View PDF

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

THE BUSINESS REVIEW
Jpzpl
r m,

FEDERAL RESERVE BANK
OF PHILADELPHIA
JULY, 1948

THE BUSINESS PULSE AT MID-YEAR
BUSINESS has been suffering from a chills-and-fever inflation.
this more apparent than during the first half of the year.

At no time was

In January, business was active. Prices hit a new peak; the fever was raging.
Chill set in suddenly in February; the sharp break in prices of farm commodities
raised serious doubts about the immediate future. But optimism, particularly in
the stock market, began to return in March. And in April the tax cut and more con­
crete plans for European aid and rearmament dispelled the last vestiges of February
chill.
May introduced a new look in the post-war scene—a semblance of economic
equilibrium. The National City Bank Letter for that month observed that “. . . de­
flationary and inflationary forces are temporarily in fair balance.” Mr. Emil Schram
expressed the view before the Joint Committee on the Economic Report that
“we have emerged from the period of shortages and unless the Congress permits the
budget to become unbalanced again, I firmly believe we have already entered the post­
war period of stabilization.”
The following mid-year review and preview attempts to find out how close we
have really come to achieving over-all economic balance and what are the chances
for maintaining it during the rest of this year.
In an uncontrolled economy, supply and demand are always brought into
approximate equality — at some price. During a period of inflation, equality is
achieved largely by rising prices. To achieve a desirable balance, however, we must
have equality between supply and demand at stable prices. This can come about by
making supply “catch up” with demand, or by restricting demand to meet the avail­
able supply of physical goods and services, or by doing both.
Economic balance has not been achieved and is not likely to be achieved during
the rest of the year. We are liable to have more fever before the year is over—and
the more we have the more vulnerable our economy becomes.




EC ENT BUSINESS TRENDS
UNITED

INDEX

STATES

I N D EX
SEASONALLY ADJUSTED

SEASONALLY
ADJUSTED

1948
WE ARE TURNING

DEPARTMENT STORE
SALES ARE HIGHER

1943

MORE NON­
DURABLES THAN
OUT

THAN EVER.

LAST YEAR.

1947

,

OUTPUT OF DURABLES
DECLINED WHEN THE
COAL STRIKE DEPLETED
FUEL SUPPLIES,

WHOLESALE PRICES
ARE RETURNING TO
THE JANUARY POST­
WAR PEAK.

94 7-

1935-39 =100

MILLIONS

1500
NEW CONSTRUCTION
EXPENDITURES ARE
PUSHING TOWARD A
NEW PEAK.

1300
1200
CONSUMER PRICES
HAVE ATTAINED THE
HIGHEST LEVELS ON
RECORD.

1947

800 U^jZrL

150

—U_1IIIII
J

Page 72



FMAMJJA

I

I

SOND

RECENT FINANCIAL TRENDS
UNITED

STATES

BILLIONS

BILLIONS

S

BONOS OWNED BY:

S
A TREASURY
SURPLUS...

CASH

84

1

-S’--*.,

82

30
BILLS C/,AND NOTES OWNED BY5

V-

28

..OTHERS

ALSO INFLATIONARY
WERE THE SALE OF
BONDS BY BANKS AND
OTHERS/ AND THE
PURCHASE OF THESE
BONDS BY THE SYSTEM
IN SUPPORTING THE
MARKET.

26

...MADE POSSIBLE THE
RETIREMENT OF S3.8
BILLION IN SYSTEM
HOLDINGS OF SHORT­
TERM GOVERNMENTS.

FEDERAL RESERVE

-FEDERAL RESERVE
BANKS

AN ADDITIONAL S.9
BILLION WERE SOLD
TO BANKS AND OTHER
INVESTORS.

RESULT'-

RESERVES

RESERVES...

CWEEKLY REPORTING BANKS)
WEEKLY REPORTING

... AND DEPOSITS
DECLINED...

THIS REDUCTION IN
SHORT-TERMS WAS
DEFLATIONARY. BUT..

...A RETURN FLOW OF
CURRENCY, AND...

(WEEKLY REPORTING BANKS')

MONEY IN CIRCULATION

COMMERCIAL LOANS

(INCLUDING CONSUMER)

AN INFLOW OF GOLD
WERE INFLATIONARY.

...BUT COMMERCIAL
LOANS WERE THE
‘ONLY TYPE OF LOANS
REDUCED.

REAL ESTATE LOANS

SOLD STOCK
JAN.

FEB.

MAR.

APR.

1948




MAY

JUNE

JAN.

■ I .... I APR. I MAY■
.■
MAR.

FEB

1948

Page 73

Review of the First Half—1948
Demand Falling Off?
Demand, as reflected in current expenditures
for goods and services, is still rising. People are

credit, of course, will also add to consumer spend­
ing power.

