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EARLY FRUITS OF VICTORY Thirty-second Annual Report of the FEDERAL RESERVE BANK OF PHILADELPHIA 1946 Third Federal Reserve District EARLY FRUITS OF VICTORY Thirty-second Annual Report of the FEDERAL RESERVE BANK OF PHILADELPHIA 1946 Third Federal Reserve District CONTENTS Page Introduction ..................................................................................... 1 Conferences with bankers......................................................... 2 Business conditions in 1946 ........................................................ 4 The clash over wages............................................................... 5 The clash over prices ............................................................... 6 Jobs for all................................................................................... 10 A year of shortages.................................. 11 What the consumer really got................................................ 12 Banking developments................................................................... 14 Banking in wartime ................................................................. 14 Banking policy in peacetime.......................... 15 Earnings and profits ................................................................. 18 Sharing the responsibility......................................................... 18 The Federal Reserve........................................................................ 19 Federal Reserve credit............................................................... 20 General operations...................................................................... 21 Directors and officers................................................................. 22 Appendix ......................................................................................... 25 (Contains tables listed on page 25) FEDERAL RESERVE BANK OF PHILADELPHIA April 30, 1947. To the Member Ban\s in the Third Federal Reserve District: This Thirty'second Annual Report of the Federal Reserve Bank of Philadelphia reviews developments in business and banking during the post'war period. Entitled the “Early Fruits of Victory,” it deals particularly with the diverse problems of the period and the manner in which they are being met. Alfred H. Williams President. EARLY FRUITS OF VICTORY For more than a year since VJ Day the American economy has shown conflicting movements that on balance emphasize inflationary pressures. Diversity of action as well as confusion of counsel in many quarters has tended to obscure the meaning of the victory that has been achieved at such heavy cost. But if we sink our shafts of thought below the surface, these appearances acquire a constructive significance of fundamental importance. We need only remember earlier periods of war and reconstruction to recall that apparent impairment of the unity of purpose and effort that made victory possible is an immediate consequence of military defeat of a powerful foe. Developments since the end of the Second World War show just about the usual manifestations that accorm pany the complex transition of the economy from wartime to peacetime activities. It need occasion no surprise that conflict seems to be the order of the day in this country. Cleavages of objectives and desires are inherent in every human society. A fundamental distinction between democracy and dictatorship is the attitude toward such differences in aims, purposes and desires. Democratic societies foster and encourage personal and independent views. Each member is free to enter his ideas in competition with those of his fellows. The only requirements are that in political life he submit to the decision of the majority and that in economic life he yield to the decision of the market place operating under democratically estab' lished rules of conduct. An immediate decision, of course, may be wrong; but when the majority so decides, they may change it. Variety of ideas gives strength, resilience, and adaptability to democratic institutions as well as significance, color and zest to the lives of democratic citizens. Differences of opinion are the basis for progress and are the very tissue of democratic society. In a dictatorship, on the other hand, differences of opinion are not tolerated. The State alone determines both the goals of society 1 Thirty'second Annual Report, Federal Reserve Banl{ of Philadelphia and the means of achieving them. Those suspected of disagreement are “liquidated.” In an attempt to promote the notion that the State is omniscient and thus is infallible, programs may be con' tinued even after it becomes obvious that they are based on error in conception and judgment. The apparent unity of dictatorships and the apparent disunity of democracies are often misinterpreted as demonstrations of strength and weakness. Twice within a generation dictators have made this mistake. Both instances have proved that the citizens of democracy are after all united on a basic principle. They agree on the right of each member to his own opinion, on the right to disagree. They will defend that right with their lives and fortunes. They even submerge actual disagreements on important but obviously lesser matters in defense of this basic principle. Democracies are strong in war because each citizen is defending for himself what all citizens of a dictatorship are defending only for the State. When war is in progress, rights tend to be submerged and duties emphasized. It is understandable that citizens of a democracy want to make sure after defeat of an external enemy that they have indeed won the victory. They want to know with certainty that they can exercise the fundamental right to disagree. The final test, of course, is to disagree in fact. The first full year of peace has brought conclusive evidence in this respect that victory has been real. The present ferment, therefore, may well presage greater strides of democratic progress, just as it did after the Civil War. Our future is neither assured nor determined. During the war we demonstrated our ability to discharge responsibilities. Since the end of the war we have been busily reasserting our rights. In the long run, however, continued progress depends on achieving and maintaining proper balance between rights and duties. Informed discussion is always an essential ingredient of democratic process. Exchanges of views are particularly important in periods of fundamental changes and con sequent readjustment to new conditions. Conscious of its respon sibility as well as opportunity for service in this district, this Bank has developed a program of conferences with the bankers in the field in an attempt not only to discuss current problems of 2 Conferences with bankers Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia mutual interest but also to seek solutions to these problems through cooperative efforts. The first step in the program was to intensify the work of the Federal Reserve Relations Committee. This Committee had been formed originally some twenty years ago primarily to discuss technical aspects of the relation between the Federal Reserve Bank and the commercial banks of the district. The Committee was revitalized in 1945 to discuss broader aspects of business, banking, and credit developments. Two all'day meetings were held at this Bank in 1946: one on May 17 and the other on October 18. Participants included twenty' six members elected or appointed by bank groups and state asso* dations representing some 900 banks in this district. Also present were the principal officers of state bankers’ assodations and officers of this Bank. Agenda were carefully planned and outlined. Included in the discussion