Part 3

Great Britain, when the United States entered the war, pegged the pound sterling in New York at $4.76-⁷/₁₆, which means that Great Britain through Morgan and Company, the agent of the Bank of England, engaged to buy all drafts on England payable in pounds sterling at $4.76-⁷/₁₆ for each pound sterling on the face of such bills. This was accomplished by the United States Treasury furnishing the money to Great Britain against British bonds, which enabled Great Britain and British merchants to buy in the United States the goods she required without paying usurious rates of interest for such credits. Except for the backing of the United States Government the pound sterling would have been most seriously depreciated in the United States and in the entire world.

Great Britain, the wisest of all financial countries, thoroughly understood this problem and put the pound sterling within two per cent. of commercial par—for the purpose of protecting Great Britain against the gigantic loss due to an adverse international exchange. The United States must pursue the same policy and make it effective with other countries. She has no adequate organization by which it may be accomplished.

It might be said—why do not the great New York, Chicago and Boston banks take steps to protect the United States against this loss thro the depreciated dollar?

The answer is—It is none of their business.

The answer is—They handle these bills as commodities coming over their counter; they buy them and sell them at the market, and the market is fixed by persons who appraise the matter purely from a standpoint of profit, and commissions based on an estimate of implied risk. Banks buy Spanish pesetas and sell Spanish pesetas to other banks all over the world; they do not look at the matter from a public standpoint, and it is not to be imputed to them as a fault because they do not regard this question from a public point of view.

Since the war arose gigantic volumes of foreign securities have been placed on sale in the United States which serve to protect them against an adverse exchange in the United States.

By these means other nations have undertaken to protect themselves against an adverse balance of trade in the United States due to the great shipments of goods from the United States. A similar policy is necessary for the United States to protect itself in turn.

It will thus be seen that the United States has loaned its Allies five thousand, five hundred and nineteen millions, and that there have been floated in the United States in addition gigantic volumes of securities of other nations, amounting probably to a still larger sum. In addition to this we have bought from Europe and paid for several billion dollars of American securities held in Europe.

We have also met the cost of conducting the expense of the United States in preparing for war on Germany and Austria.

THE PRODUCTIVE POWER OF AMERICA

It has been estimated by excellent authority that the productive power of the United States, including the products of agriculture, of the mines, of the forests and factories on one turnover, exceeded sixty billions for last year (1917). The actual resources of the banking power of the United States, as shown by the tabulated returns, is over thirty-nine billions, so that the United States is financially the most powerful nation in the world; its credit is superior to that of any other nation in the world; its actual gold in the Federal Reserve Bank amounts to eighteen hundred millions, and in the Treasury it amounts, with the silver included, to twenty-eight hundred millions. The power of the United States properly organized and properly directed is sufficient to put the United States dollar at par throughout the world and keep it at par.

THE DOLLAR AT PAR

Every intelligent man understands the extreme importance of keeping the United States dollar at par in the United States, and it is of equal importance, according to the business transacted, to keep the United States dollar at par in our foreign business. We bought last year from other nations nearly three billion dollars’ worth of goods.

If the United States dollar is put at par and kept at par it will become a stable measure of value in international contracts and will enable merchants all over the world to use the American dollar as a standard measure of value. This will lead to international business being transacted on American dollars and will establish the prestige of the United States throughout the world according to the actual financial and commercial strength of the United States.

AMERICAN MERCANTILE MARINE

After the war America will have a gigantic international mercantile marine, which must be employed in international commerce; otherwise it will pass into the hands of other nations who will employ such ships in commerce. As a means of maintaining American commerce and keeping the American merchant marine employed we must expand our export business, and one of the factors of vital importance is to have adequate foreign banking facilities, information and credit furnished our exporters and our importers.

The banking capital employed in the foreign exchange department of the American banks probably will not amount to $200,000,000. The usual bills are 30, 60 and 90 day bills, so that the available American Capital in this service is by no means adequate to handle the foreign business. Our imports and exports in 1917 were over nine billions. We ought to handle a large part of foreign international bills, for we have the banking power if it were organized and employed. As a means to this end I have introduced a bill in the United States Senate (Sen. 3928) which I fully explained in the Senate Feb. 25, 1918, to establish a Federal Reserve Foreign Bank.

