Number Six

D

'Change there is no apparent apprehension in well-informed banking quarters as to the speculative boom and erratic price movements. Responsible bank and trust company heads are fully alive to basic factors and the economic as well as business and financial problems which still loom up for adjustment. The extent to which public and professional buying is represented by the enormous transactions in stocks cannot be fairly gauged but certain it is that the conservative banking element is still master of the situation. The most serious aspect is the possibility that high call rates will continue to attract interior funds in large amounts thus creating a situation which might cause embarrassment when such funds are suddenly recalled. On the other hand, the pronounced improvement in business and industry, the fact that the world is short of goods and credit which this nation alone is able to supply on a large scale and other developments of an encouraging nature, afford plausible ground for bullish enthusiasm. Industry is more stabilized and reconciled to present high price standards, while business sentiment is increasingly confident.

Whether the future has been sufficiently discounted and stock prices are now at their crest are debatable subjects. Indicative of the sustained upward movement is the fact that the average of fifty active industrial and railroad stocks shows an advance of fully 20 points as compared with the low average of 69.73 for the present year on January 21st. The average of 40 bond prices also shows an advance of three points from the low level last March. The volume of trading is best indicated by the fact that total sales of stocks for the year to June 9th aggregated 118,159,000 shares as compared with 65,311,000 for the corresponding period last year and 89,213,000 for the same period in 1917.

The fact that call rates on industrial collateral have touched as high as 12 per cent. was due not alone to speculative fervor, but also to the instalment payment operations in connection with the Victory Loan which brought excess reserve of Clearing House banks down to the lowest level of the year. The exceptionally heavy advance payments on Victory Loan account imposed a severe strain upon banking resources which necessitated calling loans in large volume and this was also the principal reason for the break in stocks of from 5 to 20 points

when the bullish movement reached its height during the early days of this month. The feeling, however, is one of confidence in banking circles that corrective measures will be applied whenever the speculative tendencies become too unruly.

BANKING AND CREDIT

HE restoration of normal prices depends first of all upon deflation of currency and the absorption by the public of so-called "war paper" held in the portfolios of banks and trust companies. The situation is clearly described in the last issue of the Financial and Economic Review issued by the National City Bank of New York, as follows:

"The bankers of the country should recognize that the present state of credit expansion is abnormal and not to be accepted as permanent. The circulating credit which is afloat against Government war securities in the banks is pure inflation. It belongs to the war financing, and it ought to be eliminated from the peace situation as soon as possible. The longer it remains a factor in the situation the more difficult it will be to eliminate it, and to go on from this level to a still higher degree of inflation, will weaken the position of the country and invite a disastrous reaction.

"Because the nations of Europe are helpless to avoid it is all the more reason why we should keep our own foundations sure. With this great crop to be sold at high prices, and with the abundant trade which is in prospect for the coming fall season, there should be surplus earnings and profits enough to accomplish a substantial amount of debt reduction without imposing serious restrictions upon enterprise, and the bankers should make it their policy to achieve this result. If the recovery of commodity prices and general state of prosperity this year is made the basis of more indebtedness, through land speculation and stock speculation, it may prove in the end to have been unfortunate that we did not have more drastic liquidation this year.

"In view of the unsettled state of industry and social affairs the world over,

the revival of industry must receive first consideration, but we repeat that this does not require that the present state of inflation should be accepted as permanent. The present cost of food-stuffs is the main influence in making the present general price-level and is the chief obstacle to a general decline. If European importations of food should fall to the pre-war volume the situation in this country would be materially affected, and a general readjustment would naturally be made."

FEDERAL RESERVE DISCOUNT RATE

THE Federal Reserve Bulletin, in the June issue, takes cognizance of Tthe the speculative boom and issues the following words of caution:

"One phase of the present situation which parallels conditions that have existed at the close of most former wars is the development of an active speculative situation in the securities market. During the past month operations on the New York Stock Exchange have been upon a basis practically unprecedented since the opening of the war and paralleled only by the active market operations which marked the advent of large munitions orders when the European contest had definitely established itself. A succession of "million-share days" with abnormally high prices in many classes of goods, has indicated the scope of the speculative movement itself, while the fact that much of the buying within recent weeks is said to have come not from professional traders but from prospective investors throughout the country, indicates the hold which the movement is already taking upon the population of the United States. One phenomenon which has presented itself as cident to this speculative movement is the existence of high call money rates. These rates have at times gone as high as 72 per cent., although only for a short period in any instance. Such fluctations of the call money rate have promptly been followed by little more than very moderate curtailment of the volume of banking accommodation.

