Speech

FJj. F COPY - LIBRARY TREASURY DEPARTMENT Release NOON, January 23, 1920, THE PROBLEMS OF THE UNITED STATES AS A CREDITOR Bv Hon. W. G. P. Harding, Governor of -/<, ' the Feeeral Reserve Board. \\ Delivered before the Second Pan-American Financial C o n f e r ^ £^ Friday Morning, January 23, in the Pan American Union Building, A new country engaged primarily in the processes of internal de- velopment is essentially self-centered. During the period of development attractive opportunities are constantly afforded for investment at home. The requirements for construction and industry are greater than can be met with domestic capital; hence it has been the custom in all the countries on the western hemisphere to seek loans in and to feell securities to the older countries on the other side bf the Atlantic, *bus everywhere in North and South A ica we see evidences in the great systems of transpor- m0r tation, in mining developments, irrigation projects, and in the larger in- dustrial plants, of the effective use of the foreign capital which has been attracted to our continents* We in the United States, while accustomed to maintain a favorable trade balance through a moderate excess of exports over imports, had come to look upon European, capital as a natural and necessary factor in our de- velopment and to accept with complacency the fact that we were a debtor and not a creditor nation. Being absorbed primarily in our own affairs we were satisfied with a minor position in financing the commerce of the world. Yfcile we had, of course, extensive trade relations with all civilized countries, we undertook to finance nnly a comparatively small part of our exporting and importing transactions, leaving the greater part of it to European bankers and acceptance houses, Consequently, most of our trade with our sister republics to the south was financed by means of credits opened in London and other Old World centers. Our participation in foreign financing was confined principally to dealings in short bills and our fixed investments, represented by holdings in securities of foreign governments and municipalities and by stocks and bonds of foreign industries, were com- paratively small; in fact., we had bt*c6me so dependent upon foreign capital that, up to a few years ago it was the custom to finance our growing crops f means of finance bills dtawn in anticipation of seasonal exports of ag- ricultural staples in the fail of the yeals i 1 The financial depeftdentje upon Elii-ope which existed in the tin tee States obtained, perhaps in a greater proportionate degree, in South -Atoerioar^ oountries, and for this reason tile outbreak of the world war in August 1914 caused a jar which shook the American continents from Alaska to Tierra del Fuego, • •>... i... 1 When' the First Fan Financial Conference was held in Washington Qarly i the year 1915 there was a full discussion of the problems with n which all of our countries in the New World were confronted as a result of the war then raging. The financial authorities and representatives of all •American nations were obliged to consider means, not only of carrying on their usual activities without the accustomed aid from Europe in the shape loans and investments, but also of repayrparvt of maturing loans and of Providing a market for their domestic securities which were being offered *or sale in ever increasing volume by the nationals of the belligerent » countries. The difficulties seemed almost insurmountable, yet they we re overcome, and today the Old World looks with appealing eyes to the New World Odt)i) as its source of supply for those things 'essential to its rehabilitation, and. not only for the material things themselves, but in large part for the credits with which to obtain them. Five years ago the United States stood as a debtor on the world's balance sheet to the extent of1 perhaps five billions of dollars, part of Which was represented by loans of short maturities and the greater part V American securities held abroad. As the war progressed exports of food- stuffs and other raw materials and of munitions increased enormously and were paid for by the importation of more than one billion dollars of gold, by the sale of from thred to four billion dollars of American securities and of perhaps one billion dollars of obligations of European governments and municipalities. Early in the jear 191? it became evident that the United States was no longer a debtor nation, hut was a creditor nation to the extent of perhaps two billions of dollars. Since the entrance of our country into the war, in April 1917, approximately ten billions of dollars have been advanced by the Government of the United States to the foreign nations associated with us in the war, and commercial credits also have been increased so that today our country is a creditor to the rest cf the world in the amount of perhaps fourteen billions of dollars. In addition we have been obliged, because of our active participation in the war, to provide for the equipment and maiate nance of our military and naval establishments about fifteen billions of dollars* our total national debt, as represented by outstanding obligations of the Government, has increased from about one billion dollars in 1914 to approximately twenty-five billion dollars today. At the same time the an- nual expenditures of our Government, which up to the time of your first meeting here had seldom exceeded twelve hundred million dollars, have in- creased four fold. These expenditures, which include interest on the na- tional debt and the sinking fund for its retirement, are provided for by moans of taxation, which is naturally very much higher than it was under pre- war conditions, The income of our Government arising out of interest pay- ments on its loans to other nations is as yet negligible for the reason that an extension in the tine for the payment of interest has been given countries which were affected most adversely by reason of the war* Exchanges on most of the nations which were involved in the war, such as Great Britain, Franco, Italy, Belgium, Gernuny and Austria, and of the new nations which have sprung up since the signing of the armistice, such as Poland and Cz echo -Slovakia are far below their normal parity, so that the United States in assuming its