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Thirty-first Annual Report

Federal Reserve Bank
of New York
For the Year Ended December 31, 1945

Second Federal Reserve District

federal

R eserve Bank

OF NEW YORK

April 25, 1946.

To the Stockholders of the
Federal Reserve Bank of New York:
I am pleased to transmit herewith the thirty-first
animal report of the Federal Reserve Bank o f New
York reviewing the year 1945.

A l l a n S peoxjl ,

President.

CONTENTS
PAGE
Problems of Postwar A dju stm ent..................................................
5
Reconversion in the Second Federal Reserve District. . . . 10
Business Financing ..........................................................................

Government Financing in 1945 ......................................................

Money Supply: Federal Reserve P o lic y ........................................
Amendments to Regulations T and U ..................................

16
21

Member Bank Earnings .................................................................

Organization of the World Fund and Bank

The United States Balance of International Payments................
Wartime Developments............................................................
Postwar Developments ............................................................

28
28
32

Foreign Exchanges .........................................................................

Foreign Relations of the Federal Reserve System

Operations of the Bank in 1945 ......................................................
Guaranteed War Production and Termination Loans..........

41
43

Financial Statem ents.......................................................................
Statement of Condition............................................................
Income and Disbursements......................................................

44
44
47

Membership Changes in 1945 ........................................................

Changes in Directors and Officers..................................................
Changes in Directors .............................................................
Changes in Officers .................................................................
Member of Federal Advisory C ouncil....................................

49
49
50
50

List of Directors and O fficers.......................................................... 51

MEMORIAM

It is with deep regret that we record the loss of the
following employees who gave their lives in the service of
their country.

1 9 4 1 -1 9 4 5
BAKER,

RAYMOND

GARRETTSON,
GATTO,

ELMER

JOSEPH

HEGARTY,

KEVIN

JOHNSON,

ROBERT

MATHEWS,

DEWEY

MORRIS,

THOMAS

MULLINS,

JAMES

MURPHY,

HAROLD

RANNEY,

FRANK

SLADE,
WAY,

WILLIAM

JOHN

W INSTEN,

HARRY

“ . . . The world will little note, nor long remember,
what we say here, but it can never forget what they did
here. It is for us the living, rather, to be dedicated here
to the unfinished work which they who fought here have
thus far so nobly advanced. It is rather for us to be here
dedicated to the great task remaining before us — that from
these honored dead we take increased devotion to that cause
for which they gave the last full measure of devotion — that
we here highly resolve that these dead shall not have died
in vain — that this nation, under God, shall have a new birth
of freedom — and that government of the people, by the
people, for the people, shall not perish from the earth.”

Federal Reserve Bank of New York
Thirty-first Annual Report
The year 1945 was a year of surprises. Much economic forecasting
and policy making had been based on the assumption that demobilization
and reconversion would be a two-stage process. But the collapse of Japan
followed with dramatic suddenness the termination of the war in Europe.
The result was that in the last five months of the year reconversion hit
the American economy with full force and with little or no opportunity
to ease its impact.
There had been a widespread debate as to whether the war would
be followed by deflation or inflation. Very plausible arguments were
marshaled on each side.

Those who feared deflationary developments

stressed the demobilization of the armed forces and the reduction of the
budget to a peacetime basis. On the inflationary side were the deferred
demands for civilian goods and the large wartime savings in the form
of currency and bank deposits and individual holdings of Government
securities.

Though there was a wide difference of emphasis on these

conflicting factors, the commonly expected pattern of postwar experience
was that of a sharp, though possibly short, downturn immediately follow
ing the war (particularly if the two wars ended close together), a
recovery of output and employment as reconversion got into full swing,
and a much more problematical long-run prospect after business and
consumer buying had caught up with deferred demands.
The second great surprise of 1945 was the lightness of the initial
impact of reconversion. It had been widely predicted that in the first
six months after the war the national income would drop by 15 per
cent or more, and various official and private estimates placed the amount
of unemployment to be expected by the spring of 1946 at from 5 to 10
million. Actually, and notwithstanding the wave of strikes in major
industries, unemployment has at no time exceeded 3 million, and the
drop in national income payments from the wartime peak to the first
quarter of 1946 has not exceeded 5 per cent. Yet in the same period the
number of persons in the armed forces has been brought down from 12
million to 5 million, and the Federal budget, from a deficit that in the

THIRTY-FIRST ANNUAL REPORT

first half of 1945 was running at an annual rate of 50 billion dollars,
has been rapidly moving toward an even balance.
It is clear that there was a general underestimation of the force of
the expansionary factors which the close of the war would let loose on
the economy. The outstanding feature has been the continuous rise of
consumption from month to month since the war ended. This is all the
more remarkable in view of the fact that during the war consumption
had been already at the highest level in our history. Perhaps an even
more remarkable fact is that, so far as the data yet indicate,* the rise of
consumption, in the aggregate, has not been financed to any extent out
of wartime savings but mostly out of current income. Apparently what
is happening is that the public, while still retaining its huge backlog of
savings, is spending much more freely out of newly received income
than almost anyone anticipated, and in the process is generating new
forces of expansion which are proving sufficient to offset very largely
the great decline in military expenditure. Meanwhile, the replacement
of persons temporarily employed during the war by returning veterans
is proceeding more rapidly and smoothly than was anticipated.
These unexpectedly favorable developments in the initial phase of
transition from war to peace have sharpened fears that we may repeat
the experience after the last war. After a brief period of hesitation, a
buying boom got under way in the spring of 1919. Wages and prices
rose in a spiral. There was feverish inventory accumulation and forward
buying, and export trade expansion, to meet the needs of a war-torn
world, intensified the internal inflationary forces. In the spring of 1920,
the boom collapsed, prices dropped 40 per cent by July 1921, and un
employment rose to over 5 million. The American economy is much larger
today than it was in 1919, and swings of the same relative magnitude in
employment would run to considerably larger figures. W e have, moreover,
come through a much bigger war, particularly as regards the American
effort, and the forces generated by it which can affect the postwar period
are much more powerful. There was little counterpart after the last war
for the present huge accumulation of deferred demands. Comparatively,
we took that war in our stride, with relatively little restraint upon the
civilian economy. W e produced, for example, a million passenger auto
mobiles in 1918.
* It must be remembered that available figures of savings are net figures, and it is
possible that there has been substantial use of wartime savings by some people while
others have continued to save large amounts.

FEDERAL RESERVE BANK OF NEW YORK

Undoubtedly, there are very strong expansionary forces at work
today. One of the most striking facts is that the growth of consumption
has been mainly in nondurable goods. Expenditures for such goods have
been far higher in relation to disposable income than could have been
expected on the basis of the relationships in the period 1929-40. Part of
the explanation undoubtedly is that consumption had been at low levels
during the depression years and supplies of many goods of this character,
as well as of the durable goods, were limited during the war.

The return

of large numbers of servicemen to civilian life has also involved much
special outlay, and with this has been coupled the sharp increase in
Government transfer payments reflecting increased mustering-out pay to
discharged servicemen and unemployment compensation.

Undoubtedly,

also, an important element has been the general sense of release from
war and the resultant willingness to spend more freely.
Some of these influences are temporary and may already have reached
or passed their peak. But against any leveling-off in this type of demand
is to be put the fact that the expansion of durable goods, both consumers’
and producers’, has scarcely begun.

It seems reasonably certain that the

deferred demands for automobiles, housing, and other consumer durable
goods, combined with replenishment of producers’ inventories and demand
for fixed capital goods, will carry civilian production, already at a new
peacetime high, to substantially higher levels. To home demands will
undoubtedly be added a substantial export demand, for the financing of
which, in addition to Governmental aid and such private lending as may
develop, there has been built up during the war a large volume of
foreign gold and dollar balances.
All these factors lend force to the question whether we are now laying
the groundwork for a fairly extended period of high output and employ
ment or whether, as after the last war, we are to have a sharp inflationary
outburst followed by depression. Undoubtedly, there are strong infla
tionary pressures. The money supply has trebled since 1939, and business
and the consuming public are more liquid than at any previous time in
our history.

Though production is rising, it will, under the best condi

tions, take some time to get a broad and well-balanced output, and until
this is achieved there will be strong upward pressure upon prices. Another
and related factor is the tendency toward a continuing decline of interest
rates.

The combination of low and declining interest rates, redundant

money supply, and favorable business expectations has often in the past
been a highly explosive inflationary force, pushing up prices in all mar

THIRTY-FIRST ANNUAL REPORT

kets, for both securities and commodities.

To these forces are added, in

the present case, the large and still untapped wartime savings and the
huge backlog of deferred demands.

Of special importance in such cir

cumstances is the relation between wages and prices. As already stated,
the inflationary outburst after the last war followed the familiar wageprice spiral, increases in each pushing the other higher.

The dropping

of wage controls after Y -J Day and the early sanction given to wage
increases which would not require price increases developed quickly into
a general demand for higher wage rates to sustain the wartime level of
take-home pay, and it soon became apparent that some offsetting price
increases would be unavoidable.
In assessing our present situation, it may be helpful to list some of
the main features of past inflationary periods. Historically, drastic in
flation has usually been associated with budgetary deficits and with deficits
in a country’s international balance, leading to currency depreciation.
With these, and largely as a consequence of them, has gone a distrust
of the currency resulting in capital flight and a panicky desire to run
away from money into commodities, real estate, and equity securities.
These conditions are today fortunately absent in this country. The
Federal deficit is rapidly diminishing, and there is a highly favorable
prospect of a balanced budget for the fiscal year 1947. In the last
bond drive, the Treasury overborrowed its requirements and with
its present large balances is effecting some reduction of the debt. W e
should do everything possible to maintain revenue at its present high
level and to reduce or postpone expenditures.
Internationally, there is no pressure on our balance of payments and
no anxiety about the external stability of the dollar. There is, however,
a danger of excessive exports at a time when supplies at home are still
scarce.

There is no fundamental distrust of our currency, such as

characterized the great European inflations after the last war.

But we

do have a redundant money supply and a tendency toward continuing
decline of interest rates, and these, when combined with other inflationary
pressures, can have effects which, though much milder, are not dissimilar
in character to distrust of the currency.
Probably the two most fundamental aspects of our situation today
are the danger of a wage-price spiral, such as we had after the last war,
and the related questions of the volume and cost of output. As has been
stated, the drive for higher wage rates soon forced recognition that

FEDERAL RESERVE BANK OF NEW YORK

there would have to be some accompanying rise of prices. The problem
is how to stabilize this relation. The modified wage-price policy announced
by the President on February 14th recognized the need for re-imposition
of wage-rate control and established a procedure for wage-price adjust
ments which may achieve a more stable relation, though in view of the
fact that major strikes are still in progress it is too early to assess the
results of the new policy.

There have also been uncertainties and much

division of opinion with regard to the operation of price controls.

tension of the Price Control Act seems an indispensable condition of a
successful anti-inflationary policy in this immediate postwar period, when
potential demand is so far in excess of available supply.

But there has

been a growing awareness that the control must be flexible and be based
on recognition of the fact that price changes, in a period when we are
trying to work back to a condition of free markets, have an indispensable
role to play in bringing out a balanced output and directing and controlling demand.
Fundamentally, in a situation like the present, the antidote to infla
tion is a large and balanced output with rising productivity per worker.
Viewed as a whole, there is evidence that output is expanding, but it
takes time, under the best of conditions, after a great war to fill up the
channels of trade with civilian goods and achieve a well-balanced output.
To this objective Governmental and business policies must be mainly
directed, and upon our success in achieving it will largely depend whether
we shall lay the foundations in 1946 for a period of orderly prosperity
or have an inflationary outburst terminating in depression. Perhaps
equally important, especially for the longer run, is the emphasis on
increasing productivity per worker. During the war, we achieved an
enormous expansion of output, and by this means more than any other
managed to ward off the danger of inflation. But we did it more through
concentration of the war effort in the mass production industries than
through any over-all increase in productivity. Indeed, there is consid
erable opinion that there was an actual loss in efficiency, and this is not
surprising in view of the fact that war compels a country to get the
largest output in the shortest time regardless of cost. But if history is
any guide, the war should be followed by a resumption, and even an
acceleration, of the sharp advance of productivity per worker which
characterized the interwar period. Such an advance would provide the
basis not only for reducing inflationary pressures through the rise of
output, but also for establishing the relation of high incomes and low
prices which is essential for continuing prosperity in the longer run.

