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Thirty-second Annual Report

Federal Reserve Bank
of New York
For the Year Ended December 31, 1946




Second Federal Reserve District

F ederal R eserve bank
OF N E W Y O R K

March 27,1947.

To the Stockholders of the
Federal Reserve Bank of New York:
I am pleased to transm it herewith the thirtysecond annual report o f the F ederal R eserve Bank
o f New Y ork review ing the year 1946.




A

llan

S proul,

President.

2

CONTENTS
P AG E

Economic Developments and P r o s p e c ts ..........................................

5

Production and Employment ...........................................................

11

Termination of Wartime Controls and Price Developments . 1 6
Business Profits and Business F in a n cin g ........................................
Business Financing ...................................................................

20
22

Bank Credit and the Money Supply

24

Federal Reserve Credit and Credit Policy . r
Selective Credit Controls .........................................................

27
32

Foreign Economic and Financial Reconstruction .......................
Progress of World Bank and F u n d ..........................................
U. S. Government Lending and Financial A i d .....................
Restoration of International Trade ........................................

37
37
39
43

The United States Balance o f International Paym ents...............

45

Developments in the Foreign Exchange M a r k e t .........................

49

Foreign Relations of the Federal Reserve S y s t e m .......................

51

Volume and Trend of the Bank’s O p era tion s...............................

53

Financial Statements ..........................................................................
Statement o f Condition .............................................................
Earnings and Expenses .............................................................

55
55
58

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

60

Changes in Directors and Officers ..................................................
Changes in Directors .................................................................
Changes in Officers .....................................................................
Member o f Federal Advisory Council ....................................

61
61
62
63

List of Directors and Officers ..................... .....................................

64




3




Federal Reserve Bank of New York
Thirty-second Annual Report
The year 1946 must be viewed in its setting, as part of a period of
transition from war to peace. In our report last year we commented on
the widespread debate as to whether the war would be followed by de­
flation or inflation and the very plausible arguments that had been
marshaled on both sides. On the deflationary side were the reduction in
military expenditures and the demobilization of the Armed Forces, and
on the inflationary side, the deferred demands for civilian goods and
the large wartime savings. Despite the wide difference of emphasis on
these conflicting factors, there was considerable agreement on the
general pattern of postwar experience to be expected: an immediate,
though possibly short, downturn following the war, a recovery of output
and employment as reconversion got into full swing, and a more prob­
lematical long-run prospect after business and consumer buying had
caught up with deferred demands.
This was the pattern after the first World War, and it is the pattern
we have been following after this war. In fact, so far as the phases
of change and their duration are concerned, the parallel between the
two experiences has thus far been striking. During 1946 economic
analysis was increasingly concerned with a comparison of the two post­
war periods, and became increasingly centered, particularly after the
downturn in the stock market last summer, on the question whether the
parallel would carry on into a depression corresponding to that of
1920-21.
In our report last year we commented on the surprising lightness of
the initial impact of the sudden ending of the war. Though there had
been official and private estimates that the national income would drop
by 15 per cent or more in the first six months after the war and that
the amount of unemployment to be expected by the spring of 1946
would be 5 to 10 million, actually, and notwithstanding the wave of
strikes in major industries, unemployment at no time exceeded 3 million,
and the drop in national income payments from the wartime peak to
the first quarter of 1946 did not exceed 5 per cent. Yet in the same
period the number of persons in the Armed Forces was brought down
from 12 million to 5 million, and the Federal budget, from a deficit that




5

6

THIRTY-SECOND ANNUAL REPORT

in the first half of 1945 was running at an annual rate of 50 billion dol­
lars, moved rapidly toward an even balance.
It was thus already clear by the early months of 1946 that there had
been a general underestimation of the postwar expansionary forces.
The very mild postwar decline ended in the first quarter of the year.
Thereafter the expansionary forces increasingly assumed a dominating
role, and national income and employment rose sharply in each succeed­
ing quarter. The result was an annual aggregate of production which,
while lower in physical terms than that of the war years, was about
one-fifth above the real output of 1941, the last year before we entered
the w ar; and in dollar figures, owing to the rise of prices, was within 3
per cent of the 1945 total and 61 per cent above that of 1941.
This expansion, which has carried over into 1947, has been due to
the strength of consumer and business demand. The high level of ex­
penditures for consumer nondurable goods has been the outstanding
feature of the reconversion period and has carried the ratio of such ex­
penditures to disposable income much above what it was before the war.
It is in this type of expenditure that the inflationary pressures have
been most apparent. Among the reasons have been the accumulation of
deferred demands, the relaxation of saving after the war, the abandon­
ment of rationing of most foods and other consumer goods, the re­
equipping of 13 million service men returning to civilian life, and per­
haps especially significant, the lack as yet of an adequate flow of dur­
able goods. Though expenditures for consumer durable goods in 1946
expanded in value to about double their low wartime level, they were
still substantially below their prewar relation to consumer income.
Added to the expansion of consumer expenditures has been a large and
rapidly growing investment in inventories and plant and equipment,
residential construction, and foreign demand for American goods.
The year 1946 saw the virtual completion of the reconversion proc­
ess— a process carried through more rapidly and smoothly than had
been generally assumed—and along with it an abandonment of most
wartime controls. The inflationary outburst after the first World War
followed the familiar wage-price spiral, increases in each pushing the
other higher. This time the relaxation of wage controls after V-J Day
and the early sanction to wage increases which would not require price
increases developed quickly into a general demand for higher w^age rates
to sustain the wartime level of take-home pay, and it soon became ap­
parent that some offsetting price increases would be unavoidable. The




FEDERAL RESERVE BANK OF NEW YORK

7

modified wage-price policy announced by the President on February 14,
1946, in connection with the steel settlement, resulted in upward adjust­
ments of wage rates throughout industry; but the wave of work stop­
pages did not decline substantially until after the shutdown of the soft
coal mines in April, which was followed by the brief railroad strike.
Another coal crisis was averted in December only by Government resort
to the courts. The outcome of the postwar wage adjustments was that
from the wartime peak reached in the first quarter of 1945 to the final
quarter of 1946 average hourly earnings in nonagricultural employment
were raised about 14 per cent and average weekly earnings, about 8%
per cent, despite the return to a normal work week and the elimination
of overtime premium pay.*
Though the wage disputes, along with the increasing demand for
goods and the removal of production controls, exerted strong upward
pressure on the price structure, the actual rise in wholesale prices in the
first six months of 1946 was only 5 per cent, and the real spurt did not
occur until the breakdown and final abandonment of general price control
in the second half of the year. Beginning with the temporary suspension
of price control at the end of June, the uprush of wholesale prices in the
second half of the year was faster than that which occurred in any six
months’ period after World War I.
For the year as a whole there was a rise in wholesale prices of 32
per cent and in the consumers’ price index of 18 per cent, bringing the
latter above the June 1920 peak. The rise in the cost of living was the
largest for any recorded twelve months’ period; as in the case of whole­
sale prices, most of the increase occurred in the last half of the year in
response to successive decontrol measures. While the price rise was
general, it was especially marked in food and farm prices, with very
substantial increases also in textiles, hides and leather, building materials,
and chemicals. Of the rise in the consumers’ price index, food prices
were responsible for almost four fifths of the total. Surveying the year
as a whole, it seems clear that despite the increases in wage rates and
other costs, the price advance in 1946 stemmed in major part from the
high level of industrial and consumer demand rather than from the
cost side. This is confirmed by the very sharp rise in farm income and
by the markedly improved performance of profits, in the aggregate, of
both corporate and unincorporated business.
* These figures are derived from indexes of hourly and weekly earnings compiled and
published by the Federal Reserve Bank of New York.




8

THIRTY-SECOND ANNUAL REPORT

In the closing months of 1946, there appeared to be signs that a
gradual readjustment of prices was under way. By mid-October, prices
of many farm products and foods had started to decline while other
commodity prices continued to increase moderately. By the end of
January 1947, wholesale prices of farm products had dropped 4 per
cent below their 1946 peak and food prices were 12 per cent lower; but
early in February a new upward movement of prices, including food
and farm prices but embracing many others, got under way and by
March had carried the over-all index to the highest point since 1920. It
is thus too early to say, as this report goes to press, how far the upward
movement of prices may extend, or what the further repercussions on
wages, output, and employment may be. On several occasions in the
course of the 1919-20 inflation, commodity prices gave even more definite
indications of weakness or hesitancy than they did toward the end of
1946, only to resume the upward movement that finally came to an end
in May 1920.
This brief survey of the general course of economic change in 1946
brings us back to the question of how far the parallel with the movements
after the first World War will be carried and suggests a comparison be­
tween the leading features of the two periods. As was said earlier, the
general pattern and even the duration of the changes thus far have
been strikingly similar, and it is clear that many of the same features
have been present in both. This is of course not at all surprising since
the basic situation is that of transition from a world war to a peacetime
economy. In both cases there was a short decline in production and em­
ployment followed by a recovery of boom proportions. In both cases
wholesale prices showed a sharp upward trend, rising about 20 per cent
in the first year and a half after World War I and about 30 per cent
(though from a considerably lower level) after World War II. In both
cases wage rates have risen substantially, though somewhat less this time
than after World War I. In both cases industrial profits have been
exceptionally high and agriculture has enjoyed an extraordinary pros­
perity, selling a record output at more than double prewar prices. In
both cases there was a strong world demand for American exports and a
very large favorable balance of trade. In both cases the volume of con­
struction, as well as construction costs, rose sharply, while rents lagged
far behind. In both cases prices of common stocks rose substantially
but began a downward movement about one year after the end of the




FEDERAL RESERVE BANK OF NEW YORK

9

war. In both cases the climate of political opinion underwent a change
toward less Government control and direction of economic affairs.
On the other hand, there have been a number of major differences
between the two situations. The monetary stringency and the high in­
terest rates that characterized the 1919-20 upswing have been absent,
and both individuals and business have had much larger liquid funds
relative to their volume of expenditure than after World War I or
indeed at any previous time in our history. We commented last year
on the continuing downward drift of interest rates. Though within the
past year this movement has been checked, the country’s monetary posi­
tion remains highly liquid.
Another major difference which may be classed as monetary is the
greatly increased size of our Federal budget and our Federal debt, and
the consequently much increased role that fiscal changes can play in our
economy. The difference which has perhaps been more emphasized than
any other has been the huge backlog of deferred demands. This, to­
gether with the present redundancy of money and the large accumulation
of savings, constitutes the main ground for the rather general expecta­
tion that even though a temporary corrective downturn may be necessary,
it should be much milder than that of 1920-21 and should lead more
promptly and surely than on the earlier occasion could be foreseen to a
period of healthy activity at a high level of income and employment.
This difference perhaps should not be pushed too far. It is true
that after the first war there was not the same visible backlog of un­
satisfied demands as this time, but as the events of 1922-29 proved there
was in fact a large potential backlog, and once the intervening depression
was ended the country embarked upon a wave of expansion of both pro­
ducer and consumer goods which has few parallels in our history. This
fact did not, however, prevent a drop of 40 per cent in wholesale prices
between May 1920 and July 1921 and unemployment of over 5 million.
With the American economy so much larger today than in 1920 a
swing of the same relative magnitude in employment would run to
much larger figures, and against the background of the thirties, the acute
public consciousness of the unemployment problem and the acceptance
by legislation in this and many other countries of some measure of
Governmental responsibility for employment, would cause a severe shock
in this country and throughout the world. While the consciousness that
unsatisfied demands are still large, particularly for the durable goods,
both consumer and producer, probably does provide our best assurance




10

THIRTY-SECOND ANNUAL REPORT

against any recession’s getting out of hand, it does seem equally true
that the longer the price rise continues and the farther it goes, the
greater will be the likelihood that a balanced structure of prices, wages,
and profits cannot be obtained without a serious, even though temporary,
downward adjustment. Much therefore depends upon the developments
of the months immediately ahead.
There has been much analysis in recent months of the substantial
rise of inventories in 1946, with the evidence seeming to indicate on the
whole that the rise has not assumed dangerous proportions as measured
by prewar relationships of inventories to sales, and has been due in con­
siderable part to the imbalance between input and output which is in
large measure unavoidable in such a large-scale transition from war to
peacetime production, and also to the need of adjustment to the greatly
enlarged magnitude of our national production as compared with any
previous peacetime period. But this is one of the factors to be closely
watched for possible speculative developments.
So far as production is concerned, our present problem is probably
largely one of how to effect the smoothest possible transition from the
unusually high level of consumer nondurable expenditures to the still
rising volume of expenditures on consumer and producer durable goods.
In this first phase of expansion, the filling of the pipe-lines has been
increasing consumer money incomes relative to goods brought to market,
and the question of how serious the transition may be will depend upon
how quickly and smoothly the expansion of expenditures on durable
goods, both producer and consumer, will take over the role of sustaining
demand.
Besides the question of inventories and of the changing proportions
of expenditures, a major question will be the further behavior of wageprice relationships. It was the vicious circle of wages and prices and the
swollen inventories that accompanied the process that were primarily re­
sponsible for the slump and the collapse of prices in 1920-21. Since
the middle of last year the record of work stoppages and the prospect
of more orderly wage-price adjustments have seemed much improved.
While individual upward adjustments may still be desirable, it seems
imperative that we should not try to seek adjustment through bringing
prices and costs up to the level of the highest, but should work in the
direction of bringing down the many categories of prices and costs
where the rise has been abnormal. In general, the aim should be to
achieve through rising productivity and a better balanced flow of goods




FEDERAL RESERVE BANK OF NEW YORK

11

that combination of high incomes and falling prices which has always been
the basis of progress in our kind of economic system.
One of the chief imponderables in our present situation lies in
the field of our international economic and political relations. The col­
lapse of our foreign trade in 1920 was one of the causes of the depres­
sion of 1920-21, though it played a much smaller role than the inventory
boom and tfye wage-price vicious circle. This time, our export trade and
our favorable balance of trade (and even more, our balance of payments
position on current account) are much larger than after the other war.
But the prospect of a collapse of our foreign trade is also much less,
partly because foreign countries’ holdings of gold and dollar balances
are so much larger than ever before and partly because we are now much
more committed governmentally to sustain a flow of goods and services
to the outside world. This is one important factor in our present price
situation, and it seems likely to have an important bearing also upon
our budget and fiscal policies. But the upward pressure on agricultural
prices, where it has been greatest, seems likely to ease when the worst
phases of distress abroad have passed. With other effects the world
situation may have upon the American economy it is difficult now to
foresee, and no analysis of the problem can be attempted within the
limits of this brief survey. Much will depend upon the peace settlements
reached, the progress made by England in correcting her most difficult
situation, our relations with Russia, and our general trade and financial
relations with the world.
Production and Employment
In the course of the year American industry largely completed the
immediate job of reconversion — not only the physical conversion of
plant and equipment to the manufacture of civilian goods, but also the
changeover from controlled wartime production to a competitive peace­
time economy. The job of adapting plants and equipment to civilian
production was already well under way by the end of 1945; the recon­
version low point in nonagricultural employment had been passed in
October 1945. Yet it was a number of months before many types of
civilian goods were reaching the market in large enough volume to make
much impression on the huge backlog of consumer demand accumulated
during the war. This was partly because a series of industry-wide
labor disputes in the first half of 1946 crippled production in many
of the nation’s basic industries. Strikes in the coal, steel, and non-




