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.... ,., X-3922 F E D E R A L R E S E' R ~.7 E B 0 A R D STNl'EvTEN'::' FOR THE ?RESS For Release in Morning rYapers, Monday, Decerriber 31, 1923, The January, 1921 iss,.le of the Feieral Reserve +, Bulletin will carry ti.1e following review of banking and business developments during the year 1923. The year 1923. - In the business an::l ban1.:ing developments of the year 1923 the outstanding fact has been the high level of industrial ond agricultural output and the derrand for bank credit to finance a volume of production and trade never previously equaled. Throughout the year the buying power of consumers, arising out of practically full industrial employment and increased income of farMers, has been reflected in a growth of retail trade and in a more active distribution of merchandise than in any other year. The increase in the dewand for corrn:erci2,l cred.i t, which began in the middle of 1922, continued at a rapid rate during the early part of 1923 when there was an unusual degree of industrial activity and was rraintained at a high level with a further rise during the months of crop moving and fall tr;>de. Taking the year as a whole, the credit situation ''vas characterized by a growth of credit to meet the renewed derrand of active business. Growth in bank credit. - The extent of the demand for bank credit is shown by the fact that the total loans of all me:r.ber ban}~s increased about three-quarters of a billion during tho first nine rr;onths of the year. This increase of about 4 per cent followed upon an increase 'W.ich tool< place during the last nine months cf 1922 at an even more rapid rate. In tr..at year the grovrth of loans was accompanied by &.n c:,ven more rapid grcwt11 in investments; in 192~), ho·.vever, inve~tmer.ts decl ir.ell sl i g:C1tly while loans continued to incre:tse. The srowth of member ba:1k credit since the spring of X-3922 -2- 1922 v~s at a rate rr.ore rapid than tile previ0us lean li~uidation, so that by the middle of 1923 total loans and investm::nt:; were gr85-ter than in November, deposits, while du.ring the first nine months demand deposits. o~ 192·3 there was a decrease in The chj_ef so"'J.I'ce o: incr .:;as3 b m,?mber banl<: funds during 1923 was the growth in tim:; deposits, supplemer.ted. by additional borrowings at the Federal Reserve banks. The growth in member bank credit in the agricultural dis_tricts during the period was to a much larger extent than in the industrial districts financed by borrowings at the reserve banks. The discounts at the six Federm Reserve Banks located in the agricultural districts (Richmond, ltlanta, St. Louis, Minnea.polis, Kansas City, and Dallas) increased by 69 per cent between January and banks increased by 31 ~eptember, per cent. while discounts at all other reserve Loans increased rr.ore rapidly in industrial districts, and this increase was met in part through the sale of investments, while in the agricultural districts investments continued to increase. In the financial centers funds available for commercial loans were also increased through a reduction in loans secured by stocks of commercial borrowin~ ~nd bonds. The volume at member banks in leaciing cities declined slightly after the first week in Octcber and the lessened demand for credit was also reflected in sorr:e''!hat easier money rates. Constancy of reserve bank credit. - At the Fedsral Reserve Banks disco~ts increased rapidly during the year, but there was a corresponding de- cline in open-maryet holdings, with the result that total earning assets remained relatively stable. In fact, as shewn by the attached chart, relative stability in the total volume, vJ:ith changes in the composition, ha-s X-3922 -}· been the principal charo.cterist ic cf F3dera1 Reserve past two years. Ba:-.2~ a ssots durinc tbe During these two ye.srs t.hs COUJ."ltry steadily used from In view of this relatively constant dem:md, L-12 years 1922 a~1d 1923 afford an opportunity opcn-r.arl~et of observing the effect of cha1:ges in. the VC!h:crne