Regional President Speech

Hons LIBI5RTY BONDS, O.i MORS INCOitS! BY B2NJ. STRONG Thar® are undoubtedly thousand* of Ajericans who are to-day pussled in endeavoring to determine how many Liberty bonds they should buy* It is not intoned in this article to fomulate rules by which one may ac­ curately decide his duty in this matter. That decision must be made by each individual according to his ability, his personal needs, and his patriotic impulses. But some light say be thrown on the subject by present­ ing various aspects of the question which may not have occurred to tho reader. The question certainly involves perplexities which many who are unacquainted with the relations of Government finances to the security markets find difficulty in solving to their own satisfaction. Needless to say the financial officers of our Government are confronted with like perplexities, only from quits a different standpoint. The individual is considering his own comforts, or, posaibly, what he believes to be his necessities. His viewpoint is a narrow one compared with that of the Secretary of the Treasury, who is charged with the duty of borrowing a large part of the money required for tho prosecution of tho war but who, at the ease time, must so shape his planr, within the limits imposed by Congress, so that the business of the oountry which is essential to winning the war, may proeoed and even be ex­ tended without being hnpered for lack of capital. But the money must be raised! In the early months of the war, the Treasury was required to pro­ vide funds without any accurate measure by whioh the aaouat could be determined. Congress was appropriating billions for war purposes. 'fi* were promptly called Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis upon to make large advances to the government* which are allied again rt Gann any, but no one knew, or oould estimate, how rapidly the funda ap­ propriated by Congress oould be spent by the varioue departments of the Government, so that, nscesearily, the borrowing policy of the Treaeury oould only be mapped out in a tentative way until experience disclosed act what rate war materials oould be produced and money be actually apent. Since late in 1917, advanoee to allied governments and our own •xpendituros by the army and navy department*, have beoome nore stable and regular. Thoee who are raiaing fund* can estimate with more certainty hew auch *111 be disbursed over a givsn period; in fact, the Government's financing has developed a rhythm which permits a fair judgment of require- nente for period* of from four to six months in advance. Assuming that ex­ penditures will shortly amount to $2,000,000,000 a month, end that it ie possible for Congress to levy taxes whioh will produce a total of, say, $8,000,000,000 for this fiseal ysar, there will still remain $16,000,000,000 to be raised by borrowing. The euccess of theee borrowing operations will depend primarily upon the extent to which our people are willing to economise and then upon the extent to which they are willing to turn over the fruits of their economies to the Government. Unexpended incase is gsnsrally repre­ sented in this country by unused balances in the bank. The Government needs thoss idle bank balances and asks its cltisens to hand thorn over to the Treasury in exchange for interest bearing bonde. Therefore, successful borrowing by the Treasury will depend upon the mount of those idle bank balancee and upon whether their ownere will be willing to exchange then for Government bonds. The bonde recently iaeued by the Government, known as the Third Liberty Loan, bear interest at 4 1-4^ and were offered at par. it wae, therefore, quite natural that anyone having idle funds in bank should ask him­ Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis self the question, - la it my duty to buy a 4 1-4^ Government bond at par when 1 can buy other good bonds and stocks which will pay aa a rot urn of ^ or 8$, or even aora? Saoh inveator muet bo hit own judge in deciding between bis duty to hie Government and hi* own real need* in the way of inooae. It is not dif­ ficult , however, to state eeme eimple exemples which may be an aid in arriv­ ing at a decision, and the iaportanco of tho decision will be appreoiated when one realises that the sub of all of these decisions by all of the investors in the country is what will sake war loans suecseeee or failures* Possibly the first point to consider in shoosing between a subscrip­ tion to Liberty bonde or the purehaee of other bonda or etoeks which pay a higher return, is whether an investment in eosie other security nay aid or hinder the Government in the proeeoution of the war. There ie no choice whatever between investing in the war bonds ef the Government or in new issues of eeouritiee made by overprices whioh are engaged in operations which are ef no assistance to our war activitiee. At this time ne eitisen has a right to