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Twenty-fourth Annual Report

Federal Reserve Bank
of New York
For the Year Ended December 31, 1938




Second Federal Reserve District




CONTENTS
PAGE

Money Market Developments in 1938_______________________

5

Supply of Funds___________ __ ___________________________

5

Supply of Capital for Business..........................................

11

Demands for Credit and Capital__________________________

15

Increase in Government Borrowing...................................

16

New Security Issues.............................................. ...........

18

Needs of Small Business for Credit or Capital...................

20

Industrial Loans of This Bank___________________ _____ _____

22

Federal Reserve Policy........... ............................. ...........................

25

The Foreign Exchanges and Capital and Gold Movements____

27

Foreign R elations__ _______________________________________

33

Operations of the Bank During 1938...... ........... ........................

34

Financial Statement ........................................................

35

Income and Disbursements.............. ................................

37

Membership Changes in 1938------------------- ----------------------------

39

Changes in Directors and Officers----------------- -------------- ---------

40

Member of Federal Advisory Council.................................

41

Changes in Officers............................................................

41

List of Directors and Officers-----------------------------------------------

42




3

Federal Reserve

bank

O F N EW YORK

March 8,1939.
To the Stockholders of the
Federal Reserve Bank of New York".
I am pleased to transmit herewith the twenty-fourth annual
report of the Federal Reserve Bank of New York reviewing the
year 1938.




G eorge

L.

H a r r is o n ,

President.

4

Twenty-fourth Annual Report
Federal Reserve Bank of New York
The year 1938 witnessed a rapid and unprecedented ac­
cumulation of idle funds in the New York money market and
a further downward trend in money rates. Economic and politi­
cal conditions throughout the world combined to create a reser­
voir of funds here which not only surpassed previous records,
but which far exceeded immediate requirements, and which
greatly increased the magnitude of the problems of future credit
policy. The abrupt decline in business activity in the United
States, which started in the autumn of 1937 and continued dur­
ing the first five months of 1938, helped to provoke conditions
and policies which contributed to the huge increase in excess
reserves of member banks in this country.
Supply of Funds
The principal factors that produced the record volume of
excess reserves near the end of 1938 may be summarized briefly
as follows:
1. Abandonment of the policy of gold sterilization by the
Treasury, resulting in a release of all of the gold in the
Treasury inactive gold account and gradual disburse­
ment of the proceeds;
2. The reduction by the Board of Governors of the Fed­
eral Reserve System of the percentages of reserves which
member banks are required to maintain against their
deposits;
3. The heavy inflow of gold from abroad, especially in the
latter half of the year.
With respect to the first factor, the initial step was indi­
cated by the following announcement issued by the Secretary of
the Treasury on February 14,1938:




5

6

TWENTY-FOURTH ANNUAL REPORT
On December 22, 1936, the Secretary of the Treasury stated
that, after conferring with the Board of Governors of the Federal
Reserve System, he proposed to take appropriate action with respect
to net additional acquisitions or releases of gold by the Treasury
Department whenever it was deemed advisable and in the public
interest to do so.
In pursuance of that policy, the Secretary of the Treasury,
after conferring with the Board of Governors of the Federal Reserve
System, today announces that gold acquired by the mints and assay
offices after January 1, 1938, will be included in the inactive gold
account only to the extent that such acquisitions in any one quarter
exceed $100,000,000. No change is being made in the procedure
whereby any gold released by the mints and assay offices is taken
from the inactive gold account.

In effect, this announcement reflected a partial abandon­
ment of the gold sterilization policy. It indicated that gold
acquired by the Treasury from foreign sources and domestic
production would be added to the Treasury inactive gold account
only to the extent that such acquisitions exceeded $100,000,000
in any quarter of the year. All gold received not in excess
of $100,000,000 in any quarter would be used by the Treasury,
and to that extent would tend to increase member bank reserve
balances.
Later, on April 14, in a message to Congress, the President
announced that all of the gold in the Treasury inactive account,
which then amounted to approximately $1,200,000,000, as well
as $200,000,000 of other free gold in the Treasury, would be
released, and that the proceeds would be disbursed and thus
provide the basis for expansion of bank credit. All of this gold
was released immediately following this announcement, the
proceeds were credited to the gold certificate fund of the Fed­
eral Reserve Banks, and Treasury deposits in the Reserve
Banks were increased accordingly. While member bank reserves
were not immediately expanded by the full amount of the gold
released, nevertheless a rapid distribution of funds from the
large Treasury balances followed in subsequent weeks, partly
through Government expenditures in excess of current receipts,
and partly through the retirement of some of the outstanding
Treasury bills as they matured.
The second principal factor in the increase of excess re­
serves occurred on April 15, when the Board of Governors of
the Federal Reserve System announced the following reduc­
tions in the percentages of reserves which member banks would
be required to maintain against their deposits, effective at the
opening of business on April 16.




7

FEDERAL RESERVE BANK OF NEW YORK
Classes of member banks and of deposits

Prior to April 16

Beginning April 16

Demand deposits:
Central Reserve Gty banks....................
Reserve City banks..................................
“Country” banks ....................................
Time deposits:
All classes of member banks...................

Per cent
26
20
14

Per cent
22%
17%

6

5

12

This change had the effect of reducing total reserve require­
ments of all member banks by approximately $760,000,000, and
of immediately increasing excess reserves of member banks by
a corresponding amount.
The third major factor tending to expand member bank
reserves was a net inflow of a substantial amount of foreign
capital which, together with heavy payments to the United
States on merchandise account, caused a further great increase
in the gold stock of this country, especially in the latter half
of the year. During the early part of 1938, as the diagram on
page 27 indicates, there was a substantial further reduction in
the amount of foreign capital held in this country, continuing
the movement that started in the latter part of 1937. This out­
ward movement was stimulated by a renewed outbreak of
rumors abroad of an impending further devaluation of the
dollar. At the same time, however, as in the autumn of 1937,
merchandise exports from the United States proceeded at a rate
of about $100,000,000 a month in excess of merchandise imports.
This excess of exports occurred in spite of a decrease in exports,
and was due to a more rapid decline in imports from abroad,
accompanying the drastic decline of business activity in this
country. On the whole payments due to this country on mer­
chandise account during the first half of the year were in excess
of withdrawals of foreign capital from our markets. As a re­
sult during that period there were gold imports in moderate
amount, which, together with gold acquired by the Treasury
from domestic sources, increased the gold stock of this country
by approximately $200,000,000.
In the latter half of the year merchandise exports con­
tinued largely in excess of imports, but in addition the with­
drawal of foreign capital was checked, and in turn a heavy
flight of capital from Europe to the United States began. The
movement started with the development of tension between
Germany and Czecho-Slovakia over the Sudeten issue, and in­




8

TWENTY-FOURTH ANNUAL REPORT

creased rapidly when that situation led, in September, to fears
of a general European war. Some moderation of the inflow of
capital followed immediately upon the Munich agreement, but
continued unsettlement in the European political situation, and
the accompanying weakness in sterling exchange, resulted in a
further flow to the United States during the last quarter of the
year. Total gold imports during the latter half of 1938, exclu­
sive of net earmarkings for foreign account, were nearly $1,500,000,000, and, for the year as a whole, the total increase in this
country’s gold stock was approximately $1,750,000,000, or nearly
one-half of a billion dollars more than the estimated world pro­
duction of gold during the year.
Altogether the release of unutilized gold by the Treasury,
the reduction in the percentages of reserves which member
banks are required to maintain against their deposits, and the
increase in the gold stock (together with issues of silver certifi­
cates and coin against silver acquired by the Treasury), would
have increased member bank excess reserves by about
$4,000,000,000, had not about one-half of this amount been ab­
sorbed by other factors, as is indicated in accompanying table.
Factors tending to increase excess reserves:

Release of gold from the inactive gold account and other
Treasury free gold in April............................................
Reduction in reserve requirements by Board of Governors
effective April 16 .........................................................
Increase in Treasury currency (chiefly silver certificates). . . .
Total..................................................................... .

(Millions of dollars)
1,750
1,390
760
160
4,060

Factors tending to reduce excess reserves:

Net increase in Treasury deposits in Federal Reserve Banks..
Free gold acquired by the Treasury and not used in 1938...
Increase in currency circulation............................................
Increase in reserve requirements due to deposit expansion....
Increase in foreign deposits in Federal Reserve Banks........
Decrease in Federal Reserve Bank credit*...........................

780
485
300
465
25
10

Total.........................................................................

2,065

Net increase in excess reserves..................................

1,995

* Due chiefly to repayments of Federal Reserve Bank loans to member1 banks and to
industrial borrowers.

