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(T h e article on the last page describes the sou rces o f the dem and fo r loan s an d cu rren cy u n d er the F ed era l R eserve system )

M O N TH LY R E V IE W
Of Credit and Business Conditions
In the Second Federal Reserve District

By

th e

Federal

Reserve

Agent,

Federal

Reserve

Bank,

New

York

N ew Y o rk , J a n u a r y 1 , 19 22

Money Markets in 1921
N reviewing the course of rates during 1921 in the
various money markets of this district, it will be
well first to consider certain influences which have
operated more or less uniformly to affect all of them
— the bill market, the market for Treasury certificates,
the commercial paper, and Stock Exchange call money
markets, as well as the markets for longer term invest­
ment securities. Some of these influences were absent
in previous periods of falling interest rates, and others
were present but produced somewhat different results.
T h e principal factor absent heretofore was the Federal
Reserve system, and while it had been in operation for
two full years of peace prior to 1921, yet its powers of
expansion alone had been tested. A year ago bankers
and others sometimes expressed doubts as to whether a
state of expansion was not inherent in the Reserve system,
and as to its ability to adapt itself to the conditions which
a reduction in the volume of credit might bring.

I

R epaym ent

of

MILLI0N5
OF DOLLARS

R e s e r v e B a n k L o an s

I t will be recalled that the high point of expansion in
the Reserve system, as registered in its loans to member
banks, occurred in the late autumn of 1920, at the close
of the crop-moving season. The high point of expansion
took place some five months after prices in the United
States, in common with prices in most of the other coun­
tries of the world, had begun to decline; and the period
during which Reserve B ank loans were largest spread
over those months when the fall in prices in this country
was m ost severe. This reflected heavy borrowing by
banks to meet demands not only of their business cus­
tomers, to many of whom the first effect of declining
values and the ensuing cancellations of orders was a
necessity for even larger accommodation, but also of
their agricultural customers for the harvesting and dis­
posal on falling and demoralized markets of crops pro­
duced at high cost.
A t the beginning of 1921 the volume of loans of all
sorts at the Reserve Banks still remained very high,
standing at $3,130,014,000 as against $3,421,976,000 at
maxim um . These loans measured the use to which the
Reserve system had been put as the new agency for the
supply of credit for emergency and seasonal require­




ments. T h ey also measured the maxim um drain of war
and post-war financing on the country’s reservoir of
credit which, when the tide of credit turned, one might
expect to see gradually replenished.

Earning Assets and Total Reserves of all Federal Reserve Banks on the
Last Reported Date Each Month
T h e foregoing diagram indicates clearly the fall in
loans and the rise in the level of the credit reservoir
which occurred in 1921.
E ffect

of

L o w e r P r ic e s

and

G old I m ports

There were two compelling factors which accelerated
the replenishment of the reservoir.

The first was the extent of the fall in prices, which,
coupled with the diminishing volume of business, re­

2

MONTHLY REVIEW

quired a constantly smaller amount of credit to finance
current transactions. Consequently, as the loans made
at times of high prices were paid off, the new loans made
for current needs left a margin of credit with which the
banks could repay debt at the Reserve Banks.
T h e second was the great movement of gold to this
country. During 1921 about $700,000,000 was added
to our stock of gold through importation. M u ch of this
gold served either directly or indirectly to pay debts
owed by foreigners in the United States, and practically
all of it found its way into the Federal Reserve Banks.
T h e reason why the gold passed into the possession of the
Reserve Banks was mainly because neither gold nor any
other form of money can earn interest while it remains
in the vaults of a member bank, inasmuch as the latter
can count nothing as reserve against its deposits except
a balance at a Federal Reserve Bank. Consequently,
when a bank turns gold into the Reserve B ank, it im­
mediately becomes a source of income equivalent to the
amount of interest it had been paying on a corresponding
amount of its debt to the Reserve Bank, or equivalent to
the rate of interest it m ay earn on fresh loans which
it is thereby enabled to make.
Furthermore, during 1921, owing to lower prices and
less business activity than in 1920, a smaller amount of
Federal Reserve notes was required for pocket and till
m oney. In similar periods prior to 1914 excess of cur­
rency only served to increase bank reserves in the larger
cities and sometimes stimulated unhealthy extensions
of credit in an effort to find profitable use for such re­
serves. Federal Reserve notes, however, are an “ elastic”
form of currency and the excess supply of them, as well
as the incoming gold, as fast as it found its way to the
banks was sent by them to the Federal Reserve Banks
to pay their debts or to build up reserve balances.
Thus as the diagram has shown, during 1921 the Federal
Reserve Banks took in the gold and retired their excessive
notes, with the result that the level in the system ’s credit
reservoir rose from 45.4 per cent, at the beginning of the
year to 70.7 per cent, at the close. I t should be under­
stood, however, that just as the Federal Reserve Bank
puts out Federal Reserve notes not on its own initiative,
but only on the initiative of the member banks which
require them for the use of their customers, so also it
cannot call in Federal Reserve notes on its own initiative.
Once issued, they stay in circulation until the customers
find their supply excessive and deposit them with the
member banks, which then deposit them with the Federal
Reserve B ank, where they go out of circulation.
A s a result of the lessened demand for credit and notes
and the imports of gold, member banks reduced their bor­
rowings at the Federal Reserve Banks from $2,719,134,000
on Decem ber 30, 1920, to $1,224,703,000 on December
21, 1921, a reduction of 55 per cent. During the year a
considerable number of the banks in N ew Y o rk C ity
and other financial centers paid off their entire borrowings
at the Reserve Bank while others reduced them m a­
terially. A s this liquidation continued, and banks went
out of debt, their surplus funds became available for
investment, and competition between banks as lenders
was gradually reestablished, resulting in general easing
of interest rates.




R e d u c t io n s

of

R eserve B a n k R ates

Concurrently writh these developments, m axim um
discount rates of the N ew Y o rk Reserve Bank were re­
duced by successive steps during the year from 7 to 4 ^
per cent. In each case these reductions were preceded by
declines in the market rates of interest; they were often
followed as well by further declines in such market rates.
T h e relation between the discount rates of the Federal
Reserve Bank of N ew Y o rk on different types of paper
and open market rates for the same or similar types is
illustrated in the accompanying diagram.
RATE

RATE

J0r

BANK
^RKET

L IB E R T Y
BONC >5

19Z1
Open Market Interest Rates at New York Compared with the Discount
Rates of the Federal Reserve Bank of New York. Open Market Rates
Shown are for Prime 4 to 6 Months Commercial Paper, Prime 90-Day
Bankers Acceptances, Certificates Maturing in 4 to 6 Months, and an
Average of the Yields of 4 Issues of Liberty Bonds and Victory Notes
most frequently offered as Security for Advances

