frsbog_mim_v06_2859.pdf

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X A06

EX·OPPICIO MRM••RS

W. P G. HARDING GOVllNOR

WILLIAM G. McADOO

CHAI t

MAN

PAUL

M

WARBURG

VICI GoVEllNOR

FREDERIC

A DELANO

ADOLPH

C. MILLER

CHARLES

S. HAMLIN

JOHN SKELTON WILLIAMS

COMPTROLLER O f THE CURRIHCY

FEDERAL RESERVE BOARD

H. PARKER

WILLIS

SECHT

RY

SHERMAN P. ALLEN, Asst .il;CRITAllY

ANO FISCAL AGENT

W SHINGTON

ADDRESS REPLY

TO

FEDER L

RESERVE

BD ftg

November 1, 1917.

G0ntlomen:

In connection with

applications for the

exporta-

t ion

of coin, bullion, and currency, I

inclose

herewith a

form of bond he Board

s u g g s t ~

that

the

execution of

this bond be required of applicants irt those cases in v.hich

there

is

any uncertainty on your part s to

t h ~

responsibility

of such

applicant,

or where you

desire additional

assurance

that

the purposes £or which the application is granted will

be fulf Hie d.

·Iery truly

yours,

Secretary.

Inclosure.

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Releas&d

for

p\lrlJ.:-a -on

in

thn

e rem.ng

p a z e r ~

o{

S ~ ~ u r l a v N o r e m ~ e r Srd, 1 ~ 1 7 .

WAR

FINANCE

AND Ifil'LA

TI ON

Address of A C

Miller,

Member, Federal

Reserve Board,

before

the

National

Conferenca

on Financing the

War

of the

~ r c a n

Academy

of

Political and SocJ.al Science

S ~ t u r d a y ~ o r n 1 n g November

3rd,

1917,

at

10 o'clock.

J

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·•

·"The " .leglnnlng

of w=isdc:n

i;1

the

f ir.ancing of this war

said Mr.

Miller

is

the : i l ~ 1 1

ap9reciation

of

the fact that the

ultiuate

term

in o ~ i r fin::inc' u.ust be.,

not

dollars ut what dollars

will

bu1. f

thf' ·.ra.r g o t . ~ on,

i t

Will

becon:e

clearer

and clearer

that

this war is

an

eccnomi.c endurance contest and that

victory

will

l ie

with

the nations which

are

best able to

resist

the

processes of economic disintegration. Indeed

this

war

will

not

end unti l al l the power of America is

developed

to

i ts

highest

pitch of efficiency and then

delivered as

fighting-power and

gun•

power

at

the far-flung

battle fronts

o

Europe.

Every

nan.,

woiran.,

or child., capable of doing

anything,

nust regard themselves as.

part of

.the

great

fighting

machine whose purpose

is

to transDUte

the productive

p a v v e r ~

the saving

power,

and

the

will

power of the

people at

home

into gun-power at the front. The Winning of this

wa.r presents a problem of economic and financial strategy as well

as of military

strategy.

Indeed our economic and

f i n a n c i ~ l

strategy

n 1st work hand in hand with our l'Lilitary strategy if

we

are to irake

ourselves most effective

in

coordina.ting -;ntr own activ:i.ties and

those

of

the

other

nations

f

orcd.ng

the·

g r a ~ d

~ l l i a n c e

into

one

great whole so as to bring the w - ~ r to an early ~ n d successful

tarmna.tion.

11

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- 2 -

Contjnuing Mr M:'.ller

said ?Jany are the contributions that

tin:e and circumet&nce

will

snow America m.ist

make

toward

the

success-

ful prosecution of the war. But perhaps none

will in

the end prove

more

important

t ~ n i ~ h a i

supplying

leadership and mastery

in

co-

ordinating

t h ~

activities of herself and her associates along

the

larger

lines

of economic and

military strategy

0

Turning

the

more

imnediate aspeGte

of

the

financing

of

the

'var Mr Miller called

attention to

t h ~ financial and economic

principles· that were laid down by

the President in his

War lfessaga

and

later

expanded in

his

Proclana.tion of

April

15,

on wa r

economics.

All

that this

or

any

conference

on

finance

ca n do

11

said Mr. Miller

is to translate.the President s principles into details

of

finan

cial

aministration

and organ:i.Zation.

11

The

President callaci

upon

Congress

a nd

the

country

to exert

all

i t s

poNer and employ

al l

i ts

resources

to

bring

tbe Governzr ent of the Gonran

Empire

to

terms and

end

the

war

•

He pointed

ou.t v ha t

th.is

w·oulcl involve in

the

i laf of

financial

and

economLc preparation in these

staterr.ents:

1

I t will involve, ·of course,

the

sranting

oi

adequate

credits

to

the

Government,

sustained,

I

h o p e ~

so

far

as

they

can equitably be sustained

y

th3

present generation,

by well-conceived

taxation.

