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Released for publication in morning papers pf Saturday, June 7th, 1919 •




address by

A.C. Miller, Member. Federal Reserve Board,
Delivered at Pittsburgh,
Friday morning,

June 6, 1919~

before the
National Hardware Association of the United States.

The perplexity in which the business mind of the country
was left at the time of the annistice by the confused price


resulting from the war has been much relieved by what has taken place
in the last six months and particularly in the last three months. It
would be premature to say that the situation has clarified itself sufficiently to speak of the price outlook with confidence.

Certain factors,

however, which are destined to exercise a very considerable influence
upon the trend of prices in the future, are coming to be discernible and
it is worth while, because of the decisive bearing which the price
situation has upon business and employment, to undertake at this time
to examine them.
The expectation that prices would drop and go on dropping was
expressed by competent students at the time of the armistice and was
shared by many business men.
Civil War.

Such had been our experience after the

Indeed, some, who had in mind that experience, feared that

thedecline of prices might proceed so rapidly as to be disturbing.
Prices dropped some 30 per cent in the first six months of the year


This fact suggested that at least a considerable decline might

not unreasonably be expect.ed in the United States following the close
of the great war.

Such, moreover, had been a very conmon feature of

the after-math of other great wars.
There seemed to be justification, therefore, for the expectation
that prices in Europe and the United States would begin to

the turn of the year 1918.


The only question was how rapid would be

the decline and how long continued.


The operation of natural economic

X-1565 .

forces and particularly the devotion of the productive energy a.nd resources of different countries to peace industries was expected to do
much to relieve shortages which were in part responsible for the momentous
price changes induced by the war.

The fact that fifty million men or more

were to be released from armies and from war work led to the belief that
there would be a


resumption of industrial activity in Europe and

increased production of goods and resulting declines in values a.nd prices.
This conclusion also seemed to be the logical consequence of the general
acceptance of the view that the price situation, which had developed
throughout the world as a result of wa.r conditions, was highly artificial
and highly inflated.

differences of opinion may have existed during the war as

to the cause or causes of the


advance of prices experienced,

it is now coming to be more and more clearly recognized and frankly a.d-

mitted that the chief factor in the price revolution is to be attributed
to the enormous increase in the volume of circulating credit, bank notes
and government currency put ·out in the past four and a



The situation in the United States is coming to be so well under.stood that no extended reference to it is necessaryo

It is well known

that in our five Liberty Loan Campaigns the Treasury has been"obliged
to borrow from the community and issue government obligations more
rapidly than the


rate of savings by the people could support,

with the result that a considerable part (perhaps as much as seven billions of dollars) of the several issues of bonds made by the Government
have had to be financed by an . expansion of banking credit and, to a


of banking currency.


3 It is coming to be recognized that our banking and financial
tion can never be as healthy and strong as it


should be until the ba.nks relieved of the burden of carrying such large investments., either
for themselves or for their customers, in Liberty Bond operations. This
means that such parts of the community as have not yet done their full
part in absorbing and digesting the government issues, must by one method
or another be induced or


to save and pay up, or buy.

Those who

believed that this process would be rapid, and they were many, and that
the Government would soon disappear from the market as a competitor for
current loan funds, expected as a natural consequence that the volume
of our circulating bank credit and currency would shrink and that with
the shrinkage would come a lowering of the price level.
Other countries, it was thought, would move along the same general
course as the United States, though of necessity more slowly because of
their continuing financial difficulties.

A reduction in the volume of

circulating media of one kind or another was, however, regarded as such
an essential part of good financial policy in the process of post-war
readjustment that this reduction was taken almost as a certainty.
The feeling of

caution and hesitation, which cha.racterized the

temper of the American business community at the close of the war, was
the natural outgrowth of this expectation of the probable future course
of prices.

