View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Form

P.

R.

51 1

TO I

GOTTERNOR DRAPER

FROM

MR. CLAYTON

•

—«^

J

RE* /IARKS:
I thought you would be interested to see the Chairman's letter
to Randolph Burgess respecting the
article in the National City Letter
of a month ago. Please return to me
after you have finished with it.




April 5, 1944

Mr. I* Randolph Burgess, Vice Chairman,
Th© Katlonal City Bank of New York,
New York, li:ieir York1*
Dear Randy;
Following up our brief discussion of the matter when you
were down here son© weeks ago, 1 wish to cow-ent OK some of the points
nade in a part of the National City Letter of Korea 1944. I refer to
the discussion of the reOQMBeaAatloa la the fi&ruch Report for a broadening, of the Federal Reserve System* s authority tinder section 12?-b»
The a r t i c l e f i r s t states that «***it should be noted that
tfee federal Reserve BaBks now have authority to make many sore of
these loans than they have ever had outstanding; they nuke few because there are few credit-worthy applicants no* cared for elsewhere***
This rather superficial conclusion i s supported by a quotation from
the August 1938 Monthly Review of tee Federal Rftfterre Bank of Wtm
'fork which indicates that the expenses and losses involved in such
credit are greater thao tot JuuOiie, even with, interest as high as six
p«r cent* If the author had taken the trouble to check Mm recent
figures, he would have found that the Kew York Bankfs experience up
to the end of December Zt§ 194?, would look quite different,
Further»ore, the a r t i c l e i s discussing the operations of the twelve Federal
Reserve &aaka so. ffeat i t would have been, cere•• accurate and fairer had
the author cheeked into the experience of the Syster. as a whole. Thus
for th© entire period of operations under section 13b up to December 31*
19 4$ f the twelve .Federal Reserve ^t&iika* &3 a group, had wmAm net Mrs*
ings of 11,42^,000 after providing for losses of |?,05E,000,
Bearing upon th© mieation of the volume of loans made by the
federal Reserve £&nkst I tm. eoftlosiEg h-erewith a copy of a l e t t e r I
wrote to Jesse Jones back in 19?9.
l o r e iiivportantly, the Baruch recommendation i s criticized
because i t "departs frost the principle of getting the Gov@rim.ent out
of &uslneasM# Evidently the assumption la that the Federal Ra*«rve
Banks are "OoTtra*ent* and the funds appropriate under section 13^
in reality a return of part of the capital funds oi" the Federal Reserve Banks appropriated to the FDIC in 1954, are Government funds.
With this 1 at.;reet although most bankers look upon the Federal Reserve iaskf as priFste financial Institutions owned by the rrenbar
banks. However, the funds in question are not to be loaned directly




Mr. W. Randolph Burgess

-£-

but are to be used as a guarantee fund so as to generate loans by
coBsnercisi banks up to three or four tines the amount of the fund.
If losses should prove to be heavier than the incase from the guarantee fund so that the capital of the fund would be impaired, one
might say that public funds had been used. All this, however, is
al»ost academic argument, since the important question is not whether
the proposal by itself does or does not "get the Government out of
business** but liaether it will serve to keep the Government from getting into the private credit field zaore heavily at some other point.
It Is a question of alternatives.
It seeiss to me the sigQS are unmistakable that, due to the
political appeal of legislation in behalf of small ousiness, Congress
will provide some governmental Eechanies for liberal financing of
small business during the reconversion period and thereafter. A review of the "small business" influence in Congress is illuminating,
notwithstanding the fact that the Smaller War Plants Corporation bill
had little or no support trow the Armed Services and only a reluctant
approve! by the Chairmen of the fte* Production Board, it passed both
Houses without a single opposing vote. Hearings on tfeat bill before
the Banking and Currency CoBarittees of both Houses are replete with
declarations ty Republicans fend DesiQcrats alike that they favored
special consideration for assail business. The Sssll Business Committees, which were not taken seriously a few years ago, have now become powerful in their influence. In addition to the perennial Mead
Bill, other bills sre being prepared. I am informed that the Senate
Ssall Business Committee has prepared a Confidential Print of a bill
which would, in effect, greatly enlarge and broaden the powers of the
Sssaller War Plants Corporation, changing its name to Federal Smaller
Business Corporation, raising its capital to one billion dollars, authorizing loans to, ana investment in the stock of, any type of business
and for any purpose, and in other respects leaking it a powerful credit
and service organization for small business during the reconversion
period and thereafter until July 1, 1948. Senator Taft has himself
introduced a bill, S. 1777, providing for a small ousiness financing
administration in the Department of Commerce. This bill would authorize the insurance of a total of $500,000,000 of loans to be outstanding at any one time and, in addition, would permit the insurance
of investment companies against loss on stocks up to an aggregate of
$500,000,000 et any one tiute. Companies whose borrowings or stock
issues would be eligible for insurance could have an equity capital
of as Buch as one Billion dollars. Doubtless other bills will be offered. You will agree with ne, I am sure, that legislation of either
type mentioned above would be most unsound and should be prevented.
Thus turning thumbs down on the proposal I Bade to Mr, Baruch
and which he reco^r-ended in his report will not "get the Government




Mr, V. Randolph Burgess
out of bus!ness"• Politically, I don't think i t i s possible to get
the Government o t of industrial lending, so that i t cones dov.-n to
a question of what kind of an agency the Government should hare and
on what basis the credit should be extended. The answer to these
questions will determine in large part the welfare of the private
banking structure, lor that reason, I believe that the Federal Reserve Systeae should become the Government's %tm in the credit field
except for agricultural credit. I realize that many influential
bankers oppose such an idea on the grotmd taken by your Bank Letter
that the oyster's assets should not be so used. But by keeping the
federal Reserve out of the picture, we succeed only in affording an
excuse for Congress to set up other agencies which compete with the
private banking system* I believe an aggressive program under a
liberalized l?b sigbt have forestalled the creation of the Smaller
War Plants Corporation. And I believe today tbtt if the Federal Reserve System were entrusted wltb the responsibility of assisting
snail and medium sized business to weather the financial storms of
the termination and reconversion periods, proposals such as the Federal Smaller Business Corporation might nave difficulty obtaining support. And I think you end I will both agree that if private credit
is to be supplemented by sose form of noMimuttf intervention, i t
would be preferable that i t be handled by the Federal Reserve Banks
through the gu^rasteeing of loans s&de by the eomsercial banks. Other*
wise, you will have new agencies not only lending Government funds
directly, but also investing directly in shares.
I nould appreciate i t if you would brlsg this matter to the
attention of the editor of your aonthly l e t t e r . I t has such a longestablished and excellent reputation for speaking with authority and
with impartiality that I mt confident that those who edit i t would not
intentionally misinform your large number of readers. It is not merely
that the article to which I referred does a disservice, in By opinion,
to the Federal Reserve, but if &y analysis of the situation is correct, i t is not in the interest of our private banking system. Accordingly, I felt that the subject was of such importance that I should
give you and, through you, the editor the reasons why I differed so
strongly from the attitude : expressed in this a r t i c l e .
The information respecting the CoEmittee Print of e b i l l to
establish a Federal Smaller Business Corporation is confidential until
released by the Senate Small Business
With kindest personal regards,
Sincerely yours,

