Speech

X-1155 THBFEDERAL RESERVE NOIE, I?5 JUNCTIONS AND, LIMIT42£0NS JTBGM m ADDRESS OF W* P. G« HARPING, GOVERNOR OF THE FEEERAL RESERVE BOARD, BEFORE THE CONVENTION QF THE OHIO BANKERS ASSOCIATION AT COLUMBUS, .OHIO, THURSDAZ, 3FE0MBER 5, .1918* FOR RELEASE IS MOKETIKG FAEERS OF FRIDAY, SEP95KBER-6th# *Hh& flapUen or short title of the Federal Reserve Act defines it as M,An act to provide for the establishment -of Federal reserve banks, tt furnish an elastic currency, to afford means of redis- counting commercial paper, to establish a more effective super vision »f banking in the United States, and for other purposes." It is evident therefore, th&t two of the principal objects «f the : act are (1) T6:feLrnish an elastic currency, and (2) To afford means of discounting commercial paper* Section 16 provides that the elastic currency referred t#, namely. Federal reserve notes, may be "issued at the discretitn of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2~ the Federal Reserve Board tot the purpose of making advances to Federal reserve banks * * * and for no other purposes." That the relationship between the currency authorized and the re- discounting of commercial paper is a close one is clear, for the t reason that Section 16 as originally enacted provided that ap~ plications,of the Federal Refeerve agent for Federal reserve notes must be accompanied with a tfender of collateral in amount equal td the sum of Federal reserve nfates applied for and that the collateral security thus offered shall ie notes and bills accepted for re­ discount under the provision^ of Section 13, which section relates - not to open market transactions, but entirely to eligible notes* bills and acceptances which may be discounted by & Federal reserve bahk under Reified tei*ms dfcd conditions* In addition to requir­ ing the pledge of 100% of discounted paper, Federal reserve banks were also obliged to maintain reserves in gold and lawful money of not less than 40 per centum against their Federal reserve notes in actual circulation and not offset by gold or lawful money deposited with the Federal Reserve agent* Un&er a strictmconstruction of this section, it would have been difficult, if not impossible, for the Fuueral reserve banks to mobilise in their OTOI vaults the gold holdings of the country, since the extent to which Federal reserve notes could be issued depended entirely upon the amount of commercial paper held under discount by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis >-3*- these batiks, and in as much as they are required to maintain a 40% gold reserve against Federal reserve notes, they could not acquire gold in exchange for Federal reserve not4s, unless the notes wfere first issued a©,inst an equal amount of commercial payer. It was, therefore, necessary to resort to the expedient of first issuing n6tes against 100% commercial paper and of subsequently permitting the Federal reserve banks to deposit gold in order to reduce their liability against such notes and thereafter to issue additional notes against commercial paper which was released by this process* It was also difficult to mobilize the gold in the Federal reserve bank, because of the fact that Section 19 of the act, as originally passed, required manber banks to maintain only a part of their required reserves with the Federal reserve banks* the balance being held in gold or lawful money in their vaults, or carried with correspondent banks. In order to enable the Federal reserve laanks more effectively to control the countiy*s gold which was widely diffused, being used for purposes of circulation and held in the vaults of manber and nonwcember banks, and to be in position at the same time to issue notes in such volume as might be necessary to supply an adequate circulating medium, Congress amended the act on June 2i 1917 by f providing that all of the lawful reserves of member tanks be kept Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3 A- sn deposit with the Federal reserve banks and that Federal reserve notes might be issued to the reserve banks without limit against deposits of gold or gold certificates* any gold thus obtained to be counted as part of the 40$ gold reserve which the reserve banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -4- are obliged to hold against outstanding Federal reserve notes. Thus the new method permits the dilution of gold with commercial paper and requires only 60$ of paper in addition to 40$ of gold as against 100$ of paper and 40$ of gold as provided in the original enactment* The effect of these amendments has been to add enormously to the gold holdings of the several Federal reserve hanks and to enlarge the discounting paver of the reserve system* The right to issue Federal reserve notes against deposits of gold has been availed of very freely, and gold received in the course of the daily transactions of the hanks has been retained and pay­ ments have been made in reserve notes instead of in gold* This practice has boon urged repeatedly upon the reserve banks and also upon member and non-member banks, which have been asked to trans­ fer their gold as it accumulates to the Federal reserve banks, the argument being that in the vaults of the reserve banks gold is available as a basis either of now note issues, or as a means of extending their loaning facilities, while in circulation or dis­ tributed among the 25,000 or more commercial banks of