Speech

00 m< <v<.v, ^ fytfyVU-U' 658 SI lard AFTERNOON PAPERS MAY 19i6 NOT EARLIER. HOW THE FEDERAL RESERVE SYSTEM IS MEETING THE REQUIREMENTS Address of A- C. MILLER Member of the Federal Reserve Board ^ " G O V E f' • LIBRARY' Delivered May 2U, at the Annual Convention of the MISSOURI BANKERS' ASSOCIATION at St. Louis. RELEASED FOR PUBLICATION IN AFT2RM00N.?A?KHS. 0? MAY $U,lQl6. ^ HOW THE FEDSRAt RESERVE SYSTEM IS MEETING THE RSQ,UIRE?.*Ei!TS. * * * * * The financial outlook for the United States has never "been so full of interesting possibilities as at the present time, . nor has it ever called for a more definite understanding of whence wo have come, where we are at, and whither we are going. In the course of the past year and a half we have replaced financial dependence upon Europe by dependence upon ourselves and we have also been able to extend a very considerable measure of financial service to some of the warring nations, and to many of the neutral countries of South America. The record of our material and fi- nancial progress in the past year and a half discloses results which are stupendous and seem little short of miraculous. Much has been said of our new opportunities; but it is Important that the banker, who has a very serious part in shaping the course of business and tempering the spirit of the community to a new situation, should recognize that the situa- tion with which wo are confronted is not alone pregnant with op- portunity, but i3 also weighted with serious responsibility. It is, indeed, doubtful .whether any country in the history of modern commerce ha3 ever been faced by a situation so calculated •• ' fxCROl . V.',,' .( ..•-".• (xEROi : "7 COPY f I — — vjcOPY t-y 658 -2- to chslllenge tho best of which it is capable in conceiving and Carrying to fulfillment great plans. It is a situation which invites to a mastery in the world of finance and of large affairs; but to attain this mastery we must first be- come masters of ourselves and of our own by developing to highest efficiency instruments of direction and control which match our splendid resources. It calis* moreover, for a new type of business leadership and a capacity for co- i ordinated action on a larger scale than we have been accus- tomed to in order that we may be able to act with Wisdom, vigor and effect in this new region of affairs and responsi- bilities into which we have entered* It id fortunate,- indeed it would b6 difficult to exaggerate tho degree of our good fortuhe>- that the most im- portant and considerable step toward fitting ourselves to meet tho now occasion should have been taken in advance of the gr6at changes in the sphere of international relationships which > are bound to come as one of the frodUltd 0i the war, I refer of course to the establishment of our new banking organization^ tho Federal Reserve System. That system, and what it stands for, must bo, as indeed, it has already proved itself to be., our chief reliance in meeting our new responsibilities and in turn- ing our new opportunities to profitable account for ourselves 658 -3- and to benefit for the rest of the world. No agency or resource in the field of finance which the nation today possesses or has ever possessed is comparable in its potentialities to the Fed- eral Reserve System. It is, not only the newest thing in Amer- ican finance, but also the best thing. Until we definitely understand this,, we are not in a position to do our best in meeting the new occasion. To recognize this is the beginning of wisdom. It is also well that we should recognize that the atmosphere was never so propitious for the discussion of ques- tions of finance upon the broad and high plane of national interest and policy as now. I believe I speak truly and with strict fidelity to the historical record, when I say that for the first time since wo, as a nation, began to make financial history, questions of currency and finance and banking have ceased to be political and party questions. To have taken the banking question out of politics, where it long fingered to the prejudice of the nation's commercial and financial interest, is a matter of sufficient moment and promise to en- title it to rank as a real achievement. Whatever differences may have existed on questions of banking policy before the -5- establishment of the Federal Reserve System, they have pretty much ceased to exist since. The country, as you know, has sot its approval upon the Federal Reserve Act as a piece of funda- mental legislation on which to build and under which we are to develop the banking system of our expanding industry and , commerce for dec?.des to come. So well was the work of legis- lation done, and so completely ha3 the result been accepted and approved Tpy the business, banking and general public opin- ion, that the banking question has fortunately at last ceased to be a problem of legislation and has become one of adminis- tration. Congress has given us a superb instrumentality; it i3 for our bankers and those who are charged with the adminis- tration of the new law to do their part in using this new in- strumentality wisely and effectively in strengthening the financial foundations of our industry and promoting its healthy, prosperous and steady growth. The test of a banking system is the aid it gives to productive enterprise by supplying its credit neods. Banks become powerful ana valuable auxiliaries in the industrial system in proportion as' they give increased activity and mobility to the community's industrial and commercial capital; 658 -5- and "banking profits and prosperity are never go legitimate and so fair an indication of the character and quality of the serviae banks are rendering, as when they prosper and flourish along with the comnvunities in which they exist. The changes which were made in our banking system under the Federal Re- serve Act were designed to accomplish many different things, but the goal toward which everything pointed was that of mak- ing the nations credit facilities more widely available in all useful and legitimate ways for ihdustrial and commer- cial employment on tenns of safety, and of such ease as is consistent with safety- How far the new banking system is fulfilling the promise of its sponsors and meeting the expec- tations of tha'nation, more particularly how it has met the a 103ts which its first year and/half have brought, are ques- tions of the kind which suggest themselves at a time when the nation, throughout its length and breadth, is taking stock of its capabilities and when "preparedness" is its watchword. For the now system is no longer a theory, but a fact• Xt is in actual operation, with a record which can be examined-, and which can be tested by results. -7- The new "banking organization has already found its place in the American financial system and has already made an enviable history for itself. Its influence has ndt only been felt in every part of the country,, "but has reached across thd seas. It has had to meet conditions and circumstances in many respects more unusual than could have been contemplated by its framers, and yet 30 well contrived and so flexible is the structure of the new banking sys- tem that it has been found capable of adjusting itself to each new condition. It has thereby given evidence of its capacity for growth and development along with the changing and expanding needs of the .American credit and business system. It is just this qual- ity which takes the Federal Reserve Act out of the class of ordi- nary financial legislation and makes the new "banking organization a system in a very real and far-reaching sense. In breadth of conception the Reserve Act is a constitution rather than a statute; a financial constitution characterized,, as an organic act should be, by that quality of adaptiveness which has always been the boast of our great political constitution, and a quality which we have long since come to regard as an essential, not to say the sovereign, element in any great and vital piece of constructive legislation. In reviewing the working of the Federal Reserve Banks I wish to direct your attention to four or five aspects of the new c 658 -7-' system which in my judgment are calculated to disclose the capa- bilities of the system and the temper and wisdom of its adminis- tration. 