were such subjects as developments in lending and investment; bank operating problems, with particular emphasis on sources of earnings and factors of cost; and developments in corn trolling inflationary pressures, with spedal reference to the debt retirement program of the Treasury, private credit expansion, and credit control proposals as outlined in the Board of Governors’ Annual Report for 1945. The results of these discussions were printed in booklets, copies of which were sent to all banks in the district. Over the years these records should provide valuable history of contemporary thinking on banking and credit in this district. The second step in the program has been the development of field conferences for the interchange of ideas with small groups of executive bank officers, one from each bank. These groups range in size from ten to thirty, with an average of about twenty bankers. About forty such conferences have been held, covering all counties in the district. Where counties were relatively small, two or more were combined into one group. These field conferences were organized largely on the basis of the discussions at the meetings of the Federal Reserve Relations 3 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia Committee but with particular emphasis on local conditions. At least four officers of this Bank participated in each of these con* ferences. A senior officer acted as moderator and kept the discus' sion within the general framework outlined in advance. All officers of this Bank have participated and staff members have attended most of the meetings. Under a cooperative arrangement with the Pennsylvania State College, county farm agents, and frequently the director of agricultural extension or his assistants also participated. The underlying idea of these field conferences and that of meet' ings of the Federal Reserve Relations Committee has been to provide an opportunity for intimate discussion of banking and credit problems by a limited number of executive bank officers. The primary objective of these conferences has been to stimulate dis' cussions and factual analyses as essential steps in searching for solutions of the problems in the light of changing conditions in the economy. In developing ea,ch discussion an attempt was made to bring out the experiences and views of each participant both on difficulties common to the group and on broader problems affect' ing banking and credit. The initial response to these conferences has been beyond expectation. It shows that the broadened program of bank and public relations fills a void that has apparently been growing over the years. Requests for continuing the field meetings are most encouraging particularly as they indicate that the program is both well conceived and workable. This outcome is gratifying, and at the same time it imposes heavy responsibilities upon the officers of this Bank to encourage and carry on free discussion and inter' change of ideas in mutual confidence. Business Conditions in 1946 The clash of interests and opinions was reflected in all segments of the economy. Production, prices, and income felt their impact. Opposing groups sought to make their influences felt by both poli' tical and economic means, and the progress of transition was 4 Thirty'second Annual Report, Federal Reserve Bank of Philadelphia retarded by a welter of conflicting arguments and opposing sets of “facts.” By comparison, the physical problems of reconversion — the redesigning of products and the assembly of tools — were easy. For most industries reconversion was accomplished by the first quarter of the year. The controversies over wages and prices, however, continued bitter and voluminous. The industrial disputes of early 1946 had their origin jn events which transpired immediately after V-J Day. The curtailment of munitions production had caused gross weekly earnings in manufacturing industries to drop from an aver' age of $47.50 at the beginning of 1945 to $40.87 in September. Labor wanted to maintain its “take home” pay; management, faced with reconversion difficulties of an unpredictable nature, held that wages could not be raised without raising prices. The clash over wages The decision to free wages from Government control and the abolition of the War Labor Board almost immediately after V-J Day precipitated a long series of industrial disputes which resulted in what was later known as the “first round” of wage increases. It began with the work stoppage in the oil refineries which led to their seizure by the Government. It was the General Motors strike which began late in November 1945 that set the pattern for wage negotiations early in 1946. The fact-finding board appointed by the President investigated the dispute and recommended a 17^2 Per cent wage boost. There was no settlement at that time, however, and late in January the workers in the steel, electrical manufacturing, meat packing, and farm equipment industries went on strike. One and one-half million workers were directly involved in these disputes, and many more were indirectly affected by the stoppage of parts and material flow through the industrial machine. Production in the Third Federal Reserve District, which seemed to be making a recovery from the low point reached in October, dropped nearly 20 percent in Feb ruary owing to a sharp decline in durable goods output. The pro duction of consumers’ goods was not affected by the strikes, and production in those lines hit a record high in February. The crisis in production resulted in the issuance of Executive Order 9697 — the Wage-Price Stabilization Plan of February 14. 5 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia Additional Government controls were established over wages, but increases in pay were to be permitted in accordance with the numerous precedents which had been set throughout industry in the previous months. Price increases were to be permitted to the extent necessary to offset increased labor costs. The steel dispute was immediately settled on the basis of this plan, and this, together with other recommendations of a fact-finding board, became the basis for the settlement of scores of strikes. It was hoped that the realignment of wages and prices on a slightly higher level would correct inequalities and distortions which had developed and would make it possible to stave off a wage-price spiral until production could be increased sufficiently to meet existing demands. Industrial production recovered somewhat in March but the bituminous coal strike, which lasted for almost two months, sent it down again in April and May. An anthracite strike of seven days’ duration took place in June, but by the end of that month the “first round” of industrial disputes had been about completed and durable goods production moved upward. In July, factory employ ment in Pennsylvania rose to its highest point since the beginning of the year, though it remained considerably below the average for 1945. During the first half of 1946 there was increasing controversy over price control. Its proponents said it was necessary to continue it in order to keep the gap between money supply and goods from causing a runaway inflation. Its opponents pointed to distortions in the structure of prices and to the need for encouraging production by price increases. Both sides wanted to do away with price control as soon as possible. Every one agreed that its retention would be incompatible with the free peacetime economy which we were trying to reestablish. But there was considerable disagreement as to the timing of its discontinu ance. Price revisions permissible under the existing regulation allowed wholesale prices to advance 5 percent from January to June, and the consumers’ price