Читать книгу Economics and the Public Welfare - Benjamin M. Anderson - Страница 14

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5

The Federal Reserve System, 1914-18

The Federal Reserve System, as we have seen, was not in operation when the Great War broke out at the end of July 1914. The Federal Reserve Board was not organized until August 12, 1914, and the Federal Reserve banks were not open for business until November 16, 1914. It was the Aldrich-Vreeland notes, and the close cooperation of existing banks, clearinghouses, stock exchanges, and the Treasury which met the first shock of the war.

Limited Rediscounts and Earnings Till April 1917. The flood of gold which came to us beginning with December 1914 made one of the easiest money markets in the history of Wall Street down to that time, and made it largely unnecessary before April 1917 for the banks generally to have recourse to rediscounting at the Federal Reserve banks. Certain of the Federal Reserve banks, notably those in Dallas, Kansas City, and Atlanta, started to rediscount substantially soon after they began business, particularly as the rise in agricultural prices and the revival of agricultural prosperity made increasing demands on the loan funds of the member banks in those districts. But the Federal Reserve banks in the great financial centers were not rediscounting enough to enable them to pay dividends through practically the whole period prior to the entrance of the United States into the war.

At the beginning of 1917 the Federal Reserve banks had earning assets of $221,896,000, including rediscounts for member banks, bills of exchange bought in the open market, various government securities, state and municipal warrants, and the like. Their chief asset, however, was the nonearning asset, gold. Foreseeing war from the beginning of 1917, the Federal Reserve banks sought to strengthen their position by reducing their earning assets, and when the war broke out their earning assets amounted to only $167,994,000. With decks cleared for action, they were prepared to rediscount on an enormous scale as the burden of war finance should compel the other banks to have recourse to the Federal Reserve System.

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Rediscount Rates Above Market. The Federal Reserve banks began to function on the basis of very orthodox central banking principles. They kept their rediscount rates above the market (meaning by the market the rate of interest charged by great city banks to prime borrowing customers). They started in November 1914 with rates at 6 percent in New York, Boston, Chicago, Philadelphia, Cleveland, St. Louis, and Richmond, and at 6.5 percent in the five other Federal Reserve banks. They engaged to a limited extent in open market operations. The law allowed them to buy United States government securities in the open market, and state and municipal tax anticipation warrants with six months or less maturity, but the supply of both of these was very limited. The federal public debt was less than a billion dollars, and approximately $700 million of this was already used as collateral for national banknotes. A substantial part of the rest was tied up in trust funds, and the floating supply was small.

We had an immense expansion of bank credit in the period from the beginning of 1915 to April 1917, but Federal Reserve policy made no contribution to this expansion. The expansion was based (a) on the incoming gold, and (b) on the reduction in reserve requirements which the Federal Reserve Act of 1913 had provided.

Concentration of Gold in Federal Reserve Banks. The Federal Reserve authorities were much impressed with the danger of the great influx of gold, and took measures to get the gold concentrated in the Federal Reserve banks. The original theory involved in this was perhaps not very clear, but in 1916 and in early 1917 there was a very definite practical consideration that we might be involved in war, and that it was important that the gold of the country be concentrated in a central reservoir as a basis for war finance. The procedure was cumbersome.

Awkward Process of Exchanging Federal Reserve Notes for Gold. The original Federal Reserve Act did not provide for the simple issue of Federal Reserve notes against gold. Incidentally, it did not provide for the issue of Federal Reserve notes by the Federal Reserve banks. The Federal Reserve notes were issued by the government to the Federal Reserve banks against collateral, and then by the Federal Reserve banks to the member banks. The government was represented in each Federal Reserve bank by the Federal Reserve agent. The Federal Reserve agent could issue notes against commercial paper, sixty percent, and gold, forty percent. The Federal Reserve banks had very little commercial paper. In converting a great deal of gold into Federal Reserve notes, therefore, it was necessary to use the same commercial paper a good many times. The president of the Federal Reserve bank would turn over to the Federal Reserve agent gold and commercial paper, receiving Federal Reserve notes. He would then turn over an additional sum of gold in redeeming the commercial paper, so that the notes had now 100 percent gold collateral. He would then use the same commercial paper with additional gold in getting more notes, and

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repeat the operation many times. A very substantial part of the incoming gold was by this means concentrated in the hands of the Federal Reserve agent as collateral for Federal Reserve notes.

