Speech by Benjamin Strong, Governor of the Federal Reserve Bank of New York at the Tokyo Ginko Club
Title
Speech by Benjamin Strong, Governor of the Federal Reserve Bank of New York at the Tokyo Ginko Club
Creator
Strong, Benjamin, 1872-1928
Identifier
WWP18781
Date
1920 May 24
Description
Benjamin Strong Jr. gives a speech to the Tokyo Ginko Club.
Source
Benjamin Strong Jr. Papers, New York Federal Reserve Bank
Language
English
Text
SPEECH BY BENJAMIN STRONG
GOVERNOR OF THE FEDERAL RESERVE BANK OF NEW YORK,
AT THE TOKYO GINKO CLUB,
MAY 24, 1920
__________________________________________________
It has long been my hope to visit Japan. As with many of my countrymen I have wanted to enjoy your beautiful scenery, and to visit some of the many wonderful temples and palaces of which we have heard so much. Then I have looked forward to meeting some of the men who have helped to make Japan the great and modern nation that she has become. But more than anything I have been anxious to make some friends in Japan.
The hospitality of my reception makes certain that my visit will be a success in all of these respects. Nothing could have been so pleasing as to find upon our arrival that the friends I had looked forward to making were already made. Every attention that friendship and painstaking courtesy could suggest, has been thought of in advance and every discomfort and inconvenience of travel has been removed.
As you know it is ones first experience in visiting new scenes that makes the deep impression that endures and my memory of this beautiful country will remain vivid with this welcome of good will and kindness.
To Mr. Inoue, Mr. Fukai and their associates I am especially indebted. Some day I shall hope to have the pleasure of entertaining them and you in New York whenever you honor us with a visit. A cordial welcome awaits you.
Just now I am taking a year of rest and recreation. My trip is for no official purpose, and as you know I am not an official of our Government. So I shall not hesitate to make this the opportunity for an informal discussion of some matters of mutual interest to bankers.
I am told that you may wish just now to hear something of recent developments in American banking and finance. I am therefore proposing to strain your patience with some discussion of happenings at home which are suggested in fact by recent developments in Japan.
But I cannot refrain from a few words first upon another subject.
There is much about Japan that we in America who do not speak or read your language and who never or rarely visit your country find great difficulty in understanding. There is I believe equal difficulty in your understanding readily many things that are obscure in such a new and cosmopolitan country as ours. This is especially true of our respective systems of Government and social institutions. American writers on Japanese matters are sometimes,--too often I fear,--either blind worshippers of everything Japanese and avoid reference to much that we should know about, or are inclined to be hostile critics and go out of their way to overemphasize or condemn matters which require judicial and fair minded discussion between us. The same I believe to be true here. This lack of understanding to which I refer need not and must not become misunderstanding. The former is ignorance and can be overcome. The latter is stupid folly and must be stamped out. I have no doubt that you suffer from the propagandist in Japan as we do in America and that fair and judicial treatment of these matters of ignorance is as much needed in Japan as in the U. S. The question is how to learn more of each other? May I suggest that we learn more of each other by seeing more of each other; by more associations in matters of common interest? It is a splendid thing to have such meetings as Mr. Vanderlip, Mr. Kingsley and their associates have just concluded. Such meetings lay the foundation for real associations because they develop the better understanding to which I have referred. I may incline to over-emphasize the point, but it appears to me also that the association which you have just concluded with Mr. Lamont is the most important and the most advantageous economic development in Japanese affairs, possibly since the war with Russia. Our business men and yours by such partnerships will develop common interests and purposes and mutual confidence and friendship will result. Let us hope that more will follow.The world is just now staggering under the many burdens resulting from the war. It has entered upon the difficult and puzzling period of readjustment, when freedom of commerce and finance must be restored, and the protection afforded by arbitrary regulation, imposed upon us by military necessity, must be discontinued. And accompanying this readjustment we must encounter some losses and hardships which will arouse criticism of past policies and present conditions. It is to some of these policies that I shall refer.Economic developments in the U.S. since the commencement of the war may be divided into three periods.The first from the outbreak of the war to April 1917 when we declared war. Second the war period.Third the period since the Armistice.In the first period we struggled to meet the enormous demands upon us for goods of all kinds. Our exports reached unprecedented figures, we imported over $1,000,000,000. of gold, paid off our current debts abroad, repurchased the foreign held American securities, our bankers and investors loaned over $2,000,000,000 abroad, we increased our farm and industrial production and capacity and with it all suffered considerable general increases of prices of goods and wages of labor. The net result, notwithstanding