frsbog_mim_v18_0280.pdf

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O r.,

x 3700

Address

of

A, C.

MILLER

Member

of t he

Federal Reserve Board

before

t h e

Annual Convention

o f t h e

Maryland Bankers Association

At lan t ic C i ty ,

New

Jersey

May 28 , 1 92 1.

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x 3700

Mr*

Pres ident

and

gentleizBn

o f t h e

Maryland Bankers

Assoc ia t ion ,

I am

very happy

t o

have

an

oppor tun i ty

t o

meat

you

a nd

discuss with

you

some

of our

common problems

and

t roubles

and

p e r p l e x i t i e s ,

I

be l i eve tha t

you

gentleman consti tute

t h e

S t a t e

S e c -

t ion

of

your Association*

Le t me sa y , i n

order

t o

r e l i e v e

you of

an y

doubt

a s t o why I am

here , tha t

I am

here n e i th er

t o

s o l i c i t

membership

of you in the

Federal Reserve Bank

of

Richmond,

no r

t o complain of such o f you a s a r e no t members f o r n o t be ing mem-

bers# The p r e s e n t , t o iriy mind, i s a time th at i nv it es u s , whether

a s

prac t i ca l bankers

or as men

concerned with

t h e

admini s t r a t ion

o f t h e nat ion* s banking and f i n a n c i a l a f f a i r s i n a governmental

way, to

look

a

l i t t l e beyond

our own

immediate precincts

a n d t r y

t o

take

a

broader

and

deeper view

of the

s i t ua t i on t ha t

i s c o n -

f r o n t i n g

t h e

country

a t t h e

pr es en t time. Whether

you a r e

National bankers

o r

State bankers makes

no

d i f f e r e n c e ;

-

whether

merely business men or f a r mer s

t

o r even, f o r that matter , people

who belong t o t h e s a l a r i e d o r p r o f e s s i ona l c l a s s e s , o r t o t he

great body

o f

consumers•

The

d i f f i c u l t i e s

a n d

p e r p l e x i t i e s

s u r -

rounding

t h e

banker

and t he

bus iness

man a t the

present time make

no

discrimination between national bankers

and

their customers

and

State bankers

and

their customers

i n t he

many d i f fe ren t s ec t ions

of

t h e

count ry ,

o r i n o u r

many d if fe re nt c las ses

of

indus t ry•

I f we

have ever been confronted with

an

economic problem that concerns

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a l l o f us and from which th er e i s no escape f o r a n y o f u s , except a s i t

i s a n

escape

f o r a l l of u s , i t i s th e

p re sen t s i t ua t i on .

I

want

t o

take occas ion , there for e , th i s a f te rn oon ,

i n t h e

t ime a l lo t ted

to me, to

draw at tent ion

t o

some

o f t h e

outs tanding

f a c -

tors that a r e involved in t he existing economic an d f i n a n c i a l s i t u a -

tion, whether you happen to be a banker i n Maryland o r i n Ca l i fo rn i a ;

i n

Maine

o r i n

Texas.

I

mean

t o

talk mainly about what

we

have come

t o descr ibe by tha term postwar economic re ad ju st me nt • B ut f i r s t I

want

to say a

word

by way of

caut ion

and

co r r ec t i on -

A few

months

ago i t was

more common

t o

describe what

i s in

process a s de f l a t i on . Fo r tuna t e ly - f o r t u n a t e l y f o r t h e t r u t h , and

f o r t u n a t e l y f o r t h e truth that helps u s toward a comprehension and a

so lu t i on

of our

problem

- we are

la t ter ly coming

t o

ta lk less about

d e -

f l a t i o n and more about readjustment - Mary who d i d no t see i t last autumn

now understand tha t i t i s n o t de f l a t i on from which we are su f f e r ing ;

t h a t d e f l a t i o n , s o - c a l l e d , i s merely a symptom o f t h e r egene ra t i ve o r

restorative process through which nature

i s

p u t t i n g

us#

What

we are

going through

i s , i n

f a c t ,

a

readjustment

o r

realignment

o f t h e

d i s t o r t -

ed s t r u c t u r e of indus t ry and commerce throughout t h e l eng th and breadth

of our

country

t o a

normal basis.

The

readjustment, indeed, reaches

beyond our own shores into -world-commerce and into world-markets * V/e

a r e n o t su f f e r in g a lone, n o r even most* We a r e suffer ing a long with

t h e

r e s t

o f t he

worl d. There

i s no

country,

no

matter

ho w

important

nor how l i t t l e i m p or ta n t, i n a commercial o r f inanc ia l way

t

tha t i s no t

going through

th e

throes

of

t h i s t e r r i b l e c r i s i s

o f

a f f a i r s f rom

which

we

have been su ff er in g*

On th e

whole

we

have come through

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r

r <

most easily and s a f e l y . Much as we complain of our condi t ion and much

as we

lament

o u r

individual suffer ings

and

l o s s e s ,

we

really have reason

to be thankful that thus f a r w e have come through so well and on the

whole with

so

l i t t l e damage

to ou r

economic

and

business morale.

Why do 7/e

call this mysterious movement

o r

process through

which

w e a r e

pas sin g readj ustmen t rat her than de fl at io n ? Foremost,

and b r i e f l y , to my mind, f o r this reason: Deflation — God p ro t ec t the man

who

ever invented

t h e

word

o r

ever undertook

t o

na tu ra l i z e

i t o n

American

so i l and apply i t a s a desc r ip t i on of American conditions — d e f l a t i o n to iry

mind always implies that somebody

h a s g o t h i s

hand

on

something

and is

t ry ing

t o

squeeze something

o u t o f i t . I t

implies

th e

in te rvent ion

of a

wi l fu l and def ini te purpose on somebody's part t o accomplish a r e s u l t by

means of forced pressure. More specifically i t means forced liquidation

and

f a l l i ng p r i ce s

by

r e s t r i c t i o n

of

cred i t

and

cont rac t ion

of

currency•

I n that sense there h a s been no d e f l a t i o n . The liquidation that swept

over this country,

i n

common with

th e

r e s t

of the

world,

i n t h e

year

1920

was not of anybody*s making - l e a s t of a l l , o f t h e Federal Reserve Board*s.

