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FEDERAL RESERVE BOARD
•
C•:.~
STATEMENT FOR THE PBESS.
' d :._;_)
For release in the morning
})apers Tuesday, April 15th, 1919.
-
The Federal Reserve Bulletin for April was sent to the printer today.
Its publication has been deferred for some days in order to furnish at the
earliest possible moment the official statement of the Secretary of the
Treasury, concerning the fifth, or Victory Liberty Loan.
A large part of
the 1'i~view of the M:onth, which, as usual, is the leading feature of the issue,
deals with the conditions of the loan and the banking situation, as affected
by it.
-
After quoting at length the statement of the Secretary of the Treasury,
in which- the terms of the new offering are stated, the Board discusses some of
its salient features as follows:
"So clearly are the terms and conditions of the new issue set forth
~n the Treasury statement" says
the Review "that colmlent w·:>uld seem to
be called for with
res~ect
the announcement.
Of these the most important is
only to one or two points in connection with
proba~ly
tha character
of the new offering as an issue of 'notes' rather than of 'bonds'.
-
The
new notes, undet the terms which have been fixed by the Secretary of the
Treasury, are
to run for not over four years. Practically, therefore. the
difference between the old and
the new issues is that while the
Go~ern-
ment must redeem or refund the notes after a given period it might or
might not, at its option, refund· the older issues.
There is evidently no
warrant whatever for the view that the notes are assentially a differant
)
kind of investment or are to be regarded in some special or peculiar way
'
as contrasted with ~.. the bonds.
obligations,
They are like the latter Government
while· the period of their life is 0ntirely sufficient · to
X-1476
..
·~
- r.
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'
warrant the ordinary investor in putting his funds into them.
Indeedt
as ie well known, before the war one of the most important conservative
investments in the
mon~y
market of the United States was offered by a
series of short-term notes issued by railroads and public-service ·cor-
porations.
•
These had become a favorite investment with discriminating
buyers, their ITaturity being from one to five years. the preferred life
as a rule not exceeding two or three
y~ars.
When the investor purchases
a Government note with a :Dati.!Xity of four years he has the assurance that
the obligation thus purchased will possess greater stability of value
than could possibly be given by any
bo~d
whose maturity is long or
which is subject to the· possibility of redemption after a specified
period, but which has n0 definite
-
upon the maker or isst1.er· oi.'
su~h
o~
positive
bono.s.
cla~
for such redemption
Far from its being true, there-
fore, that the new 'not.es 1 are not well adapted to private subscription,
tbey are eminently so adayted.)
w~ile
the conditions under which they
are to be issued should bring them much close:':' to the r<::quirements
Liberty Loan$·"
The J_eview then describes tme financial si tuatio:-:. w;·uch has called
.
!
forth the new offering of notes, s~ing tnat this is so well known that only
.A
very general
descri~Jtion
of the cireum.stances attendant upon the
of the issue need be furnished.
...' ' '
:placing
.
~~
."
..
f:; :"\
~"''•;,.;.: ~.•-..:P \;~
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'
X-1476
It is noted tMt
"the
Tre~sury ~s.
from the beginning of Decerrber
l~st
to the end
of the month of lV~rch issued :i.n certificates of indebtedness intended to
anticipate the proceeds of this flota-tion a.pproxirr.a.tely $Lt, 700,000,000,
..
~ter
deducting exchanges
~nd
redemptions. These obligations run five
months from their date of issue. At the present time the expenditures
of the Treasury are running e,t the rate of a.bout $1,300,000,000 per month,
a. figure decidedly less
t~n
the rate of
e~enditure
in January a.r.d about
the same a.s that which. was estdblished during February. The exact outlay
for ~arch ~s been $1,379,811,785~ Esti~ted expenditures up to the end
of this fiscal
y~r
will bring the outlay for the fiscal year a.s a whole
to about $18,000,000,000 or $19,000,000,000 of which
-..
expended up to the end of
~reb
s~~
there ha.d been
$15,164,224,227. Congress bas in the
meantime adopted legislation designed to afford new sources of revenue
from
ta.~tion,
the first installment of which wa.s turned into the Treasury
on lVurch 15. This legislation, however, will not suffice to meet the
re~irements
of the Depdrtment, as the figures already furnished amply show.
"
The Board a.lso con1l1lents upon the fact thi.t the new loan will a.ll be used,
as pointed out by the Secretary of the Treasury in his statement, for the retirement of outstanding certifica.tes of indebtedness, which h::l.ve been issued
-'
'
in anticipation of the sale of the notes. On this point the R-eview continues
as follows:
"The policy of issuing short-term certified.tes of indebtedness wa.s
resorted to by the
Tre~sury
Department
e~rly
in tbe wa.r a.t a time when the
needs of the Government were exceptionally urgent dnd unexpected in character. They h:i.ve served their purpose well
..