of the volume of :::~em"!ier bank discounts. holdi:1gs t<.pon This changing r,alationship was corr:- mented on in the May and JuJ.y issues of the Bulletin, ani it Lovv seems appropriate, at th6 close of the year, to r:ake a rr,ore com~'lete review of the relation between the two elements of Federal Reserve credit policy -- reliscount operations and open-market operations. In the early part of 1922 the reserve bants purc.he,sed a cc:'1Siderablc volup-C! of short term government securities in the open-rrarl·et, partly for the purpose of obtaining earnings, while in 1923 they graatly reduceJ their holdings of these securities. In tho absence of chc:"nge in the aggregate derr.and for reserve bank credit, the increases in open-m2.rket purchases during 1922 were offset by a correspon1ing decline in the volu.r::e of discounts, and in 1923 the reduction in sscurities was accorr,r:a.r1iel by a ~mtst.::ntially equivalent increase in discounts. In 1922 when the reserve banks bought secu:::i ties the :f1;1rds ·which thEJ;y paid to the sellers found tl1eir ~.vay into m2mbcr ban1~s &nd permitted t.l1esG banks to repay an equal amount of their rediscounts. The; c:.ggrets<=tte :::tr;:ount of reserve bank credit in use vvas not increased or even rnateri.ally a certain amount of 11 securities. 11 "rediscounts" v'srt: rnsr0ly thus ccraerted ir;to But the effect on the memb~:r Centers, was to add to their loanable fur;ds indebtedness at the reserve banks. ch·~nged; bar1c.s, IJC::rticul'"rJy :i.n th'" laq;e CI' to enable t:leffi t 0 rc~J.UC2 t': ril• UnJcr :;.;uc:l con:L ti :Jns ba:11·s are 1 H:sly x.. 3922 to lend more fully to their In custom~rs [~nl other~;. 1923, on the other hc:.nd t when the re se1·ve bar..ks reduced their se- curity holdings, t:-tey wi':Ld::-ew from the rrarhet an equivalent arr:ount of funds. Following the withdraw.?l, the Ir.erl<:et borrowed substantially the same amount from the banks; and the banks, in turn, rediscounted substantially the same amount at the reserve banks~ so t:r..at there was no rr.aterial change in the total volume of Federal Reserve Bank credit in use. X-3922 Open-rr.arket policy. - Ths volume of op-on-mar}(E:t holdingc with which the reserve ban};s entered the 'J"33-r 1:?'2.$ put thfrn in possession of an admirable instrument for testing U:..e cie,:rsc: of' J<:::r>:;nclence of the crc;dit structure upon Federal Reserve Bank accom..aocic,tion c..nd. for placing the initiative upon member banks to determine the volun'e cf reserve bc:nk credit required to mee• the needs of bua~f. ~d. industry. For in rediscount operations the initiative is taken by the merr.ber banks, which borrow from the reserve banl:<s at the established discount rate, while in open-r:arl.et opsratior.s the initiative rray be taken by the reserve banks 1 which buy or sell short term securities in the market largely at their ovm volition and at market rates. that the reduction of open-rrarket holdings du~ing 1923 was The fact accor.~anied by an amount of discounting by member banks approxirr.ately equal to the volume of funds withdrawn from the market by Federal Reserve Banks indicated that the total volume of reserve bank credit outstanding was not in excess of requirements. Federal Reserve credit in open-market operations. poli~· during the year has been reflected chiefly .As the aggregate demand of the country for re- serve bank credit way be met either through rediscount or open•rrarket operations, the Federal Reserve Board felt tbat,these two methods of extending credit should be brought into harmony. April, 1923, The Boardt therefore, in appointed a committee of officers of reserve banks to act in corQunction with the Board in effecting a more complete coordination of all open-rrarket operations of the reserve banks, both on their own account and in the execution of orders in government securities for the Treasur:r as fiscal agents of the government. At the time the committee was appointed, the Ferleral 'Reserve BoEtrd MILLIONS OF DOLLARS T tal Ear 0------~----~----~-----J-- 1 9 2 2 EARNING ~SSETS 1 9 2 3 OF ALL FEDERAL RESER\IE BANKS ... X-3922 -tr- adopted the principle: "That the t irr.;e, rr.anner, character and volume of oper1 rrarJ:et investments purcha5ed ·by Fe:Jeral J.es2rvc F.::ml(s be govern~d vvi th p:..