arfr_1923

TENTH ANNUAL REPORTOP THE

FEDERAL RESERVEBOARD

COVERING OPERATIONS

FOR THE YEAR 1923

WASHINGTONGOVERNMENT PRINTING OFFICE

1924

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

TABLE OF CONTENTSPage.

PART I. Report of the Federal Reserve Board, with exhibits 1-319PART II. Statistical tables, arranged by Federal reserve districts 321-455PART III. Recommendations of the Federal Advisory Council to the

Federal Reserve Board for year 1923 457-467Description of Federal reserve districts 468-473

PART I.TEXT OF REPORT:

Banking and business in 1923 1Federal reserve discount policy 3Open-market policy and operations 11Gold and credit 16Currency and credit , 23Guides to credit policy , 29Operations of the Federal reserve system

Condition of Federal reserve banks 39Earnings, expenses, and volume of operations of Federal reserve

banks 40Building operations of Federal reserve banks , 44Branches and agencies of Federal reserve banks and their

operations 44Changes in membership of Federal reserve system 47Branch banking 48Check clearing and collection 48Rediscounts for nonmember banks 50Administration of Clayton Act 51Trust powers of national banks 54Amendments to Federal reserve act 56Amendments to regulations of the Federal Reserve Board 59Meetings of Federal Advisory Council 61Conferences held by the Federal Reserve Board 62Board's organization, staff, and expenditures 62

DISCOUNT AND OPEN-MARKET RATES:No. 1. Changes during 1922 and 1923 in Federal reserve bank dis-

count rates 64No. 2. Average rates charged by Federal reserve banks on bills dis-

counted 65No. 3. Annual rates of earnings on discounted bills held by the

Federal reserve banks 66No. 4. Changes during 1923 in minimum authorized rates of Fed-

eral reserve banks on bankers' and trade acceptancesbought in open market 67, 68

No. 5. Average rates charged by Federal reserve banks on bankers'and trade acceptances bought in open market 69

No. 6. Annual rates of earnings on bankers' and trade acceptancesbought in open market and from other Federal reservebanks 70

in


IV TABLE OF CONTENTS.

DISCOUNT AND OPEN-MARKET RATESContinued. Page.No. 7. Annual rates of earnings on bills discounted and on bills pur-

chased by each Federal reserve bank, 1916-1923 71No. 8. Annual rates of earnings on United States securities held by

the Federal reserve banks 72No. 9. Annual rates of earnings on total earning assets and on munic-

ipal warrants held by the Federal reserve banks 73CONDITION OF FEDERAL RESERVE BANKS:

No. 10. Earning assets of all Federal reserve banks combined, 1914-1923 74-78

No. 11. Reserves, deposits, and note circulation of all Federal reservebanks combined, 1914-1923 79-83

No. 12. Resources and liabilities of all Federal reserve banks com-bined on the last business day of each month, December,1922-December, 1923 84

No. 13. Resources and liabilities of all Federal reserve banks com-bined, by weeks, during 1923 86-89

No. 14. Deposits, Federal reserve note circulation, required reserves,excess reserves, and reserve percentages of all Federal re-serve banks combined, by weeks, during 1923 92

No. 15. Daily average figures for all Federal reserve banks combinedof cash reserves, total earning assets, deposits, and Federalreserve note circulation, also daily average reserve percent-ages, by months, during 1920-1923 94

No. 16. Average daily holdings of all classes of earning assets of eachFederal reserve bank, by months 95

Holdings of bills discountedNo. 17. Average daily holdings of each Federal reserve bank, by

months 96No. 18. Classification of paper held by each Federal reserve bank

on December 31, 1923 97No. 19. Classification of paper held by all Federal reserve banks

combined at the end of each month 98No. 20. Maturity distribution of paper held by each Federal re-

serve bank on December 26, 1923 99No. 21. Maturity distribution of paper held by all Federal reserve

banks combined on the last report date of each month. 100No. 22. Classification of bills'secured by United States Govern-

ment obligations held by each Federal reserve bank onDecember 26, 1923, and December 27, 1922 101

No. 23. Classification of bills secured by United States Govern-ment obligations held by all Federal reserve bankscombined on the last report date of each month 102

Bills bought in open market (bankers' and trade acceptances)No. 24. Average daily holdings of each Federal reserve bank, by

mon ths 103No. 25. Held by each Federal reserve bank on December 31, 1923,

by classes of accepting institutions 104No. 26. Held by all Federal reserve banks combined at the end of

each month during 1923, by classes of accepting in-stitutions 105

No. 27. Held by each Federal reserve bank on December 31,1923,by classes 106


TABLE OF CONTENTS. V

CONDITION OF FEDERAL RESERVE BANKSContinued.Bills bought in open marketContinued. Y&ge.

No. 28. Held by all Federal reserve banks combined at the end ofeach month during 1923, by classes 107

No. 29. Maturity distribution of bills held by each Federal re-serve bank on December 26, 1923 108

No. 30. Maturity distribution of bills held by all Federal reservebanks combined at the end of each month 109

Municipal warrantsNo. 31. Average daily holdings of each Federal reserve bank, by

months 110United States securities

No. 32. Average daily holdings of each Federal reserve bank, bymonths 111

No. 33. Par value of each class of United States securities heldby each Federal reserve bank on December 31, 1923 _ 112

FEDERAL RESERVE NOTES:No. 34. Accounts of each Federal reserve agent on December 31, 1923,

and December 30, 1922 113No. 35. Outstanding, held by each bank, and in actual circulation;

also gold and eligible paper pledged as collateral for out-standing notesMonthly figures for each Federal reservebank 115

No. 36. Collateral (gold and eligible paper) pledged with Federalreserve agents as security against notes outstandingWeekly figures for all Federal reserve banks combined 118

No. 37. Issued and retired by each Federal reserve agent, by months, 121No. 38. Outstanding, held by Federal reserve agent, and on hand in

Washington on December 31, 1923By banks and de-nominations , _ ^ 123

No. 39. Received from Comptroller of the Currency, returned tocomptroller for destruction; issued to Federal reservebanks, and returned by Federal reserve banks during1923By banks and denominations 125

No. 40. Issued and retired by all Federal reserve agents combinedand amounts outstanding, 1914-1923, by denominations-_ 128

No. 41. Interdistrict movement during 1923 129FEDERAL RESERVE BANK NOTES:

No. 42. Issued and redeemed during 1915-1923 and outstanding onDecember 31, 1923, by banks and denominations 131

DISCOUNT AND OPEN-MARKET OPERATIONS:Total volumeAll classes

No. 43. For each Federal reserve bank during 1923, distributedby classes 133

No. 44. For all Federal reserve banks combined, by months dur-ing 1923, with totals for 1914-1922, distributed byclasses 134

No. 45. For each Federal reserve bank, by months during 1923,with totals for 1914-1922 135

Bills discountedNo. 46. Discounted by each Federal reserve bank, by months

during 1923, with totals for 1914-1922 136No. 47. Number of banks in each district accommodated through

discount operations, by months during 1923, withtotals for 1914-1922____ 137


VI TABLE OF CONTENTS.

DISCOUNT AND OPEN-MARKET OPERATIONSContinued.Bills discountedContinued. page.

No. 48. Volume, by States, also number of member banks in eachState and number accommodated through discountoperations during 1923, 1922, 1921, and 1920 138

No. 49. Discounted by each Federal reserve bank for nationalbanks and for State bank and trust company membersduring 1923, 1922, 1921, and 1920 140

No. 50. Discounted by each Federal reserve bank during 1923, bymaturities and rates of discount charged 141

No. 51. Discounted by all Federal reserve banks combined during1923, by months and by maturities and rates of dis-count charged 142

No. 52. Average maturity (in days) of bills discounted by eachFederal reserve bank, by months during 1923, withaverage maturities for each bank and for each monthof 1922 and 1921 143

No. 53. Bills secured by United States Government obligations,discounted by each Federal reserve bank, by monthsduring 1923, with totals for 1917-1922 144

No. 54. Trade acceptances discounted by each Federal reservebank, by months during 1923, with totals for 1914-1922 ..." , ._ 145

No. 55. Bankers' acceptances discounted by each Federal reservebank, by months during 1923, with totals for 1919-1922____ 146

Bills bought in open marketBankers' and trade acceptancesNo. 56. Purchased by each Federal reserve bank, by months

during 1923, with totals for 1914-1922. _____" 147No. 57. Purchased in open market by each Federal reserve bank

during 1923, distributed by classes 148No. 58. Purchased in open market by all Federal reserve banks

combined, by months during 1923, distributed byclasses 149

No. 59. Purchased by each Federal reserve bank during 1923, byrates of discount charged 150