!• S. Eccles,
Chairman*
LC:ET/mg
 cc: Miss


Benton

n

Economic Conditions
Governmental Finance
United States Securities
1944
New York, March, 1944
General Business Conditions
HE most important business development in February has been the publication of the Baruch-Hancock report
on "War and Post-War Adjustment
Policies," and of the report to the Senate of its Committee on Post-War Economic
Policy and Planning — the George Committee —, dealing with cancellation of war contracts, disposition of surplus property and industrial demobilization and reconversion.
Both reports have official standing, and it is
certain that official policy will be based on
them. Two major recommendations of the
Baruch-Hancock group were put into effect at
once, through the appointment of General
Hines to handle "human problems" resulting
from demobilization and of Mr. W. L. Clayton
to be the Surplus War Property Administrator.
Both men have long experience and recognized
capacity in these fields. The Senate recommendations are embodied in a bill (S. 1730) introduced by Senators George and Murray.
These reports are the products of the most
intensive and expert study yet given to problems which are so important that, as the
George Committee says, "no amount of study
put upon them can be greater than they deserve." Nothing comparable to these studies
was prepared during or after the first World
War. If there had been it is likely that the
wide swings in production, employment and
prices between 1919 and 1922 might have been
moderated; and of course the danger of economic disruption after this war, unless the
Government has a sound reconversion program, is incalculably greater.

T

Where the Reports Agree and Disagree
In some public comment much has been
made of the differences between the BaruchHancock proposals and those of the Senate
Committee. Actually the similarities of the
two programs and their broad areas of agreement are far more impressive than their differences. Both are based upon the principle
that the compelling need in the demobilization
period will be to get people back to work on




BUY

A WAR

peacetime jobs. To that end, both would get
the Government out of business promptly by
having it pay its debts, move war materials
out of plants and sell its surpluses; and both
would preserve and strengthen the system of
free competitive enterprise. The specific proposals of the two reports are in harmony with
these principles.
On the subject of contract termination particularly there is evidence of constructive cooperation between the Senate leaders and the
Baruch-Hancock group. The Senate's legislative proposals are commended in the BaruchHancock report, which says that as a result
of cooperation "the program for contract termination legislation is now remarkably far-advanced." Meanwhile studies to perfect termination procedure will be continued by the Joint
Contract Termination Board, of which Mr.
Hancock is chairman.
The major difference between the two reports is that the Senate Committee proposes
(and Senate bill 1730 so. provides) to set up
a separate Office of Demobilization, headed by
a Director responsible to and under the oversight of Congress, to be supreme in all matters relating to industrial reconversion. The
Baruch-Hancock report, on the contrary, takes
a strong position against a separate organization. Believing that the agencies which did
the mobilizing also have to do the demobilizing, it argues that while the war lasts —
preparations for demobilization are inseparable from
the actual conduct of the war, from the constant adjustments required by the war . . . Such an agency
could hardly avoid coming in conflict with every other
war agency and would hinder the prosecution of the
war. By the nature of its assignment we fear it would
tend to become a pressure agency seeking to quicken
demobilization for its own sake, forgetting war needs.
. . . There is already too much over-lapping government
machinery.

Despite this strong statement, however, the
two proposals are not completely apart. The
Senate bill provides that as long as hostilities
continue the Office of Demobilization shall be
subordinate to the Office of War Mobilization.
The Baruch-Hancock report for its part says
that "Congress should lay down whatever poli-

BOND A MONTH

FOR

VICTORY

March, 19 U
earlier and begin reducing the 'bloat' than to
wait until it has to be done all at once."
This emphasis on speed in shifting from war
to peace runs throughout the report. It applies
to cutbacks in production, to settlement of
contracts and to handling of surpluses. The
report says:

cies it feels wise and desirable to guide the
existing agencies in their handling of demobilization problems," and that "later it may be
advantageous to create a new, clearly post-war
agency to liquidate present war agencies."
Argument whether Congress or the present
O.W.M. is to supervise demobilization should
not obscure the fact that the dominant public
interest is in the kind of policies established,
and the faithfulness and effectiveness with
which they are carried out. The most important aspect of the two reports is their agreement upon, the sound principles which have
already been mentioned. The problem is to
make the policies effective. The tremendous
influence that the reports seem certain to exert,
derived from their own merits and from the
prestige of their authors, is probably the best
assurance that the policies they recommend
will govern.

Some short-sighted persons will oppose prompt decisions in the hope of continuing unnecessary production. We call them short-sighted because they are
only borrowing employment from the future when it
will be needed and using it up in the present when
there is more work than all of us can do. Unneeded
stocks of raw materials bej'ond the margin of military
safety will hang over the post-war market depressing
future production, employment and prices. It will be
stockpiling trouble for he future.

The report draws a distinction, however, as
to strategic materials which ordinarily are not
produced or produced in small quantities in
this country. It points out that "such materials
can always be utilized for future war needs,
for peacetime production, or be held in a strategic reserve." But it adds :

Reducing the Size of the Reconversion Problem
In applying the stated principles, the BaruchHancock report, which is much the longer of
the two documents, naturally goes into more
detail. One of its main themes is that the
size of the post-war reconversion problem
should be reduced, and the war effort itself
speeded, by tightening up efficiency during the
war. It states forcefully that scrutiny of war
requirements to avoid waste — such as accumulating excess stocks of weapons which
rapidly become obsolete — should be intensified. It points out —

While not unduly alarmed at the physical size of
such stocks, we do feel that the timing of their acquisition can be most important. Present high costs argue
for restricting such stocks to no more than a reasonable margin of safety above current needs. Also, the
purchase of these materials deferred to later years
can be a helpful factor in stimulating international
trade when such a stimulus could be vital.
Disposal of Surplus Property

The same philosophy is carried over into
proposals for the disposal of surplus property.
The first suggestion made is that the Surplus
Property Administrator —

the potential benefits from sweating down the programs, in avoiding the waste of material, manpower
and facilities used to produce unneeded goods, at the
same time permitting increased production of needed
goods; the effect of these goods in lessening the dangers of inflation; the reduction in the dollar cost of
the war: lowering the national debt, and the cost of
carrying that debt, which must be met through taxes.

sell as much as he can as early as he can without
unduly disrupting normal trade . . .
We are keenly aware that the next months to come
will be the best months for disposal in that they will
be the easiest during which to dispose of the things
that are needed . . . Market conditions will never be
better . . . An immediate start on the problem would
reduce enormously the likely surpluses that would be
left for the more difficult months after the war . . .
Possession of all of these surpluses at the end of
the war will be a most important defense against
inflation, not simply in their balancing effect on prices
but in that they represent vast usable resources
which can be brought into the market quickly to
stimulate production and trade.

