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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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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.