the increased living cost, was a great addition to our wealth.In the second period our Government entered the markets for war supplies upon a vast scale. The demands upon our production and transportation facilities far exceeded capacity, and a great variety of powers were shortly conferred upon the President and his ministers, to enable some control to be exercised over production, transportation, consumption and credit.In the third period, at the same time that governmental control was gradually being relaxed, we suffered the reaction which was certain to follow a long period of self denial and restraint. A wave of speculation swept over the country with its inevitable accompaniment of wasteful extravagance and luxury. There was a short period, commencing late in 1918 and ending in the Spring of 1919 when reduced demands for goods from abroad, and the fear of it, coupled with cancellation of war contracts, brought about some feeling of uncertainty, some liquidation, and price reductions. We had some unemployment of labor. But the pause was short and price advances where hardly more than arrested when again they started upward.In a very general way it may be stated that living costs have until recently reached about double what they were prior to 1914.With this very inadequate review of what occurred you will appreciate that our problem was much the same as your own. In the first period mentioned, no regulation or control was possible save what little could be exercised by the Federal Reserve System, then itself in the period of organization.Beginning with the second period, April 1917, it became necessary on the one hand to control and reduce to a minimum the civil consumption of materials and employment of labor, and on the other hand to greatly increase our production of goods for military use,--at the same time avoiding such exacting demands upon the public as would cause impairment of morale.So far as it is now possible to briefly express a complete policy, it may be said that every effort was directed towards producing all that was needed for war use without needlessly bidding up prices,--to pay for all that was used for war by direct taxation without stifling production, and to borrow what funds were required in excess of tax receipts without disorganizing and inflating credit.Many agencies were created and employed, none more important than the Federal Reserve System, to which in general was entrusted the task of raising war loans and controlling credit in cooperation with the Secretary of the Treasury. We had employed the 2½ years of the first period to develop and perfect this new organization with a view to meeting increased demands upon us, should they arise. The dangers of expansion of bank deposits and currency, resulting from heavy bank subscriptions to war loans, and heavy loans to subscribers, were fully realized, and every effort was made to sell the long time bonds to the investing public. The great Liberty Loan organizations, which were adjuncts of the F.R. Banks covered every section of the country to the remotest hamlets. It is estimated that about 2,000,000 volunteer workers were enrolled in this vast army of bond sellers.--Every kind of publicity, every resource of propaganda and education was employed. The results were all that could be expected when it is recalled that the financial requirements of the Treasury finally rose to over $50,000,000 a day. The best example of this distribution was in New York City, where bonds were sold by instalment payments. In each of the last three loans about 800,000 people subscribed for $50 and $100 bonds, paying one and two dollars a week. But bank borrowing was inevitable if the loans were to be wholly sucessful, and the Reserve Banks were called upon to extend large lines of credit to the banks of the country for this purpose.The same was true to a greater extent of the Treasury’s short time loans. The heavy Government disbursements necessitated short note issues to anticipate the receipt of taxes and of proceeds of long time bonds. The notes were sold through the Reserve Banks and first principally subscribed by the commercial banks and trust companies. It was in fixing the rates for such borrowings and corresponding rates of discount by Reserve Banks, that the general rate policy was determined. Rates were, in fact, steadily advanced until now the Treasury is borrowing at 5½% and the bank rates of the Reserve System stand generally at about 6%. This has been a progressive development, but much accelerated in recent months since Government disbursements and borrowings have declined and speculation has increased.But we could not rely upon rates alone to control credit. The increasing pressure of higher rates has been supplemented by other measures inaugurated as early as the Summer of 1917. Even then it was apparent that steps must be taken to insure that adequate credit was available for the Stock Exchange Market, but on the other hand that too much credit should not be so employed. The successful floating of the Government’s loans necessitated our maintaining a reliable market where securities could be sold, and at the same time stable and moderate rates for loans upon Stock Exchange collateral. The integrity of the collateral already held by the banks of the country had to be preserved. For this purpose understandings were entered into with the New York Stock Exchange, and with the principal New York banks, by which the amounts of borrowings and lendings were reported daily. With this information in hand, the Committee which directed the work, of which I was chairman, was able to regulate the amount of credit employed on the Stock Exchange. Every