it goes on to say that this applies with equal
force to every aspect of the production program. It denounces the making of goods no
longer needed, simply to provide employment
or profit, either in the war or post-war period.
It argues for an early effective review of the
programs for the production of raw materials,
for stockpiling, for imports, for subsidies, premiums, or other devices to stimulate marginal
production. It would use materials left after
the war needs are met to expand civilian uses,
or "if that cannot be done because of a lack of
manpower or manufacturing facilities the production or import of these primary materials
should be cut back. This will release manpower and facilities for a new balance of the
program at a higher level."
It calls for making necessary decisions
promptly; otherwise later decisions will be
more difficult. "Where there have been war
expansions far beyond any possible post-war
future, it will be better to cancel war contracts




o

For efficient operation of the surplus disposal
program, the report advises the development of
inventory controls; encouragement of agencies
to report surpluses promptly and at the termination of the war "to dig persistently" so that
hidden surpluses will not accumulate in the
agencies; and planning for the handling of
future surpluses. Legislation upon disposal of
surpluses would wait until the Administrator
has had time to gain experience and study the
problems. Development of a new central sales
force is not recommended, both because the
agency might "bog down in the morass" of
unrelated items, and because "the precious
months for disposal would be lost." The recommendation, now put into effect, is that consumer goods be handled by the procurement
26

o

March, 19 U

n

o

The situation was wide open for conflicting
pressures, some wanting to hold surpluses,
some to dump them. As a result there was
vacillation, confusion and unnecessary market
disturbance. The historic example is the promise, made soon after the armistice, that the
surplus of canned goods would not be marketed "this season." This promise, however,
ignored the high cost of living; and public
pressure, plus the evident fact that the Army
stock was excessive, forced offerings of canned
foods by February 1919, the then Director of
Sales holding that he was not bound by the
earlier promise. Plainly the second decision
was sounder than the first, giving consideration to the economic conditions of the time,
but because the first promise was made market
calculations were upset, and loss and unsettlement were caused in the canned goods industry.
It is clear in retrospect that all possible surplus goods should have been disposed of during 1919 and up until the middle of 1920, a
period when prices and the cost of living rose
some 25 per cent over the level at the end of
the war. Bulk sales of industrial materials to
the industries, and sales of desirable goods on
which the recovery value was high, were made
during that period. Nevertheless, in the depression years 1921-22 surpluses having a cost
of nearly a billion dollars were sold for $120
millions. The problem now is to better this
timing and to dispose of goods when demand
is strongest, which by all signs will be during
the war and in the period closely following
the war.
Promoting Reconversion
To promote reconversion the Baruch-Hancock report recommends advance planning,
jointly by military and civilian agencies, for
the X-Day on which Germany is defeated. The
plan would seek to estimate in advance the
cancellations, the industries affected and the
resources likely to be released. It would make
tentative selections of the industries and plants
to be freed, all for the purpose of speeding reconversion and reemployment and increasing
the volume of civilian goods early. It recommends an advance listing of civilian needs
which have been restricted during the war and
which should have preference in the opening
up of civilian supply, giving highest priority
to such things as vital repairs, expanded transportation, or improved maintenance. It advises
that industries which will need to retool for
peacetime work be permitted to secure their
tools before the end of the war. It would guide
cancellations to permit the earliest release of
small concerns which can convert back to
peacetime production.
With respect to government controls,
Messrs. Baruch and Hancock state that "all
controls and the war agencies administering
these controls should be liquidated when no

division of the Treasury, capital and producers'
goods by a consolidation of existing R.F.C.
subsidiaries, ships by the Maritime Commission, and food by the Food Administrator.
As principles to govern sales, the report
urges, among others: no sales to speculators
or promoters; use regular channels of trade;
proceeds of all sales to go to reduce national
debt; equal access to surpluses for all businesses
and all sizes of business, with size of lots to be
determined accordingly; no creation of monoply.
With repect to sales of plants, the report
recommends a study of what it calls a "tangled
problem." First, it is necessary to decide which
plants will be maintained for stand-by war
purposes and which should be sold or scrapped.
Both the Baruch-Hancock report and the
George Committee report, in different words,
point out that the high dollar cost to the Government of plants constructed under war conditions is not a true yardstick of their real
value of use by industry. Both, however, also
make the point that it will not serve the national interest to sell any one plant at such
low prices as to destroy invested values and
displace workers in established industries.
Messrs. Baruch and Hancock would give authority to exchange properties or lease as well
as sell, but with the warning that —
Leasing must not become a hidden device for the
government to compete with private plants; it must
not become a hidden device for subsidies — by any
name — to anyone. Once plants leave the government's hands they must stand on their own feet competitively . . .
As long as fair selling prices or fair rentals are
paid — with sales preferable to rentals — local ownership should be encouraged. To repeat, no windfall
subsidies should be given anyone.

Both reports state without qualification that
there should be no government operation of
plants in competition with private industry.
Both agree that in the case of the synthetic
rubber and other industries whose fate will be
decided by disposition of government-owned
plants, a formulation of public policy by Congress is called for.
Lessons of World War I
This foresight in preparation for disposal of
surplus goods contrasts encouragingly with
the experience in the first World War. The
Armistice in 1918 found the Government without adequate policy, program or organization
for surplus custody, storage or disposal. Methods had to be worked out experimentally at a
time when rapid personnel turnover was a continuous problem. There was no chief coordinator of sales until July 27, 1921, the War and
Navy departments until then handling their
own surpluses independently. The Shipping
Board did not even have a sales department
until 1921.




27

March,
longer necessary." They would relax "nuisance" production controls — affecting only
small quantities of materials — early, and
would bring all materials limitations under
early review. The report points out that because of a natural inertia to overcome, there
should be an early start in relaxing controls;
also that it will be safe to err on the side of
liberality since the natural trend during demobilization will be for shortages to disappear,
— the reverse of the trend during the moblization period. It asks a running survey by
O.W.M. of the work of the war agencies, and
a running study of the functions of the agencies by the Bureau of the Budget, with recommendations for eliminating overlappings, for
merging units, "preparing ultimately to liquidate what is left." Two statements are made:

in paying subcontractors. They should protect
the government. To achieve these ends, the
Senate bill provides that settlements shall be
final except for fraud or renegotiation under
the Renegotiation Act (subject to the right of
the contractor to appeal where settlement is
not by agreement). It provides for payment
of interest at 3 per cent on amounts still unpaid sixty days after filing the claim. It limits
government reviews of contractors' settlements with subcontractors to the minimum
compatible with the public interest. It authorizes, subject to regulations, direct settlement
of subcontractors' claims, and in case of insolvency or bankruptcy of a contractor provides for payment of fair compensation to his
subcontractors. It relieves contracting officers
of personal financial liability. It limits the review powers of the General Accounting Office
to cases of suspicion of fraud, and to seeing
that payments accord with settlements. It validates informal and defective contracts, made
in good faith. It provides for record keeping
and for appeals.

As the tides of war ebb, little pools of government
functions will be left behind in various agencies, and
they should be cleaned up promptly.
We have not wanted to leave the government after
the war a jackpot of controls which invite every
pressure group to hit it.