Business expenditures for plant and equipment
and new construction generally were substantially
above last year’s level. Despite talk of growing
difficulties in financing capital expenditures, the
alleged lack of funds apparently had little deter­
ring effect on over-all expansion. Business still
financed a great proportion of its needs out of
depreciation reserves and withheld earnings.
Borrowing from banks was less than it had been,
but an improved situation in the capital market
Repeating last year’s performance, department favored the issuance of a large volume of new
store trade had a chill during the early part of securities. Some manufacturing concerns have
this year. For the first few months, sales were completed or are nearing completion of their
disappointing, but in the second quarter they rose plant expansion programs; but other firms, espe­
sharply to establish new peaks. The greatest cially commercial enterprises, the communica­
gains in retail trade occurred in such lines as tions industries, and the gas and electric utilities,
housefumishings, building materials, and hard­ are moving ahead with new building.
ware.
Federal, state, and local governments are
Higher prices, of course, account for a sub­ spending more money than they did last year.
stantial part of the rising dollar volume of The impact of the rearmament and foreign aid
business. At department stores, consumer reac­ programs has brought about increased expendi­
tion to ever rising prices is reflected by the shift tures by the Federal Government despite efforts
from cash to credit buying as well as the pro­ to economize. In addition, state and local govern­
portionately greater gain in sales in economy ments are spending large amounts of money on
basements in contrast to main store business. highways, schools, hospitals, and other projects
Although many families are being “squeezed” postponed during the war.
between the higher prices and their limited in­
Foreign demand is the only area in which ex­
come, consumers generally are spending more
penditures are diminishing. Merchandise exports
liberally than ever before.
during the first quarter of this year were $1.5
billion greater than imports, which is in contrast
Consumers’ expenditures are governed by per­ with an export surplus of $2 billion in the first
sonal income, the amount taken away in taxes, quarter of last year.
and the amount people decide to save. At least
two of these factors encouraged greater spending
The combined expenditures of individuals, busi­
during the first half of the year. Although a ness, and government pushed through to a new
lower agricultural income in the first quarter high during the first half of this year. During the
caused some hesitation in the upward trend, total first quarter, gross national expenditure, which is
personal income for the period was substantially the same as gross national product, reached an
higher than in the preceding months. In May,
rate of $244 billion—about 10
the effect of tax reductions began to be felt. Re­ annual than expenditures during the firstper cent
higher
quarter
duced taxes will provide additional consumer of last year. Preliminary estimates indicate that
purchasing power at a rate of about $5 billion a expenditures during the second quarter of this
year. The rate of personal saving may have in­ year were running just as high, and probably
creased slightly during the first quarter, but at higher, than the rate prevailing during the first
most this higher rate, if sustained, would increase three months.
total saving and reduce consumer spending by
about $2 billion a year. Even at the higher rate,
Although “soft” spots have developed here and
saying remains below the pre-war “normal” re­ there,, it is quite apparent that total demand has
lationship to income. Increased use of consumer been increasing—not diminishing.
spending as never before for consumer goods,
businessmen are spending heavily for new con­
struction and governments are making huge ex­
penditures for defense, internal improvement, and
public works. Foreign buying is the only major
source of spending in domestic markets that is
not being maintained at last year’s levels.

Page 74



How Much Money to Spend?

Behind demand lies the money supply. And
basically it is the excessive supply of money in
relation to goods and services which is at the root
of our inflation.
Efforts to stem the public’s demand by restrain­
ing the growth in the volume of spending power
had proved only moderately successful during
1947. The money supply had risen by $6 billion
and was being used more rapidly. At the begin­
ning of 1948, individuals and businesses had $170
billion worth of deposits and currency which they
could spend.
Recognizing the fact that the expanding money
supply since the war has been closely related to
the growth in bank loans, the American Bankers
Association inaugurated an intensive campaign
to urge bankers to exercise extreme caution in
granting credit. Individual bankers thus were
made aware of the fact that unless the expansion
of loans brought forth a corresponding increase
in the production of goods and services, the re­
sult would probably be higher prices.
But a program of voluntary restraint could not
do the whole job. The individual banker is seldom

in a position to appraise the effect of his loans
on the entire economy. Moreover, competition
usually forces him to take care of his customers
or else lose business to the bank across the street.

The major responsibility for restraining the ex­
pansion of credit and the money supply, there­
fore, rested with the Reserve authorities and the
Treasury. Their basic approach was to put pres­
sure on bank reserves, for the banking system
cannot expand deposits unless it has the requisite
volume of reserves behind them.
They used four main weapons:
The strongest was the unprecedentedly large
cash surplus of the Treasury. When the Treasury

received tax payments and the funds were de­
posited in the Federal Reserve Banks it reduced
member bank reserves. And when it used the
funds to retire Governments held by the Federal
Reserve Banks it extinguished those reserve
funds permanently. The Treasury surplus was
greatest in the first quarter, and that was the
period of most rapid retirement of Federal Re­
serve-held securities. In the second quarter, tax
receipts, as usual, were much smaller than first
quarter receipts and the lower taxes were already
beginning to reduce Treasury revenues. Sales of
savings bonds during the Security Loan drive




were not nearly enough to make up for the de­
clining operating surplus. And even though begin­
ning in March the Treasury could accumulate
withheld taxes in War Loan accounts and thus
achieve better timing of its withdrawals, a large
part of the deflationary impact of the Treasury
surplus has been exhausted.
Second, the Federal Reserve sold short-term
Governments to banks and other investors. These

issues had become more attractive as an invest­
ment since their rates had risen beginning in mid1947. The fact that commercial loans were de­
clining may also have caused some banks to look
to short-term Governments as a temporary in­
vestment. At any rate, the sale of these issues by
the Reserve Banks exerted an anti-inflationary
influence because they tended to reduce bank re­
serves. Around mid-May, however, the Treasury
surprised the market by announcing that June
and July financing would be carried out at the
existing rate of 1% per cent, not 1*4 per cent as
the market expected. Short-terms no longer
seemed so attractive and prices of bonds were
immediately bid up.
Third, the rise in short-term rates which had
taken place in the second half of 1947 was fol­
lowed, in January of this year, by an increase in
the discount rate from 1 per cent to 2 % per cent.

This had the psychological effect of serving notice
that the System was concerned about the exces­
sive credit expansion, and it probably injected
some caution and uncertainty into the market.
Yet, few banks were borrowing, so that the effect
of a higher discount rate could, at best, be only
indirect.
Fourth, reserve requirements were increased for
member banks in central reserve cities. Effective

February 27, requirements against demand de­
posits were increased from 20 to 22 per cent, and
on June 11 were further raised to 24 per cent. On
each occasion the higher requirements involved
approximately $500 million of reserves.