Excess reserves of member banks rose to a new high figure
of $3,480,000,000 near the end of the year. The actual increase,
however, was slightly under $2,000,000,000, or less than half the




FEDERAL RESERVE BANK OF NEW YORK

potential increase.
factors:

9

This difference was due to a number of

(a) The Treasury followed the policy of borrowing funds
to meet the expected budgetary deficit, in advance of
actual needs. These borrowings had the effect of pro­
ducing a net increase in Treasury deposits in Federal
Reserve Banks of nearly $800,000,000 during the year;
(b) Nearly $500,000,000 of gold acquired during the year
remained in the Treasury at the end of the year as free
gold, pending the time when the Treasury would find it
advisable to use the proceeds;
(c) There was a net increase of approximately $300,000,000
in the amount of currency in circulation, due in part to
an increase in the holdings of vault cash by certain
member banks, and to some hoarding of United States
currency by foreigners during and following the war
scare in the autumn, but more largely to a continuation
of the partially unexplained upward trend in currency
circulation which has prevailed for several years;
(d) Bank deposits rose to new high levels and there was a
consequent increase of $465,000,000 in the amount of
reserves which the banks were required to maintain
against their deposits.
The influence of some of these factors, which limited the
expansion in excess reserves during 1938, was temporary, how­
ever, and at the end of the year it was expected that before
many weeks the excess reserves of member banks would rise to
new high levels. A seasonal reduction of substantial amount in
currency circulation and a consequent increase in member bank
reserves were in prospect. Furthermore, the Treasury at that
time had free gold and balances in Federal Reserve Banks,
amounting to more than $1,300,000,000, in excess of minimum
working balances. To the extent that these balances are dis­
bursed, member bank reserves will be increased.
Accompanying the rapid and substantial increase in the
reserves of member banks during 1938, there was a further
decline in short term money rates in the New York money
market to lower levels than ever before. Near the end of
December, an issue of $100,000,000 of Treasury bills was sold
at a price that offered no yield to the purchasers; in fact, the




10

TWENTY-FOURTH ANNUAL REPORT

Treasury was paid a small premium on the issue. Open market
commercial paper rates also declined to new low levels in the
latter part of 1938, yields on Treasury notes and on the highest
grade industrial and public utility bonds reached lower levels
than ever before, and yields on long term Treasury bonds de­
clined to levels about as low as had been reached in many years.
This decline in money rates is in accord with past experi­
ence, which has indicated that ordinarily there is an inverse
relationship between the reserve position of member banks and
the level of interest rates. In general, as the accompanying
diagram illustrates, the larger member bank reserves become
relative to reserve requirements, the lower money rates go,
and vice versa. It is interesting to observe, however, that after
excess reserves reach large proportions, further additions ap­
pear to have a diminishing effect upon money rates, and that
when the reserves of member banks rise far above their require­
ments, even wide fluctuations in the amount of excess reserves
can occur with little apparent effect upon the rate structure.
In this respect the situation near the end of 1938 was similar
to that of 1936 when, in spite of a net reduction of more than
$1,000,000,000 in member bank excess reserves, a gradual decline
in money rates continued.
INTEREST
RATE

BILLIONS
.OF DOLLARS

Reserve P osition o f Member Banks Compared with Bond Yields and Short Term
Interest Rate
(Data are m onthly averages o f daily figures. Bond yield line represents
M oody's Investors Service data for A aa corporation bonds)




FEDERAL RESERVE BANK OF NEW YORK

11

Supply of Capital for Business
In view of the huge accumulation of idle funds there was
an insistent demand for the highest grade investments, cor­
porate as well as governmental, but the flow of funds into new
investments of a character involving any appreciable degree of
risk, such as the lower grade corporation bonds and stocks, re­
mained limited. There are many factors that have affected
this situation, including economic and other difficulties of many
industries which had been large users of capital, particularly
railroads and public utilities, changes in the investment prac­
tices of financial institutions, and changes in the forms and
employment of savings. In fact the whole situation with respect
to the accumulation and investment of capital has undergone
a fundamental change as compared with conditions that pre­
vailed in the 1920’s. As in earlier years, however, there have
been considerable capital outlays in the manufacturing indus­
tries, financed by the use of depreciation allowances and other
undistributed earnings.
Commercial bank investments. Between 1921 and 1928,
commercial banks in the aggregate were investing in corpora­
tion securities at an average rate of about $700,000,000 a year.
The total value of such investments in commercial banks, how­
ever, was reduced approximately 65 per cent between 1928 and
1934. Except for a moderate increase in the year ended June
30, 1936, there has been no expansion in such investments in
recent years. On June 30,1938, the volume of corporate securi­
ties held by all commercial banks was much less than half the
amount held ten years before. By far the largest part of the
new investments of commercial banks in recent years has been
in the form of United States Government securities, although
there have also been smaller increases in investments in the
securities of States and municipalities and of corporations or­
ganized under the sponsorship of the Federal Government. In
the last ten years, the total amount of United States Govern­
ment securities, both direct and guaranteed, held by all commer­
cial banks has increased from about 4 billion to 14 billion.

This change in the investment practices of commercial banks
may be attributed in part to the unfortunate experiences of
many banks with their lower grade corporation security invest­
ments in the years following 1929. Substantial losses were sus­
tained by the banks from 1931 to 1934 as a result of defaults
on such securities or heavy depreciation in their market values.




12

TWENTY-FOURTH ANNUAL REPORT

In view of this experience, banks, as a rule, have endeavored to
confine their investments to high grade securities, in line with
practices encouraged by bank examiners. As a result of the
change in bank investment policy, together with the unusually
small supply of new corporation securities that has come into
the market during the past few years, almost all of the increase
in bank investments has been in Government securities.
Institutional investments. A study of the changes in the
assets and liabilities of other institutions that provide channels
for the investment of the savings of the public indicates some
reduction in the rate of increase in the total volume of savings
administered by such institutions, as compared with predepres­
sion years. As in the case of commercial banks, however, these
institutions show a considerable degree of concentration of in­
vestment in Government securities.

In mutual savings banks, for instance, the growth of de­
posits during the past few years has been at a rate much slower
than in the 1920’s—a rate of growth, in fact, which has been
less than interest accumulations on deposits previously held.
Investments in corporation securities by such banks declined
substantially between the middle of 1931 and the middle of 1932,
and subsequently have continued to show a gradual shrinkage.
Since 1931 increases in the investments of savings banks have
taken the form almost exclusively of purchases of Government
direct obligations and Government guaranteed securities.
The savings represented by life insurance company reserves
have continued to show a rapid rate of growth during recent
years; the annual increases recently, in dollar amounts, have
been practically as large as they were ten years ago, although
the percentage rate of increase has been somewhat smaller.
Data on life insurance company investments indicate that, in
this case also, the largest increase in recent years has been in
Government securities. Purchases of corporation securities by
such companies during the past few years have been of even
greater magnitude than in the late 1920’s, but investments in
real estate mortgages have been greatly reduced. Furthermore,
it should be borne in mind that, as life insurance companies are
strictly limited in their investments to high grade securities,
their purchases of new corporation bonds have provided funds
only for strong companies of high standing.




FEDERAL RESERVE BANK OF NEW YORK

13

Building and loan associations have shown a gradual but
persistent decline in the volume of savings which they have
held for investment chiefly in real estate mortgages.
An increasing proportion of the savings of the country dur­
ing recent years has been in funds administered by the Federal
Government—the postal savings system, social security funds,
including the old age reserve account and the civil service and
railroad retirement funds, and also unemployment insurance
trust funds collected by the States, which are transferred to the
Federal Treasury for investment in Government securities.
Furthermore, United States savings bonds have provided a
channel for direct investment of savings in Government securi­
ties, amounting in recent years to from four to five hundred
million dollars a year.
Altogether investments of savings in United States Gov­
ernment direct and fully guaranteed obligations through the
various channels reviewed above appear to have been in the
neighborhood of $17,000,000,000 in the last five years, including
the investments of commercial banks in such securities. Mean­
while the net increase in investments in corporation securities
from all these sources, including commercial banks, apparently
has been about $1,100,000,000. A considerably larger increase in
holdings of corporation securities by life insurance companies
has been partly offset by the reduction in holdings of such
securities by other institutions. All of the increase has been in
holdings of high grade bonds. None of these institutions is
now investing any appreciable amounts in lower grade bonds or
in stocks. In fact, most of them are prohibited by law from
making such investments.
Consequently, the principal remaining source of funds for
private enterprise that involves a material degree of risk is the
direct investment of private savings from both large and small
investors. In fact, over the whole period of our present economic
system, that has been one of the most important sources of
“ risk capital.” In recent years, however, the supply of fundsi
from that source has been greatly reduced. At the bottom
of the depression in 1932, the aggregate amount of individual
incomes of $50,000 and over, after payment of Federal income
taxes, was about $620,000,000 as compared with about $5,400,000,000 in 1928, a reduction of more than 85 per cent, and in
1937, the latest year for which such records are available, the