I t

came

of

i t s e l f .

I t was no t the

consquence

of any

pol icy

o f

d e f l a t i o n .

I t w a s t h e

r e s u l t

of an

inev i tab le reac t ion

in the

course

of

economic

a f f a i r s . So f a r a s d e f l a t i o n h a s h a d anything a t a l l t o d o with what h a s

been going

on in the

las t year ,

i t h a s

been

a

d e f l a t i o n

o f

expectations

a

d e f l a t i o n

of

exaggerated expectations

on the

pa r t

of

people generally

throughout

ou r

country, north

and

south, east

and

west,

and no t

only

throughout t h e United States and the Western Hemisphere, b u t p r e t t y g e n -

erally throughout

the

world.

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r . 4v

We want on a joy-r ide soon af ter t h e Armist ice . The sudden

termination

of the war in

November,

1 9 1 8 ,

brought

an

immense relief

t o

a l l o f u s . We h ad

been tense,

we ha d

been nerved

up to a

te r r i f i c endeavor ,

th e

most he ro ic th at people

h ad

ever been called upon

t o

make

in the

publ ic be ha lf . Suddenly, i n t h e midst of th i s , came r e l i e f . A ll ws had been

told to do in the way of saving and self-denial suddenly seemed t o have

l o s t

i t s

meaning*

Our

pent-up emotions suddenly begot

an

orgy

of

r e c k l e s s -

ness and ext rav aga nce . People began to buy l e f t and r i g h t , o u t of proportion

t o

their means,

in an

endeavor

t o

keep

u p

with those

who had

become,

by

reason

of the

for tunes

o f war , the

r ec ip i en t s

of

more than their ordinary

incomes. Business,

i t

seemed,

had

never been

so

good .

I n a

word, there

followed close upon

th e

Armistice

a

s t a t e

of

inf la ted expec ta t ion

as to

t h e

f u t u r e

of

busine ss . Pr ice s were r i s i ng . Speculat ion f l ou r i sh ed .

Everything looked good.

But in 1920

people began

t o

doubt whether things could continue

t h i s

way;

they began

t o

h e s i t a t e .

I n

b r i ef , th ei r expectat ion s began

t o

d e f l a t e . I t was they who de fl at ed themselves i n t h e process of get t ing

themselves into s saner and more normal attitude as to the f u t u r e of b u s i -

ness

i n t h e

country

and the

course

o f our

fore ign t rade .

So f a r as the

Feder al Rese rve System was concerned, deflation never formed any par t

o f i t s

purpose*

I t

want

on

expanding credit

and

currency throughout

the

l a rger par t

o f the

year

1920 . I t was no t

un t i l crops were ha rve ste d,

o r

u n t i l a f t e r t h e middle o f October, that th e volume of loans an d discounts

car r ied by Federal Reserve Banks showed any diminut ion. The great

diminution

h a s

come' wi th

t h e

year

1921 and has

been

a

na tu ra l r e su l t

of

th e economic r e a c t i o n , i n t e n s i f i e d by reason o f the fact that there

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r

was a general l e t dpwn of indus t ry and connierce throughout t h e

whole world a s wel l a s throughout o u r whole country.

Esserve bank rates have

had

nothing

to do

with producing this

react ion* I n t h e winter of 1919-1920, an d later when th e further advance

of

r a t e

was

made

i n

June,

1 9 2 0 , i t d i d

something

to

check

t h e

expansion

vfoich

h ad

been going

o n . I t

helped

to

r e t a r d

th e

process

and to

prevent

the

eventual rea ct io n from degen erati ng into a v io l en t co l l apse . 3y moderating

and steadying t h e reac t ion i t helped t o make the . inevi table readjustment

order ly

b y

corapairson with what

i t

otherwise might,

and

probably would,

have been*

What does readjustment mean? I t means that when values and pr ices

and volumes of production have gotten ou t o f the i r na tura l re la t ionsh ips

they have somehow

o r

other

got to be

brought back before there

can be a

sa f e

and

s tab le bas i s

f o r

bus iness ac t i v i ty . Ord inar i ly

i n t h e

past when

we

have

had. a

v i o l e n t a l t e r a t i o n

of the

course

of

indus t ry

t h e

thing

h a s

culminated

i n a

t e r r i f i c p a n i c

and a

short , sudden,

and

unive rsa l co l l apse .

There a r e people who argue that on the whole t h e universal sudden collapse

that comes with panic i s p re f e r ab l e t o t h e slow and moderated processes

we

have

h a d

during

t h e

l a s t e igh t

o r t e n

months under

t h e

in f luence

of

t h e Fede ral Reserve System. They be li ev e i t i s b e t t e r t o have a short

and

abrupt descent

and be

over with

i t a nd

have everybody

o n t h e

same

level about

t h e

sane ti me . What

we

have

h a d i n

fact under

t h e

slow

and

re la t ively order ly readjustment dur ing t h e l a s t e igh t o r t e n months h a s

been in t he na ture o f a staggered process . The readjustment and

liquidation have been uneven

i n

their incidence,

a s

between different

l i ne s

of

industry

and a s

between different sect ions

o f t he

country.

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< ^

Pri ces have gone down un iv er sa ll y,

b u t

they have

n o t

gone down

uniformly.