It is well known that this view was shared by an important

agency of the Government, which was set
assisting theeqpected
price revisions.



for the special purpose of

course of prices by gradual and orderly

By mediating the transition from war prices to

prices, the Industrial Board of the Department of



to bring about the resumption of industry and its adjustment to


- 4 ....
,... . -

anticipated conditions more q_uickly than if left to.the u:rld.ssi3ted

working of natural econcmics forces,


Price stabilization was


to bring buyers in to the :market, particuJ2,rly for ba.s:i-c 1l:lateria.b
required in construction work and thus to a. ccelera.te
industrial readjustment and improve the er:l:!J?loyment

ths }:'rn·-:.ess o::



abandonment of this policy by the voluntary retirement of the Industrial
Board and other steps


have left the process of

have been taken toward decontrol of industry


pretty much to the unimpeded action

of the market.
The movement since the armistice is interesting.

For the first

month or two there wa.s little or no change; with the opening of the year

1919, prices moved downward, though slowly; toward the end of March the
downward trend halted and with the beginning of April there is a noticeable upward trend - most marked in the retail trades and those manufacturing trades which closely auxiliary to the leading retail trades
(such as the textiles, clothing, boot and shoe trades), but with sawe
evidence recently that it might develop into a. more general forward movement.

At the moment, p:rices are close to the war level and, in many

instances, moving forward.
Many q_uestions are raised by the le,ba.vior of prices since the armis-


Is the recent forward trend to be regarded as indicGtive of the

probable future course of prices, or is the advance to be regarded as accidental and temporary and as merely marking
expected downward trend? These
with positiveness.


of course, CGU not be answered

The factors which influence the price situation and to

which it is responsive, even under normal

an interruption of the

and frequently








the resultant is always a matter of great un0ertainty. The unexpected is apt to
supervene and destroy the validity of even the most carefully considered forecas·;; ..

result of the war, the price situation in all parts of the world h<:Lt;


so vastly complicated that conjecture is perforce a much more hazardous undRrtaking than usual, particularly if any attempt is made to ded.uGe general concl usions from tendencies discernible only in particular industries

o~ group~


industries. so subtle and exceptional are the influences now at work in different
fields of industry.

However hazardous the undertaking, it seems nevertheless worth while to
direct attention to some of the underlying factors which seem now to be emerging
and which seem likely to exercise an important bearing upon the future trend of
prices, looking forward:
(1) to a period of some years, during which the general readjustment
of the world's industry and trade is being worked out; and,
(2) to a briefer period of a year or more, during which Europe will
be in the first stages of her reconstruction.
All business calculations run in terms of prices. Business judgments are
for the most part price judgments. Ba.w materials, .labor, fuei., an'.i the other
requisites of production are bought at prices; they are conver-ted into goods
to be sold at prices. Unless the prices at which the


of production are

bought and the products are sold are fairly calculable and a satisfactory margin
of profit shown between them, the attitude of business will be hesitant. Falling
prices are, therefore, obviously to be regarded as an addition to the ordinsry
hazards of industry. It is therefore a question of vital concern to inquire
whether the price si~tion has clarified itself sufficiently to snggest some
expectation of what


be the .future price trend.

Until Europe recovers industrially and brings its productive capacity up


what will be normal for its decimated population, no considerable or rapid fall


commodity prices is to be expected. Indeed, until the point is reached where

the process of recovery is well under way. a rise of prices rather than a fall is
to be expected. Should the eventual outcon:e show


some have often predicted.

that tlie war has given an added ill[)ulse to the inventive sp:iri t and to the instinct
of thrift, the rasul ting increase in :t:Jrodu.ction and savings wo-..lld ba•.re :m


tant effect in hastening the readjustment of prices. It cannot be too strongly
emphasized that it is only as more goods are produced in


for the inflated

currencies of the world, or more income saved from earnings and used for the
purpose of liquidating loans and adva.'1ces made by the banks, that the financial
and credit situation will gradually be improved by the


of outstanding

bank liabilities and prices respond by a gradual fall. How long it may take the
mov:m:ent, as ·thus dafined, to run its course, no one can
It is a matter of corrmon


that it was fourteen years before the

currency disorders growing out of the Civil War were measurably corrected and tb.e
greanback dollar brought to a parity with gold- It took Europe fifteen years to
effect the restoration of public credit, reorganization of currency and banking,
and the readjustment of industry to a stable basis, after the clot.e of


