Full text of Annual Report of the Federal Reserve Bank of New York : Fortieth Annual Report, Federal Reserve Bank of New York, for the Year Ended December 31, 1954

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FORTIETH ANNUAL REPORT
F E D E R A L

R E S E R V E

B A N K

for the Year Ended December 319 1954

Second Federal Reserve District




OF

N E W

Y O R K

FEDERAL




RESERVE

BANK

OF

NEW

YORK

M a rc h 7 , 1955

To the Stockholders of the
Federal R eserve Bank of N ew Y o r k :

I

am pleased to transmit herewith the

fortieth annual report of the Federal Reserve
Bank of New Y ork reviewing the year 1 9 5 4 .

President

CONTENTS
Page

Recession and Recovery

5

The Pattern of Readjustment..................... ... 6
Effects of Easy Money Policy...................... ... 8
Economic Strength Abroad........................ ... 9

The United States Economy in 1954

12

Further Adjustment and Recovery...............13
Factors in the Adjustment Process...............16
Competition and Prices..................................17

The Economy of the Second District

18

Manufacturing Employment Dips, But NonManufacturing Industries Hold Up Well 18
Strength in Retail Sales and Construction 20
Agricultural Income Continues to Decline 21

Federal Reserve Credit Policy

21

Actively Easy Money....................................21
Bank Loans and Investments and the
Money Supply........................................... .26
Discount Policy and the Structure of
Interest Rates............................................. .29

The Sources, Uses, and Costs of Funds 32
The Changing Patterns of Demand
and Supply.................................................
Borrowing Costs and Market Conditions....

33
35

The Balance of Payments of the
United States

37

Exports and Imports..................................... 37
Foreign Aid and Investment........................ 39

Financial and Economic
Developments Abroad

Page

Prosperity and Increased Competition.....
Flexible Monetary Policy............................
Continued Growth of Monetary Reserves
Relaxation of Exchange and
Trade Controls.........................................
Developments in the New York
Foreign Exchange Market......................

40
40
41
43
45
46

Volume and Trend of the
Bank’s Operations

47
Domestic Operations..................................... 47
Foreign and International Operations....... 50

Financial Statements

51
Statement of Condition................................. 51
Earnings and Expenses................................. 54

Changes in Membership

57

Changes in Directors and Officers

57
Changes in Directors..................................... 57
Changes in Officers....................................... 58
Member of Federal Advisory
Council — 1955....................................... 60

List of Directors and Officers

61

Chart 1: Gross National Product, Quarterly, 1953-54; Change in Gross National Product
and Major Components, Fourth Quarter 1953-First Quarter 1954 ........................................... .14
Chart 2: Nonagricultural Employment in the United States and the Second District .................19
Chart 3: Member Bank Free Reserves by Class of Bank .................................................................. .23
Chart 4: Short-Term Money Rates ...................................................................................................... .30
Chart 5: Sources of Net Credit and Capital Funds ............................................................................33
Chart 6: Market Yields of Selected Securities..................................................................................... .36
Chart 7: Gold and Dollar Holdings of Selected Foreign Areas .......................................................44




FORTIETH

ANNUAL.

REPORT

FEDERAL

RESERVE

BANK




OF

NEW

YORK

R E C E S S IO N

AND

REC O VER Y

A t the beginning of 1954, the
recession then developing in the United States economy was a matter of world­
wide concern. The build-up of business inventories during the latter part of
1952 and the first half of 1953 had given way to inventory liquidation, and the
end of the war in Korea had been followed by cutbacks in defense expen­
ditures. Industrial production and employment had been declining since the
summer of 1953, and business demand for various types of materials and
finished goods, both domestic and imported, had fallen off. In this situation,
the principal objective of Government economic policy was to prevent the un­
avoidable corrective adjustments from feeding upon themselves and develop­
ing into a cumulative recession, and to give encouragement to the forces of
recovery. This called for vigilant surveillance of developments in the economy
and readiness to mobilize the full powers of Government for resisting depres­
sion, if that should prove necessary.
Prompt response to the signs of slackening output did not necessarily
require precipitate and forceful measures by Government to stimulate eco­
nomic activity. Such a course of action might only have postponed the prob­
lem of eliminating distortions in the economy, delaying the reorientation of
production to new patterns of demand, and possibly aggravating the adjust­
ment problem by causing new distortions. Since there was good reason to
hope and expect that natural forces of recovery would develop within the pri­
vate economy, the Government’s role appeared to be that of softening the im­
pact of the changes under way and exerting general influences that would
encourage the flow of resources, manpower, and credit into the zones where
potentialities for expansion remained real.
Tax cuts, the operation of various “ built-in stabilizers” such as unemploy­
ment insurance, and the spending needs and plans of State and local authorities
seemed likely to provide important reinforcement of consumer demand and to
exert a sustaining influence on capital expenditures. At the same time, pursuit
of an “easy money” policy by the Federal Reserve System was expected to
relieve any pressures toward forced liquidation, although there were some who
questioned whether such monetary policy would actually provide a positive
stimulus to recovery. Evidence of the effectiveness of these and other measures




5

was anxiously awaited not only here but also abroad where our trading asso­
ciates, especially in Western Europe, feared that the decline in activity in the
United States, even if of limited duration and extent, would react in magnified
form upon their own economies. As the months went by, however, confidence
gradually strengthened, and by the end of the year it was clear that a cumula­
tive downward movement had been avoided and that a vigorous recovery was
under way. And despite a moderate contraction in United States imports, the
economic strength of free Europe had remained unshaken by the economic
readjustments in this country.

The Pattern of Readjustment
On the whole, the 1953-54 recession was one of the least damaging in United
States history. The slackening of business activity extended over a period of
only nine months, from mid-1953 through the first quarter of 1954, and in­
volved a maximum decline of no more than 4 per cent in the annual rate of
Gross National Product. By the early spring months of 1954, total output had
leveled off and, after six months of over-all stability, a broad upturn developed
in the final quarter of the year, high-lighted by vigorous expansion in the
automobile and steel industries. The relative mildness of the recession does
not, of course, alter the fact that recessions, however mild, inevitably take a
toll in terms of personal hardship and distress. Although losses of wage and
salary income were substantially alleviated by Government insurance pro­
grams, unemployment rose from about 3 to about 6 per cent of the labor
force during the year ended March 1954 but receded somewhat in the closing
months of 1954.
The growth of unemployment and the general slowing-down in business
activity after mid-1953 largely reflected the slackening of inventory accumula­
tion (including defense-related inventories) and, later in the year, actual liqui­
dation of stocks that had been built up during the Korean-war boom to levels
exceeding the requirements of a prompt-delivery economy. The inventory
liquidation proceeded in orderly fashion, however. Although inventories con­
tinued to decline until the closing months of 1954, the rate of liquidation re­
mained roughly constant and consequently created no additional downward
pressure upon production.
The change from inventory accumulation to liquidation roughly coin­
cided, however, with the early stages of a substantial retrenchment of defense
expenditures, to which production in a number of important industries had
become geared. After declining moderately during the last half of 1953, defense
outlays fell off during the first quarter of 1954 at nearly double the rate of
decline during the two preceding quarters, while Federal outlays for other
6




purposes, which had been rising throughout 1953, also dropped substantially.
The depressing effects of the progressive decline in Government expenditures
over the winter months were further accentuated by declining private outlays
on producers’ durable equipment and by a falling-off in retail sales of auto­
mobiles and other consumers’ durables.
The readjustments required in the industries affected by inventory liqui­
dation and the curtailment of defense spending naturally tended to spread to
other sectors of the economy, but countervailing forces of recovery were simul­
taneously at work and proved sufficiently strong to prevent a cumulative down­
trend. Particularly important was the stabilizing influence of a steady— and
even rising— flow of consumer demand based on a continuing high level of
consumer income, which was in turn sustained by tax reductions and unem­
ployment insurance benefits. Consumer demand was also encouraged by more
competitive pricing, but the shift to buyers’ markets at no time involved a
scramble for liquidity on the part of sellers. In striking contrast to previous
recession experience, no general weakness of commodity prices developed,
thus facilitating the orderly liquidation of excess inventories.
By spring, evidence began to accumulate that the recession was “saucering
out” and that important stimulants to recovery were beginning to take effect,
despite a continued shrinkage in defense expenditures. Particularly encourag­
ing was the strong growth in home building and in State and local government
construction (which rose to record levels), while consumer spending on both
durables and nondurables appeared to be developing a rising trend. Although
industrial production varied widely from one industry to another in response
to changing patterns of final demand and differences in inventory position,
over-all output remained remarkably stable between March and August.
In the breathing space thus obtained, much progress was made in working
off the dead weight of excess inventory and, with the advent of the fall months,
signs of recovery on a broad front became increasingly apparent. New orders
increased, steel output and production of automobile and other consumer
durables turned upward, and Gross National Product rose in the final quarter
by 1.5 per cent over the third-quarter level. Seasonally adjusted employment
rose steadily after August while unemployment declined, and total income pay­
ments to individuals reached new high levels. Meanwhile, the stimulus of ex­
ceptionally high rates of construction activity continued to spread throughout
the economy.
At the close of the year, the economy was clearly on the upgrade, the
principal question being whether steady progress would be maintained through­
out 1955, or whether a spurt in the early months would be followed by some
slackening later in the year. This uncertainty brought into even sharper focus
the problem of providing adequate employment opportunities for a steadily




7

growing labor force during a period of rapid technological advance and rising
productivity. While continuing economic expansion was clearly a political and
social necessity, it was highly desirable that such development be balanced
and sustainable. In this connection, residential construction was expanding
rapidly at the end of 1954 under the stimulus of easier credit terms, and there
was some concern that this advanced level would not be maintained throughout
1955. Some concern was also aroused in the closing weeks of the year by indi­
cations of speculative tendencies in other areas. In the stock market, in par­
ticular, there was evidence of increasing speculative activity and of a rise in
stock prices at a rate that could not be maintained indefinitely and, when
reversed, could have a depressing effect on the economy.