1. It has facilitated the growth and financing of the country's enormous foreign trade. 2. It has met the requirements of domestic trade, par- ticularly the requirements of the crop-moving season and has shown a capacity to ease and steady discount rates. 3. It has shown capacity to absorb the redundant gold of the country and restrain inflation. b. It has shown capacity to maintain an atmosphere of con- fidence . Growth and financing of foreign trade. The financing of our foreign trade was always a sensi- tive point in our credit system, and foreign exchange has long "been regarded as a very accurate "barometer of our international position. The year 1915 witnessed the largest foreign trade ever experienced "by this country, the export trade particularly attaining the colos- sal magnitude of $3,600,000,000, an amount $1,000,000,000 in excess of the highest amount hitherto recorded. -9- The large excess of exports over imports of merchandise created a balance of trade in our favor of unprecedented character and dimensions and subjected our purchasers to the necessity of resorting to the American money market in order to obtain fund3 with which to meet their obligationsi The new banking system met every requirement of this unprecedented situation without diffi- culty. At no time since tho opening of the Reserve banks has there e\'er been any doubt of the ability of our banking system, by means of the newly established system of acceptance credits or otherwise, to take care of the financing of the country's ex- ports, however large the excess of these over imports might become. Tho growth in our exports has been continuous. The last month for which we have complete figures, March, 1916, shows exports over $100,000,000 in excess of March, 1915, an aggregate of $U09,850,~ U25, and which promises an estimated total for the year of be- tween $U,000,00 0,000 and $5,000,000,000. \7c.en we contrast the ease with which we now finance a volume of trade which would have staggered tho imagination ,a few years ago, with the clumsy shifts to which we were frequently reduced under our old methods of fi- nancing, we get some idea of how fundamentally and effectively our banking machinery has been improved by substituting for a precar- ious dependence upon foreign facilities those of our own making and control. You banker£3 will recall the situation into which our foreign exchange was plunged at the beginning of the European war before our new banking machinery had been set in operation. Our bankers, as had long been their custom, had drawn heavily during the summer on England« The estimated amount of our short time indebtedness maturing before the first of January, 1915/ was from four to five hundred millions of dollars. It had been expected that this would be taken care of by the proceeds of cotton and grain bills which would be drawn with the export of crops. The sudden suspension of our foreign trade and equally sudden termination of our foreign banking credits left us in a serious position. I recall a conference of momentous import, held in the office of the Federal Reserve Board and attended by leading bankers identified with international financing, at which was discussed whether and how our accruing obligations could bo met. It was decided that they could be met and there- fore should be met no matter at what inconvenience to ourselves and no matter at what cost in the loss of gold. By that act was laid a foundation for the future of America as a world banker and to the faith thus inspired in the integrity and the capacity of the American banking system we owe very largely the 658 -10-' enviable position that we have, in the brief period of little more than a year, attained in the international money market* Such an embarrassment as we suffered in the early autumn of 191U is all but unthinkable under our new banking system, unless there should be a breakdown of transportation facilities.. This is not a theory; it is a fact which is thoroughly attested by the experience and events of the past year. We have not only received from Europe during the year 1915 over $'400,000,000 in gold, but we have taken back American securities and arranged additional credits to a combined total estimated at $2,000,000,- 000. A year ago dollar credits were practically unknown in a foreign centers; today dollar exchange is/re cognized and estab- lished medium of international commerce and one of the most prised, because tho most stable, unit of international payment.. The acceptance business, for many generations the peculiar do- main of English banks and the source of much of England's pres- tige and power and profit in tanking, has been successfully natur- alised on -American soil and is thriving. Complete and accurate figures are not available, but it is a safe statement that the volume of acceptance credits created in behalf of the foreign trade of this country has averaged for several months $100,000,000 and © 658 now amounts to ovor $200,000,000; ^nd the ataoufit held by the He- serve banks to $U3,000,000. The certain knowledge that accept- ances of a sound character vail find ready discount or purchase at the counters of the Federal reserve banks and at rates as low as two per cent, which is lower than has ever been enjoyed ^y any class of commercial paper in this country, has given a feeling of assurance to our bankers in entering this new and un- familiar field and has thus enabled them to gain a foothold in -t and to make it for all time an important and invaluable de- partment of American banking. pomeotic tradecrop-moving, and discount policy. Wnile this important extension of American banking en- terprise into the foreign field was talcing place, our banking sys- tem, with the support of the Federal Reserve Banks, was assisting in the fcecuperation and extension of our home trade and industry. *he home trade i3, after all, the basis of the country's' indus- trial activity and prosperity. However large and important the foreign trade may bulk in the popular imagination, however much attention may be given to it in the financial columns, and how- ever important it may be in fact, it is still the truth, which {xcioo; OM3X I N "0 65* -12- deserves to be emphasized, that ours is primarily a country of inland trade ana industry. Among the nations vhich have reached a high degree of economic development, there is no other in which inland trade bears so large a proportion to foreign trade. Ac- cording to competent estimates, it is at least twenty-fold the volume of our foreign trade and it is therefore the necessities and the interests of our home production and consumption that deserve especial consideration in any attempt to estimate how well it is being served by the banking organization. Are its needs being supplied on reasonable terms and with the assurance that accommodation can always be had on satisfactory security? To ask this question is to answer it, so universal is the knowl- edge of the comfortable conditions which have obtained in the monoy markets of the country and generally throughout the coun- try since the Reserve banks were put into operation. How completely the requirements of the crop-moving season have teen met is also a matter of wide experience, if not of common knowledge. Never before within the recollection this generation have the credit and currency needs incident to the gathering and the movement of the crops been met so easily and so smoothly and so quietly. The operation of the Gold Set- tlement Fund which has been established to facilitate the settle- 6^8 -la- ment of exchanges among the Reserve tanks and to reduce to the lowest point the shipment of currency from one part of the coun- try to another., io in large measure to be credited v.dth the happy result which has been attained. Tho autumnal pressure on leading money markets and the consequent tightening of money rates has come to be regarded by many as something that was in- evitable in a country subject td such large periodic require- ments of cash for the movement of its staple crops. Tho last crop-moving season, the first which has had the benefit of the machinery of the Federal Reserve banking system, passed without any untoward incident and without any indication of perturbation or strain in the great money centers. Indeed, if the experience of the past year may be taken, as I believe it may., as prophetic of the great change wrought in our banking'mechanism by the Fed- eral Reserve Act, tho disturbances associated in the past with th< autumn requirements may bo regarded as an easily manageable facto: in our credit and banking situation. This, in itself, is a tri- umph which deserves to be signalised in estimating the workings of our now banking system. With rates ruling as high as six per cent for commer- cial paper when the Federal Reserve Banks were opened in the late autumn ox 19lU, and vhen the financial disorders .incident to the AciOO | fAuOOW OM3X v OM3X I 658 -ill- European war still presented a troublesome situation, and with some variation of rates between different districts, the Reserve banks, during the year 1915> greatly reduced the general level of discount rates and maintained them at a Remarkably steady level. The opening quarter of the year 1916 saw rates of from two to four per cent on bankers' acceptances, the rate in actual Practice, however, running very close to the lower limit- Trade acceptances at rates of from three to three-and-a-half per cent, rates on short-term paper up to ninety aay3 at rates of from four to four-and-a-half per cent, were the noteworthy features in the discount rate situation. The fact that rates as low as three and three-and-a-half per cent were established on commodity paper,(that is, notes and bills secured by readily marketable staples), and the further fact that the Reserve banks stood ready to take and have freely taken agricultural paper at rates of four-and-a-half to six per cent, shows that the banking accommodation provided by the new system is not restricted to any class of borrowers but is available to all classes where the security is of the type ap- proved for Reserve bank operations. -These various rates are lower than have ever been en- joyed for like classes of paper in any considerable section of the country. What i3 perhaps more important from the point of 0 658 -15- view of the geographical distribution of the facilities of the new system, there has been a marked approach to uniformity of rates among the several Reserve banking districts, a nearer ap- proach than has heretofore been e xperienced. Whether it will be practicable for a long time to come to maintain identical rates throughout the twelve Federal reserve districts has been questioned. Such an outcome may not be likely as long as there are narked differences in point of economic maturity in the different sections of the country, nor is the successful opera- tion of the Federal reserve system predicated upon the assump- tion that discount rates must be uniform in all the reserve districtsr I0ne of the important features in 'jvhich the region- al system differs from the plan of the National Monetary Commis- sion for a central bank with branches is that it does not re- quire uniformity of discount rates but allows these rates to be adjusted to the conditions of demand and supply in the respect- ive districts. These conditions are admittedly so divergent that any attempt to ignore them altogether in the determines tion of Reserve bank rates might well be regarded as undue in- terference with the necessary operation of natural forces and would sooner or later result in embarrassment. As long as the different sections of this vast country of ours are in differ- 658 -16-' ent at ages of economic development with respect to the need for, and the accumulation of. capital,, it is to bo expected t that there will be differences in the rate of interest and also therefore, of discount rates. But the disparity which long ob- tained between the rates in some of the younger and less highly developed sections and the cider centers, was undoubtedly in large measure due to the peculiar banking policies and prac- tices which had grown up under our old banking system, and which wore, to a certain extent, fostered by the law. But whatever the causes, the result was an artificial disturbance of the natural distribution of the oountry*s supply of credit facili- ties and a condition which threatened, if left to itself, to develop into an artificial and unwholesome interference with the free flow of the nation's credits. To the extent that such was the case, differences of commercial rates were without solid justification in economic lav and to that extent at least we may expect that these differences will be mitigated, r « if not altogether eliminated, under the operation of the forces sot in action by the Reserve Act for diffusion of credit facili- ties and for local control of credit conditions by regional banks. The rates which have been maintained" by the Reserve —17- 658 Banks throughout the past year or more are probably not to' be regarded as normal, except in a temporary sense- The conditions of the past year and a half have admittedly been extraordinary and have worked toward easy conditions in the credit markets of the country. When we have digested the iirmense volume of poten- tial credit sot free by the new banking refonn and are no longer subject to the depressing influence on rates exercised by the great influx of gold which we have had, it is certain that rates will advance. How soon the demand will catch up with the supply can only bo conjectured; so too, it is a matter of conjecture what the normal rate of discount will be when the demand and supply of loanable funds are more nearly in equilibrium. Much will depend upon what is one of the most difficult of the war's effects to forecast; namely, the effect of the interruption and suspension of a large part of the customary commerce and in- dustry of the European world and the destruction of an untold amount of industrial capital, upon the permanent interest rate. In the long run the interest rate on fixed investments is bound to influence short tern money rates. In the long run, too, there will be a tendency for both investment rates and commercial ra.tes in the leading financial centers of the world to move toward a common level. The course of the money market t 653 •18 in this country is, therefore, bound to be in very considerable degree influenced by the course of the leading money markets of Europe. Speaking for myself, let me say that I am under n'o illu- sion with respect to the function of the Reserve Banks in our credit system, nor any with respect to the Federal Reserve Board's position and power as the ultimate authority in the determination of discount rates. The Federal Reserve Act has invested the Board with extensive powers, in the fixing of discount rates but it has also charged the Board with the responsibility of seeing to it that rates are so fixed as " to accommodate commerce and business", thus indicating that the fixing of discount rates is an exorcise of economic and business judgment, not an arbitrary choice. No body of men in my opinion would be competent to shape the policies or guide the destinies of our new banking system, who did not realize that the determination of discount rates at their proper levels was more a matter of the wise application * f of economic law than of hasty or careless experimentation with statute