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-;"'"-· 65
)L
STAT.2:1lii:NT FOR TH:J PR:.!:SS:
Not to be rele~sed for
publication before V.'ednosday
n~~B~~r November 6, 1918.
evening,
The Federal Reserve Bul:!.o tin fer th·1
mor~th
of Hovemter contains
de-1-;.:.~.iled
studies of the present d.o'bt sitP.at:..on in the Un:i.ted. States und fo1·oign couut:ri<-s,
ru.th special reference to the banking sitL'!.at5.on as D-ffeci;od by loans on war P"'-i?e·.·
ond tho use of the purchasinG
~u.ss!ld
p0we~
thereby created.
Th.:s subject is fu.lly clir;-
in the Board's .neviEm of thJ Lionth which D.nalyzes tho <:>ffoct on prices of
the failure of our population to save, as evidenced by tho incrcane in loans
lateralled by Governmont securities.
as
in former issuJ&, tho Bourd
L~ges
0~1-
a rc-
sort to mort3 intensive sa.ving in order to absorb the no-,,. bonds more r<.lp idJ.y " an·i
in larger measure in order that the credit grantee. by tho b..L:nkn may not ro:.1ain too
long outstanding and therooy tend to increase prices.
"In tho last issue of tho Federal R0serve Bulletin evidence
show that the belief in a great inflation of tho currency h<J.S
support it.
It is, in fact, not tho issue of
notes~
wd.S
submitted to
~·el~tively
but the creation of
little •;cd~posit
credits on the booka of the banks, for the purpose of enabling borro'.vers to bny
and curry Government bonds and rendered necessary because of the fa.ilo.re ;:>f the
public to save s ufficiently 7 that cro3.tes the buying power which advance.> prices.
Tha following figures show in o.n approximate way the progressive increase in the
de_posits and investments of tho banks, both member and Federal Reserve, as well
as the declining r.-l.tio of reserve to outstilnding liabilities of the latter, ,·Jhich
is a consequence of borrowing instead of more intensive saving:
___
-----------------
,,..
.. -- -------
:
:
!
June
Nov.
.Apr.
Oct •.
Investments
Deposit liabilities: Rese~e
:
------------------------.......::..percent··
;
age of
Federal
Reportin6
Federc~.l
:Reportir.g
Federal
Reserve
member
Reserv&
Red .. 2'Ve
zr.ember
: . Bc~.n_k"""s,__ __
_ _ _ _B_~.._k_s_...__,_b....iil..,..n_k__s_....:.._!3d.llks
; ba~ks
.
:. Per Cent
22.1917
:$ 55Z,649:$
:$1,241,210 :
71.6
9,1917
69.4
788,538:11,562,007d: 1,407,547 :$9,636,993~
18, 1918
:1,286,162:12,405,743
1,556,303 :11,278,704 ! 61.3
: 5l.l
14, 1918
:2,154,8~2:.
: 1J580,802:
.
------·---------
. . . ,.• • • •
....
~ ....
"'
- - - - -
....
__ _ . . , . , ....
.
-
......_..,~ . . .
...
..
_ _ _ _ _ _ _ _ ....._ _ _ _ • _ _ • •
-~
.__.. ..
_.._ ..........
'"'
.
"'
_..,
IC
..
'"~·
•·•
•··-·--
•
a. Figures of Dec ember 7 for 653 rep ortin~ banks. Deposita, exclu.si ve oC
Government <ieposits.
"Precisely what effects nay be expected from this process of credit
expansion should. be definitely unaeratood. in oraer that the Nation
d.S c~.
whole may choose between the policy of sted.dily _;;id.c.iin6 to it·s outstd.nding bct.nk
obli6ations and.
of
curt~iling
s~ving ~nd
edness through
The Board, in
th~t
v
them by re6uld.rly reducing its indebt-
the Cd.ncellaticn of it.:> borrowing a.t the banks.