These four steps, taken alone, put considerable
pressure on bank reserves and tended to curtail
further credit expansion. Unfortunately, how­
ever, three other developments tended to counter­
act these efforts to restrict credit expansion:
First, the System increased its holdings of Gov­
ernment bonds by $3.3 billion in the process of
supporting the market. Banks were selling partly

because of the need to get reserves and to make
loans. Nonbank institutional investors were sell­
ing bonds—and had been ever since the fall of
1947—to make loans to individuals and busi­
nesses and to buy private securities. Some bond
Page 75

now somewhat below recent peaks, it is still being
maintained well above the volume of the first six
months of last year. But there are important
differences to be noted in the various lines of
nondurables. Some cotton goods, like grey cloth,
Second, $1.1 billion of currency returned to the print cloth, and sheetings, are more plentiful and
banks, increasing reserves and enabling the banks their prices have declined recently; but worsted
to expand credit further.
cloth for men’s suitings is still scarce and the
prices are firm. Paperboard products are easier
Third, $800 million of gold coming into the to obtain; however, newsprint paper is still scarce.
country expanded member bank reserves and Wheat and flour are more plentiful but there is
deposits.
no abundance of meat and dairy products. Pro­
duction of footwear is declining, but not in all
What was the net result of all these develop­ cases for lack of demand; some shoe factories
are unable to run full time for lack of sufficient
ments?
leather. Automobile tire stocks are piling up.
Member bank reserves declined $491 million. largely because the automobile industry has
Tax collections reduced the deposits owned by never got into high gear since the end of the war.
individuals and business. Loan expansion was not
The biggest job of production still lies in the
nearly so rapid as in the comparable period a year
earlier. And there was considerable talk of tighter area of durables. Pushing ahead as rapidly as
terms, particularly in the mortgage market.
their raw material and labor resources permitted,
manufacturers of durable goods turned out a
These were the favorable results. But on the huge volume of products during the first quarter,
other side of the picture—
but production declined sharply when the coal
strike diminished their fuel supply. For lack of
Reserves were always readily available to banks coal the output of steel was curtailed, and for lack
willing to sell their Governments. The rise in of steel the output of automobiles declined. Work
privately held deposits probably was halted only stoppages also hindered output in some lines.
temporarily. Moreover, the turnover, or the rapid­ Most of the producers of durable goods are
ity with which money was used, continued to heavily dependent upon the steel industry, which
rise. Although loans rose less rapidly, they did at no time since the end of the war has been able
expand further, and a large part of the decline in to meet the demand for this basic industrial mate­
commercial loans was either seasonal or attribut­ rial. At mid-year, one of the leading automobile
able to special factors such as unusually heavy manufacturers was operating at only 60 per cent
security flotations. Real-estate and consumer of capacity because of lack of steel. Of course,
loans continued upward. Finally, a part of the even if the industry had all the steel it could use,
anti-inflationary weapons available to the mone­ it might still fail to attain capacity operation for
tary authorities had been expended or were being want of sufficient lead or copper or other raw
almost fully utilized.
materials.
selling was speculative in nature, being stimulated
by tbe drop in support price on December 24. The
System bought aggressively to maintain the new
support level.

Inventories at manufacturing plants are in
better balance than last year, making for a
Industrial production ever since the end of the smoother flow of production. Latest reports show
war has been like a steeplechase—one obstacle book values aggregating $29.5 billion, about 15
after another. Whenever we really seem to get percent higher than the year before. Higher
going we run into another difficulty, such as inventory values were reported in every major
shortage of a strategic material or a labor-man­ group of manufacturing among producers of both
agement dispute in some basic industry. After durables and nondurables. Although manufac­
numerous ups and downs, industrial production turers generally have more money tied up in
in May was back to 192 percent of the pre-war inventories than they did a year ago, it is doubt­
average. January to May averaged 2 per cent ful whether physical inventories have increased
above the first five months of last year, but there very much.
were substantial differences in the rates of out­
New construction activity is running well ahead
put among the various industries.
of last year. Activity is expanding in practically
The impression that markets are filling up is every category—commercial, educational, resi­
probably based more on the recent trends in out dential, and public works. Factory construction
put of nondurable goods, rather than durables. is about the only major class in which activity
While the output of nondurables, as a whole, is is not being maintained at levels prevailing a
Trends on the Supply Side

Page 76



*

year ago. Over 350,000 houses were started dur­
Over the war period, prices of farm products
ing the first five months of this year, which is an had risen faster and farther than others and by
increase of almost one-third over the number of the end of 1947 speculative activity had developed
starts in the comparable period last year. The in anticipation of foreign needs and further price
most serious shortages of building materials have increases. Reports of favorable crops in the
been overcome, so that completion time has been United States and abroad during January pricked
reduced substantially. High costs of both labor the bubble, and dishoarding of grain stocks sent
and materials did not prevent growing activity in prices tumbling. Non-farm prices did not follow.
Building materials, fuels, and metals especially
this field.
remained very firm. By the end of June, prices
of farm products had regained over half their
loss and the average of all wholesale prices had
Has Production Caught Up With Demand?
reached a new post-war peak.
If the statement that production has caught up
or is catching up with demand means anything at
all, it must mean that prices are leveling off.

