Speech

l i b b a hy THE FEDERAL RESERVE SYSTEM AND THE FARMER Address of Chester C. Davis, Member, Board of Governors of the Federal Reserve System, at annual meeting of American Farm Bureau Federation, Pasadena, California. Thursday evening, December 10, 1936 15?/ » OCWfb Q THE FEDERAL RESERVE SYSTEM AND THE FARMER Perhaps it would seem more natural for me, in this setting, to talk to you as I did a year ago in Chicago, about the principles of direct agricultural policy. I confess it is much easier for me to think in the old terms than it is to deal with the words and ideas of the new field to which I transferred last June. My old friends, with whom for years I have had the privilege of working, have helped keep me in the old grooves. Nine out of ten want to talk about the prob- lems of balanced production and marketing, of soil conservation - in short, about the A.A.A. - instead of the problems of credit and mone- tary control and management. I now realize that when I left the A.A.A., I felt I was sailing from a storm-tossed sea into a comparatively smooth and protected har- bor* Now that I have had a chance at least to survey the new scene, 1 am not so sure. Some day, when the neiv landscape becomes more famil- iar, I may wonder why I didn't conclude, in the words of Hamlet, rather "bear those ills we have, than fly to others that we know not of". Occasionally I meet a friend who asks, "What are you doing now?" 1 tell him I am connected with the Federal Reserve System. Usually he responds with a blank look, and that part of the conversation ends lamely with his asking, "Well, how do you like being a banker?" It isn't strange that the Federal Reserve System is a thing of mys- tery. We live in a complex world. V«"e haven't much time to spend in study of subject not plainly seen as a part of our daily life and a -II- interest. And while a thing remains a mystery, it is easy for it to become an object of some suspicion - especially when a persuasive voice tells us we ought to be suspicious. That suggests one of the reasons why it is, for me, a real privi- lege to be here tonight. It jives me the opportunity to tell leaders agricultural thought something about the Federal Reserve - perhaps to dissolve some of the mysteries. The other and more important reason is this - farmers have been thinking seriously and constructively about how money and credit may be managed to achieve a greater degree of sta- bility in economic progress. They have expressed their conclusions and ^commendations through the voice of organized agriculture. It is not idle flattery when I express my personal belief that or- ganized agriculture has shown a breadth of vision and awareness of the complexity and difficulty of our national problems not matched in other general groups. It has helped educate the country as to the close inter dependence of all segments. It has shown concern for the general wel- fare as well as for its own. It has expressed its attitude through lead ership that has in the main been alert and open-minded. I express my c°nviction, without over-statement, that the salvation of this country as we know it, of its democratic institutions, of the traditions we cher and wish to preserve, depends on that kind of leadership. Tonight I want to tell you something of the Federal Reserve System its organizationj to state the broad objective which I conceive to be the concern and responsibility of this agency, along with others -4- inside and outside the government; to sketch some of the problems that need to be solved as we move toward that objective; and to survey the means and the authorities the law has provided to help cope with those Problems. In this I am speaking for myself alone and not for my associates. Nevertheless, I am sure that they all share my view that the Reserve Sys- tem needs today as never before to make clear to the leaders of agricul- ture, business and banking what it seeks to do, why it seeks to do it, what authorities it has and what it has not. Conversely, it needs to know the thought of leaders of agriculture and of other groups. It needs their help and cooperation, their wisdom and their guidance. In no other Way can it serve successfully as an instrument of the public interest and of the public will. The original Federal Reserve Act was approved on December 23, 1913. Its frequent amendments since that date evidence an evolution to meet eh? 