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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence To Chairman Eccles From Walter R. G a r d n e r ^ 0^ Date February 15,1946 Subject: The impact of foreign buying on U,S> market a The Commerce Department has submitted a memorandum on the impact of an estimated #11 billion foreign demand in 1946 on the American economy. They contend that only 57 per cent of that demand (about $4 billion) will fall on commodities in short supplyComments by Mr, Harley on the Commerce memorandum are attached. If you will turn to the final table III you will find a list of the commodities which Commerce believes will be in easy supply in 1946 arranged in order of their importance in the actual export trade of the third quarter of 1945. I may add that the Commerce classifications with regard to ease or tightness of supply were based on the assumption that there would be no widespread inflationary tendencies leading to abnormal inventories or hoarding in 1946. They were also inclined to disregard supply difficulties covered by strikes. Attachment BOARD OF GOVERNORS or THE FEDERAL RESERVE SYSTEM Office Correspondence To vr* q ™ ^ ™ . From C. R. Harley Date February 12, 1946 Subject; Commerce Estimate of Impact of Foreign Demand on Commodities in Short Supply The attached three tables show in as great detail as possible the data presented to us try Mr. Bolton-Smith of the Department of Commerce in a memorandum entitled ^Estimated Magnitude of United States Exports During 1946 Showing by Major Commodity Groups the Proportion in Tight and Adequate Supply*. The study indicates that United States exports in 1946 may reach about 11 billion dollars and that only onethird of these exports will affect commodities in short supply in the United States economy. For the purposes for which the Commerce study was prepared, the over-all magnitude of the estimates is of secondary importance. In so far, however, as the total forecast of exports might be inflated by abnormally large exports of commodities designated as in easy supply, the percentage in easy supply would be increased. There is no evidence of any distortion of this type; in comparison with my own estimate of 1946 exports totalling 8 billion dollars the Commerce figures show a somewhat larger proportion of total exports in those groups for which "easy availability® is a lower percentage than the average of 63 per cent computed for total exports. The principal question, therefore, is whether or not the *easy availability* percentage shown for the various groups and for the principal commodities is a realistic estimate of the supply-demand relationship in 1946. In discussion of specific commodities and groups of consnodities, internal contradictions within the memorandum itself may be pointed out. It is apparent that several individuals collaborated in the project, Thus the section on exports to the British Empire (excluding Canada) and that on exports to Canada stater n Items considered as being in short supply in the t&iited States include the following major groups: Fruits, Nuts and Grains Fish and Fish Products Fats and Oils Meats Milk and Dairy Products Unmanufactured wood (lumber) Rubber and Rubber Manufactures Textile Fibres and Manufactures.11 (Concerning which group a footnote states ^Although cotton in general will be in free supply, the United Kingdomfs requirements are of types which are scarce and cannot be met entirely from British Empire sources.*) Tor Mr, Gardner - 2 - To compare with this opinion we have the following appraisals of easy stgpply in 19461 Fruits Cotton, raw Milk and dairy products Rubber and manufactures Meats Fish and fish products - 100 - 100 93 72.5 25 - 25 per per per per per per cent cent cent cent cent cent easy easy easy easy easy easy supply supply supply supply supply supply The portion of the report itemizing China1a requirements lists chemicals as being in tight supply (shown 88 peer cent in easy supply in the over-all tables) and lists highway transportation equipment with no suggestion that this will be short although motor trucks and busses are elsewhere shown aa only 25 per cent in easy supply and passenger cars as 0 per cent in easy supply. In Table III there are listed 29 important commodities