former issues of the Bulletin, hci.~ defined infl~tion as the
increase of current purchasing power, "whether in the form of a.ctual
cui-rency or in the form of creciit - faster thd.ll the volume of ivailctble
goods", ..ind this is rr.cmifeatly the process which ia now
of methods of
subscribi~
and
pc~.ying
~oing
on as a result
for Government bonds, which are not
''Probably the 1"ea.ture of the prtlsent
fi~ncid.l situ~tion
of the country
which moat requires correction is this increa.se in diaposition on the pa.rt
of the public to rely too lare;ely upon the t>anks ::LS sources from which to
obtci.in tne necessd.ry funa::J for use in
finc~.ncin&
the requiren.ents of the
Governz::ent. ****""***** In order to rrovi<ie for the ta..Kine; up of
lo.:1ns
'
wh~
itself witl!
c~.uditiona.l
oft ered., it will be inevi"ta.blj neC8SSd.rJ th_-. t the public d.CiO.reas
.;reC~.ter
ed.rnestnes..> to the probleL: of
~ilving, -1.:nd.
..1pplying its
incOJ:-;e to public require"""ents .•·:dvices tro .. ,£u.n.J qucirtt:;r;;; sho111 th.tt while
rrogresa is
bein.:;
4£..:~.-le
in thi:> .u.a:t-r.er, the .:.
OltDtJ.n6
nece;.>sities of
•
~
/""""!""--·
A-''1.-its
. ·- . -.s ...
the Government are equally c oncJ.l.As h v
0
videnc.e to the effect that
already been dono must be contil1ued mld :::.dc.ac
~o
wh:.~.t
has
em'' that furthor and more
suecess£ul efforts must be made l f tho banks a.t"c not ..;o be obliged to t<1ko
and hold an undue proportion of the obligations
j
ssued by the Govorl'll"IDnt.
17ith reference to the question of pricws and credit expansion, the
following statement is
made~
"The rela.t ion between pricos and credit expansion has been frc:quently
referred to by the Board, but may bo restated somovmat :.;,s follows: B[lnk: crodi ".
when gz:anted by commercial institutions upon the strength of, or for tho pur....
pose of,
liquid~ting
commercial transactions of early maturities, serves as a
means of facilit:J.ti ing the flow of commodities from producer to consumer and.
the roturtJ. of purcho.s ing power f:tom the consum.Jr to the producor through
th~
various cht:mnols of circllli.ltion.
moans
This process cno.blcs goods to act as
~;
of purcbase and p::J.ymont for. other goods, anJ when tho m:J.turity of tho avcro.ge
loan gr<mted (or ''credit'' allov-;ed) is no long0r than th:1t of the
pr~ductivc
prooesscs in whicb the community is cng.Jged, th,; effect of it is only that of
facilitating and promoting production n.:nd distribution.
..'hen tho loans
granted or credit extended by the banks o.rc in oxcoss of the normal
v~lue
of
the goods offered for exchange, there is brought into existence an additional
or surplus volume of
purchos ing power which ho.s the some eff'oct upon tiw
prices of corrunodit ios as doos
<1 corr~sponding
addition to the money supply,
inasmuch .::.s it may be offered for commoditL:s and m<ly thus create
for them-
,J,
damand.
Crodi t wxpansion bocomcs inflation wh0n th;3 incroJ.sc of prices it
produces brings no commensurate or offsettiug inerease of production.. '~
'
•
~n~
The relationbetweenthe reserv3 sU;ua;.;io:aa.ud inflation is discLJssed.''.
in the following p<lSsage:
''The reason why the public, and especially the banking oornmunityr
lcol{,.~
with so much interest to the reserves of the banks is understood when the
nature of credit inflation is carefully cons ide red~
Ordinary extension of
credit made for the purpose of facilitating the exchange and circulation of
goods require little or no addition to the reserve funds of the banks, becaus8
the credits thus granted in the main offset and cancel one another, leaving a:n
unimportant margin to be redeemed in
~ash.
Nhen the credit structure of the
community is enlarged by the extension of bank loans not accompanied by a.·
corresponding increase in production and the proceeds are employed in the way
just described for the purchase of comr.1odities or for buying them away from
the consumers who would othei'ivise purchase them, the claims to the banl{ credE
thus brought into existence keep on passing from hand to hand.
transfers
The Government
them to contractors who furnish it with goods and to persons who
supply it with services.