index for Philadelphia rose from 129 to 133 percent of the 1935-1939 average. The clash oyer pnces The controversy culminated in the lapse of price control after the President’s veto of a modified extension bill late in June. Dur- 6 Thirty'second Annual Report, Federal Reserve Banh of Philadelphia BUSINESS CONDITIONS 7 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia ing the three-week price holiday that ensued, prices rose rapidly. They were not effectively harnessed by the compromise price con trol extension bill that was passed in July. Lifting of controls on meat and acceleration of the removal of ceilings on other products in October presaged an early end to all price regulation. It came on November 9—seven months before the statutory limit. Sugar, rice, and rents were the only items over which the Government retained control. By the end of the year, wholesale prices had attained a level of 175 or one-third above the previous year. The cost of living in Philadelphia had risen to 153 per cent of the 1935-1939 average. Remaining wage controls, since they were closely connected to prices, were also abandoned. Faced with a sharp rise in the cost of living, organized labor indicated its intention of asking for more. While the interim between July and November was relatively free of strikes, the coal dispute which started in the latter month was especially significant because it was apparently the beginning of a “second round” of major wage increase demands. With many other union contracts subject to early renegotiation, the coal settle ment could have been a very important precedent. After legal action had been started against the coal miners, the strike was called off and its settlement postponed. Negotiations for adjust ments of wage demands in other industries proceeded smoothly, and the month of December had the lowest level of strikes since the end of the war. Production in this district, at 142 per cent of the 1935-1939 average, exceeded the 1941 level for the first time since V-J Day. The rate of recovery in industrial production for the district was somewhat behind that for the rest of the country because of a marked decline in wartime shipbuilding. While the issue of still higher wages was debated vigorously both in the press and on the platform, organized labor in leading industries did not press for a second round of wage increases. Attitudes of labor leaders were undoubtedly tempered by the prospect of unfavorable Congressional action and the danger of a business recession. A slump in business activity had been widely forecast in a series of predictions from many sources since the stock market slump in September. Management on its part, perhaps tempered by rising profits, was conciliatory. 8 Thirty'second Annual Report, Federal Reserve Bank of Philadelphia CONSUMER PRICES IN PHILADELPHIA Whatever the reasoning behind it, at the end of the year both sides had apparently come to the realization that a continuation of the wage-price spiral of the spring and summer and repeated inter ruptions of production would have unfavorable consequences for all. The possibility of serious strikes remained, but we learned a great deal from our experience during 1946. The first fruits of victory in labor-management relations may well have been in the form of a lesson in making democracy work. Developments in the first quarter of 1947 bore out this hope. Unlike the early months of 1946, when at one time lpi million workers were out on strike, few strikes of more than local impor tance occurred. Labor-management relations were marked by increasing moderation and restraint, and major issues were resolved without work stoppages. An entirely different business climate prevailed early in 1947. Business had became reaccustomed to operation without Govem- 9 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia ment controls and the public had been reacclimated to the exercise of choice in free markets. Negotiations with respect to price changes were not necessary. Problems of physical reconversion were passe. A smoother flow of production, growing efficiency, and an increased ability on the part of management to plan ahead allowed for greater leeway in wage negotiations. Aided by favor* able tax revisions, over-all earnings in trade and industry were relatively high. As it became generally apparent that earnings, with few exceptions, had been substantially higher in 1946 than the preceding year, management was inclined to grant wage concessions. Although a second round of wage increases began during the first quarter of 1947, wage rates were already high as measured by past standards. Consumption had not declined noticeably, and the dearth of purchasing power which some feared might cause a recession was not clearly in sight. Labor was therefore inclined to moderate its demands. In a statement to the press, however, the President emphasized the need for higher wages if rising prices continued to cut into purchasing power. On the other hand, many business men still held to the view that any wage increase would necessitate proportionate increases in prices. Rapidly rising prices rekindled the conflict. But the most important factor of all in the situation, which made for a smoother running economy at the outset of 1947, was the fact that the experience of the previous year was well remembered. People remained conscious of the danger involved in continuing the wage-price spiral, and no one wanted to repeat the production losses which occurred in the first half of 1946. In this atmosphere collective bargaining seemed to take an encourag ing turn in the process of settling industrial disputes. Production of goods and services was maintained at high levels. In the first full year of peace practically all of our human and material resources were being used, and cash registers rang up a new retail trade record. National income consisting of money payments to labor and capital employed in production amounted to $165 billion, which surpassed that of 1945. As a nation we produced and consumed more goods and services than in any previous year of peace; nevertheless, consumers had fobs for all 10 Thirty'second Annual Report, Federal Reserve Bank, of Philadelphia to go without many things they wanted because goods were in greater demand than our capacity to produce. The year began with 53 million in the civilian labor force and 6 million in the armed forces; it ended with the latter reduced to 2 million and the civilian labor force expanded to more than 58 million. Nevertheless, thousands of establishments still had their “help wanted” shingles hanging outside. In almost every line unfilled orders were piled up to die ceiling — demands for housing, household appliances, automobiles, and clothing appeared to be insatiable. Business eagerly employed returning veterans but in many lines of activity jobs went begging. At the end of 1946 more people were employed in manufacturing, mining, construc tion, trade, and transportation than at the beginning of the year, and unemployment was negligible. One of the outstanding changes in the labor market was a continuation in the liquidation of jobs in war industries and the expansion of jobs in peacetime industries. In the Philadelphia area, employment decreased in the manufacture of aircraft, ord nance, and shipbuilding, but new jobs opened up in all other lines resulting in a net gain in employment. Although unemployment was one of the least of our worries in 1946, Congress debated whether private enterprise or the Federal Government should assume responsibility for maintaining sufficiently high levels of employment to assure prosperity. The influence of the issue was reflected in the Employment Act of 1946 which recognized the interest