14

TWENTY-FOURTH ANNUAL REPORT

amount was about 20 per cent of the volume in 1928. Not only
has the amount of savings from large incomes available for
investment been greatly reduced, but the high rates of taxation
in the upper brackets in recent years have provided an incen­
tive for the diversion of a considerable part of such savings
from the financing of private enterprise to investments in tax
exempt Federal, State, and municipal securities. Even among
investors with smaller incomes, who are not subject to such
high rates of taxation, there is reported to have been a disin­
clination, in recent years, to invest in any corporation securities
involving a substantial measure of risk, in view of the wide
fluctuations in market values, and the great reduction in the
profits of most corporations during recent years, as compared
with the prosperous years of the 1920’s. Many private investors,
apparently, do not consider the prospect of profits from ven­
turesome investments in private enterprise sufficient to outweigh
the risk of losses.
Still another obstacle to the raising of additional capital
by private enterprise, which applies especially to small concerns,
is the high cost of selling new issues of their securities. The un­
certainties involved in the marketing of such securities tend to
make underwriting costs very high relative to the size of the
issues. Furthermore, public offerings involve substantial ex­
penses for the legal and accounting services required for the
preparation of registration statements to be filed with the
Securities and Exchange Commission. Direct sales of new
securities by small corporations to local banks were also made
difficult, until recently, by rules of bank supervisory authorities
requiring banks to limit their investments to readily marketable
securities. Those rules, however, were relaxed in June, 1938.
Altogether, events of recent years, economic, political, and
financial, have tended to increase the flow of investment funds
into Government, State, and municipal securities, and other
securities of the highest grade, and to restrict the flow of invest­
ment into private enterprise where a material degree of risk is
involved. Either the hesitation of capital to flow into new enter­
prises, or the diminution of opportunity to invest in them, or
both, will remove an important force for recovery, one which
has proved most effective in all of our past experiences. It will
be impossible to answer the question whether there are in fact
diminished opportunities until the hesitation of private capital
to invest in them is overcome.




FEDERAL RESERVE BANK OF NEW YORK

15

Demands for Credit and Capital
The continued recession in business activity during the
early months of 1938 was accompanied by a fairly substantial
reduction in the commercial loans of member banks and although
the recession was checked in June, the decline in loans continued
seasonally until early August. For the first seven months of the
year, the reduction in such loans for weekly reporting member
banks in New York City was approximately 19 per cent, and for
all weeldy reporting member banks approximately 15 per cent.
This reduction apparently resulted largely from further prog­
ress in the liquidation of business inventories, which had reached
high levels in the early part of 1937, together with smaller re­
quirements for funds to finance the diminishing volume of
business.
Despite the vigorous upturn in business activity in the
latter half of the year, and the usual seasonal financing of crop
movements and autumn trade during that period, there was
little increase in the total volume of agricultural, commercial,
and industrial loans at the weekly reporting member banks.
This experience is not unusual, however, as it has been observed
frequently in the past that the appearance of a net increase in
loans tends to lag after an upturn in business. Presumably
this is due to continued liquidation of old loans in the early
stages of recovery, and to the conversion of inventories into
cash by some business organizations, which provides sufficient
funds to finance the first stages of business expansion. Another
factor which tended to prevent an expansion in business loans
in the latter half of the year was the use of the proceeds of
certain new security issues for the repayment of bank loans,
especially in New York.
Loans for the purpose of financing security trading also
showed further liquidation during the first five months of the
year, accompanying continued decline in security prices during
that period. Subsequently, beginning in June, there was an
upturn in security prices and a gradual increase in loans, re­
flecting a moderate expansion of margin accounts, and also,
near the end of the year, a temporary increase in the borrowings
of security brokers and dealers. Direct loans by the reporting
banks to finance security trading by their customers, however,
showed no expansion during the Tatter part of the year, and,
for the year as a whole, there was a small net reduction in the
total volume of security loans.




TWENTY-FOUKTH ANNUAL REPORT

16

Real estate loans and personal and other miscellaneous
loans showed practically no net change for the year. Alto­
gether, the total loans of the weekly reporting member banks
showed a net reduction for the year as a whole. The principal
outlet for bank credit during the year, as for some time past,
was investment in securities.
Increase in Government Borrowing
While corporation financing in the security markets revived
somewhat from the low levels of the latter half of 1937, the
principal borrower in 1938, as in a number of preceding years,
was the Federal Government. Total cash receipts and expendi­
tures of the Government were nearly in balance during the first
three months of the year, but, as the accompanying diagram
indicates, expenditures subsequently increased substantially
while receipts declined gradually. There was a new program
of Government spending to promote business recovery, and to
meet increased needs for relief, which raised total disburse­
ments to record levels (except for the period when veterans’
bonus payments were at their maximum in 1936 and one month
at the height of the Civil Works Administration program in
1934). Receipts, therefore, fell considerably short of expendi­
tures after March. In reviewing the figures shown in this

o

1933

1934

1935

1936

1937

Cash R eceipts and Expenditures o f the United State* Government




FEDERAL RESERVE BANK OF NEW YORK

17

diagram, it should be noted that the data differ from the figures
on Government receipts and expenditures shown in current
Treasury statements. The figures in the diagram on total re­
ceipts are adjusted to show cash receipts from all sources, ex­
cluding new issues of Government securities, but including items
such as receipts of unemployment insurance trust funds from the
States. Total disbursements are adjusted to exclude items such
as transfers to trust accounts, which do not represent actual
cash outlays. Income tax and other receipts that are payable
quarterly, as well as interest payments on the National debt,
have been distributed over three month periods to smooth out
temporary fluctuations and give clearer indication of the trends
in receipts and expenditures.
The first form of Government disbursements to show an
increase during 1938 was repayments of unemployment insur­
ance trust funds to certain States where unemployment benefits
became payable at the beginning of the year. Disbursements
of this kind were in the neighborhood of 35 million dollars a
month during 1938. There were also increases in disbursements
under the Agricultural Adjustment Act, and in expenditures for
the National defense, but by far the largest increase was in
expenditures under the Works Progress Administration pro­
gram, designed to provide employment for many of those who
were released from private employment during the first half of
the year. The construction projects authorized by the Public
Works Administration reached very large volume in the latter
part of the year, but actual cash disbursements for these proj­
ects were comparatively small, leaving the greater part of such
expenditures to be made during 1939.
In the early months of this expansion of Government ex­
penditures, no sales of new Government securities were required
because of the large Treasury balances in Federal Reserve
Banks which resulted from the release of unused gold in the
Treasury. In September, however, the Treasury followed the
policy of borrowing funds in advance of actual needs. There
was still available at that time a large volume of funds in the
form of Treasury balances in the Reserve Banks and free gold
in the Treasury, but the additional funds obtained through se­
curity sales strengthened the Treasury cash position still fur­
ther. The new securities sold in September amounted to ap­
proximately $800,000,000, and on December 15 the Treasury
sold an additional $700,000,000 of new securities.




18

TWENTY-FOURTH ANNUAL REPORT

Holdings of direct obligations of the Government, by weekly
reporting member banks in principal cities, increased approxi­
mately $610,000,000 during the last five months of the year, but
as there had been a preceding decline of about $360,000,000 dur­
ing the first seven months of the year, the net increase for the
year as a whole was only about $250,000,000. The principal
New York City banks, in fact, had a net reduction of about
$200,000,000 in their holdings of direct Government obligations,
which apparently was due chiefly to the retirement of a rather
large volume of Treasury bills, of which the New York City
banks were important holders. This retirement of Treasury
bills occurred in connection with the adoption of a program,
completed at the end of August, of issuing only bills of three
months’ maturity, in the amount of $100,000,000 weekly. The
total amount of bills which can be outstanding under this pro­
gram is $1,300,000,000. Formerly Treasury bills were sold with
maturities of as much as nine months, and the total outstanding
has been as high as $2,650,000,000. Reporting member banks
in 100 other principal cities outside New York increased their
holdings of direct obligations of the Government by slightly
more than $450,000,000 during the year.
A moderate amount of securities was issued by the Recon­
struction Finance Corporation and the Commodity Credit Cor­
poration in 1938, and holdings of securities fully guaranteed by
the Federal Government increased by nearly $500,000,000 in
New York City banks during the year, and by about one-fourth
of that amount in other weekly reporting banks. Both groups
of banks also showed moderate increases in their holdings of
other securities, presumably chiefly State and municipal issues.
Altogether, the total loans and investments of the large
New York City banks showed a small net reduction during 1938,
but reporting member banks in other principal cities showed an
aggregate increase of about $300,000,000, or about 2*4 per cent.
New Security Issues
The condition of extreme ease in the money market which
persisted throughout 1938 was favorable to the sale of high
grade securities at low interest cost. There was in fact a mod­
erate revival in the flotation of corporation securities, starting
practically from the beginning of the year. As the accompany­