tho country it is of no moro value than any other fonn of currency* Since the amendments to the act the issue of Federal reserve notes outstanding has expanded greatly, having risen from something over $500,000,000 on June 1,1917, to slightly more than $2,000,000,000 on August 23,1918. The fact that this growing volume of our papor currency has been accompanied by a continuous Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -5- advanco in wages and commodity prices has boon frequently coniEontcd upon and has subjected the Federal reserve system to sons unmerited criticism. Half-truths arc often the most dangerous falsehoods, and while the evils of constantly rising prices and inflation are beyond question, and while it is undeniable that present prices might in ordinary circumstances be justly attributed to currency inflation, wo ^fcculd in considering the Federal reserve note as a factor in our present economic and financial situation, analyzo the circumstances out of which our present situation has resulted* The outbreak of the European war in August 1914, was followed immediately by a convulsion in business and a financial crisis throughout the world. In this country,relief was afforded by the issue of about $375,000,000 of emergency national, bank notes, and following the establishment of the Federal reserve banks on November 16,1914 there was a rapid return to more normal conditions* The effect of purchases in this country by belligerent nations began to bo felt early in 1915 and the volume of those purchases increased rapidly during that and the succeeding year. As there was no co-ordination in tho purchases of the respective governments, thoy wore placed in the position of bidding against each other, and as their needs for large quantities of raw material and manu­ factured goods and munitions was urgent, — quick deliveries being desired above everything else — there was no restraint upon prices. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -fr Very large profits woro obtained by sellers; labor naturally demanded and obtained a part of tho profits in tho shape of in creased wages, and the large volume Of gold which came into the country to pay for goods purchased, amounting to about $1,200,000,000 during these two years, affected all priGeS and brought about a sympathetic advance in those articles which were not needed for shipment abroad as well as those which were in de mand for war purpbses. There is no doubt that we felt tho effect in 1915 and 1916 of an inflated currency, but tho inflation was a gold inflation, and it became necessary, in order to avoid tho greater evils which would have resulted from a sudden and unregu lated outflow of gold, — a gold contraction, — to take staps to impound the gold in order that its use and outflow might be kept under control. When this country entered the war in April 1917, prices had already advanced from the low point in 1914 to a greater extent than they have since advanced, index figures being as follows: ( From the Official Bulletin of the U*S. Bureau of Labor Statistics) Index Number January 1914 100 'I July 1914 99 " March 1917 155 Increase about 55$ n July 1918 198 Increase since l&rch 1917, about 28$ Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -7- Attention is called to a comparative statement showing monoy outside the Treasury and the Federal reserve banks as of November 2, 1914, just prior to the opening of the Federal reserve banks; on February 1, 1917, the date of our break with Germany* and on August 1, 1918, the latest date for which accurate figures are available?• Cln thousar.dd of dollars) November 2, February 1, August 1, 1914 1917 1918 Gold coin $665,800 $641,500 $448,900 Gold certificate 913,300 1,281,900 498,000 Standard silver dollars •s 70,300 71,000 77,300 Silver certificates 482,800 461,500 353,100 Subsidiary silver 162,500 187,900 218,900' Treasury notes of 1890 2,400 2,000 1,800 United Staies botes 234,900 329,700 295,000 Federal reserve notes *«- 258>4Q0 1^855,300 Federal reserve bank notes 3,500 11,700 National bank notes 1.083.500 * 678.900 689700 t $3,615,500 $3,916,300 $4,449,700 * Including $360,000,000 w Aldrich-Vrooland currency." and the total stock of gold in the United States on these dates is estimated at November 2, February 1, August 1, 1914 1917 1918 $1,835,000,000 $2,912,465,116 $3,080,767,801 respectively. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ~8- While the amount of Federal reserve notes in circulation increased between Febriiary 1 1317 ard August 1, 1918 by abtut 7 $1,596,$00,030, there was a dacreaso- during the same period, in gold and gold certificates, represented by the increased holdings in gold of the Federal reserve banks, of about a billion dollars, and there has been a slight decrease in the volume outstanding in fether forms of currency, so that the net increase in circu­ lation betweeri these two dates has been $533,363,^0* As com~ pared with Noveinber Z\ 1914 the figures for August 1, 1918 shew an increase of $834 3S0 6U£«. On making allowance for the 3 P Aldrich-Vreeland notes outstandtag on November 1, 1914, ($360,300,000) which have all been retired, the increase in cir­ culation outstanding has been $1,194,000,000. pst about equal f to our gain in geld during that period* In the meantime there has been since the fall of 1914 a very large increase in the da­ ps sits and in the loans and discounts of the national