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1143 X-2080 FEDERAL RESERVE BOARD STATEMENT FOR THE "RESS For r e l e a s e i n Monday morning papers, December 6, 1920. The Federal Reserve B u l l e t i n of December devotes much space s i o n of economic and f i n a n c i a l during the year Just c l o s i n g . f o r t h e month to a discusconditions I t says: Close of a Remarkable Year The year 1920 has been a period of decided advance i n t h e process of economic readjustment consequent upon the conditions l e f t by t h e war. Production had been developed t o a very high p o i n t a s a r e s u l t of war n e c e s s i t i e s , b e s i d e s being d i v e r t e d i n t o channels d i f f e r e n t from those normal i n peace time. I t was, t h e r e f o r e , i n e v i t a b l e t h a t a period of readjustment involving some decrease i n output, a t l e a s t temporarily, should ensue. On former occasions, when problems of a s i m i l a r s o r t have developed, the process of readjustment from a war t o a peace-time l e v e l of b u s i n e s s has been extremely r i g o r o u s . Conditions during the p r e s e n t period of readjustment have by comparison been t o l e r a b l e . Production during t h e l a t t e r p a r t of t h e year has, i t i s t r u e , f a l l e n off i n some branches following upon the readjustment of the p r i c e structure. Fundamental a l t e r a t i o n s i n t h e d i s t r i b u t i o n of l a b o r between t r a d e s and employments have a l s o been a f e a t u r e of r e c e n t months. In t h e banking f i e l d t h e advance of t h e volume of d e p o s i t s changed during t h e r e c e n t months i n t o a r e c e s s i o n , although Federal Reserve note c i r c u l a t i o n was about $200, 000, 000 l a r g e r a t the close of November than a t t h e end of J u l y . I t i s a l s o t o be noted t h a t t h e r e has been a marked change i n the composition of bank p o r t f o l i o s r e s u l t i n g from the gradual r e t i r e m e n t of long-term or s p e c u l a t i v e paper and t h e s u b s t i t u t i o n of - 2 - X-2080 1143 paper based upon bona, f i d e commercial t r a n s a c t i o n s growing out of the a c t u a l purchase and s a l e of goods* In i n t e r n a t i o n a l t r a d e the condi- t i o n s which l e d t o an excessive development i n exporting business have been i n p r o c e s s of change, and a r e t u r n t o more normal c o n d i t i o n s i s now in progress. So f a r a s concerns t h e European c o u n t r i e s the year has been noteworthy i n i n t e r n a t i o n a l t r a d e f o r a decided evidence of i n c r e a s e of productive power which, although i n t e r r u p t e d from time t o time by i n t e r n a l d i f f i c u l t i e s of one kind or another, has n e v e r t h e l e s s been the dominant f e a t u r e i n t h e f o r e i g n economic movement. Very sharp r e d u c t i o n i n p r i c e s coupled with heavy decreases i n p r o d u c t i o n , extensive unemployment, and business r e a c t i o n , o f t e n involving bank f a i l u r e s , have been the outstanding f e a t u r e s of readjustment i n former years. The t r a n s i t i o n through which t h e community i s now passing, while n e c e s s a r i l y uncomfortable, has t h u s f a r been accompanied by only a minimum of the unfavorable symptoms developed on other occasions. While the p r e s e n t process i s a s yet incomplete and while some l i n e s of business may be expected t o pass through a s t i l l f u r t h e r period of r e o r g a n i z a t i o n , t h e r e i s good reason f o r b e l i e v i n g t h a t with our p r e s e n t s t r o n g banking s t r u c t u r e the d i f f i c u l t y of the t r a n s i t i o n w i l l not be much f u r t h e r aggravated and t h a t a normal s i t u a t i o n w i l l be r e s t o r e d with f a r l e s s than usual d i s t r e s s . The f i s c a l s i t u a t i o n both a t home and abroad i s s t i l l u n c e r t a i n due t o t h e f a c t t h a t while the war was t e c h n i c a l l y over a t t h e signing of t h e a r m i s t i c e , i t was not over i n t h e f i n a n c i a l sense u n t i l a long time l a t e r , while i t has not been p o s s i b l e during the r e a d justment period t o p l a c e p u b l i c finance i n any country upon i t s peace time f o o t i n g , pending much c l o s e r ascertainment of t h e b e s t method of taxation. The close of t h e year 13-0, however, i n s p i t e of t h e f a c t 1144 ' " X-2080 t h a t i n some branches of economic and f i n a n c i a l l i f e t h e r e i s s t i l l much p r o g r e s s t o be made before reaching a d e f i n i t e b a s i s f o r f u r t h e r growth, must n e v e r t h e l e s s be regarded a s quite unmistakably a t u r n i n g p o i n t i n t h e process of t r a n s i t i o n from conditions produced by the war to t h e normal economic b a s i s of i n t e r n a t i o n a l and i n d u s t r i a l l i f e . The Basis of P r o s p e r i t y . In t h u s e s t i m a t i n g the p o s i t i o n of the economic o r g a n i z a t i o n a t the close of the year 1$20, very l a r g e emphasis should undoubtedly be * placed upon t h e volume of production. I t i s i n the quantity of output supplied by a n a t i o n t h a t the best t e s t i s found of i t s t r u e p o s i t i o n from ;he economic s t a n d p o i n t . Although t h e year 1920 shows a downward movement i n some branches of production and t r a d e and a l e s s e n i n g of the a c t i v i t y with which c r e d i t media a r e employed, a g r a t i f y i n g a s p e c t o f . t h e y e a r , i s seen i n the f a c t t h a t t h e changes thus f a r r e p o r t e d have been so small, e s p e c i a l l y when t h e great a c t i v i t y of production and the g r e a t e x t e n s i o n of c r e d i t which occurred during the war period a r e borne in mind. Considering the year 1$20 i n comparison w i t h s i m i l a r p e r i o d s , r e a c t i o n shown by t h e indexes r e p r e s e n t i n g the chief l i n e s of business a c t i v i t y , a s already s t a t e d , i s i n most cases r e l a t i v e l y - minor a s compared with t h e volume of production and t r a d e when a t i t s high p o i n t . While much i s said of changes in p r i c e s and p a r t i c u l a r l y of d e c l i n e s of p r i c e s a s an i n d i c a t i o n of economic r e t r o g r e s s i o n , i t i s t o be remembered t h a t the r e a l income of t h e community i s the quantity of goods a v a i l a b l e f o r consumption and not the money value of the goods t h u s produced. The fundamental t e s t of the degree i n which conditions which make f o r p r o s p e r i t y 1145 X-2080 have been regained and former industry r e s t o r e d i s found i n the indexes which e x h i b i t a c t u a l volume of output. Of primary importance a r e s t a t i s t i c s showing t h e y i e l d of a g r i c u l t u r a l and manufacturing i n d u s t r i e s . Next t o t h e s e a r e indexes showing the a c t u a l movement of goods from producer t o consumer. The l&iteaf may be best derived from s t a t i s t i c s of f r e i g h t movement, f i g u r e s showing the a c t i v i t y of money and c r e d i t , and data r e f l e c t i n g a c t i v i t y of wholesale and r e t a i l t r a d e . P r i c e s play an important p a r t a s a f a c t o r i n t h e p r o c e s s of d i s t r i b u t i o n , and t h e p r i c e l e v e l i s of f i r s t s i g n i f i c a n c e t o the student of business conditions because i t a i d s i n d e f i n i t e l y determining t h e p r o f i t - m a k i n g p o s i t i o n of t h e v a r i o u s economic f a c t o r s of t h e community a s measured i n terms of mocay. It is t r u e t h a t r e d u c t i o n s i n wholesale p r i c e s i n 1$20 have g r e a t l y lowered the general l e v e l s . I t should be remembered, however, t h a t f a r too g r e a t s t r e s s may be placed upon the l e v e l of p r i c e s i n connection with rational c o n d i t i o n s , since p r i c e s a r e expressions of r e l a t i v e value and hence of much g r e a t e r i n t e r e s t t o the i n d i v i d u a l than t o tha community a t l a r g e . ±146 X-2080 The Volume of Production. Viewed from the standpoint of the volume of commodities rendered a v a i l able f o r consumption, the year 1920 has been one of unusual