Full text of Annual Report of the Federal Reserve Bank of New York : Thirty-Third Annual Report of the Federal Reserve Bank of New York for the Year Ended December 31, 1947

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Thirty-third Annual Report

Federal Reserve Bank
of New York
For the Year Ended December 31, 1947

Second Federal Reserve District




Reserve Bank
of N ew York

federal

March 22, 1948

To the Stockholders of the
Federal Reserve Bank of New York:

I am pleased to transmit herewith the thirtythird annual report of the Federal Reserve Bank
of New York reviewing the year 1947.




A l l a n S pkoul,

President.

2

CONTENTS
PAGE

Inflation Here and Abroad......................................................
Production, Prices, and Employment ......................................
Trends in the Second District.........................................
The Money Supply..................................................................
Federal Reserve Credit and Credit Policy..............................
Consumer Credit ...........................................................
Foreign Economic and Financial Reconstruction....................
The World-Wide Dollar Shortage....................................
The European Recovery Program....................................
Government Relief and Loan Operations.......................
The World Bank and Fund..............................................
The United States Balance of Payments................................
Developments in the Foreign Exchange Market..................
Foreign Relations of the Federal Reserve System................
Volume and Trend of the Bank’s Operations.........................
Financial Statements...............................................................
Statement of Condition....................................................
Earnings and Expenses..................................................
Changes in Membership .........................................................
Changes in Directors and Officers...........................................
Changes in Directors ....................................................
Changes in Officers ........................................................
Member of Federal Advisory Council..............................
List of Directors and Officers..................................................




3

5
11
18
20
24
32
34
34
36
38
40
41
45
47
49
52
52
55
57
58
58
58
59
60




Federal Reserve Bank of New York
Thirty-third Annual Report
The outstanding economic feature of the year 1947, both at home
and abroad, was the further progress of inflation. Since the war ended,
the world has been faced with a condition of inflation as severe, and
seemingly as intractable, as the deflationary conditions that charac­
terized the thirties. It has taken different forms in different countries.
The differences have arisen partly out of the differences in circum­
stances, economic and political, and partly out of the differences in the
policies pursued.
The whole problem must be viewed against the background of the
war. It is due basically to the destruction of resources in the war, and
to the difficulties inherent in the conversion of resources from peacetime
to wartime ends and back again. These immense changes have been
carried out, in all countries, by a combination of specific measures de­
signed to direct and ration production and consumption and to control
wages and prices, and of the more general monetary and fiscal policies
designed to control the money supply and the aggregate volume of
spending. During the war, the pattern of policy pursued in the different
countries was fairly uniform. Considering the magnitude of the war
effort, it was in most countries surprisingly successful. But as we see
clearly now, its main effect was to postpone rather than remove infla­
tionary pressures. The uniform pattern of policy may be said to have
ended almost with the war itself. In most of the European countries,
the main emphasis continued to be placed on the direct controls, whereas
here at home the reconversion process was accompanied by early re­
moval, or breakdown, of direct wartime controls, and the main reliance
was placed on freeing the economy to make its own adjustments.
That the policy of relaxing direct restraints was more feasible for
us than for most other countries can hardly be doubted. Inflation
always consists of some combination of deficiency of goods and super­
fluity of money. In both respects we entered the postwar period in
relatively favorable conditions. We had given an astonishing demon­
stration of productive capacity and could look forward, once reconver­
sion was completed, to a backlog of deferred demand, both domestic and
foreign, which would keep our economy running, for some years at
least, at full speed provided cumulative maladjustments did not inter­




5

6

THIRTY-THIRD ANNUAL REPORT

fere. On the money side, we came out of the war with a substantially
higher ratio of money to national product than at the beginning, but
with nothing comparable to the large money “ overhang” that has
plagued the European countries. Though most of the European coun­
tries— despite the wartime destruction of plant, the big hole still re­
maining in Germany, the disruptions in trade produced by the iron
curtain, the loss of foreign assets, and the chaotic conditions in the Far
East — have made more progress in production than is commonly recog­
nized, and though some have resorted to unprecedented measures of
monetary contraction, their problem, in general, is still one of acute
deficiencies in output combined with a highly redundant money supply.
One result of these differences in circumstances and in policies has
been the now familiar distinction between our “ open” inflation and
what in Europe is being called “ disguised” or “ suppressed” inflation.
Since the abandonment or breakdown of OPA in the middle of 1946,
inflation has expressed itself here in a rise of prices which, up to the
break in the primary agricultural markets in January and February
of 1948, had carried our price level approximately to the point from
which the postwar deflation began in May 1920. But this rise in prices
was accompanied by an expansion of physical output which, despite a
period of hesitation and uncertainty last year, carried us by the end of
the year to a record peacetime peak. In some of the European countries,
on the other hand, the attempt to suppress the rise of prices by direct
controls and subsidies has met with a rising volume of complaint that
the process is only accentuating the scarcities, diverting labor and ma­
terials from more to less essential employments, and leading to disrup­
tion of trade and hoarding of goods. Moreover, there is increasing evi­
dence that, in a number of countries at least, the controls are cracking
and the suppressed inflation is coming out into the open in the form
of price increases that go far beyond anything we have seen, or are
likely to see. This rise of internal prices and the disturbed conditions
of production and distribution have of course had the effect of greatly
increasing their international deficits, which has resulted in increased
inflationary pressure on our own economy.
It is against this sort of background that our own experiences in
1947 must be appraised. Throughout the year, the impact of world
conditions on our economy, and the differences here and abroad that
have been described, had a major effect upon the course of prices and
production. During the first part of the year we had a surplus of




FEDERAL RESERVE BANK OF NEW YORK

7

exports never previously equaled in time of peace, and though later in
the year this excess somewhat declined, the pressure of specific exports,
notably grains under the Government’s buying program for European
aid, has been a major spearhead of our inflation.
One effect of our relatively favorable conditions has been that our
inflation has been of the chills-and-fever rather than the runaway type.
At no time since the postwar expansion began in the first quarter of
1946 have we been entirely clear whether we should fear more the infla­
tion that was visibly going on or the deflation that might at any time
ensue if too vigorous corrective measures were adopted; and as prices and
production rose to new heights, this fear of a downturn that might get
out of hand grew correspondingly. The result was that the movements
of prices and production both pursued an irregular course in 1947. The
uprush of prices that began in the middle of 1946 appeared to have
run its course by the end of the first quarter of 1947. This fact, coupled
with the general feeling of uncertainty which had been generated by the
stock market decline of the preceding summer, and perhaps particularly
by our awareness that the level of production was already very high and
that we had about reached the point in time at which depression had set
in following the boom after World War I, resulted in some months
of hesitation in which the upward pressure on prices seemed to have been
removed and production underwent a moderate decline.
The resumption of inflationary pressure in the second half of the
year can be traced fairly directly to the growing evidence of deteriora­
tion in the situation in Western Europe, as revealed particularly by
Secretary Marshall’s speech on June 5, and the growing recognition
that the economic and political restoration of Western Europe would
require not only a large-scale program of aid from us — the European
Recovery Program which has now been approved — but also substan­
tial interim aid before that program could be put into effect. During
the summer — with the further adverse turn in Britain’s balance of pay­
ments resulting in part from* the winter fuel crisis, the rise in prices
here, and the premature attempt to resume convertibility of sterling—the British loan ran out with astonishing rapidity. In May the French
price level, already very high, broke out in a rise of runaway propor­
tions. The Italian economy was in critical condition by early fall. The
combination of bad harvests in Western Europe and our own short corn
crop exerted acute pressure on grain prices here, and through them on
meat, dairy products, and other prices. As the effects spread out, there




8

THIRTY-THIRD ANNUAL REPORT

occurred a broad rise of prices during the second half of the year, which
brought us to about the level from which the downturn occurred in 1920.
While the price rise has been marked in many categories, it seems clear
that agricultural prices in particular have been the spearhead, rising to
much beyond their 1920 peak, and giving an impetus to demands for
increased wages which, in turn, resulted in higher prices of other prod­
ucts. No more striking evidence of the distortion of the price structure
on the agricultural side could be given than the fact that, despite the
pronounced drop of prices in the primary commodity markets in Janu­
ary and February of 1948, agricultural prices had not got down to the
parity support points by the middle of February.
Until this drop in the commodity markets occurred, we had had about
two full years during which the volume of effective demand exceeded our
current capacity to supply it except at rising prices. There were, how­
ever, some significant differences as between 1947 and 1946. In the
earlier year, industrial production increased substantially in each succes­
sive quarter, whereas in 1947 the level of industrial production reached
in the first quarter was not again attained until the last quarter; but for
the year as a whole it was 10 per cent above 1946, and in many impor­
tant branches of industry operations were at a record peacetime volume,
with capacity being utilized to the full. Steel production in the last
quarter of 1947 was only 3 per cent under the wartime peak of the first
quarter of 1944. Though steel and some other materials were still in
tight supply, there was in general a better balanced flow of goods than
in the preceding year, representing in part the further progress of re­
conversion and in part the very large volume of capital expenditures
that has characterized the postwar period. One noteworthy difference
between the two years was that in 1947 the main expansion was in the
durable goods industries, both consumer and producer. It will be re­
called that in the first phase of the expansion of civilian production after
the war, the leading role had been played by consumer nondurable
goods, a fact which, in view of the high level of consumption of such
goods already attained during the war, took many Government and
business analysts by surprise, and was largely responsible for the serious
errors of forecasting which were made in 1945. The production of non­
durable goods in 1947, though about 4 per cent greater in quantity
than the year before, averaged about the same as in the last quarter of
1946. In dollar value, consumers’ expenditures for nondurable goods
increased 14 per cent over 1946, whereas expenditures for durable goods




FEDERAL RESERVE BANK OF NEW YORK

9

rose 33 per cent. The other noteworthy change was the substantial
further increase in capital expenditures, for producers1 equipment and
new construction. After a period of hesitation in the spring of 1947,
caused by high building costs and the uncertainty as to which way
costs would turn, construction was resumed with a rush at rising prices,
with the result that total private construction for the year exceeded
that in 1946 by about 25 per cent in value but less than 5 per cent in
volume.
As indicated earlier, up to the break in the commodity markets early
in 1948, ours has been an intermittent inflation. It has been charac­
terized by a strong upward movement of both output and prices, but
with the emphasis transferred increasingly to the latter. There have
been throughout sufficiently marked periods of pause and uncertainty
to raise recurrently the question whether the inflation had run its course
and would presently give way to a deflation that might get out of hand.
The drop in the stock market in 1946 raised such a question, and the
year 1947 has been much referred to as the year in which the expected
postwar depression, paralleling 1920, did not occur. Nevertheless, as
has been said earlier, there was a period in the spring of last year in
which the price rise appeared to have leveled off, and this was a period
also of moderate recession in output. The drop in agricultural prices
this year has again raised the question. Is this merely another inter­
ruption of the inflationary spiral; is it the first phase of the downturn
twice previously anticipated; or is it a correction in one sector of the
economy which had got seriously out of line, and having been brought
back will now provide a basis for continued high output and employ­
ment with decreasing inflationary pressure ?
These are the possible alternatives. The last would seem much the
most desirable, and quite without any attempt at prediction, one may at
least indicate some of the elements in our current situation which may
point in that direction. That agricultural prices had got seriously out
of line with other prices is apparent, as are also the reasons for this
development. Since the first of this year the evidence has been accu­
mulating that the world food situation and our own give some promise
of improvement, at least as regards the grains, where the pressure has
been most acute. A correction, however, of the dimensions we have had
might well have collateral effects in other segments of the economy, some
favorable and others less so. It might well take the edge off the wageprice spiral, which would surely be a major stabilizing factor. But it




10

THIRTY-THIRD ANNUAL REPORT

also might readily induce hesitation in trade and production which, if
too pronounced or prolonged, might lead to a cumulative contraction of
output and employment. But with the pressures of demand already
threatening to strain the economy beyond capacity, as seemed to be the
case in late 1947, some slowing up of capital expenditures would be
desirable, while the release of consumer income by a drop in food prices
could be an important factor in sustaining other kinds of consumer
expenditure, provided consumers were not at the same time becoming
worried about the outlook for employment.
If these should prove to be the results of the decline in the com­
modity markets, the corrective adjustment that has taken place would
be salutary indeed. In the background there is still undoubtedly a large
backlog of unsatisfied demand, both domestic and foreign. In any case,
with many of the maladjustments that characterized the boom after
the first war much less serious this time, the evidence seems to warrant
confidence that we do not face a downturn of such dimensions as occurred
in 1920-21; and, on the other side, the improvement in the food situation,
if it turns out to be substantial, might well mean that the worst phases
of the inflationary spiral, so far as this country is concerned, have run
their course. It is important to recognize that for the European coun­
tries also a decline of world agricultural prices would go far to lessen
inflationary pressures and would be an important contributory factor
to the success of the European Recovery Program. But this hopeful
analysis of economic trends can be justified only on the dual assumption
that the European countries will pursue a vigorous anti-inflationary
policy and that American business, labor, and consumers, as well as
domestic borrowers and lenders of credit, will pursue a policy of watch­
fulness and restraint.
We must bear in mind also that in a period of rapid change like
the present, new developments require continuous re-appraisal of our
economic outlook. As this report is written, the foreign aid program
is being broadened to include further assistance to China, Greece, and
Turkey, and major budgetary changes are in process. The enlarge­
ment of the foreign aid program indicates that we must think in broader
terms than Western European recovery, strategic though that is, and
must take account of our economic and political relations with the world
as a whole. As to the budgetary changes, it seems premature to attempt
to form a judgment about the effects of the combination of income
tax reduction and increased expenditures for defense, but obviously




FEDERAL RESERVE BANK OF NEW YORK

11

these changes raise important questions for both monetary and general
economic policy, and their effects must be closely watched.

Production, Prices, and Employment
During the second full year since the end of the war, the American
economy achieved virtually full employment and capacity production.
Despite a slight decline in over-all agricultural production, the aggre­
gate physical output of mines, farms, factories, and other commodityproducing industries rose 7 per cent above 1946, while services declined
owing to a drop in Government services. Since prices continued to
advance, the increase in dollar value of gross national product
(13 per cent) was considerably larger than the over-all gain in real
output. Nevertheless, the 1947 gain in output represented a much better
record than had been generally anticipated at the start of the year.
The total value of goods and services produced in this country during
1947 was approximately 230 billion dollars, compared with 204 billion
in 1946 and the peak wartime rate of 220 billion.
G ross N ational P rod u ct
B IL L IO N S
OF DO LLA R S

* Gross private investment is the combined total o f gross private domestic investment and
net foreign investment. Net foreign investment was small up to 1941 and was negative
in 1942-45.
Source: U . S. Department o f Commerce.




12

THIRTY-THIRD ANNUAL REPORT

At the start of 1947, the demand for both consumers ’ and producers’
durable goods, backed by rising incomes, substantial liquid assets, and
credit, continued on a high level. Business firms were still accumulat­
ing inventories, and the need for a large volume of residential and
nonresidential construction persisted. Foreign demand for our exports
remained pressing, and the level of Government expenditures, though
down sharply from wartime, was still several times greater than under
prewar budgets. During the first half of the year, moderate declines
occurred in some of the major segments of the economy, mainly in non­
durable goods production, accompanied by some tapering off of inventory
accumulation and a lag in the volume of new construction. However,
gains in other lines, chiefly in export trade and in business investment
in plant and equipment, offset these tendencies and helped to push the
gross national product to new record levels by the end of the year.
Production of nondurable goods was close to the all-time peak at
the beginning of 1947, but by the end of the first quarter the situation
had changed appreciably. The backlog of domestic demand for non­
durable consumers’ goods, such as restocking by distributors and vet­
erans’ civilian needs, had been greatly reduced by a year and a half
of full-scale peacetime production. The increasing availability of durable
goods and the rise in prices, particularly of food, cut into consumer
budgets and limited purchases of many nondurable goods. As sales
slackened and the promptness of deliveries from manufacturers to dis­
tributors increased, retailers endeavored to reduce their outstanding
orders and inventories. Meanwhile there was considerable discussion
of the possibility of a widespread downward readjustment of prices.
As a result many distributors and some consumers deferred purchases
in the hope of obtaining lower prices later. Under such conditions,
some manufacturers curtailed operations rather than produce for inven­
tory while high prices prevailed. The return of more competitive peace­
time conditions made it less feasible for manufacturers to stabilize pro­
duction by spreading deliveries and allocating quantities to their cus­
tomers, as they had been able to do during the wartime excess of demand
over supply.
The rapid increase in the value of business inventories which had
taken place during the latter half of 1946 continued into the first
quarter of 1947, although at a somewhat slower rate. This increase
represented both the accumulation of goods to build up stocks to normal
levels relative to the current volume of business and the rise in prices




FEDERAL RESERVE BANK OF NEW YORK

13

of the goods held. By the second quarter, however, distributors’ “ pipe­
lines” seemed to be largely filled. In fact, there was a net liquidation
of nearly one billion dollars of nondurable goods inventories by whole­
salers and retailers between the end of March and the end of July,
while at the same time the rate of accumulation of stocks by manufac­
turers declined sharply.
The construction industry, which had been expected to be one of
the chief sustaining factors in the domestic economy during 1947, got
off to a slow start in the first half of the year. While work continued
on the large number of projects which had been started but not com­
pleted in 1946, there was a lag in the number of new projects initiated
despite the continued pressing need for housing and the extensive plans
of business for expansion. To some extent, the widespread expectation
of a reduction in building costs caused prospective builders to defer
their plans. Before midyear, the most optimistic estimates of 1947 con­
struction activity had undergone a substantial downward revision.
Despite the large volume of demand for both consumers’ and
producers’ durable equipment, the durable goods industries were unable
to take up fully the slack caused by the decline in nondurable goods
production and construction. This was mainly because of shortages of
fuel and of raw and semimanufactured materials, principally steel; from
time to time, the output of various types of finished goods was curtailed
for lack of materials or parts. On the whole, however, the flow of raw
materials and component parts to manufacturers was much smoother
than in 1946, both because of adjustments in production and because
the flow was less frequently interrupted by work stoppages. Certain
durable goods lines experienced declines in production and employment
in the first half of 1947 because of reduced demand. Employment at
plants producing radios and some types of nonferrous metal products
declined during the spring, and output of building materials slackened.
A major offsetting factor to any weakness in the general economic
situation that might have been developing in this period was
the unexpectedly sharp rise in exports. Between the last quarter of
1946 and the second quarter of 1947, exports rose by more than half,
while the surplus of exports over imports more than doubled. Most
of this increase represented expenditures made for foreign relief and
reconstruction, largely out of funds supplied by the United States
Government and, to a lesser extent, through depletion of war-torn foreign




