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X-1214 THE NATIONAL BANKS IN WAR TIME. — THEIR PROBLEMS AND WORK. FROM AN ADDRESS OF W.P.G.HARDlNG, GOVERNOR OF THE FEDERAL RESERVE BOARD, BEFORE THE NATIONAL BANK SECTION OF THE AMERICAN BANKERS ASSOCIATION AT CHICAGO, I L L , , WEDNESDAY, SEPTEMBER 25,1918. FOR.RELEASE IN MORNING PAPERS OF THURSDAY* SEPTEMBER 26th, In these stirring times our thoughts are constantly with our sons and "brothers who are in the fighting lines in France, or who a r e keeping watch upon the high seas. We are thrilled by the ac- counts of their military prowess, our hearts are gladdened "by their constant advance a^-inst a formidable enemy and we are inspired by their courage and unswerving determination to overcome the enemy. Within a short whale there will be more than two million men in khaki on the other side to support the gallant troops of England, France, Belgium, Italy and Greece, and the Czechoslovaks, battles to free the world from the a utocracy; f/'<S V BOABO.^ in their r^ of German militarism and X-I2I4 -2- and we knew that their numbnrs v/ill "be steadily increased until the Bill fruition of our hopes aid aspirations shall have been attained* But human activities in this great war are not confined to the military fronts; the battle lines are not alone in Siberia, in the Balkan Peninsula, in northern Italy, in Lorraine, Picardy and Flanders, but they extend throughout the civilized world. There is an •American front, manned by millions of men and women who constitute tiie great home guard, and who must furnish the munitions and supplies ahd the transportation facilities for those who are actually Hrpcsed to the shot and shell and poisonous vapors of the en any. Without the work which is "being done at home, and which must be carried on ih constantly increasing measure, the efforts of our soldiers and sailors could not be long exerted. Important sectors of our home front are held by the bankers of •America, who are on the financial filing line, ani it is of their work and of their problems which I wish to speak today. The national banks of the United States have in other times and in other A wars _3roved their loyalty and efficiency. in fact they were bo in in the midst of the convulsions of a country torn by civil war and their creation is due.to the desperate needs of the nation in those dreadful days. Through the establishment of the national banking system not XI214 —3- °aly was a market afforded for United States "bonds, tut facilities were provided for tlio issuance of a national currency capable of Circulating without discount in all sections of the country. ra So pid]y did the national banking system grow that in 1865, shortly after the close of the Civil War, there were 1517 national banks, having aggregate assets of #1,359,867,074, included in which were Waited States bonds to secure circulation of $272,634,200. and about $75,000,000 government bonds held as investments. In 1898, when we were at war with Spain, consciousness of our tanking strength undoubtedly had much to do with the ease with which too,000,000 Premium; of Z% bonds were sold to the public at a substantial but the natibrial banks coordinated wider the Federal reserve syston are now en^ged in the most stupendous work they tave mQ ever undertaken, and in according t o the national banks their ed of praise, I do not wish to slur nor underestimate the import- ^ o e of the work which has been done by the state banks, savings ka-fcks and trust companies as well- There is no question, however, thxough the operation of the Federal Reserve systan the vast fi s c a l undertakings of the government have been successfully carried ° u t thus far without any undue disturbance to our financial structure ^ without a money panic ot prie&s of any kind. For three years the burden of supporting tiie Federal Reserve X-1214 system was borne almost entirely by the national banks,, - all through those times when many of the banks could not perceive that any substantial benefit would be likely to enure from membership, and when stock in the Federal Reserve banks was looked upon as a dead investment. Even a year ago, five months after the United States had entered. the war, there were only 86 non-national banks which were members of the Federal Reserve system. It is gratifying to note however, "that henceforth the responsibilities and privileges of membership will be shared by the state institutions which are now coming over in constantly increasing numbers and that today about 750 state banks a ^d trust companies are members, with total resources of nearly six a nd three quarters billions of dollars* The problems of the American banker have always been more com- plex and difficult than those of banks in other countries and their w ork is more varied and exacting. This is due, in part, to our wide expanse of territory and to the amount of.pioneering which has to be done incident to the building up and development of a new country. It is due also to the fact that the spirit of American institutions derrandt independence of action and that the tendency in this country has been toward' a large number of independent banking units, most them of small and moderate capital, rather than toward a compact group of highly capitalized banks conducting their operations throughout the X-I2U -5- country through the medium of branches. The need of some means of coordinating this large number of jnlependent banks, of reserving a portion of their resources for the cannon defense of the f inanelal front, the necessity for providing a more elastic currency which could expand and contract in accordance