'ngxng conditions and broadening responsibilities. The control authority is the Board of Governors, whose members, un- the law, must be selected "with due regard to a fair representation the financial, agricultural, industrial, end commercial interests and geographical divisions of the country," Let me digress to clear up one common misunderstanding. The present law does not require that one member shall be named who represents agri- culture as such. It contemplates that the entire board ana all its mem- bers shall be representative of all the interests that make up our nation. -4- I do not regard these interests as fundamentally conflicting. Rather, if interests seem to conflict, it is because some groups fail to under- stand clearly the economic interdependence of all groups - fail to un- derstand that no one group can permanently prosper at the expense of another group or class. The Board of Governors is composed of men who without exception re- gard themselves as representatives not of any one group of class inter- est, but of the common interest arid the public welfare. I am happy to say that without exception these men are extraordinarily interested in agriculture, aware of its importance, and alive to its peculiar prob- lems. Fortunately it is not necessary for agriculture, in its current relations with the Reserve System, to lean upon the weak reed of a sol- itary and isolated spokesman. The authorities of the System which relate to management of domes- tic credit and money are vested principally in this Board. It is there- fore a public agency, responsible to the people for an administration that is in the general welfare, and not primarily for the banking or ar*y other single interest. Its contact with the banking and business structure is through 12 Reserve banks and their 25 branches. Earnings of the Reserve banks, be- yond the 6 percent dividend which is paid from earnings to the member banks on stock held, are not subject to distribution among member banks, kut must, in case of liquidation, be paid into the Treasury of the United States. Under the franchise tax .in effect up to 1935, the Reserve banks -5- Paid $150,000,000 into the Treasury. One half of the surplus held by "the Federal Reserve Banks in 1953, or 139 million dollars, was appro- priated by Congress and subscribed as capital stock of the Federal De- Posit Insurance Corporation. I mention these items in passing for the sake of those of you who may have regarded the Reserve System as in- tended and operated for banking profits. Part of the responsibilities of the Reserve System lies .in the di- rection of control and supervision of banking practices, shared among various - I almost said too many - federal and state authorities. This is not the occasion to discuss that field. Part lies in the field of domestic monetary and credit control, to which I have already referred. Before I attempt to define what I conceive to be our objective in ^e second field, in which our interest tonight really falls, let us Pause for a moment to consider the conditions which have led thoughtful Cl-ti2ens to insist that currency and credit management must replace laissez-faire and the automatic gold standard. The Reserve System, as you all know, was created in a pre-war v/orld it was commonly believed that the ^old standard was an automatic regulator and the best device known to man for bringing about a degree of stability in world affairs. I ajn not competent to say how efficient- ly it functioned before the World War undermined it. But the fact is "that we find ourselves in a v/orld entirely off the gold standard. The Aspects of a restoration of that standard in anything like its pre- v'ar.form are toe remote to help us in meeting the realities of the world situation and our domestic problems today. Every nation, prompted by exhaustion of its gold reserves, or by economic necessity, or by its own foresight, has abandoned that standard. I can understand why many men who have lived most of their adult lives in a gold standard world now yearn for a restoration of conditions and Methods which prevailed in a by-gone day, and why many of our banking ana business leaders, schooled in a gold standard world, are slow to reconcile themselves to a world in which so many old guides and methods have disappeared. But it is evident that we must be ready to test out and to perfect new instrumentalities and new techniques, in substitution those which no longer exist, in the common effort to preserve and expand the recovery now so rapidly under way in this country. The depression from which we are emerging paints the condition which 1 want you to see as the background for my discussion. It wasn't the first post-war depression as far as this generation of farmers is con- Cerned. They know what deflation means for they have lived through the devastation of two such cycles - that of the early twenties, and the °ther at the crest of what we were told was a new era of ever-expanding Prosperity for the entire world. Today we hear much talk about the dangers of inflation, but the farra- 03? still remembers vividly the disasters of deflation. Deflation strikes the farmer with particular violence. He is in no such position e,s is the industrialist to curtail his production. The farmer is obiiged to incur debt today at a given price level knowing that it will ; -II- be a long time before he can market his crops and derive his income to meet his debts. If during that long interval there is a drastic dovm- ward spiral of the price level, in other words, a deflationary spiral, bankruptcy, loss of his farm, of his home, of his livelihood, stare him the face. We know all about that from painful experience. I recall only to stress the point that the farmer is particularly interested avoiding deflation. And I think it has been drummed into us by now that neither the farmer, nor the worker, nor the great mass of our People