New-York tribune., 1917-07-16
By BENJAMIN STRONG, JR.
Governor, Federal Reserve Bank oil
New York.


While this country, with its vast ma
terial and banking resources, mas maue
a notable record in the FACILITY
with which large loan operations have
been conducted largest until re-
Gently being the placing of the Anglo
French bonds-it has nevertheless been
apparent during the past two months
that people have not fully grasped the
significance OF a loan of, say S2,OOo,OOO,-
600. the entire proceeds of which must
be paid over in very short period, as
We say, "in CASH
Government loans of this magnitude
necessitated by the war, require a thor-
ough examination and understanding Oh
the principles OF credit. as otherwise
unskilful management of operations OF
that size is certain TO put oanSihg
machinery out of order, and disordered
banking machinery means disturbance
of business.
No loan of $1,000 100000 can be paid
for as we commonly express 1t IN
cash" The amount is too large and
pavment must be made By complicated
bookkeeping operations, which can De
roughly described as transfers OF
credit" To do this successfully credit
must be shifted from the account OF
one bank depositor to the account OF an
other bank depositor, from one bank TO
another bank, from one part of the
country to another part Of the coun-
try. and these shiftings Of credit In
volve a temporary shifting Of certain
proportion of bank cash or reserve
money, and therein lies the danger
Shifting of Funds Inevitable
II every purchaser of government
bonds could make payment at his own
bank and this amount be transferred by
that bank TO the credit of the govern
ment, then the credit could be disbursed
by the government in the community
where the bank is located and no dis
turbance of credit whatever would arise,
because no bank reserves would need
to be shifted. In great loan OF 81
600 900 COO subscribed and paid for in
varying amounts in all parts OF the
country. it is inevitable that pre-
liminary Withdrawals of bank balances
from one part of the country to another
will be made in anticipation Of payment;
and again, after the funds are placed
at the credit of the government
throughout the country they must be
gradually withdrawn to those points
where the government has various bills
TO pay. The machinery of the Reserve
banks proved TO be adequate to meet
the necessity Of shifting credits from
one part of the country TO another POS
siblv a correct view of their function
would be to say that they were the
chief bookkeepers of the transactions
and the books being kept in twelve
separate places, at each of the Reserve
banks. the only shifting OF reserve
money occasioned by the movement OF
, credit is that which takes place between
the twelve Reserve banks through the
normal machinery created for that very
purpose.
Look at the problem from the stand
rotnt Of the bond buyer There are in
this country exclusive OF negligible
number of those who own securities OF
foreign origin which could be resold in
foreign countries) only four classes OF
people who can subscribe for govern
ment bonds.
The first class Of buyers comprises
those who have boarded actual cash or
currency in their houses or safe deposit
vaults, who are induced to buy govern
n,ent bonds and who produce that cash
for the purpose. Purchases of govern
mcnt bonds by such people (of whom
there are few in the United States)
have the effect Of strengthening the
banking position, because it brings re-
serve money-that rs, gold-out of hid
iLg and puts it in bank reserves, where
it serves as the basis of credit. The
change occasioned in the nations gem
eral bank account as a result is not
simply to add given amount TO the
hank deposits, but to also add an equal
amount, dollar for dollar, Of reserve
cLsh. France, prior to the war, held
vast store of gold tucked away in
peasants hiding places, and the produc-
tion of that gold in response TO the
governments call has immensely
strengthened its banking position.
Capitalist Buyers
The second class is composed of the
capitalists and corporations with BAL
ances in the bank in excess of needs
When bonds are purchased by a MEM
Der of this class the owner of the bank
balance, Mr.. X. Y. T.. sells or transfers
that balance to the government in ex-
change for a government bond. II the
government leaves the deposit with the
bank which held Mr. X. Y. Us account,
il is simply transfer of the balance
Of Mr.. X. Y. z. to Mr.. L. s. A. No cash
reserves shift, no loans would need to
be called and no change would take
place in the balance sheet of the bank,
either of assets or liabilities.
The third class of bond buyers is
that which has bank accounts. but has
no surplus balance in bank TO spare for
investment in government bonds Hav-
ing credit at the bank, however. they
are induced to buy government bonds
end borrow from the bank temporarily
in order to pay for them. This is the
least desirable buyer of government
bonds, although a necessary one at the