success. As i s w e l l known, t h e output of primary wealth - the product of the fauns and, i n g e n e r a l , of a g r i c u l t u r a l e n t e r p r i s e - has been of more than average s i z e . Preliminary e s t i m a t e s have already been f u r n i s h e d f o r t h i s output i n former months. The f i g u r e s of the Department of A g r i c u l t u r e , made a v a i l a b l e a t t h e opening of November, a r e s u b s t a n t i a l l y the same as those which have already been published f o r October 1 and, as pointed out i n p a s t i s s u e s , e x h i b i t i n most l i n e s a s u b s t a n t i a l advance above the average of r e c e n t y e a r s , and in some important crops c o n s t i t u t e the l a r g e s t output ever produced. In the case of corn, the only product f o r which the November e s t i m a t e s d i f f e r from those of October, the estimated o u t p u t , although showing a d e c l i n e of about 17,000,000 b u s h e l s , s t i l l remains the l a r g e s t on r e c o r d . While t h e s i t u a t i o n a s to a g r i c u l t u r e i s p r a c t i c a l l y beyond question, the work of the year i n r e s p e c t to manufacturing i s l e s s c l e a r . According to some i n v e s t i g a t o r s , however, the output of the country, whether a s measured i n t h e aggregate or per c a p i t a , was probably close to high-water mark a t the close of s p r i n g . The f a c t s would i n d i c a t e t h a t i n the more d i s t i n c t l y manu- f a c t u r i n g and i n d u s t r i a l l i n e s there had been subsequent to the heavy war production a n a t u r a l decrease i n and readjustment of output which became e v i dent s h o r t l y a f t e r the opening of 1919 and which continued f o r several months thereafter. The requirements of buyers did not dominate market c o n d i t i o n s , but t h e r e subsequently developed shortages i n v a r i o u s l i n e s . Of t h i s s i t u a t i o n the f i n a l r e s u l t was a considerable increase i n productive a c t i v i t y , although i n some l i n e s , such a s those of t e x t i l e production, a s o - c a l l e d " s e l l e r s ' market" e v e n t u a l l y developed. That t h i s s i t u a t i o n had not become w e l l e s t a b - l i s h e d u n t i l the spring of 1920 was f a r advanced i s n o t s i n g u l a r . This period - 6 ~ X-2060 . 1147 of higher p r o d u c t i o n was a p p a r e n t l y reaching i t s peak d u r i n g the e a r l y months of 1980. Since the l a t e spring of the year 1920, however, there h a s been i n progress a c e r t a i n decrease i n o u t p u t . The c o n d i t i o n of d i f f e r e n t i n d u s t r i e s in t h i s regard i s by no means uniform, although i t may be seen most c l e a r l y i n t e x t i l e s . Shipbuilding and very r e c e n t l y the i r o n and s t e e l i n d u s t r i e s , e x h i b i t an i n f l u e n c e of the same kind. The decrease i n u n f i l l e d o r d e r s on the p a r t of the United S t a t e s Steel Corporation, which has been i n progress ever since about the beginning of August, p o i n t s c l e a r l y n o t only to a r e l a t i v e decrease i n the a c t i v i t y of these b a s i c i n d u s t r i e s but also to a f a l l i n g off i n t h a t of o t h e r i n d u s t r i e s which a r e p r a c t i c a l l y dependent upon then. s t r u c t i o n may be ranked a s one of the l a t t e r . B u i l d i n g con- x x x x x x x x x x -1- X2080 1148 Movement of Goods, Care should be taken i n reviewing conditions a t the Close of the year 1$2Q and i n comparing them with those e x i s t i n g a t previous dates throughout the year t o d i f f e r e n t i a t e between production changes and trade changes. In a l l p e r i o d s of t r a n s i t i o n i t i s the l a t t e r t h a t are the more obvious. I t should s t e a d i l y be borne i n mind t h a t the year 1920 has been a more d i s t u r b e d p e r i o d i n connection with the movement of goods to market than i n production, and t h a t as a r e s u l t there has been a t times congestion and a r r e s t e d movement of commodities, while a t other times the d e l i v e r y and consumption of products