12

THIRTY-SECOND ANNUAL REPORT

ferrous metals industries intensified the shortages already caused by the
high level of industrial demand. Production of finished goods was
often held up by the shortage or uneven flow of important com­
ponent parts, as, for instance, electric motors and storage batteries.
Output of these components was in turn hampered in many cases by
shortages of basic materials, strikes, and price ceilings.
As the supply ‘ ‘ pipe-lines ’ 9 filled and as the time lost in work stop­
pages declined, industrial production rose to record-breaking peacetime
levels. By November 1946, the Federal Eeserve index of industrial
production had reached a point 20 per cent above the reconversion low
point (in February 1946, during the steel strike) and 83 per cent above
the prewar (1935-39) average. Output dropped slightly in December,
because of the effects of a new stoppage of bituminous coal mining, but
in the early months of 1947 productive activity was at a higher level
than at any time during 1946.
The biggest reconversion problems, of course, were those faced by
many of the durable goods industries, and it was likewise these lines
which were most seriously affected by the long series of shortages of
materials and parts and by labor disputes. During the war, output of
durable goods (for military use) had been expanded to unprecedented
levels, but by February 1946, reconversion and work stoppages had
reduced activity in these industries far below the wartime peak. By
the end of 1946, however, durable goods production (for civilian use)
had risen substantially, and output of many types of consumers9 durable
goods had reached or exceeded prewar levels. Eadios, washing machines,
vacuum cleaners, electric and gas ranges, electric irons, and passenger
car tires all were coming out of the factories in far greater numbers than
in 1940 or 1941, and production of civilian-type trucks set a new record
in 1946. Passenger car output, which had been hampered by particularly
difficult reconversion problems, lagged and in the fourth quarter of 1946
was still 14 per cent below the 1941 average.
Large quantities of goods were absorbed during 1946 in replenish­
ing business inventories. By the end of the year, the value of manufac­
turers ’ inventories had reached the record level of 20.3 billion dollars,
approximately one-fourth greater than at the end of 1945. When the
replacement of inventories of war goods by stocks of materials and parts
for civilian production and the increase in inventories of wholesalers and
retailers are taken into account, the total amount of inventory accumula­
tion from Y-J Day to the end of 1946 amounted to approximately 13




13

FEDERAL RESERVE BANK OF NEW YORK

billion dollars. However, much of the rise in the latter half of 1946 was
attributable to increased prices rather than greater physical volume. On
the whole, the amount of stocks held does not appear excessive when
considered in relation to the present high level of shipments and sales,
although unbalance is apparent in certain lines.
Activity in the construction industry, which had been at a low ebb
during the later stages of the war, expanded sharply in 1946. In the
face of a housing shortage of emergency proportions and the extremely
low supplies of building materials and skilled building labor prevailing
at the end of the war, the Federal Government set up a Veterans
Emergency Housing Program in order to give veterans’ housing a pre­
ferred place in the nation’s reconversion program. About one million
dwelling units, including about 370 thousand temporary and converted
units, were started during 1946, of which approximately two thirds were
completed — an impressive record, considering the difficulties involved.
A substantial amount of nonresidential construction, started before
building controls were reimposed in the spring of 1946, was also accomT o ta l C iv ilia n L a b o r F o r c e an d E m p lo y m e n t

M IL L IONS
orPERSO N S

70

60

50

40

30

20

10

1940

1941

1942

1943

* Revised series.
Source: U. S. Department of Commerce.




1944

1945

1946

14

THIRTY-SECOND ANNUAL REPORT

plished. With a large backlog of demand and a steadier flow of materials,
another year of large-scale construction activity has been predicted for
1947, although there is some question as to how much of the potential
demand will develop into actual demand while construction costs remain
at their present high levels.
Total civilian employment in 1946 reached new high levels. In July
the civilian labor force exceeded 60 million persons, an all-time record,
and during the latter half of 1946 an average of over 8 million more
people were employed than during the corresponding period of 1940.
The number of those unemployed and seeking work never rose above
2.7 million during the reconversion period, indicating the ease with
which discharged veterans and war workers were absorbed by the
economy. In the year following V-J Day, approximately 5 million
temporary workers left the labor force; these included not only house­
wives and older persons uninterested in peacetime jobs, but also youths
returning to school.
Nonagricultural employment rose steadily during 1946 until in
December it set a new peacetime record and equaled the peak months of
the war effort. Factory employment and payrolls, however, did not fully
recover their wartime levels. At the postwar low point, employment in
manufacturing establishments was about one-third below the wartime
peak, and by the end of the year approximately one half of this loss
had been recovered. Construction employment in 1946 was more than
double the 1945 level, and trade, finance, and services also increased their
working forces. Federal, State, and local government employment by
January 1947 had dropped 830 thousand below the V-E Day level.
Income payments to individuals in 1946 surpassed all previous
levels. In December 1946 they were running at a seasonally adjusted
annual rate of about 175 billion dollars, or approximately two and onehalf times the 1939 level. The higher level of income payments in 1946,
compared with 1945, was attributable to the large Government payments
to veterans, the increased income of farmers and independent business­
men, and greater corporation dividend payments. Despite the high level
of total employment, the shift of many individuals from military service
to private employment, and widespread increases in wage rates, total
salaries and wages were about 5 billion dollars less than in 1945. This
reflects mainly the shorter work week prevailing after the end of the
war, with consequent loss of premium overtime pay, and the shifting




FEDERAL RESERVE BANK OF NEW YORK

15

Indexes of Income Payments and Electric Power Production*
(1 9 35 -3 9 average = 100 per cent)
PER C E N T

* Adjusted for seasonal variation by the Department of Commerce and the Federal
Reserve Bank of New York.
Source: U. S. Department of Commerce and Federal Power Commission.

of large numbers of workers from jobs at high wages in war plants to
work at more moderate rates in other occupations. Wages of manu­
facturing production workers were most affected by these factors,
particularly by the decline in hours worked. At the end of 1946 weekly
earnings of factory workers were still somewhat below their wartime
peak, although earnings of other major groups of nonagricultural
workers, which had risen less rapidly during the war, reached new
record levels. This bank’s composite index of weekly earnings indicates
that in December 1946 weekly earnings of all nonagricultural employees
averaged 8 per cent above the wartime peak, and nearly 75 per cent
above the 1939 level. The trend of total income payments in 1946 and
preceding years is illustrated in the accompanying chart, which also
shows the trend of electric power production, one of the best general
indicators of industrial activity.
The high level of peacetime activity attained in 1946 was accom­
plished with fewer reconversion delays and less unemployment than was




THIRTY-SECOND ANNUAL REPORT

16

generally anticipated. It now appears that only in agriculture is the
major impact of reconversion still ahead, although this is not to say, by
any means, that the economic consequences of the war have been
obliterated. The total national output of goods and services last year
was the highest it has ever been in peacetime, even after allowance for
price changes. Under present conditions of nearly full employment of
the country’s labor supply, further increases in output must come mainly
from increased productivity per worker. The vast investment of capital
and the development of improved techniques during and since the war
should soon make themselves felt, now that the initial difficulties of the
reconversion period are past. The domestic outlook for 1947 will depend
largely on whether more stable labor-management relations are achieved,
consumer demand is maintained, prices that are substantially “ out of
line” are adjusted downward, and other prices are reduced as improve­
ments in the demand-supply position and in productive efficiency occur.

Termination of Wartime Controls and Price Developments
The release of the nation’s economy from practically all of the
remaining wartime controls, and the accompanying rise in prices and
wages, were two outstanding developments of the year. With the objec­
tive of achieving a “ swift and orderly transition to a peacetime economy,’ 9
controls in many fields had been terminated or liberalized shortly after
the end of the war. All controls over manpower and construction and
most rationing, wage, export, and direct production controls had been
dropped before the end of 1945, although wage increases without approval
of the Wage Stabilization Board were permitted only in cases where they
could be granted without price increases. In a few instances, notably
that of construction, the abrupt abandonment of controls proved pre­
mature, and later some regulations had to be reimposed. Late in 1945,
the War Production Board’s 650 regulations, plus the complex Controlled
Materials Plan and priority system, had been trimmed to 52 orders and
3 main priority regulations, and the operation of these had been en­
trusted to a new agency, the Civilian Production Administration, which
was charged with speeding reconversion and consumer goods production.
By the beginning of 1946, price and rent controls and sugar ration­
ing were the only major wartime controls still remaining. Between V-J
Day and June 1946, the Office of Price Administration removed price
controls from a number of items for which balanced demand and supply




FEDERAL RESERVE BANK OF NEW YORK

17

were expected to keep prices at a reasonably stable level, as well as from
numerous items whose prices did not enter significantly into business
costs or the cost of living. Nonetheless, thousands of items remained
under price ceilings, which became the object of widespread dispute.
After the lifting of direct wartime production controls — allocations,
priorities, limitation orders, etc. — prices had tended to resume their
normal peacetime position as the major determinant of the distribution
of resources among alternative lines of production. Wartime and postwar
changes in wages and cost of materials, as well as other factors, had
brought about distortions in the price structure.
Since the huge civilian demand minimized sales competition, manu­
facturers tended to concentrate as much production as possible in the
lines which yielded the greatest profit under existing price ceilings
(usually the higher-priced items) or to lower the quality of their products.
In some instances goods were withheld from the market in the hope of
higher prices or were sold in the black market above ceiling prices. Con­
tinuation of price controls in these circumstances was widely held to be
responsible for many of the shortages which continued to prevail in the
spring and early summer. In reply to the demand for complete elimina­
tion of price control, so that higher prices might expand production and
bring about a better balanced flow of consumer goods, the OPA insisted
that price controls must be retained until the inflationary danger result­
ing from the most urgent consumer demands and from short supplies of
civilian goods had been removed. The postwar OPA policy of gradual
decontrol and of making only such adjustments in price ceilings as it
found necessary to remove inequities and correct maladjustments
resulted, nevertheless, in a gradual upward movement of prices.
Following V-J Day, approval of wage increases which would neces­
sitate price increases was in most cases refused, but in February 1946
wage-price policy was greatly liberalized. As a result the number of
price increases allowed in the second quarter of 1946 greatly exceeded
those in previous quarters. For the first half of, the year as a whole,
the rise in the wholesale price index amounted to 5.4 per cent and the
rise in the consumer price index to 2.6 per cent.
When the Emergency Price Control Act came up for renewal before
its expiration date of June 30, 1946, Congress passed instead a lastminute bill calling for greatly modified, more flexible controls, which
President Truman vetoed on the grounds that it “ provided a sure




18

THIRTY-SECOND ANNUAL REPORT

formula for inflation.’ ’ For twenty-five days, until a bill more satis­
factory to the Administration could be passed, the country was without
national controls on prices or rents for the first time in over four years.
Wholesale food prices rose 24 per cent during July, and in the aggregate
wholesale prices advanced 10 per cent while consumers’ prices went
6 per cent higher. Under the new price control law the pace of decontrol
was stepped up. Controls were not reimposed on grains and dairy
products, and although prices of livestock and meats were put back
under ceilings, less than seven weeks later it was found necessary to
remove these controls again. In succeeding weeks controls were lifted
from other important groups of commodities, and finally, on November 9,
President Truman announced the removal of all remaining price controls
except those on sugar, rice, and rents.
As a result of decontrol prices again rose sharply. Wholesale food
prices rose in October to a peak 55 per cent above the level prevailing at
the end of June but began to decline thereafter. Prices of farm products,
which had increased during the war more than prices of any other com­
modity group, rose 23 per cent but leveled off at the end of the year.
Prices of other commodities at the end of the year were 18 per cent above
the June average and were still rising. Prices of several commodities
doubled or tripled their former ceilings. In some instances particularly
spectacular advances were followed by declines. At the beginning of
1947 it appeared that the general advance in the price level had been
halted, if only temporarily, but a recent resumption of the price rise
of some commodities has at least delayed a reversal of the price trend.
Because of the postwar housing emergency, the construction industry
remained under Government controls longer than any other major sec­
tion of the economy. The general decontrol of prices in November
included building materials, and it became apparent that the control of
prices on new construction which had been undertaken as part of the
Veterans Emergency Housing Program would no longer be feasible.
Early in December the President greatly liberalized the regulations
governing housing construction and in effect turned the initiative in the
housing program back to private industry.
Altogether, the official index of wholesale prices rose 32 per cent
during 1946, and that of consumers’ prices 18 per cent. (Some part
of these advances undoubtedly reflects the absorption of previous
black market premiums.) It seems generally agreed that some sort
of price readjustment will be in order for this country during 1947.




FEDERAL RESERVE BANK OF NEW YORK

19

Wholesale and Consumers* Prices

1939

1940

1941

1942

1943

1944

1945

1946

* All commodities other than farm products and foods.
Source: U. S. Bureau of Labor Statistics.