No. 60. Purchased by all Federal reserve banks combined, bymonths during 1923, by rates of discount charged 151

No. 61. Average maturity (in days) of bills purchased by eachFederal reserve bank, by months during 1923, withaverage maturities for each bank and for each monthduring 1922 and 1921 152

No. 62. Purchased by each Federal reserve bank during 1923, bymaturities, also average maturity for each bank 153

No. 63. Purchased by all Federal reserve banks combined, bymonths during 1922, by maturities, also average ma-turity for each month, and totals for 1914-1923 154

United States securitiesNo. 64. United States bonds and Victory notes purchased by

each Federal reserve bank, by months during^ 1923,with totals for 1914-1922 155

No. 65. United States Treasury notes purchased by each Federalreserve bank, by months during 1923, with totals for1916-1922 _* 156

No. 66. United States certificates of indebtedness purchased byeach Federal reserve bank, by months during 1923,with totals for 1918-1922 157


TABLE OF CONTENTS. VII

COLD SETTLEMENT FUND: Page.No. 67. Summary of transactions of each Federal reserve bank during

1923 158No. 68. Clearings and transfers for all Federal reserve banks com-

bined, by weeks, during 1923 159FEDERAL RESERVE AGENTS' GOLD FUND:

No. 69. Summary of transactions of each Federal reserve agent during1923_ '_"'._ 160

CLEARING OPERATIONS:No. 70. Operations of each Federal reserve bank in the Federal reserve

clearing system during 1922, with totals for 1919-1922 161No. 71. Number of member banks and of nonmember banks on par

list in each Federal reserve district at the end of eachmonth during 1923 163

OPERATIONS OF BRANCHES:No. 72. Operations of each Federal reserve branch bank during 1923 _ _ 165

EARNINGS AND EXPENSES:No. 73. Earnings and expenses of each Federal reserve bank during

1923 167No. 74. Profit and loss account of each Federal reserve bank during

1923 1 169No. 75. Reimbursable expenditures of fiscal agency department of

each Federal reserve bank during 1923 170No. 76. Gross and net earnings of Federal reserve banks, also disposi-

tion made of net earnings, 1914-1923 171RECEIPTS AND DISBURSEMENTS OF FEDERAL RESERVE BOARD:

No. 77. Receipts and disbursements of the Federal reserve board for1923 177

ALLOTMENTS OF UNITED STATES SECURITIES:No. 78. Allotments of each series of United States notes and certifi-

cates of indebtedness issued during 1923, by Federal reservedistricts 181

ASSETS AND LIABILITIES OF MEMBER AND NONMEMBER BANKS:No. 79. Abstract of condition reports of all member banks combined- _ 182No. 80. Abstract of condition reports of all State bank and trust

company members combined ^ 183No. 81. Abstract of condition reports of all member banks in New

York City 184No. 82. Abstract of condition reports of all member banks in the city

of Chicago . 185No. 83. Abstract of condition reports of all member banks in reserve

cities 186No. 84. Abstract of condition reports of all member banks outside of

central reserve and reserve cities (so-called country banks) _ 187No, 85. Loans, investments, deposits, and borrowings of national

banks on call dates, 1914-1923 188No. 86. Loans, investments, capital, surplus, deposits, and borrow-

ings of all member banks on call dates, 1914-1923 190No. 87. Principal resources and liabilities of about 764 reporting

member banks in leading cities, by weeks, during 1923 192No. 88. Assets and liabilities of all banks in the United States and

island possessions 194


VIII TABLE OF CONTENTS.

DEBITS TO INDIVIDUAL ACCOUNTS: Page..No. 89. Debits to individual accounts as reported by banks in 141

principal citiesSummary by months and districts, 1921-1923 195

GOLD IMPORTS AND EXPORTS:No. 90. Gold movement into and out of the United States, June 1,

1919-December 31, 1923, by principal countries 19TNo. 91. Total imports of gold into and exports of gold out of the

United States, by countries, 1922 and 1923 197COST OF BANK PREMISES:

No. 92-93. Cost of bank premises of Federal reserve banks andbranches 198, 199

State banks and trust companies admitted to membership 200Fiduciary powers granted to national banks 226Banks granted authority to accept drafts and bills of exchange up to 100

per cent of capital and surplus 243.Personnel and salaries:

Salaries of officers and employees of Federal Reserve Board 246Salaries of officers and employees of Federal reserve banks 249Salaries of national-bank examiners 253

Directory :Federal Reserve Board 255Federal Advisory Council 255Officers and directors of Federal reserve banks and branches. 256

Amendments to Federal reserve act 263Regulations of Federal Reserve Board 265Resolution of the Federal Reserve Board on establishment of Cuban

agencies 295Court opinions in par clearance cases:

Atlanta case - - - - 296North Carolina case 298

Court opinions on exercise of fiduciary powers:Supreme Court of Pennsylvania 304Supreme Court of Missouri 307Supreme Court of the United States 314

Federal Reserve Board indexes:Production, employment, and trade, 1919-1923 318Wholesale prices and foreign exchange, 1919-1923 319>

CHARTS.

Movement of earning assets of Federal reserve banks, by classes, 1922and 1923 i 14

Gold movements into and out of the United States and growth of reservesof Federal reserve banks, 1919-1923 17

Movement of Federal reserve notes and earning assets of Federal reservebanks, 1917-1923- 24

Movement of loans and of demand deposits of member banks in leadingcities, 1922 and 1923 26-

Movement of Federal reserve notes and of deposits of Federal reservebanks, 1917-1923 28

United States securities, purchased bills, discounted bills, and total earn-ing assets for all Federal reserve banks 90

Reserve ratio, deposits, Federal reserve note circulation, and total reservesfor all Federal reserve banks 91

Federal reserve note circulation and holdings of bills discounted, bills pur-chased, and United States securities 324, 335,

346, 357, 368, 379, 391, 404, 414, 424, 436,Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

TABLE OF CONTENTS. IX

PART II.Statistical tables, arranged by Federal reserve districts: Page.

District No. 1Boston 322District No. 2New York 333District No. 3Philadelphia J 344District No. 4Cleveland 355District No. 5Richmond 366District No. 6Atlanta 377District No. 7Chicago 389District No. 8St. Louis 402District No. 9Minneapolis 412District No. 10Kansas City 422District No. 11Dallas 434District No. 12San Francisco . 444

PART III.Recommendations of the Federal Advisory Council, 1923 459Description of Federal reserve districts . 468Map of Federal reserve districts . _ 474


PART I.

REPORT OF THE FEDERAL RESERVE BOARD,WITH EXHIBITS.

XI


THE FEDERAL RESERVE BOARD.

DECEMBER 31, 1923.

A. W. MELLON, ex officio,Secretary of the Treasury, Chairman.

HENRY M. DAWES, ex officio,Comptroller of the Currency.

XII

D. R. CRISSINGER, Governor.EDMUND PLATT, Vice Governor.ADOLPH C. MILLER.CHARLES S. HAMLIN.GEORGE R. JAMES.EDWARD H. CUNNINGHAM.


ANNUAL REPORT OF THE FEDERAL RESERVE BOARD.

WASHINGTON, February 15, 1924.SIR: The year covered in this, the tenth annual report of the

Federal Reserve Board is of more than ordinary interest, since ithas afforded an opportunity for the Federal reserve system to functionunder circumstances less influenced by conditions arising out of thewar than any previous year. In the absence of those major dis-turbances which so profoundly affected business and credit conditionsduring the war and early post-war readjustment, Federal reservecredit policies, in response to prevailing economic conditions andon the basis of earlier experience, have undergone a fuller develop-ment. The volume, character, and occasion of rediscount operationsand open-market transactions of the Federal reserve banks, the extentand influence of gold movements upon the credit and currency situ-ation, rate policy, and the basic factors underlying general creditpolicythese and other related matters that will be of continuingimportance in the future have held an important place in the year1923 in the functioning of the Federal reserve banks and in thedeliberations and decisions of its governing authorities.

The text of the report as herewith presented is devoted to a dis-cussion of some of the broader aspects of the workings of the Federalreserve system and the fundamentals of its operation and adminis-tration as they may be viewed in the perspective of almost a decadeof experience. These are believed to be matters of such widespreadpublic interest as to make a fuller discussion of them than has beenattempted in any previous report of the Board a useful undertakingat this time. In consequence many administrative matters whichhave had the attention of the Board during the year 1923 are givena subordinate place in the present report.

BANKING AND BUSINESS IN 1923.

