Читать книгу Economics and the Public Welfare - Benjamin M. Anderson - Страница 13
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The United States entered the war on April 6, 1917. Our war economic policy had to be rather rapidly improvised. Basic in it was the belief in a free economy and a determination to maintain sound money and sound public finances. There was, however, recognition that the ordinary market forces, left to themselves, would not suffice to bring as speedy a shifting from peace activities to war activities as the emergency called for. And there was recognition that if the government merely added a great increase in expenditure to existing civilian expenditure and competed against the people for goods and supplies and services, there would be an inordinate further rise in commodity prices. Goods were already very scarce, as we had been pouring out great quantities of exports to Europe and as our own people, with money incomes increased by the war prosperity, had been resisting the export of goods by bidding up prices.
Taxes and Loans—Sprague’s Proposal. The traditional policy of the American government in financing a war had been by war loans, with enough increase in taxes to provide for the interest and amortization of the war loans. We had financed the Spanish-American War on this basis. But there came a speedy realization that, for the war on the scale which we were about to engage in, this procedure would be quite inadequate. One of the most influential figures in bringing this forcibly to the attention of the Congress and the President and the country was Professor O. M. W. Sprague of Harvard University, who wrote an article calling for an all-tax policy which had the significance of a great state paper. Sprague had been watching developments in England and other belligerents closely. He had seen how an immense increase in government spending, based on government borrowing and especially government borrowing from the banks in those countries, had generated a great rise in prices, wages, and profits, which in turn had led to a further rise in prices, wages, and profits as the people spent their unusual income competing with the government. He urged, correctly, that except as goods could be brought in from the world
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outside the country, the war must in any case be fought with the current production of the country. If we had full production, the government’s increased consumption and utilization of commodities must in any case come out of the current real income of the people. We could not save ourselves current sacrifice by creating loans for future generations to pay, though by borrowing we could easily enough leave a burden of debt for the future. He proposed that we should forthwith impose taxes equal to the government’s expenditure, so that the people might by taxes be forced to relinquish their ability to compete with the government.
The proposal was overly drastic, but in the compromise that came out of it we adopted the definite policy of heavy and growing taxes and the further policy of borrowing from the people instead of borrowing from the banks, to the full extent this could be done. If the people gave up their income to the government through the purchase of government bonds out of current income, we should similarly hold down their ability to buy and to compete with the government. Bank credit was to be used in moderating the transition and in softening the shock. Men might borrow from the banks on a margin to buy bonds and pay off the loans in installments, in effect giving to the government part of their income before they got it, but the savings would come in subsequent months and be paid to the banks.
Federal Reserve bank credit likewise was to be used in this process, but the government was not to borrow directly from the Federal Reserve banks. Rather, the Federal Reserve banks were to rediscount for other banks against government war paper.
To an amazing extent the policy was successful. The facts are well brought out in a chart issued by the board of governors of the Federal Reserve System.1
The commercial banks at the peak of the government borrowing held over $4 billion in government bonds, but they had had over $700 million to start with in bonds to secure national banknotes. Investors held over $18 billion, mutual savings banks held substantial amounts, Federal Reserve Bank holdings were very small indeed. At the peak of the government borrowing in 1919 it was estimated that the commercial banks held altogether about $6.5 billion of government war paper, of which about $3 billion were loans secured by government bonds and $3.5 billion were war bonds owned (including, of course, short government notes). We actually got the current savings of the people with taxes and with bonds on a tremendous scale.
The Role of the Federal Reserve Banks in Government Finance. The Federal Reserve banks had reduced their earning assets to well below $200 million by the time of the outbreak of the war, getting ready for the war
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emergency. Their great asset was the nonearning asset, gold. They expanded credit greatly during the war, when viewed in the perspective of that time, though in terms that look very modest indeed when we consider their history in the period since 1932 and, above all, in the period of World War II.
