Thomas Tooke

A convenient way to flood the banking system with government securities.

In Inflationary Period of 1913-1920, Unreserved Banking on April 27, 2012 at 1:55 am

As Kemmerer wrote, patriotism was quite convenient:


Much of this potential loan and deposit expansion appeared in the early years of the war, when the demands of European belligerents for our products assumed tremendous proportions and offered high profits to American producers of materials, so high as to call for a large expansion in the production of these materials. Labor was shifted from “non-essential industries” to “essential industries,” and while many of the former lagged, the latter were greatly stimulated. Here then was a great demand for increasing bank credit at just the time that the establishment of the federal reserve system, the reduced cash reserve requirements of commercial banks, and the heavy imports of Gold from Europe were making a larger loan and deposit expansion possible. The new federal reserve law and the  heavy gold imports created a potential supply of new circulating bank credit, the war stimulated the demand. It was the banker´s financial interest to expand credit, and to the interest of many groups of business men to seek these newly available funds.

As a matter of patriotic duty bankers were expected to expand their loans and deposits. Long before the United State entered the war, the sympathy to the Allies in this country became so pronounced and the conviction that they were fighting our battles became so strong, that production for the Allies and the granting of loans to finance such production were felt to be patriotic acts. After the United States entered the war, the extension of bank credit to the maximum limit consistent with safety to “essential industries,” and to the buyers of libery bonds was looked upon as the paramount duty of banks. “.


My comment here about how the Treasuries (war bonds) were initially inserted into the banking system with the incentive to let people borrow short term at low rates to buy liberty bonds and make a “spread”. Before that, without the generous  discount, it would be very difficult for the bank to have incentives to load up on government war bonds. This is how the Treasuries invade the banking system.

More from Kemmerer´s writings…


The demands of patriotism were looked upon as requiring the public to avail themselves to the limit of the liberal loan facilities made available by the banks. Nearly everywhere the belief prevailed that with the loans thus available, war industries should expand their production and the public should buy bonds to the maximum. “Borrow and buy”was a widely used slogan in the first three liberty loan campaigns, and was strongly, although more quietly, urged upon the public, in the fourth liberty loan and the victory loan campaigns.



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