Part I.-GENERAL ECONOMIC SITUATION DURING THE FISCAL YEAR.

The Business Situation.

The fiscal year (July, 1922, to June, 1923) was marked by a complete recovery from the great slump of 1921 in all branches of industry save agriculture, and even in agriculture there was some improvement. This recovery had found a special impetus in the activity of building, railway, and other types of construction resulting from postponement during the war. It spread, however, to industry in general, so that the continuance of business activity is not dependent upon the maintenance of an equal measure of building construction hereafter.

The best measure of economic prosperity in industries other than agriculture is the volume of production and transportation. In these industries large production follows from active demand and may readily be coincident with advancing prices. Agricultural production is subject to decidedly different influences, as the prices for its major products are dominated by the European situation instead of our domestic needs, although full employment in this country at good wages has distinctly increased consumption, particularly of animal products.

The marked improvement in industrial activity is clearly brought out by the index numbers in the appended table of statistics (Table 1, p. 11). Although the latter part of the previous fiscal year already showed a decided upward movement, the manufacturing production of 1922-23 was nearly 25 per cent greater than that of the preceding 12 months. As compared with the bottom point of the slump, it showed an increase of more than 40 per cent. Production of minerals, forest products, and electric power, and construction of buildings showed approximately similar increases. The railroads hauled over onefifth more freight (ton-miles) in 1922-23 than in the preceding fiscal year. All these indexes of economic activity for the fiscal year stood materially higher than during the very prosperous year 1919.

Especially conspicuous, naturally, has been the increase in the activity of those industries which manufacture chiefly articles entering into new construction and equipment, the demand for which is always peculiarly affected by waves of depression and prosperity. Pig-iron production, for example, during the fiscal

year was nearly double that in 1921-22 and at a rate three and one-half times greater than at the bottom of the slump.

Advance in the general business activity of the country appeared practically continuous from month to month throughout the fiscal year, and in most branches the close of the year marked the highest point attained. The only important exception was in the letting of building contracts, which fell off in the last five months of the fiscal year, partly because construction is beginning to catch up with the deferred requirements and partly because costs under the stimulus of demand had risen to unduly high figures. There is no reason to anticipate, however, that the decline in building activity will precipitate a general depression.

PRICES. The business of 1922-23 was conducted on a distinctly higher level of prices than that of the preceding fiscal year, though the level is still, as unquestionably it should be for the best public interest, far lower than during the inflation of the war and the postwar boom. In general, there has been no feverish boosting of prices. Average wholesale prices during the fiscal year were 10 per cent higher than in 1921-22, 56 per cent higher than in 1913, but 37 per cent lower than at the peak of the postwar boom, in May, 1920. There was comparatively little fluctuation in the general level during the course of the fiscal year, the higher average resulting chiefly from the rather rapid increase which had taken place in the first half of the calendar year 1922. The general wholesale price index varied only from 155 in July, 1922, to 159 in April, 1923, and down to 153 in June. The higher level of wholesale prices during the fiscal year was shared by every group of commodities-not necessarily, of course, by every individual commodityincluding farm products and foods. (See Tables 2 and 3, pp. 11 and 12.)

Retail prices, as usual, lagged behind wholesale. The average price for retail food was a little lower in the fiscal year than in the preceding one. A slight advance, however, set in during the summer of 1923. This situation of a moderate increase in wholesale prices, accompanied by stationary retail prices, gave stimulus to industry.

AGRICULTURE.-The situation in certain branches of agriculture continues unsatisfactory, though in most instances with distinct improvement. It should be clearly understood that by no means all branches of agriculture are suffering.

The fall in the prices of most major agricultural products after the boom was exceedingly violent-some fell even below prewar levels. Taking all important agricultural products together

including some showing much less decline the wholesale price index as compared with a pre-war base taken at 100, fell from 247 in January, 1920, to 114 in June, 1921, while all other commodities (including manufactured foods which are much affected by farmers' prices) fell from the same maximum to a minimum of 154. A considerable advance in the average prices of farm products began early in 1922. The average index for the fiscal year under review was 139, or 10 per cent higher than the average for the preceding fiscal year and more than 20 per cent higher than the minimum above mentioned. The advance was greater than that in other commodities, but as compared with normal pre-war ratios farm-product prices were still relatively a good deal lower than the average prices for other goods. The index for July, 1923, was the same as that for the July preceding. Wheat and hogs were exceptions, the prices averaging lower in 1922-23 than in the preceding year and lower at the end than at the beginning of the year. Cotton and corn have advanced materially. (See Table 2, p. 11.)