Wartime Amendments. In the summer of 1917, after our entrance into the war, important changes were made in the Federal Reserve Act. One change eliminated this cumbersome process of issuing Federal Reserve notes against gold. Federal Reserve notes were allowed to be issued directly against gold alone, as well as against commercial paper and gold. Another provision reduced the reserve requirements of member banks to thirteen percent on demand deposits in the central reserve cities, ten percent in the reserve cities, and seven percent in the country banks, with three percent on time deposits for all classes of institutions. At the same time the member banks were required to carry all of their legal reserves as deposits with the Federal Reserve banks, their own gold and lawful money held in their own vaults no longer counting as legal reserves. This made it possible for the member banks to turn over all their gold to the Federal Reserve banks, receiving in return either deposit credits or Federal Reserve notes, depending upon their own and their customers’ needs.

Great State Institutions Enter System. The main objectives in this legislation were to encourage the concentration of gold and gold certificates in the Federal Reserve banks, and to encourage banks which had remained outside the Federal Reserve System to come in. When the system was first inaugurated, all national banks were obliged to come in or to surrender their national charters, but many powerful institutions with state charters, including the great trust companies in New York City, remained outside the system. On October 13, 1917, President Wilson issued an appeal to the state banks and trust companies to enter the system as a wartime measure. The response was gratifying. The great state banks and trust companies of New York City entered rapidly and readily. And this was true in other major cities. Much the larger number of the banks with state charters remained outside, but very speedily the major part of the banking resources and banking capital of the country had entered the Federal Reserve System.

Great Technical Services During War. The Federal Reserve System performed great and distinguished services for the government and the country in World War I. It is difficult, indeed, to see how we could have handled the financial problems of the war without it. It made possible a smoothness and simplicity in handling huge financial transactions that would have been incredible under the old system. In the summer of 1918, for example, the federal government collected around $4 billion in taxes in a few weeks. In connection with the first liberty loan in 1917, $2 billion were paid into the federal Treasury in a short time. Financial transactions of this magnitude would have led, under the old system, to drains, falling primarily on the New York banks, which would have forced the banks almost instantly to suspend cash payments. Had the old subtreasury system remained in full

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vigor, under which all payments to the federal government were placed in cash in the vaults of the government itself, the mechanism would have broken down with the first liberty loan. Under the Federal Reserve System, however, these huge financial transactions were largely accomplished by bookkeeping entries. The Federal Reserve banks and the Federal Reserve Board at Washington, moreover, developed an extraordinary finesse in balancing debits and credits. They studied in advance the probable demands to be made on banks in various localities, and made an effort to route collection items through them in such a way as to give them funds which would break the shock of the heavy withdrawals. They provided in advance for rediscounting paper for these banks, and suggested to the Treasury the best places where government deposits might be made to offset heavy drafts. The policy was also developed of having each Federal Reserve bank rediscount with the others in such a way as to keep the gold reserve ratios of the twelve Federal Reserve banks approximately equal.

Gold Settlement Fund. Shortly after the inauguration of the Federal Reserve System, the Federal Reserve Board required the Federal Reserve banks to create a gold settlement fund in Washington, designed to lessen the physical transfer of gold from one Federal Reserve district to another in connection with interregional settlements. On July 1, 1918, daily settlements among the Federal Reserve banks were inaugurated, reducing in general the amount of gold that had to be transferred from one to another at any given date, and making it possible for the Federal Reserve Board at Washington to keep in constant touch with the reserve situation of each bank and to keep reserve percentages equalized by rediscounting. Daily settlements did not mean daily shipments of gold to and from Washington. “Suspense accounts” kept by the various Federal Reserve banks with the gold settlement fund obviated this. We went far during World War I in the direction of making one central bank out of our twelve Federal Reserve banks.