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"There is here undoubtedly an element of danger to the financial position of the country. Ordinarily a sharp check could be administered through the advancing of the rates of rediscount at Federal Reserve Banks. Such a check for the moment encounters some difficulty so long as the policy of promoting the absorption of Government securites by favoring rates is maintained. For the moment the avoidance of abnormally high loan accounts must be effected by means other than those which would ordinarily be applied under the methods and principles of central banking. Eventually, when circumstances will permit,

and the Federal Reserve Banks assume their normal functions making advances chiefly against liquid commercial paper, reducing to small proportions advances against United States Government collateral, a natural and effective check to existing conditions in the money market may be afforded through changes in rates at Federal Reserve Banks. As things stand the continuance of emergency conditions caused by the war has caused this primary function of the Federal Reserve system to be held more or less in abey

ance."

DEFLATION AND ACCEPTANCE

RATE

R. PAUL M. WARBURG, chairman

Mof the Executive Committee of the

American Acceptance Council, submits the following very timely suggestions in his recent address before the National Association of Credit Men regarding acceptance rate policy.

"It has now become the country's very serious duty to liquidate as rapidly as possible the war paper and holdings of Government bonds in the hands of banks and trust companies. This item, representing undigested Government bonds amounting, it is estimated, to more than four billion dollars, constitutes one of the fundamental causes of banking inflation. In order to promote their absorption by the savings of the people and in order to encourage thrift, if not by compelling borrowers, if necessary, to reduce their loans, Federal Reserve bank rates for

loans secured by Government bonds in due course will have to be increased. They would have to approach more closely the then governing rates for commercial paper, while rates for bankers' acceptances should be held at a rate sufficiently lower to provide for an ample margin in their favor against single name paper. And between these two rates the trade acceptance should find its proper level.

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"As this process of absorption takes. place, and as the Government reduces the volume of outstanding Certificates of Indebtedness, acceptances may be expected to reoccupy their proper position as the most available and safest pass-key to the facilities of the Federal Reserve banks. Ultimately acceptances bound to become the main investment and rediscount field for Federal Reserve banks and this demand alone will create a large market for them at favorable rates. It may take a year or two before the course here contemplated will gain full sway, but it is to be hoped that at an early date we may see the beginning of a definite policy pointing in that direction.

bankers' acceptance rates, the British "In determining the future level of our discount rate will play an important role. Sooner or later our rate and the British must be brought into a proper relation. It is impossible to predict exactly in what manner this will be accomplished. Our British friends at the end of the war have now established a gold embargo, while our gold embargo may be expected to end with the signing of peace, if not, indeed, at an earlier date. England's future foreign exchange and discount policy is still undecided. At present there exist two divergent schools of thought: One, led by Lord Cunliffe, believing that foreign exchanges must be brought back to their pre-war levels by the establishment of a high British discount rate. That school holds to the old doctrine that high rates of interest will draw gold freely into a country enjoying a strong banking credit. If such a policy of high interest rates were adopted, it might safely be followed by the lifting of the British gold embargo. The proponents of the policy of high interest rates are opposed, however, by another group of British political and

financial leaders urging the maintenance of the gold embargo, preserving present artifically low interest rates under its protection, and allowing sterling exchange to remain at a discount in several foreign countries, particularly in the United States. It is difficult to see how such a policy, in the long run, may be expected to bring about a healthy cure. Whether or not it may be advisable for England to continue it as a temporary device is a matter that only British leaders can judge. My own belief is that sooner or later England, whose banking prestige and power has rested so largely upon the tradition of a free gold market, will adopt a course leading toward the lifting of the gold embargo, that is a policy of higher and effective discount rates. To me it remains a riddle how note issuing banks, on both sides of the water, could hope to deflect "deflation" unless they take steps not only to arrest a further increase in their investments, but indeed to decrease them. And this they can achieve only by placing their active official rates above those of the open market.

"It is an evil condition that prolongs the necessity for Governments to issue billions of bonds or currency for the purpose of paying millions of people who idle. It intensifies the inflation of prices because it continues to swell the outstanding amount of money and credit, while, at the same time, idleness interferes with a proportionate increase of goods. But this state of things, bad enough in itself, is aggravated most viciously if, in order to place Government bonds (issued for unproductive purposes) upon a low interest basis, the general level of rates of interest is artificially lowered and bonds, instead of being absorbed by savings, are carried by manufacturing new credit, be it through added bank loans or circulation. "During war the laws are silent," is an old Roman saying,which applies with equal force to economic laws. But the war, happily, is ended and we must now boldly face the question of whether we wish unconditionally to surrender to inflation and accept it as a finality-that is sacrifice all services rendered in the past to the services of the futureor whether we are determined to work

toward a readjustment in the direction, at least, of the pre-war level, even though, I believe, nobody expects us even approximately to reapproach it.

