The Credit of the Government

Title

The Credit of the Government

Creator

Strong, Benjamin, 1872-1928

Identifier

WWP18843

Date

No date

Description

A document on government credit and currency policy.

Source

Benjamin Strong Jr. Papers, New York Federal Reserve Bank

Language

English

Text

(6) The Credit of the Government. The issue of paper money, bearing the obligation of the Government, must be examined in its historical and economic aspects, and, further, with regard to the protection of the credit of the Government itself. Discussing only the ,latter features of this subject, what are the possibilities under the Owen-Glass bill of difficulty or disaster as contrasted with the accepted plan common to all the great European nations, of a bank note issue under Government regulation, but without the Government obligation. Should this country become involved in a foreign war, a great economic disturbance, or, what is more possible, should our credit situation be subjected to the djisturbing influences of a great conflict between foreign nations, how may the demand obligations of the Government created by the Owen bill affect the credit of our Government?The bill provides that the notes shall be redeemable in gold, on demand, at the Treasury Department of the United States, or in gold or lawful money at any Federal reserve bank. The bill permits the Federal Reserve bank to authorize member banks to use Federal reserve notes or notes of the National banks as reserves. Under these conditions, any great economic disturbance in this country, or any world-wide disturbance of credit which might react upon this country’s credit establishment, involves a danger to the credit of the Government, so long as the Government’s obligation is attached to the notes, to the extent, in fact, that a suspension of the reserve requirements of the regional banks as permitted by the bill might involve a suspension of specie payments by the United States Government. A great European war, necessitating huge expenditures, would raise rates of interest in foreign countries that would react in turn upon our banking system, requiring the exercise of every possible measure, first, to retain our store of gold; second, to the extent that it became impaired, to enable the regional banks to pay their notes in lawful money; third, to enable the Government to redeem ists lawfu,l paper money in gold. Will a system of regional banks, which is the instrument for issuing old millions of Government obligations, be able to protect the Government in such an emergency, and is it not the duty of Congress to see that any legislation now enacted shall afford every means which can be devised to that end? A drain upon the gold of the country in such emergency would be due to the necessary repurchaese of foreign investments, to the interruption of our foreign commerce and the disturbance of the balance of international trade, to the floating of foreign loans in this market, to the withdrawal of foreign bank credits not extended to this country, and to the imposition upon our own credit establishment of the burden of financing trade which is now largely carried by England. Gold, in this emergency, would be withdrawn through the presentation of Federal reserve notes of the regional banks, so long as they were able to furnish gold in payment, when unable to furnish gold, presumably they would exercise their right to pay in lawful money. The demand for gold would thereby be transferred to the United States, by the presentation of the lawful money. This process might necessitate the suspension of the reserve requirements as to the regional banks throughout the country. The ability of the Government to pay gold would be limited to $150,000,000 now held in its trust fund reserve, and its ability to obtain gold from the regional banks. By what process might the Government redeem its notes in gold if the regional banks had suspended their reserve requirements and the Government were forced to rely upon its own ability to purchase gold by the use of its own obligations? The markets of Europe would be closed. Our gold supply at home would be subject to influences largely corresponding to those which now arise in this country in time of panic. We will have possibly 20,000 State institutions, who, influenced by the strain and shock to the credits of the country, due to conditions described and to the suspension of the reserve requirements of the regional banks, will at once endeavor to strengthen their gold reserves, and to do so by presenting Federal reserve notes to the regional banks and demanding gold for them. Should payment be made in lawful money, the demand would be transferred to the Government. Our system for many years will be unable to overcome the influence of the process of hoarding on the part of State institutions which are not subject to Federal control or to the influence of regional banks.As contrasted with this condition, if the notes are the obligatiojn of a central bank, the absolute suspension of reserve requirements could be made without involving the credit of the United States for the redemption of the notes, and the last resort of banking practice could be safely employed before suspension of payment in gold would be forced upon the Government. The United States is already obligated for the redemption on demand in gold of a sum of paper money greater than the entire funded debt of the Government. Why add to the peril? Why offer gratuitously the credit of the United States when it is not required? Why create a note issue with a redemption fund hardly more than one-half of the amount which experience shows to be required in Europe, and then attempt to cure its defects by the endorsement of the Government?

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Citation

Strong, Benjamin, 1872-1928, “The Credit of the Government,” No date, WWP18843, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.