new role as a creditor nation must contend with abnormal conditions and is faced with problems which were un- blown to the old creditor nations of ante-bellum days. Our exports have increased as well as the spread between our export and imports (our net balance for the year 1919 was about four billions of dollars) yet because of the exhaustion of capital and the greatly reduced supply of gold in the Old World our gold imports during the year amounted to $76,500,000 while our exports of gold amounted to $368,100,000, making net gold exports for 1919 of $291,600,000. These figures are, however, ex- clusive of $173,400,000 of gold received from Germany for foodstuffs sold t the German government. This gold, less about $42,000,000 which has been sold and released to foreign interests, is held at present in London await* ing shipment to this country or disposition abroad. Counting the gold held in London, our net loss of gold during 1919 was about $160,300,000, Costs of production in this country have greatly increased and so have costs of domestic transportation, and essentials of every kind have advanced in like proportion. For these reasons as well as because of the larger requirements of the Government much larger sums than usual are re- tired in our domestic transactions, and therefore in meeting foreign demands '*or credit we are confronted with a problem of the first magnitude. 3?he Secretary of the Treasury has asked the Congress for authority to advance about one hundred and fifty millions Of dollars for purely humani- tarian reasons in order to prevent actual starvation in certain localities, tut with this exception there appears to be no probability that further credits will be established by the Government of the United States- It is evident therefore that wo must depend upon private enterprise and capital to provide the credits which will be needed for the rehabilitation of Europe and for the maintenance of our export trade. It is highly import an- that all long credits which may be granted be kept out of the commercial tanks whose policy should bo to maintain themselves in a liquid condition. We must therefore look to the investment market, at least until conditions beeone more normal to supply the credits needede 9 Because of the groat demand upon capital in this country wo must not lose sight of the necessity for restricting our foreign credits to es- sential purposes. It is not to be ejected, for the present at least, that loans and investments abroad will be made because of attractive rates of interest or favorable prospects for profit; they will be made primarily in the hope of restoring more normal conditions in the war stricken countries by enabling their populations to get back to productive work and with the incentive also cf opening foreign markets for those commodities of which v,e — 6- Produce an exportable surplus. We cannot, however, export things which we do not have, and in order to provide an exportable surplus we must produce more or, failing that, consume less. During the past year we have witnessed an unpreceden- ted era of oxtravagance in this country; there has been a continuous rise prices, and while the value of our products expressed in dollars has tQQn greater than ever before in our history the physical volume of gcods Produced was less than the production of any year since 1916. Our domestic demand has been competing with export demands, and the result has been that prices have been bid up on both the foreign and domestic consumers. During the war the popular response to theappealS for, conservation saving was magnificent. The reaction, however, has been corresponding- ly violent, and our poople must bo aroused to the consciousness that after we may have been living since the close of the war in a fool's para- ge a. that more work, economy, and liberal investment in foreign se- an curities are necessary if we wish to make our present apparent prosperity real and permanent. We should realize that the world is still suffering from the effects of the war and we should not ignore the continued neces- sity for conservation. There should be a less lavish but more efficient Use of oapital and credit, extravagance should be discouraged, and the Volume of essential commodities increased. It is important that the world should got back to work, and in order to provide steady employment for the People of our own country even, it is necessary that there should be a sus tained demand for the products of our fields and forests, mines and fac- tories, and in order to maintain this steady demand it is necessary to provide markets abroad for our surplus production. In order for the - 7- populations of European countries to get back to work and to produce the things necessary for their own support and for exchange with other nations, thus restoring tranquility to a war-torn world, it is neces- sary that we should send them the raw materials, commodities and equip- ment which they need so urgently. With every appeal to aid Europe at- tention should he called to the necessity for a greater restriction of domestic consumption 'in order that we may he assured of an adequate ex- portable surplus• In recent months such restriction in our consumption as has been affected has come through competition and constant advances of prices, Had shipments abroad been accompanied by corresponding voluntary curtailment of consumption at hone* prices Would not have been forced"up so high, and from the resulting savings there would have been accumulated a capital fund available directly or indirectly for the pur- chase of whatever Europe may have had to sell in order to finance ner imports, In meeting the responsibilities to the world which circumstances have imposed upon the people of the United States we mast rely upon all agencies which can be utilized. During the past few years our inter- national bankers have been studying the problems of world finance from a new angle; they have extended their facilities and are engaging in trans- actions which they did not undertake a few years ago. New banking cor- porations have been organized which have established throughout branches the world so that today there is hardly an important commercial center in a civilized country which has not one or more American banks. Our larger manufacturers