Effects of Easy Money Policy
In conjunction with a number of other stabilizing influences, monetary policy
played an important role in limiting the extent and duration of the recession.
Tax reductions and income-sustaining Government payments, public debt
operations designed to avoid competition with private and local government
investment demands for the available supply of savings, the response of con­
sumers to more competitive markets, and the resilient confidence of business
in the longer-run prospects all helped to avoid the development of cumulative
contractive tendencies. The relative contributions of monetary policy and
other helpful influences are not, of course, susceptible of precise measurement.
Each worked to reinforce the others, and no undue reliance was placed upon
any single constructive influence.
The stabilizing influence of monetary policy was indirect but widely
pervasive, both during the later stages of the Korean boom in the form of
restraint and subsequently in the form of ample availability of funds for both
short-term credit and long-term capital needs. The inventory cycle, for
example, was probably damped down by the tightening of credit conditions
in early 1953, which tended to moderate the excesses that would subsequently
have to be worked off, and by the shift shortly before the actual downturn to
ready availability of credit, which avoided pressures for rapid liquidation and
facilitated an orderly adjustment of surplus stocks.
The most readily visible effect of the “ easy money” policy pursued
throughout 1954, however, was its contribution to the financing of construc­
tion, particularly to the mortgage financing of home building which was
further stimulated by the easing of mortgage terms. Consumption also was sus­
tained and encouraged by easier consumer-credit terms, after an initial lag
caused by lender caution in view of a possible increase of credit risks. Under­
lying the strength of the capital markets and easier consumer financing was

8




the ample availability of bank reserves, which exerted pressure upon the com­
mercial banks to seek new outlets for their excess funds. Over the course of the
year total bank credit expanded more rapidly than in any previous year since
World War II, despite repayments of business borrowings as a result of inven­
tory liquidation and the end of “ tax borrowing” with the expiration of the
excess profits tax. Other types of loans increased, and there was a large in­
crease in bank investments, which either financed public and private expendi­
tures directly or provided funds for investment by others.
The general situation at the year end seemed to justify taking up some of
the slack in the banks’ reserve positions. The banking system continued to be
provided with ample funds to enable it to meet all real needs for credit, but it
appeared inadvisable to maintain such a degree of ease in the money market
as might encourage speculative uses of credit which could have disturbing
effects upon the economy.

Economic Strength Abroad
The downturn of the United States economy in mid-1953 had aroused serious
misgivings abroad of a contagious spread throughout the rest of the free
world of the slackening in economic activity here. Five years before, a rela­
tively minor decline of American production and import demand had been
accompanied by a sharp break in international commodity prices, a severe in­
tensification of foreign restrictions upon dollar imports, and an international
exchange crisis that culminated in the September 1949 devaluation of the
British pound sterling and numerous other currencies. In the intervening years,
however, the brittle vulnerability of the world economy in 1949 had been
transformed into resilient strength by the remarkably successful recovery effort
undertaken by Western European and many other foreign countries with
United States aid. Most international commodity prices remained firm, despite
a moderate reduction of United States import demand in 1954. Many foreign
countries continued to accumulate gold and dollars in amounts substantial
enough to permit further extensive progress in relaxing dollar import restric­
tions. Production, employment, and income rose substantially in Western
Europe, and economic standards elsewhere were generally well maintained.
At the year end, however, rising incomes and growing raw material needs
seemed to be tending to bring about balance-of-payments strains in certain
countries.
To a certain extent, the relative stability of international commodity
prices during 1954 reflected the completion of inventory readjustments that
had begun some years before with the collapse of the speculative boom engen­
dered by the outbreak of the Korean war. In this country, private stocks of




9

imported raw materials were apparently already at relatively low levels as the
downturn of 1953 began, with the result that the moderate reduction of raw
material requirements for current output was not seriously aggravated by in­
ventory liquidation. Of possibly even greater significance, however, was the
sustaining influence upon raw material prices of the strong upsurge in 1954
in Western European industrial production.
Industrial production in Western Europe rose by 9 per cent between the
third quarters of 1953 and 1954, the same period in which the output of United
States industry fell by 9 per cent. The 1954 expansion of European industry
was both more substantial and more general than in the previous year. France
and Belgium, which had lagged in 1953, scored substantial advances, while
all other Western European countries experienced continued growth. Record
levels of building activity, increasing demand for industrial equipment and
durable consumer goods, higher levels of trade within Europe, a rise in exports
to overseas countries outside North America, and the restoration of public
confidence in currency values appear to have been the factors most directly
responsible for the rapid rise in production. Significantly, the surge in busi­
ness activity was not based upon defense expenditures, which showed little
change, nor apparently upon speculative forces; prices at the wholesale as well
as the retail level were stable, and there was little evidence of speculative accu­
mulations of stocks of raw materials.
A further encouraging aspect of the rapid expansion of Western European
production was the financing of increased import requirements without
balance-of-payments strains during most of 1954. This is explained in part by
the fact that an important share of the increase in output went into the export
markets. Particularly significant was the growth of Western European exports
to the primary-producing and other nondollar countries, which in turn found
ready markets in Europe for their exports. In effect, Western Europe and other
major areas of the nondollar world reinforced each other’s economic resistance
to the effects of the readjustment in the United States. Toward the end of the
year, however, certain countries’ imports were tending to grow at a faster pace
than exports, and it appeared that corrective measures might have to be taken.
On dollar trade account, a reduction of roughly 500 million dollars in
foreign receipts from merchandise and service transactions with the United
States was accompanied by a moderate growth in imports from the United
States, the latter development reflecting in part the relaxation in the course of
1954 of discriminatory trade restrictions against the dollar. These develop­
ments opened up a deficit of approximately 1.6 billion dollars in foreign
countries’ current-account transactions with the United States. During the
course of the year, however, the outflow of United States private capital rose
by nearly 1.2 billion dollars, largely attributable to a sharp increase in port­

10




folio investments abroad (particularly in Canada), together with a sizable
outflow of short-term capital in the form of bank and exporter credits to Latin
America. Meanwhile, the dollar position of a number of foreign countries was
strongly sustained by a continuing, although somewhat reduced, flow of official
United States economic aid and other expenditures. Moreover, with the marked
falling-off of private hoarding demand for gold, a much larger share of foreign
gold production flowed into official reserves. By the year end, foreign holdings
of gold (exclusive of the USSR) and short-term dollar assets had risen by 1.9
billion dollars, compared with an increase of 2.6 billion in 1953, to a new
postwar peak of 25.0 billion.
Underlying the relative stability of the commodity and exchange markets,
the growth of output, and the strengthening of reserve positions has been
the re-emergence in many foreign countries of a reasonably sustainable
balance as a result of the remarkable physical and financial reconstruction
efforts made with American assistance since the end of World War II. The
general recovery of industrial and agricultural output in Europe, and notably
the extraordinary growth of German production, has made possible in most
countries a substantial removal of direct controls upon consumption and in­
vestment. The restoration of market economies has encouraged a spontaneous
response of investment to technological innovations and shifting patterns of
final demand and thereby opened the road to progressive economic growth.
Investment in new technological processes and efforts to improve efficiency
have also brought substantial rewards in the form of higher productivity, and
have made possible wage increases without generation of strong inflationary
pressures. Late in 1954, however, symptoms of strain appeared in a number
of countries and there was some danger that further wage increases might
outrun rising productivity.
Externally, industrial recovery has greatly strengthened Europe’s capacity
to furnish the capital goods required by overseas countries engaged in pro­
moting economic development; in particular, German and British industries
have proved highly competitive in these markets. At the same time, the
growth of raw material output in nondollar primary-producing countries since
the war has reduced Europe’s dependence on dollar-area sources of supply,
enlarged the markets for European exports, and strengthened the complemen­
tary relationships between the industrial and primary-producing countries of
the nondollar world. Finally, by means of monetary and fiscal restraint, the
expectation of further price increases has been broken and a propitious en­
vironment created for the resumption of a sizable flow of voluntary savings.
This primary objective of public confidence in monetary stability having been
achieved, it proved feasible in a number of countries to pursue in 1954 (al­
though to a somewhat lesser extent than in 1953) policies of monetary ease




11

which aided in the achievement of higher levels of production and economic
activity. Toward the end of the year, however, certain countries found it appro­
priate to allow monetary conditions to tighten somewhat.
Against this background of reasonably well-balanced economic growth
and further reserve accumulation, a number of countries— notably West Ger­
many, the Netherlands, Sweden, and the United Kingdom— found it possible
in 1954 to make further substantial progress in relaxing their discriminatory
restrictions against imports from the United States. The easing of import re­
strictions was accompanied, moreover, by a number of measures designed to
increase the transferability of major currencies. These actions fell into the pat­
tern of a step-by-step approach toward the goal of re-establishing the converti­
bility of the pound sterling and other European currencies, and confirmed the
abandonment of emphasis on purely “ formal” convertibility. Further advance
toward the re-establishment of freer multilateral trade and payments depends
importantly on the balance-of-payments effects of the relaxations already
undertaken. The revival of United States economic activity toward the end of
the year and the renewed emphasis on liberalization of United States trade
policies by the United States Government enhance the prospects for such an
advance, provided that the principal trading nations succeed in maintaining
reasonable monetary stability.