Taking the year as a whole and regarding it in the perspective ofthe after-war readjustment period, there is abundant evidence that,so far as the United States is concerned, economic readjustment hasbeen proceeding at a rapid rate and is now nearing completion. Theeconomic balance as between various industries and sections of thecountry is not yet fully restored, but during the past two years

l


2 ANNUAL REPORT OF THE FEDERAL RESERVE BOARD.

there has been rapid progress in the direction of a more stable equi-librium and of a better alignment of prices between different com-modity groups. In agriculture there has been a general improvement,though in the wheat-growing and livestock industries the recoveryhas been slow and incomplete. The year 1923 was characterized bya large industrial output, practically full employment, a sustainedconsumers' demand for goods, and a level of prices more stable thanin any year since 1915.

In the banking history of the year the outstanding events are thelarge increase in the volume of credit and currency provided to meetthe demands of the country's business, the considerable inflow ofgold, and the continued use of a volume of reserve bank credit ofover a billion dollars that changed little between the opening and theclose of the year. In the support of the increased volume of produc-tion and trade the member banks of the Federal reserve system be-tween the spring of 1922, when the recovery of industry made itselffelt in a larger demand for credit, and the end of 1923 extended anadditional volume of credit of over $3,300,000,000. This representsan increase of about 14 per cent for the period and brought the totalloans and investments of all member banks to a record level. Thatthe banks of the country were able to finance the credit requirementsof an enlarged volume of business and to meet an increase in thedemand for currency amounting to more than $500,000,000, withoutgiving rise to a demand for additional Federal reserve bank credit,is explained by the fact that member banks met this demand by theuse of funds made available by the continued inflow of gold. Thisgold has served as a substitute for reserve bank credit. Had therebeen no gold imports, the growth of business and the increased demandfor currency would have resulted in a demand for Federal reservebank credit approximately equal to the half billion of gold importedduring the period.

The ability of the banking system during the past two years tomeet the considerable increase in the demand for credit and currencywithout an increased use of reserve bank credit differs from theexperience during the war period and the years of active businessimmediately following the war. During 1919 and 1920, for example,the rapid increase in member bank credit was accompanied by a morerapid rate of increase in Federal reserve bank credit. In 1922 and1923, however, it was the additional gold received from abroad andnot additional use of reserve bank credit which enabled the memberbanks to meet the increased credit and currency demand. The fact thata volume of Federal reserve bank credit of about $1,200,000,000 hasbeen continuously in use during the past two years indicates that, whilethe gold received from abroad has been sufficient to supply the re-serve and currency needs of member banks, it has not been in such


ANNUAL REPORT OF THE FEDERAL RESERVE BOARD. 3

volume as to enable the member banks, after supplying the new de-mands of their customers for credit and currency, to meet their totalrequirements without continuing to borrow in considerable volumefrom the Federal reserve banks. Federal reserve banks, therefore,continued in the year 1923, as in other years, to be an important andessential element in the country's credit structure.

Changes in the volume of member bank credit during the year,more than in Federal reserve bank credit, have reflected the courseof business developments. Total loans of all member banks increasedby nearly $1,000,000,000 during the year. That the principal demandfor credit was for commercial, industrial, and agricultural purposes isindicated by the rapid increase in the volume of loans of this char-acter made by member banks in leading cities. The period of mostrapid increase in the demand for credit was the first quarter of theyear, when trade was active and the volume of production in basicindustries was greater than at any previous time. At the openingof 1923 the upward movement of production, which had begun inthe middle of 1921, continued at a rapid rate and production inbasic industries reached the highest level on record; labor was fullyemployed; and prices were rising. During the late spring and sum-mer months, however, there was a recession in industrial activity,though the distribution of merchandise was well maintained. Theslackening in productive activity arose more from the hesitancy ofbusiness concerns in placing forward orders than from a lesseneddemand on the part of ultimate consumers, and the price declineswhich occurred during the period were chiefly in materials used inindustry rather than in consumers' goods. During the last quarterof the year, while the volume of production was below the recordlevels of the spring, trade continued active and prices showed adegree of stability unusual in recent years.

FEDERAL RESERVE DISCOUNT POLICY.

These banking and business developments constituted the circum-stances in which the Federal reserve system functioned during 1923and with reference to which Federal reserve credit policy was formu-lated. In carrying out this policy the system has not relied uponchanges in discount rates as the only means of influencing the generalcredit situation. The open-market transactions of Federal reservebanks during 1923, which are later considered in some detail, as wellas their discount policy, have reflected Federal reserve credit policy.Furthermore, the experience of several of the reserve banks is demon-strating that changes in discount rates need not be in all circumstancesthe main reliance or in any situation the exclusive reliance in makingthe credit policy of the reserve banks effective. By maintaining con-stant, close, and direct contact with the loan policies and operations


4 ANNUAL REPORT OF THE FEDERAL, RESERVE BOARD.

of its member banks, through examination or otherwise, a reservebank can do much by other means than changes in discount ratesto establish an effective supervision and control of the credit releasedby it to its member banks.

Discount policy in 192S.Discount rates in 1923 underwent fewerchanges than in any other year in the history of the system. Theonly changes in discount rates were at the Federal reserve banks ofBoston, New York, and San Francisco, where near the end of Feb-ruary rates were advanced from 4 per cent to 4 per cent, bringingthe rates at these banks to the level prevailing at all other reservebanks.

These advances gained significance from the fact that they werethe first rate advances in more than two years. At the time therehad been a considerable increase on a national scale in the demandfor credit and the existing inequality between discount rates invarious districts tended to attract an undue proportion of borrowingto the centers with low rates. The effect of the rate advances ofthe three banks was to bring about a better regional distribution ofcredit and to test the character and soundness of the credit demandby having the obligations of borrowers passed upon by banks in theirown locality.

The attitude of the Federal reserve system, as expressed in theserate changes, was not immediately reflected in any change of thevolume of bank credit in use. This, however, is not to be taken asindicating that the advances of rates, slight as they appeared, werewithout consequence. The influence of the change of discount ratesby the reserve banks can not be measured by any immediate effectthat they might be expected to have on the total volume of borrow-ing at member banks. The credit process which finally gives rise toa granting of credit by a member bank has its beginning in thebusiness plans and decisions of the bank's customers. The move-ment in the volume of credit at any given time, and particularly intimes of business expansion, has a momentum which can not beimmediately checked, and while the expansion is actively going onthe movement tends to gain momentum at an increasing rate. Thevolume of banking credit in use and outstanding, as recorded in thestatements of the banks, is the outcome of commercial plans andcommitments which may antedate by many months the extension ofcredit by the banks. Business transactions which are alreadyunder way will ordinarily be carried through to completion, quiteirrespective of changes that have supervened in credit conditionsand money rates. The rise in discount rates is not intended tointerrupt or interfere with antecedent commitments that are inprocess of completion but rather to induce a more prudent attitudeon the part of borrowers with regard to new commitments. I t


ANNUAL REPORT OF THE FEDERAL. RESERVE BOARD. 5

requires, therefore, some time for a rate change to show its effectsin the altered lending operations of the banks.

In the months immediately following the rate advances made inFebruary, 1923, the volume of credit, especially the borrowings forcommercial and industrial purposes, continued to increase at a rapidrate. Prices, particularly of those commodities which had beenadvancing rapidly for about a year, ceased their rise in May, chieflybecause the increased volume of production which the rise in priceshad stimulated was reaching the market and taking effect in suppliesof goods available for consumption. While consumers7 demandwas maintained and the volume of trade continued large throughoutthe year, there was some recession in industrial activity in the secondlialf of the year and a decline in the price level from the peak reachedin May to approximately the level of the corresponding months ofthe previous year.

The rise of prices during the early months of 1923, which in com-parison with the price movements experienced under more settledbusiness conditions of the years before the war was proceeding ata relatively rapid rate, led to expressions of concern that the countrymight once more be entering upon a period of credit expansion andgave rise in certain quarters to a demand for further discount rateadvances. The judgment of the Board, however, was that theincreasing volume of credit was justifying itself in the continuedincrease in the volume of production and consumption; the factthat there was little indication of speculative activity was regarded assufficient evidence that credit was not being put to uneconomic uses.

In commenting on the business and credit situation at the time,the Board said in its Review of the Month for March that "theeconomic use of credit is to facilitate the production and orderlymarketing of goods and not to finance the speculative holcjing ofexcessive stocks of materials and merchandise. So far as the availableindications go, the increased demand for credit during recent monthsappears to have arisen from the larger financial requirements ofcurrent production and trade and not from speculation in inventories.When production reaches the limits imposed by the available suppliesof labor, plant capacity, and transportation facilitiesin fact, when-ever the productive energies and resources of the country are em-ployed at full capacityoutput can not be enlarged by an increaseduse of credit and by further increases in prices." The view of theBoard at the time that the upward movement of prices was not dueto an unwarranted expansion of credit, as tested by the volume oftrade and industry, was confirmed by the subsequent course ofeconomic events.

