Speech

V3HAT THE FEDERAL FES^VE SYSTEM HAS DONE SDTCE CHE ARIIISTICE TO SUFPOPT AC-PI CULTURE. > Released for Afternoon Pcpars 'T.".:3dnesday, February 28. ADDRESS OF JOH MITCHELL HSIBSE, FEDERAL SSaER^E BQAED WASHINGTON, D.C. ' Before tho NORTHWEST AGRICULTURAL STABILIZATION CONFERENCE St .Paul, Minn, February 27-28,1923. X-3642 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis mm X-36U2 It is a pleasure and privilege to be here today to discuss with you the Faderal Reserve System and its relation to agriculture. Before approaching the particular phase of that subject which has been assigned me, viz.: "V/hat the Federal Reserve System has done to support agriculture since the armistice," I would ask your attention for a few minutes to a brief consideration of the nature of the Federal Reserve System. To many of you, undoubtedly, these facts will be familiar, but my warrant for repeating them is the amazing ig­ norance and misconception of the System which is evident through­ out the country and is disclosed even in debates in Congress. First, the Federal Reserve Act was never intended as a panacea for all economic ills. It was adopted solely for what it was, a banking reform which would put the commercial banking system of the country in a better position to serve the needs, especially the short term credit needs, of agriculture, commerce, and industry. As set forth in the title of the Act, it was designed as, "An Act to provide for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.n In no sense was it planned as a price regulating ma<*>■ jpfl nor was it considered that the System should provide capital to be loaned out for long periods* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - ' X-3&+2 Drafted while the memory of the panics of 1893 and 1907 was still fresh, the framers of the Act sought to prevent the re­ currence of such panics, when banks were unable to realize upon their reserves, and depositors were unable to receive in currency the funds due them. To that end the old system of pyramided re­ serves which had failed repeatedly was abolished and the reserves of all national banks and those of such state banks as chose to enter the System were put on a mors scientific Dasis, and were mobilized in the Federal Reserve San^s. It is these reserve de­ posits, amounting now to about $1,300,000,000. - the reserves of sixty per cent of the bank deposits of the country - that the Federal Reserve Banks are called upon to protect. Right hera , let me call your attention to the fact that the interests of the depositors as well as the interests of the borrowers of a bank are entitled to the fullest protection. Were it not for the depositors , there would be no banks, as we know them, and I think this is a fact that has been toocften overlooked. That the Federal Reserve Act has provided the public with an elastic currency abundantly able to meet all requirements during the most severe crisis in the history of the country has been iv.lly demonstrated. That elasticity is made possible by the operation of section 13 of the Act, whereby member banks in need of funds to make good their reserves may rediscount their eligible notes with the Federal Reserve Bank- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - X-3642 And hare 1st me say that it was never contemplated that any bank should continually lean on the Federal Reserve Bank for support. Rat.ier, it was the purpose that the banks should operate upon tneir own resources, but would find ever ready help at the Federal Reserve Banks in times of seasonal expansion of credit, such as planting or crop-moving time, or tn times of emergency. But the facts are that during the critical years^just passed, many banks were obliged to borrow steadily from the Federal Reserve Bank. While the amount of necessary borrowings in some instances was startling, excessive bor­ rowings today are pretty well liquidated, snowing how it is possible for agri- cultural and live stock districts to grow out of abnormal financial difficulties, when proper time and encouragement are extended. In this respect I say the Federal Reserve Banks have gone the limit. Just a word now as to the organization: \ Tns Federal Reserve System is not a central banking system, nor is it a government bank, - for the government has never invested a cent in the capital of any of t.ie Federal Reserve Banks, nor do government deposits form any con­ siderable proportion of the system's resources wnich are composed chiefly of contributions from member banks in the form qf capital and reserve deposits; ■> nor is it a system whose operations are dictated or controlled by any set of government officials or by a bureau in Washington. Tnere are instead twelve separate Federal Reserve Banlcs, eacn an individual unit, under government super­ vision, but managed by its own board of directors, composed of residents of the district. In the Federal Reserve Act careful provision is made that the Digitidzeidr feorc FtRoArSsE Ro f a Federal Reserve Bank, nine in number, be fully http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - k - X-36U2 representative of all interests of the district. Three of them are appointed by the government through the Federal Reserve Board, and they can have no connection with any other bank. Three others, known as Class A Directors, are elected by the member banks as their representatives, and they are practically always officers of member banks. Three others, known as Class 13 Directors, are also elected by the member bank stockholders, but these directors are representative of the industrial, commercial, and agricultural - the borrowing in­ terests - and can be neither officers nor directors of any bank. Further precaution has been taken to insure that all in­ terests are properly represented, accordingly, the member banks are divided into three groups, according to size, the large banks in one group, those of medium size in another, and the smaller banks" in a third- Each group then elects one Class A and one Class 3 director, thus insuring fair representation. The Federal Reserve Board is a supervisory oody ana defines by regulation what classes of paper may be discounted at the Federal Reserve 1-ank, in accordance with the law- But, the Federal Reserve I3oard cannot compel a Federal Reserve Bank to make any loan which it does not 'care to, nor can it prohibit a Federal Reserve Bank from making any legal loan. The only control it has over the loaning policy of the Federal Reserve Banks is to authorize, and compel if necessary, one Federal Reserve Bank to come to.the assistance of another. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5, - x-3^2 Such authorization has been granted whenever requested, but at no time has it ever been necessary for the Federal Reserve •oard to order one bank to help another, as they have always co­ operated to the fullest extent. In 1920, for instance, the Federal Reserve Lank of Cleveland was lending more funds to the hard-pressed agricultural districts than it was to its own member banks* One other point must be borne in mind: The Federal Reserve 3anks have no dealings with individuals or with private corporations. They receive deposits only from banks and from the government and make loans only to member banks* With this sketchy explanation of the Federal Reserve System let us come to the subject at hand and review briefly the economic conditions since the armistice. STien on November 11, 191S, the armistice was signed by General Foch and by representatives of Germany, the world was emerging from the worst struggle in history. Men and treasure had been destroyed at a fearful rate for more than four years; large stretches of territory had been devastated, and the entire economic machinery of the belligerents had been diverted to the one end of producing war materials. In the United States the situation was similar, but in proportion to our population and resources, much Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 6 - X-3^2- less acute. While four millions of our men were withdrawn from productive activity and were actually taking part in the war or training for it, and while much of our industrial machinery was engaged in satisfying war requirements, nevertheless our fundamental industries - agriculture, iron and steel, coal, textiles, etc - were in a prosperous condition, and, though requiring some readjustment, prepared to continue operations in times of peace. The credit mechanism, ,as well as the industrial plants all over the world, had been diverted from the service of the civil population to the service of the States and their military needs. In this respect also Amsrica, though affected by the same influences, had suffered less than her allies. Currency inflation everywhere \t was great, and in the United States prices were about double their I pre-war level. The years immediately following the armistice, 1919 and 1920, were generally speaking, characterized by continued business activity and credit expansion, which developed into a wo rid-wide post-war boom- Prices were high and rising, production continued at a high rate, and here in the United States prosperity was general-. In Europe the bel­ ligerent countries were endeavoring to reconstruct their economic foundations. Their own resources were exhausted by the long struggle, food supplies were low, raw material stocks were almost all gone, and there was urgent need of imports in order to feed the populations Digitized for FRaAnSdE Rt o resume productive activity. While these countries had little http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 7 - x-36^2 with which to pay for imports, they btill had. large unexhausted war cracLits with the United States Treasury, and they were permitted to utilize these credits tc secure food and raw materials from the United States, Funds supplied directly by the United States Government in 1919 paid for no less than $3,000,000,00C. of our exports to Europe. In adaition European countries were able to borrow large amounts privately from our banks. As a consequence, our exports reached unprecedented heists in 1919 and 192C, the value of exports of agricultural products alone in 1919 being $U,IOC,000,000. and in 1920 $3,^00,000,000. It was not until the spring of ic;20 that the period of post­ war prosperity and speculation began to show signs of a possible turn. 7/ith Government credits exhausted and private credits increasingly hard to obtain, European countries were no longer able to buy our food and raw materials in such large quantities, or to pay such good prices. Prices of all commodities, as well as of agricultural com­ modities reached their peak about June, 1920, and then declined spectacularly. Once the turn had come, the downward movement gathered momentum as speculative booms collapsed and speculative holdings were thrown on the market. All through the rest of 1920 and the first part of 1921 prices continued to decline; only in the latter part of that year did they become relatively stabilized, and not until 1922 did a rise occur. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - X-36^2 Prices of agricultural products, which are peculiarly- sensitive to foreign demand, and, as raw materials generally more quickly responsive to economic changes, dropped lower than those of other commodities. Keaping this situation in mind, let us now see what the Federal Reserve System did to support agriculture. This should be considered from two points: First, to what extent did the Federal Reserve System extend credit; and second, what was the attitude of the Federal Reserve Board, expressed through its regulations and rulings, towards agr i cultural pape r. Accommodation extended by the Federal Reserve Banks to their member banks is measured primarily by the volume of bills discounted for member banks, the direct means by which a member bank in need of funds may obtain accommodation from its Federal Reserve Bank. In this connection I wish to emphasize the fact, referred to before, that Federal ileserve Banks cannot create credit, nor can they make direct loans to individuals or corporations. The assistance of the Federal Reserve Banks is extended to agriculture and industry through the member banks, which must first pass upon the borrower's application for an extension of credit. The member bank is, of course, familiar with the needs of its community, with the reliability and integrity of the oorrower, and the sufficiency of the security which he offers, and will not be disposed to deny credit to a customer who Digitized for FRASER http://fraser.stilosui sefend.toirgt/ led to it, so long as funds are available for the purpose* Federal Reserve Bank of St. Louis - 9 * X-36U2 It is here that the function of the Federal Reserve Lank appears in so far as the extension of credit is concerned, which is to furnish the member bank with needed funds by the discount of eligible paper. This chart tells the story of how the Federal Reserve Lanks came to the aid of agriculture much more clearly than any number of statistical tables. These three curves show the course of prices, the 1913 average price being taken in all instances as 100. The black line representing the price of all commodities shows that in November, 1912, the average price stood at 203, z^ then increased steadily until May, 1920, when it -was almost 2^0, or two and a half times the average 1$13 price. Then followed the sudden drop, as shown by the curve. The blue curve representing live stock prices shows that for part of 1919 they stood slightly above the general average of prices, then broke sharply, recovered slightly, and then in October, 1920, several months after the slump in other prices, declined to about the same level as crop prices, since when they have fluctuated together at a level con­ siderably below that of the prices of other commodities. Prices of crops are shown by the red line, which starts at November, 1913, at a level