·:irr<J.ry ree:;ard. to the accorr::nodation of coJT.marce and business and to the effect of such purchi"33S or sales on the general credit sit,-t..ation. 11 As the Act provides that discount rates shall be fixed 11 wi th a view of accommodating comm8rce &nd business," the adoption of this principle definitely established policies. open-~.arket policies on the same basis as discount Open-l!'.arket operations provide a cushion of credit between the direct borrowings of member banks and t.he money rrarket, and have facilitated the qow of credit into and out of the reserve banks in such a v.ray as to exerc1se a steadying influence in the market end to reduce the tendency toward periodical tightness of rr:oney formerly felt by business in the spring and by agriculture in the auturrm. Indeed, open-rr.arket operations, particularly sales of securities, have proved to be a valuable adjunct to discount policy. The minor influence which sales of securities by reserve banks exerts l!'.ay, at times, avoid the necessity for resorting to the major influence of a change in discount rates. Discount rate changes in 1923 were fewer than in any other year in the history of the system. Advances in discount rates from 4 per cent to 4-1/2 per cent at the Federal Reserve Banks of Boston, New York, and San Francisco were rr.ade early in the year, and since that time the level of rates r.as been the same at all the reserve banks. Tiith the growth of discounts, however, which accompanied the reduction in the holdings of government securities, the influence of existing discount rates was extended to a larger proportion of the total Federal Reserve Bank credit in use, and the cost of obtainins reserve bank credit was borne more directly by member uanks. Changes of dis- count rates made with a view of influencing the demand for red.iscount -~- X-3922 accomrr:odation from Federal Reserv·e Banl<s are 8attE:;r un1,;;rstooJ by the general public than open-rrar}~et transact ions. T:1e experience of the past year, however, shows that chc.nges in th9 volume of s~~cu::i ties held by the reserve banks, when such changas are well t irr.ed, are capable of exerting an important and useful influence on credit conditions. The weekly state- ments of condition of the Fede-::al Reserve Banks sl1ow the amount and con:position of open-market holdings and rr.ake it possible for the public to follow these changes from week to Vieek. Open-rr.arket operations during l92J... - In viev; of the importance d-uring ~923 ~ of t'ne open-rr.ar1 t opera t· ' ·1 <e 1ons, a o.e t a1 e d s t a t emen t o f th e c bu nges ) during the year in the composition of open-market holdings and of their relation to total earning assets is shown in the following table. -e- X-3922 .. -' • __________ jjn rr'otal Change between Jan. 10 and Dec. 12 ------·-· _ _Q:p_E.J:l.-n-.~~:tet;__ holding§__ ________ .l~C:U.S. Loncls: Treasury Djscnunts . -- . ------January 10 February 14 March 14 April 11 May 9 June 13 July l l August s September 12 October 10 November 14 December 12 mi~_.J,_ion§) ··- 1,246 1,191 1,183. 1,135 1,148 1,035 1,134 1 ,C91 1,121 1,143 1,150 512 653 613 6~\ c.:...., 695 70S 847 623 SL2 . ---~------- 734 535 570 512 4~~ ,) 7.77 .,i i I 791 762 2'37 268 279 27lf 359 426 250 - 308 869 l,lSS :-58 Total --4- and Notes: C.ortificates 176 163 161 163 1'-f9 125 94 83 95 77 39 -·------- 226 185 225 274 2S7 332 190 184 75 37 33 7 7 5 5 12 19 S7 79 - ce2:Jtances - , 6~t ... 313 +103 2lq 17S 179 132 263 330 .