The

farmer

h a s

suf fered

t h e

most,

and

even

a s

amongst

the

farmers some have suffered more than others, depending on the conditions

a f f e c t i n g t h e markets f o r the i r par t i cu lar s t ap les* The cot ton planter has

been worse

h i t

than

any

other conparable group#

He is

most dependent

on

th e

foreign market*

The

l ive stock

man has

been

i n a

very

bad

s i tua t ion

because h i s products also must find a considerable market overseas« The

r e s u l t i s that there h a s been extreme inequality i n t h e readjus tment p r o -

cess

« For th e

most part

t h e

South, especial ly

t h e

Gulf cotton states,

f e l t

th e

heavy blow

of the

readjus tment f i r s t ,

and on the

whole most

severely*

Ordinar i ly

in a

heal thy s t ate

of

industry when things

a re in

balance there i s a paral lel ism between th e p r i ces of finished goods a s they

go

into

use and the

basic cost prices

of the raw

mater i als tha t

go

into

th e

manufacture

of

those goods. There

i s a

close correspondence between

t h e

pr ices

of

muslin

and

ca l i co

and of raw

cot ton - There

i s a

correspon-

dence between variations

of the

p r i ce

of

boots

and

shoes

an d

va r i a t i ons

of the

cost

o f

hides

and

le at he r . There

i s a

paral lel ism between

the

s e l l i ng p r i ces

o f a l l

these good?

and

labor cost

and

fuel cos t

and

t r ans -

po rt at io n cost* That pa ra ll el is m, however, does

n o t

e x i s t

a t the

present time,

We

have

raw

mater i a l s , par t i c u la r ly such

raw

mater ials

a s

grow

on the to p o f the

s o i l ,

a s

dis ti ng ui sh ed from thos e taken from

under

th e

s o i l , down pr et ty near

to bad

rock.

We

have some

a

l i t t l e

below the 1913 l e v e l . Tu t in many sections of the country there h a s

been l i t t l e r e f l e c t i o n

of the

f a l l

of raw

mater i a l

i n t h e

f in i shed

product pr ices•

To

i l l u s t r a t e

th e

po i n t ,

I

o f f e r

an

instance

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r - i

though

I do no t

o f f e r

i t a s

typical*

We

know

t o o

l i t t l e

a s a

whole

of

t h e

rela t ionship between re ta i l pr ices

and

p r i ce s

of

bas ic

raw

mater ia ls

i n t h e United States a t t h e present time t o make pre cis e g ene ral iz ati on

possible* Bu t the instance I give you wi ll serve a s a suggest ion of

one of the things bothering u s a t t h e pr es en t time# Wheat h a s f a l l en

from th e peak, 53 P

e r

cent ; f lour h a s f a l l e n 47 p e r cent* ^re ad h a s

f a l l e n

1 0 p e r

cent# This in di ca te s

a

s t r ik ing lack

of

correspondence

between t h e movement of wholesale prices and r e t a i l p r i c e s •

Now, I .atn

we ll aware th at

i t

takes more than wheat

o r

more than

f l o u r

t o

make bread* Bread

i a a

product

of a

pretty highly organized

manufacturing process*

The

manufacturer

h a s h i s

p lan t

a s

wel l

a s h i s

ra w ma te r i a l . H e h a s h i s f u e l a s well as h i s r aw mater ial b i l l - ^eyond

tha t h e h a s h i s p a y roll, concerning which he could doubtless tell some

very dis turbing things.

He

a l so

h a s t o

market

h i s

product*

^>ut

when

allowance i s made f o r a l l these factors I do not think anyone can doubt

tha t t h e dispar i ty between sel l ing pr ice and cost i s abnormal• A drop

of

53

P

e r

cent

i n

wheat

and a

drop

o f 40 pe r

cent

i n

f l o u r ,

a s

compared

with

1 0 p e r

cent

i n t h e

case

of the

loaf

of

bread, indicates that some-

thing

i s o u t o f

jo in t- Before

we can

have anything like

a

normal economic

s i t ua t i on t h e rela t ionship between t h e pr ices or raw mater ia l ana f in i shed

product mast b e rees tab l i shed .

Wa cannot expect extensive downward revisions i n wages until

we get considerable extensive downward revisions in the r e t a i l s e l l i n g

pr ices of those things that make up the bulk of the ordinary workman

1

s

family consumption#

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^

We

have

got to

6

e t t h a

paral lel ism more completely restored

between t h e s e l l i n g p r i c e s o f bas i c raw m a t e r i a l s and t he f in i shed

consumable commo ditie s before

we can

f ee l t ha t

wa are

reasonably through

with t h e readjustment process and that indust ry and business i n th is

country will again move on a reasonably steady ke el . Un ti l th at i s

accomplished, we s h a l l n o t b e through wit h o u r economic d i f f icu l t ies*

.uut we have a be t t e r under s t and ing of the na tu re of t h os e d i f f i c u l t i e s ,

and we

hava

a

bet ter unders tanding

of

what

we

have

got to do to

hasten

t h e

so lu t ion

o r

e l imina t ion

of

some

of

t ho se d i f f i c u l t i e s .

I f I were t o venture a statement as to what i s t h e most im -

portant immediate point upon which t o concen t r a t e a t t en t ion i n t h e p r o -

cess of f u r t h e r i n g and h a s t e n i n g t h e readjustment process I should s ay

i t was th e

r e t a i l p r i c e s i t u a t i o n *

The advice that M r. Hoover gave before th e United States

Chamber

of

Commerce

a few

weeks

a g o ,

when

he

advised people

who

were

purchasers a t r e t a i l t o shop around, was good advice* We need t h e r e -

t a i l p r i c e s i t u a t i o n to be brought into closer touch with t h e wholesale

p r i ce s i tua t ion , wi th

t h e

manufac tu r ing s i tua t ion

and

wi th basic

i n -

dust ry condi t ions before we can f ee l t ha t we have g o t r ead jus tmen t to a

sa t i sf ac to ry po in t . Everybody must share t h e common l o t * There must

be no escape f o r a n y from t h e common l o t i n times like t h e present*

Just exact ly as war makes no d i sc r imina t ion i n t he l i f e i t t a k e s ,