14

THIRTY-THIRD ANNUAL REPORT

countries ’ gold and dollar reserves. In such cases, the demand was
largely for goods (e.g., grain and steel), which were already in relatively
short supply in this country. There was also extensive spending in the
United States by countries which had accumulated unusually large
gold or dollar holdings during the war. While this latter group of
countries bought a certain amount of goods that were still relatively
scarce here, their purchases also included large quantities of consumers9
goods which were not in short supply.
By late spring, it was a common expectation that the latter half of
the year would witness a downward trend in business activity and
prices. There was, in fact, a decline in manufacturing employment
of 320,000 production workers between March and July, more than
half of which was in the textile and apparel industries. The Federal
Eeserve index of industrial production fell for four consecutive months,
from 190 in March to 176 in July. Scattered price declines occurred,
following the development of cautious buying by distributors, resistance
to higher prices by consumers, and pleas by Government officials for
business to “ hold the line,, against inflation. As a result, the genera]
level of wholesale prices in June was below that of March, and con­
sumersJ prices in general leveled off during this period. Even export
trade, which had had a sustaining influence, began to decline from the
peak reached in May, owing in large part to depletion of some foreign
countries’ dollar balances or to newly imposed exchange restrictions
abroad.
The immediate outlook underwent a radical change about midyear
as it became clear that the domestic corn crop would amount to not
more than three-quarters the size of the 1946 harvest, and that the
European crops would be the worst in many years. The short American
corn crop and the necessity of further large shipments of grain to
Europe sent grain prices to the highest levels in thirty years, and prices
of livestock, dairy, and poultry products were consequently pushed up
by increased feed prices. Thus, the stage was set for a renewed rise
in prices.
Meanwhile, an unexpectedly generous wage settlement in the bitumi­
nous coal industry in the early part of July touched off price rises for
coal and steel and, somewhat later, also provided some of the basis for
a rise in railroad freight rates. In turn, there was an advance in prices
for many industrial products for wrhich coal, steel, and freight costs
are basic.




FEDERAL RESERVE BANK OF NEW YORK

15

The simultaneous advance in both agricultural and industrial prices
during the summer convinced businessmen and consumers alike that
no early downward readjustment of prices was in sight. This view was
strengthened by the prospect of a continued large volume of exports
in connection with a Government-financed European recovery progratn
and also by the stimulus to consumer demand furnished by the cashing
of veterans’ terminal leave bonds. Distributors, experiencing a high
level of consumer demand and anticipating still higher prices, increased
their buying. Of similar import was the elimination of most remaining
restrictions on building construction at the end of June and, with the
prospect of lower building costs dimmed, a large volume of construction
projects got under way in the latter half of the year. Under the
stimulus of such developments, most measures of economic activity
rose to new postwar peaks by the end of 1947, and in many cases
new all-time records were set.
The main sustaining factors in the economy which were present
at the start of 1947, with the exception of inventory accumulation, still
dominated the scene at the beginning of 1948. At the turn of the year,
a general atmosphere of business optimism prevailed, based on the
current record-breaking levels of business activity and the continuing
high level of demand for consumers’ goods and capital equipment.
Production of durable goods at the year end was at the highest peace­
time level on record. Nondurable goods output had recovered by Novem­
ber to a point close to the all-time peak, although it dropped back
somewhat in December. The aggregate volume of production at the
beginning of 1948 was not much greater than it was at the start of
1947, but production was better balanced; consumers now find all but
a few types of goods (such as automobiles) readily available, most
supply pipelines have been filled, and the bottlenecks in component
parts which plagued assembly lines throughout 1946 have diminished.
Yet the prospects of further expansion in output to meet the still heavy
demands for consumption and investment seem limited, unless there is
a substantial increase in managerial efficiency and labor productivity.
The scarcity, at present high levels of output, of critical materials,
such as steel, petroleum, and some nonferrous metals, in effect puts a
ceiling on production.
Similarly, farm production in this country has been at record or
near record levels in recent years, and little further immediate expan-




16

THIRTY-THIRD ANNUAL REPORT

sion in output seems feasible except under unusually favorable weather
conditions. At present the outlook for 1948 crops is generally favorable
and, as the crop outlook in Europe and in the Southern Hemisphere has
been improving; the upward pressure on farm prices has eased since
the turn of the year. In view of the strong domestic and foreign
demands for farm products, however, and the continued high level of
agricultural prices, despite recent downward adjustments, American
farmers are likely to continue to strive for maximum production.
Employment has continued to press on the goal described in recent
years as “ full employment/ ’ The total number employed (including
those in the armed forces) was maintained close to 60 million persons
during the latter half of 1947. In the closing months of the year, esti­
mated unemployment was below 2 million persons, a level which is
usually considered to represent the minimum amount of “ frictional”
unemployment. Labor turnover was smaller than in 1946; labor-management relations were comparatively peaceful during most of 1947; and
the time lost by work stoppages reached a postwar low in December.
Wages and salaries increased generally, but workers in manufactur­
ing and mining benefited to a larger extent than those in other indus­
tries from the second postwar round of wage increases. In December
1947, weekly earnings of manufacturing wage earners showed a rise
of 13 per cent over a year previous, and miners’ weekly earnings were
up 10 per cent, but earnings of clerical and professional employees had
advanced only 5 per cent in the same period, according to indexes
compiled by this bank. Many of the less favored workers found their
wage gains substantially offset, or more than offset, by the further 9 per
cent rise in living costs during the year. Fixed income groups, of course,
experienced the largest losses in “ real” income.
Despite the rising dollar volume of consumer expenditures, the
physical volume of goods distributed was little changed, and in some
lines, such as department stores, an actual decrease in unit sales occurred
in 1947. As shown by the accompanying chart, by the end of 1947,
high food prices had raised the proportion of consumer budgets spent
on food to the highest point in recent history. Furthermore, the filling
of long deferred demands for durable goods in 1947 increased the share
of total consumer expenditures devoted to such goods to double the
wartime low and equal to the previous high level of 1941 and 1929. As
a result, a smaller percentage of personal consumption expenditures was




FEDERAL RESERVE BANK OF NEW YORK

PER CENT

17

Share o f Food and Durable Commodities Expenditures
in Total Personal Consumption Expenditures

* Excluding tobacco and alcoholic beverages.
Source: U. S. Department o f Commerce.

available for other nondurable goods and services in 1947 than at
any time in at least two decades.
The high rate of domestic capital expenditures has been one of the
most significant features of the year under review. Investment in con­
struction and producers’ durable equipment reached a record level in
the last quarter of 1947. The bulk of investment in recent months
has gone into housing and into plant and equipment; the renewed
growth in inventories appears to be little greater than that necessitated
by the continued price rise and the volume of sales. Net foreign invest­
ment, which is discussed in more detail in a subsequent section, also
reached record levels in 1947.
Wholesale prices at the year end were close to the peak reached in
the 1920 boom, and retail prices in general had long since exceeded all
previous marks. Food prices (both wholesale and retail) had more than
doubled their 1939 level, and prices received by farmers had tripled
in the same period. Nearly half of the total increase in farm prices
was made during the war, when the increase in prices of farm products
outstripped the advance in other prices. By the end of 1946, the rapid
rise in food prices following the relaxation of controls had narrowed




THIRTY-THIRD ANNUAL REPORT

18

Indexes o f W holesale Prices
(1939 average = 100 per cent)
PER CE NT

S ource: U. S. Bureau o f Labor Statistics.

the gap between farm and food prices, but prices of other commodities,
which were more thoroughly controlled, had &sen only about a third
as much. Although the ‘ 4other commodities ’ ’ group made a large relative
gain in 1947, it still lags far behind the farm and food groups.
T

rends

in

th e

S

econd

D

is t r ic t

During 1947, business activity in the Second Federal Reserve
District was maintained close to the high peacetime level prevailing at
the end of 1946. The predominant influence, in this District, of con­
sumers? nondurable goods industries (notably the apparel industry)
had facilitated reconversion following the end of the war, and thus
production, employment, and income payments had been better main­
tained in this area in 1946 than in the rest of the country. For the
same reason, however, the year-to-year gains in 1947 were more moderate
than elsewhere in the nation. For example, while factory employment
in the Second District during 1947 was about 4 per cent above 1946,
for the country as a whole the gain was 8 per cent. Toward the end of
1947, nonagricultural employment and payrolls in the District were
well above prewar levels, and unemployment and time lost by strikes
were the lowest since the end of the war.




FEDERAL RESERVE BANK OF NEW YORK

19

In manufacturing, the outstanding development of the year in the
Second District was the decline in activity during the spring and early
summer, occasioned chiefly by more cautious buying of “ soft goods’ ’
by retailers and the reappearance of the prewar seasonal drop in apparel
production. At one time as many as 80,000 workers in the New York
City garment industry were temporarily unemployed. Although employ­
ment has risen since that time, it has not again equaled the high level
of the previous year. The dollar value of shipments of women’s, misses’,
and juniors’ outerwear from the New York metropolitan area during
1947 declined 7 per cent from 1946, compared with 3 per cent in the
rest of the country. Cuttings of most types of men’s clothing increased,
however, as a result of continued strong demand and an easier supply
of woolens.
Construction contracts awarded in this District increased at a
greater rate over 1946 than in the country as a whole, owing to a
13 per cent rise in residential construction; nonresidential contracts
awarded declined slightly. The rest of the country showed a reverse
trend, with a 6 per cent gain in nonresidential awards and practically
no change in the amount of residential contracts awarded.
The dollar volume of department store sales in the Second District
was about 9 per cent higher in 1947 than in 1946, a slightly larger
gain than in the rest of the country. Sales of apparel stores, which in
this District account for a large volume of sales that in other parts of
the country are made by department stores and mail order houses,
declined 4 per cent for the year as a whole, the first year-to-year decline
experienced since 1938. The increase in the dollar volume of department
store sales was not so great as the rise in retail price indexes, so that
some decline in the physical volume of sales is indicated. The largest
gains in the dollar volume of department store sales were apparently in
the more rural areas, such as Northern New York State.
Although cash receipts from farm marketings in New York State
showed the sizable increase of about 12 per cent over 1946 receipts, this
gain was well below the increase shown in other sections of the country,
particularly in areas specializing in grain and livestock production.
Increased physical production of some commodities, as well as higher
prices, contributed to the greater cash receipts of farmers in the Second
District. New York State production of fluid milk, one of the principal
sources of farm income in this District, was 6 per cent greater in 1947




THIRTY-THIRD ANNUAL REPORT

20

than in 1946, and the New York State fruit crop
favorably with 1946, which was also a good year.
State feed grains and hay crops, important to
poultry industries, were two-fifths less than in
potatoes, an important crop in this District, was
the 1946 crop, the record-breaking size of which
surplus problem.

as a whole compared
However, New York
the large dairy and
1946. Production of
about one-fifth below
had caused a serious

The Money Supply
Expansion of the money supply in the hands of the consuming
public continued during 1947, but the rate of expansion was less rapid
than in 1946 and much slower than during the war years. Total demand
deposits at all banks, exclusive of Government and interbank accounts
and after adjustment for “ floa t/’ rose approximately 3.6 billion dollars,
the smallest increase since 1938. Currency holdings of the public (i.e.,
currency outside the banks) decreased 130 million dollars, thus reversing
the expansion which had begun in the mid-thirties. Time deposits in
commercial and mutual savings banks and in the Postal Savings System
continued to grow at well above the prewar rate, but the rise for the
year— about 2.3 billion dollars—was less than half the increase in 1946.
Deposits and Currency in the United States
December 31, 1939-47*
B IL L IO N S
OP D O L L A R S

•December 31, 1947 preliminary.




FEDERAL RESERVE BANK OF NEW YORK

21

Government deposits held by the banking system were further reduced
in 1947.
Growth of the privately owned money supply in the form of demand
deposits and currency, even at the considerably reduced rate of about
3Y2 billion dollars in 1947, was a source of concern to the monetary
authorities, in view of continuing inflationary tendencies in the economy.
It is clear that the increase in the money supply was not the result of
accumulation of idle balances but reflected demands for additional
money for active use. The ratio of the average money supply to the
gross national product turned downward in 1947 for the first time
since 1942, indicating a somew^hat faster turnover of money and probably
an activation of money balances which the public had previously held
idle. Although expansion of the real output of goods and services during
1947 (which the President’s Economic Report estimates at less than 5
per cent) was somewhat greater than the increase in the money supply,
it was not rapid enough to keep pace with the increase in money
expenditures.
Growth in bank loans, except those on securities, was again the
major factor in the expansion of the money supply in 1947. Although
loans, other than those against securities, increased more slowly than
in 1946, total bank loans increased by a larger amount than in 1946,
as the reduction in security loans was much smaller than in the previous
year. Loans to business, which accounted for the greatest share of the
expansion, followed the same time pattern as in 1946—a modest increase
in the first half of the year and a sharp expansion in the second half.
Growth in business use of bank credit during 1947 reflected in part the
need of additional working capital for a growing physical volume of
business at rising prices. To some extent, however, it also represented
financing of expenditures for construction or capital equipment which
did not immediately contribute to greater production of consumer goods,
and to this extent it contributed to the prevailing inflationary pressures
by adding to the already heavy demands for scarce materials and labor.
In many cases, these loans to finance capital expenditures may have been
regarded by the borrowers as temporary sources of funds to be replaced
subsequently by long term financing, but the unsettled conditions that
prevailed during much of the past year made it difficult to raise equity
capital and, at times, interfered with other types of long term financing.
Another important element in the growth of bank deposits was the
large volume of foreign spending in this country which was financed




THIRTY-THIRD ANNUAL REPORT

22

Causes of Changes in the Volume of Bank Deposits and Currency*
(In millions of dollars; ( + ) or (—) reflects effect on volume of deposits and currency)

Changes in

Date

1939
1940
1941
1942
1943
1944
1945
1946
1947

Bank Loans
Treasury
net cash
income Loans on
or outgo securities Other
+ 2,805
+ 2,708
+ 9,994
+39,248
+50,809
+46,146
+35,751
989
- 6,868f

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

600
274 + 1,182 0
223 + 1,805
114 + 2,979 - 7,300
+
261 - 2,962 -20,600
+
798 - 1,112 -24,800
206 -31,400
+ 2,208 +
+ 2,244 + 2,096 -19,800
- 3,664 + 8,950 + 6,100
500p
- l,100e + 8,450e +

316 + 2,934
+
152 + 3,615
464 + 1,101
724 30
845 - 1,355
+
129 - 1,163
212
+ 1,016 818
+
931 +
+ l,200p + 3,309f

-

86
115
85
110
441
647
919
826
580p

Other

Total

458 + 5,187
- 1,187 + 6,755
+
217 + 6,328
120 + 14,963
- 1,965 +21,089
+ 2,358 +17,837
+
392 +20,568
+ 2,891 +14,211
+
889p + 5,800p

* Exclusive of U. S. Government deposits and currency in banks, but inclusive of time
as well as demand deposits.
e Estimated by Federal Reserve Bank of New York.
t Adjusted for payment of United States quota in International Monetary Fund,
p Preliminary.
Source: Treasury cash income or outgo and nonbank Government security holdings —
derived from Treasury Bulletin; all other data — Board of Governors.

by gold sales or drawings on previously accumulated deposits of foreign
central banks or governments in the Reserve Banks. These foreign
expenditures, which amounted to approximately 3 billion dollars, covered
only part of the payments for the record volume of net exports of
goods in peacetime from the United States during the past year, but
represented the most inflationary element in our export surplus. Not
only did they contribute substantially to the growth in bank deposits,
but, to the extent that they were not offset by operations of the Federal
Reserve System, they contributed also to the volume of member bank
reserves, and provided a basis for additional expansion of bank credit.
Thus they added to the volume of purchasing power in this country,
while subtracting from the amount of goods available for domestic
markets. Exports which are financed by the United States Treasury
with funds obtained through tax collections or sales of securities to the
public have no corresponding inflationary effects, as the diversion of
goods from the domestic markets is matched by a corresponding diver­
sion of income from actual or potential domestic spending; also there
is no net effect on bank deposits or bank reserves.
Gold-financed foreign purchases in this country were reflected in
an increase of 3.1 billion dollars in the gold certificate fund of the




FEDERAL RESERVE BANK OF NEW YORK

R e s e r v e B a n k s , b u t w e r e n o t fu lly r e fle c te d in
U n ite d S ta te s g o ld s to c k , sin c e n e a r ly 7 0 0 m illio n
v io u s ly h e ld b y th e T r e a s u r y fo r th e S t a b iliz a tio n
p a r tia l p a y m e n t o f th e U n ite d S ta te s s u b s c r ip tio n
M o n e ta r y F u n d . I n a d d itio n , 2 7 5 m illio n o f g o ld h
w a s c r e d ite d to th e g o ld c e r tific a te a c c o u n t o f th
p r o v id e th e M o n e ta r y F u n d w ith a w o r k in g b a la
d e p o s its in th e F e d e r a l R e s e r v e B a n k s .

