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August 9, 1950

Since the outbreak of hostilities buying has increased

sharply

from the advanced levels reached in the second quarter and prices have
risen considerably further. Seasonally adjusted purchases of goods at
department stores rose 20 per cent in July — an unprecedented increase
for one month. Buying of major appliances in the third week of July
reached a fate which was triple the level prevailing in June.

In the

fourth week of July, purchases of these and other department store goods
showed little abatement. Likewise, demand for passenger cars and new
houses has been maintained at peak rates and in excess of the supply
available. Buying, however, of such foods as sugar and coffee appar­
ently has declined to more normal levels during the past two weeks.
Business purchases of materials and orders for capital equipment also
expanded sharply in July. Orders for new freight cars, for example,
increased to 30,000 from 2,200 in June.
This general upsurge in buying has been in anticipation of a
return to wartime shortages of civilian goods and a resumption of
generally advancing prices. The buying has been financed by high and
rising levels of consumer and corporate incomes, by an accelerated
expansion in bank loans to business and credit extensions to consumers
for purchasing durable goods and homes, and by the spending of liquid
assets. Partial data indicate some recent reduction in savings bank
deposits. Also, the redemption of Series E Government savings bonds
exceeded purchases by 50 million dollars in July, while last July people
bought considerably more bonds than they cashed.




Page 2

These increases in demand have stimulated activity in those lines
which had not already been at current capacity levels in June. In manu­
facturing, further increases in output of such goods as textile, petroletua,
and machinery products are possible and expected during the third quarter
but production of these and other finished goods is limited by the supply
of such basic materials as steel, nonferrous metals, lumber, cement, and
rayon. Output of fuels and other minerals are rising and the Board's total
index of industrial production in August is likely to be about 205 per cent
of 1935-39 — up 3 per cent from the peacetime record level in June and up
one-fifth from a year ago.
Construction activity continued to rise in July and the volume of
new contracts awarded indicates that building activity will be sustained /
at record levels in August. Prices of building materials have advanced
further since June to new highs and property values are again rising.
Total nonagricultural employment has increased considerably and
is close to the record level reached in mid-19^8. Unemployment is still
about 1 million greater than at that time reflecting the increase in the
labor force. Average hours worked indicate that a substantial amount of
overtime is being put in, particularly in the durable goods industries.
Agricultural production will be down somewhat this year. Total
crop production was expected earlier to be 6 per cent below last year's
large volume and recent crop developments have shown little improvement.
Carryovers of basic crops, however, are larger than last season and stocks
of livestock products are greater. Farm marketings of livestock products
are running somewhat above last year's level.




Page 3

Altogether, production of these and other goods and services were
at record levels and rising before the Korean crisis. At the same time,
however, over-all demands were also at advanced levels and rising. Consumer;
demands for automobiles and other durable goods were exceptionally active,
reflecting the rising level of employment, the stimulus of the large
veterans insurance dividends, and the widespread use of credit on easy terms
Consumer credit outstanding increased by about 550 million dollars in June
to a level of 19*6 billion dollars. Mortgage and other credit similarly
increased sharply. Business demands for inventories were expanding further
and earlier plans for expenditures on plant and producers equipment were
being revised upward. Government stockpiling activities were being stepped
up, and various other developments, especially in the international sphere,
also were expanding demands for goods in this country and abroad.
As a result of these upward pressures, wholesale prices, especially
of imports, metals, lumber, and livestock, rose considerably in April and
May and in June the consumers* price index increased further by 1 per cent.
The upsurge in buying since that time has been followed by sharp rises in
prices, especially of raw materials and foods. Basic commodities have
risen 16 per cent and on August 8 were 25 per cent higher than in March.

V

The sharpest advance has been in rubber to 6l cents per pound as compared
with 29 cents in June and 20 cents in March. All commodities at wholesale
by August 1 had risen 5 per cent in five weeks and were 8 per cent higher
than in March. Wholesale prices of farm products and foods were up 12 per
cent from March and industrial commodities, 5 per cent. Retail food prices
now are nearly 10 per cent higher than in March and the total of consumer
prices — including controlled rents — is probably up k per cent.




Page k

Since August 1 prices of domestic basic commodities have leveled
off. Buying interest in these commodities has been reduced by actual and
prospective increases in market supplies and growing sentiment for Federal
action to curb inflationary developments. Prices of rubber and other
imports, however, have continued to advance, scrap metal prices are now
rising, and additional increases have occurred in prices of manufactured
goods.

Division of Research and Statistics,
Board of Governors, Federal Reserve System.




Recent Changes in Prices

Series

Percent rise to Aug. 1 , 1950 from*
I
940
Week ending
June 21± |
March IB monthly h g i
ijs

Consumer Prices
All items
Foods
Apparel
Rent

2
TT
0
0

k

T
0
l

- 1
r-j
-8
k

Wholesale Prices
All commodities
Farm products
Grains
Livestock
Foods
Other commodities
Textile products
Chemicals
Building materials
Metals and metal products
28 Basic commodities
Selected items *
Rubber
Lard
Print cloth
Hides
Tin
Hogs
Cocoa
Wool tops
Cotton
Coffee
Sugar, raw
Steers
1?et
lha
Zinc
Copper
Steel scrap