THIRTY-FIRST ANNUAL REPORT

10
R

e c o n v e r s io n i n t h e

S econd F

ederal

eserve

is t r ic t

In this District, as in the country as a whole, the transition from
wartime to peacetime activities was well under way by the end of 1945.
Termination or cutbacks of war production had been largely completed
and physical reconversion of plants had made much progress. The prin
cipal restraining influences on expansion of peacetime production (aside
from the wage-price problem and resulting work stoppages) were con
tinued shortages of certain materials, and difficulties of shifting workers
from war industries to those in which labor was in demand.
Factory employment had been declining gradually for a number of
months before the end of the war, more largely because of the shrinkage
in the labor force resulting from the continued growth of the armed
forces than because of lack of jobs, and consequently had not been accom
panied by a material increase in unemployment. A further sharp drop
in industrial employment occurred in the month following the end of the
war with Japan, but just as the wartime rise in employment had been
less rapid in this District than in other parts of the country, so the
drop in employment immediately after the war was less severe, owing
largely to the importance of industries producing essential civilian goods,
especially in New York State. A t the end of the year, a gradual rise in
factory employment was evident in a number of communities, and other
lines of business which had had great difficulty m obtaining suitable help
during the war were expanding their work forces. The construction in
dustry, for example, which had reached its lowest level of activity in
many years during the first quarter of 1945, expanded fairly rapidly
during the remainder of the year, although this industry, like others,
continued to be handicapped by shortages of materials and skilled labor.
The situation varied widely among various industrial centers of the
District.

In communities such as Buffalo, Utica, and the New York City

area in New York State, and Paterson and Newark in Northern New
Jersey, where major war industries such as aircraft factories and ship
yards had played a large part in the wartime growth of employment,
the greater part of the wartime increase had been canceled by the end
of 1945. On the other hand, communities in which there was no com
parable growth of specialized war production facilities, and whose indus
tries were more readily converted to peacetime production, such as

FEDERAL RESERVE BANK OF NEW YORK

Rochester, Syracuse, and the Albany-Troy-Schenectady area, still had
a considerably higher level of factory employment at the end of 1945
than before the war.
On the whole, this District appears to have fared better in 1945 than
some other sections of the country which in preceding years had experi
enced a more rapid growth of activity. Total income payments to indi
viduals in this District, which had lagged behind the rest of the country
during the early war years, are estimated to have increased by about
6 per cent from 1944 to 1945, compared with an increase of less than 4
per cent for the country as a whole. Similarly, retail trade in this area
ran moderately ahead of the rest of the country during the past year,
whereas it had lagged noticeably between 1939 and 1943.

On the

whole, this District appears to be entering the postwar period with at
least as favorable prospects as most other sections of the country, although,
like other districts, it has some communities which are facing difficult
problems of readjustment.
Income Payments in the United States and in the Second Federal
Reserve District*

(1939 = 100 per cent)

PER CENT

* U . S. Department of Commerce estimates for the United States; data for Second Federal
Reserve District estimated by Federal Reserve Bank o f New York.

THIRTY-FIRST ANNUAL REPORT

Business Financing
The most striking feature of the year with respect to business
financing was the extraordinary volume of refunding operations carried
out by corporations to take advantage of the prevailing low interest rates.
The total volume for the year amounted to nearly 5 billion dollars, and
in the month of October alone was close to a billion dollars, reflecting
efforts to complete refinancing operations before the Victory Loan and
before the end of the year.

(Flotations of corporation securities were

largely suspended during War Loan drives to avoid competing with
Treasury issues for investors’ funds.)

A factor which, in addition to

the low level of interest rates, tended to stimulate refunding operations
in 1945, was the scheduled expiration of the excess profits tax at the end
of the year; corporations subject to the excess profits tax took advantage
of their ability to retire securities which were callable only at substantial
premiums and to offset the cost of the premiums and other refinancing
expenses against their net income for the year, thus reducing their tax
liabilities by a substantial percentage of the cost of the refinancing
operations.

Annual Volume of Domestic Corporate Security Issues for Refunding
and ,or New Capital

m il l io n s

OF DOLLARS

1937
Source:

1938

1939

1940

Commercial and Financial Chronicle.

1941

1942

1943

1944

1945

FEDERAL RESERVE BANK OF NEW YORK

Prominent among the corporations engaging in large-scale refunding
operations were railroads which, as a result of the improvement in their
financial position growing out of the record volume of railroad traffic
during the war, had improved their credit standing to the point where
their securities became salable on a more favorable basis, relative to other
types of securities, than for a number of years. Public utilities engaged
in refunding operations on an even larger scale, and there was also a con
siderable volume of such operations by industrial concerns.

Railroad

and public utility issues took the form chiefly of bonds, whereas industrial
issues included a considerable proportion of preferred stocks which also
were salable on a lower yield basis than ever before.
Although refunding operations accounted for the major share in the
total volume of new securities sold during the year, there was a rising
trend in the volume of corporation securities sold to obtain new funds for
plant construction and improvements to assist in meeting the expected
heavy demands for goods and services in the postwar period.

The strong

stock market which prevailed during most of the year facilitated the
successful flotation of a number of common stock issues, but the volume,
while larger than in any years since 1936, was still far short of the
flotations of equity securities in the latter part of the decade of the 20’s.
After the end of the war with Japan, bank loans to business bor
rowers other than war contractors, which had undergone a considerable
shrinkage from the beginning of 1942 to the middle of 1944, began to
expand, and in the latter part of 1945 showed a fairly rapid growth.
Some of the loans represented, in effect, refunding operations, as the
borrowers arranged term loans from banks to obtain funds with which
to retire outstanding securities.

In addition, however, there was a grow

ing volume of business borrowing to finance current and planned ex
pansion of peacetime operations.

By the end of 1945 the total volume of

business loans in weekly reporting member banks was at the highest level
since at least 1931, and further expansion was in prospect.
Altogether, it would appear that, despite the huge growth in business
holdings of liquid assets, such as cash in banks and Government securities
during the war period, plans for expansion in the postwar period are
calling for sizable amounts of new capital and bank credit.

THIRTY-FIRST ANNUAL REPORT

Government Financing in 1945
Despite the rapid curtailment of war expenditures in the latter part
of the year, total Government disbursements for the year as a whole were
only moderately smaller than in 1944.

W ar expenditures in the first

seven months of the year averaged even higher than in the previous year,
and the subsequent shrinkage in such expenditures was partly offset by
increases in expenses of the “ aftermath of war” category, such as aids
to veterans, excess profits and other tax refunds, and interest on the
public debt.

As a result, total expenditures declined only from about

96 billion dollars in 1944 to 88 billion dollars in 1945.

Nevertheless,

total current expenditures and receipts were rapidly approaching a
balance at the close of the year.
For the full year, tax and other receipts increased slightly further,
and for the first year since 1940 exceeded 50 per cent of Government
expenditures.

Total revenues from individual income taxes and business

income and excess profits taxes were practically the same as in 1944.
U . S. Government Expenditures and Sources of the Financing of Such
Expenditures, by Calendar Years

B U L L IO N S
OF D O LLA RS

EXPENDITURES

-ii20f

RECEIPTS

BANK C R E D IT

SAVING S*

TAXES
A L L OTHER
WAR
EXPENDITURES
1941 ’42 ’ 4 3 ’4 4 ’ 45

1941 ’ 4 2 ’ 4 3 ’ 4 4 ’ 45

t Net absorption by nonbank investors of Government securities.

FEDERAL RESERVE BANK OF NEW YORK

moderate increase in payments by individuals was offset by some reduc
tion in corporation taxes which reflected the use of excess profits tax
credits to offset, in part, payments due in the last five months of the year,
as permitted by the Tax Adjustment Act of 1945 which was approved
in July.

The small net increase in total receipts was attributable to gains

in other income, including excise taxes and the proceeds of renegotiation
of war contracts and of surplus property sales.
Two heavily oversubscribed War Loans, together with net sales of
Savings bonds in interdrive months, produced more than enough funds
to cover the reduced net expenditures of Government in 1945, and left
the Treasury at the close of the year with a working balance of about
26 billion dollars— nearly 4 billion more than at the end of 1944.

This

balance is far greater than the amount required to cover the remaining
deficit for the balance of the current fiscal year, and is sufficient to permit
the retirement of a substantial amount of outstanding Treasury securities.
Although the amount raised by borrowing operations was in excess of
Treasury needs during 1945, the net increase in the public debt (47 bil
lion dollars) was about one-fourth less than in 1944, when, as a result
of three W ar Loans, the Treasury raised a larger amount of funds to
meet its greater expenditures and its working balance was increased by
nearly 10 billion dollars.
In the Seventh War Loan, which opened in April 1945 and closed
at the end of June, the Treasury raised over 26 billion dollars compared
with a goal of 14 billion, and in the Victory Loan (November-December)
the amount raised was over 21 billion dollars compared with a goal of
11 billion. In both cases the figures are exclusive of limited sales of
securities to commercial banks for the employment of time deposits and
of securities sold to Government agencies and trust funds, which
amounted to approximately 2y2 and 2 billion dollars, respectively.
For the year 1945 as a whole the portion of the increase in the public
debt absorbed by nonbank investors, other than Government agencies and
trust funds, was about 48 per cent of the total, the smallest percentage
since 1942.

This was so despite the reduced amount of Treasury bor

rowing, and if public holdings of Government securities financed by
bank loans were excluded, the comparison would be even less favorable.
In the Seventh War Loan, however, public absorption of Treasury securi
ties, exclusive of subscriptions financed by bank loans or sales to banks
of previous issues of Treasury securities, appears to have been greater

THIRTY-FIRST ANNUAL REPORT

than in any other War Loan.

Bank loans and purchases of previously

outstanding issues provided about 40 per cent of the funds invested in
Seventh War Loan securities, whereas in most other drives the proportion
was not far from 50 per cent. In the Victory Loan, subscriptions financed
indirectly by the commercial banks appear to have represented over half
of the total.

In addition, net sales of Savings bonds in interdrive months

were smaller than in preceding war years, and for the first time there were
net redemptions of Savings (tax) notes.
Redemptions of Savings bonds continued to increase with the growth
in the volume of securities outstanding, and were accentuated after the
end of the war, reflecting in part reduced industrial employment resulting
from cancellation of war contracts.
ward trend.

Meanwhile, sales showed a down

For the year as a whole, redemptions were equal to 43

per cent of sales, compared with 21 per cent in 1944.

Nevertheless, they

averaged only slightly over 1 per cent a month of the amount out
standing, and even after the war were less than had been commonly
expected.

Redemptions of Savings notes exceeded sales by 1.5 billion

dollars in 1945, compared with excess of sales over redemptions in 1944
of about 1.4 billion dollars.

Money Supply: Federal Reserve Policy
The already unprecedented money supply in the form of currency
and bank deposits increased substantially further during 1945, chiefly
through indirect participation by commercial banks in Treasury finan
cing, although the moderate increase in bank loans to business was a
minor factor.

Total deposits (adjusted to exclude interbank deposits

and “ float” between banks) plus currency, increased about 24 billion
dollars during the year to approximately 175 billion, compared with 61
billion at the end of June 1939 before the outbreak of war in Europe,
and 78 billion at the end of 1941 when the United States entered the war.
Demand deposits, exclusive of Government deposits as well as interbank
deposits and “ float” , increased 8 billion dollars during 1945, compared
with 6 billion in 1944.

The greater increase in 1945, when a smaller

increase might have been expected, is accounted for by the fact that the
two W ar Loan drives in 1945 absorbed a smaller part of the growth in
private deposits than the three loans in 1944.

Government deposits

showed a net increase of about 4 billion dollars in 1945, compared with
10 billion dollars in the preceding year.
dollars against 7 billion in 1944.

