Chapter XVI Public Finance and Bank Credit

$12,725,340,849 a 1917-18 $1,995,886,359 8,964,443,485 1,609,178,036 38,295,750 23,739,099 93,454,000 344,120 Daily $2,577,765 2,708,406 2,347,545 2,719,986 3,680,736 4,776,801 6,719,323 .8,949,613 11,337,768 14,904,690 17,098,401 19,719,272 CHAPTER XVI Public Finance and Bank Credit The entrance of the United States into the war brought at once a very great increase in expenditures by the federal govern ment, particularly when advances to the Allies are included. The following table 1 prepared by Professor Bogart gives the expendi tures of the United States through the months of 1917, exclud ing advances to Allies. The first three months, when' expendi tures were on a peace footing, are also given by way of contrast. The entrance of the United States into the war was on April 6, 1917: . Monthly January $79,910,714 February 75,844,498 March . . . . . . . . . . . . 72,773,903 April 81,599,598 May 114,102,810 June 134,304,040 July 208,299,031 August 277,438,000 September '. . . . . . . . . . 349,013,305 October 465,045,360 November 512,952,035 December 611,297,425 Total $2,982,580,719 Professor Bogart gives alsQ a table covering three fiscal years showing the objects of expenditures, as follows: Purpose 1915-16 1916-17 Civil establishment 0 $380,911,373 $425,565,747 Military establishment . .•.. 132.185,275 409,789,321 Naval establishment 155.029,426 257,166,437 Rivers and harbors to • • 32.450.301 30,487,560 Panama Canal 17.503,728 13,112,130 Public debt to. • 22,910.313 24,742,129 . Miscellaneous 1.016.310 34,028,110 TotaJ 0 •• $742,006,726 $1,194,891,434 Purchase of obligations of foreign governments ..............•.................... 885.000.000 b 3.351,400.000 Total 0 • 0 • • • • • • • • • • • • • • •• $2,079,891,434 $16,076,740.849 a Appropriations. b Actual for period July I-December 31, 1917.

1 E. L. Bogart: Direct Costs of th{' Present War, page 2. 179 180 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING The rapid developments in the plans of the American Govern ment, coupled with the unexpected intensity and magnitude of American participation in the war in the summer of 1918, has led to a substantial growth in the expenditures of the government, and the total appropriations authorized for the fiscal year 1918 1919 run far above $30,000,000,000. The loans made by the United States Government to its allies down to September 26, 1918, total $7,206,476,666, distributed as follows: Great Britain $3,745,000,000 France 2,065,000,000 Italy 860,000,000 Russia . . . . . . . . . . . . . . . . . . . . 325,000,000 Belgium 157,020,000 Greece 15,790,000 Cuba 15,000)000 Siberia 12,000,000 Liberia 5,000,000 Roumania 6,666,666 Total $7,206,476,666 The fiscal policy of the Treasury in raising funds for these staggering expenditures has been on the whole an admirable one.1 Advantage has been taken of the mistakes of other bellig erents, and a very judicious balancing of short term financing, taxes and long term bonds has been devised.

Professor Bogart's table 2 for the revenues of the United States for three fiscal years is as follows: Less normal revenues...... . . War revenues . 1917-18 $220,000,000 973,000,000 535,000,000 666,000,000 1,226,000,000 1,800,000 265,000,000 $3,886,800,000 779,788,065 $3,107,011,935 1916-17 $225,962,393 354,387,426 95,297,554 179,572,888 180,108,340 1,892,893 80,952,632 $1,118,174,126 779,788,065 $338,386,061 303,486,474 84,278,302 56,993,658 67,943,595 1,887,662 52,012,529 $779,788,065Total . ·Source 1915-16 Customs $213,185,845 Internal revenue: Ordinary . Emergency . Corporation income tax Individual income tax .. Excess profits tax . Sales of public land . Miscellaneous . 1 The adverse criticisms have already been indicated. They relate to the reactions of the Treasury policy on the gold policy and discount policy of the Federal Reserve Board. :I Ope cit., page 4.