or groups which the Commerce memorandum expects to be in 100 per cent easy supply in 1946• Comments may be made on a number of these: Industrial machinery - includes mining, well drilling and pumping machinery, 25 per cent of the total exports of the class in 1936-38. The capital-goods expert attending the conference in Mr. Bolton-Smithfs office stated that this type of machinery was scarce and would continue to be scarce. Other components of the class are construction and conveying machinery, machine tools and steam locomotives. While capacity for locomotives is presumably more than adequate for domestic needs it is difficult to believe that certain types of machine tools and construction machinery will not be short for periods of varying duration. Cotton, unmanufactured - see comment in the British Empire portion of the Commerce memorandum. In general, of course, the ease of supply in raw cotton depends upon the release of stocks now held by the government. Cotton prices have been rising rapidly in recent months without precipitating any effective governmental counteraction. Auto parts for replacement) - Transfer of facilities to new Auto parts for assembly ) car parts will greatly diminish the supply of replacement parts while domestic demand will no doubt increase as one more yearfs service is extracted from aging automobile transportation facilities. To? Mr. Gardner - 5 - Fruits and preparations - See comment in the British Empire portion of the Commerce memorandum. See also statements made last week in Atlantic City at the National Food Brokers Association urging cancellation of allocations of dried fruits (prunes and raisins) for export to Canada and Britain in view of the domestic shortage. At Atlantic City also the Chief of the Army Quartermaster Corps Subsidence Branch predicted that some form of allocation of canned fruits and vegetables could be expected if the current shortage of fruits and vegetables remained unrelieved. Vegetables and preparations - At the same conference, Secretary of Agriculture Anderson advocated continuation of government subsidies to stimulate vegetable canning and promised that if subsidies were withdrawn after June 30, canners could expect an increase in ceiling prices adequate to maintain their gross returns. Copper and manufactures - The government has just reinstituted a program of foreign purchases, eliminated last October, in order to stave off a threatened shortage of copper. Beverages - In the third quarter of 1945 this group was composed of malt liquors (36 per cent) and hard liquors (10 per cent) now certain to be tight because of orders restricting the use of grain in their production, and orange juice (36 per cent) which has been scarce on domestic markets for several years. Fresh orange prices reached exorbitant levels in the past season. Scarcity of sugar will prevent syrups and flavors (11 per cent) from reaching an easy supply position. Fertilisers and materials - Are still under international allocation and are notoriously scarce in foreign countries. Brass and bronse - A long strike in New England brass works makes the estimate of 100 per cent easy supply for 1946 unwarranted. Discussion of any of the commodities listed as less than 100 per cent in easy supply must be based completely upon comparative judgments. Only one further commodity group will be discussed. To call the important class Iron and steel mill products 75 per cent *easy* appears unrealistic in view of the current steel strike which will surely lower steel output in 1946 by at least 10 per cent as compared with earlier estimates. The press reports that the Civilian Production Administration was only dissuaded by the State Department from banning all steel exports during the strike. To: Mr. Gardner - 4 - A general comment may be made regarding the Commerce study aa a whole. If we were to accept for the moment the easy supply appraisals contained in the study, we could reach certain conclusions which would represent a quite different interpretation of the data from that drawn by the Commerce group. For example, the Commerce study suggests that, on the basis of ease of supply appraisals appropriate for 1946, exports in the third quarter of 1945 would have been 66 per cent in easy supply* Another method of