23

th e in c r e a s e in th e
d o lla r s o f g o ld p r e ­
F u n d w a s u s e d in
to th e In te r n a tio n a l
e ld b y th e T r e a s u r y
e R e se rv e B a n k s to
n c e in th e fo r m o f

T h e p r in c ip a l fa c to r t e n d in g to c o u n te r a c t th e e ffe c ts o f b a n k lo a n
e x p a n s io n a n d th e in flo w o f fo r e ig n fu n d s d u r in g th e p a s t y e a r w a s
th e su b s ta n tia l e x c e ss o f T r e a s u r y c a sh r e c e ip ts o v e r G o v e r n m e n t d is ­
b u r se m e n ts a n d th e u se o f m o st o f th e fu n d s to r e d e e m G o v e r n m e n t
s e c u r itie s h e ld b y th e b a n k in g s y s te m , in c lu d in g la r g e a m o u n ts o f s e c u r i­
tie s h e ld b y th e F e d e r a l R e s e r v e B a n k s . T h e e x c e s s o f r e v e n u e s o v e r
e x p e n d it u r e s a m o u n t e d t o a b o u t 6 .7 b illi o n d o lla r s in 1 9 4 7 , c o m p a r e d
w ith le s s th a n o n e b illio n in 1 9 4 6 . T h e T r e a s u r y r a is e d a d d itio n a l
a m o u n ts w h ic h c o u ld b e u s e d fo r th e r e d e m p tio n o f m a r k e ta b le s e c u r i­
t ie s t h r o u g h n e t s a le s o f 1 .8 b i lli o n d o lla r s o f S a v i n g s b o n d s , t h r o u g h
t h e s a le o f a b o u t 8 0 0 m illio n d o lla r s o f c lo s e ly r e s t r ic te d lo n g t e r m
b o n d s t o s a v in g s in s t it u t io n s o n O c t o b e r 1 , a n d t h r o u g h n e t s a le s fr o m
G o v e r n m e n t in v e s t m e n t a c c o u n ts o f a b o u t 8 0 0 m illio n d o lla r s o f T r e a s u r y
b o n d s . T r e a s u r y d e p o s its in th e c o m m e r c ia l b a n k s a g a in w e r e d r a w n
u p o n to p r o v id e fu n d s fo r d e b t r e tir e m e n t, th o u g h n e c e s s a r ily in m u c h
s m a lle r a m o u n ts th a n in 1 9 4 6 .
N o t a ll o f th e p u b lic d e b t o p e r a tio n s c a r r ie d o u t b y th e T r e a s u r y
d u r in g 1 9 4 7 , w ith fu n d s o b ta in e d fr o m th e s e v a r io u s s o u r c e s , h a d th e
e ffe c t o f r e d u c in g th e m o n e y s u p p ly in th e h a n d s o f th e p u b lic , h o w e v e r ,
a s s o m e o f th e r e d e e m e d s e c u r itie s w e r e h e ld b y n o n b a n k in v e s to r s .
F u r t h e r m o r e , in v e s tin g in s titu tio n s s u c h a s in s u r a n c e c o m p a n ie s a n d
s a v in g s b a n k s , a s w e ll a s o t h e r in v e s t o r s , s o ld c o n s id e r a b le a m o u n t s o f
“ b a n k e lig ib le ” T r e a s u r y s e c u r itie s to c o m m e r c ia l b a n k s d u r in g th e
fir s t n in e m o n th s o f th e y e a r , a n d a d d itio n a l a m o u n ts o f b o th “ b a n k
e lig ib le ” a n d “ r e s t r ic t e d ” T r e a s u r y b o n d s w e r e s o ld , t h r o u g h th e
m a r k e t, to th e F e d e r a l R e se r v e B a n k s to w a rd th e e n d o f th e y e a r .
(T h e la t t e r s a le s , h o w e v e r , w e r e p a r t ly o ffs e t b y m a r k e t p u r c h a s e s b y
th e se in v e s to r s o f s h o r t te r m T r e a s u r y s e c u r itie s, m a n y o f w h ic h w e r e
s u p p lie d b y t h e R e s e r v e B a n k s .)
T h e n e t r e s u lt o f a ll t h is c o m p le x o f o p e r a tio n s in G o v e r n m e n t
s e c u r itie s, b y th e T r e a s u r y , th e R e s e r v e B a n k s , th e c o m m e r c ia l b a n k s,




24

THIRTY-THIRD ANNUAL REPORT

a n d s a v in g s in s titu tio n s a n d o th e r in v e s to r s , w a s a n e t r e d u c tio n d u r in g
1 9 4 7 o f a p p r o x im a t e ly 6 .8 b i lli o n d o lla r s in t h e G o v e r n m e n t s e c u r i t y
h o ld in g s o f c o m m e r c ia l a n d F e d e r a l E e s e r v e B a n k s , m o s t o f it th r o u g h
o p e r a tio n s w h ic h te n d e d to r e d u c e th e b a n k d e p o s its o f th e p u b lic b y
c o r r e s p o n d in g a m o u n ts . T h e n e t r e d u c tio n in G o v e r n m e n t s e c u r ity h o ld ­
in g s o f th e n o n b a n k p u b lic , w h ic h te n d e d to in c r e a s e th e b a n k d e p o s its
o f th e p u b lic (o r a t le a s t to o ffs e t p a r t ia lly th e r e d u c t io n in v o lv e d
in n e t c a s h r e c e ip ts o f th e T r e a s u r y ) is e s tim a te d a t a b o u t 5 0 0
m illio n d o lla r s .
A m in o r fa c to r te n d in g to r e d u c e th e v o lu m e
b a n k d e p o s its w a s th e fu r th e r g r o w th in th e c a p ita l
T h e in c r e a s e in s u c h fu n d s d u r in g 1 9 4 7 is e s tim a te d
d o lla r s , a s m a lle r a m o u n t th a n in 1 9 4 6 w h e n 8 1 8
a d d e d to b a n k c a p ita l.
T h e c o m b in e d e ffe c t o f a ll c r e d it -e x p a n d in g a
tr a n s a c tio n s d u r in g th e y e a r w a s a n e t in c re a s e
d o lla r s in th e a g g r e g a t e v o lu m e o f b a n k d e p o s its
s a v in g s ) a n d c u r r e n c y h e ld b y th e p u b lic . A p p r o x
th is a m o u n t w a s in th e fo r m o f s a v in g s a n d o th e r
a r e n o t s o r e a d ily u s a b le a s d e m a n d d e p o s it s a n d c

o f p r iv a t e ly o w n e d
fu n d s o f th e b a n k s.
a t a b o u t 5 8 0 m illio n
m illio n d o lla r s w a s

n d c r e d it-c o n tr a c tin g
o f a b o u t 5 .8 b illi o n
(d e m a n d , tim e , a n d
im a te ly tw o fifth s o f
tim e d e p o s its , w h ic h
u rren cy.

Federal Reserve Credit and Credit Policy
T h e g e n e r a l p o lic y o f th e F e d e r a l E e s e r v e S y s t e m d u r in g th e p a s t
y e a r w a s to d isc o u r a g e a n d r e s tr a in u n n e c e s s a ry e x p a n s io n o f b a n k
c r e d it w h ic h w o u ld a d d to in fla t io n a r y p r e s s u r e s a n d m a k e th e e c o n o m y
o f th is c o u n tr y m o r e v u ln e r a b le to a d v e r s e d e v e lo p m e n ts . T h e im p le ­
m e n t a t io n o f th is p o lic y in v o lv e d t a k in g s te p s to e lim in a te a r r a n g e m e n ts
a d o p te d d u r in g th e w a r to fa c ilita te w a r fin a n c in g , to b r in g a b o u t a
b e tte r b a la n c e in th e m a r k e t fo r G o v e r n m e n t s e c u r itie s o f v a r io u s m a tu r ­
itie s , t o c o u n te r a c t t h e e ffe c t o f fa c t o r s s u c h a s g o ld in flo w s w h ic h t e n d e d
to e x p a n d b a n k r e s e r v e s , a n d to m a in ta in s o m e p r e s s u r e o n th e r e s e r v e
p o s it io n s o f c o m m e r c ia l b a n k s — a ll w it h th e p u r p o s e o f d is c o u r a g in g
m o n e tiz a tio n o f th e p u b lic d e b t th r o u g h c o m m e r c ia l b a n k p u r c h a s e s o f
G o v e r n m e n t s e c u r itie s fr o m n o n b a n k in v e s to r s , a n d o f m in im iz in g th e
in d u c e m e n t fo r b a n k s to e x p a n d th e ir lo a n s a n d th e ir o th e r in v e s tm e n ts .
T o c a r r y o u t th is p o lic y , w h ic h r e q u ir e d a c o o r d in a te d p r o g r a m o f d e b t
m a n a g e m e n t, th e S y s te m w o r k e d c lo s e ly w ith th e U n it e d S ta te s T r e a s u r y .
D u r in g th e fir s t s ix o r e ig h t m o n th s o f th e y e a r , c r e d it c o n tr o l
p r o b le m s c o n tin u e d to c e n te r a r o u n d th e w a r tim e p a t te r n o f in te r e s t




FEDERAL RESERVE BANK OF NEW YORK

25

r a te s , r a n g in g fr o m % o f 1 p e r c e n t fo r t h r e e -m o n th T r e a s u r y b ills to
2 Y2 p e r c e n t f o r l o n g e r t e r m T r e a s u r y b o n d s — a p a t t e r n w h i c h w a s
in h e r e n tly u n s ta b le b e c a u s e o f th e in d u c e m e n t it o ffe r e d s a v in g s in s titu ­
tio n s a n d o th e r s to s h ift fr o m s h o r te r to lo n g e r te r m T r e a s u r y b o n d s ,
a n d th e in d u c e m e n t it o ffe r e d c o m m e r c ia l b a n k s to b id fo r th e m e d iu m
t e r m s e c u r itie s h e ld b y n o n b a n k in v e s t o r s w h ile , a t t h e s a m e t im e , s e llin g
s h o r t te r m se c u r itie s w h ic h th e R e s e r v e S y s te m h a d to a b so rb to m a in ­
ta in th e in te r e s t r a te p a tte r n . T h e a b s o r p tio n o f s h o r t te r m s e c u r itie s
b y th e R e se r v e S y s te m a d d e d to b a n k r e se r v e s a n d so te n d e d to p r o v id e
th e b a s is fo r a p o te n tia l e x p a n s io n in c o m m e r c ia l b a n k c r e d it a n d d e p o s its
a m o u n tin g to s e v e r a l tim e s th e in c r e a s e in b a n k r e s e r v e s . F u r th e r m o r e ,
th e e ffo r ts o f fo r e ig n c o u n tr ie s to s u p p ly th e ir n e e d s b y p u r c h a s e s in th e
U n it e d S t a te s le d t o h e a v y s a le s o f g o ld b y s u c h c o u n tr ie s , t h e e x p e n d i­
t u r e o f t h e p r o c e e d s o f w h ic h a ls o a d d e d t o b a n k d e p o s it s a n d r e s e r v e s
h ere.
D u r in g th e fir s t q u a r te r o f th e y e a r , th e e x p a n s io n a r y te n d e n c y in
b a n k r e s e r v e s a n d in b a n k d e p o s its a r is in g o u t o f s u c h tr a n s a c tio n s w a s
o ffs e t b y a h e a v y e x c e s s o f T r e a s u r y t a x c o lle c tio n s o v e r G o v e r n m e n t
e x p e n d it u r e s , a n d t o a le s s e r e x t e n t b y s a le s o f S a v i n g s b o n d s in e x c e s s
o f r e d e m p tio n s . T h e r e s u lt in g s u r p lu s o f fu n d s a v a ila b le to th e T r e a s ­
u r y w a s u s e d to r e d e e m m a tu r in g G o v e r n m e n t s e c u r itie s , a la r g e p r o ­
p o r tio n o f w h ic h w e r e h e ld b y th e b a n k in g s y s te m , in c lu d in g c o n s id e r a b le
a m o u n ts h e ld b y F e d e r a l R e s e r v e R a n k s . T o th e e x te n t th a t th e r e ­
d e e m e d s e c u r itie s w e r e h e ld b y c o m m e r c ia l b a n k s , th e u s e o f ta x r e c e ip ts
fo r th e ir r e tir e m e n t r e s u lt e d in th e e x t in g u is h m e n t o f b a n k d e p o s its .
A t th e s a m e tim e , h o w e v e r , th e r e d u c tio n in d e p o s its r e d u c e d th e r e q u ir e d
r e s e r v e s o f th e b a n k s a n d th u s r e le a s e d r e s e r v e fu n d s w h ic h th e b a n k s
c o u ld u s e a s th e b a s is fo r o th e r le n d in g a n d in v e s tin g o p e r a tio n s . B u t
to th e e x te n t th e fu n d s w e r e u s e d to r e d e e m s e c u r itie s h e ld b y th e
F e d e r a l R e s e r v e B a n k s , b o th b a n k d e p o s its a n d b a n k r e s e r v e s w e r e
e x tin g u is h e d . T h e a m o u n t o f s u c h r e d e m p tio n s fr o m R e s e r v e B a n k
p o r tfo lio s w a s m o r e th a n s u ffic ie n t to a b s o r b th e r e s e r v e s r e le a s e d th r o u g h
t h e r e d u c t io n in c o m m e r c ia l b a n k s ’ r e q u ir e d r e s e r v e s , a n d a ls o t h e
a d d it io n s t o r e s e r v e s r e s u lt i n g f r o m g o ld s a le s a n d e x p e n d it u r e s b y
fo r e ig n c o u n tr ie s d u r in g th is p e r io d . A s a r e s u lt , th e c o m m e r c ia l b a n k s
w e r e fo r c e d to s e ll s h o r t te r m G o v e r n m e n t s e c u r itie s d ir e c tly o r in d ir e c tly
to th e R e s e r v e B a n k s to m a in t a in t h e ir r e s e r v e s a t th e r e q u ir e d le v e ls .
A ft e r th e fir s t q u a r te r , h o w e v e r , T r e a s u r y r e c e ip ts a n d d is b u r s e ­
m e n ts w e r e m o r e n e a r ly in b a la n c e , so th a t th e r e w a s n o th in g lik e th e




26

THIRTY-THIRD ANNUAL REPORT

s a m e v o lu m e o f fu n d s a v a ila b le to th e T r e a s u r y f o r d e b t r e t ir e m e n t.
M e a n w h ile , h o w e v e r , th e T r e a s u r y h a d in itia te d a p r o g r a m o f s e llin g
lo n g te r m m a r k e ta b le b o n d s fr o m th e v a r io u s in v e s tm e n t a c c o u n ts u n d e r
its c o n tr o l fo r th e p u r p o s e o f m e e tin g d e m a n d s in th e m a r k e t fo r s u c h
s e c u r itie s , a n d th u s p r e v e n t in g a r is e in th e ir p r ic e s a n d d e c lin e in
th e ir y ie ld s , w h ic h w o u ld h a v e te n d e d to d e p r e s s lo n g te r m in te r e s t
r a te s g e n e r a lly — a d e v e lo p m e n t n o t c o n s id e r e d a p p r o p r ia te in v ie w o f
t h e e c o n o m ic c o n d it io n s t h e n p r e v a ilin g . S u c h s a le s c o n t in u e d in la r g e
v o lu m e th r o u g h th e s e c o n d q u a r te r o f th e y e a r a n d in to th e th ir d .
I n a d d itio n , m o d e r a te a m o u n ts o f fu n d s in e x c e s s o f im m e d ia te
T r e a s u r y n e e d s w e r e a v a ila b le in G o v e r n m e n t W a r L o a n a c c o u n ts in
th e c o m m e r c ia l b a n k s. A r r a n g e m e n ts w e r e m a d e w h e r e b y th e T r e a s u r y ,
t o s u p p o r t t h e S y s t e m ’s e f f o r t s t o k e e p b a n k r e s e r v e s f r o m e x p a n d i n g
a n d th u s to d isc o u r a g e u n n e c e s s a ry e x p a n s io n o f b a n k c r e d it, u s e d
a v a ila b le fu n d s to r e d e e m 1 0 0 o r 2 0 0 m illio n d o lla r s o f m a t u r in g T r e a s ­
u r y b ills fo r a n u m b e r o f w e e k s in th e s e c o n d q u a r te r . S in c e m o s t s u c h
b ills w e r e h e ld b y th e E e s e r v e B a n k s , th e ir r e d e m p tio n h a d th e e ffe c t o f
ta k in g r e s e r v e s a w a y fr o m th e c o m m e r c ia l b a n k s a n d th u s o ffs e ttin g
a d d it io n s to r e s e r v e s fr o m g o ld in flo w s a n d o t h e r fa c t o r s .
T h e s e m e a s u r e s w e r e r e a s o n a b ly s u c c e s s fu l, b u t c o u ld n o t b e c o n ­
t in u e d in d e fin it e ly , a s th e fu n d s a v a ila b le t o th e T r e a s u r y fo r r e d e m p ­
t io n s o f T r e a s u r y b ills a n d th e s u p p ly o f m a r k e ta b le T r e a s u r y b o n d s
a v a ila b le f o r s a le f r o m T r e a s u r y in v e s t m e n t a c c o u n ts w e r e lim it e d .
M e a n w h ile th e n e e d fo r m e a s u r e s to r e s tr a in c r e d it e x p a n s io n in c r e a s e d .
W h ile th e r e w a s e v id e n c e , in th e la te w in te r a n d e a r ly s p r in g o f 1 9 4 7 ,
o f a m o r e c a u tio u s in v e n t o r y p o lic y a n d in v e s tm e n t p r o g r a m o n th e
p a r t o f b u s in e s s b o r r o w e r s , o f s o m e la g in a c tiv ity in r e s id e n tia l b u ild ­
in g , a n d o f a s lig h t r e d u c tio n in in d u s tr ia l p r o d u c tio n , th e s e te n d e n c ie s
w e r e la te r r e v e r s e d . S ig n s a p p e a r e d , b e fo r e th e m id d le o f th e y e a r , o f
a c h a n g e o f p u b lic a n d b u s in e s s s e n tim e n t a n d a n u p w a r d tr e n d in
c o n s u m e r s p e n d in g , w h ic h le d r e ta ile r s a n d o th e r s to r e la x th e ir c a u tio u s
b u y in g p o lic ie s a n d to in c r e a s e t h e ir b o r r o w in g . I n th e s e c ir c u m s t a n c e s ,
it w a s c o n c lu d e d th a t fu r th e r s te p s s h o u ld b e ta k e n to m a in ta in s o m e
d e g r e e o f c o n tr o l o v e r th e v o lu m e o f F e d e r a l E e s e r v e c r e d it o u ts ta n d in g .
S
T
h
w

