frsbog_mim_v18_0305.pdf

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F E D E R A L R E S E R V E B O A R D X-3?'d6'

STATEMENT FOP THE PRESS

F o r r e l e a s e i n Morning Papers,

Monday, April 3 0 , i g ^ m

The fo l lowing i s t h e Review o f th e Month a s

conta ined

i n t h e

fcr thco.ning

i s cu e o f th e

Federal Reserve Bullycin^

BUSINESS EXTENSION (rD.TKE RE5-R7Z BMJZS. Credit d eve lop me nts d ur ing t h e

pa st month have fu r t h e r emphasized t h e fact that current business expansion

i s being f inanced independently of reserve bank credi t . I n these circumstance^,

t h e

weekly statement

o f t h e

reserve banks

i s n o t

i n d i c a t i v e

o f

changes

i n

cr ed it cond itio ns* Changes i n r e s e r v e s , i n ea rn ing asse t s , a n d i n Federa l R e-

serve note ci rc ul at io n have been re la t i ve ly sl ig ht since la s t summer

an d

have

n o t

r e f l e c t e d

t h e

considerable growth

i n

bank credit*

T he

r e s e r v e r a t i o ,

a s

was po in ted o u t last month i n a d i scuss ion o f t h e e f f e c t of gold imports on

o u r c r e d i t s i t u a t i o n , h a s a t p r e s e n t l i t t l e v a l u e a s a n i n d i c a t o r o f credi t

movements. I t w a s these gold imports that enabled member banks t o meet t h e i n -

creased credi t

a n d

currency demands

of

t he ir customers without obtai ning

a

corresponding amount of accommodation a t t h e reserve banks„ Thus, under imme-

d ia t e ly p reva i l ing cond i t ions , i t i s t h e changes i n member bank loans and

investments rather than a n y item i n t h e reserve bank statement that roughly

measure t h e r a t e of inc rease i n t h e u s e o f bank cr ed i t . This ra te of growth i n

bank c r e d i t , compared wi th

t h e

r a t e

of

expansion

i n

product ion

an d

t rade ,

a f f o r d s ,

i n t h e

absence

of

such

a

t e s t

a s t h e

reserve ra t i o which

i s

dependent

upon free gold movement, a n important indicator of changes i n c r ed i t cond i t ions , .

The f ac t t ha t t h e recent growth of c r e d i t h a s been accompanied b y a f u r t h e r i n -

crease

i n t h e

physical volume

of

product ion

i s

favorable evidence

o f th e

economic

e f f e c t i v e n e s s o f th e c r e d i t i n u s e .

Comparat ive s tabi l i ty i n t h e volume of reserve bank credit while member bank

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c red i t i n c rea s ed h a s characterized credi t developments during t h e p a s t 1 5 months.

Sinoe t h o middle o f 1 9 2 2 , when renewed demand f o r c r e d i t was f i r s t r e f l e c t e d i n

lar ger commercial lo ans , t o t a l loans a,nd investments of member "banks i n leading

c i t i es have increased

by

$1*300,000,000, while earning assets

of the

Reserve

Banks have increased b y less than $100,000,000* A t t h e present t ime t h e t o t a l

of member bank credit i s n ea r l y a s l a r g e as in 1920 and the volume of goods being

produced,

a n d

marketed exceeds

t h e

peak reached

i n

t h a t y ea r ,

y e t t h e

volume

of

reserve bazik credit i s $2,200,000,000 less .

PKEBENl GUHKENCY KEQPIES.HMTS» During

t h e

p a s t

two

months Fed era l Reserve not e

' o n h a s d ec l i n ed s l i g h t l y a n d t h e growing demand f o r cu r rency h a s been

met by an increase i n other forms of money i n c i r c u l a t i o n . I n f a c t , t h e t o t a l

y ' n c i r c u l a t i o n is now $242,000,000 lar ge r than a year a g o , while Federal

eserve notes during this period have increased by only $52,000,000 a n d Federal

. notes have dec l ine d b y $58 ,000 ,000 . Gold an d g o l d c e r t i f i c a t e s i n

