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VICTORY

AND

BEGINNINGS

OF PEACE

Thirty-first ý4nnual 'kcport
of the
FEDERAL

RESERVE BANK

OF PHILADELPHIA

1945
Third Federal Reserve District

a

CONTENTS

Page
1

Introduction

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

Physical magnitudes
Third

District

Income

in 1945

6

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

6
.........................
10

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

Trade

11

..

..............
...........................
Toward peacetime business

11
12

The money supply and banking
.
War financing

13
.................................

Federal Reserve credit.
Currency

. .-.............
and demand deposits ......

..

16

16

Other effects of the war
............................
Significance for future policies
.......

19
23

Prices

.......
......................................
The Federal Reserve Bank in the war years
...............
Directors and officers
Appendix
(Contains

15

........
tables listed on page 32. )

25
31
....

35

FEDERAL

BANK

RESERVE

OF PHILADELPHIA

March

15,1946.

To the Member Banks in the
Third Federal ReserveDistrict:

victory during 1945 permitted
businessmen and bankers to take
stock of the effects of war and to give undivided attention to plans for peacetime operAnnual Report
ations. In this Thirty-first
of the Federal Reserve Bank of Philadelphia,
war developments have been reviewed with
special attention to their peacetime implications, particularly in the light of inflationary
developments.

Military
American

ALFRED

H.

WILLIAMS

President.

VICTORY

AND BEGINNINGS

OF PEACE

Every major war disrupts lives and leaves a heritage of
maladjustment. The second World War left in its wake conflicting forces of unparalleled magnitude. One of the most
important conflicts may be visualized as one between goods and
services on the one hand and the supply of money on the other.
Output has receded far below its peak while the supply of money
is still increasing. The result is strong upward pressure on prices.
Our present problems originated largely during the war,
Initially
it was
when the most insistent need was production.
houses
for
facilities:
necessary to construct vast new
war plants,
As
war workers, cantonments, and so on.
a result, construction
skyrocketed to a peak in July 1942 almost three times as high as
the level in 1939. After the major part of the expansion program

INFLATIONARYDISTORTIONS
1939=100

%

%

250

26

0

__._ 2(

0

INDUSTRIAL
PRODUCTION

ff°

f

200

ýf

%

ff
`

ý`------...

----

ý

ý
\

ff
ý

ý

f

ý

MONEYSUPPLY*

f

15

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__

-.

I: 0

ff
ff
_

ffff

10

----

- ---

ýý

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1943

DCPoSiiS

ýýýý

ODTSO[

MMKS

1945
+acosý o

1

0

Thirty-first

Annual Report, Federal ReserveBank of Philadelphia

was completed, the volume of construction declined rapidly to
below the pre-war level.
Enlarged facilities together with increased employment
and
lengthening of work hours made possible a rapid and sustained
rise in industrial output until October 1943 when production
was two and one-quarter times as great as before the war. Output
was maintained at slightly below this peak until the defeat of
Germany in May 1945. From May until October it declined
Recovery immediately
precipitately by more than one-fourth.
followed
by
temporary recession early in 1946 as
thereafter was
labor-management
disputes.
a result of wide-spread
In considering the monetary aspects of these developments
it is helpful to recall that in the fiscal year 1945 nearly half of
all expenditures were being made by the Federal Government.
By way of contrast the maximum proportion reached in the First
World War was only one-fourth.
It was clear from the outset
have to
that the costs of the war-whatever
their size-would
be met. It was equally clear that if distortions were to be held to
a minimum the costs should be financed as far as possible outside
the banks.

The over-all magnitudes from January 1941, shortly after
the start of the defense program, to the end of 1945 are shown
in the following table.

Government expenditures'

Amount
(Billions $)

Per cent

378

100

150

40

72
22
134

]9
6
35

1

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

Government taxes, etc
.......................
Borrowings :
From commercial banks
..................
From Federal Reserve Banks
.............
From others
............................
* Includes $24 billion

increase in Treasury balance.

There was never any doubt that funds would be forthcoming
to meet all the requirements of the Government. The capacity cq
the banks to absorb securities, however, was not always understood. At first many were prone to assumethat a bank would
2

Thirty-first Annual Report, Federal Reserve Bank of Philadelphia
lose reserveswhen it bought
securities. Such drain would occur,
of course, if a single bank in a banking system increased its purchasesunduly relative to its position in the system. It was forgotten, however, that reserveslost by one bank are usually gained
by other banks. When
most banks are expanding, the tendency
to lose reservesas a result of security purchases is offset by the
tendency to gain reserves from purchases by other banks.
The banking system as a whole needs reserves not to buy
Government securities but to meet the requirements against the
enlarged deposits with which payment for the securities is made,
and to meet withdrawals of currency and exports of gold. To
encouragebanks that hesitated to purchase Government securities
becauseof fear
of loss of reserves, the Federal Reserve System
announced that it had adequate powers and was prepared to use
them "to assurethat an ample supply of funds is available at all
times for financing the war effort. "
The next step, which was taken within a few months of ter
Pearl Harbor, was to establish by agreement between the Treasury
and the Federal Reserve System a structure or pattern of interest
rates on Government securities. This pattern of rates was to be
maintained by the Federal Reserve System. Stability was an
objective becauseof a desire to avoid evils that arose in the last
war which was financed at rising rates. Stable rates would remove
the incentive for buyers to hold back on the expectation of higher
rates. The structure of rates agreed upon was a slight modification
of the pattern that had developed during the pre-war years of
excessreserveswith low demand for loans and diminishing supply
of desirable securities.
Other
buying
elements of policy took the form of (1)
Treasury bills by
3/$
the Reserve System at
per cent and giving
the sellers the option of buying them back at the same rate; (2)
suspension of reserve requirements against war loan deposits; (3)
reduction in reserve requirements of central reserve city banks;
and (4) advances to member banks at a rate of one-half per cent
against Governments maturing or callable in one year or less.

The basic policies
of maintaining the pattern of rates and
of providing banks with reserves became powerful forces in
subsequent developments. With a floor under bond prices and
3

Thirty-first

Annual Report, Federal ReserveBank of Philadelphia

hesitancy,
assuranceof reservesthere was, after an initial period of
long
end of the pattern.
an accelerating movement toward the
There was no incentive to postpone purchases in anticipation of
higher yields, but there was a powerful incentive to invest in the
higher-yielding, longer-term issues.The establishedpattern assured
not only the higher coupon rate but also capital appreciation
with the passageof time.
Initiative passedfrom the System to the banks and the market,
and the lure of higher yields and sure profits proved irresistible.
The technique of raising funds by means of drives added to the
policing difficulties of the Federal Reserve System because local
committees were zealous to reach high totals, and the quality
of the results tended to be measured locally and nationally by the
amount sold and not by the source of the funds.
In a desire to secure the higher yields on long-term issues,
banks sold their short-term issues. This shift would not have
added to inflationary pressures if nonbank investors had bought
the short-term issues that banks were selling. Other investors,
however, did not buy these issues because they also preferred the
greater yields on longer issues. As a result, shorter issues came
increasingly to the Federal Reserve Banks, which stood ready
to acquire them at the established rates. Each such acquisition
increased reserve funds with which the banks could expand their
deposits. The movement into longer issues started in the area
of the "bank eligibles" but finally moved to the "restricted"
area as banks purchased eligibles from non-bank investors, who
then competed for restricted issues.The result has been a persistent
rise in bank credit and declines in medium and long-term interest
rates.

One consequence of the war has been the generation of all
the forces that characterize an inflationary boom. First of all
we have an inadequate supply of goods. The needs and wants
of the American people, long unsatisfied, are enormous. Linen
closetsare empty, householdfurnishings are threadbare, appliances
and motor cars need repair or replacement, railroad equipment
is run-down, housing is distressingly inadequate, and retailers'
shelveshave bare spots.
4

Thirty-first Annual Report, Federal Reserve Bank of Philadelphia
Against thesephysical deficiencies we have an excessof spending power, accumulated during forty-four months of war and
currently received as income. Personal holdings of liquid assetscash, deposits, and Government securities-have reached $145
billion or over three times their 1939 level and those of business
have reached $80 billion
or four times pre-war. In addition there
is a large potential foreign demand that will compete with domestic demand for some time to come.
The end of the
war brought another element into the picture:
namely, removal of certain controls and pressure to remove others.
A comprehensive
program of direct controls over production,
distribution,
wages, and prices was introduced shortly after we
entered the war. The program was much more effective than
the limited controls adopted in the First World War in preventing
the greatly enlarged supply of money from forcing prices upward.
has
Since the end
of the war, however, practically all rationing
been discontinued
less
stringent.
and wage and price controls are
For lack of
goods and because of a growing concern as to the
future value
for real
of money, expenditures are being made
estate, securities, and commodities.
Evidences of strong and
increasingly
inflationary
mounting
pressures are becoming
apparent.
The banking
or aggrasystem plays a key role in mitigating
vating inflationary
developments.
Expansion in earning assets,
whether in loans or securities, involves expansion of bank credit.
In addition
inflationary
to aggravating
pressures, such expansion could have other serious repercussions at the present time.
The supply
of high-grade, longer-term
securities is shrinking.
As a consequence,
for such securities as
is
fierce
bidding
there
remain available
decline in yields
The
falling.
and yields are
tempts investors
banks,
including
to extend their
types,
of all
activities to lower quality securities.