law; a question of the conditions affecting the demand and supply of, loanable funds, present ?jid prospective, as re- flected in the market for short term commercial loans. The Re- serve Banks will, therefore, show wisdom in recommending, and the 1 r T Federal Reserve Board wil?' showN wisdom in sanctioning only such rates as correctly interpret the trend of business and credit conditions and needs, so as, in a genuine sense, " to accoirmo- date commerce and business". For the Federal Reserve System is not above or beyond economic law. There is a magic in the Federal Reserve System but it is no venture in financial alchemy. It cannot make something out of nothing, nor for any length of time, and except at the cost of serious injury to the movement of the country's industry, maintain rates that are out of line with the natural economic trend. It would be poor policy, at any time, to favor present business at the expense of calculable future needs or require- ments, nor should accommodation be withheld from present busi- ness because of undue solicitude or fear for possible future requirements. Such rates would not "accommodate". In the one case they would be too low, in the other too high; but the error committed and its mischievous effects would usually not become manifest until the results were well beyond control. The Federal Reserve Banks as a whole might have maintained rates at a very much lower .level than has been in effect during the past.year or more, but it is hard for mo ( ) 658 -20- to sde whai good purpose would have "been served by such abnormally low rates. As I view it, the chief results would have probably been, first, to have given an unhealth- ful stimulation to business enterprise of doubtful validity, possibly going so far as to work a dangerous inflation of credit and the launching of undertakings that would later on have been caught in the grip of rising rates; and, second, to have narrowed the margin of banking profit, mors especially in sections of the country which are for tho first time experiencing the levelling influence on rates of a fluid credit system. I need hardly point out that lower rates would have borne hard on those of you who still follow the costly practice of paying inordinately high rates of interest on depositors1 accounts. It is a familiar fact that in many parts of the country, banking competition has raised the rate of interost paid on savings accounts to a point where industrial development is retarded and bankers1 profits threatened. It is well to encourage thrift by suitable inducements, but the matter is overdone when the induce- ment in the shape of interest goes beyond the rate war- -22- w < -21- ranted by "Industrial conditions; and thereby'diminishes the incentive to individual investment and enterprise. And this leads me to remark in passing that I believe that there must bo a readjustment in the interest paid to depositors to con- form to the reductions in the rates of interest and discount which will result under the moderating influence of the new banking conditions. 3. Absorption of redundant gold and checking: oX Inflationary tendencies. I am afraid that the great influence exerted by the Federal Reserve Banks in steadying the movement ahd level of rates is not generally appreciated at its full value and significance. The wise policy of conservatism and self- restraint which has been pursued by the Reserve Banks as a whole has given to the movement of industrial expansion which has been under way for the past year, taking the country by and large, a quality of health and solidity that it would almost certainly not otherwise have possessed. In this, the first substantial trial of the Federal Reserve System's capacity for leadership, its success has been un- questionable. It has, 9o far as its situation permitted, created an atmosphere conducive to healthy expansion, and V ( . _ .1 . f 658 -22- has used such influences as it could command to temper the spirit of reckless adventure and prevent it from bocoming a menace to the country's welfare. The result has been that the forward movement in industry which every part of the coun- try has been experiencing in greater or less degree, has been one of the most substantial that the country has ever known. How easily it might have been otherwise can be conjectured by those who have not forgotten how often incipient indus- trial prosperity has been turned into misadventure and col- lapse in the olden days, because of the lack of the guid- ing and steadying influence of such authoritative and com- petent leadership as the country now enjoys. You will recall how frequontly and confidently, up to the very last moment preceding the passage of the Federal Reserve Act, the prophecy was made that the new banking system about , would bring./inflat'ion, especially inflation of currency. One of the primary purposes of the Federal Reserve Act was to provide a method of elastic note issue. It is, of course, obvious that there can be no elasticity of circulation with- out the possibility of expansion which may, if the manage- ment of note issues is in incompetent hands, lead to inflation. 658 -23- Discretion must lodgo somowhoro, ;jid if it bo abused,bud conse- quences will result. How carefully the new system has func- tioned in this respect, and how prudently it has used its issuing power to diminish, rather than aggravate any tend- ency toward inflation of credit is one of the most grati- fying evidences of the wisdom of our new banking law and the ability of its managers. This deserves to be made clear, for there has been much misconception of the policy which has been pursued by the banks with respect to note issues. The statement is sometimes made by persons who have not taken tho trouble to inform themselves, that there has been a great expansion of tho Federal reserve note cir- culation at a time and under conditions when there was no need of additional currency. What are the facts ? If you look at the Daily Statement of the Treasury for May 13, 1916, you will find that $187,166,000 of Federal reserve notes have beon issued by the Federal Reserve Agents or tho Government to the Federal Reserve Banks. The Federal roservo notes are of course obligations of tho Government as well as of the issuing banks and are issued by the Govern- ment to tho banks and by them to the public. Before we can determine what, if any, influence has been exerted by the Federal reserve notes issued by the 658 -24- Government in augmenting the money supply of the country, we need, of course, to know on what basis the banks have issued the notes to the public, and also what portion of the notes that have been issued by the Government to the banks are hold in the bank's vaults. On may 13, 1916, it appears that $27,218,000 of Federal reserve notes issued to the banks had not yet been issued to the public, and of the $159,948,000 outstanding and issued to the public, all but $9,567,000 had been issued in exchange ibr gold. That is to say, that except for $9,567,000 of Federal reserve notes outstanding against which the Government holds commercial paper for an equal amount and the banks hold a gold reserve of 40$, there was for every dollar of Federal reserve notes issued to the public by the Reserve Banks a dollar of gold taken from the public by the banks and deposited with the Federal Reserve Agents, representing the Government. In brief, to this extent the Federal reserve note is tantamount to a gold certificate or warehouse receipt for gold. 658 - 25 - A dollar of reserve money is, by usual computation, estimated to be capable of supporting a volume of credit in the customary form of deposit liabilities, of four or five times itself. When, therefore, it is recalled that the Federal re- serve note is not legal tender and cannot therefore be counted in the reserves of the national banks, you can readily see how the policy and rathod which the Federal Reserve Banks