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counts of all banks based on the loans and discounts of 1914, by geographical (listricts, in accordance with the census classification.

This table shows that from 1914 to 1920 loans and discounts of banks in the New England district increased 65 per cent; in the Eastern States, 94 per cent; in the Middle States, 105 per cent; in the Southern States, 139 per cent; in the Western States, 163 per cent; and in the Pacific States, 105 per cent.

In other words, this statement shows that the largest percentage of expansion during the period of expanding loans took place also in the agricultural sections of the country. Hence, there was a larger percentage of expansion of bank loans in agricultural States than there was in industrial States.

So that in 1920, when the period of deflation began, we have the largest degree of expansion in those sections of the country where we have the largest number of nonmember banks.

Let me very briefly indicate what took place in the period of deflation. In order to get at the movement of money and credit during the period of deflation we had an examination made of the statements of 9,700 banks as of April 28, 1921, and May 4, 1920. Those examinations covered the course of loans and discounts, of deposits, of borrowings from Federal reserve banks, and also of borrowings from correspondent banks—I will not deal with all of the factors, because it is not necessary to what I have to say.

In making these examinations we divided the banks in accordance with the character of the counties in which they were located. These counties were divided into agricultural counties, those in which 80 per cent of the total product of the county was agricultural; and semiagricultural counties those in which 50 per cent and less than 80 per cent of the total products of the county was agricultural; and nonagricultural counties those in which less than 50 per cent of the total production was agricultural character. That was determined on the basis of the census, the statistics of the Department of Agriculture, the United States Geological Survey, etc. The examinations showed that in the agricultural counties—that is, counties in States in which there had been the largest expansion of loans and discounts—there was in this period a reduction of loans and discounts of 1.2 per cent only, while in the semiagricultural counties there was a reduction of loans and discounts of only 1.3 per cent, and in the nonagricultural or industrial counties a reduction in loans and discounts of 1.5 per cent. In other words, the largest reduction of loans and discounts took place in the sections of the country where there had been the least expansion.

The situation with respect to deposits was exactly the opposite. Deposits in agricultural counties diminished 11 per cent, in semiagricultural counties they diminished 5 per cent, and in nonagricultural counties 4 per cent.

Of course, no one can trace exactly what happened, but substantially I think it was this: In the agricultural counties farmers found it impossible to liquidate the loans which they had made at the banks and drew down their deposits in order to liquidate the debts which they owed to merchants, implement dealers, factors, etc., who in turn paid their indebtedness to the wholesalers and manufacturers of the cities, who reduced their bank indebtedness in the city, thus enabling a larger percentage of deflation of loans and discounts in the city and at the same time helping to maintain in the industrial counties a higher percentage of deposits.

I think there were two reasons why so small a proportion of reduction of loans and discounts took place in the agricultural counties of the country, and those two reasons have a direct bearing upon the necessity for some legislation such as the joint commission proposed.

The first of those reasons was that the prices which the farmer received for what lie had ready for market were not sufficient to liquidate the indebtedness whiclı he had made in producing them and the accumulation of indebtedness on the farm for equipment during the period in which farm labor was scarce and the farmer was compelled to make up the lack of farm labor by a larger use of machinery.

Mr. King. May I ask the gentleman a question ; will he yield?
Mr. ANDERSON. Yes.

Mr. King. Was there any pressure brought to bear upon these borrowers to require them to liquidate that you discovered in the investigation?

Mr. ANDERSON. I shall reach that in just a moment. There was certainly the same pressure upon the agricultural communities that there was upon the industrial communities. As a matter of fact, the policy in force in the various Federal reserve istricts was not identical. As the gentleman knows,

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in some Federal reserve districts they had a progressive rate which had the effect of imposing a uniform pressure upon all borrowers, regardless of the circumstances under which the original loans were made and regardless of the effect of the imposition of the pressure.

The CHAIRMAN. You speak of a progressive rate. That was made possible by an amendment to the Federal reserve act during the stress period?

Mr. ANDERSON. Yes.

The CHAIRMAN. We went into that very carefully. Do you believe, as a result of your investigations, that that act should be repealed—the clause permitting that?

Mr. ANDERSON. I think it is unnecessary, and I think that it involves an unsound banking practice. I think the sound banking practice requires the exercise of a sound banking judgment in determining whether a loan shall be made or called, and when you substitute for that sound banking judgment an arbitrary rule which imposes the same pressure for liquidation upon all borrowing banks regardless of their condition or ability to pay, I think you depart from the sound judgment which ought to be exercised and sound principle which ought to be applied in banking practice.