FEDERAL RESERVE BANK OF NEW YORK

19

ing diagram indicates, however, the volume of such issues at
no time in 1938 reached such volume as in 1936 and the early
part of 1937. The total volume for the year was 12 per cent
less than in 1937, and was 53 per cent less than in 1936 when
refunding issues to take advantage of low money rates reached
their maximum.
The security issues during the first three quarters of the
year included a fairly substantial proportion of issues sold for
the purpose of providing the borrowers with new capital, but
in the last quarter most of the new issues were for refunding
purposes. The volume of new capital provided through the
security markets for business enterprise in 1938 was less than
in 1936 or 1937, and remained far short of the volume provided
in that manner in the period preceding the great depression.
The securities sold during 1938 were largely issues of sub­
stantial size and of high grade. While high grade securities
of large corporations sold freely and at low interest rates, the
market for issues by borrowers, other than large, well known
corporations in strong position, continued to be thin.
Many of the new security issues during 1938 were sold
directly by the borrowers to insurance companies (or to insur-

QUARTER

1936

QUARTER

1937

QUARTER

1938

A verage M onthly Volum e o f Dom estic Corporate Security Issues for New Capita!
and for Refunding
(In millions o f dollars)




20

TWENTY-FOURTH ANNUAL REPORT

ance companies and banks), thus avoiding the necessity of pre­
paring registration statements to be filed with the Securities
and Exchange Commission, and also avoiding the charges of
investment houses for underwriting the issues. The direct sales
also enabled the insurance companies to acquire a larger share
of desirable new issues than they would probably have been
able to obtain from underwriters, who would have offered them
to various institutions among their clientele. It is estimated
that insurance company holdings of corporation securities dur­
ing 1938 increased by an amount almost equal to the volume of
new capital raised by business organizations through security
sales during the year.
Needs of Small Business for Credit or Capital
Particular attention has been directed during the past year
to ascertaining the extent of needs of small concerns for addi­
tional credit or capital.
In this District the Smaller Business Association for New
York, New Jersey, Connecticut, Inc., sent out last April a
questionnaire to ascertain the credit needs of small businesses
in this area. About 6,000 replies were received. After review­
ing the replies, the Association’s banking committee concluded
that about two-thirds either indicated no legitimate need for
credit or indicated no sound basis for credit. Approximately
13 per cent were quite indefinite as to the character of their
needs for credit, but the remaining 20 per cent were classified
in three groups as to their apparent merit as prospective bor­
rowers. It was decided that, in order to obtain more specific
information as to the possibility of supplying credit in these
cases, the Federal Reserve Bank of New York would be asked
to investigate 100 cases out of approximately 300 that appeared
to be most meritorious. The principals of these 100 concerns
were invited by this bank to come in for a discussion of their
problems and were also urged by the Association’s banking
committee to do so. In 45 cases there was no response to this
invitation. Of the 55 that did respond, replies were received
from five indicating that they were no longer in need of credit
accommodation, four submitted financial statements which in­
dicated that they could reasonably expect to obtain credit




FEDERAL RESERVE BANK OF NEW YORK

21

assistance from their own banks, and four others appeared
to be already obtaining adequate credit accommodation from
their banks. In the remaining 42 cases, the condition of the
businesses of all but eight was such that they could not be
encouraged to make formal application to this bank for loans.
The eight just referred to appeared to have some merit, and
were invited to file applications with this bank. Only one did
so and the application was approved. Subsequently, however,
a member bank which had offered to participate in making this
advance decided to make the loan without the need of participa­
tion by the Federal Reserve Bank of New York.
It appears that in a number of other cases the small busi­
nesses that replied to the Association’s banking committee,
indicating a need for credit, had already filed applications with
the Reconstruction Finance Corporation office in this District.
The experience of the Corporation with these applications ap­
pears to have been similar to that of this bank. On the whole,
therefore, it was concluded that very few legitimate cases of
unsatisfied demands for credit or working capital, which can
be extended on a reasonably sound basis, exist in this District.
The inquiry just referred to was concerned primarily with
needs for credit or working capital, rather than permanent
additions to the proprietary capital of business concerns. A
review of approximately 750 applications for working capital
that have been declined by this bank during the past four years
indicates that in a large percentage of cases the need was for
permanent additions to capital rather than intermediate term
loans for working capital. The condition of the businesses,
however, indicated that the supplying of additional capital in
these cases would entail a high degree of risk in most instances.
This conclusion is not surprising in view of the fact that each
year about 20 per cent of all corporations suspend operations,
while approximately the same number of new businesses are
started.




22

TWENTY-FOURTH ANNUAL REPORT

Industrial Loans of This Bank

Inquiries from business organizations concerning the possi­
bility of obtaining loans of working capital from this bank,
under Section 13b of the Federal Reserve Act, increased sub­
stantially in the first quarter of 1938, accompanying the severe
recession in business activity and profits, and the total for the
quarter was greater than in any similar period since the third
quarter of 1935. During succeeding quarters of 1938, however,
the number of inquiries diminished rapidly. As some time
elapses between the initial inquiries and the filing of formal
applications, the number of such applications received reached
its maximum in the second quarter, but in this case also there
was a rapid decline during the remainder of the year.
Quarterly Period

Applications

1,754
658

277
258

362
291
372
234

161
114
124
87

215
118
74
47

72
55
28
28

35
29
21
34

20
14
8
10

299
207
131
56

42
50
30
9

4,937

1934
June to September.........................................

Inquiries

1,387

1935

July to September.........................................
October to December.....................................
1936
January to March .........................................
April to June...............................................
July to September.........................................
October to December.....................................
1937
January to March .........................................
April to June..........................................
October to December.....................................
1938
January to March .........................................
April to June...............................................
July to September.........................................
October to December.....................................

As in preceding years, it was found that in a considerable
percentage of cases the inquiries were for loans that would be
ineligible for this bank to make under the section of the law
referred to above, or the situation of the prospective borrowers




23

FEDERAL RESERVE BANK OF NEW YORK

offered little hope that loans could be made on a sound basis.
In fact, it was observed during the past year that the quality
of applications received in general was not as good as in pre­
ceding years. The reason for this appears to be that it is now
easier for prospective borrowers, whose condition and prospects
appear to be reasonably satisfactory, to obtain working capital
from other sources. Commercial banks have increasingly en­
gaged in the practice of making loans of 1 to 5 year maturities,
and it appears that the attitude of bank examiners has become
more favorable to such loans, provided that they are made on
a sound basis.
As a result of the poorer quality of applications received
during 1938, the ratio of approvals to declinations of applica­
tions by this bank was lower than in preceding years. The
disposition of all applications received between June 19, 1934,
when the Federal Reserve Banks were first authorized to make
these working capital loans, to the end of 1938, is summarized
in the following table.
Up to Dec. 31,1938
Applications approved and advances or commitments made.........
Applications approved but withdrawn by applicant after approval
Applications approved and awaiting closing................................

358
156
2

Total applications approved....................................

516

Applications declined ................................................................
Applications withdrawn before consideration................................
Applications on hand awaiting consideration..............................

796
72
3
1,387

At the close of the year, 263 loans totaling $14,000,000 had'
been repaid in full, and partial repayments aggregating $4,900,000 on an additional 83 loans had been received, leaving a total
of $7,300,000 to be paid on 95 loans and commitments. The
total of loans made up to the end of 1938 was $26,200,000.
A recent review of the results of the industrial loans made
by this bank, either directly or in conjunction with commercial
banks, indicated that, on the whole, these loans had been helpful
to the borrowers, and beneficial to their respective communities
through the maintenance or increase of employment in the
plants of the borrowers. While a little over one-fifth of the
borrowers showed continued deterioration of their position since




24

TWENTY-FOURTH ANNUAL REPORT

receipt of the loans, nearly two-thirds showed definite improve­
ment. In an additional 15 per cent of the cases the borrowers
appeared to have benefited only temporarily, although the
eventual outcome in a number of these cases was still in doubt
at the time of the review.
As a banking operation, the lending of working capital by
this bank has not been profitable. Gross earnings on these loans
at the end of 1938 amounted to approximately $1,450,000, and net
earnings, before the establishment of reserves against estimated
losses, were $642,000. These net earnings were not sufficient
to provide fully for the reserves set up against estimated losses,
which at the end of 1938 aggregated $915,000; the remainder
was obtained chiefly from the special surplus account which had
been created previously in connection with the industrial loan
operations of this bank.