Under the impact of war and reconversion, prices of certain commodities
tended to get far ont of line with the general price level. Farm prices in
October 1946 were more than two and one-half times their 1939 level,
while prices of commodities other than farm products and foods showed
an advance of only about 40 per cent in the same period. It is expected
that farm prices will recede from their peak levels during 1947. The
Department of Agriculture estimates that by the end of the year the
average prices received by farmers may drop as much as 20 to 25 per cent
below their peak. The markets were sustained in 1946 and the early
part of 1947 by the exceptionally large domestic and foreign demand
for American agricultural products. Demand is likely to decline from
present levels (although renewed evidence of high foreign demand has
recently strengthened some markets), but supplies, which are relatively
inelastic, at least over the short term, will be large. The reduction in
farm prices anticipated for the 1947 crop is already discounted in most
futures prices, which are below spot market prices. Although Govern­
ment support policies will prevent as steep a decline in farm prices as




20

THIRTY-SECOND ANNUAL REPORT

occurred in 1920, prices of some commodities must show a sizable drop
from present levels before supports become effective.
Readjustments in the price structure can come about not only
through declines in over-priced commodities, but also through increases
in relatively under-priced items, so that the average level of prices may
remain fairly stable. The advances in prices of metals and other in­
dustrial raw materials have not yet been fully reflected in prices of
finished goods or in retail prices. Also, many important wage negotia­
tions now in progress are likely to result in higher costs. The present
high “ break-even” points and the downward inelasticity of wage rates
because of the increased strength of organized labor (a factor of much
less importance in previous depressions) would seem to preclude a
sharp general drop in prices, such as characterized the 1920 reces­
sion. Eventually, however, consumer resistance to high prices and
increasing industrial productivity should bring about somewhat lower
prices. In the meantime, some improvement may be noted in the quality
and the selection of goods, particularly in the lower-priced lines.

Business Profits and Business Financing
Corporate profits were high in 1946 as a whole and showed pro­
gressive improvement from the first to the final quarter. Total profits
for the year, before taxes, are estimated at approximately 20 billion
dollars, or about 5 per cent below the 1945 figure. Profits after taxes,
however, are expected to reach 12 billion dollars, the highest figure on
record and a gain of about a third over the previous year’s showing.
The higher net after taxes reflects chiefly the elimination of the excess
profits tax on 1946 incomes. The repeal of that tax, as well as substantial
tax refunds and loss carrybacks, and the different methods used to ac­
count for extraordinary reconversion expenditures and expenses in
connection with labor disputes, all make it difficult to estimate the
actual profitability of business during the year.
It is clear, however, that 1946 profit trends reflected the progress
of reconversion. Corporate income on a quarterly basis reached a low
point for the postwar period in the first three months of 1946, which
apparently represented the nadir of shipments of the durable goods
manufacturing industries and perhaps also the peak of reconversion
expenditures. Substantial improvement in net earnings appeared with
the second quarter reports. In the remaining two quarterly periods,




FEDERAL RESERVE BANK OF NEW YORK

21

the further improvement in earnings was more moderate, but sizable
enough to carry fourth quarter profits before taxes to a level approach­
ing, if not exceeding (on an annual rate basis), the 1943 wartime peak,
and to raise fourth quarter profits after taxes to the highest level on
record.
The best earnings were made by companies not seriously affected
by reconversion problems and strikes. By and large these companies
were in wholesale and retail trade, in service industries, in industries
manufacturing nondurable goods such as textiles, paper, rubber, food
products, and drugs and chemicals, and in the printing and publishing
and amusement industries. In many cases, the substantial increase in
the profits of these industries was attributable to the release of demands
which had been restrained during the war. In other instances, where
companies had been producing for both the military and civilian
markets, sales fell off in 1946, but income rose nevertheless because
of the wider profit margins on peacetime business. In many cases,
notably the textile and paper manufacturers, food processors, and
trade concerns, inventory profits probably played an important part
in the improved earnings experience. In all cases lower taxes con­
tributed considerably to the more favorable net earnings record.
In contrast, profits of industries with acute reconversion problems,
particularly the automobile and other transportation equipment manu­
facturers, the electrical and farm machinery industries, and other metal­
working industries, fell behind the 1945 level or showed little gain. It
was in these industries that some of the most prolonged wage disputes
occurred, and that the attainment of a smooth flow of materials and
of stabilized production at high levels was most hindered by material
shortages and recurrent bottlenecks. The iron and steel industry
achieved an early return to peacetime production and, after a slow
start early in the year attributable to an industry-wide strike, was one
of the few durable goods industries to show a substantial expansion
in earnings during 1946. Construction contractors and building ma­
terial manufacturers had substantial increases in volume and in profits.
Earnings of the railroads, on the other hand, fell decidedly below those
of 1945 as a result of higher wages and increased costs of materials and
supplies, coupled with reduced demand for passenger transportation,
less intensive use of freight cars due to the five day week in many
plants, and inability to load freight cars as fully as during the war.




22

THIRTY-SECOND ANNUAL REPORT
B u sin e ss F in a n c in g

Financing needs of business for plant expansion and increased
working capital were large during the year. While business financing
through the banks and the capital markets was on the largest scale
in a number of years (excluding refunding operations), it was not large
in comparison with the capital expenditures of industry as a whole.
Business enterprise in the aggregate apparently met ,a large part of
its financial needs by drawing upon its large cash resources accumulated
during the war and by using undistributed current earnings.
The increase in business borrowing from the banks during the year,
amounting to at least 4 billion dollars, represented the continuation
of a trend that started in the middle of 1945 and was probably greater
than in any previous year. In contrast to the preceding year, when a
sizable volume of term loans had been obtained from banks in order
to refund outstanding securities, business demand for loans in 1946
resulted chiefly from the need to finance larger inventories and increased
payrolls, a need that grew with rising commodity prices and wage rates.
Business borrowing on a term basis to finance plant expansion, and
short term borrowing for the same purpose pending the sale of new
securities in the capital market, were also significant 'factors in the
1946 loan expansion. To some extent, the unsettlement in the securities
markets in the latter part of the year may have resulted in bank
borrowing by corporations which might otherwise have met their needs
through investment banking channels.
The flotation of new money issues in the capital market amounted
to 3Y2 billion dollars in 1946. This was almost three times the volume
of 1-945 and was the largest volume since 1930 according to tabulations
of the Commercial and Financial Chronicle. Bond issues accounted for
about 2 billion dollars of the total new money issues, compared with
600 million dollars in 1945. The most striking development with respect
to security flotations during the year, however, was the marked expan­
sion in public offerings of new stock issues, which had been in relatively
light volume ever since 1930. Stock financing, divided evenly between
common and preferred issues, came to 1% billion dollars in 1946. The
sale of new stocks was greatly stimulated by the rising trend of prices
for outstanding issues, which reached its peak in May. New offerings,
especially in the first part of the year, were so well received that
shares sold quickly at substantial premiums above issue priced, so that




FEDERAL RESERVE BANK OF NEW YORK

23

profits in so-called “ free rides” were large. This tended further to
augment the demand for new stock issues, particularly for the more
speculative securities in the low price range. The gradual recession
in stock prices during the summer and the sharp declines of September
and early October made this type of financing more difficult during
the latter part of the year, however. There were severe breaks in
prices of some of the issues floated earlier in the year, and the volume
of new stock issues fell off sharply in September and October; it did
not fully recover during the remainder of the year.
Although public utility corporations sold a substantially larger
volume of new capital securities in 1946 than in any year since the
early thirties, issues of manufacturing companies continued to dominate
the “ new money” section of the investment market. In this respect,
the postwar capital market more closely resembled wartime than prewar
conditions. Reflecting the uncertain status of the common carriers’ earn­
ing power, flotations of railroad securities for capital expansion purposes
remained at the low wartime levels.
Refunding operations declined sharply in the latter part of 1946.
The total volume of securities sold to refund outstanding issues amounted
to less than 3 billion dollars, compared with nearly 5 billion in 1945.
The opportunities for interest savings through refundings were notice­
ably reduced as interest rates tended to harden after April. Repeal
of the excess profits tax removed a powerful incentive for refunding
securities, since the proportion of the premiums required to retire old
issues and other expenses of refinancing that could be offset by tax re­
ductions was much smaller than during the war years. However, as a
result of declining long term interest rates in the first quarter, and
the continuing incentive of tax offsets for companies not operating
on a calendar year accounting basis, the volume of refunding continued
high during the first half of the year.
The price decline in the securities markets during the summer and
early autumn did not prevent a continued high level in the over-all
volume of security issues in the latter part of the year, but rather had
the effects of changing the composition of new securities as to types and
purposes, of requiring somewhat more liberal yields, and of altering
the channels of distribution. The decline in stock prices made it in­
creasingly difficult to sell equity issues for either new capital or refund­
ing purposes; flotations of common and preferred stocks averaged about
115 million dollars a month in the last four months of the year, com­




24

THIRTY-SECOND ANNUAL REPORT

pared with a monthly average of 200 million in the preceding eight
months. Bond offerings for refunding purposes also dropped con­
siderably, but new bond issues sold for business expansion purposes rose
sharply, reflecting in part the offering of a few very large issues. Be­
cause of the unsettled state of the market for outstanding securities,
approximately one-half the new bonds floated in the last four months of
the year were placed privately with insurance companies and other
large institutional investors, in contrast to about one fourth sold in this
way in the preceding months of the year.

Bank Credit and the Money Supply
The privately owned money supply in the United States increased,
in 1946, at a rate which, while considerably below that of the war years,
was still quite rapid. The total volume of demand deposits and cur­
rency, adjusted to exclude Government and interbank deposits, “ float” ,
and currency held by banks, increased by about 7.6 billion dollars in
1946, compared with increases of 11.9 billion in 1945, 10.8 billion in 1944,
16.8 billion in 1943, and 14.3 billion in 1942. Time deposits, including
those in mutual savings banks and the Postal Savings system as well as
in commercial banks, increased by about 5.3 billion in 1946, an increase
B IL L IO N S
o r D O LLA RS

Deposits and Currency in the United States
December 31, 1 9 39-46*

* December 31, 1946 preliminary.




FEDERAL RESERVE BANK OF NEW YORK

25

about two-thirds as great as in the preceding two years. The increase
in the amount of currency outstanding, however, was the smallest since
1938, and was only a small fraction of the annual increases during the
war years. Government deposits, which were close to their peak by the
end of December 1945, when the Victory Loan was completed, were
reduced by 21.9 billion dollars during 1946.
The principal factor tending to result in continued growth in the
money supply in the hands of the public during the early part of the
year was further monetization of the public debt through bank purchases
of “ bank eligible” Government securities from nonbank investors. For
the year as a whole, however, such operations had little net effect on the
money supply, as bank purchases of Treasury bonds, directly or indirectly
from nonbank investors, were largely offset by sales of short term securi­
ties to such investors, partly in replacement of securities redeemed by the
Treasury. Furthermore, privately owned deposits were reduced sub­
stantially by the liquidation of bank loans which had been obtained to
finance the holding of Government (and other) securities.
A more important factor during the last ten months of the year
was the use by the Treasury of most of its large volume of deposits in
War Loan accounts to redeem outstanding securities. A major part of
the securities redeemed were from the investment portfolios of the
banking system, but substantial amounts were from the holdings of
nonbank investors, and their redemption added to the volume of bank
deposits held by the general public. Nevertheless, the use of Government
deposits for debt retirement resulted in far less expansion of private
deposits than would have occurred if the funds had been used to finance
other Government expenditures. And the debt retirement operations
had the effect of exerting recurrent pressure on the reserve positions of
the banks, and thus had a somewhat restrictive influence on their ability
to extend credit. Furthermore, cash revenues of the Treasury exceeded
cash disbursements by close to 1 billion dollars during 1946. On the
whole, therefore, Government financial operations during the year may
be characterized as mildly anti-inflationary in their effects.
The largest factor in the growth in the money supply was the rapid
increase in bank loans, other than loans on securities. Business loans
increased by an amount that was probably greater than in any preceding
year, and there were substantial increases also in consumer loans and in
loans on real estate. A considerable part of the increase in business




26

THIRTY-SECOND ANNUAL REPORT

loans undoubtedly was necessary to finance the expansion of peacetime
production which was essential to bring the supply of, and demand for,
goods into better balance. But some part of the increase in bank loans
probably tended to accentuate inflationary pressures.
Causes of Changes in the Money Supply*
(In millions of dollars; (-{-) or ( —) reflects effect on volume of deposits and currency)
Changes in

Date

1939
1940
1941
1942
1943
1944
1945
1946

Bank Loans
Treasury
net cash
income Loans on
or outgo securities Other
+ 2,805
+ 2,708
+ 9,994
+39,248
+50,830
+46,095
+35,763
990

274 + 1,182
223 + 1,805
114 + 2,979
+ 261 - 2,962
+ 798 - 1,112
+ 2,208 + 206
+ 2,244 + 2,096
- 3,670e + 8,970e

Non-bank Bank
Gold
Total
and
bank
holdings holdings
of U. S. of other foreign
capital
securities securities accounts accounts
-

600
0
- 7,300
-20,600
-24,800
-31,400
-20,000
+ 5,500p

316 +
+ 152 +
464 +
724 845 + 129 + 1,016 + l,000e +

2,934 3,615 1,101 30 1,355 1,163 212 818 -

86
115
85
110
441
647
919
800e

Other
+
+
+
+

458
1,187
217
120
1,986
2,409
580
2,079e

Total
+ 5,187
+ 6,755
+ 6,328
+ 14,963
+21,089
+ 17,837
+20,568
+ 12,907p

* Exclusive of U. S. Government deposits and currency in banks,
e Estimated by Federal Reserve Bank of New York,
p Preliminary.
Source: Treasury cash income or outgo and nonbank Government security holdings —
derived from Treasury Bulletin; all other data — Board of Governors.

Another factor in the increase in the money supply during the past
year was the disbursement in this market by foreign central banks and
governments of funds previously held in the form of deposits or ear­
marked gold in the Reserve Banks. The amount (about 800 million
dollars) was not very great, but since these disbursements made reserve
funds available to the banking system, as well as increasing the volume
of deposits, they provided the basis for a considerable expansion of bank
credit. Their direct effect on deposits was counterbalanced by the
opposite effect of an increase in the capital funds of the banks during
the year.
As the following chart indicates, the ratio of the public’s
average holdings of money in the form of currency and deposits to the
gross national product in 1946 was close to the highest on record.
Between 1930 and 19.42, except in the worst depression years, the money
supply in the hands of the public ranged between 60 and 70 cents for
each dollar of gross national product. In the first two years of this
country’s participation in the war, however, the rise in the gross national




FEDERAL RESERVE BANK OF NEW YORK

27

Money Supply as Percentage of Gross National Product, 1929-46*
PER CE N T

* Money supply includes currency outside banks, demand deposits adjusted for items
in process of collection, and time deposits; it excludes interbank and U. S. Government
deposits. Data for 1929-42 are averages of 3 call dates; for 1943-46, averages of monthly
data. All 1946 data preliminary.
Source: Money supply, Board of Governors of the Federal Reserve System; gross
national product, U. S. Department of Commerce.

product was so much more rapid than the expansion in the money
supply, that the ratio dropped to approximately the 1929 level — about
55 cents of money to each dollar of gross national product. Since 1943,
the ratio has climbed rapidly, despite the growth in gross national
product which accompanied the expansion in the money supply, and by
1946 it was close to the ratio of 1932, when the ‘ ‘ liquidity preference”
of the public was exceptionally high — more than 80 cents of money
supply to each dollar of gross national product.