profit from inflation at the other extreme. In other words, sta- bility, and by that I do not mean a static condition but a stabilised Progress, is of vital importance to agriculture. I It has seemed to me, as no doubt it has to you, that broadly we Were confronted with two alternatives during the depression that followed Iqoq either to let depression take its course until we reached some laow bottom on which recovery could be based - in other words, to .vrite our existing debts by process of bankruptcy, receivership and liqui- until they were at a level at which they could be met - or else to hbr ing up the price level to a point approximating what it was when 4.1 e burden of debt was contracted, and to restore national income as I • raPidly as possible to a level at which the debts could then be paid off ^thout wholesale write-downs, bankruptcies, foreclosures, liquidations ^ i i t disturbances characteristic of extreme defla- 0 er v 0 en tion. I I It appears now to be rather generally accepted that the former j course was not the sound or the wise one; that there appeared to be no bot- tom to the deflation and that to permit that deflation to continue fur- ther would be to run the risk of widespread public revolt. It seems to be now more generally accepted that intervention by the government on a scale adequate to stop the deflationary processes and to turn the tide Upward v/as imperative from every standpoint, humanitarian and economic. It was most particularly necessary to restore the agricultural price level because agriculture, as I have said, is likewise the greatest suf- erer from violent deflation, as you all well know. The steps taken with reference to devaluation of the dollar and the pr°gram of the Agricultural Adjustment Administration were directed pri- marily to restoring a more equitable balance for agriculture in our economic scheme. That was the purpose and the result has been in that Section. I am mentioning this, all too briefly, to suggest one or two more ^Uestions in relation to our major problem of greater economic stability. Is not possible that we can so shape our future course and so direct OUr -nni • policy that the government will serve in effect bo counterbalance hs o i cycles which private enterprise, left to itself, has inevitably gen- ra°ed in the past and undoubtedly will continue to generate in the fu- ture ii i - unless we devise better methods of managing our broad economic °blems? Is it not possible to have the government prepared to check pec,Jlative inflation and to intervene as an offset if deflation threat- ens in the future? -II- When business was local ana commerce small in volume, the cycles spent themselves before too much momentum gathered on the swing toward the top or to the bottom. Now that agriculture, finance, commerce, and industry a.re closely interwoven and in delicate balance, these cycles somehow assume different proportions to me. There comes to my mind Victor Hugo's vivid story of the battle be- tween men and the cannon that had broken loose in the ship hold during a stoiin at sea. With each lurch and sway the cannon gathered more de- structive momentum until it threatened to batter the ship to pieces. Men captured and chained it. The very statement of these background conditions suggests the Point I am striving to reach - a definition of the objective which is ln nay mind, and I am satisfied, in yours. Our experience challenges us ttot only to achieve a greater degree of stability in our economic prog- ress than we have had in the past, but to make that decree a substantial one, VJhat we all seek broadly is to have our individualistic, profit economy - that sounds like a very ponderous terra - to have our economy s° function as to call forth the greatest possible use of our produc- tive facilities and man oov/er and the widest distribution of the fruits our labors, consistent with orderly uninterrupted progress toward higher standards of living for all of our people. bet me try to express more concretely and narrowly what I believe farmers want - a fair and reasonably constant price relationship be- tween what they have to sell and what they have to buy. They want this -10- Parity of exchange established on a level that will not make debts pre- viously contracted, too burdensome. Then they would like to see this re- lationship maintained without undue distortion either up or down. Need- less to say, they want a steadily expanding market for their production. That is quite an order. I do not know of any single act of govern- ment, any one formula, or any magic or legerdemain, that can accomplish it t 1 am sure that if I did, I could make a much more inspiring talk here tonight. The Federal Reserve System is entrusted with certain responsibili- ies - certain limited segment of the government's economic battle a f^ont. I order to drive home once more the vast complexity of that n battle line, let me paint additional details on the background canvas of recent history. The war had left us with a productive plant overexpanded and dis- serted in many lines. The second post-war depression was preceded by GXcessive emphasis on exports, a bad tariff, a