The diagram shows that the discount rates of the N ew
York Reserve Bank during 1921 were generally above the
market rates for bills and Treasury certificates, but below
those on commercial paper. During the year there has been
some discussion of the relation of the Reserve Bank
rates to the rates prevailing in these three markets, and
the feeling is becoming more general that the Reserve
Bank rates by the very nature of the several markets
are more closely related to the market rates on bills and
certificates than they are to the market rates on com ­
mercial paper. Furthermore, the commercial paper of
the open market is largely single name paper, whereas
commercial paper discounted with a Reserve Bank
necessarily bears in addition a banking endorsement,
which adds to its security, however good the commercial
name m ay be.
W h en the system was first established there was no
open market rate upon any class of paper having access
to the Federal Reserve Bank except that upon commercial

FEDERAL RESERVE AGENT AT NEW YORK
paper sold by brokers. Distribution of commercial
paper through brokers served and still serves a most
valuable end in financing current business transactions.
This market differs, however, from the other two markets,
in that there is no general open market to absorb such
paper if the banks investing in it wish to sell it. Th e
market is what might be called a one-way market. The
bill and certificate markets on the other hand, which have
developed during the past two years, have for their public
not only the banks, but also business and investment
corporations, trustees, individuals and others who wish
to purchase an investment where the element of com ­
mercial risk is eliminated and which can be resold as
readily as it can be purchased.
Th e effect of the influences just discussed upon the
various money markets m ay be summarized as follow s:
B il l M

arket

A considerable decline in the foreign trade of the
United States during 1921 in addition to the fall in prices
resulted in a reduction in the amount of bankers bills
in the N ew Y o rk market. There was, however, a steadily
broadening market. Dealers reported considerable num ­
bers of new customers, not only among savings banks,
commercial banks, and trust companies, but also among
industrial corporations, and private investors wishing to
place funds in an investment affording satisfactory rate,
minimum risk, and instant convertibility. W hile pur­
chases by N ew Y o rk C ity banks were relatively re­
stricted during the year, the demand from country banks
was good and the list of country member banks for which
bills were purchased by the Federal Reserve Bank of
N ew Y ork increased from 217 to 250 and purchases for
foreign banks considerably more than doubled. On a
number of occasions dealers were unable to secure suf­
ficient bills to meet the demand.
In consequence of the smaller volume of bill offerings
and the strengthening market, rates moved consistently
downward during the year. B y December all maturities
were offered at 4 Y per cent, as compared with a range of
6 to § Y i per cent, in December, 1920. Rates at which
dealers purchased bills were generally Y of one per cent,
above the offering rate.
T he continued increase not only in the number of
dealers handling acceptances, but in the amount of
capital which they are able to command has been an
important factor in the steadiness of rates. The dealers
provide a tw o-w ay market; that is, they not only sell
bills to customers, but they repurchase bills from them.
Th e maintenance of such facilities is essential to the
development of the American market for bills, which in
turn is a highly important factor in financing American
foreign trade.
Th e same dealers who handle bills commonly deal in
Treasury certificates, which, like bills bearing banking
endorsement, are available for purchase by a Federal
Reserve Bank or as collateral for loans at the Reserve
Banks. A s in previous years, the Federal Reserve Banks
stood ready to purchase such bankers acceptances and
Treasury certificates as the market could not readily
absorb. In consequence, however, of the broadening
market, the decreased volume of bills, and easier money
conditions, the market was less dependent upon the




3

Reserve Banks than at any other time since its inception
in 1916. On Decem ber 22 the Federal Reserve Bank
of N ew Y o rk held $59,000,000 of purchased bills, as
compared with $114,000,000 on December 31, 1920, and
$ 203,000,000 on Decem ber 31, 1919. There was a cor­
responding decrease in the bill holdings of the entire
Reserve system.
A highly important development in 1921 was the
growth of a market for call money lent against the secur­
ity of bankers acceptances and Treasury certificates,
large amounts of which are ordinarily carried in port­
folio by the dealers. B y far the largest part of their
portfolios is carried on borrowed money. In order that
their business m ay offer a reasonable prospect of profit,
the rates for such loans should be related to the rates
which their securities earn, rather than be subject to
conditions peculiar to the other market for call money,
that on the Stock Exchange. W ith the easing of credit
conditions during the year such funds in considerable
volume have become available at rates Y to 1 per cent,
below those prevailing on the Stock Exchange.
T r e a s u r y C e r t if ic a t e M

arket

T h e volume of Treasury certificates of indebtedness
outstanding on Decem ber 15, 1921, was $2,100,000,000,
compared with $2,300,000,000 on January 1, 1921, and
$2,400,000,000 eighteen months ago. W hile figures are
not available to show exactly the proportion of certificates
held on these dates by all the banks of the country, the
statistics supplied by the 808 member banks which report
weekly to the Federal Reserve Board and which include
most of the large purchasers of certificates, provide some
indication of the widening distribution of these issues
among investors. On N ovem ber 30 these banks held
8.7 per cent, of the certificates outstanding, compared
with 11.8 per cent, on January 1, 1921, and 17.8 per cent,
on July 31, 1920.
Progress in the development of an active open market,
indicated by the foregoing figures, was due both to the
increase in the amount of unemployed funds and to more
widespread recognition of the combined advantages of
unquestioned safety and high degree of liquidity of cer­
tificates as a form of temporary investment. Like bills,
their immediate convertibility into cash at all times is
assured through the existence of the open market and the
assurance that the Reserve Banks are empowered to pur­
chase certificates or lend upon them as collateral.
The increasing demand for certificates resulted in the
heavy oversubscription of new issues, and the quoting of
all outstanding issues at substantial premiums. In
February, 1921, the Federal Reserve Bank of N ew Y ork
discontinued its preferential discount rate on advances
secured by certificates, and the rate was raised from
b Y l to 6 per cent., the rate already in effect for Liberty
bonds and Victory notes. This action had no effect on
open market quotations. Early in the year current bid
and asked prices began to be reported currently in the
daily newspapers.
R ates of interest borne by new issues paralleled the
decline shown b y rates on other forms of short invest­
ment. The D ecem ber 15, 1920, issues bore interest at the
rate of 5 % per cent, for 6 months and 6 per cent, for 12
months. On Decem ber 15, 1921, two issues of similar

4

MONTHLY REVIEW

maturities were offered, bearing interest at 4 34 per cent,
for 6 months and 43^ per cent, for 12 months. These
issues were immediately quoted in the open market at
prices to yield about 4 per cent, and 4 .30 per cent.,
respectively.
On June 15 and September 15, 1921, the Treasury
offered for public subscription three-year Treasury notes
as part of the Secretary of the Treasury’s program,
announced on June 8, “ to spread the $7,500,000,000 of
short-dated debt, which is now concentrated in rela­
tively few maturities, into a progressively smaller aggre­
gate am ount of better diversified maturities extending
over the period from 1923 to 1928.” T h e first of these
bore interest at 5 % per cent., and the second at 5J^ per
cent. B y Decem ber both of these issues were quoted at a
yield of less than 4 % per cent.
C o m m e r c ia l P a p e r M

arket

Th e volume of commercial paper outstanding declined
continuously during 1921 up to October 31, when the
outstanding paper of thirty distributors showed the
lowest total since regular reports to this bank began in
1918. T h e decline .began in February, 1920, about nine
months before bank loans began to show any material
reduction and in its early stages was caused chiefly by the
withdrawal from the market of banks which were ex­
periencing an increasingly heavy demand from their own
customers.
M IL L IO N S OF
DO LLAR S