Time deposits increased 9 billion

The demand for currency diminished,

FEDERAL RESERVE BANK OF NEW YORK

Deposits and Currency in the United States*
(December 31 of each year)

BILLIONS

OF D O L L A R S

200

175
150
TOTAL
MOiNEV SUP PL

125

W rn i;
s a g e s

100

75
50

... »
I
X

V V

•
^
\

X X
X
X
X? V ^ X

0
1939

\ \
X ^\

C»>?\SSv\N v \
\ x
\ \ s. ■ '
^
x \ \

xn> x

. \ i.

\
^ xx

,C 7 V V 7 X ,

■

v X

1940

1941

DEMAND DEPOSITS $<
/ \ a . / ah M iQ T m ^ v Os

1942

1943

1944

1945

* December 31, 1945 preliminary.

especially in the latter part of the year, and the increase in the amount
outstanding outside the banks for the full year was somewhat over 3
billion dollars, compared with nearly 5 billion in 1944.
As in preceding years, the principal increases in total bank deposits
occurred during W ar Loan drives, reflecting the effects of bank loans
on and bank purchases of Treasury securities.

While deposits of indi

viduals, businesses, trust funds, etc., were reduced considerably during
each W ar Loan drive by payments for the new Treasury securities, the
reductions in such deposits were far less than the increases in Government
deposits, owing to the large amounts of subscriptions by nonbank in
vestors which were financed through bank loans or through sales of
previously acquired securities directly or indirectly to the banks.

Fol

lowing each W ar Loan, Government deposits were drawn down and
private deposit accounts were built up through Government expenditures,
until, just before each W ar Loan, the total volume of private deposits,
was substantially higher than before the preceding War Loan.
At the end of 1945 Government deposits were at a new high level.
Consequently, a sizable element in the total volume of bank deposits

THIRTY-FIRST ANNUAL REPORT

represented potential, rather than actual, purchasing power to the public.
The extent to which Government deposits will be shifted into deposits
in the hands of individuals and businesses will depend upon the use made
by the Government of its funds.

As a result of the heavy oversubscrip

tion of the Victory Loan, Government deposits at the end of 1945 were
far larger than are likely to be needed by the Government to bridge the
gap between receipts and expenditures for many months to come.

Use

of the surplus funds to retire Government securities held by the public
would increase the money supply available to the public for spending or
investment quite as much as net Government expenditures.*

Use of the

funds to redeem bank-held securities would cancel part of last year’s
increase in bank credit and would help to prevent further growth in the
money supply in the hands of the public.

In so far as the redeemed

securities are held by the Federal Eeserve Banks, their retirement would
reduce the reserves of the commercial banks as well as their War Loan
deposits.
Tendencies which encouraged a large growth in the volume of bank
credit, and so caused a further growth in the money supply were
accentuated during 1945.

Commercial banks, excluded from direct par

ticipation in W ar Loan subscriptions since the Second War Loan, and
offered no large issues of Treasury securities directly since 1943, were
in the market more or less persistently for Government securities pre
viously purchased by nonbank investors, not only during the drives, but
also to a lesser extent during the intervening periods. Since the begin
ning of 1945 especially, the banks increasingly tended to bid for the
longer-term bonds which they are eligible to hold.
Bank buying of such securities (as well as shorter-term securities)
facilitated “ roll-over” operations during W ar Loan drives by savings
institutions and other corporations, through which such investors sold
to banks at premium prices substantial amounts of Treasury securities
previously acquired, and used the proceeds to subscribe for new Treasury
issues at par.

Such operations enabled the sellers to obtain profits on

the securities sold, in addition to accrued interest, and to buy larger
amounts of new higher-yielding securities offered in the next W ar Loan
than they would have been able to buy with new funds obtained in the
ordinary course of their business.
* Reserve requirements of banks would be increased, however, owing to the transfer of
funds from Government deposits to private deposits.

FEDERAL RESERVE BANK OF NEW YORK

The situation was also conducive to speculative subscriptions by
individuals during drives— subscriptions placed in the expectation, not
of holding the securities to maturity, but of selling them within compara
tively short periods after the drives at premium prices, and thus obtain
ing quick profits in addition to current interest.

An incidental result

was the “ padding” of War Loan subscriptions, which gave an exagger
ated impression of the degree of success of the W ar Loans in obtaining
new funds from nonbank investors for the financing of the war.

Another

result was a successive rise in the average interest cost to the Treasury
on its borrowing in the Sixth and Seventh W ar Loans and in the Victory
Loan, despite the downward tendency of interest rates in the market,
owing to an increasing concentration of subscriptions in the longestterm, highest-yielding securities offered.
These tendencies, which had as their end results large-scale shifts of
Treasury securities into commercial banks, with accompanying increases
in the money supply, and upward pressure on prices of Treasury securi
ties which commercial banks are eligible to hold, were outgrowths of the
wartime “ pattern of rates” on Government securities which was largely
maintained from 1942 onward.

They are indicative of the problems

involved in maintaining such a structure of interest rates.

The wartime

rate pattern ran from % per cent for three month Treasury bills to
2 % per cent for bonds maturing or callable in about 25 years. So long
as such a rate pattern is maintained it gives assurance that a security
will move to a lower-yield basis and will rise in price as the period to
its maturity becomes shorter, until it begins to near its call or maturity
date. As confidence in the maintenance of the pattern of rates grew,
and the longer it was maintained, the more obvious became the advantages
of investing in long-term rather than short-term securities, and all classes
of investors, including commercial banks, tended to shift their buying to
the longer-term securities.
Commercial banks obtained funds for purchases of such securities
(as well as funds to meet the drains on their reserves resulting from
public demands for currency, and from transfers of deposits and in
creases in their reserve requirements) by selling Treasury bills to the
Reserve Banks, by selling other short-term securities, such as Treasury
certificates of indebtedness, in the market and, to some extent, by bor
rowing from the Reserve Banks on the collateral of short-term Treasury
securities at the preferential discount rate of

Per cent.

In view of the

general shift of demand to the longer-term securities, the Federal Reserve

THIRTY-FIRST ANNUAL REPORT

Banks were forced to become large buyers of short-term securities to
maintain stability in that section of the market.

In meeting the com

bined objectives of providing member banks with needed reserves and
exerting a stabilizing influence on the Government security market
during the war period, the Federal Reserve Banks bought a total of
about 22 billion dollars of Government securities, largely short-term.
This made it possible to finance a war which required an enormous
amount of funds, without rising rates of interest, an unprecedented
accomplishment.
It created problems, however, just as did other phases of the war
effort.

As long as the Federal Reserve System was under the necessity

of supporting the short-term section of the Government security market,
the initiative in determining the amount of Federal Reserve credit
available to the banks was shifted from the System to the commercial
banks, and effective control over the ability of the banks to expand their
investments and deposits was impossible.

It was evident at the end of

the year that these problems arising out of the wartime structure of
interest rates would by no means disappear with the completion of war
financing, but would continue and, in fact, were in some respects likely
to become accentuated.

While yields on the longer-term “ bank eligible’ ’

Treasury bonds had sagged considerably under the pressure of bank
buying because of the limited supply, yields on long-term “ restricted”
bonds had been fairly well maintained by periodic Treasury offerings of
such bonds in virtually unlimited amounts. With the close of the Victory
Loan, however, the prospect for further issues of long-term bonds was in
doubt because of the huge cash balance then held by the Treasury and
its greatly reduced need for funds. Meanwhile further accumulation
of funds in insurance companies, savings banks, trust funds, and in the
hands of other investors, which would be available for investment in
long-term Government securities, was practically certain, after the over
buying of the Victory Loan drive had been absorbed.

In the absence

of further issues of long-term bonds, investment of these funds in out
standing securities would tend to raise prices and lower yields, and thus
would tend to depress long-term interest rates.
A t the same time it appeared probable that commercial banks would
continue to buy Treasury securities in the market as long as they could
obtain the necessary funds easily and cheaply from the Reserve Banks.
There are still large amounts of medium-term Treasury securities (which
banks are eligible to hold) in the hands of savings institutions and other

FEDERAL RESERVE BANK OF NEW YORK

investors. Furthermore, as securities approach maturity, and their yields
decline to very low levels, they tend to be sold by other investors to the
banks.

The general tendency, therefore, would be for medium and

longer-term interest rates to decline further, and for the public debt to
shift into the banking system. The resulting “ monetization of the debt”
would be reflected in further growth in the money supply in the hands
of the public above the record level that resulted from war financing.
In view of the widespread shortages of goods and the accumulated de
mands and accumulated purchasing power, and jthe resulting inflationary
pressures on the general level of prices, the prospect of still further
growth in the money supply could not be regarded with indifference.
This posed serious problems for the Federal Reserve System and for
the Treasury.
A

m endm ents

e g u l a t io n s

and

In view of the great wartime growth in the money supply, and the
undesirability of unnecessary further extensions of credit, the Board of
Governors of the Federal Reserve System first increased margin require
ments for credit extended by brokers and banks to finance trading in
stock exchange securities, and then eliminated margin trading entirely.
By amendments of Regulations T and U, effective July 5, 1945, the
Board raised margin requirements from 50 per cent to 75 per cent.
Further amendments, effective January 21, 1946, raised the requirements
to 100 per cent, thereby eliminating margin trading and preventing any
further expansion of credit in connection with trading in listed securities.

Member Bank Earnings
Accounting of member bank earnings is neither precise nor uniform,
and no method of attempting to present an over-all picture seems to be
free of the possibility of misinterpretation. On the basis which this bank
has used for a number of years, in reporting bank earnings and expenses,
net profits, after income taxes, of member banks in this District increased
substantially further during 1945, averaging 11.6 per cent of total capital
funds, compared with 9.5 per cent in 1944, 7.2 per cent in 1943, and 4.4
per cent in 1942.*

Increases in reported profits in many cases, however,

were attributable in considerable measure to nonrecurrent additions to
current earnings.

Included among the nonrecurrent additions to current

earnings were a number of large recoveries on loans or investments pre
viously charged off or written down on the banks’ books, and other large
* Unweighted averages of ratios for individual banks.

THIRTY-FIRST ANNUAL REPORT

transfers from “ valuation reserves” to undivided profits or general
reserves. In addition, the relatively large profits taken by many banks
on securities sold during the past year may be considered at least partly
nonrecurrent.
Furthermore, the changes in bank profits from 1944 to 1945 were far
from uniform; over 200 banks, or more than one fourth of all banks
included in the annual survey, had smaller profits in 1945 than in the
previous year.

Such cases were especially numerous among the smaller

banks of the District, although they occurred also among the larger banks
outside New York City.
It was especially difficult, under the conditions which prevailed
during the past year, to arrive at figures which would reflect accurately
the current earning power of banks.

The reported net current earnings

of the banks, adjusted for taxes on current income, are not an adequate
measure, as it has been a common practice of the banks to take (in effect)
part of their income from investments in Government securities in the
form of capital gains.

This is done by selling securities at premium

prices and reinvesting in other securities which, after provision for
amortization of premiums, provide a lower rate of current income than
the securities originally held.

On the other hand, some banks continue

to follow the practice of using profits on securities sold for “ valuation
reserves” — that is, to write down the book value of securities in their
portfolios by applying profits taken on securities sold.

Such banks have

not reported large additions to current earnings in the form of capital
gains, but will not have to make provision for amortization of premiums
out of the future income from their investments as will banks that have
not followed that practice.
A quite different situation arises when unfavorable conditions pre
vail in the security markets, or in the economic situation generally.

such times net profits of the banks run lower than net current earnings
because of charge-offs or actual losses on assets.

Frequently, however,

these charge-offs or losses result, not from operations during the current
year, but from loans or investments made in prior years.
On the whole, it is probable that the net profits of member banks in
this District for 1945, as computed by this bank, give a somewhat exag
gerated impression of the banks’ earning power.

And it is difficult to

appraise accurately the prospect for bank earnings in the period ahead
since a number of conflicting factors are at work, some tending to increase
bank profits still further, and others tending to reduce them.