T h e in itia l p r o g r a m o f th e T r e a s u r y a n d
y s t e m i n v o l v e d t h e e l i m i n a t i o n o f t h e S y s t e m ’s
r e a s u r y b ills ( % o f 1 p e r c e n t ) a n d g r a d u a l m o
ig h e r s h o r t t e r m r a te s , e s p e c ia lly th e r a te o n
h ic h w a s o f s p e c ia l s ig n ific a n c e s in c e s h o r t te r m




th e F e d e ra l E e se rv e
fix e d b u y in g r a te fo r
v e s in th e d ir e c tio n o f
T r e a s u r y c e r tific a te s ,
r a te s g e n e r a lly te n d e d

FEDERAL RESERVE BANK OF NEW YORK

27

to b e r e la te d to th a t r a te . T h e fir s t s te p — e lim in a tio n o f th e fix e d r a te
a n d r e p u r c h a s e o p tio n o n n e w is s u e s o f T r e a s u r y b ills — w a s ta k e n e a r ly
in J u ly , a n d w a s fo llo w e d b y a T r e a s u r y o ffe r in g o f a n 1 1 -m o n th % p e r
c e n t c e r tific a te o n A u g u s t 1 , a 1 0 -m o n th c e r tific a te a t th e s a m e r a te o n
S e p t e m b e r 1 , a n d fin a lly a o n e -y e a r c e r tific a te a t 1 p e r c e n t o n O c to b e r 1 .
T h is p r o g r a m w a s r e e n fo r c e d b y c o n t in u e d s a le s o f m a r k e t a b le T r e a s u r y
b o n d s fr o m T r e a s u r y in v e stm e n t a c c o u n ts o n a s u b s ta n tia l b u t d im in ish ­
in g s c a le , a n d b y a n o ffe r in g o f h ig h ly r e s tr ic te d lo n g te r m 2 ^ p e r c e n t
T r e a s m y b o n d s to b e is s u e d o n O c to b e r 1 .
A t fir s t, it s e e m e d th a t th e s e m e a s u r e s w e r e h a v in g little e ffe c t.
A lt h o u g h th e y ie ld s o n n e w is s u e s o f T r e a s u r y b ills r o s e r a p id ly to
le v e ls a t le a s t e q u a l to y ie ld s o n T r e a s u r y c e r tific a te s o f c o m p a r a b le
m a t u r it y , b a n k s a n d o th e r in v e s to r s s h o w e d n o g r e a t in c lin a t io n to
in c r e a s e th e ir b ill h o ld in g s . T h e m a r k e t fo r b o th r e s tr ic te d a n d b a n k e lig ib le b o n d s r e m a in e d fir m , a n d th e r e c o n tin u e d to b e s o m e e v id e n c e
o f a te n d e n c y o n th e p a r t o f b a n k s a n d o th e r s to s h ift th e ir h o ld in g s
o f th e m o r e r e c e n t is s u e s o f T r e a s u r y c e r tific a te s in to lo n g e r te r m T r e a s ­
u r y b o n d s , a lth o u g h s o m e in s t it u t io n s s h ift e d a t le a s t p a r t o f th e p r o ­
c e e d s o f s a le s o f t h e lo n g e r c e r t ific a te s in t o b ills a n d c e r t ific a te s o f
s h o r te r m a tu r itie s .
M e a n w h ile , th e r e w a s a r e s u m p tio n o f in fla t io n a r y te n d e n c ie s in
th e c o m m o d ity m a r k e ts , s p e a r h e a d e d b y a s tr o n g r is e in g r a in p r ic e s a n d
s u p p o r te d b y a d v a n c e s in c o a l a n d s te e l p r ic e s . I n c r e a s in g e v id e n c e
a p p e a r e d o f a n a b a n d o n m e n t o f e a r lie r b u s in e s s e x p e c t a t io n s t h a t th e
la tte r h a lf o f 1 9 4 7 w o u ld b r in g a p r o g r e s s iv e d is a p p e a r a n c e o f s e lle r s ’
m a r k e ts , d o w n w a r d p r e s s u r e o n p r ic e s , a n d s o m e c o n tr a c tio n o f b u s in e s s
a c tiv ity . T h e r e w a s a s tr o n g r e v iv a l o f h o m e c o n s tr u c tio n a n d r a p id
g r o w th in b u s in e s s c a p ita l e x p e n d itu r e s . C o m m e r c ia l lo a n s , w h ic h in
th e a g g r e g a te h a d n o t s h o w n m u c h n e t in c r e a s e d u r in g th e fir s t h a lf o f
th e y e a r , e x p a n d e d r a p id ly , a n d n e w c o r p o r a te a n d m u n ic ip a l s e c u r ity
is s u e s w e r e b r o u g h t o u t a t s u c h a r a te a s to c a u se in te r m itte n t c o n g e s ­
t io n in th e m a r k e t a n d r a p id r e a d ju s t m e n t s in th e te r m s o f n e w o ffe r ­
in g s . F o r a w h ile , th e r is e in in t e r e s t r a t e s o n h ig h g r a d e c o r p o r a t io n
b o n d s a n d o n m u n ic ip a l b o n d s w a s r e g a r d e d s im p ly a s a c h a n g e in th e
d ir e c tio n o f r e s to r in g a m o r e n o r m a l r e la tio n s h ip b e tw e e n th e y ie ld s o n
s u c h s e c u r itie s a n d th e y ie ld s o n U n ite d S ta te s G o v e r n m e n t b o n d s .
H o w e v e r , p u r c h a s e s o f s u c h s e c u r itie s , a n d a n in c re a s e in th e
a m o u n t o f m o r tg a g e fin a n c in g , to g e th e r w ith p a y m e n ts fo r th e n e w




THIRTY-THIRD ANNUAL REPORT

28

is s u e o f lo n g te r m T r e a s u r y b o n d s o n O c to b e r 1 , a p p a r e n tly a b s o r b e d
r a t h e r f u lly th e a v a ila b le fu n d s o f in v e s t in g in s t it u t io n s , a n d a s h a r p
r e v e r s a l o f s e n tim e n t w ith r e s p e c t to lo n g te r m in v e s tm e n ts fo llo w e d .
W h e r e a s p r e v io u s ly t h e r e h a d s e e m e d to b e a n a lm o s t in s a t ia b le
d e m a n d fo r lo n g te r m h ig h g r a d e s e c u r itie s , q u e s tio n s b e g a n to b e
r a is e d a s to th e a d e q u a c y o f in v e s t m e n t fu n d s to m e e t a ll d e m a n d s . T h e
c h a n g e in s e n tim e n t w a s a c c e n tu a te d w h e n th e T r e a s u r y a n n o u n c e d n e a r
th e m id d le o f O c to b e r t h a t it w o u ld o ffe r a n is s u e o f a n 1 1 -m o n th , 1 p e r
c e n t c e r tific a te in e x c h a n g e fo r th e c e r tific a te s m a tu r in g N o v e m b e r 1 .
T h is a c tio n , w h ic h w a s r e c o g n iz e d a s fo r e c a s tin g a fu r t h e r r is e in th e
o n e -y e a r r a te to 1 % p e r c e n t, a c c e n tu a te d th e te n d e n c y to c o n c lu d e t h a t
a g e n e r a l r is e in in te r e s t r a te s w a s u n d e r w a y , a n d p r ic e s o f th e lo n g e r
t e r m G o v e r n m e n t s e c u r itie s , a s w e ll a s s h o r t t e r m , d e c lin e d . T h e e a r lie r
t e n d e n c y o f b a n k s to a b s o r b r e a d ily a n y a v a ila b le s u p p lie s o f th e lo n g e r
te r m e lig ib le b o n d s a n d to s e ll s h o r t te r m s e c u r itie s to th e R e s e r v e
S y s t e m d is a p p e a r e d a lm o s t e n t ir e ly , a n d th e d e m a n d fo r T r e a s u r y b ills
in c r e a s e d c o n s id e r a b ly .
C o m m e r c ia l lo a n s a s w e ll a s r e a l e s ta te a n d c o n s u m e r lo a n s c o n ­
t in u e d to e x p a n d r a p id ly , h o w e v e r , a n d , a s c o n c e r n o v e r in fla tio n g r e w ,
Total Loans and Investments of All Member Banks*
B f L L IO N S
OF D O L L A R S

1 2.0

\---------------- ------------------------------------------------------------------------------------------------------

1941

1942

1943

1944

1945

*June and December call dates from Dec. 1940 to Dec. 1947.
tD irect and guaranteed.




1946

1947

FEDERAL RESERVE BANK OF NEW YORK

a tte n tio n w a s d ir e c te d in c r e a s in g ly to th e g
c o n t r ib u t in g fa c t o r , a lt h o u g h t h e r e w a s s o m
to w h e th e r th e g r o w th in lo a n s w a s m o r e a
t io n a r y p r e s s u r e s . T h e in flo w o f g o ld w a s
r e s e r v e s fe e d in g th e g r o w th in b a n k c r e d it.

r o w th o f b a n k lo a n s a
e d iffe r e n c e o f o p in io n
r e s u lt o r a c a u s e o f in
p o in te d to a s a s o u r c e

29

s a
as
fla ­
of

I n th e s e c ir c u m s ta n c e s , th e P r e s id e n t, in h is m e s s a g e to th e s p e c ia l
s e s s io n o f C o n g r e s s th a t c o n v e n e d o n N o v e m b e r 1 7 , r e c o m m e n d e d th a t
a c tio n b e ta k e n to c h e c k th e g r o w th in c r e d it. T h e C h a ir m a n o f th e
B o a r d o f G o v e rn o rs o f th e F e d e ra l R e se rv e S y ste m th e n p re se n te d to
C o n g r e s s io n a l c o m m itte e s a r e c o m m e n d a tio n o f th e B o a r d th a t th e
S y s t e m b e g iv e n t e m p o r a r y a u t h o r it y to r e q u ir e a ll c o m m e r c ia l b a n k s to
m a in ta in s p e c ia l r e s e r v e s , in a d d itio n to th e r e s e r v e s th e y a r e r e q u ir e d
to m a in ta in u n d e r e x is tin g la w s . I t w a s p r o p o s e d th a t th e b a n k s b e
p e r m itte d to h o ld th e s p e c ia l r e s e r v e s e ith e r in th e fo r m o f s h o r t te r m
G o v e r n m e n t s e c u r itie s o r in th e fo r m o f c a s h a s s e ts in e x c e s s o f s p e c ifie d
p e r c e n ta g e s o f d e p o s its , a n d th a t th e F e d e r a l O p e n M a r k e t C o m m itte e
b e a u th o r iz e d to fix th e n e w r e q u ir e m e n ts a t p e r c e n ta g e s u p to 2 5 p e r
c e n t o f d e m a n d d e p o s its a n d u p to 1 0 p e r c e n t o f tim e d e p o s its . T h e
p la n w a s s u b m itte d a s a m e a n s o f c o u n te r a c tin g th e e ffe c t o n b a n k
r e s e r v e s o f fu r t h e r g o ld in flo w s , p r e v e n t in g b a n k s f r o m c o n v e r t in g s h o r t
te r m G o v e r n m e n t s e c u r itie s in to a d d itio n a l c a s h r e s e r v e s , r e d u c in g th e
m u ltip le o f c r e d it e x p a n s io n b a s e d o n b a n k r e s e r v e s , in s u la tin g p a r t o f
th e G o v e r n m e n t s e c u r itie s m a r k e t a g a in s t th e e ffe c ts o f h ig h e r in te r e s t
r a te s in th e p r iv a te c r e d it m a r k e t, a n d g e n e r a lly p e r m ittin g th e F e d e r a l
R e s e r v e S y s te m m o r e e ffe c tiv e ly to c o n tr o l th e v o lu m e o f b a n k c r e d it.
W id e s p r e a d o p p o s itio n to th e p r o p o s a l, b a s e d o n q u e s tio n s a s to its
n e c e s s ity a n d a s to its e ffe c tiv e n e s s in a c h ie v in g th e r e s u lts c la im e d fo r it,
w e r e v o ic e d a t C o m m itte e h e a r in g s a n d e ls e w h e r e , a n d th e C o n g r e s ­
s io n a l c o m m itte e s to o k n o a c tio n .
I n th e fa c e o f c o n tin u in g in fla tio n a r y p r e s s u r e s , fu r t h e r a c tio n
in v o lv in g th e u s e o f e x is tin g p o w e r s o f m o n e ta r y c o n tr o l a n d d e b t
m a n a g e m e n t w a s ta k e n . I n k e e p in g w ith a n a g r e e m e n t w h ic h h a d b e e n
r e a c h e d w it h th e T r e a s u r y in th e fa ll, th e T r e a s u r y u s e d its s u r p lu s
f u n d s p r i m a r i l y t o r e d e e m t h e R e s e r v e S y s t e m ’s h o l d i n g s o f m a t u r i n g
is s u e s o f G o v e r n m e n t s e c u r itie s . T h is p r o g r a m w a s fo llo w e d w ith
r e s p e c t to c e r tific a te s m a tu r in g in N o v e m b e r a n d D e c e m b e r 1 9 4 7 , a n d th e
e a r ly m o n th s o f 1 9 4 8 , a n d in c o n n e c tio n w ith th e r e tir e m e n t o f p a r t o f
s u c c e s s iv e m a t u r in g is s u e s o f T r e a s u r y b ills . T h e a r r a n g e m e n t p r o v id e d




30

THIRTY-THIRD ANNUAL REPORT

a n e ffe c t iv e m e a n s o f o ffs e t t in g g o ld in flo w s a n d o f k e e p in g s o m e p r e s ­
s u r e o n th e r e s e r v e p o s itio n o f m e m b e r b a n k s . D ir e c t a c tio n w a s
s u p p le m e n te d b y a jo in t s ta te m e n t o n N o v e m b e r 2 5 b y th e B o a r d o f
G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s te m , th e C o m p tr o lle r o f th e C u r ­
r e n c y , th e F e d e r a l D e p o s it In s u r a n c e C o r p o r a tio n , a n d th e E x e c u tiv e
C o m m itte e o f th e N a tio n a l A s s o c ia tio n o f S u p e r v is o r s o f S ta te B a n k s ,
u r g in g th e b a n k s to a v o id n o n e s s e n tia l lo a n s . A n d n e a r th e e n d o f 1 9 4 7
th e A m e r ic a n B a n k e r s A s s o c ia t io n la id p la n s fo r a s e r ie s o f m e e tin g s
in a ll p a r t s o f th e c o u n tr y e a r ly in 1 9 4 8 to p r o m o te v o lu n t a r y a c tio n b y
th e b a n k s to a v o id u n n e c e s s a r y o r u n d e s ir a b le e x te n s io n s o f c r e d it.
M e a n w h ile , h o w e v e r , th e d e c lin e in T r e a s u r y b o n d p r ic e s , w h ic h
h a d s ta r te d in O c to b e r , c o n tin u e d u n d e r th e p r e s s u r e o f s e llin g p a r tic ­
u la r ly b y s a v in g s in s titu tio n s s u c h a s in s u r a n c e c o m p a n ie s , w h ic h w e r e
fin d in g in v e s tm e n t a n d lo a n o u tle ts in e x c e s s o f th e ir c u r r e n t ly a c c u m u ­
la tin g fu n d s . I n th e se c ir c u m s ta n c e s , th e S y s te m in te r v e n e d in th e
m a r k e t w ith th e a id o f T r e a s u r y in v e s tm e n t a c c o u n ts , b e g in n in g a r o u n d
th e m id d le o f N o v e m b e r . A t th e s a m e tim e u n c e r ta in ty a s to in te r e s t
r a te p r o s p e c ts le d to in c r e a s e d d e m a n d fo r s h o r t te r m G o v e r n m e n t
s e c u r itie s , e s p e c ia lly T r e a s u r y b ills , s o t h a t S y s t e m p u r c h a s e s o f lo n g
t e r m b o n d s w e r e r e a d ily o ffs e t b y s a le s a n d r e d e m p tio n s o f s h o r t t e r m
s e c u r itie s a n d c o n s e q u e n tly d id n o t a d d to th e v o lu m e o f b a n k r e s e r v e s .
D o u b ts p e r s is te d , h o w e v e r , a s to th e e v e n tu a l le v e l o f in te r e s t r a te s
a n d o f p r ic e s o f lo n g te r m b o n d s , a n d s e llin g o f b o th e lig ib le a n d
r e s tr ic te d T r e a s u r y b o n d s c o n tin u e d o n a s u b s ta n tia l s c a le . I n fa c t ,
t h e r e w a s g r o w in g e v id e n c e o f s a le s , n o t t o p r o v id e f u n d s f o r o t h e r
im m e d ia te u s e s , b u t r a th e r to p r o te c t r e m a in in g p r o fits o r to p r e v e n t
l o s s e s o n G o v e r n m e n t b o n d s . I n t h e s e c i r c u m s t a n c e s t h e S y s t e m ’s s u p ­
p o r t p r ic e s w e r e lo w e r e d o n D e c e m b e r 2 4 . A te m p o r a r y p e r io d o f
c o n fu s io n fo llo w e d in w h ic h th e r e w a s a s h a r p in c r e a s e in th e v o lu m e o f
o ffe r in g s o f G o v e r n m e n t b o n d s w h ic h th e S y s te m h a d to a b so rb . T h e
s e llin g in th e fin a l w e e k o f 1 9 4 7 w a s e n la r g e d b y a s u b s ta n tia l v o lu m e
o f o ffe r in g s b y c o m m e r c ia l b a n k s, so m e o f w h ic h d e c id e d fo r ta x p u r ­
p o s e s to e s ta b lis h lo s s e s to o ffs e t p r o fits ta k e n o n G o v e r n m e n t s e c u r ity
o p e r a t io n s e a r lie r in th e y e a r . E a r ly in 1 9 4 8 , h o w e v e r , th e v o lu m e o f
s e llin g o f G o v e r n m e n t b o n d s fe ll o ff r a p id ly .
F o r t h e p a s t y e a r a s a w h o le , t h e S y s t e m ’s a g g r e g a t e h o l d i n g s o f
G o v e r n m e n t s e c u r itie s a n d th e to ta l v o lu m e o f F e d e r a l R e s e r v e c r e d it
o u ts ta n d in g w e r e r e d u c e d s u b s ta n tia lly . A s th e a c c o m p a n y in g c h a r t




FEDERAL RESERVE BANK OF NEW YORK

31

M ajor Factors Affecting the Reserve Position of Member Banks*
B ILLIO N S
OF DOLLARS

32

28

24

20

16

12

8
4

0
* Monthly averages o f daily figures.