huge volume of foreign tendings, an excessively rapid expansion of credit, a faulty distribu- tion of income, and an orgy of speculation in real estate and in securi- Values rose to unwarranted levels - and the consequent collapse s on an unprecedented scale. Once started, the deflation proceeded a vicious spiral, resulting in a terrific drop in prices, in incomes, ill employment, and in the volume of money. Contraction of bank credit c<nci bank money was both the result of the business collapse and the of some of its worst phases. Our national income dropped from -II- 80 billions a year in 1929 to less than 40 billions in 1952. At this juncture the new Administration came into power and adopted a policy of adequate help to the sufferers from the depression, of re- lief for debtors, of protection to creditors, and of great public ex- penditures to fill the gap created by the decline in private enterprise. By financing the deficit through sale of securities to banks, the Gov- ernment restored our supply of money. How much of this falls in the field of money and credit? It is apparent that in an economy which functions through the medium of money, an adequate supply of money, .including bank credit, must be available to the country's business. Bear in mind that 90 percent of our payments ape in fact made by check. Certainly our present problem is not to create more money. The supply has been restored to a level sufficient to finance a much larger v°-i-ume of activity than we have yet achieved. With the unprecedented v°lurne of excess reserves of the banking system, resulting primarily A reni the great tide of gold that has come to our shores, there is far m°re than enough, both of currency ana of bank credit, existing and po- tential, to finance our farms and factories at a rate of productivity e*ceeding anything we have ever known. Our problem now is to consolidate our recovery, to preserve it and to use existing, and if necessary, new instruments to bring about more ctabili ed progress and greater productivity. By this I mean greater 2 Ube of our man power in production, increased at as rapid a rate as can -12- he absorbed by a wider distribution of the fruits of our labor. We must seek, on the one hand, to secure a full recovery and, on the other, to prevent the great supply of money from being syphoned off into specu- lation in the stock market, in real estate, in commodities or in such other ways as would produce an unhealthy boom, an inflationary condition that would be inexorably followed by another collapse of the fruits of °ur labors. The Federal Reserve System is following an easy money policy. As -Long as we have a great supply of idle men and idle plants, it ought to c°ntinue to do so. I have suggested one problem. If the present volume deposits, with the b:;nk credit that could be sustained on the exist- lnS volume of banking reserves, swings into speculative investment in- stead of into financing production and distribution, we are in for trouble. To invest our money and credit again for speculative purposes in securities and real estate and commodities would be to tread the path oi- folly to probable disaster. But under present conditions I certainly arn not in favor of the historic method of attempting to check specula- tive inflation by raising interest rates and tightening the money mar- along the line. Until we reach a much larger national income than we have yet achieved, an abundance of cheap money to finance pro- ^Uction and distribution is required. This problem is ours, and it is yours. The farmers are the shock tr 0oPs in the fight of our economy with the business cycle. They are, -II- therefore, more immediately and more acutely concerned in the mainten- ance of an orderly progress, without violent fluctuations, in our economic life. As J have attempted to indicate, the Federal Reserve System is one instrument which can be used to help achieve that orderly progress. Functioning alone it cannot prevent inflation ana deflation, but it should be possible so to coordinate its powers with those of other agen- cies as to attain a reasonable degree of stability. It should be pos- sible through a better coordination of monetary, credit ana fiscal poli- cies to achieve that goal. So far as the Reserve System is concerned, it has broadly four maJor powers to influence the volume and cost of money. First, it can fix discount rates, the rates that member banks have to p y when they borrow from the reserve banks. That is the classical a lristrument of central bank control, but it is not operative now when tanks have more funds than they know what to do with, and consequently n°t borrow at any rate. Secondly, the System can sterilize or make inactive a portion of ^he existing excess reserves by an increase in the percentage of depos- its which a member bank must carry with the Federal reserve bank in its Gistrict. You Vviil recall that last July the Board of Governors announced an increase in these reserve requirements. Thirdly, the System has the authority to ..urchr.se and to sell govern- ment securities, bankers acceptances, and certain other paper. This is -14- known as an "open