THE UNITED STATES

ECONOMY

IN 1954

By the end of 1954, the American economy ap­
peared to have largely completed the adjustments begun in 1953. In so doing,
it passed through three distinct phases. In the first quarter of the year, the
Gross National Product still continued to decline, falling to 4 per cent below
the 1953 peak. During the next six months, the forces of contraction and ex­
pansion were almost evenly balanced and comprehensive indicators of business
activity displayed remarkably little change. By the fourth quarter, the economy
was again expanding and the Gross National Product, at a seasonally adjusted
annual rate, rose to 362 billion dollars, 6.5 billion dollars above the low quarter
of the year. For 1954 as a whole, the estimated value of goods and services
produced totaled 357 billion dollars, a slight (2 per cent) decline from the

12




preceding year. Since commodity prices remained relatively stable, the reduc­
tion in aggregate activity mainly represented declines in the physical volume
of output.

Further Adjustment and Recovery
The pattern of business activity in 1954 reflected, for the most part, a continua­
tion of the process of adjustment to basic changes in the underlying economic
situation that had emerged in 1953. These changes entailed, fundamentally, a
transition from rapid growth spurred by rising defense activity to a lower
level of defense expenditures and greater emphasis upon private demands and
initiative. Part of the adjustment arose from the fact that, during the period
of accelerated expansion in final demand, inventories had been built up beyond
the needs of a prompt-delivery economy because of the orientation of output
toward military items with long production lead-times, some precautionary
buying of materials that had been in limited supply, and also competitive pres­
sures to force distributors to increase their selling efforts.
The downward pressures exerted upon the economy during the period of
realignment were of considerable magnitude. During the second half of 1953,
as indicated in Chart 1, a shift from inventory accumulation to depletion
equaled the net decline in the seasonally adjusted Gross National Product;
aggregate final purchases (Gross National Product less inventory change)
leveled off, and defense expenditures, which had been rising at a quickened
pace, began to turn down. The continued decline in the Gross National Product
from the last quarter of 1953 to the first quarter of 1954, however, reflected a
5 billion dollar fall in the seasonally adjusted annual rate of final purchases.
As may be seen in Chart 1, the major share of the decline in such purchases
for this period was attributable to lower national security expenditures, which
receded at nearly double the rate of decline of the preceding two quarters.
Other Federal spending, which had been rising throughout 1953, was also
reduced substantially. In addition, the downturn in outlays on producers’ dur­
able equipment that had begun in late 1953 accelerated somewhat during the
opening quarter of 1954. Expenditures on consumer durables, mainly because
of lower automobile sales, remained about 6 per cent below the average for
1953. Other areas of final demand, in the aggregate, showed little change over
this period. Inventory liquidation continued at about the same rate as in the
fourth quarter of 1953, and so exerted no additional contractive influence on
the economy.




13




Chart

1

GROSS

N A T I O N A L PR O DU CT , QUA R TE RL Y,

1953-54*

G R O SS N A TIO N A L PRODUCT

/ / } INCREASE IN INVENTO RIES
EjHl DECREASE IN INVENTO RIES

CH AN G E IN G R O S S N A T I O N A L P RO DU CT

AND M A JO R COMPONENTS

FOURTH QUAR TER

1954*

1953-FIRST

QUARTER

GROSS NATIONAL
PRODUCT (TOTAL
EXPENDITURES)

OTHER FEDERAL
GOVERNMENT

PRODUCERS' DURABLE

CONSUMPTION

GOVERNMENT

CONSTRUCTION
CH ANGE IN
BUSINESS
INVENTORIES

* S e a s o n a lly a d ju s t e d a n n u a l ra te s.
S o u r c e : U n ite d S t a le s D e p a rtm e n t o f C o m m e rce .

14

The weakening in major sources of demand, and particularly for the
products of such durable goods industries as steel, automobiles, and rnetalfabricating, was reflected in marked declines of production and employment.
By March, the Federal Reserve’s seasonally adjusted index of industrial pro­
duction had fallen to 123 per cent of the 1947-49 average, 10 per cent below
the July 1953 peak. Nearly 6 per cent of the civilian labor force (3.7 million
persons ) were estimated to be unemployed in March, as against 3 per cent a
year earlier.
Despite the magnitude of the downward pressures on economic activity
that emerged in the first quarter and the fact that during the remainder of the
year national security outlays continued to fall at nearly the first-quarter rate
while producers’ durables outlays also registered further, though moderate,
declines, no cumulative deflationary forces developed. In fact, the economy
during the second and third quarters of 1954 generally moved sideways, as
the strength of the forces of expansion matched that of the forces of contrac­
tion. Construction outlays rose to record levels and consumer spending regis­
tered a substantial recovery, with most of the gains recorded in outlays on
nondurables and services. The upward trend in State and local spending
continued. With final demand stable and prices steady, inventory liquidation
proceeded in an orderly manner and at a fairly constant pace.
The index of industrial production showed no further decline during the
second and third quarters of the year but fluctuated narrowly between 123
and 125 per cent of the 1947-49 average. In certain basic industries, however,
considerable further shrinkage in output occurred, notably in the steel indus­
try where inventory problems had been particularly serious, and in the lumber
and rubber industries where operations were curtailed for a time by labor dis­
putes. For a number of other lines, such as household appliances, furniture,
and textiles, a partial recovery in output was recorded. The level of unemploy­
ment over these months was generally slightly lower than it had been at the
end of the first quarter but, for the most part, fluctuated in response to seasonal
factors.
By the fall of the year, signs of recovery were becoming evident in many
business indicators. Manufacturers’ new orders started to increase, and declines
in their inventories were mainly confined to finished goods— a pattern charac­
teristic of the later stages of the adjustment process. The rate of steel output
advanced by over 25 per cent between late August and the end of November.
The apparel industry, which had made sporadic advances in the spring and
late summer but had in general been operating far below the levels of early
1953. also began to show more definite signs of revival. After August, the
adjusted index of industrial production began to turn upward and the rise
accelerated in November, as production of new-model cars gained momentum:




IS

by the year end, the index had reached 130, or 6 per cent above the low of 123
reached in the spring and late summer and within 5 per cent of the 1953 peak.
Output of consumer durables, moreover, had recovered over four fifths of its
decline from the peak month in 1953.
All these developments were reflected in a fourth-quarter rise of the Gross
National Product above its year-earlier level. Gains in output, however, were
not fully matched by improvements in the labor market: while employment rose
and unemployment receded somewhat, the number of persons out of work in
the fourth quarter still averaged about a million higher than a year earlier.

Factors in the Adjustment Process
The manner in which the economy was able to absorb the shocks inevitably
involved in a rapid transition toward a new pattern of final demand bore im­
pressive evidence of its underlying strength. Despite the hardships which
declines in production and higher unemployment created for particular groups
and communities, business and consumer confidence remained high through­
out this period, a fact which was perhaps most dramatically emphasized by the
almost continuous rise in stock prices. The maintenance of ample credit avail­
ability provided powerful support to the forces of strength and helped to avoid
pressure on businessmen to reduce their inventories rapidly to levels below
those in keeping with the actual rate of sales and the greater availability of
supplies. In contrast to other recent experience, moreover, recession in the
United States did not spread generally to foreign countries; most of the world
in fact enjoyed a growing prosperity that probably helped to hasten the recov­
ery of the American economy. Thus, when toward the end of 1954 the two
major forces of contraction— declines in defense expenditures and inventory
liquidation— had nearly run their course, the stage was set for the forces of
expansion to exert their influence without substantial offsetting factors. The
early introduction of new-model automobiles and the momentum provided
through normal seasonal influences aided in hastening the upturn.
Perhaps the most remarkable feature of the economic scene during 1954
was the rapid increase in the volume of private residential construction. Con­
tract awards for such building advanced nearly 30 per cent over the 1953 total.
Increased availability of mortgage funds, easier terms for loans guaranteed by
the Veterans Administration, liberalization in Federal housing legislation, as
well as the high level of liquid assets in the hands of consumers, the needs of
growing families, the demand for more living space per person, and the con­
tinuing trend toward homeownership all appear to have contributed to the
housing boom.
16