FEDERAL RESERVE BANK OF NEW YORK

Among the factors tending to cause further increases in bank profits
are the following:
1. At the end of 1945 banks held considerable amounts of Govern
ment securities purchased near the end of the year, from which
they received little income in 1945, but will receive income through
all, or a considerable part, of 1946.
2. Commercial and industrial loans have been expanding at a fairly
rapid pace in recent months, and may continue to increase.
3. While not many banks have been subject to the excess profits '
tax, banks generally will have the advantage of the reduction in
the combined normal and surtax rates on corporation income.
Among the factors tending to limit the further growth of bank
earnings or to cause reductions, the following may be listed:
1. Expenses for salaries and other items have been increasing and
will probably increase further.
2. Total bank earning assets are unlikely to continue the rapid
growth of war years because of the conclusion of war financing
in 1945, liquidation of loans on Government securities which were
made during the Victory Loan, and the use of part of the huge
Treasury working balances that resulted from the Victory Loan
to retire Government securities held by the banks.
3. Additions to current earnings in the form of capital gains and
recoveries are likely to be smaller. Banks apparently are running
out of assets on which further recoveries are possible, and oppor
tunities for profit-taking may be limited.
4. Profits taken on securities sold in 1945 and previous years, and
replacement purchases at premium prices will require greater
deductions from current income for amortization of premiums,
and hence result in lower rates of income from investment
portfolios.
These conflicting forces will, of course, affect individual banks dif
ferently, and it would not be surprising if the experience of individual
banks in the period ahead showed even greater diversity than in 1945.
On the whole, it seems unlikely that bank profits will continue the rapid
growth of the past three years, and it is possible that some reversal of
that trend may occur.

THIRTY-FIRST ANNUAL REPORT

Organization of the World Fund and Bank
The last report of this bank contained a brief summary of the
Articles of Agreement of the International Monetary Fund and of the
International Biank for Reconstruction and Development drawn up by
44 nations at the United Nations Monetary and Financial Conference
held at Bretton Woods, New Hampshire in July 1944.

These agreements

were to be referred to their respective governments for formal adoption
or rejection.

They were to come into force no later than December 31,

1945, and only when signed on behalf of governments having 65 per cent
of the aggregate quotas and 65 per cent of the aggregate subscriptions
in the case of the Fund and the Bank, respectively.
The United States was the first country to act upon the agreements.
Following several months of hearings in the spring and summer of 1945
before the House and Senate Committees on Banking and Currency,
enabling legislation to provide for American participation in the Fund
and Bank, known as the “ Bretton Woods Agreements A ct” , was passed
by Congress and approved on July 31, 1945 by the President.

In addi

tion to authorizing the President to accept membership for the United
States in the two organizations, the Act contained a series of important
provisions relating to American participation therein.

The major pro

visions are as follows:
1. The Act provides for the establishment of a National Advisory
Council on International Monetary and Financial Problems, to consist of
the Secretary of the Treasury, Secretary of State, Secretary of Com
merce, Chairman of the Board of Governors of the Federal Reserve
System, and Chairman of the Board of Trustees of the Export-Import
Bank.

The essential purpose of the Council is to coordinate the policies

and operations of the American representatives on the Fund and the
Bank and of all agencies of the Government which make or participate
in making foreign loans or which engage in foreign financial, exchange,
or monetary transactions.

The Council will advise and consult with the

President and with the American representatives on the Fund and the
Bank regarding major problems arising in the administration of the
two institutions; it will recommend to the President general policy direc
tives for the guidance of these representatives; and it will periodically
publish reports evaluating the operations and policies of the two
institutions.
2. The Secretary of the Treasury is authorized to use the 1.8 billion

FEDERAL RESERVE BANK OF NEW YORK

dollars of gold in the inactive account of the Exchange Stabilization
Fund to pay part of the American subscription to the International Fund
(amounting to 2,750 million dollars).

The balance of 950 million dollars,

as well as such payments as are required on the American subscription to
the Bank (amounting to 3,175 million dollars) are to be met from
proceeds of securities to be issued under the Second Liberty Bond Act
as amended.

In order to keep to a minimum the cost of participation

in the institutions, the Secretary of the Treasury is authorized, to the
extent permitted under the Articles of Agreement, to substitute for dol
lars held by the Fund or Bank noninterest bearing, nonnegotiable special
notes of the United States payable on demand.
3. The American representatives on the Bank are directed to obtain
an official interpretation from that institution as to its authority to make
or guarantee loans for programs of economic reconstruction and the
reconstruction of monetary systems and, if necessary, to propose and
support an amendment to the Articles of Agreement so as to permit such
loans.

The American representatives on the Fund are similarly directed

to obtain an official interpretation from the Fund as to whether it has
the authority to use its resources (1) other than for current monetary
stabilization operations which afford temporary assistance to members or
(2) to provide facilities for relief, reconstruction, armaments, or financing
large or sustained capital outflows, and, if necessary, to propose and
support an amendment negativing such interpretation of (1) and (2).
4. The Act suspends the operation of the so-called Johnson Act of
1934 with respect to members of the Fund and Bank.
5. The American Governor of the Fund and Bank is to be the same
person, and he is to have a single alternate.
It was not until late in the year that other countries, sufficient in
number to make it operative, adopted the Bretton "Woods program.
This delay was partly attributable to the reluctance of Great Britain
to adhere until it was assured of special financial aid from the United
States to meet its transitional balance of payments difficulties, and to the
reluctance of other countries to act until Britain had done so.

The

conclusion of negotiations concerning an Anglo-American Financial
Agreement on December 5, however, was quickly followed by the ad
herence to the Fund and Bank of Britain and a large number of other
countries.

On December 27, twenty-eight countries, including the United

States, with combined quotas and subscriptions in excess of the required

THIRTY-FIRST ANNUAL REPORT

minimum of 65 per cent, formally signed the Articles of Agreement in
a ceremony held in Washington*. By December 31, 1945, the latest date
on which the Articles of Agreement could come into force, another seven
countries had joined.
Initial steps in the organization of the Bretton Woods institutions
as going concerns were taken at the inaugural meetings of the Boards of
Governors of the Fund and Bank held at Wilmington Island, Savannah,
Georgia, from March 8 to 18, 1946.

At these meetings the Boards of

Governors admitted three new members, El Salvador, Nicaragua, and
Panama, to the two institutions on the same terms as the charter
members.

A quota and subscription of 68 million dollars in the Fund

and the Bank, respectively, were allotted to Denmark, and on March 31
that country formally adhered.

The present membership in the Fund

has thus been raised to thirty-nine, with aggregate quotas of 7,397.5
million dollars, and in the Bank to thirty-eight, with aggregate subscrip
tions of 7,670 million dollars.

The period for admission, on the same

terms as the charter members, of the countries which attended the Bretton
Woods Conference in July 1944, but did not sign the Articles of Agree
ment by December 31, 1945, was extended to December 31, 1946.

This

concerns the Soviet Union, Australia, New Zealand, Venezuela, Haiti,
and Liberia.
Seven Executive Directors were elected at the meetings, in accord
ance with the Articles of Agreement, to each of the two institutions (in
addition to the five directors appointed in each case by the United States,
the United Kingdom, France, China, and India). The individuals elected
to the Executive Directorate of the Fund were from the following coun
tries: Belgium, Brazil, Canada, Czechoslovakia, Egypt, Mexico, and the
Netherlands.

The Executive Directors elected for the Bank were from

Belgium, Canada, Chile, Cuba, Greece, the Netherlands, and Poland.

the event that the Soviet Union adheres to the organizations by December
31, 1946, and thus becomes one of the “ Big Five” entitled to representa
tion on the directorates of the Fund and Bank, arrangements will be
made whereby India will continue to have representation on the Executive
Directorate of each until the next general election of directors two years
hence.

It was agreed that each Executive Director or his alternate must

be continuously available at the head office of the Fund and Bank.
Maximum salaries of $30,000 were voted to the Managing Director of
* Only twenty-seven countries signed the Bank Agreement, Colombia having adhered
to the Fund but not the Bank.

FEDERAL RESERVE BANK OF NEW YORK

the Fund and the President of the Bank, $17,000 to each of the twelve
Executive Directors, and $11,500 to each of their alternates.
salaries are to be net after taxes.

All these

The salary of any Executive Director

or alternate who devotes only part of his time to the business of the
Fund or the Bank will be prorated.
Washington was selected as the permanent headquarters of the two
institutions.

By-laws relating to organizational and procedural matters

were also adopted at the meetings.
The first meeting of the Executive Directors of the two institutions
is scheduled to take place early in May.

At that meeting the Managing

Director of the Fund and the President of the Bank will be elected.
Other matters on the agenda will include the date when operations will
commence, applications for membership, applications for loans from the
Bank, and recommendations regarding the selection of the Bank’s Ad
visory Council.
The following table shows the quotas and subscriptions of the prin
cipal members of the Fund and Bank, on the basis of present membership.
(In millions of dollars)
Country

Fund quota

Bank subscription

United States......................................................
United Kingdom ...............................................
China ..................................................................
France ................................................................
India ....................................................................
Canada ................................................................
Netherlands ........................................................
Belgium ..............................................................
Brazil ..................................................................
Czechoslovakia ..................................................
Poland ................................................................
Union of South Africa .....................................
Mexico ................................................................
Denmark ............................................................
Yugoslavia ..........................................................
Chile ..................................................................
Colombia ............................................................
Cuba ....................................................................
Norway ..............................................................
Egypt ..................................................................
Greece ................................................................
All other countries ...........................................

2,750
1,300
550
450
400
300
275
225
150
125
125
100
90
68
60
50
50
50
50
45
40
144.5

3,175
1,300
600
450
400
325
275
225
105
125
125
100
65
68
40
35

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

7,397.5

7,670

—

35
50
40
25
107

THIRTY-FIRST ANNUAL REPORT

The United States Balance of International Payments
W

a r t im e

evelopm ents

The end of hostilities in August 1945 brought to a close a period in
which the balance of payments between the United States and foreign
countries undoubtedly was subjected to more rapid and fundamental
shifts than at any time in the financial history of the country.

The

year-to-year impact of the war on this country’s international financial
and commercial transactions has been discussed in previous Annual Re
ports.

It will be recalled that the transition of the balance of inter

national payments from a peacetime to a wartime basis went through
two principal phases roughly corresponding to, first, the period of our
neutrality when aid to the Allies was on a “ cash and carry” basis and,
second, the period of lend-lease assistance.

Aside from an increase in the

volume of transactions, the entry of the United States into the war as
a combatant had no profound effect on the balance of payments, for
by that time most of the shifts had crystallized into a well defined pattern.
Throughout the entire six years of war the dominant feature in the
balance of payments was the unprecedentedly large surplus of merchan
dise exports, reflecting the shipment of war equipment and food to the
Allies. Despite a marked rise in our imports as a result of our purchases
of strategic materials abroad, this country’s merchandise export surplus
rose to a peak of over one billion dollars in May 1944, the month prior
to the invasion of Europe, and totaled 33 billion dollars during the six
years ended August 1945. In addition to the huge expansion in our net
exports, the foreign trade of the United States was subject to far-reaching
changes in both the character and flow of trade.

Exports to the con

tinental European countries virtually disappeared, while the United
Kingdom, Russia, and to a lesser extent our non-European Allies, became
the principal recipients of our exports— largely war supplies.

On the

import side, new sources of supply had to be developed to meet the
demands of our war production and to compensate for the loss to the
enemy of areas, chiefly in the Far East, on which we had previously
relied for raw materials.
Before the inauguration of the lend-lease program, the large net
export of merchandise at first was accompanied in the balance of pay
ments by a net gain of gold from abroad, as the Allies, particularly the
United Kingdom, endeavored to finance their overseas purchases.

From

FEDERAL RESERVE BANK OF NEW YORK

the end of August 1939 to the end of October 1941 (when the movement
was reversed) the net gain of gold from abroad amounted to 5.7 billion
dollars.

This was in addition to the 3.5 billion dollars (net) of foreign

gold which had been sold to the United States Treasury in the 13 months
prior to the outbreak of hostilities.

Toward the end of 1940 the heavy

inflow of gold was supplemented by, and later supplanted by, a largescale liquidation of foreign-owned dollar assets.

From the end of Sep

tember 1940 to the end of February 1942, foreigners liquidated their
holdings of banking funds and securities to the extent of over 700
million dollars, about half of which represented sales of American
securities.

To this must be added the sale of such foreign-owned business

enterprises as the British-controlled American Viscose Corporation.
In the second phase of the wartime balance of payments our net
export of goods was offset primarily by the extension of lend-lease
assistance.