Federal Reserve Credit and Credit Policy
The volume of Federal Eeserve credit outstanding showed a small
net reduction during 1946, despite an increase in the money supply
(in the form of bank deposits and currency) and a consequent increase
in the banks9 need for reserves. Because of the growth in deposits, the
required reserves of member banks rose by more than 1 billion dollars,
and the amount of currency in circulation showed a further increase
of somewhat more than 400 million dollars. The need for reserve




THIRTY-SECOND ANNUAL REPORT

28

funds thus created was partly met by the net disbursements of foreign
central banks and governments, referred to above. Another factor
tending to contribute to the banks’ reserves was their net receipt of
more than 800 million dollars from the Treasury, representing chiefly
net disbursements from the Treasury’s balances in the Reserve Banks
and an increase in Treasury currency outstanding. But the largest
factor contributing to the net reduction of approximately 1 billion
dollars in Federal Reserve credit in use was a reduction of more than
900 million dollars in the excess reserves of member banks, which
were temporarily at a rather high level at the end of 1945.
Factors Affecting the Reserve Position of Member Banks
and the Need for Federal Reserve Credit
(In millions of dollars)
1941
Factors affecting member bank reserves:
Increase in currency circulation..........
Treasury operations, net...................
Gold and foreign account operations,
net...............................................
All other.........................................
Total............................................
Increase in required reserves.................
Net increase (+ ) or decrease ( —) in
need for reserves..............................
Change in excess reserves.....................
Federal Reserve credit in use................

1942

1943

1944

1945

1946

—2,428
- 341

-4,250
+ 1,211

-5,039
- 164

-4,858
+ 104

-3,208
- 241

- 436
+ 822

+1,101
+
5

-

30
582

-1,355
+ 767

-1,163
- 102

-

212
143

+ 818
+ 18

-1,663

-3,651

-5,791

-6,019

-3,804

+ 1,222

+ 1,954

+1,764

+ 521

+ 1,052

+ 1,742

+ 1,140

+3,617
-3,530
+ 87

+5,415
-1,097
+4,318

+6,312
- 752
+5,560

+7,071
+ 435
+7,506

+5,546
- 200
+5,346

-

82
916
998

The chief importance of this reduction in Federal Reserve credit
outstanding lies not in its size, but in the fact that it marked the
end of the period of rapid growth which was one feature of war financ­
ing. Unfortunately it did not indicate that material progress had
been made by the Federal Reserve System in regaining control of
the volume of Federal Reserve credit in use, although there were
some developments during the year tending to make Federal Reserve
credit a little less freely available, and otherwise to exert some restric­
tive pressure on the reserve positions of member banks.
During the early part of the year the matter of principal con­
cern with respect to member bank credit and in the money market
was the evidence of further monetization of the debt through bank
purchases of Government securities from nonbank investors, and of
a tendency toward further declines in interest rates. In these circum­




FEDERAL RESERVE BANK OF NEW YORK

29

stances, it was concluded that the Reserve Banks’ preferential dis­
count rate of % per cent on advances to member banks secured by
Government obligations maturing in one year or less no longer
served a useful purpose. It had been adopted in 1942 as a means of
enabling the banks, to the extent necessary, to use all their available
funds for war financing, while retaining assurance of their ability
to obtain needed reserves readily and at low cost. -In the changed cir­
cumstances of 1946 the preferential discount rate performed a dis­
service and it was abolished by all Reserve Banks during April and
May. This action was not in itself a restrictive measure of much im­
portance, but it was interpreted as an indication that the Federal Re­
serve System did not favor a further decline in interest rates and
did not wish to make member bank borrowing too easy.
In order to maintain orderly conditions in the market for Govern­
ment securities and to avoid such changes in interest rates as might
lead to an increase in the cost of servicing the public debt, however,
the System continued to buy short term Government obligations when
other market buyers were not available at somewhere near existing
prices and yields. But it was evident that as long as the System con­
tinued to maintain short term rates on Government obligations at
their existing levels, it could not exert an effective influence over the
volume of Federal Reserve credit; it could not restrain sales of short
term obligations by the banks directly or indirectly to the Federal
Reserve System to obtain funds with which to purchase longer term
Government securities from other investors or to make other extensions
of bank credit.
As one approach to a solution of this problem, the Board of Gov­
ernors in its Annual Report for 1945 (published in June 1946) presented
for the consideration of Congress three suggestions as to additional
powers which might be granted the System to enable it to restrain the
banks from adding still further to the money supply. Each of these sug­
gestions, and any combination of them, was intended to enable the
System to reassert its control of the cost and availability of credit with­
out causing a serious rise in yields and fall in prices of Government
securities. The suggestions may be summarized as follows:
1. That a limitation be placed on the amount of long term securi­
ties (Government and non-Government) which commercial banks
would be permitted to hold against demand deposits;




THIRTY-SECOND ANNUAL REPORT

30

2. That commercial banks be required to maintain secondary re­
serves in the form of Treasury bills and certificates in addition
to their primary reserves; and
3. That the Board of Governors of the Federal Reserve System be
given increased authority to raise primary reserve requirements,
within some specified limit, against demand deposits.
There was no opportunity for Congressional consideration of these
proposals in 1946. The Reserve System remained dependent upon the
use of its existing powers and instruments of policy for any restrictive
action which might be desirable. Fortunately, there were several develop­
ments which, after the earliest months of the year, helped to halt the
tendency toward lower long term interest rates and toward further
expansion of the money supply through bank purchases of Government
securities from nonbank investors. Among the more important of these
developments were the Treasury’s debt retirement program, which was
started on March 1 and continued through the remainder of the year; the
belief which arose during the spring that heavy liquidation of speculative
holdings of long term Government securities would occur when the
holders were called upon to repay the loans with which they were
carrying these securities; substantial sales of marketable Government
bonds by a Government trust account; and a growth in the demands
for bank credit from business concerns and individuals, accompanied
by some firming of interest rates on certain classes of bank loans and
also on corporation securities.
The debt retirement program exerted recurrent pressure on the
reserve positions of member banks during the last ten months of 1946,
as it involved withdrawals of funds from the commercial banks to redeem
securities held by the Federal Reserve Banks. Most of the funds used
by the Treasury in the debt retirement program were withdrawn from
War Loan deposit accounts in commercial banks. Substantial portions
of the securities redeemed were in each case held by commercial banks
and, to that extent, the funds withdrawn from War Loan deposits were
returned to the banks (in the aggregate). When the redeemed securities
were held by nonbank investors, payments for the securities were
returned to the banks, in the form of deposits by their customers. In
this case, however, there was a growth in bank deposits subject to
reserve requirements and therefore in the aggregate amount of the banks9
required reserves. Finally some part of each issue was held by Federal
Reserve Banks, and here the funds withdrawn from War Loan deposits




FEDERAL RESERVE BANK OF NEW YORK

31

in commercial banks were used by the Treasury to pay the Eeserve Banks
for the redeemed securities and thus were not returned to the com­
mercial banks. The latter, therefore, sustained net losses of reserve
funds in connection with each debt retirement operation, and were forced
to restore their reserves to the required levels — in many cases by selling
securities in the market. A considerable part of these securities were
purchased by the Reserve Banks, but this did not prevent a recurrent
“ squeeze” on the reserve positions of the commercial banks which tended
to limit their ability to make further purchases of Government securities
from nonbank investors or to extend credit in other ways.
Liquidation of speculative holdings of long term Government
securities financed by bank loans did not develop in May and June on
the scale that had been feared, but occurred gradually over a number of
months and exerted a moderately restraining influence on the market
for such securities. Beginning in the summer, marketable Government
bonds totaling more than 500 million dollars were sold for Government
trust accounts, and this also had a dampening influence on prices.
Finally, in the latter part of the year, active demands for bank credit
and new capital, from business organizations and others, contributed
to a slight rise in interest rates on some types of bank loans and on
corporate securities. This tended to raise questions as to the future
course of interest rates, and hence was a deterrent to a resumption of
active bidding for longer term Government bonds and a restraint on
rising prices and declining yields. Consequently, there was little need
for the Federal Reserve System to take further measures of credit
restraint, after the spring of 1946, at least so far as further monetiza­
tion of the public debt was concerned.
At the end of the year, however, the immediate debt retirement
program, involving the use by the Treasury of its excess working
balances, was virtually completed, a considerable part of the more
speculative holdings of long term Government obligations had been
liquidated, and sales of marketable Government securities by Government
trust accounts were small and irregular. Consequently there was no assur­
ance that there might not be a recurrence of the tendencies which caused
concern in the early months of 1946.
Furthermore, concern over the inflationary tendencies of credit
expansion had largely shifted to the rapid growth in business and other
loans by banks, which, as was pointed out earlier in this report, was




32

THIRTY- SECOND ANNUAL REPORT

the largest factor in the further increase in the money supply in the
hands of the public during 1946. While many of the new loans helped
to facilitate increased production, it is quite likely that speculative
activities were also financed, and that bank credit was used in other
ways which tended to accentuate demands for basic commodities or
finished goods which were in short supply, thus adding to inflationary
pressures. Except in the cases of security loans and consumer loans,
the Reserve System can exert a restraining influence upon the growth
of bank credit only through its general instruments of policy — chiefly
those which affect the availability of Federal Eeserve credit, and hence
of bank reserve funds.
In view of the large bank holdings of Government securities, and
in view of the responsibilities of the Federal Eeserve System toward
the Government security market, growing out of the program of war
finance, it is difficult for the System to exercise control over the volume
of Eeserve Bank credit and, therefore, of bank reserves. Particularly,
the fixed buying rate for Treasury bills and the support given the
market for other short term securities by the System make it easy for
the commercial banks to obtain the reserve funds which will permit an
expansion of loans or investments. In these circumstances, there was
considerable discussion during the year of the possible advantages or
disadvantages of further steps in the direction of eliminating wartime
arrangements under which the Federal Eeserve System was committed
to the support of the market for short term Government obligations.
The president of this bank has advocated ‘ ‘ defrosting’ ’ short term
interest rates, at an appropriate time, in order to restore to the System
some measure of control over the volume of Federal Eeserve credit
supplied to the banks of the country, and in order to restrain a persistent
tendency toward monetization of the public debt which is inherent in
the maintenance of a fixed pattern of rates.*
S elective C redit C ontrols

In view of the inflationary pressures which prevailed during most
of the year, further steps were taken in the direction of tightening the
selective credit controls available to the System — the regulation of
* Monetary Management and Credit Control, Supplement, Monthly Review of Credit
and Business Conditions, Federal Reserve Bank of New York, January 1947.




FEDERAL RESERVE BANK OP NEW YORK

33

security margins and the regulation of consumer credit. Effective
January 21, 1946, the Board of Governors of the Federal Reserve
System, by amendments to Regulations T and U, raised margin require­
ments for trading in securities listed on national securities exchanges
from 75 per cent to 100 per cent. This change had the effect of pro­
hibiting new loans on listed securities (for the purpose of trading in
such securities) by either security brokers or banks, except in certain
specified circumstances. In order to assist stockholders who receive
rights to subscribe to securities, the Board amended Regulations T and
U, effective December 1, 1946, by permitting loans to be made to finance
the purchase of securities by stockholders exercising subscription rights.
For this purpose registered securities were given a loan value of 50
per cent.
Subsequently, following the dampening of speculative
activity in the security markets in the latter part of 1946 and the con­
sequently reduced threat of substantial credit expansion to finance such
speculation, the Board announced a restoration of the general margin
requirement to 75 per cent, effective February 1, 1947. It should be
remembered that these restraints apply only to the use of stock exchange
collateral for loans to finance security trading, and not to the use of
such collateral for business borrowing. In the existing circumstances,
it is questionable whether more liberal use of credit to finance security
trading would be beneficial to the economy unless there is evidence
that it is needed to facilitate the flotation of securities to provide funds
required for productive purposes.
Despite the rising volume of industrial production during the year,
demands for many classes of consumers’ goods continued to exceed
supply, with consequent upward pressure on prices through most of the
year. In these circumstances, the Board of Governors of the Federal
Reserve System continued Regulation W (Consumer Credit Regulation)
in effect, with few changes, until December. In fact, it tightened the
Regulation somewhat, in September, by raising from 1,500 dollars to
2,000 dollars, the maximum size of credits to which the Regulation was
applicable, and by reducing from 18 months to 15 months the maximum
permissible maturity for instalment loans not connected with the
purchase of consumers’ durable or semidurable goods. (Instalment
credits for the purchase of such goods remained subject to a maximum
maturity of 12 months except in the case of instalment credits for the
purchase of automobiles, the maximum maturity of which was 15
months.)