day the amount to be loaned was determined, and the loans apportioned among about 65 banks. Borrowers who seemed to be borrowing too much, were dealt with by officers of the Stock Exchange. A loan account of many hundreds of millions was handled under this plan and rates were held fairly steady at about 6%.In the late Summer of 1918, the expectation of an early ending of the war gave rise to a considerable speculation in stocks. Thereafter, and until about a year ago, the Committee exercised its influence to limit the loan account to a reasonable and necessary amount. It was successful in a large measure, but finally the pressure to remove restrictions became so great that our control of the borrower was discontinued about a year ago. Thereafter we relied upon two influences. One was the discrimination which banks generally now exercise in favor of bills which may be discounted at the Reserve Bank. The result has been the very high rates generally exacted for Stock Exchange loans. The other was our direct influence with the member banks, and our ability to require reduction in their discounts if it appeared that the proceeds were used for speculative purposes. The daily reports made by our member banks have enabled us to determine how much was so employed, and to regulate to some extent the speculation movements. We cannot claim that our policy has been an ideal one or our program wholly successful. But it has accomplished much, due largely to the splendid cooperation of the public and of our bankers and business men.But possibly our most important efforts to check expansion since the war ended have been exercised through our direct relations with the member banks which own our stock and maintain their reserve accounts with us. Here our work has been educational, designed to inform the bankers generally of the policy and wishes of the government and of the Reserve System. Meetings are held, usually at the office of the Reserve Bank, frequently at other convenient centers, when groups of bankers are frankly told of conditions, warned of dangers, advised as to policies to be pursued, and informed of the working of the new banking system. We also have a staff of men who visit our member banks, taking with them a record of transactions with those visited, and dealing more in detail and at greater length with these matters.In general there is a strong desire to meet our wishes and cooperate with our policies. At times, however, we may become suspicious that a certain bank may be discounting with us in excess of what is prudent, or without due consideration to general conditions, possibly for the purpose of financing or promoting some new venture. This is more likely to occur with smaller banks outside of New York City, than in the case of the large metropolitan banks. We do not hesitate to send for a responsible officer of such a bank, inquire into the reasons for the enlarged borrowing and require a reduction if found warranted.You may ask how the influence of the bank can be employed in this way without arousing resentment. Frankly at times it does cause complaint. General respect for the necessities of war times has done much to make our influence effective. But behind this the purpose of the law creating the System is clear. The Reserve Banks to be sure are subject to strict supervision by a Government body the Federal Reserve Board,--but they are owned by the member banks, and their affairs must be administered impartially, with due regard to the interests of all the members and of the country as a whole. We cannot relax our rules in favor of one bank, to the detriment of all the others. To insure that impartial administration would be possible, and that our information would enable us to judge of the soundness of the credits we granted, we are given broad powers by the Federal Reserve law. One of the most effective is the power to examine the books and affairs of our member banks. This power is gradually being exercised to a wider extent as our organization grows and the need arises. Having the power to examine, we are also able to gather much valuable information both of general conditions, and the condition of specific banks, by calling for special reports. We also receive and hold copies of the regular reports of examination of member banks made by the National and State examiners.It is expected that a further control of unjustfied expansion of the bank loan account will be possible when the law is amended to permit us to make higher rates than our normal discount rate, for discounts granted to individual banks which seek more than a normal line of discount with us.It is during periods of expansion that banking seems a simple and easy road to wealth. Then the seeds of later disaster are sown. With this in mind we have given much attention to improving credit methods. No bill will be accepted at the Reserve Bank unless we have on file a signed statement of the affairs of the borrowers; except the paper is of very small amount.Our larger commercial banks have always been particular in securing such statements. We have now educated practically all of our banks to do so, have furnished them with forms and convinced them of the prudence of this course. In consequence we have in our possession the most complete files of credit reports in the country; an invaluable asset when banking becomes less easy to conduct.With our Treasury borrowings and disbursements on such a vast scale, there was danger that these transfers and payments, the shifting of credit from one section of the country to another would cause financial disturbances. This has all been conducted pursuant to a program laid out in advance at frequent conferences