I say euotained

so

far as

ir a y be

equitable by

taxation1

because

i t

seems

to

n:e

that i t

would be most unwise

to

base

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I · - 4 6 ~

· 3

the credi·ts which wil l now be neceseary, entirely on money

borroWett..

t

is

our

duty,

I

n,oat

respectfully

urge,

to

.:

protect o u ~

people, so

far

as

we llBY, against the v e r y ~ o e r

ious hardships au.d

. i V i ~ s which would be

likely

to arise

cnit of the inflation

which would be produced by

vast

loans.•·

t will inv '>lvA

the organization

and mobilization of all

the material resour:es

of the country to supply

the

naterials

of

war

and

serve

the

incidental

needs of the

nation in the

most abur.dant and

yet the

most economical way poslible.

1

This

is the time

for America

to

correct

her

wipardoilable

fault

of

wastefulness

and extravagance.

Let

every nan and

every woDan asswr.e the duty of careful, provident use

and.

e x p e n ~ i t u r e as a public dut7, as a dictate t patriotism

wh1,.ch ·no one can now expect ever to be excused or forgiven

for

ignoring•.n

·

: ~ T h e interpretation I place upon the President's reference

to the

relation

of loans and taxation in the financing of our

war,

suggests the f ollONing rule - that taxation should be carried to

the

point

where

the

rerrainder of

the

needed income of

the

Government

can safely be provided out of the proceeds of

l o a n s ~

that

is be

provided

without producing inflation

of

credit

and

prices.

The

clear

inference I draw is

that

sound

finance

requires

that the

limits of taxation

Ill.let be extended as borrowing r e ~ c h e s

the

limits of inflation.

Briefly

sumrro.rizing the econou;ica.1 and financial prin-

ciples contained in the President's o b s e r v ~ t i ~ n s I would state

them as follows:

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- 4 •.

(1) well-conceived

taxaticn;

(2)

avoida.nc3 of inflation;

(3)

s tdct

e c ~ . : > : i y through saving;

(4) u r g a n i ~ a ~ : c n and mobilization of al l

the

country's

e e

onom:i. c r 3

sources.

11

'

I

beg

you to

observe that the President has

pointed

out

the

necessity

of

mobilizing,

not

a

part

of

the

c o u ~ t r y

economic

resources,

not

so mich as could be conveniently spared from private

use.

but a l l the economic resources'.

Mr.

lti.ller

stated his Gpinion

that

i t would require all

..

of the

economic.

r e ~ o u r c e e

of the country to

bring the

war to a

s1eedy and victorious conclusion.

In

conf inzation of this v i e w ~

he

stated

some

underlying

facts

bearing

upon

the

economic

c o s ~ s

of

the

war

in

terms of the uan-pOwer which

i t

would

require.

I

have i t on competent authority

said

Mr. Miller

11

that i t takes the

labor of four men., working

in industries

of one kind or another

producing military and other n e e d e ~ supplies.

to

ua.intain one sol-

dier at the front. This means

that

an .Azmrican army of one million

men.will

require

the output of four million

u:en,

working in f ~ c t o r y

field, and f

ou.ndry. If

we should need to

rruintain

an

rmy

of two

million men at

the

front, eight

million

u:en will be

needed work-

ing

at

bona

to

rr.aintain. provision and equip them. I

also

have

X t i:£9

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- 5 -

i t

o ~

competent authority th.a·.;

the IQlnitions

provisions

and

other

.

u a i n t e n ~ n c e that the

armies and

civilian populations

of

our Allies

in Europe

m;st

have from us will reciuire

the output

of more

than

ten

million ~ : ? . b l ' ' . ' : ' e A s

w o ~ k i r ~ g

1::i

this country.