market" operation because such purchases or sales must be made in the market openly and not by direct arrangement with the other parties to the transaction, whether it be the Treasury or Private investors and institutions. This function is performed through ^e mechanism of an Open Market Committee, consisting of the members of the Board of Governors and, by rotation, five presidents of the regional P^ i t-aeral reserve banks. Let me say again that the Board of Governors is a Public body whose duty is to exercise its functions in the national interest and not in the interest of any group or section, and that the °Pen Market Committee, of which the Board of Governors is a majority, likewise functions in the national .interest and not in behalf of any Private, sectional or group interest. When the Open Market Committee buys government securities, the ef~ fect is to create additional reserves in the banking system as a wnole therefore, to ease money conditions ana to tend to make interest rates low. Conversely, when the System sells securities, the effect, a°sumirig that operations are on a sufficiently large scale, is to tight- money conditions and raise interest rates. Fourthly, the Board of Governors, under the Securities Exchange Act > is charged with responsibility for fixing margin requirements, ^ch at present are 55 percent. That is to say, those who purchase °gistered securities must put up 55 percent of the purchase price ana ar*kers ana brokers are not permitted to loan more than 45 percent. This nstrument which did not exist in 1929, may be expected to impose some cUrb upon stock market speculation. In addition, the Board has certain direct powers, to which some authorities attach a great deal of importance, to influence lending Policies of member banks and to discourage and prevent speculative use of bank funds. I am hardly qualified from my relatively brief service to pro- nounce judgment upon the effectiveness of these various powers, but I a° wish to suggest to you several considerations. First, it is evident that these powers are not of themselves sufficient either to guarantee stability, bo prevent booms and depressions or to bring about a stable P^ice level. These powers all can be utilized with those objectives in mind, but unless these powers are part of a broader policy pursued by the Government, the Reserve System alone cannot possibly attain the °esired objectives. It is important, therefore, to use ocher instru- mentalities. I mention as an example the recently imposed tax on undi- vided profits. It is evident that this tax has a very direct monetary effect in so far ?.s it tends to prevent the accumulation of large pools idle funds which in the past have tended to spill over into specula- tive channels, and in so far as it diverts these funds to where they are not only subjected to a fair share of taxation but are diverted, in Pai>t at least, into the general spending stream. I would like to submit to you' the proposition that our goal of m°re stabilized economic progress can be approached best by concentrat- ing our thought on the maintenance of a high and growing national in- come. The question is how to insure that this income is more steadily -II- ®aintained and directed into productive channels, and away from specula tion which generates distortions in our economic mechanism and thus le&ds to deflation and collapse. As I see the function of the Federal Reserve System in its rela- tion to the broad general welfare, it is to use its powers so as to con tiibute to the existence of an adequate supply of money at reasonable *&tes and to do whatever it can to facilitate the flow of money into tl:ie right channels. The flow must not be so fast that it produces an lnflation or so slow as to tend in the direction of deflation. It is w°rth while to recall that we had an adequate volume of money in 1929 incidentally, that we were on a gold standard and that we had a ba 1 anced budget. Yet these things - very desirable, according to s ome - not prevent the depression from developing and then intensifying 111 to the worst crash in our history. It is worth while to remember tha1 +v 0 T-ne mere existence of a large volume ana supply of money was not Efficient of itself either to prevent a deflation or to assure stabili- 2abion of the price level. I wish the problem were that simple. should put our minds upon the problem of the flow of money, its °per distribution between consumers and investors, so that there may be °uoh plants to supply our growing needs and enough income in the ands of consumers to buy the products of our soil and our factories. it seems to me broadly that the effect of the government's policy aS ^een along two lines - first, to create easy money conditions as a 0 of which debt-carrying burdens could be lightened upon farmers, -17- homes, businesses and virtually all other borrowers. Thus it is possible to bring about a large degree of necessary debt adjustment Without the violence of bankruptcy procedure. It is possible for states and cities and municipalities to refinance and to obtain funds with "''hich to carry on their contributions to economic and general