of the Governors of the Reserve Banks with the officials of the Treasury and the Federal Reserve Board. All of the Reserve Banks and their branches are connected by their own telegraph and partly their own telephone lines, with each other and with the Treasury in Washington. Collections, payments and transfers are largely made by telegraph, and settlements are effected by changes in the proportionate ownership in a large fund of gold deposited by the Reserve Banks in trust in the Treasury. These settlements are made daily by brief a telegram in code.During all the period of the war and since, a great educational movement, organized under the direction of Mr. Vanderlip, has been operating to teach the people of the country to economize in the use of materials of all kinds and in the unnecessary employment of labor needed for the war effort. It is called the War Savings Organization and was somewhat patterned after the British plan. It has done much to promote economy and has produced about one billion dollars from the sale of war savings stamps.In what I have said, some but not by any means all of our efforts to insure the maintenance of sound economic conditions have been described. My statement is principally of the New York point of view and experience. The program was infinitely varied in different sections according to local needs, conditions and feelings. In some things we have not been wholly successful, some things we have omitted which might have been done,--but in general the sound financial condition of the country and of our banks is the reward of a sound Treasury policy, of the existence of the Reserve System, and of its efforts to promote sound banking.I have referred to the criticism now arising, coincident with our entering the period readjustment. It is not necessary to review the charges of our critics which are as familiar to you as they are to me. I can only express my own views with which you may not agree.When war arises, a great part of the energy of the nation must be redirected from the pursuits of peace to conducting war and producing the materials destroyed by war. This may require the services of thirty percent, or more or less, of the working population and possibly a like percentage of the production of labor ordinarily consumed in times of peace. Our economic system has not yet been so organized and perfected that this transformation can be effected promptly. Were it so, by some system of rationing consumption and mobilizing labor, the whole of the 30% might be saved from consumption, and the materials required for war be produced out of the saving without any gross increase in production. We would simply change the character of what we produce. The same would be true of the credit required to finance the production and movement of that percentage of goods. What was saved would be absorbed by Government taxes and loans and no expansion of credit would result. But this ideal is not humanly possible. Warring governments enter the markets to buy goods in competition with each other and with their own citizens. Prices advanced more rapidly than production increases. The banking and credit machinery of the world, which plays the part of bookkeeper, simply records the price advance on the books of accounts. Of all materials required for war, credit is the easiest to manufacture. One stroke of the pen on the books of a bank, one revolution of the printing press, and bank deposit or note currency is produced. The banking machine responds to the demands of higher prices and sometimes of Finance Ministers, almost it seems with a note of joy. This is because we cannot control consumption by direct methods of rationing.But our critics say that it could be controlled by making new credit difficult and expensive to obtain. In other words by advancing our rates of discount. My reply is, how far should they be advanced? Will 6% be effective in reducing consumption, or will it require 60%? Should we risk a catastrophe to security values, government credit and credit generally, by relying solely upon making credit dear so that labor and goods may be cheap? The penalty of high rates must be borne by the just and the unjust alike. Producers of shells and war ships would feel the pressure as severely as would producers of automobiles and whiskey. It would mean a complete Government control of all industry and commerce and transportation essential to war and a high percentage of mortality among those not enjoying such protection. In the absence of means to directly control consumption, particularly of unessential materials such as luxuries, it seems to me that a great variety of indirect methods of influencing as well as controlling both production and consumption must be employed. The interest rate is only one of many such means, it will not be effective alone and relied upon alone would bring disaster. All indirect methods work imperfectly, slowly, and with a degree of injustice to different classes. The origin of the disease of high living cost lies in the wasteful and useless consumption of goods by the people. The remedy is to induce frugality, simple living, self denial,--to build up the morale of the civilian population to a high standard of patriotism,--and to visit the wrath and condemnation of public opinion upon those who violate the code of war time behaviour.
Beyond this the various agencies of the Government can do much. But they cannot do it all, and we must be content and possibly gratified to realize, after bitter experience, that war causes suffering and economic loss which no system can avoid--that the supreme effort must now be directed to realizing the great ideal--that war can be prevented.