Commercial Paper Outstanding—Thirty Dealers
This factor began to give way early in 1921 to other
causes, nam ely, lower prices, less active business, a smaller
volum e of paper offering, particularly of the better grades,
and an increasing number of banks buying paper again
as the needs of their customers decreased and as they
extinguished their debts at the Reserve Banks.
These changes in market conditions found reflection in
the selling rates for commercial paper. R ates rose
steadily through 1920 to a range of 8 to 8 ^ per cent, in
the late summer. There was some slight easing before




the close of the year, but in 1921 the decline became rapid
and by December the market was on a 5 per cent, basis
for prime paper.
Additional evidence of a return towards more normal
distributing conditions in recent months has appeared in
the tendency for large city banks to supplant country
banks as the principal sources of demand for paper.
W hereas, during the greater part of the past tw o years
there was little demand in N ew Y o rk and other large
cities, buying in a number of the centers, and particularly
in N ew Y o rk C ity , has now become considerably more
active. Some dealers now report that a larger proportion
of their sales are in N ew Y o rk C ity than in any other
locality. These conditions, coupled with a revival of
business in some lines and some transfer of borrowings
from bank loans to the paper market, resulted in an
increase of $18,000,000 in the volume of commercial
paper outstanding on N ovem ber 30, as reported m onthly
b y thirty dealers to this bank; the first increase in volume
since September, 1920.

S to ck E x c h a n g e C a l l M

qney

M

arket

Lessened activity on the N ew Y o rk Stock Exchange
resulted in a diminishing volume of call loans required
to finance its transactions during the first eight months
of 1921. Thereafter, however, demands increased until
in N ovem ber and D ecem ber the call loans placed b y N ew
Y o rk C ity banks for themselves and their correspondents
reached a point somewhat above the total of a year before.
Prior to the establishment of the Federal Reserve
system and the development of a call loan market based
on bankers acceptances and Treasury certificates, the
Stock Exchange call money market was the m ost readily
convertible money market in the United States. I t
continues to be by far the largest and best known call
money market. Just as it facilitates the exchange, dis­
tribution, and marketing of the securities of governments
and of corporations operating in all parts of the United
States, so also the funds it uses are derived at present in
about equal proportions from N ew Y o rk C ity banks and
from banks in other parts of the country which place
them through their N ew Y o rk correspondents. In addi­
tion, funds in substantial amounts are provided b y in­
dividuals, corporations, private bankers, and brokerage
houses. W hile loans on Stock Exchange securities cannot,
like loans on bills and Treasury certificates, be converted
into cash at the Reserve B ank, nevertheless the practical
elimination of money panics b y the existence of the
Reserve B ank has not been without its favorable effect
on the convertibility of Stock Exchange call loans.
T h e rates on call loans secured b y Stock Exchange
collateral reached their high point simultaneously with
the largest volume of loans, in 1919, and gradually worked
downward from that point. T h e typical rate in 1920 was
7 and in 1921 it was 6 per cent. T h e average call loan
renewal fell from 7 per cent, in Decem ber, 1920, to 5 per
cent, in December, 1921.
T im e money rates on Stock Exchange collateral de­
creased from a range of l]4 t to 73/2 per cent, in January
to a range of 5 to 5]/i per cent, in Decem ber. A few
loans have been made lately for short periods at 4 % per
cent. A n increasing volum e of funds has becom e avail­
able to this market, but demand for loans was com ­

FEDERAL RESERVE AGENT AT NEW YORK
paratively light,
quiet.

and the market in consequence was
S e c u r it y M

arkets

Th e security markets of 1921 m ay be divided roughly
into two distinct periods. During the first half of the
year both stock and bond markets were dull and generally
depressed as a result of the scarcity of funds, falling com ­
m odity prices, and uncertainty regarding business condi­
tions. In the second half of the year both markets
responded with vigor to easier money conditions, a some­
what more stable price level, and improving business
activity in certain lines.
T h e reaction of the stock and bond markets to credit and
business conditions was governed in considerable degree
by a marked tendency for funds to flow into investment
rather than into speculative issues. During the early
part of the year this tendency had the effect of preventing
bond prices from showing the weakness which the stock
market evidenced. Whereas stocks broke sharply in
M a y and June to new low levels for the year, bonds on
the average held substantially above the low points
which had been reached in M a y and Decem ber of 1920.
T h e effect in the fall of the year was to cause a demand
for bonds which in late October and N ovem ber resulted
in the heaviest trading since 1904, and a rapid rise in
price that brought corporation bond averages to the
highest levels since 1919 and m ost of the Liberty issues
to the highest since 1918. Victory notes sold over par
for the first tim e, with the exception of a few transactions
shortly after their issue in 1919. T h e rise in stocks, on
the other hand, was accompanied by a much smaller
volume of trading than in the active periods of recent
years, and average prices in Decem ber were slightly
under the previous high quotation for 1921 and sub­
stantially lower than prevailing prices in 1920.
T h e accompanying diagram brings into comparison
the movement of stock and bond prices in 1920 and 1921.
T h e indices are those of the A n n a list for forty representa-

DOLLAR3
)

)i

ft

fi

VV
\
0
1
.

*S"'"T J...

Savings Bank Deposits
s

A

f x

BOMD5

\

1 9 2 .0

192,1

' A

-

'r A j
V

s

)___ _

Average Prices of 40 Bonds and 50 Stocks on the New York
Stock Exchange




tive corporation bonds, and for fifty stocks, half indus­
trials and half railroads.
T h e market for new security issues responded even more
vigorously than the stock and bond markets to changing
credit conditions. In the early months of the year sales
were limited b y the capacity of the market to absorb
new offerings, and the market was frequently congested.
Towards the middle o f, the year the volum e of offerings
decreased as borrowers satisfied their most pressing
requirements, but with the advent of lower interest rates
in the later months those who had been able to postpone
financing came into the market. Although the resulting
volume of financing was large, practically all issues were
readily absorbed and the m ost desirable were heavily
oversubscribed. A n unusually broad market was indi­
cated b y large numbers of small subscribers to m any of
the issues of well known companies.
The total volume of issues of all classes for the first
eleven months of the year was somewhat larger than in
1920. A reduced am ount of corporation securities was
offset b y a larger volume of State and municipal bonds
issued to pay for soldiers’ bonuses or construction proj­
ects; and farm loan bonds and foreign issues.
T h e yield basis upon which new securities were offered
declined rapidly in the later months. In December,
prime long term railroad bonds were being sold on a 5 to
5}/2 per cent, basis compared with 7 per cent, in 1920, and
public utility and industrial bonds of the better grade were
offered at about 6 per cent., compared with 7 to 7J^ per
cent, a year ago. In the State and municipal market,
where yields reached their highest level about August and
September of 1921, the decline was particularly rapid; so
that in December, N ew Y o rk C ity could dispose of
$ 55,000,000 fifty-year 4 ^ per cent, corporate stock on
about a 4.35 per cent, basis. This was reoffered to in­
vestors to yield about 4*^ per cent., and some other
municipals were offered at even lower yields. A n offering
of $30,000,000 Danish Government bonds at 6 ^ per cent.,
compared with an 8 per cent, yield on an offering of the
same government in October, 1920, was indicative of the
change in the market for foreign issues.
The growth of the market in this country for foreign
government bonds has been a notable development in
recent years. A t the close of the year there were 47 sep­
arate foreign government or municipal issues quoted
actively on the N ew Y o rk Stock Exchange, representing
over $2,000,000,000 of original issues, compared with
11 in 1914 of an original issue value of somewhat less than
$900,000,000.

