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263
X-1515
'\
FEDERAL
RESERVE
BOARD
STATEMENt' FOR THE PRESS
Release morning papers, Thur·ad.J..y,
Nay 8, 1919·
The Federal Reserve Bulletin for Ma.y was completed and sent to tbe
printer today.
In the Review of the Month, the leading feature of the issue, principa.l
attention is devoted to the changed position of the Government a.s a borrower.
and to the altered conditions in the business world growing out of the pa..rtial readjustment of trade
~nd
industry to post war conditions.
Speaking
of the financial sittu.tion, the Review, a.f.ter sketching the prospects in
,.
connection with the Victory Loan ~ni subsequent financing, calls attention
to the position of the Government as a commercial borrower in the money
IDarke t and sa.ys: ·
11 The whole investment situation has been c~licated by such a
va.riety of (c::LCtors since we entered the war that the shrillkage in vct.lues
sustained by ~Y of our leading investment securities mct.y not safelf
of itself be taken a.s an indication of recdo_l>italization or adJustment
to a new level of interest retu~.
Subsequent to the conclusion of
the aflnistiee and prior to the placing of t:p.e fiftl::. 'Libei'ty loan there
was an interruption to normal development of b11siness, <'iue to the fact
that whereas war demands bad been suspended, peace doma.':lds had not yet
begun to make themselves effectively felt. It was a.u epoch
of
"readjustment" and of transition from war to peace. The fifth loan
marks, financially speaking, the close of this transition :period, and
future sales of securities, whether governmentally or privately issued,
will have to be adjusted to the new basis of yield. On the whole, this
alteration is a desirable change in the conditions w~ich have he~etofore
existed and gives promise of the early restoration of std.bili ty and normal equilibrium in the investment market& It probably meas also that
the Governwent 1s offerings of securities will be more and ruore tct.ken by
investors who purchase them bee~use they desire to hold and retain them."
... 2The Review then passes to the relationship between
industria-l activity_..
1-1515
financi~l
and
On this point it aUliiiila.riz.es the existing conditions
as follows:
"The entry of the Government into the investment market upon what
rray be regarded as practic~lly a. normal basis synchronizes with the reopening of industrial activity upon a substantially parallel footing .•
The close of the month of April finds business apparently readjusted to
the new conditions, a.t least tempora.rilf, and ready to proceed with current activities in the belief that existing conditions will not, for a.
reasonable tiue a.t least, l::e very ma.teria.llf altered. This situation is
:reported. to"t he Board .by. F.ed.e~al Reserve Agents from all part.s of t be.
country, it being their view that present conditions a.re beginning to
be recognized a.s, in effect, normal. for the time."
Discussing the business prospects, the Review suggests tba.t a temporary
•
adjustment ~s practiea.lll' been brought a.bo¥t, and that with this as a. basis
i t ma.y be expected
that a. period of business activity will now set in a.nd
continue for some time to come.
tt sketches the position of industry a.s out-
lined by Federa.l Reserve Agents, and the:n,describes the present status of
prices in the following
~a.ge:
nThe decline of prices which bas already occurred ba.s been chiefly
confined to rela.tively few ba.sio comnodities, and while these enter
extensively as materials of production into the manufacture of consu.ma.ble
goods, competition has not yet served to restore the l~vel of general
prices a.t retail to aren the new basis which bas been reached in the
underlying or es$entia.l lines referred to. On the other ~. world
conditions have been such as either to hold certain classes of prices
practically st.:a.ble or even in some cases tol:ring about a. slight -upward
trend. Pa-rticularly has this been -tr~ in some instances where, through
Gover',Jmlent control, the price level bad been held down to a basis lower
than tba.t which it would naturally have assumed. The net result, a.s
shown in the Board's price index, therefore, is a. slight advance in the
general level. This bears out the view often expressed in the Federal
Reserve ~lletin that the underlying and most general factor tending to
sustain the· present high level of values is the credit and banking
situation, . inflated a.s it is throughout the world. So long ca.s the
condition of inflation referred to continues to exist a.s a.t present, it
must be expected that reductions of price will, occur slowly as a result
of chazlges in the denwld for and supply of commodities. This will in
some cases bring about reductions in the levels of values, but in others
will produce corresponding ani offsetting v'-"'riations in the opposite
direction. Prices will thus be subject to tewpora.ry oscillations, but in
order to b·ring abou.t any brOad and far-reaching readJustment affecting
the rel&tionship of al.l camnodities to the unit of purchasing power,
inflated. credit condtions must be eliminated, and the business community
muat.be placed upon practically the footing in relation to credit and.
moni';ly which it is no mal]¥ to occU}ly."
X-1515
.
- 3 Business, it is pointed out, is becoming
IDl}Ch
more a.ctive and vigorous
tbart during the past few months.
11
The readjustment of business" says the Review,
"to a new price basis is, however, proceedingt ~nd the increased a.ctivity
of trade due to the revival of purchasing ~~der the,prospective great
increase in agricultural output ~nd the general disposition throughout
the country to abandon the attitude of hesitation and postponement,
which h3.s been chd.racteristic for some time past, has rendered the
question of control of prices by public authority less urgent than it
seemed to be a few vveeks ago. What is now happening seems to indicate
that business will, after a. period of initial re.:J.dj,":stn,ent in prices,
proceed upon a level net far removed from that established during the
war, leaving the question a.s to the ultillU.te level of prices to the
future and to more slowly acting forces."