#

values one man

f

s U f a no more than anot her*s ; j us t a s each man gives

h i s

l i f e f r a e l y

t o t ha

common cause,

so in a

t ime l ike this

we

must

a l l

be prepared t o share tha common l o t i f we expect a so lu t ion of our common

d i f f i c u l t i e s # P e a c e n o le ss than w a r h a s i t s t r i a l s and v i c t o r i a s , and

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~ 9 T

X-3700

i f we

would show one-half

of the

concern,

f o r o u r

common interests

i n

peace that we show i n w a r , show one-half o f t h e p a t r i o t i c r e s o l v e t o

manfully accept whatever

t h e

p r e s en t s i t ua t i on

may

r equ i r e

i n

order

t ha t i t s h a l l be corrected* we would expedi te t h is b usin ess pf p o s t -

w ar read jus tment very mater ia l ly4 3 u t u n f o r t u n a t e l y t h e f o r c e s of

ind iv idua l cupid i ty

a r e a p t t o g e t t h e

b e t t e r

of our

generous impulses

i n time o f peace jus t as i n time of war there i s a s o r t of f o r g e t f u l -

ness of self that makes one almost court danger and welcome sacrifice*

i n

order

t o

j u s t i f y

o u r

f a i t h

i n

ourse lves

an d

prove

o u r

devot ion

t o

country•

The papers t hi s morning re po rt tha t t h e United States Railroad

Wage uioard i s about t o hand down on the f i r s t o f June i t s wage a d -

jus tment de ci s i on , That i s a mat te r of great moment i n helping improve-

ment

o f t h e

e x i s t i n g s i t u a t i o n .

I t

i nd i ca t e s

t h e

de t e r mi na t i on

of

th i s

responsible agency

t o

reduce wages

a s t h e

cos t

of

l i v i n g

i s

reduced#

We

may expect th at they wi ll go on with this work of wage adjustment, a s

t h e s e l l i n g p r i c e s of c l o t h i n g and f u e l and food f a l l f u r t h e r e d

p a r t i c u l a r l y a r educ t i on o f house re nt s fo llo w upon increa sed bu il di ng

operat ions*

We may

expect tha t

th e

cos t

of

ope r a t i ng

t h e

r a i l r o a d s

so

f a r a s t h e wages bil l i s concerned will b e reduced, and t h a t in due

course

t h e

Interstate Commerce Commission

o r t h e

r a i l r o a d s

of

the i r

own motion wi l l reduce f r ei g ht ra te s , thus el i min at i ng another of the

obstruct ive elements« The ra i l road wage s i tua t ion i s i n t i m a t e l y i n t e r -

locked with t h e whole problem of post-war readjustment#

Th e

increase

i n

ra i l road ra tes a l lowed las t year , necessary

a s

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-r 10 r* X-3700

-was in order t o p r o t e c t t h e investment status o f th e r a i l r o a d s and in

order that

t h e

roads might have some hope

of

a t t r a c t i n g

t h e

c a p i t a l

necessa ry

t o

sustain them,

w as

never the l ess

s o

cons ide rab le

a s t o

work

a

very in ju r ious in t e r rup t ion o f th e natura l f low o f commodities* We have

grea t d i s t ances

t o

cover between markets

i n t h e

Uni ted Sta tes ;

t h e

r a t es

on c e r t a i n t r a f f i c must n e c e s s a r i l y b e very l o w i f goods a r e t o move.

P resen t h igh r a t e s , i f p e r s i s t e d i n , would bring t o pass some very d i s -

a s t r o u s r e s u l t s

, and

here

a n d

there some vi o l en t l y un fa i r re su l t s

i n

breaking

u p

es t ab l i shed marke t s

a n d

indust r ia l a l ignments#

I was ta lk ing wi th a manufacturer from th e f a r West a f ew

weeks ago* I asked h im What i s t h e r a i l road s i tua t ion do ing t o

you? He r e p l i e d t h a t i t was one o f the g rea t es t t h ings tha t had

ever happened t o h i s sect ion* I t w as l i k e a great wall of p r o t e c -

t ion t o loca l i ndus t ry , h e s a i d . He went o n to s ay t h a t i n h i s

p a r t i c u l a r l i n e

of

business there

h a d

never been

a s

much act iv i ty

-

i t w a s high er than i n 1920« The eastern manufacturer could n o t

g e t i n t o h i s markets because of high f r e i gh t r a t es . Whi le th a t happen-

ed to be a s a t i s f a c t o r y s i t u a t i o n f o r th i s pa r t i c u l a r manufac tu re r ,

thus pro tec ted

by

r a i lway r a t e s ,

i t w as n o t a

comfort ing condit ion

f o r t h e

manufacturer

i n

Chicago

o r S t*

Louis

o r

Kansas City

who

was

th us exclu ded from acc ess

t o a

customary market»

I t

does

n o t make f o r a heal thy economic s i tu a t io n , e i th er , consid er in g

t h e count ry a s a whole*

I would n o t l eave y o u , however, with t h e impression that th e

completion o f th e readjustment process i n th is count ry i s merely a

domestic ma tt er . Even i f w e g e t t h e r e t a i l p r i ce s i t ua t ion more

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- 1 1 -

X-3700

completely reconstructed,

and

wages adjusted

on

par a l l e l l in es , even

i f

we ge t

rai l road rates sat i s factor i ly revised downward,

and

even

i f the

reserve rates

o f .