FEDERAL RESERVE BANK OF NEW YORK

25

Federal Reserve Policy

The principal expression of Federal Reserve policy during
1938 was the reduction in member bank reserve requirements
by the Board of Governors, effective April 16, mentioned on
pages 6 and 7 of this report. This action was taken as a part of
the Government’s program of promoting recovery, announced iri
April when business activity was still declining, and, together
with the release of inactive gold by the Treasury, served to
increase substantially the large supply of available funds in
member banks.
The total amount of Government securities in the System
Open Market Account was maintained at $2,564,000,000 during
1938. Changes were made in the maturity distribution of securi­
ties held in the Account, both by purchases and sales in the
market and by the exchange of maturing issues for new issues
offered by the Treasury at quarterly financing dates. The
operation of the Account during the year showed no change
in Federal Reserve policy.
In the latter part of December an unusual situation arose
in the Treasury bill market. The volume of such bills available
in the market had declined from $1,950,000,000 at the beginning
of the year to $1,300,000,000 on August 31, when issues were
limited to $100,000,000 of three month bills each week. Toward
the year end there was a special demand for Treasury bills
for statement purposes, which continued into January as the
bills came into demand to reduce tax liabilities on State tax
dates. As previously noted, the last issue of Treasury bills in
December, was sold at par or better, and the outlook then was
that this situation would persist well into January. In addition,
the market for short term Treasury notes was distorted by the
value given to those notes as prospective “ rights” in connection
with subscriptions to new issues of Government securities, so
that notes with maturities of less than two years were selling on
a no yield basis. In the circumstances, it was impractical to
replace maturing bills in the System Account with newly issued
bills, or with short term notes. In view of this situation, the
following statement was issued on December 30, at the close of a
meeting of the Federal Open Market Committee in Washington:




26

TWENTY-FOURTH ANNUAL REPORT
The Federal Open Market Committee announced, following a
meeting today, that weekly statements of the total holdings in the
Federal Reserve System’s Open Market Account may at times show
some fluctuation depending upon conditions in the market affecting
the Committee’s ability to replace maturing Treasury bills held in
its portfolio. The volume of Treasury bills available on the market
has declined materially during the year and, owing to the large and
increasing demand, such bills are already selling either on a no yield
basis or at a premium above a no yield basis. It has, therefore,
become difficult and in some weeks impossible for the System to
find sufficient bills on the market to replace those that mature.
Short term notes are also selling on a no yield basis and longer term
notes have at times been difficult to obtain. In these circumstances,
it may be necessary from time to time to permit bills held in the
portfolio to mature without replacement, not because of any change
in Federal Reserve policy but solely because of the technical situa­
tion in the market. Because no change in Federal Reserve policy
is contemplated at this time, maturing bills will be replaced to the
extent that market conditions warrant.

The record of the meeting of the Federal Open Market
Committee on that date, subsequently published, indicated that
its executive committee was then directed to replace maturing
Treasury bills in the System Open Market Account with other
Treasury bills or Treasury notes, only to the extent that
such replacements could be made without paying a premium
over a no yield basis, or to the extent that Treasury notes could
be obtained without undue disturbance to the note market.
Actually, replacements continued to be made.
The discount rate of this bank remained unchanged through­
out the year at 1 per cent.




FEDERAL RESERVE BANK OF NEW YORK

27

The Foreign Exchanges and Capital and Gold Movements

During 1938 the dollar appreciated substantially in the
foreign exchange market as a consequence first of the heavy
export balance in merchandise trade, and second of a large
flight of capital to the United States in the last five months
of the year because of the fear of war in Europe. The heavy
trade surplus, up to the end of July, was offset, in part, by
gold shipments to the United States but, principally, by the
disbursement by foreigners of their dollar balances acquired
in previous years. After July, when foreigners wanted dollars
not only for the purchase of American goods but also for the
accumulation of funds away from European centers and prob­
ably for investment and speculative purposes as well, the move­
ment of gold to this country took place at a rate more rapid
than any previously experienced. Over the year as a whole,
the net merchandise export surplus of this country amounted to
$1,134,000,000, and the net reported gain of gold from abroad
was $1,640,000,000. Data on capital movements between the
United States and other countries, which have been made public
through November, 1938, indicate that the capital inflow in the
four months of August, September, October, and November was
sufficiently rapid to exceed by $299,000,000 the reduction in

1935

1936

1937

1938

Principal Factors Causing Gold Inflow Into the United States
(Cumulative m ovements o f gold, foreign capital, and excess o f merchandise exports
over im ports since January 1, 1938. Data on foreign capital movement
through O ctober o f 1938)




28

TWENTY-FOURTH ANNUAL REPORT

foreign funds here during the preceding seven months. A fur­
ther capital inflow was reported to have occurred in the final
month of the year.
The strength of the dollar in foreign exchange quotations
can be illustrated by its course against the pound sterling.
From an opening rate of $5.00 % on January 3, the pound went
to a high of $5.03% on February 16 under the influence of
rumors, which had been current in Europe since early October,
1937, that the dollar would be devalued as a recovery measure.
From this level the pound went as low as $4.93 % close to the
end of May in response to fears of war in Europe, engendered
by the German annexation of Austria on March 13 and the
Czecho-Slovak mobilization of May 21. It recovered to $4.981
/4
in mid-June in response to the recurring rumors abroad of im­
minent dollar devaluation. From June 15 until September 28,
sterling fell continuously as the European political scene be­
came more critical, reaching a low of $4.61 in this market on
September 28. After an abrupt recovery to $4.81 13/16 follow­
ing the Munich Conference, however, the pound sagged again
as second thoughts on the Munich pact, the German campaign
against the Jews, and Italian claims against France raised the
question whether the Munich agreement was, in fact, an assur­
ance of lasting peace of Europe. From a level of $4.62% on
DO LLAR S

Fluctuations in Sterling Exchange at New York during 1938, Showing Various
Factor#* which, in Addition to the Large Merchandise Export Balance of the
United States, Affected the Rate (Daily closing rates)




FEDERAL RESERVE BANK OF NEW YORK

29

November 26, sterling recovered to $4.70, principally under the
impact of short covering prior to the year end. In the last few
days of the year, renewed selling sent sterling to $4.64 on
December 31, so that the net decline for the year was $0.36, or
7 per cent.
The fall in the pound during the year was accompanied
by the rise in the London gold price in terms of sterling from
139s 5d on January 3 to 150s on November 26, a record high
price. The dollar equivalent of the London gold price remained
above the level at which gold shipments to New York could
profitably be undertaken for practically all of the first seven
months of the year, reaching a high of $35.19
on February
18. It then declined, reaching the New York shipping “ parity”
of about $34.76% by August 3, and held close to that level
throughout the remainder of the year, except for two weeks
in September when the shipping point itself was reduced by
several successive sharp increases in war risk insurance pre­
miums. On this account the dollar equivalent of the London
gold price fell, at the height of the crisis on September 28, to
$34.25%, the lowest since January, 1935. It recovered, however,
to $34.77 on October 1.
Closing Cable Rates at New York
Exchange on

January 3

High

Low

Belgium ...............
Denmark..............
England...............
France..................
Germany..............
Italy.....................
Netherlands..........

$.1698
.2237
5.0106
.0340
.4029
.0526
.5576
.2517
.2583
.2318
.9997
.3339
.2936
.0522
.8000
.2915
.3785
.2963
.3131

$.1704
.2248
5.0375
.0340
.4055
.0527
.5616
.2531
.2596
.2331
1.0006
.3377
.2943
.0595
.8000
.2920
.3806
.2990
.3155

$.1673
.2066
4.6288
.0259
.3971
.0526
.5330
.2325
.2384
.2238
.9812
.3085
.2250
.0521
.6103
.2700
.3456
.1590
.2902

Switzerland ..........
Argentina, Official..
Argentina, Free.. ..
Uruguay ...............
Japan ...................
India ....................
Shanghai ..............