has been steady and s a t i s f a c t o r y . I n general, the year may be divided i n t o t h r e e p e r i o d s , the f i r s t culminating i n the e a r l y spring or toward the end of April, a t which time a peak of congestion had been reached on the railways as the r e s u l t of bad weather and lack of s a t i s f a c t o r y e f f i c i e n c y of r a i l r o a d -personnel aggravated by the t e n t a t i v e or "outlaw" s t r i k e s which had been i n p r o g r e s s . T h e r e a f t e r t h e r e ensued a period of f a i r l y steady moving of commodities to p o i n t s of consumption, a s s i s t e d by the f a v o r a b l e weather in the s p r i n g and summer as well as by the increase i n e f f i c i e n c y of t h e r a i l r o a d s of the country. From about September onward the movement of goods again began to show a d e c l i n e , t h i s being due i n the case of a g r i c u l t u r a l s t a p l e s to a tendency to hold products a t the p o i n t s of production, while i n the case of manufactured a r t i c l e s i t was probably the outcome of a r e l u c t a n c e or unwillingness on the p a r t of d i s t r i b u t o r s to go on r e c e i v i n g consignments. This s i t u a t i o n has been noteworthy from time to time n o t only with r e s p e c t t o the domestic movement of goods but a l s o in r e l a t i o n to e x p o r t s . I t was worthy of note a l s o t h a t i n s p i t e of the l a r g e y i e l d in a g r i c u l t u r a l l i n e s the g r a i n movement h a s been unexpectedly small, p a r t l y in consequence of d e f e c t i v e t r a n s p o r t a t i o n a t c e r t a i n times of the year and p a r t l y a s a r e s u l t of a d i s p o s i t i o n on the p a r t of farmers to hold back t h e i r p r o d u c t . - 8 1-2080 Conditions i n t r a n s p o r t a t i o n were r e f l e c t e d i n 1 1 4 9 the f i g u r e s showing the movement of goods l a s t spring and in c e r t a i n decreases of the same s o r t f o r the c u r r e n t autumn, notwithstanding t h a t the ton-mile f i g u r e s on r a i l w a y s are to-day of l a r g e s i z e . x x x x x x x. . An examination of the index numbers f o r the value of imports and exp o r t s l e a d s to the conclusion t h a t , w i t h p r i c e f l u c t u a t i o n eliminated, our export volume f o r 1920 i s on a lower l e v e l , some of the months f o r the p e r i o d being lower than the average monthly f i g u r e f o r 1913 • The volume of imports, however, i s higher than the 1913 l e v e l , a f a c t which i l l u s t r a t e s the statement o f t e n made t h a t the r e a c t i o n subsequent to the war which had been g e n e r a l l y p r e d i c t e d by economists i s now i n p r o g r e s s . The f i g u r e s , f o r imports and exports, both when measured i n volume and when measured i n values, have shown an absolute tendency to f a l l o f f , although the growth of imports up to the p r e s e n t time h a s been g r e a t e r than t h a t of imports when a d j u s t e d v a l u e s are taken a s a b a s i s f o r comparison. The year 1920 must undoubtedly be regarded as a p e r i o d of t r a n s i t i o n from war c o n d i t i o n s to peace c o n d i t i o n s i n our f o r e i g n t r a d e . These changes are most c l e a r l y i l l u s t r a t e d when the i n f l u e n c e of p r i c e f l u c t u a t i o n s i s e l i m i n a t e d from f i g u r e s i n order to place them on a comparative "basis of volume. x x x x x. R e t a i l Tnade. The a c t i v i t y of r e t a i l trade i s u s u a l l y regarded as a d i r e c t index of the a t t i t u d e of consumers with r e s p e c t t o the p r i c e l e v e l and i s looked to by s t u d e n t s of the b u s i n e s s s i t u a t i o n not • merely f o r the purpose of o b t a i n i n g a t e s t of b u s i n e s s conditions from the r e t a i l trade standpoint, b u t a l s o of a f f o r d i n g an i n d i r e c t index of the probable r a t e a t which stocks of goods w i l l p a s s off through r e t a i l t r a d e channels i n t o the hands of consumers. For a good many months p a s t the Board has been developing a r e t a i l trade index based upon f i g u r e s