Gentlemen, it is a great honor and privilege to meet this distinguished company. You men of affairs in Japan, and we in America have before us a great future of progress, with great services to perform, and great responsibilities to assume. We must undertake them with mutual helpfulness in our minds, as one of the objects of our common effort. I shall take home with me happy memories of my visit and hold constantly my good wishes for your prosperity and happiness.
GOVERNOR OF THE FEDERAL RESERVE BANK OF NEW YORK,
AT THE TOKYO GINKO CLUB,
MAY 24, 1920
__________________________________________________
It has long been my hope to visit Japan. As with many of my countrymen I have wanted to enjoy your beautiful scenery, and to visit some of the many wonderful temples and palaces of which we have heard so much. Then I have looked forward to meeting some of the men who have helped to make Japan the great and modern nation that she has become. But more than anything I have been anxious to make some friends in Japan.
The hospitality of my reception makes certain that my visit will be a success in all of these respects. Nothing could have been so pleasing as to find upon our arrival that the friends I had looked forward to making were already made. Every attention that friendship and painstaking courtesy could suggest, has been thought of in advance and every discomfort and inconvenience of travel has been removed.
As you know it is ones first experience in visiting new scenes that makes the deep impression that endures and my memory of this beautiful country will remain vivid with this welcome of good will and kindness.
To Mr. Inoue, Mr. Fukai and their associates I am especially indebted. Some day I shall hope to have the pleasure of entertaining them and you in New York whenever you honor us with a visit. A cordial welcome awaits you.
Just now I am taking a year of rest and recreation. My trip is for no official purpose, and as you know I am not an official of our Government. So I shall not hesitate to make this the opportunity for an informal discussion of some matters of mutual interest to bankers.
I am told that you may wish just now to hear something of recent developments in American banking and finance. I am therefore proposing to strain your patience with some discussion of happenings at home which are suggested in fact by recent developments in Japan.
But I cannot refrain from a few words first upon another subject.
There is much about Japan that we in America who do not speak or read your language and who never or rarely visit your country find great difficulty in understanding. There is I believe equal difficulty in your understanding readily many things that are obscure in such a new and cosmopolitan country as ours. This is especially true of our respective systems of Government and social institutions. American writers on Japanese matters are sometimes,--too often I fear,--either blind worshippers of everything Japanese and avoid reference to much that we should know about, or are inclined to be hostile critics and go out of their way to overemphasize or condemn matters which require judicial and fair minded discussion between us. The same I believe to be true here. This lack of understanding to which I refer need not and must not become misunderstanding. The former is ignorance and can be overcome. The latter is stupid folly and must be stamped out. I have no doubt that you suffer from the propagandist in Japan as we do in America and that fair and judicial treatment of these matters of ignorance is as much needed in Japan as in the U. S. The question is how to learn more of each other? May I suggest that we learn more of each other by seeing more of each other; by more associations in matters of common interest? It is a splendid thing to have such meetings as Mr. Vanderlip, Mr. Kingsley and their associates have just concluded. Such meetings lay the foundation for real associations because they develop the better understanding to which I have referred. I may incline to over-emphasize the point, but it appears to me also that the association which you have just concluded with Mr. Lamont is the most important and the most advantageous economic development in Japanese affairs, possibly since the war with Russia. Our business men and yours by such partnerships will develop common interests and purposes and mutual confidence and friendship will result. Let us hope that more will follow.The world is just now staggering under the many burdens resulting from the war. It has entered upon the difficult and puzzling period of readjustment, when freedom of commerce and finance must be restored, and the protection afforded by arbitrary regulation, imposed upon us by military necessity, must be discontinued. And accompanying this readjustment we must encounter some losses and hardships which will arouse criticism of past policies and present conditions. It is to some of these policies that I shall refer.Economic developments in the U.S. since the commencement of the war may be divided into three periods.The first from the outbreak of the war to April 1917 when we declared war. Second the war period.Third the period since the Armistice.In the first period we struggled to meet the enormous demands upon us for goods of all kinds. Our exports reached unprecedented figures, we imported over $1,000,000,000. of gold, paid off our current debts abroad, repurchased the foreign held American securities, our bankers and investors loaned over $2,000,000,000 abroad, we increased our farm and industrial production and capacity and with it all suffered considerable general increases of prices of goods and wages of labor. The net result, notwithstanding the increased living cost, was a great addition to our wealth.In the second period our Government entered the markets for war supplies upon a vast scale. The demands upon