Vigorous development of business activity during the rest of 1922, merging into fullfledged prosperity in 1923, was prophesied by Colonel L. P. Ayres, Vice-President of the Cleveland Trust Company, speaking Saturday night at the dinner of the Harvard Club which concluded the annual conference of the University Committee on Economic Research. The dinner was attended by some two hundred business men, Colonel Ayres said in part:
"The upturn of commerce and industry during the past year has largely been due to the attempt of the business world to make good four great shortages. The first of these was the shortage of building construction which had been accumulating during the past six years. This shortage had reached such large proportions by the beginning of 1922 that careful estimates indicate that in our cities it amounted to as much as the total amount of building normally done in two and a half years. This means that the construction industry would have to work at 25 percent above its normal output for 10 years to make good the accumulated deficiency. In view of the amount of this shortage and its widespread distributions, it seems entirely probable that the building boom of 1922 will continue through 1923, but probably with somewhat diminished vigor.
Shortage of Railroad Equipment
"The second great shortage was one of railroad equipment. It had been accumulating during the war period and since the war, and this year it has made itself felt in an acute demand for locomotives, cars, rails, and repair parts. Railroad earnings are increasing, and even those roads that are in straitened circumstances are placing large orders. There seems to be every probability that the makers of railroad equipment and supplies will continue to be active during 1923. This insures a very considerable bulk of business for the iron and steel Industries, for the railroads are their best customers.
"The third of these shortages was one of automobiles and trucks. Since most of us would not have agreed last year that any shortage existed, it seems strange to call it one. Nevertheless the amazing activity of the motor industry during 1922 shows that there did exist a real and great shortage of cars, for clearly there were some millions of people in this country this year who wanted new automobiles and who had the money with which to satisfy their desires.
High Automobile Production
"During recent months automobile output has been making new high records, altogether in excess of any heretofore reached in the second half of any year. There are no evidences that demand will suddenly diminish during 1923, and the present prospects are that sales will reach high figures next year. During the present year production capacity has increased, and very great extensions of automobile plants are now nearing completion. One thing that seems certain is that the automobile industry in 1923 will reach an unparalleled pitch of competition. Probably there will be notably fewer competing automobile firms in 1925 than there are in 1922.
"The last of these four great shortages was a somewhat general shortage in many lines of the thousands of articles sold in stores. This shortage has been gradually developing since prices broke in the spring of 1920, and started on their long downward course that continued to the early months of 1922. When prices are falling merchants purchase goods in as small amounts as possible, because they do not want to take the losses that would result if the market value of the goods should drop before they could sell them. For nearly two years the wholesale purchasing of the country was done on a short-time basis, and much of the ordering was almost on a week to week basis. This gradually produced a condition of distinctly low stocks on hand in thousands of retail establishments.
Prices Now Rising
"Since the beginning of this year prices have been rising, and the influences that produced the shortage are now reversed. Present tendencies are for merchants to order enough for present needs and those that probably will arise in the near future, for they fear that if they do not buy now they will have to pay more later. As in the case of the other three shortages, it seems probable that the effects of this one will continue to be felt in 1923, and that they will constitute a stimulating influence on industry and on commerce.
"We have considered four great shortages that were largely instrumental in bringing about the present revival of business. In discussing how long that revival is likely to continue we must consider the probable trends of four kinds of prices. First came the prices of securities, the market quotations for bonds and stocks.
Bond Prices Now at Top--
"It seems likely that bond prices have about reached their top for the present movement. In times of business revival the prices of bonds tend to rise during all the first part of the general recovery, and then to stop rising and gradually to decline as industry expands to full activity. That characteristic course has been followed so far in this business recovery. It would seem likely that not much further increase should be expected, and that bond prices might probably be somewhat lower at the end of 1923 than they are now.
"Stocks have been rising for more than a year in one of the steadiest and most sustained bull markets of which we have any record. It has been the experience of the past that such a market does not terminate until prosperity is general. If present conditions continue, that time will come not many months in the future. A personal guess would be that the turning point of the present rising market for stocks might be expected to come some time after January and some time before July, depending on the rapidity of expansion in industrial production.
Interest Rates Rising
"The second sort of price movement to be considered is the price of money, the course of interest rates. In the summer of 1920 the interest rates on commercial paper reached a high point of eight percent. From that peak they fell for two years, until in this August they were below four percent. Since then they have been rising, and it seems probable that they will tend to rise rather than to fall during the rest of 1922. If industry continues to expand during the early months of 1923, interest rates will probably advance. If they do advance in any marked degree in the early months of next year, that upward movement will probably foretell the turning point in the stock market. My personal opinion is that money rates will advance next year.
"The third group of prices to be considered is that of general wholesale commodities. They are now rising, and they have been during most of the present year. They are rising, because of a short supply of manufactured goods, an abundant supply of credit, and an increasing purchasing power of farmers, miners, and industrial workers. These same influences bid fair to carry the advance along for some time to come. An individual forecast would be that they might be expected to turn down some time next fall, perhaps about a year from now.