have pur- sued in the management Of their Federal reserve issues, do far from inflating the bankable funds of the country,, has actually reduced them by a large amount* in other words, of the vast amount of of gold which the country received in settlement of the international balance during the year 1915/ and whichj if allowed to accumulate in the reserves of the banks would have threatened a serious unsettlenent and disturbance in our credit situation, 36$ (or $150,381,000) has been drained off and stored up in the keeping of the Federal Reserve Agenta until such time as changed conditions and the interests of com~ merce and industry may require its use. The note-issuing policy c pursued by the banks has thus had the twofold effect of actually diminishing the tendency to inflation through substituting the note in place of gold and, at the same time, has provided a defi- nite reservoir of gold which can be tapped without producing any 653 - 26 - shock or anxiety when the inevitable demand begins for the re- turn to Europe of some considerable part, if not the whole > of the gold which necessity has obliged Europe to part with to us. So far from being a source or cause of inflation, the very oppo- site is the case, and the country owes much to the salutary action of the Federal reserve issues in mitigating the effects of the gold influx. Whether we could or how we would have dealt with the problem of the increasing gold supply had we not fortunately had the agency of the Federal Reserve Banks, may well be questioned; but it is worthy of remark and careful consideration that although a condition so extraordinary as this was probably never contem- plated by the framers of the Federal Reserve Act, and therefore no special provision made for it, nevertheless, so well conceived was the general framework and machinery of the system that it was found that it could be turned to useful account in rjieeting the situation created by the presence of the redundant gold supplies. U. Commercial confidence. I have reviewed, perhaps at what has seemed to you tedious length, three distinct, important and difficult kinds of service which the Federal reserve organization ihas rendered in 653 - 27 - the first year and a half of its existence - a period character- ized in its general aspects "by much uncertainty and anxiety - in order to show how the new banking system is standing the test. It has met every requirement in the financing of the largest export trade the country has ever enjoyed; it has equalized and steadied discount rates at a low level throughout every district of the country and in this connection it has withstood the temptation to utilize its vast resources and power to depress discount rates to the point where both a dissipation of its resources and an unhealth- ful stimulus would result; and, thirdly, it has dons much to check the inflationary tendency threatened by the huge influx of gold. X come now to a fourth matter which is in some respects equal in importance to any of the others, if not of greater import- ance, because it has underlain each one of them and has made pos- sible the definite and signal results which have been achieved- I refer to the atmosphere of confidence that has been induced and maintained from the very day and even before the day of the open- ing of the Federal Reserve Banks, and in every section cf the coun- try. It is, of course, hard, not to say impossible, to estimate the value of any element of business health and activity so intan- gible as confidence, and yet it is of the very essence and life of the modern business system. Business is largely a state of mind. Business flourishes in tho atmosphere of hope and the sun- shine of cheer; it is chilled and choked by the poisonous vapors of fear and anxiety and is paralysed by the atmos- phere of despair. The method of the Federal Reserve Sys- tem, I trust you understand by this time, is the method of hope and of encouragement. It is this quality which dis- tinguishes the Federal roserve legislation from any other im- portant piece of legislation ever enacted by our Government touching the fortunes of business. It is this quality which entitles it to bo regarded in a very genuine and critical sense as a product of constructive statesmanship. It is this quality which makes the advent of the Federal Reserve System mark an epoch in the business life of America and a atep of incalculable length in the development of tho.new relations which the statesmanship of the future will 3eek to cultivate between the agencies of Government and the agencies of business. That it has thus far succeeded in this vital function, tho past year and a half bears eloquent te3ti- i mony. A more striking contrast of conditions than those which confronted the country at tho inception of the Federal Reserve System, when business and financial chaos was im- 658 23 .. pending a3 a result of the outbreak of the European war, and those which have obtained since the banks were set in operation, can not be found. Our international relations during the year 1915 were marked by several critical episodes any one of which under ordinary conditions would have thrown business into convulsion. Public opinion and feeling has on several occasions been in a state of extreme tension. IThen we recall the Luoitania incident, the Arabic, Ancona, and Sus- sex,to say nothing of the Mexican tangle, we can readily under- stand why war at times seemecitc many imminent, and to some a certainty, and yet throughout it all the business pulse haa boon strong and steady and firm. There has been little of a dramatic or sensational character to record in our recent business annals. There have been moments when that sen- sitive barometer of business feeling, the stock market, has registered some nervousness and hesitation, but nothing for a moment comparable with the disturbance and shock following threatened ruptures in our foreign relations on former oc- casions, so unqualified has been the confidence that the business community as a whole, has felt in the new banking system* "When President Cleveland, twenty years ago, sent to Congress his message defining the position of this country 658 - 30 - with respect to Great Britain's attitude on the Venezuela "boundary dispute, the leading markets of the country were threatened with collapse. When President Wilson delivered his recent address to Congress with respect to the position of our country on Germany's methods of submarine warfare, though the situation was vastly more delicate and critical, our leading markets showed little weakness and less anxiety, and why? Because there was confidence that, come what might, a we were possessed of/banking organization whose resources and management gave ample guaranties of financial safety. The gratifying evidence thus given of the feeling of security which our new banking system has inspired in the business community, is one of its greatest achievements and most valuable assets 9 For it may be laid down as axiomatic in modern finance that a V financial and banking system, to meet the ultimate test, must not only be strong, but must also be generally believed to be strong - and adequate to any need. That difficult test has been successfully met. Indeed, when we reflect upon the conditions of the past year, the establishment of the Federal Reservo System almost coincidently with the war seems almost to have been providential. Without the new system we should certainly 658 - 31 - have "been floundering like a ship at sea without rudder or compass to guide it; with it we have sailed like a well- ballasted ship, steadily and securely. And all this has been accomplished with a very moderate, not to say insignif— icent, amount of activity, as business activity is commonly measured in those days, on the part of the Federal Reserve Banks, thus showing that it is not the amount of business done which measures the usefulness and effectiveness