During the closing months of 1923 prices became more stable, thereduced volume of production became better adjusted to the current

8653824t 2Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis


demand, and the volume of commercial and agricultural borrowingsafter reaching a peak during the crop-moving period, declined slightly.All of these developments indicated that the year 1923 by comparisonwith previous years attained a considerable degree of economicstability. The outcome for the year shows that the banks of thecountry through the extension of credit supported the industrial andtrade recovery that was under way and that the Federal reservebanks through their discount policy performed the function laiddown in the act of "accommodating commerce and business/7

Relation of discount rates to market rates.The experience of thelast year throws light upon the important and much discussed butas yet little understood problem of the basis of Federal reserve dis-count policy and rates.

Discussions have usually addressed themselves to the question ofrelationship that should exist and be maintained between Federalreserve bank rates and the rates in the open market and betweenFederal reserve bank rates and prevailing rates charged by memberbanks to their customers for current commercial accommodation.The view most widely held in financial and banking circles is that theFederal reserve bank rate should move in sympathy with generalmoney rates, rising as they rise and falling as they decline. A furtherdevelopment of this theory, based upon the leadership which it isfelt the Federal reserve banks should assume in the money market,asserts that when money conditions are tightening the Federalreserve bank rates should lead the rise of money rates. A stillfurther and more extreme view holds that Federal reserve bank ratesnormally should be above the level of member bank rates. A com-parison of money rates in the New York market during the year 192&with the discount rate maintained by the Federal Reserve Bank ofNew York is presented in the following table:

Federalreserve

discountrate.

1923.JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember

4.004.004.504.504.504.504.304.504.504. 504.504.50

Primebankers'accept-

ances, 90days.

4.004.004.004.1254.1254.1254.1254.1254.1254.1254. 1254.125

I PrimeTreasury j commercial'

certificates.! paper, 60! to 90 days

3.663.654.124.133.953.843.913.864.014.223.943.88

4.634.634.985.135.1'J4.914.945.025.125,5.1255.104.88

It appears that the Federal reserve bank discount rate of 4^ percent was in excess of the rate on bankers' acceptances and Treasury



certificates of short maturity throughout the year and below thecommercial paper rate.

The relation in 1923 between Federal reserve bank rates and ratescharged by member banks in the different districts to their customersis indicated by a comparison of the practically uniform rate through-out the year at all the Federal reserve banks and the rates paid bycustomers to member banks on paper rediscounted with the Federalreserve banks. This comparison is presented in the following table:

BostonNew York. . .Philadelphia.Cleveland

4.424.424.504.50

Richmond I 4.50Atlanta \ 4. 50Chicago I 4. 50St. Louis ! ' '"4.50

4.504.504.50

San Francisco ! 4. 44

Minneapolis..Kansas City.Dallas.

Average for all districts 4.47

5.075.225.315.586.096.255.62

. 5. 597.937.158.415.84

5.48

The table brings out the fact that the margin between the Federalreserve bank rate and member bank rates varies considerably fromdistrict to district, and that in general the spread is narrowest inthose districts where the financial centers are located. The differ-ences in the margin reflect in part the differences in the costs andrisks of member bank lending in various sections of the country.These differences between districts also represent the wider marginbetween the Federal reserve bank rate and member bank ratesin smaller cities as compared with the larger centers. With theFederal reserve bank rate at 4J per cent, the rates charged to cus-tomers in December, 1923, were 5.44 per cent for cities of 100,000population and over, 6.34 per cent for cities from 15,000 to 100,000,and 7.54 per cent for cities of less than 15,000. The diversity inmember bank rates, whether considered by Federal reserve districtsor by size of cities is, therefore, apparent. It follows that the Fed-eral Reserve Board, in approving the maintenance by all Federalreserve banks of rates at a uniform level practically throughout theyear, was guided by no mechanical rule as to the necessity of main-taining a fixed and invariable relationship between reserve bankrates and member bank customer rates. Indeed, the observationsof the Federal Reserve Board and the experience of the Federalreserve banks make it certain that the Federal reserve banks andthe Federal Reserve Board can not adequately discharge their



function of " fixing rates with a view of accommodating commerecand business'7 by the simple expedient of any fixed rule or mechani-cal principle.

New York and London money markets.Reference has alreadybeen made to the principle not infrequently advocated that the dis-count rates of the Federal reserve banks must be higher than cur-rent rates for commercial accommodation in order to be "effective"rates. This view appears to be based on a loose analogy with theLondon market and with the traditional policy of the Bank ofEngland. "Bank rate" in the London market is the official mini-mum rate at which the Bank of England stands ready to extendcredit on paper of certain well-defined character. This rate isnormally above the rate at which this class of paper is bought andsold in the London money market. It is not, however, abovethe rate charged by the London joint-stock banks on loans to theircustomers, in the form usual for borrowings in England for ordinarycommercial and industrial use, that is to say, in the form of "over-drafts" and "advances."

A comparison of the rate structure of the New York market withthat of the London market brings out that in the New York marketthe official discount rate of the Federal reserve bank is also abovethe open-market rate on that class of paper, to wit, bankers' accept-ances, most nearly comparable to the bills which are the principaltype of paper in the London market. A comparison further showsthat in London, as in New York, the bulk of the loans made bycommercial banks to their customers are at rates higher than bankrate in London or the Federal reserve discount rate in New York.

English banking practice does not, therefore, establish the inferencethat Federal reserve bank discount rates in order to be effective mustbe penalty ratesthat is, be higher than the rates charged bymember banks on customer loans. Little in the way of good wouldresult from any attempt to adopt or set this up as the regulativeprinciple in the adjustment of reserve bank rates.

There is an important difference between the relationship sus-tained by member banks to their Federal reserve banks and byLondon joint-stock banks to the Bank of England. When memberbanks lend money to their customers they obtain from them promis*sory notes which are eligible for rediscount with the Federal reservebank. The London joint-stock banks, on the other hand, makemost of their loans to customers in the form of overdrafts or advanceswhich do not result in negotiable instruments and therefore can notbe converted into balances at the Bank of England. The tempta-tion which is present under the American banking system to redis-count customer paper and relend the proceeds because of the profitarising from such rediscount, when the Federal reserve bank rate is


ANNUAL REPORT OF THE FEDERAL, RESERVE BOARD. 9

sufficiently below the customer rate to make such a transactionprofitable, is not present under the English system.

That this difference in the respective banking situations of the twocountries is a fact to be reckoned with in the application of the dis-count policy of the Federal reserve banks is certain, but the methodsby which it will most appropriately be reckoned with, experienceis already making it clear, are not to be found principally, if at all,in the establishment and maintenance of reserve bank rates atpunitive levels. The outlook for Federal reserve credit regulationwould indeed be unpromising, in view of the great disparity of cus-tomer rates at member banks in different sections of the country,if the reserve banks had no other means than discount rates by whichto regulate the volume of their credit used, and if this discount ratecould exert no effective influence unless it were a penalty rate.

The experience of the Federal reserve banks under normal con-ditions of operation has as yet been too brief to make it possible tospeak comprehensively and definitely concerning the proper relationof Federal reserve bank discount rates and member bank customerrates. This is particularly true because of the variety of economicand financial conditions in the United States, partially expressed,as has just been pointed out, in the lack of uniformity of interestrates in the different sections of the country. It will take muchfurther and fuller experience under more normal conditions to enableeach Federal reserve bank operating in the particular circumstancesof its district to work out the most practicable method of relatingits rates to competitively determined member bank rates within itsfield of operation. The regional organization of the Federal reservesystem was recognition of the fact that Federal reserve discount ratesneed not at all times and in all circumstances be uniform in theseveral districts, and experience appears to confirm the conclusionthat no single and uniform method of adjusting discount rates will befound equally workable and equally satisfactory in all the districts.

While it is not, therefore, possible to speak dogmatically on the sub-ject of Federal reserve rates and the basis on which they will best andmost usefully be adjusted in fulfilling the purpose of the Federalreserve act, to wit, that of fixing rates "with a view of accommodat-ing commerce and industry/7 it is possible to point to certain con-siderations derived from the experience of the Federal reserve bankswhich have an important if not a decisive bearing upon the problemof regulating the flow and use of Federal reserve bank credit by meansof the discount rate. Broadly stated, an effective Federal reservediscount rate will be one that gives effective support to a Federal re-serve bank's credit and discount policy. The objective in Federalreserve discount policy is the constant exercise of a steadying influ-ence on credit conditions.