·,_
a.s& .me=~.ns
of supplying the
Treasury without de l.d.y with the funds of which it stood in need. In so doing,
however, the
certific~te
policy ha.s necessarily placed upon the ba.nks tbe
X-1476
necessl ty of bearing a co1'l.tlnu1ng ourden of war securities •.
This burden was,- of course, at a minimum inmediately after tha conelusion of a Libertr loan, inasmuch as at that time at least a considerable part of the new bonds had been sold to the public and the
certificates to that extent 'funded 1 •
In so far. of course, as.a
Liberty loan did not result in inducing the public a.CtUa.lly to take
O'f~r
and pay for the.-P new bonds. the banks instead of carrying the
short-term certificates of the Government now carried the paper at
whatever date maturing. which had been made by their clients for the
purpose of enabling themselves to subscribe for bonds.
Inasmuch as
the process of borrbwing by the Government against certificates has
almost invariably been begun within a very short time after the completion.
.
.I
of a Liberty Loan, there has been steadily in the hands of the 'banks a
vary~g
quantity of certificates which,has increased as the date of
flotation of each Liberty Loan drew nearer, thereafter to be technically
reduced by the pUblic through the process of borrowing at the banks for
the purpose of absorbing the bonds.
The necessity of general puvlic
subscription as an ~indispensable element in the process of finQ.llcing
th*s becomes apparent. 11
a
·..~
•
Atte.ntion ie then called to the necessi,tf of a~ing
distribution of the new notes, as
agai~st'
a wide popular
the condition in which they
might be left in the hands of the banks, and the statement of the
Secretary of the Treasury, issu.ed on March 12th, wherein broad~:
subecription to the notes was urged, is qu<>ted.
comments upon the necessity of taking'up the
possible, saying:
The
~otes
J,13Vi~w
then·
as generally as
X-1476
.,. 5 It
"It should be understood that under the plan of financing which
has been pursued by the c-overnment since the entry of the United States
into the war, the direct source from which public funds are drawn is the
commercial banks of the country.
Precisely this same situation exrsts
in the case of the fifth loan, and precisely the same obligation rests
•
•
I
upo.n the community to participate in the purchase and absorption of the
bonds needed for the
funding of the certificates.
During the
cont~-
a.nce of the war there wao, of course, the impetus growing out of the
belief that. subscriptions made
~n
this way were necessary for the pur-
pose of aiding in the immediate maintenance of the armies in the field.
The Goverilment still has strong military forces in Europe engaged in the
ilqlortant and necessary work of con.pleting our operations there..
-
The
obligations which have been met sincA the opening of the year and are
still to 'be liquidate<i are those which :cemain subsequent to the conelusion of the war, and which represent'the
obligations or indebtedness
'
incurred for the conduct of 'the struggle,
EsJent).a'tly, however~ the
reason why the public should subscribe i.cr enll.
·r..eJ.:C:J ,r-.P the secu.ri ties
offered in one of these great periodical loans is that cf self-interest.
If the obligations
•
alreac~¥
taken 'by the banks a.re not li.qlJ.idated, the
communit,y at.large will suffer from a continued inflation of banking
credit and from the high\ prices that a.re consequent upon this condition
of affairs.
Only one reme4.¥ for the situation now existing can be
applied - that, namely, of subscribing freely for the Government
obli~
ticms when offered and of paying for them out of the 'proceeds of saving.
or to be accumulated
either already SJ:.cumulated/f.rom time to time-Indeed, the urgency for ad.' herence to this policy is greater now than it was turing the war, inas, much as at that time there was strict oversight and control. on the part
of the Governmsnt over production, distribution, and.
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in a. measure, consumption, while dot present tm.t
ani properly been grea.tly rela.xed,or, in many
oversight las Il<;;i.tura.lly
br~ches
of business entirely
abolished. The responsibility of saving d.lld c cnserving resources thus renains
with those who are tbe recipients of current incomes, either fr<m investments
or from sa.J.a.ries and wages, in
per~ps
a. higher degree than
WI.$
previously
true.