Unlike manufacturing and mining products, changes in volume of production on farms often do not reflect parallel changes in the prosperity of the agricultural community. The demand for most farm products is far less elastic than for most other products. In any case agricultural production can not adapt itself rapidly to changes in demand. The area planted to all crops combined in the United States has shown only insignificant variations in recent years, although standing about 10 per cent higher than before the war. Most individual crops also show little variation in acreage, although there has been a material decline in wheat acreage since 1919 and although cotton acreage shows a considerable increase in 1923 over 1922. Naturally the farmer can not suddenly change either his aggregate plantings or the proportion planted to the different crops. Short-time variations in crop production are due more to weather conditions than to human will.

Again, while large production and advancing prices are likely to go hand in hand in the case of manufacturing and mining industries, the opposite more frequenlty occurs in agriculture. In the case of several of the important agricultural products the prices are much more dependent upon conditions abroad, especially in Europe, than in the case of most manufactured and mineral products. A conspicuous illustration is the fact that the prosperity of the United States during the past year or two has meant only a moderate increase in domestic demand for wheat. so that its price has been primarily dependent upon the foreign market.

The situation in most branches of agriculture seems to be gradually adjusting itself. The partial recovery in foreign demand for cotton has permitted a higher price for the crop of 1923 than for that of 1922, in spite of an increase of 14 per cent in acreage and an appreciable increase in production. While the prices of hogs have been somewhat lower of late, the relatively high prices of corn, which is chiefly fed to livestock, seem to indicate confidence of cattle and hog raisers in the future. The dairy industry in general is prospering, the demand for dairy products varying more than that for most other agricultural products with general movements of prosperity and depression in industry. As for wheat, which is more dependent on foreign markets than any other agricultural product and which is subject to greatly increased competition from Canada and other foreign countries, it seems necessary gradually to reduce acreage. Wheat planting had been stimulated during the war more than that of any other crop, increasing to a maximum over 50 per cent higher than the average for 1909-1913. The acreage planted in 1923, though one-eighth less than in the year preceding, was still about 15 per cent above that before the war. With the gradual growth of domestic consumption, due chiefly to increase in population, the output of the pre-war acreage could at present practically all be consumed in our own country.

Financial Review for the Fiscal Year.

From the standpoint of financial conditions the fiscal year under review opened auspiciously, chiefly as a result of the marked revival in trade and industry that had been under way for several months, despite the coal and other strikes then in progress.

Much had been accomplished during the first half of the calendar year 1922 in the liquidation of the frozen credits accumulated in the previous year. The loans and discounts of the Federal Reserve banks and of the member banks had reached a minimum, while the returns of the reporting member banks of the Federal Reserve system showed their largest investment holdings up to that time. Rates on both call and time money had fallen below 4 per cent.

The banks of the country as a whole, with the exception of those in certain agricultural districts, were therefore in excellent condition to meet the requirements of expanding production and distribution of commodities. This condition continued throughout the fiscal year. Bank loans and discounts began to increase in the later months of 1922 and reached their maximum in the middle of May, 1923, continuing substantially at this level through June. Nevertheless, there were at all times ample bank

ing accommodations to finance industrial and commercial requirements, even at their peak.

Differences between the industrial and agricultural sections. of the country with respect to the revival of industry and the use of bank credit are, however, to be noted. In April, 1922, the proportion of the total volume of rediscounts of the reserve banks which were made for banks in cities of 100,000 and over and for banks in cities of less than 15,000 was approximately the same, namely, 42 per cent; while in April, 1923, the proportion for the large cities was 75 per cent and for the small cities about 15 per cent. This change in proportions is largely a reflection of the marked improvement in trade and industry as compared with agriculture in the year ended April, 1923.

At the close of the fiscal year the banking situation continued to be essentially sound. In the early months of 1923 the banks had wisely restricted the extension of credit to the legitimate needs of business and had thus played a large part in the prevention of inflation which many feared would result from the pronounced upward tendency of prices.

With reference to the Federal reserve banks, it is to be noted that the marked increase in trade did not result in any extensive use by the member banks of their rediscount privileges. While the volume of discounted bills outstanding July 18, 1923, was about 80 per cent higher than the amount reported for July 19, 1922, it was less than that reported at the close of January, 1922, and was only about 46 per cent of the monthly average for 1921. Bills bought in the open market by the several reserve banks increased about 23 per cent from July 19, 1922, to July 18, 1923. In other words, the total volume of bills discounted and bills bought in the open market by the reserve banks increased only from 592 millions to 989 millions from July to July, a very moderate increase in the use of reserve-bank facilities during a period of rapidly expanding business.

During the year the Federal-reserve note circulation increased only about 85 millions; that is, from 2,157 millions in July, 1922, to about 2,242 millions in July, 1923. Likewise, due to the continued influx of gold from abroad, the reserve ratio of the reserve banks was maintained at a high level, being 76.6 per cent on June 30, 1923, as compared with 77.9 per cent on June 30, 1922.

Gold continued to flow in throughout the year under review, but at a greatly diminished rate as compared with the preceding fiscal year, the respective values being about 235 millions and 441 millions. This decline in the inward gold movement is due chiefly to the decline (nearly one billion dollars) in the excess