'

tGold stock adjusted for foreign account balances with Federal Reserve Banks and for pay­
ment o f 688 million dollars to the International Monetary Fund as part o f the United
States subscription.

in d ic a te s , th e r e d u c tio n o c c u r r e d m a in ly in th e e a r ly p a r t o f th e y e a r ,
w h e n h e a v y t a x c o lle c tio n s c a u s e d a s h r in k a g e in th e d e p o s its a n d
r e q u ir e d r e s e r v e s o f th e b a n k s a n d w h e n th e u s u a l s e a s o n a l c o n tr a c tio n
in c u r r e n c y c ir c u la tio n o c c u r r e d . T h e r e a fte r th e r e w e r e w id e flu c tu a ­
t io n s f r o m w e e k t o w e e k b u t n o g r e a t n e t c h a n g e i n t h e S y s t e m ’s h o l d ­
in g s o f s e c u r itie s . I n th e fir s t w e e k o f 1 9 4 8 , to ta l F e d e r a l R e s e r v e c r e d it
i n u s e w a s a p p r o x im a t e ly 2 b i lli o n d o lla r s le s s t h a n a y e a r p r e v io u s .1
T h e p o lic ie s fo llo w e d d u r in g 1 9 4 7 e n a b le d th e F e d e r a l R e s e r v e
S y s te m , in c o o p e r a tio n w ith th e T r e a s u r y , to m a in ta in a r e a s o n a b le
d e g r e e o f s ta b ility in th e G o v e r n m e n t s e c u r ity m a r k e t, to p r e v e n t a d d i­
tio n s to m e m b e r b a n k r e s e r v e s a s a n o u tg r o w th o f m a r k e t-s u p p o r tin g
o p e r a tio n s , a n d to c o u n te r a c t a c o n s id e r a b le p a r t o f th e e ffe c t o n b a n k
r e s e r v e s o f t h e h e a v y in f lo w o f g o ld .2 I n t h e fa c e o f i n c r e a s in g d e m a n d s
1Year-end figures were distorted by a temporary bulge in member bank excess reserves,
which was quickly eliminated in the first few weeks of 1948.
2A further step in this direction was taken on January 12, 1948 when nine of the Federal
Reserve Banks raised the rate on discounts and advances (secured by Government
securities and eligible paper) from 1 per cent to 1% per cent. The other three Reserve
Banks raised their rates correspondingly within a week.




32

THIRTY-THIRD ANNUAL REPORT

for credit for current business, for working capital, for the financing
of home and other construction, and for consumer expenditures, the
System was not able to prevent some expansion in bank reserves and in
the aggregate amount of bank credit based on those reserves. The
growth in the money supply in the form of demand deposits and cur­
rency amounted during 1947 to about 3 per cent. This was, no doubt,
a contributing influence in the rise of commodity prices, but that rise
was induced primarily by other factors, such as crop failures in Europe,
rising costs of industrial production in this country, and the existing
excessive money supply, a heritage of the war and its financing. It
is doubtful whether, in the circumstances of the year 1947, credit expan­
sion could have been prevented entirely (it is even more doubtful that
purchasing power placed in the hands of the public during the war
could have been substantially reduced), except by such drastic measures
as would have interfered seriously with production — production urg­
ently needed to meet domestic and foreign demands.

C o n s u m e r C r e d it

During 1947, the volume of consumer credit outstanding increased
by a somewhat smaller percentage than during the first postwar year,
but the absolute increase was about the same—more than 3 billion dollars.
At the end of 1947 the volume of consumer credit outstanding, esti­
mated at about 13.4 billion dollars, reached an all-time peak and was
more than twice as large as at the end of the war.
Instalment credits accounted for more than two thirds of the
increase in the total amount of consumer credit outstanding during
1947. Instalment credits extended by merchants increased more than
80 per cent. Automobile dealers nearly doubled their outstanding
volume of credits, but the total of this type of paper is still considerably
smaller than in 1941, despite higher prices. Outstanding instalment
accounts at department stores and mail order houses also nearly doubled
and at the end of the year were nearly 40 per cent above the prewar
peak. Instalment cash loans made by banks and other agencies increased
more slowly.
While there was a marked reduction from the high 1946 rate of
increase in other types of consumer credit, the increase in dollar volume
was still substantial. Charge accounts, which rose nearly 1.1 billion
dollars in 1946, increased by half that much during 1947; outstanding




FEDERAL RESERVE BANK OF NEW YORK

33

balances at the end of the year were 3.6 billion compared with 1.8
billion at the end of 1941.
Until November 1947, the Board of Governors of the Federal
Reserve System and the Federal Reserve Banks administered the regula­
tion of consumer credit under an Executive Order issued in August
1941. Believing that, with the return of peace, continued regulation of
consumer credit should be based on a specific, legislative grant of
authority, rather than on an emergency Executive Order, both the
Board of Governors and the Council of Economic Advisers recommended
to President Truman early in 1947 that he ask Congress for legislation
bestowing specific authority on the Federal Reserve System to regulate
consumer credit. The proposed legislation was similar to Regulation
W in the form in which that regulation was in effect between December
1, 1946 and November 1, 1947, and covered only instalment credit.
Maximum maturities for all consumer instalment credits and minimum
down payments for all major durable goods were to be authorized by
the law, the exact percentages to be left to the discretion of the admini­
strative authorities. It was pointed out that the easing of credit terms
under existing conditions would do little to increase the production or
supply of most consumers’ goods; it would primarily increase an
already large demand and hence tend to accentuate price inflation.
Nevertheless, the proposal aroused strong and vocal opposition and,
despite the President’s recommendation that consumer credit regulation
be continued on a peacetime basis, Congress passed on August 8, 1947
a Joint Resolution ending all consumer credit controls after November 1,
1947. Regulation W of the Board of Governors was accordingly discon­
tinued as of that date.
Between the time of enactment of the Joint Resolution and the
expiration of consumer credit controls, inflationary pressures throughout
the economy gained greatly in strength and became recognized as a
serious threat to economic stability. Consequently, when Congress was
called back in November for a special session to deal with inflationary
developments and European relief, the President again requested— as
part of his anti-inflation program—legislation providing for the regula­
tion of consumer instalment credit. A bill to restore the control of the
Board of Governors over this type of credit until March 15, 1949 was
passed by the Senate in December and sent to the House Committee
on Banking and Currency, but the latter Committee did not act upon
the bill before the close of the special session.




THIRTY-THIRD ANNUAL REPORT

34

It is difficult to determine the precise effect which the termination
of the emergency control has had so far on the volume of consumer
credit. There was a sharp increase during November and December,
but a considerable part of this was probably seasonal. The termination
of control led almost immediately to some significant relaxation of
instalment terms, although bankers’ organizations and trade associations
strongly urged all financing institutions and retailers to adhere to
conservative credit practices. These efforts appear to have been fairly
successful, so far as banks and finance companies are concerned, but
some vendors are now offering credit terms well below the standards set
by Regulation W. As competition increases, other vendors may seek to
meet it by offering more liberal terms, a tendency which could sustain
demand and prices temporarily, but which can have undesirable long-run
consequences in the present economic situation.

Foreign Economic and Financial Reconstruction
T he W

o r ld - W id e

D

ollar

S hortage

In the international field the year 1947 was characterized by a
growing disequilibrium between the needs of foreign countries for
American goods and services and the supply of dollars and gold at their
disposal for the financing of such needs. While this so-called dollar
shortage was particularly severe in the case of European countries, it
was essentially a world-wide phenomenon.
During 1946 most countries had made considerable progress in
their efforts to convert from war to peacetime production, and countries
that had suffered physical damage and destruction had made a good
start toward reconstruction. Ambitious programs to raise prevailing
low consumption levels had also begun. The economic recovery of the
world — with the exception of the devastated industrial areas of Ger­
many and Japan and of certain other areas in Asia and the East Indies
— appeared to be well under way.
Commencing early in 1947, however, a number of adverse factors
combined to arrest and even to reverse this trend. An unusually severe
winter in Western and Central Europe interfered with production, dis­
rupted transportation, and led to increased demands upon the United
States for fuel and food. Inclement spring weather in Europe, followed
by the driest summer in decades, resulted in widespread crop failures
and in curtailment of hydroelectric power production. In Western
Germany, inadequate food rations, political unrest, and indecision re­




FEDERAL RESERVE BANK OF NEW YORK

35

garding the permissible level of industrial activity brought rehabilitation
to a virtual halt. The production and export of German coal, vital to
the industrial output of other European countries, fell far short of the
target set by the occupation authorities. Growing political tension
between the Western Powers and Soviet Russia had adverse repercus­
sions in the form of strike waves in France and Italy, which added to the
inflationary pressures. Finally, the sharp rise in American prices
which had begun in the summer of 1946 increased the cost of the goods
and services that had to be purchased from the United States.
Largely as a result of these influences, European countries faced
sharply increased balance-of-payments deficits with the United States
in 1947. This deterioration in Europe’s condition contributed to a gen­
eral worsening in the dollar position of other foreign countries, which
for the most part had surpluses with Europe. But the main causes of
the worsened dollar position of non-European countries were a rapid
rise in their imports of American goods, now more freely available, to
meet large backlogs of demand, and the higher prices of these goods.
In one or two countries, notably Canada, the dollar shortage may have
been aggravated by heavy foreign lending in the immediate post­
war period. The general deterioration abroad necessitated a more rapid
rate of utilization, than in 1946, of outstanding foreign loans and credits
and of existing foreign dollar and gold reserves. In fact, drafts on these
combined resources were carried to a point where, to prevent their early
exhaustion, foreign countries were increasingly forced to tighten their
import restrictions on purchases of American goods, to the detriment of
their domestic consumption and investment. In the latter half of the year,
when funds earlier appropriated by the United States Government for
foreign aid had been virtually exhausted, new emergency aid programs
had to be devised and a long-range aid program (now called the Euro­
pean Recovery Program) began to take shape.
Probably the most serious development in the international field
during 1947 was the marked weakening of the British international
financial position. British reserves of gold and United States and
Canadian dollars fell by about 610 million dollars to about 2.1 billion
by the end of 1947, while the unutilized portion of the American credit
dwindled from 3,150 million dollars to 300 million.1 The clause of the
Anglo-American credit agreement which required Britain to make all
sterling accruing to foreigners on current account convertible into dollars
1 By March 1, 1948, this small balance had been completely exhausted.




36

THIRTY-THIRD ANNUAL REPORT

went into effect on July 15, 1947. An unexpectedly severe run on
sterling followed which reached its peak about the middle of August,
when in the course of six working days the British were forced to pay
out 237 million dollars. On August 20, they found themselves compelled
to suspend convertibility. Further measures to save dollars were taken
during September, under a new “ austerity” program. These measures
included a slashing of imports from hard-currency sources, a corre­
sponding reduction of consumption, and increased diversion of domestic
output to export markets. Present aims are to increase exports during
the first 6 months of 1948 to an average of 125 per cent of their 1938
volume (compared with the 120 per cent attained by the end of 1947),
and to reduce the balance-of-payments deficit on current account (in all
currencies) from an estimated 675 million pounds in 1947 to 136 mil­
lion in the first half of 1948. The attainment of this goal, however,
would still leave a dollar deficit of 227 million pounds in the latter
period. What will happen to the balance of payments in the last six
months of 1948 depends on United States aid.
The suspension of convertibility, of course, had an adverse effect on
Britain’s creditors, who were deprived of expected dollar revenues.
Particularly hard hit was Canada, which imports heavily from the
United States and exports largely to countries unable to pay for more
than a limited part of their imports in “ hard” currencies. In spite of
an over-all balance-of-payments surplus, Canada was forced in 1947 to
draw heavily on its gold and United States dollar reserves, reducing
them from 1,245 million dollars at the beginning of the year to 480 mil­
lion in November, when measures were decreed to restrict expenditures
of United States dollars. By the end of the year, Canada’s gold and
United States dollar reserves had risen to 502 million dollars.

T he E

uropean

R ecovery P rogram

In the early summer of 1947, when it had become apparent that
further large-scale financial aid from the United States was necessary
to enable European countries to maintain minimum consumption stand­
ards and to carry through reconstruction, Secretary of State Marshall,
in a speech at Harvard University, suggested that, if European countries
wished to prepare and to cooperate in a program of reconstruction, the
United States would stand ready to support such a program “ so far as
it may be practical for us to do so.” As a result, a conference of sixteen




FEDERAL RESERVE BANK OF NEW YORK

37

Western European countries2 convened in Paris in July 1947 and set up
a Committee for European Economic Cooperation.
In its report, presented to the United States on September 22, the
Committee outlined a production program in the participating countries
and in Western Germany designed to raise the over-all agricultural and
industrial output of those areas to above prewar levels by 1951 and to
achieve by that date a reasonable equilibrium in their over-all balances
of payments. To help attain these objectives, the participants pledged
themselves to mutual assistance in the joint development of resources
and trade and to the creation and maintenance of internal financial
stability. The report emphasized, however, that the achievement of
the production goals depended predominantly upon a sustained large
flow of imports from the rest of the world, and especially from the United
States. It was estimated that over the four-year period of 1948-51, after
allowance for receipts from exports of goods and services, the partici­
pants would have a cumulated balance-of-payments deficit of 16.5 billion
dollars with the United States and of 22.4 billion with the Western Hem­
isphere as a whole.
Three American committees, appointed on June 22 by President
Truman, studied the implications of the Marshall Plan for the United
States. A committee of Government specialists (the Krug Committee)
examined the state of this country’s resources from the viewpoint of our
ability to support the plan. A second committee, consisting of the
President’s Council of Economic Advisers, studied “ the impact on our
economy of aid to other countries.” An advisory group of 18 business,
labor, and educational leaders under the chairmanship of Secretary of
Commerce Harriman, analyzed the broad aspects of the program and
“ the limits in which the United States may safely and wisely plan to
extend . . . assistance.” In their reports, issued in October and
November, all three committees agreed that the proposed program was
well within our physical and financial capacity.
On December 19, 1947 the President submitted to Congress a bill
(the Economic Cooperation Bill of 1948), incorporating many of the
conclusions of these three committees, as well as some of the recom­
mendations of the Select Committee on Foreign Aid of the House of
Representatives (the Herter Committee). The proposed legislation
contained an authorization to appropriate, for the 15-month period
2Austria, Belgium, Denmark, France, Greece, Iceland, Ireland, Italy, Luxembourg,
Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey, and the United Kingdom.




38

THIRTY-THIRD ANNUAL REPORT

April 1, 1948 to June 30, 1949, a sum of 6.8 billion dollars3 to be
used for grants and loans to the participating countries and Western
Germany for purchases of goods and services in the United States or in
any other country. The Administration estimated that the full program,
over the entire period up to June 30, 1952, might necessitate appropria­
tions of about 17 billion. The Administration bill also called for the
establishment of a new Government agency, the Economic Cooperation
Administration, to administer the program.

G o v e r n m e n t R e l ie f

and

L oan

O p e r a t io n s

In the course of 1947 the form, if not the basic character, of the
United States Government’s postwar program of loans and financial
assistance to foreign countries underwent certain changes.
By June 30 the United States contribution of 2.7 billion dollars to
the United Nations Relief and Rehabilitation Administration had
been entirely committed and the activities of that international agency
were formally brought to a close. Largely in order to complete the
work of UNRRA, a number of new emergency aid programs, involving
appropriations of 1,340 million dollars, were undertaken by the United
States Government. In July Congress appropriated 332 million for
post-UNRRA relief to Austria, Greece, Italy, and Trieste, and for
certain special relief funds; in December an additional sum of 18
million was appropriated for China. In July, also, Congress appro­
priated 71 million for American participation in the activities of the
International Refugee Organization, which was to take over from
UNRRA the task of caring for displaced persons in Europe and in the
Middle East. The inability of the United Kingdom to continue aid to
Greece after March 31 necessitated special aid to the latter country. In
July, therefore, Congress appropriated 300 million dollars for economic
and military aid to Greece, and at the same time voted 100 million for
military aid to Turkey. To bridge the gap until April 1948, when the
European Recovery Program was expected to be enacted, Congress
passed in December the Foreign Aid Act of 1947, under which a sum of
522 million dollars was appropriated for interim relief to France, Italy,
and Austria.
3On March 14, 1948 the Senate approved a bill authorizing 5.3 billion dollars for the
12-month period April 1, 1948 to March 31, 1949. The monthly rate of aid under the
Senate bill would be about the same as under the Administration’s proposal.