well-being Iu their communities through the maintenance of' schools, roads, and °ther customary activities which in many instances had to be curtailed 0r suspended altogether in the depths of the depression. The Federal Reserve System contributed its share to the creation of easy money con- ditions and is still pursuing that policy. Secondly, the government unbalanced its budget in order to raise Uttds and to put them in the hands of people who would spend them and thi nus start an upward cycle of business activity. One by-product apart from business activity of itself was to restore solvency in innumerable • °eal communities and states and cities and municipalities which were °nce more able to collect back taxes as well as current taxes, and to back on their feet where they would no longer have to lean upon the Fe t °eral Government and put a further drain upon the government's re- s°Urces, While the total expenditure by the government has been large con- ui°ered by itself, it is small when considered in relation to the re- mits, i undertaking to say that this alone was responsible for am not Recovery, i think I am quite aware of the resourcefulness and initia- te of the American people ana particularly of our farmers who face -18- and overcome adversity with genuine fortitude and courage. But the gov- ernment program gave something for resourcefulness and initiative to work on. After the government had unbalanced its budget to a gross total Csf* some 13 billion dollars during the past three years up to the end of the last fiscal year, there occurred a recovery in the national income Ahich is now running at the rate of well in excess of 60 biliion dollars dually, and that at the same time there has been an enormous increase 1inning into hundreds of billions of dollars in the value of farms, homes, "toeks, bonds and all the rest of our national assets. I do not see any reason for believing that we lack as a people the 1^teliig through unselfish thinking, to achieve the objective which ence? v/e •-] 11 X1 want. The objective is clear. What we want is a steadily rising aticnal income, equitably distributed among all classes. As I have said "e*ore, I have no panaceas. I know of no single device, through the gold taudard in its old form or in some newly devised form, or through any simple mechanism, to achieve this objective. fhere is undoubtedly much that can be accomplished through enlight- en^ iJ The readership in .industry and agriculture and in the field of Labor. °°.]ectives of the Federal Reserve System are identical with your own kjectives. Such powers as the System has to influence the supply, the Cost ^ - and the flow of money, it is undertaking to exercise toward the ob- j ecti vo 4-ve oi a more orderly, a more stabilized economic progress. * have learned enough to suspect that monetary management is not exact sciencej that there are many incalculable, unpredictable and -19- unmanageable factors in human behavior and psychology which no set of rules or laws or policies can govern. Nevertheless, I am confident that vn-th the whole-hearted cooperation which I have been privileged to enjoy from leaders of agriculture in all parts of the country, I can as an in- dividual become better informed and better equipped in the discharge of >"ny own responsibilities as a member of the Board of Governors cf the Fed- eral Reserve System. And I am equally confident that with cooperation in the study of our common problems and in the seeking of intelligent solu- *f* * Iono, we as a nation can find the ways and means of achieving that greater productivity and wider diffusion of real wealth and that greater stability in economic progress which is essential for a progressive na- tion and for the preservation of our institutions under what we like to CaU the American System. I said I had no panacea to offer. 1 0.0 have a formula to suggest. We L1L v • e in a swiftly changing world. Governments will play an increas- lriSly important role in assisting their citizens to make adjustments. TM s V;i-'-l be true of money and credit, as well as of other economic and s°cial factors. In determining what government can do, the all-important th' is the attitude of' those to whom you delegate its powers. If they tight and inflexible, eyes glued to the past, while the vast ener- >ie° this country easnarl, another and more serious explosion may Ccur* If they combine intelligent understanding with courage - the ^iiingness to act; if they use, change, discard, or supplement existing ' c as changing conditions or experience indicatej then government may -20- assist its people to direct the nation's boundless energy up the road oi orderly progress toward a more abundant life for them. I realize that you have heard that phrase ridiculed, but I am glad to use it, without apology, until a better one comes along.

Chester C. Davis (1936, December 9). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19361210_davis

@misc{wtfs_speech_19361210_davis,
  author = {Chester C. Davis},
  title = {Speech},
  year = {1936},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19361210_davis},
  note = {Retrieved via When the Fed Speaks corpus}
}