•
Both these classes pass on the credit clo,ims to
others in exchange for goods which they desire and they remain outstanding,
representing
~n
effect an addition to the purchasing media of the community.
There is no means
ofj uermanently canceling or digesting such
,;
outstandir,g
~
credits except one - thoir use by those into '<Mhose hands thay come for the
purchase of the securities against which the credits were extended, notably
Government bonds in our present situation.
Ordinary commercio,l credits fQr-
nish their own means of ca.ncellatir>n through the mat LIT ing of the paper ~u:pon
which they were based and the
which they were extended.
completi~n
of the productive process to finance
Credits based upon noncommercial operations or in-
vestment sec!lrities poseeas no such quick self-red11cing q11ality.
'
as they
increase, therefore, they tend to make a more or less lasting addition to tho
outstanding volume of bank liabilities and the.r~by increase tho so,perstn<ctQr 8
X-1265
•
of bank credits which rests up .m
~t~e
un1erlyi:l6
''During the la.st yfkir, there h'-'-s beEln
gold
d.6c,r~gate
cever to the
:.~es'H"V"~
-~. •iACrP<.:...:;~e
iG3
money of the cot•m;ry •
in the percentage of
b<J.nking lia"b:.litjec o::: the country, Ilkiinly th:::
result of the process above outlined. This decline
h~s
not been occasioned by
any falling off in the aggre(!;d.te gold holdings of the American ban.king sysi.ie'll,
which indeed have shown some incred.se. It i:> ·:iue altogether to the rapid increase in the outstanding volume of bank liabilities. It is this
f~ture
o:.·
the situation which gives to the decline of the golct percentage its signiiicl.nc
~
That is to say, the decline oi' this percent,igc is an important index of our
changing position, not because of any
or
disproportio~te
inadequ~;y
of 60lo but beca.use of undue
expansion of the creait structure which the gold reserve
of the nation is required to support and protect in consequence of
inadeqUG~.te
saving by the people.
"Decline of the re,erve percentages of the central banking institutions
has been a general phenomenon
~n
all of the belligerent countries since the
opening of the war and. .tus everywhere been aduri.tted to be
undesir;;~.ble.
As
shown in the studies of public <iebt and currency, published elsewhere in this
issue of the
Bull~tin,
~t
reflects the disposition of these countries to rely
upon borrowin5 and when necessary upon direct borro,vin5 frorJ the bankin5 institutions - the public
bein~
eitheJ' too little able or too little willinc:; to
furnish out of its current consumption either in the form of taxes or of airect
loans to the Govern.'Tlent the su.ws necessary to avo:ict cred.it inflation ::t.nd to hole:
reserves dt a normil percenta;e level. The c:;redt 60ld strength of the United
States largely due to the heavy accessions to our nationd.l stock of gold in the
two years preceding our entry into the war) has, it is true, placed this
country in an exceptional .:ind peculiar position;
c~.nd
to this E;Xtenl the
char-
acter of the credit inflation experienced J.n the United States differs from th,;tt.
existinb in other countries and has been less
e~sy
tc l"E:l.ljze. But it would te
a mistake for us to proceed on the assumptio:a t:1.:it inLlotion in the United
standing liabilities reflects -;;he relat:.ve inn'eC1.se of the latter as c ompa.red w::.t•;
::-r~s0ntecl
the means of their direct ,;onvt>rsion on delllcl.nd and. ·~,;Le problerr:jis the problam
Jf
controlling the growth of b.mHng credits."
Besieies th8 st1.1dies of publ.i.c debt a·c home and abroad already referred
to~
thE
November Bulletin cvntains d. c'lllectic.n of o.atd. d0signea to show progress in tn'
rationing of creait and proauctive pl)we::- in this ana. other countries.
