Evening star., 1920-02-28

AS the question of financing the war
with Germany demonstrated the ex-
pansive power: OF the federal reserve
system. the present conditions will be a
test Of the ability of the system to check
expansion and to induce healthy liquf-
dation. says the sixth annual report OF
the Federal Reserve Board. made public
last week
Though the fires of the European
war, had been lit when the act Great
ing The Federal Reserve BOARD was
grafton seemed very remote from tho
United States. and no one dreamed Of
the strain to which this country would
be put in loaniig large sums to the
beiIfgcrent powers. and later IN provid.
ins the sfnews of war for its own Army
and Navy. The system. which. in ma ny
quarters. was looked on as an expert
n1ent in national finance even in normal
times. was subjected to tcst which
even. its originators might well have
viewed with apprehension. but within
period of two years s25. 900. .o0o. 900 Of
interest-bearinE obliRatio were fioated
without reducing the reserves OF the
federal reserve banks below normal
pre-war point
Problem Bonrd Must solve.
Now tl1r problem of the ABSORPTION of
those bonds and the control of the credit
situation is facing the Federal Reserve
Board. which points out in its report
that "dehation merely for the sake of
restoring security values and commotfi-
ty prices to their pre-war levels with
OUT regard to other consequences would
De an insensate proceeding in the exist
ing posture OF national and world af-
lairs. Summarizing conditions grow
Ing out OF the war, the boards report
says: '',,'-
The purchasing power Of the pub
nc growing out of high wages and
large profits is greater than it has
ever been before; and this purchasing
power. competing with export de-
mands arising out of the necessities of
europe. has raised prices to a point
tnat takes no account of prudence.
EVERY element of increased cost is
ADDED to price, and there is. therefore.
no incentive to manufacturers to pro-
duce cheaply or to hold back because
OF any element of cost. whether of
credit. labor .r material. as they can
Always sell their output at profit.
Ihere is practically unlimited dema nd
Tor credit, not only for the n1anufac-
ture and distribution of goods. but
also for speculation in commodities
and in the securities representing
ownership of the industries producing
those commodities and which profit by
their production and sale
Feared Results of Change.
From the facts set forth above. II
is evident that an advance in discount
rates while the government had an
unwieldy floating debt and liberty
bonds were still largely unabsorbed
would have added to the difficulties Of
government financing While reeu-
lation and control of credit have been
as desirable since the war restrictions
were removed as before, the board
was convinced that to ATTEMPT this
control through premature adjust
ments of rates would be SO detrimen-
tai to the Treasury's position as to
onset. il not prevent entirely. the re-
suits sought. {.
Early in December. however. after
the program of the Treasury for the
adjustment of the floating debt had
advanced to a stage where il could
no longer be seriously affected by the
adoption OF a more normal banking
policy. the board notified the federal
reserve banks thatn.'t was ready 10
consider their suggestions for rate
changes and that it would approve
an advance in the rates for paper Sc.
cured by government obligations other
than Treasury certificates of indebted.
nesss AS the highest rate borne at
that time by the certificates was Az
per cent and as they were held largely
by banks. the board felt that in view
OF all the circumstances the existing
rate on notes secured by Treasury