The major economic forces and weaknesses at home and abroad have now been
exposed and can be appraised, and the time is ripe for forward action to
expedite our recovery.
Although some of the causes of our depression are due to speculation,
inflation of securities and real estate, unsound foreign investments, and
mismanagement of financial institutions, yet our self-contained national
economy, with its matchless strength and resources, would have enabled us
to recover long since but for the continued dislocations, shocks, and
setbacks from abroad.
Whatever the causes may be, the vast liquidation and readjustments which
have taken place have left us with a large degree of credit paralysis,
which together with the situation in our railways and the conditions
abroad, are now the outstanding obstacles to recuperation. If we can put
our financial resources to work and can ameliorate the financial situation
in the railways, I am confident we can make a large measure of recovery
independent of the rest of the world. A strong America is the highest
contribution to world stability.
One phase of the credit situation is indicated in the banks. During the
past year banks, representing 3 per cent of our total deposits have been
closed. A large part of these failures have been caused by withdrawals for
hoarding, as distinguished from the failures early in the depression where
weakness due to mismanagement was the larger cause of failure. Despite
their closing, many of them will pay in full. Although such withdrawals
have practically ceased, yet $1,100,000,000 of currency was previously
withdrawn which has still to return to circulation. This represents a large
reduction of the ability of our banks to extend credit which would
otherwise fertilize industry and agriculture. Furthermore, many of our
bankers, in order to prepare themselves to meet possible withdrawals, have
felt compelled to call in loans, to refuse new credits, and to realize upon
securities, which in turn has demoralized the markets. The paralysis has
been further augmented by the steady increase in recent years of the
proportion of bank assets invested in long-term securities, such as
mortgages and bonds. These securities tend to lose their liquidity in
depression or temporarily to fall in value so that the ability of the banks
to meet the shock of sudden withdrawal is greatly lessened and the
restriction of all kinds of credit is thereby increased. The continuing
credit paralysis has operated to accentuate the deflation and liquidation
of commodities, real estate, and securities below any reasonable basis of
values.
All of this tends to stifle business, especially the smaller units, and
finally expresses itself in further depression of prices and values, in
restriction on new enterprise, and in increased unemployment.
The situation largely arises from an unjustified lack of confidence. We
have enormous volumes of idle money in the banks and in hoarding. We do not
require more money or working capital--we need to put what we have to
work.
The fundamental difficulties which have brought about financial strains in
foreign countries do not exist in the United States. No external drain on
our resources can threaten our position, because the balance of
international payments is in our favor; we owe less to foreign countries
than they owe to us; our industries are efficiently organized; our currency
and bank deposits are protected by the greatest gold reserve in history.
Our first step toward recovery is to reestablish confidence and thus
restore the flow of credit which is the very basis of our economic life. We
must put some steel beams in the foundations of our credit structure. It is
our duty to apply the full strength of our Government not only to the
immediate phases, but to provide security against shocks and the repetition
of the weaknesses which have been proven.
The recommendations which I here lay before the Congress are designed to
meet these needs by strengthening financial, industrial, and agricultural
life through the medium of our existing institutions, and thus to avoid the
entry of the Government into competition with private business.