Wages Also Going Up
"The last of this group of four kinds of prices is the prices of labor, commonly termed wages. These are rising, after having gone through a long decline. They will probably continue to rise next year, and it would be reasonable to expect that they might advance during all of 1923, for the turning points of wages ordinarily come somewhat later than those of the prices of goods or of securities.
"At this point it is appropriate to consider what influence or influences will probably call a halt on the expansion of business when the time comes for it to turn the corner, and begin the slowing down process. In the past the turning point from prosperity to business decline has characteristically come when expanding commerce and industry have made such great demands for money as to cause a shortage or a stringency of credit. When that has happened interest rates have risen so high as to discourage further business expansion, and to result in a general slowing down of activity.
"At present no such prospect is in sight. Banks throughout the country have great amounts of loanable funds. They have far greater investments than ever before, and these could readily be converted into loanable funds. The Federal Reserve System has immense gold holdings which might form the basis of an almost unlimited amount of credit. If the present expansion of business were to go forward until halted by a shortage of credit we might well look forward to a very great business boom.
"It seems probable that the present business, expansion will be halted, not by a shortage of credit, but by a shortage of labor, complicated by a shortage of railroad transportation, and it seems further probable that those two shortages are already well on the way toward becoming serious. During the peak of the boom in the spring of 1920 manufacturing firms began an active and aggressive competition for labor, and when that happened manufacturing costs ran up and profits disappeared.
Labor Shortage May be Serious
"Already shortages of labor are beginning to appear. As they grow more acute, competition for labor will take place, wages will go up, efficiency will decline, and business expansion will probably halt. While this is going on the existing shortage of railroad transportation will probably continue to be serious, and that in turn will increase expenses and discourage enterprise.
"In summarizing the prospects for next year's business it may be said that it now appears probable that 1923 will be a year of business prosperity that will culminate and begin to slow down before the end of the year. Among the statistical measures of business and industry there are some that will probably advance, some that may be expected to decline, and some that will in all likelihood both advance and decline.
"Among those that will probably advance are the following: Interest rates, wages, railroad car loadings, automobile output, money in circulation, cost of living, unfilled orders of the Steel Corporation, bank loans; iron and steel production, traffic on the Great Lakes, rediscounts with the Federal Reserve Banks.
"Among those that will probably decline are the following: The price of bonds, the number of failures, building construction, the reserve ratio, bank investments.
"Among those that will probably rise first and then fall are the following: Stock prices, wholesale commodity prices, the volume of manufactures, the volume of employment.
"To the foregoing it might be added that there will probably be during 1923 an increased number of marriages, an increased number of divorces, and a decreased number of suicides, for these are regular accompaniments of a period of prosperity."
Mr. G. W. Norris, governor of the Federal Reserve Bank of Philadelphia, discussed "The Objective of Federal Reserve Credit Policy".
Reserve Banks Are Independent
He called attention to the fact that while the twelve Federal Reserve Banks are independently controlled and operated, each intended to serve the interests of its district, no financial transaction of any moment in one market is without its reaction in other markets, and that the credit policy of the Federal Reserve System should therefore be considered with recognition of the fact that the administrators of the System have a national responsibility.
Governor Norris denied the extreme view that the System controls the volume of credit, calling attention to the facts that it has no dealings with the speculative markets and no direct contact with the general public; that two-thirds in number of the banks of the country have no discount relations with it at any time, and that it is seldom that more than half of the remaining third, or one-sixth of the total, are borrowing from Reserve Banks.
Must Assure Sufficient Credit
He admitted, however, that a banking system which has demonstrated its capacity to add nearly three and a half billion dollars to the volume of credit, which supplies half of the currency in circulation, and engages in investments and open market operations, exercises a sufficient influence to make its operations a matter of public interest and concern. For these reasons, he said, it is important that the administrators of the System should have a clear conception of the goal at which they are aiming, and that the public should know what that goal is. He said that repeated discussions of the subject had crystallized in the opinion that it is the duty of the System to assure to the business world the availability of credit and currency in volume sufficient to provide for the production and distribution of goods, with the collateral duty to see to it that credit expansion, necessary and proper in a period of business expansion, shall not degenerate into credit inflation in a period of speculative activity.
He spoke of the constant effort that is being made by economists and statisticians both inside and outside the System, to keep track of production, of the activity of business, of the general price level, and of credit conditions, with the view of giving such timely notice as will tend to check inflation, and of utilizing the facilities of the System to abate the inevitable rigors of deflation. He expressed the hope that business men will in the future make increasing use of the monthly bulletins issued by the Federal Reserve Board and by the regional banks, watch carefully the reserve ratio of the banks as reported weekly, and take timely warning of the changes in credit conditions indicated by changes in the discount rates of the Reserve banks