The perplexing
problem is how to limit the expansion of
credit and yet maintain orderly conditions in the money market.
If the supply
money is not restricted, inflationary forces will
be aggravated.ofOn
be
the other hand, if credit expansion is to
restricted, the handling of the public debt would be made more
difficult for
the Treasury.
5

Thirty-first

Annual Report, Federal ReserveBank of Philadelphia
Physical Magnitudes

Victory was the outstanding achievement of 1945. While
dramatically climaxed with a $2 billion atomic bomb, most of
the tortuous road from Pearl Harbor to Potsdam had to be fought
with pre-atomic weapons forged at enormous cost in human
effort and dollars.
of purpose stimulated heroic deeds in the battle lines
lines. Output of goods
and miraculous achievements on production
for
home
than doubled. Gross
use
at
and
abroad
more
and services
from
billion
in
19 39 to almost $200
$88
national product climbed
billion in 1944; during 1945 it was maintained in about the same
high level. Part
volume and the outlook is for continuance at a
higher prices.
increase,
the
of
course,
was
a
result
of
of
Unity

After Pearl Harbor, the country's leading manufacturing
plants were converted into arsenals and within a short time the
country was turning out the greatest avalanche of war materials
ever produced. To manufacture such a flood of materials additional facilities had to be built and all available labor power had
Approximately
$25 billion of new plant and
to be utilized.
installed,
equipment were
which increased productive capacity
by a very substantial amount. Employment,
exclusive of agriculture, was stepped up from 30 million in 1939 to 40 million
in
early 1943. Hours of work were lengthened and processes were
simplified and streamlined to secure maximum efficiency.

This record output of war materials, never before surpassed
or equalled, was all the more remarkable becauseit was accorn_
plished with a minimum of internal dislocations. Civilian consumers, though somewhat inconvenienced, were adequately
supplied with most of the necessitiesof life. Prices were kept
well under control. Despite a huge increase in spending Power,
civilians were able to buy necessarygoods and services at prices
only moderately above peacetime levels.
Third
District
in 1945

The outbreak of war in Europe and the beginning
of
national defense efforts quickened industrial
groduction in this district. When the United States
was
drawn into the war the Government placed large contracts
in
6

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

this area becauseit had ready facilities for immediate production
of ships, steel, machinery, electrical equipment, textiles, food,
clothing, leather, petroleum products, and many other materials
urgently needed by the armed forces. By the middle of 1943
industrial output of the district was almost double the pre-war
volume. Heavy industries produced less railway and industrial
equipment becausethey had to turn out artillery, tanks, and ordnance. Light industries had to abandon household appliances and
textile fabrics to make radar, small arms, parachutes, and cloth for
uniforms.
Durable goods for the most part went to war and their output
attained fabulous proportions. Steel output doubled; electrical
equipment trebled; production at locomotive and car shops was
multiplied more than four times; ships-twelve times; and aircraft
-over twenty times. These magnitudes reflect the acute need
for transportation in global warfare.
Production of consumer goods rose 10 to 15 per cent in the
early stage of national defense activity, but after our entry into
the war output of civilian products had to be and was held in
check. Although production of war materials was given priority,
output of most essential civilian goods and services was maintained
throughout the war at levels equal to and in some instances higher
than peacetime standards of consumption.

The war of course had diverse effects upon consumer goods
industries. Some rose with the high tides of war, others enjoyed
a brief stimulus and subsequently receded, and still others became
war casualties. Canning and baking prospered throughout the
war; their
were in great demand not only by the armed
forces but products
by civilians who had more money to spend and
also
fewer opportunities
to buy durable goods. Textiles, long
prominent in this area, had an early wartime expansion that was
not sustained after the large initial military requirements for
fabrics had been
met. Production declined, not because civilian
demand was lacking
but becausetextile mills encountered serious
labor shortages. Carpets
and rugs and hosiery are examples of
war casualties,primarily victims of raw material shortages.
The war restored to
anthracite some of its lost markets when
the acute shortage of fuel oil forced conversion to coal-burning
7

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

larger output
a reduction in employment,
units. Notwithstanding
by working longer hours and by means of greater
was obtained
from 52 million tons
mechanization. Anthracite production rose
declined in 1945
Production
in 1939 to 64 million tons in 1944.
to 55 million tons as a result of a strike and continued shortages
of labor.
The war stimulated even greater expansion of bituminous
Procoal to meet the heavy railroad and industrial requirements.
from
bituminous
Pennsylvania
93
duction of
rose
million
coal in
With the cessatons in 1939 to almost 150 million tons in 1944.
decreased so that
tion of hostilities, industrial, fuel requirements
bituminous output declined about 10 per cent in 1945.
Expenditures for construction in this district rose from $200
was the
million in 1939 to more than $400 million in 1942-that
period when additional facilities were being built in our industrial
centers and additional housing was required to accommodate
large numbers of workers who moved into these areas. Upon
the completion of the building program, construction declined
sharply to about $100 million in 1944. Private construction
was
prohibited,
which permitted the transfer of both materials
and labor to essential war industries.

In 1945 over $200 million of contracts were awarded in the
district. Most of these contracts were for commercial construction. The housing shortage has been acute but revival of
residential construction has been delayed by lack of materials.
To meet the almost unlimited demand for products of
all
kinds required substantial increases in employment. Before
the
Pennsylvania
war,
employed almost one million workers in its
widely diversified industries. At the peak of the war effort, manufacturing employment in the state was in excess of 1 %2 million
workers, which represented a gain of 65 per cent over pre-war
levels. Sustained increases occurred in every major industry
except
leather and textiles. The greatest gains occurred in the
shipyards,
aircraft factories, and other plants turning out transportation
equipment.
Employment
in the transportation
equipment industries,
a whole, rose to eight times the pre-war level. Employment
8

as
in

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

ID
ivs-:

350

f-,

300

.

--:

-F

PRODUCTION

f._..----

--------- ý;--

- ------

----

"

250

DURABLE
GOOD
`*
'%
j-ý

200
150

ý'-ý

.. -

-ý ý

%ýi

--

___ -- i ý-- -

"j
.

TOTAL
PRO
DUCTION`---

-ý--

-. _.

ý'

---

!I

.. -

---.

--

--

--

jý

-----

.. - --

-

ýONSUMERS'
GOODS"`

100
ý.

150

ý

I
--------EMPLOYMENT

-

100

ÖN

300
250

--

-

----

---

----

-

----

AGRICULTURAL
PA!' "
EMPLOYMENT-

------

--

------

-

h

NC ME

_

11
1\

ý

ý

--ý__-.
11
11

200
FARMINCOME

150
f
100

fý ý

1%
L-`1ý

- -----

200

-

150

100

----

-

---

NON-AGRICULTURAL
PAYROLLS-PA*

ISO

100

----_-_

-ý-----

---------

---

--

-

_ý

TRADE AND PRICES -

DEPARTMENTSTORE
SALES"

-

---

__
ýý.. -_

ý. ý

- -

,ýýý.
- ----------r
ý-

...
__...
COSTOF
LNING
IN PHILADELPHIA

ýýr-

50

9

---_--

-

-. -.

.. _ _.

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

iron and steel plants almost doubled, and in the machinery and
After the fall
electrical equipment industries it almost trebled.
been
filled,
"pipe
lines"
had
production
1943,
the
when
war
of
for
fewer
many
were
released
with
workers
and
was maintained
industrial
forces.
By the end of 1945,
emservice in the armed
from
ployment in Pennsylvania had declined about 25 per cent
its wartime peak to a level of about 1,200,000 workers.

The greatestdeclines occurred in iron and steel,transportation
equipment, and machinery industries in which activity had been
doubled and redoubled by the war. Although employment had
contracted substantially in these leading Pennsylvania industries,
they had more workers on their payrolls at the end of 1945 than
were employed before the war. In the closing months of 1945
employment in these plants was expanding as rapidly as availability of labor and materials permitted.
and increasing emwartime production
ployment was accompanied by a steadily rising tide
establishments of
of income. Total payrolls in nonagricultural
Pennsylvania attained a peak in early 1944 of 235 per cent of
pre-war income. Average weekly earnings in manufacturing
plants of the state rose from $25 in 1939 to almost $50 in March
1945. During the war, working time in reporting firms was
stepped up from 36 to 45 hours a week. Hourly pay rose from
69 cents to an average of $1.07. Despite the elimination of overtime immediately after the end of the war, earnings were maintained at high levels; in December 1945 they averaged better
than $42 a week.