JLU ANNUAL REPORT OF T H E FEDERAL, RESERVE BOARD,

The Federal reserve banks are the country's supplementary reser-voir of credit and currency, the source to which the member banksturn when the demands of the business community have outrun theirown unaided resources. The Federal reserve supplies the neededadditions to credit in times of business expansion and takes up theslack in times of business recession. It is its responsibility to regu-late the flow of new and additional credit from its reservoirs in accord-ance with solid indications of the economic needs of trade and industry.When production, trade, and employment are in good volume and thecredit resources of the commercial banks of the countay are approxi-mately all employed and there are signs neither of speculative businessexpansion nor of business reaction, Federal reserve bank rates shouldbe neither so low as to invite the use of credit for speculative purposesnor so high as to discourage its use for meeting legitimate productiveneeds of the business community. It seems clear that if business isundergoing a rapid expansion and is in danger of developing an un-healthy or speculative boom, it should not be assisted by too easycredit conditions. In such circumstances the creation of additionalcredit by rediscounting at Federal reserve banks should be discour-aged by increasing the cost of that creditthat is, by raising the dis-count rate. It seems equally obvious that if industry and trade arein process of recovery after a period of reaction, they should be giventhe support and encouragement of cheaper credit by the prompt estab-lishment at the Federal reserve banks of rates that will invite the useof Federal reserve credit to facilitate business recovery. The reasonfor variable Federal reserve discount rates is the necessity of adjust-ing rates to these changes in business and credit conditions.

The experience of the Federal reserve banks, notwithstanding thatthe brief period of their active operation on a considerable scale hasbeen one of disturbed economic and financial conditions, is demon-strating that there is a sufficiently close connection between changesin Federal reserve bank rates and changes in rates charged theircustomers by member banks on a sufficiently large volume of cus-tomer borrowings to make Federal reserve rates an important andat times a leading influence in money centers. In that sense theFederal reserve bank rate may be said to be effective. Its effective-ness and the range of its influence have been promoted in no incon-siderable degree in recent years by the increasing fluidity of theAmerican credit systemthat is, by the ease with which credit flowsbetween the larger financial centers and the interior of the country.

Member bank customer rates have shown a tendency to move withchanges in Federal reserve bank rates. This is particularly notice-able in the larger financial centers of the country, for reasons that neednot be detailed, and when after a considerable period of stable ratesthe Federal reserve bank rate is advanced. This is not merely



or principally because of the addition made to the cost of credit, butbecause an advance of rates when properly timed is taken by thebusiness community as an indication of the attitude of the Federalreserve system toward the credit situationthe relation of thevolume of the country's credit to the volume of its production andtrade. It is for this reason that the leadership of the Federal reservebanks when rates are advancing appears from experience to be morepromptly recognized than when rates are declining.

OPEN-MARKET POLICY AND OPERATIONS.

The credit policy of the Federal reserve system in 1923 was ex-pressed not in its discount policy alone, but also in the open-marketoperations of the Federal reserve banks. The year has witnessed aconsiderable development in the scope, purpose, and method ofthese open-market operations. The results of the year have demon-strated that open-market operations, when wisely timed and wellconceived, are, in a larger measure than has hitherto been generallyappreciated, capable of giving effective support to the discount policyof Federal reserve banks without an accompanying change of rates.This new chapter of experience is of sufficient consequence in its bearingupon the development of the Federal reserve system co merit extendednotice.

Discount and open-market operations.Two broadly distinguishableclasses of credit operations, that is to say, ways of making "discounts,advancements, and-accommodations," are recognized and authorizedby the Federal reserve act. There are, first, the so-called rediscountoperations, and, second, the so-called open-market operations, thesebeing the terms used by the Federal reserve act to distinguish thetwo major classes of Federal reserve bank operations. The provi-sions of the law governing rediscount operations are found in section13 of the Federal reserve act and those governing open-market oper-ations in section 14.

An "open-market" operation consists in the purchase or sale inthe general or open market by a reserve bank of such classes of in-vestments as it is authorized by the act to buy and sell. The classesof investments specified by the act as appropriate for purchase andsale by the Federal reserve banks in the open market are cable trans-fers, bankers' acceptances, bills of exchange, securities of the UnitedStates Government, and certain types of obligations of minor politicalsubdivisions. In making purchases and sales of these classes of se-curities the Federal reserve banks may deal directly with the public,for the act provides that they may purchase and sell "at home orabroad, either from or to domestic or foreign banks, firms, corpora-tions, or individuals."


12 ANNUAL REPORT OF THE FEDERAL RESERVE BOARD,

By a rediscount operation, on the other hand, is meant the redis-count by a member bank with a reserve bank of the paper of it&customers, when that paper conforms to the ^eligibility'7 tests setup by the reserve act. There is no open market for customerpaper or so-called line of credits loansno market, at least, in thesense in which the term market may be applied to such two-namepaper as trade bills, bankers' acceptances, etc. An important pur-pose of the Federal reserve act was to improve the status of customerpaper of eligible character, or, as the Federal reserve act states in itstitle, "to afford means of rediscounting commercial paper."

There can be no doubt that the Federal reserve act looked forwardto the development in the United States in the course of time of anopen market of considerable extent for dealings in short-termbills of the kinds described in section 14 of the act, and itwas expected and desired that operations in the open market shouldbe engaged in by the Federal reserve banks from time to time muchafter the manner of the central banks of leading foreign countries bythe purchase or sale of securities for the purpose of exerting an in-fluence on the state and course of credit.

A review of the history of the open-market transactions of the Fed-eral reserve system shows that during the first three years of theiroperation the volume of open-market securities held by the reservebanks was larger than the volume of their discounts for memberbanks. Easy money conditions during this period, the large influx ofgold, and the strong reserve position of the member banks made itpossible for them to finance the great growth that was then takingplace in the volume of the country's business without borrowing fromthe Federal reserve banks. The reserve banks entered the openmarket at this time partly to secure earnings from the investmentsfrom which their operating expenses could be defrayed, but largelyalso for the purpose of building up a broader discount market in theUnited States by encouraging the use of bankers' acceptances andby freely dealing in them.

After the entry of the United States into the World War the in-creased demand for credit for Government financing resulted in arapid increase in borrowing by member banks at the reserve banks.From that time until the end of 1921, when the liquidation followingthe crisis of 1920 had pretty well completed its course, the volume ofpaper held by the Federal reserve banks as discounts was muchlarger than the holdings of open-market investments. The volumeof such investments was at times considerable during this period,but, taking the period as a whole, the holdings of open-market invest-ments during the five years from the time of our entry into the waruntil the spring of 1922 constituted a relatively small proportion ofthe total earning assets of the Federal reserve banks.


ANNUAL REPORT OF THE FEDERAL RESERVE BOARD. 1 3

Open-market operations in 1922 and 1923.During the years 1922and 1923 the open-market transactions of Federal reserve banksentered upon a new phase. Not only were these transactions attimes large in their absolute volume as well as in their volume relativeto the rediscount operations of the banks, but they also showedbetween the beginning and the end of the period great fluctuations,both absolutely and relatively. Moreover, during these two years,in contrast to the earlier period, open-market transactions of theFederal reserve banks were principally in Government securitieseFollowing the general liquidation in 1921 there was a rapid and con-tinued repayment of borrowings by member banks. The volume ofpaper held under discount by the Federal reserve banks reached a lowlevel during the first part of the year 1922. Some of the reservebanks, in order to assure themselves of sufficient earnings to meet theirexpenses and their dividend requirements, began to purchase con-siderable amounts of short-term Treasury securities. By mid-yearthe volume of such securities held by the reserve banks reachednearly $600,000,000. The course of these operations, entered uponindependently by each of the twelve banks, made evident the needfor a better coordination of the open-market operations of the severalbanks, and in 1922 led to the creation of a committee of officers ofthe reserve banks for the purpose of coordinating reserve bankdealings in Government securities, so as to prevent possible conflictbetween their own transactions and those which as fiscal agents ofthe Government they were conducting for the Treasury. Moreover,and eventually destined to be far more important, the character andscale of the open-market operations engaged in by the Federalreserve banks during the year 1922 and the early part of 1923 showedthe need of bringing these operations more definitely into line withthe general credit policy of the system.