Personal consumption expenditures in 1954 rose slightly over the level of
the preceding year, as outlays on nondurables and services continued to grow,
more than offsetting a decline in consumer expenditures on automobiles and
other durable items. The rise in aggregate consumer outlays was the more note­
worthy since it occurred at a time when consumer credit outstanding showed
little change in contrast to the rapid growth in 1952 and 1953; indeed, heavy
repayments on instalment obligations almost equaled, and at times exceeded,
new borrowings. The rate of personal savings, while declining during the
year, remained relatively high, averaging 7.7 per cent of disposable income.
A major factor in the strength of consumer demand was the fact that dis­
posable personal incomes during 1954 advanced moderately from the level of
the preceding year despite the somewhat slower pace of over-all economic ac­
tivity. This notable strength in disposable incomes resulted from the work­
ings of such automatic stabilizers as unemployment insurance payments, as
well as from reductions in income tax rates and from larger interest and divi­
dend payments that partly offset declines in wage and salary disbursements.
The increasing number of retired persons receiving private pensions exerted
a further stabilizing influence on consumer income. The reductions in excise
taxes which became effective in the spring also helped to stimulate consumer
spending.
Although business outlays on plant and equipment continued to fall
throughout the year along with the reduction in defense expenditures, the de­
cline was moderate. Although defense-oriented expansion of plant facilities
had nearly been completed, business firms made large expenditures for mod­
ernization and cost cutting, in accordance with longer-range plans and in
response to growing competitive pressures. There was also a rapid upsurge in
the construction of office buildings, as well as continued growth in the con­
struction outlays of State and local governments.

Competition and Prices
The economic adjustments of 1954 were accompanied by more aggressive com­
petition in many lines, notably automobiles and other consumer durable goods,
and in textiles. Simultaneously, the rate of business failures also increased,
particularly among smaller firms, and there was an unusually large number of
mergers in industries especially affected by the readjustment.
While the more intensely competitive climate thus created new problems
for many business firms, it also resulted in better values for the consumer and,
in general, appears to have aided in the maintenance and— toward the end of
the year— the expansion of consumer purchases. For the year as a whole, the
consumer price index averaged almost exactly the same as in 1953; whereas




17

the index had been rising gradually in most of 1953, however, it receded
slightly during the early part of 1954 and again in the latter part of the year.
The official statistics, moreover, probably did not fully reflect the lowering in
real costs to consumers that resulted from special price concessions— and par­
ticularly from the growing importance of discount houses— as well as through
the offering of improved products. Rents advanced only slightly during 1954
in contrast to several previous years of marked rise.
As mentioned earlier, the stability in wholesale prices was an important
aid in (and a reflection of) the orderly liquidation of inventories; the whole­
sale price index fluctuated within a range of only 1 per cent during the year.
Prices of industrial materials generally remained steady even while over-all ac­
tivity was still declining, partly because of Government stockpiling purchases
and the strengthening of foreign demand. As the recovery began to develop
toward the end of the year, prices of steel, rubber, and copper scrap and of
some other industrial materials rose somewhat. Wholesale prices of farm pro­
ducts continued to recede, but the decline in 1954 was only 1.3 per cent as
against the 9 per cent drop between 1952 and 1953. For the year as a whole,
weekly earnings of factory employees remained virtually unchanged, as a 2
per cent average increase in hourly rates was offset by a 2 per cent reduction in
average hours worked. By the year end, however, both the work week and
average weekly earnings had risen slightly over December 1953.

THE ECONOMY OF THE SECOND

DISTRICT

Economic trends in the Second District during
1954 broadly paralleled those in the country as a whole. Total income pay­
ments remained at about the same level as in the preceding year, as declines in
farm and factory earnings offset gains in nonmanufacturing wages and sala­
ries and in rental, dividend, and interest payments. Employment patterns were
also similar to those in the United States, with total payrolls falling about 2 to
3 per cent below 1953. The upturn in employment toward the end of the year,
however, came slightly later in this area than in the country as a whole.

,

Manufacturing Employment Dips But Nonmanufacturing Industries
Hold Up Well
In the Second District, recession had its principal impact on manufacturing
employment, which fell through most of the year at about the same rate as
nationally. Nonmanufacturing employment in the District rose slightly above
18




1953 levels, in contrast to very moderate declines in the rest of the nation, as
increases in construction and government employment slightly more than off­
set declines in transportation and public utilities.
Nondurable manufacturing employment, which is especially important in
the District, has sometimes acted as a “ stabilizer” in periods of economic re­
cession by fluctuating less widely than the heavy goods sector. In both 1953 and
1954, however, payroll cuts by nondurable goods industries were slightly more
pronounced in this region than in others, as Chart 2 shows, although not so
sharp as in durable goods manufacturing in either this area or the nation as a
whole.

Chart

2

NO NA G RI CU L T UR AL
AND

THE SECOND

EM PLOYMEN T

IN THE UNITED STATES

DISTRICT

(MONTHLY INDEX NUMBERS; JAN UARY 1953 =

100 PER CEN T; ADJUSTED FOR SEASO N AL VARIATION)

S o u rc e : C o m p u te d b y th e F e d e r a l R e se rv e B an k o f N e w Y o r k fro m d a t a s u p p lie d b y th e D e p a rtm e n tr of
L a b o r o f N e w Y o rk S t a t e , N e w J e r s e y , C o n n e c tic u t, a n d the U n ite d S t a t e s .

The most important declines in nondurable employment in the District
were in the apparel industry, which is heavily concentrated in New York City.
Reduced activity was particularly evident among producers of women’s coats
and suits, as unseasonably warm weather in the early autumn apparently dis­
couraged the purchase of winter garments. Toward the end of the year, how­
ever, activity picked up somewhat in all major lines of apparel.




19

In durable goods industries, employment fell about as far below 1953
levels in the District (9 per cent) as in the entire country; the rates of decline
were very similar until September when employment turned up and rose more
than seasonally in the nation but less than seasonally in the District. Declines
in manufacturing employment led to substantial unemployment in Upstate
New York and in New Jersey, where heavy manufacturing industries play an
especially important role. The Buffalo, Albany-Schenectady-Troy, and UticaRome areas in New York, as well as Paterson, New Jersey, were all classi­
fied during the year as areas of “substantial labor surplus” with 6 to 12 per
cent of the labor force out of work. The smaller communities of Amsterdam
and Gloversville, New York, which are confronted with problems of long-range
economic adjustments, continued to be listed as areas of “very substantial labor
surplus” . New York City, on the other hand, had only a moderate labor sur­
plus, despite the lower levels of employment in the garment industry.

Strength in Retail Sales and Construction
Consumer buying in District department stores showed modest increases over
1953 in contrast to declines in the nation as a whole. Among the major
cities, sales gains were recorded for New York and Rochester, while lower
levels were reported in Buffalo and Syracuse, Newark, and Bridgeport. All
declines were slight, however, with the largest a drop of 5 per cent in Bridge­
port. Data on buying at other retail outlets are fragmentary but suggest a
similar geographical pattern of changes in consumer purchases.
Construction contract awards in the District also increased over 1953,
and, if the total for 1953 had not included the unusually large awards for the
New York State Thruway, the gain in 1954 would have been almost as great
as that for the country as a whole, or almost 15 per cent. Nonresidential con­
tracts, which were unchanged in the United States, rose sharply in the District
(14 per cent), mainly because of the high level of awards for large office build­
ings in the New York City area. Large increases were recorded also in awards
for school buildings, particularly on Long Island and in Upstate New York.
Contracts for residential construction, which had been declining in 1953,
rose by 19 per cent in 1954. Home building expanded quite rapidly in the
Metropolitan New York and Northern New Jersey areas, but lagged in some
Upstate New York areas; awards in Albany and Schenectady, for example,
were well below 1953 levels, perhaps reflecting the substantial decline in
employment in that area. Builders attributed much of the increase in residen­
tial building to easier financing and favorable housing legislation.
20




Agricultural Income Continues to Decline
Gross receipts of Second District farmers fell by 6 per cent in 1954, the same
rate of decline as in 1953 and a somewhat sharper reduction than that for farm
receipts in the country as a whole (4 per cent). Prices received by District
farmers fell, on the average, more (6 per cent) than farm prices in the country
at large (3 per cent), reflecting the fact that poultry and dairy products, which
are especially important in the District, have been more severely affected by
price declines than many other types of farm products. The fall in milk prices
was in part attributable to a lowering of price supports. Farming costs were
somewhat lower, but net income apparently continued to decline.