From the enactment of the Lend-Lease Act on March 11,

1941 through September 1945, when virtually all such assistance was
terminated, a total of 44 billion dollars of goods and services was pro
vided to foreign governments and an additional 2.1 billion, not charge
able to foreign governments, was used to expand production facilities in
the United States and for other purposes related to the lend-lease
program.

The British Empire received by far the largest share, amount

ing to 30.3 billion dollars, or 69 per cent, of the total aid extended to
foreign governments.

The Union of Soviet Socialist Republics acquired

the next largest amount— 10.8 billion dollars or 25 per cent of the aggre
gate. The remaining 6 per cent was scattered over a large number of
countries, principally France, China, the American Republics, and the
Netherlands.

Actual exports under the lend-lease program amounted to

32.5 billion dollars, of which 17.7 billion were in the form of munitions,
12.7 billion in industrial and agricultural products, and 2.1 billion in
petroleum products.

On the other hand, the United States received

through June 1945 a total of 6.3 billion dollars of reverse lend-lease aid
from our Allies.

The bulk, or 5.9 billion dollars, was provided by the

British Commonwealth of Nations.
Supplementing the lend-lease program, which relieved the pressure
on the remaining gold and dollar exchange resources of the United Nations,
the United States Government’s wartime expenditures abroad placed
sizable amounts of dollar exchange at the disposal of many foreign coun
tries.

According to data collected by the Clearing Office for Foreign

THIRTY-FIRST ANNUAL REPORT

Transactions of the Department of Commerce, the Government spent
14.8 billion dollars abroad during the period from July 1, 1940 to Sep
tember 30, 1945.

These dollar disbursements, which were in addition to

civilian relief as well as lend-lease assistance, included 7.6 billion for our
military expenditures abroad and 7.2 billion for nonmilitary outlays—
largely for the purchase of supplies and materials. Of the 14.8 billion
dollar total, 6.9 billion dollars were disbursed in the British Common
wealth, and 3.9 billion in the American Republics.

Partially offsetting

the outlays, dollar receipts (excluding reverse lend-lease aid) totaled 4.7
billion dollars during the same period.

About 2.6 billion of this amount

was received from the British Commonwealth.
As a result of our heavy wartime expenditures abroad at a time
when most war materiel was being shipped abroad on lend-lease terms
and when civilian goods, for the most part, were not available for export,
dollars began to accumulate in foreign accounts, thus reversing the trend
in the early phase of the war.

To a large extent these funds were con

verted into gold which mostly remained under earmark in New York,
although sizable amounts were exported.
Wartime changes in foreign holdings of short-term dollar assets
and estimated foreign gold reserves can be seen from the chart on page 31,
which shows such holdings at the beginning of the war, in June 1941,
and at the end of hostilities in August 1945. When the war began the
monetary gold reserves of all foreign countries (exclusive of the
U.S.S.R.) amounted to an estimated 10.8 billion dollars, compared with
16.6 billion held by the United States. The bulk, or an estimated 8.9
billion, of foreign holdings was owned by the European countries.
The Latin American nations, many of whose gold reserves had been seri
ously depleted in the early 1930’s, held only about 700 million dollars
of gold in August 1939.

Reflecting the heavy drain in the early phases

of the war, the European gold reserves by the middle of 1941 had declined
to about 5.7 billion dollars, indicating a reduction of nearly 40 per cent
from the prewar level.

On the basis of published figures the United

Kingdom gold reserves alone receded from 2 billion dollars in August
1939 to 300 million at the end of 1940.

Several of the neutrals also lost

considerable amounts of their gold in the early part of the war, largely as
the result of a flight of capital induced by fears of a German invasion.
Swedish reserves declined by over 200 million dollars to 150 million
during the first year of hostilities, while the Swiss gold stock was drawn

FEDERAL RESERVE BANK OF NEW YORK

Foreign Holdings of Short Term Dollar A ssets and Estimated Foreign Gold Reserves*

down by about 100 million to a low of 489 million dollars.

On the other

hand, some increase during the period from August 1939 to June 1941
was shown in the gold reserves of non-European countries. This was
due chiefly to a rise of over 100 million dollars, or about 20 per cent,
in Latin American holdings and an increase from 222 million to 427
million dollars in the Union of South Africa reserves (included in the
“ All Other” group in the chart).
In the latter part of 1941 many countries, especially the Latin
American nations and the European neutrals, began to acquire sizable
amounts of gold through the conversion of their current acquisitions of
dollar exchange.

This gold buying program continued with little inter

ruption throughout the remainder of the war, and by the end of August
1945, all foreign countries, exclusive of the Soviet Union, had built up
their gold reserves to about 13.8 billion dollars, or 3 billion above the
amount held at the outbreak of hostilities.

Percentagewise, the largest

increase during the entire war period occurred in the South African

THIRTY-FIRST ANNUAL REPORT

reserves, which rose more than fourfold to 909 million dollars, and in the
Latin American holdings, which also increased about four times to an
estimated 2.8 billion dollars.

Argentina, Brazil, Mexico, and Venezuela

were the principal gainers in the latter group.

European gold reserves,

at about 8.5 billion dollars in August 1945, were about 500 million dollars
below the prewar level.

By August 1945 the Swiss holdings had accumu

lated to 1,084 million dollars, or nearly double the August 1939 level and
the largest amount on record, while the gold reserves of Sweden had
risen to 479 million, or 124 million above the prewar level and also a new
record high.

The building up of the neutrals’ gold stocks, however, was

more than offset by the wartime reduction in those of the European
allied nations.
Supplementing the rise in foreign holdings of gold, short-term
dollar assets held by foreigners, as can be seen from the chart, increased
by a net amount of 3.2 billion dollars (from 3 billion to 6.2 billion)*
during the war period.

Significant increases occurred in the holdings

of Canada (included in the “ All Other” group on the chart) and Latin
America.
P

ostw ar

evelopm ents

Although sufficient time has not elapsed to foresee the precise pat
tern of the United States balance of international payments in the post
war period, by the end of 1945 there were many indications of the return
of this country’s international commercial and financial transactions to
a peacetime basis. This transition began immediately after V-J Day,
when President Truman terminated virtually all lend-lease transfers of
goods and services, except those for which arrangements calling for full
or substantial down payments were completed prior to the exportation
of the merchandise.

Lend-lease exports dropped from a peak of more

than a billion dollars a month around the time of the invasion of France,
and a monthly average of about 900 million a month during the re
mainder of 1944, to a monthly rate of around 500 million dollars shortly
after V -E Day in May, and declined steadily after V-J Day to 75
million in October 1945.

Concurrent with the reduction in lend-lease

shipments, commercial exports rose steadily after V -J Day, amounting
to 458 million dollars in December.

As a result of this expansion in

our cash export trade, together with some curtailment in the rate of
* Furthermore, owing largely to a repatriation of American funds abroad, short-term
claims on foreigners were reduced by 187 million dollars during the war period.

FEDERAL RESERVE BANK OF NEW YORK

importation, the latter part of 1945 witnessed a complete reversal in
our merchandise trade balance— from an excess of imports over cash
exports to a surplus of cash exports over imports.

During November

and December total commercial exports exceeded imports by nearly 300
million dollars.
At the same time that the foreign needs for dollars to cover
purchases here were increasing, United States Government wartime
expenditures abroad were declining abruptly.

The magnitude of this

reduction can be seen from the fact that payments to foreign accounts
effected by this bank on behalf of United States Government departments
and agencies had declined to less than 40 million dollars in December
1945, as compared with a monthly average of around 100 million during
the summer of 1945 and with a peak of over 200 million in January 1945.
Reflecting these developments, the accumulation of dollar exchange
in foreign accounts, which had been one of the dominant characteristics
of the wartime balance of international payments, was halted in Novem
ber, when a net “ outward” movement of slightly over 130 million dollars
occurred.

This appears to be the largest reported net capital “ outflow”

for any month on record.

There was also a noticeable shift in the inter

national flow of gold in the latter part of 1945.

The net loss of gold

through foreign purchases here dropped from a monthly average of 110
million dollars in 1944 to about 50 million during the first nine months of
1945. The movement was reversed in October, when a 30 million dollar
net gain of gold from abroad was shown. This was the first significant
net gain of gold in about three years.
The renewed liquidation of foreign-owned dollar assets which first
became apparent toward the end of 1945 is perhaps the beginning of a
large postwar export of capital (interpreting that term broadly to
include the use of funds accumulated here during the war to pay for
postwar purchases of goods from the United States).

The primary

demand upon the liquid funds which foreign countries accumulated
during the war will, of course, come from the unprecedented need for
capital goods for reconstruction and rehabilitation and for industrial
and transportation equipment,
possible during the war.

the replacement

of which was not

Furthermore, there is a huge pent-up demand

for consumers ’ goods, which this country was unable to supply during
the war.

Finally, following the establishment of more stable economic

and political conditions abroad, there may be some repatriation of

THIRTY-FIRST ANNUAL REPORT

private foreign funds which fled to the United States in the period of
tension leading up to the war; that is, to the extent that these funds
have not been requisitioned by the monetary authorities of the countries
concerned.
Of perhaps more importance than the “ outflow” of foreign capital
will be the export of American capital in the form of foreign loans.
Thus far the principal credits extended to foreign countries have come
from United States Government agencies, chiefly the Export-Import
Bank.

On July 31, 1945 a new Export-Import Bank Act was approved,

providing, among other things, for the expansion of the bank’s lending
power from 700 million dollars to 3.5 billion.

During the last half of

1945 new commitments of slightly over 1 billion dollars were made by
the bank, as shown in the accompanying chart depicting total new
commitments authorized, by type, for various periods since September
1940.

Since V-J Day the credits extended by the Export-Import Bank

New Commitments Authorized by Export-Import Bank, for Periods Indicated
MILLIONS
OF DOLLARS

10001

------OTHER LOANS

// //
/////-

900
DEVELOPMENTAL LOANS
TO LATIN AMERICA

800
700
600

77/77.
/////

////< •
/ / / ''A
/,.///.
/////.
////'J
//////

RECONSTRUCTION LOANS

/////,

L E N D -LE A S E TAKE-OUT
LOANS

500
400
300

200
100

0
SEP 2 6 ,’4 0

T >*
O

DEC 3 1 , 4 0 *

1941

1942

1943

1944

JAN 1,’4 5 JU L 1,’4 5
TO .
JA,
JUN 3 0 ,4 5 DEC 31/45

* Lending power of Export-Im port Bank increased from 200 to 700 million dollars, September
26, 1940.
t Lending power o f Export-Im port Bank increased to 3,500 million dollars, July 31, 1945.

FEDERAL RESERVE BANK OF NEW YORK

have been of two principal types.

The first, and most important, has

been “ lend-lease take-out” loans designed to facilitate the financing of
goods which had been requisitioned under the lend-lease program but
which had not been contracted for as of Y -J Day.

Of the 1 billion

dollars of new commitments made during the last six months of 1945,
655 million were for three of such credits— 550 million dollars to France,
55 million to Belgium, and 50 million to the Netherlands.

All carry

2 % per cent interest and are repayable over a 30 year period.

A total of

15.6 million dollars had been disbursed under the Netherlands credit by
the end of 1945, while neither the French nor Belgian credit had been
drawn upon.
The second type of Export-Import credit extended under its expand
ed lending program has been for the purpose of assisting liberated
foreign countries to finance the purchase of United States goods needed
for reconstruction.

During the second half of 1945, commitments for

these “ reconstruction” loans totaled 265 million dollars.

These credits,

which are repayable in 30 semiannual instalments beginning 1951, in
cluded 50 million dollars each to the Netherlands and Norway, 45 million
to Belgium, and 20 million to Denmark.

The remainder consisted of a

100 million dollar “ cotton” credit line to European countries to finance
the purchase of raw cotton in the United States.