of 215, somewhat above the average price of all commodities. Then followed a rapid rise until August of 1919. when there was a sharp break, which did not, however, bring the price Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - io - X-36U2 down to the general average. This decline lasted but three months, following vhich came a rapid and continual rise until a peak of 30^ was reached in June, 1920, about a month after the prices of other commodities had started to decline. Then came the almost per­ pendicular decline vhich soon carried them below the level of other commodities, where they have remained ever since. Meanwhile, what was the Federal Reserve System doing? Throughout the war period there had been a rapid increase in the amount of discounted paper held by the Federal Reserve Banks, and on November lp, 191S , four days after the signing of the armistice, the Federal Reserve Banks held under discount for member banks a total of $1,800,000,000. of eligible paper, the largest amount of accommodation extended to member banks by the Federal Reserve System at any one time up to that date. But the post-armistice period saw an even greater extension of credit to member banks by the Federal Reserve System, for there was an almost continuous increase in the amount of discounted paper during the next two years, culminating on November ?, 1920, in the stupendous total of $2,227,000,000., which marks the high point in the history of the Federal Reserve System. That declining prices should ■ultimately result in a lessened re­ quirement for accommodation at the Federal Reserve Banks was only to be expected, but as the chart shows, this reduction did not begin until late in 1920, five months after the break in prices-began. There­ after it ran a practically parallel course with the price decline. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ^ 11 - X-36U2 These "being the facts, how can the statement be justified that the Federal Reserve System, by curtailing credit, "brought about the decline in prices? An analysis of Federal Reserve Bank discounts during this period made for the Joint Commission of Agricultural Inquiry, shows that the decline in the loans of the Federal Reserve Banks began in the industrial and financial sections of the country, and that while liquidation of loans was occurring in the East, loans in the agri­ cultural districts were increasing in volume. Again I say, in the face of these facts, how can the Federal Reserve System be said to be responsible for the decline in agri­ cultural prices? Such an accusation is ridiculous. That the rapid increase in prices which marked the year 1919 and the first half of 1920, and the consequent increase in credit requirements could not go on indefinitely is self-evident, and the fact that the break in prices which came was not. confined to the United States, but was common to practically all of the civilized world, further indicates that its cause is not to be found in the credit or discount rate policy of the Federal Reserve Banks. Inter-Federal Reserve Bank accommodation through the re­ discount or sale of paper discounted for member banks or purchased in the open market, as I have said, is the means provided to enable one of the Federal Reserve Banks to obtain assistance from another in time of need. Rediscount operations were resorted to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis « 12 X-36U2 T on a small scale for the first time late in 1917 and frequently thereafter during the war. It was not until the post-wa» ^ericd of expansion, however, that the ever increasing demands of member banks for accommodation at the Federal Reserve Banks occasioned any misgivings as to the ability of the Federal Re­ serve Syotem to meat any legitimate demand for credit, without having recourse te the provision in the Federal Reserve Act authorizing the Board t® waive the minimum reserve requirements. By the end of 1919, the reserve ratio of the Federal Reserve Syotem - that is the ratio of its gold and lawful money reserves to its combined deposit and Federal Reserve note liabilities - had fallen t« kyji>. Throughout 1920 this ratio ranged between k2 and k^ . During the early post-armistice 0 period the Federal Reserve Banks in the Middle West had an excess of lending power beyond the needs of their districts, and they were able to rediscount paper for other Federal Reserve Banks in nead of assistance. Just before the prices of farm crops began their pre­ cipitous decline, the situation was reversed and the increased demands of merr.ber banks in the Middle West, not only forced the Federal Reserve lanks in the Middle West to withdraw their assistance to other Federal Reserve Banks, but compelled'them tj rediscount substantial amounts of their paper with other Federal Reserve Banks. One point which I wish to stres-. is that the only way in which the Federal Reserve Banks can extend credit is through the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 13 - X-3642 member banks, and in so far as eligible banks refrain from joining the System, just so far is the Federal Baser/3 System nandicapped in its efforts to aid. At the present time there are about 9,900 member banks, of which over 1600 are state banks and trust companies. There are, however, approximately 9500 eligible state banks and trust companies which are not members of the Federal Reservs System. These non-member banks are, of course, chiefly the smaller banks, but it is evident that the number of eligible state banks and trust companies that have remained outside of the Federal Reserve System is nearly equal to the total number of member banks, in­ cluding all national banks. While the Act expressly provides that member banks shall not act as agents for nonmember banks in discounting their paper with the Federal Reserve banks, when need arose the Federal Reserve Board waived tnis provision and authorized the Federal Reserve Banks to rediscount for member banks paper which they had received from non- member banks, in this way extending the aid of the system to practically every bank in the country. * We have now arrived at the point wnere we can consider the attitude of tne Federal Reserve Board as expressed through its regulations ind rulings, towards agricultural paper. When the Federal Reserve Act was encated Congress discriminated in favor of agriculture by permitting the Federal Reserve Bankr., to discount agricultural paper having a maturity up to six months, whereas the longest maturity of all other paper eligible for rediscount with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 13a - X-3342 the Federal Reservj ^anks was fixed at ninety days. Tlyg law provides that the proportion tnat agricultural paper may form of the entire assets of a reservs bank shall b3 fixed by tne Federal Reserve 3oardi and the Board fixed this ratio at 99% and has never reduced it. T.i3 regulations of the Federal Reserve Board defining w.iat may be considered as agricultural