The following table exhibits the extent of Federal Reserve Bank expansion almost to the time of the Armistice, which was November 11, 1918. It stops with October 25. It was prepared late in 1918 by Dr. M. Jacobson, statistician of the Federal Reserve Board. It is not altered nor are the dates altered, because changes in accounting methods since the inauguration of
PRINCIPAL RESOURCE AND LIABILITY ITEMS OF THE FEDERAL RESERVE SYSTEM ON SELECTED DATES
(In thousands of dollars)
| Resources | Nov. 26, 1915 | Dec. 22, 1916 | Oct. 25, 1918 |
| Total gold reserves | 492,063* | 728,445* | 2,045,132* |
| Total cash reserves | 529,375* | 734,470* | 2,098,169* |
| Bills discounted: | |||
| Secured by government war obligations | 1,092,417 | ||
| All other | 32,794 | 32,297 | 453,747 |
| Bills bought in open market | 16,179 | 124,633 | 398,623 |
| U. S. government long-term securities | 12,919 | 43,504 | 28,251 |
| U. S. government short-term securities | 11,167 | 322,060 | |
| Total earning assets | 89,200 | 222,158 | 2,295,122 |
| Total resources | 637,261 | 1,009,852 | 5,270,785** |
| Liabilities | |||
| Capital paid in and surplus | 54,846 | 55,765 | 80,324 |
| Government deposits | 15,000 | 29,472 | 78,218 |
| Member banks’ reserve deposits | 397,952† | 648,787† | 1,683,499 |
| Other deposits, including foreign government credits | 117,001‡ | ||
| Federal Reserve notes in actual circulation | 165,304 | 275,046 | 2,507,912 |
* Includes amounts of gold and other lawful money deposited with Federal Reserve agents against Federal Reserve notes issued.
** Includes clearinghouse exchanges and other uncollected items formerly deducted from member bank deposits.
† Net amount due to member banks.
‡ Exclusive of deferred credits on account of uncollected checks and other cash items.
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the system, partly due to changes in law, would make it difficult for anyone not intimately versed in Federal Reserve statistics to make the changes correctly.2
Limited Government Security Purchases by Federal Reserve Banks. In this table, particular attention is called to two items showing the United States government securities held by the Federal Reserve banks. Of long-term securities they held twenty-eight million on October 25, 1918, and of short-term securities they held 322 million. The second of these figures was temporary, growing out of the exigencies of the fourth liberty loan. It was promptly reduced to 118 million in a few days.
In general, the Federal Reserve banks gave credit only against rediscounts, and direct holdings of government securities remained very small, with four exceptions of a few days each.
Temporary Holding of Government Securities During Liberty-Loan Drives. They had learned from British experience the trick of easing off the money market by the purchase of government securities while a loan was being floated. With each of the four liberty loans they did this. With the first liberty loan the sum was a few tens of millions. With the fourth liberty loan the increase was over $200 million. When they bought government securities, they paid for them with checks on themselves. These checks came into the hands of member banks. The member banks then deposited them in the Federal Reserve banks, building up their reserve accounts. This eased the money market and facilitated the great transactions in the placing of billions of dollars of liberty loans. When the loan was over the Federal Reserve banks sold the government securities, withdrawing the money from member bank reserves and tightening the money market again, usually forcing member banks to rediscount in the process.
Money Market Tightens as War Goes On. The money market during the war grew progressively tighter. Both capital and money market funds grew increasingly scarce. Bank credit expanded, but at progressively higher rates of interest. The call rate—which had dropped low in 1915 and to the middle of 1916, averaging less than 2 percent and dropping to 1 percent for one month in May 1915—had already tightened sharply in the second half of 1916. With our entrance into the war it began to move very sharply higher. It touched 7 percent in September 1917, dropped momentarily to 4 percent in October, and then moved up to 6 percent by January 1918, at which figure it was pegged—the pegging being accompanied by a rationing of call money by a clearinghouse committee.
Bond yields went up. It was a firm money situation. The pressure of firm money rates undoubtedly did a great deal to retard bank expansion and to hold it down to necessary things.
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The Treasury in its borrowing policy made rates of interest which were reasonably attractive to investors. The first liberty loan was at the rate of 3.5 percent, fully tax-free. The second liberty loan was at 4 percent, partially tax-free. The fourth liberty loan was at 4.5 percent, partially tax-free. There were, moreover, provisions that holders of one loan might convert into a later loan if the rate were higher. The government did not rely upon the rate alone to attract investors’ money. It counted also on patriotism, and on the wonderfully organized system of drives under which a good many men who were reluctant to buy bonds found themselves under such pressure from their neighbors that they bought them. Social pressures were used as well as rates. But the rates were well above the rates at which government bonds had been selling before the war began, and were rates which an investor could feel would give a good bond, selling at par if he carried it through the period of war pressure.