THIRTY-SECOND ANNUAL REPORT

34

Important and sweeping revisions in the Regulation were made,
however, effective December 1. All types of consumer credit were freed
from controls, with the exception of instalment credits (or cash loans)
to finance the purchase of major durable goods. Many items were
dropped from the list of goods subject to instalment sale restrictions.
Required down payments for the remaining 12 items or classes of goods
were continued at the same level (20 per cent on furniture and 33Ys
per cent on the other items) with one exception, and a uniform maximum
maturity of 15 months was set. These revisions made the Regulation
much simpler and easier to administer, but control was retained over
those types of consumer credit which are subject to wide fluctuations
and which, consequently, are most likely to accentuate economic
instability.
Despite continued restrictions on consumer credit, and the fact
that major consumers’ durable goods (sales of which ordinarily are
financed largely by consumer credit) were in many cases available to
consumers only in limited quantities, the total volume of consumer
credit rose very sharply during 1946. At the end of the year it was
Consumer Credit by Major Types
(Estimated amount outstanding end of December 1929, 1933, 1941, 1945, and 1946)
B ILLIO N S
OF DO LLA RS

_________ __ __________.

12

10

8

6 -

CHARGE
ACCOUNTS

4
•in s t a l m e n t :
X A S H LOAN:*

2

mm

mmmjm

0
1929




1933

1941

1945

1946

FEDERAL RESERVE BANK OF NEW YORK

35

estimated at nearly 10 billion dollars, or about the same amount as
the previous peak reached in the fall of 1941. Within this aggregate,
charge accounts, single-payment loans, and “ service” credit were well
above their 1941 peaks. Instalment credit, on the other hand, was still
far below its level at the end of 1941, but it had expanded nearly 70
per cent during the year, and is expected to grow even more rapidly in
1947 as automobiles and other major consumers’ durable goods become
more freely available.
Relaxation of credit terms for the financing of such goods would
tend to accentuate the demands for them and, as long as demands con­
tinue in excess of the available supply, this would accentuate inflationary
pressure on prices. Even though manufacturers resisted the temptation
to raise prices, there would be danger of stimulating unauthorized prac­
tices by the less scrupulous dealers, which, in effect, tend to allocate
available supplies to the highest bidders. And even when substantially
greater supplies of goods are available, easy credit terms might tend
to concentrate within a few years demands which, from the viewpoint
of stability of business and employment, it would be better to spread
over a longer period.
The reason for concentrating the application of consumer credit
control in the area of instalment credit for the purchase of the principal
consumers’ durable goods is illustrated by the following diagram.
As the diagram indicates, the major fluctuations in industrial employ­
ment over a number of years before the war were in the production of
durable goods, rather than in the production of nondurable goods, even
though consumer expenditures for nondurable goods usually are much
greater than expenditures for durable goods. Accentuation of demands
for consumers’ durable goods, by liberal extensions of consumer credit
during periods of rising business activity and employment, tends to be
followed by a drain on current consumer incomes (through the repay­
ment of indebtedness-previously contracted) and sharp curtailment of
demands for such goods, in periods of declining business activity and
employment. Thus, while instalment credit unquestionably serves a
useful purpose in broadening the market for goods which many con­
sumers would be unable to pay for in cash, unrestrained use of such
credit in periods of high activity and general optimism is likely to prove
harmful, both to business and to consumers.
If consumer credit regulation is to serve a useful purpose, it must be
flexibly administered. To be effective in contributing to efforts to




THIRTY-SECOND ANNUAL REPORT

36

combat instability of business and employment, it must be applied
restrictively in periods when demands tend to outrun supply; and must
be relaxed in periods when more freely available credit can contribute
usefully to the maintenance of demand and thus to the maintenance of
production and employment. To expect consumer credit control, how­
ever wisely administered, to iron out the fluctuations in the consumers’
durable goods industries would be to expect far too much. It is not
too much to expect that it can help to moderate such fluctuations.
Number of Employees in Major Groups of Manufacturing Industries*
M IL L IO N S
OF PERSONS

* Number of employees reduced to equivalent number o f full-time workers. Durable
goods industries include construction material, furniture, and metals; consumers’ semidurable goods, textile and leather; consumers’ perishable goods, food and tobacco.
Source: Simon Kuznets, N a tio n a l In c o m e a n d I t s C o m p o sitio n , 1919-1938, V ol. I,
pp. 334-5; number o f employees computed from percentage distribution by Federal Reserve
Bank o f N ew York.




FEDERAL RESERVE BANK OF NEW YORK

37

Foreign Economic and Financial Reconstruction
During the past year, gradual progress was made in the field of
international economic and financial reconstruction, although many
and serious difficulties remain to be overcome.
The International Monetary Fund in December accepted existing
exchange rates as the initial par values for 32 member countries,
in anticipation of the commencement of active Fund operations on
March 1,1947. The International Bank for Eeconstruction and Develop­
ment called up 15 per cent of its capital subscription, and received
loan applications from eight member countries. The United States
Government, pending full assumption by the International Bank of its
responsibility for reconstruction and development loans, further devel­
oped its own interim lending program by increasing its postwar loan
authorizations to 8.5 billion dollars, of which 3.5 billion had been utilized
up to the end of 1946. Additional assistance to war-devastated countries
abroad was provided by over 1 billion dollars in relief shipments through
UNRRA, and by 1.5 billion of “ straight” lend-lease transactions and
United States Army relief operations. •
Owing largely to this American aid, most of the Western European
countries greatly expanded their imports; their exports also rose sharply,
although less spectacularly. The physical volume of British exports was
slightly less in 1946 than in 1938, and was still far short of the postwar
target level (75 per cent above the 1938 volum e); however, the value
was greater than in 1938, and the volume increased as the year pro­
gressed. A considerable network of bilateral trade arrangements was
negotiated among European and Latin American countries during the
year.
Complementing American financial efforts to restore international
trade on a multilateral and nondiscriminatory basis, the State Depart­
ment issued its Suggested Draft Charter for an International Trade
Organization, containing detailed rules of trade policy based T)n its
Proposals of December 1945. A Preparatory Committee appointed by
the United Nations to draft such a charter recommended acceptance of
most of the basic policy directives proposed by the State Department.
P rogress

of

W

orld

Bank

and

F und

The operations of the International Bank for Reconstruction and
Development during the year were confined to the gradual building up




38

THIRTY-SECOND ANNUAL REPORT

of an operational staff, the calling up of a percentage of members’
capital subscriptions, and study of the loan applications received.
After the adherence of Colombia, Venezuela, Turkey, and Italy,
which raised the Bank’s membership to 42, total capital subscriptions
amounted to 8,013.5 million dollars on March 27, 1947.* In the course
of the year the Bank called up the 2 per cent of its subscribed capital
that was payable in gold or U. S. dollars and another 13 per cent
payable in local currencies. On March 25, 1947, it called up another
5 per cent payable on or before May 26, thereby completing the calling
up of the anticipated 20 per cent of the subscribed capital. Of the
cash received, approximately 150 million dollars was invested in United
States certificates of indebtedness.
Loan applications or ‘ 4
letters of intent” have been received from
eight countries, involving some 2.3 billion dollars of proposed loans. The
applications of France and Denmark for 500 and 50 million dollars, re­
spectively, were reported to be under active consideration. In response
to a request from the United States representative, the executive
directors ruled that the Bank *has authority to make or guarantee
monetary-reconstruction loans, including loans for long term stabilization.
The International Monetary Fund, on March 27, 1947, also had a
membership of 42 countries (after Venezuela signed the Articles of
Agreement on December 30, 1946, Turkey on March 11, 1947, and Italy
on March 27, 1947), with quotas aggregating 7,710.5 million dollars.**
As part of its preparations for beginning exchange transactions on
March 1, 1947, the Fund, on December 18, accepted as initial par values
the existing rates of exchange for 32 member countries. The par rates
for Brazil, China, the Dominican Republic, Greece, Poland, Uruguay,
and Yugoslavia, for France in respect to French Indo-China, and for
the Netherlands in respect to the Netherlands East Indies, have not yet
been set, owing in most cases to unsettled economic or political conditions
in those countries.
At the first annual meeting of the Board of Governors, held in
Washington in September 1946, the executive directors, in response to a
* This total will be raised to 8,024.5 million when Syria and Lebanon, which were
admitted in September 1946, sign the Articles of Agreement. At the end of 1946, the
following five countries that attended the Bretton Woods Conference had failed to join
the Bank: Australia, New Zealand, Haiti, Liberia, and the Soviet Union.
** Total quotas will reach 7,721.5 million when Syria and Lebanon, which were admitted
in September 1946, sign the Articles of Agreement. Bretton Woods signatories which had
not joined the Fund as of the end of 1946 were the same as in the case of the Bank.




FEDERAL RESERVE BANK OF NEW YORK

39

request by the British director, interpreted the definition of “ funda­
mental disequilibrium, ’ 9 under which exchange-rate alterations could
be permitted, to include unemployment of a chronic or persistent char­
acter arising from pressure on the balance of payments. (For any
proposed alteration exceeding 10 per cent of the initial par value of a
currency, the Fund must be satisfied that the change is necessary to
correct the fundamental disequilibrium.) A further interpretation by
the directors, at the request of the American director, limited the use
of the Fund’s resources exclusively to temporary assistance in the
financing of balance of payments deficits on current account for
monetary stabilization purposes.
U.

S. G o v e rn m e n t L en d in g an d F i n a n c i a l A id

The Act of Congress of July 1945 authorizing American participa­
tion in the International Monetary Fund and the International Bank
included provision for establishment of a National Advisory Council on
International Monetary and Financial Problems, to consist of the
Secretaries of the Treasury, State, and Commerce; the Chairman of
the Board of Governors of the Federal Eeserve System; and the Chair­
man of the Board of Directors of the Export-Import Bank. The Council
was directed to coordinate the policies and operations of the United
States representatives on the Fund and the Bank, and of all agencies
of the United States Government that make, or participate in making,
foreign loans or that engage in foreign financial, exchange, or monetary
transactions. The United States thus, for the first time, acquired an
instrumentality for a consistent and well directed foreign loan policy.
A statement of the foreign loan policy of the NAC, issued in March
1946, recognized the crucial importance to American stability of economic
reconstruction and development abroad and the necessity of supplement­
ing, by an extensive lending program, the foreign resources, UNRRA
assistance, and surplus property arrangements that are available for
such reconstruction. Pending the extension by the International Bank
of developmental and reconstruction loans, the NAC recommended
approval by Congress of the 3,750 million dollar credit to Great Britain,
as well as a considerable increase in the Export-Import Bank’s lending
power; the latter recommendation was not implemented by appropriate
legislation, however. The NAC considered that a large part of such
foreign loans would be spent on capital goods and materials in surplus
supply, while export controls would prevent undue drains on this




40

THIRTY-SECOND ANNUAL REPORT

country’s supply of less plentiful commodities. Recognizing that
eventual loan repayments would depend fundamentally upon the ade­
quacy of dollar exchange provided by American imports of goods and
services, the NAC expressed the belief that population growth, rising
living standards, and the depletion of natural resources in the United
States would facilitate the solution of the transfer problem.
Reports made by the NAC on the period from August 1945 to
October 1946 record intensive activity in negotiating the financial agree­
ment and the war settlement with the United Kingdom, in assisting
the establishment of the Fund and Bank, and in advising upon a broad
range of foreign financial problems. The United States is recorded as
favoring early admission of all peace-loving nations to both the Fund
and the Bank. With respect to use of the Bank’s resources, the NAC
agreed that United States approval was not required under the Articles
of Agreement of the Bank for lending or investing dollars derived from
the 2 per cent payable in gold or dollars by all members on their capital
subscriptions, and raised no objection to investment of such funds in
short term obligations of the United States.
The broad postwar program of United States Government foreign
lending and financial assistance, the early phases of which were dis­
cussed in the previous Annual Report of this bank, was further developed
and expanded during 1946. Designed principally to assist war-devastated
foreign countries to acquire from the United States supplies and services
urgently needed for purposes of relief, rehabilitation, and reconstruction,
this program has consisted of both outright relief and long term dollar
loans and credits.
Gratuitous relief has been extended primarily through this country’s
participation in UNRRA, for which the United States Congress has
appropriated a total of 2.7 billion dollars. During 1946, UNRRA ship­
ments from the United States aggregated slightly over 1 billion dollars,
and, in addition, several hundred million dollars of aid was extended
by this country through UNRRA in the form of freight services and
cash payments. Direct relief assistance has also been granted through
the United States Army, which distributed supplies in areas occupied
by our Armed Forces to the extent of about 750 million dollars between
Y-E Day and the end of 1946. In addition, about 600 million dollars of
supplies and services have been provided in the form of so-called




FEDERAL RESERVE BANK OP NEW YORK

41

“ straight” lend-lease (for which no material compensation has as yet
been arranged), consisting primarily of shipments to China. Relief has
also been extended to Italy (135 million dollars) out of lend-lease funds.
In addition to its relief program, the United States Government
authorized a total of over 8.5 billion dollars of foreign loans and credits
between July 1, 1945 and December 31, 1946. Many of these loans and
credits are available over a number of years, and of the total authorized,
only about 3.5 billion dollars has so far been utilized, mainly during 1946.
During the eighteen months ended December 31, 1946, the total of
Export-Import Bank loan authorizations amounted to about 2.2 billion
dollars, of which 1.1 billion was actually disbursed, primarily in 1946.
Of these disbursements 655 million dollars represented utilization of
three credits, authorized in the latter part of 1945, to finance the pur­
chase by France, Belgium, and the Netherlands of lend-lease goods that
had been requisitioned but not contracted for by V-J Day. Of the
remainder of the disbursements, 255 million was drawn upon under the
terms of reconstruction credits, of which a total of 1.4 billion dollars
had been authorized by the end of 1946, to war-devastated countries in
Europe and the Far East.
As indicated in last year ’s report, a sizable amount of dollar credits
has also been extended to foreign countries to finance the purchase of
lend-lease ‘ cpipe-line ’ ’ supplies, that is, goods which had been contracted
for but not delivered by V-J Day. Long term credits of this character
had been utilized by September 30, 1946 to the extent of about 1.1
billion dollars. Some of these credits, such as those to Russia and
China, are to be repaid over a period of 30 years and carry an interest
rate of 2% per cent, whereas those to Britain and France are to be repaid
as part of the general war settlements with those countries.
The most important single foreign loan authorized by the United
States Government since V-J Day is the 3,750 million dollar line of
credit to the United Kingdom, under legislation approved by President
Truman on July 15,1946, for the purpose of helping that country finance
its over-all dollar requirements during the transition period. This loan,
unlike most of the other post-V-J Day loans of the United States Govern­
ment, is not tied to the financing of prescribed transactions, and is avail­
able until December 31, 1951, with repayment of principal and payment
of interest at 2 per cent to begin on that date and to extend over a




THIRTY-SECOND ANNUAL REPORT

42

period of 50 years. Payment of interest may be waived under certain
specified conditions. By the end of 1946, total disbursements under
this credit had amounted to 600 million dollars, and it is believed that
such disbursements may be at a more rapid rate in the future.* The
loan agreement obligated the United Kingdom to remove exchange
controls over current transactions according to a given time schedule,
to arrange settlements on blocked sterling balances held by foreign
countries, and to assume other commitments designed to facilitate multi­
lateral world trade. Concurrently with the negotiations leading to the
* By April 1, an additional 700 million dollars of this credit had been placed at the
disposal of the British.
United States Government Foreign Lending and
Financial Assistance
July 1, 1945 to December 31, 1946
(In millions of dollars)
Foreign loans and credits a
Amount authorized
1.
2.
3.
4.
5.

