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.845 x-1713 FEDERAL HESERVE BOARD STATEiiEOT FOR THE PRESS To be r e l e a s e d f o r morning p a p e r s , Tuesday, November 4, 1919. The Review of the Month f o r the November Federal Reserve B u l l e t i n , w i l l say: PUBLIC afD PRIVATE FIKWCS: The month of October has been unusually f r e e from Government f i s c a l operations l i k e l y t o i n f l u e n c e i n any way the d i r e c t i o n of the money market. During the month i n t e r e s t disbursements, including i n t e r e s t payments on the f o u r t h Liberty loan due on October 15 amounted to about $113,000,000, the e f f e c t being, as u s u a l , a temporary s h i f t i n g of funds from Government to p r i v a t e hands and a corresponding rearrangement of bank d e p o s i t s . L i t t l e extraneous i n f l u e n c e o r i g i n a t i n g with the Treasury operations has been f e l t i n any other d i r e c t i o n . Expenditures f o r the month have amounted to. approximately $736,718,000 while incomes have been $433>022 ; 000. The opinion expressed i n the l a s t issue of the Federal Reserve B u l l e t i n t h a t no new c e r t i f i c a t e i s s u e s would be required during the month of October has been j u s t i f i e d , the very large cash balance of the Treasury and t h e s u b s t a n t i a l y i e l d of the l a s t p r e c e e d i r g tax c e r t i f i c a t e i s s u e s having provided a l l t h a t was n e c e s s a r y t o c a r r y the department through the month. The month has been an unusually a c t i v e period i n p r i v a t e f i n a n c e . Great f l u c t u a t e s in c a l 1- money r a t e s and v a r i a t i o n s i n the r a t e s charged on commercial paper have occurred since the end of September» There has been an i n c r e a s i n g demand f o r funds from p r i v a t e b u s i n e s s , both i n commodities and s e c u r i t i e s . Speculation i s a t t a i n i n g an unprecedented a c t i v i t y and i s embracing not only corporation i s s u e s of a l l kinds, but a l s o r e a l e s t a t e and many c l a s s e s of commodities. P r i c e s both of farm l a n d s , s t a p l e commodities such as c o t t o n , s e c u r i t i e s and other p r o p e r t i e s continued to r i s e , notwithstanding the r e d u c t i o n of Government purchases and. the f a c t t h a t the Government has i t s e l f r e l e a s e d to consumers large q u a n t i t i e s of goods purchased f o r Army u s e . Two f a c t o r s have c l e a r l y developed themselves during the month as dominant i n the whole f i n a n c i a l s i t u a t i o n - the problem of domestic s p e c u l a t i o n and the p o l i c y to be pursued w i t h r e s p e c t t o the demands on c r e d i t r e s u l t i n g from i t . 846 X-1713 —2In a t e c h n i c a l sense t h i s c o n d i t i o n has r e f l e c t e d , i t s e l f i n a «®esfc©ning of the r e s e r v e p o s i t i o n of Federal Reserve Banks- The reserve percentage reached on October } l s t the f i g u r e of 47.9$, that being the lowest p o i n t ever r e a c h e d . As has been p o i n t e d out i n former i s s u e s of the B u l l e t i n , too much importance may be a t t r i b u t e d to what i s c a l l e d the " r e s e r v e p e r c e n t a g e T h e decline of the r e s e r v e percentage a t .Federal Reserve Banks ought n o t to be considered as rn i s o l a t e d phenomenon, but has p r i n c i p a l s i g n i f i c a n c e i n connection with the c o n d i t i o n of member b a n k s . These banks rediscount f o r the purpose of r e s t o r i n g t h e i r reserve b a l a n c e . Such a balance may become depleted f o r any of s e v e r a l reasons, b u t i n a time l i k e the p r e s e n t the chief f a c t o r leading to r e d i s c o u n t i n g i s the expansion of loans and discounts mode i n favor of customers. Analysis of the a s s e t s of member banks t h e r e f o r e becomes necessary i n order to a s c e r t a i n the r e a l meaning of an increase i n r e d i s c o u n t s . Such an i n c r e a s e may be due to advances i n aid of s p e c u l a t i o n pure and simple, or i t may be the outgrowth of l e g i t i m a t e demand f o r commercial funds- . The member bank i n r e d i s counting n a t u r a l l y s e l e c t s those items from i t s p o r t f o l i o upon which the most favorable r a t e w i l l be granted by the Federal Reserve Bank. If there be a p r e f e r e n c e i n favor of some s p e c i f i e d kind of p a p e r , as i s t r u e today of paper secured by Government o b l i g a t i o n s , such paper almost i n v a r i a b l y i s s e l e c t e d as the b a s i s f o r r e d i s c o u n t i n g . The fsc t t h a t the r e d i s c o u n t s with Federal Reserve Banks c o n s i s t so l a r g e l y as they have h e r e t o f o r e of what i s c a l l e d nwnr paper" can not t h e r e f o r e be taken as conclusive evidence of the purpose f o r which the r e d i s c o u n t i n g h a s been undertaken* Loan accounts of member banks, as already i n d i c a t e d , may be extended because of the demand f o r funds f o r speculative purposes, or because of advances f o r s t r i c t l y commercial and i n d u s t r i a l undertakings, or f o r the purpose of carrying s u b s c r i p t i o n s to Government s e c u r i t i e s . Were the d i f f e r e n t i a l r a t e which now f a v o r s war loan paper to be reversed so Ifchat i t would favor commercial paper, i t