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F i n a n c i a l Developments i n I9V7 and E a r l y 19^8 I n f l a t i o n a r y forces continued t o dominate t h e n a t i o n ' s economy during 19^7 and t h e e a r l y months o f 19^8* T o t a l demand by consumers, businesses and government, based on r i s i n g Incomes, on t h e use o f p r e v i o u s l y accumulated savings, and on new borrowing, exceeded t h e capacity o f t h e economy t o supply goods and services* Aggregate output, nhich a t t h e beginning o f 19^7 was l a r g e r t h a n i n any previous peacetime p e r i o d , showed l i t t l e growth i n t h e course of t h e year* further P r i c e s rose under t h e pressure o f vigorous demands, and t h e t o t a l value of t h e n a t i o n ' s product o f goods and services continued t o increase* Employment was close t o a maximum l e v e l p o s s i b l e w i t h t h e e x i s t i n g labor f o r c e * The l a r g e volume o f employment, r i s i n g wage r a t e s , h i g h p r i c e s f o r farm products, and l a r g e p r o f i t s by businesses were r e f l e c t e d i n a f u r t h e r growth of n a t i o n a l income* Consumer expenditures, which had n e c e s s a r i l y been l e s s than income during t h e war p e r i o d because of t h e s c a r c i t y o f goods a v a i l a b l e f o r purchase and t h e e f f e c t o f r a t i o n i n g and p r i c e c o n t r o l s , a f t e r the war more r a p i d l y than personal incomes* increased This r e f l e c t e d t h e increased a v a i l a b i l i t y o f goods and t h e w i l l i n g n e s s o f many consumers t o spend f r e e l y notwithstanding sharply advanced p r i c e s * Many consumers drew upon t h e i r l a r g e wartime accumulations o f savings and others borrowed t o supplement c u r r e n t income* Although c u r r e n t personal savings were considerably below the abnormally h i g h wartime l e v e l , i n d i v i d u a l s i n t h e aggregate continued t o add t o t h e i r holdings of l i q u i d assets* - 2 Heavy business expenditures f o r equipment, p l a n t , and i n v e n t o r i e s , prompted by expanding markets and increased earnings, added t o t h e t o t a l volume of buying. Farmers, w i t h incomes a t record h i g h l e v e l s , were l i k e w i s e a c t i v e buyers o f equipment, as w e l l as of consumers1 goods. There was a l s o a sharp expansion i n expenditures o f S t a t e and l o c a l governments. Growing domestic expenditures were r e i n f o r c e d by e x c e p t i o n a l l y a c t i v e demand f o r American goods from abroad, r e f l e c t i n g acute needs on t h e p a r t o f war-ravaged Europe and l a r g e purchasing power on the p a r t of other c o u n t r i e s . Expenditures by the F e d e r a l Government i n 19^7 were an important f a c t o r i n t o t a l demand, as measured by peacetime standards, although somewhat smaller than i n 19^6. A t t h e same t i m e , Government cash r e c e i p t s exceeded cash payments, and a s u b s t a n t i a l amount of Government s e c u r i t i e s was r e t i r e d . I n 19^7* p a r t i c u l a r l y i n the l a s t h a l f , t h e r e was a s u b s t a n t i a l f u r t h e r increase i n t h e demand f o r bank c r e d i t and f o r investment funds. O f f e r i n g s o f corporate s e c u r i t i e s increased r a p i d l y and these o f S t a t e and l o c a l government issues continued i n l a r g e volume. There was a growing demand f o r mortgage and consumer c r e d i t , as w e l l as f o r commercial l o a p s . Bank loans, which Increased moderately i n the f i r s t h a l f o f 19^7* expanded sharply i n the l a s t h a l f of t h e y e a r . For t h e y e a r as a vhole t o t a l loans o f a l l commercial banks Increased by more t h a n 7 b i l l i o n d o l l a r s and t h e i r holdings o f s e c u r i t i e s o f S t a t e and l o c a l governments and corporations increased by about a b i l l i o n d o l l a r s . - 3 Expansion i n p r i v a t e bank c r e d i t was p r i m a r i l y responsible f o r a f u r t h e r l a r g e g r o w t h i n 19^7 i n t h e a l r e a d y o v e r - l a r g e volume o f money i n t h e hands o f b u s i n e s s and i n d i v i d u a l s . T o t a l d e p o s i t s and c u r r e n c y , e x c l u d i n g Government d e p o s i t s , i n c r e a s e d o v e r t h e y e a r b y almost 6 b i l l i o n dollars. I n an a t t e m p t t o r e s t r a i n i n f l a t i o n a r y bank c r e d i t expansion, measures were u n d e r t a k e n b y t h e F e d e r a l Beserve System and t h e T r e a s u r y , a c t i n g i n c o o p e r a t i o n , t o reduce t h e a v a i l a b i l i t y , and i n c r e a s e t h e c o s t o f bank c r e d i t * . These o f f i c i a l measures, cdlzpled w i t h t h e g r o w i n g demand f o r f u n d s , r e s u l t e d i n a r i s e i n money r a t e s and bond y i e l d s d u r i n g t h e l a s t h a l f o f 19^7* t h e Government bond m a r k e t * I n October t h i s movement began t o a f f e c t D u r i n g p a r t o f November and December, t h e F e d e r a l Beserve and t h e T r e a s u r y t h r o u g h l i m i t e d purchases