THE UNITED STATES 181 This table was prepared before the actual revenues were col lected in 1918. Approximately correct for customs and approxi mately correct also for actual receipts for internal revenues, as shown in the report of the Treasury Department of September 14,1918 (when collections of $3,694,703,334 were recorded), it probably underestimat~s by a very substantial amount the total internal revenues when evasions and delinquents and under estimates by tax payers are all straightened out. In a single day, the authorities of the Treasury concerned with revising the tax returns picked up an extra hundred millions from a single indus try. Good authorities have expressed the opinion that the total revenues from taxes and customs for the fiscal year 1917-1918 will reach $4,500,000,000. For the fiscal year 1918-1919, new legislation is pending which is expected to b~ing the tax receipts up to $8,000,000,000.

Such taxes, wholly apart from the further drains on the income o! the people through the enormous loans, would have been deemed incredible by students of taxation a few years ago. The total income of the country, including all interest, wages, profits and rents, was estimated in 1910 at $30,500,000,000. $8,000,000,000 in taxes would have been an enormous propor tion to take from this. The appropriations now made by Congress for the fiscal year 1918-1919 substantially exceed the total income of the country for 191O. None the less, the country is bearing its burden of taxes and in addition is subscribing heavily to liberty loans. The First Liberty Loan, dated June 15, 1917 (15-30' year loan)1 amounted to $2,000,000,000; the Sec ond Liberty Loan, dated November 15, 1917 (10-25 year loan) amounted to $3,808,766,150; the Third Liberty Loan, dated May 9, 1918 (10 year loan) amounted to $4,176,516,850; the Fourth Liberty Loan, dated October 24, 1918 (15-20 year loan) has exceeded $6,900,000,000, making a grand total of more than $16,900,000,000 raised in liberty loans by the end of Oct9ber, 1918, with the certainty that further and even greater loans will come as long as the war continues.

1 An excellent It conspectus" of the four liberty loans appears in the Economic World of October 12, 1918, page 523.

182 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING Yet another important source of income for the government has been in the sale of war savings stamps and thrift stamps, designed to reach the smallest savings. The total receipts from this source/ by October 23, 1918, were $807,222,544. The explanation of the ability of the country to meet such extraordinary financial burdens is to be found in the figures which we have given before 2 for the growth in the income of the country. Under the joint influence of expanding physical . volume of production and rising prices, the income of the coun try has risen from $30,500,000,000 in 1910 and $32,600,000,000 in 1914 to $49,200,000,000 in 1916, to $68,600,000,000 in 1917, and to well over $70,000,000,000 in 1918. 3 But not even this great growth of the income of the people of the United States was sufficient to enable them to meet the whole burden of war finance without temporary resort to ex pansions of credit by the banks. The amounts involved were too great, and the shock to industry and trade. of such subtractions taken in large blocks from the current incomes of the people or of businesses would have brought bankruptcies and demoraliza tion. Expansions of credit, largely temporary, have for the most part eased the tension and made the process a wonderfully smooth and frictionless one. For this, the policy of the Treas ury in anticipating tax payments and liberty loans by short term Treasury certificates is in large degree responsible, though, as we have seen, the machinery of the federal reserve system has also aided very greatly. The government has commonly spent the tax receipts and the liberty loans before the people have paid them. It has done this by selling in advance, very largely to the banks, short term Treasury certificates maturing about the time the tax payments or the liberty loan payments were due. The volume of these short term certificates has risen and fallen, rising to billions just before the tax payments or the liberty loan pay men.ts were due, and falling greatly as tax payments and liberty loan payments came in and the government returned to the 1 New York Evening Post) October 26, 1918.

2 Page 156. I Vide Value of Money, pages 267-278, and Annalist, January 6, 1919, pages 5-6 and 61.

THE UNITED STATES 183 banks the short term ·advances made. In part, too, the Treasury certificates have been taken by large tax payers or prospective purchasers of large blocks of liberty bonds, and these Trea,sury certificates have been accepted by the government in lieu of cash in payment of taxes or in payments on liberty loans. Further, however, the banks have been called upon to purchase the liberty bonds themselves and to make loans on liberty bond collateral to purchasers of these bonds. The extent of this will receive consideration below. Banks have, moreover, been obliged to no small extent to make temporary advances of funds and possibly even long time advances of funds to various businesses to enable them to meet the tax payments, particularly the excess profits tax payments of corporations whose" profits" have con sisted, in part, of nonliquid assets. The traditional policy of an American Congress in meeting a war emergency has been to rely largely on long time loans and only gradually and through a long period of years to raise the revenues required to pay them off. This tradition represents a great advance over the Civil War practice, when during the early period of the war much of the burden was carried by the issue of inconvertible paper money. It is probable that in the absence of vigorous action by certain Arperican economists, the loan policy would have been pursued to extremes in. the present war.