n

have increased

by

$127,000,000, s i lver

a n d

s il v e r c e r t i f i c a t e s

by

^100,000,OX, National Bank notes b y $11,000,000, a n d Uni ted States notes by

$10,000,000. More than t h r e e - f i f t hs o f t h e y e a r ' s i n c rea s e i n c i r c u l a t i o n o c -

d between February 1 a n d Apr i l 1 o f t h i s y ea r . A p a r t of t h i s ad d i t i o n a l

ency h a s been suppl ied o u t o f t h e cash reserves o f t h e Reserve Banks, which

l i n e d s l i g i t l y d u r i n g t h e p a s t tw o months. B u t , l i k e t h e additional demand

' t , t h e recent demand f o r add i t iona l cu r rency h a s been m et wi thou t s u b -

s t a n t i a l i n c r e a s e i n t h e u s e o f Beserve Bank credit ,

While increases i n other forms of money i n c i r cu l a t i o n h av e l a rg e l y s u p -

p l i e d

t h e

recent dernnd

f o r

more currency,

t h e

f a c t

i s

t h a t

t h e

present volume

n c y i s much l e s s tha n i n 1 9 2 0 , even though pr od uc ti on , t r a de , employment,

and

member-bank credit

a r e n ow a t o r

near

1920

l e v e l s .

On

Apr i l

1 , 1 9 2 3 , t h e

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total volume of money i n c i r c u l a t i o n was nearly $1,000,000,vOO less than a t i t s

peak

i n

November,

1 9 2 0 , an d

over $600,000,000 less than

o n t h e

corresponding date

o f 1 9 2 0 . Changes i n t h e demand f o r hand- to-hand currency a r is e ch ie f l y f rom

t h e

pocket-money

an d

t i l l -money requirements

of

r e t a i l t r ade , f rom pay- ro l l needs ,

and

from

t h e

h a b i t

of

accumulating

a n d

holding currency

a s

sav ings .

The

volume

of r e t a i l t r a d e , t a k in g t h e country a s a whole, i s approximate ly t h e same now as

this season

i n 1 9 2 0 ,

though re ta i l p r ic e s

a r e

lower .

I n

c e r t a i n a g r i c u l t u r a l

sections, however, where hand-to-hand currency i s l a rge ly used an d where busin

recovery h a s been slow and incomplete , t h e volume of bus iness i s s t i l l

m u c h

below

the 1920 l e v e l , a n d i t i s probable that it i those sections there i s a smaller

demand f o r currency* There i s a l so a t p re sen t a much reduced amount of currency

he ld

a s

savings .

The

extent

of

such ho ld in gs depends l e ss upon

t h e

current

volume of employment than upon th e dura t ion of the pe r iod of full employment; i n

1920 such holdings were doubtless a t a record figure , s ince full- t ime employment

and high wages h a d continued f o r sever al ye ar s . During t h e subsequent period of

slack employment much of the currency held a s savings was spen t , an d th e present

per iod of fuller employment h a s n o t y e t continued long enough t o r e s u l t i n

similar accumulation.

Of the var ious f luc tua t ing demands f o r currency t h e pay-rol l requirement i s

probably t h e most important because i t inc ludes t h e seasonal demand a t harves t

time

and

because

i t

in flu enc es othe r currenc y demands ar is in g from r e t a i l trade

and from savi ngs. During recent years t h e range of f l u c t u a t i o n i n p a y r o l l and

Federa l Reserve note c i rcula t ion h a s been similar , though t h e changes i n t h e

volume

of

currency have lagged behind

t h e

changes

i n p a y

ro ll * While

th e p ay

ro l l

increased since

t h e

beginning

o f 1 9 2 2 , i t i s

s t i l l much lower than

a t t h e

peak

in 1920} This , taken toge the r with t h e lower level of r e t a i l p r i c e s , i s probably

