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F E D E R A L R iS S 'J R V ii B O A R D
STATSENT FOR TH4 PRt2S3.
F o r r e l ea se i n morning
newspapers of February 6 t h .
The February issue of the Federal Reserve Bulletin was complete and
sent t o t h e pr inter today.
I n t h e Review o f t h e Month, t h e f i r s t i t en in the nev? issue, t h e B u l -
le t in discusses t h e general s i tuat ion a s t o publ ic and pr ivate f inancing
a n then says that i n sp i te of the beginning of industrial demands a t banks
and the requirements o f t he las t insta l lments o f t he Fourth Liberty Loans
there h a s been exhibited a tendency toward t h e increase of bank balances a t
f in anc ial cen ters , "Easier ra t es f o r money" t h e Review continues "have a c -
companied t h i s inward movement o f funds, although t h e price paid f o r longer
term capi ta l
f o r
i n d u s t r i a l
use has not
boon lowered, while rates
f o r
ca l l
loans and other prime commercial paper have fallen b u t s l i g h t l y . The tendency
however, h a s been downward and may be taken a s ind ica t ive of d i s t i n c t r e -
cuperative power on the par t o f t he financial community", AS an indicat ion
of
capaci ty
t o
ree sta bl i sh normal condi t ions a t t en t io n
i s
ca l l ed
to t he be -
ginning
of a
".ecline
i n t h e
amount
of war
paper, both
a t
Federa l Reserve Banks
anu at
member banks . This .l ee li ne
h a s n o t
been
a s
rap id
a s h a s
beai true
a f t e r t h e close of former Liberty loans. The expi ra t ion of the installment
period o f t h e loan with t h e c lose of January h a s , however, seen t h e success-
f u l l i qu ida t ion of most o f t h e ins tal lme nt accounts while th er e a r e encourag-
i n g
indications that borrowers
who
obtained accomodation
f o r a
90-day period
a r e either reducing o r canceling their indebtedness, thereby releasing a p r o -
PprjupTy.to
anQun t
Q f
b a n k f u n d 3
f o r U 3 Q
j_
n
other financing.
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Of the
si tu at io n with respect
t o
indust r ia l f inancing
t h y
Review remarks
that: "Thus f a r there h a s been li t t le more than a beginning of indust r ia l
f inancing
f o r
foreign countr ies,
and th e
scope
of
such operations will
depend much upon
t h e
outcome
o f the
peace conference.
So
m#3h
a t
least
seems clear
—
that
t h e
United States will have
a
larger amount
of new
capi tal
avai lab le f o r u se i n i nd us tr ia l development than wi ll o ther nat ions* Our
problem will be determination o f the basi s upon which t hi s c ap it al is to be
divided between domestic
and
foreign demands
and the
conditions under which
i t
w i l l
b e
found advisable
t o
enlarge
our
holdings
o f
foreign indu st r ia l
ob li ga ti on s. However t h i s problem
may be
worked
o u t , i t i s
already plain
that a fundamental and e s s en t i a l a i d i n i t s so lu t ion wi l l b e t h e accumulation
of as much fluid capital as poss ib le . The requirement that saving be
fu r thered
and
promoted
i s
th e re fo re again emphasized. There
i s
already
a
tendency
i n
many quarters toward
a
r e l axa t ion
of the
res t ra in ts upon
e x -
pe nd it ur e imposed whi le
the war was
s t i l l
i n
progress*
The
c a l l
f o r
modera-
t i o n i n outlay and actual accumulation of funds i s , however, a s uigent a s
ever i f real soundness i n nat ional and individual f inance i s soon to be
res tored ."
The
condit ion
o f the
currency c i rcu la t ion
o f t h e
country
and the
tendency
of
Federal Reserve notes
t o
r e tu rn
t o t h e
issuing banks
i s
given
at tent ion, both
as an
ind icat ion
of
some slackening
i n
business act iv i ty
and as a
demonstration
o f the
e l a s t i c i t y
of the
Federal Reserve note issue
i t s e l f .
On th e
l a t t e r po in t
i t i s
observed th at r ec en t redemptions
of
Federal Reserve notes constitute t h e most extensive reduction that has
occurrred since t h e organizat ion o f t h e system, while contemporaneous with
th is reduct ion
i n
outstanding Federal Reserve notes there
h a s
been observable
a
tendency,
n o t y e t
s ta t i s t ica l ly measurab le , toward
t h e
reduct ion
of
other
noteworthy
forms
of
currency
i n
c i r c u l a t i o n .
" I t i s a •
f a c t ' says
t h e
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- 3 ?
Review "that a t nany banks t h e over- the-counter deposi ts a r e beginning t o
include
a
considerable amount
of
gold coin
and
gold ce r t i f i c a t es . Thi s
r e t u r n
of
funds
t o t h e
f inancial , centers
i s i n
pa r t
t h e
outgrowth
o f
grea ter
confidence due to the terminat ion of the war , , which h a s celled forth much
hoarded currency from i t s hiding places , b u t i t i s also due in no samll
degree t o t h e s lackening of bus iness ac t iv i ty and in lesser measure to the
f a l l i n g of prices already noted. The decline i n bus iness ac t iv i ty lessens
th e amount of cash required by individuals f o r the i r per sonal t r ansac t ions ,
by f i rms and corporat ions f o r t h e maintenance of thei r counter o r vault cash,
as well a s f o r payr o l l s , and even by country banks f o r t h e cu rre nt meeting of
dal la
of
de po si to rs . Lowered volume
o f
bus iness
h a s i n
years past always
given rise
t o a
f low
of
actual currency
and
money toward
t h e
f i nanc i a l
center s , an d under present conditions this flow is in no small degree
eventual ly
a
flow toward
t h e
Federal Reserve Banks, resulting
in the
ultimate
cancel l a t ion o f outstanding note currency.