Income

Expanding

Agricultural

income in this area rose as a consequence
of
greater output and substantial increases in prices of agricultural
products. Cash receipts from farm marketing combined with
Government payments more than doubled during the war period.
Gross farm income in Pennsylvania, New Jersey, and Delaware
rose from $400 million in 1939 to more than $800 million
in
1945. Farmers saved large amounts of their increased wartime
incomes partly because they were unable to buy equipment, and
they made substantial reductions in their mortgage debts.

10

Thirty-first Annual Report, Federal Reserve Bank of Philadelphia
Trade

Swollen wartime incomes enabled people not only to
lay aside substantial sums as savings but also to increasetheir current spending. Wartime trends in consumption
are revealed by department store sales, which increased steadily
throughout the war. In 1945 department store sales in this
district were $427
million-a
record volume and more than 75
per cent above the 1939 level. Wartime changes in the sales in
various divisions of department stores indicate how people spent
their money. More money was spent on women's and children's
clothing, books, and sporting goods; less money was spent for
men's and boys' clothing, housewares, floor coverings, and furniture. Expenditures, obviously, had to be curtailed for such items
as major household appliances and automobiles which were not
manufactured during the war, as well as consumers' goods like
shoeswhich were strictly
rationed.
During the
war years, people not only spent more money
for clothing but
also for food- Greater spending power enabled

many people formerly in the lower income groups to buy highpriced foods such as beef, dairy products, and bakery delicacies.
Expenditures for food
were also increased by the wider practice
of eating at restaurants and hotels.
Toward
During the
limited amount
early months of 1945 a
peacetime
of reconversion from war to peace was already under
bus
business
job
s
way. After the collapse of Japan in August, the
By
the
of unwinding the
war economy was greatly accelerated.
had
end of the year the
to
peace
physical aspects of reconversion
been
11
, _. ,, in tors" aistrict.
,".
-- v;
.. r-,,
--uauy -compietea
Reshuffling
Such
of personnel was quick and comprehensive.
unemployment
huge
volumes
as occurred after V-J Day, when
of Government
contracts were canceled, was largely transitional
and many workers
were reemployed almost immediately on assembly lines set
for
Returning veterans
up
peacetime production.
replaced women
opened up rapidly
and new job opportunities
to take the
Earlier
place of many wartime jobs that disappeared.
be greatly
estimates of transitional
to
proved
unemployment
exaggerated. The
indicate the speed
various business barometers
11

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

and facility with which readjustments were accomplished at the
end of the war.
from war to peace1945
(1935-1939 = 100)

Transition

Third District:
Industrial production, total.......
Durable goods production........
Consumer goods production
......
Pennsylvania:
Employment
...................
Payrolls
.......................
Philadelphia:
Department store sales
.........
Cost of living
................

War ends

Post-war
slump

Production
for peace

August

October

December

144.3
240.1
98.7

125.6
180.4
97.4

130.6
183.9
106.4

108.8
197.6

103.5
179.3

109.8
193.8

174.7
128.4

184.1
127.8

183.8
128.6

In the closing months of 1945 industrial. production in the
district was expanding; output of both durable and consumers'
goods was increasing. Employment in both manufacturing
and
nonmanufacturing
establishments was growing, payrolls were
rising, f arm income was being maintained at high levels, and retail
trade was surpassing all records. Notwithstanding
strikes, threats
of strikes, and shortages of labor and materials, business generally
stood on the threshold of expanding production and rising consumption.

The Money Supply and Banking
When we turn from the physical aspects of conversion and
reconversion to their counterparts in the field of finance, certain
contrasts appear. The problems encountered in converting our
physical resources to the requirements of war were more difficult
and took more time to work out than did the process of gearing
our monetary and banking system to meet the money costs of
war. Without underestimating the complexity of the financial
problem facing any government in wartime, it is still true that
there was never any serious doubt that the funds could and would
be raised as quickly as they were required. In providing these
funds, however, it was necessary to create new money to bridge

12

Thirty-first Annual Report, Federal Reserve Bank of Philadelphia
the gap between total expenditures and money raised from noninflationary sources. This new money, created to finance the war,
remains with us and creates financial problems that are far more
difficult than the physical problems of reconversion. While
physical reconversion has been accomplished with a speed that
exceeded expectations, little headway has been made in coping
with the financial aftermath of war.
The fact that the flow
demand
of many goods in greatest
as yet seems like a mere trickle, although physical facilities are
available for producing an avalanche of peacetime goods, is
itself largely financial in
delayed
origin. Labor troubles, which
resumption of output in many fields, have revolved principally
around the adequacy of money income in the face of rising living
liquid assets have made it
costs. Accumulations
of money or
for
possible
the worker and the employer alike to resist settlement
of disputes for protracted periods. Price controls, necessary if
this cumulative excess of spending power is to be prevented from
sending prices of scarce goods skyrocketing, make producers less
willing to accept higher labor costs which cannot be met by raising
selling prices, while the price inflation which has already developed
makes labor less willing to work for the reduced "take home" pay
accompanying the shorter work week normal to peacetime.

An overexpanded money supply, created in meeting the demands of war finance, cannot be cast aside like facilities useful
only in producing war goods. Neither could financial commitments of the Government be canceled like war contracts when
the war ended. War financing usually continues for some time
after the fighting stops, and problems of debt refunding, debt
servicing, and monetary control inherited from the war will be
with us long after industrial and military demobilization are
completed.
War
Modern wars have always produced inflationary
financing
finance
pressuresin the countries which have had to
their heavy costs. The unique feature of the financial problem
facing the United States in World War II lay in the magnitudes
involved. The
approach to the problem, however, differed from
the precedent of previous wars in the more general recognition
of inflationary sources of financing, the dangers of which were
stressedfrom the outset.
13

Thirty-first

Annual Report, Federal ReserveBank of Philadelphia

It was anticipated that the Government would have to borrow
funds, and
on a huge scale to supplement taxation as a source of
in
be
Government
the
sold
necessary
that
securities could not
bankthe
commercial
without
utilizing
the
resources
of
amount
Efforts
ing system.
were exerted throughout the war period,
however, to meet Treasury deficits insofar as possible by borrowing from nonbanking sources.Whether or not the war could have
been financed with lessinflationary results is open to debate, but
certainly there was no lack of frankness in warning the public
that to the extent that commercial banks provided the funds
needed, inflation of our money supply must follow.
Over the five-year period ending December 31,1945,
the
Federal Government spent $354 billion and added $24 billion to
its cash resources in the general fund. Of this total, $150 billion
was raised from taxes or other current receipts and Government
debt was increased by $228 billion during the same period.
In spite of efforts to utilize other sources of funds, the banking
system through purchase or lending against Government securities financed almost $100 billion, or 44 per cent of the increase
in Federal debt. This includes more than $77 billion increase in
commercial bank holdings of Government securities and in loans
to purchase or carry such securities, and $22 billion in additional
Government securities absorbed by the Federal Reserve Banks.
It is this $100 billion added to the assets of the banking system
that has expanded the money supply, since it was accompanied by
an approximately equal expansion in bank deposits and currency
combined.
The accompanying table illustrates the close relationship
between increased bank holdings of Government securities
and
Although
the growth in bank deposits or currency.
other
banking changes have exerted some influence on the
volume
of deposits and currency, they in part offset each other and
their combined effect is of relatively minor importance.
The
most important of these were an increase of $1 billion in other
Federal Reserve credit, minor changes in other loans and investments of commercial banks, and a loss of $1.9 billion in monetary
gold stock.
14

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

Government

financing and monetary expansion
(Billions of dollars)

Dec. 31,
1940

Government security holdings
:
Commercial banks
..............
Federal Reserve Banks
..........GovLoans to purchase or carry
ernments*

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

Total

......................
Commercial bank deposits :
Demand deposits adjusted........
U. S. Government deposits.......
Time deposits
Currency outside ..................
banks............
Total
p Preliminary.