with business requirements, and of establishing a broad discount market, are some of the causes Which led to the establishment of the Federal Reserve system- It is not ny intention, however, to attempt to discuss your routine work or your every day problems, but X wish instead to touch upon some of those questions which confront you, and those militant duties which are imposed upon you, in your work of holding the financial trenches in the great battle now raging for liberty and civilization. The Liberty Loan organizations are about to begin the campaign for the fourth Liberty Loan, The success of this campaign depends upon the cooperation of the banks, -.not upon a half-hearted or complacent acquiesence on their part in the plans adopted, but upon their active, incessant and aggressive cooperation, given in a genuine American spirit worthy of the cause for vhldb the lean is to be raised. For weeks past most of you have been taking your allotments of Treasuiy Certificates of Indebtedness which are issued in anticipation of this loan, just as yai M v e done in tbe case of the certificates which anticipated previous loans. In order to meet X-I2I4 -6- your allotments you have been obliged no doubt to reduce your regular discount lines and to decline to take paper which, in ordinaiy circumstances, would have been attractive to you. But you have made it possible for the government to meet its financial requirements and you have also provided means, to the extent of certificates held, of taking care of the payments that you will be called ^ o n to make for the Liberty Bonds vihich will be subscribed tor by your customers. The opinion and advice of every £pod tanker on f inancial matters is constantly being sought; your in- fluence is great, and your value as an educational force is incalculable • Banks are the great distributing agencies through v&ich tJ *e bonds pass into the hairls of the public and it is desirable, 'wtereser practicable, that the bonds should be placed with the customers of banks, and. with those who are not depositors, rather than taken for investment by the banks themselves. But it is ex- pected, of course, that banks will do their full part in placing ths bonds in the hairis of the public, by continuing their practice of 1 aiding freely against bonds as security, calling in turn upon tte Federal Reserve banks & r such assistance as may be needed. The Liberty Loan is essentially a popular loan. since tta first has full exemption from income taxes. No issue The second, X-I4I4 -7~ third and fourth leans therefore, pay a hi$ier return in the hands of of moderate moans than tbey do when held "by the millionaire. She discount rates at Federal Reserve banks are so adjusted as to erable banks to lend at approximately the rate borne "by the bonds, with a small ma e rgin of profit. Previous issues haye been widely distributed, and ach issue has shown a larger number of subscribers than the preceding ° n e t the number in t 1b case of the third Liberty Loan being more than 17 m »000,000. The Comptroller of the Currency is authority for the state- eat that of tte total amount of bonds issued up to this time only 4$ w ®re held on June 29th as investments by the national banks, or 2*29^ of their resources, while they were carrying at the same time loans secured ty Liberty Bonds amounting to $475,000,000, or 2,56$ of their resources. The Federal Reserve Board, from the time when it became evident tha f t this country would be forced into the war, has spared no pains to ortify the position of the Federal Reserve banks, in order to enable to meet all legitimate demands which may be rrnde upon them and to ^Uder the greatest amount of assistance to the member barte in the performance of their war time duties to the government,, Upon the recom- " N a t i o n of the Federal Reserve Board, Congress amended the Federal ReSe *ve Act in several important particulars on June 21, 1317. ot st to The effect these amendments has been to bring into the system a large number of *te banks, besides enabling the Federal Reserve banks more effectively control the c o u n t r y ' s gold which had been widely diffused, having been X-I2I4 -8- used for purposes of circulation and held in vaults of member ard non-member banks. As you know, all the lawful reserves of member tanks are now kept on deposit with the Federal Reserve banks, and as Federal Reserve notes may be issued without limit against deposits of gold or gold certificates, the gold holdings of the Federal Reserve been banks hsue /augmented to an amount exceeding ^2,000,000,000, and the discounting power of the Reserve banks has thereby been greatly increased. Both the monber and non-member banks have been urged re- peatedly to transfer their gold as it accumulates to the Federal Reserve banks, and the appeal has not been in vain, for the response has been very general and gratifying. p In the vaults of the Reserve banks gold is available eithsr as a basis of new note issues or as a means of extending their loaning facilities, while in circulation or distributed among the 25,000 or more commercial banks, it is of no more value than any other form of currency. .There still remains in circulation and in bank vaults however, about ^900,000,000 in gold certificates and coin, most of which can be deposited and should be deposited, tteir place to be taken as far as necessary by Federal Reserve notes. In mobilizing the gold of the country into the vaults of the Federal Reserve banks, it is not the intention to increase the volume of loans beyond the amount actually required, but these are war times, and a w inability on the part of