As during 1947, prices which some producers
lowered at the beginning of the year were raised
later on. Even prices of goods like shoes, which
appeared to be plentiful, remained high. Such
The fact that one can now step up to a counter competition as did appear did not result in gen­
and buy many items for immediate delivery which erally lower prices. In June, wholesale prices
were not available a year ago has led a few ob­ as well as prices of consumers’ goods, were at
servers to say that production is already well an all-time high.
caught up. Men’s clothing is more plentiful.
Some types of radios are waiting for buyers.
Demand did not stand still while the flow of pro­
With goods in sight, the business environment duction increased. Higher incomes and the ease of
has become somewhat more competitive. Many obtaining credit on the part of both consumers
others say that although production has not yet and business made buyers able and, in the eco­
caught up with demand, it is rapidly catching up.
There is some evidence to support this view. With nomic sense, willing to pay higher prices. Pur­
the possible exception of automobiles, the backlog chasing power continued several jumps ahead of
of anticipated demand for most consumers’ dur­ supply.
able goods has been substantially reduced. Sea­
Another kind of price—the price of labor—also
sonal clearance sales are again a common occur­
rence. Many manufacturers indicate that they indicated a lack of balance during the first half
have completed post-war plant and equipment of 1948. Wage rates increased steadily but slowly
until June. For a time it appeared that industry
expansion.
might resist third-round wage demands. But
But this way of looking at the problem dis­ rather than risk costly work stoppages, especially
regards price movements. In free markets, unless since wage boosts could be recaptured in higher
prices are deliberately administered by the seller, prices, key firms gave in one by one and a clear
price brings supply and demand into balance. trend was established. This part of the process
Over a period of time, falling prices mean that of inflation continued.
there is a tendency for supply continually to ex­
The new surge in wage rates will be smaller
ceed demand. A tendency for demand to exceed
supply, on the other hand, is reflected in rising than that of the previous rounds in 1946 and
prices. Unless prices are considered, therefore, 1947. But in a few important instances, the tie
one cannot tell just what it is that production is between wage rates and the cost of living has
been recognized explicitly in labor contracts and
supposed to be catching up to!
some further increases in wage rates may result
from higher living costs alone. By and large,
In the early spring, the price situation was by
current
no means clear. Prices of commodities other there is no reason to believe that the different
round of wage increases will have a
than farm products and foods stopped climbing, kind of effect on demand or costs than its two
similar to the situation in the second quarter of predecessors.
1947; and the sharp break in agricultural markets
during February sent the average of all whole­
As with monetary developments, even the ap­
sale prices down with dramatic suddenness. It
pearance of balance in the first half of 1948
soon became evident, however, that the farm
price break was in the nature of an adjustment proved to be temporary. Production had not
long overdue, rather than the beginning of a caught up with demand and it was questionable
whether much progress, if any, had been made.
general price decline.




Page 77

What’s the Matter with Inflation?

Inflation of the chills-and-fever variety—a com­
paratively slow process—has become pleasant to
many people. Nearly everybody who wants a
job has one. Trade is active, dividends are high,
and wages are rising. Perhaps, it has been said,
a “controlled” inflation is merely a painless
stimulant.
To an increasing extent, however, the business
community, and especially bankers, have grave
misgivings about the character of our “pros­
perity.” They feel that inflation cannot long
remain “controlled,” and that the higher we go
with the wage-price spiral the harder and the
farther we shall fall.
The last is, admittedly, a “hunch.” Rising
prices do not, in and of themselves, generate eco­
nomic collapse. Surely it is not inevitable that a
depression must follow the present boom. Yet,
the feeling is not without basis. The process of

inflation creates distortions in economic relation­
ships — stresses and strains — which render the
system more vulnerable to shock and increase the
danger of a serious decline.

Strains arise, first of all, out of disproportionate
changes in incomes. On the average, consumers’
incomes have not lagged far behind prices, but
many families are below average and are now
feeling the pinch. A recent survey released by the
Board of Governors states that although the
financial status of most consumers is still strong,
it showed the first signs of weakening in 1947.
Fewer families had cash reserves and there was
a substantial increase in total consumer indebted­
ness.
Disparities in price advances make it difficult
for various segments of the economy to do busi­
ness with each other. Profits of industries whose
selling prices are relatively inflexible, like those of
the utilities, are “squeezed.” In jmany cases
break-even points advance, reducing margins of
safety and exerting some degree of compulsion
to continue expanding output with too little re­
gard for longer-term considerations.

Page 78



The process of inflation tends to shift buying
power to producers. Expenditures for new plant
and equipment take goods away from consumers
who then spend their incomes on the smaller
amount that is left. There is no doubt that after
a long depression and a major war, our economy
requires huge amounts of investment. But the
rapidly rising prices of an inflationary boom are
liable temporarily to distort the demand pattern
and so increase the danger of misdirected capital
investment which may later become “idle produc­
tive capacity.” Moreover, inflation intensifies the
durable goods cycle, thus contributing to the
development of unsettling peaks and troughs of
production.
Although inventories are not excessive with
respect to sales and receivables are not too high
by comparison with past standards (which may
not be adequate), the need for financing business
operations at higher and higher prices is rapidly
reducing business’s “liquidity cushion.” For all
United States corporations, the ratio of cash and
Government securities to current liabilities at the
end of 1947 was no higher than in 1939. This
ratio now appears to be satisfactory, but the
trend is in the wrong direction. As the structure
of debt grows—and this includes credit of all
kinds—our economy becomes more vulnerable,
less able to resist cumulative liquidation if busi­
ness adversity, say, a decline in the rate of in­
vestment, should develop.
Such stresses and strains are not precisely
measurable, although their general nature is
known. It seems likely that they have been in­
creasing in intensity in recent months. Thus far,
however, the “squeeze” on certain consumer
groups has been offset by high incomes and ex­
penditures elsewhere. The growth of the debt
structure has fed inflation, not slowed it.
The distortions in evidence during the first part
of 1948 were not sufficient to decrease total de­
mand and cause a business downturn, but they bear
close watching. The real danger is in allowing
ourselves to slip into the comfortable belief that we
have entered another “new era” in which the only
direction we can go is up.