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X-3706

t h e most important single fact i n account ing f o r t h e smaller volume o f

cur rency now in c i rc ul a t io n . This le ss er demand f o r cur rency, together wi th

t h e go ld i mp or ts which .have su pp li ed member bank s wi th a b a s i s f o r loans

without addit ional borrowings from t h e Reserve Banks., accounts f o r t h e

present reduced volume o f Reserve Bank credit compared with 1920*

I f t h e r e l a t ion be tween p a y r o l l a n d Federal Reserve notes which held

dur ing previous years cont inues ,

t h e

r ap id inc rease

i n t h e p a y

ro l l s ince

t h e middle of 1922 wi l l soon re su l t i n a s u b s t a n t i a l i n c r e a s e i n demand f o r

cur rency, a n d i n order t o secure t h e additional currency member banks will

seek accommodation a t t h e Reserve Banks*

PRODUCTION AND CREDIT * The inc reased u s e o f c r ed i t , wh ich i s r e f l e c t e d i n

t h e l a rge r l oans a n d investments of member banks, b u t n o t i n t h e earn ing

a s s e t s of Federal Reserve Banks, h a s been pr imar i ly i n response t o t h e i n -

creased volume

o f

prod uct ion* Thus

f a r

business expansion

h a s

been cha rac t e r -

ized b y a r ap id inc rease i n t h e output of basic commodities* I n f a c t , t h e

growth in.the physical volume of product ion s ince t h e middle o f 1 9 2 1 ind ica t es

a r a t e o f in du s t r i a l r ecovery a lmos t wi thou t pa ra l l e l i n American business*

Within a year and a ha l f a f t e r recovery began t h e monthly output of 21 basic

commodities, a s measured b y t h e Federal Reserve Board's index of p roduc t ion ,

increased over 6 7 p e r c e n t . The volume o f goods produced and.consumed during

t h e f i r s t q u a r t e r of 1923 proba bly exceeds th at o f an y s imi l a r pe r iod i n t h e

h i s t o r y o f t h e countr y# Fu l l e r employment of equipment and of l a b o r h a s

produced

t h e

a dd it io na l income from which p r o f i t s

a n d

wages were realized*

I n f a c t , p r o f i t s , i n many lines o f industry have been dependent upon quantity

p roduc t ion , t h e lower production cost p e r un i t more than o f f s e t t i ng t h e i n -

creased cost o f m a t e r i a l s . I t i s p a r t l y i n consequence c?f larger output

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t h a t t h e p r i c e s of manufactured goods have n e t more fu l ly r e f l ec t ed t h e i n -

creases i n p r i c e s of raw ma te r i a l s . La rge r p a y r o l l s a l s o u n t i l q u i t e

re ce nt ly have res ul te d ch ie f l y from incre ased employment ra th er than from

advances

i n

wage r a t e s . These inc reas es

i n

product ion

a n d

employment have

thus f a r e c o n o m i c a l l y j u s t i f i e d t h e i n c r e a s e s i n t h e total volume of bank

c r e d i t s F o r c re di t ex ten sion does n o t r e s u l t i n overexpansion' s o long a s

t h e a d d i t i o n a l c r e d i t y i e l d s p r o p o r t i o n a t e r e s u l t s i n t h e larger product ion

an d market ing o f goods,

CREDIT CONDITIONS, 192 3 AHD 19 20 . The current volume o f wholesale a n d r e t a i l

t r ade ind ica t es tha t t h e goods now being produced a r e moving s a t i s f a c t o r i l y

in to t h e channels of d i s t r i b u t i o n . About 70 0 firms engaged i n var iou s l in es

of wholesale t rade an d r e p r e s e n t i n g p r a c t i c a l l y a l l s e c t i o n s o f t h e country

a r e now rep or t ing th e i r monthly sa l es t o t h e Fe de ra l Reserve Banks# Since

t h e opening o f t he year t h e total volume of s a l e s b y these concerns h a s been

about I S p e r cent lar ge r than dur ing t h e corresponding period a yea r a g o .

