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Form F: R. 131 BDARD DF GDVERNDRS OF THE FEDERAL RESERVE SYSTEM Office C o r r e s p o n d e n c e To Chairman Eocles Date Apm is, 1958 Subject: From Mr» Goiawweiser Attached i s a preliminary draft of t h i s week's Current Coinments. The final draft to be prepared tomorrow w i l l con- tain additional material. Cc. 70 April 18, 1938 COKMPEHTIAL C0SB1MT COMMENTS (Preliminary draft) Excess reserves Following the reduction in reserve requirements April 16, excess reserves increased to a total of $2,500,000,000, mhich compares with an average level of about $1,500,000,000 maintained during March. Excess reserves are now substantially higher than at any time since the first increase in reserve requirements August 16, 19S6, The reduction in reserve requirements amounted to $750,000,000 and excess reserves have been further augmented since the first of April by a reduction of $200,000,000 in Treasury deposits with the Reserve banks. These deposits now amount to $1,500,000,000, reflecting the deposit of $1,390,000,000 of inactive gold and excess gold in the working balance made on April 14. As this gold was included in Treasury cash, its deposit at the Reserve bank had no immediate effect upon excess reserves. With the excess of Treasury expenditures over the next few months, the balance will be drawn, dowa and added to member bank reserves* During the current statement week ending April SO, it is anticipated that excess reserves will be increased somewhat further through net Treasury expenditures and some further reduction in money in circulation* Reporting member banks Total loans at reporting member banks in leading cities declined substantially during the week ending April 13, reflecting further reductions in loans to security brokers and dealers in New York and in commercial loans - 2- in 100 other cities. Brokers* loans are now close to the lowest levels of 1932 and 1933* Holdings of United States Gtovernment obligations increased by #60,000,000 at New York City banks but showed little change elsewhere. Government security market The Government security market was firm in the early part of last week and advanced sharply in the latter part of the week following the release of the President's message* The average yield on long-tera Treasury bonds declined to 2*40 per* cent on Saturday, the lowest yield this year* The average yield on Treasury notes maturing in 3 to 5 years declined to 0*86 percent compared with the previous low of 0.92 percent in December 1936* Bond market Prices of industrial and public utility bonds moved generally higher last week, but railroad bonds were weaker* Losses of the latter averaged about 3 points in the lower grades, but were limited to less than a point for the highest grade issues* Municipal bonds showed small mixed changes* New security issues offered for sale last week were limited to a few municipal issues totalling about $5,000,000* Stock market Stock prices rose again last week, continuing an advance which began April 1* Shares of industrial corporations advanced sharply, but shares of utility corporations advanced only moderately, and railroad shares declined slightly. The volume of sales on the New York Stock Exchange averaged 1,000,000 shares per day. Prices of British stocks in London advanced further last week* - 3 - Brokers1 balances Preliminary reports to the Board of mardber firms of the New YoaSc Stock Exchange indicate that the volume of credit extended by these firms to their customers (reported as "customers* debit balances11) declined further during March by an amount which probably exceeded #100,000,000, bringing the total of these borrowings to about #830,000,000, which i s #730,000,000, or 47 percent, below the post-depression peak reached in April 1937, and #140,000,000 above the depression low reached in the summer of 1932* Total borrowings of these films from banks and other sources in New York and elsewhere decreased during March by about #60,000,000, and customers1 free credit balances (which constitute another source of funds available to the brokers) decreased by about #40,000,000. The decline in the credit balances may have been due to customers9 withdrawals of such balances following the Whitney failure* foreign purchases of American stocks Foreigners turned buyers of domestic stocks last week* As a result of steady buying, their net purchases were larger than the purchase or sales balance for any other week since the beginning of the year. Industrial production The latest estimates show l i t t l e change in output of steel and auto* mobiles. Steel production this week i s estimated at 32,4 percent of capacity and automobile production last week was about 62,000 cars. conditions Figures for the country as a i&ole indicate that factory employment declined somewhat and payrolls showed l i t t l e change from the middle of February to the middle of March, although increases are usual at this season* The number employed in the machinery industries decreased considerably further and, on a seasonally adjusted basis, most other major groups of industries showed some decline. Commodity prices Following the President's message last Thursday there was a slight advance in prices of commodities traded in on the exchanges* The DowJones index of commodity futures at noon on Monday was at 50*56 as compared with 49*51 at the close last Wednesday* Gold movements and foreign exchange rates The United States acquired $12,000,000 of foreign gold on balance in the week ending last Saturday* Imports of $14,000,000, which were added to the reported stock, were offset to the extent of $2,000,000 by net Stabilization Fund sales* Gross sales by the Fund were rather more than $4,000,000, most of which represented gold earmarked for French account* The French franc turned strong following the ovendielming vote of full financial powers to the Daladier Government by the Chamber on April 12, and the French Fund i s reported to have purchased substantial quantities of gold, mainly in London. The franc rose from 3*10 cents on April 12 to 3*15 cents on the 13th, but the Fund operations prevented any further substantial rise* It i s currently quoted at about 3*16 1/2* - 5 The stronger tendency in leading foreign currencies which, became evident on Monday the 11th, following announcement that a spending program was under consideration in the United States, continued throughout the week. The advance was accelerated following the Presidents message to Congress on the 14th recommending new public works expenditure and announcing desterilization of gold and a reduction in member bank reserve requirements* Sterling, which was quoted at #4.96-1/4 on April 9, passed $5.00 on Saturday the 16th and rose to nearly $5*01 on the 18th. Present foreign exchange quotations may undergo some revision, however, when the leading European markets, which closed on Friday, reopen on Tuesday. New French financial program On April IS and 15 the French Parliament almost unanimously voted the new Daladier Cabinet power to take financial and economic measures by decree until July 51. In approving the grant of powers, conservative leaders declared that the new Government possesses the confidence of investors, and that it will be able to issue the internal loan its predecessors were unable to float. An issue of 15,000,000,000 francs is planned. The special powers will be used to raise the 55,000,000,000 francs the Treasury estimates it will require by the end of the year. It is understood that in addition to the public issue 10,000,000,000 francs will be borrowed from the Bank of France. Part of the remainder will be obtained from bills drawn by armament contractors on the Treasury, which can be discounted at the Bank of France and at commercial banks. These bills, which will enable contractors to realize immediately on amounts due them from the State, are said to be modeled on the German work-creation bills. There will also be increases in taxes on profits in the armament industries and on monopolies, and in some tariff schedules. - 6 The program lacks the more controversial features of foimer Premier Blum f s proposals, notably the capital levy, a modified foxm of exchange control, and revaluation of the gold stock• After voting the decree powers Parliament adjourned until May SL# Before acting on his financial program, the Chamber accorded Daladier an almost unanimous vote of confidence. Thus the present Government, by -winning support from the Communists to the extreme right, is the nearest approach to a "National Union* government yet achieved, although, the overwhelming majorities obtained initially do not necessarily mean equally strong support in the future* The Socialist party, which voted as a unit in the Chaiaber, divided fairly evenly in party caucus on the question of backing the Government, while the extremes of right and left have made it clear that their backing cannot be relied upon ndien Parliament reconvenes. The Government will be greatly strengthened if it can settle the current labor disputes in a manner satisfactory to both sides, but there appear to have been no significant developments as yet.
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