In addition to the

reconstruction credits granted during 1945, commitments of somewhat
over 400 million dollars were reported to have been made during the first
quarter of 1946. This total was made up of a 200 million dollar com
mitment reportedly extended to the Netherlands, 100 million to the
Netherlands East Indies, two commitments aggregating slightly over 66
million dollars to China, 35 million to Finland, and 25 million to Greece.
As in the case of the “ lend-lease take-out” credits, actual disbursements
under the so-called reconstruction credits have as yet been small.
The remainder of the 1 billion dollars of commitments made in the
last 6 months of 1945 consisted primarily of the usual “ developmental”
loans to Latin American countries and credit accommodations granted to
American exporters.
In addition to the Export-Import Bank’s foreign lending program,
sizable credits will arise from the financing of goods in the lend-lease
“ pipe-line” , namely, goods which had been contracted for but not
delivered prior to Y -J Day.

Recipient countries are required to pay for

these goods in cash or by credit, or by supplying goods and services to

THIRTY-FIRST ANNUAL REPORT

the United States.

According to the President’s recent Budget Message,,

credits for this purpose, amounting to 675 million dollars, have already
been extended to the Soviet Union, France, the Netherlands, and Bel
gium.

Credits are also being negotiated with countries that had been

receiving lend-lease aid, to finance the disposition of lend-lease inven
tories and installations and surplus property.

None of these credits,

however, will involve new expenditures by the Government; rather they
represent deferred payment for goods and services provided to other
countries.
In addition to the loan accommodations extended during 1945, con
siderably larger Government credits remained for consideration in 1946.
The proposed financial agreement with the United Kingdom alone in
volves 4.4 billion dollars, including 650 million to be used in final
settlement of lend-lease balances.

Sizable credits have also been sought

by other countries, including France and Russia.
As to private loans, a 100 million dollar accommodation was granted
in February 1945 to the Royal Netherlands Government by a group of
New York banks, secured entirely by gold held in New York.

New York

banks also extended a credit of 16 million dollars to Norway.

Aside

from these credits and participations in credits guaranteed by the ExportImport Bank, the export of capital on private account has not as yet
assumed significant proportions. As conditions abroad become more
attractive to foreign capital, it is expected that private American capital
will again move abroad, both in the form of short and medium-term
bank credit, and of portfolio and direct investments. However, a larger
channel for American investments abroad is expected to develop during
the coming year through the establishment of the International Bank
for Reconstruction and Development. When both Governmental and
private loans are considered, it is probable that the postwar period will
witness an export of American capital in excess of the movement which
occurred after the first World War.

Foreign Exchanges
Although some progress was made during 1945 toward the resump
tion of peacetime international trade and finance, the New York foreign
exchange market, for the most part, continued in much the same state of
controlled quiet which had prevailed throughout the war.
Even in the case of the pound sterling activity was on a compara

FEDERAL RESERVE BANK OF NEW YORK

tively small scale. Considerable interest, however, developed in sterling
exchange following the British announcement on June 30 that, as of
July 2, all United States Registered Sterling Accounts and the “ Central
American Sterling Accounts” of 13 Latin American countries would
be converted into “ American Sterling Accounts” .

Sterling in the

new accounts is freely available for transfer to any other American
Account, as well as for payments to residents in the sterling area.
Holders of the old United States Registered Accounts were guaranteed,
up to September 30, convertibility of the balances held on June 30 at
the official rate of $4.02%.

With this exception, the exchange guarantee

at the official rate established in 1940, was withdrawn and subsequent
conversions were to be made at “ the rate of the day” .
Following the announcement of these changes, the spot quotation for
sterling in the New York market receded to a low of about $4.02% in
August and again in September, after having held at $4.03% during the
first half of 1945. At the same time, the forward rate for sterling showed
a marked reaction, the discount on three months’ deliveries widening in
September to 8 % cents, equivalent to 8.08 per cent per annum.

This

compared with the forward quotation of 1 % cent discount for three
months for approved commercial transactions set by the Bank of England
on August 1.

The rates subsequently recovered, however, and by early

October the spot quotation had returned to $4.03%, which level was
maintained during the remainder of the year.

The forward rate also

strengthened after the September reaction, the three months’ discount
narrowing to as little as *4 cent
early December.
Also indicative of a return to more normal conditions, the British
Treasury in June announced a new official buying price for gold. The
new price, at 172 shillings 3 pence a fine ounce, is, at the rate of $4.03%,
the equivalent of about $34.75 an ounce.

A t the time of the change, the

British authorities stated that the former price of 168 shillings an ounce
(equivalent to about $33.89 an ounce), which had been fixed in September
1939, took into account abnormal wartime charges, including war risk
insurance and possible variations in freight rates.

The new price, which

represented an adjustment to “ substantially reduced” shipping risks
because of the end of hostilities in Europe, would, it was stated, be more
closely in line with a peacetime gold shipping parity with New York.
The British Treasury emphasized that the change did not indicate any
alteration in policy, either with respect to exchange rates or attitude
toward gold.

THIRTY-FIRST ANNUAL REPORT

After the liberation of France, new French exchange regulations
were issued in April 1945 providing for the resumption of financial
relations with the United States.

These regulations provided for the

opening of new franc accounts by American banks with French cor
respondents approved by the French Exchange Control.

Although old

franc accounts remained subject to previous regulations until further
notice, the new free accounts (“ Comptes Etrangers Libres” ) can be
credited with the proceeds of any dollar sales to the Banque de France,
and with transfers from any other free account.

Funds in the new

accounts can be used for payments or transfers to residents’ accounts
and are freely convertible into dollars.
Toward the end of 1944, the French franc was fixed at a rate equiva
lent to about $0.02, or virtually the same as that previously used for con
version purposes by the United States Army.

This rate continued until

December 26, 1945, when the long-expected devaluation of the French
franc was announced.

On that day the French Parliament approved the

Ministry of Finance’s proposal to depreciate the external value of the
franc by approximately 60 per cent and to fix new official buying and
selling rates for the dollar in Metropolitan France of 118.90 francs to
the dollar (equivalent to $0.008410) and 119.30 francs (equivalent to
$0.008382), respectively. With respect to other French territories, the
new rates fixed for St. Pierre and Miquelon and French African colonies
(equal to about $0.0140), and for Indo-China (equal to roughly $0.1400)
represented a depreciation of only about 30 per cent.

The rates for

New Caledonia and French Oceania and for Lebanon-Syria remained
virtually the same, vis-a-vis the dollar, as existed before the devaluation
of the Metropolitan franc.
As a result of rumors circulating in the New York market prior to
the devaluation, there was some increased activity in French exchange;
the activity subsided, however, soon after the announcement of devalua
tion and New York quotations held steady at about $0.0084%, or close to
the new French official rates.
Devaluations occurred in a number of other European exchanges
following liberation.

In April 1945, the Banque Nationale de Belgique

set its buying and selling rates for the dollar at 43.70 and 43.96 francs,
respectively.

These rates are equivalent to about $0.02288 and $0.02275

a franc or roughly 30 per cent below the prewar level.

The Finnish

FEDERAL RESERVE BANK OF NEW YORK

markka has undergone three devaluations since the end of last May, and
the rate at the end of the year was equivalent to about $0.0074, as com
pared livith about $0.02 prior to the end of May 1945.

One of the most

severe depreciations occurred in the Greek drachma, which at the
end of the year was quoted at the equivalent of about $0.20 per 100
drachmai and which in January 1946 declined to $0.02 per 100
drachmai; this compared with about $0.67 per 100 drachmai in May
1945.

On the other hand, the rates set for Denmark and Norway after

liberation are virtually the same as those existing prior to the German
occupation of those countries.

The so-called free rate for the Swiss franc,

which fluctuated widely in the early part of 1944, became stabilized later
in that year and continued to hold relatively steady during 1945.

The

New York rate for this exchange rose to a high of $0.2380 late in
October, but subsequently reacted somewhat to close 1945 at about
$0.2345-$0.2365, as compared with $0.2325-$0.2340 a year earlier.
Among the Western Hemisphere exchanges, the high degree of
stability, which had been apparent throughout most of the war, con
tinued during 1945.

The rate for the Canadian dollar in unofficial deal

ings in the New York market firmed somewhat in the first half of the
year to reach a high of $0.9100 in June, and closed the year at $0.9075,
to show a small net appreciation for the year as a whole.

On October

13 the Canadian Foreign Exchange Control Board announced that, ef
fective October 15, its selling rate for United States dollars had been
changed from 11 per cent premium (equivalent to U. S. $0.9009) to
10% per cent premium (equivalent to about U. S. $0.9050). The buying
rate, however, remained at 10 per cent premium (U. S. $0.9090). It
was also announced that the Board had made “ swap” facilities in
United States dollars available to residents of Canada for financing com
mercial operations involving the production and distribution of goods.
The rate for “ swap” transactions was established at 3/16 of 1 per cent
premium for each 30 days.
Exchange rates for the various Latin American currencies were
quite steady, except for some fluctuations in the “ free” rate for the
Argentine peso.

Moderate strength was shown in this rate during the

early part of 1945, when it rose from $0.2486 in January to $0.2515 in
March. A slightly easier tendency then became evident, and in the latter
part of the year some pressure was reported to have developed.

This

pressure was attributed in part to the year-end remittance of dividends

THIRTY-FIRST ANNUAL REPORT

and profits to the United States, and possibly also in part to a flight of
capital induced by political developments.

By the end of 1945 the

“ free” rate for Argentine exchange had receded to $0.2468.
The only other noteworthy movement in Latin American rates oc
curred in the noncontrolled rate for the Uruguayan peso.

This rate,

after closing 1944 at $0.5425, held at about this level until July, when,
following the temporary withdrawal of the Uruguayan authorities from
the market, it rose abruptly to $0.5637%.

A further slight rise brought

the rate in October to a high of $0.5650, at which it was quoted at the
end of 1945.

The rates quoted in the New York market for Brazilian,

Cuban, Mexican, and Venezuelan exchange continued during 1945 to
maintain their previously existing levels.

Foreign Relations of the Federal Reserve System
Resuming the rise which occurred in 1942, 1943, and the early part
of 1944, the amount of funds (dollar balances, earmarked gold, United
States Government securities, and other investments) held by the Fed
eral Reserve Banks for account of foreign central banks and govern
ments, rose to a new high total of 6,971 million dollars in September
1945.

Subsequently, however, the total receded somewhat to 6,830 mil

lion at the close of the year, compared with 6,122 million at the end of
1944. The net increase for 1945 was due primarily to further increases
in foreign holdings of earmarked gold and United States Government
securities, both of which rose to new highs in October, and, after some
decline in the latter part of 1945, showed net gains of 357 million and
694 million, respectively, for the year as a whole. Gold held under ear
mark at the Federal Reserve Banks at the end of 1945 amounted to
4,294 million dollars (including about 100 million earmarked for do
mestic banks as security for a foreign loan).

Dollar balances, on the

other hand, continued to decline from the high point of 1,650 million
dollars reached in May 1944, and at the close of 1945 amounted to only
861 million dollars.
The export of gold released from the earmarked holdings of foreign
central banks and governments, which first became apparent in 1943,
continued during 1945 but in much smaller volume than in the previous
year.

However, despite the smaller exports in 1945, the net increase in

the amount of gold held under earmark for foreign account was also
smaller than in 1944, owing to reduced purchases.

FEDERAL RESERVE BANK OF NEW YORK

Considerable progress was made during 1945 in reconverting to a
peacetime basis this bank’s dealings with a number of its foreign cor
respondents.

A number of accounts which had been dormant for some

time were reactivated during the year.

Included in these were several

European central bank accounts which had become inactive when the
control of the funds held therein was transferred to the governments in
exile.

In addition, one new foreign account was opened on the books of

the Federal Reserve Bank of New York, acting on behalf of itself and the
other Federal Reserve Banks.
The Federal Reserve Banks during 1945 made a series of short
term advances, secured by gold held in New York, to a Latin American
central bank, the largest amount outstanding under this agreement being
12 million dollars.

In addition, a short-term loan of 35 million dollars,

also secured by gold here, was made to the government of a liberated
European country.
Steps taken by the governments of the Netherlands and Denmark
toward currency reform were reflected in arrangements whereby this
bank agreed to receive and hold for the account of the Netherlands
Government and Danish National Bank, respectively, old Dutch and
Danish currency owned in the United States which were called in by the
monetary authorities of these countries.

The owners of the currency are

to be reimbursed by the Dutch and Danish authorities after the latter
have satisfied themselves that the currency is genuine and was acquired
legitimately. This bank also entered into agreements during the year
with three foreign central banks to act as their agent in the purchase
and sale of cable transfers payable in their currencies.