Rediscount Rates Below the Market, but Rising with the Market. The Federal Reserve banks, to facilitate the loan policy of the government, put their rediscount rate below the market. The New York Federal Reserve discount rate was placed at 3 percent in 1917, was raised to 3.5 percent at the end of the year, and to 4 percent in early 1918, remaining below the market, but following the market up. But our experience with the Federal Reserve System has shown that while a rate below the market is undesirable, it does not in itself create bank expansion, nor does it by itself create cheap money. Banks usually are prudent in rediscounting. They do not like to be in debt to the Federal Reserve banks.
In 1919 and early 1920 the banks did borrow to relend at a profit, but expansion of bank credit which took place in those years was in the face of rapidly rising rates of interest and was due to the inordinate demands of borrowers in a boom. The rates below the market permitted expansion to go further than it would have gone, but did not permit it at low rates of interest. Our experience with the Federal Reserve System, taking all the years since it has been in existence, would show that the decisive instrument for cheapening money is open market purchases rather than discount rate.
Wartime Reduction in Reserve Requirements. The legislation of 1917 reduced the reserve requirements to thirteen percent, ten percent, and seven percent for demand deposits in central reserve cities, reserve cities, and country banks, respectively, and to three percent on all time deposits.3
Bank Expansion Slows Down During War. The extremely low reserve requirements set by the legislation of 1917 did no harm in the period of the
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war. The fact that these low reserve ratios make possible a tremendous multiple expansion on the basis of excess reserves was not operative,4 because there were no excess reserves to work on.
The expansion of bank credit was slowed down sharply during the war as compared with the preceding years 1915, 1916, and the first part of 1917. For the period June 30, 1914, to June 30, 1918, bank deposits expanded year by year as follows:
TOTAL DEPOSITS OF ALL COMMERCIAL BANKS
(In millions of dollars)
| Call date | Total |
| 1914—June 30 | 17,390 |
| 1915—June 23 | 17,993 |
| 1916—June 30 | 22,079 |
| 1917—June 20 | 25,885 |
| 1918—June 29 | 28,011 |
For the period of our actual participation in the war, the expansion was as follows:5
DEPOSITS OF COMMERCIAL BANKS
| December 31, 1918 | $26,541,039,000 |
| April 6, 1917 | 20,705,588,000 |
| Increase | $ 5,835,451,000 |
LOANS, DISCOUNTS, AND INVESTMENTS OF COMMERCIAL BANKS
| December 31, 1918 | $29,354,214,000 |
| April 6, 1917 | 22,297,775,000 |
| Increase | $ 7,056,439,000 |
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This is a remarkable exhibition of restraint in the employment of bank credit in a great war. We had to finance the government with its four great liberty loans and its short-term borrowing as well. We had to transform our industries from a peace basis to a war basis. We had to raise an army of four million men and send half of them to France. We had to help finance our Allies in the war, and, above all, to finance the shipment of goods to them from the United States and from a good many neutral countries. We had an immense shipbuilding problem.
Private Financing of War Production—War Finance Corporation Unimportant. Commercial bankers and investment bankers, moreover, had to finance the industrial expansion that took place for war purposes. There were no great government loan organizations replacing private finance. There was, to be sure, the War Finance Corporation, a government corporation with a capital of $500,000,000, which was to extend new credits to essential industries and to savings banks and public utilities which had been suffering under the war pressure. But in practice the War Finance Corporation down to October 15, 1918, had extended credits of only $43,202,592. The most important extension of credits made by that date was $20,000,000 to the Bethlehem Steel Corporation, $17,320,000 to the Brooklyn Rapid Transit Company, $3,235,000 to the United Railways of St. Louis, and $1,000,000 to the Northwestern Electric Company. All the rest of the credit given to industry in the great war effort was made by the commercial banks and the investment market. Private finance was adequate, and private finance did an immensely efficacious job. To repeat the figures, in doing this job commercial bank credit expanded only $7,000,000,000 in loans, discounts, and investments, and only $5,835,000,000 in deposits. (The gap on the liability side of these bank figure is filled by rediscounts at the Federal Reserve banks and by an increase in banking capital funds.)