of the Government in maintaining conditions favorable to a high level of employment. The real significance and implications of this Act will be frilly realized only with the passage of time and the state of the economy over the years. The persistence of shortages of many though a diminishing number of items throughout the year served to remind us that supply lines in peace, like those in war, are long. From the farmer or the miner to the retailer is a long road, as most of us learned in our efforts to restock pantry shelves and linen closets. Fortified with an abundance of buying power derived from both past savings and current earnings, consumers competed vigorously with each other for everything that appeared in the A year of shortages 11 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia market; and producers at every stage, from the retailer back to suppliers of raw materials, likewise had to fight for supplies, equip* ment, and labor. Throughout the year industrial production as measured by the Federal Reserve Board’s seasonally adjusted index expanded from 160 to 182 per cent of the 1935*39 average. This is more indica* tive of total productive activity than of output of finished goods, because many of the materials and hours of work that went into the productive machine did not emerge in the form of end products for consumption in 1946. Many customers were perplexed by the persistent scarcity of goods in the face of expanding production. The explanation lies not only in the fact that a substantial part of the output consisted of machines, materials, and supplies for producers, but also in the fact that inventories had to be replenished all along the line. It is estimated that inventories increased by $10 billion throughout the year. Probably as much as one*third of that was price increase, but shelves and stock piles were generously replenished. Somewhat in excess of $10 billion worth of new construction was put in place in 1946. This was more than double the activity of the preceding year. Despite the very substantial increase, the output of finished structures ready for use fell behind both plans and expectations, owing largely to insufficient materials and labor. In the case of residential construction, for example, the Veterans’ Emergency Housing Program early in the year called for initiating construction of 1,200,000 dwellings. Actually only one million were started and not quite half a million were completed. In this district, contract awards of all types amounted to $400 million but, as elsewhere, rising costs discouraged some new ventures and com* pletions were delayed for want of skilled craftsmen, or hardware, or millwork, or nails. After paying their 1946 taxes, individuals had $146 billion left for their own use. Of that amount they rea y got saved $19 billion and spent $127 billion. Spending and saving reverted to about the pre*war pattern — people spent more and saved less than during the war years. In addition to the obvious fact that they had more money, people spent more than What the consumer 12 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia the year before for two reasons. Goods were more plentiful, and they cost more. People had to spend more money for food than in 1945. Food stores did almost $25 billion worth of business — oneffifth above the previous year. Price increases, however, accounted for a sub' stantial part of the expansion in dollar volume; in December food prices averaged about 30 per cent above those at mid'year. Dollar' wise, the country’s farmers produced a record output but physical quantities were below the previous year and less than the 1944 peak. Gross farm income in the three states represented in the Third District was only fractionally above that of 1945. Dairy and poultry farmers, so prominent in this area, were handicapped by the tight feed situation. Unable to obtain all the durables they wanted, people spent heavily on nondurables such as apparel, food and drink, but throughout the year more and more durables became available. Automobile manufacturers overcame the handicaps of material shortages sufficiently to turn out two million cars. Though con' sumer needs were by no means satisfied, they bought increasing quantities of radios, refrigerators, washing machines, and related household requirements. The changing pattern of consumption is revealed by department store sales. Stores in this district sold more goods of practically every kind in 1946 than in 1945, but the greatest increases took place in such lines as household appliances, furniture, and floor coverings. Toward the end of the year consumer buying reflected increasing resistance to rising prices. Most restraints imposed on our economy during the war were removed in 1946. Differences of opinion over wages were settled democratically, and all resources were turned to the production of goods for civilian markets. Though tremendous energy was exerted, complete fulfillment of all requirements was not attained owing to large accumulation of consumer needs backed up by heavy spending power and by reason of supply difficulties. In the overall view, despite some shortcomings and failures, the unrestricted play of conflicting opinions and ideas was paying off. Free men working together in a free nation had again proved a powerful combination. 13 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia Banking Developments With the transition from war to peace, the evolution of sound banking policy and program has not been simple. Faced with an excessive accumulation of spending power in the hands of the public and aware of many distortions in the economy, commercial banks have had none too easy a task in developing policies that mitigate rather than contribute to the distortions. In most instances safety of deposits and maintenance of income have proved far less a problem than the correct evaluation of “service to the community” — one of the three objectives usually regarded as basic in commercial bank operations. During the war, bankers as well as industrialists adapted their operations to the requirements of the time. Helping to sell bonds for the Treasury, restricting credits where the public welfare would not be served and extending credit where war aims would be furthered — these were part of their operations. The prime mover in these activities was a sense of patriotic responsibility rather than compulsions. Banking tn wartime Banks came out of the war with assets and liabilities altered both in volume and nature far beyond any expectations that might have been held when we stood on its threshold. True enough, at the close of the 1930’s the volume of United States Government securities in bank portfolios was much larger than it had been in the 1920’s — a result of the deficit financing of the depression and post-depression years. But in the six years ended December 194? member bank holdings of Governments in this district were multiplied five and one-half times. This reflected the failure of taxes and absorption of securities by nonbank investors alone to supply the funds necessary to finance a war in which expenditures for one year alone were about three times as large as total costs of World War I. Loans to support the purchase or carrying of Treasury securities increased. Accommodation for business purposes in this district, following a rise through 1941, declined by June 194? to a point substantially lower than in pre-war 1939. Advance Government payments on contracts, progress payments, and accumulation of internal resources enabled many business concerns in war lines to 14 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia run at top speed without much help from the usual credit sources. Consumer credit also contracted materially. The changed pattern of bank earning assets is illustrated in the following percentage breakdown: United States Member Banks (End of year) Loans ........................................... U. S. Gov’t obligations ........... Other securities ................... Total ........................ .. Third Federal Reserve District 1939 1945 1946 1939 1945 1946 41% 42 17 21% 73 6 28% 65 7 41% 33 26 16% 75 9 24% 66 10 100% 100% 100% 100% 100% 100% In the discharge of its wartime responsibilities, the Federal Reserve Bank of Philadelphia in participation with other Reserve banks also purchased very large amounts of Government securities after 1941. The Reserve banks stood squarely behind the Govern ment’s financial program, enabling banks to meet a greatly expanded demand for currency and to obtain the reserves needed to carry growing deposit structures. Largely on the basis of increased holdings of Governments by the banking system, member bank deposits in this district increased from $3^ billion in 1939 to $6% billion in 1945 and the Federal Reserve notes of this Bank expanded from $349 million to $1,635 million. In the last half of 1945 there was an overlapping of war finance and the financing of peacetime activities. yhe jag^. great war |oan dr£ve was held in December of that year, but in this district loans to finance civilian industry were already pointing upward. Consumer credit, which had fallen sharply from the peak in 1941, was gaining momentum. Other loans also were reviving. Banking poltcytn peacettme The decisions facing bankers at this point were crucial. Were they to stay in the risldess market and depend upon their greatly expanded holdings of Government securities to assure safety of deposits and provide earnings? Or were they to revert to their earlier function and give credit service to their communities and 15 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia asstime the risks always to be found in this role? Opportunities for expanding loans were plentiful in most communities. While many businesses had abundant liquid assets, others needed funds for reconversion, building up inventories and to carry receivables. Consumers were ready to borrow to help finance their purchases. And a real estate boom was under way, calling for large amounts of mortgage money. The record for 1946 indicates that bankers generally chose to enter the loan field, most of them quite actively. Credit to carry Government securities declined with the absorption of these bonds, but the total loans of member banks in the Third District increased by $329 million or 35 per cent. A further increase of $90 million occurred in the first quarter of 1947, indicating no abatement in the demand for loans. By the close of 1946 the proportion of loans to total earning assets had risen to 24 per cent and by March 1947 to 26 per cent, as against 16 per cent in the middle of 1945. It was, of course, still far short of the 40 per cent at the close of 1939 and 69 per cent in 1929, when total earning assets were much lower. Failure to even, approximate ratios in the earlier years cannot be taken as evidence that bankers were not adequately serving their communities. The whole background of banking had shifted in two important respects — the war heritage of huge quantities of Government securities in bank portfolios and a tremendous accu' mulation of liquid assets in the hands of many business concerns and individuals. United States Third Federal Reserve District Member Bank Loans (Millions $) Dec. 1939 June 1945 Dec. 1946 Dec. 1939 June 1945 Dec. 1946 Business* ... Security........ Real estate .. Consumer ... j All other .... Total........ 6,570 1,491 2,957 2,944 j 13,962 8,221 6,496 3,248 1,688 934 14,038 2,973 5,358 3,308 1,020 363 87 245 } 250 20,588 26,696 94S * Including agricultural loans. 16 { 299 139 229 172 51 561 67 344 250 40 890 1,262 Thirty'second Annual Report, Federal Reserve Bank, of Philadelphia Analysis of the loan figures in the foregoing table shows that in the period of approximately one and a half years to the end of 1946 all major types other than those made to carry securities increased considerably. In the post-war period there also was an accumulation of securi ties other than issues of the Federal Government. Holdings in this district rose from $437 million in June 1945 to $564 million at the close of 1946, and maintained this level in the first quarter of 1947. Management of their portfolios of United States Government obligations was an important aspect of policy for banks. But in this instance fiscal policy also played a considerable part. Many short-term securities were retired from bank holdings by the Treas ury’s redemption program. The decline in Treasury issues was much more marked at the city banks than at the country banks in this district, as the latter group experienced gains in private deposits sufficient to offset the heavy withdrawals from war loan accounts. But whether the decline in short-term Governments was due to redemptions or sales to meet deposit losses, the effect in either case was to lengthen the average maturity of securities remaining in the portfolios. This tendency was furthered slightly by moderate purchases of medium-term issues, but was offset in part by the shortening of maturities with the passage of time. Reports from two-thirds of the commercial banks in this district show the following changes during 1946: Investment in Governments (Millions $) Philadelphia banks Banks outside Philadelphia Dec. 1945 Dec. 1946 Change Dec. 1945 Dec. 1946 Change Bills, notes, certificates ............. Bonds callable— 1946-1950 ............... 1951-1955 ............... 1956-1960 ............... After 1960 ............. Nonmarketable issues 783 296 —487 893 605 —288 434 696 121 61 6 333 560 144 63 6 —101 —136 + 23 + 2 484 856 168 242 97 497 868 220 238 95 + + + — — Total .................... 2,101 1,402 —699 2,740 2,523 Number of reporting banks ...................... 37 35 559 556 17 13 12 52 4 2 —217 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia The decline in deposits resulting from the retirement of securities was in inactive war loan balances, part of which were trans ferred by the redemption process to the potentially more active private deposits. These deposits also were expanded by bank loans and bank purchases of securities other than obligations of the Federal Government. It is the active means of payment that are most important. The record of 1946 and early 1947 shows com modity prices up sharply after the removal of controls, inventories up considerably, distortions in the economy, and other factors that warrant careful examination of the reasons back of the credit growth and that which may lie ahead. Developments during the war years resulted in larger profits for banks. Yields on securities and on loans declined materially between 1939 and 1945, but this trend was more than countered by the expansion in Government security holdings, which for member banks in this district became the largest single source of earnings. Earnings and profits A substantial rise in total earnings was more than sufficient to meet growing expenses and income taxes. Noncurrent receipts from recoveries and profits on sales of securities also ran consider ably ahead of amounts charged off in 1945 and stayed ahead in 1946. The result was a racord level of profits in 1945 — nearly $55 million as against $21 million in 1939. In 1946 current earn ings and expenses expanded further and two-thirds of the banks reported larger net profits than in 1945, but the aggregate of such profits declined to approximately $521/2 million. Banks have paid out only about a third of their profits in the last two years. The resulting additions to the capital