Ano·~he4· I)~
the Boaro. 's series of monog1·ap:Os on foreign banking conaitions is also present.oCl,
this time with reference to the business of the First N<i.tional Bank of
Boston~
Wijolesale price index numbers anu. further J:Ud.teridl for the stueiy of business cone·
fo7~·
ditions are a.lso contdinea in this isaue. Ruline;s as to COlw.l!ercial paper ana
eign
exch~n5e
and opinions of ccunsel eire also published. aeports of business
cona.itions furnished oy Feder..1l Reserve a.c;ents are unusually complete a.nd nay bv
summarized as f oll ONs:
General activity of business thrQughout the Unitea States is reported by
tically all Federal Reserve agents. Owing to Government
r~Sstriction
pra~~
-of n:dnufactur'-
ing and production, this activity iet more r:ind more confined to a cor,;paratively
srrall number of lines in which the industry of the country is being specialized.
The condition of agriculture is aliliost uniformly reporteil as promising.lteturllr
fron::. the old crops of staples, incluc:ting grain of all kinds, cotton and tobaeco
promises to be most satisfactory, notwithstanding a material reduction of yield
in certain lines dS comparea with the
expect~tions
of the past summer. Prepara-
tions for the next crop year ..1re l;!;enera.lly well under '"dY ana hold. out g,ood
promise of success. The conei ition of the soil in r::.ost of the grow:ing regions is
satisfactory and even in the drought area of TexdS there has
be~n
a uarked im-
provement.
V•hile war vvo.rk is almost uniforu.ly active .:inil proo.u~tiv£, there are .many classes
of staples needed. for civilian use ,in >Vhich the 0u.tput 1 o·~ 5 euera.l sale is being
materially linri.teCi. This is true both of cott,m .wei woJJ tt->Xtiles,of shoes and
other articles of current use. In these lines the w:..thurd.wal of grecLt qua.ntities
of materia.ls d.na the concentra.tion of
~oductive power
largely for Gctcrnmcnt contrc.cG:, has limited the >~9$+.
VCJ!'9
of machine industry ava.ilD.blo for the sorvi~c 1:J: c:.,ti:i.ians and mal::es it qu.;stionable how far it would be prv.cticab) a to mo0t Jun:..::md upon the.. present lo···e i
-·
a condition, i t mey bo nctud, favora'tle to an increD.Se of national savings 'Je-·
cause of diminished opportunities for sp:mding..
Hcvartheless, retail trade id
reported as in excellent 0ondit ion r:.nd durnand
wo.s h.:;vcr b<Jttor.
It hc:.s boon
2_)0SS
ible to s<1tisfy this dcrr.ond. only becaus3
of the fact tho.t considerJ.blo stocks of cor.sUDablo cobr.1od.ities had b..:en lD.id
in o. good ·.ih ile ago owing to the increo,s ing unc.:;rt<:linty 'tlith rcferonce to
conditions of supply.
l.l.llJong thr; soocia.l fa.ctors of the uonth which h<::.vo en-
tured into the business situ<J.tion J.nd ha·\To in som0 resp;;:cts tended to rcndor -cLu
results of the past four weJks· less ·1su.tisfactory" from tho dealer's point 9i
view than they oth(;rwiso 'Jould h<1vo been, arc conspicuously mcntion0C!., 'ch-:;
Fourth Liberty
Lo~n
and th0 general epidemic of influenza.
Tho epidemic ht:l.S tJndod
and iron, a.s woll
<lS
to limit production of :.:dl kinds, not<.1bly coal? stual!
opor::.t ions in tho shipyo.rds.
floating 'the Libo:rty Loan has in sam-:
r~sp3cts
.d.tto:1tion to the; proc.:;ss of
,-,ithdr<.::wnth... o.ttention of busi-
ness m.;;n of all class<Js fron thoir own innn.:;diate pursuits, 'ilhilc
part of the population to buy and arrunga for
probably had a
d~cided
Tho prospects of
payi~g
~fforts
on tho
for Liberty bonds have
influence in reducing demand at retail establishments.
and
·economy on tho part of tho public at largo
saving~
do not appear an cncou:r;.;ging as is to be wished..