our production and transportation facilities far exceeded capacity, and a great variety of powers were shortly conferred upon the President and his ministers, to enable some control to be exercised over production, transportation, consumption and credit.In the third period, at the same time that governmental control was gradually being relaxed, we suffered the reaction which was certain to follow a long period of self denial and restraint. A wave of speculation swept over the country with its inevitable accompaniment of wasteful extravagance and luxury. There was a short period, commencing late in 1918 and ending in the Spring of 1919 when reduced demands for goods from abroad, and the fear of it, coupled with cancellation of war contracts, brought about some feeling of uncertainty, some liquidation, and price reductions. We had some unemployment of labor. But the pause was short and price advances where hardly more than arrested when again they started upward.In a very general way it may be stated that living costs have until recently reached about double what they were prior to 1914.With this very inadequate review of what occurred you will appreciate that our problem was much the same as your own. In the first period mentioned, no regulation or control was possible save what little could be exercised by the Federal Reserve System, then itself in the period of organization.Beginning with the second period, April 1917, it became necessary on the one hand to control and reduce to a minimum the civil consumption of materials and employment of labor, and on the other hand to greatly increase our production of goods for military use,--at the same time avoiding such exacting demands upon the public as would cause impairment of morale.So far as it is now possible to briefly express a complete policy, it may be said that every effort was directed towards producing all that was needed for war use without needlessly bidding up prices,--to pay for all that was used for war by direct taxation without stifling production, and to borrow what funds were required in excess of tax receipts without disorganizing and inflating credit.Many agencies were created and employed, none more important than the Federal Reserve System, to which in general was entrusted the task of raising war loans and controlling credit in cooperation with the Secretary of the Treasury. We had employed the 2½ years of the first period to develop and perfect this new organization with a view to meeting increased demands upon us, should they arise. The dangers of expansion of bank deposits and currency, resulting from heavy bank subscriptions to war loans, and heavy loans to subscribers, were fully realized, and every effort was made to sell the long time bonds to the investing public. The great Liberty Loan organizations, which were adjuncts of the F.R. Banks covered every section of the country to the remotest hamlets. It is estimated that about 2,000,000 volunteer workers were enrolled in this vast army of bond sellers.--Every kind of publicity, every resource of propaganda and education was employed. The results were all that could be expected when it is recalled that the financial requirements of the Treasury finally rose to over $50,000,000 a day. The best example of this distribution was in New York City, where bonds were sold by instalment payments. In each of the last three loans about 800,000 people subscribed for $50 and $100 bonds, paying one and two dollars a week. But bank borrowing was inevitable if the loans were to be wholly sucessful, and the Reserve Banks were called upon to extend large lines of credit to the banks of the country for this purpose.The same was true to a greater extent of the Treasury’s short time loans. The heavy Government disbursements necessitated short note issues to anticipate the receipt of taxes and of proceeds of long time bonds. The notes were sold through the Reserve Banks and first principally subscribed by the commercial banks and trust companies. It was in fixing the rates for such borrowings and corresponding rates of discount by Reserve Banks, that the general rate policy was determined. Rates were, in fact, steadily advanced until now the Treasury is borrowing at 5½% and the bank rates of the Reserve System stand generally at about 6%. This has been a progressive development, but much accelerated in recent months since Government disbursements and borrowings have declined and speculation has increased.But we could not rely upon rates alone to control credit. The increasing pressure of higher rates has been supplemented by other measures inaugurated as early as the Summer of 1917. Even then it was apparent that steps must be taken to insure that adequate credit was available for the Stock Exchange Market, but on the other hand that too much credit should not be so employed. The successful floating of the Government’s loans necessitated our maintaining a reliable market where securities could be sold, and at the same time stable and moderate rates for loans upon Stock Exchange collateral. The integrity of the collateral already held by the banks of the country had to be preserved. For this purpose understandings were entered into with the New York Stock Exchange, and with the principal New York banks, by which the amounts of borrowings and lendings were reported daily. With this information in hand, the Committee which directed the work, of which I was chairman, was able to regulate the amount of credit employed on the Stock Exchange. Every day the amount to be loaned was determined, and the loans apportioned among about 65 banks. Borrowers who seemed to be borrowing too much, were dealt with by officers of the Stock Exchange. A loan account of many hundreds of millions was handled under this plan and rates were held fairly steady at about 6%.In the late Summer of 1918, the expectation of an early