structure will be helpful in facing the risks to be assumed in credit granting over the years to come. The exercise of freedom of choice in personal and business activities within rather broad limits — one of the keystones of a democracy — implidfe a willingness to recog nize and assume correlative responsibilities. This is particularly so in the case of bankers, whose actions may affect the volume of money and the stability of monetary values. All of the broad powers lodged in the hands of fiscal, credit and supervisory agen Sharing the responsibility ts Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia cies, and such additional powers as they may be given cannot displace the need for sound judgment on the part of individual bankers. At a time such as this, when the volume of spending power already in existence is so large, everyone who extends credit has exceptional responsibilities. It is actions of individuals — in banking, in industry, and in trade — that will determine the extent to which we achieve the full benefits of democracy. Errors will be made, but by the inter play of many minds the processes of business and finance can give rise to a maximum of spiritual and material well-being. The Federal Reserve The central banking organisation, composed of the Board of Governors of the Federal Reserve System and the Federal Reserve Banks, has been directed to exercise its broad powers of credit control in the public interest. Its general objective is to contribute as much as possible to the smooth and sustained functioning of the economy at a high level of activity. Constant change in the economic picture requires that policies be flexible — tailored to fit changing situations. During the war the primary objective could be none other than to facilitate the financing program of the Government. At the outset the Board of Governors announced that “The System is prepared to use its powers to assure that an ample supply of funds is available at all times for financing the war effort and to exert its influence toward maintaining conditions in the United States Government security market that are satisfactory from the standpoint of the Government’s requirements . . .” This policy, bom of necessity, was faithfully carried out. In the process, outstanding Federal Reserve credit increased tenfold from $2.3 billion in early December 1941 to approximately $25 billion at the close of 1945. This expansion was a reflex of the demand for huge quantities of currency and the increasing need for larger bank reserves as deposit structures grew. 19 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia The inflationary aspects of deposit and currency expansion were obvious. Spending power, accumulated and currently being made available through income payments, was out of line with the supply of goods and might be expected to continue so for a long time to come. Potentialities in part became actualities as controls were eliminated and the unbalance of supply and demand was free to exert its pervasive influence on the price structure. These changed conditions were recognised in certain actions taken by this Bank and other Reserve Banks during 1946. The preferential discount rate on advances to member banks secured by short-term Governments, established in 1942, was eliminated in the spring of 1946. And buying rates on bankers’ bills up to four months in term were advanced somewhat. A certain amount of pressure was exerted on bank reserves by the Treasury’s debt redemption policy, at least to the extent that it involved payment to the Reserve Banks of funds drawn from commercial banks or that it increased required reserves by shifting funds from reserve-free war loan accounts to private deposits as nonbank security holdings were retired. The expansion in private deposits, however, was adding to private purchasing power and bank extension of private credit was having a like effect. For all member banks in this district the figures show gross deposits down one-half billion dollars in 1946, but that part of deposits representing the balances of individuals and business concerns increased by about the same amount. Federal Most of the credit extended by this Bank is reflected credit'6 *n participation in Government securities held in cre ** the System Open Market Account. In this way the Bank shares in any steps taken on a national basis to adjust the volume of bank reserves and their availability to the money market. An area remains, however, in which the Bank deals directly with the district’s need for Federal Reserve credit. Dollarwise the volume of direct borrowing from the Bank con tinues to be relatively minor. Nevertheless, of the approximately 650 members in the district, as many as forty were borrowing here at one time in December and for the year as a whole the number of members receiving such accommodation came to 113. 20 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia A somewhat smaller number of banks — 87 — availed them' selves of this Bank’s facilities for adjusting reserve positions through the purchase or sale of Treasury bills. The dollar volume of bill operations, however, exceeded that of discounts. Bills held by this Bank under repurchase option ranged from $101 million to $254 million, and weekly purchases and sales were as high as $100 mil' lion. Diminishing holdings by the commercial banks are narrowing the opportunity for adjusting reserves through this medium. Outside of the field of credit the Reserve Banks have responsibility of contributing to the smooth flow of business payments through check collection, currency supply, and other functions, and of facilitating Treasury operations in their roles as fiscal agents. Such operations, which the public has come to take as a matter of course, require the great bulk of the time of the stafF. General operations The aggregate of issues, redemptions, and exchanges of Treas' ury securities naturally dropped considerably in 1946, following years of intensive activity revolving around great war loan drives and heavy emphasis on inter'drive sales of securities. This per' mitted a substantial reduction in the full'time staff of the Fiscal Agency Department, elimination of part'time workers, and finally, early in 1947, the return of the Savings Bond Division of the Department from temporary facilities to the Bank’s regular quarters. The volume of Government checks handled also contracted sharply with the reduction in war expenditures, but in other direc' tions operations of the Bank increased substantially. In number of pieces or transactions handled the increases over 1945 were as follows: currency received and counted, 17 per cent; coins received and counted, 14 per cent; ordinary checks handled, 24 per cent. Somewhat smaller increases also were shown in noncash collections and in transfers of funds. Securities held in custody for member banks rose from $2.2 billion to about $2.5 billion. In addition to the operations of more or less routine character, the Bank administers regulations of the Board of Governors, examines state bank members, and maintains a Department of Research for its own needs and as a service to the banking and 21 Thirty'second Annual Report, Federal Reserve Banl{ of Philadelphia business public. Activities along research lines stepped up with the coming of peace and reassertion of the normal forces bearing upon banking and business. Statistical and analytical material is made generally available through regular reports such as the Business Review, special releases, and contributions to the data required for meetings and investigations in banking and the business field. The administration of consumer credit controls under Regulation W continues to require the maintenance of an adequate