disc oun t should

be

greatly lowered,

we

should s t i l l

n o t

be out of the woods* The foreign trade situation would b e l e f t a s the

f l y i n t h e

ointment-

1

In 1920 ten

commodities, mostly products

of the

soi l , cot ton

leading

t h e

l i s t with wheat foll owin g second, con sti tu te d

4 4 p e r

cent

of

t h e

export values from

t h e

United S t a t e s . When

we

have

t e n

commodities

cons t i tu t ing c lose

to one

hal f

of the

goods

we

send overseas,

and

most

of

them

th e

products

of the

farm,

i t i s

obvious that

a

shrinkage

in the

demand

f o r

those products must have

a

very serious effect upon

t h e

pos i t ion

of

everybody

i n t h e

agr icul tura l sec t ions

and

also upon manufacturing

i n -

d u s t r i e s i n non-agricultural sect ions which depend f o r a large par t of

their domestic market upon

t h e

buying power

of the

farmer* That so rt

of

derangement works back,

and

t h i s

i s

what actually

h a s

been taking place

i n t h e

l a s t

s i x o r

e igh t months* Europe

i s

poor , Europe

i s n o t

able

to

ea t and

dress

and

l i v e

a s

us ua l• Europe

h a s n o t t h e

buying power

and

cannot borrow* Peo ple th er e

a r e

consequently

n o t

eat ing

a s

they ought

f o r

t h e i r own good, a s well a s f o r t h e good of th e American farmer who has

grown live stock

to be

eaten

i n

Europe

or who has

grown c ot to n

to be

worn

a f t e r

i t i s

manufactured,

i n

Europe*

I t i s a

curious phenomenon,

b u t i t i s a

fac t that

h a s

been

demonstrated over and over ag ai n , th at even where a commodity i s consumed

perhaps a s much as 90 per cent a t home» an d only t e n p e r cent abroad, i f

t h e

market

f o r

t ha t

t e n p e r

cent

i s

destroyed

o r

s e r i ous l y cu r t a i l ed

i t

will break

th e

p r i ce

f o r t h e 90 p e r

cent that

i s

consumed

a t

home. When

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-12- X 3700

you

have

a

commodity like cutton, that must find

i t s

principal market

abroad, you can readily understand that t h e cessa t ion of European buying

o r t h e

serious diminution

of

European buying

i s

sure

to

work havoc

no t

only a s regards t h e cot ton planter b u t a s regards everybody anywhere else

who is

dependent

on the

cot ton planter

a s h i s

customer.

Wa have had a shrinkage of 53 P

e r

cent in our expor t s in the

course of the l a s t yea r . The amazing thing to me is that such a shrinkage

h a s n o t worked an even more violent effect upon o u r domest ic s i tuat ion.

That shrinkage,

i t

should

be

added,

i s o f

course

a

shrinkage

i n

va l ue ,

n o t

a shrinkage i n volume. Pr ic es hav e gone down, so tha t t h e same bale o f

cot ton a s would have taken a higher value a year ago , o r the same bushel

of

wheat,

now

takes

a

lower value,

The

percentage f igure

of

shrinkage

by

va l ue , t he r e f o r e , i n a certain sense gives an exaggerated impression of

what h a s happened. Estimate s of what t h e shrinkage of physical volume h a s

been since

t h e

r eac t i on

s e t i n a

year

ago

indica te tha t

i t i s

about

)0 pe r

cent. That

i s to sa y , we a re

sending about

J> p e r

cent less goods

out of

t h e

country

i n

po i n t

of

physical volume,--measured

by

cargo capacity,

e t c . ,

'—than a year a g o . I n other words, we a re j u s t about back where we were

i n 1913* We a r e shipping about t h e same volume of commodities t o foreign

markets a s we d id i n 1913> i f anything a l i t t l e b i t less , wi th t h e tendency

s t i l l downward acco rdin g

t o t h e

l a t e s t i nd i ca t i ons .

And

t h i s

i s

making

a

very troublesome factor

in ou r

economic si tuat ion.

Since 1913 this country h a s grown a good deal. The census tel ls

u s t ha t we have grown in populat ion t o about 106,000,OCX). Bu t we have also

grown i n o u r productive power, i n o u r a b i l i t y t o ship more vtfieat, more c o m ,

more copper, iron and s t e e l and bacon and cot ton and so on . Ye t Europe i s

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* 1 3 -

X-3700

no t now i n a

p o s i t i o n

t o

take

a s

much

of

these

as i n 1 9 13 * I t i s

evident ,

t h e r e f o r e ,

why the

markets

f o r

certain commodities

a r e

g l u t t e d

i n

this

country* Under

t h e

strain something

h a s g o t t o

give

way .

Something would

have

t o

give

way

even under more normal conditions«• Where co nd it io ns

a r e

a s

abnormal

as now, and

where everybody

i s i n a

mora

o r

less apprehensive

frame

o f

mind,

t h e

e f f e c t

of

accumulated supplies

of

bas ic s tap les

i n

breaking pr ices i s o f course much greater* The r e s u l t i s th a t c e r t a in of

o u r

industries have been

so

thoroughly readjusted that their pr ices

a r e

r e a l l y below normal* Their pr ic es

a r e

below what prices were

in 1913

b e fo re

t h e war

broke upon

t h e

world# Unt il these pr ic es ,

b y

coming

u p ,

meet ce rt ai n othe r pr ic es which have s t i l l

to

come down,

t h e

p a r a l l e l i s m

o f

p r i c e s w i l l

n o t

have been reestablished

and we

s h a l l

n o t

have

a

good

condit ion* I t i s my opinion t hat we sh a l l n o t have a good condition until

Europe

i s

once more able

t o

come into

t h e

American market

a s a

f a i r l y

normal buyer•

We

have

a

domestic economic situation

i n

which

t h e

fo re ign

factor cannot

b e

neg lec ted

f o r a

moment

b y

anyone

who

wants

t o g e t a

l ine

on

what

we

ought

to do i f we a re to

f i n d

a

c o r r e c t i o n

of i t#

I n this connect ion, I want t o ca l l your a t ten t ion t o a phenomenon

t h a t

h a s

been very s t r ik ing

and to xry

mind

of

alarming s ignif icance s ince

t h e

f i r s t

o f t h e

year*

I

have

i n

mind

t h e

tremendous flood

of

gold that

h a s

come t o o u r sh or es f rom Europe *

When t h i s movement f i r s t s e t i n l a s t autumn, the re w a s a d i s -

4

p o s i t i o n o n t h e p a r t of some of the f in a n c i a l j o u rn a l s t o t a k e s a t i s f a c t io n

a n d

pride

i n i t *

They cal le d a t te nt io n

t o t h e

fac t tha t

we

were

t h e

great

c r e d i to r n a t io n

o f t h e

world, that

we

were

on a

gold b a s i s , arid t ha t gold

w as coming here f o r these reasons* I t i s true that gold i s coming h#re

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X-3700

because

w e a r e t h e

g r e a t c r e d i t o r n a t i o n

o f t h e

world*

B u t i t i s

wel l

n o t

t o overlook that wherever there i s a c r e d i t o r t h e r e i s - a l s o a debtor* and

t h a t

on t he

average

t h e

p r o s p e r i t y

o f t he

c red i to r depends

a

good deal upon

t h e p r o s p e r i t y o f t h e d e b t o r . A poor an d d i s t r e s s e d d e b t o r i s n o t a very

good asset f o r a c r e d i t o r who wants t o b e p rosperous i n t h e long run*

Thi s g r ea t i n f lux of gold tha t h a s been coming t o u s i s evidence

n o t o f t h e r i c h e s of Europe bu t o f t he n e c e s s i t y o f t h e s i t u a t i o n i n which

E u r o p e f i n d s i t s e l f . The gold which t h e c o u n t r i e s o f Europe a r e sending u s

England^ France, Sweden

a n d t h e

o t h e r s

- is a

measure

of

the i r need*

I t i s

t h e measure o f t h e i r n ee d, f i r s t , a n d second t h e measure o f t h e i r d e t e r m i n -

a t i o n t o show t h e i r good f a i t h b y going t h e l i m i t i n seek ing t o e s t a b l i s h o r

m a i n t a i n t h e i r c r e d i t i n t h e American marke t* They a r e sen din g gold he re

p a r t l y i n s e t t l e m e n t o f o b l i g a t i o n s a l r e a d y c o n t r a c t e d a n d p a r t l y i n order

t o

create exchange

t o

t ake ca re

of

the i r cu r r en t pu rchases

of

things which

a r e a b s o l u t e l y n e c e s s a r y t o t h e f u n c t i o n i n g o f t h e i r i n d u s t r i e s , a n d f i n a l l y

t o keep th ei r fo re ig n exchanges f rom ge t t in g fu r t he r demora l ized- This

gold movement,

i n

b r i e f , shows

a

d i s p o s i t i o n

on

t h e i r p a r t

t o do

t h e i r p a r t

a s d e b t o r s and a s b u s i n e s s men who are long v i s ioned a n d have grea t re sp ec t

f o r t h e u p b u i l d i n g o f t h e i r c r e d i t t o a h i g h l e v e l i n t h e American market*

We do not

want th is gold ,

w e do no t

need

i t # We

have

g o t

more gold

now

than

we

n e e d .

S o h a s

A r g e n t i n e ,

s o h a s

Japan . Russ i a

i s

p r a c t i c a l l y

s t r i p p e d o f h e r g o l d . A c o n s i d e r a b l e p a r t o f t he gold we a r e g e t t i n g i s

undoubtedly o f R u s si a n o r i g i n . I f n o t i t s e l f Russian gold> i t i s gold from

European count r ies such

a s

France

o r

Sweden which r e pl ac e

t h e

gold they send

u s with Russian gold* T he r e s t i s mainly t h e n e w gold th a t comes t o t h e

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. 1 5 - x- )700 " '

London markst from

t h e

South African mines

and i s

bought

i n

London

f o r

American account because t h e d o l l a r i s c o n s t a n t l y a t a premium* There i s

n o b e t t e r u s e t h a t th e man who h a s South African g o 4 i n London c a n p u t i t

t o than t o s e l l i t t o New York f o r do l l a r s*

P r a c t i c a l l y a l l of th is gold h a s accumulated i n t h e hands of the

Federal Reserve Banks.

The

Federal Reserve System

h a s

added

i n t h e

course

of t he l a s t t wel ve months about $425,OuG,000 to i t s gold re se rv e. Since the

f i r s t o f this year when t h e f l o o d - t i d e o f t he movement s e t i n , we have

added

t o ou r

res er ve hol din gs about $340,000,000* These huge acc ess ion s

have na tu ra l ly h a d apronounced effect i n r a i s i n g t h e r e s e r v e r a t i o of the

Federa l Reserve Tanks, par t icu lar ly a s l i q u i d a t i o n was going on a t a rapid

pace

a t t h e

same time.

A

year

ago ou r

r ese rve

was 42 per

cent; today

i t i s

5 6 p e r cent* This i s a r i s e a t t h e r a t e of 33 P

e r

cent i n t h e course of a

year* The r e s e r v e r a t i o h a s r i s e n t o t h e extent o f a t least one-hal f

because of the g rea t i n f lux of gold into t h e Federal Reserve ^anks* The

r e s t

o f t he

r i s e

i s due t o

l i q u i d a t i o n *

We

have reduced

o u r

n o t e c i r c u l a t i o n

i n t h e pa st ye ar something l ik e $275*000,000. We have reduc ed o u r loans

a n d

d i scoun t s

by an

amount something like $850,000,000*

So we

have

had two

major inf lue nce s tha t expla in t h e change i n t he r a t i o o f t h e reserve system*

( l ) inc rease i n t h e gold reserves and ( 2 ) diminut ion i n no te l i a b i l i t i e s .

The diminut ion o f t he no te l i a b i l i t i e s i s l a r g e l y t h e r e s u l t o f t h e e x -

t i n c t i o n

of

obligat ions owed

b y

member banks

t o

Federal Reserve -oanks,

a n d

i s r e f l e c t e d i n t h e marked decline o f t h e loans an d d i scoun t s o f t he Federal

Reserve Banks.