of the Reserve Banks, but the character and the extent of the influence exp- orted by them, whatever the ways in which that influence may be exerted. With money rates unprecedentedly low, as they have been during the past year and with the banks of the country pretty generally in liberal supply with respect to loanable funds, it is hard to see what good purpose could have been served by an attempt on the part of the Reserve Banks to force the use of their funds "by demoralizing reductions of rates, even if they could have succeeded, by this means, in diverting business to them- selves- I do not doubt that as the natural expansion of bus- iness grows up to the supply of credit facilities with which wo are now so richly blessed, the loaning power of the Reserve Banks will be drawn upon in increasing degree, and that most, if not all, of the Roserve Banks will have abundant opportunity to engage in activity which will be at once useful to the com- munity and profitable to themselves. But until this point is reached, it would be shortsighted to complain because the Reserve Banks, as a whole, have not been dividend-earning in- stitutions. Activity is the law of being of any ordinary busi- ness concern, but the Reserve Banks are not ordinary business concerns. They have a very aacrod place and function in the country's credit system. Profit is not their object, and not, therefore, the test of their fitnoss. . Not the amount of bus- iness done, but the amount of good done, is the proper standard by which to judge them. But when this is said or admitted, it should also be added by way of a warning word to those who would wish to 3ee the operations of the Federal Reserve Eanks cir- cucumscribed within narrow limits, simply in order to avoid the effect of their competition with powerful member banks, that the limited amount of commercial operations in which the ma- jority of the Reserve Banks have thus far engaged, is not for a moment to be taken as indicating the range of their normal activity. There will, in time, be much business that those [banks will have to assist in order effectively to perform their f. . V ' i 653 - 33 - functions as regulating and governing banks, and while this business should not be undertaken from motives of profit, we may confidently expect that it mil, in the ordinary course, yield returns that will easily pay the expenses of maintain- ing the Reserve Banks and meet their dividend requirements, and thus satisfy the ordinary test of business success along with the other and more difficult tests; for let us not o\*erlook the fact that higher and more difficult tests than any which the system has thus far had to meet may await it in the un- certain and troubled future toward which the whole commercial world seems moving, as a result of the terrific disorganization of industry, commerce, and finance which the gigantic struggle now in progress in Europe will entail. Econimic Readjustment After the War: It has been predicted on the one hand, that the load- ing countries of Europe will find themselves industrially and financially so weakened as a result of the war that they will be long in repairing the damage sustained by their industrial or- ganisation, and will be, in consequence, a factor of diminished importance in the sphere of international commerce. The m©re destruction of large percentages of their working populations 658 - and the disability through injuries and disease, of other large percentages, to aay nothing of the destruction of vast amounts of physical capital, it is suggested will'result in such shrink- age of their productive power as to keep them busy at home for a long time in repairing waste and loss. The crushing burdens of taxation that will lie heavily upon the commerce and industry of Europe are also pointed to as factors, that will rstard in- dustrial recovery. Germany, which before the war occupied a nost formidable position in export trade and in ocean carrying, as a result of British domination of the sea, has boen practically shut out from her customary over-seas trade. To what extent and how soon, she will recover her former position is regarded as highly'problematical, and weakened competition in our markets and some of the new markets in which we have recently been ac- quiring a foothold, is, in consequence expected. Others, however, predict that the economic recovery of Europe will bo rapid, and that competition, both commercial and industrial, among the leading nations, more intense than has ever before been experienced, i3 to be expected soon after the close of the war. The animosities, rivalries, and am- bitions for commercial and industrial supremacy, which had 658 - 35 - much tc dc with tho mating of the war, will, it is said, con- tinue and give to the period after the war much of the un- settled and unsettling character of war times. Those who take this view predict that an era of protracted and "bitter commercial warfare will follow-the termination of the armed conflict, and that the differences and scores which were not settled on the field of "battle will be fought to a finish on the field of commerce, and that neutral nations will inevi - tably be drawn into the struggle. Without undertaking to pass judgment upon predictions of this character, I think it nevertheless well that we should be alive to the contingencies which may b© ahead, and I do not hesitate to express my belief that Europe will give tc the world an impressive exhibition of the recuperative powers of modern industry even after such a costly and exhausting war as has been in progress. Stupendous as are the examples that tho past year and a half have given us of the destructive agencies of civilization when turned to war, I believe wo shall got equally impressive examples at its close, of the construc- tive forces of modem civilisation when its energies and aspira- ti ons are turned to the healing work of peace. V7ar destroys, i XERO " COPY n 658 - 6 - 3 "but that is not all that it does. Fortunately for a world in which war is long likely to remain a persistent and recurring fact, war "brings some industrial compensations, though the off- set to the losses and injuries be far from complete. War, especially war of the kind which is going on in Europe and touching to passionate intensity the vital impulses of great communities of men, stiffens and steels their fibre and makes them more capable to bear the hard and heavy burden of modern industry, and. therefore will make them more formidable competi- tors, in time , of nationa which have not had to face the dis- cipline of war. No one can begin to approximate how much the industrial efficiency of the average man and woman in Europe will bo raised as a result of the experiences and lessons which war has taught tham in unity of purpose and action, in organ- ization and efficiency, in oconcmy and thrift, in industry, and in devotion to duty. These things will tell, and I believe tell mightily, in the productive and competitive strength of the larger European nations after the war. Necessity has already worked some wonderful transformations in the industrial systems of the countries at war, and it is not unreasonable to m * t expect that the nations which emerge from the trenches will, man for man and woman for woman, (for woman is clearly to play a role 6^8 - 37 - in tho industrial economy of Europe in the future far more im- portant than she has in the past) come more near to realizing their full productive capacity than ever "before. This war has also taught lessons to the warring na- tions which will not soon be forgotten or wasted, as to the momentous effect which an efficient credit organization can exert in maintaining a country's industry in a state of health and activity and just as the European credit system has shown a capa- city to finance the costs of war v.hich has far outrun the wildest expectation, so it may be expected that it will show a new