Preview of the Second Half —1948
As long as prices are rising rapidly it can not tendency for demand to exceed supply will per­
be said that we have attained economic balance. sist and force prices still higher.
Prices generally are still rising, including the
prices of some of the things that are alleged to be
The fact that the general price level may be ris­
in abundance.
ing does not preclude the possibility of downward
readjustments in individual lines.
Such re­
As we enter the second half of 1948 we are con­ adjustments have already occurred—the most
fronted with great obstacles in achieving eco­ recent and severe in agricultural products. Al­
nomic balance; in fact, we seem to be headed for though recent events point toward still higher
another turn of the inflation spiral.
prices for some foods in the immediate future, the
steady improvement of agricultural conditions
A high level of business activity is feeding a abroad and large crops at home may bring about
huge stream of spending power into the hands of a reversal of the situation later on. Industrial
individuals, reinforced by consumer credit and prices appear to be very firm but they are not
by a $5 billion tax cut. We are already committed immune to price dips, particularly in lines in which
to heavy rearmament expenditures and continued scarcity premiums have been high.
aid to friendly nations. We still have a long way
to go to meet our housing requirements, indus­
In general, however, for the remainder of this
tries have not completed their plant expansion year it appears that production and business
and modernization programs, public utilities are activity will stay at peak levels and that there
behind schedule in expanding their facilities, and will be continued upward pressure on prices.
numerous public works programs are just getting
under way.
It is important to observe the order of magni­
tude of increases in expenditure over last year.
Consumer expenditures are currently running
about 10 per cent higher than last year and there
is every indication that consumers will continue
to increase their expenditures during the remain­
der of this year. Construction expenditures so far
this year are in the neighborhood of 40 per cent
above last year’s. Businessmen estimate thenexpenditures for plant and equipment will be 15
per cent higher. Government expenditures are
also larger despite recent efforts to economize.

Banking and Credit
One of the most important factors preventing
the achievement of balance in the second half of
the year is the likelihood of further expansion of
credit and the money supply.

If business activity continues to rise and prices
and costs pursue their spiraling upward trend,
businesses will need bank loans for fixed and
working capital. Because of the improvement in
the securities markets, businesses may meet a
growing proportion of their needs by floating
Prospective increases in production do not ap­ new issues. Nevertheless, banks will be a major
pear to equal the prospective increases in demand. source of funds either directly through loans
Practically the entire available labor force is al­ or indirectly through purchases of corporate
ready employed, and virtually all of our produc­ bonds.
tive resources are already in use. Additional in­
Banks also are likely to buy an increasing
creases in the flow of goods and services during
the remainder of the year will be gradual. If by amount of securities which states and municipali­
increased efficiency and the use of new plant, ties issue to finance expansion programs. They
industrial production is increased by about 5 per will continue to extend credit, either directly or
cent, we will have done well. Last year, total indirectly, to consumers. Consumer spending
physical output rose an estimated 7 per cent above promises to remain large, and credit will be used
the year before. It is unlikely that we can ex­ more and more as the financial position of con­
sumers weakens.
ceed that record by very much.
Admittedly, this is a much simplified approach
to the problem. Although it is not possible to make
a precise calculation, it appears that the present




Banks are likely to expand their real-estate
loans further if construction activity continues as
strong as it has been, although more conservative
Page 79

policies by lenders and recent housing legislation
may tend to work in the opposite direction.
So the demand for loans is likely to increase.
The Treasury and Reserve authorities will not
have the strong weapons for offsetting credit
expansion which they were able to use in the
first half of the year. The Treasury will be with­
out the substantial cash surplus which it enjoyed
in the first quarter and, in fact, there are some
indications that the Treasury surplus may turn
into a deficit during fiscal year 1949. If so, the
Treasury very likely will be unable to exercise a
significant dampening influence on bank reserves
and deposits.

Prescription for Fever

There is no single, certain, painless cure for
inflation.
The traditional remedy has been to allow the
fever to burn itself out. But this has always
been hard on the patient. It would seem much
more desirable to bring inflation to a halt be­
fore the crisis is reached. This calls for a co­
operative effort on all fronts:
Federal Reserve policies aimed to restrict
the growth of the money supply.
Continuation of voluntary efforts of bankers
to restrain unnecessary lending.

A substantial reduction of Governments held by
the Federal Reserve Banks, therefore, cannot
come about through cash redemptions. Sales of
short-terms to the market, such as those ac­
complished in the first half, would have a depres­
sing effect on bank reserves and the money sup­
ply, but the ability of the System to sell shortterms depends on the willingness of investors to
buy.

A consistent anti-inflationary policy of the
Government in such fields as budget policy,
loans, guarantees, subsidies.

The statutory power to raise reserve require­
ments has been almost exhausted. The only re­
maining authority is to raise requirements of
member banks in central reserve cities from 24
per cent to 26 per cent.

Increasing productivity of labor.

It will be very difficult to establish balance on the
monetary front during the second half of the year.
Yet the Reserve authorities must continue to use
such powers as they have to pursue an anti-inflationery policy consistent with their responsibility
for maintaining orderly conditions in the Govern­
ment security market.

Page 80



Caution on the part of management and con­
stant awareness of the growing weaknesses
inherent in inflation.

Greater saving and less spending by con­
sumers.
We must be careful, of course, that the cure
does not bring on a reaction worse than the
disease. Vigorous, yet flexible, anti-inflation poli­
cies should help our economy to come to a bal­
ance at a higher level of activity than we have
ever before enjoyed in peacetime.

BUSINESS STATISTICS
Production
Philadelphia Federal Reserve District
Adjusted tor Seasonal Variation

Not Adjusted

Production Workers in Pennsylvania
Factories

Per cent change
Indexes: 1923-25 = 100

INDUSTRIAL PRODUCTION
MANUFACTURING..............
Durable Goods.......................
Consumers’ Goods................
Metal products.....................
Textile products..................
Transportation equipment
Food products.......................
Tobacco and products....
Building materials..............
Chemicals and products. .
Leather and products.........
Paper and printing.............
Individual Lines
Pig Iron..................................
Steel.......................................
Iron castings.........................
Steel castings.......................
Electrical apparatus...........
Motor vehicles.....................
Automobile parts & bodies
Locomotives and cars........
Shipbuilding.........................
Silk and rayon....................
Woolens and worsteds.. ..
Cotton products..................
Carpets and rugs..................
Hosiery..................................
Underwear...........................
Cement..................................
Brick.......................................
Lumber and products.........
Bread & bakery products.
Slaughtering, meat pack.. .
Sugar refining......... .............
Canning and preserving. .
Cigars....................................
Paper and wood pulp.........
Printing and publishing. .
Shoes.......................................
Leather, goat and kid....
Explosives..............................
Paints and varnishes.........
Petroleum products...........
Coke, by-product................
COAL MINING
Anthracite...........................
Bituminous...........................
CRUDE OIL................................
ELECTRIC PTE—OUTPUT
Sales, total.............................
Sales, to industries..............
BUILDING CONTRACTS
TOTAL AWARDS+............
Residential-)-.......................
Nonresidentia]-|-................
Public works & utilities^