While there have
be~n
on-
forced ·3Conomios luo to the absence of certain classes of goods from tho markets,
ZltF~
while it is expected that the operations of "chc '7a.r Inrlu.strios
system of :t'.J..tioning will compol
~
Bo3.rc~
;md it;::
furthor extonsic,n of this involuntary oconoiPy,
it would appear that ·many classes of tho popula.t:.on
e1r)
still spending thdr
curront incom..;s as fr,:;oly o.s ever, (notwithstanding thG f2.ct that prices uro
today at record figure)
bucause they have not
.)nt
er::o:-:-::..c.;d tho nationo.l duty
.\ h
-
t72
. .to save o.s a personal obliga:li jon.
B~ing
ox::peotee.
with
~
conditions aro
~nder
ro:porto~
the ciroumsto.:1ces..
vor,v large stock of
co~lJ
as
be
of indebtedness and thoir efforts
incl~cing
.:l.bsorbing tho bonds which aro to be
moc..s~re
abo~t ~s s~tisfactory
The banks entcrec. ·che Fourth Liberty Loa,_
certificate~
have been largely directed tov13rd
th0 vory larg<J
to b0
~sod
the poblic to arrange for
tc fWld those certificates.
ovent~all:r
D~o t:~·
of holp •vhich the ban::.:s are extending to the Govorn1:1ur-l; •
there h<.lS been an effort on the part of institlltions in many parts of tho co!4.1 ·
try to restrict the cxton;Jio:n of credit to industries whiah arc
Jssont ial.
Troas~ry
The greater demands of tho
~nq~..;stiono.blV
anC'.. the restriction Of com-
mercial demands has resulted in a very great increase i:1 the proportions of
bank assets \Vhich are h0ld in the form
t ions..
~f
paper :protected by Government
Collect ions, ho·.1ovar, are reported good in a1:r.1ost all parts of tho
country notwithstanding
an apparent tenclancy in sor.1e regions to offer pa.per
instead of cash, v·lhila market rutes of interest continue
Federal Reserve Banks rates have been
issued.
ancl high.
~o~
othJrs. the building
in~ustry
There hJS been con-
in most cas.::s.
ontor:prises being
~nf.ert<.o.J..c:m
1,1aru c..:p~:lications for ~.;err:1ission to oroct buildings .::.N no-."!
avvaiting action before the va.rious Govcrnmar_t boards in
·,~,-o.shington,
bllt
of those bodies h..;:.s in conformity with n.:::.tional wc.r policies
chocked :progress in
soc~riti~s
prL~tically
of tho nation shows a
nccess~ry
at
throughout tho
progress in tho cutting uown of the volume of invcstmunts and
sta.tion<:l.I'y conc"'..ition, only absollltcly
attit~do
f~rrn
substanti~lly unch~god
month, except for minor rc<J.rrangomonts and uclj~stmonts.
tinuo~s
oblig~
n;.;•:~ constr~ction ..
~he
...
X-1265
-9·
\•
CAL<{~
~q_'
/
fl
Prices generally throughoat the 'lini "';ed Sta.t% a1·e high and are showiug
a tendency toward a further upward movement. In som3 lines this upward
tendency is restrained by general or partial price. fixing, but in others
there is no legal check ano producers look tor a
fur~her
drift to higher
levels. The impression that pedce is not far distant is leading to a careful
reconsideration of the ace ouuting e.nd
Many are carrying very sltld.ll otocks
inventories. In the
latt~r
class of
o~
techn~.caJ.
p?si tion of many businesses.
good:J 1 while others show fairly lare:e
cas~s
warning is given that with the
possible approach of peace, brihging, as it will, new economic and price
conditions, producers should seek to protect themselves, so far as possible,
by the adoption of an ultra-conservative attituae with respect to inventories.
That t"uch conservatism is, on the whole, general and that there is but little
tendertoy toward reckless inflation, is the testimony of practically allthe
Federal Reserve Agents.
A~l
things considered, the position of business for
Octob~r
appears
to have been"satisfactoryt' The nf,lW influer..ces growing out of the Fourth
Liberty Loan and Government financing have not yet made themselves tully
evident.
)n
@FedFRASER