The report states that "as far as possible no
manufacturer should be permitted to jump the
gun on his competitors." But —

With respect to government property in private plants, the Baruch-Hancock report recommends that manufacturers be allowed to move
it at their own risk at any time, and at the
government's risk after 60 days from the preparation of inventory lists. The Senate bill makes
this period 30 days.
These are excellent provisions. They deserve
unanimous support and speedy action.
The "Financial Kit"
While recognizing that "no plan of interim
financing can be as good as final settlement
itself", Messrs. Baruch and Hancock have assembled a "financial kit." This provides for
immediate 100 per cent payment for completed
articles and certain costs easily proved, and of
approved settlements with subcontractors, and
90 per cent of certain other costs on which the
government is able to satisfy itself. It asks
Congress to authorize (supplementing V and
VT loans) a "new, simplified" system of
T-loans, to be made by local banks with government guarantees up to 90 per cent, and it
further proposes direct government loans or
partial payments if private loans cannot be
obtained in thirty days. It is suggested that
Congress might want to authorize the Smaller
War Plants Corporation to assume the 10 per
cent risks under the T-loans, when local banks
find themselves unable to do so.
The Senate bill includes provisions to enable
interim financing (in an amount not less than
90 per cent of the contractor's claim less certain liabilities) through advance payments,
loans or guarantees, and specifies that no such
financing shall extend beyond the settlement
of the termination claim. A penalty against
making excessive claims is provided.

It may not always be possible to do so, and industrialists must understand that this objective cannot
be allowed to interfere with war requirements or hold
back the production of needed civilian items and so
to contribute to inflation and unemployment.

Settlement of Terminated Contracts

The Baruch-Hancock discussion of contract
termination covers 25 typewritten pages, and
Title III of S. 1730, embodying the proposed
legislation on the subject, covers 33 printed
pages. They cannot be readily summarized in
a brief space. Those who want details may
obtain one copy of the full Baruch-Hancock
report free upon application to the Office of
War Mobilization, 323 Washington Bldg.,
Washington 25, D. C, while the Senate bill is
obtainable from the Senate Document Room.
Basic principles of termination and a formula
for calculating amounts due contractors had
already been established, through the issuance
in January of the uniform termination clause
for fixed-price contracts and the statement of
principles for determining costs. Statements
on other aspects of termination, to govern the
procedures of the procurement agencies, are
being issued from time to time, and many aspects are still under study, including the possibility of overall company settlements, standard
termination clauses for subcontracts and costplus-fixed fee contracts, possibility of direct
settlement of subcontractors' claims, and
others.
Three principles for contract settlement are
laid down in the Baruch-Hancock report. Settlements should be speedy, to provide contractors with cash and free their plant space. They
should be final, to leave no uncertainty in the
mind of contractors and to remove hesitation




28

o

c

o

March, 19 U

o

These provisions accord with the general
philosophy of the Baruch-Hancock approach.
Contractors will have troubles enough in the
post-war period, and their problems should
not be made unnaturally difficult by inability
either to get payment on valid termination
claims or to get interim financing while awaiting payment.
Another recommendation, however, goes
beyond termination loans and departs from the
principle of getting the government out of
business. This is the suggestion that "as a
permanent source of credit for small and medium-sized enterprises on a basis of broader
risks than banks can be expected to assume,"
the Federal Reserve System's authority to
make industrial loans be expanded and' liberalized to permit one-half billion dollars in outstanding loans. In considering the need for
such a measure, it should be noted that the
Federal Reserve Banks now have authority to
make many more of these loans than they have
ever had outstanding; they make few because
there are few credit-worthy applicants not
cared for elsewhere. As evidence of the high
degree of risk in these loans, the Federal Reserve Bank of New York in its monthly review
for August 1938 stated that a number of the
concerns to which it made loans had failed and
that "in general the experience of this bank
with this type of loan indicates that the income
received even at rates as high as 6 per cent is
not adequate to cover expenses and losses."
The recommendation in effect asks the Reserve Banks to provide industrial capital on a
loan basis to the business groups among which
risks are largest and failures highest. Apart
from the question whether the System's assets
should be so used, and whether enterprises of
dubious efficiency or utility can be nursed to
good health by lavishing credit upon them, the
effects on other enterprises are to be considered. Subsidies to one uneconomic producer,
keeping him in the field, may reduce the business of half a dozen others, more efficient, to
a marginal status and make them in turn applicants for public credit. There is conflict
here with another statement in the report,
which says:
Let us not provide credit to the returning soldier
or small businessman which will only chain him like
a galley slave to a loan he can never repay.

In Summary

Some observers will find flaws and inadequacies in this demobilization and reconversion program, and some details doubtless will
evoke sincere controversy, which will help perfect them. The program, however, has two
great merits which are vastly more important
than flaws or disputable details. One is its
practical value, — the emphasis that is put upon
speed of reconversion and reemployment, and




29

the effectiveness of the proposals to achieve
speed. The second is the fact that the authors
of these documents are animated by a belief
that this country should continue to seek its
progress through a system in which private
competitive enterprise is the generating force;
and that they reject any idea that the imposition of the government regulations and controls, which have been necessary to enforce
priorities and concentrate energy upon the war
effort, constitutes a permanent change-over
from a free to a government-directed system.
The letter of transmittal with the BaruchHancock report declares: "With peace . . . each
has the right to make what he pleases. Governmental direction and aid disappear. The
markets become free and each individual is
dependent upon his vision, his courage, his resourcefulness and his energy." The report
adds :
There has been too much loose parroting of the
slogan, that if individual enterprise fails to provide
jobs for everyone, it must be replaced by some one
of the other systems that are around. The war has
been a crucible for all of the economic systems of the
world, for our own, for Communism, Fascism, Naziism
— all the others. And the American system has outproduced the world.

The Senate Committee, for its part, says,
"The paramount consideration in the handling
of all demobilization problems should be the
preservation and strengthening of the American system of free competitive enterprise."
Business men should find confidence and reassurance in these declarations, and in the
steadfast adherence of the specific proposals to
them. It is equally significant that the program
does not offer to business subsidies, favors, or
anything but fair and just treatment. It does
not offer to prop up enterprises which cannot
support themselves, or to bear risks which
business itself should bear. Its concern is only
to clear the way.
Commentators of leftist persuasion may
say that the proposals deal with business with
too open and generous a hand, and that they
would reduce the economic activity of government too much. At the opposite extreme, some
may think that the treatment proposed for private enterprise is still unduly restrictive and
insufficiently generous to restore economic
health. Labor unions are protesting that they
lack representation in the plans. Such diverse
views are probably the best evidence that the
proposals do not cater to any special interest,
but are concerned only to serve the general
interest.
Because the principles of these reconversion
proposals are sound and wise, the country
stands to gain inestimably by supporting them.
The power of public opinion behind them will
be the best assurance that the principles are
adhered to and applied effectively.