divert surplus income to the creation ef Boneeeential Industrie* when that in­ come is needed by the Government for war purpoaee. That queation has already , been an ewe red by our Govemaont for every investor. Capital Is cues Cofcmitteeo have been appointed, pureuant to Act of Congress, to determine whether it ie er ie not in the public interest to allow any given ieeue of new sefuritiee to be offered to the public. When bankers offer bonde er stocks which are advertieed ae having been euhnitted to the Capital Issuee Committee and approved by that Committee as not incompatible with the public interest, it may clearly be under­ stood by the investor that eur GoveramcBt hae passed upon the question aa to whether investments in such eeouritiee will aid or injure the Government'e war finance program, and, eo far aa the investor is concerned, he need make no further inquiry as to whether that particular security ie or ie not euitable for “ 3 “ Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis investment at the present time. Its issue ha* received the Government's ap­ proval. He may feel justified, because of his ovn needs andthose of his family, in purchasing securities of that class on the ground that it affords indirect aid to the prosecution of the war. There are, however, few in this country vho eJ-e able by-prgusticirig'fcconory to i'ne’rSsse'thei?'savings fund at this time-^ho 0Sn*ot‘; blsjl afford thdj trifling sacrifice of additional income involved through the purchase of Liberty bonds rather than some other in­ vestment, and their satisfaction in rendering direct aid to the Government will certainly more than offset the slight loss in income. But this ■'toes not answer the investor’s queuti^ to whether he may not purchase som* existing aeourity which pays a higher return than Liberty bonds. Here a nice question arises which will bo discussed later. Another example may be used to illustrate the state of mind of an invostor who must consider his own personal necessities. He may be a poor man who has been dependent upon a small salary or a small income from a nest egg of investments accumulated after long years of toil; he may have saved a small part of this income, or, possibly, some of his inveetments paying a high ■ate of interest may have been repaid at maturity. He is conscious of the fact that it costs him more to live, with prices at their present high level, than it did before the war. Must he make the saorifioe involved in accepting 4 1-4* interest instead of a higher rate, possibly even 6% or 8> which he may have been receiving until hie old investments were repaid! This is neces­ sarily one of those doubtful cases where each man must decide according to his present needs, as contrasted with the needs of his Government. If economies can be practioed which will not interfere with the maintenance of his health, or that of his family, or with the education of his children, or with continued efficiency in his work, he is justified, and, possibly, required as a matter of duty to forego a larger income in order that his Government may have his sup­ port. By this sacrifice he aasumee his share of the burden of the war. On Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis the ether hand, if it rsslly involvee impairment of health, or efficiency, or the lose of education for his children, suoh a person is, doubtless, werranted in making investments of & character that will pay a higher return •o as to maintain the standard of living that is easentiel for the welfare of that individual, and of his family, and, through then, of the nation. But, in selecting an inveetaent which pays a higher return, it ie desirable, if possible, to piok out some new issue and, of oeurse, a sound security, which has reoeived the stamp of approval ef the Capital Issues Coramittee, ne thereby he gives support to some enterprise which is engaged in work that direotly or indirectly promotes the prosecution of the war, and which needs new eaoital. If this is a fair statement ef the position of a man with an incone of, say, twenty-four hundred dollars a year, who is able to save two hundred dollars; it ie still hard to justify withholding his savings from the Government. Two hundred dollars invested at 4 l-4> produces $6.50 a pear and at ? 