banks and of the state banks and trust companies* A comparative statement of these items as shown by the abstract ef reports of national banks on the dates called by the Comptroller which are nearest t» the dates used in making the comparison of circulation outstanding foll<3ws: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ^9- TOTAL GROSS DEPOSITS TOTAL LOANS AND CIS- OF NATIONAL BANKS, COUNTS ( INCLUDING OVERDRAFTS) OF NA­ TIONAL BANKS* October 31,1914 $8,075, 942,000 $6,335,276,000 Ifarch 5,1917 12,958,172,000 8,720,250,000 Juno 29,1918 14,016,087,000 9,632,899,000 The exact figures for the stats banks and trust companies aro not available, but their addition would make a total southing mora than double the figures for the national banks alone* It is evident, therefore, that the deposits of member and non-member banks were increased from October 30,1914 to Juno 29,1918, by more than $11,000,000,000 and the loans by about $7,000,000,000* There is of course a direct relation between the deposits and loans of the banks, the normal condition being; that thsy move up or down together. It should be remembered that the use of Fed­ eral reserve notes has never anticipated an increase in deposits or loans of the banks except in so far as notes may have been used in exchange for gold* Increased loans of member banks, which create additional deposit liability, result in rediscounts at Federal reserve banks and tho issue of Federal reserve notes follows the rodiscounting of eligible paper* The Federal reserve note therefore, does not initiato expansion. It is merely an incident Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -10- of an expansion which has alroady taken place-* It is true how- over, that the machinery which has boon .provided for the issue of Federal reserve notes and the knowledge on the part of the mon>- ber "banks that Federal reserve notes are available if ncoded has undoubtedly encouraged discounting at local banks. But the provisions of the act as to eligibility of paper which nay bo re— discounted by the Federal reserve banks are rigid, and have 'boon strictly enforced by the Federal Reserve Board. Mombor banks have been repeatedly and consistently advised to keep themselvos in liquid condition and to confine their loans as far as possible to short time commercial paper issued for essential purposes^ in order to maintain themselves in position to cooperate with the Treasury in the unparalleled financial operations which war require ments have forced it to undertake* On July 6th the Federal Reserve Board addressed a letter to all the banks and trust companies in the United States, calling attention to the necessity for a gradual, but consistent curtail ment of non-essential credits and urging that the banks oxercise a reasonable discretion in restricting credits which are cloarly not needed for the prosecution of the war or for the health and necessary comfort of tho public. In this letter the Board called attention to the fact that in order to prosecute tho war Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis •11- successfully, tho Government is compelled to issuo obligations to provido for its largo expenditures which involve waste and de­ struction rathor than a permanent addition to the national wealth. War is inexorable in its demands, and any financial plan which in­ volves tho expenditure of $24,000,000,000 a year, unless based entirely upon taxation of a confiscatory character, necessarily forces expansion of credits and is apt to cause an advance in the price of nocossitios. Abnormal demands "by tho Government, unavoidable and necessary in tho proseiri: eircumstancos, must bo counteracted by increased production and by a greater oconomy on tho part of the civilian* population which must decrease, by combined effort, the normal was to incident to domestic life and business pursuits* The Federal Reserve Board has had constantly in mind tho dangers of inflation, -While it has devoted itsolf assiduously to building up the ?old holdings of the Federal reserve banks it has, in permitting; the issuance of Federal reserve notos, always insisted that they bo used as sparingly as possible,, with the double purpose of maintaining* tho strength of the banks and of avoiding redundancy. While the Federal reserve note is a direct obligation of the Government, the safeguards and limitations thrown around it by law Five it many of the characteristics of a bank note. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -12- It is not a legal tender, but is receivable by all national and member banks and Federal reserve banks and is receivable for all taxes, customs and other public dues; it bears a distinctive lottor and serial number indicating the Federal reserve bank through which it is issued, and cannot be paid out by any other Federal reserve bank under penalty of a tax of ton per centum upon the face value of notes so paid out* It is redecixable in gold on denand at the Treasury or in gold or lawful money at any Federal reserve bank, and is a first and paramount lien upon the assets of the issuing bank, which is required to maintain a roscrvo in gold of not l3ss than forty per centum against the total of fits Federal reserve notes in actual circulation^ The consolidate statement* of all Federal reserve banks as of August 23rd shows that there wore $2,032^837,000 of Federal re servo notes in actual circulation on that date* The actual