Operations of the Bank in 1945
The operations of the bank remained at a very high level as long as
the war continued, and showed only slight contraction after it ended.
For the year as a whole, the volume of operations was fully as great
as in 1944.
Operations conducted by the bank as fiscal agent of the United
States, which accounted for a considerable part of the great increase in
the bank’s work during the war, showed little abatement on the whole,
although some wartime operations were approaching completion. Despite

THIRTY-FIRST ANNUAL REPORT

Some Measures of the Volume of Operations of the
Federal Reserve Bank of New York
1945
Number of pieces handled*
Discounts and advances .............................................
Currency received and counted .................................
Coin received and counted .........................................
Checks handled:
United States Government checks .....................
All other ................................................................
Collection items handled:
United States Government coupons paid** . . . .
All other ................................................................
Disbursements as fiscal agent for
Reconstruction Finance Corporation, its subsidi
aries, and Commodity Credit Corporation. .
Issues, redemptions, and exchanges by fiscal agency
departments:
United States Government direct obligations . .
All other ................................................................
Safekeeping of securities:
Pieces received and delivered .............................
Coupons detached ................................................
Wire transfers of funds .............................................
Incoming and outgoing mail:
Registered ..............................................................
Ordinary ................................................................
Amounts handled
Discounts and advances ...............................................
Currency received and counted .................................
Coin received and counted .........................................
Checks handled:
United States Government checks .........................
All other ................................................................
Collection items handled:
United States Government coupons paid** . . . .
All other ................................................................
Disbursements as fiscal agent for
Reconstruction Finance Corporation, its subsidi
aries, and Commodity Credit Corporation. .
Issues, redemptions, and exchanges by fiscal agency
departments:
United States Government direct obligations . .
All other ................................................................
Safekeeping of securities:
Pieces received and delivered (par value) . . . .
Wire transfers of funds .............................................

1944

3,000
799,990,000
1,563,245,000

2,000
803,124,000
1,474,796,000

103,989,000
237,303,000

93,956,000
231,733,000

6,529,000
1,052,000

5,716,000
1,111,000

136,000

189,000r

55,575,000
244,000

53,343,000
330,000

67,030,000
1,207,000
174,000

86,439,000r
l,070,000r
167,000

766,000
12,255,000

2,324,000r
16,499,000r

$20,669,069,000
5,012,660,000
154,801,000

$11,036,595,000
5,012,560,000
144,082,000

34,105,029,000
153,587,138,000

34,534,949,000
144,130,545,000

1,503,073,000
2,854,038,000

1,162,032,000
2,476,282,000

1,482,210,000

1,814,584,O O
Or

180,576,687,000
2,101,136,000

140,914,520,000
2,099,760,000

582,264,216,000
63,858,021,000

488,273,437,O O
Or
62,873,298,000

* Two or more checks, coupons, etc., handled as a single item are counted as one
piece.
* * Includes coupons from obligations guaranteed by the United States,
r Revised.

FEDERAL RESERVE BANK OF NEW YORK

the fact that there were only two W ar Loans in 1945 compared with three
in 1944, the volume of Government securities issued, redeemed, and ex
changed during 1945 was greater than in the preceding year.

Issues

of Savings bonds were smaller than in 1944, largely because of one
less War Loan, but partly because of a falling off in sales in interdrive
months, especially in the latter part of the year.

On the other hand,

redemptions of Savings bonds increased substantially, and for the year
as a whole were nearly double those of 1944 measured either by number
of bonds or by dollar amount.
One operation which was reduced drastically during 1945 was the
handling of ration checks. After reaching a peak in March when 655
thousand ration checks were handled, the monthly volume was reduced
by the end of the year to about 60 thousand, owing to the termination of
rationing for all items except sugar.
Applications received by the Foreign Funds Control Department for
licenses to conduct transactions involving blocked accounts increased after
the end of the war in Europe, but the “ defrosting” of blocked accounts
in the latter part of the year is expected to result in a gradual reduction
in the operations of this Department.
As the accompanying table indicates, the work of the bank in con
nection with supplying the public with currency and coin remained at
a high level, but on the whole did not show as great an increase as in
preceding war years. Collection work, including the handling of United
States Government checks and coupons and other checks and collection
items, increased further in 1945.
G uaranteed W

r o d u c t io n a n d

T e r m in a t io n L o a n s

The work of the Credit Department in arranging and supervising
guaranteed war production and termination loans to war contractors was
in its final stages at the end of 1945.

Under Executive Order No. 9112,

issued March 26, 1942, the Board of Governors of the Federal Reserve
System issued Regulation V, effective April 6, 1942, the objective of
which was to facilitate and expedite war production “ by arranging for
the financing of contractors, subcontractors and others engaged in busi
nesses or operations deemed by the War Department, Nayy Department
or Maritime Commission to be necessary, appropriate or convenient for
the prosecution of the war.”

Under this regulation the Federal Reserve

Banks were authorized to arrange guarantees of loans made by financing

THIRTY-FIRST ANNUAL REPORT

institutions under the Executive Order. Except in the case of loans to
contractors in an exceptionally weak financial position, the financing
institutions assumed some portion of the risk in each commitment, and
the branch of service having the predominant interest as to dollar amount
of contracts assumed the balance.
Three successive forms of guarantee agreement were used throughout
the “ V-loan” operation.

Each of the first two (the second was merely

a refinement of the first) granted the borrower rights of suspension of
debt and waiver of interest payments in accordance with a formula based
on the relationship of live contracts to terminated contracts. Computa
tion under this arrangement proved too complex in practice, and as

consequence a third form of guarantee agreement excluding such rights
was adopted after the passage of the Contract Settlement Act of 1944.
A t that time statutory authority was also given for the “ T-loan” , or
termination loan, the borrowing formula therein providing solely for
advances against assets of the borrowers arising out of canceled war
contracts.
In the aggregate this bank received 1,881 applications for “ V ” ,
“ V T ” , and “ T ” loans which resulted in 1,332 authorized and issued
guarantee agreements, the remaining applications being either declined
by the Services or withdrawn by the applicants. The guarantees issued
thereunder represented aggregate commitments of 4,396 million dollars,
in which the guarantors (War and Navy Departments and Maritime
Commission) assumed a risk of 3,776 million.
As at the close of business December 31, 1945, there remained
outstanding 130 “ V ”

or “ V T ”

guarantees covering commitments

aggregating 666 million dollars in which the guarantors assumed a risk
of 542 million. As at the same date there were 64 4‘ T-loans’ 9 outstanding
covering commitments aggregating 23 million dollars, in which the guar
antors assumed 20 million of the risk.

Financial Statements
Statem ent

C o n d it io n

The total assets of this bank continued to increase during 1945,
although at a slower rate than in the preceding year. The major factor
in the increase was the continued expansion in the bank’s holdings of
Government securities, which amounted to approximately 1.1 billion

FEDERAL RESERVE BANK OF NEW YORK

dollars and reflected sales by member banks to the Reserve Bank of
Treasury bills under repurchase option, together with this bank’s par
ticipation in purchases of Treasury securities in the market for the
System Open Market Account.
Discounts and advances, which represent loans to member banks,
also continued to expand, although the amount shown in the year-end
statement does not accurately reflect the change in member bank bor
rowings during 1945 compared with the preceding year. For the year
as a whole, the volume of member bank borrowings was approximately
double that of 1944, and at one time during the year reached a total
of 702 million dollars, the largest amount since March 1933.
For the fifth consecutive year, the total reserves of the bank
declined, and at the close of the year amounted to slightly over 5 billion
dollars, compared with a peak of nearly 10 billion dollars at the end
of 1940. However, the net outflow of funds to other parts of the country,
which was the greatest single factor tending to reduce the reserves of
(In thousands of dollars)

Assets

Dec. 31, 1945

Dec. 31, 1944

Gold certificates ................................................
Redemption fund for Federal Reserve notes

$ 4,908,821
124,283

$ 5,149,403
106,731

$ 5,033,104

$ 5,256,134

Total gold certificate reserves ........
Other cash ........................................................

36,867

57,125

Discounts and advances .................................

214,344

77,775

—

Industrial loans ................................................
U. S. Government securities:
Bills ............................................................
Certificates ................................................
Notes ..........................................................
Bonds
........................................................

$ 3,052,191
2,098,442
531,769
237,552

$ 2,259,370
1,622,723
520,764
412,908

Total U. S. Government securities. .

$ 5,919,954

$ 4,815,765

Total loans and securities ...............

$ 6,134,298

$ 4,893,552

* After deducting participation of other Federal
Reserve Banks amounting to .................

$11,666,274
$

49*
17,759
569,682
8,894
16,460

$10,819,655
Os

Total assets .......................................

40*
17,675
420,234
8,674
15,382

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

THIRTY-FIRST ANNUAL REPORT

this bank in the preceding four years, diminished greatly in 1945, and
there was a reduction also in the net loss of gold to foreign countries
compared with the two preceding years.
The Federal Reserve notes of this bank in circulation increased
further during the past year, but in this case also the change was smaller
than in the preceding year, amounting to slightly over 550 million
dollars, compared with an increase of well over 1 billion dollars in 1944.
Total deposit liabilities of the bank increased nearly 350 million
dollars further during 1945, chiefly as a result of a 300 million dollar
gain in member bank reserve balances, which reflected further growth
in required reserves resulting from the continued increase in their
deposits. A substantial reduction in this bank’s participation in deposit
accounts carried for foreign central banks and governments was approxi
mately offset by increases in Treasury deposits and in other deposits
(which include accounts carried for nonmember institutions).

(In thousands of dollars)

Liabilities

Dec. 31, 1945

Dec. 31, 1944

Federal Reserve notes .......................................

$ 5,407,924

$ 4,851,017

Deposits:
Member bank—reserve account .............
U. S. Treasurer—general account ..........
Foreign ......................................................
Other ..........................................................

$ 4,855,437
293.764
337,584*
343.765

$ 4,554,844
175,050
466,212*
287,547

$ 5,830,550

$ 5,483,653

Total deposits .....................................
Deferred availability items .............................
Other liabilities ................................................

236,189
1,413

319,639
1,139

$11,476,076

$10,655,448

63,630
116,860
7,205
2,503

59,282
84,903
7,142
12,880

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

190,198

164,207

Total liabilities and capital accounts

$11,666,274

$10,819,655

Ratio of gold certificate reserves to deposit
and Federal Reserve note liabilities com
bined ..........................................................

44.8%

50.9%

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

* After deducting participation of other Federal
Reserve Banks amounting t o ...................

523,414

735,225

FEDERAL RESERVE BANK OF NEW YORK
I n co m e

an d

D isbursem en ts

Gross earnings of the bank showed a further increase of 7 million
dollars during 1945, chiefly as a result of the continued growth in
Government security holdings. Earnings on loans to member banks were
more than double those of 1944, but continued to represent only a small
part of total earnings.
Net expenses increased only slightly in 1945, so that most of the
increase in gross earnings was carried to net earnings. Additions to net
current earnings, mainly from profits on sales of Government securities,
were relatively small and showed little change from 1944. There were
no important deductions other than current expenses, and net earnings
amounted to well over 25 million dollars, compared with 18% million
dollars in 1944. The usual 6 per cent dividend, amounting to about 3.6
million dollars, was paid to member banks, and the remainder of nearly
21.6 million was transferred to surplus.
Profit and Loss Account
For the Calendar Years 1945 and 1944
(In thousands of dollars)
1945

1944

36,026
11,623

28,993
11,445

24,403

17,548

802
135

829
133

937

962

Deductions from current net earnings ..........

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

25,337

18,505

66
3,627
63
21,581

80
3,483
51
14,891

84,903
21,581

70,012
14,891

Earnings ............................................................
Net expenses ......................................................
Current net earnings .........................
Additions to current net earnings:
Profits on sales of U.S. Government securities
All other ....................................................
Total additions ...................................

Net earnings ......................................................
Paid United States Treasury (Section 13b) . .
Dividends paid ..................................................
Transferred to surplus (Section 13b) ..........
Transferred to surplus (Section 7) ...............
Surplus (Section 7) beginning of year ........
Addition as above .............................................