FEDERAL RESERVE CREDIT POLICY

Actively Easy Money
The Federal Reserve System made use of all its instruments of general credit
policy during the year 1954 to help cushion and reverse the economic reces­
sion that began to develop in mid-1953. System policy during 1954, which has
been described as one of “ active ease” , was designed to assure a ready avail­
ability of credit facilities for creditworthy borrowers at all times and thus to
facilitate the readjustment and provide the economy with all the encourage­
ment for economic recovery that cheap and abundant credit may afford.
Toward this end, the Reserve Banks reduced discount rates, the Board of
Governors of the Federal Reserve System reduced member bank reserve re­
quirements, and the Federal Open Market Committee directed extensive use of
open market operations to counteract seasonal influences and to maintain an
easy reserve position at member banks.
The policy of “ active ease” pursued by the Federal Reserve System
through most of 1954 involved the maintenance of substantial amounts of re­
serves in excess of the immediate needs of the banking system, but it did not
imply a steady increase in the supply of bank reserves, nor did it involve
steady and persistent net security purchases for the System Open Market Ac­
count. In periods of seasonally declining credit needs, part of the reserves
accruing to the banks were absorbed by sales from the System Account. Simi­
larly, some of the reserves released in midsummer by the reduction in reserve
requirements were temporarily absorbed until the need for them developed.
On the other hand, in periods of seasonal increase in the demand for credit, or
when member banks’ reserves as a whole were under pressure from the Treas­
ury’s financing program or other influences, purchases were made for the




21

System Open Market Account to maintain an abundant but controlled supply
of liquid funds in the market. In addition, temporary purchases of securities
from dealers under repurchase agreements were made from time to time to
relieve localized tightness in the principal money market centers, especially in
New York City.
Over the year as a whole, total reserve balances held by member banks
declined 1.3 billion dollars. However, because of a number of factors, most
importantly the reduction in reserve requirements, the change in total reserves
was not a valid indicator of the actual conditions of credit availability during
1954. Under the conditions prevailing in 1954, a better measure of the change
in immediately available uncommitted bank resources was the amount of free
reserves (defined as excess reserves less member bank borrowing from the
Federal Reserve Banks). During 1953, as Chart 3 indicates, the central reserve
and reserve city banks hardly ever carried appreciable amounts of free re­
serves, even though the pressure on their reserve positions eased significantly
after April. In 1954, on the other hand, despite the fact that the larger banks
make it a rule to keep as fully invested as possible, the amount of reserves held
by the central reserve and reserve city banks exceeded their combined reserve
requirements and borrowings from the System by a significant margin in al­
most every month. The “country” banks in the aggregate held free reserves in
both years, but in substantially larger volume in 1954. In the first five months
of 1953, average member bank borrowings exceeded excess reserves by 580
million dollars. Even in the last seven months of 1953, after System policy
shifted in the late spring and the banks were able to reduce their borrowings
and accumulate reserves, they held on the average only 259 million dollars of
free reserves. In 1954, however, average free reserves rose to more than 625
million dollars.
Partly because of seasonal factors, the actual amount of free reserves held
by member banks varied somewhat over the course of the year. For example,
in January, member banks as a group gained a substantial volume of reserves
as the result of seasonal declines in currency in circulation and in business
loans. Simultaneously, an unexpectedly sharp decline in the Treasury’s balance
with the Reserve Banks poured funds into the market. These reserve gains were
only partly offset by a seasonal drop in float and by large-scale withdrawals of
reserves through Federal Reserve open market operations. Free reserves rose
above 800 million dollars during the month. But these unusually liquid condi­
tions were short-lived, as shown in Chart 3, and in the early part of February
the banking system experienced fairly sizable temporary losses of reserves
which reduced the average amount of free reserves held during the month to a
little over 325 million dollars. Required reserves declined steadily through
April as bank loans were repaid and bank-held Treasury debt was retired, and

22




Chart

3

MEMBER BANK FREE RESERVES BY CLASS OF BANK
{M O N TH LY A V E R A G E S O F DA ILY FIG U R E S)
MILLIONS
OF DOLLARS

*
------------ y
A /
/ v

.

V

V

\

i

t

-------- — '

+

!

I

there also continued to be a net return flow of currency. As a result, free re­
serves tended to accumulate, adding gradually to bank liquidity.
At times the Federal Reserve System entered the market, either through
outright transactions or through repurchase agreements, to smooth out tem­
porary fluctuations in the volume of reserves available to the banking system.
Since data on actual bank reserve positions are not available until one or two
days after the events they measure, System operations aimed at smoothing out
the wide swings of a potentially disturbing character must be based partly
upon forecasts of the various factors affecting member bank reserves. At times




23

it is inevitable that these forecasts will fail fully to anticipate major move­
ments in the principal factors, and it was part of the policy of “ active ease”
to resolve any uncertainty as to the likely trend of bank reserves on the side of
ease. As a result, there were some brief periods when conditions in the money
market were excessively easy.
During the summer months, the average level of free reserves rose to more
than 700 million dollars. The higher level during these months was only partly
a reflection of open market operations. More important was the reduction in
member bank reserve requirements which took place in instalments from June
16 through August 1. (Reserve requirements for central reserve cities were
reduced 2 percentage points to 20 per cent against net demand deposits, and
those for reserve city and country banks 1 percentage point to 18 and 12 per
cent, respectively; the required reserves against time deposits for all classes
of banks were reduced from 6 per cent to 5 per cent.) Approximately 1.6
billion dollars of reserves was freed by the reserve requirement reductions.
A relatively small part of the newly freed reserves was employed immediately
to support the deposits arising from bank subscriptions to the 3.7 billion
dollars of tax certificates sold by the Treasury during the summer. The banks
had no immediate need for the remainder at that time, although it was ex­
pected they would need these funds in the fall when credit and currency de­
mands would increase. Therefore, in order to avoid unnecessarily liquid
money market conditions, the Reserve System reabsorbed a large part of these
funds, temporarily, either by selling Treasury bills in the open market or by
allowing its holdings of maturing bill issues to run off without replacement.
To accomplish this withdrawal, the bill holdings of the System Open Market
Account were reduced by approximately 1.3 billion dollars in the period from
June 23 through August 25.
In the closing months of 1954 the usual seasonal factors tended to drain
free reserves from the banking system, but the daily average figure for all
member banks declined only moderately. The principal offset to the loss of
free reserves was provided by net purchases of nearly 1.0 billion dollars of
securities for the System Open Market Account between the early part of
September and the end of November. The recovery from the economic reces­
sion that got under way at that time apparently added somewhat to the demand
for money and credit and this, together with the cessation of System Account
security purchases in December, contributed to a moderate firming in money
and credit conditions at the year end.
Summarizing, the security holdings of the System Open Market Account
actually declined by about 430 million dollars over the full year. Net sales or
redemptions of maturing bills amounted to 1.4 billion dollars in the first eight
months and net purchases to 1.0 billion in the last four months. In addition,

24




there was a net reduction over the year of 554 million dollars in the amount of
securities held by this Bank under repurchase agreements, giving a total de­
cline in Federal Reserve security holdings for 1954 of 984 million dollars. The
June-August reduction in member bank reserve requirements, however, freed
approximately 1.6 billion dollars of reserves, so the net effect of open market
operations and reserve requirement policy was to add about 600 million to the
available reserve funds of member banks.
The actively easy conditions of credit availability during most of 1954
were reflected in the New York money market and in the principal money
market rates. Member banks were under almost steady pressure to find invest­
ment outlets for the funds which tended to accumulate in their money positions,
and competition between banks and nonbank investors for short-term invest­
ments helped to drive interest rates to the lowest levels in several years. From
time to time, however, as the result of varying combinations of circumstances,
an uneven distribution of available reserves developed and the New York
market took on a relatively tight appearance despite general ease elsewhere.
The most striking example of this paradoxical situation occurred in August
and September, when the net effect of both Federal Reserve and Government
operations was to withdraw reserves from banks in the central money market
while adding to those of the country banks. The sales of securities made from
the System Open Market Account, during the summer months, to absorb the
currently unneeded portion of funds freed by the reduction in reserve require­
ments drew the funds initially from the large banks in the central money mar­
ket although all member banks had shared in the release of reserves through
the action on reserve requirements. The situation was compounded when, on
August 2, the Commodity Credit Corporation (CCC) redeemed certificates of
interest and took over bank loans in the amount of nearly 2 billion dollars.
Most of the certificates and loans were held by country banks, whereas most
of the funds to pay them off were drawn from city banks. Finally, the money
market banks probably took a larger-than-proportionate share of the 3.7 billion
dollars of tax anticipation certificates, which were sold on August 2, and there­
fore experienced a larger increase in required reserves.
Free reserves were drawn back into the money market to ease the pressure
on the New York City banks only gradually, since the free reserves were widely
scattered and the rates initially prevailing were too low to induce the country
banks to strive actively to put these funds to work. Reflecting the search for
available funds by the large money market institutions, however, yields on
Treasury bills rose gradually and rates for Federal funds advanced close to
the Reserve Bank discount rate. The higher rates eventually proved effective in
attracting outside funds. At the same time, security dealers were induced by
the higher interest costs of financing their portfolios in the money centers to




25

search aggressively for outside funds at lower rates. One of the techniques
frequently used by dealers which was particularly effective in mobilizing
reserves in outlying areas was the repurchase agreement, under which dealers
sold securities to banks and other investors outside the principal money mar­
kets under contracts requiring them to repurchase the securities at a stipulated
price and on a given day. The rates charged for such accommodation were
generally well below the rates at which funds were available in New York City.
Although such adjustments took place more slowly, at times, than might have
been anticipated, the experience provided a good illustration of the manner
in which a free money market operates to eliminate temporary distortions in
the distribution of reserves and to channel available funds to the areas of
greatest relative need.