Federal Reserve X-I2I4 -9- banks to respozd to legitimate demaids made upon them would he disastrous . It is clear that in proportion as the gold holdings of the Federal Reserve banks are increased, the ability of such "banks to extend accommodation to other banks or to issue notes is enlarged. As reserve holdings are curtailed, the lending power of the banks is correspondingly reduced. The national banks of the country can render good service at this time "by informing the people in their respective communities of the absolute falsity of the statements which have been made occasionally ard which appear to be the result of a deliberate propaganda, that it is the intention of the government to confiscate "bank deposits. Such a statement is absurd upon its face, but is well calculated to alarm the ignorant, and, althou^i it has been denied and denounced in the strongest tenns by the Secretary of the treasury and other high authorities, it is evident, from the proportion of the money paid out every week in payrolls which does not return to the banks, that large amounts in the aggregate are being hoarded cr carried upon their persons by workmen who are now receiving unusually higti wages. Banks should give especial attention to the problem of bringing into sight any money hoarded in their communities, and should urge its investment in war savings stamps or X-I2I4 -10- Liberty Bonds, as well as the establistaent of bank accounts« There is gocd reason to believe that the present is an opportune time, in industrial ccraouailties ospecially; for organizing systematic campaigns for bringing conceal! ed money into the vaults of the bank's, or for effecting its exchange for government obligations. One of the most important functions of any bank is the granting of credits. This is a power which should be exercised with prudence and discretion in any c;.rcumstances, but under present conditions there are many new and perplexing features to be considered. As the para- mount business of this countly at present is war, and as the government is the largest purchaser of all essential commodities, it is clear that tlbe banks of the country should do their part, not only in aiding the government to obtain the funds and credits needed, but that they sLould so readjust their own lending operations as to contribute most effectively toward supplying the government with necessary articles and commodities. Therefore the question of credit conservation has been a v i t a l one for months past. a vVar expend!.tures * e essentially different from any vtfiich are ordinarily made in times of peace. Instead of contributing toward a permanent addition to the national wealth, the large payments which the government is making f cr the maintenance and equipment of our military and naval establish- ments involve waste aid destruction, — inevitable concomitants of war. X-I2I4 -11- This process necessarily tends to inflation, which, tc^ether with concentrated demsnd and the need for quick deliveries, brings about rapid advances in the price of necessities* Infinities such as are dealt with in higher mathematics, have no place in the arithmetic of w^r financing, even though the figures run into the billions. The supply of credit, of goods, and of man power is limited, and as far as possible these resources should be conserved and set aside for tie use of the government, whose abnormal demands — inevitable and necessary in the present circumstances — must be counteracted by greater economy on the part of our civilian population, whose efforts should be directed toward decreasing the normal waste incident to our business pursuits and to our every day l i f e . Credit extended for non-essential purposes involves the use of labor, of transportation, of material, and of reserves whidn ought to be kept free for purposes of the government. Unrestricted credit means unnecessary competition with the government, and tends to impede and. delay its operation, and needlessly advances prices. At a time wten the supreme business of the country is war, it is idle to talk of business as usual, for our accustomed business and personal habits cannot in many cases be continued without interfering with the government's work and the consequent infliction of serious injury upon the nation. Uncle Sam, at this time, is a world banker — he is extending credits in large amounts to foreign X-I2I4 -12- countries associated with him in the war and his power to continue to play the part of "Uncle" in the financial sense depends upon the extent of his resources in men, goods and gold, and the avoidance of unnecessaiy credit. Needless recourse to the facilities of the federal Reserve hanks weakens proportionately his gDld reserve, and this gold reserve is the financial backbone of ci vilization. Any waste of the raw materials and manufactured products of the country adds to our financial burdens by increasing the amount whicSi we must import from other countries, and such waste at the same time reduces the volume of goods which should be available for export purposes — the best means of paying for imported commodities. The far sighted banker does not content himself by considering merely present problems, but he turns his eyes to the future and endeavors to lift the veil in order that he may see the shadow of coming events and make his plans accordingly. I-lany thoughtful bankers f e e l , therefore, that the preservation of our economic strength is of the greatest importance in making provision for that period of readjustment which will follow inevitably the re-establishment of peace. By refraining from buying luxuries and by restricting the use