Special Committee Investigating the Munitions Industry, Hearings Persuant to S. Res. 206, Part 30

Special Committee Investigating the Munitions Industry, Hearings Persuant to S. Res. 206, Part 30

Strong, Benjamin, 1872-1928

WWP18564

1917 July 7

Memorandum on finance and the munitions industry.

Benjamin Strong Jr. Papers, New York Federal Reserve Bank

English

MUNITIONS INDUSTRY
MEMORANDUM

Advances to Allies.—A constructive program reaching certainly six months into the future, or, still better, a year, should be developed as soon as possible. As that will take time, our Treasury might well determine what advances could be made for, say, the next two months and within that limit credits could then be apportioned among our Allies according to a tentative program laid out in conference with them which would not commit us or them as to a further period until the comprehensive program was developed. I should suppose that from $180,000,000 to $200,000,000 a month for Great Britain and about $100,000,000 for France would cover their needs for the next two months. As to Russia and Italy, the need is not so pressing nor for so large amounts at present.
Announcements.—The policy of announcing each advance as made strikes me as liable to cause embarrassment to us and to our Allies. If the Secretary would announce total advances to the Allies, say once a week, it would overcome this difficulty.
Financial legislation.—I am convinced that the amount provided by Congress for advances to our Allies will be inadequate for even a six months’ program, that generous financial support promptly accorded at this time will be of greater value than later, and I hope that our Government will find it possible to secure all necessary legislation at this session of Congress to enable our Treasury to give our Allies the fullest possible support.
General organization.—The development of a program (financial, food, munitions, shipping, etc.), based upon existing legislation cannot be concluded satisfactorily without a better understanding of the requirements. To accomplish this, possibly the following principles might be helpful.
The whole subject of furnishing food, military supplies, transportation, and credit should be governed by considerations of military necessity. These considerations can only be weighed at the seat of war. The general policy might, therefore, be worked out by an international commission on which all of the Allies would be represented (United States, France, Great Britain, Russia, Italy), which would sit permanently in Paris, the membership of which should be composed of the ablest men available to deal with commercial, industrial, and transportation questions, as well as finance. The members of such a commission should be supported by an adeqaute staff of experts. It would determine priorities between the Allies, each nation retaining priority for its needs, out of its own resources.
If such a commission were created, this country would shortly occupy it natural position toward the war. We must organize as an immense farm to produce food, an immense factory to produce military and other supplies, an immense transportation system to furnish rail and water transportation, and an immense bank to finance the purchase and transportation of material.
The organization in this country would properly direct its efforts to furnishing those things and in such quantities to the respective allied powers as recommended by the commission sitting in Paris.
The local organization in this country might consist of:

First. A Purchasing Board: This Board would distribute and execute orders and its technical staff would see that quantity, quality and deliveries were as required.
Second. A Price Fixing Body or Board: Such an organizationwould stand between the country's regular commerce and industries and our government in its war requirements and settle questions of prices.
Third. A Priority Board: This organization would settle all questions of priority of delivery as between our government and its Allies on the one hand, and other customers on the other. It should co-operate with the Commission sitting in Paris.
Fourth. Foreign Representation: Each of the Allied governments must, of course, be represented here by competent commissions with full authorities, whose functions should be exercised in co-operation with the Purchasing Board and would include making contracts, cloncluding financial arrangements with our Treasury, paying for goods purchased, inspection before shipment, etc.
Fifth. The Treasury: The function of our Treasury in such a scheme of organization would be the normal one of raising funds, apportioning credits according to the agreed needs and paying the bills, being governed by representations made by our representatives on the commission sitting in Paris.

The organizations subordinate to the purchasing board would have a useful place in such a scheme but would be controlled in their activities, first, by the purchasing board; second, by the board fixing prices; and third, by the priority board, all of which would co-ordinate through the purchasing board as the central organization.
This general plan is based entirely upon the principle that our participation in the war and all activities growing out of it must be governed by military necessity which can only be determined at the seat of war.
Government Loans.—The experiences of the past three months convince me that a much larger credit will be needed than that now provided by Congress. A permanent, Nation-wide organization must be created at once in order to facilitate Government borrowing. Congress should, I believe, authorize a large issue of short-term notes with a greater variety of character so as to meet the needs of different classes of investors and savers and it should confer greater authority upon the Secretary of the Treasury in fixing rates of interest.
A permanent paid organization should be promptly developed by the twelve Reserve banks which could be expended and contracted as new loans were placed. At the same time a separate organization should be provided at once to develop saving in detail among all classes of people. These savings should be segregated, temporarily invested in the Government’s short obligations, and then converted into permanent loans when issues are made. Only such a plan, which anticipates and earmarks in advance, will avoid increasing pressure upon our banking system and possibly its dislocation.
Currency.—Our participation in the war makes a certain expansion of bank credit necessary and inevitable. This can be sound or unsound according to the skill with which it is managed. All necessary legislation has now been enacted with the passage of the amendments to the Reserve Act and a perfectly sound expansion of vast proportions is possible, provided the Reserve banks are able to assemble a much greater proportion of the country’s gold supply even than the amount already held, about $1,300,000,000. This requires large issues of Federal Reserve notes, to take the place, dollar for dollar, of small denomination gold certificates, but if successfully conducted will place an immense burden of expense upon the Reserve banks. I would strongly urge that the Secretary of the Treasury immediately discontinue issues of gold certificates in denominations of ten and twenty dollars and that the Federal Reserve Board instruct Federal Reserve banks to furnish all requirements for currency in their respective districts by issues of Federal Reserve notes on which they should pay the shipping charges. Congress could then be asked to make an appropriation to enable the Bureau of Engraving and Printing to defray the cost of preparing Federal Reserve notes. The saving to the Government on other currency, the cost of which it now bears, will largely offset this added expense.
We are facing the possibility of a great shortage of bills of one and two dollar denomination. This can be met in advance of the fall demands, which will be heavy, by reissuing large denomination silver certificates and United States notes in one and two dollar denominations. Each Reserve bank should be instructed now to accumulate these bills against the fall demand. This will increase the vacuum to be filled by further issues of Federal Reserve notes, and the simultaneous withdrawal of gold certificates above suggested would automatically draw gold into the Reserve banks without causing comment or possible alarm.This accumulation of gold will offer a basis for credit expansion which can be controlled within safe limits by the discount rates of the Reserve banks.
Trade with the enemy.—House Resolution No. 4960, introduced by Mr. Adamson, covers transactions in goods, but fails adequately to impose restraint upon foreign exchange transactions and shipments of gold and provides no organzation for supervising such transactions. A body should be created for the purpose of supervising all possible enemy exchange operations and gold shipments, and this body should have power to require reports and production of papers and records. A letter covering this matter has been sent to Mr. Frank L. Polk, of the State Department.
Gold.—At the present time we are importing gold from England which is being re-exported to Spain, Cuba, Japan, Canada, and South American countries. The unwisdom of this development is apparent. The demand upon our credit system will shortly be so great that we must not only preserve but augment our gold base, even if it involves curtailing trade and credit transactions with neutral countries. Whatever organization is developed to deal with foreign exchange should have authority to deal with this matter.

Enclosure

Strong, Benjamin, 1872-1928