~ ...., .. X-3922 - 9- Of the two principal types of securities digible for pu.rcho.se by rese:rve b.:mks -- accept once and U. S. se cu..rit ies --, the volum3 of acceptonces held by the reserve banks increased by about ~lOC,OOO,OOO during the ~rear, ,vhile gove:rnrrent securities declined by over $4oo,ooo,ooo. The increase in K:Jeral re.:;erve bank hold ir!gs of acceptances since the r;,iddle of October reflected in part the seasonal growth in the volurr.e of acceptances created in connection with the Iincmcing'of ·;:rop exports. The reduction in holoings of United Sts tes securities, chiefly certi fica te.:3 of indebtedness, cant irrued a.lrws t without interruption throughout the year, though during NoverEber and De cemcer there was a slight increase in the holdings of Treasury certificates. A con;parison of the composition of earning assets shows that the reduction in open-rr,arlr.et holdings between the n:iddle of January and the r.:.iddle of Decer:ber wss sorLawhat larger than the increase in d Locounts, with the result that for the period the total volllfue of rese~ve bank credit decreased slightly. Stability in the othe:r principal iten:s of the :rese:r:ve bank .;;taten;ent has also characte:rized the year's operations .. H.eserves ren;a.ined at about ~3,800,000,- 000; Federal reserve note circulation, afte:r a seasonal declinc'3 early in the year, continued at about $2,200,000,000; deposits. consisting largely of r;.ernbe:r banks' reserve balances, declined somewhat, :reflecting the decrease in a errand aepo"'i ts with n.ember banks; and the :reserve ratio throughout the yea.:r rer..ained n~ar per cent. 76 This absence of change in the rc::;e:r:ve bank staten;ent durint; 9 year of gc-owth in business 9Ctivity and of increasing credit and currency derrand is closely related, 9S was pointed out last rwnth in this H.eview, to the use r:0de of irrported gold. Du.:r ing 1923 the inflow of gold coL. tinu:~d in sor,ewha.t larger volur;,e than during the previous yea.r, net irr,ports of $262,080,000 for the -10 - X-3922 fi:r5t ~leven rwnths exce:ding the total of ~;;23B,Ov0,UCO fo:r 1922. T.hi:s sdditior12l ~;old was not :reflected in an increase in the resa:rves of the Fsde.r·al Hese:rve b9nks because ce:rtain of these banks rdet the der:ar,d for cur:rency by putting golJ to certificates in;circulation. Thus the increase of the total r;.oney in circulaI tion of ~307,000,000 bet·,veen Decer:.be:r, 1922 and Decer:,be:r, 1923, ;·JC:JS largely in gold certificates, ra the.,. than in Federal rcser·ve notes. Course of business. The t:rend of r,,er::ber bonk. credit d'-1:ri:1g the ye3:r, c-athe:t' th9n of Federal reserve bank credit, ba.;; reflected the cour.:.e of business develorJrr.ent~. The period of rr.ost rapid increase in th~ der,_am for credit vvss the first '~uarter of the year:, when trade was active and the volur;.e of prcduction in basic industc-ies was greater than at any previou.;; tirr.e. Production reached its peak for- the year in M:gy, ::md afte:r that tirr.e the grO'ivth in the den.snd for c:r::;dit fo:t' com;_e:rcial purposes slackened. The :rece~sion in industrial activity during the surm;er- r;-_onths 1 however, was not Dccompanied by a decline in th::: distrillution of r.e.rchandise, and in the autumn the deru;md for adciitionJl ·:::redit, l:J:rgely f:ror;, agricultul':'e, resulted in a fu.,.the:r incre3se in cor:,rr.erci::Jl lo.Jns ot rr.er;,ber bJnks in leading cities. 'lne slachelning in trade activity during the 13 t ter port of the ~rear arose rrore f:ror;, the hesitJncy of business conc2rns in pl3cing forw31'd or:de.rs thJn f:rom 3 lessened der::,Jnd on the part of ultiL:Jte consurnersj snd the price declines of the pe.riod were chiefly in rrateri::.:ls used in industry nthe.,. thJn in consurr.el:'s 1 goods. The ye3r :;s 3 vvhole l3:rge industrbl output, prscticslly full er:.ployr..ent, N3S 3 ch~1r3cte:rized by s ou..:;ts.inud consurr.ers' derr::md fo:r goods, ::md a leval of price:..; core stJble th::m in r:my yeJr since 1915. ,. . - lT - X-_3922 ings of facto:ry worka r..: sr:d l.arbe:r proce0ds f :rorr. the sale of f2nn products fu_rni.:;hed the buying po,·,:;:r to c1bso:rb th::: Y2~Jr 1 s incre.::sed outpl;t of (;OOOS. The income of inuustriJl Ncrkers, as cl;e r:c...sult of a ''Ol':L.C: of employu.ent J_pproxir.:ste- ly 13 pe:r:- cent l9rge:r th:m in lS22 and of wage advan..::es, g:·e:Jtly exceeded that of the previous yeJr. coo The totJl value of ag:ricul tura1 pro(j-c:.ction was Jbout ~SOO ,OCO,- gre3te:r th3n in 1922- This incre:::se in incorr.e WJS not Jc::ompani.sd oy 3 cone.sponding :rise in the co.:;t of liv1ng Jnd the .large gro·.rth in s3,;jne;s Jeposit::. indicates thJt the:re 'v3s a con... identle p;·:'gin of inco;,;e Jtole :3Xfencitures. The ·incr-e3sed buying during the yecn is reflecte-d in the volurr:s of. r:tsil trJde, vmich W3S lsrgar for every POnth of 1923 th:m of 1922 so far ;:,s r.cnthly figu.res ZJre novv 3V2ilJb1e, and ths tot'.ll of dep::;rtn.ent store S8les for ti1e Cen mcntL.:> exceeded those for the co:r.re3ponding n.onths of l:Jst ye 3 r ·by 13 pe:r cent~ 'I'ne dist""ilmtion mci r,3 rk.e ting of gcod s wos f3cili t3 ted by the in"p:r~ver;::mt of t.r:ms:yortatic;n fJcili ties Jnd ths vclur:.e of rc~il rood traffic wa::> the lnrgest on reccrd • In sg.ric-u.lture ths fincl e;;,tirr,ates for the year indicc..te prcducticn lsrger th3n the ye 3 r before and 3 J phy~ic_jl ·;olur::e cf t the prev::Jiline; level of fJ.rrL prices the tctJl V31ue of the ye 3 r•., c:r:-ops is about 12 per cent :.1bove th:Jt Fur the:rr:.o:re, 3 1922. l3rge-r proportion of f3rr,-, incor:e 'HJ::> available for cc.rrrent expenii- ture since le"s of t .. e income than in preceding years Ssles cf E3il r:unities, incressed uy L C>f t;Js ussd L the r'cjJJyment cf order houses, representing chiefly f>Urchs.ses in rurol cc;~- 31 psr cent in 1923. 'The r e cove r;;r of ag:r i cult-ure, hcv-v :;v er , still inccr.;plate, p3rticub:rly in the vr.a:;t ond livestock industries, ::md the U..'1U3U:Jl bu::>ines::> grov·ilth of th;;; ye3T h3s b,;;,:;n chiefly in the indust r·i.3l sectiun.s · It L, the d ecc:md on the p3rt of industri::Jl vvorkers .vhich, ev;:;n with the decre3s2d fo:r<lign der:,Jnd, hJs result-;;d in J better r:.Jrket for ;,t;ricu1tur:3l products. - 1?. ... the growth in the ccnstructicn C'f bt:.ilcings .cnrl the; 'l\:nuf'JC'~ura Tbe uutcmcbile outpt:.t of the ye;r- siE LtGl '+ ,CGO ,000, ::m increase tlnn 50 pe:r: cent ever: 1922. level du.:ring 1922 r'83Ched 3 D;)::JJ:'l.y of rrt;to:r car-s. ~f r.o"t'e T:.e uuildint, ;ctivi1Jy v1bich hc::d bean a.t a high J.JXi.T:.Qr;, }n the <<prir,g d' 1923 :md 0h2D slocken;;:d Wi tr. the subsequent decline in c.::nstructi::m ccst.:> .:1ctivity il::J~; r:n.:J•.·.·ed [md f ;r the :re3pcnd ing rr.::n ths c f 1922, t'2pidly th::m CGnst:ru.cti~.n fc:r bu:3ines;;; and industrial p 1J<pG::,e~:; but ccnsti tuted a larger propo rtivn of the tctJl than in the fcur p:r,~vi.us ya~J:rg. 'Ir.:.e lsrge vclurr:e of construction n.:•t ..;nly ls·d to incraasad production cf building n.ate :l"i3l s, but also resulted in lsrge ssles c;f fu:rnitu'~"'e ~)nd cth.:::r hcus::hcl:j gccds snd w0s an irr:pcrtant L'ct.:or in the demand in rr0ny line'=> of trc-de. they declin,::d during the l.3ttar p3rt cf the y:oJr, rer ·;ined, :nevc.l:rt:neless, c'~n- to 0 point bel:.m thDt , f .Nc\'enlJc.::,., 1922, but tLe :vc;'r'Dg>2 f:~r tha ll r;1cnths cf 1923 '.VOS slig.htly hic:;b.:::r t'.:lan the ~-ve:oge for the yc;:c;r 1922. !!,ure sit.:Snificant ":.J."ai''. - 13 - •• X-3922 prices Gf certain ag.ri.::ultur.Jl pr:jucts ::md tte c:..ntinuad decline in fuel t:18n at any t in:3 s i -:1ce De: c0r.b2 :r, l '020, Tt,is rise w:;s due :mti rely tv the :recessj_on frcrr, th;; unUSU:Jlly hit.h bvelS re.:·ched during the first c1U3rte:r. c..f advar:ce which cvnld ho:roly oa c.aint:ined r:.essicn .vhich fcllO'l,Bd W3S the business cc;:::u:'lity. 3!1 (;?JV2 The d.s;;;; t.:.. h.;.:;sit3ncy Jnd the :re- e.xp.ressicn cf th-2 c·.:..nserv::~tiv:; attitude tJl:en by Ir, the fJll r:ccnths, :~vwe"i·e:r, nith the: c-::ntinu::mce cf :Jcti,·e :r::d e :ond an unci i;-; inisl.ed der:.and f.rcm c:.nsur.-..e.rs, tmsiness l.le cJ.r,.e Lcre c~nfident. S."broughc..ut 1323, 3 yeJr Nhen ousindSS vc:lur:e, _l:)r·ices, and credit ,vere adjusting therr.s::lves t-., :Le ndw levels, it ;ns priLa.rily the .:1ttitude L-f tmsir~ess whic...l-J. rr.:ue'"~"t)u b .. th th0 upNa-·d :)nd th::: dc.Jmvard m~ver.:;ents :_,nd ex- :;rcised 2 stabiliziug inL~ ::r:ce up8n tr::1: ,:; and ir:dustry.
@FedFRASER