Economics and the Public Welfare. Benjamin M. Anderson
banks at the peak of the government borrowing held over $4 billion in government bonds, but they had had over $700 million to start with in bonds to secure national banknotes. Investors held over $18 billion, mutual savings banks held substantial amounts, Federal Reserve Bank holdings were very small indeed. At the peak of the government borrowing in 1919 it was estimated that the commercial banks held altogether about $6.5 billion of government war paper, of which about $3 billion were loans secured by government bonds and $3.5 billion were war bonds owned (including, of course, short government notes). We actually got the current savings of the people with taxes and with bonds on a tremendous scale.
The Role of the Federal Reserve Banks in Government Finance. The Federal Reserve banks had reduced their earning assets to well below $200 million by the time of the outbreak of the war, getting ready for the war
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emergency. Their great asset was the nonearning asset, gold. They expanded credit greatly during the war, when viewed in the perspective of that time, though in terms that look very modest indeed when we consider their history in the period since 1932 and, above all, in the period of World War II.
The following table exhibits the extent of Federal Reserve Bank expansion almost to the time of the Armistice, which was November 11, 1918. It stops with October 25. It was prepared late in 1918 by Dr. M. Jacobson, statistician of the Federal Reserve Board. It is not altered nor are the dates altered, because changes in accounting methods since the inauguration of
PRINCIPAL RESOURCE AND LIABILITY ITEMS OF THE FEDERAL RESERVE SYSTEM ON SELECTED DATES
(In thousands of dollars)
| Resources | Nov. 26, 1915 | Dec. 22, 1916 | Oct. 25, 1918 |
| Total gold reserves | 492,063* | 728,445* | 2,045,132* |
| Total cash reserves | 529,375* | 734,470* | 2,098,169* |
| Bills discounted: | |||
| Secured by government war obligations | 1,092,417 | ||
| All other | 32,794 | 32,297 | 453,747 |
| Bills bought in open market | 16,179 | 124,633 | 398,623 |
| U. S. government long-term securities | 12,919 | 43,504 | 28,251 |
| U. S. government short-term securities | 11,167 | 322,060 | |
| Total earning assets | 89,200 | 222,158 | 2,295,122 |
| Total resources | 637,261 | 1,009,852 | 5,270,785** |
| Liabilities | |||
| Capital paid in and surplus | 54,846 | 55,765 | 80,324 |
| Government deposits | 15,000 | 29,472 | 78,218 |
| Member banks’ reserve deposits | 397,952† | 648,787† | 1,683,499 |
| Other deposits, including foreign government credits | 117,001‡ | ||
| Federal Reserve notes in actual circulation | 165,304 | 275,046 | 2,507,912 |
* Includes amounts of gold and other lawful money deposited with Federal Reserve agents against Federal Reserve notes issued.
** Includes clearinghouse exchanges and other uncollected items formerly deducted from member bank deposits.
† Net amount due to member banks.
‡ Exclusive of deferred credits on account of uncollected checks and other cash items.
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the system, partly due to changes in law, would make it difficult for anyone not intimately versed in Federal Reserve statistics to make the changes correctly.2
Limited Government Security Purchases by Federal Reserve Banks. In this table, particular attention is called to two items showing the United States government securities held by the Federal Reserve banks. Of long-term securities they held twenty-eight million on October 25, 1918, and of short-term securities they held 322 million. The second of these figures was temporary, growing out of the exigencies of the fourth liberty loan. It was promptly reduced to 118 million in a few days.
In general, the Federal Reserve banks gave credit only against rediscounts, and direct holdings of government securities remained very small, with four exceptions of a few days each.
Temporary Holding of Government Securities During Liberty-Loan Drives. They had learned from British experience the trick of easing off the money market by the purchase of government securities while a loan was being floated. With each of the four liberty loans they did this. With the first liberty loan the sum was a few tens of millions. With the fourth liberty loan the increase was over $200 million. When they bought government securities, they paid for them with checks on themselves. These checks came into the hands of member banks. The member banks then deposited them in the Federal Reserve banks, building up their reserve accounts. This eased the money market and facilitated the great transactions in the placing of billions of dollars of liberty loans. When the loan was over the Federal Reserve banks sold the government securities, withdrawing the money from member bank reserves and tightening the money market again, usually forcing member banks to rediscount in the process.
Money Market Tightens as War Goes On. The money market during the war grew progressively tighter. Both capital and money market funds grew increasingly scarce. Bank credit expanded, but at progressively higher rates of interest. The call rate—which had dropped low in 1915 and to the middle of 1916, averaging less than 2 percent and dropping to 1 percent for one month in May 1915—had already tightened sharply in the second half of 1916. With our entrance into the war it began to move very sharply higher. It touched 7 percent in September 1917, dropped momentarily to 4 percent in October, and then moved up to 6 percent by January 1918, at which figure it was pegged—the pegging being accompanied by a rationing of call money by a clearinghouse committee.
Bond yields went up. It was a firm money situation. The pressure of firm money rates undoubtedly did a great deal to retard bank expansion and to hold it down to necessary things.
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The Treasury in its borrowing policy made rates of interest which were reasonably attractive to investors. The first liberty loan