Mr. LUCE. Mr. Anderson, for a century or more the Bank of England's discount rate has been used for precisely that purpose.

Mr. ANDERSON. But the Bank of England is not the banking system of the United States.

Mr. STEAGALL. I agree with you it was not wisely employed; it was at least overdone. I have an idea that if allowed to raise the rates it should be not to the extent they did in the other instance.

Some one has made the suggestion that the Federal Reserve Board should have the right to raise the rate, but in no case to exceed the lawful rate of interest prevailing in the State in which the borrowing bank was located. But did they not follow a practice that probably resulted in preventing the failure of many banks, rather than the exercise of a judgment which would have resulted in denying loans outright in many cases?

Mr. ANDERSON. My conclusion would be directly to the opposite of that, because in the case of the progressive rate the rate was applied regardless of the cond'tion of the bank. No room for the exercise of sound judgment which would have permitted a more lenient policy in a case where leniency was necessary—that, I think, is the infirmity of the progressive rate.

Mr. STEVENSON. You say it was applied regardless of the condition of banks. It was applied in proportion to the banks exceeding its basic line.

Mr. ANDERSON. That is true.

Mr. STEVENSON. It was not applied regardless of the condition of the bank, but in proportion to the bank's mak ng loans largely in excess of its average balance; and, therefore, the statement you made just a little bit ago would be rather inaccurate that the same pressure was applied to all the banks to bring about deflation.

Mr. ANDERSON. The pressure, of course, in that case would be the heaviest upon the banks making the greatest effort to meet the requirements of its customers.

Mr. STEVENSON. Or, rather, on the bank that was extending itself to such an extent that it was necessitating its borrowing every month more largely than ordinarily a prudent bank should do. Was not that the situation?

Mr. ANDERSON. Yes; in some cases. But, as I said before, it is a substitution of an arbitrary rule for the exercise of sound banking judgment, which I think should be applied.

Mr. STEAGALL. But that in practice would work this way, would it not? If you remove the authority to fix the rate and remand the bank directors to exercise of sound judgment, the result would be that in some cases sound judgment would suggest it was still safe and all right to extend further accommodations, whereas in other cases good judgment would suggest that they decline the loan; and therefore, in practice, if you had not given them that authority, there would have been banks here and there that would have been unable to get accommodations that necessarily

Mr. ANDERSON. The answer to that is that it did not work that way, and that in the districts where they did not apply the progressive rate there was less distress on the whole, considering the conditions, than there was in the districts in which it was applied.

Mr. STEAGALL. That is probably true; but is this not also true, that the conditions in the districts where the progressive rates applied were necessarily

different from the conditions respecting banks to which that rate would not apply?

Mr. ANDERSON. Not at all. It was applied in the Kansas City district and it was not applied in the Minneapolis district. I'do not think anyone can say that the credit conditions in the Kansas City district were any more difficult than they were in the Minneapolis district, but I think every man who has gone through the figures of what occurred in both districts will say that the pressure applied in the Kansas City district was more arbitrarily applied and applied with greater hardship than it was in the Minneapolis or Chicago districts.

Mr. STEVENSON. I agree pretty largely with what you say about it. I think they ought to have backbone enough to say, “ You have got enough; we will not loan you any more; you will have to deflate.” That is the proper thing to do. But that situation was brought about by representation to this committee which was not carried out, and I am going to say it for these records right now. I have been punched at about those things. It was represented to us that this era of speculation in New York had caused banks to borrow seventy-five times their average balance in New York, and they had to stop it, and they wanted th progressive rate of interest for the purpose of stopping that; and we went ahead and passed it, and then they applied it in Atlanta and Kansas City and never said “boo" in New York.. That is what happened.

Mr. APPLEBY. What about it, Mr. MacGregor?
Mr. STEAGALL. We drew a gold brick.

Mr. ANDERSON. There was one other primary reason why the liquidation of bank loans in agricultural sections were less than in the industrial sections. This reason was that the maturity of the credit extended to farmers was the same as that extended to commercial interests, and was not adapted to the turnover which the farmer has.