If we

accept a a

approximately e.ccurate. thA er tin:ates of our

present

available

labor

supply

as

airiounting

to thirty million

workers

the :a:agnitude of

the

economic pt9blems with·which

we

are

confronted

is

suggested

by

the

requirement

that

one-half

nr more of our. existing labor

supply

mist

during

the

period of

the war

be devoted

·to

the

producing

of

materials

and

supplies to

be

conswr.ed by

our own and

the

armies

of our Allies and the civilian po:pulationa of

the

nations

in

Europe.

which are dependent on us for ~ t of their necessary keep. This

means

that

the

civilian

population

of

our

own

country

will

have

to

rearrange

i ts

mode

of

living

so

as ·to

be

able to get along with

the

products of the r ~ m a i n i n g

labor

power of the country -

that

is about

one-half of what has been custoira.ry - unless

happily

the labor forces

of the country can be

effectively reczuited

a.nd augmented

y

the

introduction of

.cmn

and

women

W l o are

not

now

to

be r e c k o ~ c l

among

the productive

classes

of the comr.unity. In brief as a

nation

more of

us mist w o r k ~ ~ n d

l l of us mist

do

z;ore work

e..nd then

consurr.e less in

order

that

we ira 1

have

t r ~ r@quisite margin

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28R6

X 469

of

disposable goods

'for

the use of our

army artd

OLtr Allies.

We can do this

if

wa

will,

and i t i ~ doubtful whethor we can win

the

\Ya.4,

or at any rate win i t in short

o r d e r ~ u u l e s s

we raise our

will power

to

a

point

where we compt31 oureslves

to do i t

11

Turning

to tha

sµbject cf the

mor...ey

side of the

wa.r,

Mr.

Miller

called

attention to the

nineteen

billions, which Congress

has authorized

to

be

spent

or

advanced

to

our

Allies

for

the

f ~ s c a l

year ending June 1918. "Never has any n e a ~ t i o n > either in this ·1

or a.ny war,, u n d e r t a k ~ n

so

" a.st an

obligation

in the

E ; a r ~ e }:e

riod of

tirra.

We a.re

undertaking :.o

spel d in a single

year

almost two and

.a half

t i ~ e s

as

nucn

as

any

of

the

leading

belligerents

of E l ~ r o p e

have spent

since

the b g ~ i n n i n s of the war.

Can WP manage this vast expsndi

ture?

W:1at ~ . a v e -.ve got to

offset t

in

·;1'e

way

of

t h ~

requisite financial n s c l . . . l r c e ~ ?

I t

aust be clear to ~ n y o n e who ~ i v e o ar.y

serious

attention

to

the

f ~ n a n c i n g of

the

war that t h ~ e ~ p e n d i t u r ~ s of

the

Government :tra.\st

come out of

the

j.ncoma

C .f

the

coim:unity.. The limits

within

which

any pa.rt of

the

burden

of w ~ costs

can be

shifted

to.

p c a t e r j t y ~

are

so

narra.?,,

es·pecially for

a country in

our pcsition

wj.th no

countries from which i t can borrow, that we

mist

regard tha whole

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X-469

7

burden

as

one

that has

g ~ t

to

be assun.ed and

paid for as

we

go

along,

out of the product of the nations current

i n d ~ s t r i e s that

is, out of

i t s

income.

Unfortunately,

no

~ f f i c i a l and authoritative

estin:ate

of

the nation's

present

inccne

has

been tr.a.de.

So.me widely

used estiaates

at

the

beginning

of the

war

placed the annual money income of

ihe

nation

~ t

forty

b ~ l l i o n s

er thereabouts.

Such

infonration

and

in•

quiry

as I have been able

to ma.keJ

havVever

lea.els rre to believe

that

this

is an

u n d e r s t a t e ~ s n t of

the actual situtation

•

It

i s

y present opinion

that

the current annual product of

t ~ a

country's

business and industry or

i ts

current annual industria and businees

incoUB

reachas

to n o ~

lass than

fifty

billions

of dollars. How

lJUCh

of

this

stupendous amount

.rray properly

be

reg£trded

aG

surplus

incoll8

that is to say

over

and above what

the

peopla

of

the

country rru.stspend in order

to

keep themselvas in a state of

health,

strength,

and

cheer is

a ma.tter upon which

o p i n i o n ~

would prob-

ably

differ.

Our annual savings fund at the beginning of the war

was

variously

estiu:ated

at

f r o m ~ f o u r

to six

billions

of

dollars

that

means

that

out

of

the

incorre of

t ~ cou:1try

a t

that

time

sorr.e

four to

six

billions was not o n s u ~ d y the ~ N n e r s of

the

inco:aa

but

was in-

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.

8

X-459.

vested

in

extenoions

of

industry

-

in

other

words,

was

an

addition

to

the financial

and

industrial c ~ p i t a l of

the

countrr. I do not

offer

as anything more than my con-

,

jecture,

but I am of

the

opinion that the momentous increase

in the money income of the country

in.the

past two years owing

to

the

intensif ed demands

for our

products

and uniformly high

pricea,

has

possibly

increased the potential savings

fund of the

country by as m11ch e.s ten

b:i.ll=i.ons

t

doll t.rs - in

other words that

the country

as a whole may

be in

a

position·

to

lay aside- three

doJ.lars now for·each

one

dollar

that was laid

.