At the outbreak of the war, however, a strong movement was begun to finance the war largely by taxes. The leading. figure in this movement was Professor O. M. W. Sprague, whose writ ings during the winter and spring of 1917 had the significance of a great state paper. In our discussion of loans and taxes in France, we have criticised Professor Sprague's view as repre senting an exaggeration, and had his extreme program been car-, ried out it would have been unfortunate. The significance of his work, however, is to be found in the fact that a much heavier taxation program than would otherwise have been employed was pu~ through, and it is probably just to say that Professor Sprague purposely cast his argument in a somewhat extreme form, being well aware that the opponents of his plans would make all the qualifications that were necessary, and that the 184 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING great danger was that taxes would be too light rather than that they would be too heavy.1 ' Among the arguments which have been offered against the employment of loans and bank credit in financing the war has been the contention that such a policy, leading to an expansion of bank credit, would force up prices-an argument commonly cast in 'the mold of the quantity theory, though not necessarily involving quantity theory reasoning. To the astonishment of most adherents of t~e quantity theory, the period since the great expansion of bank credit growing out of liberty loans has not been the period of rapidly rising prices. It will be most con venient to discuss this matter in connection with the discussion of prices in the United States. It is enough to point out at this time that commodity prices had their great rise between Decem ber, 1916, and June, 1917, that since June and July, 1917, the average of commodity prices has been fairly stable in the United States; and that from June, 1917, to the middle of 1918 stock and bond prices have had on the whole a steadily downward course, while there has been something approaching panic in the real estate markets in several of our greater cities.

Those writers who see nothing but" inflation" in expanding bank credit during periods of stress, emergency and rapid transi tion, fail wholly to take account of the essential functions of the bank credit. Bank credit expands when transitions are to be accomplished. An enormous volume of new bank credit has been required to finance the shifting of industry from peace occupations to war occupations, to finance the huge receipts and disbursements of the Treasury, to ease the tension of ta~ pay ments, to enable business men to liquidate slow assets while changing the character of their production and meeting the bur den of taxes and loans. Expansion of bank credit is necessitated by the "hoarding" of deposits by business men who feel the necessity of keeping an unusually liquid position in times of stress and uncertainty. It is hard to understand what the" inflation1 The present writer takes the greater pleasure in making this acknowledg ment. to Professor Sprague, Inasmuch as he felt called upon to criticize in some measure Professor Sprague's plan in the spring of 1917. See" Con scription of Wealth,'.' Annalist, April 16, 1917.

'I THE UNITED STATES 185 ist" theory would have banks do in a great emergency. It is certain that if banks refused to expand their credits in times of stress, we should have demoralization and chaos-as has been abundantly exemplified in our discussion of w~r time conditions in France. It will be interesting to examine statistically the extent to which the war finance of the United States Government has been accompanied by bank expansion. Precise measurements appear at the present time to be impossible, but certain significant figures can be presented which will make it clear that the apprehensions expressed in the spring of 1917 that the loan policy would lead to excessive expansion were on the whole unfounded. The follow ing figures dealing with bank resources are of course a crude index, but are none the less significant. They represent resources of all banks reporting to the Comptroller (including national, State, savings and private banks and trust and loan companies, but excluding federal reserve banks) and resources of federal reserve banks.