concerning stocks of goods, turnover, and other important items f u r n i s h e d by a s p e c i f i e d number of l e a d i n g r e t a i l e s t a b l i s h - 1150 - y - X-2080 ments ifa the s e v e r a l Federal Reserve D i s t r i c t s . A study of these f i g u r e s , and e s p e c i a l l y a comparison of cumulative single percentages designed to embody n o t only the r e t u r n s of the c u r r e n t month b u t a l s o accumulated r e s u l t s of preceding months, p o i n t to a decline i n s a l e s , which has n o t , i t would seem, gone t o very g r e a t length tlms f a r , i n some d i s t r i c t s amounting merely to the c u r t a i l m e n t o r a b o l i t i o n of a seasonal i n c r e a s e of the volume of b u s i n e s s which would otherwise have been expected, the remaining volume b e i n g higher than t h a t of t h e preceding y e a r . The tendency, however, i n other d i s - t r i c t s has been d i s t i n c t l y downward, and a t the p r e s e n t time the Board's i n dex p o i n t s c l e a r l y to a l i m i t a t i o n of t h e a c t i v e buying of consumers which was so n o t i c e a b l e during 1919 and the e a r l i e r p a r t of 1920. This b e a r s out the general impression already e x i s t i n g with r e s p e c t to r e t a i l t r a d e cond i t i o n s a s i n d i c a t e d by many r e p o r t s of a general n a t u r e f u r n i s h e d by expert observers i n the v a r i o u s branches of t r a d e . The a c t i v i t y of r e t a i l t r a d e i s of s p e c i a l i n t e r e s t a t the p r e s e n t time, because i t u s u a l l y i s one of the l a s t elements i n the b u s i n e s s s i t u a t i o n to shew the e f f e c t s of those f a c t o r s which make f o r depression or r e d u c t i o n . Curtailment of purchasing power does n o t u s u a l l y occur, a t l e a s t i n f u l l measure, u n t i l r e d u c t i o n s of employment and lowering of p r i c e s have r e s u l t e d i n l e s s e n i n g the incomes of buyers who are thereby induced to suspend or l i m i t t h e i r purchases. Accord- ingly, a d e f i n i t e r e a c t i o n i n r e t a i l t r a d e seldom p r e s e n t s i t s e l f u n t i l a f t e r readjustment h a s made considerable progress i n manufacturing and even i n wholesale a c t i v i t y . This i s f o r the reason t h a t the d e c l i n e i n r e t a i l t r a d e makes i t s e l f f e l t i n some d i s t r i c t s a t a date considerably l a t e r than t h a t which appears to mark the ttuming p o i n t i n production by manufacturers, x x x x x. 1151 . 10 - X-2080 Production and Foreign Exchange The downward trend of exchange during 1920 appeared to have reached the low point toward the middle of November, when sterling was quoted below 3<30- As may he seen from the graphic representa- tion already published in the laat issue (p* 1159) i the movement of practically all European exchanges has been steadily downward and practically on parallel lines since early in the year. The sharp depression which was brought about in the early part of November was attributed b y experts to the necessity of financing considerable quantities of grain and cotton bills growing out of the shipments of this year*s products at a time when, as already pointed out in former issues, there was a very large outstanding indebtedness on the books of foreign banks and business houses, which resulted in creating an overhanging supply of exchange, which was at times "dumped" in the market whenever a slight upward trend suggested the possibility of converting foreign currencies into dollars at even a tolerably favorable rate* This, of course > was a situation primarily applicable only to European exchanges. Nevertheless " ; . ^ in relations with South American countries the situation was equally unfavorable, due to conditions already set forth and including depression of prices as well as the disturbance of our foreign trade relationships with those countries * may be said that the year 1920 has been a period of In a general way it practically steady deterioration in exchange conditions, as reflected in the constantly growing open balances in favor of the United States which are being carried in an increasingly large list of foreign nations. 