FEDERAL RESERVE BANK OF NEW YORK

39

During the year additional appropriations of 940 million dollars
were made by Congress for civilian relief in occupied areas (Germany,
Korea, and Japan). Beginning November 1, the United States Govern­
ment assumed the total dollar cost of civilian supplies for the bizonal
area of occupied Germany, in view of the British Government’s inability
to continue financing its share of these costs.
The amount of aid actually made available by this country under
official relief programs in 1947 was approximately 2.2 billion dollars.
Provision of goods and freight services under UNRRA aggregated
slightly over 500 million dollars. Shipments under the post-UNRRA
program and the Greek-Turkish Aid program amounted to 245 million
and 93 million dollars, respectively. Civilian supplies made available
to occupied countries aggregated somewhat more than 1.0 billion dollars.
War damage and other transfers to the Philippine Republic totaled
120 million, and miscellaneous transfers under official programs 221
million.
During the year the Export-Import Bank authorized new credits
of 614 million dollars and made total disbursements of 825 million. The
largest authorization involved a credit of 300 million to Canada for
the purchase of equipment and raw materials. A credit of 100 million
dollars was authorized for specific segments of Italian industry to assist
them in restoring and expanding their export markets. A 50 million
dollar credit was granted to Belgium for the purchase of essential materials and equipment, and another of the same size to Mexico for the
financing of specific industrial projects. Of the Bank’s aggregate author­
izations in 1947, only 30.5 million dollars was actually disbursed during
the year, the bulk of the loan disbursements being made from previously
authorized credits. The largest disbursements were made to France
(536 million) and the Netherlands (90 million) under reconstruction
credits granted in 1946. By the end of 1947 uncommitted funds of the
Export-Import Bank had declined to 497 million dollars, compared with
919 million at the end of 1946.
The final winding up of the lend-lease program was virtually com­
pleted during 1947. Lend-lease “ pipeline” credits (of which about 1.2
billion dollars had been authorized after V-J Day) had been almost
completely utilized by the end of 1946. “ Straight” (nonreimbursable)
lend-lease, which had been of some quantitative importance in 1946, was
negligible in 1947. During the year final lend-lease settlements were




40

THIRTY-THIRD ANNUAL REPORT

agreed upon with the Netherlands and the Union of South Africa, and
at the end of the year negotiations for such settlements were in progress
with the governments of the Soviet Union, China, Brazil, Czechoslovakia,
Greece, Norway, and Yugoslavia.
About 200 million dollars of credits were authorized during the year
by the Foreign Liquidation Commissioner of the State Department in
order to finance the sale to foreign countries of United States surplus
property located abroad. Small credits were authorized by the United
States Maritime Commission for financing the sale abroad of war-built
vessels, under the Merchant Ship Sales Act of 1946. Total disburse­
ments under the surplus property and ship sale credits amounted to
317 million dollars during the year.

T he W

orld

Bank

and

F und

In the course of 1947 the International Bank for Reconstruction
and Development began the operational phase of its activities, both as
lender and as borrower. On May 9 its first loan, totaling 250 million
dollars, was made to France, followed by loans of 195 million to the
Netherlands, 40 million to Denmark, and 12 million to Luxembourg
(the last figure including the equivalent of 2 million dollars in Belgian
francs.) On July 15 the Bank undertook its first security marketing
operations, successfully floating 150 million dollars of 25-year 3 per cent
and 100 million of 10-year 2^4 per cent bonds, nearly all of which were
taken by investors in the United States. In the latter part of the year,
the Bank did not engage in any financial operations but had a substantial
amount of loan applications under review and was preparing to sup­
plement the economic aid provided by the European Recovery Program.
On December 31 the Bank held 485 million dollars in uncommitted dollar
balances, while loan applications by eight nations amounted to nearly
2,290 million.
The International Monetary Fund, having opened for business on .
March 1, 1947, carried out its first operations in May 1947 with sales of
25 million dollars to France and 6 million dollars and 1.5 million pounds
sterling to the Netherlands. By the end of the year, the Fund had com­
pleted 22 transactions, amounting to 468 million dollars and involving
the currencies of Belgium, Chile, Denmark, France, Mexico, the Nether­
lands, Turkey, the United Kingdom, and the United States.




FEDERAL RESERVE BANK OF NEW YORK

41

During the year, the Fund had to fix its policy with respect to
monetary actions on the part of several of its members. In June it
approved the introduction of a multiple exchange rate system in Ecuador
for the purpose of helping that country to conserve its foreign exchange
resources. In December it received notification from Italy of that coun­
try’s adoption of a system of multiple and flexible exchange rates. Al­
though deeming the new system not in accordance with its long term
objectives, the Fund issued a statement expressing its sympathy with the
Italian measures, since they were stated to be temporary. Italy has not
yet agreed with the Fund on the par value of its currency. On January
25, 1948 the Fund refused to approve a French Government proposal to
establish a transitional system of dual exchange rates, official and free.
The Fund felt that the proposed system would be discriminatory and
might prove disruptive to international trade and monetary relationships.
The French Government, however, did not subscribe to this viewpoint
and has put its plan into effect.
A recommendation to members that they prevent transactions in
gold with other countries at premium prices was made by the Fund in
June, and a number of countries (including the United States) have
since taken steps to carry out this recommendation. A proposed gold
production subsidy in Canada was approved (after some revision) by
the Fund in December; at that time the Fund emphasized that future
proposals of a similar nature would be considered on their individual
merits.

The United States Balance of Payments
Although the United States balance of international payments in
1947 conformed broadly to the pattern that had prevailed in 1946, it
nevertheless underwent some important quantitative changes. Most
notably, there was a sharp expansion in net transfers of goods and
services to foreign countries, as well as a conspicuous increase in the
rate of drain on their gold and dollar reserves.
According to estimates of the Department of Commerce, the United
States provided about 19.6 billion dollars of goods and services to foreign
countries during 1947, compared with 15.2 billion in 1946. Payments
due foreign countries for imports of goods and for services increased
from 7.1 billion dollars in 1946 to 8.3 billion in 1947. Our net trans­
fers of goods and services consequently rose to 11.3 billion, compared
with 8.1 billion in 1946. In the latter half of the year, however, under




42

THIRTY-THIRD ANNUAL REPORT

the impact of increasing import restrictions against American goods,
induced by the growing world-wide dollar shortage, the volume of these
net transfers was considerably less than in the first half of the year.
Recorded merchandise exports aggregated 14.5 billion dollars in
1947, an increase of 4.8 billion over the preceding year. This sharp rise
was largely a reflection, on the one hand, of the greater availability of
goods for export and their higher prices, and, on the other, of a setback
in industrial and agricultural output in Western Europe. Recorded
relief shipments of goods, however, declined from somewhat over 1 billion
dollars in 1946 to only about 700 million dollars in 1947 (in both cases
excluding goods shipped by the Army for use in occupied countries).
Because of production difficulties abroad, merchandise imports of the
United States rose only moderately, from 4.9 billion in 1946 to 5.7 billion
dollars in 1947. Our recorded merchandise export surplus in 1947 rose
most sharply with respect to Canada, Western Europe, the Union of
South Africa, and certain Latin American countries.
Although United States Government loans and other aid to foreign
countries appear to have been somewhat higher in 1947 than in the
Principal Means o f Financing U. S. Exports of Goods and Services,
1946-47 Quarterly Totals
B IL L IO N S
OF D O L L A R S

1ST

3RD

~2N0

4™

1ST

1946
Source: Basic data from U. S. Department of Commerce.




3 R0

2 nd
1947

4TH

FEDERAL RESERVE BANK OF NEW YORK

43

preceding year, the increase in the current account deficit of foreign
countries with the United States was so sharp that, on balance, those
countries lost almost 3 billion dollars of gold to the United States during
1947. This was the largest net gold movement in our balance of pay­
ments in any year since 1940 and more than offset our total net gold
losses to foreign countries in 1942 to 1945 inclusive. Of the foreign net
loss of gold in 1947, 1,057 million dollars was attributable to net releases
to the United States of foreign gold earmarked here and the remain­
ing amount to net exports to this country. The largest net imports of
gold into this country came from the United Kingdom, Canada, Argen­
tina, the Union of South Africa, and France. There were relatively few
exports or sales of gold to foreign countries during the year.
The international gold movement of 1947 reduced the amount held
under earmark in this country for foreign accounts at the end of the
year to 2,766 million, compared with 3,823 million dollars as of Decem­
ber 31, 1946. Despite its gold contribution of 687.5 million dollars to the
International Monetary Fund in February 1947, the United States’ net
gain of gold from all international transactions, together with a small
gain from domestic production, increased the monetary gold stock by
2,225 million dollars to 22,754 million dollars as of December 31, 1947,
or to the highest level since September 1942.
In addition to the export of capital from the United States result­
ing from Government foreign loans and financial assistance, there was
also a recorded net “ outflow” of nearly 2.1 billion dollars through
banking and brokerage channels.1 This movement, which compares with
a net “ outflow” of 1.2 billion dollars in 1946, was predominantly attrib­
utable to a reduction of approximately 2.0 billion dollars in banking
funds held in the United States for foreign accounts.2 Other net capital
movements through banking and brokerage channels were comparatively
small; these smaller movements included net “ inflows” of about 175
million dollars through long term security transactions3 and a net
1 This figure does not take account of the capital “ inflow” in international and foreign
accounts combined resulting from the 2,375 million dollars contributed by the United
States to the International Monetary Fund and Bank.
2This figure excludes the increase in balances arising not only from transactions men­
tioned in footnote 1, but also from the sale in this country in July of 249.3 million
dollars of debentures of the International Bank.
8Allowance is not made here for the sale of the International Bank debentures men­
tioned in footnote 2.




44

THIRTY-THIRD ANNUAL REPORT

“ outflow” of nearly 255 million dollars through increased United States
banking claims on foreign countries.
The net decrease of approximately 2.0 billion dollars in foreign
banking funds4 occurred chiefly in accounts held for Canada, China,
the United Kingdom, Italy, Sweden, France, the Netherlands, Brazil,
Norway, and the Netherlands East Indies. In most cases these decreases
were closely associated with the financing of foreign deficits on current
account with the United States. In the case of the United Kingdom,
however, heavy drains on these accounts were also incurred through the
conversion, under the terms of the Anglo-American credit agreement, of
foreign sterling balances into dollars, until sterling convertibility was
partially suspended in August.
The net capital “ inflow” of about 175 million dollars through
international transactions in long term securities5 was the result of
net redemptions and repurchases by foreign countries of slightly more
than 280 million dollars of their own obligations held in this country,
offset in part by net sales of foreign-owned American securities. The
latter were executed primarily for Dutch and French accounts under
the security liquidation programs pursued by those countries for the
purpose of obtaining much needed dollars. Net redemptions and repur­
chases of foreign securities were carried out primarily by Canada, Argen­
tina, Australia, and the Dominican Republic. There were cash redemp­
tions of about 30 million dollars of Dominion of Canada obligations,
as well as of a number of Canadian corporate and provincial issues.
A large refunding operation was carried out by the City of Montreal,
which in February sold nearly 80 million dollars of serial refunding
debentures in order to retire a wide list of old issues of varying interest
rates and maturity dates. In addition, two relatively small foreign issues
were sold in the American market to obtain new money: 10.0 million
dollars of the Kingdom of Norway 3 ^ per cent sinking fund external
loan bonds, and 20.0 million of the Kingdom of the Netherlands 10-year
3% per cent bonds.
The small net rise of nearly 255 million dollars in this country’s
banking claims on foreign countries involved chiefly increases in claims
on certain European and Latin American countries. These increases
reflected new commercial bank loans to foreign countries under ExportImport Bank guarantee and certain other short term accommodations
4 See footnote 2 on preceding page.

6See footnote 3 on preceding page.




FEDERAL RESERVE BANK OF NEW YORK

45

granted by commercial banks to foreigners, particularly in connection
with the financing of American exports. However, there were sizable
net repayments on the loans, secured by gold, by the Federal Eeserve
Banks to foreign central banks, which had been outstanding at the end
of 1946.

Developments in the Foreign Exchange Market
The volume of trading in the New York foreign exchange market
rose rather sharply in 1947, primarily because of increased activity in
sterling in the first eight months of the year. The larger turnover in
sterling was associated with certain adjustments in the British exchange
regulations which were undertaken to make sterling balances acquired
currently by other countries convertible into dollars, in keeping with
the terms of the Anglo-American Financial Agreement. With the sus­
pension of sterling convertibility on August 20, the volume of trans­
actions in the foreign exchange market declined somewhat.
Several minor changes in official exchange rates were made early in
the year and were reflected in the ruling quotations in this market.
On January 3, 1947 the Banco do Brasil fixed a new buying rate for
dollars of 18.38 cruzeiros to the dollar (equivalent to $0.054406), com­
pared with the previous rate of 18.50 to the dollar ($0.054054). Effective
January 13, the British authorities changed their official buying and
selling rates for dollars from $4.03% and $4.02%, respectively, to
$4,031/4 and $4.02%. Similar minor adjustments were made shortly
thereafter in the official rates of certain other sterling area countries.
Despite occasional tendencies towards weakness in the pound ster­
ling, spot quotations on that currency were, in general, held within the
limits of the buying and selling rates established on January 13, 1947.
The spot rate was quoted on December 31, 1947 at $4.03 3/16, indicating
no net change for the year as a whole. The quotations for three months’
forward deliveries of sterling, however, were more responsive to Britain’s
changing dollar position, and shifted from a premium of 3/16 of a cent
at the end of 1946 to a discount early in 1947 which widened to 3%
cents by August 8. This trend appears, for the most part, to have been
related to growing concern over the ability of the British authorities to
maintain the official rate for the pound. After the partial suspension
of sterling convertibility, the forward rate followed an irregular course;
at the end of the year, a discount of 2% cents was quoted.




46

THIRTY-THIRD ANNUAL REPORT

The -unofficial rate for the Canadian dollar declined in a thin market
by about 5% cents during the year, being quoted on December 31 at
$0.894375. This weakness was primarily associated with Canada’s rapid
rate of loss of United States dollars, and with resulting periodic rumors
of an impending depreciation of the Canadian dollar rate. Despite rigid
dollar-saving measures introduced by the Canadian authorities in Novem­
ber, the unofficial rate showed continued weakness in the remaining
weeks of the year.
The “ free” rate for the Swiss franc declined gradually during the
year from $0.2825 to $0.2412. This decline, which narrowed consid­
erably the spread between the free rate and the official rate of $0.2336,
was attributable in part to steps taken by the Swiss authorities to make
francs more freely available against United States dollars at the official
rate.
The only important changes in Latin American currency quota­
tions occurred in the rate for the Peruvian sol, which declined from 14
cents early in the year to 5 ^ cents in October. By December 31, how­
ever, it had recovered to 8% cents.
Effective November 28, the Italian authorities modified their dual
exchange rate system so that the official buying rate for foreign cur­
rencies, which had been rigid, was to be fixed each month at the average
free rate for the preceding month.
Effective January 26, 1948, the rates at which the French Exchange
Stabilization Fund bought and sold foreign currencies in terms of francs
were raised by 80 per cent. The new official rate for the United States
dollar thus amounts to 214.392 francs (equivalent to $0.004664 per
franc). In addition, the French authorities created a “ free” market in
which the United States dollar and the Portuguese escudo are quoted.
The free market for dollars will be supplied by one half of the proceeds
of exports to the dollar area (the other half to be turned over to the
Exchange Stabilization Fund at its official buying rate for dollars) and
by noncommercial payments and the repatriation of French holdings of
dollars. Exchange acquired in the free market may be used for pay­
ment for imports of other than essential commodities and for all other
payments licensed by the exchange control authorities. The market
rate for the franc in New York declined from $0.0084 on January 23
to about $0.0033 early in February (corresponding approximately to
the free market rate in Paris at that time).




FEDERAL RESERVE BANK OF NEW YORK

47

Foreign Relations of the Federal Reserve System
Total assets held by the Federal Reserve Banks for account of
foreign central banks and governments, including accounts maintained
with the Federal Reserve Bank of New York as fiscal agent of the United
States, declined 1,960 million dollars further during 1947 to 3,370 million
dollars. This amount compares with the peak of about 7 billion dollars
reached soon after the end of hostilities in 1945. The reduction during
the past year, which reflected the continued heavy foreign requirements
for dollars, is even more significant when considered in the light of the
large-scale shipments of foreign-owned gold to the United States and the
substantial amounts of dollars made available under the United States
Government’s foreign lending program and by the International Bank
and the Monetary Fund.
In contrast to the decline in assets held for foreign account, the
total of dollar balances, United States Government securities, and gold
held at the Federal Reserve Bank of New York for the International
Bank and the Monetary Fund increased substantially during the year.
Of the various types of assets held for foreign account, by far the
largest reduction during 1947 occurred in gold held under earmark,
Total Gold and Dollar Assets Held at the Federal Reserve Bank of New Y ork
for Foreign A ccounts and for International Fund and Bank
B IL L IO N S
OF DO LLAR S

1939

1940




1941

1942

1943

1944

19 45

1946

1947

48

THIRTY-THIRD ANNUAL REPORT

which declined from 3,823 million dollars to 2,766 million. Holdings
of United States Government securities decreased from 969 million dol­
lars to 187 million dollars, and dollar balances from 508 million to 392
million.
One regular account was opened during the year for a newly organ­
ized foreign central bank, the Banco Central de la Republica Dominicana.
In addition two foreign accounts were established by this bank acting
as fiscal agent of the United States, but three fiscal agency accounts,
which had been established during the war to facilitate the United
States Government’s operations abroad, were closed, as was also one
regular account.
The increased activity in loans on gold to our foreign correspondents,
which first developed in 1946, continued throughout the year, although
the total of such loans outstanding declined about 100 million dollars,
to approximately 50 million. All of these loans were made for initial
periods not exceeding three months, and interest was at the discount rate
of this bank, which remained at 1 per cent throughout 1947.1 At the
beginning of 1947 loans against gold to five European and Latin Ameri­
can central banks were outstanding. New loans were made to the central
banks of six countries during the year, while outstanding loans to seven
central banks were repaid in full. The four loans against gold which
were outstanding at the end of 1947 were all to European central banks.
Although earmarked gold held at this bank for foreign account
showed a net decline of 1,057 million dollars during the year, the volume
of gold transactions handled by this bank was at a record level. Such
transactions included handling imports of gold from abroad, purchasing
gold for earmark here, and releasing gold from earmark for sale or
export, as well as making transfers between earmarked accounts. Other
activities for foreign account showing an increase in volume during the
year included dollar payments, collections, and investments in bankers
acceptances.
The Federal Reserve Bank of New York, acting as fiscal agent of the
United States, continued to carry out the transactions of the United
States Stabilization Fund under authorizations from the Treasury De­
partment.
Rather extensive operations were performed during the year by
this bank as depository for the International Bank for Reconstruction
1The rate was raised to 1% per cent on January 12, 1948.




