Regional President Speech

ADDRESS AT HE? YORE SGLtfE BAKJGRS ASSOCIATION GROUP VI, HOTEL LL'BTIKIQUE, HEW YORK CITY, DEO. 9, 1915. Delivered by Mr. Benjamin Strong, Jr. The Federal Reserve Bnks have nov/ been in operation about one year. Daring that time, so much discussion has taken place and so much has been written in regard to the important features of the Act:.and the operations of the banks, that one runs the risk of tiresome reiteration in any further dis­ cussion of theie subject s. Nor can very much be said in regard to the busi­ ness actually conducted by the banks in this period, for the volume has been inconsiderable and its character of slight i.tiportance, compared to the volume and character of the work of organization. Few difficulties are presented in employing men and organizing the machinery to enable one bank to conduct a large business. A great many difficulties sere presented, however, in organizing twelve banks on very short notice, and so developing their machinery that they will work in har­ mony and unison. I shall not attempt any detailed reveiew or the methods ♦ th-it have been employed to bring about the results so far accomplished. The policy of the system as a whole, h s been very largely determined by the Fed­ eral Reserve Board as expressed in the various regulations which it has is­ sued. The physical and mech nicil organization of the banks and the plans for their harmonious operation have bean perfected through frequent meetings of the Governors of the banks, as well as of various members of their staffs, such as the auditors, and in other cases, the transit managers and the assist­ ant cashiers. It may be asked why so much time ha3 been devoted to organization in a br.nk such as ours, which ir.s but $12,000,000 invested at interest, and where the balancc of its assets consist singly of £-200,000,000 in cash. In Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis other words, why hasten organization any faster than the business develops? I think a complete answer to this question can be made by calling your at­ tention to the responsibilities which will rest upon this country and upon the Federal Reserve Banks as an important part of its banking machinery, in re- effecting necessary A adjustments which ultimately must be made as a result of the war. It would be foolhardy to prophesy what this process of readjust­ ment will be, but some of the effects of the readjustment I think can be discerned at this time. People who have been accustomed to doing busi­ ness with banks, to a great extent measure the ability of the banks to meet their liabilities by the amount of the bank’s gold resources. The degree of confidence felt in a bank by its customers, may also be felt in a larger my by an entire nation as to its banking system, and this is par­ ticularly true in those countries whose banking systems are based upon a centralized control of gold reserves which are held by central banks nfiiich have the exclusive right of note issue. Daring this present period, we are exporting vast quantities of goods to Europe and notwithstanding the huge loans which we are extending to foreign nations and banking institutions and notwithstanding our purchases of large amounts of American securities formerly held abroad, our customers in foreign countries find it necessary to ask their banks to ship us large amounts of these gold reserves in pay­ ment for their purchases* Since the gold movement started in our favor, we have received about $400,000,000 in this way. Much of this gold, if not all of it, immediately finds lodgement in the banks, and to some extent in Reserve Banks. In other words, our ratio of reserves to bank liabilities is be­ come unduly large and the ratio abroad is being correspondingly reduced. In order that these payments may be made, the belligerent nations have even induced their citizens to give up their gold to the banka, thereby Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 3 - - enabling the banks to enlarge their loans and note Issues at the same time that they are shipping gold to us. The result is plain enougji to he seen: liabilities, both banking and national in belligerent countries, are out of usual proportion to gold reserves; our gold reserves in a sense, are out of usual proportion to bank liabilities. We also know that there is nothing quite so fluid or which readjusts quite so promptly as credit. In normal times, when oredit becomes extend­ ed and money rates are abnormally high in one part of the globe, money is attracted to that point. Balances of trade, financial operations, the ex­ penditures of tourists and investment transactions generally about offset each other, just as in the clearings at the Clearing House, debits offset credits and but a very small balance 1b settled in gold. Just now, however, in an international sense, the clearings are out of balance. We are presenting more checks at the Clearing House than are being presented against us, the balances are constantly in our favor and gold moves in our direction in unprecedented volume. What will be the reaction from this development, and in what way will the Federal Beserve Banks be involved in the operation? It seems to me that when tke war is over, or at any rate, whenever .our export balance of trade disappears, readjustment# will begin to take place. 