"Neglect on the ,part of the public full¥
~ a.ppreci~e
dnd fully to
perform its duty in taking up a.n:l· :,;:aying for the forthcoming VictQry note
issue'\ says the aaview, "would b.:ive a. very :preJwiici..a.l effect
ing fOsition by
.o~.ggra.va.ting
\ij)On
04~-
the
the st;,J.te of credit exp.:a.nsion which cil.Q.red.dy
e~ieh,. 11
It is pointed out tba.t, under the Income Tax 11-w a.pprox.il:lately $1.,00l,COO)OOO
h:a,ve Urea.d.y been received
·•
•
<il-t
a. first installment. "This'! s;;a.ys tbe review,
"'is currently a.ecepted a.s equiv..:1.lent to about one-qaa.rter of the total
return ttl be expected, but is probably in excess of that figure. Whileprobably the la.rge majority of individ.ua.ls a.nd corporations will :px-efer to
take adv<:l.llt.il.ge of the inst<iillment methOd of ployment, there d.re not
who .;a.re following the custom of former
ye~rs
of
~ying
;.n lump
SU'III ..
4
few
Such
payments tend rel.;i.tivel;r. to reduce the pd.yn..ents to be received at subsecpent insta-llment periOds. There is no me..ms of estim..a.ting with d.Ccara.c1
the toW-1 return on the b.J.sis of the installment of Mit.rch 15, unless it
be
~ssumed
tha.t this inst.;a.llment is roughly equa-l to one-quarter of tbe
total, in which
C<l-~e
the gross
incOi.t:e
from the income, corpora..tion <Jnd
excess profits taxes will Qmount to not more thd-0
$4,ooo,ooo,ooo.n
"\]' 1'.""•7 6
...._ ...
The moreys received on March 15 served to
li~uidate
issues of
of indebtedness which were falling dne on that date and
sirr;ply to transfer a specified amn;:n·;; of ba."'lk credit
certificate~
consequentl~l·
f:;.~om
one gro1:p 5n
the community to another through the med5um, ih·s·:;, cf tax pa;yme:r:1ts to
the Government, and
ing certificates.
t~'len
liqo.Lidat.iug
pa;yment:;~
Inas much as practically
15 receipts were thus abs():::'beo. in
tax payment leaves the
'l'~ea::mry
f;et~li:ng
rr..ade tJ meet
$Soo.ooo,ooo
:it~ outst.Fmd-
of the March
mat.U'ing cla5.ms., the first·
in abcut the same posi tic:..1 as before,
so far as current payments are concerned, and it must therefo:..:·e dispose
of the same problem as heretofore in con..'l'lection with its progl"am of bc:r-and expendi t1.1re .. n
rowing
After thus discussing the situation as to the prospective fifth loan,
the B.eview takes u;p the questicn of railroad financing and points out that
this
~
matter is now definitely shifted to the War Finance Corporation
unde;;.• the plan already announced, whez·eby that organ..hation cooi?erated with
the Director General of Railways.
The War Finance Coi'}?oratio:o. bonxl offering
of April 2nd is descr.ibed and the lleview then t:uxns t.o t.he gene:ca,l
commeJ..~r-,iaJ
paper si tuat:i.on, saying that
"Renewed purchases of commercial paper by banlcs
are reported,
while not a few institutions are stated. to be ccnsideril:lg the best
methods to be followed in the use of t.he5.r flu:i.d fu.."lds when
Treasury certificates of
indebtod~ess
shall be
withdraWl~
short~-term
fromfue market.
The volume of funds available for private industrial an!ierprises has
seemed to be
reasm~bly
at a tolerably
high
satisfactory, although rates have been kept
level
as
a
result
of
the
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conservatism of ba.nkers who desi._.e to avoid the development of a."f!.:y
cramped position which might result from the demands of the Government ,during the progress of the fifth loa.n. While the Government is still
supporting the export trad.e in no inconsiderable degree, it is note'
worthy tba.t a substa.ntial :percentage of the new financi!lg now in
progress is intended for .,hP. pm:pose of facilii;ati:ng the
movemen·~
of
goods to foreign count:r.ies. These credits are ta.kir..g the fonn in many
instances of acceptances, wh:.le in others tbey a.re
simpl~
ordina-ry
advances designed to sustain business which is being developed for
export a.ccount."
The recent Belgian industrial credit is cited a.s an example of current peace
borrowing
for the
re~~ilitation
of European countries, whose productivity bas
been in\Paired by the war. On the question of foreigp exchange, the lleView, after
referring to the suspension of governmental control, or "pegging", says that
''These ch.mges in the sitw.tion of exchange rra.rk the beginning of a.
new period in international finance. The witho.ra.wa.l of Government support
in important brcnches of e.xchd.nge is equivd.lent to e. staterr.ent that hence-
forth the movement of commodities for private account between the United
States ar.d other countries must be fina.llced on some basis o-.her than th:l.t
of Government guaranty. In nornal tirr.es the decline of e.xchange occurs
in countries adversely affected by a.n unfavorable balance of tra.de.