ending of the war gave rise to a considerable speculation in stocks. Thereafter, and until about a year ago, the Committee exercised its influence to limit the loan account to a reasonable and necessary amount. It was successful in a large measure, but finally the pressure to remove restrictions became so great that our control of the borrower was discontinued about a year ago. Thereafter we relied upon two influences. One was the discrimination which banks generally now exercise in favor of bills which may be discounted at the Reserve Bank. The result has been the very high rates generally exacted for Stock Exchange loans. The other was our direct influence with the member banks, and our ability to require reduction in their discounts if it appeared that the proceeds were used for speculative purposes. The daily reports made by our member banks have enabled us to determine how much was so employed, and to regulate to some extent the speculation movements. We cannot claim that our policy has been an ideal one or our program wholly successful. But it has accomplished much, due largely to the splendid cooperation of the public and of our bankers and business men.But possibly our most important efforts to check expansion since the war ended have been exercised through our direct relations with the member banks which own our stock and maintain their reserve accounts with us. Here our work has been educational, designed to inform the bankers generally of the policy and wishes of the government and of the Reserve System. Meetings are held, usually at the office of the Reserve Bank, frequently at other convenient centers, when groups of bankers are frankly told of conditions, warned of dangers, advised as to policies to be pursued, and informed of the working of the new banking system. We also have a staff of men who visit our member banks, taking with them a record of transactions with those visited, and dealing more in detail and at greater length with these matters.In general there is a strong desire to meet our wishes and cooperate with our policies. At times, however, we may become suspicious that a certain bank may be discounting with us in excess of what is prudent, or without due consideration to general conditions, possibly for the purpose of financing or promoting some new venture. This is more likely to occur with smaller banks outside of New York City, than in the case of the large metropolitan banks. We do not hesitate to send for a responsible officer of such a bank, inquire into the reasons for the enlarged borrowing and require a reduction if found warranted.You may ask how the influence of the bank can be employed in this way without arousing resentment. Frankly at times it does cause complaint. General respect for the necessities of war times has done much to make our influence effective. But behind this the purpose of the law creating the System is clear. The Reserve Banks to be sure are subject to strict supervision by a Government body the Federal Reserve Board,--but they are owned by the member banks, and their affairs must be administered impartially, with due regard to the interests of all the members and of the country as a whole. We cannot relax our rules in favor of one bank, to the detriment of all the others. To insure that impartial administration would be possible, and that our information would enable us to judge of the soundness of the credits we granted, we are given broad powers by the Federal Reserve law. One of the most effective is the power to examine the books and affairs of our member banks. This power is gradually being exercised to a wider extent as our organization grows and the need arises. Having the power to examine, we are also able to gather much valuable information both of general conditions, and the condition of specific banks, by calling for special reports. We also receive and hold copies of the regular reports of examination of member banks made by the National and State examiners.It is expected that a further control of unjustfied expansion of the bank loan account will be possible when the law is amended to permit us to make higher rates than our normal discount rate, for discounts granted to individual banks which seek more than a normal line of discount with us.It is during periods of expansion that banking seems a simple and easy road to wealth. Then the seeds of later disaster are sown. With this in mind we have given much attention to improving credit methods. No bill will be accepted at the Reserve Bank unless we have on file a signed statement of the affairs of the borrowers; except the paper is of very small amount.Our larger commercial banks have always been particular in securing such statements. We have now educated practically all of our banks to do so, have furnished them with forms and convinced them of the prudence of this course. In consequence we have in our possession the most complete files of credit reports in the country; an invaluable asset when banking becomes less easy to conduct.With our Treasury borrowings and disbursements on such a vast scale, there was danger that these transfers and payments, the shifting of credit from one section of the country to another would cause financial disturbances. This has all been conducted pursuant to a program laid out in advance at frequent conferences of the Governors of the Reserve Banks with the officials of the Treasury and the Federal Reserve Board. All of the Reserve Banks and their branches are connected by their own telegraph and partly their own telephone lines, with each other and with the Treasury in Washington. Collections, payments and transfers are largely made by telegraph, and settlements are effected by changes in the proportionate ownership in a large fund of gold deposited by the Reserve Banks in trust in the Treasury. These settlements are made daily by brief a telegram