Export-Import Bank loans .............................
Loan to Britain ...............................................
Lend-lease pipe-line credits .........................
Surplus property disposal credits ................
Other foreign loans .......................................
Total

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

Amount utilized

2,251
3,750
1,500 c
964 e
95

1,115 b
600
1,150 d
769 e
20

8,560

3,654

International financial assistance
Amount authorized
1. United States participation in UNRRA . . .
2. Other relief ......................................................
3. Post-V-J Day nonreimbursable lend-lease ..
Total

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

2,700 g
h
h
—

Amount utilized /
2,000
850
600
3,450

a Not including short term advances to foreigners in connection with purchase of raw
materials, nor credit arrangements where repayment will be made fully in foreign
currencies, services, or real and other property.
b Includes disbursements of 27 million dollars made by commercial banks under ExportImport Bank loans, without the latter’s guarantee.
c Estimated total, including some arrangements for settlement of war accounts.
d As of September 30, 1946.
e As of November 30, 1946; excluding foreign credits under consideration by the United
States Maritime Commission for sale of United States merchant vessels.
/ Estimated utilization from beginning of individual programs through latest dates for
which data are available.
g Total authorized United States contribution.
h Part of general authorizations.




FEDERAL RESERVE BANK OF NEW YORK

43

authorization of the British loan, a settlement was reached between the
two governments in December 1945 covering mutual war accounts, lendlease ‘ ‘ pipe-line ’ ’ goods, and the disposal of United States surplus
materials located in the United Kingdom. This settlement provided for
payments by the United Kingdom of 650 million dollars, to be made on
the same terms as the repayment of the 3,750 million credit.
Similar in purpose to the Anglo-American financial agreement was
the broad program of United States Government financial assistance to
France concluded last May. This program consisted of a 650 million
dollar Export-Import Bank loan (in addition to a similar loan of 550
million dollars granted in the fall of 1945)* and long term credit
arrangements totaling 720 million dollars for surplus property disposal,
lend-lease “ pipe-line” shipments, and the settlement of war accounts.
A large number of long term credit arrangements have also been
authorized by the Foreign Liquidation Commissioner of the State
Department to finance the sale to foreign countries of United States
surplus property located abroad. A total of 1 billion dollars of surplus
disposal credits, including those to the United Kingdom and France
noted earlier, had been authorized up to November 30, 1946. Of this
total about 800 million dollars had been actually utilized through the
transfer of goods. Principal recipients of surplus property disposal
credits were France (300 million dollars), Italy (160 million), the
Netherlands Indies (100 million), United Kingdom (60 million), Poland
(50 million), and Greece (45 million). Most of these credits carry
interest at 2% per cent and are payable over periods of up to 30 years.
R estoration

of

I n t e r n a t io n a l T rade

While considerable progress was made in 1946 in the restoration of
international trade, the growth of some countries9trade was handicapped
by production difficulties or exchange shortages. In Continental Europe,
where reconstruction problems were most acute, exports of most of the
ex-belligerents rose sharply during the year, but only in some of those
countries did exports reattain the prewar volume. (Data are not
available for Russia and most of Eastern Europe.) In most cases
imports, as was to be expected, showed a greater increase in value
over the prewar level than did exports, although much if not all of their
* Both amounts included in the 2.2 billion dollars of Export-Import Bank authorizations
mentioned earlier.




44

THIRTY-SECOND ANNUAL REPORT

increase reflected higher prices. A large part of these imports repre­
sented UNRRA and other relief shipments not requiring payment, or
was financed by United States loans or by drawing on gold and dollar
reserves.
Great Britain continued efforts to solve her difficult balance of
payments problem. Although the value of British exports in 1946 was
almost double that of 1938, the increase was entirely due to higher
prices. Export volume rose steadily during the year, and the volume
index for the final quarter was 11 per cent above 1938, but for the
year as a whole, the volume of exports was slightly below the 1938 level,
whereas the attainment of a postwar volume 75 per cent above that
level is considered essential; the British goal for the end of 1947 is a
volume of exports 40 per cent above the 1938 level. Furthermore, the
value increase in 1946 was chiefly in trade with sterling and blockedcurrency countries, whereas the British foreign exchange problem pri­
marily concerns trade with the hard-currency areas (especially the
United States and Canada). Although British imports were held to a
lower level than can probably be sustained without harm to exports, a
large unfavorable trade balance remained and had to be met in part
by drawing on the American and Canadian credits. These obviously
can provide only temporary help, and the solution of the British tradedeficit difficulties continues to be one of the most critical economic
problems today.
Trade of the European neutrals, for the most part, rose high above
prewar levels in value during 1946, although part of the increase reflected
higher prices. Canadian trade also was far above prewar levels, in
volume as well as in value, although of course remaining below the
wartime peaks; in these respects it paralleled the United States per­
formance. The Canadian trade increase with the United States and
other non-Empire countries was particularly pronounced.
Latin American trade values, which continued far above prewar
levels, were also above 1945 in most cases, although volume declined in
some countries; resumption of trade with Europe was very slow, except
with Switzerland and Sweden. In India, although trade values were
above prewar figures, the physical volume was smaller. In China,
imports increased strikingly relative to exports, thus contributing to a
critical deterioration in the country’s foreign exchange position. Japan­
ese trade was at a sharply lower level than before the war.




FEDERAL RESERVE BANK OF NEW YORK

45

In December 1945 the State Department issued its Proposals for
Expansion of World Trade and Employment, recommending the estab­
lishment of an International Trade Organization, and suggesting for
incorporation in its charter detailed rules of trade policy based on the
reduction of tariffs, quotas, and other trade obstacles, and on nondiscriminatory treatment among members. Acting upon this recom­
mendation, the Economic and Social Council of the United Nations
appointed shortly thereafter a Preparatory Committee of experts, com­
prising representatives of the United States, United Kingdom, U. S. S. R.,
and fifteen other countries, to draft such a charter for presentation to
a prospective International Conference on Trade and Employment.
This Preparatory Committee, from which Russian representation had
meanwhile been withdrawn, convened in London on October 15, 1946,
accepting as a basis for its discussions a second State Department docu­
ment, A Suggested Charter for an International Trade Organization.
Wide agreement was reached upon all of the major policy issues
involved in the proposed charter, with the exception of those arising out
of State trading monopolies and relations with nonmembers of the ITO.
Full agreement upon a complete charter text, as well as concerted nego­
tiation of tariff reductions by all the governments represented on the
Preparatory Committee, will be sought at the second meeting of the
Preparatory Committee in Geneva in April 1947. If such tariff nego­
tiations are successful, it is hoped to establish a General Trade and
Tariff Agreement, which would set forth the new tariff schedules. In
this Agreement would be incorporated the bulk of the commercial-policy
recommendations of the London meeting for the reduction of preferences,
quantitative restrictions, etc., as well as provision for an Interim Tariff
Committee to administer the Agreement until the ITO becomes effective.

The United States Balance of International Payments
During 1946 the United States balance of international payments
shifted further from the well-defined pattern which it had followed after
1941 and until the end of war in 1945. Lend-lease transfers of goods
and services to foreign countries, which had dominated our wartime
balance of payments, continued to drop at a rapid rate, and by the
end of the year had virtually ceased. On the other hand, United States
Government foreign lending and other financial assistance rose to a
high level. Furthermore, this country’s wartime cash deficit on trade
and service account (arising from the fact that our exports were chiefly




46

THIRTY-SECOND ANNUAL REPORT

on a lend-lease basis while our imports and other overseas expenditures
were largely paid for in cash) was replaced by a cash surplus. Con­
sequently, during 1946, foreign countries in the aggregate were net
losers of gold and dollar assets to the United States, instead of net
gainers as they had been during the war.
According to estimates of the Department of Commerce, the United
States provided about 15.3 billion dollars of goods and services to
foreign countries during 1946, compared with 16.0 billion dollars in
1945. On the other hand, our receipts of goods and services from
abroad amounted to only about 7.1 billion dollars in 1946, compared
with about 8.8 billion in the preceding year. As a result, our net
transfers of goods and services to foreign countries rose from 7.2 billion
dollars in 1945 to 8.2 billion in 1946. Furthermore, whereas the net
foreign deficit on current account vis-a-vis the United States in 1945
was almost completely covered, until the latter part of the year, by
net lend-lease aid calling for little or no cash repayment, the greater
part of the deficit in 1946 had to be paid for in cash, on either an
immediate or a deferred basis.
Of the 8.2 billion dollar net foreign deficit on current account in
1946, about 3.1 billion was met by gratuitous aid from this country in
the form of relief through UNRRA, United States Army distribution
of civilian supplies in areas occupied by our Armed Forces, “ straight”
lend-lease (nonreimbursable in character), and private relief shipments
and support remittances. The remainder of the deficit (the “ cash”
deficit proper) was financed to the extent of about 3.0 billion dollars
by long term foreign borrowing from the United States Government and
its agencies, and to a lesser degree by net foreign utilization of gold
. and dollar assets.
Total transfers of goods alone amounted to about 12.1 billion
dollars in 1946. Of this amount, about 10.3 billion involved exports
from this country, and the balance transfers from supplies and property
located abroad. Fundamental changes occurred during the year in
the pattern of our recorded exports. Lend-lease exports declined from
almost 5.6 billion dollars in 1945 to less than 0.7 billion in 1946, and of
the latter the bulk called for cash payment. Relief shipments, on the
other hand, rose from slightly under 500 million in 1945 to somewhat
over 1 billion in 1946. All other exports rose from 3.8 billion to almost
8 billion dollars.




FEDERAL RESERVE BANK OF NEW YORK

47

Recorded merchandise imports rose only moderately, from 4.1
billion dollars in 1945 to 4.9 billion in 1946. The rise would undoubtedly
have been much sharper, given the continuing high levels of income in
this country, were it not for the relatively slow recovery of production
in the war-devastated countries of Europe and Asia. Our net exports
of services in 1946 yielded a surplus of about 1.2 billion dollars, com­
pared with 0.4 billion in the preceding year. This increase reflected in
large part a rather sharp decline in United States Government military
expenditures for services obtained from foreign countries.
In addition to the huge export of capital from this country
associated with United States Government foreign lending and financial
assistance, there was a smaller net “ outflow” of capital through inter­
national banking and security transactions, which reflected in part the
expenditure in this country of dollar balances previously acquired by
foreign countries. The wartime “ inflow” of capital was reversed in
November 1945, and from October 31, 1945 to October 31, 1946 (the
latest date for which published data are available), the recorded net
“ outflow” of capital amounted to about 685 million dollars. Of this
total, almost 310 million dollars was for Canadian account alone, and
about 200 million, 170 million, and 80 million were for British, Dutch,
and French accounts, respectively. On the other hand, substantial net
“ inflows” of capital were reported for some areas, notably for certain
of the Latin American countries, reflecting chiefly continuing favorable
balances of trade with the United States.
Included in the “ outflow” of capital in this period was a net reduc­
tion of about 289 million dollars in the total amount of foreign funds
held in banks in this country. This reduction reflected primarily the
drawing down of foreign-owned dollar balances to help finance purchases
in this country. Official foreign accounts alone were drawn upon
to the extent of about 552 million dollars (net), but this decline was
offset in part by a net increase of 263 million in private foreign
banking funds. An additional net “ outflow” of capital took place
during the same period in the form of an increase of about 342
million dollars in this country’s banking claims on foreigners. The
latter primarily reflected sizable loans, secured by gold, to foreign
central banks by the Federal Reserve Banks, as well as increased
loans to foreigners by commercial banks under Export-Import Bank
guarantee.




48

THIRTY-SECOND ANNUAL REPORT

International transactions in long term securities had a compara­
tively slight effect upon the aggregate recorded flow of capital between
the United States and foreign countries during the period under review.
In the 12 months ended October 31, 1946 net sales or maturities of
foreign-owned American securities, chiefly long term United States
Government obligations, amounted to 323 million dollars. On the other
hand, this net “ outflow” of capital was in large part offset by net re­
purchases or redemptions by foreigners of 250 million of their own
securities held in this country; these included the redemption of a
large volume of Argentine Government dollar bonds and of some
Canadian securities held in the United States. Some redemptions,
however, notably in the cases of Canada and Australia, were effected
by flotations of new issues in this country.
Commencing in December 1945, there was a renewed net gain of
gold by the United States (following net losses since November 1941).
From the beginning of December 1945 to the end of 1946 the net gain
of gold from foreign countries amounted to around 790 million dollars,
reflecting the release and sale of substantial amounts of gold previously
earmarked for foreign accounts, as well as the sale of a considerable
part of the net gold imports aggregating 331 million dollars. Net
imports from Canada alone amounted to about 380 million, and there
were also substantial imports from the Union of South Africa. There
were, however, sizable net exports of gold to certain Latin American
countries, representing chiefly the release and shipment of gold ear­
marked here for those countries. During the 13-month period, foreign
earmarked gold in this country declined by 460 million dollars to 3,828
million on December 31, 1946.
Despite their net losses of gold to the United States since December
1945, foreign countries as a whole (including Russia) are estimated to
have held an aggregate of about 16 billion dollars of gold at the end of
1946. These reserves, combined with total foreign official holdings of
dollar balances amounting to about 3.8 billion dollars on October 31,
1946 (and drawing rights in the International Monetary Fund), will
in a number of cases help foreign countries to finance any net deficits
on current account with this country which they may have in coming
years. These assets, however, are very unevenly distributed; in many
cases the countries most likely to have sizable deficiencies in their cur­
rent international accounts during the transition period are those lack­
ing substantial amounts of gold reserves or dollar assets. Consequently,




FEDERAL RESERVE BANK OF NEW YORK

49

the larger part of the deficiencies of dollars are likely to be handled,
at least for another year or two, by continued drawings upon the
credits extended to foreign countries by the United States Government
and its agencies. It is expected, however, that financial assistance wil]
become increasingly available through the facilities of the newly organ­
ized International Bank for Reconstruction and Development, and
eventually, it is hoped, through a renewed flow of private investments.

Developments in the Foreign Exchange Market
Further relaxation of the Treasury Department’s foreign funds
control regulations, as well as some liberalization of exchange controls
abroad, led to a modest revival of the New York foreign exchange
market during 1946. The range and volume of trading continued to be
relatively restricted until the middle of the year; in the latter half of
the year, however, some rather wide fluctuations occurred in a more
active market. In the case of several currencies, there were abrupt
changes in the quotations ruling in this market, reflecting important
revaluations in official rates which occurred abroad.
The process of removing our wartime foreign funds controls has in­
volved two major steps, the freeing of current transactions and the
provision of machinery for the release of existing blocked foreign assets.
Current transactions have now been freed with all areas except Portugal,
Spain, and Tangier. The machinery for releasing blocked assets is in
operation with all except these three areas and Germany and Japan.
According to the procedure established, assets are released when a
designated foreign governmental agency has certified in writing that
it is satisfied that no other blocked country or national thereof, at any
time since the date of original blocking, has had any interest in the
property involved.*
On July 5 the Canadian dollar was appreciated by 10 per cent to
its prewar parity with the United States dollar. Prior to July 8 the
rate for the Canadian dollar in unofficial dealings here fluctuated within
relatively narrow limits. On that date, the New York rate opened at
$0.99375, or 8-9/16 cents above the previous close. Subsequently, how­
ever, the rate moved between $0.973125 and $0.9500, and at the end
of the year it was quoted at about the lower level.
* In the case, however, of a few countries, notably China, there was a general un­
blocking of previously frozen assets without the use of the certification procedure.