'This will be the world's cheap money market. If foreign nations and banking institutions emerge from the war with their oredit maintained, normal oredit operations will be resumed. Borrowings in this market or sales of goods in this market or the re-sale of securities to this country, or other international transactions in such volume or sequence as we cannot now iforeoaii will begin very promptly to oause the return of some part of this gold to restore depleted bank reserves. To express it in the simplest language, those nations and banking institutions which have Inn un­ duly expanded their liabilities, will begin to build up a stronger founda­ tion of gold reserves, if they have credit, or the goods, or securities to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 4 - - sell whioh will enable them to acquire the gold. It will be the first time in our history, with the exception of the developments at the out­ break of the war when this country will be oalled upon to exhibit its strength and resourcefulness in international finance. I feel very certain that with the immense resources in gold now being accumulated by the Federal Reserve Banka, we will be able to bear our part in this readjustment with credit to the country and to the system. Just how the operation will occur oannot be prophesied. From the standpoint of the member banks, it seems to me that we ean feel great satisfaction and assurance, as well as a security never before felt, in having the com­ mand of resources of institutions whioh can convert bank assets of a liquid character, such as commercial paper, into credit or currency at notice. It seems to me that we should then be able to demonstrate, as I have no doubt we will, that proper banking machinery will enable us to meet the demands upon our banking resources whioh may then be made with­ out the shook and confusion and without the humiliation which we suffered in 1893 and 1907. While it would, as I have stated, be hazardous to at­ tempt to forecast the various steps *8 order of events by which these ad­ justments will be required of us, we can, nevertheless, face with equanim­ ity, the necessity of a large loss of gold if we have gold on hand and in our custody, and that, is where the Federal Reserve System will demonstrate its value. Ho small part of thawork of the past year has been directed toward providing both the machinery and the material means of protecting the interests of member banks against these demands which will likely be made upon them as a consequence of the war. It may be that some of our members have allowed their attention to be directed too intently upon other considerations than those which are of national, as well as individual, importance. I am reminded of this by a letter just received from a banker in this state who calls ay at ten- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 5 - ~ 'tion to the diasatisfaction of some of the member banks, arising from the pos­ sible loss of interest and possible loss of exchange profits, as a result of the gradual transfer of reserves and the enlargement of the collection system, I hope the member banks will not permit this consideration to influence them too strongly in their attitude toward the system and I particularly hope that they do not assume that the difficulties, and all of the difficulties which they have been discussing among themselves are not quite as fully well-known to the management of the Reserve Banks. The work of the past year has developed a belief in the minds of many of us that we have not yet established as close relations with the mem­ ber banks as are necessary to a complete mutual understanding, this being due no doubt, to the engrossing character of the work of organization and the laok of time for more frequent meetings than has heretofore been possible. Steps have been taken, however, to overcome this difficulty. At the last meeting of the American Bankers Association, a National Bank Section was organized and an Executive Committee representative of the National bank members appointed. This is an encouraging development. For the first time, the entire ■antbership of the Federal Reserve System is organized and has appointed a representative body with which we can deal. You will be interested to learn that the offi­ cers of our bank have already held one meeting with the members of the Execu­ tive Comnittee of the National Bank Section. We have further arranged for a conference of the Governors of the Federal Reserve Banks with this Committee to be held in Washington next week. At the conclusion of the meeting, a joint conference will be held with members of the Federal Reserve Board. Thus, for the first time, opportunity is presented for an organization representing all the member banks to discuss all of those problems face to face, both zklxx with the body that supervises the system in Washington and with the officers who are running the banks in the different sections of the country, I am hopeful that these meetings will be productive of satisfactory results. TCe* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 6 ~ - furtheraor©, have -under consideration, a plan by which the Federal Legisla­ tive Comnittee of the American Bankers Association may hold a similar con­ ference some time during the month of January, These meeting will lie de­ voted to making earnest effort to reconcile conflicting views as to the meaning of the statute and as to how it should be put into practical oper­ ation and careful consideration will be given by the officers of the reserve batiks to such recommendations as are submitted. 1 trust the members in this district will accept ay assurances, which I earnestly make, that every effort will be given to make the opera­ tion of the banks in every way satisfactory to them and to their legitimate interests so far as the lar permits. You should not lose si($it of the fact that all of our stock is owned by the member banks, that all of our deposits belong to them, — the member banks elect two-thirds of the directors, by whom the officers are selected and our direct responsibility is to our own membership. We have no objects or interests to serve save theirs. I hope, also that the various steps which we are taking to put the law into opera­ tion, as required by the terms of the statute, can be undertaken with the cooperation of you who are our stockholders and that we can with your aid develop relations of mutual confidence and cooperation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Benjamin Strong (1915, December 8). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19151209_benjamin_strong

@misc{wtfs_regional_speeche_19151209_benjamin_strong,
  author = {Benjamin Strong},
  title = {Regional President Speech},
  year = {1915},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19151209_benjamin_strong},
  note = {Retrieved via When the Fed Speaks corpus}
}