The part that open-market operations may play in general creditpolicy is influenced by the fact that changes in the volume of securi-ties held by the reserve banks have an effect on the volume of theirdiscounts for member banks. The purchase of securities in the openmarket by a Federal reserve bank places funds in the hands of mem-ber banks which these banks may use in the repayment of borrowingsfrom the reserve banks; the sale of securities, on the other hand, bywithdrawing funds from the market may lead to additional borrowingfrom the reserve banks. The difference between discount operationsand open-market operations is that the initiative in rediscountinglies with the member banks, while in the purchase and sale of secu-rities the initiative may be taken by the reserve banks. The extentto which member banks borrow in order to replace the funds with-drawn by the reserve banks through the sale of securities is a measure



of the demand for reserve bank credit. The sale of securities by areserve bank may thus serve as a test of the degree of adjustment be-tween the demand for reserve bank credit and the outstanding volumeof such credit.

The changes in the volume of open-market holdings and of dis-counts during 1922 and 1923 and the extent to which these changesoffset each other in the total volume of earning assets are shown inthe chart. The volume of open-market holdings with which theFederal reserve banks entered the year 1923 amounted to $712,000,000,made up as follows: Government securities, $457,000,000; accept-ances, $255,000,000. At that time the discounts of the Federal re-serve system amounted to $628,000,000. The earning assets of the 12MILLIONS OF DOLLARS MILLIONS OF DOLLARS

1200

600

1200

600

1922 1923reserve banks, therefore, at the beginning of the year 1923 consistedof discounts and open-market investments in approximately equalvolume. By the end of the year the volume of open-market holdingsfor the 12 banks amounted to $440,000,000, made up of Govern-ment securities, $104,000,000, and acceptances. $336,000,000. Thereduction in the volume of open-market investments was accom-panied by a substantially equal increase in the volume of discounts,with the result that the total volume of Federal reserve bank creditoutstanding changed but little. The gradual withdrawal from theopen market by the reserve banks during the first half of 1923 placedupon the member banks the responsibility for validating the con-tinued use of the existing volume of reserve bank credit and tested



the degree of dependence of the credit structure upon the volume ofFederal reserve bank accommodation outstanding. The recordshows that member banks met the test by discounting in a volumesubstantially equal to the reduction in open-market holdings. Therewas no material change in the volume of reserve bank credit in use.The reduction of open-market holdings by reserve banks, therefore,did not result in the withdrawal of support, but in a change inits character. The fact that the reduction of the open-marketholdings durmg 1923 was accompanied by an increased amountof discounting by member banks in a volume approximately equalto the funds withdrawn by the reduction of open-market holdingsshowed that the total volume of reserve bank credit outstandingwas not in excess of the demand for such credit.

The relationship just described between open-market operations,discount operations, and the total volume of reserve bank credit isbased upon the experience of the Federal reserve system as a whole,and is not evident to the same extent in the operations of the indi-vidual reserve banks. The purchases of Government securities in1922 by reserve banks outside the money centers did not result in acorresponding decline in the discounts for their member banks, andin the early part of 1923 the security holdings of some reserve bankswere materially reduced without causing a commensurate increasein the borrowings of member banks of those districts. The fact thatopen-market operations of individual reserve banks may not bereflected in changes in the demand for credit at these banks, but mayinfluence the credit situation in the money centers where the purchasesor sales are made, makes it evident that open-market policy shouldbe a system policy.

Open-market policy in 1923.It was for these and related consider-ations that the Federal Reserve Board in April, 1923, took steps tobring about a better coordination of the open-market operations ofthe Federal reserve banks with their discount operations and theirgeneral credit policy. The necessity of coordinated action amongthe several banks with respect to open-market policy and operationswas also an important consideration leading to the earlier appoint-ment of the committee of reserve bank officers to act under the generalsupervision of the Board in handling open-market problems andoperations. This committee is now the agency through whichtransactions in furtherance of the system's open-market credit policyare carried out. In view of the influence which the open-marketoperations of any reserve bank in the general money market mayhave on the credit situation, the board regarded it as essential thatthe purchases and sales of securities by reserve banks should be madewith primary regard to their broader consequences and in accordancewith the credit policy of the system. The following was the principle



laid down by the Board in this matter: "That the time, manner,character, and volume of open-market investments purchased byFederal reserve banks be governed with primary regard to the ac-commodation of commerce and business and to the effect of such pur-chases or sales on the general credit situation.77

As the Federal reserve act provides that discount rates shall befixed "with a view of accommodating commerce and business/' theadoption of this principle by the Board has established the open-market policy on the same basis as the discount policy.

The experience of the past year in open-market and discountoperations of the reserve banks is significant, because it has demon-strated that with a constant demand for reserve bank credit con-tinuous readjustments in the composition of this credit may occurwithout resulting in an increase in the total volume outstanding.That throughout 1923, a year of growing business activity andincreased credit and currency requirements, there was no demandfor additional reserve bank credit was due to the continued inflow ofgold from abroad which furnished to member banks the funds neededto finance the enlarged volume of trade and industry.

GOLD AND CREDIT.

The important influence exerted by the inflow of gold from abroadduring the year 1923 on the banking situation in the country atlarge and on the position of the Federal reserve banks in relation tothe general credit situation has already been the subject of briefreference in this report. Net gold imports into the United Statesduring the past year amounted to $294,000,000. A gold movementof this magnitude in the course of a single year would constitute animpressive development and a factor of consequence even if it were anisolated occurrence. The gold inflow into the United States in thelast year, however, presents itself as a continuance of the influx whichhas been in process since the closing months of the year 1920, andthe indications are that the movement which has been bringing goldto our shores during the past three years has not yet spent its force.The shifting of the world's principal monetary metal which has takenplace in this period of time is without precedent in monetary history.

Gold imports and the Federal reserve hanks.Since the Federalreserve banks began operations in November, 1914, over two billions ofgold have been added to the stock of the United States by importa-tion. It is the gold which has been thus received from abroad thatnow constitutes the larger portion of the gold reserves of* the twelveFederal reserve banks.

The first billion of this gold came prior to the entry of the UnitedStates into the World War. Under the policy of gold concentrationpursued by the reserve banks during the war, the bulk of the gold


ANNUAL REPORT OF THE FEDERAL, RESERVE BOARD. 17received during the two years before our entry into the war was addedto the gold holdings of the reserve banks. That concentration formeda part of the general policy of financial mobilization and was a mostmaterial factor in the success of the plan adopted for the financing ofthe war. During the period of our participation in the war goldmovements were on a relatively small scale.

The second billion of gold has been received during the five yearssince the conclusion of the war. This second billion was the netaddition to our gold stock after the loss of some $400,000,000 of

GOLD MOVEMENT AND RESERVES( IN MILLIONS OF DOLLARS ) IMPORTS AND EXPORTS

1120

1919 1920 1921 1922 1923

Bars above baseline represent imports; bars below base line, exports. Black portions represent netimports or exports.

gold between the removal of the gold embargo in 1919 and theautumn of 1920. Net imports of gold during the year 1921 aloneamounted to around two-thirds of a billion dollars. The goldreserves of the Federal reserve system, which stood at $2,063,000,000at the end of the year 1920, increased to $2,875,000,000 at the endof the year 1921, to $3,047,000,000 at the end of the year 1922, andto $3,080,000,000 at the end of the year 1923. Gold movementsinto and out of the United States and the growth of the reserves ofthe Federal reserve banks from 1919 to 1923 are shown in the chart.Digitized for FRASER

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Gold is the tangible and conventional basis of bank lending andcurrency issuing power. The particular effect exerted by an influxof gold, therefore, depends upon business and credit conditions andneeds at the time when the gold is received. Gold received fromabroad in the usual course first finds its way into the member banks.So long as it remains in their hands, it does not count as part oftheir legally required reserves. A member bank receiving the gold,therefore, deposits it with its reserve bank. If this bank has paperunder rediscount with its reserve bank at the time, the gold maybe used to reduce its rediscounts. If it has no paper under rediscountthe gold adds to its reserve balance and to that extent increases itslending power.

The first billion of gold which, as already noted, came prior to theentry of the United States into the World War, by increasing thereserves of member banks constituted a banking basis for the enor-mous growth of bank credit and currency which was used to financethe production of war materials and other supplies bought by Euro-pean Governments in great volume. That was a period of businessand credit expansion calling for enlarged lending by the banks of thecountry.

Further expansion of credit and currency was occasioned by thevast expenditures of the Government during the period of our par-ticipation in the war. The addition of $1,149,000,000 of gold to thereserves of the Federal reserve banks after our entry into the warformed the basis of an increase in the discount and investment opera-tions of the Federal reserve banks from $226,000,000 in April, 1917,to $2,291,000,000 in December, 1918. The reserve ratio of the Federalreserve system, which stood at 84.7 per cent in April, 1917, whenthe aggregate reserves of the system amounted to $963,000,000, fellto 48.8 per cent in December, 1918, when the aggregate reserves ofthe system stood at $2,151,000,000.

