In January, 1921, the price level of farm products was 143 per cent of the 1913 level, and by June of the same year it had dropped to 114 per cent. The price levels for the corresponding dates of the previous years had been 247 per cent and 237 per cent, respectively. The farmers were dumbfounded by this sudden price movement. Not being particularly well informed about price changes in other countries, they did not associate this decline with world conditions, but thought of it only as a domestic problem. In addition, a good many farmers regarded it as a temporary condition which could be remedied if they would hold their products off the market for a little time. Consequently, a new demand for credit was manifested for this purpose. II. THE NECESSITY FOR STOPPING CREDIT In the fall of 1920, when the farmers' bank loans were at their highest, falling prices of agricultural products made the farmers both unwilling and unable to liquidate their loans. In addition, falling prices created a new demand for more credit. However, when the farmers asked their bankers for loans for this purpose, they were told that it was impossible to extend them. More than this, the bankers said that instead of asking for more credit, the farmers should pay off some of their old loans. The situation was the same as obtains at the end of every business boom. Indebtedness was large, the demand for additional loans was heavy, and available bank credit was scarce. The demands of war financing and of the business boom which occurred during 1919 had practically exhausted the credit resources of the country. The great increase in the price level was requiring more than twice as much credit to carry on the same volume of business in 1920 as in the years immediately preceding the war. The banks of the country were borrowing heavily from the Federal Reserve Banks, and the resources of these institutions were being rapidly absorbed. If an expansion should take place during 1920 similar to the one which occurred in 1919, the reserves of the Federal Reserve Banks would fall below the minimum required by law. Obviously some control had to be exercised over this expansion. The Federal Reserve Board, in its Sixth Annual Report, summarized this situation very well in the following terms: The expansion of credit set in motion by the war must be checked. Credit must be brought under effective control and its flow once more regulated and governed with careful regard to the economic welfare of the country and the needs of its producing industries. Deflation, however, merely for the sake of deflation, and a speedy return to "normal" deflation merely for the sake of restoring security values and commodity prices to their pre-war levels without regard to other consequences would be an insensate proceeding in the existing position of national and world affairs . . . radical and drastic deflation is not, therefore, in contemplation nor is a policy of further expansion. Either course would in the end lead only to disaster and must not be permitted to develop." This statement, together with many other utterances of the Board which were given from time to time, shows rather clearly that there was no intention on the part of the Board to deflate the credit structure just for the sake of bringing the country down to a lower price level. Without any regard at all for price levels, or even for the security back of the loans, the reserve position of the Federal Reserve Banks required that the credit expansion which had been going on ever since the beginning of the war should stop or we would be forced off the gold standard. Today, with our great plethora of gold, it is rather difficult to visualize such a banking condition. But in the spring of 1920 we were losing gold to foreign countries, and our bank reserves were getting so low as to cause concern. The following table shows this very clearly: RATIO OF CASH RESOURCES TO NET DEPOSITS AND FEDERAL RESERVE NOTE LIABILITIES OF TWELVE FEDERAL RESERVE BANKS 'Sixth Annual Report, Federal Reserve Board, 1919, pp. 71-2. RATIO OF CASH RESOURCES TO NET DEPOSITS AND FEDERAL RESERVE NOTE LIABILITIES OF TWELVE FEDERAL RESERVE BANKS Professor Kemmerer of Princeton compiled statistics for our whole banking system, which showed that the ratio of cash reserves to total deposits had decreased from 11.7 per cent in 1913 to 6.6 per cent in 1919.1° Obviously, from a purely banking standpoint, a situation of this kind was dangerous. It had been brought about through the expansion of the war financing and the speculative era which followed close upon the cessation of hostilities. Inflation of prices, credit, and speculation continued at a more rapid rate during 1919 than during the actual hostilities. Such a tendency could not continue forever if we were to remain on a gold standard. Eventually a halt had to be called. Early in 1920 the Board entered upon its policy of raising the rediscount rates on commercial paper. By the end of the year 7 per cent was the average rate on commercial paper discounted at the five Federal Reserve Banks located at Boston, New York, Atlanta, Chicago, and Minneapolis. Six per cent was the rate at the other Federal Reserve Banks. Soon after these high rates had gone into 10 Seventh Annual Report, the Federal Reserve Board, 1920, p. 604. effect a severe credit stringency developed in the agricultural states of the South and West. Immediately the Federal Reserve Banks were accused of unduly restricting the credit granted to agriculture and of curtailing their loans to country banks so that the credit of the country was absorbed by the financial centers at the expense of the rural communities. A misunderstanding of the causes of the rural credit stringency was responsible for this attack. III. THE IMMEDIATE CAUSE OF THE RURAL CREDIT STRINGENCY A restriction of loans by the Federal Reserve Banks to agriculture was not the cause of the rural credit stringency of 1920. There is no basis in fact for the assertion that the farmer's difficulty in securing credit during this time was due to the curtailment of Federal Reserve Bank credit to the country banks. Such curtailment did not take place. In spite of the increases in rediscount rates, Federal Reserve Bank credit continued to expand in the agricultural districts. For the country as a whole, Federal Reserve Bank credit did not reach its maximum until October, 1920. For the agricultural states the maximum was not reached until midsummer of 1921. The Joint Commission of Agricultural Inquiry found that between May 4, 1920, and April 28, 1921, the borrowings from the Federal Reserve Banks by member banks located in agricultural counties had |