s u p p o r t e d p r i c e s o f Government bonds a t t h e l e v e l s t h e y had reached i n t h e m a r k e t , w h i c h were i n most cases s t i l l s u b s t a n t i a l l y above p a r * On December 2k p r i c e s o f T r e a s u r y bonds were p e r m i t t e d t o d e c l i n e t o a new l e v e l , -which m a i n t a i n e d t h e 2 - 1 / 2 p e r c e n t y i e l d on t h e l o n g e s t - t e r m T r e a s u r y bond and y i e l d s on o t h e r i s s u e s a t a p p r o p r i a t e l e v e l s i n r e l a t i o n t o r a t e and t o t h e 1 - 1 / 8 p e r c e n t r a t e on T r e a s u r y c e r t i f i c a t e s * this The F e d e r a l Beserve System became an a c t i v e b u y e r a t t h e new l e v e l * L a r g e amounts o f T r e a s u r y bonds were purchased b y t h e Beserve Banks d u r i n g December 19^7 and t h e e a r l y weeks o f 19^$ i n p r o v i d i n g s u p p o r t t o t h e market* A s u b s t a n t i a l p o r t i o n o f t h e s e purchases were f r o m i n s u r a n c e companies and o t h e r i n s t i t u t i o n a l i n v e s t o r s and some were f r o m banks* A t t h e same t i m e banks, as w e l l as o t h e r Increased t h e i r holdings o f Treasury b i l l s , investors, c e r t i f i c a t e s , and n o t e s * - I n t h e second veek o f January k - as a measure o f restraint upon t h e use o f F e d e r a l Reserve Bank c r e d i t , t h e F e d e r a l Reserve Banks I n c r e a s e d t h e i r d i s c o u n t r a t e s on advances t o member banks f r o m 1 t o 1 - l / k per cent. The B o a r d o f Governors a l s o t o o k a c t i o n l a t e i n January t o i n c r e a s e f r o m 20 t o 22 p e r c e n t , e f f e c t i v e F e b r u a r y 27, 19W3, t h e r e s e r v e s r e q u i r e d t o be m a i n t a i n e d a g a i n s t n e t demand d e p o s i t s b y member banks i n c e n t r a l r e s e r v e c i t i e s (New Y o r k and C h i c a g o ) . The r e q u i r e m e n t f o r banks i n t h e s e c i t i e s had been a t 20 p e r c e n t s i n c e t h e l a t t e r p a r t o f 19^2, when i t had been reduced f r o m 26 p e r c e n t , the maximum p e r m i t t e d under e x i s t i n g l a w . I n v i e w o f t h e expanding volume o f bank l e n d i n g and t h e accompanying i n f l a t i o n a r y developments, t h e F e d e r a l and S t a t e banks u p e r v i s o r y agencies I s s u e d i n November a j o i n t s t a t e m e n t u r g i n g banks t o c u r t a i l s p e c u l a t i v e l o a n s , t o g u a r d a g a i n s t o v e r - e x t e n s i o n o f consumer c r e d i t , and t o c o n f i n e f i n a n c i n g t o l o a n s w h i c h w o u l d h e l p p r o d u c t i o n and n o t m e r e l y I n c r e a s e consumer demand. Toward t h e end o f 19^7 t h e American Bankers A s s o c i a t i o n sponsored a n o r g a n i z e d e f f o r t by b a n k i n g l e a d e r s t o encourage v o l u n t a r y restraint on i n f l a t i o n a r y bank c r e d i t e x t e n s i o n among t h e c o u n t r y 1 s 15,000 commercial b a n k s . To t h e e x t e n t t h a t i n d i v i d u a l banks r e s t r i c t v o l u n t a r i l y t h e i r l e n d i n g and i n v e s t i n g programs, anti-inflationary monetary and s u p e r v i s o r y p o l i c i e s p u r s u e d b y t h e F e d e r a l Reserve System and t h e T r e a s u r y a r e r e i n f o r c e d and made more e f f e c t i v e . Such v o l u n t a r y a c t i o n t o be e f f e c t i v e i n r e s t r i c t i n g c r e d i t e x p a n s i o n r e q u i r e s t h e a d o p t i o n b y i n d i v i d u a l banks o f r i g i d s t a n d a r d s i n a l l l e n d i n g o p e r a t i o n s , w i t h a v i e w t o p r e v e n t i n g f u r t h e r expansion i n t h e t o t a l volume o f bank d e p o s i t s as w e l l as a v o i d i n g l o a n s t h a t may I n v o l v e a h i g h degree o f risk. Expansion o f bank loans has c o n t i n u e d i n 19^8 b u t a t a slackened pace* T o t a l bank l o a n s i n c r e a s e d about t h r e e - q u a r t e r s o f a b i l l i o n d o l l a r s i n the f i r s t quarter o f the year* d u r i n g t h e s e months was l a r g e r i n 1 9 t h a n Growth i n l o a n s i n 19k6, a y e a r o f near r e c o r d l o a n expansion, b u t was somewhat s m a l l e r t h a n i n 19^-7• S l a c k e n i n g i n bank l o a n expansion i s due l a r g e l y t o a s m a l l d e c l i n e i n l o a n s t o b u s i n e s s e s , -whose demand f o r bank c r e d i t a r e u s u a l l y reduced i n t h i s season* Bank l o a n s t o r e a l e s t a t e buyers and t o consumers have c o n t i n u e d t o expand* P r i v a t e l y - h e l d d e p o s i t s and c u r r e n c y d e c l i n e d about k b i l l i o n s d u r i n g t h e f i r s t q u a r t e r o f I9WJ, r e f l e c t i n g t h e l a r g e s u r p l u s o f T r e a s u r y cash r e c e i p t s o v e r e x p e n d i t u r e s * F u r t h e r expansion i n bank l o a n s and g o l d i n f l o w s tended t o o f f s e t i n p a r t , however, t h e c o n t r a c t i v e e f f e c t on t h e money s u p p l y o f Treasury o p e r a t i o n s *
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