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

$ 58.8

* Estimated.

durThe most
striking characteristic of the monetary situation
ining the war, therefore, has been
between
the close similarity
financing
by commercial
creases in Government
and Federal
Reserve banks
and the expansion in bank deposits and currency.
Omitting
time deposits, the table shows an increase of about
$84 billion in the
money supply of the country consisting of
checking accounts, paper money, and coin.
Federal
Reserve

At the beginning

of 1941, the excess reserves of mem-

ber banks reached an all-time high of about $7 billion,
credit
largely as the result of the heavy inflow of gold into
the United States. Since the latter part of 1943, excessreserves
have fluctuated
drives
around $1 billion, rising during war loan
with the movement of funds from private deposits to reserve-free
war loan accounts and falling in the periods between war loans.
Throughout the
period, Federal Reserve credit has been expanded as needed to assureample member bank reserveswith the
primary objective of keeping adequate bank funds available to
meet the requirements of war financing. The principal need
for increasing Federal Reserve
credit has been to prevent the
effect of the $19V2 billion increase in currency demand and an
almost $2 billion lossof gold from reducing member bank reserves.
15

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

Excess reserves were so large at the beginning of the period that
have been
very little increase in member bank reserves would
had been needed only to support the deposit
if
they
required
expansion which occurred during the war. Required member
bank reserves did not reach the level of total reserves held at the
beginning of 1941 until June 1945, and total reserves at the end
levels.
of 1945 were less than $1 %zbillion above January 1941
Currency
Not only has our total money supply increased during
and demand the war years, but there has been a marked shift in
deposits
the relative importance of the two types of money
deposits and currency. The public determines
in use-checking
between
the ratio
the two, with banks occupying the relatively
passive position of accepting currency when offered for deposit
and having to pay out currency when requested by depositors.
The ratio of currency outside banks to adjusted demand and Government deposits combined, rose from 20.5 per cent at the end
of 1940 to about 29.5 per cent at the end of October 1945. This
compares with a ratio of approximately 15 per cent in both 1914
and 1930.
The relatively greater reliance of the public on currency during
the war period developed from a combination of influences, most
important among which have been: (1) the large number
of
people, including war workers and men in service, removed from
localities where they had established banking connections;
(2)
the use of cash in black market transactions and for purposes of
tax evasion; (3) rising prices and increased spending where payments are least likely to be made by check; and (4) the increased
proportion of our money supply in possession of those not accustomed to using banks, and its progressive accumulation
in
holdings of idle money as a result of rapidly expanding payrolls
and limited supplies of available consumers' goods. The last factor
probably accounts for most of the currency expansion occurring
during the war.
Other effects War financing has been the chief cause of three other
of the war
important changes in the banking picture over the
five
past
years; namely, a great expansion in risk-free earning
decline in the ratio of bank capital to deposits,
assets, a marked
in net profits. In December 1940, Governincrease
and a rapid
16

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

ment securities comprised lessthan 43 per cent of member banks'
earning assetsbut by the end of 1945 this proportion had risen
to 73 per cent. The trend toward low-risk assetsalso was enhanced
by the growing importance of loans against Government securities as collateral and loans guaranteed by Government agencies
under the V, VT, T loan programs.
The ratio of capital accounts to deposits of all member banks
fell from 10.1
in
per cent at the end of 1940 to 5.9 per cent
December 1945. Since the primary purpose of bank capital is
to protect depositors from the risk of loss through shrinkage of
assets, the ratio of capital to deposits is not a satisfactory test of
capital adequacy. This ratio is affected by growth in deposits,
even though the growth is counterbalanced by growth in riskfree assets. When
one compares capital accounts to assets other
than Governments and cash, there has not only been no decline
but some increase. Of course, no general formula can accurately
measure the gradations of risk as between different banks or under
changing economic conditions.
Member banks' net profits after taxes rose from 6.2 per cent
of capital accounts in 1940 to 10.9 per cent in 1945. A considerable part of the higher net profits of the past three years has
resulted from a substantial excess of recoveries and profits on sales
over losses and charge-offs. From its very nature, this source cannot be a regularly recurrent item in bank profits. In fact, as long
as banks assume risks in their loans and investments they must
expect losses to average higher than recoveries in the long run.
Although
had
current earnings rose less than profits, they also
reached higher levels relative to capital investment by the end of
the war.
Higher earnings have
resulted from an overwhelming increase
in banks'
earning assets which was more than sufficient to offset
the effect of declining interest rates and increased expenses. The
entire increase in banks' net current earnings is traceable to their
participation in war financing, since earnings from sources other
than Government securities have actually declined in relation to
capital. Banks generally have shown a conservative dividend
policy and have applied over two-thirds of wartime profits after
taxes to building
up capital accounts.
17

Thirty-first

Annual Report, FederalReserve Bank of Philadelphia

Although all of thesewartime changesare apparent in member

banks of the Third District, as well as throughout the country,
district has
the accompanying table shows that banking in this
differed from the average in the degree of change which has
occurred. Government securities were relatively less important
in banking portfolios in this area before the war, but they made
up a larger-than-average percentage of earning assets at the end
district
of 1945. Ratios of capital to deposits at banks in this
higher
levels
during
the war, although this was due
remained at
have expanded less than
fact
deposits
in part to the
that their
banks
district.
in
those of member
any other

Finally, although the ratio of net profits to capital accounts
was lessduring the war period than at member banks throughout
the country, Third District banks have paid out a larger proportion of profits in dividends. A somewhat more liberal, although
still conservative, dividend policy might be attributed to the higher
capital ratios in this district at the beginning of the war and to
the fact that deposits expanded less during the war.
Trends

in earnings, capital,
risk-free investments
Member banks

and

I

Third District

United

States

1940 1

1945 1

1940

1

32.6%

75.2%

42.6%

73.1%

14.0

8.2

10.1

5.9

26.9

36.2

24.9

25.2

6.2

10.9

1945

Ratio ofGovernment securities to total earning assets, December 31..........
Capital accounts to deposits, December 31
..........................
Capital accounts to risk assets, December 31
Profits after taxes to capital accounts .........................

3.4

10.2

Another aspect of bank credit expansion during the war has
been the unequal rate of deposit growth in different parts of
the
country. Over the five years preceding December 1945, deposits
of member banks in the Third District increased 96 per cent, as
compared with an average increase of 130 per cent in the United
States. Principal causes for the relative shift of funds away from
18

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

the Northeastern area include: the greater decentralization of
wartime industry and rapid development of production in the
South and West; heavier expenditures on military facilities and
personnel in the same areas; and the rapid rise of income in
agricultural regions. The volume of funds raised by the Government over the war period has greatly exceeded expenditures in
the Northeast, and Treasury operations have resulted in fairly
consistent drains.
With the return to a peacetime economy, some of the influenceswhich have produced interdistrict flow of funds during the
war will be ended, and some reversal in the flow may occur during
the transition period. The fact that Third District war industries
to a large extent were turning out products which required relatively little conversion of plant from peacetime pursuits has
simplified their post-war reconversion problems. Some industries
required no time for reconversion and many were able to convert
to peacetime production within a few weeks.
Its widely diversified production, and particularly the importance of consumers' goods industries such as textiles, should
place this district in a relatively strong position for meeting the
accumulated demand for civilian goods. It is expected that bank
deposits in the Third District
during the
will expand, at least
transition period, even should total. deposits of all member banks
remain at present levels. If bank credit in general continues to
expand, deposits in the Third District may expand at a somewhat
faster rate than the
average.
SignificanceAmong
the effects of high war incomes and expanding
for future
limited civilian
money
supply,
under conditions which
policies

spending, has been the unprecedented accumulation
of liquid assetsby individuals and business concerns. Since 1939,
holdings
of currency, demand and time deposits, and Government
securities have increased $160 billion, or 246 per cent, according
to Federal Reserve estimates. At the end of 1945, personal holdings included $45 billion in
currency and demand
money-both
deposits-and
about $100 billion in time deposits and Government
securities, an important
part of the latter being redeemable on
19

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

demand. At the samedate businessheld $43 billion in money and
$37 billion in time deposits and Governments, of which a large
part are relatively short-term.
It is estimated that individuals and business concerns in the
Third District hold approximately $13V2 billion in liquid assets,
divided roughly into $5 billion of currency and demand deposits
and $8V2 billion in time deposits and Government securities.
Since these liquid asset holdings include only actual money
or assets which at its own discretion the public can convert
promptly into money, they represent a spending potential whose
inflationary aspects can readily be recognized. The differentiation
between money and other liquid assetsis based upon the fact that
further conversion,
only the former can be used widely, without
for purposes of making payments. In this sense time deposits and
Government securities are not money, and as long as the public
does not exchange them for money they are not inflationary,
except as their existence may influence owners to spend more
readily.

The distinction is not very important when for any reason
the public desiresto convert a large quantity of these assets into
money. Time deposits of commercial. banks in particular are
closely related to our money supply. An expansion of commercial
bank assetsmay result in creation of time deposits instead of
demand deposits. While time deposits are principally savings
accounts and normally are a relatively permanent type of savings,
a large part of their increaseduring the war may be comparable to
the accumulation of temporarily idle funds in the form of currency or checking accounts. Af ter very short notice, time deposits
may be changed into demand depositsand thus increaseour money
supply without any increasein bank assets.
As in the case of time deposits,
holdings represent only temporarily
a whole desires to reduce its holdings
securities, the Treasury must either
or issue new securities. A reduction
20

many Government security
idle funds. If the public
as
of maturing and redeemable
draw on its working balance
in the working balance,
of

e

Thirty-first Annual Report, Federal Reserve Bank of Philadelphia
course,increasesmoney in the hands of the public directly. If new
securities are issued but are not sold elsewhere, the commercial
banking system must be relied upon to bridge the gap as was the
caseduring the war; but this means further monetization of the
Government debt.
The conversion of time deposits into demand deposits, and the
shifting of Government securities now held by nonbank investors
into the portfolios
of banks with resulting deposit creation, represent the two most immediate possibilities for a continued increase
in our money supply. It is extremely important
that further
during
be
monetary expansion
the war
avoided, and at no time
was it more important
to encourage nonbank investors to keep
their present Government holdings intact and to purchase additional offerings than in the months to come.
The present high
ratio has several imcurrency-to-deposit
portant implications. From the standpoint of the banker, unnecessarily high currency holdings represent potential deposits which
might be invested profitably.
From the standpoint of inflation,
the effect is not so much on the total amount of money as upon
the rapidity of turnover.
Idle currency holdings may be more
conducive than checking accounts to quick spending. Either is
apt to be used more freely than savings accounts. In this sense,
there would be somewhat less inflationary pressure if part of the
saved income represented by currency holdings had been placed
in savings
accounts.