gold reserves held by these banks on the same date amounted to $2,003,051,000, -After setting aside the reserve required by law against deposits, the ratio of gold reserves to Federal reserve notes in actual circulation, was 73,7$, the notes being otherwise secured by eligible paper and acceptances discounted or acquired by the banks. Federal reserve notes should not be confused with Federal reserve bank notes, of which there were in circulation on August 23rd, $16,864,000* These notes are direct obligations of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -13- tho Federal roservo Panics and are similar in their character to national bank notes. Thoy may "bo issued against any bond of the United States which has the circulation privilege, against Treasury one year notes and against treasury certificates of indebtedness* "fthon :(ss"iu& against a ?$ obligation of tho Govern­ ment thoy ar3 tar.od at tlv* rate of i$> pet anm^m., and if issued against Government obligations* bearing a higher rate, tho tax is increased correspondingly* Vheso ^otes are being issued in small denominations to take the place of silver certificates which have been retired under the Act of April 5. 1918 for the purpose of re­ leasing silver dollars to be broken up and melted for efc^oirt to India and othei* foreign countries* !fho amount of silver which may be usod in this way is limited to $350,000,,000. The issue of these notes is thus limited' to this amount and as they merely replace silver as withdrawn,, thay have no effect upon the volume of circulation outstanding* The Federal reserve note should not be confused with fiat issues of other times,* nor is it a bond s&cur&fi/currency* Its issue is carefully saf oguarded, and while a gradual increase in the volume outstanding vrill no doubt be necessary for sons time to come, thus testing one phase of its elastic quality, there is no Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -14- doubt that whonovor the requirements of tho country permit, it will provo its flexibility by its contraction or by tho increase* of gold roscrvo against it to a point \tfiero it will more nearly approximate a gold certificate. It was originally intended that tho Federal reserve note supersede in tho courso of twenty years, tho naticrul bank note. Provision was rrado in the Federal Reserve Act for tho purchase by the Fedoral reserve banks of the bonds securing national bank notes and for tho resale of tho bonds to the Treasury for cancellation* This process was well under way when it was in­ terrupted by the war, but the increase in national bank noto cir­ culation has boon slight, — only about $11,000,000 since Fobruary, 1917* Contraction of Federal reserve note circulation, in so far as it is secured by eligible paper, will be natural and autorratic as tho discount operations of tho banks are reduced, but the noto is in no sonso an etrsrgoncy currency, for it is and will rornain our principal circulating iredium, its dominance in this respect increasing as tho regaining $900,000,000 of gold vvhich is outsido of the Treasury and the federal reserve banks are absorbed by tho reserve banks% Ever since the establishment of tho Fedoral reserve banks tho Board has endeavored persistently and consistently to increase the aggregate gold holdings of tho banks. Since tho entry of tho Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis *-15** United Statos into the war, tho necessity for such an effort has boon emphasized^, while tho inclination of tho public and Of the banks to cooperate has been marked* More than $2,000,000,000 of gold and gold certificates have been withdrawn from circulation and transferred into tho vaults of the Federal reserve banks, but as already stated, there still roirains in circulation and in bank vaults abou-v $900,001,000 )i void certificates and coin, most of which can be depositee3 and Fheuld bo deposited, their place to bo taken as far as necessary by Fodor&l reserve notes* It is tho intention of the Board in tho future, as in the past, to watch closely the loaning operations of tho banks, and it is not its purpose in mobilising the gold of tho country into tho vaults of the Federal re servo banks^.to incroaso tho volume of loans boyond the amount actually required, but those are war times, and any inability on the part of Foderal reserve banks to respond to legitimate domands made upon thorn would be disastrous. It is cloar that in proportion as the gold holdings of the Federal reserve banks are increased, the ability of such banks to extend nocdod accommodation to other banks or to issuo notes is enlarged. ^s reserve holdings are curtailed, the lending power of the banks is correspondingly roducod* As member banks are no longer requirod to carry reserves Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -16- *>f lawful money in their own vaults, it follows that gold held by them is of no mote value than aiy other form of currency * and every dollar of gold that is hoarded by iridividuals is withdrawn, not only from reserve use, "but also from circulation; ani is a net loss to the community* 03ie effect of hoarding therefore, is to impair the ability of the Board to provide the strongest possible gold cover for our growing volume of Federal re&exve notes and deposits, — and deposits will necessarily contihtie to increase during the con tinuance of the war. It is desirable in the existing circum stances to have every