paper eligible for discount with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - Ik - x-361+2 ^aturiti&a up tc six months are of necessity soir.c-.vhat technical in language but may be summarized as permitting Federal Reserve Lanks to rediscount for six months any loans which are in the proper form and vdiich are used to finance any one or more of the steps of planting, cultivating, harvesting, or marketing a crop or of breeding, fattening, or marketing live stock> Moreover, one of the normal phases of marketing agricultural products is carrying them for a reasonable time in order to gffect their orderly marketing, rather than dumping large quantities on the markst at one time, ana paper which is used to finance the carrying of a crop pending its orderly marketing may be eligible as agricultural paper. The Federal Reserve Loard has also been partly responsible for a change in existing laws, which has been very helpful to the agriculture interests. Ycu cankers are familiar with Section ^200 of the Revisad Statutes, which contains the limitation on the amount which a national bank may lend to any one person- This limitation is, in general, lOfa of the lending bank's capital and surplus, with certain classes of paper excluded as not being considered loans of money. The Poard fait that the classes of paper excepted from this loan limitation might properly be oroadened in a way that would enaole the farmers and cattle raisers to obtain additional credit from national banks without contravening any principles of sound banking, and it recommended certain amendmentsto Section 52OO of the Revised Statutes to accomplish this purpose. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Following this recommendation, Congress amended Section 5200 by an Act approved October 22, 3.919, so as to permit a national bank to lend to any one borrower in excess of 10$ of its capital and surplus, but not to exceed 2tfo provided that the loans over and t above 10£ are represented by notes, secured by shipping documents, warehouse receipts, or other similar documents covering readily marketable non-perishable staples, including live stock. At the same time, Congress also broadened the class of paper, known as "bills of exchange drawn in good faith against actually existing values", which national banks may discount without limit, so as to include drafts secured by shipping documents conveying or securing title to goods shipped, demand obligations when secured by documents covering commodities in process of shipment, and bankers' acceptances of the kinds described in Section 13 of the Federal Reserve Act. These amendments, by increasing the ptxwer of national banks to extend accommodations on the security of farm products and live stock, have proven of great value to farmers and cattlemen in their financial problems. At this point I would like to say a few words about bankers1 acceptances, which have lately been coming into continually greater use as a desirable form of credit instrument. Bankers' acceptances, as you know, are drafts or bills of exchange drawn on and accepted by a bank or trust company or other banking concern, and the law authorizes Fsiaral Reserve Banks to rediscount bankers' acceptances under .certain conditions. For this purpose, such acceptances mast be indorsed by a member bank, and must be drawn to finance the importation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis or exportation of goods, the domestic shipment of goods, or the storage of readily marketable staples. Acceptances which grow out of the domestic shipment of goods or the storage of readily marketable staples must further be secured at the time of acceptance by shipping documents or -warehouse receipts conveying or securing title to the goods or staples in question. Under existing law all bankers1 acceptances, whether used to finance agricultural or commercial needs, must be limited in maturity to three months in order to be eligible for rediscount. Bankers1 acceptances have no. been used very extensively in connection with the shipment of agricultural products, although the Board recently had occasion to rule that a national bank may accept a draft drawn upon it, if secured by a bill of lading covering a shipment of cattle to a cattle raiser who has purchased them with the intention of fattening and re-selling them, and that such acceptances may be eligible for rediscount. This was a very liberal ruling in permitting the acceptance credit to cover the period required to fatten the cattle and was a distinct advantage to farmers, since the Board has always ruled that acceptances drawn to finance the manufacturing or processing of industrial materials are ineligible. Bankers' acceptances, however, used to finance the storage of agricultural products pending orderly marketing have recently been coming into more general use, both by individual farmers, and more particularly by cooperative marketing associations. Most of the rulings on agricultural credits made since the Digitized for FRASER armistice have been in connection with cooperative marketing associations, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 17 - which have been of 30 much assistance in the orderly marketing of agricultural products and in securing for the farmers a fair return for their labor. The Board recognizes that cooperation in marketing crops under proper management is a step in the right direction that farmers may tale toward improving their credit standing and their general economic condition, and it has gone as far as existing lav/ permits in encouraging the extension of credit to cooperative marketing organizations, A very recent evidence of the Board's desire to provide more ample credit facilities to the agricultural interests, is the amendment to its Regulation B, dated December 19, 1922> which makes eligible for purchase by Federal Reserve Banks in the open market, bankers1 acceptances with maturities up to six months, drawn by farmers or by cooperative marketing associations to finance the orderly . marketing of staple agricultural products, and secured by warehouse receipts covsrirg such products. Such acceptances were formerly • eligible for purchase only with maturities not in excess of three months, and their present eligibility for purchase with longer maturities should prove the means of furnishing much of the additional credit needed in such transactions. The Board recently also issued a number of very liberal rulings designed to secure to farmers operating through cooperative marketing associations the maximum credit facilities possible under present law. These rulings were made from.time to time as questions were Digitized for FRASER submitted from various sections of the country. They involved farm http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - IS - produce differing as widely as fruit from California, wheat from the Middle West, and tobacco and cotton from the South, but the same principles of sound financing