1-2JC $15.00 a year. He foregoes an additional income of $6.50 per annum, which even the poorest man can afford, and it muat not be overlooked that the income from his new investment is free of any taxes what*) ever. This may eeem an insignificant contribution to the Government's war , effort, hut 10 000,000 people making an investment of this sise can furnish the Government with $2,000,000,000, which is ons»third of the probable amount of the Fourth liberty Loan. A third olaes of investors, now a much larger ono then ie realised, comprises thoee patriotic man and women who have abandoned business or pro­ fessional occupations to enter the any or navy or Red Cross, or other branches of the service, in consequence of which their inoooee have been greatly reduced and often the good-will of a business or of a professional practice Jeopardised for all time; frequently, in fact, not withstanding that thsse men and women may have dependent ohildren to support. Lftt us take as an illustration a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis successful young lawyer who has built up % practice whiob has bean paying him $10,000 a year; ho haa acououlsted, cay, $13,000 by eeonoay and Bering; ha haa a wife and ohildron. In surrendering his practice to enter tha Govern­ ment's service, his incoae aay ba reduced to a salary of $2,000 a yoar or laaa. Hit ineosie from his seeuritiea may bring this up to $2,700 a year.o In winding up his practiea ha aollaeta outstanding bills from his eliants totaling $10,000 and aust decide whothar to apand this money in aaintaining his former standard ef living or to invest it in soraa security paying a high return so as to help altlgste the hardship ef enforeed sooneay, or te buy Liberty bonds. A man of strong character, with a family loyal to the purpose for whioh he haa Bade tha sacrifice of hie practice, nay he able to readjust hie plan of living te an in­ come of £2,700 a year, plus tha $425. additional incosie froa tha Liberty bonds that ha buys, end still ba perfectly happy and oonfortable and feel that he is doing his duty both to hie feaily and to his Governaent. CM the other hand, he may be tempted to believe that in order to educate children vho are at school and oollage, and to aaintaln hie own health and efficiency, it is neoeeeary to obtain a larger incosM then ia possible by the investment in Government bonds. There is certainly no reason why that man should be condemned for risking the future of his fasdly, the education ef his children, or even his own health, by deeliain^ to aake the additional eacrifioe of income involved in the purchase *f a 4 1-4* Government bond. But he had already made a sacrifice of great proportions and while tha nation can well afford to insure his efficiency by peraitting hin to obtain the largest income possible froa aa investasnt in soae eecurity issued by a corporation which is engaged in war work, the chances are that one vho makes suoh sacrifices ae this can be relied upon to sake the saall additional saorifiee ef income involved in purohusing the war bonda of his Government. A fourth type to consider is the aan of large inooae who spende but Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis a fruction of it and nee large ameunta to invert every year. This nan should have little difficulty in hie decision - if he is engaged in some business directly promoting the prosecution of the war, which requires for its neeee- sary development the employment cf increased mounts of capital, he should not, of oouree, hamper the efficiency of his business by withholding from it the capital which possibly be, alone, oan furnish by se employing a portion or all of his surplus incoae. This appliea to the manufacturer ef war materiala particularly. On the other hand, if he ie a retired capitalist, with an in­ come beyond hie needs, it is unquestionably his duty to the nation to invest every dollar of the surplus which he accumulates in the bonds of the Govorn- sent, beyond, possibly, a moderate amount in new security issues bearing the stamp of approval of the Capital Issues Committee, which he may consider safe. Theso are only a few of a great variety ef types of possible in­ vestors who faoe a decision which is vital to the nation and they are referred to simply for illustrative purposee. There are, however, principles of great importance underlying the whole queetion of the purchase and sale of eecuritiee by investors in thene war times, which should be considered by every investor before he decidss what he shall do with his savings. IShen one buys a security in the security market, it may be that the eeller, in turn, will invest the procseds in Government bonds. On the ether hand, it say be that the person selling the securities desires funds for some purpose not at all related to th« war, or, in fact, to waste in quite unneces­ sary living expenses or extravagances. The buyer oan hardly stipulate with the seller as to how the latter shall spend the aoney, but oan he take the risk of the seller's intentions! Of course the existence of a security market where investment securities are bought and sold is a facility which in many ways aids Government financing, and, deprived of that facility, the Government would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis encounter difficulties which would not arise if a security market did not exist. An native market where the ownership of eecuritiee can be promptly ehiftad fron or.e person to another is one of the means by which those who deeiro to buy Ooveranent bonds, acd are willing