1152 - U - X-2080 Foreign exchange c o n d i t i o n s during the year 1920 throw i n t e r e s t ing l i g h t upon the "bearing of exchange r a t e s on i n t e r n a t i o n a l trade* They show t h a t abnormally low quotations of f o r e i g n c u r r e n c i e s tends to reduce the export shipments of the n a t i o n , p a r t i c u l a r l y when these low quotations are the r e s u l t of unpaid balances which give r i s e t o a q u a n t i t y of exchange t h a t may "be thrown upon the market a t any given moment• The exchange s i t u a t i o n i s t h e r e f o r e in some measure r e s p o n s i b l e f o r the slowing down of the export t r a d e of the United S t a t e s , and i l l u s t r a t e s once more the n e c e s s i t y of a c t i o n designed to b r i n g about soundness i n i n t e r n a t i o n a l financial relations* Another phase of present c o n d i t i o n s which deserves p a r t i c u l a r a t t e n t i o n i s seen i n the f a c t t h a t as things stand the amount of our exports would seem to be quite c l o s e l y conditioned upon the amount of our imports. As our banking and mercantile c r e d i t s i t u a t i o n becomes more and more s a t u r a t e d with f o r e i g n c r e d i t , or, i n o t h e r words, reaches a p o s i t i o n where i t i s d i f f i c u l t t o extend any more accommodation - c e r t a i n l y no more long-term accommodation - to f o r e i g n e r s , the n a t u r a l i n f e r e n c e would seem to be t h a t c u r r e n t and f u t u r e shipments of our goods abroad could be paid f o r i n very l a r g e measure w i t h con temporary shipments of goods t o t h i s country» Such a s i t u a t i o n i s e v i d e n t l y developing, as i s seen i n the study of f o r e i g n trade already presented# The f a c t s as thus s e t f o r t h a f f o r d a s a t i s f a c t o r y e x p l a n a t i o n of the steady increase i n our importations from abroad and f u r n i s h a warrant f o r the opinions of those who have b e l i e v e d t h a t t h e r e would be a l a r g e r movement of goods i n t o the United S t a t e s as the r e s u l t of the e x t e n s i v e c r e d i t s which have in the p a s t been granted foreign countries• 1153 -la- X-2080 P r i c e s and. Trade, P r i c e movements have already been i n c i d e n t a l l y referred to as a f a c t o r a f f e c t i n g readjustment. The remarkable changes of 1920, however, require some s p e c i a l a t t e n t i o n . In the case of wholesale p r i c e s , readjustment has occurred i n a more s t r i k i n g f a s h i o n than i n perhaps any other f i e l d . In January p r i c e s i n the United Skates stood at, 842 p e r cent of the pre-war l e v e l , according to the Federal Reserve Board index number. They •continued to advance u n t i l A p r i l , when the index number stood at 263. May p r i c e s were at approximately the same high l e v e l , but since t h a t time the decline has been q u i t e c o n s i d e r a b l e . By October the Board T s number had f a l l e n to 208, showing a d e c l i n e of 21 p e r cent from the peak. More or l e s s s i m i l a r readjustments have been made i n f o r e i g n p r i c e s during t h e same p e r i o d . B r i t i s h p r i c e s reached t h e i r peak i n April and have been on the d e c l i n e since then, the r e d u c t i o n s i n the past two months being e s p e c i a l l y noteworthy. Canadian p r i c e s have shown tendencies very similar to those i n t h e United S t a t e s . In Japan the drop i n p r i c e s has been more extreme, the d i f f e r e n c e between the March, and October index numbers amounting to 30 p e r c e n t . Fiance and I t a l y show somewhat d i f f e r e n t f l u c t u a t i o n s . - In b o t h c o u n t r i e s p r i c e s reached t h e i r peak i n April of t h i s y e a r , receding from t h e s e h i g h p o i n t s during the next two months, but i n c r e a s i n g a g a i n r e c e n t l y . But even in th e s e two cases the index numbers a r e a t s l i g h t l y lower p o i n t s than l a s t spring. * * * * * *
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