were involved in all, and in each case the cooperative association was a non-stock, non-profit corporation, the members of which consisted exclusively of growers of the particular crop which the association was organized to market. The growers agreed to sell and deliver their entire crops to the association, title passing at the time of delivery, and the association assuming absolute control over the commodities and their re-sale. Generally speaking, the commodities were pooled according to grades and after all of a particular pool had been sold the proceeds were distributed pro rata. It should be understood that the Boards rulings on this subject would not necessarily apply to associations operating on a materially different plan: Several kinds of borrowings are involved. If the grower ^3iir3z to do the borrowing himself, he can borrow on his own note, using the note or its proceeds to finance the carrying of his product for such reasonable period as is necessary in order to effect orderly marketing* Such a note constitutes agricultural paper, and may be rediscounted with maturities up to six months. Or he can draw a draft on the cooperative marketing association at the -time he delivers his crop, the association accepting it* He then discounts the draft at his local bank, which, under the Board*s rulings nay rediscount it at a Federal Reserve Bank as agricultural paper with a maturity up to six months, if the grower uses the proceeds for an agricultural purpose. If the association Digitized for FRASER http://friatsesre.sltlofu iswfeids.ohreg/s to borrow money directly from a bank in order to make Federal Reserve Bank of St. Louis X-36'42 - 19 - payments to the growers for produce delivered, its notes are eligible for rediscount, but the Board has held that under existing law such notes are commercial notes, the maturity of which must not exceed ninety days, because the proceeds of such notes are used for the commercial purpose of buying the commodities from the growers. There was considerable discussion over the case where the grower draws his own draft on the association, as to whether the draft should be considered agricultural and have a six months- maturity. The point was made that the grower in all probability would use the money so obtained in paying debts previously incurred, and that unless this could be held to be an agricultural purpose, little agricultural, or six month fc . credit could be obtained in this way. The Federal Reserve Board ruled, however, that when a farmer or grower delivers his crop to a cooperative marketing association actually engaged in orderly marketing and when he is obliged to borrow money for ordinary general purposes, such as the payment of obligations previously incurred in growing or harvesting the same crop, a draft drawn by him on the association may properly be considered as drawn for an agricultural purpose, because it puts him in funds so that he can carry his crop pending its orderly marketing. As I said before, the carrying of agricultural products for such periods as are reasonably necessary in order to accomplish orderly marketing is a legitimate and necessary step incident to normal distribution and constitutes an agricultural purpose. The Board pointed out, however, that there is a distinction Digitized for FRASER between carrying products for such periods as are reasonably necessary http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • 20 - X-36U2 and mere speculative withholding from the market in the hope of obtaining higher prices. Under the Federal Reserve Act paper drawn to finance speculation is ineligible for rediscount. Another very liberal ruling which has been of material aid to cooperative marketing associations is the ruling that bankers' acceptances drawn to finance the domestic storage of commodities pending orderly marketing by such associations are eligible for rediscount* The association arranges with some national or state bank to accept drafts secured by warehouse receipts, and, after acceptance, such drafts are eligible ft>r rediscount by Federal Reserve Banks with three months maturity. Under the new amendment to the Board1 s regulation they may also be purchased in the open market with maturities up to six months* One of the most recent, and also one of the most liberal, rulings of the Board on this subject was to the effect that where a member of a cooperative marketing association delivers his crop to the association and at substantially the same time draws a draft on the association, which is accepted by it and discounted by the drawer at his own bank, the draft is a "bill of exchange drawn in good faith against actually existing values". By virtue of this ruling, such a draft is not subject to the IO7S limitation prescribed in the Federal Reserve Act on the aggregate amount of paper of any one borrower which a Federal Reserve Bank may rediscount for any one member bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • 21 - X-36U2. These are probably the most important rulings ' made by the Federal Reserve Board on this subject, but, of course, there are other classes of eligible paper that can be used in borrowing by cooperative marketing associations. The point I wish to emphasize is the past and present willingness of the Board to assist the cooperative marketing movement in every appropriate way* I have shown how the Board is limited by the terms of the law in ruling upon the eligibility of paper for rediscount and how it has gone as far as it could under the terms of existing law in foster­ ing the need of agriculture for broader credit facilities* Under these circumstances, only Congress has power to provide additional credit facilities to agriculture by liberalizing the provisions of existing law, or by creating new credit machinery* The post-war period of expansion and inflation, followed quickly by the inevitable deflation, with its particularly harmful effect on the agricultural "interests, mad'e it evident that the existing credit machinery of the country was inadequate to care for the needs of the farmers. The Federal Reserve System can properly supply only short term credits, because the assets of Federal Reserve Banks furnish the basis for a large part of the country*s currency, and they must be kept liquid. The Federal Farm Loan System, on the other hand, provides long term credits, but there is an obvious need for some machinery to provide what may be called intermediate credits Digitized for FRASER http://fraser.stlouisfed.org/ of from six months to three years* Federal Reserve Bank of St. Louis - 22 - X-36U2 Among the many Mils introduced in Congress designed to extend additional credit facilities to the agricultural interests, perhaps the most important are the bills recently introduced by Senator Capper and Senator Lenroct» These bills have been passed by the Senate and are now being considered by the House, and unless some­ thing unforseen develops, it seems probable that a bill embodying :the best features of each, will become law during the present session of Congress. You are, no doubt, familiar in a general way with the provision of these bills, so that I need not discuss tham at length, even if time permitted, but I wish to point out how the Federal Reserve Board has supported the agricultural interests by recommending the enactment of such a bill, and by recommending also the passage of other legislation which would provide still further credit facilities to the farmers. As frequently happens with regard to legislation affecting banking and credits, the Board was requested to consider and comment on the so-called Capper and Lenroot bills. In response to this request, the Board on December 21, 1922, addressed a letter to the Chairman of the Senate Banking and Currency Committee, expressing its approval of the general purpose of both bills and making detailed comments on certain provisions in them. Except for expressing its general approval of the purpose, the Board refrained from commenting on those portions of the bills, which contain provisions creating new machinery to supply agricultural credits of an intermediate type, running from six months to three years, because such matters were not properly within the Digitized for FRASER h B ttp o : a //f r ra d se1s r.s tl j ou u is r f i ed s . d or i g c / tion* The Board confined itself rather to the Federal Reserve Bank of St. Louis - 23 - X-3b^2 provisions of the bills which amended the Federal Reserve Act or direct?i.y affect 3d the operations of the Federal Reserve System, and offered a few constructive suggestions designed to safeguard the elasticity and soundness of 'che currency issued through the federal Reserve Banks, and also to make the proposed amendments more liberal and effective. In that letter the Board recommended that the maturity of a certain type of farmers paper eligible for rediscount at the Federal Reserve Banks he extended from six months to nine months. It further recommended that certain paper of cooperative marketing associations be expressly declared tc be agricultural paper, and thus eligible for rediscount with maturities up to nine months. Under the present law some of this must be classed as commercial paper eligible for discount only with maturities up to three months, and some of it must be classed as finance paper and not eligible at all for discount. The Board also recommended that bankers' acceptances, drawn for agricultural purposes and properly secured be made eligible for rediscount with maturities up to six months. Such acceptances are now eligible for rediscount only with three months maturity, but the Board endorsed this amendment to the law, as being in line with the recent amendment to its Regulation B, which I have already discussed and which makes such acceptances eligible for purchase in the open market with six months maturity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Both tha Capper and Lenroot bills proposed to amend the Federal Reserve Act by lowering the amount of capital which banks are now required to have as a condition to becoming member banks. These amendments are designed to attract more banks to membership in the Feaeral Reserve System, and thus make the resources of the System more widely available, and the lioard express 3d its approval of them. In addition to these recommendations the Board suggested and urged that sight- or demand drafts drawn to finance the domestic shipment of non-perishable, readily marketable, agricultural staples, be made eligible for rediscount or purchase by the Federal Riserve Banks, vh.3n properly secured. Under existing law such drafts are ineligible for rediscount at Federal Reserve Banks because they have no definite maturity. Such drafts are largely used in financing the movement of crops and I believe the passage of the amendment will be of much assistance to agriculture* I wish to emphasize that in this statement of the attitude of the Federal Reserve Board towards pending rural credits legislation, I have been substantially quoting from a letter which the Board wrote to Congress in response to a request for an expression of the Board's views on this legislation. This letter, then, is an official statement of how the ~ourd regards the pending legislation designed to improve the credit standing and economic position of the farming interests, and I think you will agree with me that the Federal Reserve Board has shown itself to be ready and willing to place the vast resources of the Federal Reserve System at the service of agriculture, so far as is consistent with the principles of souna banking, which I do not believe the farmer himself Digitized for FRASER http:/w/froasuelrd.s tlocuaisrfeed .otrog / see violated. Federal Reserve Bank of St. Louis I have outlined what the Federal Reserve System has J.?nG to support agriculture and live stock interests during recent years. What follows is ray personal observation of what might t>j done to assist agriculture* Before this consideration, however, I want to dwell "briefly upon the great benefits that havo "been derived not only in the Northwestern states hut throughout all agricultural and live stock sections from the operations of the War Fin?.nce Cor­ poration. A more helpful, constructive piece of work has never he en accomplished "by any governmental organization. Every assistance possible was rendered by the Federal Reserve Banks in facilitating the corporation's operations. The plight of the farmer today is not due, in my opinion, to a lack of credit facilities* The causes are more fundamental. Mention has been made of how the short term credit needs of agriculture are provided for by the commercial banks and the Federal Reserve System, and of how the pending rural credit legis­ lation is designed to satisfy the need for intermediate credit. In this connection it is interesting to note that the estimated borrowings at banks of the 6,448,000 farmers on personal loans, secured and unsecured, amount to approximately $3,870,000,000, or an average borrowing per farmer of $600.. It has been stated that one of the difficulties confronting the farmer is that he is paying too high a rate of interest. Even if true, and if a reduction of 4 percent could be made, it would mean a saving of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -25- only 024, per year to the averaga farmer, and I submit that there is morethan a ^24. diffaranco batwoon success and failure with the average firmer. Consequently, a lower interest rate, although par­ ticularly to "be desired, would not help the farmer out of his difficulties to any appractabla degree. It can be stated that the organization of the proposed intermediate agricultural credit asso­ ciations would "without dcubt provide tho farmer with a lower rate of interest than he is now paying and be greatly beneficial in this respect. But they would not by any means be a panacea for all of his troubles. There remains the question of how