(In millions of francs) June 30 June 23 June 30 June 30 1914 1915 1916 1917 1918 National and State banks etc 26,971 27,804 32,271 37,126 a 40,525 Federal reserve system.. 381 625 2,000 b 3,806 a The figure for 1918 is based on the Comptroller's figures for national banks, as of May 10, and the figures for State institutions at about the same date, prepared by Mr. R. N. Sims, Examiner of State Banks in Louisiana. See Annalist, August 12, 1918, page 150. For other years, the Comptroller's figures are used. These figures are not the Comptroller's figures for" bank in2 power," but for total resources. 6" June 21, 1918. The figures for the banks other than the federal reserve banks show that the great expansion of bank resources occurred before the entrance of the United States into the war. From June, 1915, to June, 1917, the expansion was nearly ten billions; from June, 1917, to June, 1918, the expansion was a little over three billions. The main expansion since the United States entered the war has been in the federal reserve banks themselves. But the figures for expansion by the federal reserve "system do not repre ~ent net adQition to the banking resources of the country. To the 186 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING extent of over two billion dollars they represent gold transferred by the other banks to the federal reserve banks, and on the lia bility side, viewed from the standpoint of addition to the circu lating currency of the country, the only items in the federal reserve banks' balance sheets which should be considered are the excess of federal reserve notes over the gains in gold and the government deposits subject to check.

Instead, therefore, of increasing the rate of expansion of bank resources, the entrance of the United States into the war and the vast loans of the government down to June, 1918, wereaccom panied by a marked reduction in the rate of expansion. The following charts, covering the period March 1 to October , 11, 1918, tell a similar story for the member banks of the federal reserve system reporting to the federal reserve banks. The first chart shows the growth of demand deposits and of total loans, investments. and Treasury certificates of indebtedness, together with the ratio between them, for the reporting member banks in all twelve districts and for the reporting member banks in the New York district. For the member banks in all twelve districts, demand deposits, including government deposits, show almost no increase during this period, while for the New York district, there appears even a slight decline. During this same period, the government deposits and deposits by foreign governments with the federal reserve banks have remained small, around $300,000,000. The second chart shows the amount of war obli gations of the United States held by the reporting member banks, either owned outright or made the basis of loans, together with the total earning assets of these banks, and the proportion of total earning assets represented by United States war obligations. The black area, indicating United States bonds owned, exaggerates the outright ownership of liberty bonds, since it includes some hundreds of millions of the old bonds securing national bank note circulation. On the whole, the liberty bonds have been taken by the people. The area representing loans secured by United States obligations is again gratifyingly small. On the whole, the people have paid for their liberty bonds out of current income. The main item in the extenTHE UNITED STATES 187 1918 MEMBER BANKS IN ALL 12 DISTRICTS 12(A~ \ o t=<a: RATIO OF LOANS AND INVESTMENTS (OTHER THAN U.S~·GOV'T LO~G TERM SECURITIES)·TO. DEMAND DEPOSITS (INCLUSIVE en OF U.S. GOV'T DEPOSITS) OF REPORTING MEMBER BANKS.z: ac: ~:s~~ f ~ :) ~ g S ~ ~ ~ ~ :=0:1 C :I .. .. C I#) 0 Z 0 .. ...