Bank Loans and Investments and the Money Supply
The provision of ample reserves can encourage banks to lend and invest, but
it cannot insure that borrowers will borrow and thus draw fresh money into
the spending stream. Thus, in 1954 many borrowers repaid outstanding loans
and, until the last few weeks of the year, many banks experienced an over-all
decline in the demand for credit despite their efforts to maintain or increase
their volume. But it was apparent that the policies of the Federal Reserve Sys­
tem avoided pressures for liquidation and resulted in lower interest rates and
easier credit terms. These in turn brought repayment schedules within the
capabilities of larger numbers of borrowers and helped to sustain the volume
of loans in the banking system. And, to the extent that the banks found loan
demands insufficient to employ all their available funds, they turned aggres­
sively to investments in Government and other securities. Bank holdings of
Federal debt increased 6.0 billion dollars during the year, partly as a result of
purchases of securities offered by nonbank holders who had other uses for the
proceeds, and partly as a result of purchases of new securities offered by the
Treasury. Consequently, a large amount of money and credit was released and
created to contribute directly to the economic revival. Total commercial bank
credit increased by more than 11 billion dollars in 1954, more than in any
previous year except the World War II years and nearly three times as much
as in 1953 (see the accompanying table).
Despite limited demands for business and personal loans, total loans
extended by commercial banks increased by about 3.6 billion dollars in 1954,
slightly more than in 1953. Nearly half of the increase, or roughly 1.7 billion
dollars,1 was in real estate loans. Loans for purchasing and carrying securities,
both to brokers and dealers and to others, showed the second largest increase
1The 1954 figures on changes in loans by type are partly estimated.
26




YEARLY CHANGES IN EARNING ASSETS
OF ALL COMMERCIAL BANKS, 1950-54
(In millions of dollars)

YEAR
1950
1951
1952
1953
1954p

LOANS

GOVERNMENT
SECURITIES

OTHER
SECURITIES

TOTAL

+ 9 ,2 84
+ 5 ,4 97
+ 6 ,4 17
+ 3 ,4 30
+ 3 ,6 00

-4 ,9 7 8
- 503
+ 1,794
+ 108
+ 6 ,0 00

+ 2,172
+ 940
+ 804
+ 525
+ 1,600

+ 6,478
+ 5,935
+ 9,014
+ 4,063
+ 11,200

p Preliminary.
Note: Because of rounding, the figures do not necessarily add to the totals shown.

in 1954, about 0.9 billion dollars. This was the greatest increase in this kind
of credit during any of the postwar years. Agricultural loans were up only 0.3
billion, against an increase of 1.0 billion in the previous year; however, the
figures on agricultural credit reflect a net increase in outstanding CCC certifi­
cates of interest of only 360 million in 1954, as against 810 million in 1953.
Consumer loans, including instalment credits for the purchase of automobiles
and major appliances, declined by about 0.2 billion, compared with increases
of 1.7 billion and 2.3 billion in 1953 and 1952, respectively.
Commercial and industrial loans fell by 0.4 billion dollars in 1954, com­
pared with a decline of 0.7 billion in the previous year and an increase of 2.0
billion in 1952. However, the data on changes in business loans for the full
year conceal the marked shift that occurred in the demand for commercial
loans in the latter part of 1954. At the year end, presumably in response to the
quickening pace of business activity, a somewhat greater-than-seasonal busi­
ness loan demand appeared. But it was not large enough to offset the loan
contraction that occurred earlier in the year when repayment of excess-profitstax borrowing, inventory liquidation, and the lower levels of business activity
reduced the needs for bank loans.
Another feature of the 1954 business loan picture was the fact that a
disproportionate share of the over-all decline occurred at New York City
banks. In the year ended December 29, 1954, commercial, industrial, and agri­
cultural loans of the weekly reporting member banks in New York City de­
clined by nearly 1 billion dollars, whereas commercial banks as a group
recorded very little net change in this composite classification (the decline in
commercial loans being approximately offset by the increase in agricultural
credits). A breakdown of commercial loans extended by the City banks into
various industry classifications indicates that the metal and metal-products
companies, sales finance companies, and public utilities were chiefly respon­
sible for the net loan repayments. Generally, the largest and strongest firms




27

in these industries, the firms with well-known names and prime credit ratings,
are customers of the New York City banks, and part of the loan repayment
may reflect the substitution of open market borrowing at lower rates, such as
sales of commercial paper, for bank loans. Another part of the decline may
represent refinancing in the capital markets of temporary short-term bank
credits arranged by public utility companies in 1953 when long-term rates
were relatively high. Finally, a considerable part of the borrowing for excessprofits-tax purposes, which was repaid in early 1954, may have been concen­
trated in New York City.
Although the loan repayment at the New York City banks was the most
striking development, business loan demands in the rest of the banking system
were also light during most of 1954. Therefore, the banks turned to invest­
ments to find employment for the larger part of the funds made available to
them by the easy money policy of the Federal Reserve System. Bank holdings
of Government securities increased by approximately 6.0 billion dollars in
1954 and holdings of other securities by about 1.6 billion. This was the largest
increase in holdings of Government securities since the end of World War II,
and the second largest increase on record in holdings of other securities. Only
in 1950, when the banks acquired 2.1 billion dollars of securities other than
those of the United States Government, was there a larger increase in their
portfolios of these obligations. Since the total of marketable Treasury obli­
gations outstanding increased by only 3.2 billion dollars in calendar 1954,
the banks were able to acquire only part of their new Government security
holdings on direct subscription. The balance they purchased indirectly,
through the open market, from insurance companies, savings banks, and other
institutions which were making room in their portfolios for new mortgages
and other higher-yielding obligations in amounts greater than they could
purchase with their current accruals of funds.
The expansion in commercial banks’ security portfolios was accompanied
by a marked lengthening in the average maturity of their holdings. The
Treasury Survey of Ownership shows that, at the end of December 1953, the
average maturity of marketable Government securities held by commercial
banks was three years and seven months. By the end of October 1954 (the
latest date for which figures were available at the time this report was written),
the average had risen to four years and six months. The limited demand for
loans and the low yields on short-term instruments induced banks to reach out
for longer maturities in an effort to sustain earnings. At the same time,
Treasury debt management operations during the year complemented the

28




banks’ efforts to acquire longer maturities as the Treasury successfully offered
several intermediate-term notes and bonds on refundings of maturing issues.
Against a total increase during the year of 3.2 billion dollars in marketable
Government obligations outstanding, certificates (both regular and tax antici­
pation series) increased 2.1 billion, notes declined 3.4 billion, and bonds in­
creased 4.5 billion.
As a corollary of the rapid growth in commercial bank assets in 1954, the
money supply (defined as privately owned demand deposits and currency out­
side banks) grew by approximately 3.8 billion dollars. This represented an in­
crease for the full year of 4.4 billion in demand deposits adjusted and a
decline of 0.6 billion in circulating currency, and an increase in the total
money supply of approximately 3 per cent. In addition, time deposits in com­
mercial and mutual savings banks increased by 4.9 billion, of which 3.0 billion
was at commercial banks. Velocity of the money supply, as indicated by the
rate of turnover of demand deposits, continued to rise in 1954, partly as
the result of a sharp rise in New York City where most of the increased activity
in the securities markets was centered. The annual rate of turnover of demand
deposits in New York City in 1954 averaged 162.1 per cent of the 1947-49
average, compared with 140.1 per cent in 1953, an increase of 15.7 per cent.
In other reporting cities the annual rate of turnover in 1954 was 122.6 per cent
of the 1947-49 average, up 2.0 per cent from 1953.

Discount Policy and the Structure of Interest Rates
Federal Reserve Bank discount rates were lowered twice in early 1954, from
2 to 1% per cent in February and to 1% per cent in April. The purpose behind
these reductions was dual. First, they were made to bring the discount rate
into closer alignment with open market rates, most of which had already de­
clined under the impact of the System’s open market policy of “ active ease” ;
and, second, they served to give direct expression to that policy and the lower
rates of interest implied by it. The discount mechanism itself served a some­
what more limited purpose in the easy money atmosphere of 1954 than it had
under the tighter conditions of 1952 and the early months of 1953. In the
period of restrictive policy in 1952 and 1953, the System employed open mar­
ket operations to limit the volume of funds available to the banking system
and thus made it necessary for banks to borrow both to make temporary
reserve adjustments and to meet part of their seasonal and other needs for
funds. In 1954, in contrast, most banks borrowed only occasionally and then
only for temporary reserve adjustment purposes. For more lasting purposes,
they were able to draw on the reserve funds provided the market by the Sys­
tem’s open market operations and reductions in reserve requirements. Under




29




actively easy money conditions, the discount rate became primarily a symbol
of the direction of System policy and a pivot for certain other short-term
market rates. Member bank borrowing from the Federal Reserve Banks aver­
aged 146 million dollars on a daily basis during 1954, compared with 1,175
million between July 1952 and May 1953 and 464 million between June and
December 1953.
The search by the commercial banks for investment outlets and their ex­
pectation in the spring of progressively easier reserves drove market rates of
interest sharply lower during 1954, as Chart 4 indicates. The average issue rate
on Treasury bills declined in one year from a peak of 2.416 per cent in June