December 31
$.1684
.2072
4.6400
.0262
.4014
.0526
.5440
.2333
.2391
.2255
.9902
.3095
.2272
.0586
.6108
.2709
.3474
.1655
.2912

30

TWENTY-FOURTH ANNUAL REPORT

The French franc also fell sharply against the dollar during
the year, going from $0.0339 % on January 3 to $0.0262 3/16
on December 31. From the beginning of the year to May 3,
the franc declined gradually to $0.0301 %, while the London
cross-rate weakened from 147.30 francs per pound to 164.56,
as successive cabinets fell in France. On May 5, the Govern­
ment revalued the franc downward and established a minimum
level of 179 francs per pound, then equivalent to $0.0279 in
New York. A substantial repatriation of capital followed this
move, but continued adverse trade balances, Treasury difficulties
in borrowing, and fears of war led to a renewed drain of capital
until November, when, under decree powers the Government
presented a recovery program, which initiated a second sub­
stantial repatriation of funds.
Among the other European currencies, the belga was sub­
ject to sharp speculative attacks, first on the occasion of the
downward revaluation of the franc, and second in December
in response to internal political difficulties, but both attacks
were weathered successfully. The guilder and the Swiss franc
declined in roughly parallel fashion to sterling until September,
since which time they appear to have been managed independ­
ently of the pound and held fairly steady in terms of the dollar.
Pegged quotations in Scandinavian currencies were unchanged
in terms of the pound sterling. Dealings in the reichsmark
and the lira remained subject to stringent official restrictions
in Germany and Italy, although quotations for blocked marks
fell during the year, and were especially weak in September
during the crisis.
Outside Europe, depreciation of the peso continued in
Argentina, and foreign exchange restrictions were imposed in
New Zealand and tightened in Japan, while both currency
depreciation and exchange control supervened in Mexico and
China. Local conditions, including excessive merchandise im­
ports for domestic consumption in relation to exports, capital
flight, and imports of war materials, were principally responsible
for these developments, rather than the state of world markets.
The outward movement of capital in the first seven months
of the year, when foreigners, in effect, drew on dollar balances
in New York to pay for net merchandise imports from this
country, amounted to $410,000,000, which resulted from a with­
drawal of $443,000,000 in short term banking funds and an




FEDERAL RESERVE BANK OF NEW YORK

31

inflow of $33,000,000 in security transactions, including changes
in brokerage balances. In the four months, August to November
inclusive, the inflow of capital amounted to $709,000,000, short
term banking funds accounting for $690,000,000 of this amount,
and security transactions plus changes in brokerage balances
accounting for the remaining $19,000,000. The influx of capital
during this period was at the highest rate on record and, in the
two weeks ended September 21, near the peak of the European
war scare, it reached $288,700,000. After the Munich agree­
ment, foreign buying of American securities took place in Oc­
tober on the most substantial scale in eighteen months, but the
movement of short term banking funds in the last month of
the year, although it continued inward, was less than half the
volume of October.
In the movement of capital to this market over the year,
English and French sources, and European countries other than
those shown separately in the accompanying table, were the
principal contributors to the total inflow, while Far Eastern
and Swiss funds were withdrawn from this market, the former
Movement of Capital between the United States and Foreign Countries
December 29, 1937 to November 30, 1938 (a)
(In millions of dollars; capital inflow + or outflow —)’

By Source

Short term
banking funds

France ......................................
Germany ...................................
Italy .........................................
Netherlands...............................
Switzerland ..............................
Other Europe...........................

+112
+ 55
+ 12
+ 1
+ 1
— 87
+ 83

+
+
+
+
+
+
+

9
10
1
3
12
25
49

+121
+ 65
+ 13
+ 4
+ 13
— 62
+132

Total Europe......................

+177

+109

+286

Canada .....................................
Latin America .........................
Far East ..................................
All Other..................................

+148
— 16
— 79
+ 17

—
—
+
+

+
—
—
+

Total .................................

+247

+ 52

+299

Dec. 29, 1937—July 27, 1938....
July 28, 1938—Nov. 30, 1938....

—443
+690

+ 33
+ 19

—410
+709

(a) Source: United States Treasury Department,
brokerage balances.




Security
transactions (b)

63
6
8
4

Total

85
22
71
21

(b) Including the movement in

32

TWENTY-FOURTH ANNUAL REPORT

to pay for merchandise imports, the latter in connection with
gold operations here. The small Latin American outflow included
a $25,000,000 bond issue sold by Argentina in this market.
The net reported gain of gold from abroad, resulting from
imports, exports, and changes in gold held under earmark for
foreign account, amounted to $1,640,100,000. Imports from
England reached a total over the year of $1,208,800,000, and
Japan, the Netherlands, France, Canada, and Sweden furnished
additional substantial amounts. The net gain in the first quarter
was $43,100,000, in the second quarter $108,600,000, in the third
quarter $687,700,000, and in the fourth quarter $800,700,000.
Total net imports of gold aggregated $1,973,600,000, but of this
amount $333,500,000, net, was earmarked for foreign account,
partly reflecting efforts of European authorities to place some
of their metallic reserves away from the area of threatened
war. Gold movements during 1938, by countries of origin or
destination, are summarized in the accompanying table. Some
of the gold receipts shown in this table were earmarked for
foreign account upon arrival, but such transactions are not re­
ported by countries.
Gold Movements by Countries
(In thousands of dollars)
Country
Argentina ...............
Australia.................
Belgium ..................
Colombia ................
England ..................
France....................
India ......................
Mexico ...................
Netherlands ............
Philippines..............
Sweden...................
All Other...............
Total.................




Exports to
....

Imports from

Net

2

31,831
39,162
15,488
76,430
10,558
1,208,802
86,136
16,160
168,740
37,169
163,049
27,882
60,146
37,904

31,831
39,162
15,488
76,315
10,558
1,208,729
81,136
16,160
168,740
36,472
163,049
27,880
60,146
37,902

5,889

1,979,457

1,973,568

....
....
115
....
73
5,000

....
....

697

....

2

....

FEDERAL RESERVE BANK OF NEW YORK

33

Foreign Relations

During 1938 the accounts maintained at this bank for the
Austrian National Bank and the Central Bank of Bolivia were
closed, the former being liquidated on April 28, 1938, and the
latter closed, at the request of the Central Bank of Bolivia, on
April 18, 1938. The total number of foreign banks of issue for
which accounts are maintained was thereby decreased to forty,
including the Bank for International Settlements. Balances
maintained by foreign correspondents with this bank stood at
$199,211,000 at the end of 1938, as compared with $171,750,000
at the end of 1937, and $98,620,000 at the close of 1936. In
addition, $628,587,000 of gold was held under earmark for for­
eign correspondents on December 31, 1938, as compared with
$295,130,000 a year previous. The total of earmarked gold
near the end of December, 1938, was larger in dollar value than
at any previous time.
In behalf of the twelve Federal Reserve Banks, one short
term loan, secured by gold, was extended to a foreign central
bank during 1938 in the amount of $80,000. This loan was made
in January, 1938, for a period of four months, and was repaid
before maturity.
As the result of partial repayments of principal, the par­
ticipation of the Federal Reserve Banks in the credit originally
extended jointly by a group of central banks and the Bank for
International Settlements to the National Bank of Hungary in
1931, was reduced from $2,282,000 at the close of 1937 to
$2,055,000 at the end of 1938.
The balances held abroad by this bank in its own behalf
and in behalf of the other Federal Reserve Banks were reduced
slightly during 1938 from an aggregate amount equivalent to
$179,000 to the equivalent of $172,000; of the latter amount
$85,000 is repayable in United States dollars and the remainder
in foreign currencies. Total holdings of commercial bills de­
nominated in foreign currencies amounted to $549,200 at the
end of 1938, exclusive of the Hungarian credit referred to above.
Of this amount $466,400 is repayable in United States dollars.




34

TWENTY-FOURTH ANNUAL REPORT

Operations of the Bank During 1938

Data on the volume of work, the types of which can be
measured readily, are shown in the following table for the year
1938 compared with 1937. Reflecting in part the lower level of
business activity during 1938 than in 1937, the volume of opera­
tions of this bank in general showed some reduction for the
year. An exception was in the handling of checks, the number
of which increased slightly, notwithstanding a decrease in the
dollar volume; the number of checks handled has been increasing
1938
Number of Pieces Handled
Bills discounted:
Applications .........................................................
Industrial advances:
Notes discounted ...................................................
Commitments to make industrial advances..............
Bills purchased in open market f ................................
Currency received and counted.....................................
Checks handled ...........................................................
Collection items handled:
United States Government coupons paid * ............
All other ...............................................................
Issues, redemptions, and exchanges by fiscal agency
department:
United States Government direct obligations..........
All other ...............................................................
Wire transfers of funds...............................................
Amounts Handled
Bills discounted ...........................................................
Industrial advances:
Notes discounted ...................................................
Commitments to make industrial advances..............
Bills purchased in open market for own account..........
Currency received and counted.....................................
Coin received and counted............................................
Collection items handled:
United States Government coupons paid * ............
All other ...............................................................
Issues, redemptions, and exchanges by fiscal agency
department:
United States Government direct obligations..........
Wire transfers of funds.................................................