I n r e t a i l t r a d e t h e s a l e s of 30b department s tor es lo cate d in 100 c i t i e s

throughout t h e cou ntr y have al so exceeded t h e s a l e s of las t year by 15 pe r

c e n t . I n March, 1 9 2 3 . s a l e s of these stores were above t h e l e v e l of March,

1 9 2 0 , i n s p i t e o f t he lower r e t a i l p r i ces now p re va i l ing . Depar tment - s to re

s a l e s

a r e a t

p r e s e n t r e l a t i v e l y h i g h e r

i n t h e

. i n d us t r ia l d i s t r i c t s

o f t he

East

than i n t h e a g r i c u l t u r a l s e c t i o n s o f t he Souta an d West® The volume of

merchandise buying

i n

ru r a l d i s t r i c t s

i s

f u r t h e r i n d i c a t e d

b y t h e .

s a l e s

o f

mail-order houses, which during recent months have been approximately 37 pe r

cent above t h e s a l e s of a year a g o , though th e present dol lar volume of the i r

buying i s s t i l l much below t h e l e v e l o f 1920 .

The e x t e n t t o which var ious sec t ions o f t h e country have shared i n t he

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current/, growth

of

bus iness

and.

c r e d i t

may be

shown

i n a

general

way by th e

changes

i n t h e

volume

of

check payments

and of

member bank credit.

F o r

th i s

purpose a comparison i s made of the total volume of bank debits during the

f i r s t q u a r t e r of 1923 with t h e corresponding period in 192 0 , and a comparison

of the to ta l loans an d investments of member banks a t th e end o f th e year

1922

wi th s imi la r f i gur es

f o r

November,

1 9 2 0 .

This comparison

i n t h e

form

of

percentages , with ly20 f igures taken

a s 1 0 0 , i s

shown below

b y

Federal

Reserve Dis t r ic t s .

Mem-

Check b e r

Federal Reserve

p a y -

bank

D i s t r i c t

ments

.

c re d i t

P e r P a -

cent. cent.

Boston

IO9.5

lO^.O

New York

99*6

9 9 - 2

P h i l a d e l p h i a . . .

1 0 0 . 6 1 0 1 . 4

C l e v e l a n d . . . . . .

97*8

1 0 5 . 4

Richmond.- . . . . . .

8 5 . 6

9 6 . 4

A t l a n t a . . . . . . . .

SO.9 . 90»7

Chicago . 9 4 . 6 9 5 . 9

Mem-

Check

b e r

Federal He serv e

p a y -

bank

Dib t r i c t

ments

.

c r e d i t .

P e r

Pa r

cen t .

cen t .

9 6 . 9

1 0 5 . 0

8 8 . 2

9 0 - 5

Kansas City

' 81 .6

8 7 - 5

1 aj 1 a u

8 7 - 8

8 4 . 6

San F ra n c i s c o . . . •

. . . 1 0 1 . 9

1 0 4 . 0

System.v. 97 .51 9 8 . 6

r Both i n volume of bus iness a n d i n bank credit th e more recent figures,

taking t h e country a s a whole, show b u t a sl ig ht re du ct io n compared wit h 1 9 2 0 .

ihen (considered b y r e se rv e d i s t r i c t s t h e re i s a close correspondence in the

changes since 1920 in c r e d i t and in bu si ne ss volume. With b u t f e w except ions ,

b u s in e s s a c t iv i ty i n t h e i n d u s t r i a l E a s t and on the P a c i f i c c o a s t e i t h e r a p -

proximates or 'exceeds that

of 1920 and has

been accompanied

b y

corresponding

increases

i n

c r e d i t ;

I n

marked contrast

a r e

cond i t ions

i n t h e

South

and

Middle West, where both business volume

a n d

bank credit

a r e

considerably below

•the 1920 l e v e l .