Chart 4
SHORT-TERM MO N E Y

RATES

PER CENT
PER ANNUM

COMMERCIAL PAPER 4-6 MONTHS

mummm

FEDERAL RESERVE DISCOUNT RATE wamm— m
TREASURY BILLS NEW ISSUES

1953 to a low of 0.616 per cent in June 1954 and averaged 0.953 per cent in
1954, against 1.931 per cent for the preceding year. Open market commercial
paper rates on four-to-six months’ prime paper moved down from an average
of 2.52 per cent in 1953 to 1.58 per cent in 1954 and closed the year at a range
of 1*4-1% per cent; finance company paper and bankers’ acceptances followed
a similar pattern. The prime loan rate of the commercial banks in New York
City was reduced from 3*4 per cent to 3 per cent in March, and then main­
tained at that level. As noted earlier, the relatively higher rate on bank loans
encouraged some of the banks’ larger customers to resort to other forms of
financing, such as bankers’ acceptances and open market commercial paper, on
which rates were lower.
While the easy money policy had its initial influence in the short-term
market, declining rates stimulated banks and other investors to reach out
further in the maturity range in search of more attractive yields. Gradually,
the net investment demand stemming from the Federal Reserve System’s easy
money policy and the supply of bank credit it brought into the market led to
lower rates throughout all maturities and on all types of securities. Yields on
fully taxable twelve-to-fifteen-year Government bonds declined from a peak
of 3.09 per cent in May 1953 to 2.54 per cent by June 1954. Average yields
on high-grade municipals declined from 2.99 per cent in June 1953 to 2.48
per cent a year later, and those on Moody’s Aaa corporate bonds from 3.40
per cent in June 1953 to below 2.90 per cent through the last half of 1954.
As a result of the decline in rates, corporations were encouraged to carry
through capital expansion programs, and States and municipalities to arrange
financing for schools, new roads, and other civic purposes. Mortgage money
became available in large volume, and new construction reached record levels.
Thus, easy money, spreading its influence throughout the credit structure, had
a strong stimulating effect on capital investment.
It is not often possible to look back on a period of economic change and
conclude, beyond doubt, that a particular economic policy had certain deter­
minable results. The interaction of innumerable forces and counterforces—
credit policy, fiscal policy, tax policy, consumer and business expectations, to
name a few— is almost inevitably too intricate to permit simple generalizations
about broad cause and effect. Flexible credit policy was employed in 1954 to
provide an abundant supply of cash and credit to the economy and, in con­
junction with the other instruments of public economic policy, to halt and
reverse the recession that had gotten under way in mid-1953. The recession
was reversed and, by the end of 1954. recovery was well advanced. While the
statistics indicate that the recovery was to a large measure based upon exten­
sive recourse to the credit markets, easy credit availability could not. by itself,
have brought about the display of underlying soundness and strength that the




31

United States economy has just presented. But it is, nevertheless, reasonable
to conclude that credit policy, both when it restrained credit excess prior to
mid-1953 and induced postponement of many capital projects, and more re­
cently when it eased conditions in the credit and capital markets and encour­
aged capital expenditure, contributed positively to the necessary conditions for
economic stability and sound growth.
As 1954 drew to a close, the improvement in economic conditions indi­
cated that the circumstances in which a program of aggressively active credit
ease was needed to combat economic recession were being replaced by circum­
stances that called for somewhat less aggressive provision of credit. Flexible
credit policy was then in process of adjustment to the new circumstances.

THE SOURCES, USES, AND COSTS OF FUNDS

As noted in the preceding section of this Report, the
market for new capital and credit was characterized by a ready availability
of funds throughout 1954, owing in large measure to sizable accumulations
of savings and to the Federal Reserve System policy of “ active monetary
ease” . Aggregate demand for additional capital and credit through the markets
was somewhat lower than in the two preceding years, but was still high, even
though over-all economic activity had contracted slightly from 1953 to 1954.
The demands for long-term funds for mortgage investment and for State and
municipal projects were at record levels, and the ready availability of funds
for such purposes was an important factor in providing the upward thrust in
construction activity which helped greatly to offset and reverse the recession­
ary tendencies of the economy.
Although incomes and savings were high, the banking system provided
a larger part of the new funds than in 1953, both in absolute and in relative
terms, as shown in Chart 5. The capacity of the commercial banks for credit
extension was increased by the availability of ample reserve funds, and the
tailoring of new and refunding Treasury issues to fit the banks’ portfolio needs
encouraged the use of this potential. As indicated earlier, the Treasury policy
of avoiding competition with other needs for capital encouraged institutional
investors to invest their available funds in mortgages, private securities, and
State and municipal issues. In fact, these institutions sold substantial amounts
of Government securities indirectly to the banks to supplement current ac­
cruals to their available funds. The greater competition among lenders to place
their funds advantageously led to generally low borrowing costs throughout
the year.

32




C h a rt, 5
SO U RC ES OF NET

1952

FUNDS

1953

1954

* C o m p ris e s n et in c re a s e in c o m m e rc ia l b a n k lo a n s a n d in v e stm e n ts, a n d n e t c h a n g e in
Federal R e se rv e h o ld in g s o f G o v e rn m e n t s e c u r it ie s .
S o u r c e : E s tim a te d b y the F e d e r a l Res& rve B a n k - o f N e w Y o rk fro m v a rio u s so u rc e s .

The Changing Patterns o f Demand and Supply
Aggregate net borrowings of new capital and credit in 1954 declined about 15
per cent from the previous year, but to a large extent this was accounted for by
the reduction in borrowing by the Federal Government. Long-term money was
in greater demand by the private sector of the economy; the small decline in
corporate issues for new money was more than offset by increased mortgage




33

borrowing and by a rise in term loans from the banks. The demand for long­
term funds by State and local authorities in 1954 also increased over the pre­
vious year to a new record. The volume of outstanding short-term loans by
the commercial banks (i.e., all except real estate and term loans) increased
only moderately in 1954.
Net cash borrowing from the public by the Federal Government con­
tracted from 4.6 billion dollars in 1953 to 0.9 billion in 1954, reflecting mainly
the decline in defense spending, and the relatively small need for net cash
borrowing enabled the Treasury to hold the public debt within the limit (281
billion dollars) prescribed by Congress last August. Corporate issues for new
money (excluding investment companies) also-declined, by about 10 per cent,
to 7.2 billion dollars in 1954. Corporate offerings designed to raise working
capital were smaller than in 1953, but there appears to have been a slightly
larger proportion of flotations for the purpose of financing plant and equip­
ment expenditures, despite the reduced volume of such spending during the
year. On the other hand, outstanding mortgage debt increased by 11.8 billion
dollars, about 2 billion more than in 1953, thus providing the funds required
for the year’s record private construction outlays, particularly for new hous­
ing. Long-term debt of State and local governments rose by a record 4.7
billion dollars in 1954, over 30 per cent more than the increase of the pre­
ceding year. A notable development was the increase in turnpike and other
highway issues, including a substantial amount of “revenue bonds” .
Although short-term loans by commercial banks increased only moder­
ately during 1954, the banking system substantially expanded its holdings of
real estate mortgages and State and local government securities. Commercial
bank holdings of Federal Government securities rose much more than in 1953,
even though net Treasury borrowing was much less. The holdings of the
Federal Reserve Banks were reduced by almost 1 billion dollars, and consider­
able reductions occurred also in the holdings of life insurance companies, sav­
ings banks, and nonfinancial corporations. The growth of bank holdings of
Government obligations was encouraged by Treasury offerings of new and
refunding issues in the intermediate maturity range which were well suited to
meeting the banks’ investment demands. The Treasury, for its part, was able
to take advantage of the easier credit conditions and to proceed aggressively,
at lower rates, to shift substantial amounts of the public debt out of the short­
term area and thus to reduce its refunding problems in the years immediately
ahead.
The supply of funds channeled through institutions such as insurance
companies, pension funds, mutual savings banks, and savings and loan asso­
ciations rose somewhat in 1954, continuing the persistent growth in the im­
portance of these institutions in the capital market. Capital supplied by these
34




sources was over % billion dollars greater than in 1953; the new funds flowed
to an increasing extent into mortgage investments. On the other hand, net
additional funds supplied directly to the capital market by individuals and
nonfinancial corporations contracted sharply in 1954 from a relatively high
level in the previous year. To a large extent, this development reflected the
accumulation of Government securities as tax reserves by nonfinancial cor­
porations in 1953 and their subsequent liquidation in 1954, when net accruals
of tax liabilities were reduced.