Napoleonic Wars. Considering thG vast reach of the present war, on its
economic side has not yet closed, and considering the great descruction of indusi:1
trial and financial capital, the terrible disorganization of inc.t•.sr.ry, and the
impairment of the morale of the working forces of Europe, there seems little
reason to expect that the process of reconstruction and readjustment, first the
one and then the other, through which Europe is about to pass, will be short or
easy. Ten years would seem, on the whole, a shott period in whiGh to expect a
restoration of economic conditions in Europe to a normal basis and the rectification of the price situation.
The general outlook, therefore, may be said to be for a gradual fall of prices
during the next ten years or longer, depending mainly upon how rapidly Europe will
recover her productive power and correct her currency disorders by deflating her





distended currency.
Those who take a more sanguine view should not overlook the bearing


an artificially forced rapid deflation - should that in any event be practicable
- would have u:pon the debt status of the European Gov.::rnments. One of the zr.ain
reasons for believing that deflation and, therefore, price reductions, will not
:proceed rapidly in Europe is derived from this cause."
The enormous debts, which the war has left European countries, have been
contracted in terms of depreciated currencies; by and large commodity prices are
double or more than double vvhat they were in Western Europe in 1914. They have

100 per cent in the United States; they h&ve increased more in England

than in the United States; more in France than in England; more in Italy than in
France; in Russia and in the countries that constituted the

fo~r Austro~Hun•

garian Empire, conditions are so chaotic that no basis for comparison is availahle.
If prices could be and were put back to their
much the



level, the effect would be

as doubling the debts of the several countries of Europe while

maintaining their existing price levels. Such a proceeding would, of necessity,
of national debts
place a burden of taxation virtually so heavy as to force a repudiation/under one
guise or another. Even under their existing depreciated currencies, European
countries are struggling with the problem of handling their great debts, and their
enormously swollen national budgets. This condition alone, if nothing else, would
be a
slow process in
seem to compel the expectation that deflation
Europe and that,, as deflation will be gradual, so the fall of prices will be gradua::
Many factors will, no doubt, enter into the restoration of the value of the
flated currencies of Europe.


But, in the end, it is likely to turn out, as in

the United States after the Civil War, that Europe's main .reliance in correcting
the present condition of inflation will be the natural process ofngrowing up"
to its
excessive and redundant volume of currency.
With the


in all leading countries more closely interlocked


than ever before because of the new

of interest and fortune resulting

from the war, no one country, like the United States, can set itself apart and
maintain a price structure very far out of line with the world price


Price movements in the United St&tes are bound to be affected by the price
movements in Europe and no great changes in the price structure of this country
are to be expected except as they reflect changes in the world's price structure.
With the larger part of the commercial world in a serious condition of inflation
and no prospect that the period of economic readjustment will be a short one;
the fall of prmces, to which rreny have been looking forward as an inevitable
consequence of the war, seems likely to be a slow one; so slow that for most
ordinary purposes in making business calculations and in reaching


it may be taken as a negligible factor. While prices, looking
forward over a long series of years, rr.ay assuredly be expected to show a downward
course, the fall of prices from year to year, it is to be repeated, will probably
be so small as to make possible losses from the decline a factor of no conseqQence, except in the case of long period investments of fixed capital upon an
extensive scale, when it would probably be a wise precaution to set up special
sinking funds to amortize shrinkages of value from this cause.
While the general trend of prices for the next ten or fiftaen years may be
expected to be downward, the downward movement is not likely to pursue a steady
and unbroken course. It will probably be


by frequent ups and downs in the

process of finding a new norwal level because the general process of economic

is likely in each important stage of its development to result in

some mal-adjustments, which would inevitably produce price disturbances.
The future price trend, in other words, is likely to have much of a fluetuating character and, therefore, to give to the period of readjustment something
more of a speculative character than is usual in normal circumstances.
So much as regards the general and more distant price trend. As regards the


near future, there is little reason, I think, to expect any marked interruption
of present :price tendencies in our own and other leading rr.arkets, mainly because
the world's urgent need for goods. Europe is in a bad condition in nearly every
way · economically, socially, :politically, physically and psychologically.


