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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 ` -- f -j -- I -. __ -. I: 0 ff ff _ ffff 10 ---- - --- ýý f [lwp[tKi ýýýýý -li 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