of necessities to the actual requirements of health and reasonable comfort, a reserve purchasing power can be created which X-I2 14 -13- will of the greatest vatoe in bridging over our industries during the period of reaction sr,i reconstruction which will follow the war, when "swords will he beaten i*.to plow nl^es« and Mars will give place to Mercury and Ceies. An intelligent and prtdent use of credit will be an important factor in strengthening the national resources during the period of the war, in aiding its successful prosecution, besides maintaining our economic strength for the time; when our a m i e s will return to the employments of peace. It is important, however, that a wise dis- cretion should he exercised and t b t there should he a careful discrimination between essential, less essential, and non-essential credits. It is difficult to suggest any fixed and definite xule to govern in distinguishing between these various classes of credits. A loan might be desired for what appears at first glance to be a . „ p t failure to obtain the credit raight non-essential purpose, and yet failure create a condition which might indirectly have a distinctly harmful effect upon the Ability of productive enterprises in the community, to obtain credit. It is important, therefore, that ban, officers should inform themselves as to tte ultimate use to which the j^ertPd proceeds of a proposed loan will he diverted. present conditions J^re X-I2I4 -14- fully justity the "banks in taking such steps as may be necessaxy to restrain speculation, bu+ at the .same time, a general refusal to make loans on good security would seriously impair the liquid?.ty of investments and would force liquidation which might disturb very seriously the v/hole financial situation* It is important to avoid sharp and radical readjustments of credit and vflierever possible lines should be reduced without undue hardship to the borrower or without causing a shock which would render the granting of necessary credits more difficult«. The problem of non-essential credits i s , however, not entirely for the consideration of the banks. The question will be de- termined for them in many instances by the Capital Issues Committee ^ ^ by other governmental bodies such as the War Indtsstries Board, which has large powers in the determination of the character and quantity of production and of priorities in the delivery of materials ^<1 goods. In normal times great enterprises and large developments are tfc® Result of credits previously arranged by bankers, but the military Necessities of today have changed the order so that in many cases developments are predetermined, and bank credits are adjusted to conditions instead of creating them, thus becoming an effect instead X-I2I4 -15- of a eaissa* Your problems gentlemen,'are by no means confined to Placing proper restrictions upon non-essential or less essential credits, but they include means of sustaining through adequate credits, the vast number of enterprises and industries whose operations are essential or c o n t r i b u t o r to the donduct of the war and to the health and necessary comfort of the public. In addition to direct advances to the government, you are being called upon to furnish funds for use of the mercantile community and for the payrolls of mining and manufacturing and transportation companies, and for the production and movement of crops and livestock. In these operations yai w i l l f i n d your membership in the Federal Reserve systan of the greatest value, for not oriLy can you rediscount freely with your Federal Reserve banks the notes which represent your loans in most of these transactions, ^ you can effect through these banl© such exchange transfers as you desire and can c a l l upon them to send you any currency that you may need. Shipments from Reserve banks or branches can reach most of you within twenty-four hours, and in order t o facilitate your transactions and to ercourage a freer movement of domestic exchange, serious consideration is now being given to having the Federal Reserve hanks absorb a l l costs incident to transfers of currency for member hanks, Both from and to Federal Reserve banks. You have also recourse to the War Finance Corporation, vfoichi is authorized to make advances X-I2I4 —16— to b.-anks, bankers, or trust companies, and to savings banks, upon terms and conditions set forth in Sections 7 and 8 of the V/ar Finance Corporation Act. Your attention is directed to tie great importance of increasing our supplies of food stuffs, of cotton and wool, of coal, and of all manufactured articles of an essential character, and it is hoped that you will extend your credit lines with this object in view as far as my be consistent with the principles of sound banking and business prudence. While it is desirable that you should remain free to exthe security of loans and ere is e your am discretion as regards/the details of your business, it is necessary nevertheless, that we should all ing out a general policy. work together in carry- The exigencies of the times require that banking policy must be deteimined in Washington to a greater extent than would normally be the case, but every confidence is felt that the splendid patriotism which has been manifested in the past by continue to national bankers in the hour of the nation's peril, will/be exhibited today when our country is engaged in the greatest war of all history, arid that through your cordial and effective cooperation complete victory will crown our military undertakings, to be followed by a lasting and American peace.
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