reporting the same data would be? while 45 per cent of foreign purchases were of goods in completely easy supply, 55 per cent of foreign purchases affected commodities more or less in short supply. The average of easy supply for the latter group was no more than 40 per cent. One may well question whether either interpretation is meaningful. In aggregating the data minimum attention is given to the inflationary effects which may occur in connection with specific commodity classes. Attachments Table I EXTENT TO WHICH FOREIGN HEEDS CAN BE MET FROM GOODS IN EASY SUPPLY IN UNITED STATES IN 1946 (Comparison of 1946 estimates with third quarter of 1945) (Amounts in millions of dollars) Estimated world requirements 1946 Commodity grot?) Total Amount in easy supply Amount Percentage Annual rate of non-military exports from U.S. during t h i r d ouarter 1945 Amount i n easy supply, 1946 Total Amount Percentage 1,153 1,155 iao 895.2 895.2 100.0 Chemicals 498 450 90 375.6 329.6 88.2 Miscellaneous 206 175 85 294.8 248.8 84.4 468 350 75 495.6 384.0 77.5 2,922 1,900 65 1,626.4 1,104.8 67.9 912 595 65 631.6 412.8 65.4 2,154 1,290 60 769.2 525.2 62.2 (b)l,110 1,017 209 445 305 55 40 33 25 866.0 812.8 222.8 409.6 47.3 294.0 36.2 56.0 25.1 (a) (a) 91.6 20.4 22.3 10,649 6,720 7,079.6 4,680.4 66.1 Non-metallic minerals Vegetable products, inedible Machinery and vehicles Metals and manufactures Animal products, edible Textile fibres Vegetable food products and beverages Wood and paper Animal products, inedible Total 63 (a) Almost entirely hides, skins, and leather which are included as ^textiles and clothing11 under textile fibres and products* (b) Raw cotton, raw wool, and textiles and clothing (which includes hides, skins, and leather)• Note;- This table has been compiled from data given in a memorandum entitled "Estimated Magnitude of United States Exports During 1946 Showing by Major Commodity Groups the Proportion in Tight and Adequate Supply11 from office of Mr. Bolton-Smith of the Department of Commerce, Table II ANNUAL RATE OF EXPORTS IN THIRD QUARTER, 1945 Commodity Groups in Order of Ease of Supply on 1946 Basis (Amounts in millions of dollars) Commodities Non-metallic minerals Petroleum and products Coal Other non-metallic minerals Hydraulic cement Sulphur, crude Abrasives Chemicals Medicinal and pharmaceutical preps. Chemical specialties Fertilizers and materials Coal tar products Industrial chemicals Soaps and toilet preparations Pigments, paints, varnishes miscellaneous Commodities for relief and charity Scientific and professional instruments Other Photographic and projection goods Vegetable products, inedible Tobacco, unmanufactured Cigarettes Corn starch and flour Seeds Rubber and manufactures Other Vegetable oils and fats, inedible Naval stores, gums and resins Machinery and vehicles Industrial machinery Auto parts for replacement Auto parts for assembly Merchant vessels Railroad freight cars Marine engines Agricultural machinery and implements Other Motor trucks, busses Electrical machinery and apparatus Passenger cars Total In easy supply Percentage 895.2 895.2 100.0 505.6 236.8 105.2 18.0 18.0 11.6 505.6 236.8 105.2 18.0 18.0 11.6 100.0 100.0 100.0 100.0 100.0 100.0 373.6 329.6 88.2 117.2 75.6 16.8 27.6 70.0 54.8 31.2 117.2 75.6 16.8 18.4 52.4 26.0 23.2 100.0 100.0 100.0 88.2 74.8 74.7 74.4 294.8 248.8 84.4 76.4 41.2 154.0 23.2 76.4 41.2 116.0 15.2 100.0 100.0 75.5 65.5 495.6 384.0 77.5 221.6 13.2 221.6 13.2 8.0 5.2 8.0 5.2 182.0 132.0 8.0 4.0 100.0 100.0 100.0 100.0 72.5 50.0 42.8 14.8 - 0 0 1,626.4 1,104.8 67.9 467.2 155.6 54.4 54.0 26.0 467.2 155.6 54.4 54.0 26.0 4.0 4.0 181.6 79.6 374.0 229.2 145.6 47.2 93.6 57.2 100.0 100.0 100.0 100.0 100.0 100.0 80.2 59.3 25.0 25.0 — 0 .8 AHNUAL EATE OF EXPORTS IH THIRD QUARTER, 1945 (Continued) Commodity Groups in Order of Ease of Supply on 1946 Basis (Amounts in millions of dollars) Commodities Metals and manufactures Copper and manufactures Brass and bronze Aluminum and manufactures Iron and steel mill products Other metals and manufactures Iron and steel advanced manufactures Animal products, edible Eggs Dairy products Other animal products, edible Fish Meat products Lard Oleomargarine Total In easy supply Percentage 631.6 412.8 65.4 40.0 40.0 7.2 6.8 7.2 6.8 425.6 18.4 133.6 