March, 19
10 per cent postwar or debt retirement credit.
Such net taxes took approximately 70 per
cent of the net income before taxes in 1943,
compared with 66 per cent in 1942 and 48 per
cent in 1941.
With the same basic tax rates in effect during the past two years, the somewhat higher
average overall rate in 1943 may be attributed to
(1) the increase in total net income before
taxes, with most of such increase subject to the
90 per cent excess profits rate rather than the
40 per cent normal and surtax rate; (2) the
prevailing rates havirfg applied to fiscal year
companies only upon their earnings after July
1, 1942, prior to which the lower 1941 rates
applied; and (3) the exhaustion, by 1943, of
excess profits tax credits carried forward in
previous years by some companies.
The current high tax rates tend to stabilize
net income, since taxes offset to a large extent
increases or decreases in operating income.
Thus the Treasury takes the position of absorbing the major share of any improvement
or deterioration in earning power.

Industrial Corporation Earnings
Annual reports of leading manufacturing
companies now becoming available reflect
rising industrial costs at a time when the rate
of increase of industrial production was tapering off toward the close of the year. Reports
for 730 companies so far published for the
full year 1943 indicate combined net income
after taxes and reserves of approximately $1,137
millions, an increase of 2 per cent over 1942,
compared with an increase of 13 per cent in
the first nine months of the year, as shown by
tabulations of quarterly reports.
Practically all companies experienced advances in costs, but those still having large
increases in volume of sales were able to offset
these additional charges. Many manufacturers,
however, reported actual curtailment in volume, due to changing needs of the war effort
and to effects of priorities and scarcities of
materials. While earnings on a consolidated
basis were slightly in excess of 1942, the number of companies showing decreases exceeded
those showing increases in the ratio of approximately four to three.
The steel industry presents an outstanding
example of the effects of rising costs against
ceiling prices last year. There was an increase
of 3 per cent in ingot production to a new
high record, an increase of 12 per cent in wages
and salaries paid, and a decrease of 7 per cent
in the net income of 30 leading companies.
Other important groups showing lower net
income last year included food products, cotton goods, paper and paint, while those showing increases included distilled beverages, rubber products and petroleum refining.
For most companies, the 1943 earnings are
subject to the renegotiation of government
contracts, which may reduce the earnings
finally realized. While many companies have
set up reserves against estimated refunds, such
reserves may or may not prove adequate.
The tabulation is composed mainly of the
larger industrial corporations having in 1943
an aggregate net worth of $12,333 millions —
an average of about $17 millions per company
— compared with $11,926 millions in 1942. Because of the increase in net worth, the average
rate of return thereon declined from 9.4 per
cent in 1942 to 9.2 per cent in 1943. Our accompanying summary shows, by major industrial groups, the comparative figures for the
two years.
Increases in Tax Reserves
Reserves of the 730 companies for federal
taxes upon income—estimated on the basis
of tax details given by companies accounting
for around nine-tenths of the total net income
— were $2,170 millions in 1942 and $2,650
millions in 1943. This liablity is computed
after deducting from gross taxes payable the



Industrial Earnings in Recent Years
The course of industrial earnings during
recent years is indicated by the following summary of our tabulations giving net worth and
rate of return for leading companies since
1928, together with the Treasury Department
"Statistics of Income" for all manufacturing
corporations in the United States through 1941
(preliminary), the latest year for which official figures have been issued. Although the
number of companies included in our own tabulations is not exactly the same each year, because of variation in the number of reports
publicly available, the general course of earnings is indicated by the annual average percentage rates of return on net worth. These
rates for both series are given in the diagram
also.
Net Income of Manufacturing Corporations

Year
1928.__.
1929.__
1930__
1931_.
1932__
1933__
1934_
1935__
1936_
1937—
1938™
1939_
1940™
1941__
1942™
1943

(In Millions
All Mfg . Corp. in U. S.*
Per
Net
Net
Income Worth
Cent
aft. Tax Jan. 1 Return
8.2
$3,935 $48,050
9.1
50,017
4,537
2.7
1,424
52,695
52,122 D-1.0
D-521
47,640 D-3.4
D-1,616
237
0.5
43,976
2.7
43,342
1,166
5.6
38,152
2,122
8.3
37,611
3,116
8.0
38,467
3,069
3.0
41,239
1,228
7.1
41,260
2,946
8.9
3,775
42,438
44,163
5,492
12.5
„.„.—..

of Dollars)
Leading Mfg. Corp.**
Net
Net
Per
Num- Income
Worth
Cent
ber
aft. Tax
Jan. 1
Return
$2,087
$16,261
12.8
827
827
2,444
17,266
14.2
8.2
717
1,499
18,223
456
3.1
712
14,642
670
D-36
13,565 D-0.3
653
359
3.0
12,152
676
532
4.6
11,564
734
822
6.7
12,251
789
1,413
13,623
10.4
940
14,705
1,545
10.5
672
4.4
940
15,202
960
8.4
15,181
1,281
925
1,554
14,803
10.5
825
1,539
12,931
11.9
710
9.6
1,210
12,585
730
9.2
12,333
1,137

D- Deficit. *From Treasury Department annual "Statistics of
Income". **From National City Bank annual tabulations of
published shareholders' reports.

For the large manufacturing corporations,
the average rates of return on net worth in
30

o

March, 19U
N E T INCOME OF LEADING MANUFACTURING CORPORATIONS FOR T H E YEARS 1942 A N D 1943
Net Income is Shown after Depreciation, Interest, Taxes, and Other Charges and
Reserves, but before Dividends.— Net Worth Includes Book Value of Outstanding
Preferred and Common Stock and Surplus Account at Beginning of Each Year.

No. of
Cos.
13
12
62
14
18
9
12
33
5
11
29
18
5
15
17
15
4
29
32
9
10
11
12
17
30
8
21
27
22
11
66
8
9
30
41
12
33
730

Industrial Groups

Baking
Meat packing
Misc. food products
Soft drinks
Brewing
Distilling
Tobacco products
Cotton goods
Woolen goods
Knitted goods
Misc. textile products
Clothing and apparel
Leather tanning
Shoes, etc
Rubber products
Lumber
Furniture, wood products
P a p e r products
Chemicals—industrial, etc
Drugs, soap, etc
P a i n t and varnish
Petroleum products
Cement, gypsum, etc
Other stone, clay and glass
Iron and steel
Agricultural implements
Building equipment
Electrical equipment
H a r d w a r e and tools
Household equipment
Machinery
Office equipment
Nonferrous metals
Misc. metal products
Autos and equipment
Railway equipment
Misc. manufacturing
Total manufacturing

Net Income
Years
1942
1943

Net Worth
January 1
1942
1943

Per Cent

Return
1942 1943

$ 21,742
50,552
54,878
8,163
5,523
28,373
51,912
24,482
7,875
3,881
20,773
10,037
4,237
15,371
41,569
7,574
3,568
31,751
110,910
32,231
10,136
36,425
14,819
26,410
195,502
14,515
13,602
84,325
13,533
4,436
48,595
13,483
11,632
31,370
32,657
17,403
15,243