As long as a large segment of our population uses currency
instead of bank deposits
for
or other channels of investment
accumulating savingsin substantial. amounts, the ratio of currency
to deposits not only will be higher than necessary for current
transactions but wider fluctuations in the ratio are likely to occur
with changes in the income pattern. It will be important to
watch the behavior of currency.
It is quite
possible that lessreturn flow of currency will develop
in the near future
than has been anticipated, especially if incomes
remain high. Following World War I, the peak of currency ex21

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

of ter the Armistice.
pansion was not reached until two years
leveling
be
Although currency expansion seemsto
off, a substantial
instead of contracrise in prices could result in further expansion
tion. The banks themselvescan do much to reduce the currencydeposit ratio by encouraging greater use of checking accounts by
the public. A lower ratio will be to the long-run advantage of the
banking system, and present levels of bank earnings may indicate
the desirability of banks re-evaluating their present minimum
balancerequirements and schedulesof service charges.Few changes
would reduce currency holding more effectively than lowering
the cost of using checking accounts.
The relative decline of bank capital as banking resources exbanks as
panded during the war raises another problem affecting
they plan their peacetime operations. The present high proportion
little immediate danger from
of risk-free assetsmeans that there is
low bank capital ratios, but it is nevertheless true that some individual banks have too little capital and that bank capital on the
average is insufficient to support any marked increase in private
is
or risk financing. Although further expansion of bank credit
undesirable under existing inflationary conditions, from the longrun viewpoint it is to be expected that our economy will expand
and that banks will be called upon to assume their share of risk
financing. Recent offerings of new bank stock have met favorable
response from the investing public.
Banking in the Third District may face a regional problem
the reverse of that which concerns banks in districts that have
expanded most rapidly during the war. If banks in this area gain
from the interdistrict flow of funds, as suggested earlier, member
bank reserves will expand. Unless such funds are used in absorbing Government securities now held by banks in other areas, they
may intensify inflationary pressures locally, particularly if resulting excess reserves are used as a basis for expanding private credit.
As we face the problems of peace, existing monetary
and
banking conditions hold disturbing implications for the prospects
has left us with a redundant
of a stable economy. The war
supply
deposits and currency, together
both
in
demand
of money,
with
huge amounts of other liquid assets which the public can readily
22

4

Thirty-first Annual Report, Federal Reserve Bank of Philadelphia
turn into additional money. The banks are in a strong position
and there should be little difficulty in financing sound business
needs; but if banks assumean increasing volume of Government
or private financing, and if consumer and trade credit is used in
increasing amounts to finance current transactions, there is grave
danger that economic stability, high money income, and the accumulated money savings of the war period will all be dissipated
in the quicksands of price inflation.
Prices
Price inflation is a usual consequence of maladjustments
growing out of war production and war finance. A lack of balance
between goods on hand and money in people's pockets and in
deposits at banks creates a price problem of major magnitude.
After four years of steady wear and tear without replacement,
consumers are clamoring for goods-new automobiles, refrigerators, washing machines, and household appliances of all kinds.
Industrial plants also
must overhaul, improve, and replace worn
out and obsoletecapital equipment.
People have
to spend it. Consumer
money and are willing
is
incomes are being
high
levels
and buying power
maintained at
holdings
by
reinforced
of
enormous wartime savings. Personal
liquid
assets-cash, deposits, and Government
securities-have
expanded about $100 billion since 1939 to an estimated $145
billion
at the close of 1945. Runaway prices were prevented during the war
when inflationary
pressures were developing as a
consequence of unprecedented expansion in production and war
financing.

Inflation is a characteristic
of every major war because the
production of goods for civilian use does not increase commensurately with the rise in buying power. Inadequate price control
added unnecessarily
$14 billion to the cost of the First
World War. It has about
been estimated that without price control
the cost of World War II would have been increased unnecessarily
by more than $80 billion.
Profiting by
our former experience, determined effort was
madeto hold prices in check. Within fivea
months after our entry
23

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

into the SecondWorld War, a comprehensiveprogram was adopted to keep the cost of living from spiraling upward. The program
embraced heavy taxation, imposition of price ceilings on commodities and rents, stabilization of wages and prices of agricultural products, rationing of essential commodities, restrictions on
credit and instalment buying, and active efforts to sell war bonds
to individuals.
The results of these efforts to "hold the line" are revealed by
official price indexes. Retail prices of consumers' goods rose only
31 per cent during six years of World War II compared with a
rise of twice that amount during the four years of World War I.
Wholesale prices rose only 41 per cent during six years of World
War II compared with a rise of 103 per cent during the four
years of World War I.
In Philadelphia, the wartime rise in prices of consumers' goods
paralleled the national changes. Rents 'rose only 4 per cent, but
some other items were more difficult to control. In November
1945 household furnishings were 46 per cent above the August
1939 level, food was up 48 per cent, and clothing 50 per cent;
but the index of all consumers' goods and services increased only
31 per cent.

The price problem does not end with the termination of war.
Almost half of the inflation generated by the First World War
occurred after the Armistice. In view of our former experience,
the error of hasty abolition of price controls should not be repeated. Realizing the danger of post-war inflation, the Office of Price
Administration last August announced a price policy to stabilize
the national economy during the period of transition. The program included the continuation and rigorous enforcement of
price controls over food, clothing, rents, and consumers' durable
goods not made during the war, but wartime controls over wages
were removed.
Efforts to "hold the line" have been under terrific bombardment from all quarters. Industry complains of being caught in a
higher wages and the insistence
vise between demands for
on price
Labor
complains of the squeeze between rising costs of
ceilings.
24

Thirty-first Annual Report, Federal Reserve Bank of Philadelphia
living and a falling "take home" pay resulting from reduced working hours and overtime pay. The situation is complicated by
strikes and threats of strikes which obstruct the flow of goods so
urgently needed. Holding the line became steadily more difficult
in the closing months of 1945. Wage rates were increased over
wide sections of the economy, and numerous price increaseswere
granted in responseto irresistible pressure.
A generally higher level of wages and prices is in prospect as
a consequenceof the recent Wage-Price Stabilization Order issued
by the President. Wage increases which have occurred since
August 1945 will become the
guide for industry-wide advances.
Price increaseswill be
allowed where higher wages have serious
effectson profits. This realignment of wages and prices, it is hoped,
will eliminate the squeezeon labor and industry while avoiding an
inflationary spiral until production is adequately increased.
Nevertheless, the basic
problem of inflation is the excess of
spending power over goods at existing prices. Increasing the flow
of goods and services, though necessary, will not in itself solve the
problem. The problem of inflation cannot be solved adequately
without control over the supply of money and the exercise of
restraints by individuals and business concerns over the volume
of their expenditures.

The Federal Reserve Bank in the War Years
The
work of the Federal Reserve Bank of Philadelphia during
the war reflected the basic decision
on System policy announced
the day after the
decision
attack on Pearl Harbor. In effect the
was that no activity
the
war would
be impeded because essential to the conduct of
lack
funds.
The
importance
of an
of
of
efficient financial machine
Federal Reserve
the
the
and
place
of
System in it
were recognized when the System was declared an
essential industry in
mid-1943.

No policy
could be effective until it was executed efficiently.
The daily
work
which occupied each of the Bank's employees
during the
war years was directed toward fulfilling some part
of the over-all task undertaken by the Federal Reserve System.
25

Thirty-first

Annual Report, Federal ReserveBank of Philadelphia

Some indication of the sheersize of the job performed by this
Bank during the four years succeeding Pearl Harbor may be obtained from figures such as these:
1,765,000,000
814,000,000
448,000,000
156,000,000
15,000,000
6,000,000
80,000,000

coins counted
pieces of currency counted
handled
ordinary checks
U. S. Government checks processed
ration checks cleared
collection items (coupons, etc. ) handled
pieces issued, redeemed or exchanged
Fiscal Agency Department.

by

But while statistics give some idea of the millions of man-hours
involved, they fail to suggest the problems which had to be solved
before the job could be completed. There was the problem
of
space, which eventually became so acute as to necessitate transferring most of the staff and equipment of the Fiscal Agency
Department
to new quarters. There also was the problem
of
machinery and equipment; new card-punching machines, sorters,
tabulators, and the like were needed to prevent entire operations
from bogging down.