|3T0C K5

v

■

5

Deposits in representative savings banks in the Second
Federal Reserve D istrict showed a moderate upward
trend between N ovem ber 10 and Decem ber 10, as com­
pared with a slight decrease in the m onth previous. A n
increase is normal for the time of year. N in e of eleven
reporting banks in N ew Y o rk C ity showed slight gains
in aggregate deposits during the period, while five of ten
reporting banks in cities outside N ew Y o rk reported in­
creases and five showed slight declines. T h e increases,
however, were sufficiently large to cause an increase in
the aggregate figure,

6

MONTHLY REVIEW

Gold Movement
Im ports of gold during N ovem ber amounted to $51,859,000, an increase of $4,729,000 over October, but
about $14,000,000 less than during September. N early
two-thirds of the receipts were from France and England.
Exports of $608,000 were the smallest since April. The
excess of imports over exports for the first eleven months
of this year has been $638,435,000 as compared with
$67,374,000 for the same period last year.

Rates on Argentina, Brazil, and other South American
countries made further slight advances. O f the Far
Eastern rates those on India advanced slightly while rates
on Japan and Shanghai were lower.
The following table shows the changes that occurred
in the principal exchanges during the m onth.

Country

December 20
Last

Imports
(000 omitted)

Country

First
Second Third
October
Quarter Quarter Quarter

England....... $51,163
France..........
45,235
Sweden.........
4,679
Canada........
20,553
China& Hong
Kong........
12,508
British India.
8,081
Netherlands .
1,557
Germany. . . .
3
So. America..
6,069
All Other___
13,687

$51,087
28,103
37,941
4,535

$57,813
79,972
12,252
5,931

$9,892
18,597
4,205
1,147

6,804
9,065
14,159
4
6,175
24,534

3,648
10,049
2,785
16,342
5,831
20,611

312
3,591
248
614
2,869
5,655

Total Impts. $163,535 $182,407 $215,234

$47,130

Novem­ Total
Jan. 1ber
Nov. 30
$18,407 $188,362
15,051 186,958
5,916
64,993
2,375
34,541

202

1,029
471
3,000
1,486
3,922

23,474
31,815
19,220
19,963
22,430
68,409

$51,859 $660,165

England.................................
France....................................
Italy.......................................
Germany................................
Belgium..................................
Holland..................................
Switzerland............................
Spain......................................
Sweden (Stockholm).............
Argentina...............................
Brazil......................................
Japan (Yokohama)...............
China (Hong Kong)..............
China (Shanghai)..................
India.......................................
Canada...................................
Bar Silver in New York........

$4.2100
.0810
.0458
.0059
.0777
.3682
.1945
.1497
.2495
.3346
.1266
.4670
.5488
.7663
.2788
.9350
.6675

+ .2125
+ .0088
+ .0041
+ .0021
+ .0077
+ .0165
+ .0075
+ .0127
+ .0165
+ .0082
+ .0016
— .0105

0

— .0175
+ .0094
+ .0212
-.0 3 0 0

13.5
58.0
76.3
97.5
59.7
8.4
+ 0.8
22.4
6.9

21.2

61.0
6.3
♦
*
42.7
6.5

*Silver Exchange Basis.

Foreign Trade

Exports

$2,205
1,287
2,643
665
55

$5,762
45

$246
55

*645
1,124

257

Hong Kong..
Mexico.........
Sweden.........
Canada........
British India.
All Other.. . .

$453
3,098

$744
920

635

506

285

’ 49

1

Total Expts.

$4,471

$2,219

$6,856

$7,576

Net Imports. $159,064 $180,188 $208,378

$39,554

50

$9,410
5,405
2,643
2,708
1,179
385

$608

$21,730

$51,251 $638,435

T h e preliminary statem ent of the D epartm ent of C om ­
merce for foreign trade during N ovem ber reported the
value of exports to be $295,500,000, the smallest for any
month this year, and the value of imports as $211,300,000,
the highest since last April. T h e export balance of
$84,200,000 was slightly under that for April, and the
smallest since August, 1920.
The following table gives the figures for the m onthly
value of exports and imports for the first eleven months
of 1921.
(000 omitted)

D uring the first ten days of December, imports amounted
to $11,137,000, and exports to $200,000.
Month

Exports

Imports

Excess
Exports

January............................ .
February............................
March.....................................
April.......................................
May........................................

$654,271
486,454
386,680
340,364
329,710
336,899
325,181
366,888
325,747
343,552
295,500

$208,797
214,530
251,969
254,579
204,911
185,756
178,159
194,769
179,292
188,008
211,300

$445,474
271,924
134,711
85,785
124,799
151,143
147,022
172,119
146,455
155,544
84,200

Foreign Exchange
Exchange rates on all important European financial
centers advanced substantially in the early part of D ecem ­
ber. T h e advance in sterling continued a movement
which has been practically continuous since the latter
part of July, and reflects not only developments in the
international situation which have had their effect on
all the more important European exchanges, but a decline
in prices which has been much greater in England in
recent months than in the United States. On December
12, sterling reached $4.24, the highest quotation since
September, 1919. Other European rates m oved to
higher levels during the month and Swiss francs were
quoted at a slight premium, the first European exchange
to exceed par value in practically two years. German
marks rallied slightly from the low point touched in
N ovem ber.




Change
Per Cent.
from
Depreciation
November 19 from Par

July.........................................
September..............................
November..............................

Reductions in cotton and wheat shipments were im­
portant factors in smaller exports in N ovem ber. Cotton
shipments decreased nearly 226,000 bales to 648,695,
This figure was the largest for any month this year with
the exception of October, but was less than the total for

7

FEDERAL RESERVE AGENT AT NEW YORK

is now only 11 points higher than the Departm ent of
Labor index of wholesales prices in the United States, the
index for the cost of living in England is 103 points above
the 1914 level, while that for the U nited States is 64
points above it. T h e spread between wholesale price
figures and cost of living quotations in England is partly

Novem ber last year. Since April monthly shipments had
been running much above those of last year. T h e cotton
movement continued less heavy in December. N ovem ber
exports of wheat dropped to 13,846,000 bushels, from
18,360,000 bushels in October, and 30,800,000 bushels in
September. In this market, also, new buying remained
light. Other important articles of export, which showed
declines in volume, were condensed milk, corn, flour, rice,
lard, some of the meats, and mineral oils.
Shippers of copper reported an active foreign demand
during N ovem ber, and sales close to the largest since 1919.
T h e demand remained good in December, though slightly
less active than in N ovem ber. Germany was the largest
buyer, followed by the Far E ast, France, England, and
Austria.
There was little change as regards current buying of
manufactured and partly manufactured materials. Some
exporters reported a quieter market towards the year
end, but on the whole it appeared that gains of recent
months were maintained. Individual orders usually
continued to be for comparatively small quantities of im ­
mediate necessities, and came from widely distributed
sources. In steel, Canada was the largest purchaser,
and there was a somewhat more active demand from
Japan than a month ago, and a scattering of business
from South America. One leading export corporation
reported an increase in business from Cuba as a new
development.