dollar of gold in the Federal reserve banks, letting the circulating medium consist of currency based on gold* Money of every Kind, whether gold or silver, should be deposited in bank and used, but not hoarded* Surrender to the Federal reserve banks of gold coin and gold certificates and abstention from hoard ing means an increase in the volume of bank credit available for the community and increased ability to finance the war and fee neces sary requirements of business* It seems proper, in this connection, in view of the general impression that because of its power to control discount rates the Board can regulate the volume of rediscounted paper, to say some thing regarding the discount policy of the Board. During the year 1915 and for the greater part of 1916, owing to the abnormal ease Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -17- of the money market, there was "but little resort to the discount facilities of the Fedcml re so we D;>nkG# flaring this period the deposits of rseub'Si- *i.-& no:i-member banks were increasing by leaps and bounds, aad 'jb& ^a^'s as a rule *are able to take care of the legitimate needs of cus'omors ani to make large purchases of com­ mercial pape* without using their credit either with correspondent banks or with the Federal reserve banks# in such ciroumstances, it is clear that tho Board*s control ever disccunt *atee was merely nominal* Deserve bank rates were low, in conformity with the general trend of the money market, and even by engaging in open market operations the Federal reserve banks found it difficult to invest a sufficient portion of their funds to enable them to meet in full their dividend requirements- Kicter rales would of course have brought in even a snailer volume of business. Late in the year 1916, rates began to stiffen and the volume of discounts with the Federal reserve banks shewed a tendency to increase, but the banks generally still hedd a surplus of funds and any drastic advance in Federal reserve discount rates would not have materially affected tfie money market* After our entrance into the war the whole situation underwent a radical change♦ Eie President, in an address to Congress on April 2 1917 pledged the entire resources #f the nation to the f f staceessful conduct of the v(&r and war became the paramount business f Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis as- of the country* An issuo of Treasury certificates announced immediately, was followed "by the first Liberty bond campaign, tho avowod purpose of which was to secure subscriptions to $2,000,000,000 of "bonds "boaring 3a$ interest* It was apparent that this issuo would be followed by others, and it was nanifostly the duty of tho Board to support tho financial plan of the Troasury, Within twolvo months aboUt $10,000,000,000 of bonds wore sold by the Government, and since April 1917, there has been outstanding an average of about $1,000,000,000 of Treasury certificates, issued in anti­ cipation of taxes or Of the proceeds of bond salos. Mindful of the of feet which high interest rates on Government obligations would have upon investment securities and the money market as a whole, it has been the aim of the Secretary of the Treasury to Hold rates do^rn to the lowest possible level, and it is now his announced purpose to niaintain as a maximum a rate of 4kfo on Treasury certificates and 4^$ on Liberty bonds* In these circumstances, the Federal Reserve Board has felt that it should direct tho policios of tho system so as to insure prompt accom­ modation to banks whose customers might require assistance, either in providing for commercial demands caused by increasod business Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -19- dctivitios, or in making their payments for bonds, as woll as to banks which bought "bonds for thoir own accounts It was dcemod important that .there should "be no disturbance in tho money market and that intorost ratos should bo kept as nearly normal and tree from fluctuation as possible* Thoroforo the Board, heforo tho subscriptions to tho first Liberty bond issue woro cl*ched, ostablishod a preferential rato of discount for notes of momber banks socured by Government obligations, who tho r certificates or bonds, and, in order further to assist tho Treasury in disposing of bonds, the Board authorised Federal reserve banks to discount for non-member banks upon tho endorsement of a momber bank, notes secured by Government obligations, who tho r made by non-member banks thornsclvos or by their customers, when tho proceeds had been or woro to be usod for the purposo of carrying Treasury certificates or United Statos bonds* Tho Board, thoroforo, distinguished "bo two on commorcial loans and loans made upon tho socurity of Government, obligations, by giving a preferential in favor of the latter. The policy of tho Board has thus far been justified hy results. Tho "bonds were widely distributed cvnd each subsoquont issue has. shown a larger number of subscribers than the proceeding one, the number of subscribers to. the third Liberty loan boing more than 17,000,000 Only 4$ of the total amount of bonds issued up to this time were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis •20- held on June 29th as investments by tho national banks/ or 2.29$ of their resources, while thoy were carrying loans secured by Liberty bonds amounting to $457,000,000, or 2.56$ of their re­ sources. As tho rates on