in code.During all the period of the war and since, a great educational movement, organized under the direction of Mr. Vanderlip, has been operating to teach the people of the country to economize in the use of materials of all kinds and in the unnecessary employment of labor needed for the war effort. It is called the War Savings Organization and was somewhat patterned after the British plan. It has done much to promote economy and has produced about one billion dollars from the sale of war savings stamps.In what I have said, some but not by any means all of our efforts to insure the maintenance of sound economic conditions have been described. My statement is principally of the New York point of view and experience. The program was infinitely varied in different sections according to local needs, conditions and feelings. In some things we have not been wholly successful, some things we have omitted which might have been done,--but in general the sound financial condition of the country and of our banks is the reward of a sound Treasury policy, of the existence of the Reserve System, and of its efforts to promote sound banking.I have referred to the criticism now arising, coincident with our entering the period readjustment. It is not necessary to review the charges of our critics which are as familiar to you as they are to me. I can only express my own views with which you may not agree.When war arises, a great part of the energy of the nation must be redirected from the pursuits of peace to conducting war and producing the materials destroyed by war. This may require the services of thirty percent, or more or less, of the working population and possibly a like percentage of the production of labor ordinarily consumed in times of peace. Our economic system has not yet been so organized and perfected that this transformation can be effected promptly. Were it so, by some system of rationing consumption and mobilizing labor, the whole of the 30% might be saved from consumption, and the materials required for war be produced out of the saving without any gross increase in production. We would simply change the character of what we produce. The same would be true of the credit required to finance the production and movement of that percentage of goods. What was saved would be absorbed by Government taxes and loans and no expansion of credit would result. But this ideal is not humanly possible. Warring governments enter the markets to buy goods in competition with each other and with their own citizens. Prices advanced more rapidly than production increases. The banking and credit machinery of the world, which plays the part of bookkeeper, simply records the price advance on the books of accounts. Of all materials required for war, credit is the easiest to manufacture. One stroke of the pen on the books of a bank, one revolution of the printing press, and bank deposit or note currency is produced. The banking machine responds to the demands of higher prices and sometimes of Finance Ministers, almost it seems with a note of joy. This is because we cannot control consumption by direct methods of rationing.But our critics say that it could be controlled by making new credit difficult and expensive to obtain. In other words by advancing our rates of discount. My reply is, how far should they be advanced? Will 6% be effective in reducing consumption, or will it require 60%? Should we risk a catastrophe to security values, government credit and credit generally, by relying solely upon making credit dear so that labor and goods may be cheap? The penalty of high rates must be borne by the just and the unjust alike. Producers of shells and war ships would feel the pressure as severely as would producers of automobiles and whiskey. It would mean a complete Government control of all industry and commerce and transportation essential to war and a high percentage of mortality among those not enjoying such protection. In the absence of means to directly control consumption, particularly of unessential materials such as luxuries, it seems to me that a great variety of indirect methods of influencing as well as controlling both production and consumption must be employed. The interest rate is only one of many such means, it will not be effective alone and relied upon alone would bring disaster. All indirect methods work imperfectly, slowly, and with a degree of injustice to different classes. The origin of the disease of high living cost lies in the wasteful and useless consumption of goods by the people. The remedy is to induce frugality, simple living, self denial,--to build up the morale of the civilian population to a high standard of patriotism,--and to visit the wrath and condemnation of public opinion upon those who violate the code of war time behaviour.
Beyond this the various agencies of the Government can do much. But they cannot do it all, and we must be content and possibly gratified to realize, after bitter experience, that war causes suffering and economic loss which no system can avoid--that the supreme effort must now be directed to realizing the great ideal--that war can be prevented.
Gentlemen, it is a great honor and privilege to meet this distinguished company. You men of affairs in Japan, and we in America have before us a great future of progress, with great services to perform, and great responsibilities to assume. We must undertake them with mutual helpfulness in our minds, as one of the objects of our common effort. I shall take home with me happy memories of my visit and hold constantly my good wishes for your prosperity and happiness.
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Strong, Benjamin, 1872-1928, “Speech by Benjamin Strong, Governor of the Federal Reserve Bank of New York at the Tokyo Ginko Club,” 1920 May 24, WWP18781, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.