to sell existing investments for the purpose, are enabled to do so trithout delay and often without crreat lose. W'jt. evnry sale of investment bonds end stocks is, however, inspired by thnt dfifiro, although these constant transfers of investments do to some unknown extent result in the transfer of bcnk balances from those who haws accumulated then without expectation, and, possibly, without ability to buy Government bonds, to the ownership of those who are able and billing to do so. When the Oovemraent nlaoes a Liberty Loan, *11 those who have money to invest are brought under the influence of e great oamnaign of education, which is, in feet, a frreat selling oaapaign. Those who have accumulated the bank bal- ences by selling thoir investments are just as subject to the influence of the cnapaipn as are those *ho in the first instance acemulated the bank balances by thrift or otherwise and later transferred them to other pereons in exchange for securities. It can hardly be cleimed, therefore, that the available in­ vestment fund of the nation is reduced as the result of such transfers of securities. The important thing is to reach all owners of idle bank balances, however thofe balances may have arisen, with the Liberty Loan propaganda and induce them to buy Government bonds; those who can not afford to invest in low- rate securitise making it possible for ethers who ean afford to do so by pur­ chasing from thorn the securities which they are willing to sell. To illustrate this point, if we asstase thct the total value of all investment securities in this country aggregate 550,000,000,303 at the time of a Liberty Loan offering; that at the sane time the total of idle bonk balances in the country aggregates #6,000,O'K),ooo; and that the Government is inviting subscriptions to $6,000,000,000 of liberty bonds, it makes no difference in the reeult whether tne jj(6,fr"X),300,000 is turned over to the Treasury in exchange for Liberty bond* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis by those who originally accumulated tho $6,000,000,000 or by others who have acquired those bank beilunose by soiling the portion of the $50,000,000,000 of eseurities which they formerly owned. Thie prooess of shifting of owner­ ship betvo >n invertors, as steted above, doss, indeed, to sane extent, facili­ tate tho Government*• borrowing operations. But there is another aspect of the security marlcets, which boars on this natter, where influences in&y arise v;hioh could be highly det rimert’tel to tha Government's borrowing program. uippoee a large number of people with idle fund* beoame interested in tho market in a speculative'' vaV* rather than simply as purchasers of investment securities; and because thjy believed that stooks and bond* would advance, -sere lod to use -their surplus income as margin for the purchase of aecurities vhich they could aot fully pay for, and, in consequence, borrowed heavily from the bunite in order to carry then. Such a movenent night gain speculative headway and result in a general advance in eeourity prices, particularly those of a speculative nature. People in thie country only too readily develop an ineatiable appe­ tite to buy securities "for a rise." The result of such a movement would be a greet increase in bank loans; - speculators oan borrow more money on stocks no thay advance in price, end generally do; bank credit would, &s a result, be absorbed and the surplus earnings of many individuals, which might have >»n applied to the purehase of Covernnent bonde, would be used aa margin in speculative operations which would serve only to alog the banking machine. This would elearly be a diversion of investment funds from legitimate to ille^itiiuate purposes -;han it ie considered that the nation is at vtar and needs those funds. It may, in general, be said that the existence of a ee­ ourity market, where investment seouritiee may be readily bought end sold, is a good thiig , probably even an essential thing in ordar to preedWethe stabil­ ity of financial affairs during war time; - but that on tho contrary, tha ex­ istence of e speculation which attracts capital to speculative operations is Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis an unessential and of tan a -dangero'ur Abing. *?