FEDERAL RESERVE BANK OF NEW YORK

49

and Development and the International Monetary Fund. In addition,
as provided for in the Bretton Woods Agreements Act, this bank was
requested to act as fiscal agent of the International Bank in connection
with that bank’s first two bond issues, dated July 15, 1947. With the
cooperation of other Federal Reserve Banks, this bank also continued
to render services to the Export-Import Bank, in the capacity of fiscal
agent, in connection with the participation of commercial banks in the
200 million dollar Export-Import Bank credit to the Kingdom of the
Netherlands.

Volume and Trend of the Bank’s Operations
The year 1947 witnessed further sizable postwar contractions in
the bank’s war-enlarged fiscal agency operations, but the volume of
normal peacetime operations of the bank continued at a high level.
The over-all operational volume, although reduced somewhat from that
of 1946, remained relatively high.
As in recent years, the Reserve Bank facilities for discounts and
advances were used only moderately by the member banks in 1947;
while the number of applications for discounts and advances increased
somewhat, the aggregate dollar volume declined. The dollar volume of
currency and coin received and counted at this bank reached an all-time
peak during the year; there was, however, a slight reduction in the
number of pieces, reflecting a trend toward the use of the higher
denominations. The number and dollar amount of gold bars and bags
of gold coin handled by the bank increased nearly fourfold during
the year as a result of the heavy inflow of gold from abroad. In the
case of collection items handled, United States Government coupons
paid declined both in number and dollar volume, reflecting the effect
of the Treasury’s public debt redemption program. The collection of a
smaller number and dollar volume of corporate coupons also is reflected
in the reduction in “ All other” collection items shown in the accom­
panying table.
The postwar contraction in the number and dollar volume of United
States Government checks cleared and collected continued during the
year, but there was an increase in checks cleared and collected for busi­
nesses and individuals, as well as in wire transfers of funds, reflecting
the rise in prices and in general business activity. Except for minor
interruptions, the total number and dollar volume of checks handled
have increased steadily ever since the early 1930’s; in this period the
number of checks processed increased from 143 million to 347 million




THIRTY-THIRD ANNUAL REPORT

50

Some Measures of the Yolume of Operations of the
Federal Reserve Bank of New York

Number of pieces handled*
Discounts and advances..........................................
Currency received and counted .............................
Coin received and counted.....................................
Gold bars and bags of gold coin handled...............
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 otherf ......................................................
Safekeeping of securities:
Pieces received and delivered .........................
Coupons detached............................................
Transfers of fundsj ...............................................
Incoming and outgoing mail:
Registered ......................................................
Ordinary .........................................................

1947

1946

3,000
913,007,000
1,964,191,000
472,000

2,300
917,697,000
2,046,492,000
121,000

42,033,000
304,893,000

61,730,000
290,828,000

6,820,000
4,794,000

7,305,000 r
5,736,000#

60,000

110,000

25,693,000
365,000

35,046,000
182,000

11,585,000
1,590,000
213,000

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

507,000
8,980,000

578,000
10,040,000

Amounts handled
Discounts and advances ........................................ $ 5,729,077,000 $ 8,496,610,000
5,731,126,000
Currency received and counted..............................
5,470,460,000
Coin received and counted.....................................
233,407,000
170,361,000
6,517,079,000
Gold bars and bags of gold coin handled...............
1,813,632,000
Checks handled:
16,587,953,000
United States Government checks ..................
19,763,836,000
All other.........................................................
180,993,904,000
172,736,289,000
Collection items handled:
1,561,776,000
United States Government coupons paid** . .. .
1,771,718,000 r
All other..........................................................
2,272,932,000
2,564,566,000 r
Disbursements as fiscal agent for
Reconstruction Finance Corporation, its subsidi­
910,080,000
1,139,277,000
aries, and Commodity Credit Corporation
Issues, redemptions, and exchanges by fiscal agency
departments:
182,907,272,000
United States Government direct obligations . . 175,741,508,000
1,414,172,000
1,708,798,000
All otherf........................................................
Safekeeping of securities:
559,285,746,000 614,362,919,000
Pieces received and delivered (par value) ....
89,976,186,000
Transfers of fundsj ..............................................
77,880,003,000
* Two or more checks, coupons, etc., handled as a single item are counted as one
“ piece”.
** Includes coupons from obligations guaranteed by the United States.
# Change from previous Annual Report figures due to difference in method of counting
items.
f Includes issues of International Bank for Reconstruction and Development in 1947.
J Includes wire and mail transfers; excludes gold transfers,
r Revised.




FEDERAL RESERVE BANK OF NEW YORK

51

per annum and the dollar volume from 58 billion dollars to 197
billion dollars.
The rapid growth in the volume of checks handled has been accom­
panied by a constant endeavor on the part of this bank to improve the
efficiency of its operating technique, with the aim of rendering better
service to the member banks, and through them, to agriculture, commerce,
and industry and to the general public. In pursuit of this policy, and
in conjunction with other Reserve Banks and the American Bankers
Association, this bank continued to promote the use by member banks
of the Federal Beserve check routing symbol. This symbol, which is a
distinct aid in sorting checks for clearing purposes, is now being used
by all commercial banks in this District, and a substantial portion of
checks handled by this bank now bear the recommended fractional
symbol. A further step in check handling technique has been the expan­
sion in the use of air transportation to include the shipment of virtually
all interdistrict checks sent to other Reserve Banks. The consequent
saving in the time required for presenting such checks for payment
has reduced this bank’s average daily float by virtually two thirds and
has also resulted in earlier availability of about 50 million dollars daily
for “ direct-sending” member banks participating in these shipments.
To encourage further the use of the direct-sending privilege and to facili­
tate consolidated check shipments by air, the Federal Reserve Banks
began on August 1, 1947 to absorb all transportation costs on direct
sendings, which had previously been prorated between the Reserve Banks
and the direct-sending banks. This absorption of such costs has had
the incidental result of moderately increasing the number of member
banks using the Reserve Bank check collection facilities.
Among the fiscal agency functions of this bank, new issues, redemp­
tions, and exchanges of U. S. direct obligations declined substantially
during 1947, reflecting the continued tapering off in.Treasury financing
operations. This process was also reflected in a reduced volume of
securities handled by the safekeeping department. In both instances,
however, the number of security transactions declined proportionately
more than the dollar volume. The major factor in the greater propor­
tionate decline in number than in dollar volume of security transactions
was the reduction in Savings bond transactions, which involve numerous
but relatively small individual dollar amounts. This factor was only
partly offset by the processing in 1947, of 178 million dollars of Armed
Forces Leave Bonds which averaged only about $200 apiece. Issues,




52

THIRTY-THIRD ANNUAL REPORT

redemptions, and exchanges of securities other than direct Government
obligations rose sharply in number owing to the inclusion for the first
time of bond issues of the International Bank for Reconstruction and
Development, which were issued in relatively small denominations,
compared with the large denominations of Treasury guaranteed obliga­
tions. There was a downward trend in the dollar volume of Govern­
ment guaranteed securities handled, and disbursements for the Recon­
struction Finance Corporation, its subsidiaries, and the Commodity
Credit Corporation also declined.

Financial Statements
Statem ent

of

C o n d it io n

This bank’s assets increased nearly 1.2 billion dollars during 1947,
to a total of 12.9 billion dollars. The past year’s rise was occasioned
entirely by an increase in gold certificate reserves; other asset accounts
showed sizable changes in several instances, but a small net reduction
in the aggregate.
The enlargement in gold certificate reserves stemmed mostly from
the 2.8 billion dollars of net gold imports and releases of earmarked
gold during the year. The imported gold is purchased by the Treasury
(either directly or through the Stabilization Fund), which then reim­
burses itself by crediting the gold certificate account of the Reserve
Banks in exchange for a deposit credit to its account in the Reserve Banks.
In addition, gold 'certificates amounting to 275 million dollars were
credited by the Treasury to the Federal Reserve Bank of New York
in 1947 in order to provide the International Monetary Fund with dollar
balances. However, the gold certificate increase at this bank, from these
sources, was reduced by a rather heavy unfavorable balance in the move­
ment of funds between the Second Federal Reserve District and the
remainder of the country, which were consummated through the inter­
district settlement fund.
Total holdings of United States Government securities showed a
decline of 102 million dollars during 1947, representing this bank’s
share of a larger decline at all Reserve Banks. Reductions in this bank’s
holdings of Treasury bills and certificates of indebtedness of 360 million
and 407 million dollars, respectively, were only partly offset by increases
of 232 million in Treasury notes and 433 million dollars in Treasury
bonds. The declines in bill and certificate holdings reflected cash redemp­




53

FED ERAL RESERVE B A N K OF N E W YORK

tio n s b y th e T r e a s u r y d u r in g 1 9 4 7 a n d th e in c r e a s e d d e m a n d b y
w h ic h fo llo w e d th e u n p e g g in g o f th e % p e r c e n t T r e a s u r y
o n J u ly 3 a n d th e g ra d u a l h a r d e n in g th e r e a fte r o f sh o r t te r m
ra te s. T r e a su ry n o te s a n d b o n d s, o n th e o th e r h a n d , w e re p
b y th is b a n k in th e m a r k e t d u r in g th e la tte r p a r t o f th e y e a r in
a n c e o f t h e S y s t e m ’s p o li c y w i t h r e s p e c t t o t h e l o n g e r t e r m
m e n t se c u r itie s.

in v e sto rs
b ill r a te
in te r e st
u rch ased
fu r th e r ­
G overn ­

D is c o u n ts a n d a d v a n c e s , w h ic h r e p r e s e n t m e m b e r b a n k b o r r o w in g ,
w e r e 1 7 m illio n d o lla r s le s s o n D e c e m b e r 3 1 t h a n a y e a r p r e v io u s , b u t ,
a s th e b a n k s te n d to r e d u c e th e ir b o r r o w in g s to a m in im u m a t th e y e a r
e n d , th e fig u r e fo r t h a t d a te is n o t u s u a lly o f m u c h s ig n ific a n c e . H o w ­
e v e r , a s r e fle c te d in th e ta b le s h o w in g v o lu m e o f o p e r a tio n s , th e to ta l
a m o u n t o f a d v a n c e s to m e m b e r b a n k s w a s s u b s ta n tia lly le s s d u r in g 1 9 4 7
th a n in 1 9 4 6 . U n c o lle c t e d ite m s a n d d e fe r r e d a v a ila b ilit y ite m s (t h e
la tte r o n th e lia b ilit y s id e o f th e s ta te m e n t) b o th r e c o r d e d s iz a b le in ­
c r e a s e s , o w i n g i n p a r t t o t h e f u r t h e r g r o w t h i n t h e v o l u m e o f t h i s b a n k ’s
c h e c k c le a r in g a c tiv itie s .
Assets of the Federal Reserve Bank of New York
(In thousands of dollars)

Assets

Dec. 31,1947

Dec. 31,1946

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

$ 6,259,354
120,919

$ 5,061,375
124,008

$ 6,380,273

$ 5,185,383

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

$

39,413

$

44,537

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

$

41,860

$

58,935

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

$ 3,270,067
1,482,995
322,183
622,496

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

Total U. S. Government securities. .

$ 5,697,741

$ 5,799,794

$ 5,739,601

$ 5,858,729

$

$

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

Total loans and securities ...............
Due from foreign b a n k s...................................
Federal Reserve notes of other banks ..........
Uncollected items .............................................
Bank premises .................................................
Other assets ......................................................
Total assets

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

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




30*
17,676
670,430
8,239
25,057

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

$12,880,719

$11,704,486

$

$

65

68

54

THIRTY-THIRD A N N U A L REPORT

F e d e r a l E e s e r v e n o te s in a c tu a l c ir c u la tio n , w h ic h r e p r e s e n t r o u g h ly
8 5 p e r c e n t o f a ll o u t s t a n d in g c u r r e n c y in c ir c u la tio n , r o s e 5 2 m illio n
d o lla r s fu r t h e r in th e N e w Y o r k D is tr ic t d u r in g 1 9 4 7 (b u t d e c lin e d 1 7 7
m illio n in th e r e m a in d e r o f th e U n it e d S ta te s , p r in c ip a lly a s a r e s u lt
o f th e r e d u c e d n o te c ir c u la tio n o f th e S a n F r a n c is c o B a n k ). T h e r is e
in th e S e c o n d D is tr ic t is th e s m a lle s t y e a r -t o -y e a r in c r e a s e o f th e p a s t
d e c a d e ; it c o m p a r e s w ith a n in c r e a s e o f 3 0 6 m illio n in 1 9 4 6 , 5 5 7 m illio n
in 1 9 4 5 , a n d a r e c o r d w a r t im e in c r e a s e o f 1 ,0 8 4 m illio n d o lla r s in 1 9 4 4 .
A m o n g th e d e p o s it lia b ilitie s m e m b e r b a n k r e s e r v e a c c o u n ts r o s e
6 7 0 m illio n d o lla r s d u r in g th e y e a r , r e fle c tin g a n in c r e a s e in r e s e r v e
r e q u ir e m e n ts a n d a t e m p o r a r y r is e in e x c e s s r e s e r v e s a t th e y e a r e n d .
A d d itio n s to m e m b e r b a n k r e s e r v e s d u r in g th e y e a r w e r e la r g e ly th e
r e s u lt o f th e h e a v y in flo w o f g o ld fr o m a b r o a d , b u t m o s t o f th e s e a d d i­
tio n s w e r e n o t lo n g r e ta in e d . T h e p r o c e e d s o f g o ld im p o r ts a n d r e le a s e s
Liabilities of the Federal Reserve Bank of New York
(In thousands of dollars)

Liabilities

Dec. 31,1947

Dec. 31,1946

Federal Reserve n o te s .......................................

$ 5,765,916

$ 5,714,364

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

$ 5,573,276
229,639
168,000*
472,411

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

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

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

$ 6,443,326

$ 5,412,575

$

$

449,937
4,109

362,569
2,811

$12,663,288

$11,492,319

$

68,888
138,596
7,319
2,628

$

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

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

$

217,431

$

212,167

Total liabilities and capital accounts

$12,880,719

$11,704,486

$

$

Capital accounts:
Capital paid i n ...........................................
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
f After deducting
Federal Reserve




participation of
Banks amounting
participation of
Banks amounting

other
to . .
other
to . .