The movement thus observable will afford „ no ground f o r surpr ise t o
those fam il ia r with t h e underlying pr in cip les of the Federal Reserve note
system, demonstrating
as i t
does
t h e
e l a s t i c qua l i t y
of the
Federal Reserve
note,
and
showing th a t, with redu ced busi ness req uiremen ts,
t h e
c i r cu l a t i on
will reduce i tself with
t h e
s ane f ac i l i t y
as i t had
previously shown
i n i t s
prewar expansion t o meet incr ea sed requ ireme nts» That i t should return t o i t s
prewar amount is no t to be expected, especial ly i n view o f the fact that so
large a volume of Federal Reserve notes h a s been issued i n s u b s t i t u t i o n f o r
th e
outstanding gold certificates which have been impounded
f o r t h e
purpose
of s t r engthening t h e reserve of member a n d Federal Reserve Banks. Remembering,
however, that, a s shown i n t h e Federal Reserve Bulletin f o r October 1918, the
r ea l " i n f l a t i on" o r abnormal expansion of currency i n t h e United States i s less
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than t h e figures nominally representing t h e growth o f t he c i r c u l a t i o n , the
contraction ;vhich
h a s
already occurred within-i
th e
short space
of a
month
or a
l i t t le more suggests that
i t nay no t be
long before this exooss expansion
wi l l bo mater ia l ly reduced."
As to the bus iness s i tua t ion an d outlook t h e Review emphasizes th e fact
t ha t t h e country is now passing through a per iod of t r a n s i t i o n i n which
extensive readjustments aff ect ing both ca pi ta l and labor a re a c h a r a c t e r i s t i c
f e a t u r e . I t ca l l s a t t en t ion t o t h e study that i s being given t h e problem of
current business i n othet countries a nd t h e tendency there t o r e tu rn to-, a
s table pr ice level .
"Reports
o f
business conditions" na.de
t o t h e
Board
by
Federal Reserve
agents
i t i s
noted, "show that
th e
re turn
of
active production
a n d c o n -
sumption i s being retarded by high expenses o f production. Uncertainty*
n o t only among consumers, b u t al so among th os e who would ordinarily be in
t h e market f o r r a w materials with which t o manufacture goods, concerning
t h e p o s s i b i l i t y o r p r o b a b i l i t y of a further drop i n val ues , tends i n t h e
same direction. I t i s argued that any such decline will b e ca r r i ed by
those who are a t t he moment i n possession o f t he stocks o f goods which
a r e thus tending t o move toward lower l e v e l s . Prod ucer s of secondary
ar t ic les involv ing t h e app l i ca t i on of la rgo quant i t i es o f primary raw
mater ia l s a r e r e luc t an t t o absorb t h e los s th re at en ed , alth ough some
business men are showing a d i spos i t i on t o treat such losses as one of un-
avoidable charges upon business i n t h e process of a speedy readjustment>
The great volume o f our export trade daring t h e month of December furnishes
a measure of foreign demand, b u t i t remains true that this export trade i s
i n largo part concerned with raw mat er i a ls , foods, and the l i k e , an d that
wo are s t i l l f ac in g t h e problem of i i nd ing o r making a market f o r o u r
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nanafactored goods
i n
fo re ign countr ies ,
a
process
i n
which
we can
hardly
hope t o make t h o desired success so long a s prices continue upon a level
higher that that existing i n other co unt ri es . Those cou ntr ie s which f i r s t
succeed
i n
re ad jus t ing th ei r cos ts
o f
production
and
rastoring their industry
t o a normal level of values will b e most successful i n developing their
exports and co n t ro l l in g t h e markets o f consuming nations t h e world over.
The
f a c t s
i n t h e
Cu.se appear
to be
unders tood abroad,
a s i s
indicated
by
th e content o f t h e repor ts o f t he various boards an d commissions which have
lately been looking into t h e banking an d c red i t s i tu a t io n and which have
expressed t h e i r opinions with refere nce
t o t h e
course properly
t o b e
followed
i n bringing about a r e tu rn t o stable conditions*"
The Bullet in contains a r ep r in t o f t he Br i t i sh repor t on "Financial
F a c i l i t i e s " a s well a s a co l l ec t io n of rece nt important documentary ma te ri al
r e l a t i v e
t o
gold produ ctio n, c en tr al bank re se rve s
an d
gold novenents.
Business conditions throughout t h e United States a r e surveyed a t length,
both
a s
presented
i n t h e
repor ts
o f
Federal Reserve Agents
and in
those
of tho Fede ral Reserve Boar d's own busine ss index se ct io n.