50

THIRTY-SECOND ANNUAL REPORT

The Swedish krona was revalued upward on July 13 by approxi­
mately 16% per cent to a level of about 27% cents. Both the Canadian
and Swedish appreciations were undertaken primarily in an attempt
to protect domestic price levels against the price increases in the
United States which followed the initial expiration of OPA controls
on June 30.
On the other hand, the Turkish pound and the Chinese yuan were
devalued during 1946. The Hungarian Government in August 1946
replaced the pengoe (rendered worthless by hyper-inflation) with a new
currency, the forint, equivalent to $0.085184. In Brazil the abolition of
dual rates in July was followed by several changes in the Bank of
Brazil’s buying rate for dollars, resulting in a minor appreciation of
the cruzeiro. After holding steady at about $0.2350 (slightly above the
official rate) until mid-1946, the “ free” rate for the Swiss franc rose
abruptly late in June and again in the latter part of November. On
November 30 the United States Treasury announced the unfreezing of
Swiss assets in this country. At the end of 1946 the “ free” rate for
the Swiss franc was quoted at $0.2825.
Except for a temporary decline to $4.03% in the middle of May,
the spot quotation for sterling held steady during the first seven months
of the year at about $4.03%, which was the Bank of England’s official
buying rate for dollars. After the beginning of August, however, the
rate receded somewhat, reaching a low point for the year of $4.02%
late in November. By the end of December the rate was up again to
$4.03-3/16.
In the closing months of the year, the British Government an­
nounced a series of preliminary steps designed to make foreign re­
ceipts of sterling on current account freely convertible into United States
dollars or any other currency by July 15, 1947, in accord with a provi­
sion of the Anglo-American Financial Agreement of December 1945.
On October 2 it announced that British banks had been authorized to
approve transfers of sterling from the Argentine Special Accounts to
so-called American Sterling Accounts. Discussions between the British
and Canadian authorities resulted in an arrangement, effective January
1, 1947, whereby a broader use of sterling by Canadian importers and
exporters was permitted. A somewhat similar arrangement had been
worked out early in 1946 between the British and Brazilian authorities.




FEDERAL RESERVE BANK OF NEW YORK

51

Foreign Relations of the Federal Reserve System
As in the recent past, the foreign relations of the Federal Reserve
System have centered around the operation of the accounts of foreign
central banks and governments held at the Federal Reserve Bank of
New York, acting either on behalf of all Federal Reserve Banks or as
fiscal agent of the United States. These accounts include gold earmark
and security custody accounts as well as deposit accounts. This bank
makes payments and accepts deposits for foreign central banks and
governments maintaining accounts with it and acts for them in the
collection of checks, notes, bills, and other items payable in this country,
and in the purchase and sale of foreign exchange. Among other facilities
provided in the operation of the accounts is the purchase or sale, upon
instructions, of United States Government and other securities. This
bank also endeavors to carry out instructions to purchase for foreign
account prime endorsed bankers acceptances with guarantee of payment
at maturity of the acceptances purchased.
In addition to operations incident to the earmarking and holding of
gold for foreign account and to the release and sale or export of such
gold, facilities also exist for the granting of certain loans secured by
gold held under earmark at this bank. Unlike the type of loan that has
been made by the Export-Import Bank of Washington and the type of
loan that is likely to be extended by the new International Bank for
Reconstruction and Development, gold-secured loans recently granted
by the Federal Reserve Banks have been short term loans intended to
cover temporary dollar deficiencies in connection with foreign countries’
balances of international payments. Interest on the amount outstanding
has ordinarily been at the regular discount rate of this bank (now 1
per cent per annum).
Further progress was made during 1946 in the return of the Federal
Reserve System’s foreign operations to a peacetime pattern. This
was reflected in the reactivation of a number of foreign central bank
accounts which had been closed or become dormant during the war, and
conversely the closing of most of the foreign government accounts which
had been set up during the war. New accounts for five central banks
were opened during the year.
In keeping with the over-all reduction in foreign holdings of gold
and dollar exchange since V-J Day, the total amount of assets held by
the Federal Reserve Banks for account of foreign central banks and




52

THIRTY-SECOND ANNUAL REPORT

governments continued during 1946 the decline which began in the last
quarter of 1945. By the end of the year the total had receded to 5,330
million dollars, or 1,501 million below the level of a year earlier and
1,641 million below the September 1945 peak. This decline was evident
in practically all types of assets held by the Reserve Banks. Foreign
holdings of United States Government securities were reduced by 685
million dollars during the year and dollar balances by 353 million.
Gold held under earmark for foreign account receded by a net amount
of 368 million to 3,823 million dollars. The decline in the latter item
reflected not only the excess of releases of gold for sale to the United
States Treasury over new purchases, but also releases of 273 million
dollars of gold for export. This amount, which exceeded the total
shipped in 1945, brought to about 1.5 billion dollars the total of all
gold exported since the movement began in 1943.
The only assets showing a noteworthy increase during the year were
prime endorsed bankers acceptances, which this bank purchased for a
number of foreign central banks with guarantee of payment at maturity.
At the end of the year a total of 6.5 million dollars of such bankers
acceptances was held for foreign account. While the amount was not
large in relation to the sizable amount held in 1930 (when the total
amount of outstanding acceptances was much larger than the 1946
volume), these were the first acceptances purchased and held for foreign
account since the latter part of 1939.
Although the volume of foreign operations undertaken on behalf
of United States Government departments and agencies was further
reduced during 1946, there was, nevertheless, a rather sizable increase
in the total volume of foreign transactions handled by this bank. There
was a substantial increase during the year in both the number and size
of gold-secured loans, as described above, granted to foreign central
banks by the Federal Reserve Banks. A series of such loans which were
made under an arrangement with a European central bank were the
largest transactions of this type during the year. At the end of 1946
more than 100 million dollars was outstanding under this loan arrange­
ment. The gold loan facility was also used to a lesser extent by another
European central bank and by three Latin American central banks. A
total of about 150 million dollars of loans on gold was outstanding at
the end of the year.




FEDERAL RESERVE BANK OF NEW YORK

53

In addition to its relations with foreign central banks and govern­
ments, the Federal Eeserve Bank of New York was appointed, pursuant
to the Bretton Woods Agreements Act, as depository of the International
Monetary Fund and of the International Bank for Eeconstruction and
Development. In June 1946 this bank was authorized by the Treasury
Department to act as fiscal agent for the Export-Import Bank of
Washington with respect to a 200 million dollar loan which that bank
had previously granted to the Netherlands Government and in which
about 40 commercial banks subsequently participated to the extent of
approximately one half of the total. Acting in this capacity, this bank,
directly and through the other Eeserve Banks, set up the necessary
arrangements for the participation by the commercial banks. Lastly,
as fiscal agent of the United States, this bank continued to operate the
Exchange Stabilization Fund under authorizations and instructions
from the Treasury.

Volume and Trend of the Bank’s Operations
The year 1946 was the first full calendar year of peacetime opera­
tion since 1938. It showed a sizable contraction of the bank’s fiscal
agency work, which had grown greatly during the war, although the
volume of this work continued at a far higher level than before the
war. At the same time there was further expansion of the more usual
types of peacetime operation. On the whole, the volume of operations
remained relatively high.
The conversion from war to peace was accompanied by a large
decrease in both the number and dollar amount of checks handled for
the United States Government, but by an even greater expansion in the
number of checks cleared and collected for individuals and businesses.
Total checks handled during the year represented an all-time peak.
Public demand for currency and coin continued to increase (though
more slowly than during the war years) and in consequence, new highs
in the total volume of currency and coin received and counted at this
bank were recorded. The number and dollar amount of collection items
handled for the United States Government rose somewhat further, but
the number and dollar amount of collection items handled for others
declined moderately. The aggregate dollar amount of discounts and ad-




54

THIRTY-SECOND ANNUAL REPORT
Some Measures of the Volume of Operations of the
Federal Reserve Rank of New York

1946

1945

2,300
917,697,000
2,046,492,000

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

61,730,000
290,828,000

103,989,000
237,303,000

7,325,000
1,030,000

6,529,000
1,052,000

110,000

136,000

35,046,000
182,000

55,575,000
244,000

27,676,000
1,328,000
197,000

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

578,000
10,040,000

766,000
12,255,000

$ 8,496,610,000
5,470,460,000
170,361,000

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

19,763,836,000
172,736,289,000

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

1,771,752,000
2,547,381,000

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

1,139,277,000

1,482,210,000

182,907,272,000
1,708,798,000

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

614,362,919,000
77,880,003,000

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

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 .................................................
Transfers of fundsf ....................................................
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) . . .
Transfers of fundsf ....................................................

* 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,
f Includes wire and mail transfers; excludes gold transfers.




FEDERAL RESERVE BANK OF NEW YORK

55

vances receded nearly 60 per cent as member banks reduced their bor­
rowing from the Reserve Bank.
Some further reduction occurred in the volume of fiscal agency
disbursements for the Reconstruction Finance Corporation, its subsidi­
aries, and the Commodity Credit Corporation. In addition, the absence
of War Loan drives during the year was reflected in a lower level
of public participation in sales of Government securities, thereby sharply
reducing the number of Government securities issued, redeemed, and
exchanged at this bank. This was also true of the number of securities
handled by the Safekeeping Department. However, the dollar volume of
such issues, redemptions, and exchanges of Government securities, and
of the securities transactions of the Safekeeping Department, was
higher than in 1945 since the Treasury debt retirement program, to­
gether with exchanges, involved large amounts of securities held by
member banks.
Despite the considerable progress made by the United States
Treasury in its program for “ defrosting” blocked foreign accounts, the
work of this bank’s Foreign Funds Control Department did not decline
materially during the year. This was largely because of the transfer
to the New York Bank of the Foreign Funds Control functions of the
other eleven Federal Reserve Banks.

Financial Statements
Statem ent

of

C o nditio n

This bank’s total assets showed only a slight increase during 1946,
in contrast to the large year-to-year increases during the three preceding
war years. In those years, the increases had arisen chiefly from con­
tinued purchases of Government securities, made to provide member
banks with needed reserve funds. In 1946, changes in the various asset
items were small in most cases; the most noteworthy changes were a
considerable reduction in discounts and advances, and a small decline
in holdings of Government securities.
Year-end data on discounts and advances frequently are not of
much significance, because of the tendency of member banks to reduce




56

THIRTY-SECOND ANNUAL REPORT

their indebtedness to a minimum at sneli times, but the reduction of
155 million dollars between the end of 1945 and 1946 is indicative of a
generally reduced volume of member bank borrowing since the elimina­
tion in April of the preferential discount rate of ^2 per cent on ad­
vances secured by Government securities maturing or callable in one
year or less. The net change during 1946, however, overstates the
degree to which member bank borrowing was reduced; on the basis of
annual averages of the weekly figures, member bank borrowing receded
40 per cent from 1945 levels, or from 202 million dollars to 117 million
dollars. Holdings of United States Government securities declined 120
million dollars during the year as decreases of 442 million dollars in
Treasury notes, 208 million in certificates of indebtedness, and 48 million
dollars in Treasury bonds, more than offset a rise of 578 million
in Treasury bills. The decline in security holdings other than Treasury
bills was occasioned by redemptions which were only partly offset by
purchases in the market, while the increase in Treasury bills reflected
the acquisition of such bills from member banks which were forced to
sell securities to maintain their reserves at the required levels.
(In thousands of dollars)
Assets
Gold certificates .........................................
Redemption fund for Federal Reserve notes

Dec.

31, 1946

Dec.

31, 1945

$ 5,061,375
124,008

$ 4,908,821
124,283

$ 5,185,383

$ 5,033,104

Other cash ...................................................

$

44,537

$

36,867

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

$

58,935

$

214,344

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

$ 3,630,224
1,890,027
89,585
189,958

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

Total U. S. Government securities .

$ 5,799,794

$ 5,919,954

Total gold certificate reserves ........

Total loans and securities .............
Due from foreign banks ..............................
Federal Reserve notes of other banks ..........
Uncollected items .......................................
Bank premises..............................................
Other assets .................................................
Total assets ...................................
*After deducting participation of other Federal
Reserve Banks amounting t o .................




$ 5.858,729

$ 6,134,298

$

$

34*
19,882
576,280
8,459
11,182

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

$11,704,486

$11,666,274

$

$

68

70

FEDERAL RESERVE BANK OF NEW YORK

57

Following five consecutive years of decline, gold certificate reserves
rose 152 million dollars during 1946, owing to deposits of gold certifi­
cates by the Treasury against gold purchased from foreign countries,
and to a small favorable balance for the Second District in clearings
through the interdistrict settlement fund.
Among the liabilities, Federal Reserve notes of this bank in circula­
tion increased 306 million dollars further in 1946. (The increase in
outstanding notes of this bank was greater, proportionately, than for
all Reserve Banks combined.) This compares with increases of 557
million in 1945 and well over one billion dollars in 1944 and reflects the
continued tapering off of the wartime increase in the outstanding cur­
rency circulation, of which the largest component is Federal Reserve
notes.
(In thousands of dollars)
Liabilities

Dec. 31, 1946

Dec. 31, 1945

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

$ 5,714,364

$ 5,407,924

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

$ 4,903,039
94,716
189,873*
224,947

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

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

$ 5,412,575

$ 5,830,550

$

$

362,569
2,811

236,189
1,413

$11,492,319

$11,476,076

$

65,801
136,549
7,253
2,564

$

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

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

$

212,167

$

190,198

Total liabilities and capital accounts

$11,704,486

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

Contingent liability on bills purchased for
foreign correspondents .........................
Ratio of gold certificate reserves to deposit
and Federal Reserve note liabilities com­
bined ....................................................
* After deducting
Federal Reserve
t After deducting
Federal Reserve




participation of
Banks amounting
participation of
Banks amounting

other
to...
other
to...