and enormous power to meet the requirements of industrial recupera^- tion. Let us not, therefore, make the mistake of supposing that it will be an industrially feeble and unambitious Europe which will emerge from the war. The history of modern commerce affords no parallel to the situation which exists or may exist, and wo can there- fore learn little from history as to what we may expect. The nearest approach is the long period of economic disturbance following the close of the Napoleonic wars, It took fully fifteen years for the world of commerce and industry to work out the needed readjustments and recover a normal equilibrium, and the process was embittered and embarrassed by policies of { 658 38 commercial reprisal and tariff wars, similar to those which are now being planned by the contending groups in the European war. Neutrality was no protection then, nor will it be now. Our commerce and industry pursued a troubled course from 1815 to I83O, marked by a succession of alternating periods of fit- ful and feverish activity and industrial breakdowns. The process of readjustment which had to be gone through in order to determine what the relative positions of the several nations should be in the new commercial economy was a long and costly one for each and all. Uncertainty was everywhere. To recognize the possibility, not to say the probability of the recurrence of something similar would seer^ to be the part of prudence for- us, and the first step in intelligent preparation for it. The one thing which is certain in forecasting the future is the uncertainty of the conditions with which we shall be surrounded. Let me add however, in order to relieve unnecessary suspense, that I do not look for an immediate reaction in our industrial situation at large as a result of the close of the war. But I do expect that some of the industries'which have been stimulated into frenzied activity by the forced draught of evanescent war orders, may have their troubles. Also I 6^8 35 think that there is much danger that their ttoubles, unless' localized and controlled, may breed trouble, uncertainty, and anxiety for others. There is a contagion of trouble as well as of prosperity. We know this from aad experience. This much, at least, may safely be said; that our industry and com- merce are to travel uncertain and uncharted ways in the years which are ahead, and uncertainty, X need not tell you, is the great bane and foe of modem business. To eliminate it where we can, or to minimize it where we can not completely control it, is our clear duty. We shall not, therefore, if ive are wise, neglect to strengthen our defenses so as to make them equal to any contingency with which we may be confronted- And this leads me, in conclusion, to say some frank words to the State banks, whose cooperation should be forthcoming in order to widen the base of our banking structure, to give the country the fullest sense of safety and security- 5* How are State banks meeting their test* Speaking to £L.convention made up largely of State bankers I should be remiss in my duty if I did not avail myself of this opportunity to speak plainly to you. 'You know that 658 - Uo - the Federal Reserve Act was purposely planned upon a "broad and generous scale in order that every bank in the country, whether State or National, doing a commercial banking business in safe and legitimate ways, might secure for itself and its customers the advantages and protection of the Federal Reserve and at the same time contribute its quota of strength to it. The State banks surpass in number the National banks and repre- sent a substantial part of the commercial banking power of the nation. To what extent the proportion has declined since the establishment of the Federal Reserve System can not bo approxi- mated with accuracy but it i3 a fact that the National banking system has since the establishment of the Federal Reserve Sys- tem shown an accelerated rate of growth and a greater capacity for growth than State banking during the same period, the in- crease in the deposits of the National banks having been esti- mated to be three or four times as great as those of the State Banks since the inauguration of the new System. TThat the relative growth of member and non-member banks will be in the future, I shall not undertake to prophesy but as lo£g as there is a considerable portion of the banking power of the nation or- ganized as State banks and which is eligible for membership in the Federal Reserve System and'.has not joined, the system will not have attained its fullest strength and its widest field of usefulness. , 658 -41- Why are you State banks not coning in to the new system ? The provisions of the law respecting State bank mem- bers are as liberal as could well be desired, and the regula- tions which the Federal Reserve Bo„rd has laid down on this subject are even more liberal. Those of you who have read the Act and the Regulations of the Board will, I believe, find no reasonable ground of complaint. You will find few restrictions upon your customary banking methods. The Board has even gone so far as to provide a way by which any State bank becoming a member bank may withdraw from the system in order that you need not be deterred by the feeling that membership means an irrevocable choice. The attitude of the Federal Reserve Board has been founded in the conviction that our now banking system should be as broad and as strong and as capable, as the financial condition of the country will support and the limitations of the Reserve Act will permit. It is almost a year now 3ince this Board issued its regulations concerning the admission of State banks. Thirty-four banks have joined. The strong conviction which the business community in every part of the land has formed of the benefits of the new system require that it should be known why the growth of State bank membership has been so slow. 658 -42-' Are any of you holding back because of dissatisfaction with the provisions of the Federal Reserve Act or with its administration The Federal Reserve Act and the Federal Reserve System are here to stay. They have won the sanction of public opinion and are regarded as the essential bulwark of our financial safety* As to the administration of the Act and of the twelve Reserve Banks little but good has been hoard. But if the State banks are hold- ing back because of dissatisfaction with the administration of the law or the banks, they should make it known in order that the defects may be remedied, and the country given the full advantage of a banking system carried to the highest point of strength and efficiency. Coming to another reason, I have sometimes hoard it suggested that financial conditions have so changed that there i3 no longer need of the kind of protection and security which the Federal Reserve System was designed to provide. It must » be admitted that the financial situation during the past year has been so exceptionally easy that it might well have be- gotten in the minds of those who are not in the habit of look- ing beneath the surface of things, the idea that financial strain and convulsion is a thing of the past. They are likely 658 -43- to experience some surprises. I have already given my roa- son3 for oxpecting that the years which are ahead and which will reap the consequences of the financial disorganization and demoralization growing out of the great war, will be years of uncertainty and disturbance for us in corrmon with the re3t of the world; years filled with rjixietyj and requiring for the good management and the protection of our national interests, the guidance and support of the Federal Reserve System. What- ever other mistakes wo make, let us not deceive ourselves on * this point, and be lulled into a blinding passivity; for when trouble comos, as sooner or 1 .ter it will and State banks in overwhelming numbers run to cover under the shelter of the Federal Reserve Banks, they may find some difficulty in get- ting in as quickly as they would like. There is also a feeling abroad in some parts of tho country that in some mysterious way the Federal Reserve System, with the membership of the National banks, has pro- duced a situation in which tho oonoficont effects of the new banking system, like the rains lof heaven which fallalike upon the just and the unjust, will be so inevitably and widely diffused that non-member banks, no less than member banks, will reap the full advantages. Lot me say very frankly that I believe there is some truth in this - yes, much truth - but not so much a3 is frequently assumed. 