May Apr. May
1948 1948 1947

May 1948
from

1948
from May Apr. May
1948 1948 1947
5
Month Year mos.
ago
ago 1947

112p
113p
121p
106p
142
77p
125p
127p
118
48p
171p
107p
117

in
114
123
105
144r
78
123
121
127
55
166
96
118r

109r
lllr
114r
105r
143
72r
122r
130
125
33
163
96
120

0
— 1
— 2
0
— i
— 2
+1
+ 6
— 7
—14
+ 3
+12
— 1

3 b 3
2
- 3
7 r 6
1 b 1
0 b 2
+ 8
- 6
+ 2
- 4
- 2 - 4
- 6 -1
+45 +10
+ 5 + 8
+12 + 12
- 2 - 1

110p 108
lllp 110

106
108r

141
74p
131p
117p
115
50p
174p
98p
118

139r
75
131
114
115
50
168
94
120

141
69r
130r
119

99
113
83
108
217
27
107
61

89r 94
108r 109
90
89
115
97
234r 229
27r 42r
108 126r
55
61

+11
+ 5
— 8
— 6
— 7
+1
— 1
+ 9
+ 1
+ 2
— 2
+ 4
— 2
— 4
ll
—31
+ 2
+ 3
+ 11*
— 7
—16
+12
— 7
+ 2
— 1
+ 13
+11
— 8
— 1
+ 5
+ 7
+ 19
+11
+86
— 4
+ i
+ 2
+ v

+ 6
+ 4
- 7
+11
- 5
—36
-15
- 1
+28
+ 8
+ 9
-14
+ 10
+ 18
- 7
+247
+ 4
+ 8
+ 5*
+21
-18
-12
- 5
+ 7
- 4
+ 9
+15
+ 3
+ 7
+ 8
-10
+11
+ 12
+ 5
- 1
+ 8
+ 11
+18

ro3
119
86
112
200
34
112
59

100r 97
113r 115
94
93
117 101
204r 211
34r 54r
117 132r
59
60

94
92
83p 85
38p 37
106p 109
79
82
131

67p
55
32

___

87
76r
44
97r
67
122
97
19
54r 53
31
29
—

—

128 137
67
79
201p 179
119 128
100
98
120 121
105p 93
109p 98
99 108
110
110
242p 230
142p 133
79
66
73
66
123p 66
277 288
507 501
508 499
372 349

106
82
227
126
93
125
97
95
96
103
224
158
71
65
117
281
468
458
316

243
144
306
370

166
120
146
374

210
142
227
364

b
b

+ 1
+ 5
- 4
- 3
— 1
—31
- 4
- 7
+26
+ 4
+ 9
-17
+24
+12
- 8
+19
+ 3
+ 7
-3*
+ 10
-15
- 7
0
+ 8
- 2
+ 7
+ 17
+29
+ 7
+ 8
- 3
0
+ 3
-17
0
+ 9
+ 10
+ 9

+ 15 +46 +58
+ 2 +20 +23
+35 +110 +71
+ 2 - 1 + 101

• Unadjusted tor seasonal variation.
+ 3-month moving daily average centered at 3rd month.

91
90
78p 78
37p 38
104p 104
79
82
133

Factory
employment
Apr.
1948
0
+1
+1
+ 3
0
— 1
— 1
0
+ __
2
+ 1
— 1
— 2

May
1947
0
— 4
0
+ 4
+ 5
0
+ 3
+ 1
_
0
— 4
+ 3
— 1

Factory
pay rolls
Apr.
1948
+ 5
— 2
+ 4
+16
0
— 1
0
+ 2
+__
2
+ 3
— 2
+ 2

Building
permits
value

33
166
87

121

84
71r
44
94r
67

124

75p
59
30
115
128
82
151p
116
100
122
96p
99p
100
116
242p
148p
77
73
111
288
472
487
379

76
57r
29
104
133
103r
151
118
99
124
93
96
109
116
229
138
65
66
61
297
491
514
352

65
105
292
435
440
323

233
152
321
259

202
132
231
335

159
127
153
262

22

57
27

110

106
100

171
122

93
126
88

86

97
109
224
165

May 'Apr. May Apr.
1947 1948 1947 1948
+16 + 24 +269 — 1
+ 9 + 3 + 99 + 7
+ 9 + 53 +233 — 1
+ 15 — 2 +158 + 7
+15 — 69 — 27 + 5
+ 6 + 117 + 151 + 6
+20 + 9 — 59 + 2
+ 16 — 72 — 59 + 10
...... — 82 +m + 10
+15 + 9 — 49 + 2
+ 6 — 55 — 65
+11 — 17 + 38 + 6
+ 9 + 104 + 139 + 5

May
1947
+41
— 6
+ 8
+ 8
+ 5
+ 2
+ 6
+ 2
+ 7
+ 5
+ 7

+ 3

ft

■' Debits

Apr.
1948
0
— 6
— 6
+ 2
—19
— 7
— 9
— 9
0
— 7
—10
— 2
— 8

Changes in Major Industry Groups
Pay rolls

Employment

128
154

Per cent
change
from
Apr. May
1948 1947
0
0
0 — 1

Per cent
May change
1948
from
In­
dex Apr.) May
19481 1947
286 +1 + 9
326 +2 + 7

104
121
95
86
94
94

—1
+2
—5
—1
—1
+1

+ 1
0
0
+ 7
+ 2
+ 6

239
241
208
217
242
211

0
+5
—6
—2
—2
+6

+23
+ 12
+24

118
136
117

0
—1
—2

0 263
0 270
— 3 244

+1
—4
—1

+12
+ 3
+ 4

153
145
87
136
139
144
209
223

+2
—2
—3
+1
+1
—1
—1
—1

309
—15 274
— 7 173
292
— 2 294
1
—12 291
442
— 5 456

+6
+4
—2

219

+1

418

+i

+ 18
—17
— 7
+ 16
+ 8
— 2
+ 14
1
+10

154
133

—3
—1

Indexes
(1939 average = 100)

