Economics and the Public Welfare. Benjamin M. Anderson

72 26⅜ Brooklyn Rapid Transit 94½ 79 15½ Canadian Pacific 220½ 156⅛ 64⅜ Chesapeake & Ohio 68 41½ 26½ St. Paul 107⅛ 85 22⅛ U. S. Steel 67¼ 50½ 16¾

      These securities were favorites with Europeans, and they were subject to special pressure of foreign selling in the period that preceded the close of the stock exchange. But the declines were really a good deal less drastic than might have been anticipated. Our stock exchange in those days was pretty tough and resilient. The declines in the averages were heavy, but

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      again moderate under the circumstances. Twenty-five typical railway stocks had an average price of 78.18 at the end of June 1914. They declined to 66.8 for their closing price in July. Twenty-five typical industrial stocks had a closing price of 58.19 in June 1914 and dropped to 48.76 by the end of July.

      Break in Stocks Moderate in 1914 as Compared with 1937. If we contrast the break in security prices at the outbreak of the war in 1914 with the break in security prices in the governmentally regulated stock exchange of 1937, we may wonder whether governmental regulation designed to protect investors has proved itself an unqualified success. The high price for the Dow-Jones industrial average was 194.40 in the summer of 1937, and this dropped to 98.95 in the early months of 1938. The high for the Dow-Jones average of railroad stocks in 1937 was 64.46, and this dropped to a low of 18.00 in the early months of 1938. The investor was safer in the unregulated market of 1914 than when protected by the SEC in 1937.

      Clearinghouse Certificates. In 1914 the New York banks, with liquidity suddenly impaired, though with assets which they trusted for the long pull, found themselves under unusual pressure to export cash. During the week ending July 31 the clearinghouse banks and trust companies of New York lost $56 million in cash reserve, of which $20 million represented withdrawals by American and Canadian banks. Resort was promptly made to the use of clearinghouse loan certificates, good between the banks, which had been used in New York also in previous extreme crises, namely, 1907, 1893, and 1873. These certificates were obtained by an individual bank through application to the Clearinghouse Committee. The Clearinghouse Committee would take the notes of the applying bank, secured by approved collateral with proper margin, and bearing interest of six percent. The clearinghouse certificate was the obligation of all the banks in the clearinghouse, and was acceptable to all of them in lieu of cash in settlement of clearinghouse balances. The bank which held the clearinghouse certificate received the interest which the borrowing bank paid. The clearinghouse certificate thus relieved the pressure on the cash resources of the weaker banks.

      Aldrich-Vreeland Notes. In the three previous crises of 1873, 1893, and 1907 the New York banks had been obliged to restrict cash payments. We had in those years an inelastic currency, a currency which could not suddenly expand to meet emergencies or even to meet seasonal variations. It consisted of gold, silver dollars and silver certificates, United States notes (greenbacks), and national banknotes. Of these only gold could be increased, and a substantial increase of gold could come only through imports, impossible in the emergency situation of 1914 and slow in the crisis of 1907—at which time, however, the import of $100 million of gold from Europe did end the money stringency and permit the resumption of unrestricted cash payments.

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      We were fortunate in having available a further remedy in 1914. The Federal Reserve banks had not yet begun to operate, and the shock had to be met without this assistance. But the Federal Reserve Act of 1913 had wisely saved and improved upon the provisions of the Aldrich-Vreeland Act of 1908, which had been designed to enable national banks to issue notes freely in a crisis. This act was to have expired by limitation on July 1, 1914. But Carter Glass, chairman of the House Committee on Banking and Currency, had had the foresight to have it extended for another year to provide against emergencies pending the inauguration of the Federal Reserve System, and had amended it by reducing the tax on notes issued under the Aldrich-Vreeland Act from five percent to three percent during the first three months of issue, thereafter increasing it one-half percent to a maximum of ten percent.

      No use had been made of the Aldrich-Vreeland Act prior to this emergency. The very term emergency currency had been an obstacle. But at the outbreak of the war speedy resort was had to it and the new notes were issued in large volume. Of the 7,600 national banks, 2,197 became members of the “Currency Associations,” which issued these notes. The maximum amount of these notes outstanding was $386,616,990, on October 24, 1914. Redemption of this currency began as early as October 1914. By December 26 redemption amounted to $217 million and on July 1, 1915, all but $200,000 of the authorized currency had been retired.

      The crisis of 1914 was unique in our history in that it was entirely due to external causes. The internal situation was liquid and solvent. The crisis may be said to have ended in November 1914 except for the cotton-growing southern states. Cotton was hard hit. There was a record crop of sixteen million bales, largely dependent on the European market. Cotton broke when stocks did, and the cotton exchange closed when the stock exchange closed, the closing price being 10½¢ per pound. The cotton exchange reopened in November 1914 with quotations at 7½¢ per pound, while cotton was being sold in the South for 5¢ to 6¢ a pound. An emergency loan fund was provided by banks in the northern states of $100 million, while southern banks provided $35 million. As it turned out, very little use had to be made of this fund. Less than a quarter of a million dollars was applied for in New York City, and one great bank took all of this. There came a sharp increase in foreign demand for cotton early in January 1915.

      Gold and Foreign Exchange Problem. Perhaps the most acute problem that New York had to face with the outbreak of the war was the problem of gold and foreign exchange. There had been a drain on New York’s gold for a considerable time in connection with the German, French, and Russian accumulations of gold in anticipation of war. Moreover, from March 1914 to August 1914 imports of goods to the United States had exceeded exports in unprecedented amount. Europe was depressed and had reduced its buying. Our imports were not unusually large, but our exports were unusually small. Usually our heaviest imports would come in the spring,

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      and our heaviest exports to pay for them, agricultural commodities, would come in the autumn. It had been a long-standing practice of American bankers to tide over the period of low exports by drawing finance time bills on London in payment for imports, which they would later liquidate by documentary bills drawn on London, connected with our heavy autumn exports. Finance bills are pure credit instruments drawn by banks on banks; documentary bills represent the actual movement of goods and are accompanied by the usual shipping documents. There had been an unusually heavy volume of such finance bills drawn in the late spring and early summer of 1914, which London was entitled to collect from New York. An additional heavy volume of payments due to London grew out of the selling of securities in New York by frightened Europeans at the outbreak of the war.

      A further unusual factor which complicated the situation was the fact that the government of New York City, seeking to escape the discipline which New York bankers had sought to impose in connection with the city’s borrowing and their demand that expenditures be curtailed or revenues be increased, had borrowed $80 million on short term in England and France. With sterling exchange almost unobtainable the city’s obligations abroad were in danger of dishonor. The New York banks came to the rescue of the city and undertook to provide the necessary sterling, but administered a spanking to the city officials which the latter accepted with due