= ~ "CII~=:llI=::.~:::;"':;:Il>==:Q1"':~~llI:~~~;::"CII:::IO:~~.~~:;"':;;: 2.50 15 (A) TOTAL LOANS, INVE8TMENTS AND CERTIFICATES 2.00 OF INDEBTEDNESS (B) TOTAL DEMAND ~~:~:~T:E~~~~~g~~;s 1.50 (B)~~9 ~ - ~ ~ (c ) RATIO OF LOANS AND INVESTMENTS TO DEPOSITS 1.00 (Cl···································..TE:r..······· 6 .50 3 MEMBER BANKS IN NEW YORK DISTRICT o 0 1 ------------------2.00 12 1.50 9 (F) RATIO OF LOANS AND INVESTMENTS TO DEPOSITS (D) TOTAL LOANS, INVEST-1 00 MENTS AND CERTIFICATE8 • OF INDEBTEDNESS (E) TOTAL DEMAND .,50 DEPOSITS· INCLUDING GOVERNMENT DEPOSIT8 6(Fl : [Y.J..•......•• (0) (E) 3 o 188 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING 1918 EARNING ASSETS OF REPORTING MEMBER BANKS AND PROPORTION OF EARNING ASSETS REPRESENTED BY U.S. OBLIGATIO.NS 40 12 "F ENTIRE 12 DISTRICTS ~"..., NEW YORK DISTRICT 30 9 20 6 (E) .(A) u.s. BONDB OWNED 10 3 gB)U.S. CERTIFICATES 0 INDEBTEDNESSOWNED ~(C) LOANS SEClIRED 0 0BY U.S. OBLIGATIONS §3(D) OTHER LOANS AND INVE;,TMENTS ••••••(E) PERCENTAGE OF 40 12TOTAL EARNING ASSETS R"EPRESENTED BY A+B+ C 30 9 20 6 10 3 (~! \ , ' r--:n "'""S~ q-: ....,..:-: ~ o o ~.~==~=:::~~:;~:;::==:~~=:~~=~~~;~:~.,:::=g~~~~~~;: ; ~ ~ ~ ~ ~ : g ~ :!: ~ ~ THE UNITED STATES 181) sions of credit by these banks in connection with war finance has been in the short term certificates of indebtedness, issued by the Treasury in anticipation of loans and taxes. These have risen, as we have seen, to large proportions preceding loan or tax pay ments, and have declined as the government receipts from taxes and long term loans have come in. What extension has taken place between March 1, 1918, and October 11, 1918, has taken place in the federal reserve banks themselves and not in the main body of the banks which deal directly with the people. The expansion in the federal reserve banks connected with war finance during the period covered by these charts has been approx imately a billion dollars, the main item being" bills discounted secured by government war obligations." Bearing in mind the tremendous operations involved in the period covered, which includes the Third Liberty Loan of $4,177,000,000, the payment of nearly $4,000,000,000 of taxes, and the issue of several bil lions of short term Treasury certificates in anticipation of the Fourth Liberty Loan, this is a showing which .few would have been optimistic enough to expect a year .before.

But this is not to discount the value of the forebodings issued by many economists at the outbreak of the war. By pointing out the danger of undue bank expansion, they have aided in preventing it, though the caution of bankers and business men would have largely done so in any case. Men do not pay interest at the banks for amusement. Banks do not extend their loans lightheartedly without seeing where they may expect to come out. With the tremendous uncertainties in the minds of both bankers and business men as to the future of business, with the grave uncertainties which have at times existed since our entry into the war as to the outcome of the war itself. with the certainty that perplexing problems, if not unmanageable prob lems, would have to be met at the end of the war, business men and bankers have both been cautious in accepting and in making loans. People generally, moreover, have borrowed from the banks to a very small extent for the purpose of enabling them to continue ordinary consumption. It would be this kind of borrowing 190 . EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING which would be most objectionable and which would have the greatest tendency to raise commodity prices. The essential thing in connection with war finance is that it shall provide a mechan ism whereby the current flo\v of goods and services in the country may be diverted from the consumption of the people to the use of the government.. If the people try to continue their customary consumption of goods and services at the same time that the government is enormously increasing. its expenditures, so that the people are competing with the government in the markets for labor and supplies, the result will be, of course, assuming that the labor and other resources of the country are fully em ployed, to force prices up. But neither in normal times nor apparently at the present time are loans for ordinary consump tion purposes important elements in the assets of American banks.1 In very large measure, moreover, as the government operations have made demands upon the loan funds of the banks, other bor rowers have dropped out. Building operations have largely stopped. In general, long time construction for ordinary pur poses has been greatly reduced. Few men would have the hardi hood to build new plants at prevailing high costs with the prac tical certainty facing them that after the war competing plants can be built at much lower costs.

There has been, moreover, a very definite and vigorous effort on the part of the government and the banks to curtail credits to non-essential industries. This has been part of a large scheme whereby transportation facilities, coal, copper, steel, labor and other basic necessities of production have been diverted from non-essential industries to the industries needed for war. As early as January, 1915, the stock exchange in London issued orders in conjunction with the Treasury, limiting the issues of new securities in the United Kingdom during the war to such' issues as could be shown to the Treasury to be advisable in the national interest; and a vigorous control on the part of the 1 There really should not have been serious apprehensions that the American banks would lend or the Anlerican people try to borrow many billions of dollars to be spent on ordinary consumption. The people have curtailed consumption, particularly the buying of automobiles, pianos, furniture, expen sive rugs, carpets, curtains and the like and also food and clothing.