Government obligations were advanced, the preferential rates on paper secured by these obligations wore increased correspondingly at the Federal reserve banks* So that instead of a rate ef from 3 to 3|$ as first established, rates at the banks ate now ranging from 4 io 4%% on paper so- cured by Government issued* with a maxinum rate of b^fo on 90 day c commercial paper and 5^f> on 6 months agricultural paper. The Board does not believe that in the existing situation marked advances in rates would be advisable in view of the obvious necessity of avoiding any policy likely to disturb the financial operations of the Treasury* The needs of those, industries and commercial enterprises which are directly contributory to the conduct of tho war must bo supplied at all hazards, and a drastic advanco in discount rates would not reduce the financial require­ ments of such concerns, but would merely impose an added cost upon the people* In its letter of July 6th, to which reference has already been made, the Board called attention to the importance of a wise discrimination between essential and non-essential crodits. It Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ~21~ believes that the exercise of discriminating judgnent on the part of the banks throughout the country ih making their loans will be more effective in counteracting any tendency toward credit ex­ pansion than an advance In rates would be. Bie suggestion has been made by the Board that the federal reserve banks organize, each in its own district, local groups comprising leading bankers and business men, in order to discusa ways and means o£ bringing about the tesult desiredU It is exceedingly difficult to lay down any fixed and. definite rules to govern In distinguishing between essential and non-essential credits* A loan raigit be desired for what appears at first glance to be a non-essential purpose, and yet failure to obtain the credit might create a condition which might indirectly have a distinctly harmful effect upon the ability of productive enterprises in the community to obtain credit* In the same way> in the larger centers, refusal by banks as a group to lend on standard securities would seriously impair the liquidity of in­ vestments and would force liquidation which mi$it disturb very seriously the whole financial situation. It is important to avoid sharp and radical readjustments of credit and wherever possible lines should be reduced without undue hardship to the borrower or without causing a shock which would render the granting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -22- of necessary credits more difficult* It would seem that those interests and enterprises obviously catering to extravagances and luxuries should be considered first* Upon investigation it may develop that industries of this Kind need hot be closed down, no* their labor thrown out of employment* but that they can be gradually diverted to essential lines of production and distribution Existing high prices are creating an added strain on the financial resources of the country and are contributing enormously to the cost of the war. It is probably impossible to effect dhy redubtich in tiie prices o£ necessary materials and commodities or in the compensation of those engaged in producing them, but there are two means and the employment 5 of both will be necessary, of retarding a further advance* One is by curtailing credits which are not necessary and by diverting such portion of these credits as map be needed into productive channels; and the other is to increase the production of the raw materials and manufactured articles which are needed in our military and naval operations and which are essential for the sustenance and necessary comfort of the people* In times like these, high prices and high wages do not always increase production* We see too frequently a disposition to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -23- accept as ample? tho roturns from limited production and from fewer working days to the week* We have now 1,500,000 men on the shell scarred fiolds of Franca, and thoir deods of valor have already thrilled tho allied world. Soon this number will grow to 3,000,000, then to 4,000,000, thus assuring complete and glorious victory and the perpetuation of that heritago of liberty for vthyGh our forefathers fought to give us; and those millions of us who are unable to take our places at tho front; but who must roirain behind to do that work which is necessary to sustain the nation at hocce, and to maintain our fighting heroes in France, should strain every nerve to furnish all that is necessary, in gold, credit, services and goods, and we should not overlook or slur tho fourth Corrarandmont, — that Divine injunction to Moses, wherein wo are directed not merely to rest on tho seventh day, hut are sharply rominded of our presont duty in tho comoand, "Six days shalt thou labor and do all that thou hast to do," The war must ho won by force of arms abroad, supported by greater production, econony and thrift at homo. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

W. P. G. Harding (1918, September 4). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19180905_harding

@misc{wtfs_speech_19180905_harding,
  author = {W. P. G. Harding},
  title = {Speech},
  year = {1918},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19180905_harding},
  note = {Retrieved via When the Fed Speaks corpus}
}