1,912
2,174

2,751
4,167

125
14
158
645,229,000
880,939,000
199,324,000

93
57
1,252
683,487,000
1,022,766,000
195,892,000

4,971,000
2,026,000

4,990,000
2,111,000

1,080,000
360,000
209,000

1,064,000
395,000
243,000

$87,161,000

$207,289,000

973,000
1,789,000
1,091,000
2,971,426,000
89,189,000
70,471,328,000

2,036,000
2,254,000
8,809,000
3,268,841,000
105,552,000
77,897,043,000

496,769,000
1,725,713,000

493,835,000
1,881,825,000

17,958,369,000
1,995,611,000
27,498,995,000

13,536,635,000
1,407,081,000
32,765,514,000

f Includes number purchased by this bank for System account
* Includes coupons from obligations guaranteed by the United States.




1937

FEDERAL RESERVE BANK OF NEW YORK

35

steadily since 1933, and in the last two years has exceeded the
number handled in 1929. Items which showed a reduction dur­
ing the year, both in number and dollar volume, were currency
and coin received and counted, bills purchased, bills discounted,
collection items other than United States Government coupons
paid, and wire transfers.
Activity by this bank as fiscal agent for the Government
in the issue, redemption, and exchange of United States Govern­
ment direct obligations showed a sharp increase in dollar vol­
ume, with only a slight increase in number of pieces handled,
indicating an increased proportion of transactions in securities
of the larger denominations. Operations conducted for other
Government agencies showed a reduction in number of pieces
handled, but an increase in the dollar amount.
Financial Statement
The following statement of condition of this bank compares
assets and liabilities at the end of 1938 with a year previous.
As this statement indicates, the principal change in the earning
assets of the bank during 1938 was an increase in holdings of
Government securities, reflecting an increased participation by
this bank in the System Open Market Account. (The total
holdings of the account are periodically reallocated among the
twelve Federal Eeserve Banks.) The volume of discounts for
member banks declined during 1938 following an increase during
1937, and on December 31 was lower than at the end of any pre­
ceding year since 1915, the first complete year of the bank’s
operations. Total reserves were greatly increased during the
year, accompanying the increase in the gold stock of this coun­
try and the release of inactive gold by the Treasury.
The volume of Federal Reserve notes of this bank in actual
circulation showed a further increase during the year, and
deposit liabilities reached a new high level, chiefly as a result
of the large increase in member bank reserve accounts.




TWENTY-FOURTH ANNUAL REPORT

36

(In thousands of dollars)
A

ssets

Gold certificates on hand and due from U. S.
Treasury ......................................................
Redemption Fund—Federal Reserve notes.........
Other cash .......................................................

Dec. 31, 1938

Dec. 31, 1937

$5,115,945
1,226
103,924

$3,586,484
1,124
78,420

$5,221,095

$3,666,028

$

804
241

$

2,804
316

Total bills discounted...........................

$

1,045

$

3,120

Bills bought in open market..............................
Industrial advances ............................................

$

215
3,879

$

212
4,412

Total reserves .....................................
Bills discounted:
Secured by U. S. Government obligations,
direct or fully guaranteed....................
Other bills discounted..................................

U. S. Government securities:
Bonds .........................................................
Treasury notes ............................................
Treasury b ills .......... ..................................

$ 267,426
367,938
180,058

$ 216,814
333,211
189,679

Total U. S. Government securities.........

$ 815,422

$ 739,704

Total bills and securities......................

$ 820,561

$ 747,448

$

$

Due from foreign banks.....................................
Federal Reserve notes of other banks...............
Uncollected items ..............................................
Bank premises ..................................................
Other assets ......................................................
Total assets .........................................




65
5,337
207,064
9,038
13,388

$6,276,548

68
5,292
195,811
9,973
10,808

$4,635,428

FEDERAL RESERVE BANK OF NEW YORK

37

(In thousands of dollars)]
Dec. 31, 1938

Dec. 31, 1937

Federal Reserve notes in actual circulation....

$1,029,296

$ 964,902

Deposits:
Member bank—reserve account...................
U. S. Treasurer—General Account...............
Foreign bank ..............................................
Other deposits ............................................

$4,460,340
212,295
71,368
188,480

$3,071,762
39,295
60,892
189,134

Total deposits .....................................

$4,932,483

$3,361,083

Deferred availability items..................................

$ 194,382
1,214

$ 189,511
977

Total liabilities ....................................

$6,157,375

$4,516,473

$

$

L

ia b il it ie s

Capital accounts:
Capital paid in............................................
Surplus (Section 7) ....................................
Surplus (Section 13b) ................................
Other capital accounts................................

51,043
52,463
7,457

51,058
51,943
7,744

81
,2 0

81
,2 0

Total capital accounts...........................

$ 119,173

$ 118,955

Total liabilities and capital accounts....

$6,276,548

$4,635,428

87.6%

84.7%

Ratio of total reserves to deposit and Federal
Reserve note liabilities combined.................
Contingent liability on bills purchased for foreign
correspondents ............................................
Commitments to make industrial advances..........

$

27
2,677

$

582
4,754

Income and Disbursements
Total current earnings of this bank were $842,000 less in
1938 than in 1937, and as expenses were only slightly smaller
current net earnings showed a reduction of $827,000. The re­
duction in earnings, notwithstanding the increase in the amount
of securities held, was due to lower yields on United States
Government securities. The additions to current net earnings,
principally profits of $2,316,000 on sales of Government securi­
ties, were somewhat exceeded by deductions from current net
earnings for the retirement system, for reserves, and for chargeoffs on bank premises. Net earnings were $3,291,000, and, after
providing for regular dividends of $3,057,000 to member banks,
and transferring $286,000 from the special surplus account (Sec­
tion 13b) to cover part of the reserves set up against estimated
losses on loans to industrial concerns, $520,000 net was trans­
ferred to the ordinary surplus account (Section 7).




TWENTY-FOURTH ANNUAL REPORT

38

Profit and Loss Account
For the calendar years 1938 and 1937
(In thousands of dollars),
1938*

1937

Karnings .................................. .......... ..............
Net expenses .............................. , , ...................

$

Current net earnings.............................

$

3,370

$

4,197

$

2,316

$

664

Additions to current net earnings:
Profits on sales of U. S. Government securities
A]] other , , , , ..............................................

10,706

$

7,336

11,548
7,351

83

55

$

Deductions from current net earnings:
Losses and reserves for losses on industrial
advances (net) ....................................
Special reserves and charge-offs on bank
premises ...............................................
Prior service contributions to retirement
system (final payment).........................
Assessment for building for Board of Gov­
ernors of the Federal Reserve System...
All other ....................................................

2,399

$

719

$

448

1

206

737
1,282

639
514

11

13

Total deductions ..................................

1

2,478

$

1,372

Net deductions from current net earnings............

$

79

$

653

Net earnings......................................................

$

3,291

$

3,544

Paid United States Treasury (Section 1 3 b )...........
Dividends p aid ...................................................
Transferred from surplus (Section 1 3 b )..................
Transferred to surplus (Section 7 ) ...........................

$

$

5
3,070

Surplus (Section 7) beginning of year...............
Addition as above...............................................

$

Surplus (Section

$

7)

end of year....................

3,057
286
520
51,943

469
*

520
52,463

51,474
469

$

51,943

*Some figures for 1938 have been revised since the preliminary publication of the annual
statement of this bank on January 7, 1939, chiefly to reflect the amounts transferred to
reserve for estimated losses on industrial loans from surplus (Section 13b) and to
surplus (Section 7).




39

FEDERAL RESERVE BANK OF NEW YORK

Membership Changes in 1938
There were very few changes in membership in this District
during the year—only three mergers among member banks and
one voluntary liquidation. No National banks were organized
during the year, nor were any additional State banks or trust
companies admitted to membership. The number of member
banks in percentage of total commercial banks in the Second
Federal Reserve District remained unchanged at 75 per cent.
The tables below show the classification of banks in this
District according to their charters, and the record of changes
in membership during 1938.
Number of Member and Nonmember Banks in Second Federal Reserve
District at End of Year
December 31, 1938

T

ype

of

B

an k

December 31, 1937

Non­
Per cent
Non­
Per cent
Members members members Members members members

National banks..........
State banks * ............
Trust companies.........

599
44
129

0
10
1

Total....................

772

10
0

0
11
1

10
0

147

29
47

603
44
129

147

28
47

257

75

776

258

75

* Excludes Savings banks.

Changes in Federal Reserve Membership in Second District During 1938
Total membership beginning of year...........................................................

776

Increases:
None ....................................................................................................

0

Decreases:
Member banks combined with other members.....................................
Voluntary liquidation ..........................................................................