$ 21,987
48,794
49,243
7,282
6,072
34,012
49,562
20,810
7,788
3,832
21,630
10,043
3,674
14,839
57,617
5,935
2,976
28,450
115,407
32,768
8,275
45.722
11,260
24,726
181,499
15,671
13,798
91,972
13,962
4,236
47,593
9,451
13,881
36,729
38,028
16,813
21,012

+ 1.1
— 3.5
—10.3
—10.8
+ 9.9
+19.9
— 4.5
—15.0
— 1.1
— 1.3
+ 4.1
+
—13.3
— 3.5
+38.6
—21.6
—16.6
—10.4
+ 4.1
+ 1.7
—18.4
+25.5
—24.0
— 6.4
— 7.2
+ 8.0
+ 1.4
+ 9.1
+ 3.2
— 4.5
— 2.1
—29.9
+19.3
+17.1
+16.4
— 3.4
+37.8

$240,360
595,152
497,882
51,476
44,833
224,332
462,163
231,113
85,314
42,789
214,958
90,258
35,918
169,770
416,021
71,387
58,991
391,363
1,081,902
198,511
114,937
549,472
192,713
250,335
3,207,408
138,214
151,758
688,014
62,967
31,504
266,892
83,319
165,937
331,892
214,077
184,925
87,128

$232,379
618,353
522,189
58,683
46,832
230,158
483,018
242,022
89,322
43,701
224,155
94,441
36,390
173,916
435,369
74,387
60,342
394,599
1,123,465
202,862
119,042
564,105
199,208
261,612
3,275,222
143,074
163,280
713,721
71,681
31,914
292,775
90,142
155,933
344,164
230,555
190,988
99,374

9.0
8.5
11.0
15.9
12.3
12.6
11.2
10.6
9.2
9.1
9.7
11.1
11.8
9.1
10.0
10.6
6.0
8.1
10.3
16.2
8.8
6.6
7.7
10.5
6.1
10.5
9.0
12.3
21.5
14.1
18.2
16.2
7.0
9.5
15.3
9.4
17.5

9.5
7.9
9.4
12.4
13.0
14.8
10.3
8.6
8.7
8.8
9.6
10.6
10.1
8.5
13.2
8.0
4.9
7.2
10.3
16.2
7.0
8.1
5.7
9.5
5.5
11.0
8.5
12.9
19.5
13.3
16.3
10.5
8.9
10.7
16.5
8.8
21.1

$1,119,488

$1,137,349

+ 1.6

$11,925,985

$12,333,373

9.4

9.2

1942-43 were below 1940-41, and while above
the prewar years 1938-39 were below the years
1936-37.
During the thirteen years 1928-40, the rate
of earnings of this group of leading companies
ran roughly parallel to but consistently higher
than the average for all manufacturing corporations, numbering some 86,000. In 1941,
however, the rate on the Treasury series covering all companies rose above the rate on the
"leading company" series.
One reason for this reversal of relationship
is that the Treasury statistics, compiled from
corporation income tax returns, show the net
income as defined for tax purposes, and make
no allowance for the various general reserves
—contingency, postwar, conversion, etc. Such
reserves began to assume substantial proportion only in 1941, and are not permissible deductions in computing taxes. Only when and



Per
Cent
Change

28 29 30 31 32 33 34 35

3? 38 39 40 41 42 43

Annual Rate of Return on Net Worth of All Mfg. Corp.
and of Leading Mfg. Corp.

if such losses and costs are definitely "established" are they allowed as deductions from
income for tax purposes. This treatment causes
the "statutory net income" in many cases to be
higher than that stated by the companies' au31

March, 19 UU

ditors in the annual reports submitted to shareholders, employes and the public.
The same distinction should be noted in
connection with the earnings series for "all
corporations" now being reprinted or estimated
by the Department of Commerce and carried
in the "Survey of Current Business", which
uses the statutory definitions and thus disallows,
or adds back to net income, the various general
reserves.
No one can forecast very accurately just
what should be the size of corporate reserves
against the liquidation of wartime expansion.
Many industrial companies prominent in the
last war were unable to survive the liquidation
that followed, and the extent to which industry has been transformed and expanded is much
greater during this war. Clearly the conditions
justify unusual precautions in building a backlog of reserves against unforeseen charges
and possible losses. Considerable leeway in
the matter obviously must be left with business
management and accountants.
A second possible reason for the sharper increase in the Treasury series in 1941 is that
they are based on all manufacturing companies in the United States, including large numbers that are operating at deficits or in reorganization and that issue no reports to the
public. During the period of wartime business
expansion, the reduction of deficits or sharp
rise in profits of these companies will tend to
raise the combined earnings of business as a
whole, even though taxes and operating costs
may be leveling off or reducing the earnings of
most "leading companies".
Still another factor which affects long-term
earnings comparisons is the substantial reduction in aggregate net worth during the depression years as a result of operating deficits,
payment of dividends in excess of earnings,
and writing-down of asset valuations and of
capitalization. As this reduces the base upon
which return is computed, it automatically
raises the percentage rate.
Although the indicated rate of return for
"all manufacturing corporations" in 1941 was
higher even than in 1929, due in part to the
lowering of net worth, the margin of profit
per dollar of sales—another standard measure
of business earnings—was slightly narrower.
Exclusive of intercorporate dividend receipts,
which are not related to the volume of sales,
the 1929 gross income of all manufacturing
corporations was $71,640 millions and the net
income (after taxes) $3,954 millions, or 5.5 per
cent of sales; in 1941 the gross income had
reached $92,940 millions, upon which the net
income (before allowance for the general reserves described above) was $4,990 millions, or
5.4 per cent.




32

Some of the recent controversy over wartime profits undoubtedly is due to the drawing
of generalizations from bulk statistics of business earnings without recognition of their diverse composition. The limitation as to the
usefulness of aggregates in this connection is
that they imply a "pooling" of earnings which
does not take place. Results for individual
companies can hardly be judged accurately on
the basis of aggregates for "all corporations",
including railroads (solvent and insolvent),
banks and investment companies, trade and
service companies, etc.
There is also the danger of drawing generalizations from isolated cases of allegedly excessive profits. It is difficult to write tax laws
that will catch the last dollar of excessive
profits in all cases without crippling effects
upon industry as a whole. Cases where profits
are excessive are supposed to be dealt with
through continuous price reviews and contract
renegotiation.
Balance Sheet Changes
A composite balance sheet and income account is given for 110 of the larger manufacturing companies, with sales or total assets
over $5 millions and with fiscal years closing
December 31.
Composite Income Account and Balance Sheet of
110 Manufacturing Companies with Sales
or Total Assets over $5 Millions
(In Millions of Dollars)
Year Year Year Year
Income Account
1940 1941 1942 1943
Sales
$3,324 $4,470 $5,525 $6,575
Net income before taxes
361
616
693
835
Income & exc. prof, taxes....
107
321
447
569
Net income after taxes
Dividends paid
Retained n e t income
Assets, Dec. 31
Cash
U. S. Govt. securities
Receivables, n e t
Inventories