2.Of-1. -;_

. \

t.:i a

aside or saved t\Y or

three

years ago.

This

means ~ h a t the a11nual

actual

and p o t e n t ~ a l

savings

or

i n v e s t m e n ~ f':lnd of the country

taken together may

amount-

to as

much

as fiftec;;;n t illior..s

('f

dollars .

The war

taxes· Vvh:i.ch

w e ~ e imposed by the rcce_nt

session of Congress,

conteuplated

· ~ b e raisiil{" of sttme

two

a..11d a

half

billions,

though there is aome reasor1

for believing

that the yield of 'l hese taxes m a ~ r cnnside1·e.bly outrun the

estimates.

Obviously

thi::

Government

can

r.c t

borro\V

that

which i t takes by taxathn. Current

income

is

the

source out

of which beth tax revenue

and

loan revenue is derived. f

three bill ions are taken

eut of the

annual surplus income of

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o O ( . U

r:·•-: 1-. u

: : 4f.9

the country, vmich I have ~ s t i r r a t e 4 as po•sibly fifteen billions,

then

i t

w o u l ~ appear taat twelve billion$ could

be

raised

by

loans.

The

authorized

expanditures for the

year> however, ran

close

to twenty billions and

leave

us with the problem of

how th•)

additional five

billions or

thereabouts are to

be

obtained.

Tu

my

mind, two extreir.ely

important considerations are

presented_ by this

situation;

(l) can the vast surts which

i t

is

1•oposed to

raise

from

loans

be raised

without

causing an infla-

tion of ~ r o d i t and prices, and 2) is

i t

at al l possible

that the

war should

be

carried

on ac

an

1

extra•

- that is to ~ a y

that

"business

can be as usual" du.ring the

period

of the war. No one

who l ~ o k s

beneath

the

surface a p p e a . r a ~ c e s to

the

hard and

inex

orable e c o n o ~ i c

realities,

can for a moment uaintain the position

that the war can be carried as

a n

'axtra' . Wa can not carry this

war as an extr and busines;;;; can not be as u.sw.l ~ l l . r ~ . n r i

the

period

of the war i f

w ~

mean

to

win.

"I can

not

believe",,

said Mr. Mill9r

"that those

who are

s,Ponsoring the

doctrine

of

"business as

usua.1

9

can appreciate

the

economic sig.r.ificanco of the doctrine. This v.rar,. as t ~ e President

told

Congress and the people with

rare

p r e ~ i s i o n

will involvr.

the

1

organization and mobilization of al l the material resources

of the country to supply

the materials

of

war'.

The iran who

lc 9'Yingly

preaches the

doctrine

of "business as usual" a t this

time is,, therefore, proposing that private advantage should be

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10

X-469.

set

against

~ r

ahead

t f

put;_ie

n e c e S 1 J ~ \ I .

At

this crisis

1 ~ the

Nation's

l ife

evory business, no

_matter

what

i t s

naturci

i s

attected

with

a publie interest

m t i l l public

has

thn

right,

indeed owes

i t to

i tself ,

t

determine within what limits

that business shall be

circwnscribed

in

the

interest

t

the

war,

er to what

extent i t shall be

h e l ~ e d

and fostered in the

s me

interest.

The A.'lleri.can

business

system

is

on

tr ia l

in

this

war.

o

one doubts

i t s

~ e c h n i c a l

proficiency and

should not

allow

anyone

in

i ts

renk to

raise

a q u e s t i o ~ ragarding i t s com-

p e ~ e n c y to

exeticise

vision

and imagination

~ e e i n g clearly

whnt must

be done by the nation in the way ~ r change in our business and

economic

•rganization

during the war,

thus preving that i t

has

the courage

to make w h ~ t e v e r individual 9 c . ~ c r i £ i c e s

in

~ h e way

of restraining private a d v a n t a g ~

that may

b ~ e ~ t a i l e d If i t

fails in r i s i ~ . g ta the occasi•n thr•ugh cowardice, weakness or

selfishaeas, i t

will have gene a long way t1ward sounding i ts

death-knell and surrendering t• ether a encieo

the right

•

leadership

in

the great processes ectn1cic re-construction

which

must take place

at the cl4se the

war.

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-

11

Mr.

Millar

next took u the

diecussion

of the question -

Do Government loans cause inilation?

~ ' I n f l a t i o n from Government b o r r c s w i n g ~

said Mr.