i s l i k e l y that the p o r t f o l i o s of the Federal Reserve Banks would change i n c h a r a c t e r . Member banks would s e l e c t t h e i r commercial paper as a b a s i s of rediscount? and i n consequence Federal Reserve Bank p o r t f o l i o s might c o n s i s t p r i m a r i l y of commercial b i l l s r a t h e r than of war loan p a p e r . A true a p p r e c i a t i o n of the c r e d i t s i t u a t i o n t h e r e f o r e can be obtained only by considering the p o r t f o l i o s of Federal Reserve Banks and those of member banks as an aggregate. OPERATIONS OF MEMBER BANKS: This view of the case makes i t important to consider n o t only the s i t u a t i o n a t Federal Reserve Banks, b u t that stmember banks as w e l l . In the Federal Reserve B u l l e t i n f o r October there was p u b l i s h e d the r e s u l t of a s t a t i s t i c a l a n a l y s i s of the e n t i r e war loan paper s i t u a t i o n , which showed that as of June t h i r t i e t h l a s t , the t o t a l volume of such paper i n t h e banking system might be taken as about s i x and f i v e - t e n t h s b i l l i o n s of d o l l a r s . There L a s been a decrease i n such war paper since June t h i r t i e t h , b u t there has been a continued expansion of loans and investments of member banks as shown by the f o l l o w i n g f i g u r e s ; 847 - 3 3-171) MOVEMENT OF LOANS AN) INVESTMENTS OF FEDERAL RESERVE BANKS, AND OF ABOUT 775 MEIvSER BANKS IN SELECTED CITIES. Date F e d e r a l Reserve Banks Jfeiriber Banks i n Selected Cities June 27, 193^ $2,354,167,000 J u l y 25, 1919 2,482,558,000 l4,379,579,000 August 29, 1919 2,448,977,000 lU,36s,907,000 September 26, 1919 .2,503,088,000 15,297,458,000 October 24-, 1919 2,751,751,000 15,537,104,000 _ ' $14,350,197,000 . -it- • 848 X-1713 The growing volume of d i s c o u n t s made "by t h e banking system a s a whole, in i t s t u r n , mist "be s u b j e c t e d t o the same c r i t e r i a of judgment t h a t have been i n d i c a t e d w i t h t h e h o l d i n g s of t h e Federal Reserve Banks. There i s no a v a i l a b l e t e s t of the r e a s o n s g i v i n g r i s e t o such borrowing except t h e s t a t e m e n t s or informat i o n which nay be f u r n i s h e d by the a c t u r a l borrower, t o t h e bank a t which he discounts. DISCOUNTS AND RATES: The r e a l c h a r a c t e r of t h e s i t u a t i o n depends upon t h e u s e t h a t i s b e i n g nude by member banks of tits c r e d i t f a c i l i t i e s t o be o b t a i n e d a t F e d e r a l Reserve Banks. I t i s j u s t hers* t h a t tha p r e s e n t s i t u a t i o n nast be regarded a s u n s a t i s f a c t o r y . The evidence which i s c u r r e n t l y a v a i l a b l e seems to p o i n t t o t h e f a c t t h a t member banks, under the i n f l u e n c e Of s t r o n g p r i v a t e demand, a r e i n n o t a few cases g r e a t ly expanding t h e i r l o a n s . The r e p o r t s which cone to t h e Board from t h e Federal Reserve D i s t r i c t s , g e n e r a l r e s u l t s of which : a r e reviewed i n the summary of b u s i n e s s c o n d i t i o n s f o r t h e c u r r e n t month, • s t r o n g l y s u g g e s t . a marked advance i n the growth of s p e c u l a t i v e t r a n s a c t i o n s . I t mast be bottle i n mind t h a t the growth of a c t i v i t y of t h i s k i n d weakens the e n t i r e banking s i t u a t i o n . Federal Reserve Banks can n o t , i n a time l i k e the p r e s e n t , e a s i l y c o n t r o l t h i s c o n d i t i o n of a f f a i r s merely through changes ofl d i s c o u n t r a t e s * however important the i n f l u e n c e e x e r c i s e d by such changes. The f a c t t h a t t h e r e i s a s y e t no f r e e movement of gold between n a t i o n s and t h a t b a l a n c e s of t r a d e are wholly abnormal p r e v e n t s r e d i s c o u n t changes from e x e r t i n g the e f f e c t * h i c h they would i n normal times* Cooperation on the p a r t of member banks i s t h e r e f o r e n e c e s s a r y to the p r e s e r v a t i o n of a s a t i s f a c t o r y c o n d i t i o n of s t r e n g t h throughout the banking system a s a whole, and. good r e s u l t s can n o t oe obtained through any s i n g l e method, l e a s t of a l l through t n e use of those modes of r e s t r a i n t and c o r r e c t i o n which are i n o r d i n a r y circumstances s u f f i c i e n t f o r the purpose- The r e s e r v e p e r c e n t a g e , however, s u b j e c t to the q u a l i f i c a t i o n s and r e s t r i c t i o n s which have been s t a t e d , i s an index of the changing c h a r a c t e r of the s i t u a t i o n , and one whose i m p l i c a t i o n s should be c o n s t a n t l y k e p t i n mind. As was s t a t e d i n t h e Federal Reserve B u l l e t i n f o r Octooer, the disappearance of the Treasury from the l o n g - t e r m loan market and the r a p i d r e d u c t i o n i n i t s requirements f o r short—term accommodation foreshadows the approach of the time when the f i n a n c i a l o p e r a t i o n s of the Government w i l l cease t o be the important f a c t o r i n shaping Reserve Bank p o l i c i e s and r a t 5 s which they have been. A review of a l l the c o n d i t i o n s i n the banking s i t u a t i o n has confirmed t h e Board i n the view t h a t i n the a p p l i c a t i o n of i t s discount p o l i c y an advance of r a t e s should no longer be d e f e r r e d .
@FedFRASER