The imports of gold, which took place during the year 1921 andwhich amounted to $667,000,000, came to the United States in pay-ment of foreign indebtedness and reached us at a time when generalloan liquidation which followed the crisis of 1920 was under way.This gold was a substantial factor in facilitating reduction of bor-rowings by member banks at the Federal reserve banks. As nearlyas can be estimated, about one-half of the total reduction in theborrowings of member banks during the years 1921 and 1922 waseffected by the use of the imported gold.

Influence of gold imports duriruj 1922 and 1923.The gold receivedin the United States since the middle of 1922 has had an effect dif-ferent from that just noted in 1921 and the first half of 1922. Thisrecent influx of gold has taken place after a period of liquidationand during a period when business was in process of recovery andexpansion, and when demand for credit was increasing member bank



loans. With the turn in credit and currency demands arising aboutthe middle of 1922, not as many member banks had occasion to usetheir imported gold to repay borrowings at their reserve banks.The gold, therefore, constituted an addition to their reserve balancesand enabled them to expand their loans to their customers withoutthe need of rediscounting, and also to supply the cash requirementsof their customers, just as was the case in the two years before ourentry into the war in 1917. In brief, the gold received during theperiod of liquidation in 1921 and 1922 enabled the member banks torecover a considerable degree of the independence of reserve banksupport which they had lost in the preceding years, while the goldreceived since the middle of 1922 has enabled them to maintain theirstate of relative independence notwithstanding the great interveninggrowth of credit.

The increase in credit extended by member banks to their cus-tomers which, during the past two years has amounted to over$3,000,000,000, has been large enough to absorb the gold receivedduring this time and, taking the banking situation in the country atlarge, to require the continued maintenance of the volume of reservebank credit outstanding at the beginning of 1922. While thisincrease in credit and currency demands was large enough to main-tain the existing volume of reserve bank credit, it was not so largeas to result in an additional demand for reserve bank credit.

Gold received by a member bank is in ordinary course depositedwith its reserve bank. Its first effect is to add both to the reservebalance of the member banks and to the gold reserves of the Federalreserve banks. The reserve bank has no control over the use madeof its free reserve balance by its member banks. Therefore, the usemade in the first instance of credit arising from a gold import lieswith the member bank. When, however, the member bank hasexpanded its operations to the full extent for which the gold deposithas furnished the required reserves, or has withdrawn currency ina volume equivalent to this deposit, a further use of the additionallending power arising out of the gold can be made only by borrowingfrom the reserve bank.

The ordinary bank, like any business concern, is organized and con-ducted for profit. Banks seldom carry surplus reserves. Their dispo-sition is to make full use of their surplus cash resources. . If these re-sources are in excess of what is needed to meet their customers' creditrequirements, they will put them into the general market through thepurchase of commercial paper, bond investments, or call loans, soas to keep all of their available funds in one way or another alwaysfully and profitably employed. The reserve banks are in a differentposition. They are the holders of the ultimate and only true bank-ing reserves of the country. They are the reserve banks of the coun-


2 0 ANNUAL REPORT OF THE FEDERAL. RESERVE BOARD.

try, and as such they are charged with large responsibilities for theconstant maintenance of a sound credit situation. They must,therefore, be conducted with primary regard to the bearing of theiroperations upon credit conditions rather than by the desire to makefull use of their earning power. Reserve bank credit is properlyused when in response to the credit and currency requirements ofindustry and trade. The present large gold holdings of the reservebanks not only afford assurance of adequate credit support for thegrowth of productive industry in the United States, but also willmake it possible for this country to meet any probable future demandfor gold from abroad that may arise in connection with the restora-tion of the international gold standard. It is the part of prudencefor the United States and for the Federal reserve banks in particular,as the holders of over $3,000,000,000 of gold (that is, about three-fourths of the total estimated stock of monetary gold in the UnitedStates), to pursue a course which will enable them to part with suchportion of this gold as Europe will need to reclaim for currencyrestoration with a minimum of inconvenience and disturbance toour internal financial and economic situation.

Future gold movements.In view of the important effects of goldimports upon the American credit situation and upon the inter-national monetary situation, the probable extent and direction offuture gold movements is a matter of great concern. No inflowcomparable with that which has already taken place can be expected,since this movement has drained a large part of the European goldformerly in circulation and has in addition absorbed the bulk of thegold reserves of those countries, notably Russia and Germany, whosefinancial and monetary conditions were such as to make it impossiblefor them to keep their central banking reserves intact. The reservesof the central banks of other principal countries of Europe were con-siderably enlarged during the war and have not declined during thepost-war period. Present government policy in these countries isto control gold exports and not to permit the reduction of thereserves of the central banks. In fact, of the $600,000,000 of goldimported into the United States during 1922 and 1923, the bulkconsisted of newly mined gold. It is hardly to be expected, there-fore, that in the immediate future the gold inflow will exceed or evenequal the current gold production of the world. During the pastyear India has received a share of the new gold because improvedeconomic conditions have led to a favorable trade balance, and goldhas gone also to Egypt. A larger or smaller share of the gold outputof a year constitutes the probable maximum which can be expectedto be available for distribution to the United States and other coun-tries. On the other hand, the prospect of net gold exports dependsupon the balance of international payments as influenced by trade


ANNUAL, REFORT OF THE FEDERAL RESERVE BOARD. 2 1

movements and international loans and investments and upon thedisposition and ability to withdraw gold on the part of those countrieswhich are undertaking to reorganize their currency systems on agold basis.

Gold standard and currency reorganization.The attempts duringthe past year at currency stabilization by European countries havebeen steps in the direction of the reintroduction of gold as a standard.They have not yet resulted in any considerable addition to goldreserves. Though they differ in method and detail, European effortsto promote better monetary conditions have aimed at the establish-ment and maintenance of a constant relationship between the value oflocal currencies and gold. Thus far experiments, which have been ona relatively small scale, have made use of the American dollar andother stable currencies as the equivalent of gold. In view of the lowgold value of the total volume of these currencies and the limiteduse of gold in the settlement of trade balances, the demand for goldfor purposes of reestablishing currency stability has not been con-siderable.

In international trade gold has retained its conventional position asa standard throughout the decade of currency disorganization.. Thenecessity of a common basis for calculating the prices of commoditiesentering into world trade has had the result that through mutualadjustments of prices and exchange rates international price levels,when expressed in terms of gold, have tended toward equalization.In this adjustment the American dollar, not only because of its con-vertibility into gold, but because of its stability and because of thetrade position of the United States, has become increasingly the unitof account in international trade. Thus the dollar has become thelink between countries on a paper currency basis and the gold standard.

The premium on dollar exchange and the large movement of goldto the United States in the postwar period both arose out of the largevolume of goods exported to foreign countries during and since thewar. Through shipments of gold to the United States foreign coun-tries have been able to meet their unfavorable merchandise tradebalance and to reduce their indebtedness for goods bought on creditin earlier years. In spite of the disorganized conditions of the ex-changes, the volume of trade between the United States and othercountries has been in large volume, and in the payment for goodspurchased in the United States the foreign countries have used gold,not as before the war chiefly in the settlement of balances but moreas one of the commodities that they were able to export to the UnitedStates. An added circumstance favorable to the shipment of goldto this country has been the commanding role now played by theUnited States as the world's most important and, practically speak-ing, only "free" gold market.

8653824f 3Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis


By a free gold market is meant a market in which credits, how-soever established, are gold credits; that is to say, credits for whichgold can be promptly obtained for foreign shipment and withdrawnwithout obstacle or objection. It is well known that in the financialeconomy of the world previous to 1914 London was the most im-portant of the world's free gold marketsthe one which commandedthe greatest confidence and the one, therefore, which attracted thelargest volume of foreign financial accounts and the large volume ofvaried business from every quarter of the world which followed intheir wake. By virtue of its creditor position and its unprecedentedlystrong gold position the United States has now become the world'sgold center. As such it has assumed the high responsibility of somanaging the vast gold supply domiciled here that it may be avail-able for redistribution by export as occasion may arise withoutproducing any untoward or disturbing effects in our own domestic,economic, and financial situation.