• must not overlook the faot that the existence of a market for securities enable* thousands of investors to use their securities aa tha basis for quits legitimate borrowings, frequent­ ly when funds are desired in order to aubacribe for Ocvernrcent bonda in antici- pation of expected savings, also when capital ia required to develop induetriea that are eseontial to the proeeoution of the war and when credit ia needed to pay off existing debt*, aa well aa for raany other valid purposes. Without a aarket Tor aetfuritiee, banka would be reluctant to lend on thea and billions of dollars of investment* in the hands of the people of the country, which aight be usefully employed aa the basis of necessary and desirable credit, would be rendered unliquid and unavailable as security for bank loans. Nor can wa fail to overlook the existence of a great maaa of loane now held by eur banks, which are secured by bonda and stocks, and which have no relation to specular tive operations whatever, where the protection of tho landing banks, as to the v&lue of ths collateral, depends upon the continued existence of a market where eoeuritios can be liquidated if need arises. Th3 financial officers of our ttoverxnent ara confronted with a difficult situation which they do not control and which, under our syrtes, they havs power to influence to only a slight extent. Sxpanditurss are napped out by the various departments of *:ts Oovemmont, the largest now be­ ing by the v r and navy departnente; they are submitted to Congress and ap­ propriation bills result, which authorise the expenditure of tho various aaounts 'iaaancied by the departments, as finally approved by Congress. At no point havs tho Treasury Officials any legal standing to control, and they can but slightly influence, the amount* of thea* expenditures, outside of those relating to tho adoinistration of their ownddapartaent. The Treasury, there­ fore, is called upon to rais* money, the amount of which it has no voice in determining, and the expenditure of which it has no means of controlling. Its policy must b* governed, under the archaic procedure which our Oovsrmsnt 10 - - Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis foliovs, by very sirjple rulaa. hound fin&neing of the uovonauant requires that as larr« n proportion of war szpandituraa as possible ba raired by taxation, but not so large an anount as to lap air business enterprise, and particularly those enterprises which must bs developed to high speed in or dor to orc-lucs» goods required for war purpoavc. If, thsrefor*, the Treasury it. provided by Congress with e. given proportion, a*y, ou-third, of the uxp*cte;t GovorcKont outluy fror.i taxation, whatever else it itpent »uot i» raised by the Secretary of the Tr®Ruury through v«riou» forme of borrowing authorized by Congress ut hi a rooua-t. ilight hare the attitude of the puople of the country, evan aor« than the docisions of Treasury Official*, co.:rols dovolopujnts in future yor.rs vmich will ba of vast iaportftnaa to our welfare. If wo are aula to pursue ft polioy of gradually increased taxation &a industries t,ro abiu to boar it, but nevor raisin;; taxes to the point whore essantitl business is injured, end if va can raise the balance of our war expenditure* froa voluntary subscriptions to bonde and the bonds ere paid for out of savings* th& country's financial condition after the war is over will ne substantially unimpaired and certeinly vastly batter than that of eoae other belligerents. un the ether herd, if those voluntary subscriptions are not, or oua not be auda, no one for a nonent would assune that on that account we r.uet stop fighting. The waraust be won end the funds must be raised to win it, over, if bond ipsue* fail. The failure of fa bond issue aicply ntwa that other ooihods aunt bo employed, possibly methods less sound in principle and cortcaiJLy xess palatable in application than those which are now being pursued. Ih<j c.ioice of aethods can not be said to rest any more upon Govomaont Officials that* upon the decision which oust bo cade by eaoh individual who h&s peaaxbly im­ posed upon himself rigid economy so os to ba tiblo iu buy the uuxlaua aaount of fiovernment bonds. No patriotic citizen, whatever his maeno, who can afford to pur» - li - Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis cha»a hie Govenaaent' a tar bonds dan afford to teko the risk that the hard von reulte of his eeonomiee *±il bo wasted by eoae other individual to whoa he delegatee this decision. ihat ie what he dees when he turns the product of his etonoay over to eoae one else in exchange for eone other kind of sn investa-ant, because that ether individual pay see fit to waste it. Our success in financing the war troa now on will absolutely do- penii upon the extent to whien people are willing te economise. There is no doubt as to the results which can be achieved by such eoonoaiee, whether thoj bo voluntary or enforced. ±hey oen be aade to produo*, in this country of woulVn, extravagance end waste, a sufficient fund of savings to absorb all the war bonds which the Goveranent vust issue in order to win ths war. 1 - * - Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Benjamin Strong (1918, September 27). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19180928_benjamin_strong

@misc{wtfs_regional_speeche_19180928_benjamin_strong,
  author = {Benjamin Strong},
  title = {Regional President Speech},
  year = {1918},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19180928_benjamin_strong},
  note = {Retrieved via When the Fed Speaks corpus}
}