FEDERAL RESERVE FOREIGN BANK

The Federal Reserve Foreign Bank proposed by Senate Bill 3928 is strictly in line with the policy of the Federal Reserve Act in the powers granted to the Federal Reserve Banks, and is intended to make effective the principles of the Federal Reserve Act itself.

The Federal Reserve Act authorized the Federal Reserve Banks in Sections 13 and 14 to receive deposits, discount commercial bills and acceptances, deal in gold and silver, to exchange Federal Reserve notes for gold, to contract for loans on gold coin or bullion, giving therefor when necessary acceptable security, including hypothecation of United States bonds or other securities which Federal Reserve Banks are authorized to hold, to buy and sell at home or abroad bonds and notes of the United States, of foreign Governments, etc., buy and sell commercial bills of exchange, to issue bank notes and receive Federal Reserve notes, to open credits at home or abroad, to open and maintain accounts in foreign countries, appoint correspondents and establish agencies in such countries wheresoever it may be deemed best for the purpose of purchasing, selling, or buying bills of exchange or acceptances, arising out of actual commercial transactions which have not more than ninety days to run and which bear the signature of two or more responsible parties, and with the consent of the Federal Reserve Board, to open and maintain banking accounts for such correspondents or agencies, etc.

The original Federal Reserve Act also provided, in Section 25, that any National Banking Association with a capital surplus of a million dollars, or more, might be permitted to establish branches in foreign countries for the furtherance of the foreign commerce of the United States and to act as fiscal agents of the United States.

Such National Banks are also authorized to take stock in banks or corporations, chartered under the laws of the United States or of any State thereof, and principally engaged in international or foreign exchange.

Under Section 25 some of the National Banks have established branches in foreign countries.

Some of them have taken stock in banks doing a foreign business.

But the Federal Reserve Banks have not exercised the powers contemplated by the Federal Reserve Act in foreign bills or foreign business except in a negligible degree.

The Federal Reserve Banks have been intensely occupied in domestic business, so there is that reason why they have not been disposed to enter the foreign field. These banks have increased their resources until now they exceed thirty-eight hundred million dollars. But it is also true that six of their nine Directors are chosen by the privately owned banks some of whom fear the competition of the Reserve Banks in foreign banking.

Congress later amended the Federal Reserve Act, at the request of the Federal Reserve Board, and gave the Federal Reserve Board authority to _require_ the Federal Reserve Banks to establish foreign branches, but practically nothing has been done under this authority granted by Congress. Senate Bill 3928 proposes to add a new Section to the Federal Reserve Act as Section 25 A., creating a Federal Reserve Foreign Bank of the United States, under the supervision of the Federal Reserve Board to be located in the City of New York, with a capital of one hundred million dollars, with an initial capital of twenty millions, the stock to pay five per cent., to be non-taxable, to be offered to the public and to the banks at par and if not taken by them to be taken by the United States Government.

The powers proposed for this bank are practically the same as are given to the Federal Reserve Banks, but the management of the bank is put into the hands of directors, nine in number to be designated by the President of the United States. The proposed Act directs that the members of the board shall be men of tested mercantile experience and fairly representative of the various parts of the United States. It does not say that they shall not be bankers, but if they are bankers they must be bankers who have had tested mercantile experience, such as is required of the Governors of the Bank of England.

THE PURPOSE OF THE BILL

The purpose of this proposed Act is to establish a publicly controlled agency in charge of men with tested mercantile experience, who shall administer the bank in the interest of American commerce, of American importers and exporters, of American manufacturers and producers, in the interest of American consumers, and not merely in the interest of bankers, but in co-operation with the bankers, as the Bank of England or the Bank of France co-operates with other banks while being influenced also by the general public interest.

Such a bank would buy and sell international bills of exchange and acceptances from and to American and foreign banks who desired to sell or buy such bills.

Such a bank would in this way serve the interests of other banks handling international exchange, but such a bank being publicly controlled would furnish American importers and exporters, manufacturers and producers with credits abroad, with banking facilities and accommodations at a standardized fair rate of profit, which would serve the common interest of American business men.

Such a bank publicly controlled would not expose an importer’s business or an exporter’s business to trade rivals,—a practice known to exist in certain foreign exchange departments where Germans systematically conveyed such valuable information to rival German firms.