Finally, there was the problem of securing and training the
personnel to do the job. In November 1945, early in the Victory
Loan Drive, the staff of the Bank reached a peak of 1,740, includ-

ing those on part time; this compared with about 930 at the end
of 1941. One problem of personnel was to obtain a sufficient
number of full-time employees. Because of departures for the
armed services, to war plants and for other reasons, it was necessary to take on nearly 2,400 people in order to secure a net increase
of somewhat less than 500 in the Bank's full-time personnel.
The difficulties of drawing on an ever-tightening labor market
meant calling back some employees previously retired because of
age, and greatly increasing the proportion of female employees
Bank employees were shifted from one department to another in
"rush
response to demands for temporary help in completing
jobs", but there still was a demand for more personnel which
was
not satisfied by overtime in most departments. To meet this con_
tinuing problem, several hundred part-time and temporary
er _
ployees were taken on to supplement those working full-time
and
26

Annual Report, Federal Reserve Bank of Philadelphia

Thirty-first

help carry peak loads, particularly during the war loan drives.
Students were employed after school hours and during vacation,
and
and men and women who had full-time jobs in war plants
hours.
Bank
their
regular
the
after
other establishments worked at
Rapid turnover complicated
emthe problem of training
ployees to do work which, in many cases, was new even to experienced personnel. Problems of personnel, together with those of
End of

Federal

Reserve Bank of Philadelphia
Number of full-time employees
I

Currency and coin
..............................
N. --+
-A ...o,r«
Transit

ýfotiýr

78
40

85
34
304
121
31
6
43
22
18
7
9
51
16

107
25
407
428
35
7
41
33
5
6
10
77
19

41

1

I

-A:

Secretaries
......,
Accounting, general
ledger
.......................
Audit
............................
Building and service departments
..............
Total

1945

16

., A 1:1,...,. -..

:.,
an s,,.,,,
-.,..
, .,,. .,,,. .,..................
ý ..,,.,;..,.,
Cnncumnr
F
rnrr;

1941

Z4/
54
28

and collections ..........................
riscal
Agency and RFC custodian
...............
Vault, securities-custody
Wire transfer
..
Bank examination
and bank relations............
Rrcnar,
1,

1939

...

u

0

ti
60
21
168
768

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

186

216

933

1,416

spaceand equipment, made difficult the maintenance of efficiency.
Nevertheless the volume of work generally rose more rapidly than
the number of people performing it, indicating an expansion of
output per worker. Problems of operation could not, at any cost,
be allowed to impair the
quality of the services rendered by the
Bank, which contribute so much to the smooth operation of
essential business activities. The more efficiently such functions
are performed, the more completely they have come to be taken
for granted by the
general public.
A major policy of war financing was the basis for the bulk of
the work of the Fiscal Agency Department. That policy was
that nonbank investors should supply as large a proportion as
possibleof the funds which could not be raised by taxation. The
responsibility of Fiscal Agency was to set up and maintain efficient
machinery for issuing, redeeming, and exchanging Government
27

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

securities. From the viewpoint of sheer rapidity of expansion,
in
"Fiscal" faced the most difficult problems of any department
for almost
The
department
Bank.
the
growth of the
accounted
personnel
two-thirds of the expansion of the Bank's full-time
from 1941 to 1945. Moreover, many employees from other defrom outside were
partments and part-time and temporary help
loan
drives.
during
war
added

Assistance was rendered also to the war finance committees
in the broader field of selling Government securities to the
public. The importance to the economy of financing the war
in the most desirable way was emphasized in pamphlets and
other literature prepared in the Bank aswell as in many discussions
by officers throughout the district. Commercial banks were aided
in becoming centers of war bond salesin their localities.
Despite intensive efforts to meet war costs as far as possible
by taxation and borrowing from nonbank investors, only part
was met in this way and commercial banks had to supply the rest.
That policy affected the credit and currency operations of this
Bank. In order for banks to buy Government securities their
reserves had to be maintained, especially against increasing curcontributed
to the
rency demands. This Bank, accordingly,
extension of Federal Reserve credit by increasing its holdings of
Government securities by $1.4 billion in four years. Most of this
was accomplished through participation in the System Open Market Account, but $219 million represented Treasury bills sold to
the Bank under the repurchase option. Discounts and advances
accounted for a relatively minor part of Federal Reserve credit
extended by this Bank.
Federal Reserve credit was required chiefly to provide the
reserves from which to satisfy the public's demand for currency.
In the four years 1942-1945 over $1 billion of the $17%4 billion
increase in circulating currency was in the form of notes of this
Bank. In addition to the operations involved in original issue,
there was the much greater task of maintaining this huge circulation. Currency repeatedly passes through the Federal Reserve
Banks, involving repeated handling: receiving, sorting, counting,
reissue, retirement of unfit notes and replacement with new.
28

N

Thirty-first Annual Report, Federal Reserve Bank of Philadelphia
The policy of providing funds to war producers, even where

risks might exceed those banks were willing to assume, led to the
guarantee of loans under Regulation V. Beginning in the spring
of 1942 the Federal Reserve Banks were authorized to act as agents
and Maritime Comof the War Department, Navy Department,
loans
in
to concerns engaged in war promission
guaranteeing
duction and requiring credit beyond that available from normal
nearly 600
sources. The process of analyzing and investigating
loans
brought
applications for war production
and termination
the
technical
directly
into
the Credit Department
contact with
Of the total
problems of war production
and reconversion.
had
executed.
443
guarantees
applications,
were approved and
More than one-third of the approved applications were approved
directly at this Bank.

to
The Transit Department
also made a major contribution
a smoothly functioning wartime economy. In addition to clearing
almost half a billion checks used by business and individuals to
handled
carry on day-to-day business transactions, the department
over 150 million Government checks. This Bank was given the
responsibility of sorting all Army allotment checks in the United
Army came
States, and
with the tremendous expansion of the
increasingly difficult
handling
checks.
allotment
problems of
The peak
4,600,000
rein
March
1945,
checks
were
came
when
ceived and processed in a single month. Another special wartime
function
was the clearing of ration checks. The millions of ration
handled
by "Transit"
checks
represented an essential part of the
task of allotting equitably huge quantities of meats, sugar, gasoline, and
other scarce materials.
Two other functions
directly out of
of the Bank which arose
the war situation involved control over the use of credit in consumer purchases and over foreign funds. Consumer credit control
under Regulation W, designed to restrict consumer demand by
limiting
the creation of credit in the distribution
of consumers'
goods, was undertaken in September 1941 and extended in May
1942. It applied to
all those extending instalment sale and charge
credit or instalment cash loans to consumers. The Consumer
Credit Department
of this Bank was responsible for administering
Regulation '\V
throughout the Third District, including registration of 12,000 credit
grantors coming under its provisions. The
29

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

interpreting
and
work of the department consisted not only of
but
of
educating
also
enforcing the various rules and regulations,
business and the public as to the importance of consumer credit
saccontrol. The fact that the regulation was enforced without
rifice of good will testifies to the effectiveness of the educational
campaign.
The control of foreign funds for the United States Treasury
was an integral part of economic warfare. The control was established by Executive Order in April 1940, following the German
invasion of Norway and Denmark.
As the Axis powers overran
one country after another, the control was extended to the assets
of the Netherlands, Belgium, France, and the Baltic and Balkan
states. By mid-1941 practically all of continental Europe was
included under the control, as were Japan and China. Immediately
after Pearl Harbor the Bank cooperated with the various Government enforcement agencies in investigating and compiling records
150 persons and firms of Japanese nationality.
of approximately
Over a period of about five years the Bank received and processed nearly 18,000 applications for licenses to carry on foreign
transactions. In assisting the Treasury to take censuses of foreign
holdings in this country and United States interests in foreign
countries, the Foreign Funds Department processed over 30,000
reports. As its work progressed, the department gradually was
accorded a large share of responsibility. In the later years approximately 80 per cent of all applications could be handled without
the necessity of referring them to the Treasury Department.
The Research Department continued to compile important
information on significant developments and to prepare analytical
memoranda to assist in the formulation of policies. It also devoted
much time to the problems of the transition to peace. One phase
of this work was the preparation and publication of a series of
basic studies on the economy of the Third Federal Reserve District. Another phase was a thorough study of prospects of the
Philadelphia area with a view to facilitating the transition to high
levels of peacetime production and employment. Several surveys
were conducted in cooperation with the local Committee
for
Economic Development.
Industrial forums were held on
the
basis of these surveys and detailed analyses of important industries
30