254
174

295
190

246
155

266
160

80

105

91

106

365
351
427
528
36
119
298
441
343
459
561
583
961 1,198 1,389 1,408

Total current assets
P l a n t a n d equipment
Less depreciation

1,705 2,127 2,675 2,960
2,305 2,362 2,352 2,391
1,080 1,116 1,150 1,227

Net property
Other assets

1,225 1,246 1,202 1,164
238
249
260
291

Total a s s e t s
Liabilities &
Capital, Dec. 31
Notes payable
Accts. pay. & accruals
Reserve for t a x e s

3,168 3,622

41
204
151

86
274
370

4,137 4,415

102
449
520

106
456
655

Total c u r r e n t liabilities....
Deferred liabilities
Reserves
C a p i t a l a n d surplus

396
730 1,071 1,217
313
329
393
392
90
105 , 128
160
2,369 2,458 2,545 2,646

Total
Working capital
Current ratio

3,168 3,622 4,137 4,415
1,309 1,397 1,604 1,743
4.31 2.91 2.50 2.43

o

March, 19 H
It will be seen that last year there were substantial increases in cash and in government
securities. Receivables and inventories, which
had risen sharply between 1940 and 1942, were
little changed last year despite the further
expansion in volume of sales, indicating more
rapid turnover of merchandise and prompter
collection of accounts. Depreciation reserves
in both 1943 and the three-year period were
increased more than gross plant and equipment, so that the net property account was
lower. The "other assets" include the increasing claims for tax refunds after the war.
Current liabilities increased further last year,
due to larger reserves for taxes payable. The
"current ratio" of liquidity (current assets/
current liabilities) was little changed in 194243, and although considerably below the prewar level would be almost as high if tax liability were offset against holdings of cash and
government securities, principally tax notes.
Net current assets or "working capital" continued to increase last year.
Capital funds were built up in every year
1940-43 from earnings retained after payment
of dividends, which were considerably lower
in 1942-43 than in 1940-41. While the 1943
sales of this group were 98 per cent higher
than in 1940, dividends paid were 8 per cent
lower. Reserves have steadily increased, but
amounted to only 4 per cent of total assets at
the end of 1943.
This composite balance sheet comprises a
sampling from numerous different manufacturing industries, listed in our earnings tabulation already given, and includes consumers'
goods as well as capital goods. For this reason
it is not typical of the special situation of many
companies concentrating on war production,
which have expanded tremendously in the
output of airplanes and parts, electrical and
radio supplies, marine engines and equipment, machine tools, guns and ammunition,
and other military goods. The unusual current
and postwar conversion problems of such manufacturers will of course require much more
attention than those of most organizations in
the consumers' groods lines.

lieved to have received over $500 millions under the provision permitting commercial banks
having savings deposits to invest a limited
portion of such deposits in F and G savings
bonds and the longer-term marketable 2 ^ s and
Recognizing that the core of the inflation
problem lies in the spendable funds in the hands
of individuals, the Treasury and various State
War Finance Committees have placed major
emphasis upon broadening the distribution in
this area and getting more people to save.
They have been outstandingly successful in
achieving this goal as shown first by a large
increase in the number of sales, and second by
larger sales of Series E bonds which represent
chiefly the purchases by smaller investors.
While country-wide figures are not yet available, it is estimated that in New York State
sales were made in the course of the drive to 5
million people out of a total population of under
14 millions, or better than one out of every
three. If the same ratio is maintained throughout the nation, as seems probable, it means the
sale of bonds to 50 million persons.
With respect to Series E bonds, sales are expected to reach approximately the $3 billions
quota. This is far ahead of any previous drive
and may be compared with §2y2 billions in the
third loan and $ 1 ^ billion in the second.
The effort was made particularly to encourage the purchase of bonds by individuals who
would buy them "for keeps", and to discourage
speculative purchases financed by bank loans
and undertaken in hopes of subsequent resale
at a quick profit. Such transactions had been
an increasing factor during previous drives —
particularly the third—and a substantial portion of such resales to the market found their
way into the commercial banks. The Secretary
of the Treasury in a letter to all banks in January requested their cooperation in reducing
such speculative purchases, while presidents of
the Federal Reserve Banks asked the security
dealers and brokers in their territories to limit
their subscriptions to such amounts as were
actually needed for their own and their customers' permanent investment. The New York
Stock Exchange addressed a similar communication to its membership. This policy of elimi
nating the "padding" had the effect of limiting
many subscriptions of individuals and greatly
reduced subscriptions of brokers and dealers.
Notwithstanding the closer scrutiny of subscriptions during this drive, it is expected that
the sum total of sales to individuals will come
close to the sales of $5,377 millions in the Third
War Loan, though short of the ambitious $5*4
billions quota.
Additional factors of increasing importance
as one drive follows another are the rise in
taxes and the advance in living costs, which

Fourth War Loan Results
While final results of the Fourth War Loan
are not available at this writing, indications
are that total subscriptions from all sources
included in the quota will be in the neighborhood of $16^4 billions. This compares with a
goal of $14 billions, and a total of $18.3 billions
raised during the third drive. The difference
is largely accounted for by the curtailing of
speculative subscriptions, and smaller purchases by life insurance companies and savings
banks which had less available funds.
In addition to subscriptions eligible to be
counted towards quota, the Treasury is be-




33

March, 19 U
have restricted the amounts of current income which many people have available for
investment, while accumulated savings can be
invested only once. This year there has been
the burden of the 12y^ per cent "unforgiven"
tax due March 15, as well as current taxes.
Effects on Bank Credit
Before and during drives there is always a
certain amount of portfolio readjustment by
investors, involving sales to the market, and
substantial portions of such sales are taken
up by the commercial banks and the Reserve
Banks. Purchases of tht new government offerings by investors selling other securities to
the banks, and by investors borrowing from
the banks, are of course as expansive of bank
credit as would be direct purchases by the
banks.
During drives, banks are willing buyers by
reason of the temporarily large excess reserves
created by government bond subscriptions by
the public, which result in a shift of private
deposits into war loan accounts requiring no
reserves. During the fourth drive the reduction in reserve requirements amounted to about
$1 billion, in addition to which banks gained
substantial reserves through Treasury disbursements from its balances in the Reserve
Banks.
The following table indicates the change in
weekly reporting member bank holdings of
government and other securities and in loans,
also ir Reserve Bank holdings, for the four
weeks comprising the drive, and compares
these with the changes that took place during
the third drive.
Expansion of Bank Credit During the Third and
Fourth War Loan Drives

(In Millions ol Dollars)
Change
Sept. 8
to Oct. 6
(4 weeks)

Weekly Reporting
Member Banks

Treasury bills
Other short-term
Bonds

+ 641
+ 855
+ 506

+ 971
4-1.162
+ 654

TotaJ govt. secur
Other securities
Loans to dealers on govts.—..
Loans to others on govts
All other loans