PER CENT.

World Wholesale Prices
W ith the single exception of Germany, the available
figures for wholesale prices in foreign countries in N o v e m ­
ber, show comparatively minor changes. Th e decline
in British prices was less abrupt than for several months
previous. W hile the Statist price index for Great Britain

1913 = 100 per cent.)

Indices of Wholesale Prices
1913 average = 100 unless otherwise noted
Per Cent. Change D uring
Country

Latest Quotation
September

United States:
basic commodities*...................
Department of Labor....................
Dun’s ..............................................
Bradstreet’s ....................................
Great Britain:
Economist......................................
Statist..............'..............................
basic commodities*..................
France.................................................
Italy....................................................
Japan..................................................
Canada...............................................
Swedenf .............................................
Australia |...........................................
Norway...............................................
Germany ..........................................
Denmark||..........................................
Holland...............................................

12

20

110 (Dec. 24)

149 (Nov. Av.)
136 (Dec. 1)
123 (Dec. 1)

166
160
130
334
595
214
169
174
156
274
3330
186
169

(Dec. 1)
(Dec. 1)
(Dec. 24)
(Dec. 1)
(Dec. 1)
(Nov. Av.)
(Oct. 15)
(Nov. 15)
(Oct. Av.)
(Nov. 1)
(Dec. 1)
(Nov. 1)
(Nov. I)

-

0.2

Date of High

+ 2.6
—*1.3
+ 1.1
+ 1.4

+
+
-

1.9
0.7
0.5
0.3

55
45
38
46

May 17, 1920
1920
May
May 1, 1920
Feb.
1, 1920

2.2
3.9
2.6
3.8
7.1
3.8**
1.6
8.1

- 6.8
- 7.4
- 5.3
- 3.4
+ 3.3
+ 6.0
- 1.5
- 3.8
- 2.4
- 2.0
+ 3 4 .8
- 7.9
- 6.1

+
-

2.8
1.2
7.0
0.4
0.7
2.2

47
49
62
43

-

0.6

Apr.
1, 1920
May 1, 1920
May 21, 1920
May
1, 1920
1, 1920
Dec.
Mar.
1920
May 15, 1920
Dec. 15, 1918
Aug.
1920
Oct.
1, 1920
Dec.
1, 1921
Nov. 1, 1920
Year
1918

0.0

- 1.8
+ 10.9
- 9.8

0.0

*Computed by this bank.
fJuly L 1913 to June 30, 1914 = 100.
to June, 1914 = 100.
**Revised.




November

0.0

- 0.4
+ 0.9
+
+
+
+
+
-

October

Per Cent.
Decline
from High

+ 2 2 .2

{July, 1914 = 100.

11

33
36
53
34
37

0

54
57

TfMiddle of 1914 = 100.

11July, 1912

8

MONTHLY REVIEW

due to the fact that the Statist index is heavily weighted
with raw materials.
A n inspection of the price changes in the countries of
the world since June makes it clear that the United States
has been the first country in which relative stabilization
of the general price level has taken place. T h e index
number of the Departm ent of Labor has m oved within
a range of 4 points since June. In every other country
the fluctuations have been larger and in m any even the
general trend of prices has been uncertain. Such changes
m ay be accounted for b y unsettled financial conditions
in m any of the important European countries which have
found further expression in unstable exchanges.

Domestic Wholesale Prices
T h e Departm ent of Labor index of wholesale prices
fell .7 of one per cent, between October and N ovem ber.
Prices of farm products, metals, and cloths and clothing
were slightly lower and prices of fuel and lighting, and
building materials slightly higher. There was no change
in other groups. T h e m onth’s changes served to increase
rather than decrease the spread between the prices of
different groups of commodities. T h e following table
shows the m ovem ent of different elements of the index:
(1913 average = 100)
P er C e n t .C hange

V alu e of I n d e x

Commodity
Group

Maxi­
mum
1920

Oct.
1921

Nov.
1921

Maxi­
mum to
Nov.

Oct.
to
Nov.

119

114
119
142
162
186
186
197
218
145

- 5 3 .7
-3 9 .0
-5 0 .5
-2 7 .0
- 4 7 .8
-3 4 .5
- 4 2 .2
- 4 1 .2
- 4 1 .3

-4 .2
-1 .7

149

- 4 5 .2

-0 .7

Farm products............
Metals..........................
Foods, etc....................
Chemicals, etc.............
Cloths and clothing...
Fuel and lighting.......
Building materials. . . .
House furnishings. . . .
Miscellaneous...............

246
195
287

356
284
341
371
247

142
162
190
182
192
218
145

All Groups................

272

150

121

222

Food...............
Clothing.........
Shelter............
Fuel and light.
Sundries.........

4

0.0
0.0

Total___




Per Cent.
Change
Since
Dec. 1, 1920

Per Cent.
Change
During
November

Decline
from
High

152
157
169
179
178

- .07
- 1 .9

30.6
45.5

- 0 .6
-1 .1

10.5
7.3

1.2

- 2 1 .2
- 2 3 .4
+ 1.8
- 1 0 .5
- 7.3

162.7

-

20.4

-1 4 .4

0

.7

In six of nine important industries in the United
States, for which figures are available, indices of pro­
duction for N ovem ber computed b y this bank, are higher
than those for October, and in only one industry was
there considerable reduction in output.
Flour milling
has been greatly in excess of normal during the past
six months, and N ovem ber figures show a natural reaction.
Partly as a consequence of the recently increased
demand for structural steel, there was a continued in­
crease in output in the iron and steel industry. Other
metal industries were also more active.
Continued
demand for amalgamated sheets, mainly for export,
brought a slight increase in zinc production. A more
active demand for tin resulted in increased shipments,
a substantial advance in prices, and smaller available
stocks. Sales of copper also increased substantially
in N ovem ber, bu t production was maintained at about
one-fifth of normal and sales were made from accumu­
lated stocks.
T h e figures of the following table show current pro­
duction as percentages of normal production. In com ­
puting “ norm al,” allowance has been made for seasonal
variations and the year-to-year growth of industry.

(Normal production = 100)

0 .0

-2 .1
*2.2
+ 2 .6

Th e cost of living declined .7 of one per cent, between
Novem ber 1 and Decem ber 1, according to figures prepared
b y the N ational Industrial Conference Board. T h e
changes in different elements of the index are shown in
the following table:

Items

Production of Basic Commodities

0.0

Cost of Living

Dec. 1
Level

For six months the cost of living index has been prac­
tically unchanged. T h e figure for June 1 was 161.9 com ­
pared with 162.7 on December 1. Individual elements
making up the index have fluctuated somewhat in both
directions but within a much narrower range than the
various elements making up the Departm ent of Labor
index of wholesale prices.