The United States now holds an aggregate of about $4,000,000,000of gold. This is approximately four-tenths of the estimated totalstock of monetary gold in the world. It is more than double thetotal.monetary stock of the United States before the beginning ofthe World War in 1914. The history of the distribution of gold inthe past demonstrates that monetary gold under normal conditionsdistributes itself at a fairly steady rate among gold-using countriesin proportion to their ability to command it. It is to be expectedwhen conditions are on a more normal basis that a situation similarto this will reestablish itself through the redistribution of gold.Great and impressive as has been the industrial growth of theUnited States in the past ten years, it can not be contended thatit will require a twofold amount of gold to insure the integrity andimpregnability of the gold standard. It is to be expected and de-sired that some portion of the gold which the tides of disorganizedtrade have brought us in the past ten years will eventually returnto the countries whence it has come.

Changes in the gold position of the United States for significantdates since the organization of the Federal reserve system are pre-sented in the table. The increase in the gold reserves of the Federalreserve banks during the nine years of their operation has arisenfrom net gold imports of over $2,000,000,000, from domestic goldproduction and from a reduction of about $400,000,000 of gold andgold certificates in circulation. The gold withdrawn from circulationwas replaced by Federal reserve notes, largely in pursuance of thepolicy of concentrating the gold of the country in the reserves ofthe reserve banks. During 1923, however, there was an increase inthe circulation of gold certificates, so that the larger portion of the


ANNUAL REPORT OF THE FEDERAL, RESERVE BOARD. 23gold received from abroad during the year has been added to circula-tion rather than to the gold holdings of the reserve banks.

[In millions of dollars.]

DateStock ofgold inUnitedStates.*

Gold incircula-

tion.!

Goldreserves of

Federalreservebanks.

Nov. 27, 1914Apr. 6,1917May 28,1920Dec. 13,1922Dec. 12, 1923

1,8173,0892,6643,9094,210

1,3381,991

674670

228944

1,9533,0613,116

1 Figures for the nearest first of the month.

CURRENCY AND CREDIT.

Currency in 1923.The increased demand for currency during1923 was met by the payment of gold certificates into circulation andnot by the issue of Federal reserve notes. This reflects the recentpractice of certain reserve banks, particularly New York, of supply-ing the currency requirements of their members by paying out gold.For the system as a whole there was during the year a decrease inthe volume of Federal reserve notes in circulation, though the totalof money in circulation increased. Changes in the total, rather thanin the various forms of money in circulation, measure the fluctuationsin the demand for currency. Federal reserve banks continued tobe the source from which currency was supplied in a volume responsiveto changing requirements and the form of money paid out by thereserve banks affected merely the composition of the total moneyin circulation. The table shows the volume of different kinds ofcurrency in circulation on January 1, 1923, and January 1, 1924.

Kind of money

Gold and gold certificatesSilver and silver certificatesUnited States notes..Federal reserve notesFederal reserve bank notesN ational bank notes

Total

Amount (in mil-lions).

Jan. 1,1923.

732597286

2,37337

7084,733

Jan. 1,1924.

997696307

2,22414

713

4,951

Percentage dis-tribution.

Jan. 1,1923.

15.512.66.0

50.1.8

15.0100.0

Jan. 1,1924.

20.114.16.2

44.9.3

14.4

100.0

The effect of meeting the currency demand by paying gold ratherthan Federal reserve notes into circulation has been to increase theproportion of gold in the total circulation to the largest percentage,and to decrease the proportion of Federal reserve notes to the lowestpercentage in five years.



While the Federal reserve banks during 1923 continued to functionas the source from which the public obtained the currency requiredto transact the larger volume of business, the increased use of cur-rency did not result in an increased use of Federal reserve bank credit.The reason for this was that the gold received from abroad and de-posited with the reserve banks furnished member banks withfunds to meet the increased currency demand. The relation betweengold imports and currency demand in 1923 was similar to that in 1915and 1916, which was also a period of gold imports and increasingcurrency requirements. In those years also the inflow of gold fromabroad supplied member banks with credit in sufficient volume tofinance a business expansion with little resort to the Federal reservebanks. The experience of 1923 is in contrast, however, to that of1919-20, when there were no net gold imports and when businessexpansion led to heavy borrowing at the reserve banks to meet thelarge and increasing demand for currency.

Currency demand and the reserve banks.In the experience underthe reserve system, changes in the demand for currency in the ab-sence of gold imports have been the principal factor accounting forMILLIONS OF DOLLARS MILLIONS OF DOILAHS

3000

2000

1000

3000

2000

1000

1917 1918 1919 1920 1921 1922 1923

fluctuations in the total volume of borrowing. Thus total earningassets of the reserve banks and Federal reserve note circulation fol-lowed a parallel course until 1921, when the large inflow of goldbegan. The chart shows the movement of Federal reserve notes


ANNUAL, REPORT OF THE FEDERAL, RESERVE BOARD. 2 5

and earning assets from 1917 to 1923. The divergence between assetsand notes in 1921 was the consequence of the large gold imports whichwere used in the liquidation of borrowings, and the difference of about$1,000,000,000 between earning assets and note circulation during thepast two years measures the extent by which earning assets were re-duced by the use of gold received from abroad. During 1922 and 1923the relative position of earning assets and notes in circulation has re-mained unchanged, since the gold imported during those years waspaid into circulation and was sufficient to supply the increased de-mand for currency. It is the coincidence of a volume of gold importsin 1923 about equivalent to the increased demand for currency whichchiefly accounts for the absence of growth in reserve bank assets, andmakes the relation between the movement of assets and notes differ-ent from the experience of earlier years.

Credit demand and currency demand.Though the increase in cur-rency demand in 1923 has not, as in earlier years, been accompaniedby a growth of Federal reserve bank credit, it has, as at other times,followed upon a growth in member bank credit. The larger currencyrequirements of 1923 were preceded by an increase in 1922 of loansand deposits of member banks. This is the usual sequencean in-crease of deposits being followed by an increase of the currency.Ordinarily the first effect of an increase in business activity upon thebanking position is a growth in loans and deposits. In the earlierstages of a period of banking expansion there is usually a roughlyparallel upward movement of the loans and deposits of the banks.Later on, however, the situation changes. There comes a time whenthe increase of business activity and the fuller employment of laborand increased pay rolls call for an increase of actual pocket money tosupport the increased wage disbursements and the increased volumeof purchases at retail. At this stage the rough parallelism be-tween the growth of loans and deposits of the banks gives wayto a divergent movement between these items. Loans may con-tinue to increase while deposits will remain either, stationary or showa decline. When the point is reached in a forward movement ofbusiness where manufacturers and dealers need more currency forpay roll and other purposes they draw down their deposits at thebanks. What in the first instance was the creation of bank credit inthe convenient form of a checking account has now become a demandfor cash. In other words, the customer's demand for book money(deposits) at the bank becomes converted into a demand for pocketmoney. This change is reflected in the altered position of the banks.The ratio of loans to deposits rises with an increased demand for cur-rency.

Movements of this character have occurred during the past twoyears. The year 1922 was one of business recuperation calling for



increased banking accommodation. So far as the banking position wasconcerned, what was going on in 1922 was reflected in the simultaneousgrowth of member bank loans and deposits.- The first half of the year1923 saw the forward movement in business quickened to an extraordi-nary degree. Production in basic industries was at an unprecedentedrate; there was full employment with wage increases in many industries.The stage had been reached where bank borrowers were availing them-selves of their credits to an increasing degree in the form of actual with-drawals of currency. The ratio of loans to deposits was in consequencerising.BILLIONS OF DOLLARS13

BILLIONS OF DOLLARS13

MEMBER BANKSIN LEADING CITIES

1922 1923The chart shows that in 1922 deposits of member banks in leading

cities increased more rapidly than their loans,while in 1923 deposits de-clined and loans continued to increase. Thus the ratib of loans to de-posit^ rose during 1923, reflecting the increased demand for currency.

In days before the establishment of the Federal reserve system,the ratio of loans to deposits was commonly used as a trustworthyindicator of the banking position and of the general credit situation.This ratio is still frequently appealed to as foreshadowing changes inmoney rates. But it is not commonly recognized that the establish-ment of the Federal reserve system has introduced a new factor


ANNUAL, REPORT OF THE FEDERAL. RESERVE BOARD. 2 7

which has worked a great change in the situation. Previous to theestablishment of the reserve banks a rise in the ratio of loans todeposits was properly regarded as indicating an approach to thelimits of bank lending power because it indicated also the approach-ing exhaustion of the surplus reserves of the banks. It foreshadowedan approaching shortage of cash, and, under a currency sys-tem lacking elasticity, a period of credit stringency. Under theFederal reserve system, as before, fluctuations in the ratio of loansto deposits are occasioned by changes in the country's demand forcurrency. This increased demand, however, under pres

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