This regional comparison emphasizes t h e fac t tha t , whi le t h e total volume

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X

-3706

of

bus iness

a n d

bank credi t

i s

nea r l y

a s

l a r ge

a s i n 1 9 2 0 ,

there

a r e i m -

por tant di f ferences between th e s i t u a t i o n a t. that time an d now. In 1$20

credi t expans ion way more pronounced i n ag r i cu l t u r a l t han i n i n d u s t r i a l

communities, while

a t t h e

present t ime

i t i s i r . t h e

l a r ge c i t i e s t ha t

t h e

volume of c r e d i t i s r e l a t i ve l y l a r ge r . Thus t h e Reserve Banks i n t h e South

an d

West

i n

meeting

t h e

demands

of

their member banks

in 1920

were obliged

t o rediscount large amounts with th e banks i n t h e i n d u s t r i a l s e c t i o n s ,

while

a t

present there

a r e n o

interbank rediscounts

an d n o

Federal Eeserve

Bank approaches t h e l i m i t o f i t s lending capaci ty .

T h e lesser dependence of the member barks upon t h e Beserve

Banks i s r e f l e c t e d i n t h e much smaller total volume o f Reserve Bank

earn ing as se t s a n d i n t h e smaller proportion which paper discounted

f o r .

member banks co ns ti tu te s

of

t h a t t o t a l .

On

October

15 , 1920 , o f

t h e to ta l earn ing as se t s he ld by Eeserve Banks, discounts f o r member

banks cons t i tuted g l p e r cent, while on April 1 1 , 1923» t h e p e r -

centage

was 55» and in the

middle

o f 1 9 2 2 ,

when discounts were

a t l o w

e b b , t h e

percentage

was as low as 35 per

cent .

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X-3706

OPEF-#R"ET POLICY To ta l ea rn in g a s s e t s o f t he 12 Federal

Reserve Banks combined measure t h e volume of reserve bant , credi t

made avai lable

a n d a r e

cont inuously

i n

process

of

ad jus tmen t

t o t h e

demand

f o r

such c r ed i t .

I t i s

th i s t o t a l r a th e r t han

any

s ingle

c l a s s of asse ts which indica tes a t a. given time t h e ex ten t t o which

reserve bank credit i s b e in g u t i l i z e d a s a b a s i s of member bank

c r e d i t and as a source o f cur rency. The r e l a t ionsh ip be tween t h e

open-market operations

o f t h e

Federal Reserve Banks

a n d t h e

demand

f o r

discount accommodation

on t he

p a r t

o f t he

members

h a s

been

brought ou t c l e a r l y b y t h e experience of 1Q22 and t he f i r s t q u a r t e r

of 1Q2X.

Since t h e middle of January , 1 9 2 3 , t h e i n c r e a s e i n d i s -

counts a t reserve banks h a s been accomapnied by a d e c l i n e i n h o l d -

ings

of

open-market purchases,

4 th a

c o n s e q u e n t s t a b i l i t y i n

t h e

total volume of earn ing as s e t s . This i s i n c o n t r a s t t o t he

s i t u a t i o n i n t h e ear ly par t of 1Q22, - hen member banks were rapilly

l iqu ida t ing the i r i ndeb tedness

a t t h e

reserve banks.

/ . t

that

t ime, a l so , t h e volume of earn ing as se ts remained re la t i ve ly con-

s ta nt ,because t h e d e c l i n e i n d i scoun t s w as accompanied, b y a c o r -

responding increase

i n t h e

hold ings

of

Government securities. Thus,

f o r a pe r iod of more than a year t h e t o t a l of reserve bank credit

h a s f luc tuated around £1,200,000,000 and has remained within a

range

of

*1,000,000,000

t o

$1,3 50,0 00,0 00. During th at pe rio d

discounts have f luctuated between *1,000,000,000 a n d less than

<U00,000,000, a n d Government security holdings between $600,000,000

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x-3706

and .

$22 5,0 00,0 00. Accep tance s have shown

a n

upward trend,

b e -

ginn ing wi th June ,1922 ,

and

recently have exceeded

t h e

Government

se cu ri ty ho ld in gs . Thus, during

1^ 22 and t he

f i r s t q u ar t e r

of

I 3 2 3 f l u c tu a t i o n s

i n t h e

volume

of

discounts

a n d i n t h e

holdings

of

open-market pu rc has es hcvVe o f f s e t each ot he r

an d

consequently

have

n o t

r e s u l t e d

i n

corresponding changes

i n t h e

total volume

of

rssorve bank credit i n use*

The

re la tion between open-market purchases

a n d d i s -

counts ricis n o t he ld t rue f o r reserve banks considered individually.