In other words, the farmer's notes became due at a time when either his crop was not ready for market or, if it was in marketable condition, he was not ready to sell it; and I think the testimony pretty clearly demonstrates that one of the effects of this s.tuation was the putting on the market of a very considerable amount of live stock which was immature, and a certain amount of breeding stock likewise, although it is true that the total number of receipts of cattle at the stockyards for slaughter during this period was not larger than in prior years. An examination of the character of the cattle which was brought to market shows that an excessive proportion of immature and breeding stock was brought on the market during this period. I do not think it can be said that the farmer's difficulties in this situation resulted primarily from a lack of sufficient credit. I think that it resulted more largely from the fact that the credit which he had was not adapted to his turnover, and consequently he was compelled to pay it at a time when he could not pay it except at great sacrifice of values.

And that brings me the general discussion of the principles involved in the bill which is before you.

It is pretty generally considered that the farmer has an annual turnover, but the period from the beginning of his first expenditure in making the crop or purchasing live stock until he realizes upon the crop or the progeny of the herd may be very much greater-as much as three years.

In the winter-wheat section, for instance, the first purchases of fertilizer are made in May preceding the planting of the crop; contracts at least are made at that time. If a man plows his land in the fall, he buys the plow a year before he has anything out of which he can pay for it.

Mr. LUCE. You say the contracts are made. But are they binding before deliveries?

Mr. ANDERSON. Deliveries are ordinarily made, I think, in August or September of the year preceding the making of the crop.

Mr. LUCE. Would he have to give its notes any earlier than August or September?

Mr. ANDERSON. Perhaps not. Of course, there are a great many kinds of farming in this country. We people out in the wheat sections think of farming in terms of wheat production; the people down in the district which my friend across the way represents, Kansas, and as well Oklahoma and Nebraska, think of farming in terms of beef production; in the New England States, all through the Middle Western States, in my district, we think of farming in the more diversified sense of dairy production or fat-stock production; and in all of those cases, as well as in the case of the asparagus grower and the case of the vegetable producer, the period from the first expenditure of the making of the crop until that crop matures and can be put on the market is certainly more than six months and frequently in excess of a year.

Mr. LUCE. That was just the point I wanted illumination on. I realize, of course, the live-stock phase of it, but I did not know that any other problems required more than a year.

Mr. ANDERSON. There certainly is no farmer whose expenditures from the beginning of the planting of the crop until maturity and sale comes within the average of the six-months period, and so long as we have agricultural loans substantially limited to the six-months period you are going to have recurrent periods of frozen agricultural loans.

You can not adapt the farm production of this country to a six-month loan, and if you can not adapt the farm turnover to the credit machinery of the country as it now stands, it is obviously the duty of the Congress to adapt the credit machinery to the turnover of the farmer.

Mr. MACGREGOR. Is there anything to show what the result of the amendment permitting the agricultural loans with six-months clause has had ?

Mr. ANDERSON. There are some figures in the report which indicate the extent to which six-months paper was discounted with the Federal reserve banks, and it in general shows a progressive increase in the proportion of six-months paper discounted by the Federal reserve banks during the period beginning, as I now recall—I do not have the figures before me—the early part of January, 1920, up until about October, 1920.

Mr. GOLDSBOROUGH. What was your idea of the difference between the loan frozen because a six-months note has to be renewed six times and a loan that is frozen because it is a three-year loan in the first place? What is the economic difference?

Mr. ANDERSON. The difference is that in the case of the loan that is frozen because the farmer can not pay it the farmer may be compelled to pay it by the sale of immature cattle or by premature sale of the product, whereas in the case of the loan which is predicated upon the ability to pay from the proceeds of the farm, while it may be frozen in the sense that the banker can not get his money out of it when he wants it, it is not frozen in the sense that it can not be paid when due, and that brings me to the point of this proposition as I see it. So far as I know, there is no legal limitation which prohibits a bank from making a loan for more than six months.

Mr. GOLDSBOROUGH. I understood you to say a few minutes ago that there had been practically no reduction during the period of deflation in farm credits. If that is true, then there has not been a demand for the payment of the six months' note when due.

Mr. ANDERSON. There was a demand for payment when due, and, of course, some of them were paid. But the pressure was there, whether the actual liquidation that took place during this period was much or little.

Mr. GOLDSBOROUGH. What motive, Mr. Anderson, did any banker have for compelling the farmer to be ruined by paying off his note?

Mr. STEAGALL. What is the question?

Mr. GOLDSBOROUGH. What motive did any banker have for compelling the farmer to be ruined by paying up his note?

Mr. ANDERSON. I would not impugn the banker's motive at all. But this I do know, when you get to the point of exhaustion of banking reserves and the psychology of deflation gets started there occurs in the banking minds of the country a certain psychology of fear and timidity which results in the stopping of loans and then in the calling of such loans as can be called.