Such a bank would furnish foreign exchange without profiteering or speculating.

Such a bank would be concerned to keep the American dollar at par and in co-operation with the Government of the United States would take the essential steps necessary to that end, a function which no private bank could exercise.

Such a bank through the Federal Reserve Banks could become a means of extending to every member of the Federal Reserve System foreign banking facilities and information for the benefit of the local importers and exporters, so that a member bank could take a draft of a local exporter on any part of the world and have it cashed whenever the local bank desired the money.

Such a bank could place these bills with other Federal Reserve Banks and with member banks who had unemployed money.

Such a bank as a bank of deposit could utilize some of the very large deposits now placed at two per cent. and could furnish American importers and exporters banking accommodations at as cheap a rate as does Lombard Street. Lombard Street in London now finances the commercial bills of the world, running into thousands of millions at three and one-half per cent. per annum, while the current New York and Boston rate is a minimum of four and one-half. The international exchange business of the world cannot be brought to America unless America extends accommodations on as favorable terms as London, which is now the commercial and financial center of the world. America has the power.

America, as a matter of fact, has loaned Great Britain and Allies since we entered the war, April, 1917, many billions besides taking over many billions in foreign securities placed in America—buying billions of American securities held in Europe, in addition to the gigantic financing of the war by the United States itself.

Such a bank publicly controlled by having gold deposits in Europe and Asia could make it unnecessary to incur the economic loss of transferring gold back and forth across the Atlantic and Pacific.

Such a bank could not only bring the American dollar to par, but what is more important could fix the American dollar at commercial par and maintain it there as a standard measure of value for international contracts throughout the whole world. Unless this is done America cannot become the financial center of the world.

Unless this is done the gigantic mercantile marine, which America is now building at great cost, will not be adequately served and supplied with the export and import business necessary to maintain these ships under the American flag.

Such a bank would not only furnish foreign banking facilities to every part of the United States, but would be in a position to furnish reliable credit information to American importers and exporters, manufacturers and producers as to foreign buyers and foreign sellers; reliable information and accommodation with regard to shipping conditions, storage, insurance and other questions essential to the convenient, economical and safe transaction of international business.

Such a bank publicly controlled is the mechanism through which international exchange can be stabilized, the American dollar maintained at par, American commerce furnished with credit facilities and adequately promoted throughout the world. It is the one thing needed to perfect the Federal Reserve System of the United States, now acknowledged by the banks themselves as enabling them to serve their customers as never before, enabling them to conduct their business with a sense of security they never felt before, and enabling them to make better returns upon their capital than ever before.

I have felt justified in preparing this brochure that I might call the attention of American business men and of American bankers to the importance of thus perfecting the Federal Reserve System, in the hope that with their approval and co-operation, public opinion might sufficiently crystallize to make itself effective in legislative enactment. Congress does not go very far ahead of public sentiment. This question must be determined by public opinion and this booklet is justified as one of the steps to attract attention and inform the public on this question.

Some of the banks with foreign exchange departments seem to imagine that such a bank would compete with them. The fact is the competition for international bills has taken the very great body of these bills to Lombard Street, and some American banks give their customers the Lombard Street rate by sending their bills to Lombard Street instead of to New York. The bills are issued to the extent of many billions and no bank need fear not getting all of such business as they may really need or desire. The trouble is we have not available the capital required to handle foreign bills and we should take immediate steps to make American banking capital more available for such purpose.

The available capital of American banks with foreign branches at present is inadequate to handle international bills. The imports and exports of the United States alone the last year exceeded nine billions, and the imports and exports of the world business handling international bills are very much larger yet. A number of the best foreign exchange experts engaged in handling such bills have declared themselves warmly in favor of this measure; they do not fear the Federal Reserve Foreign Bank; they welcome it, realizing it would serve the banks in the same way in the foreign field which the Federal Reserve Banks serve in a domestic way.

Importers and exporters who have studied the question strongly favor the publicly controlled Federal Reserve Foreign Bank. Preparedness now for after-war peace problems is urgent—other nations are vigorously acting. The United States cannot be a Great Leader of the world in Commerce and Finance unless it leads in fact by concrete steps and by wise laws providing the mechanism for such leadership.

THE END