X-1476
• •
- 9 The effect of such an adverse balance is to depress the rate of exchange and thus to raise the price of imported commodities in the country-;·
which is zuffering from a fall of exchange and a tendency is thus auto~atically
$et up to restrict further excessive buying by importers. Great
Britain has already found 1 t necessary to adopt strong measures to prevent further importations of commodities and the withdrawal of support
for sterling will tend to make these restrictions still further effective.
The same situation will probably exist
~ortations
with respect to
these conditions
axport trade.
ffiUSt
in an even more marked degree
from the united States into Italy.
All
necessarily exert an important effect upon our
Indeed, the extent to which we can now export to foreign
countries which have
lately been belligerent will depend upon their
ability to finance their own
needs~
or to 'obtain adequate assistance in
such financing from American banks and bankers.
Undoubtedly such assist-
ance will be forthcoming in considerable measure, but it can hardly be
expected that so tremendous a flow of goods out of the United States
will be maintained as has been true for a long tiwe past, giving us
during the years 1916-1918 a favorable meechandise balance of about
$9,000,000,000.
So far as it is thus maintained, the result will be
accomplished only through action on the part. of Americans looking to the
purpose of financing foreign bcyers in their purchases.
This, in other
words, means that the United States, t.n order to continue as a great ex~
porter, must also continue as a great investor in foreign countries, and
that to the extent she is able to do so her selling power
raspondingly developed and sustained.
~~ill
be cor-
It mu.st soon become a question,
therefore, through what agency and methods the American investor can best
be reached in entering the field of foreign investment.
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{
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"A special situation had developed early in March in connection
with French exchange.
The most striking fdature of these occurrences was
a rrarked decline in the international value of the franc - French francs
being
~oted
on March 18th at 5.80 per dollar, since when the quotation
has fallen 'below 6
vari~sly
francs~
The decline of the French franc has been
attributed to developments in connection with French Govern-
ment financing, to a del:l.berate relaxation of the control or "pegging"
'of French exchange by
the Government of France, and to other factors.
The truth of the situation is that our payments to France, both through
Government loans and through disbursements for the Arrey on the spot, have
greatl' fallen off.
New credits opened by the United States Treasury
to the French Government since the armistice and up to the end of March
amount to only $285.000,000, while the withdrawal of fully half of our
troops and their transfer back to the United States has correspondingly
decreased the amount expended for soldiers' pay and, expenses.
has not and will not for
so~e
France
time to come be in a posi ticr.a to export
effectively, and the destruction of much of her northern industrial
region, and the disorganization of other pr 0 iucing sections, as well
as the delay caased by the necessity of converting her war plants to
peace uses will necessarily retard ·
still further the development
of her power to ship salable goods.
France must therefore contemplate
for
a
considerable
time
to
come a situation
in
.
X-1476
- ll -
...
which she
~st
either purchase less abroad or rrust expect in the absence
of artificial control an unfavorable state of the exchanges.
The removal
of the restrictions by France upon the movement of gold would involve
the shipment aut of the country of a considerable volume of the metal
for the
purpo~e
of equalizing exchanges, e.nd this makes it less probable
that there will be such a restoration of the free movement of gold in
the immediate
nFrom the
f~ture.
stan~.poi~t
of the United States, the continuance of large
exports of grain and foodstuffs which have kept the record of January,
February, and t:he early part of JVf.arch fully up to that of any corresponding period in the past, means that foreign co~,tries will be under the
satisfactory
continued necensity cf -::.irr.Ung/m~w.lr. of settling with the United States
for gbods w!.i··:J:... tr.ey
aT{..
nr;t in
~osi ti.on
ing e.xports of t:1e :Tni ~ed Stute3.
to offset by means of correspond-
This suggests that the exchahge prob-
lem may become more pressir:g. Bot.h it <md the question of gold embargoes
will need to be considered at an eax·ly date.
Vecd:~i.rr3~
it is worth while
to note that the Treasury still has limited. powP.1.'s vi ext.enni,lg f:i.r.ancial
accommodation to foreign countries. 11
and
.. financial conditions during
The usUal review of business
in the
Bu~•.letin
M::~rch
is included
and, in addition, there is published a series of statements from
the Federal Reserve Banks with reference to the liquidation of war paper now in
their hands. Among the other features contained in the issue are a description
of current indexes of business conditions, and a translation of the law extending
the charter of the Bank of France, together with a review of its war operations-
@FedFRASER