Mr. King. Does not the gentleman think that this pressure began with the Federal Reserve Board and their policy?

Mr. ANDERSON. I think the increased discount rates--and I am not finding any fault with the policy, so far as that is concerned-produced a tighter policy on the part of banks all over the country. I do not think that it was inaugurated with any desire to bring pressure upon either industry or agriculture.

Mr. King. Does not the gentleman think that by this process the result was, so far as the farmer was concerned, that many people were able to buy the farmer's products at much less price than they had before been paying for it?

Mr. ANDERSON. I doubt very much whether it is sound to attribute the drop in prices which occurred during that period to the policy of the Federal reserve banks and the Federal Reserve Board. There were many other factors which began to operate before the Federal Reserve Board made any change in its policy, and those factors must, I think, be taken into consideration,

together with the psychology of the period in determining what the factors were that induced eventually the perpendicular decline in prices that occurred.

The CHAIRMAN. The question, if I understand it correctly, implies sinister motive on the part of those who might eventually profit from the deflation by the purchase of commodities from these distressed farmers. In your hearings has anything developed to prove that such a thing did exist?

Mr. ANDERSON. Do you mean that "some gentlemen higher up”-
The CHAIRMAN (interposing). Yes.
Mr. ANDERSON (continuing). Conspired to-

The CHAIRMAN (interposing). To influence the Federal Reserve Board or the advisory committee?

Mr. ANDERSON. There is not any testimony in our record to that effect.

Mr. STRONG. Mr. Anderson, might it not have been rather that needing to increase the reserves of the banks of the country, and knowing that the farmers had a crop, that the feeling grew that they had to sell it and pay their debts, so as to increase the reserves?

Mr. ANDERSON. That is possible.

The CHAIRMAN. Is it also your opinion that the thought that prevailed and the fear in the minds of bankers generally of the distress or the results of the distress on the financial system—that the culmination of that system was responsible for the retraction which took place, or the bankers' feeling the need to call in—which was the actual result of this psychology that you speak of-that they should draw in their credits to protect the financial situation, rather than a sinister motive to be made in the exploitation of the producers ?

Mr. ANDERSON. I think it is perfectly clear. We are all human, and if you owed me a thousand dollars, and I had that secured by warehouse receipts on wheat, and I had loaned you 80 per cent of the value of that wheat, and I saw that wheat declining in price I think I should be in some hurry to get my money.

Mr. STEVENSON. That, now, Mr. Anderson, comes back to the question that Mr. Luce asked-why any bank should press for its money. Take instances that I saw in my community. There is a bank that has advanced the farmer to make 100 bales of cotton, and he gets his cotton out. It is selling from 38 to 40 cents a pound, and he does not sell it. The State secretary of agriculture says, Do not sell until it is worth 50 cents." It is worth $25,000. He sits down and waits 60 days and it is down to where it is worth only $12,000, and the prices still dropping. Was there not a good deal of incentive to the bank, in ordinary prudence, to get something out of that cotton before it got down to where there was no margin in it at all?

Mr. ANDERSON. Absolutely; there is no question about that in the world.

Mr. STEVENSON. In the meanwhile the Federal Reserve Bank was asking them to reduce their line of rediscounts.

Mr. ANDERSON. Of course, you must take into consideration, too, in this connection, in measuring the amount of deflation that took place, that this deflation occurred in a period when there would normally have been an expansion due to the marketing of the crop and that this deflation, indicated in percentage, is not entirely representative of the pressure that actually took place by reason of the stopping of further loans.

Mr. MacGREGOR. There was not any stoppage during the period of deflation ?
Mr. ANDERSON. Oh, yes.
Mr. MACGREGOR. Was not there a greater expansion of credit ?

Mr. ANDERSON. Up to October there was an expansion, of borrowings from the Federal reserve bank, that is true. But during all of that period I think it is equally true that banks generally were adopting the policy of making no more loans and, so far as they could, causing the liquidation of such loans as it was possible to liquidate.

Mr. STEAGALL. Mr. Anderson, where there is a big slump in, say, the price of farm products in an agricultural community, and there is a big slump in the price of industrial products, which, of course, is the basis of securities, if a big slump occurs so that farmers can not meet their maturities, and so that the banks are embarrassed in taking care of their maturities, a great deal of confusion and disturbance would result whether any bank in the country called on anybody to pay or not, would it not?

Mr. ANDERSON. I think so.

Mr. STEAGALL. Would it not automatically bring about a disturbed or chaotic condition ?

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