frsbog_mim_v18_0280.pdf
Transcript of frsbog_mim_v18_0280.pdf
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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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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 <
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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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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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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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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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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-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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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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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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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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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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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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( 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
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. 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
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- 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.