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

of the area. Leaders in these industries attended the meetings to
discuss their
post-war problems and to develop programs to meet
them.
Another phase of the Bank's activities included discussions
with bankers. During 1945, two meetings of the Federal Reserve
Relations Committee
in January and
were held at the Bank-one
the other in October. The Committee,
which consists of 28
members representing regional banking groups in this district
and the presidents and secretaries of the three state banking
associations covered by the district, met with officers of this Bank
to discuss banking, credit, and other problems of common interest.
These discussions
later distributed
to all
were transcribed and
banks in the district.
Moreover, members of the Committee
reported at annual and interim
meetings of their respective
regional groups and in numerous cases to county groups. The
Committee has provided
for fostering better
an effective medium
between
understanding and closer relationships
this Bank and
the banks in the district generally.
In addition to
Commeetings of the Federal Reserve Relations
mittee, members of the Bank's staff participated in numerous
meetings of bankers in various localities throughout
the district
in
forums
Institute
and
of Banking.
conducted by the American
In the year 1945
in
Bank
participated
alone, the officers of the
more than 600 meetings and conferences.
Directors
In the annual election of directors George W. Reily,
and officers President
Harrisof the Harrisburg National Bank,
burg, Pennsylvania,
in
Group
2
banks
by
member
was re-elected
as a Class A director, and Albert G. Frost, President of Esterbrook
Steel Pen Manufacturing
Company, Camden, New Jersey, was
elected by member banks in Group 3 as a Class B director to suchis
ceed Ward D. Kerlin,
who after serving two terms asked that
name not be included among the candidates for election. Thomas
B. McCabe
was reappointed by the Board of Governors as a Class
C director, beginning his
new term January 1,1946. Mr. McCabe
served as Chairman of the Board and Federal Reserve Agent
and Warren F. Whittier
as Deputy Chairman during 1945; both
were reappointed for 1946.
31

0

Thirty-first

Annual Report, Federal ReserveBank of Philadelphia

The Board of Directors appointed David E. Williams, Presi-

dent of the Corn Exchange National Bank and Trust Company,
Philadelphia, as a member of the Federal Advisory Council for
the year 1946. Mr. Williams succeeds William Fulton Kurtz,
President of the Pennsylvania Company for Insurances on Lives
and Granting Annuities, Philadelphia.
Several developments took place in the official staff early in
1946. Alfred H. Williams was re-elected President of the Bank
for a term of five years, beginning March 1,1946. The directors
accepted with deep regret the resignation, effective February 2 8,
1946, of Frank J. Drinnen, First Vice President of the Bank for
ten years. He was succeeded by W. J. Davis, who has been with
the Bank since 1917 and has been a Vice President since 1936.
William G. McCreedy was appointed a Vice President of the Bank.
Mr. McCreedy has been associated with the Bank since 1915,
having served successively as Comptroller
and Assistant Vice
President. He continues as Secretary.. On January 1,1946,
Philip M. Poorman, formerly General Auditor, succeeded C. A.
Mcllhenny as Cashier. Norman G. Dash was appointed General
Auditor.
William D. Cobb, Assistant Cashier, and for many years head
of the Transit Department, retired at the end of 1945. James V.
Vergari, formerly head of the Consumer Credit Department,
and
Robert R. Williams, who had been on leave of absence in the
military service of the United States, were appointed Assistant
Vice Presidents.
The appendix, beginning on page 35,
contains the following tables:
Statement of condition
Profit and loss account
Volume of operations
Applications for industrial
Member bank reserves

loans

Changes in member bank reserves and
related items
Loan drive sales

Combined statement of member banks
Earnings and expensesof member banks
32

Thirty-first Annual Report, Federal Reserve Bank of Philadelphia

Directors
as of January 1,1946
Group

Class A:

Term Expires
December 31

Howard A. Loeb
.....................................
Chairman, Tradesmens National Bank and Trust
Company, Philadelphia, Pennsylvania.

1

1947

George W. Reily
.....................................
President, Harrisburg National Batik,
Harrisburg, Pennsylvania.

2

1948

John B. Henning
.....................................
President, Wyoming National Bank,
Tunkhannock, Pennsylvania.

3

1946

James T. Buckley
....................................
Chairman, Executive Committee, Philco Corporation,
Philadelphia, Pennsylvania.

1

1946

Charles A. Higgins
...................................
Chairman and President, Hercules
Company, Wilmington, Delaware.

2

1947

3

1948

Class B:

Albert

G. Frost
......................................
President, Esterbrook Steel Pen
Company, Camden, New Jersey.

Powder

Manufacturing

Class C:
Thomas B. McCabe, Chairman
and Federal Reserve Agent
President, Scott Paper Company,
Chester, Pennsylvania.

1948

Warren F. Whittier, Deputy Chairman
.................
Chester Springs, Pennsylvania.

1946

C. Canby Balderston
Dean, Wharton ..................................
School of Finance and Commerce,
University of Pennsylvania,
Philadelphia, Pennsylvania.

1947

33

Annual Report, Federal ReserveBank of Philadelphia

Thirty-first

Officers
1,1946

as of March
ALFRED

H.

WILLIAMS,

L. E. DONALDSON,

W. J. DAVIS,

Assistant

First Vice President

C. A.

President

ROBERT

MCILHENNY,

C.

HILL,

JAMES

Vice President
C. A.

SIENKIEWICZ,

G.

MCCREEDY,

HILKERT,

V.

VERGARI,

Assistant Vice President
ROBERT

R.

WILLIAMS,

Assistant Vice President

Vice President
WILLIAM

N.

Assistant Vice President

Vice President
ERNEST

Vice President

KARL R. Borr,

Vice President

Director

of Research

and Secretary
PHILIP

WALLACE

M. POORMAN,

M.

CATANACH,

Assistant Cashier

Cashier

NORMAN

G. DASH,

34

General

Auditor

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia
Statement of Condition
December 31

Federal Reserve Bank of Philadelphia
(000's omitted in dollar figures)

1943

1944

1945

$1,029,794
24,120
$1,053,914
24,499

$ 945,229
42,799
$ 988,028
17,815

$ 878,051
61,134

Discounts and advances
.....................
Industrial loans
United States Government securities.........

700
4,046
861,738

505
2,570
1,252,245

4,386
1,763
1,610,468

Total loans and securities
.............
Due from foreign hanks
Fed. Res. notes of other .....................
F. R. Banks.........
Uncollected items
..........................
Bank premises
.............................
All other resources
.........................
Total resources
......................

$ 866,484

$1,255.320

$1,616,617

13
4,620
117,062
3,600
4,815

12
4,042
153,977
3,457
3,278

10
7,298
139,850
3,313
4,353

$2,075,007

$2,425,930

$2,726,202

RESOURCES
Gold certificates
Redemption lund-Fed.
Res. notes.................
Total gold certificate reserves.........
Other cash
................................

$ 939,185
15,576

LIABILITIES

$1,149,726 $1,427,510 $1,635,242

Federal Reserve
notes ......................
Deposits :

5,351

710,778
28,72?
106,353
4,578

799,634
59,678
72,195
4,308

$ 802,808

$ 850,431

$ 935,815

84,031

105,809
613

106,130
500

645,809
31,375
120,273

Member hank reserve account
.............
U. S. Treasurer-general
account ..........
Foreign
.................................
Other deposits
...........................

Total deposits

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

875

$2,037,441 $2,384,363

$2,677,687

CAPITAL ACCOUNTS
Capital paid in
Surplus-Section ...................
7
Surplus-Section
...............
131)
Reserves for
......................
contingencies
..................
Total liabilities and capital accowrts....
Ratio of gold
certificate reserves to deposit
and Federal Reserve note liabilities combined
...................................
Commitments to
make industrial advances....

35

ý

$
17,859
4,421
3,600

12,227
19,872
4,468
5,000

$

13,064
28,946

4,501
2,004

$2,075,007

$2,425,930

$2,726,202

54.0%

43.4%

36.5%

$1,930

$3,048

$703

Annual Report, Federal ReserveBank of Philadelphia

Thirty-first
Federal

Profit and loss account
Reserve Bank of Philadelphia
(000's omitted)

1

1944

1945

$5,122

$7,275

$9,929

217

165

1943

Earnings from:
United States Government securities.......
Other sources
...........................

Total earnings .......................

1

134

$5,339 1

$7,440 1 $10,063

$2,498

$2,827

$3,007

409

524

349

229

211

204

Expenses:
Operating expenses*
.....................
Cost of Federal Reserve currency..........
Assessment for expenses of Board of Governors

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

Total net expenses....................
1

Current net earnings
........................
Additions to current net earnings :
Profit on sales of U. S. Government securities
...................................
Transfers of reserves in excess of requirements .................................
Other additions
..........................

$3,136

1

$3,563

1

$3,560

$2,203

1

$3,877

1

$6,503

$2,928

1$

100

$ 256

s416

150
52

13
$3,041

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

263

I4

$ 390

$ 458

1,642**

Net additions to current earnings............

$1,399

Net earnings available for distribution.......

$3,602

Distribution of net earnings :
Paid to Treasury of United States, Sec. 13b
Dividends paid to member banks...........
Transferred to surplus (Sec. 13b).........
Transferred to surplus (Sec. 7)...........