THE UNITED STATES 191 Treasury, the banks and the stock exchange has since been exerted in Great Britain not only over the issues of new corpora tion securities, but also over ordinary loans at the banks. This was particularly easy in Great Britain since a small' number of great joint stock banks with numerous branches largely domi nated the banking situation. With the outbreak of the war in the United States, it was at first thought that it would be difficult for the banks to develop an effective control in this matter, in view of the fact that we have many thousands of independent competipg banks. A desir able customer, refused a loan at one bank, might take his account to another bank and there get the accommodation he wished. There is good reason to suppose, however, that informal control worked out through the banks under the guidance of the Federal Reserve Board and the federal reserve banks has now been made effective, particularly in the larger centers.

The Federal Reserve Board from the beginning of the war has with increasing emphasis and directness stressed the importance of this. Secretary McAdoo, in his annual report to Congress in December, 1917, foreshadowed a request for legislation dealing with this matter. Early in 1918, a Capital Issues Committee of the Federal Reserve Board, semi-official in character, was organ ized, whose function it was to pass on proposed new issues of securities. Lacking power to prohibit such issues, it none the less had such great influence through the effective cooperation of banks throughout the country that it was virtually able to boy cott all issues of which it disapproved. Connected with it were local capital issues committees in each' of the twelve federal reserve districts The Capital Issues Committee of the Federal Reserve Board surrendered its function~ upon the organization of the new War Finance Corporation in May, 1918, to the Capital Issues Com mittee of the War Finance Corporation, though in part the per sonnel of the two committees remained the same.

The War Finance Corporation, organized formally on May 20, 1918, under authority of Congress,! has a capital of $500,000~000 1 Act approved April 5, 1918.

192 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING owned by the United States Government. It has a twofold func tion. One function is to continue the restrictive activities of the earlier Capital Issues Committee, passing upon and limiting new security issues. The other, supposed to be of special importance at the time the War Finance Corporation was organized, is to extend new credits to essential industries, and very specially to savings banks and public'utilities, which had been suffering as a consequence of the changes of the past two or three years. Savings banks were suffering because of a decline in the market prices of the securities which they owned, and withdrawals by depositors to purchase liberty bonds. Public utilities, as gas plants, electric railways, electric light plants and the like, had been suffering because their rates were held stationary by law while their costs were rising. It was expected too that very many of the industries most vital to the war would need more new capital than they could get through ordinary banking channels, particularly in view of the fact that the federal reserve banks are forbidden to rediscount stock and bond collateral loans. 1 The machinery whereby credits were/, to be provided by the War Finance Corporation was complex. In general, they were expected to lend, not cash, but their own notes, maturing in from one to five years, eligible as collateral at the federal reserve banks, and it was expected that they would lend these notes, not directly to the enterprises which needed the accommodation, but rather to banks which represented these industries, and which would act as intermediaries between the industries and the War Finance Corporation. These notes were to be turned over' to banks, in return for notes of the banks secured by stock and bond or other collateral. In other words, the War Finance Corporation would take over from the banks stock and bond collateral loans, not eligible for rediscount at the federal reserve 1 The writer ventures to call attention to his contention in his Value of Money, pages 518-520, that the federal reserve banks should be authorized to rediscount stock and bond collateral loans and that without this power they could not provide their most effective aid in emergencies. 1'he new War Finance Corporation is an indirect device for accomplishing just this end.

The main war titne function of the federal reserve banks has been to redis count loans on collateral in any case, since loans on government securities (not included in the general prohibition) constitute their chief earning asset.

THE UNITED STATES 193 banks, and would give them in return its own securities which were eligible as collateral at the federal reserve banks. In exceptional cases, t~e War Finance Corporation was authorized to make advances directly to essential industries, including sav ings banks and public utilities, without the intermediation of banks, and even"in the form of cash. The limitation upon the extensions of credit of the War Finance Corporation originally proposed was $4,500,000,000. This was subsequently reduced to $3,500,000,000. In practice, the machinery has proved too complex and virtually all the extensions of credit made by the War Finance Corporation down to October 15, 1918, have been made without the inter mediation of banks. The banks would have had to pay a higher rate, for one thing, in borrowing on War Finance Corporation collateral at the federal reserve banks than in borrowing on gov ernment war paper, or in rediscounting commercial paper. The total of all credits provided by that date was $43,202,592. The most important extensions of credit made by that date were $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 Northwest ern Electric Company.