May
1948
In­
dex

All manufacturing............
Durable goods industries.
Nondurable goods
industries...........................
Food.........................................
Tobacco..................................
Textiles..................................
Apparel..................................
Lumber..................................
Furniture and lumber
rapci.................. ....................
Printing and publishing. . .
Chemicals..............................
Petroleum and coal
products..............................
Rubber....................................
Leather..................................
Stone, clay and glass.........
Iron and steel.......................
Nonferrous metals..............
Machinery (excl. elect.)..
Electrical machinery.........
Transportation equip.
(excl. auto).......................
Automobiles and
equipment.........................
Other manufacturing.........

+6
+

+5
+

2
—20 315
— 8 263

+i

+4
—2

+i

—2

—2
+1

69

p Preliminary
r Revised.

Retail
sales

Weekly
Employ­ Weekly man-hours
ment
pay rolls
worked
All manufacturing ......... 1,095,600 $55,073,000 43.738.000
Durable goods industries 623,500 34.227.000 25.119.000
Nondurable goods
industries .......................
472,200 20.845.000 118,619,000

122

Local Business Conditions*
Percentage
change—
April
1948 from
month and
year ago
Allentown.........
Altoona..............
Harrisburg. . ..
Johnstown.........
Lancaster...........
Philadelphia. ..
Reading.............
Scranton...........
Trenton..............
Wilkes-Barre. .
Williamsport. . .
Wilmington. . ..
York..................

Summary Estimate—May 1948

May
1947
+34
+ 7
+ 8
+ 8
+ 11
+ 9
— 2
— 1
+13
+ 6
+11
— 8
+ 4

+n
+n
+ 3

+

—16

—1

Average Earnings and Working Time
May 1948
Per cent change
from year ago

Weekly
earnings

Hourly
earnings

Weekly
hours

Aver­ Ch’ge Aver­ Ch’ge Aver­
age
age
age
All manufacturing.... $50.31 + 9 $1,260 + 9 39.9
Durable goods indus.. 54.97 + 9 1.365 + * 40.3
Nondurable goods
industries.................... 44.15 + 10 1.120 +10 39.4
Food.................................. 44.41 + 11 1.057 + 10 42.0
.758 + 2 38.1
Tobacco........................... 28.91 + 3
Textiles........................... 44.97 + 15 1.147 + 13 39.2
.947 + 9 38.4
Apparel........................... 36.36 +10
41.95 + 18 1.020 + 15 41.1
Lumber...........................
Furniture and lumber
.990 + 4 42.6
products....................... 42.20 + 5
Paper................................ 47.94 +12 1.092 +11 43.9
Printing and pub........... 55.98 + 3 1.472 + 7 38.0
Chemicals....................... 49.48 + 7 1.212 + 8 40.8
Petroleum and coal
-10 40.2
products....................... 61.29 + 11 1.525
- 2 36.2
Rubber............................. 47.19 — 2 1.304
.965
33.94
- 7 35.2
Leather...........................
0
-10 41.1
Stone, clay and glass . 49.18 +14 1.195
- 7 40.0
Iron and steel................ 56.77 + 9 1.418
52.50 +11 1.325 + 10 39.6
Nonferrous metals....
Machinery (excl.
53.60 + 9 1.318 + s 40.7
electrical)..................
Electrical machinery.. 57.24 + 5 1.444 + 6 39.7
Transportation equip.
(excl. auto)................ 58.26 + 8 1.467 + ? 39.7
Automobiles and equip 58.39 + 9 1.424 +15 41.0
Other manufacturing. . 41.55 + 7 1.098 + 9 37.8

Ch’ge
+ 1
+ 1
+
+
+
+
+

0
1
1
2
1
2

+ 1
0
— 4
— 1
—
—
+
+
+

0
4
7
3
2
1

0
— 1
0
— 5
— 2

Area not restricted to the corporate limits of dtlee given here.




Page 81

Distribution and Prices
Per cent change
1948
May 1948
from
from
5
Month Year mos.
ago 1947
ago

Wholesale trade
unadjusted for seasonal
variation
Sales
Total of all lines..................
Drugs......................................
Dry goods ...........................
Electrical supplies ...........
Groceries ..............................
Hardware ..............................
Jewelry ................................
Paper ....................................
Inventories
Total of all lines ................
Dry goods..............................
Electrical supplies ...........
Groceries ..............................
Hardware ...........................
Paper ..................................

— 3
— 2
+ 4
—21
— 1
— 5
0
—11

+ 6
+14
+ 2
---11
+2|
+45

—

— 9
0
+ V
— 4
+ 5
+ 2
—

Philndolpkin

■---- -

Per cent change from
1948 Month!1 Year Aug.
ago
ago
1939

....

Clothing .............
Fuels ..................
Housefumishings
Other ..................

RETAIL TRADE
Sales
Department stores—District**....
Philadelphia**
Women’s apparel—District...........
Philadelphia

284
261
262
269

278
238
267
283

259r
244
260
268

+ 2
+ 10
— 2
— 5
+ 8*

+10 t 2
+ 7 + 7
+ 1 + 2
0 + 2
— 1*
...

287
254
251
258
....

262
229
240
254
...