B u t i t i s t he

for e ig n gold th a t

h a s

made much

of

t h i s

re- ,

duc t ion poss ib l e .

When a customer country i s so s i t u a t e d t h a t i t c a n b u y only a s i t

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- l o - X-3700

pays i n gold i t i s r easonab ly ce r t a in t o expect that that country i s going

t o b u y

j u s t

a s

l i t t l e

a s

p o s s i b l e

and

tha t

i t s

buying

i s

going

t o

diminish

unt i l condi t ions change.

So f a r

from

i t s

ueir.g

a

c o n d i t i o n

in

which

we

should t ake sa t i s f ac t i on ,— th i s g r ea t s t ream o f gold that i s f lowing to u s

from Europe, — rather should i t give u s occasion t o take pre t ty ser ious

thought

o f

what

i s

implied

in i t * We

cannot xpec t

t o

sell much

t o

Europe

i f we a re going t o sel l only f o r caoh, f o r gold .Nor w i l l i t b e o f very

much u s e t o u s t o g e t more gold unless we know h ow t o u s e i t . We have

more gold than we need now . Too much gold i s almost a s s e r i o u s a n evi l

a s t o o l i t t l e g o ld . We may f in d tha t as o u r le iera l Reserve ra t io keeps

r i s ing wi th add i t ions of new gold , t h e r i s e may s e t i n opera t ion before

w e s e e th e en d of i t some ver y un de si ra bl e movements. A hig h gol d re se rv e

does n o t necessar i ly make f o r economic heal th. I t does, however. make i t

p o s s i b l e

f o r u s , i f we

know

how to go

about

i t and i f we

have

t h e

v i s ion

a n d purpose , t o develop a system of fo re ign t - ade f inanc ing in a id o f

Europe, through t h e agency o f o u r banks with t h e a s s i s t a n c e o f t h e Federal

Be

serve Banks.

T he l a s t f e w months have made i t s o c le ar tha t there i s no

doubting that o u r economic recovery i s dependent upon t h e economic

r e s t o r a t i o n o f Europe. We might a s well give u p as an i d l e d a y dream t h e

thought that w e c a n g e t o u t , a l t o g e t h e r a n d s a f e l y o u t , o f o u r present

economic d i f f i cu l t i e s , excep t

a s

Europe works back toward

a

more healthy

an d

normal con di t ion . Ei t her

we

have

g o t t o

r e c o n s t r u c t

o u r

whole internal

economic organizat ion ,—

we

have

g o t t o

grow le s s co t t on ,

we

have

go t to

grow less corn a n d wheat, we have g o t t o grow le ss l i ve st oc k, e t c . , a n d

f ind o ther uses f o r t h e r e s o u r c e s a n d people now employed i n a g r i c u l t u r e —

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I *

WW

- 1 7 -

X-3700

( the se th ings a r e e a s i l y s a id b u t they a r e cLonf with extreme diff iculty an d

i t takes a long time to do t h e m l ) o r e l s e we have g o t t o h e l p t o r e s to r e

t h e buying power, an d that means restore t h e producing power, of the

c r ipp led peop le s o f Europe» That means, a s t h e f i r s t s t e p , t h a t we have go t

t o devise ways a n d means of f i n a n c i n g t h e expor t o f o u r sur pl us. farm

produc ts a n d some o f our surplus minera l produc ts t o Europe o n c red i t*

Under

t h e

ausp ice s

o f th e

Federal Reserve Board, Congress enacted

a law

known

a s t h e

Edge

A c t

because

i t w as

f a t h e r e d

b y a

member

o f t he

Senate v$io

i s

v i t a l l y i n t e r e s t e d

i n

what

can b e

done

b y

F e d e r al l e g i s l a t i o n

t o open a way to coope ra t ive bank ing e f f o r t i n t h i s coun t ry t o f inance

exports# Something h a s been accomplished under that, b u t thus f a r t o o

l i t t l e * C o n s i d e r i n g

o u r

v a u n t e d s p i r i t

o f

e n t e r p r i s e ,

o u r

v a u n t e d s p i r i t

o f adventure , there h a s been, I t h i n k , a s ingu la r apa thy i n t h e la s t yea r

a*id a ha lf wi th respe c t t o t h e need of f i n d i n g o r developing ways and means

b y

which

we can

sa fe ly hook

u p

with Europe

i n a

commercial

wa y. The gap or

r i f t t h a t e x i s t s i n t h e i nt e r na t i on a l economic s t ru c t ur e invo lvi ng Europe

a n d t h e United States must b e br idged through t h e medium o f adequa te an d

p r o t e c t e d c r e d i t s . Th at i s a n urgent problem o f concern t o every sec t ion

o f th e country* I t c a n b e s o lv e d , b u t i t s t i l l a w a it s s o l u t i o n a n d n a t i o n a l

economic recovery waits on th a t s o lu t i o n .

I am n o t h e r e to p r e s e n t an y s p e c i f i c p r o j e c t s . I d o n o t regard

t h i s a s a n appr opr i a te , occa s ion f o r tha t purpose , I am he re t o t r y t o i n -

duce

in y o u , an d t o g e t y o u to

induce

i n

others with whom

y o u

come

i n

c o n t a c t , a n a t t i t u d e o f mind th&t will be hospi table toward t h e deve lop-

ment a n d promotion o f well—considered projects f o r t h e f i n a n c i n g o f our

7/17/2019 frsbog_mim_v18_0280.pdf


. r p

- I S - X-3700 ' f

c

-

export trade

t o

Europe

and

other countries,—• Taut

t o

Europe primarily,—

a s

they

may be

presented.