Miller ra-

sults when the Government

undertakes

to borrow

1aster

than

the

people

are willing

or able

to save. The loans of the Government mist then be

forced upon the banks

the

banks

-pay

for the loans with their

credit

a.nd thus there ensues an expansion of banking credit and currency. The

inevitable

effect·

on commodity

prices

is

to

raise them.

t

needs no

extended argument· ir1 this

da y in America.

to demonstrate

that

banking

credit in any of i ts oncs

y ~ r c h a . s i n g power

exerting the

sarr.e

effect on

prices

when used in payment

for

goods or purchases

as

any

other form of purchasing media.. V ~ e n purchasing media. are produced

faster

than

ioods

are

produced -

in

brief

when

the

supply

of

~ u r r e n o y

n.nd

credit in i ts increase outruns the supply of

y ~ r c h a s a b l e

goods -

t ~ e prices of

goods

rrust ~ i s c Whether

s u e ~ a

condition is properly

to

be

described y

the i n v i d i o ~ e word

inflationJ

the

fact

renains

that

the rise of

prices of

purchasable goods

in

such a situation

is closely

connected with

the

increased supply of p - ~ r c h a s i n g media. Moreover

when

the

increase

of purchasing media

in

the

c o : : u : r ~ - . n i t y

o c c ~ s i o n e d

y

the ex-

pansion of banking

credit

follows

upon

the invastn:ont of banking credit

in

Government loans

the

conclusion ia irresistible that the expansion

of

credit

and i ts resulting c o n s e q u e n c e s ~ viz. - increased

commodity

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X 469

- 12 -

prices are induced by bank lendings to the Govermr.ent

The process

by

~ h i o h Governu.ent loans produce inflation is

disclose4 in the financial history of l l the great European bellig-

erents. All of these Governments notably Geruany have

rm de

extansivs

use of banking vredit in

the flotation

of

their

loans. Hot ~ n l y the

great central banks but the banks generally in

the se•eral

European

Governments have been put under pressure

to

invest

their credits

largely

in

the

purchase of Govenu:r ent

securities.

The London EconoJ?list character-

izes

the situation

thus

produced as

1

financing

forced on the banks

by

the Government•.

n

examination of the changes of

condition

of

the

banks

• of Great Brita.in. exclusive oi the

Bank

of England shu vs

wha t the

proceiss

has been. Their deposit l iabil i t ies that is to say

their

checking

ac

counts have increased

f

roa 1913 to 1916 about 408 ~ d l l i o n pounds Sterling

an

increase

of from 30

to

40 Rer

cent. Their

bil ls

discounted

on

the

other side

of the stateu.ent s h ~

only

a

negligible increase

an increase

of

7.7

million pounds Sterling.

Their

investments on the

other

hand

show an

increase

from

211 million

pounds Starling to 437 million pounds

Sterling an increase of over

285

zd.llion pounds Sterling or ie7 per

cent. In

view of

l l the

circumstances and

k n ~ v n facts

i t

uay

be

said

that

the increase

is

rra de

up

chiefly

i f

not

7/17/2019 frsbog_mim_v06_2859.pdf


13

X 469 .

almost

entirely

of

Governmeni

o b l i g a t i o n s ~

such

as

Treasury

Bills,

Exchequer Bonds

etc.

In brief the

~ x p a n s i o n of

banking acedit

in England is clearly disclosed y these figures to lave been oceas-

ioned

for the

mest part

y the

expansion of bank investmento in

Government obligations. A similar proceea has bean

at

w1rk in

the other

countries

of Europe. The expansion banking e e d i ~

in

Franco

an4

Germany hcwevcr has been mainly

i ~ the

form

of bank

notes, rather than n bank

deposits.

Note circulatinn in France

1289.9

was increased

f r o m f t : g ~ ~ ~ million

dollars in

August, 1914 .te

4171 .milli1ns n lctebcr 1914 an i n ~ r e a s o ft.r tho pe;ri•d 1:r 111er

223 per cent.

Thu

c i r ~ u l a t i • n of the Reichebank of

Germany has

risen

f ~ o m

693

million dollars

in

August 1914

1

to

2

1

285 millions

in October 1917 an·

increase

of 230 per cent in the course of a

l i t t le m o r ~ than

3 years.

This increaae

in

the note circulation

or

the

crent

central banks

ot

r ~ c e

and

Germany

has been occasioned

largely by

inveetments of

credit n the obligations of their Government and seem clearly

to

indicate

that

Government

borrowint•

from bnnks have been a very

great

f a ~ t o r in the expansion of their note circul,tion.

Doubtless

other

causes

have

contributed to the l ~ r · ~

loan

expansi n ef bank

l i b i l i t i es in

Europe ·

but no

one

cause has been a great Ir

factor

than the investment

of

bank

credit

in Government.loans.