The process of disbanding the armies and getting the men back to farm and workshop is proving a difficult and slow one. Idleness since the armistice has worked
its effect in


demoralization. One of the main problems presented by

the transition to peace conditions is the restoration of the economic morale of
lar@B sections of the population of Europe. Feeding the hungry ?lld clothing the
naked is an obvious anci imn:ediate necessity; equally necessary and as important
in its general effect is the


and equ.iprr.ent ; farms must be


of industry in Europe with raw materials


are lacking; the railroads must .

largely be reconstructed; machinery must be rebuilt or replaced; everywhere there
is need of basic materials and tools before Europe can get back to a condition
where she


:produce goods enough to


herself and pay for her iaports.

It will take time to effect this work of restoration and repai:i!.• While no accurate
estimate can be made of the needs of the several European countries, enough already
is known to make it clear that they are/for sorre time will continue to be very
considerable. Whether it will take one or two years to


the first stage

o£ her reconstruction, it seems certain that until it is accompliShed her needs
.will tax the ability of the non-European world to the utmost to supply foodstuffs
and raw materials. It may be expected, therefore, that there will be a very heavy
demand upon our markets for a great variety :6f goods during the first :phase of
the reconstruction process, provided we are able and willing to finance Europe
in its purchases for such a period of time as Europe have before making

settlement: that is, provided we supply by loans the capital needed in

Europe to assist her recovery.
The most important thing now, from every point of view, is that Europe should

~ rl)

- 19 -

go to work. In those pa.rts wh;.;rc they can not work becc>.use they t1:0
tools and materials, they must be helped to work. Where they do not ·g;?.nt
to work, because demoralized, they must be made to work.
Htmger and
idle~ess are one of the greatest menaces in Europe~
They present the immediate ObJectives of pohcies of coopera-tion with the
reconstruction needs of Eur9pe.
Momentarily, Europe lacks the rnea...'1s of paying for tte f cod. anc
material that she must get from the outside world..

S..l-:ie :ha.s no go0da to

give ine xcbange for these, at least not in adeq_ua.te amount; she



gold which she can spare, nor do we, or other nations in our position,
need or want more gold.

But with fair prospect that her economic and

political morale will be restored, she has what should be acceptable to
us in the process of extending economic assistance, towit:


The foundations of credit, both na.tionc>.l and private, reputation for
integrity or good fa.ith and demonstrated economic capacity, a.nd these 1
fortunately, still exist in Europe.

The prospect, therefore, is that

there may be expected a very considerable credit demand for American
goods, that is to say a demand both for goods and for the credit wi t.n.
which to buy them during the initial period of Europef\n reconstruction.
price trend may, therefore, be rea~orL~~lf expected to
rule high, if our exports to Europe on credit cor:..tir. . uq


anything like

their .present sca.le.
We are now exporting a net excess of goods over what we are receiving as


dollars a year.

at a rate of well over three thousand millions of

Assuming that the value of our annual

output of goods

of all kinds and descriptions amounts • under present conditions, to
a. a
sixty billions of dollars or more, the exportation/ of/ net excess of
three thousand millions means

a loan

to Europe of capital goods to the

extent of five per cent of our tota.l annua.l production.



On its purely


-11 -

economic side, the q_uestion whether we cc1.n indefinitely go on doing th:i.e
reduces itself to a q_uestion of productive capacity.

On the financial

side, it reduces itself to the q_uestion of our willingness to save and
add to the capital supply of 1\ available for use in Europe after

the needs of our own :tnd.ustry have been reasonably p:ro-..ided.

question is a


Beyond tba.t

one; it is that of devising the best form of

machinery for mobiJ5"'ing such capital as can be spared for the purpose
for the use of Europe ..
Complete and accurate data are not available for estimating the
extent to which the productive capacity of the United States bas increased in recent years, much less have we any satisfactory indication
of the increase in the capital or saving capacity of the United States.
There is, however, statistical foundation for a.n estimate of 16 per cent
increase in the productive capacity of the United States in the past five
years, measuring the increase not in'its money value

but , far more

significantly, in its physical volume, to warrant the use of this ratio
in estimating the financial capacity of the United States.