261
236
250
257

Inventories
Department stores—District.........
Philadelphia .
Women’s apparel—District...........
Philadelphia

254p
228
209
237

264
233
253
291

215
206
202
236

— 4
— 2
—18
—19
— 5*

+ 18
+11
+ 3
0
+ 9*

257p
226
209
232

270
235
228
256
_

217
204
202
232
„„

141
123
79
187
217
225
90
108
85

129
122
79
148
361
159
90
105
87

148
132
94
187
222
225
97
138
104

+10
0
0
+27
—40
+42
0
+ 3
— 2

— 5
— 7
—16
0
— 2
0
— 7
—22
—18

— 8
— 6
—15
—12
+ 6
— 6
— 9
—21
—22

143
127
79
166
276
192
86
100
78

122
121
79
118
188
128
76
98

80

150
136
94
166
281
191
93
128
95

202

210

194

— 4

+ 4

0

200

210

192

210

+29* +50* +40*
+38* +97* +49*
— 4 + 12 +10

40
75
235

31
54
241

27
38
210

—

May

Basic commodities
(Aug. 1939 = 100).
Wholesale (1926 =
100) .........................
Farm ....................
Food .......................
Other ....................
Living costs (1935­
1939 = 100)
United States ...

322

0

+ 8

164
189
177
149

+ 1
+ 1
0
0

+11
+ 8
+ 11
+13

+ 118
+210
+ !64
+ 86

171

+
1
+
+

- 9

+ 73
+iio

FREIGHT-CAR LOADINGS
Total
.............................................
Merchandise and miscellaneous. .
Merchandise—l.c.1...............................

+222

MISCELLANEOUS
1
1
1
1
0
0
— 1
0

205
194
118
135
197
147

-12
- 8
- 8
-10
- 9
- 7

May Apr. May
1948 1948 1947

—

Source: U. S. Department of Commerce.

Prices

Indexes: 1935-1939 = 100

Not adjusted

Per cent change
May 1948 11948
from
May Apr. May
from
5
1948 1948 1947
Month Year mos.
ago
1947
ago

+1

+ 4
+15
— 8
+ 4
+12
— 5
+ 5
— 4

— 2
0
0
— 6
+ 2
+ 1

Adjusted for seasonal variation

+
+
+
+
+

Business liquidations

95
40
96
46

235

246

—
_.
_
—

* Computed from unadjusted data.
p Preliminary.
r Revised.
•* indexes adjusted for seasonal variation have been revised; earlier data may be obtained
upon request.

Source: U. S. Bureau of labor Statistics.

BANKING STATISTICS
MEMBER BANK RESERVES AND RELATED FACTORS
Reporting member
banks
(Millions f)

June 23
1948 four
wks.

One
year

- 72
1,392 +20
276 + 6 + 21

Total investments . ..
Total loans & invest..
Reserve with F. R. Bank
Cash in vault ................
Balances with other bks.
Other assets—net...........

Liabilities
Demand dep. adjusted. .
Time deposits..................
U.S. Gov. Deposits ....
Interbank deposits ....
Borrowings ....................
Capital account ..............

Page 82



1,668 +26
2,566
464
43
103
50

2,032
443
52
364
6
27
302

+60
—32
— 1
+ 5
— 8

- 51
+ 85
- 13
+ i
+ 9
+ 1

— 8 -- 3
— 3
- 21
— 5
- 30
+41
- 28
— 1 - 2
+ 1
+ 2
.....

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

Uses of funds:
Currency demand .........................................................
Member bank reserve deposits..................................
“Other deposits” at Reserve Bank.........................
Other Federal Reserve accounts..............................
Total .............................................................................

Ratio
of
excess
to re­
quired

Member bank
reserves
(Daily averages;
dollar figures in
millions)

Held

Phila. banks
1947 June 1-15
1948 May 1-15
May 16-31
June 1-15

5411
419
393
391

Country banks
1947 June 1-15
1948 May 1-15
May 16-31
June 1-15

13%
$375 $333 $ 42
12
42
350
392
11
365
40
405
43 | 12
408 1 365 |

Re­ Ex­
quir’d cess

$406
412
387
388

$ 5
7
6
3

1%
2
2
1

June
9

June
16

— 7
— 5
—19

+11
— 4
+ 14

—13
+21
+10

—20
—20

+ 3
— 8
—15

—31

+21

+18

—28

—20

+18

+ 1
—29

+ 8
—28

+ 6
—37

June
23
' +12

1

Government securities .
Other securities ..............

Total

Sources of funds:
Reserve Bank credit extended in district............
Commercial transfers (chiefly interdistrict)....
Treasury operations ....................................................
Total

Ch'ges
in four
weeks

June
2

!

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

501 + 5 + 64
17
- 2
15
_ - 4
3
3
79 +__ 34 +26 + 31
+ 44
252
......
898 +34 +136

Third Federal Reserve District
(Millions of dollars)

++

Assets
Commercial loans ...........
Loans to brokers, etc. . .
Other loans to carry secur.
Loans on real estate.........
Loans to banks ................
Other loans .......................

Changes in weeks ended

Changes
in —

—31

1

+21

|

+18

| —28

|

—20

Changes in—
Federal Reserve
June 23 Four
Bank of Phila.
One
1948
(Dollar figures in
weeks
year
millions)
Discounts & advances $ 24.9 $+ 5.8 $+ 15.9
.5
— 1.2
Industrial loans ...
1,500.7 + 29.8 —135.5
U.S. securities.........
Total .................... $l,526.l’| $+ 35.6'|$—120.8
Fed. Res. notes . . .. $1,632.0 $+ 14.7 $— 3.8
794.5 — 28.0 — 6.5
Member bank dep..
78.2 — 90.1 + 33.6
U. S. general acct..
28.9 +
*3 — 2.5
Foreign deposits . .
.4 — .5
2.0 +
Other deposits .........
1,012.0 —140.8 + 137.4
Gold cert, reserves.
Reserve ratio ........... 39.9%
—3.8%
+5.1%

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