7/17/2019 frsbog_mim_v06_2859.pdf


14

X-469.

Whether a oimilar result is tc be: expected here

in

conrJeot-

ion with

our

greater

Government borr0\Vings

and

i f

so

how soon, wil l

l a r g ~

ly depend upon whether al l

the

people

v1ho

have income. enough to save

wil l save,

or whether

the1

can

be or Ylill be

mo de

to save

enough

aut of

their incomes

to absorb such loans

of

the

Government

a s may

be put

out

in

excess of the current savings fund of the

mtion.

The

obliga.tiona

of

a

Goverment,

such

aa

the

United States,,

when

considered

purely from

an

investment

point

of view, are unquestionably

the

most eligible sort of inves tment.

A commercial bank in a

country l ike ours,

making

daily

use

of

mobile

banking

credits

is

not to

be

likened

to

an

investment

~ ~ s t i t u t i ~ n

in

the ordinary sense of

the

word. I ts

capital

is

but

a

sml l

part

of

i ts

investment

power.

I t

3 nvestA·

i t s

credit

butthe

safe

investment of credit neeesearily

rcst1·icts

i ts choice • secur:ltir :

to

those which

are

of

unqueotionable liquid

chnracter.

The objecti•n t

considerable investments by banks

t f

their crodit in

investment

secutities,.

s u ~ h

as

Government bonds,

a r i s e ~ ~ n o t

·•ut

of

any

question as to the

quality

and solidity r such securitieo

7

but

rather

because of their lack of liquid-

i t t

The

history

of modern banking

has

demonstrated over and over

again

that

distinction must be made between security and

liquidity,

or -value

and

avail•

ib i l i ty in determing the ki.nd of investments fi t ted for banks which deal in

7/17/2019 frsbog_mim_v06_2859.pdf


15 -

their

credit. T h ~ r u are ~ a n y f ~ r n ~ of

invedtrLant

p a p ~ r which r e ~

the

point

of

saeurity

leava

nothir.g

to

be

desired,

but

Nhich

aro unsuitable

as

a

basio or t h ~ creation

of a

great

body of c u r r ~ c n y

or

of banking

credit.

The

doctrine

sat

forth

in

the· famous English

Ihllion report,

which

carra in tho mi st

o:f

the controversies

growing out

of tha nanage-

n:ent of the Bank of

Englandts

circulation during

the

Yapolaonic W a r ~ ,

whose

truth

has

baen

attested

bi

the

experiance

of

every

~ o d e r n

nation,

is that

two

things are necassary to protect b a . ~ k i n g

curroncy and

bamk-

ing

crodit

against

the

dangar of undue expansion.

One

of

these is

the

zra.intenanca

of adequate

rosarves;

the other

is

the ~ a i n t e n a . n c e

of

adequate

liquidity

of

invs3tments. y l 1 q u ~ d investments, is

u.eant bank paper

which

l i q u i d ~ t e 3 i tself in

short

periods

of tirr.c

out cf

the proceeds of

the

transactions

\irhich ha.vg given

r i s ~

to

the

p ~ ~ r

That

is

to say,

pa.per which

GTO\VS

out of

transactions

in

trade

nd induotry connected

with t h ~ production or distribution of g o o d ~ ,

' 'hich as.th&y

come to

ira.turity

in tho

nonzal

trovemants

'of

trado and

industry

~ u p p l y

the funds

out

of which the

borrowings

of

cradit at b nk

can a.nd

will

be

repaid.

Self-liquidating

pa.per

being, therof

ore, paper

w ~ 1 i c h

is

conndcted

with

p r o d u c ~ i v e operations

in

industry, that to say, o p e r ~ t i o n s which

ra3ult in an increase in the.oupply of

salable

goods, t foll0 4irB that

the

sa.rrs tranoiction,

·Abich iving rise

to

a.n increase in the

supply

7/17/2019 frsbog_mim_v06_2859.pdf


X-469.

-

16

. '

of pu.rehasing media by the expansion of

the bank s crsdit ,

also

gives

rise

to an

increase in the

supply

of

purchasable

goodo -

in brief,

the

two

go pari

p a s ~ u .

Eut when a bank

invests

ts credit in the purchase of Govern-

ment bonds which are issued for the purposes of war - in brief for

operations that result in the

consumption and

destruction

and

there-

fore, the diminution

of

goods,- we

have a

condition in

whieh

there has

been.an

a d d i t i o n ~ t o the

voluzr.e

of outstanding

b a n ~ i n g

credit

and

pur

chasing media with nothing

to

of feet

t on the

shelves

of the

shop-

keeper or

the

ware-houses of rranufacturers. In brief, transactions in

credit

of

thia sort

are not connected

with

operations

affecting

the

pro-

duction

of goods.