1921
Commodity

Anthracite coal mined . . .
Bituminous coal mined. . .
Pig iron production..........
Steel ingot production___
Zinc production................
Tin deliveries....................
Copper production...........
Petroleum production. . . .
Cement production..........
Cotton consumption........
Wheat flour milled...........
Sugar meltings..................
Meat slaughtered.............
Wool consumption...........
’"Revised.

1920
Sept.
to
Dec.

96
99

86
85
87
63

86

111
96
56
76
61
83
56

Jan. April
to
to
March June
103
64
58
58
52
31
67
100
79
62
89
85
90
70

95

66

33
35
47
28
25
108
85
67
107

86

99
104

July
to
Sept.

Octo­
No­
ber vember

93
63
27
33
38
48
16
104
90
73
131
89
101
106

89
76
34
47
38
44
20*
94f
91
76
111
114
93
124

87
67
40
50
55

63
18f
98f
85
78
125

{Preliminary.

Commodity Stocks on Hand
Stocks of basic commodities for which figures are thus
far available show in general moderate declines during
N ovem ber comparable for the m ost part with similar
declines in the m onth previous. A n increased rate of
manufacture and construction is principally responsible

FEDERAL RESERVE AGENT AT NEW YORK
for reduced holdings of raw cotton, and of tin. Lower
index figures on stocks of wheat, oats, barley, and rye
reflect mainly the beginning of the absorption of the
recently harvested crops. A ctual stocks of corn decreased
but the index is higher because the decrease was less than
that which normally takes place at this season of the year.
T h e following table gives the available figures for
Decem ber 1.
(Normal stocks = 100)

1921
Commodity

Sugar...................................
Cotton............................... .
Coffee..................................
Wheat.................................
Oats.....................................
Com....................................
Barley.................................
Rye......................................
Flour (in chief centers). . . .
Tin (world visible supply)..
Cement, Portland..............
Lead, bonded......................
Dairy products and eggs...
Poultry, frozen...................
Meats, cured and frozen...
Paper...................................

1920
Oct.
to
Dec.

49
96
106
72
224
149
93
278
118
131
48
413
99

86
93
87

Jan.
to
Mar.

68

104
96
60
251
93
90
143
116
116
91
426
95
90

88
120

Apr.
to
June

66

126
114
35
284
198

121
133
87
115
99
169
178

100

93
143

July
to Nov. 1 Dec. 1
Sept.
54
155
95
108
643
238
295
315
87
134
95
191
104
82
94
138

40
113
65
109
461
371
96
402
131
168

68

66

104
72

88

458
449
74
364
i47

*98

100
65
120

Employment
Increases in the number of persons employed in cer­
tain industries during N ovem ber and December, notably
in iron and steel plants, have been offset b y normal
seasonal declines in the number employed in others, with
the result that there has been practically no change in
the total number of workers in industrial establishments,
either in this district or in the country as a whole.. T h e
number of persons employed normally declines in the
late fall and winter months, and the absence of any
decrease as yet indicates somewhat more active industrial
operations.
Reports of the N ew Y o rk State D epartm ent of Labor
from 1,575 manufacturing firms show an increase of 3
per cent, in N ovem ber in the number of persons employed
in the metal industries and a somewhat smaller gain in
wood-working factories. These increases were offset by
reductions in forces in the clothing industry, due partly
to the strike in N ew Y o rk C ity and partly to seasonal
dulness.
In the food products industries there were
also seasonal reductions. Reports for 14 selected in­
dustries throughout the United States, made to the
Departm ent of Labor, showed increases in the number
employed in seven industries, including a gain of 7 per
cent, in paper making, and 4 per cent, in iron and steel
plants. There were decreases in the number of em ­
ployees in automobile plants and in clothing and textile
factories.
T h e M unicipal E m ploym ent Bureau of N ew Y o rk
C ity reports that the number of applicants for positions
was less in N ovem ber and Decem ber than in October.




The bureau has been able to place a larger
of those applying for work, partly because
creased demand for workers incident to the
season. Charitable organizations report that
received recently somewhat fewer appeals for

o
percentage
of the in­
Christmas
they have
assistance.

Changes in Wage Rates
Reports to this bank indicate th at the prevailing
hiring rate for unskilled male labor in this district has
declined from 40 cents an hour in September to 35 cents
in Decem ber. A m ajority of the employers continue to
pay old employees 40 cents, but are taking on new men
at the lower rate. In the iron and steel industry, 30
cents is the ruling rate.
Per capita weekly earnings in N ew Y o rk State factories,
reported b y the N ew Y o rk State D epartm ent of Labor,
and in 13 selected industries throughout the United
States, reported b y the U nited States D epartm ent of
Labor, continued to decline fractionally. Average earn­
ings in N ew Y o rk State factories are 16 per cent, below
the high point of 1920 and those reported for the United
States are 24 per cent, below.
On Decem ber 31 the working agreement between
building trades unions and employers in N ew Y o rk C ity,
entered into on M a y 1, 1920, expires and negotiations
with a view of fixing new rates of pay are now under
way. A bou t 115,000 workers are members of the various
unions and will be affected by any wage changes. The
rates of pay under the expiring agreement are on the
average 80 per cent, above the 1914 level.
Arbitration of a dispute between the N ew Y o rk E m ­
ploying Printers’ Association and printers’ unions, has
resulted in a reduction of $1 per week in the wages of
2,800 press feeders and assistants in the N ew Y o rk book
and job printing industry, setting the new wage scale at
$36.50 per week. Em ployers had asked a reduction of
$2.50 per week.

Volume of Building
Building contract awards in N ew Y o rk State and
Northern N ew Jersey during N ovem ber as reported by
the F . W . D odge C om pany, showed a seasonal decrease
of about 22 per cent, from October. For the tw entyseven northeastern States the reports showed a decline
of about 15 per cent., slightly less than the normal sea­
sonal decline. B oth in this district and throughout the
country, residential construction was maintained at the
high rate prevailing in September and October, but
contracts for business, industrial, and educational build­
ings were in smaller volume. N ovem ber contract awards
were 45 per cent, larger than in N ovem ber, 1920, in the
twenty-seven northeastern States, and 76 per cent, larger
in N ew Y ork and Northern N ew Jersey.

Wholesale Trade
W holesale dealers in five lines reported to this bank
that sales were larger in dollar amount in Novem ber,
1921, than in N ovem ber, 1920, while dealers in five other
lines reported smaller sales. Sales in all lines except
clothing were smaller than in N ovem ber, 1919.