Accepting 35

billions as an approximate estimate of the money value of the products of
American industry before the beginning of the European War, an increase
of 16.per cent in the physical productivity of industry would yield an
increase of 5 .. 6 billions of dollars in the money value of the nation 1s

But figured, as the increase should be, on the basis ofthe

1918-19 price level, which is 100 per cent higher than the 1914 level,
the increase would amount to 11.2 billions.

It is most noteworthy that

this increase in the economic productivity of the United States has taken
place without the usual addition to our working forces from immigration.




- 12·The period has been one of emigra-tion, rather than of immigration., '}lhe
estimated 11.2 billions is, therefore, to be regarded as pretty much a
purely economic surplus, after n:aking deduction of c:rurse for the
expense of taking care of the natural increase in our population,whir.h
has occurred in this interval of time and which is asti:r.uated a:t s.:,.w.e
four millions.

In other words, this increase in


production is due

to the fact that the industries of the nation have been working at a
high pitch of intensity under the


that was given by war

conditions and that a larger percentage of the nation, than before the
war, entered the ranks of its productive workers.
:Bearing in mind that the capital which Europe needs and will seek
to obtain from·us by borrowing will consist of goods which are the
product of American labor, it is obvious that the process of accommodating Europe will involve either the continued high activity of American
industry or a reduction in the amount of goods available for .American

In either event, must there by saving.

Nationally, the

question is whether we shall undertake to finance Europe by savings
out of a reduced volume of production or out of a susta.ined volume of

In the latter event, the problem of ma.ktr.og reasonable

advances of capital to Europe should present no great difficulty

The problem will then be to convert an adequate amount

of the potential savings of the nation into actual savings.
former event, however, the question would present


In the


difficulties and the attempt to undertake any excessive financing for
Europe would probably in the end result in the forced growth of the
savings fund of the nation b) a further inf1ation of credit and a
further increase in the cost of living.

- 13No more pressing financial problem confronts the United States than the
setting up and putting in motion the machinery for determining the extent to
which we can safely undertake to finance reconstruction in Europe. Fundamentally
the :problem is one of keeping the industrial activity of the nation stimulated and,
equally important, keeping the savings spirit of the country from weakening,. The
people must everywhere be made to appreciate that in the :present condition of the
European world, it is our urgent duty to keep up our newly acquired saving habit.
Beyond that a sufficient portion of the community must be educated to an interest
in the purchase. of European obligations or American obligations based upon


More than this, some corr.petent agency. which will merit the

confidence of the American people - public in character but preferably not
governmental - must be set up for seeing to it that the ap}lortionroent of such
capital as may be yielded by the savings of the nation Shall be made wisely,
with due regard., for the economic needs of .American industry and the American
consumer, as well as the needs of European industry and the European consumer.
The opportunity to mske financial and truders' profits out of the needs of Europe
by the sale to Europe of goods and materials on long-term secu.ri ties floated in
the American market is such that great care must be taken that such operations
are constantly kept within the limits of national economic prudence, both in our
own interest and in Europe's interest. It might therefore be advisable to set u:p
a Committee on Financial Facilities for Europe composed of a membership -following the analogy of the Federal Reserve organization - one-third representing
financial interests, one-third comiT£rcial interests and one-third to be selected
by the Federal Reserve Eoard representing the general public interest. But
whether this or some other method is adopted, it is of primary importance that a
national and representative character should be given to any movement for the
mobilization of our financial and economic resources for Europe's use. The matter
is one of too grave consequence to be left to the determination of private

- 14 temptations,
interest alone .. The situation offers so many ·
that abuse of the
facilities of the Federal Reserve System would be almost certain to result with
a further and disastrous inflation of credit as a
. No method of providing
for tha financing of Europe that does not contain careful aafeguards against this
contingency can be regarded as satisfactory. What Europe needs is eapHaL The
Federal Reserve Banks are not investment institutions; they d8a1 in



capital. The attempt, under any disguise,· to use their facilities as a substitute
for capital would be fatal to the Fed.eral Reserve System and injUJ5ious to the
public at large.