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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 .