787f

46.6%

52.3%
$

223,720
1,673

2,181f

$

317,868
4,366

FED ERAL RESERVE B AN K OF N E W YORK

55

fr o m e a r m a r k a r e in it ia lly c r e d ite d to fo r e ig n a c c o u n t b a la n c e s a t th e
R e s e r v e B a n k , b u t th e s e a c c o u n ts s h o w e d a s m a ll n e t d e c lin e fo r th e
y e a r , a s d is b u r s e m e n ts b y fo r e ig n c e n tr a l b a n k s a n d g o v e r n m e n ts
c o n s ta n tly o ffs e t th e c r e d its fr o m g o ld tr a n s a c tio n s a n d o th e r so u r c e s ,
in c lu d in g lo a n s fr o m th e U n it e d S ta te s G o v e r n m e n t. D is b u r s e m e n ts in
N e w Y o r k fo r fo r e ig n a c c o u n ts , h o w e v e r , w e r e la r g e ly o ffs e t b y c o m m e r ­
c ia l tr a n s fe r s to o th e r d istr ic ts. L o sse s o f r e se r v e s to m e m b e r b a n k s
t h r o u g h T r e a s u r y o p e r a t io n s a n d o t h e r t r a n s a c t io n s w e r e m e t b y s a le s
o f G o v e r n m e n t s e c u r itie s d ir e c tly o r in d ir e c tly to th e F e d e r a l R e s e r v e
S y s t e m . “ O t h e r ” d e p o s it b a la n c e s a t t h is b a n k r o s e 2 4 7 m illio n d o lla r s
d u r in g th e y e a r , p r im a r ily b e c a u s e o f in c re a s e s in th e a c c o u n ts o f th e
In te r n a tio n a l M o n e ta r y F u n d a n d th e In te r n a tio n a l B a n k fo r R e c o n ­
s tr u c tio n a n d D e v e lo p m e n t.
T h e r a tio o f g o ld c e r tific a te r e s e r v e s to d e p o s it a n d F e d e r a l
n o t e lia b ilit ie s c o m b in e d , in c r e a s e d f r o m 4 6 .6 p e r c e n t a t t h e
1 9 4 6 t o 5 2 .3 p e r c e n t o n D e c e m b e r 3 1 , 1 9 4 7 , o w i n g t o a g r e a
p o r t i o n a t e g a i n i n t h e b a n k ’s g o l d c e r t i f i c a t e r e s e r v e s t h a n i n
a n d n o te lia b ilitie s .
E

a r n in g s

and

E

R eserve
c lo s e o f
te r p ro ­
d e p o s its

xpenses

G r o ss e a r n in g s o f th e F e d e r a l R e se r v e B a n k o f N e w Y o r k in c re a se d
1 .5 m i llio n d o lla r s d u r in g 1 9 4 7 t o 3 8 .9 m i llio n . T h e in c r e a s e r e s u lt e d
e n tir e ly fr o m a h ig h e r r a te o f r e tu r n o n th e s o m e w h a t s m a lle r a v e r a g e
h o ld in g s o f U n ite d S ta te s G o v e r n m e n t s e c u r itie s d u r in g th e y e a r , a n d
r e fle c te d th e fir m in g o f s h o r t te r m in te r e s t r a te s in th e la tte r h a lf o f
1 9 4 7 a n d p u r c h a s e s o f lo n g e r te r m s e c u r itie s a fte r th e m id d le o f
N o v e m b e r . E a r n in g s o n lo a n s a g a in d e c lin e d b e c a u s e o f a r e d u c e d
a v e r a g e v o lu m e , a n d p r e v io u s s m a ll e a r n in g s fr o m h o ld in g s o f b a n k e r s
a c c e p ta n c e s a lm o s t d is a p p e a r e d .
O p e r a t i n g e x p e n s e s o f t h e b a n k i n c r e a s e d 1 .3 m i llio n d o lla r s t o
1 5 .0 m i llio n d u r in g t h e y e a r , le a v i n g a g a i n in n e t o p e r a t i n g in c o m e
o f a p p r o x im a t e ly $ 2 0 0 ,0 0 0 . T h e r is e in o p e r a t in g e x p e n s e s w a s o c c a ­
s io n e d b y a n in c r e a s e in w a g e s o f e m p lo y e e s a n d a g e n e r a l r is e in th e
c o s ts o f p r o v id in g R e s e r v e B a n k s e r v ic e s . A d d it io n s to c u r r e n t n e t e a r n ­
in g s , p r in c ip a lly a s a r e s u lt o f n e t p r o fits o n U . S . G o v e r n m e n t s e c u r itie s
s o ld , w e r e $ 2 0 0 ,0 0 0 g r e a t e r t h a n in 1 9 4 6 , w h ile d e d u c t io n s fr o m c u r r e n t
n e t e a r n in g s w e r e s o m e $ 5 0 0 ,0 0 0 le s s , o w in g to t h e n o n r e c u r r e n c e o f a
1 9 4 6 c o n tr ib u tio n to th e r e t ir e m e n t fu n d , w h ic h in c lu d e d p a y m e n t s to
e q u a liz e b e n e fits to e m p lo y e e s r e t u r n in g fr o m m ilit a r y s e r v ic e .




THIRTY-THIRD A N N U A L REPORT

56

C o n s e q u e n t ly , n e t e a r n in g s a ft e r a ll a d ju s t m e n t s , b u t b e fo r e d iv i­
d e n d s , t o t a le d 2 4 .6 m illio n d o lla r s f o r t h e y e a r , o r a b o u t $ 9 0 0 ,0 0 0 m o r e
t h a n in 1 9 4 6 . O f t h is t o t a l 4 .1 m illio n d o lla r s , r e p r e s e n t in g t h e u s u a l
6 p e r c e n t s ta tu to r y d iv id e n d o n c a p ita l s to c k , w a s p a id to th e m e m b e r
b a n k s , w h ile 1 8 .4 m illio n w a s t r a n s fe r r e d t o t h e U n it e d S t a t e s T r e a s u r y
in p a y m e n t o f a n in te r e s t c h a r g e o n F e d e r a l R e s e r v e n o te s le v ie d b y
th e B o a r d o f G o v e r n o rs o f th e F e d e r a l R e se r v e S y s te m u n d e r S e c tio n
1 6 o f t h e F e d e r a l R e s e r v e A c t . T h e b a l a n c e o f t h e y e a r ’s e a r n i n g s , 2 .1
m i l l i o n d o ll a r s , w a s t r a n s f e r r e d t o t h e b a n k ’s s u r p l u s a c c o u n t s .
Profit and Loss Account
For the Calendar Years 1947 and 1946
(In thousands of dollars)

1947

1946

Earnings ............................................................
Net expenses ....................................................

$

38,907
15,014

$

37,443
13,740

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

$

23,893

$

23,703

$

637
98

$

433
132

$

735

$

565

$

531
72

Additions to current net earnings:
Profit on U. S. Government securities
sold (net) ...............................................
All other ....................................................
Total additions...................................
Deductions from current net earnings:
Retirement system salary computation
adjustment .............................................
All other ....................................................

$

70

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

$

70

$

603

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

$

24,558

$

23,665

Paid United States Treasury (Section 13b) . .
Dividends paid ...................................................
Paid United States Treasury (Interest on
Federal Reserve notes) ...............................
Transferred to surplus (Section 13b) ............
Transferred to surplus (Section 7) ...............

$

25
4,053

$

63
3,865

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

$

136,549
2,047

$

116,860
19,689

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

$

138,596

$

136,549




18,368
65
2,047

48
19,689

FED ERAL RESERVE B AN K OF N E W YORK

57

Changes in Membership
S ix S ta te b a n k s a n d t r u s t c o m p a n ie s in th e S e c o n d F e d e r a l R e s e r v e
D is tr ic t w e r e a d m itte d to m e m b e r s h ip d u r in g 1 9 4 7 . T h e r e w a s a n e t
d e c lin e o f fo u r in th e n u m b e r o f m e m b e r b a n k s in th e D is tr ic t , h o w e v e r ,
o w in g to m e r g e r s w ith o th e r m e m b e r s in v o lv in g te n m e m b e r b a n k s .
T h e r e w e r e 7 9 7 m e m b e r b a n k s a t th e e n d o f th e y e a r , w h ic h is 8 7 p e r
c e n t o f th e to ta l n u m b e r o f b a n k s in th e D is tr ic t, a n d th e se m e m b e r
b a n k s h e ld a b o u t 9 5 p e r c e n t o f t o ta l a s s e ts o f a ll n a t io n a l b a n k s , S t a te
b a n k s , a n d tr u s t c o m p a n ie s in th e D is tr ic t . A ll n a tio n a l b a n k s a r e m e m ­
b e r s o f th e F e d e r a l R e s e r v e S y s t e m , a n d 6 9 p e r c e n t o f a ll S t a te b a n k s
a n d t r u s t c o m p a n ie s in t h is D i s t r i c t a r e a ls o m e m b e r s .
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, 1947
Type of bank

December 31, 1946

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

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

538

0

100

542

0

100

State banks and
trust companies ........

259

117

69

259

124

68

797

117

87

801

124

87

Total

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

Changes in Federal Reserve Membership in Second District during 1947
Total membership beginning of year

801

Increases:
State banks and trust companies admitted . . . .
Decreases:
Member banks combined with other members

6

10
797

Total membership end of year
* Banks in actual operation.

State Banks and Trust Companies in the Second Federal Reserve District
Admitted to Membership in the Federal Reserve System during 1947
Effective Date
Dobbs Ferry Bank
Bank of Commerce
Bronxville Trust Company
The Nassau Union Bank
Security Trust Company of Rochester
Citizens Bank of Cape Vincent




Dobbs Ferry, N. Y.
Newark, N. J.
Bronxville, N. Y.
Glen Cove, N. Y.
Rochester, N. Y.
Cape Vincent, N. Y.

January 25,1947
May 7,1947
May 28,1947
July 16,1947
December 3,1947
December 23,1947

THIRTY-THIRD A N N U A L REPORT

58

Changes in Directors and Officers
A t a r e g u la r e le c tio n in th e a u tu m n o f 1 9 4 7 , F r e d e r ic E . W o r d e n ,
C h a ir m a n o f th e B o a r d a n d P r e s id e n t o f T h e N a tio n a l B a n k o f A u b u r n ,
A u b u r n , N . Y ., w a s e le c t e d b y m e m b e r b a n k s in G r o u p 2 a s a C la s s A
d ire c to r fo r a te r m o f th re e y e a r s, b e g in n in g J a n u a r y 1 , 1 9 4 8 , to su c c e e d
H a r r y H . P o n d , C h a ir m a n o f th e B o a r d o f T h e P la in fie ld T r u s t C o m ­
p a n y , P la in fie ld , N . J ., w h o s e t e r m e x p ir e d D e c e m b e r 3 1 , 1 9 4 7 . A t t h e
s a m e tim e , C h a r le s E . A d a m s , C h a ir m a n o f th e B o a r d o f th e A ir
R e d u c t i o n C o m p a n y , I n c ., N e w Y o r k , N . Y . , w a s r e e le c t e d b y m e m b e r
b a n k s in G r o u p 2 a s a C la s s B d ir e c t o r fo r a t e r m o f t h r e e y e a r s ,
b e g in n in g J a n a u a r y 1 , 1 9 4 8 .
T h e B o a r d o f G o v e r n o rs o f th e F e d e r a l R e se r v e S y s te m r e a p p o in te d
W illia m I . M y e r s , D e a n o f th e N e w Y o r k S ta te C o lle g e o f A g r ic u ltu r e ,
C o r n e ll U n iv e r s ity , Ith a c a , N . Y ., a s D e p u ty C h a ir m a n o f th is b a n k fo r
th e y e a r 1 9 4 8 .
B
o
1
C

In
row n ,
f th e B
9 4 8 , to
om pan

D e c e m b e r 1 9 4 7 , th
P r e s id e n t o f T h e C
u ffa lo B r a n c h , fo r
s u c c e e d C h a r le s H
y, E ast A u rora, N

e d ire c to r s
u b a N a tio n
a te rm o f
. N o rto n , P
. Y ., w h o s e

o f th is b a n k a p p o in te d
a l B a n k , C u b a , N . Y ., a s
th re e y e a r s, b e g in n in g J
r e s id e n t o f th e E r ie C o u
te r m e x p ir e d D e c e m b e r

C ly d e C .
a d ire c to r
an u ary 1,
n ty T ru st
31, 1947.

T h e d ir e c t o r s o f t h is b a n k a ls o d e s ig n a t e d C a r l G . W o o s t e r , o f U n io n
H ill, N . Y ., a s C h a ir m a n o f th e B o a r d o f D ir e c to r s o f th e B u ffa lo B r a n c h
fo r th e y e a r 1 9 4 8 .
In J a n u a r y 1 9 4 8 , th e B o a r d o f G o v e rn o rs o f th e F e d e ra l R e se rv e
S y s te m a p p o in te d L e w is B . S w ift , P r e s id e n t o f th e T a y lo r I n s tr u m e n t
C o m p a n ie s , R o c h e s te r , N . Y ., a s a d ir e c to r o f th e B u ffa lo B r a n c h fo r
th e r e m a in d e r o f th e te r m o f th r e e y e a r s e n d in g D e c e m b e r 3 1 , 1 9 5 0 , to
s u c c e e d M a r io n B . F o ls o m , T r e a s u r e r o f th e E a s tm a n . K o d a k C o m p a n y ,
R o c h e s te r , N . Y ., w h o s e te r m e x p ir e d D e c e m b e r 3 1 , 1 9 4 7 .
Changes

in

O f f ic e r s

H o w a r d D . C r o s s e , fo r m e r ly a S p e c ia l A s s is ta n t in th e C a s h a n d
C o lle c tio n fu n c tio n , w a s a p p o in te d a M a n a g e r , e ffe c tiv e J u ly 3 , 1 9 4 7 , a n d
a s s ig n e d to th e C o lle c tio n D e p a r tm e n t.
L o r e n B . A lle n , a n A s s is ta n t V ic e P r e s id e n t, r e s ig n e d e ffe c tiv e
A u g u s t 1 1 , 1 9 4 7 , to b e c o m e a n o ffic e r o f T h e N o r th e r n T r u s t C o m p a n y ,
C h ic a g o , I llin o is .




FE D E R A L RESERVE B A N K OF N E W YORK

59

D u d le y H . B a r r o w s , M a n a g e r , C a sh D e p a r tm e n t, w h o e n te r e d th e
b a n k a s A s s is ta n t S e c r e ta r y in F e b r u a r y 1 9 1 8 , d ie d D e c e m b e r 2 6 , 1 9 4 7 .
J . W ils o n J o n e s , V ic e P r e s id e n t, w h o h a d b e e n w ith th e b a n k fo r
m o r e th a n t h ir t y y e a r s , a n d h a d b e e n a n o ffic e r s in c e J a n u a r y 1 9 1 8 ,
r e tir e d fr o m a c tiv e s e r v ic e w ith th is b a n k , e ffe c tiv e J a n u a r y 3 1 , 1 9 4 8 .
M em ber

of

F

ederal

A t its m e e tin g o n J a n u a r y 8 ,
b a n k s e le c te d W . R a n d o lp h B u r g e
C ity B a n k o f N e w Y o r k , to se r v e
F e d e r a l A d v is o r y C o u n c il fr o m th e




A

d v is o r y

C o u n c il

1 9 4 8 , th e B o a r d o f D
s s , V ic e C h a ir m a n o
fo r a n o th e r y e a r a s
S econ d F ed era l R eser

ir e c to r s o f th is
f T h e N a tio n a l
m e m b e r o f th e
v e D istr ic t.

THIRTY-THIRD A N N U A L REPORT

60

Directors and Officers
Class

Group

A

1

DIRECTORS

W

W . A ldrich

in th r o p

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

Term
expires
Dec. 31
1949

Chairman of the Board, The Chase National Bank of the City
of New York, New York, N. Y.
A

2

F rederic

E. W o r d e n ..............................................................................................
Chairman of the Board, and President, The National Bank of
Auburn, Auburn, N. Y.

A

3

H o w a rd A . W i ls o n

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

1950

1948

President, Citizens National Bank and Trust Company of
Fulton, Fulton, *N. Y.
B

1

L e w is H . B r o w n

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

1949

Chairman of the Board, Johns-Manville Corporation, New
York, N. Y.
B

2

C h a r le s

E. Adam s ....................................................................................... ...........
Chairman of the Board, Air Reduction Company, Inc., New
York, N. Y.

B

3

C arle C. C o n w a y

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

1950

1948

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

Vacancy — Chairman ..............................................................................

1950

C

W illia m

I. Myers, Deputy Chairman ................................................
Dean, New York State College of Agriculture, Cornell
University, Ithaca, N. Y.

1948

C

R obert D. Calkins ................................................................................
Director and Vice President, General Education Board, New
York, N. Y.

1949

DIRECTORS — BUFFALO BRANCH
Chairman .......................................................................................
Farmer, Union Hill, N. Y.

C a r l G. W o o ste r ,
T hom as

R o b in s , Jr .

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

Term
expires
Dec. 31
1948
1949

President, Ilewitt-Robins, Incorporated, Buffalo, N. Y.
L ew is B. S w if t

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

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

1950

President, Taylor Instrument Companies, Rochester, N. Y.
C h ar les H . D iefendorf

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

1948

President, The Marine Trust Company of Buffalo, Buffalo, N. Y.
R aymond F. L einen .....................................................................................................
Executive Vice President, Lincoln Rochester Trust Company, Rochester,
N. Y.

1949

C. G eorge N ie b a n k

1949

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

President, Bank of Jamestown, Jamestown, N. Y.
Clyde C. Brown .............................................................................................................
President, The Cuba National Bank, Cuba, N. Y.
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.




1950

FEDERAL RESERVE B AN K OF N E W YORK

A lla n

OFFICERS
President
John
First Vice President

S p r o u l,

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

61

Economic Adviser

H . W i ll i a m s ,

Vice President
Vice President
R o b e rt G. R o u se , Vice President
V a le n t in e W i l l i s , Vice President
R e g in a ld B. W i l t s e , Vice President

Edw ard O. D o u g la s ,

Vice President
Vice President
L. W e r n e r K n o k e , Vice President
W a l t e r S. L o g a n , Vice President, and
General Counsel

A rth u r

H e r b e r t H . K im b a ll,

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

T odd G. T ieb o u t ,

R u fus J. T r im b l e ,

P iie la n ,

Assistant General Counsel

Assistant General Counsel

H orace L. S anford ,

H arold A . B il b y ,

Assistant Vice President
F. S h e e h a n ,
Chief Examiner

Assistant Vice President

W i ll i a m

F e lix T . D avis,

Assistant Vice President
N o r m a n P. D avis,

O tto W . Ten E yck,

Assistant Vice President
F. T re ib e r,
Assistant Vice President, and Secretary

Assistant Vice President

W i ll i a m

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

Assistant Vice President
Jo h n H . W

urts ,

Assistant Vice President
W

il l ia m

F. A braham s,

W

Manager, Security Custody Department
C u r tis R. B o w m an ,
Manager, Credit Department, and
Manager, Discount Department

il l ia m

A . H e in l ,

Manager, Personnel Department
P e te r P. L an g,

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

Manager, Securities Department

H a r r y M . B oyd,

Manager, Safekeeping Department

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

Manager, Government Check Department

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

Manager, Savings Bond Department

0 . E rn est M oore,

Manager, Research Department
E. P e t e r s o n ,
Manager, Bank Relations Department

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

Manager, Planning Department

F r a n k lin

J o h n J. C la r k e ,

Assistant Counsel, and
Assistant Secretary
H o w a rd D. C ro sse , Manager,
Collection Department
P a u l R. F itc h e n ,
Manager, Cash Custody Department

W a l t e r H . R o z e l l , Jr.,

M a rc u s A . H a r r is ,

R oy

Manager, Government Bond Department, and Manager, R.F.C. Custody
Department

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

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

Manager, Cash Department
E. W e n d e ll,
Manager, Check Department

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

Manager, Accounting Department

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

OFFICERS — BUFFALO BRANCH
I n s l e y B. S m ith ,

H a ls e y

General Manager




W.

Cashier
G eorge J. D o l l ,

Assistant Cashier
M . M on roe M yers,

Assistant Cashier

Snow ,