3

Total decreases............................................................................

4

Total membership end of year....................................................................

772




1

40

TWENTY-FOURTH ANNUAL REPORT

Changes in Directors and Officers
Edward K. Mills, President, Morristown Trust Company,
Morristown, N. J., a director of this bank since January, 1933,
died March 10, 1938.
At a special election in May, 1938, Otis A. Thompson, Presi­
dent, The National Bank and Trust Company of Norwich,
Norwich, N. Y., was elected by member banks in Group 2, as a
Class A director to hold office for the unexpired term of Mr.
Mills ending December 31, 1938.
At a regular election during the autumn of 1938, Otis A.
Thompson was reelected by member banks in Group 2 as a
Class A director for a term of three years beginning January 1,
1939, and Walter C. Teagle, Chairman, Board of Directors,
Standard Oil Company (New Jersey), New York, N. Y., was
reelected by member banks in Group 2 as a Class B director
for a term of three years beginning January 1, 1939.
On January 19,1938, the Board of Governors of the Federal
Reserve System designated Owen D. Young, Chairman, Board
of Directors, General Electric Company, New York, N. Y.,
Chairman and Federal Reserve Agent of this bank for the
remainder of the year, and designated Beardsley Ruml, Treas­
urer, R. H. Macy & Co., Inc., New York, N. Y., Deputy Chairman
for the remainder of the year. On December 30, 1938, the
Board of Governors of the Federal Reserve System redesignated
Owen D. Young Chairman and Federal Reserve Agent of this
bank for the year 1939. On the same date, the Board of Gov­
ernors of the Federal Reserve System reappointed Beardsley
Ruml a Class C director for a term of three years beginning
January 1,1939, and redesignated him Deputy Chairman of the
Board of Directors of this bank for the year 1939.
In April, 1938, the Board of Governors of the Federal
Reserve System appointed Marion B. Folsom, Treasurer, East­
man Kodak Company, Rochester, N. Y., a director of the Buffalo
Branch, for the unexpired portion of the term ending Decem­
ber 31, 1938. In December, the Board of Governors of the
Federal Reserve System reappointed Mr. Folsom a director
of the Buffalo Branch for a term of three years beginning
January 1, 1939.




FEDERAL RESERVE BANK OF NEW YORK

41

In January, 1939, the directors of this bank reappointed
Frank F. Henry, Chairman, Washburn Crosby Company, Inc.,
Buffalo, N. Y., a director of the Buffalo Branch for a term of
three years beginning January 1, 1939.
Member of Federal Advisory Council
The Board of Directors of this bank appointed Leon Fraser,
President, The First National Bank of the City of New York,
New York, N. Y., a member of the Federal Advisory Council
for the Second Federal Reserve District, to serve for the
year 1939.
Changes in Officers
On January 6, 1938, the directors of this bank appointed
Norman P. Davis, formerly Special Assistant, Division of
Security Loans, as Manager of the Security Loans Department.
Horace L. Sanford, formerly Chief of the Reports Division,
Research Department, and Assistant Secretary, was appointed
Manager of the Research Department and continued as Assist­
ant Secretary. Insley B. Smith, Special Representative, Bank
Relations Department, was appointed Manager of the Bank
Relations Department.
The Board of Directors of this bank appointed Harold A.
Bilby, formerly Chief in the Auditing Division, Auditing De­
partment, Assistant General Auditor, effective July 1,1938.
On September 13, 1938, W. Randolph Burgess, Vice Presi­
dent, and Manager of the System Open Market Account, who
had been with this bank since December 1, 1920, resigned to
accept the position of Vice Chairman of The National City Bank
of New York.
On September 22, 1938, Allan Sproul, First Vice President
of this bank, was appointed Manager of the System Open Market
Account.
The following deaths among officers of this bank occurred
during 1938: Jacques A. Mitchell, Manager of the Credit De­
partment, who had been with the bank since March 1, 1927,
died March 22, 1938; Charles H. Coe, Vice President, a member
of the bank’s staff since July 24, 1916, died May 7, 1938; and
I. Ward Waters, Manager of the Cash Custody Department, a
member of the staff since December 26,1914, died June 30,1938.




TWENTY-FOURTH ANNUAL REPORT

42

Directors and Officers
DIRECTORS

Expires
Dec. 31

Class

Group

A

1

W illiam C. P otter, Old Westbury, N. Y ................................................
Chairman, Board of Directors, Guaranty Trust Company of
New York, New York, N. Y .

1940

A

2

O tis A . T hompson , Norwich, N. Y ...........................................................
President, The National Bank and Trust Company of Norwich.

1941

A

3

W illiam F. P loc!h , Long Beach, N. Y .....................................................
President, The National City Bank of Long Beach.

1939

B

1

T homas J. W atson , Lebanon, N. J.............................................................
President, International Business Machines Corporation, New
York, N. Y .

1940

B

2

W alter C. T eagle, Port Chester, N. Y .....................................................
Chairman, Board of Directors, Standard Oil Company (New
Jersey), New York, N. Y .

1941

B

3

R obert T. S tevens , Plainfield, N. J...........................................................
President, J. P. Stevens & Co., Inc., New York, N. Y .

1939

C

O wen D. Y oung , Van Hornesville, N. Y ., Chairman...........................
Chairman, Board of Directors, General Electric Company,
New York, N. Y .

1940

C

Beardsley R uml , New York, N. Y ., Deputy Chairman....................
Treasurer, R. H. Macy & Co., Inc., New York, N. Y .

1941

C

E dmund E. D a y , Ithaca, N. Y ......................................................................
President, Cornell University.

1939

DIRECTORS— BUFFALO BRANCH

Term
Expires
Dec. 31

G ilbert P ro le , Batavia, N. Y ...................................................................................................
Genesee Farm Supply Company.

1939

H oward K ellogg, Buffalo, N. Y ..............................................................................................
President, Spencer Kellogg and Sons, Inc.

1940

M arion B. F olsom , Rochester, N. Y ......................................................................................
Treasurer, Eastman Kodak Company.

1941

Fred J. Coe, Niagara Falls, N. Y ............................................................................................
President, Power City Trust Company.

1939

W illiam A . D usenbury, Olean, N. Y ...................................................................................
President, The First National Bank of Olean.

1940

F rank F. Henry, Buffalo, N. Y ..............................................................................................
Chairman, Washburn Crosby Company, Inc.

1941

R obert M . O’ Hara, Managing Director.............................................................................

I 939

MEMBER OF FEDERAL ADVISORY COUNCIL
L

eon

F

raser

President, The First National Bank of tbe City of New York, New York, N. Y.




FEDERAL RESERVE BANK OF NEW YORK

43

OFFICERS
George L. Harrison, President
Allan Sproul, First Vice President

Walter S. Logan, Vice President and

Ray M. Gidney, Vice President

General Counsel

L. Werner Knoke, Vice President

Leslie R. Rounds, Vice President

John H. W illiams, Vice President

W illiam H. Dillistin,

W alter B. Matteson,

Assistant Vice President

Assistant Vice President

J. Wilson Jones, Assistant Vice President
Herbert H. Kimball,
Assistant Vice President and Secretary

Arthur P helan, Assistant Vice President
James M. Rice, Assistant Vice President
Harold V. R oelse,

John W. McKeon,

Assistant Vice President

Assistant Vice President

V alentine Willis,
Assistant Vice President

Dudley H. Barrows,

Silas A. Miller,

Manager, Personnel Department

Manager, Securities Department

Wesley W. Burt,

Horace L. Sanford, Manager, Research

Manager, Accounting Department

Department, and Assistant Secretary

W illiam A. Scott,

Donald J. Cameron,
Manager, Foreign Department

Manager, Government Bond Department

William F. Sheehan,

Felix T. Davis,
Assistant Counsel

Manager, Bank Examinations Depart­
ment, and Chief Examiner

Norman P. Davis,
Manager, Security Loans Department

Insley B. Smith,
Manager, Bank Relations Department

Edward 0. Douglas,

Todd G. Tiebout,

Manager, Bill Department and
Manager, Collection Department

Assistant Counsel

William F. Treiber,

Edwin C. French,
Manager, Cash Department

Assistant Counsel

Rufus J. Trimble,

Myles C. McCahill,
Manager, Service Department

Assistant Counsel

Charles N. Van Houten, Jr.,

Robert F. McMurray,

Manager, Security Custody Department

Manager, Safekeeping Department

George W. Ferguson, General Auditor
Harold A. Bilby, Assistant General Auditor

OFFICERS—BUFFALO BRANCH
Reginald B. Wiltse,

Robert M. O’Hara,
Managing Director




Assistant Manager

Halsey W. Snow,
Cashier

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