In

war tirr.e

G o v e r m r . e ~ t s

borrow

not

for the purpose

o f

producing goods but for

the

purpose of getting p o s s ~ ~ s i o n of goods al-

ready

p r o d u c e ~

or being produced whose

production

is

otherNise

financed.

Thera

is lll.lch

misconception

with r e ~ r to the

meaning or

1

bank

resources

and the

eignificance

of

increaees

of banking resO\lrcee.

From

the point of view

of·

the

lending

bank an obligation of the solvent debtor

is

a

resource;

from an economic

point

of view however only that

is

a

resource which in i ts

existing

state·,

either

is

or is

in the process

oi

becoming a

usable

g o o ~ .

When

t h e ~ f o r e

banks

are investing

their

very

credit

extensively in Governusnt

securities,, there

rray

be

a/great increa..se

7/17/2019 frsbog_mim_v06_2859.pdf


• •

17.

X469.

in the banking

resources of

the c.ountry

2

without any

increase in

the countryts

actual and economic

resources.

Since

prices, that is to

say commodity

prices,

depend upon

the ratio·ot purchasing power to pUl chasable resources in the shape of

consumable goods,

i t

follows

tbat

an

increase of

bank resources·

not offset

somewhere y an

increase

ot economic

resources,

must and will

lead

to a rise

of pr.ices.

I t can hardly ·be

do\lbted,

in view of the knovm facts, that

the

great increase

of

prices.

which· is being experienced throughout

the

bel•

ligerent countriesrof Europe is in a large measure

1

·

due to

multiplication

of

means

or

purchase

nd paYinent, by tHeir b a n k ~ n g s y s t e m ~ more

rapidly

than the multiplication

or

the

goods available

for purchase.

For can i t be·

doubted

that

a

considerable part of the rise

of

prices, that -e

have ex-

perienced

in our own country

since the

beginning

r the

European War, bas

been largely induced y the great body of new banking

credit

created, which

has

outrun

in

i ts expansion the productive output

t the

Country. Moreover,

the

r ise has continued since our entry into tlE

war.

The

index

figures for

wholesale prices

show that

while wholesale

prices

n A pri l 1917 were 7

per

cent higher th ln

in

July

1914,

they

were··

9 ~

higher

in

J.uly

1917·.

Doubtless i f

later f igurea

were available

they

would

show that the

forward march of

prices continues. The rise of

prices

therefor n

this

country is slight

when

compared

with

what

i t

has been

in the countries

of

Europe. The

7/17/2019 frsbog_mim_v06_2859.pdf


I •

.. ......

-

...

.

X-469.

- 18 -

price index compiled y the

London

E ~ o n o m i s t

shows

an

increase

up to

September

1917 of 120

per

cent

as

cocpared

with

July 1914.

C a u s e s ~

not

d i s s i ~ d l a r

have bean

operating to

produce tho

rise

in those conntriea.

t

is

estima.ted that bank

deposit credits

in the United States

since

our

entry into the war, have

increased

lrom about 30.7

billions

to

.34 billions

an increase

of

three

billions

three hundred millions.

T h ~ incraase

in

loans and investrr.ents

for the

saaJ per1od

11

3

1

500,000,000. I am forced

to

think

in

viaw

of

thesi

facts

that inflation

is

already

at

work

in

the

country, and that in thia uattar of inflation we are confront@d by a

I

condition and not a thoory. If

we

examine the condition of the Federal

Reserra Banks for the

san:.e

interval of time, we get sor O

light

upon ons

of the

factors

that has sustained the expansion of

b a n k ~ n g credit.

Be

tween the 6th of April and

the

26th of October, Federal Reserve B:a.nks

have

increased

their

h o l ~ i n g s

of

bills

discounted and purchased

by

the amount of 475,000,000.00. When

you

rocall

that

the Reserve banks are-

bankers banks, and that therefore

investments

of

the

Reserve1·Bank1 in

discounted

or purchased

bille.shOVV'n on

the

books of the

Reserve

banks

as reserve credits appear

on

the books of

the

zmClber banks as

reserves

i t

is

at

once ~ v i d e n t

that the

475,QOO,OOO

increase

in R ~ s e r v e

bank

i n v e a t D B n t ~ ~ t

a

rati• of 1.00 of

reserve

credit

extended

y

a Reserve

bank to 7.00 of credit loaned

by the u:ember

bank

to

i ts customers

w o ~ l d

raise the

bank

deposits of comr.ercial banks by about 3,300,000,000

tor

the

sau:e

period

of t ~ m e . If this rise continues i ~

is

not unreasonable

7/17/2019 frsbog_mim_v06_2859.pdf


•

/

19 Ji 460

to.expect that be ore long the Reserve System

will

be irad e

into

a great

engine of banking

inflation. Its possibilities in this direction are vast.