and export houses are constantly extending their connections abroad, and a study of /foreign trade figures for the year 1919 will — 8— afford convincing'evidence that they must have extended credits on a large scale. They cannot, however, continue to extend credits indefinitely without ^<iue use of their credit with American banks, and in order to extend long credits, which will be essential for a time in order to restore Europe to a normal basis, appeal mast be made to American investors. We have a new law on our statute books known as the "Edge Act", which Provides for the incorporation of associations under Federal charters and un- Government supervision, to engage in international and foreign banking and in such other financial operations as may be necessary to promote the export of goods from the United States. Through these associations an opportunity is afforded to all exporters, producers, and manufacturers, to cooperate in ex- tending their connections abroad, and these corporations are permitted to invep in foreign securities of various kinds and to offer their own obligations spe- cifically secured by their foreign collateral to American investors. Our na- tional banks are permitted to subscribe to the capital stock of these corpo- rations to the extent of five per cent, of their capital and surplus, but the greater part of the stock mast necessarily be taken by exporters and by the Producers of goods for export. Exporters and producers, of course, cennot bear the/b^en, but it seems proper that they should provide the greater part of the capital which bears the primary risk because they are the ones who make the greatest profits out of the transactions. It is expected that corporations organized onder the Edge Act will make loans to business men in Europe, and take their obligations in the usual form. It may be that they will require the guarantee of European governments and of municipalities -and that the beneficiaries on the other side will be required to provide a fair cash margin. For exarrple, if $100,000 of goods were to be exported, it is probable that a corporation organized under the Edge Act would not loan the whole amount but would ad- vance perhaps $80,000, leaving the European importer to provide $20,000 from other sources; or, if the entire amount should be advanced, a reasonable margin of undoubted security would be required. Then when the American corporation offers its own obligations to home investors they would have a margin of safety, first in the capital of the corporation, and second in the margin provided by the European importers on each shipment of goods, and would in addition be protected by the general assets of the European borrower. They may also be protected by the guarantees of European govern- ments or .municipalities. The loans abroad should be made on terms sufficiently long as to enable repayment to be made out of credits growing out of European exports. •Because of adverse exchange rates finance bills maturing before the produc- tive capacity of European countries has been restored cJamnot be effective. A twelve months credit to a French merchant calling for repayment at maturity in dollars would involve heavy loss to the borrower unless he were able to provide himself with funds in this country by means of the export to America or elsewhere of some commodity produced in France. It is evident therefore that credits must be sufficiently long to enable borrowers to repay them out of the proceeds of goods produced in and e^orted from the borrowing country. Thus our credits should be granted, not with the idea of having them take the form of finance bills subject to indefinite renewals, but for the real advantage of the European people as well as for our own good * "Hi We the normal basis of commerce should be resumed as quickly as possible, should work towards an exchange of goods for goods and not for a continua- - . 1 0" ) Won of forced trading based upon an unlimited and indefinite system of credit. European nationals can produce many things which we either do net Produce at all, or cannot produce as cheaply as they can, or it may be that they can produce things needed in South American countries or in the - Far East, and as American importers have constant dealings with South American and Oriental countries it follows that European credits available ) in China and Japan, Argentina, Chile, Brazil, and other Latin American na- 0 Wons will he just as effective in liquidating European obligations in the United States as direot European credits in New-York would be. The basis of world commerce is an exchange of goods, and in normal tlw», an actual transfer of gold from one country to another is infrequent and always an -uneconomic transaction* ft I„ their part in the extension of credit for rehabilitating 40ing Europe the investors, bankers and exporters of the United States look with confidence to the cooperation and moral support of our friends in the Central South American countries. Your financial and industrial relations with ^ Europe have been close and will necessarily continue so. commerce with . Your us and our trade with you has been growing steadily, our dealings with each \ Other have become more intimte, and our alliances and synpathies during the war have served to cement our relationships more closely than ever. Tte articifial waterway three or four hundred feet wide, known as the Panam* Canal, which may appear to have severed the physical connection between the two continents, has united their oceans, and has tied them together more closely than ever by shortening transportation routes and facilitating travel and commeroe between them. May the ties of friendship between the two conti- nents, which are now so close, continue forever and may the countries of North America, Central America, and South Africa - Fan-Wica, the »ew World - work together in the restoration of the Old World and cooperate al- ways in their own development.

W. P. G. Harding (1920, January 22). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19200123_harding

@misc{wtfs_speech_19200123_harding,
  author = {W. P. G. Harding},
  title = {Speech},
  year = {1920},
  month = {Jan},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19200123_harding},
  note = {Retrieved via When the Fed Speaks corpus}
}