319.2 33.6 100.0 100.0 100.0 75.0 32.6 25.1 769.2 525.2 62.2 206.8 289.6 206.8 268.8 6.8 4.0 7.6 38.0 100.0 92.8 58.8 25.0 24.9 — - 0 0 30.4 152.4 64.4 19.2 6.0 Textile fibres and manufactures 866.0 409.6 47.3 Cotton, unmanufactured Eayon fibre and manufactures Other textile products Cotton, manufactures Wool and wool manufactures 347.2 64.0 122.4 240.4 92.4 547.2 32.0 30.4 100.0 50.0 24.8 _ - 0 0 812.8 294.0 36.2 150.0 98.4 29.6 18.4 468.4 34.4 13.2 150.0 98.4 29.6 16.0 100.0 100.0 100.0 87.0 — _ - 0 0 0 222.8 56.0 25.1 91.6 20.4 22.3 40.8 38.4 12.4 20.4 50.0 7,079.6 4,680.4 Vegetable food products and beverages Vegetables and preparations Fruits and preparations Beverages Other vegetable food products Grains and preparations Sugar Vegetable oils and fats Wood and paper Animal products, inedible Other animal products Leather manufactures Leather Total — 0 0 66.1 Note;- This table has been compiled from data given in a memorandum entitled "Estimated Magnitude of United States Exports During 1946 Showing by Major Commodity Groups the Proportion in Tight and Adequate Supply" from the office of Mr. Bolton-Smith of the Department of Commerce• Table III ANNUAL RATE OF EXPORTS IN THIRD QUARTER, 1945 Principal Commodities in Order of Ease of Supply on 1946 Basis (Amounts in millions of dollars) Commodities Total Petroleum and products Industrial machinery Cotton, unmanufactured Coal Tobacco, unmanufactured Eggs Auto parts for replacement Vegetables and preparations Medicinal and pharmaceutical preparations Other non-metallic minerals Fruits and preparations Commodities for relief and charity Chemical specialties &uto parts for assembly jrchant vessels Scientific and professional instruments Copper and manufactures Beverages Railroad freight cars Hydraulic cement Sulphur, crude Fertilisers and materials Cigarettes Abrasives Corn starch and flour Brass and bronze Aluminum and manufactures Seeds Marine engines Dairy products Coal tar products Other vegetable food products Agricultural machinery and implements Other miscellaneous Iron and steel mill products Industrial chemicals Soaps and toilet preparations Pigments, paints, varnishes Rubber and manufactures Photographic and projection goods Total In easy supply Percentage 7,079.6 4,680.4 505.6 467.2 347.2 236.8 221.6 206.8 155.6 150.0 117.2 105.2 98.4 76.4 75.6 54.4 54.0 41.2 40.0 29.6 26.0 18.0 18.0 16.8 13.2 11.6 505.6 467.2 347.2 236.8 221.6 206.8 155.6 150.0 117.2 105.2 98.4 76.4 75.6 54.4 54.0 41.2 40.0 29.6 26.0 18.0 18.0 16.8 13.2 11.6 8.0 7.2 6.8 5.2 4.0 8.0 7.2 6.8 5.2 4.0 289.6 27.6 18.4 181.6 154.0 425.6 70.0 34.8 31.2 182.0 23.2 268.8 18.4 16.0 145.6 116.0 319.2 52.4 26.0 23.2 132.0 15.2 66.1 100.0 100.0 100.0 100.0^; 100.0® 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ioo.o 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 92.8 88.2 87.0 80.2 75.3 75.0 74.8 74.7 74.4 72.5 65.5 ANNUAL RATE OF EXPORTS IN THIRD QUARTER, 1945 (Continued) Principal Commodities in Order of Ease of Supply on 1946 Basis (Amounts in millions of dollars) Commodities Other Other Rayon Other Other Other machinery and vehicles animal products, edible fibre and manufactures animal products vegetable products, inedible metals and manufactures Wood and paper Iron and steel advanced manufactures Motor trucks, busses Electrical machinery and apparatus Fish Meat products Other t e x t i l e products Grains and preparations Cotton, manufactures Wool and wool manufactures Lard Vegetable oils and f a t s , inedible Leather manufactures Sugar Oleomargarine Naval stores, gums and resins Vegetable oils and fats, edible Leather Passenger cars Total In easy supply Percentage 79.6 47.2 6.8 4.0 64.0 40.8 52.0 20.4 8.0 4.0 6.0 18.4 222.8 133.6 374.0 229.2 30.4 152.4 122.4 468.4 240.4 92.4 64.4 42.8 38.4 34.4 19.2 14.8 13.2 12.4 .8 56.0 33.6 93.6 57.2 7.6 38.0 30.4 — _ _ — — — — — — — — 59.3 58.8 50.0 50.0 50.0 52.6 25.1 25.1 25.0 25.0 25.0 24.9 24.8 0 0 0 0 0 0 0 0 0 0 0 0 Note:- This table has been compiled from data given in a memorand-pm entitled "Estimated Magnitude of United States Exports During 1946 Showing by Major Commodity Groups the Proportion in Tight and Adequate Supply*1 from the office of Mr. Bolt onSmith of the Department of Commerce.
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