Various efforts have been made by financiers in the course of the late summer and fall of 1918 to increase the usefulness of the War Finance Corporation, particularly by creating corpora tions of semi-banking character which should stand between public utilities and other needy borrowers and the War Finance Corporation~ A ruling of the Attorney General to the effect that the War Finance Corporation could not lend more than $50,000,000 to anyone borrower made it difficult for these plans to go through on the scale originally contemplated. One such organization, known as the Essential Industries Finance Corpora tion, incorporated under the laws of New York with an initial capital of $3,000,000, has been approved by the Capital Issues Committee of the War Finance Corporation. 1 In the interval, the savings bank situation seems largely to 1 Chicago Banker, September 28, 1918; New York Times, October 31, 1918.

194 EFFECTS OF THE WAR ON MONEY, CREDIT AND' BANKING have taken care of itself in view of the extension of such aid as was necessary by ordinary banks, and in view of the interrup tion of the downward course of investment bonds since D'ecem ber, 1917. The too great complexity of the machinery has made it diffi cult for the War Finance Corporation to do, down to the end of October, a very important constructive work. It has, however, performed very important services on the negative side in super vising and limiting the issues of new securities. There was some discussion of a proposal to extend its functions in this matter to cover all loans made by banks exceeding $100,000, but after a conference with the leading bankers of the cobntry this scheme seems to have been dropped. The banks themselves appear to be exercising sufficient control over loans, and the necessity of having the approval of the War Finance Corporation, or even of its local representatives, would introduce so much delay and friction in banking operations as probably to bring on a com mercial crisis of the first order.

During late October and early November, 1918, there has been some discussion of extending the activities of the War Finance Corporation for a longer period than that originally contemplated, and of making it an important instrumentality in the after the war adjustment. Secretary McAdoo has been quoted as favoring such a proposal. It is not impossible that the organization might advantageously take over supervision of the delicate problem of readjusting government contracts' with munition plants, aircraft plants, and other war industries w'hose operations must stop immediately after the war. If that adjustment is left to the slow machinery of the Court of Claims and congressional appropria tions, very great delay, injustice and demoralization may ensue. In additon to control, worked out informally by the individual banks, over extensions of credit, there was organized on Septem ber 17, 1917, a subcommittee on money rates of the New York liberty loan. committee, composed of the leading bankers of the city. This committee has provided funds where necessary for the protection of the stock market and particularly of the liberty loans, and has also acted to check speculation, notably during THE UNITED STATES 195 October, 1918, and especially by a ruling that banks should require a margin of 30 per cent on collateral loans made to stock brokers where an average of 20 per cent had been previously required. 1 There has thus been an admirable dovetailing of efforts on the part of individual banks, federal reserve banks, and the Treasury, the various authorities concerned with the control of supplies of copper, steel, transportation and the like, and the ordinary individual consumer, all tending to transfer funds to the government without undue expansion of bank credit, all tending to lessen the competition of the general public in the market for goods and services as the government's expenditures have increased. On the whole, we have wor~ed out, largely by informal organization, an admirably adjusted situation.

It may not be an unnecessary digression to point out here that our war experience goes far to prove that strong legal authority in the hands of the central government is unnecessary, that bank ing concentration in the French or English form is unnecessary as a means of controlling and mobilizing the resources of the country in time of stress. The common will and the common pur pose, quick to respond to intelligent suggestion from trusted lead ers, has probably proved more effective than any degree of rigid legal control eQuId have proved. Our system of forty-eight autonomous States, and thirty thousand autonomous banks, has stood as severe a test as we have any reason to anticipate it will ever be subjected to in the future. Effective cooperation need not involve the destruction of individual and local liberties. 1 New York Journal of Commerce, October 25, 1918.