the government has provided for the long torm credit needs of agriculture. The Federal Farm Loan Act has made it possible for the farmer to borrow a liberal percentage of tho value of his farm at more favorable torms and for a longer period than any other line of business enjoys. The reason for this is the fact that the income of securities issued by the Federal Farm Loan System is exempted from all taxation of every kind and description. The total amount of farm loans outstanding December 31, 1922, made under the Federal Farm Loan System, was approximately $860,000,000. During 1922 alone total loans made by the System amounted to approximately $363,000,000. It is estimated that the total mortgage indebtedness of the farmer is about $7,800,000,000 so it would seem that within a few years a large pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis portion of the formers mortgag3 indebtedness will bo in the Federal Farm Loan System. To Sim up, it is ay personal opinion that the credit facilities of this grant country yre abundontly sufficient to mo at all legitimate demands of agriculture, comnercj and industry, if properly used* A groat amount of stress has be n laid on tin importance of the organiz?.tion of cc-operative marketing associations for the purpose of "bringing about n. orderly marketing' and distribu­ tion cf agricultural products. The Federal Eeserve Board is in full accord with thi3 plan of co-operation among the farmers, and appreciates the benefits derivod by thj grower when the co-operative r.iarketing association has bean properly administered. The success of this plan, of course, depends entirely upon how the association is managed. In many cases most satisfactory results have been accomplished, while dismal failures have been experienced in others. Hiilj the extension of this movement may bring great relief to the farmer, it cannot solve all of his difficulties. There still remains the question: "What will bring about the restoration of the former and put him back on his feet?" Before making any suggestion along this line I tvant, if possible, to clear up some mistaken ideas ivhich the farmer Digitized for FRASER http://frhasaesr .stalobuoisfuetd .owrgh/ at has happened to him, since the signing of the Federal Reserve Bank of St. Louis , 2 8- X-36^2 armistice. In the first place, while the farmer has had many things hacpen to him for which he was unprepared, his business was by no means the only business that was adversely affected. Tnere is not a business of any kind or description that was not « adversely affected just as was that of the farmer. Many bank failures have occurred, raany re-organizations of industrial enterprises have be2n necessary, and eductions in inventories of jobbers and retailers at one time threatened to put nearly all of them out of business. But, fortunately, for the facmer, as well as for all other individuals, a recovery has been made and the country industrially and commercially is gradually getting back on its feet. That the farmer has not recovered to the extent tnat it is most necessary he should, is well kmcwn and for that recovery we all here today are trying to work out a solution. It is the easiest thing in the world for silver-tongued orators to offer destructive criticism, but what we want is constructive criticism. We want to know v«hat to do and how to do it. I T^e farmer has been told that the Federal Reserve System set about t'G3 deli1>%rate inflation of the currency of 1918 and 1919, and in the spring of 1920 commenced a ruthless Digitized for FRASER http://fraser.stlouisfed.org/ deflation. Federal Reserve Bank of St. Louis *29~ I want to say something right here, and I hope you vrill take it back home with you, and get your own people to thinking right about the Federal Reserve System. What I want to say is this: The Federal Reserve System, including the Federal Reserve Banks and Federal Reserve Board had no more to do with the cause of the inflation of the cur­ rency or the deflation in the prices of agricultural products than you had. The reason for the inflation in the currency of the country and also in prices of all commodities and wages was that we were engaged in war. Inflation always has been and always will be the natural resultant of war. Is it not possible for the people of this country to realize that the Federal Reserve System enabled our side in the great conflict to come out vistorious? Had it Digitized for FRnAoSEtR been for our monetary system, the establishment of which http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 30 - X-3642 borders on providentiality, I venture to say that today ad for acany years to come we would still be settling our reparations contracts or bills to Gsrmany. But to return to the situation of tne farmer. Waen he goes to market, he finds tnat the purchasing power of his dollar is only about 68 per cent of what it was before the war. In other words, since 1S20, there has been a gradual increase in tha costs w^iich t^e farmer must pay in manuf ac turans, wages, freight rates and taxes, while everything the farmer produces is sold on about the same scale of prices prevailing in pre-war times, with the exception of wool, cotton, and flax. The inevitable law of supply and demand has gotten in its work. The reason for no appreciable increase in prices of agricul­ tural products is that there has been an over-production, as compared with the amounts which Europe can purchase. As is well known, the price at which the exportable surplus is sold fixes the price for the whole crop, and Europe makes her purchases where prices are the cheapest. If our farmers persist in raising more wheat than is consumed in this country, the only price that tney can expect to receive is the Liverpool price less tne cnarges for laying our wneat down in Liverpool. This is because the wneat grower in this country is in competition with the wheat growers in Canada, the Digitized for FRASER http://fraser.stAlourisgfeedn.otrign/ e, Australia, and India, in which countries everything Federal Reserve Bank of St. Louis -31- tc bo considarsd in tha opsraticn is much Itnor than in this country, including prica of land, labcr and taxes* Hew can an .American farmer compata in tha world markets in the growing of whaat undar these conditions? Ha has compatad in the past, "but in thoss succ3S3ful yaars h9 was abl3 tc buy his lifa njcassitias for about on„-half cf what ha is now paying and all cf his farm costs were low. Thoro is absolutely nothing in sight that indicates any lowaring in tha cost of lining or lowsr prices for what the farmer has to buy. Evory industry practically is running on a normal basis. Tha building trades ara co:aa?jading tha highest v;ag,s aver paid* Vhon it takes more than tha entire proceeds of two big acres cf wheat yielding the average return in the Ninth Federal Reservo District to pay a singl3 days wage of a plasterer in the 2ast, something is radically wrong and should be corrected. It is