5
T
l
10
8
3
8
6

8

-3

TS

'=52

2

-35
-12
-8

23

13
5
7

0

k

1

8
3

-k
-14
2
0

15

23

-1h

8k

171

39
28
26
25

kl

19
18
17
13
13

43
71
30
20
18

7
5
3

12
6
0

0
0
-2

hi

k

28
28
27

22
39

Notes Compiled from B*L*S* data* August 1 consumers prices estimated
by Federal Reserve*




THE WHITE H O U S E
WASHINGTON

August 25, 1950

Dear Tom:
I want the members of the Federal Reserve Board and the
members of the Federal Open Market Committee to under­
stand that I approved on last Friday afternoon a refunding of
United States Government securities involving Thirteen and
a Half Billion Dollars ($13-l/2 billion) of issues maturing
between now and the late f l .
al
I understood from m y conversation with you over the telephone
that this action would have the complete support of all the agencies
which have been granted responsibility in that line.
I is of paramount importance that confidence be maintained in
t
the credit of the United States. I have discussed the matter with
the Secretary of the Treasury since the Korean outbreak and we
are in complete agreement.
I think i i imperative that at the earliest possible moment all
t s
operations of the Federal Reserve Board and actions relating
to the market for Government securities be so adjusted that
outstanding United States Government securities sell at par.
I want the situation maintained as i was when you and I had
t
our conversation the other evening on the action to be taken by
the Federal Reserve Board with regard to public credit.
Sincerely yours*

Honorable Thomas B. Me Cab el
Chairman, Board of Governors
of the Federal Reserve System
Washington 25, D. C.




)

— -

THE S E C R E T A R Y OF THE T R E A S U R Y
W A S

H I N G T O

N

MEMORANDUM TO THE PRESIDENT
Last Friday afternoon I announced to the market that the
$13-1/2 billion of Treasury bonds and certificates of indebted­
ness, maturing or called for redemption on September 15 and
October 1 would be refunded into 13-month, 1-l/ b percent Treasury
,
notes, which issues have to be approved by you under the provisions
of the Second Liberty Bond Act, as amended. In essence and reality,
therefore, the offering of Treasury notes is an action undertaken
by the President of the United States.
When the market opened on Monday morning, the Open Market
Committee of the Federal Reserve System, through its open market
operations, established and maintained a pattern of prices on
various short-term issues of Government securities which would
justify a 1-3/8 percent rather than a 1-1/1+ percent rate on Treasury
notes of the type offered in connection with the refunding. Their
operations, if continued along the lines followed up to now, are
untenable because they will force a market failure of the refunding
of the $13-1/2 billion of maturing issues which you approved on
Friday.
This matter is one of most serious import because it aims
directly at the matter of maintaining confidence in the financial
strength of the United States Government. As you know, confidence
in our financial strength and stability, both at home and abroad,
is o f prime importance. I developed this matter fully with the
Federal Reserve immediately after the outbreak of the Korean crisis
and in my letter of July 17, a copy of which is attached. Years
have been spent in building up confidence in this strength and the
action of the Federal Reserve at a time when the debt is $257 billion,
and when its successful management is no simple matter, may have
serious results in our successful prosecution of the “ar effort. It
w
is of paramount importance that no uneasiness about the management
of the public debt should occur, yet such uneasiness could become
wide-spread easily if a loss of confidence should result in the
action of the Federal Reserve, and wholesale liquidations of Govern­
ment securities, particularly savings bonds, could be touched off
among non-bank investors.
I mention these matters not to be an alarmist, but with the view
of approaching the situation objectively so that I may convey to you
the seriousness and possible ultimate effect on our war effort itself,
which might result from a financial disturbance of importance.




-

2

-

RECOMMENDATION

It is my recommendation that you advise the Federal Reserve
Board that you approved the Treasury refunding announced last
Friday, as required by law; and that you advise the Federal Reserve
that you intend that all agencies of the Government, with public
powers and responsibilities, are to do everything necessary to
make this operation a success; and that you are fully aware that
there need be no difficulty toward making the present operation a
success if it is the Board's intention to do so and the Board takes
appropriate action along the lines with which it is completely
familiar.

Attachment




THE WHITE H O U S E
WASHINGTON

My dear Mr. Chairman*
iXwish that you would convey to the members^ the
Federal'aeserre Board and other members of tte/tfederal
O e . Market Committee, that, as required by iaw, I
pn
aiproTed an last Friday afternoon a refunding of United
States Government securities involving §£3-1/2 billion
of maturing^!ssues. Xt is reasonableyfor me and the
Hation to exbeet that this action should have the com­
plete s^port\of all the agencies^mich have been granted,
public vover aid responsibility./

/

It seems to%e that
the present circumstances
it is of paramoun\ importanee that confidence be main­
tained in the credft of t#e United States, and that
stability be maintax^ed/fn the Government security market.
I understand that the^ecretary of the Treasury outlined
his views on these m^wrs to you fully immediately after
the outbreak of the^Kore^p. crisis, and in his letter of
July 17.
/
It is imn^rative that a\ the earliest possible
moment, all a f your operationsSand actions relating to
the market £or Government securities be so adjusted that
outstanding United States Government securities sell at
yields w#ich will make the 13-montlk 1-l/U percent issue
attractive and insure complete success of the refunding
operation. This was essentially the situation in the
Government security market that prevailed when I approved
the/l3-month, 1-1/h percent issue on lasts^riday.
Sincerely,

Honorable Thomas B* McCabe
Chairman, Board of Governors
of the Federal Reserve System
Washington 25, D. C.




Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102