1
$

Transferred from contingent reserves:
Previously charged to current net earnings
Previously charged to surplus .................
Surplus (Section 7) end of year ...................

5,706
4,670
$

116,860

—
$

84,903

THIRTY-FIRST ANNUAL REPORT

Membership Changes in 1945
Six State banks and trust companies in the Second Federal Reserve
District were admitted to membership in the Federal Reserve System
during 1945. The total number of member banks in the District, however,
decreased from 817 on December 31, 1944 to 814 at the end of 1945,
owing to the absorption of nine member banks b y seven other member
banks during the year. Member banks at the end of 1945 represented
86 per cent in number, and held about 95 per cent of the total assets,
of all national banks, State banks, and trust companies in the District.
Number of Member and Nonmember Banks in
Second Federal Reserve District at End of Year*
(Exclusive of Savings banks, Private bankers, and Industrial banks)
December 31,1944

December 31,1945
Type of bank

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

National banks ..............

551

100

558

100

State banks and
trust companies . . . .

263

132

259

139

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

814

132

817

139

* This represents only banks in actual operation.
Changes in Federal Reserve Membership in Second District During 1945
Total membership beginning of year

817

Increases :f
State banks and trust companies admitted . .
Decreases:
Member banks combined with other members
Total membership end of year

814

f i n addition to figures shown in this table, one nonmember was merged into a member
during the year.
State Banks and Trust Companies Admitted to Membership in 1945
State banks
Holland, N. Y.
Raritan, N. J.

Bank of Holland
Raritan State Bank

Trust companies
Califon, N. J.
Hamburg, N. Y.
Paterson, N. J.
Potsdam, N. Y.

Hunterdon County Trust Company
Bank of Hamburgh
Broadway Bank & Trust Company
Potsdam Bank and Trust Company

Effective date
October 13
January 9

January 27
January 12
September 28
March 5

FEDERAL RESERVE BANK OF NEW YORK

Changes in Directors and Officers
At a regular election in the autumn of 1945, Howard A. Wilson,
President, Citizens National Bank and Trust Company of Fulton, Fulton,
N. Y., was elected by member banks in Group 3 as a Class A director
for a term of three years, beginning January 1, 1946, to succeed Warren
W. Clute, Jr., President, Glen National Bank of Watkins Glen, Watkins
Glen, N. Y., whose term expired December 31, 1945. At the same time,
Carle C. Conway, Chairman of the Board and President, Continental
Can Company, Inc., New York, N. Y., was reelected by member banks in
Group 3 as a Class B director for a term of three years, beginning
January 1, 1946.
In December 1945, the Board of Governors of the Federal Reserve
System redesignated Beardsley Ruml, Chairman, R. H. Macy & Co., Inc.,
New York, N. Y., as Chairman and Federal Reserve Agent of this bank
for the year 1946. The Board of Governors also reappointed William I.
Myers, Dean, New York State College of Agriculture, Cornell University,
Ithaca, N. Y., a Class C director for a term of three years, beginning
January 1, 1946, and reappointed him Deputy Chairman of this bank for
the year 1946.
In December 1945, the Board of Governors of the Federal Reserve
System appointed Carl G. Wooster, farmer, of Union Hill, N. Y., a
director of the Buffalo Branch, for a term of three years, beginning
January 1, 1946, to succeed Gilbert A. Prole, whose term expired Decem
ber 31, 1945.
The directors of this bank appointed Charles H. Diefendorf, Presi
dent, The Marine Trust Company of Buffalo, Buffalo, N. Y., a director
of the Buffalo Branch for a term of three years, beginning January 1,
1946, to succeed Lewis G. Harriman, whose term expired December 31,
1945. Charles H. Norton, President, Erie County Trust Company, East
Aurora, N. Y., was appointed by this bank a director of the Buffalo
Branch for the unexpired portion of the term ending December 31, 1947,
to succeed George H. Bangert, who resigned effective December 31, 1945.
The directors of this bank appointed Thomas Robins, Jr., as Chair
man of the Board of the Buffalo Branch for the year 1946, to succeed
Gilbert A. Prole, and reappointed Insley B. Smith as Managing Director
of the Buffalo Branch for the year 1946.

THIRTY-FIRST ANNUAL REPORT
Ch anges

O fficers

Frederick Stocker, Manager of the Cash Custody Department, who
had been with the bank for more than twenty-five years, retired from
active service on April 30, 1945. Effective April 1, 1945, the Board of
Directors appointed Paul R. Fitchen, formerly Chief of the Cash Custody
Division of the Cash Custody Department, a Manager, and he was
assigned to succeed Mr. Stocker.
Effective April 27, 1945, Norman P. Davis, formerly Manager of
the Foreign Funds Control Department and of the Security Loans De
partment, was appointed an Assistant Vice President. At the same time,
Harold M. Wessel, formerly Chief of the Foreign Funds Control Depart
ment, was appointed a Manager and assigned to the Foreign Funds
Control Department.
Effective July 1, 1945, Loren B. Allen, formerly Manager of the
Accounting Department, was appointed an Assistant Vice President;
William F. Treiber, formerly Assistant Counsel and Secretary, was ap
pointed an Assistant Vice President, continuing as Secretary; and M.
Monroe Myers, formerly Special Representative at the Buffalo Branch,
was appointed an Assistant Cashier at the Branch.
Effective January 4, 1946, Edward 0. Douglas and Herbert H.
Kimball, formerly Assistant Vice Presidents, were appointed Vice
Presidents; Otto W. Ten Eyck of the Building Operating unit, was
appointed an Assistant Vice President; and Spencer S. Marsh, Jr.,
formerly engaged in special work in the Personnel Department and in
the Securities Department, was appointed a Manager and assigned to the
Accounting Department.
Norris 0. Johnson, formerly Manager of the Research Department,
who was granted a leave of absence in December 1944, to join the
American Financial Mission in Iran, returned to the bank in January
1946.*
James M. Rice, Vice President, who had been with the bank for
twenty-eight years, and had been an officer for twenty-five years, retired
from active service with the bank on January 31, 1946.
M em ber

F ederal A dvisory C o u n cil

In January 1946, the Board of Directors of this bank reappointed
John C. Traphagen, President of the Bank of New York, New York,
N. Y., to serve during the year 1946 as the member of the Federal
Advisory Council for the Second Federal Reserve District.
* Mr. Johnson resigned effective March 19, 1946.

FEDERAL RESERVE BANK OF NEW YORK

Directors and Officers
Class

Group

IS .

DIRECTORS
C o lt
........................................................................................
President, Bankers Trust Company, New York, N. Y.

S lo a n

H arry

P ond

....................................................................................

Term
Expires
Dec. 31
1946
1947

President, The Plainfield Trust Company, Plainfield, N. J.
A

H ow a rd

A . W i ls o n
.................................................................................
President, Citizens National Bank and Trust Company of
Fulton, Fulton, N. Y.

D o n ald so n B r o w n

..............................................................................................

1948

1946

Vice Chairman of the Board, General Motors Corporation,
New York, N. Y.
B

C h arles E. A d am s

...................................................................................................

1947

Chairman, Air Reduction Company, Inc., New York, N. Y.
B

........................................................................................
Chairman of the Board and President, Continental Can Com
pany, Inc., New York, N. Y.

C a r le C. C o n w a y

B e a rd sle y

R u m l,

Chairman

.............................................................................

1948

1947

Chairman, R. H. Macy & Co., Inc., New York, N. Y.
I. M yers , Deputy Chairman ..................................................
Dean, New York State College of Agriculture, Cornell
University, Ithaca, N. Y.

W i ll i a m

R obert D. C a l k in s

...................................................................................................

1948

1946

Dean, School of Business, Columbia University, New York,
N. Y.

DIRECTORS— BUFFALO BRANCH
T h o m a s R ob ins, Jr.,

Chairman

.................•..................................................................................

Term
Expires
Dec. 31
1946

President, Hewitt Rubber Corporation, Buffalo, N. Y.
M arion B. F o l so m

................................................................................................................................

1947

Treasurer, Eastman Kodak Company, Rochester, N. Y.
C arl G. W o o s t e r .....................................................................................................................................
Farmer, Union Hill, N. Y.

1948

E lm er B. M il l im a n

1946

.............................................................................................................................

President, Central Trust Company Rochester, N. Y., Rochester, N. Y.
C harles H . N orton

.............................................................................................................................

1947

President, Erie County Trust Company, East Aurora, N. Y.
C harles

D iefendorf

....................................................................................................................

1948

President, The Marine Trust Company of Buffalo, Buffalo, N. Y.
I nsley B. S m ith , Managing Director .............................................................................

MEMBER OF FEDERAL ADVISORY COUNCIL
J o h n C. T r a p h a g e n ,
President, Bank of New York,
New York, N. Y.

1946

THIRTY-FIRST ANNU AL REPORT

A lla n

OFFICERS
S p r o u l, President

L e s lie R . R ou n d s,

First Vice President
Vice President
J. W i l s o n J on es, Vice President
H e r b e r t H . K im b a ll, Vice President
L. W e r n e r K n o k e , Vice President
W a l t e r S. L o g a n , Vice President, and
General Counsel

A r t h u r P h e la n ,

Edw ard 0 . D o u g la s ,

H a r o ld V . R o e ls e ,

T odd G. T ieb o u t ,

R ufu s J. T r im b l e ,

Vice President
Vice President

R o b e r t G. R o u se ,

Vice President
Vice President

J o h n H . W i ll i a m s ,
V a l e n t in e W i l l i s ,

Vice President

R e g in a ld B. W i l t s e ,

Vice President

Assistant General Counsel

Assistant General Counsel
B. A l l e n ,
Assistant Vice President

L oren

H orace L. S an fo r d ,

H a r o ld A . B ilb y ,

W i l l i a m F. S h e e h a n ,

Assistant Vice President
Chief Examiner

Assistant Vice President

O t t o W . Ten E yck ,

F e lix T . D avis,

Assistant Vice President

W i l l i a m F. T re ib e r,

N o r m a n P. D avis,

Assistant Vice President, and Secretary
H. W u r t s ,
Assistant Vice President

Assistant Vice President

John

S ila s A . M i l l e r ,

Assistant Vice President
W

il l ia m

F. A b r a h a m s ,

Manager, Security Custody Department

il l ia m

A . H e in l ,

Manager, Personnel Department
fNoRRis O. J o h n s o n ,

D udley H . B a r r o w s ,

Manager, Research Department

Manager, Cash Department

D a n ie l J. Liddy,

C u rtis R. B o w m an ,

Manager, Credit Department, and
Manager, Discount Department

Manager, Foreign Department
Spencer S. M a r s h , Jr.,

Manager, Accounting Department

H a r r y M . B oyd,

Manager, Savings Bond Redemption
Department
* R o b e r t H . B rom e,

M ic h a e l J. M c L a u g h lin ,

Manager, Collection Department
E. P e te r s o n ,
Manager, Bank Relations Department

F r a n k lin

Assistant Counsel, and Assistant
Secretary

R a lp h W . S c h e f f e r ,

Manager, Check Department

W e s le y W . B u r t,

Manager, Government Bond Department

Manager, Safekeeping Department
E. W e n d e ll,
Manager, Government Check Department

Jam es J. C a r r o l l ,

Manager, Planning Department

R oy

P a u l R . F itc h e n ,

Manager, Cash Custody Department
M a r c u s A . H a rris,

Manager, Securities Department

C h a r le s N . V a n H o u te n ,

H a r o ld M . W e s s e l,

Manager, Foreign Funds Control
Department

W i l l i a m H . D i l l i s t i n , General Auditor
D o n a ld J. C a m e ro n , Assistant General Auditor

OFFICERS— BUFFALO BRANCH
B. S m ith ,
H a ls e y W.
Managing Director
Cashier

In s le y

Snow ,

G eorge J. D o l l ,

Assistant Cashier
M . M o n r o e M y e r s,

Assistant Cashier
* Resigned, effective April 30, 1946

t Resigned, effective March 19, 1946

Full text of Annual Report of the Federal Reserve Bank of New York : Thirty-First Annual Report of the Federal Reserve Bank of New York for the Year Ended December 31, 1945

FRASER