Let me

t e l l

y o u ,

simply

as an

example

o f t he

i n t e r e s t

of the

Federal Reserve Board i n this mat ter of he lp ing t h e f inanc ing o f o u r e x -

por t t rade , tha t

th e

Board recently issued

a

ru l ing au thor iz ing

t h e

Federal

Be

se rve Banks

i n

t he ir open market ope rat ion s

to buy

ban ker s' acc eptances

of a matur i ty o f s i x months. This st ep would n o t have been taken except

under t h e pressure of a p re t t y r ea l s i t ua t i o n . I n normal times reserve

banks should r e s t r i c t themselves

t o

shor t matur i t i es

- n o t

exceeding

90

$iays.

That i s a good principle f o r normal times. B ut these a r e n o t normal times.

There a r e some things that are now more important than pr ot ec ti ng the

t e chn i ca l l i qu id i t y of the Federal Reserve Banks. We recognize tha t our

f i r s t r e s p o n s i b i l i t y

i s t o

help business carry

on and

r ev ive ,

t o

help

business i n every way as wisely as we know how . One th ing I can say in

this connection

i s t o

pledge that

t h e

Federal Reserve Board,

a s

long

a s i t

i s o f i t s present frame of mind, will always test credit b y what credit

i s doing t o he lp t h e production and d i s t r i b u t i o n o f goods, t o he lp the

movemsnt

of

goods from

th e

farm

t o t h e

f ac to ry

and

from

th e

mine

to t he

foundry

a n d

from factory

an d

foundry into

t h e

markets

of

consumption,

whether those markets

be

here

o r

abroad. Recognizing th at

a t t h e

present

i t i s t h e

f orei gn market that p ar t i cu la r l y needs

t h e

a s s i s t ance

of new

f inancial machinery,

we

have rece nt ly taken, th is ste p

b y

which

th e

exporter

i n this country i s f r e e to go to arrange an acceptance credi t , an d have s i x

months b i l l s drawn with

t h e

knowledge that they

can be

taken

t o a

Federal

Reserve Bank and tha t th e Federal Reserve Bank i s authorized t o purchase

them. More th an t h i s , the Federal Reserve Banks have t h e resources t o make

7/17/2019 frsbog_mim_v18_0280.pdf


- 1 y -

X~37QO

i • - v-'

investments

i n

such b i l l s

t o

large amounts.

This

may n q t

appear

to "be a

v ary s t r i k i n g c o n t r ib u t io n

t o o u r

export financing problem- I th in k i t a very important step, an d o n e bound,

t o

y i e l d r e s u l t s

i f

expor te rs

an d

bankers know

how to

avai l themselves

o f

i t . A t a n y

r a t e ,

i t

r e p re se n t s

a l l

tha t

t h e

Federal Reserve Board under

t h e

s t a t u t e

c a n do - We

hav e shown

o u r

d i s p o s i t i o n

t o g o to t h e

l i m i t

p e r -

mit ted b y t h e l a w .

I n conc lus ion , l e t m e express my ind ivi dua l be li ef th at gloomy a s

t h e

s i t u a t i o n

o f t h e

world looks

a t t h e

moment,

i t i s f a r

b a t t e r t ha n

i t •

locks- Things

a r e

mending. That ought

t o

give

u s

s p i r i t

and

confidence

f o r

t h e f u t u r e . Th s o n e th in g I would urge a t this t ime i s t ha t every busi nes s

m an

should maintain belief-

i n h i s

country

a n d i t s

f u t u r e

an d

b e l i e f -

i n h i m -

s e l f ;

b u t

also , beyond that , bel ief

i n £ h e

world .

Do n o t

imagine

f o r a

moment that

t h e

bottom

h a s

dropped

ou t o f

c i v i l i z a t i o n .

Do n o t

imagine

f o r a moment that t h e people o f Francs o r Germany o r I t a l y o r England a r e

s s s e n t i a l l y d i f f e r e n t f r o m u s . I f we have common sense l e t u s a lso c red i t

them with common sense.

If we

have fa i th

in our own

i n t e g r i t y ,

l e t u s

have

f a i t h

i n

t h e i r i n t e g r i t y .

I f we

ha ve f a i t h

i n o u r

de te rmina t ion

and

a b i l i t y

t o

meet

o u r

problems,

l e t u s

have fa i th

i n

th e i r d e t e rmin a t io n

a n d

a b i l i t y

t o

meet their problems-

I t i s

only

as we

d i s t r us t each o ther

a s

nat ions

th a t we h&ve reason to be apprehensive of the f u t u r e -

When I reflect upon what h a s taken place i n t h e l a s t seven year s

t h e

amazing thing

to me i s

t h a t

t h e

world

i s

going forward

a s

r a p id ly

a s

i t i s .

7ilhen

t h e

whole s t ructure

of

c i v i l i z a t i o n

h a s

gotten such

a

j o l t

a s

i t g o t b y t h e w a r i t

takes some time

t o g a t

th in gs i nto working ord er .

But

every d a y tha t passes i s a d ay fur ther away from this condit ion of th ings

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~2 0- a - 3 ZOO

an d a d ay nea re r t h e a t ta inment of a vorking b a s i s . What we want a t th is

time

i s t o

have

a n

a t t i t u d e

and to

h e l p c u l t i v a t e

a n

a t t i t u d e

of

confidence

i n

ourse lves , conf idence

in o u r

f u t u r e

an d

conf idence

i n t h e

a b i l i t y

o f the

n a t i o n s of Europe gradually t o resume their normal relat ionship with u s

an d th e r e s t o f the world . C iv i l i za t ion i s going o n* I t i s merely a

ques t ion

o f

whether with

o u r a i d t h e

recovery wi l l

b e

r ap id

o r

whether

without

i t i t

will have

to be

slow, With f a i t h

w e c a n d o a l l .

F a i t h

i s

t h e foundat ion of cred i t* Credi t i s t h e foundat ion of b u s i n e s s , a n d jus t

a t

th is juncture

i t i s

par t i cu la r ly wha t

i s

needed

t o

give

a

f i l l i p

to o u r

foreign trade, without whose recovery things

a r e

going

t o

l i n g e r

an d

drag.

frsbog_mim_v18_0280.pdf

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