The Rationing of Credit. One important factor in holding down the expansion of bank credit was the rationing of credit, and the denial of credit to nonessential industries. The first organized step in this direction was taken on September 17, 1917, by a subcommittee on money rates of the New York Liberty Loan Committee, composed of the leading bankers of the city. It undertook to limit the funds available for the stock market, providing funds, on the other hand, when necessary for the protection of the stock market, and, above all, for the protection of the liberty loans. It pegged the call rate at six percent to the brokers, but it held down the supply. They could have what they had to have and what could be spared after giving precedence to the needs of the government and to the needs of the commercial borrowers. The committee also made a ruling that banks should require a margin of thirty percent on collateral loans made to stockbrokers where an average of twenty percent had previously been required. The stock market ceased to be a very effective competitor for
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loan funds, though it was not strangled, and continued to function effectively.
In addition, early in 1918 the Capital Issues Committee of the Federal Reserve Board, semiofficial in character, was organized, whose function it was to pass on proposed new issues of securities. Only essential industries were to be allowed access to the investment market. It lacked power to prohibit such issues, but it met such loyal and effective cooperation from bankers throughout the country that it was virtually able to boycott all issues of which it disapproved. Connected with it were local Capital Issues Committees in each of the twelve Federal Reserve districts. This committee surrendered its function upon the organization of the new War Finance Corporation in May 1918 to the Capital Issues Committee of the War Finance Corporation, though in part the personnel of the two committees remained the same.
There was apprehension in Washington that the competition of the bankers might prevent an effective policing of the loan situation and that with many thousands of independent banks it would be impossible to hold down nonessential loans. The proposal was once made that the Capital Issues Committee of the War Finance Corporation should pass on all loans made by banks exceeding $100,000, but this naive suggestion was promptly dropped when a great New York bank showed its loan transactions of a single day, which included one $5,000,000 loan to an essential industry made in fifteen minutes as a necessary part of meeting a rush order by the government. The great banks did scrutinize loan applications with respect to their essentiality with great rigor, and the smaller banks over the country were rapidly educated in the matter.
Of course a great deal of ordinary activity was precluded by the enormous cost of such activity. Construction, for example, dropped to a very low level in 1918. The Index of Construction stood at 111.3 in 1916. It dropped to 64.9 in 1918, and of the 64.9 a very high percentage indeed was essential construction for war purposes.
Commodity Control and Price Fixing. But we did not rely upon financial restraints only in holding down the volume of nonessential production, consumption, and construction. Construction itself was directly controlled by the denial of essential materials and by the requirements of a license for any building costing more than $500.
Price fixing we engaged in cautiously. There was a pretty clear recognition of economic fundamentals. Prices have work to do. Prices have the important function of accomplishing priorities, allocations, and rationing. That is their regular work. It is the work of free prices and freely moving wages to determine whether labor and supplies shall be drawn to the production of commodity A or of commodity B. Rising prices mean more production. Falling prices mean less production. Rising prices mean less consumption. Falling prices mean more consumption. With freely moving
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prices, commodities are divided among consumers in accordance with the relative urgencies of demand. With freely moving prices and freely moving wages, the goods in most urgent demand are produced, and the production of the less urgently demanded goods declines.
When prices are fixed by government, the government should step in to do directly the work that free prices would otherwise do. The government should allocate commodities. The government should give priorities. The government should ration commodities. If wages are fixed, the government should take steps to divert labor from less urgently needed production to more urgently needed production. Price fixing by itself tends to derange perversely the control of production and consumption. Holding prices down and doing nothing else encourages the depletion of supplies which would last longer if their prices were higher.
It follows from this that price fixing ought not to be pushed in advance of the development of machinery for commodity control.
In World War I we knew these things very well. Proposals for the fixing of all prices met very little sympathy from President Wilson, who was a good economist. We established a pretty comprehensive system of commodity control of scarce essentials needed for war or for the life and health of the people. We had priorities. We had allocations. We had rationing. We denied coal and freight cars and raw materials and capital to nonessential industries, or we restricted sharply the amounts of these things that they could get.
As part of this we had price fixing. We had no price fixing without priorities, allocation, and rationing. We had a great deal of priorities, allocations, and rationing without price fixing. We did not try to fix the price of luxuries. We simply denied the luxury industries the materials and supplies they needed.