658 -44- To the extent that the success and effectiveness... of the new system will depend upon the feeling of security that it inspires - in other words, to the extent that the success of the system depends upon what may be entitled its psychological reserve - it is no doubt true that all the banks, irrespective of their connection with the new system, will participate in the result. But it may readily happen, and it will probably happen, that from time to time - no one can say in the face of the critical years that are ahead of U3 how froquontly these times will occur - the needs which the community will have of the Reserve Banks will call for more than psychological reserves and will at times cut deeply into their gold reserves, and then will it become • clear that the strength of the system is measured also by the cash that it holds in hand. The State bank, therefore, which con- ducts a banking business that qualifies it for membership in the system under the liberal conditions laid down by the Fed- eral Reserve Board, and which sustains relations with the business comrrunity of the kind that give rise to financial difficulties and embarrassments of the sort which have called forth the establishment of the Reserve Bank3 as a means of protecting the community, are taking the responsibility for -45- themselves and, what is of far more serious consequence, for the communities of customers which they serve, of keeping the new system from becoming in the fullest sense an American system, equal to any demands that may be made upon it. You are the bankers of a community which is servod mostly by State banks. Your State h:.s extensive agri- cultural, manufacturing and merchandising interests. They are precious to your people. Their condition makes or mars your prosperity and your condition may make or mar theirs. I see no good reason why the people of Missouri, or Arkansas, or Mississippi, should not enjoy in all circumstances the same sense of security as is enjoyed by the farmer, tho manu- facturer, and the merchant in States or sections of the country which are served preponderantly by National banks. I believe the welfare and security of the Missouri farmer, merchant, or manufacturer was just as much in the mind of Congress vhen it enacted the Federal Reserve Act as that of k manufacturer, merchant, or farmer of Massachusetts or Conn- ecticut. Ho is entitled to all the good that can be reaped from tho new banking system and he is entitled to know it, if his existing banking connections do not secure him tho fullest ana freest access to it. 658 -46- The Reserve Bank affords an ever ready means by which good commercial paper can, at a momentTs notice, on presentation at the counters of the Federal Reserve Bank, be turned into either credit or currency. No such thing as a currency famine can overtake the customer of a bank that, by reason of its mem- bership in the Federal Reserve System., has the right and ability to go to that bank and get gold, credit or currency. Non-member banks may get it' as a matter of favor, but I believe that people as thoy come to understand these matters more fully, will see the difference between deeding with a bank that, as a matter of right and of course, can go to a Federal Reserve Bank for as*- sistance in the certain knowledge that it will be forthcoming, and those banks which, if they get such assistance at all/ will get it indiroctly and as a matter of favor and of public spirited generosity on the part of the member banks and of the Reserve Banks * In matters of such vital concern to its industry and agriculture, no community can afford, or will bo willing, to pin its faith to bank3 which are on the out- side of the Federal Reserve System. Those of you who need a more personal and cogent reason for becoming member banks will soon find it, I believe V/ 658 -47- when tho plan which has been devised for the clearing and collection of checks has been put into operation by the Fed- eral Reserve Banks. The Federal Reserve Bank of St.Louis will soon issue a circular giving complete information and I am confident that the plan will have been in opera- tion but a short time before many non-member banks will realize the nocessity of joining the Federal Reserve System in order to participate in its new collection plan. The plan i3 well conceived* The Federal Reserve Banks will extend unsurpassed collection facilities to such of their members a3 choose to avail themselves of them, but the system is optional* No member bank will be obliged to clear through it3 Federal Reserve Bank. The only element of compulsion is that every bank, whether member or non*-member, will be obliged to pay without deduction checks drawn upon it ^nd presented at its counter for payment by tho Federal Reserve Bank or its representative, either in acceptable ex- change or in lawful money. The plan is reasonable: many letters that are coming to the Federal Reserve Board from those who have boon the victims of excessive exchange charges' provo this. The plan is also practicable and is going to ( ) 658 ^48- bo offoctivo 1 this is proved by the objections that are being urged against the plAn by those banks that arc now taking tribute from the commerce and business of the country in the shape of unreasonable exchange charges. It has been estimated that as soon ad the plan has been put into opera- tion checks upon at least fifteen thousand b-*nks, National banks, State banks,and trust companies, throughout the United States can be handled at par through Federal Reserve Banks, subject to a small service charge. Par collections will be the rule. State banks whose checks cannot be collected at par will be a small and rapidly diminishing minority and, as they will find it difficult to retain much good business when checks drawn upon thorn are at a discount while checks drawn upon the majority of banks can circulate at par, the day is near at hand when checks upon practically all banks can bo handled at par by Federal Reserve Banks. If the reasons I have advanced for State bank mem- bership in the Federal Reserve System are sound, as I believe you will, on sober reflection conclude they are, why, then, I repeat, are you State bankers hesitating and waiting ? 65* -49- I asked this question the other day of one of tho largest "bankers in this district and his answer as /'most of them donH know. They can't tell you. But you will got them in quickly enough when trouble comes." I have spoken to little effect if the logic of my wordd does not say to you, "DonU wait Hill trouble comes, but make the assurance of the new banking system for•yourselves and those you serve, doubly secure by coming in now, and doing your part in giving to this country of ours a banking system worthy of its nomo and worthy of its future." To falter is, therefore, to fail. To fail in this vital test, at this vital time, is unbusinesslike, is ungenerous; is, therelorp, un-iimerican and unpatriotic. A. C. M* 5/19/16

Adolph C. Miller (1916, May 23). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19160524_miller

@misc{wtfs_speech_19160524_miller,
  author = {Adolph C. Miller},
  title = {Speech},
  year = {1916},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19160524_miller},
  note = {Retrieved via When the Fed Speaks corpus}
}