~ h e

twelve banks composing

the

Facie.ral Reserve

System

have

an aggregate

capacity of cradit

expansion

of

about

bl10 billion dollars.

If

we

asswm

that one dollar of .Reserve bank credit

increased

seven fold

when

transmitecl

into

c.red.it

of a

member

bank

extended to

i t • customers, i t is clear

as

a

proposition

of bookkoe1ing arithmetic that the

Fadaral Beserve banks and

member banks of

the

Federal

·Reserve

System

P,ve·

an aclditional crodit capacity

of

soma fourteen

m i l l i ~ of

dollars. The question which I

balieve

the

•

ountry

ms t

soon face

is

whether i t

will

be : the part of

financial

prudence for

us to

fi:na.nce our Govbrmmnt loans

y

an expansion Jf

banking

credit

with

accompanying

inflation

or whether i t

\vill be better

to pursue

the

course of

c o ~ v e r t i n g the p • t ~ n t i l

savings fund

of

the

nation

·

into

an

actual

savings fund of ~ u f

ficient

magnitude

to

absorb

the

loans

of t h ~ Govermrent.

This survey

establishes the

following conclusions:

l )

Tho

ultima.te

terme

of

w r war financing m,i3t

be,

not money, Pt

what money

will

buy.

2)

Vast

as

our proposed

expenditures

and advances

are, there is

reason

to believe that they can·

be met

without the use of

any doubtful or

wasteful

expedients

of finance; for

there

is

reason

to

believe

that

our annual

income uay aJLount

to

as uuch as i t y billions a year and be capable of

yielding a

saving

fund which can

be

p p r ~ p r i t e d by the

Govermr ent

through . l . ~

7/17/2019 frsbog_mim_v06_2859.pdf


I •

20

X .. 469

loans

and

taxation to

the amount of

fifteen

billions of dollars.

....

.- . .

(3) The war cannot be carried

as

an extra and business cannot

be as usual.

4:)

Any

attempt

to

carry the

war

as

an

extra

would pave

the

way

for

an

abuse of 1oans and a

certain

inflation of credit and prices which in

the

end

would

increase

the

probable cost of

the

wa.r

by

as

mich

as twenty-five per

cent., through

the

enhanced

prices

which

the

Government would have

to pay

for

all supplies purchased.

5)

Government G n d ~ i s s u e s , t o be s f e ~

JLUat

be

·bottoir.ed upon real

sav-

ings.

Intensive

and

discriminated

savings

and methods of

promoting

~ i t · ·

thrif t are necessary ingredients in

any

effective program of war

f

ina.nce.

(6) A

siJLilar

necessity exists

for the

ef ect1ve

m o b i l ~ z a t i o n

of the

inM

dustrial

power of

the

country. The right of

way

rr.ust be given.to industries

t h t r ~

tributary

to the war neecls of the Government.

Pri1rity cf i n d ~ s t r y

is

therefore

definitely indicated as an essential

part

of a good financial

policy.

(7) Working to the

sair.e

end,

is

priorty of credits, the dif farent

industries of the CO\lntry h v ~ n g priority upon·the fluid credit of the

Federal Reserve System

in the

order of their importance (embargG of credit

to

non-essential

enterprises) Such a-priority is

consistant

with the

spirit·

of

the

Federal Reserve Act which

in one

of .--::::its most fundamental clauses

directs

that

rates

' 'shall be fixed with

a view of accomodating comr.aJ ce and

business . Wa.r DON

being

the nation's business, t would be proper for

the

Federal

Reserve Board and Banks to ix discount:>: rates with a view of

7/17/2019 frsbog_mim_v06_2859.pdf


. ~ ~

•

•

21

1-469.

accomoda.ting COII Lf:lrce

and

business _to

the degree in

which

i t contributes

to

war

production.

(8) The need of a well

inf

orme4 economic strategy

for

the purpose

of

co-ordil'Jating the

industrial activities oi the United States and.those

of

our

Allies

so

as to Weld

the

pop l.ation of l l

these countries

into

one great whole

as

a fighting rr.a.chine,, thrcmgh the conversion of the

needed raw

rr.aterials

and

uanufactured

supplies

into

gun

po.vd.er

at

the

r o n t ~

i his is

.a

war

of blood and iron.

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