staff to keep contact with the many concerns granting such credit. Approximately 12,000 are registered in this district. Our experience indicates that compliance with the terms of the regulation in general has been very good. The terms of John B. Henning as a Class A director of gank and James T. Buddey as a Class B director terminated at the end of 1946. In the regular election Mr. Henning was re-elected by the banks of Group 3. Mr. Buckley was unable to accept renomination. To succeed him the banks of Group 1 selected William J. Meinel, President and General Manager of Heintz Manufacturing Company of Philadelphia. Warren F. Whittier, whose term as a Class C director also expired on Decem ber 31, was reappointed for three years by the Board of Governors. The Board of Governors appointed Thomas B. McCabe as Chair man of the Board and Federal Reserve Agent and Mr. Whittier as Deputy Chairman in 1946 and redesignated them for service in these capacities during 1947. Directors and officers David E. Williams, President of the Com Exchange National Bank and Trust Company of Philadelphia, represented this district on the Federal Advisory Council during 1946 and was reappointed by the Board of Directors of this Bank to serve during 1947. Effective January 1, 1947, Robert N. Hilkert, formerly Assis tant Vice President in charge of personnel, was appointed a Vice President. At the same time Richard G. Wilgus, Manager of the Division of Reports and Analysis of the Bank Examination Depart ment, was appointed an Assistant Cashier. Early in 1946 Robert R. Williams and James V. Vergari, Assistant Vice Presidents, were also appointed Assistant Secretaries of the Bank. 22 Thirty'second Annual Report, Federal Reserve Banl{ of Philadelphia Directors as of January 1, 1947 Group Term, Expires December 31 Howard A. Loeb............................................................ Chairman, Tradesmens National Bank and Trust Company, Philadelphia, Pennsylvania. 1 1947 George W. Reily............................................................ President, Harrisburg National Bank, Harrisburg, Pennsylvania. 2 1948 John B. Henning.......................................................... President, Wyoming National Bank, Tunkhannock, Pennsylvania. 3 1949 William J. Meinel.......................................................... President and General Manager, Heintz Manu facturing Company, Philadelphia, Pennsylvania. 1 1949 Charles A. Higgins........................................................ Chairman and President, Hercules Powder Company, Wilmington, Delaware. 2 1047 Albert G. Frost.............................................................. President, The Esterbrook Pen Company, Camden, New Jersey. 3 1948 Class A: Class B: Class C: Thomas B. McCabe, Chairman and Federal Reserve Agent ........................................................................... President, Scott Paper Company, Chester, Pennsylvania. 1948 Warren F. Whittier, Deputy Chairman..................... Agricultural Consultant, Chester Springs, Pennsylvania. 1949 C. Canby Balderston ..................................................... Dean, Wharton School of Finance and Commerce, University of Pennsylvania, Philadelphia, Pennsylvania. 1947 23 Thirty'second Annual Report, Federal Reserve Banl{ of Philadelphia Officers as of January 1, 1947 Alfred H. Williams, President W. J. Davis, L. E. Donaldson, First Vice President Assistant Vice President C. A. McIlhenny, Robert R. Williams, Vice President Assistant Vice President and Assistant Secretary Ernest C. Hill, Vice President James V. Vergari, Assistant Vice President and Assistant Secretary C. A. Sienkiewicz, Vice President Karl R. Bopp, William G. McCreedy, Director of Research Vice President and Secretary Wallace M. Catanach, Robert N. Hilkert, Assistant Cashier Vice President Richard G. Wilgus, Philip M. Poorman, Assistant Cashier Cashier Norman G. Dash, General Auditor 24 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia APPENDIX Statistical Tables Page Statement of condition............................. 26 Profit and loss account............................. 27 Volume of operations............................... 28 Changes in member bank reserves and related items.......................................... 29 Combined statement of member banks. 29 Applications for industrial loans............. 30 Member bank reserves............................. 30 25 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia Statement of Condition December 31 Federal Reserve Bank of Philadelphia (000’s omitted in dollar figures) 1944 1945 1946 RESOURCES Gold certificates ........................................... $ 945,229 42,799 Redemption fund—Fed. Res. notes........... Total gold certificate reserves......... $ 988,028 17,815 Other cash ..................................................... 505 Discounts and advances.............................. 2,570 Industrial loans ........................................... 1,252,245 United States Government securities....... $ 878,051 61,134 $ 939,185 15,576 4,386 1,763 1,610,468 $ 858,145 61,009 $ 919,154 19,235 15,547 523 1,645,130 Total loans and securities___ .____ $1,255,320 $1,616,617 $1,661,200 Due from foreign banks.............................. Fed. Res. notes of other F. R. Banks....... Uncollected items......................................... Bank premises............................................... All other resources....................................... 12 4,042 153,977 3,457 3,278 10 7,298 139,850 3,313 4,353 8 8,181 157,813 3,170 2,912 Total resources ........................ . . . . . $2,425,930 $2,726,202 $2,771,673 LIABILITIES Federal Reserve notes.................................. $1,427,510 $1,635,242 $1,699,277 710,778 28,722 106,353 4.578 799,634 59,678 72,195 4.308 818,125 34,511 39,555 2,424 Total deposits .................................... $ 850,431 $ 935,815 $ 894,615 105,809 613 106,130 500 122,081 528 Total liabilities .................................. $2,384,363 $2,677,687 $2,716,501 Deposits: Member bank reserve account............... U. S. Treasurer—general account......... Foreign ....... ....................................... Other deposits . . .. ................................... Deferred availability items.......................... Other liabilities............................................. CAPITAL ACCOUNTS Capital paid in............................................. . $ Surplus—Section 7....................................... Surplus—Section 13b .. . ............................... Reserves for contingencies.......................... $ 13,926 34,720 4,489 2,037 12,227 19,872 4,468 5,000 $ 13,064 28,946 4,501 2,004 Total liabilities and capital accounts. $2,425,930 $2,726,202 $2,771,673 Ratio of gold certificate reserves to de posit and Federal Reserve note liabili ties combined ........................................... 43.4% 36.5% 35.4% Commitments to make industrial advances $3,048 $703 $1,281 26 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia Profit and loss account Federal Reserve Bank of Philadelphia (000’s omitted) 1944 1945 1946 United States Government securities... $7,275 $ 9,929 $10,600 Other sources ........................................... 165 134 192 Total earnings................................... $7,440 $10,063 $10,792 Operating expenses*................................ $2,827 $ 3,007 $ 3,704 Cost of Federal Reserve currency......... 524 349 373 Assessment for expenses of Board of Governors .............................................. 211 204 187 Total net expenses .......................... $3,563 $ 3,560 $ 4,264 Current net earnings..................................... $3,877 $6,503 $ 6,528 Earnings from: Expenses: Additions to current net earnings: Profit on sales of U. S. Government securities ................................................ $ 263 Transfers of reserves in excess of re quirements ............................................. 86 150 55 Other additions ....................................... 41 52 34 $ 390 $ $ 256 458 Deductions from current net earnings.... 4 Net additions to current earnings............. $ 386 $ Net earnings available for distribution... $4,263 $ 6,956 $ $ 227 178 5 453 138 $ 48 $ 6,577 Distribution of net earnings: Paid to Treasury of U. S., Sec. 13b.... Dividends paid to member banks........... Transferred to surplus (Sec. 13b)......... Transferred to surplus (Sec. 7)............. $ 84 719 47 3,413f $ 84 0 766 814 32 6,074ft —11** 5,774 * After deducting reimbursements received for certain fiscal agency and other expenses. ** Transferred from surplus (Sec. 13b). f $1,400,000 subsequently transferred from Surplus to Reserves for Contin gencies. tt $3,000,000 also transferred to Surplus from Reserves for Contingencies. 27 Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia Volume of operations Federal Reserve Bank of Philadelphia 1944 1945 1946 1 209,594 437,431 112,036 1 208,611 474,170 115,501 1 243,613 540,658 143,234 16,320 17,321 20,820 52,426 5,275- 70,155 5,041 34,410 832 1,299 185 63 1,373 180 65 1,400 193 69 25,479* 36 26,756* 22 17,241* 16 Pieces or transactions handled (000’s omitted) Discounts and advances.............................. Currency counted......................................... Coins counted ............................................... Ordinary checks ........................................... Checks handled in packages by automobile run service ................................................. U. S. Government checks (including Treas ury card checks first handled in 1943).. Ration checks ............... ............................... Collection items: Coupons of U. S. Government and agencies ................................................... All other (notes, drafts and coupons).. Transfers of funds™.............. ........................ Issues, redemptions, and exchanges by Fiscal Agency Department: U. S. Government direct obligations... All other ..................................................... Dollar amounts (000,000’s omitted) Discounts and advances.............................. Currency counted......................................... Coins counted ............................................... Ordinary checks ........................................... U. S. Government checks (including Treas ury card checks first handled in 1943).. Collection items: Coupons of U. S. Government and agencies ................................................... All other (notes, drafts, and coupons).. Transfers of funds....................................... Issues, redemptions, and exchanges by Fiscal Agency Department: U. S. Government direct obligations.... All other ..................................................... $ 509 1,077 41 45,548 $ 1,184 1,178 44 47,441 $ 1,065 1,428 48 56,278 8,188 8,401 5,074 103 243 8,424 131 260 9,032 152 257 10,323 9,788* 110 8,686* 110 6,902* 48 Securities held in custody for member banks at end of year.............................. $1,921 mil. Savings bonds in safekeeping at end of 229,000 year (number of pieces).......................... $2,207 mil. $2,485 mil. 303,000 345,000 * Includes savings bonds sold through other issuing agents, and redemptions through qualified commercial banks. 28 Thirty-second Annual Report, Federal Reserve BanJ{ of Philadelphia Changes in member bank reserves and related items Third Federal Reserve District (Millions of dollars) 1944 1945 1946 Reserve Bank credit extended in district... Interdistrict commercial transfers................. Mint gold purchases, net.................................. Treasury operations ........................................ — 31 4-1,053 — 0 — 676 + 39 +944 — 1 —660 — 74 +722 + 1 —587 Total ............................................................ + 346 +323 + 62 Currency demand ................................... . Member bank reserve deposits...................... “Other deposits” at Reserve Bank.......... Other Federal Reserve accounts................... 4- 281 + 65 — 1 + 0 + + — + Total ............................................................ + 346 +233 + 89 — 0 + 1 +323 Sources of funds: Uses of funds: All member banks Third Federal Reserve District Dec. 31, 1946 (Millions of dollars) Change from + 62 Percent distribution Dec. 31, June 30, Dec. 31, June 30, 1946 1945 1939 1939 Assets Loans and discounts....;......... U. S. Government obligations.. Other securities ........................ Cash assets................................. Fixed assets ................................ Other assets ................................ $1,263 3,505 564 1,471 65 29 +$329 +$ 343 — 852 + 2,756 + 57 — 63 + 15 + 471 — 5 — 113 + 2 + 4 Total ................................. $6,897 Liabilities and capital accounts Deposits: Individuals, partnerships, and corporations— Demand ............. .................. Time ..................................... U. S. Government................... Bank ......................................... Other ....................................... 18.3% 50.8 8.2 21.3 .9 .4 26.3% 21.4 17.9 28.6 5.1 .7 —$454 +$3,398 100.0% 100.0% $3,670 1,740 161 394 301 +$291 + 198 — 974 — 44 + 32 +$2,416 + 676 + 75 + 11 + 102 53.2% 25.2 2.3 5.7 4.4 35.8% 30.4 2.5 10.9 5.7 —$496 +$3,281 90.9% 85.3% Total deposits ................. $6,267 Other liabilities.......................... Capital accounts ........................ 42 588 Total ................................. $6,897 43 18 2 3 29 + + 10 32 —$454 + + 21 96 .6 8.5 +$3,398 100.0% .6 14.1 100.0% Thirty'second Annual Report, Federal Reserve Ban\ of Philadelphia Applications for industrial loans Federal Reserve Bank of Philadelphia 1946 June 30,1934December 31,1946 Approved ................................................... Rejected ..................................................... Withdrawn ........ ........................................ Under consideration ................................ 6 0 1 0 371 457 71 0 Total number .................................... 7 899 Approved ................................................... Rejected ..................................................... Withdrawn ........ ........................................ Under consideration ................................ $2,530,000 0 20,000 0 $64,326,426 Total amount..................................... $2,550,000 $85,485,476 Number Amount Member bank reserves Third Federal Reserve District (Dollar figures in millions) Actually Required held 17,126,350 4,032,700 0 Excess Ratio of excess to required Philadelphia banks: 1943: 1944: 1945: 1946: 1947: Jan jan. Jan. Jan. Jan. 1-15.................................. 1-15.................................. 1-15.................................. 1-15.................................. 1-15.................................. $418 370 388 423 425 $358 357 374 411 415 $ 60 13 15 12 10 256 272 316 379 388 184 215 247 297 339 72 57 69 82 49 39 26 28 28 15 674 642 704 802 814 542 572 621 708 754 132 70 84 94 60 , 24 12 14 13 8 17% 4 4 3 3 Country banks: 1943: 1944: 1945: 1946: 1947: Jan. jan. Jan. Jan. Jan. 1-15................. . .............. 1-15.................................. 1-15.................................. 1-15.................................. 1-15.................................. All members: 1943: 1944: 1945: 1946: 1947: Jan. Jan. Jan. Jan. Jan. 1-15.................................. 1-15.................................. 1-15.................................. 1-15.................................. 1-15.................................. 30