10

MONTHLY REVIEW

T h e accompanying diagram compares the dollar sales
in N ovem ber, 1921, with those of both N ovem ber, 1920,
and N ovem ber, 1919.
In view of the decline in prices which has taken place
in the last year, it is probable that the physical volume of
groceries and hardware sold in Novem ber, 1921, was
larger than in N ovem ber, 1920, thereby indicating in­
creased physical volume of goods sold in seven of the ten
lines shown. A s compared with sales in N ovem ber,
1919, the physical volume last month was apparently
greater in six lines, nam ely, clothing, dry goods, drugs,
hardware, shoes, and stationery.

aoor
150

III

100

T Ia.
i

DIAMONDS
CLOTHING
DRY GOODS
DRUGS
GROCERIES
HARDWARE
STA TIONERY
JE W E L R Y

DIAMONDS
1919

r

?9£0

V

1921

Sales (dollar amount) of Representative Diamond Cutters and Jewelry
Manufacturers in the Second District (1919 Average = 100 per cent.)

MACHINE T O O L S H )

Retail Trade

Dollar Amount of Sales of Wholesale Dealers in November, 1921, Com­
pared with Sales in November, 1920, and in November, 1919
T h e dollar amount of sales in N ovem ber, 1921, was
lower than in October, 1921, in eight lines. T h e decreases
ranged from 45 per cent, in diamonds to 1 per cent, in
groceries, whereas sales of shoes increased 3 per cent,
and sales of stationery increased 10 per cent.
These
changes were largely seasonal.
T h e fluctuations in sales in all lines are shown in the
following table. Sales in N ovem ber, 1920, are taken
as 100 and sales during N ovem ber, 1919, and N ovem ber,
1921, are expressed in percentages of the N ovem ber,
1920, figures. Price changes are estimated.

Nov.,

Nov.,

Nov.,

1919

1920

1921

Per Cent.
Change in
Price,
Nov., 1920
to
Nov., 1921

146
133

-3 0
-3 5

D ollar V alue

of

Sales

(November, 1920 Sales = 100)
Commodity

215
400
103
157
116
116

102
88
147
155

100
100
100
100
100
100
100
100
100
100

121
112
110

-20
-10

66

-10
-20

76
73
70

18

-1 5
-2 5
-3 0
-1 5

Sales reports from representative diamond cutters and
jewelry manufacturers are published this m onth for the
first time. These figures have been added to the tabula­
tions because sales in these lines are peculiarly sensitive
to changes in the purchasing power of the consumer.




PERCENT

50

SHOES

Shoes...........................
Diamonds....................
Clothing......................
D ry goods...................
Drugs...........................
Groceries......................
Hardware....................
Stationery....................
Jewelry........................
Machine to o ls.............

Fluctuations in these sales during the years 1919,
1920, and thus far in 1921, are shown in the following
diagrams.

Christmas sales b y department stores in N ew Y o rk
C ity and vicinity from Decem ber 1 to Decem ber 20 were
about 3 per cent, larger in dollar value than sales during
the corresponding period in 1920 and 5 per cent, larger
than sales during the first three weeks of Decem ber, 1919,
according to preliminary reports received from 16 repre­
sentative concerns. Sales of these stores have been the
largest ever reported.
As prices are lower than those prevailing last December
it is evident that a greater volume of merchandise has
been sold. Merchants report that there have been m any
more customers in the stores and that business has been
well distributed, with increased sales in those depart­
ments that handle practical and useful articles such as
house furnishings, furniture, rugs, carpets, and articles of
wearing apparel. A m ajority of the stores report in­
creased sales by their toy departments. Sales of jewelry
and other strictly holiday goods were about the same as
last year. M edium -priced merchandise was in general
in greater demand than the most expensive, or the cheap­
est grades. The average size of each purchase was some­
what smaller than last year.
Complete reports for Novem ber from 47 firms or cor­
porations operating 61 representative stores in this district
show that sales in that month were 8.2 per cent, below the
sales of N ovem ber, 1920. This decline, which compares
with an increase of 2.8 per cent, in October, over October,
1920, is attributed by merchants in part to the closing of
the stores on Armistice D a y this year and to the unfavor­
able weather toward the latter part of the m onth. Stores
in all cities reported smaller sales. W h en allowance is
made for price changes, however, the total amount of
goods sold during N ovem ber was probably larger than
that sold during N ovem ber, 1920. The number of in­
dividual sales as reported by 20 stores that keep such
records was 7.3 per cent, greater. T h e average amount
of the individual sale declined 12 per cent, from $3.55 in
Novem ber, 1920, to $3.13 in N ovem ber, 1921.

11

FEDERAL RESERVE AGENT AT NEW YORK
Departm ent store sales in N ovem ber compare much
more favorably with those of last year than do sales by
mail order houses but less favorably than sales by chain
store systems in 5 lines, for which figures have been
received. T h e chain store sales, however, are affected
by the increase in the number of stores. T h e following
table shows the changes.

Chain Stores..............
Department Stores.. .
Mail Order Houses. . .

Sales
Nov., 1921

Sales
Nov., 1920

Per Cent.
Change

$61,055,000
33,606,000
28,541,000

$60,802,000
36,627,000
43,637,000

+ 0.4
- 8.2
-3 4 .6

M a il order sales have been adversely affected by the
reduced demand from the agricultural population. O f
the chain systems, the five and ten cent stores report an
increase of 4.4 per cent, over sales last N ovem ber, and
cigar stores a decrease of 6.8 per cent. Sales of dry goods,
drug, and grocery stores were about the same as last year.
Stocks held by department stores, computed at the
selling price, on Decem ber 1, 1921, were nearly 10 per
cent, below the stocks on Decem ber 1, 1920. This decline
was attributable to the fall in prices and the physical
volume of stocks was probably somewhat larger this year
than last. Between N ovem ber 1 and Decem ber 1,
there was an increase of about 2 per cent, in stocks, a
seasonal change due to the receipt of holiday goods.
Th e accompanying diagram compares the stocks and
sales of department stores during 1921 with those of
1920. T h e sales lines run closely together throughout the
year. The stock lines follow the same trend but 1921
figures have been 10 to 20 per cent, below those of 1920,
owing chiefly to the fall in prices. T h e diagram indicates
that merchants have been able to maintain sales at the
1920 level and at the same time carry stocks of less value,
thus increasing the rate of turnover.

PERCENT.

Sales (dollar amount) of Representative Department Stores in the
Second District each month and Stocks (selling value) at the end of
each month (Average Sales in 1919 = 100 per cent.)

Business Failures
Th e number of commercial failures in the United States
reported by D u n ’s was larger in N ovem ber than in any
previous month since January, 1916, but the large total
was the result of failures among smaller grocery, dry
goods, clothing, and general stores and textile m anu­
facturers operating on small capital. T h e average
liability per failure was distinctly less than the 1921
m onthly average up to this time. Failures have recently
been more numerous among trading than among manu­
facturing concerns.