$

84

5

1

$ 386

$ 453

$4,263

$6,956

$

$

84

701

719

28
2,789

47
3,413t

84
766

32
G,074ti'

* After deducting reimbursements received for certain fiscal
agency and other
expenses.
** Principally charge-off on bank premises and payments to Retirement System,
I $1,400,000 transferred to Reserves for Contingencies.
fit $3,000,000 also transferred to Surplus from Reserves for Contingencies.

36

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

Volume of operations
Federal Reserve Bank
of Philadelphia

i

1943

1944

1945

1
200,093
433,502
110,713

1
209,594
437,431
112,036

1
208,611
474,170
115,501

17,608

16,320

17,321

23,389
0
4,993

52,426
0
5,275

70,155
0
5,041

1,214
212

1,299
185

1,373
180
65

Pieces or transactions handled
(000's omitted)
Discounts
and advances
Currency counted
.....................
Coins counted
..........................
Ordinary checks.............................
Checks handled in*..........................
n packages by automobile run
service
U. S. Government
checks (including Treasury
card checks first handled in 1943)
Work relief
..........
checks
Ration checks
...............
. .... ........ ........
Collection items.... ..............
Coupons of U.: S. Government
and agencies.
All other (notes......................
drafts and coupons)
Transfers
......
funds
of
Issues,
....
redemptions,
Agency Department:and exchanges by Fiscal
U. S. Government direct
obligations.......
All other
...............................

62

63

19,717*
4

25,479*
36

26,756*
22

$ 327
1,015
40
43,593

$ 509
1,077
41
45,548

$ 1,184
1,178
44
47,441

8,188
0

8,401
0

103
243

131
260

Dollar amounts
(000,000's omitted)
Discounts
Currency and advances.....................
counted
Coins counted
..........................
Ordinary
.............................
checks
U. S. Government
...........................
checks (including Treasury
card

checks first handled in 1943)
Work
........
.
relief checks
Collection items
.................
........
Coupons
of U. S. Government
and agencies.
All other (notes, drafts,
Transfers
and coupons) ......
funds
of
Issues, redemptions, ..........................
Agency Department and exchanges by Fiscal
:
U.

S. Government direct
obligations........
All other
................
................

Securities held
in custody for member banks
at end of year
Savings bonds
.
in.............
safekeeping. at end of year
(number
of pieces)
.......................
*Includes

6,723
0
78
224

7,158

8,424

9,032

8,014*
17

9,788*
110

8,686*
110

$1,651 init.
133,000

$1,921 mil.
229,000

$2,207 mil.
303,000

savings bonds sold through other issuing agents, and redemptions through
qualified commercial banks.

37

Thirty-first

Annual Report, Federal ReserveBatik of PhiladelPhia

Applications
for industrial
loans
Federal Reserve Bank of Philadelphia

1945

Number
Approved
...............................
Rejected
Withdrawn ................................
.............................
Under consideration
.....................

Total number
........................

I

12
0
2
0

365
457

14

892

70
0

Amount
Approved
Rejected ...............................
................................
Withdrawn
Under consideration
Total amount
........................

Member bank reserves
Third Federal Reserve District
(Dollar figures in millions)

I

$2,155,000
0
21,000
0

$61,796,426
17,126,350
4,012,700

$2,176,000

$82,935,476

0

I
Actually
held

Ratio
of
excess to
required

Required

Excess

$294
358
357
374
411

$155
60
13
15
12

53
17
4
4
3

224
256
272
316
379

145
184
215
247
297

79
72
57
69
82

55
39
26
28
28

673
674
642
704
802

439
542
572
621
708

234
132
70
84
94

53
24
12
14
13

1

Philadelphia banks:
1942:
1943:
1944:
1945:
1946:
Country
1942:
1943:
1944:
1945:
1946:

Jan.
Jan.
Jan.
Jan.
Jan.

1-15
1-15...................
1-15...................
1-15...................
1-15...................
...................
banks:
Jan. 1-15
Jan. 1-15...................
Jan. 1-15 ...................
Jan. 1-15 ...................
Jan. 1-15...................
...................

All members:
1942: Jan.
1943: Jan.
1944: Jan.
1945: Jan.
1946: Jan.

1-15
1-15...................
1-15...................
...............
1- 15 .
1-15 ...................
...................

$449
418
370
388
423

38

Thirty-first

Annual Report, Federal Reserve Bank of Philadelphia

Changes in
member bank reserves and related items
Third Federal Reserve District
(Millions of dollars)
Sources of funds:
Reserve Bank credit extended in district........
Interdistrict commercial transfers
..............
Mint gold purchases, net
......................
Treasury operations
Total

1

1943

676

1+

+301

Total

-}-30fi

Investor class:
Individuals, partnerships, and personal trusts
Savings banks ..................
Insurance companies . ... ..... ..
Brokers and dealers
.............
State and local governments
and
their agencies
................
All other (nonfinancial
corporations, associations, etc. )
........
Total
....................
E bonds (included
above in sales to
individuals)
....................
Total sales to nonbank investors:
First Drive
Second Drive.....................
...................
Third Drive
Fourth Drive ....................
...................
Fifth Drive
Sixth Drive ....................
....................
Seventh Drive
Victory Drive ..................
..................
Total all drives............

+j-

281
65

+1-1
+1+0

Third Fed.
Res. Dist.

+232
+ 89
-0

+1

+301

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

Loan drive sales in 1945
(Dollar amounts in millions)

-660

346 1 +322

Uses of funds:

Currency
demand
............................
Member
bank reserve
deposits
.................
"Other deposits" at Reserve Bank
..............
Other Federal Reserve accounts
................

1945

+ 39
+944

31
+1,053

+210
. 846
+0-0-1
-755

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

1

1944

+

346

+322

I%

Third District of U. S.

United
States

$15,457
4,011
7,298
596

5.7
4.7
1.2

279*

3,318

8.4

785

16,787

4.7

$47,457

5.5

341

6180

5.5

$ 335
659
934
856
1,003*
1,065*
1,488*
1,125*

$ 700
13,476
18,944
16,730
20,639
21,621
26,313
21: 144

4.3
4.9
4.9
5.1
4.9
4.9
5.7
5.3

$7,465*

$146,727

5.1

$ 975
228
339
7

$2,613*

+ Including proportionate
share of purchases by Commonwealth
in the last four drives
were not allocated by counties.

39

of Pennsylvania,

which

Annual Report, Federal ReserveBank of Philadelphia

Thirty-first

All member banks
lnlra

reueral

n-LVU

(Millions

Dec. 31,
1945

a =LrICL

of dollars)

Assets
Loans and discounts ..............
U. S. Government obligations.....
Other securities
.................
Cash assets
Fixed assets .....................
Other assets ....................
....................

Total
Liabilities

................
and capital

Dec. 30, June 30,
1939
1944

934
4,357
507
1,456
70
27

....

17,351

I

Percent change
from

15.6
20.7
26.8
14.0
16.7
12.5

+
+
+
+
+

1+

Percent
distribution
Dec. 31, June 30,
1945
1939

1.5
+
+481.7
- 19.1
+ 45.6
60.7
+ 8.0

12.7
59.3
6.9
19.8

26.3
21.4
17.9
28.6

.95.1
.4

18.5 1 +110.1 1 100.0 1

.7

100.0

accounts

Deposits :

Individuals,
corporations-

partnerships,

and

Demand
....................
Time
.......................
U. S. Government
..............
Bank
Other .........................
........................
Total deposits
..........
Other liabilities
..............
Capital accounts
..............

Total

"..

6,763

+ 19.3 1+ 126.51

1 7,351

Earnings and expenses
Third District member banks
(Millions $)
Total earnings:
On securities
......................
On loans*
.........................
Other
.............................
Total
.........................
Current expenses:
Salaries and wages
.................
Interest
Other

Ul.

on deposits .................
.............................

Total

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

Net current

earnings ................
Net charge-offs (-) or recoveries and
profits on sales of securities (+) ..
Taxes on net income
................
Net profits
..........................
Cash dividends declared

+ 169.5
44.9
+
+1,219.8
+
14.4
+
35.2

+
+
+
+
+

32
556

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

14.3
24.1
31.8
10.3
28.1

3,379
1,542
1,135
438
269

46.0
21.0
15.4
5.9
3.7

92.0

85.3

+ 28.0 +
+ 8.8 +

52.4
13.0

.4
7.6

.6
14.1

+ 18.5 +

110.1

100.0

100_0
I

1942

1943

1944

1945
__

44.0
42.2
21.5

53.3
35.2
22.1

64.2
32.5
23.1

75.9
31.7
23.9

119.8

131.5

107.7

1

110.6

30.2
10.6
28.1

68.9 1
38.8
-17.9
2.9

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

Includes service charges and fees on loans.
40

1
-

1

30.9
9.7
29.7

32.2
10.2
29.8

34.8
12.2
322

70.3 1

72.2

79.2

40.3

47.6

52.3

2.4
8.8

+16.4
13.9

4.8
5.0

-

18.0

30.5

36.4

54.9

15.9

15.8

16.4

17.8

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