Federal Reserve bank during the war period, from barely more than a tenth of a billion dollars to over two billions at the date of the armi stice. Observe that after the war, as the member banks availed them selves freely of the rediscount privilege, the total rediscounts rose ra pidly by more than another billion, despite the decrease of war paper. The "other discounts," which meant commercial loans, must be looked upon as in large part the cause of the commercial speculation, "profit eering," and inflated prices, which marked the period from the middle of 1919 to the middle of 1920.
the rediscount privilege, and took the proceeds, either in notes or in credit, to their reserves, this being a source of large earnings for the Federal Reserve banks. The accompanying table shows the net earnings by years: § 12. Gold hoards and artificial interest rates. The war time influence and activities of the Federal Reserve Board, and of those controlling the various district banks in general, merit high praise. They steadily urged the sound economic policy of industry, thrift, and self-denial on the part of the people. They fostered no illusions that the magic of bank ing credit or of. paper money could take the place of real production of the goods needed, and of real abstaining from the goods not needed, for the prosecution of the war. Al though the banks (district and member) found it necessary to take and hold for a time an increasing proportion of the successive loans ("war paper"), and the local banks to lend heavily at low rates of interest to customers on the security of war paper, great efforts were made to get the public to pay in full and to relieve the banks of this burden.
In two particulars the policy of the Board is more open to question. The Board showed a mercantilist bias in favor of an artificial heaping up of gold in this country, as shown in its fathering and defense of the gold embargo. It de fended this on the ground, first, that it was desirable to con serve the available gold supply on the assumption that this would make the country stronger economically. But this could but have the effect, in the end, of artificially inflating our prices at home, of increasing the amount of Liberty bonds to be issued, and of causing the value of the American dol lar to depreciate in the countries from which at the time we were buying in excess of our sales. The Board thus con
tradicted its own sounder doctrine that goods, not artificial inflation of credit and prices, was what was needed to win the war. The Board further attached undue importance to maintaining low interest rates artificially at a time when the natural trend of rates was upward. This could but en courage the increased use of credit by the public, and thus neutralized the Board's own sound policy of keeping down the use of credit for purposes less urgent or of a speculative nature. Throughout the war period (and for a full year thereafter) our banking practice was in violation of the basic principle of central rediscount, "well established in the tradition of Europe, that the official rate of rediscount should be above the market rate." Fig. 6. Chapter 9. The increasing wholesale prices appear to be even more nearly parallel with the rapidly expending bank deposits than with the monetary circulation.
§ 13. The post-war period. At the sudden termination of military operations, the Federal Reserve Board at once gave expression to wise warnings against the inflation and specula tion that usually have occurred at such a time. It declared the immediate problem to be that of "preventing credit from expanding too far, and so far as practicable of reducing any excess that already exists." It again counseled thrift and the acceptance of falling prices by the people, and limitation of credits by the banks. If this policy could have been made effective, the price index of armistice month (which was 206) might have been the peak, and prices might have moved slowly downward to lower levels. As it was, prices wavered, fell as low as 197 in February, 1919, rose again, then with a bound went up in July, 1919, to 219, and still upward to the peak of 272 in May, 1920, then to plunge steeply down ward to 151 in May, 1921. Enormous evils of speculation and undeserved profits to some, unjust burdens of rising prices to many others, great waste of productive effort, and finally much unemployment and suffering in the period of crisis, would have been avoided if the price readjustment downward had progressed evenly from the date of the armis tice.