our mines, and our factories, sending w h a t e v e r m a y be desired t o those countries w h i c h are able t o pay cash, and sending the articles most needed t o those r e q u i r i n g credit. T h e c o n t r o v e r s y between capital and labor w i l l receive serious consideration at the conference w h i c h has been called t o meet i n W a s h i n g t o n i n October, and let us hope t h a t the w h o l e question w i l l be approached i n a b r o a d A m e r i c a n s p i r i t , t h a t wise counsels w i l l prevail, and t h a t the difference w i l l be ironed o u t a n d adjusted f a i r l y and i m p a r t i a l l y . I n the language of the L i t a n y — F r o m a l l false doctrine, heresy a n d schism, Good L o r d , deliver us. L e t us realize t h a t crops cannot be g r o w n , coal cannot be b r o u g h t above t h e ground, metals cannot be fabricated nor textiles w o v e n w i t h o u t capital and w i t h o u t w o r k , t h a t c a p i t a l is e n t i t l e d t o a j u s t r e t u r n and t h a t the laborer is w o r t h y of his hire, t h a t increased p r o d u c t i o n and greater economies are the o n l y correctives f o r the present h i g h cost of l i v i n g and are essential if w e w i s h t o have a surplus of goods t o send abroad, t h a t shorter hours w i t h h i g h e r pay tend i n e v i t a b l y t o reduce p r o d u c t i o n and increase costs, and t h a t the A m e r i c a n U n i o n , w h i c h is represented b y the flag w h i c h w a v e d t r i u m p h a n t on the battlefields of France, is the supreme u n i o n and is the one t o w h i c h w e owe a param o u n t allegiance. 11
@FedFRASER