We did very little about retail prices: “The great bulk of regulation over prices administered by the federal government during the war pertained to producer or wholesale prices. There was no real attempt save in food and fuel to control prices at retail. The task of controlling retail prices was undertaken in a comprehensive manner by the Food Administration after its wholesale control was well under way.”6
Seeing the problem primarily as a problem of commodity control rather than of price control, we did not try to do it by one comprehensive organization which would do all the price fixing. Rather we had separate boards for different industries. We had a separate grain and flour administration and a separate fuel administration, for example. These handled both price fixing on the one hand, and allocations and rationing on the other, in their particular fields.
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The need for having the good will and cooperation of the industries was in general recognized. And the need for using the brains of the industries and for having administrators trusted by the industries was in general recognized. As far as possible we used the existing machinery of the markets.7 The one serious failure in price fixing came in bituminous coal, where this principle was not recognized in 1917, where the knowledge of the men in the trades was not used, where prices were fixed arbitrarily on the basis of imperfect knowledge, where production was as a consequence radically curtailed, and where a great deal of unnecessary disorder arose.
The Fuel Administration in 1917 apparently did not know that there were such things as differentials based on quality of coal, and apparently had never heard of British Thermal Units. The result was, in certain cases, that companies with both high-quality mines and low-quality mines and scarce labor shut down the high-quality mines and produced only coal with high ash content.
When Harry Garfield took charge of the Fuel Administration, he recognized these difficulties, called in the skilled men of the industry, softened the animosities that had arisen, radically improved the machinery and the practices, and finally made the fuel control successful.8
Wages we did not try to fix in World War I. Efforts were made to reduce the competition for labor, particularly interstate competition for labor, by the industries. Nonessential industries were made ineffective competitors for labor by being denied coal, freight cars, and capital. But wage fixing was not attempted. Wages continued to rise during the war, even though the general average of commodity prices was held down.
Price fixing was thus a factor, but not the dominant factor, in controlling the level of commodity prices during World War I. As previously shown, the curve for commodity prices at wholesale flattened out after July 1917, reacting slightly from 189 percent of 1913 prices in August to 182 in December, and then gradually, under very heavy pressure, rising slowly to a peak of 204 in September 1918, after which it again receded. This was an amazing achievement. It was accomplished by four main policies. First, there was a sudden imposition of very heavy taxes, taking up a great part of the income of the people. Second, the Treasury’s borrowing policy got
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investors’ money, got the current savings of investors. The banks took some of the bonds, but every effort was made to keep the banks from doing much. Third, we had a progressively firm money market, with tightening interest rates, which held down bank expansion. Fourth, we had price fixing for scarce essentials. There was a great deal of functional control of prices. There was very limited direct control of prices. There was a great deal of direct control of commodities and a great deal of wartime planning of production and consumption.
The Verdict of Charles Evans Hughes. Governmental economic planning in World War I was highly intelligent and very honest. There were blunders made. One blunder was in the cost-plus contracts, which made it to the advantage of a corporation that had such a contract with the government to incur unnecessary expenses, since the profit was a fixed percentage of the outlay. There were many blunders incidental to the haste and confusion. The army, in its haste, ordered unnecessary goods. Thus, among the surgical instruments sent to the front line hospital bases there were a large number of obstetrical instruments—an inexcusable and incredible thing, but readily enough explained when it appeared that the order for surgical instruments had been based on the standard supply of surgical instruments at an army post in the United States at which there had been a good many officers’ wives.
There were some cheating and some gouging. But on the whole the record was amazingly clean and efficient. And when charges of great abuses were made after the war, President Wilson called upon his opponent in the 1916 election, the Honorable Charles Evans Hughes, later chief justice of the United States Supreme Court, and one of the most highly respected lawyers in the country, to make a thorough investigation, giving him carte blanche, access to all records, and adequate assistance. Hughes made a very thorough investigation and came out with a report that sweepingly vindicated the War Administration.
We were concerned in World War I with profiteers. It troubled us that certain companies should make a great deal of money out of war. But we were more concerned with getting results. We imposed very heavy taxes on excess profits and very heavy taxes on war profits, and we felt that it was better to let them make the profits and to tax them heavily than to slow them down by trying to prevent their making profits in the first place.
We did not look upon a great war as primarily an opportunity for accomplishing sweeping social reforms or for reconstituting the basic principles of economic life. We looked upon the war rather as something that had to be done and to be got through with as quickly as possible. We believed in economic freedom. During the war we submitted to drastic, needed economic restraints and controls. But we had no love for them, and we got rid of them as speedily as we could when the war was over. Most of them we dropped immediately—including price fixing.