estimated that the building program for 1S23 totals approximately $5,000,000,000. Prosperity appears to bj'the out­ standing feature in -vary line of business but agriculture. Is it possible to have a return cf normal industrial activity without a restoration of the purchasing powar of the f armor? Ily ans'.var would bs no, but we seem to hava til it r o turn right nov:, in soma so ct ions Digitized for FRASER cf the United States, but the quastion is, how long will it last? http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 32 - X-3642 There would seem to be two ways by which the farmer can work himself into a position where it is possible for him to show a profit at the end of eacn year out of his operations. First: Curtail the production of all agricultural commodities that are exported in competition witn products produced in foreign countries to such an extent that our farmers would be producing slightly less than our domestic consumption. This would mean for example that tne production of wneat would have to be reduced to around 6CO,CCC,000 bushels, and the price the consumer would have to pay would be the Canadian price plus the tariff and cost of transportation. This would mean that today the farmer would receive around $1.65 for his wheat. Such curtailment would not necessarily mean a decrease in productive activity but would entail a re-arrangement of the farmer's operations all aloni the line. It would mean, in other words, a better balancing and diversification of crops. It is aost necessary that every farmer produce practically everytning he eats and nave farm products to exchange for tnose necessities he cannot raise. Digitized for FRASER http://fraser.stlouisfed.orgT/ here is no reason why the farmers should not raise Federal Reserve Bank of St. Louis -33- raore flax than is now being raised in this country. A fair aver?-ge of the annual ?.mount of flax inported into this country from 1914 to 1922, inclusive, wouli ho approximately 12,000,000 "bushels. The f armors could well increase their production of flax — say ten million "bushels — or employ one million acres without aff acting the price they are now receiving which is the Argentine price plus th3 cost of transportation and t*~e tariff. Would that the producers of wheat were in tha fortunate positionthat the flax grower is ! Let me ask you the question: Would the United States Steel Corporation manufacture a surplus ovar donustic demnnds if the price at which the surplus had to "be sold fixed a price for the entire product that was less than the cost of production? Tha answjr is: Most certainly No. But the whest growers of the country are in a comparable situation today. There can be no sound argument why the farmers of this country should raise wheat and sell it at a lowar price than it costs to produce the wheat. If wo only grew as much whaat as our domestic consumption requires, there would not be any suffering abroad. It is claimed that Canada has potential wheat producing possibilities sufficient to supply the requirements of the world. It should be an easy matter if such is tho case for Canada to increase hjr production 200 million bushels, if necessary. In addition to Canada's potentialities, it is certain that Eussia will sooner or later again be a competitor in the raising of wheat. Digitized for FRASER http://fraser.sTtlhoeui sfesde.ocrog/n d method would be to seaure a reduction Federal Reserve Bank of St. Louis -34- in the prices of all commodities the farmer is obliged to purchase. But such a reduction does not seem to be in prospect, ncr is it clear how any action "by any agricultural group could "bring it about? This can be accomplished only by a reduction in wages which can bsst be obtained by a liberalization of our immigration laws, and a modification of our tariff laws. The conclusion would then seem to be forced upon us that to work cut their salvation the farmers must approach their problems as a business problem and solve it along business lines, must organize to gain all the advantages that lie in co-operative marketing associations, but above all, seek to plan their production with relation to the demand* It is just as important that the business of farming be conducted along sound, business lines as any other business* It is folly and a sheer waste of time even to try to change economic laws by legislative action* The successful man, in any kind of business, achieves his success not by opposing economic laws but by adapting his operations to them. That the future of agriculture is bright seems to mecertain. It is estimated that in ten years our population will have in­ creased to such an extent that our present wheat production which is said to have reached practicably our full producing capacity will be entirely consumed by domestic consumption. This is no sound farmer in the Digitized for FaRrAgSuEmRe nt for letting nature take its.course.What will become of the./ http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 35 - X-36*2 meantime? 3 If a plan can be worked out tnat will provide for tne farmer during this interval'it will, in my judgment, solve for all time to come tne problem now confronting us. As for the future, it appears to me that it is only necessary for one to take his pencil and paper and do a little figuring. In all probability our population will increase at an average rate of one and one-naif millions during the next ten years. Uhe average consumption of wheat, per person, in this country, is approximately 6 bushels, which means an increased annual consumption of 9 mil­ lion bushels, amounting, in 10 years, to an increase of 90 million bushels per annum. In addition to this increased consumption of wheat, there will, of course, be an increased consumption of all other agricultural products. The question naturally arises what agricultural sections will take care of this increased consumption? I do not believe any one would say tnat New England can expand to any extent agriculturally, neither can tne Middle States. The only sections left are tne Soutn and West. The section that has t*.e brightest future, agriculturally, is, in my judgment, this great Northwest. Its business is that of providing necessities for a rapidly increasing public which must be fed, and a public accustomed to the highest standard of living. I am sure that agriculture will ultimately recover, but this recovery can best be acceletated by the fullest cooperation between all the forces at work, the United States Department of Digitized for FRASER Agriculture, tne Agricultural Colleges, such organizations as the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

John R. Mitchell (1923, February 26). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19230227_mitchell

@misc{wtfs_speech_19230227_mitchell,
  author = {John R. Mitchell},
  title = {Speech},
  year = {1923},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19230227_mitchell},
  note = {Retrieved via When the Fed Speaks corpus}
}