$

$11,666,274

2,181t
46.6%

$

317,868
4,366

44.8%
$

523,414

58

THIRTY-SECOND ANNUAL REPORT

Total deposits at the Federal Reserve Bank receded 418 million
dollars during the year, as a result of substantial declines in all major
deposit categories except member bank reserve accounts; the latter
increased 48 million dollars owing to a growth in the volume of member
bank deposits requiring reserves. Deposit balances of foreign central
banks and governments with this bank were drawn down 148 million
dollars (part of a larger reduction at all Reserve Banks), reflecting the
termination of United States lend-lease aid in August 1945 and the sub­
sequent necessity for foreign countries to pay cash for an increased
portion of the goods and services supplied to them by American sellers.
Reflecting the combined effect of higher gold certificate reserves
and a decreased total amount of Federal Reserve note and deposit liabili­
ties, the reserve ratio of this bank increased slightly from 44.8 per cent
at the close of 1945 to 46.6 per cent at the close of 1946.

E a r n in g s

and

E xpenses

Gross earnings of the bank rose 1.4 million dollars further to 37.4
million dollars in 1946, owing primarily to greater average holdings of
Treasury bills. Earnings on lo^ns were reduced slightly as member bank
borrowing declined, but holdings of bankers acceptances for this bank’s
own account contributed a small amount of earnings for the first time
since 1937.
Net expenses increased by more than 2.1 million dollars to 13.7
million, causing a reduction in current net earnings by 700 thousand
to 23.7 million dollars. The rise in net expenses reflected increases
in aggregate compensation of employees and an accompanying in­
crease in the bank’s contribution to the retirement fund. Additions to
current net earnings, mostly in the form of profits on sales of Govern­
ment securities, were about 400 thousand dollars less than a year ago,
while total deductions were 600 thousand higher, mainly because of
special payments to the retirement fund, including adjustments to
equalize benefits of employees returning from military service. As a
result of all factors, net earnings after all charges were reduced 1.7
million dollars to 23.7 million. The usual 6 per cent dividend, amounting
to some 3.9 million dollars, was paid to the member banks and prac­
tically all of the remainder of net earnings was transferred to surplus.




FEDERAL RESERVE BANK OF NEW YORK

59

Profit and Loss Account
For the Calendar Years 1946 and 1945
(In thousands of dollars)
Earnings ......................................................
Net expenses ...............................................

$

1946
37,443
13,740

$

1945
36,026
11,623

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

$

23,703

$

24,403

$

433
132

$

802
135

$

565

$

937

$

531
72

$

Additions to current net earnings:
Profits on sales of U. S. Government
securities ..........................................
All other ..............................................
Total additions ..............................
Deductions from current net earnings:
Retirement system salary computation
adjustment .......................................
All other ..............................................

—
3

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

$

603

$

3

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

$

23,665

$

25,337

Paid United States Treasury (Section 13b) . .
Dividends paid ............................................
Transferred to surplus (Section 13b) .......
Transferred to surplus (Section 7) ..........

$

63
3,865
48
19,689

$

66
3,627
63
21,581

Surplus (Section 7) beginning of year ....
Addition as above .......................................
Transferred from contingent reserves:
Previously charged to current net earn­
ings ...................................................
Previously charged to surplus .............

$

116,860
19,689

$

84,903
21,581

Surplus (Section 7) end of year .............

$




5,706
4,670
136,549

$

116,860

THIRTY-SECOND ANNUAL REPORT

60

Changes in Membership
During 1946 five State banks and trust companies in the Second
Federal Reserve District were admitted to membership in the Federal
Reserve System. The total number of member banks in the District,
however, decreased from 814 on December 31, 1945 to 801 at the end
of 1946, owing to the absorption of 17 member banks by 12 other member
banks and the absorption of one member bank by a nonmember bank.
Also during the year, three nonmember banks were merged into State
member banks. Member banks at the end of 1946 constituted about 87
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, 1946
Type of bank

December 31, 1945

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

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

542

0

100

551

0

100

State banks and
trust companies ....

259

124

68

263

132

67

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

801

124

87

814

132

86

Changes in Federal Reserve Membership in Second District During 1946
Total membership beginning of year ......................................................

814

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

17

1

801

* In addition to figures shown in this table, three nonmembers were merged into member
banks during the year.
State Banks and Trust Companies in the Second Federal Reserve District
Admitted to Membership in 1946
Effective Date

The Trust Company of New Jersey
South Shore Trust Company
Bank of Delevan
Bank of Syosset, New York
Bank of Clarence




Jersey City, N. J.
Rockville Centre, N. Y.
Delevan, N. Y.
Syosset, N. Y.
Clarence, N. Y.

February 27
July 17
August 15
October 2
December 26

FEDERAL RESERVE BANK OF NEW YORK

61

Changes in Directors and Officers
At a regular election in the autumn of 1946, Winthrop W. Aldrich,
Chairman of the Board, The Chase National Bank of the City of New
York, was elected by member banks in Group 1 as a Class A director
for a term of three years, beginning January 1, 1947, to succeed S. Sloan
Colt, President, Bankers Trust Company, New York, whose term ex­
pired December 31, 1946. At the same time, Lewis H. Brown, Chairman
of the Board, Johns-Manville Corporation, was elected by member
banks in Group 1 as a Class B director for a term of three years,
beginning January 1, 1947, to succeed Donaldson Brown, until recently
Vice Chairman of the Board, General Motors Corporation, whose term
expired December 31, 1946.
Effective December 31, 1946, Beardsley Ruml, Chairman, R. II.
Macy & Co., Inc., resigned as a Class C director of this bank. Mr.
Ruml had served as a Class C director since January 1937, as Deputy
Chairman of the Board from January 1938 to January 1941, and
thereafter as Chairman and Federal Reserve Agent.
The Board of Governors of the Federal Reserve System appointed
Robert D. Calkins, Associate Director, General Education Board, New
York, as a Class C director for a further term of three years, beginning
January 1, 1947. The Board of Governors also reappointed William I.
Myers, Dean, New York State College of Agriculture, Cornell University,
Ithaca, N. Y., as Deputy Chairman of this bank for the year 1947.
In December 1946, the Board of Governors of the Federal Reserve
System appointed Thomas Robins, Jr., President, Hewitt-Robins, Incor­
porated, Buffalo, N. Y., as a director of the Buffalo Branch for a further
term of three years, beginning January 1, 1947.
The directors of this bank appointed Raymond F. Leinen, Execu­
tive Vice President, Lincoln Rochester Trust Company, Rochester, N. Y.,
a director of the Buffalo Branch for a term of three years, beginning
January 1, 1947, to succeed Elmer B. Milliman, President, Central
Trust Company Rochester, N. Y., Rochester, N. Y., whose term expired
December 31, 1946. The directors of this bank also appointed C. George
Niebank, President, Bank of Jamestown, Jamestown, N. Y., a director
of the Buffalo Branch for a term of three years, beginning January 1,
1947. Mr. Niebank will fill a vacancy resulting from an amendment




62

THIRTY-SECOND ANNUAL REPORT

to the by-laws of the branch, adopted in accordance with a general
program throughout the Federal Reserve System, under which the
chief executive officers of the branches will no longer serve on the
branch boards of directors.
Insley B. Smith was reappointed as chief executive officer of the
Buffalo Branch for the year 1947, with the title of General Manager
instead of Managing Director as heretofore.
The directors of this bank designated Marion B. Folsom as Chair­
man of the Board of Directors of the Buffalo Branch for the year 1947,
to succeed Thomas Robins, Jr.
Changes

in

O fficers

Peter P. Lang, formerly Special Assistant in the Foreign Depart­
ment, was appointed Acting Manager, effective February 26, 1946, and
was appointed Manager, effective August 8, 1946, in each case being
assigned to the Foreign Department.
Norris 0. Johnson, formerly Manager of the Research Department,
resigned, effective March 19, 1946, to become an Assistant Vice President
of The National City Bank of New York.
Robert H. Brome, formerly Assistant Counsel and Assistant Secre­
tary, resigned effective April 30, 1946, to enter the private practice of
the law in Basin, Wyoming. John J. Clarke, formerly a Special Attorney
in the Legal Department, was appointed Assistant Counsel and Assistant
Secretary, effective April 1, 1946.
Andrew N. Overby, who left the bank in September 1942 to enter
military service, was, upon his release from the service, appointed an
Assistant Vice President, effective May 1, 1946. In August 1946, Mr.
Overby was granted a leave of absence to serve as Special Assistant to the
Secretary of the Treasury in the field of international monetary and
financial affairs.
Daniel J. Liddy, Manager of the Foreign Department, who had
been a member of the staff for twenty-eight years, died on June 24,
1946.
Effective August 8, 1946, Walter H. Rozell, Jr., formerly Special
Assistant in the Foreign Department, was appointed Acting Manager,
and, effective January 2, 1947, he was appointed Manager, in each case
being assigned to the Foreign Department.




FEDERAL RESERVE BANK OF NEW YORK

63

0.
Ernest Moore, formerly Chief of the Foreign Research Division,
Research Department, was appointed a Manager, effective October 1,
1946, and assigned to the Research Department.
John H. Williams, formerly Vice President, was appointed Economic
Adviser, effective January 2, 1947. He will continue to serve as adviser
to the directors and the President of the bank.
M em ber

of

F ederal A dvisory C o u n c il

At its first meeting in January 1947, the Board of Directors of this
bank selected W. Randolph Burgess, Vice Chairman of The National
City Bank of New York, to serve during the year 1947 as the member
of the Federal Advisory Council from the Second Federal Reserve
District.




64

THIRTY-SECOND ANNUAL REPORT

Directors and Officers
Class

DIRECTORS

Group

A

1

W in t h r o p

A

2

H arry

A

3

H ow ard

B

1

L e w is

B

2

C harles

B

3

C arle C . C o n w a y

Term
Expires
Dec. 31

W . A l d r i c h ...............................................................
Chairman of the Board, The Chase National Bank of the City
of New York, New York, N. Y.

1949

H . P o n d ..........................................................................
Chairman of the Board, The Plainfield Trust Company,
Plainfield, N. J.

1947

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

1948

H. B r o w n .........................................................................
Chairman of the Board, Johns-Manville Corporation, New
York, N. Y.

1949

E. A d a m s .....................................................................
Chairman, Air Reduction Company, Inc., New York, N. Y.

1947

.......................................................................
Chairman of the Board, Continental Can Company* Inc.,
New York, N. Y.

1948

C

Vacancy — Chairman

C

W il l ia m

I.

M yers,

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

1947

Deputy Chairman .........................................

1948

Dean, New York State College of Agriculture, Cornell
University, Ithaca, N. Y.
D. C a l k i n s ....................................................................
Associate Director, General Education Board, New York, N. Y.

C

R obert

DIRECTORS—BUFFALO BRANCH

1949
Term
Expires
Dec. 31

B. F o l s o m , Chairman .........................................................................
Treasurer, Eastman Kodak Company, Rochester, N. Y.

1947

G. W o o s t e r ...........................................................................................
Farmer, Union Hill, N. Y.

1948

R o b i n s , J r ...........................................................................................
President, Hewitt-Robins, Incorporated, Buffalo, N. Y.

1949

H. N o r t o n ........................................................................................
President, Erie County Trust Company, East Aurora, N. Y.

1947

H. D i e f e n d o r f ...................................................................................
President, The Marine Trust Company of Buffalo, Buffalo, N. Y.

1948

R aym ond

F. L e i n e n ........................................................................................
Executive Vice President, Lincoln Rochester Trust Company, Rochester,
N. Y.

1949

C.

..........................................................................................
President, Bank of Jamestown, Jamestown, N. Y.

1949

M a r io n

C arl

T hom as

C harles

C harles

G e or g e N ie b a n k




MEMBER OF FEDERAL ADVISORY COUNCIL
W. R a n d o l p h B u r g e s s ,
Vice Chairman, The National City Bank of New York,
New York, N. Y.

FEDERAL RESERVE BANK OF NEW YORK

65

OFFICERS
President
First Vice President

A llan Sproul,
L e s l ie R . R o u n d s ,

Vice President
Vice President
H e r b e r t H . K i m b a l l , 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

E dw ard

0.

D o u g las,

J. W il s o n J o n e s ,

T odd G . T ie b o u t ,

B. A llen ,

Eyck,

Assistant Vice President

D a v is ,

W il l ia m

F.

T r e ib e r ,

Assistant Vice President, and Secretary

S il a s A . M il l e r ,

John

Assistant Vice President

H . W u rts,

Assistant Vice President

F. A brah am s,

W il l ia m A . H e in l ,

Manager, Security Custody Department

Manager, Personnel Department
P eter P . L a n g ,

D udley H . B a rro w s,

Manager, Foreign Department

Manager

S p e n c e r S . M a r s h , J r .,

Bow m an,

Manager, Credit Department, and
Manager, Discount Department
H arry M . B oyd,

Manager, Safekeeping Department
W esley W . B u rt,

Manager, Accounting Department
M i c h a e l J . M cL a u g h l i n ,

Manager, Collection Department
0 . E rnest M o o r e ,

Manager, Research Department
F r a n k l in

Manager, Savings Bond Redemption
Department

E. P eterson,

Manager, Bank Relations Department
W a l t e r H . R o z e l l , J r .,

Manager, Foreign Department

J a m e s J. C a r r o l l,

R alph

Manager, Planning Department

W .

S cheffer,

Manager, Check Department

J o h n J. C l a r k e ,

C harles N . V an

Assistant Counsel, and
Assistant Secretary

R.

F. Sheeh an,

O tto W . T en

Assistant Vice President

P aul

T r im b l e ,

Chief Examiner

Assistant Vice President

R.

R oelse,

Assistant Vice President

F e l ix T . D a v is ,

C u r t is

J.

W il l ia m

Assistant Vice President

W il l ia m

V.

H orace L . S a n fo rd ,

H aro ld A . B il b y ,

P.

Vice President
Vice President
R o b e r t G . R o u s e , Vice President
V a l e n t i n e W i l l i s , Vice President
R e g i n a l d B . W i l t s e , Vice President
H arold

Assistant General Counsel

Assistant Vice President

N orm an

Economic Adviser

A rth ur P h e lan ,

R u fu s

Assistant General Counsel
L oren

J o h n H . W il l ia m s ,

H outen,

Manager, R.F.C . Custody Department
R oy E . W end ell,

F it c h e n ,

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

Manager, Cash Department, and
Manager, Government Check Department
H aro ld

Manager, Government Bond Department

M . W essel,

Manager, Planning Department

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

OFFICERS—BUFFALO BRANCH
I n sley

B.

S m it h ,

H alsey W .

General Manager




Cashier
G eorge J. D o l l ,

Assistant Cashier
M . M on roe M yers,

Assistant Cashier

Snow ,

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