+2.002
+ 28
+ 892
+ 774
+ 680

+2.787
+ 6 6
+ 317
+ 613
+ 179

Total loans
......
Total loans & investments....
Federa Reserve Banks
Treasury Dills
Other short-term
Bonds

+2,346
+4,376

+1.109
+3.962

Totai efovt secur

-

Change
Jan. 19
to Feb. 16
(4 weeks)

„

— 45
— 903
+ 95
+ 339
+
2 + 4 4
+

52

— 520

It will be seen that in the four weeks of the
fourth drive reporting bank holdings of gov-




ernments expanded $2,787 millions, or $785 millions more than in the third drive. This was
mainly due to repurchases of Treasury bills
from the Reserve Banks and to increased shortterm open-market purchases. Expansion of
loans directly secured by governments was less
by about $700 millions, reflecting the reduction
in speculative purchases, and the expansion ot
all other loans was less by about $500 millions
The smaller increase in the latter figure in
the recent drive is a part of the picture, in that
there has been evidence—particularly during
the third drive — that considerable borrowing
to finance government securities has been
classified under other headings. Total loans
and investments of the reporting banks expanded by $3,962 millions, or $400 millions
less than in the third drive. Federal Reserve
Bank holdings were reduced by approximately
$500 millions during the fourth drive, as
against an increase of $50 millions in the third.
In comparing these figures, several points
need to be borne in mind.
(1) The pre-drive liquidation of governments by non-banking investors apparently
was considerably smaller in the case of the
fourth drive than in the third. While this
tends to cut down new subscriptions, it makes
them more representative of new investment.
As evidence of this, reporting bank absorption
of governments (net purchases plus loans),
together with Federal Reserve absorption,
amounted to around $450 millions in the six
weeks prior to opening the fourth drive, or 40
per cent less than in the corresponding period
before the third.
(2) CommerciaJ bank purchases during the
fourth drive include, in addition to securities
bought in the open market and bills repurchased from the Federal, the limited purchases
of F and G savings bonds and longer-term
Treasury bonds made eligible under the terms
of the drive,
(3) The weekly reporting member bank government security holdings represent only about
two-thirds of the total for the commercial banking system, although a considerably larger
share of the loans against securities.
Need for Still Greater Effort
This showing of the extent of bank credit
involved in the lates drive indicates that, despite the real progress made in getting the
right kind of sales in larger volume than ever
before, there is still much hard work to be done
in reaching more people and in getting larger
individual purchases. Great masses of the
people are not accustomed to buying bonds,
and it requires a process of education to get
them into the habit of the systematic purchases
which are needed to finance the war and to
reduce the danger from inflationary spending
No system of taxation that would be bearable

Q

March, 19 Uh

o

could be wholly relied upon to eliminate this
inflationary danger. The bond drives, together
with regular purchases between drives, afford
a flexible means of reaching people in relation
to their means. The results of this drive reemphasize the lesson of previous drives that
the American people will and do respond to
this democratic voluntary form of approach.
Foreign Dollar Balances and Gold
Foreign owned dollar balances have increased steadily since we entered the war, despite substantial sums converted into gold.
The growth of both foreign-owned deposits
and the gold earmarked here for foreign central
banks is shown in the table that follows
Foreign Deposits, Earmarked Gold and Monetary
Gold Stocks
(In Millions of Dollars)
Foreign D e p o s i t s
Dec. '41 Dec. '42 Dec. '43 Feb. '44
In Federal Reserve Banks™ $ 774 $ 806 $ 1,512 $ 1,551
In Reporting Member Banks
883
736
824
810

Total
Earmarked Gold
Gold Stocks

1,657

1,542

2,336

2,215

2,674

3,477

22,736

22,726

22,004

2,361
21,802

It will be seen that foreign-owned deposits
rose in the two years 1942-43 about $680 millions, while gold earmarked for foreign account
advanced $1,260 millions to $3,477 millions.
Because of the domestic production of some
$170 millions of gold and the net imports of
about $380 millions in these two years, the
actual gold loss was but $732 millions. However, during the first seven weeks of 1944 the
Treasury monetary gold stock declined by another $200 millions, to $21.8 billions.
While details as to the gold flow are lacking
because of war censorship, it may be assumed
that gold is being lost to the countries which
have export trade balances with us. Figures
recently published by the Department of Commerce indicate that the excess of our merchandise imports over our cash exports amounted
to about $600 millions during the first nine
months of 1943. Of this excess the Latin American countries accounted for about $370 millions. For the full year 1943, the excess of
total imports over cash exports aggregated
about $780 millions.
On the basis of available information, combined gold and foreign exchange reserves of
the 14 principal Latin American republics (including the dollar notes circulating in Cuba)
rose during 1943 by the equivalent of almost $1
billion to more than $2.4 billions. Of this total,
one-half, or $1.2 billion, is known to be gold

o



at home, with the balance in gold abroad,
dollars, pounds sterling, and other currencies.
Gold Reserves of European Neutrals
Gold holdings of European neutral countries
have likewise shown considerable increase.
In the case of Switzerland and Sweden, the
conversion of foreign exchange into gold has
caused a steady rise of gold reserves. Portugal
has benefitted from a large expansion of its
transit trade and the sale of such valuable strategic materials as wolfram. Much the same
has been true about Turkey, which has been
selling chrome ore to both Allied and Axis
countries; and to a lesser extent about Spain.
All European neutral countries have continued
to receive refugee funds. Furthermore, following the freezing of dollars, the transactions in
that currency on the continent have practically
ceased, and increased use has been made of
gold in the settlement of international transactions. The Germans are believed to be using
some of the gold seized in the occupied countries, which accounts for the recent refusal of
the leading Allied Powers to buy or recognize
the sales of the Axis-tainted gold.
Gold Holdings of Certain Foreign
Countries
(In Millions of Dollars)
Gold Holdings
Dec. 1939 Dec. 1941
Switzerland
$ 549
$ 668
Sweden
308
223
Portugal
:
69
59
Turkey
•
29
92
Spain
42
Total European neutrals $ 955
South Africa
249
Total
Foreign Exchange Reserves
Portugal

Latest
$ 964
384
59
161
85

$1,084
366

$1,653
685

1,204

1,450

2,338

29

189

529

Whatever the sources, European neutrals
and South Africa have in the last two years
increased their gold holdings by nearly $1
billion, as will be seen from the table above.
Portugal acquired in the same period a huge
foreign exchange reserve, some of which is unquestionably gold. As in various Latin American countries, the inflow of funds into Portugal
has led to an expansion of purchasing power,
giving rise to a now notorious black market.
Since the public has remained unresponsive to
a government loan which was to mop up the
purchasing power, the government is reported
to have considered putting a large part of the
country's gold into circulation. The proposal
was deemed unwise, since the gold might be
needed after the war for settlement of international payments.

THE NATlOiNAL CITY BANK OF NEW YORK

o

Your
rour Dollars
uonars help
neip

make
the
make possible
possible the

AMERICAN* RED CROSS




o
PRINTED IN

U. S. At