Considerable attention is devoted to the prospect of the foreign trade
of the Country.
The Board takes the position
goods is hardly to be expected.
"·,:J~
c.
t~t
a great inrush of foreign
On this point it says:
"The view has been expressed in some quarters that the resulting
state of the exchanges would lead to heavy exportation of goods t o the
United States, the procee~s thereof to be available to pay for or settle
outstanding interest cl.d.).ms and perhaps accruing installments of
principal obligations, or, at all events, to liquidate new .md heavy
purchases of ~terial from this country. Developments during the past
few weeks have raised avery serious doubt how far any sut;!h movement
is to be expected. In many lines European costs are riow ~pparently
higher than in the United States, this· being true of textiles and other
items in which Great Britain seemed formerJy to enjoy,:~. decided competitive advantage. The existence of high ~nney costs ahroa.d will
necessarily alter the competitive situa.{jion which hc.d existed before
the war, and will raise the question how foreign CO'!:JJ.t::ies ~1·e actually
to pay off their indebtedness unless the price situation is fa-vorable
to shipments of goods to the United States. AdJustment of international
price levels to the altered coniitions of the different co~~tries is a
necessary step to the readjustment of international tTade on a stable
basis.
In order to
stabili~e re~tions
with other countTies and to provide
a means of a.t once keeping up our export trade and paying for imported goods,
looks with favor upon
the ~oa.rd
the formation of so-called investment trusts. After describ-·
ing the methods by which such investment trusts operate in foreign countries,
their relation toe xport business is outlined a.s follows:
X-1515
- 4"The investment trust, from this standpoint, would be ID:;~.de
highly beneficial to those who participated in it simply as investors.
In the present situation, however, the establishment of companies for
foreign financing will serve a very much larger end. ":::'11is end is the
facilitation and promotion of the export business of the United States.
It is highly probable th.:l.t in present circumstdllces the proceeds will be
used in purchasing American supplies and materials even though there
has been no e:xpress stipulation that the proceeds growing out of ·such
advances shall be spent in the country from which the capital is derived
or that they shall be used in the purchase of mdChinery, ruaterials, and
the like, produced by designated concerns or groups of concerns. In the
present situation, the extension of our actual export t~ade in materials
is more feasible than ever before because of the fact tha.t the United
States occupies so conspicuous, not to say uni~ue, a position as a
creator a.nd furnisher of ca.pital in interw.tional business. · Occupying
the position it does, the Nation is thus able to make its own terms !or
the furnishing of capital. It may be able, in other words, within limits,
to establish its own price for goods sent to foreign countries, taking
its payment in the form of securities which are then distributed to buyers,
but clearly, good judgment and moderation in'fixing the terms of the loans
and the conditions of purchase will be required if a satisfactory and
permanent relationship is the object aimed at."
The :Board considers foreign exch:l.nge developments
d~ring
the past month
in considerable detail, and also gives the position of reserve a.nd member banks
and of exports and iaports of gold out of and into the United
St~tes.
lroportant
action with reference to the acceptance situation is outlined in the following
..
paragraph:
~~t a meeting of governors of Federal Reserve Banks with the Federal
Reserve :Board at Washington on March ·:20..22, . the following report was
made:
'The discussion developed the fact that there is a growing
tendency on the part of member banks to misuse and possibly
abuse the right of acceptance credits in domestic transactions.
These abuses doubtless grow, in many cases, out of a leek of
knowledge of what are correct practices, and to some extent out
of difficulties incident to the war. The principal abuses noted
were in the employment of acceptance credits for transactions
which are ~n fact loans upon commodities. In such cases the use
of the acceptance credits is frequently a subterfuge to :£scape
the provisions of section 5200 of the National Bank Act, and in
other, cases an improper drawing of bills against domestic shipment of goods. It is thebelief that it would be' a mistake to
endeavor to correct these practices through general regulations
applying to the purchase of bills by the reserve banks. 1
"After full consideration of the situation the Federal Reserve
:Board has re~uested a conmittee of Federal Reserve Agents to prepare
sui table acceptance literature designed to explain · the acceptance
266
X-1515
- 5principle .;~.nd to guide the development of acceptance methods among the
barking comM.mit;1 w:i.th a view to improving present practic.es, and at
the same time with the object. of stimulating the wider use a.ni application of the ar-~epta.:-:we princtple, both in domesti.; and foreign
tra;de under sound and sa.fe conditions. The investigation of this
situati.on will probably be begun shor'ii1y after the conclusion of the
Victory loan campaign, and i t will be sought to obtain general expressions of opinion from all those who are most conversant with acceptance
principles al"..d. practices • 11
The May issue of the Bulletin contains an elaborate description of
the war experience of the banks of Belgium, as well as an
accou~t
of the
war activities of the German Reichsbank. New and important rulings by the
Board and by the
Division of Foreign Exchange are published, and detailed statistics relating
to prices at home and ab=oad are furnished.
The usu.;i.l
sta.tisticc~.l
and summaries of Federal Reserve Ba.nk condition are included.
ta.bles
@FedFRASER