There have been la rg e pur cha ses

of

Government securities

b y r e -

serve banks

i n t h e

in te r io r wi thou t

a

corresponding decline

in t he

discounts f o r their member banks* P u t t h e f a c t t h a t f o r t h e 1 2 banks

combined earning assets have remained comparatively constant indicates

th a t

a

cor re sponding l iqu ida t ion

h a s

taken place

a t

other re ser ve banks.

A r e c o g n i t i o n o f t h e d e s i r a b i l i t y of coordinating more

c lo s e ly

t h e

open-market operations

o f t he

several reserve banks

l e d

t o a d i s c u s s io n of open-market policy a t t h e recent conference of the

Federal Reserve Board with

t h e

governors

o f t he

reserve banks.

The

Federal Reserve Board's posit ion

i n t h e

ma t te r

i s

i n d i c a t e d

b y t h e

adopt ion

o f t h e

fol lowing pr in c i pl e with respec t

t o

open-market

i n -

vestment operations

o f t he

Federal Reserve Tanks

"That

t h e

time, manner, character,

and

volume

o f

open-market

investments purchased by Federal Reserve Danks be governed with

primary regard t o t h e accommodation of commerce and bus ine ss and

t o t h e e f f e c t of such purchases o r s a l e s o n t h e gene ra l c red i t s i tu a t io n .

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By

pro vid ing tha t open-market investment ope rat io ns

a r e t o

b e

governed "with primary regard

t o t h e

accommodation

of

commerce

a n d b u s i n e s s ,

i

t h e p r inc ip le r e s t s upon t h e same gen era l con sid era -

t i o n s a s those provided i n t h e Federal Reserve A c t f o r t h e de te rmina-

t i o n of d i scoun t r a te s . S ince i n open-market operations t h e i n i t i a t i v e

can b e

taken

b y t h e

reserve banks ra ther than

by

member ba nk s, th es e

o p e r a t i o n s may b e used a s a gauge o f th e degree of adjustment between

t h e requirements f o r rese rve-bank c re di t an d th e volume of i t in

a c t u a l u s e . T he sa le of an investment b y a reserve bank i s a means

of t e s t i n g t h e demand f o r c r e d i t by p l a c in g t h e i n i t i a t i v e f o r a n d t h e

cos t

of

such cre d it d i r e c t l y upon borrowing member ba nks .

ADMl^ISTR^TIQF OF CRIP IT» To what e xt en t t h e member banks will b e

a b l e

t o

f i n a n c e

a

fur ther growth

o f

bus iness without addi t iona l

accommodation from t h e reserve banks depends mainly upon t h e s i z e of

gold imports i n t h e immediate future an d th e f u r t h e r p o s s i b i l i t i e s

of s hi f t i ng f rom inves tments a n d loans on s e c u r i t i e s t o loans f o r

commercial

a n d

in du st r ia l purp ose s. Gold imports have re ce nt ly been

small , t h e n e t imports f o r February being $7,000,000 a n d f o r March,

$5, 500 ,00 0, compared wi th

a

monthly average

o f

^20,000,000

f o r 1 9 2 2

and of ^5^,000,000 in 1 3 2 1* I f t h e gold movement continues a t t h e

present reduced sca le , t h e imported gold will n o t b e s u f f i c i e n t t o

form a b a s i s f o r a n y cons ide rab le inc rea se i n c red i t ex tens ion b y

member banks

an d

a l s o

t o

meet

a

growth

i n t h e

demand

f o r

currency.