Business of Department Stores
New York
and
Brooklyn
Per cent, change in net sales in November, 1921,
compared with net sales in November, 1920.......
Per cent, change in number of transactions in No­
vember, 1921, compared with number of transac­
tions in November, 1920........................................
Per cent, change in net sales from July 1, 1921 to
November 30, 1921, as compared with same
period in 1920..........................................................
Per cent, change in stocks (retail price) at close of
November, 1921, compared with stocks at close
of October, 1921......................................................
Per cent, change in stocks (retail price) at close of
November, 1921, compared with stocks at close
of November, 1920.................................................
Percentage of stocks (retail price) at close of July,
August, September, October, and November, 1921,
to net sales during same months...........................
Percentage of outstanding orders (cost) at close of
November, 1921, to total purchases during calen­
dar year 1920.. .......................................................




Buffalo

7.6

-

8.4

+ 10.3

+ 14.1

-

0.5

-

5.4

-

5.2

-

5.7

+ 3.0

-

0.2

-

-

-

6.9

-

Newark

Rochester

-

Elsewhere
in Second
District

Apparel
Stores

-1 1 .4

-1 0 .4

-1 4 .1

-

-

1.0

+ 2.7

+ 7.3

9.7

-

-

Entire
Second
District

8.2

3.6

-1 1 .0

-

+ 1.1

+ 2.1

+ 3.5

+ 0.4

+ 0.2

+ 2.1

6.7

-1 2 .9

-2 4 .2

-2 9 .5

-

-

-

362.9

428.7

371.0

392.7

414.2

549.5

251.7

372.3

5.4

5.8

3.6

4.7

3.5

4.6

7.1

5.3

7.9

-

7.7

Syracuse

2.7

4.2

6.0

5.7

9.4

S o u r c e s

o f

t h e

D e m

a n d

H E following is an extract from an address by
W . P . G . Harding, Governor of the Federal
Reserve Board, delivered before the W ashington,
D . C ., Chamber of Commerce on December 13, on the
subject, “ The Federal Reserve System as Related to
American Business.” Th e full text of the address m ay be
had from this bank on request.

T

Although more than seven years have elapsed since the
establishment of the Federal Reserve Banks, there is
still a surprising lack of knowledge of what they really
are and of what their proper functions are, not only on
the part of the public at large, but among business men
and bankers as well...................
I n it ia t iv e

to

L end N

ot w it h

a

R eserve B a n k

A Federal Reserve Bank can not lend directly to the
customers of a member bank, nor does it, in fact, take the
initiative in making loans to a member bank for the pur­
pose of enabling the member bank to distribute the funds
so advanced to its customers. Th e Federal Reserve
Bank lends to the member bank against transactions
already made, for the purpose of enabling the member
bank to restore its reserve to the legal requirement,
after the reserve has been impaired or is about to be
impaired because of increased loans and deposits...................
W

hat

R egulates

the

I s su a n c e

of

N otes

There is, perhaps, even greater confusion in the public
mind regarding the issue of Federal Reserve notes than
there is regarding the rediscounting functions of the
Federal Reserve Banks. There are some who appear to
have an impression that the Federal Reserve Board has
power to expand or contract the currency of the country
at will and that it has exercised this power in a reckless
and arbitrary manner.
W h ile the law prescribes that
the Federal Reserve Board shall have the right, acting
through the Federal Reserve A gent, to grant in whole or
in part or to reject entirely the application of any Federal
Reserve Bank for Federal Reserve notes, it has never
exercised this right. On the contrary, it has always
approved prom ptly every application which has been
made for the issue of Federal Reserve notes. One of
the purposes of the Federal Reserve A ct, as stated in its
caption, is to furnish an elastic currency, but there are
m any whose idea of elasticity is continuous stretching.
Currency to be really elastic must be susceptible of
expansion or the reverse, as the needs of industry and
commerce m ay require. M a n y believe that there was a
preordained contraction of the currency during the year
1920, determined upon in order to reduce prices.
The
expansion of nearly $600,000,000 in Federal Reserve note
circulation which actually took place during that year
shows that the impression is absolutely unwarranted.
A n increase or decrease in the volume of Federal Reserve
notes outstanding is not the result of any preordained
policy or premeditated design, for the volume of Federal
Reserve notes in circulation depends entirely upon the
activity of business or upon the kind of activity which
calls for currency rather than book credits.
N

otes

I ssu ed A g a in s t C o l l a t e r a l

Federal Reserve notes can be issued only against col­
lateral in an amount equal to the sum of the Federal
Reserve notes applied for, which collateral security must
be notes and bills discounted or acquired b y the banks




fo r

L o a n s

a n d

C u r r e n c y

or gold or gold certificates. The law requires each
Federal Reserve B ank to maintain a reserve of 4 0 per
cent, in gold against its Federal Reserve notes in actual
circulation.
During the present year the loans of the Federal
Reserve Banks to their member banks have decreased
by about $1,550,000,000 and as the notes discounted
with Federal Reserve Banks have been paid off Federal
Reserve note currency has come back to the Banks and
in the absence of a demand for it, has not been reissued.
Upon paym ent of commercial paper which has been
deposited to secure Federal Reserve notes, there neces­
sarily results either an immediate return of an equivalent
amount of notes to the Bank or an automatic increase
in the percentage of gold reserves available for their
redemption.
C ir c u l a t io n C o n fo r m s

to t h e

P u b l ic N

eed

Federal Reserve notes are not legal tender, nor do they
count as reserve money for member banks. T h ey are
issued only as a need for them develops and as they be­
come redundant in any locality they are returned for
credit or for redemption to the Federal Reserve Banks
or to the Treasury at W ashington. Thus, there can
not be at any tim e more Federal Reserve notes in cir­
culation than the needs of the country at the prevailing
level of prices and wages require, and as the demand
abates the volume of notes outstanding will be corre­
spondingly reduced through redemption. T h e increased
volume of Federal Reserve notes in circulation from
1917 to the end of the year 1920 was, in so far as it was
not the result of direct exchanges for gold and gold cer­
tificates, the effect of advancing wages and prices, and
not their cause, just as the reduction which has taken
place during the present year is the result of lower prices
and smaller volume of business, rather than their cause.
Under the Federal Reserve system , as business ex­
pands, as labor is more fully employed and as production
increases and distribution becomes more active, there
follows a demand for greater discount accommodations
and a need for more currency, and the increased volume
of discounts furnishes a means of providing the increased
volume of currency required.
Th e Federal Reserve Banks hold today a gold reserve
of about $2,850,000,000 and a combined reserve against
member banks’ deposits and note issues of slightly more
than 73 per cent. Or if the legal minimum reserve of
35 per cent, be set up against deposits, there would re­
main a gold reserve of slightly more than 100 per cent,
against Federal Reserve notes outstanding.
F r ee d o m

from

M

oney

P a n ic s

But the Federal Reserve system should not be expected
to accomplish the impossible. I t is not a panacea for
all economic and financial ills and it cannot, however
skilful its administration m ay be, prevent periods of
depression in the future, although it can do much to
m odify them . Other nations, such as Great Britain
and France, with their great central banking institutions,
have always had their years of prosperity and their
periods of depression, although they have been free from
the money panics which we formerly had in this country
as a result of our inadequate banking system and which
we would, no doubt, have had in the m ost aggravated
degree a year or so ago, but for the efficiency and stabiliz­
ing influence of the Federal Reserve system .