"It is a pathetic fact that peoples, like children, apparently can learn only from their own experiences, but not from the experience of others. We know that war prosperity usually ends in a crash; shall we be able to avoid it?

"If we wish to we must beware of booms based on a fake prosperity which has its roots in inflated credits and prices. It is an ungrateful and an almost superhuman task to stop the easy flow from our credit reservoirs that creates the enlarged foundation for our growing credit pyramid. While the Federal Reserve system proved our salvation during the war and while our imposing reserve power may be destined to play a most important role in meeting some of the grave problems that still lie ahead of us, I believe the moment is near at hand when we must not permit this reserve to be encroached upon for the sake of added credit expansion at a time when the healing process must be sought in contraction. To apply that remedy may be a harder task than to follow the lures of fictitious prosperity born of easy money, but in the long run I believe it will be a more prudent and more charitable strategy.

"Such a course would not imply that we should be slackers in shouldering our full share in attacking and solving the world's burning economic problems. It means only that we must manfully and planfully husband our resources, instead of squandering them by persona! extravagances and headlong speculations-and concentrate our efforts on doing the big constructive things with wealth bottomed upon solid production and saving, instead of resting on the quicksand of further inflation of credit and prices.

"We cannot formulate any definite opinion as to what will be the future level of our own acceptance rates until we have a clearer picture with regard to the scope of our future Government requirements, the amount and the terms of sale of United States Certificates of Indebtedness to be kept outstanding in the future, and until we know what England's discount policy will be.

"My own belief is that in due course our discount rates for bankers' acceptances will be on a par with (if not lower than) the English acceptance rate. Whether our rate will drop down to theirs, or theirs move up to ours, or whether possibly we shall meet half way between, we cannot venture to guess until governments and note issuing banks have reached definite conclusions with respect to their future financial policies. It appears, however, to be a reasonable expectation that (even though we should lift our gold embargo and England should not), we may hope to be in a position to maintain an acceptance rate enabling us to meet the British rate in world markets, and on a level substantially lower than our commercial paper rate, whatever it may be at that time.

"As a consequence of the war, the indebtedness of other countries to us has become such that if these foreign nations are to be kept in a position to buy our goods, we shall have to grant them credits or purchase their obligations, or other assets. We are not yet fully equipped for the placing of foreign securities on a large scale; moreover the credit of foreign governments in many cases is least well established in countries where the demand for our goods and credits is most urgent. But where Government credit may be found inadequate, private credit may be of sufficient strength. People must eat and clothe themselves and, in such countries, certain industries may, therefore well prove strong enough to warrant the granting of credits involving the movement of our products to them or theirs to our shores.'

UNAUTHORIZED CHECKS

HE action of the Governor of the State Tof New York in vetoing the Sage

Malone "Unauthorized Check

bill, which passed both houses of the Legislature may be a blessing in disguise. The Executive Council of the American Bankers Association, at the recent Spring Meeting, decided to take up the matter of urging legislation along this line throughout the United States. It is

quite evident that Governor Smith did not comprehend the facts in the case when he vetoed the Sage-Malone bill on

the ground that it would interfere with the negotiable instruments law. Mr. Willard King, president of the Columbia Trust Company of New York, explained the purpose of the bill clearly in a letter to the Governor, as follows:

"The purpose of the amendment is to define what shall constitute knowledge of an infirmity in a negotiable instrument or defect in the title of the person negotiating it, and the amendment is rendered necessary by the fact that the courts have differed in their interpretation of what constitutes "knowledge." Moreover they have gradually placed a heavier and heavier burden upon the banks by charging them with greater knowledge of such defect than in the earlier decisions, contrary to the practice of the English courts. You of course will appreciate that with the multiplication of commercial transactions, the banks really know less and less about the individual transactions represented by these checks. Except in small towns, the officers of banks cannot in human nature be expected to know whether a check drawn by a given corporation, and signed by the officer or officers who, under the by-laws of that corporation, are authorized to sign its checks, is being used for other than corporate purposes. The corporation has presumably filed with the bank a copy of the by-laws or standing resolution authorizing certain officers to sign checks, and directing the bank to honor such checks. It seems to me that it is not sound practice to require a bank to look farther into the transaction than to make sure that the check conforms absolutely with these provisions. To require the bank to look into the use the corporate officer is making of the proceeds of the check, is to place upon the bank a burden which belongs upon the directors of the corporation. It is they who should pass their by-laws with due care, select their officers, and supervise or bond them."

JOINT BANK ACCOUNTS

R. WILLARD C. FISK recently

M communicated the following interMcommunicated

esting decision relative to joint bank accounts to the Secretary of the New Jersey Bankers' Association: