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....-~ FEDERAL RESERVE BO.ARD STATEMEHT FOR THE PRESS For release in Morning Papers, Monday , :,ra.rch j , 192 3 . The following is the Heviow of the Month as contained in the forthcoming is~ue of the Federal R0serve Bulletin. BUSV'!ESS .~lTD CR.'SDIT ---Since -t:rie. O,t)eninc; of the yaa.r thara 1Ls ba,m continuad growth in tha vol'UID3 of :;:-:rodu..::tion, furthGr incraa!:,.;;s in tha .i_-rices of rratarials, and a larger deD~~~for credit. ~10U(ft ba~ic the general credit trend has been sorr;ewhat obscured by saasonal influence;:>, the differences Jetween the deve1o . .~ments this year .:tn~ ::;.t the ~e6innint,; an increc.se in the credit requirerr:ents of business. loans at member 03nks durins in 1922, ~d J~Uluary w~s the decrease in reserve oant than a ye'J.r a._,o. The reduction in only half as large in di~counts 1S23 ~s was much smaller Also, tha return flow of Federal reserve note currency was not so }:JronoU.nced this year t..vo e8.rlier. of 1';;22 indicate _1,S last, and c:.m:e to an end :1 week or Borrowinc; for commercial :..:mrposes, which has increased· steadily since midsurnrrer of 1922, showed no seasonal decline, but continued to increase during January and February. The effect of this larger credit demand was felt early in February in a hi6har level of money rates in the fin~cial centers. In considering the present condition of industry and trade and the prospective demand for credit, it is irr~ortant to 6ive attention not merely to the financial si tue:":.tion, but to influances affect inc; the current volume of production and trade. Credit changes tend to lag behind .. ..-...~ ~ -~--~·-· ,( ...!' .r•·. f. ~ ·-·-·." '·"" -2changes in productive output, and consequently the irnrredi&te financial developmmts do not &dequately reflect the a:ctent of present industrial acti'rity. 111'3 factors of iJrimary importance 5.n estirratint: the present outlook are tne volume and characiter of g0ods be:cng produced and marketed, and the sources of dema!ld for those goods. It is well knc·.vn th2ct the trend of production has been upward since the middle of l'j21, c-md that the cu rre;1.t ov•.::,mt is l0rc;e, but the extent of recovery and the rr.agni·cu,!e of the })resent vobme of production compared to earlier realized. 1 eriods of business astivit,y are not so fully During the last quarter of 1922 production was greater than at any similar period duri:1g the pazt five years. • The Faderal Reserve Board's index of production in basic industries, which measures the changes in the output of 22 comrr:odities, shovvs tLat in September, 1922, production was equal to the monthly average for 1919 1 and that since that month there has been an almc~t continuous ccdvance. During so short a period as the last five months there has been a 20 per cent increase in output, and in January the level of production rosa aboV•3 the peak of 1920. Durin6 this period industrial disturbances hava been few, mining has proceeded on a larger scale, and traffic conditions have improved. relatively mild winter and the continued dem~nd The for housing facilities have led to a continua:.-1ce of buildine; operations. Greater efficiency, both of labor and of factory equipment, has made larger output lJos:oible, and the !lustained decand for basic materi~ls at advancing prices has made .?reduction profitable. The chief factor in the la:~:ger l~rodu.ction increased output of iron and steel. T::is durj.ng January was the ou~:_t)u'i.; d·rril1g ':;he first mo:1th ,·!' ~·~ -3of 1/23 was cioubl::: t:~,at of tl:e same month last year; the output of steel ingots was, in fact, the 1argast on record for any January and with the exce;?tion of T.1arch, 1920, tte largest for any montn since 1918. R;cent estir.dtas of the consumjJtion of steel by important lines of industry indicate the character of 1::.resent demand. Railroads used apl_Jroximately 25 per cent of L1.st year's steel production; tr21"1sport::ction and storage of oil, gas, a.nd water consumed 15 per cent; buEd.ings and bridges ap:_Jroximataly 12 per cent; the automobile industry 9 per cent, and tf.e export demand atout 8 per cent. Larger steel production during J~"'luary has been accompanied by a growth in the volurr.e of un.fillsd orders and by an increase in the A l~rice som~·,vhat of steel. similar situo.tion exists in the building indus try .md in the indust:ci3S prociucint> building r.r.aterials. Since the latter part of 1922 the vo1UJIB of orders )laced for 1uml.ler has exceeded production, some weeks running as hit._;h as January shipments of 1 umber ~0 i'er cent in excesu; in December and a~;:ceeded ~.:;reduction by about 20 iJer cent. Production of lumber, cement, and face brick during January, 1923, average about 45 per cent greater than a year earlier, and rrices of building ma.tarials advanced 19 per cent during tha same period. The advance in prices of thesa materials during the past ye<.1r has been greater than for any other group represented in the index number of the Bureau of Labor - r•f"' ;_ ;::._/ -4- X-3655 Statistics, but the increase in their ptoduction has been still breater. The dekUnd for basic materials and for house furnishings resulting from ~~e present building activity has played a large part both directly and indirectly in creating the current volume of production and trade. ~~e construction industry and, in fact, the production of equipment goods in general are fluctuating in cbaracter, and the influe~ce of the additional dem8nds arising from such industries upon the volume of employment, and hence on the buying power of workers, is greatest during periods of changing business activity. the production of consumers' goods ordinarily ~fuile fluctuates less than that of basic materials, yet their output has also responded to the recent increase in business activity, and to the larger purchasing power resulting from fuller employment~ At the beginning of 1922 the pro- duction of textiles, shoes, and food declined, but during the latter part of the year the output of these goods again increased. .For the year as a 11vhole, cotton ~?onsumption at textile mills was the largest since 19l8j woolen mills were particularly active during the last quarter of the year and maintained their production during January.- The output of f;ood products was greater during 1922 than in either of the two preceding years, although in general less than during 1919. It is estiw~ted that d1ITing last year more meat was consumed in the United States than during any previous year. The dorrestic derrand for consumers• goods is the largest market for ~merican products and the increase in the money income of the nation during the past year has been reflected in that market. -~- STOC:~s: PRODUCTION 1'JJS In orler to letarmine the economic significance of the large vclume of current prodl-:.ct ion, it iJ important to know whether the output is beir:g mar:keted &s it is produced or is accumulating in large quantities. 1523, .i.'.. comparison of the stocl:s of basic rr.c:.terials in January, with those for the corresponding month a year ago indic~tss, far as information is availc:"ble, t:1at they are not accl.:unulating. as Ls this conclusion bears an important rels.t ion to tl1e c'urrent business and credit situation, the evidence is presented in some detail, 'rhe fact that stocks of many ba3ic ms.terials at the beginning of the year were less than a yeD,r ago in:licates been accompanied by active tr~dinf:: th;~_t increassd output hc,s :.,nr:l t:b.z,t thcZ goods produced steadily into the channels of trade. ~1ave rr:oved f. further indicz"tion that no large physical volume of goods has been accumulated by industrial corporations is furnished by the recently published annual st2-terrents of a considerable number of those concerns, includ.ing both those en8aged. in the prod.uction of raw materials and of finished e;oods. These stc:.tements show that inventories at the close of 1S22 averar-:ei some''lh<'t less than in 1321, notwithstanding the fact that prices o.re hiq:her than a year a.go. InforrrBtion concerning stocks in hands of retailers is less comprehensive, the only available data being the re:9orts received by Federal Reserve Banl:s from 500 department stores in over 100 cities. The merchandise stoCks held by these stores at the end of the year were relatively low and during January declined slightly, The relation between production and stocks is ordinarily :roegarded as of great value in throwing light upon business and credit . ; (..,'') .. . ....., ~-'-~~~ -6conditions and tendencies. In a period of bus i .1sss revival, when 1 prices .:::,re advancing, there com2.s a time •vhon the expectation of further increases in prices furnishes a po•verful incentive to rr:anufacturers and merchants to enlarge"the volume of their purchases of materials and merchandise, and so to accumulate stocks. Such practice, i f generally pursued, may for a time be itself the cause for bringing about the expected increase. T..-1e policy of purchasing far in anticip'"'.tion of demand 1Jecause of expected price advances, 2.nd of ordering materials in excess of requirements because of fear of shortages, introduces an element of unhealthy sp3culJ\tio"8. into production and trade. Such policies, furthermore, ordinarily lead to increased borrowing to finance the larger inventories, and borrmvin;; for this purpose accounts in part for the enlarged demand for credit ''Ihich accompanies a rise in prices. How large a volur;;::O- of credit at any ?:iven time is required to maintain a healthy condition of productive industry is not always easy to determine, particularly in a country of such varied and complex economic activity as the United State". But it is ;vell to emphasize that an economic use of cr:;dit is to facilitate the production and orderly marketing of goods, and not to finance the speculative holding of excessive stocks of m&terials and merchandise. So far as the available indications go, the increased de-rrand for credit during recent months appears to have arisen from the larger financial requirements of current production anj trade, and not from speculation in inventories. Further evidence as to present ~arketing is furnishsd by the car loadings of merchandise and the volum.:; of wholesale and retail sales, -·..:r~ ..• '-~· '-~·· -7Railroad loadings of merchandise in the last quarter of 1322 were about 10 per cent larger than those of the last quarter of 1521. During January-there was a further increase of merchandise loadin;s, ani the total for the month was 23 per cent larger than the corresponding month of last year. The volume of wholesale and retail merchandising in- creasad in the last quarter of 1-..22, but the increase of wholesale trade was not unusually large for the season of the year. For 1922 as a whole, ho,vever, the volume of vvho1esale trade •vas substantially greater than in 1321. In retail trade ths sales, both of department stores and rrail-order houses, v:ere consi:lerably l&rger in the fall cf 1)22 than in 1321. During the last quc::.rter cf the year department stores increased their s~les over the corresponding period of the previous year by approximately 6 per cent, while, comr;aring tha same periods, rrail-order houses reported sales order sales, however, which refl~~ct ~1 per cent larger. Mail- the merchandise derr.and ·in rural districts and which declined heavily during 1)20 and 1)21, were still srr.aller in dollar value than they were in 1')1), whereas department store sales, representing city trc..de, ,._.ere much la.rger. December sales of reporting department stores reached the largest monthly figure of the last four years, and in January were 12 per cent larger than in January, 1322. The increased buying which made possible this larger marketing of goods came chiefly from fuller eirrployment and the larger pay rolls and from some incresse in the net proceeds to the farmer from the sale of his products. Restoration of buying ~;~ ... ~ . X-3555 -3- power resulting from reemployment after the industrial inactivity of 1:~21 is one of •the causes for the sustained :iemand t:hat has sup- ported tha increase in that activity. Dc1ring the past year the pay rolls at industrial establishments increased approximately cent. 25 per Moreover, this increased money income was not offset by corresponding increases in the cost of livin~. Retail prices rose very little during the year, so tra t the advance in >Jholssale pric.:-s has not yet been fully refL;cte:i in tha prices of goods ':.ought ty the ultimate consumer. These conditions h2-ve enabled wage earners to make savings. as is eviience:i by the ,::;ro·vth of sc;.vinr;s deposits throughout the country. T~1.e incre.:"se durins the year in savings depos:i.ts for about E:GO re~)orting banl<s distributed through the 12 Federal Reserve Jistricts an:i holding approxirr:etely one-third of the total time_ and saving:s deposits of the country was f;445,000,000. About So per cent of this increase took place during the last three rwnths. The accumulation of these savin~s represents partly the _deposit of funds arising from the redemption of Victory Vot2s and '''ar Savings Cert ific' tes, but it indicates more part iculo.,rly that current money income has not only been sufficient to purchase a large volume of consumers 1 goods, but also to contribute to t"f1.e funds now being invested in houses and other capital goods. It is generally true that in years when prC'duction is large '::oth cr:nsumpt icn and saving are also greatest. The curtailed buying power of European purchasers under present conditions raises the questions as to th0 ext:mt of :iepsndency • r ·-;;:_ /'f •' /' 1 0'5 <J• " - '"' ';) of various lines of industry upon foreign buyers and the relative importance of domestic and foreign markets, Very wide differences exist in the relative amounts of various products shipped to foreign markets. The relatively large proportion of certain farm products marketed abroad explains the connection between the condition of world markets and the prosperity of the American farmer. The relation between the total foreign trade and total domestic produdion is difficult to estimate with accuracy~ but both on the basis of physical units anJ of dollar value it is clear that no large propoption of the country's production during 1322 was marketed abro~. It should not be ass~ed, however, that the foreign trade of the United States is unimportant because, however measured, it is only a small part of our combined domestic and foreign trade .. 'J;'he cotton growers of the South and the farmers of the Middle .,'est depend to a considerable extent upon foreign demand to insure their crops at profitable prj.ces. the existence of a foreign ~arket ~brketing Moreover, eve:c. for rr.anufacturers t ready to absorb surplus products is an important price stabilizing factor, even though the actual volume of certain kinds of goods sold abroad may not be large. The physical volume of exports in 1922, according to the foreign trade index of the Federal Reserve roard and other available data, was s+ightly less than in 1321, but the movement of goods was in general well maintained and of the year .. ~~s highest in the last three months The rise in those months was dua entirely to increassd exports of raw materials, chief among which was raw cotton. The - 10- ~ dstuf f s and . manufactures, on the other hand , showe d quant1•t•1es of xoo 196 a tendency to decline in the latter part of 1922, following large movements of those classes of goods earlier in the year. Thw lower priced cereals, such as corn, rye, and oats, were exported in larger qu:tnt it ies than in the previous year, but wheat exports fell sh::_,rply on account of strong competition from Canada, which tended to discourage fcreign buying. In Jecember, hmvever, wheat exports showed a decided recovery from the level of Novembe.r and. preceding months. Manufe.ctured goods were shipped abroad in about the same quantity d.uring 1322 as in the preced.ing year, exports having increased ste.S~dily in volu.rne from the summer of 1921 until about the mid.d1e of last year. Since then the gain in that direction has not b~en sustained. Export tre.de in textile manufactures was larger in 1922 than a yea:r earlier, but shipments of iron and steel manufactti.res and machinery were srr.n.ller. The downward. trend of manufactured exports during the latter half o.f 1322, at the scune time that production in this country was expanding, indicates tbat 1\.merican manufacturers have not depended upon foreign markets to any large extent as an outlet for the recent increase in output. • • . ' PRICES AND PRODUCTION: X-3655 - 11 - ., 197 . While production and prices have both been in- creasing during the past year, for many commodities the rate of increase in production has been greater than the rate of wdv3nce in price. Wholesale prices, as measured by the index of the Bureau of Labor Statistics, have advanced 13 per cent in the course of the past year, while ths volume of production in basic industries has increased l.;-o per cent. Prices of raw materials taken as a group_ have advanced 20 per cent during this period, while the prices of consumers• goods have risen only a little more than 6 per cent. During the three months ended Janu.ary, 1923, the diverse price movement among different groups of comnodi ties had. balanced bined index has shown no net change. on~ another' so that the com- In January it remained unchanged at 156 per cent of the 1913 average. Prices of many basic commodities, however, advanced during January and February to new high levels for the current movement, in some cases reaching the highest points since 1920. During the past year price advances have been effective in calling forth larger output, and the expansion of production has been supported by the larger-use of credit. . When, however, production reaches the limits iiilPosed by the available supplies . ' of labor, plant capacity, and transportation facilities- in fact, whenever the productive energies and resources of .the country are employed at full capacity - output can not be enlarged by an increased use of further inc~eases credi.t and by in prices. With production at its present volume, prices of many basic materials advancing, and the buying power of the public apparently considerably strengthened, the question arises, what will be the trend in the demanclfor credit and how soon will increased loan activity at banks result in a larger demand for accommodation at the Federal Reserve Banks? 198 X-3655 - 12- CREDIT CONDITIONS: ~---·-· · - - --- As stated in the beginning, the credit developments during the early part of this year differ in some signific::mt particulars from those during the corresponding period a year aso• was The extent of seasono..l liquidation less this year them lastt and the movements in various classes of loans indico..te the difference in the ch:J.racter of present borrowing compared with that of a year ago. L::.st ye:.:u: Hquidation ·Nas chiefly of commercial loiiDs, while this year l t w;:;_s for the most par.t confm-=;d to loans secured by stocks and bonds• commerci.J.l leans con til1:1J.Jn3 to inL:rease. .At reporting member banks between the close of the year and the middJ.e of February, loans secured by corpor::1te obligations declined about $1~7 ,:::::.c.ooo, while other loans, la.re;:;ely comnercial in chEU"acter, increased by :::.bout $243 ,OOOyOOO. The larger P0-rt of these commercial lo:ms were rrnde by b:mks in the industrial .:md financial East, where the increased demand for credit has teen reflected in higher money rates. 'l'he e:,tent to which this increc:..sed dern:::md for credit m::1y be met by other means than borrowin:_; at Reserve :Ranks is limited.. between the begin.">ling of 1921 ani midsummer cities used funds arising from loDn ::>f Al thoush dur5.ng the period 1922 rr..erriber bstnks in leading liquic'lation in the 1.:nuchase of securities to the extent of over $1,000,000~000, it is doubtful how far they will be a.ble to meet the increased financial requirements of business by the sale of these securities. While a portion of these securities might be absorbed by ultimate investors ~t of current s~vings, a large volume of sales within a short period is not 1;kely to result in any considerable increase in the total volume of · is funds available for current operations.. The fact/ tJ::lat· member banks have n:P.de use of all their available funds either for locms or investments, that a reduction in investme-nts will result in increased demand for loans, und that the ... .. 199 -13growing demand for commercial credit will lead member banl:s to apply for additional accommodation at Federal Be serve Banks. The incr~ased demand for credit for cQmmercial purposes is beginning to reflect itself in increased borrowing from certain of the reserve ban}.s, particularly those in the larger centers 'iit.ere rorrowings reflect most sensitively the greater industrial demands. The outstanding fact in re- serve bankrdevelopmants during the first eight weeks of 1923, taking the system as a whole 1 is that saasonal liquidation of discounts th:s year was negligible compared with last year, being only about $2,000,000. " . the net aggregate reduction this year Member banks reduced their borrowingss at eight of the reserve banks 1 but tbese reductions were offset by increases at the Philadelphia, Dallas, San Francisco, and New York reserve banks~ The largest increase in discounts for the period was at the Federal Reserve Bank of New York, where member banks increased their borrowings by $96,ooo,ooo. To better adjust its relation to the altered condition of the money market thus evidenced, the New York reserve bank has raised its discount rate from 4 to 4~%· Action which was also taken .at the Boston and San Francis.co reserve baru~s 1 • brought the rates of these banks to the uniform level of 42~ now obtaining at all Federal Reserve banks. Expansion in the volume of rebank servejcredit at a time when physical production is approaching maximum, particularly if the growth of business extends to all districts, will bring the reserve banks into a closer relationship through their rediscount operations to the movement of production, trade, and prices, than they have sustained for more than a year.
@FedFRASER