Fur the rmo re, wh il e member banks si nc e t h e opening o f t h e year have

been able i n p a r t t o inc rea se the i r loans f o r commercial purposes

7/17/2019 frsbog_mim_v18_0305.pdf


~

l i

~ x 3706

b y th e u se o f funds withdrawn from investments a n d from loa ns on

s e c u r i t i e s ,

t h e

extent

of

such t rans fe r

i s

l im i t e d

b y t h e

fac t tha t

t h e

s a l e

of

s e c u r i t i e s

i n

excess

of

current savings indirectly leads

t o a demand f o r bank cr ed it . Since t h e opening of t h e , y e a r t h e

monthly rate of growth i n commercial loans a t member banks i n leading

c i t i e s h a s been nearly 2 p e r cent* A continuance of th is credi t

trend mast soon result i n increased borrowings by member banks a t t h e

reserve banks.

The

re la t ion between

t h e

expansion

of

bank credit

an d th e

expansion of b u s in e s s , a s well a s t h e r e s p o n s i b i l i t y of the banking

community f o r t h e economic u s e o f c r e d i t , i s c l e a r l y s e t f o r t h in a

recent report

of a

committee

on

unemployment

a n d

business cycles,

appointed

by

Secretary Herbert Hoover,

a s

chairman

o f t h e

P re s id e n t ' s

Conference

on

Unemployment held

i n

September,

192 1 . The

report

s ta tes : "Expansion

o f

bank credit

i s a

necessary condit ion

o f ex -

pansion ofbusiness operat ions .

*** But an

overextension

o f

credi t

may so

inc rease

t h e

purchasing power

of

business

men

tha t

i t

wil l

merely resul t

i n

enabling them

t o b i d

a g a in s t

one

another

f o r

l imited

supp l ies of goods a n d ma te r i a l s so as t o for ce pr ic es above what c o n -

sumers a r e w i l l i n g a n d able t o p a y . Bank cr ed it o f t e n expands s o

rap id ly tha t

i t

l i f t s

t h e

buying

o r

investment power

o f

business

men

out o f l ine with t h e general buying power o f t h e community. Because

of t h e i r s t r a t e g i c p o s i t i o n t h e banks* have an unusual duty an d an ex -

cept ional opportuni ty t o give sound information a n d counsel t o

business

men. ***

While

t h e

re la t ionship between

t h e

volume

o f

c red i t

7/17/2019 frsbog_mim_v18_0305.pdf


X-3?O6

a n d t h e

volume

o f

bus ine ss

a n d t h e

movement

o f

p r i c e s

i s n o t

always

simple t o i n t e r p r e t , i t appears t o b e s u f f i c i e n t l y c l o s e t o make i t

a ma t te r o f f i r s t importance tha t t h e volume and t he f low Of c red i t

should

& t a l l

t imes

b e

t e s t e d

b y t h e

contr ibut ion which addi t ions

t o

t h e

volume

o f

credit make

t o t h e

to ta l economic pr od uct io n. Additi ons

t o c redi t which can no t be economica l ly va l ida ted by a commensurate

e f f e c t i n ac tua l p roduc t ion a r e s p e c u l a t i v e , a n d a s such should b e

sub jec ted t o c o n t r o l , .so tha t bus iness a n d indus t ry can be maintained

i n a

h e a l t h y s t a t e " .

The

pres ent lending capac i ty

o f t h e

country 's banking system,

i n

view

o f t h e

great growth

o f t h e

r e s e r v e s

a t t h e

rese rve banks ,

i s

now f a r i n

excess

o f t h e

credit needs

o f t he

c o u n t r y

,

s productive

c a p a c i t y .

I n

such

a

s i t u a t i o n

i t i s t h e

a v a i l a b l e s u p p l i e s

o f

l a b o r

and

equipment

a n d n o t t h e

po t en t i a l supp ly

of

c red i t tha t

i n t h e e n d

must

f i x t h e

l imit which

may be

a t t a i n e d

by

aggrega te na t ion a l produ c t i on.

As

the se l imi t s

a r e

approached credit policy must

b e

inc rea s ing ly

in f luenced

b y

c a r e f u l c o n s id e r a t i o n

o f t h e

con t inued e f fec t iveness

of

f u r t h e r a d d i t i o n s

t o t h e

total volume

o f

c r e d i t

i n

con t r ibu t ing

t o

inc rea sed p ro duc t i v i t y .

frsbog_mim_v18_0305.pdf

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