Borrowing Costs and Market Conditions
In the first half of 1954, the costs of financing new capital and credit con­
tinued the decline which had begun in 1953; as shown in Chart 6, market
yields leveled off in mid-1954 and rose only slightly thereafter. In general,
financing costs throughout 1954 were lower than in the previous year.
Prices rose and yields fell for seasoned corporate bonds during the first
few months of the year, settling down at about the same level that had pre­
vailed during most of 1952. Although some market congestion occurred from
time to time later in the year, small price concessions by dealers were usually
successful in moving stocks of unsold securities. The rise in common stock
prices, accentuated in the last months of 1954, ran counter to the pattern of
other security prices, which tended to level off or decline after the midyear.
Stock price rises seemed to reflect an underlying confidence in business pros­
pects as well as the abundance of investment funds seeking profitable outlets,
although there were signs of speculative fever, especially during the last two
months of the year. The rise in share prices in 1954 was accompanied by an
increase of over 40 per cent in customers’ debit balances with New York Stock
Exchange firms, and the growth in margin trading showed signs of accelerat­
ing toward the end of the year.
Corporations took advantage of the generally lower financing costs in
1954 to engage in extensive refinancing operations. Although yields on highgrade stocks declined sharply and thus reduced the spread between stock and
bond yields, corporations continued to favor bond issues over equity flotations
in their financing programs. This was particularly true of the public utilities,
especially electric, gas, and water companies, which floated a larger share of
the total issues in 1954 and which did a higher proportion of bond financing
than in previous years. The record volume of issues by State and local authori­
ties was marketed without much difficulty, although some congestion in the
market occurred in the second and fourth quarters at the time of heavy new
offerings. Yields on municipal bonds fell in the first few months of the year
and again during the summer, but increases occurred during the heavy con-




35




Chart 6
MARKET YIELDS OF SELECTED SECURITIES
(M ON THLY A V ER A G E S )
PEI?
CENT

6

200 STO CKS*

v \

VA

M OODY'S CORPORATE Aaa

HIGH-GRADE MUNICIPAL

N
3-5 YEAR TREASURY ISSUES

J

F

M

A

M

J

J
1953

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O

N

D

1954

*End-of-month figures.

centrations of new issues in the spring and again toward the end of the year.
In the first part of 1954, Government security prices rose and yields de­
clined under the predominant influence of the easy monetary policy. Prices
were also influenced by the expectation that the recession would reduce credit
demands. Market yields on short-term Government securities continued to fall
through June, and Treasury financing costs on new issues reached the lowest
levels in several years. Short-term yields rose somewhat during the second

36

half of 1954, as the commercial banks reduced their bill holdings in favor
of Government securities of longer maturity and money market conditions
firmed. Following marked declines in the first few months of the year, yields
on intermediate and long-term Government securities tended to fluctuate
irregularly at relatively low levels. Occasional weakening of prices and yield
increases appeared attributable to such factors as increases in the supply of
medium-term issues through Treasury financing operations and occasional
congestion in the market for new corporate and municipal issues, while prices
of the longer-term Treasury bonds were affected by recurrent discussions of
the possibility of a new long-term Treasury issue. Toward the end of the year,
a slight but fairly widespread tendency toward higher yields appeared, prob­
ably in reflection of the large volume of corporate and municipal offerings, as
well as press reports of a shift toward a System credit policy of less active
ease and a growing belief that a long-term bond would be included in the
Treasury’s financing operations during the first quarter of 1955.
In spite of growing demand for mortgage money, the increased avail­
ability of lenders’ funds resulted in easier mortgage market conditions in
1954. Institutional investors found mortgages relatively more attractive be­
cause of the decline in yields on corporate and municipal bonds and Govern­
ment securities after the middle of 1953. Interest rates on conventional mort­
gages appeared to soften somewhat, and prices in secondary markets for all
types of mortgages were firmer. The Housing Act of 1954 relaxed the maturity
and downpayment terms on Federal Housing Administration insured mort­
gages, and the terms of Veterans Administration and conventional mortgages
were also easier than in 1953. Sales of homes were facilitated by the easier
terms and, despite large repayments on outstanding mortgages, the growth in
mortgage debt was greater than in any previous year. In fact, there was some
concern at the end of the year lest the easy terms lead to overbuilding of homes
and a subsequent slump in building activity.

THE BALANCE OF PAYMENTS OF THE UNITED

STATES

Exports and Imports
Imports of goods into the United States and payments for foreign services
declined last year by approximately 500 million dollars to 15.9 billion. At the
same time, our exports (excluding goods and services financed by military
aid) increased by more than 400 million dollars to about 17.5 billion. The re­
sulting current-account surplus of 1.6 billion dollars was more than counter­
balanced, however, by the 3.4 billion made available to the rest of the world




37

through United States Government grants and loans and through private re­
mittances and capital outflows. The rest of the world (including international
institutions) was thus able to add about 1.8 billion dollars to its gold and
dollar assets through transactions with the United States. This rise included
more than 1 billion dollars of foreign short-term dollar assets, approxi­
mately 220 million dollars of long-term investments, about 230 million dollars
that accrued to international institutions, and more than 300 million dollars’
worth of gold. In addition, foreign countries other than the USSR added to
their reserves approximately 600 million dollars in gold from new production
and other sources. (All 1954 data in this section of this Report are prelimin­
ary.)
A large part of the 650 million dollar decline in our merchandise imports
was due to lower purchases in Europe of iron and steel mill products and other
goods for which United States demand had been especially strong in 1953
because of defense needs. Reduced purchases of copper, tin, and wool also cur­
tailed United States imports from the sterling area, while imports from Canada
and Latin America were affected by lower demand for metals, notably tin,
copper, and aluminum. It is noteworthy that the slackening of United States
demand failed to affect seriously the prices of primary products, partly be­
cause of an offsetting increase in Western European imports as production
there rose substantially.
United States payments for services, including military expenditures
abroad, rose by more than 100 million dollars over 1953 and were 750 million
dollars above the 1952 level. The decline in military expenditures in the Far
East, principally in Japan and South Korea, was more than offset by increased
“offshore” purchases in Western Europe which, together with the spending
of our armed forces, continued to provide a sizable share of Europe’s dollar
earnings. An increase in United States tourist expenditures abroad was an­
other factor maintaining the total of United States payments for goods and
services at a higher level than in any previous year except 1953.
The decline in United States imports appears to have had the effect of
reducing the rate of increase in foreign monetary reserves, rather than of
reducing the foreign demand for United States goods and services. Substantial
declines in United States commercial exports of such products as coal, grains,
and industrial machinery were more than offset by increased sales of cotton
and certain semimanufactures, including nonferrous metals and industrial
chemicals. Most of the increase occurred in merchandise exports to Western
Europe, where a number of countries relaxed substantially their import re­
strictions on dollar goods. Exports to Latin America were maintained at rela­
tively high levels, but Brazil and Colombia found it necessary to add substan­
tially to their dollar obligations and to tighten import restrictions toward
38




the end of the year. Exports to Japan were particularly high during the first
half of 1954 but fell sharply in the latter months of the year, as Japan took
steps to curb imports and to bring its external accounts into better balance.
Foreign payments for United States services during 1954, on the other hand,
continued at about the level that has prevailed since 1951; the small rise over
1953 was primarily due to larger remittances of earnings on United States
investments abroad.

Foreign Aid and Investment

A sharp drop in United States military aid exports during 1954 reduced ex­
penditures for this purpose by nearly a billion dollars below the 4.3 billion
expended in 1953. The reduction centered almost entirely on Western Europe.
Military aid to the Far East, on the other hand, continued near the 1953 level.
Foreign aid expenditures for defense support and economic and technical
assistance declined for the fifth consecutive year, the 1954 reduction amounting
to 300 million dollars. Roughly two thirds of the decrease affected Western
Europe where such grants, at 940 million dollars, were at the lowest rate since
1946. Such transfers as did occur consisted mainly of deliveries or payments
from a backlog of allocations made previously; nearly one third of the total
went to France in compensation for expenditures incurred in support of the
war in Indochina.
Major changes also occurred in the movement of United States capital
in 1954. There was a substantial increase in the net outflow of private United
States capital which, at 1.5 billion dollars, was nearly four times the 1953 rate.
The rise occurred in the portfolio and short-term capital accounts, while net
direct investment declined somewhat, largely owing to the completion of sever­
al large projects in Canada and Latin America. Increased portfolio investment
reflected substantial first-quarter purchases by United States investors of
Canadian securities and of International Bank obligations. The large outflow
of short-term capital, primarily to Latin America, began in the second quarter
of 1954 and contrasted sharply with the substantial 1953 reduction in Latin
America’s commercial arrears. A considerable part of the increase involved
Colombia where the adoption of certain exchange control procedures tempor­
arily delayed dollar transfers. Bank credits to Brazil also increased sharply.
On United States Government loan account, there was temporarily a net
inflow of capital as repayments exceeded new lending for the first time in
seventeen years. Export-Import Bank lending activity was sharply reduced
until the latter part of the year when renewed activity got under way. Under
a law that came into force last August, the Export-Import Bank’s lending




39

authority was expanded and new procedures for expediting loans were subse­
quently adopted.
As a result of all these factors, the rate of accumulation of gold and
dollar assets by the rest of the world through transactions with the United
States declined from 2.3 billion dollars in 1953 to approximately 1.8 billion
in 1954. Western Europe and, to a lesser extent, the sterling area were major
gainers of gold and dollars, while a few countries, especially in Latin America
but also in Asia, experienced net losses. The over-all gain was particularly note­
worthy in that it was achieved during a period of somewhat lower United
States business activity and of reduced outflows of United States Government
loans and grants, and was accompanied by a significant reduction in the dis­
crimination against dollar goods. The 1954 United States balance of payments
thus reflected the increased economic strength and stability in the countries
of the free world.

FINANCIAL AND ECONOMIC

DEVELOPMENTS

ABROAD

Prosperity and Increased Competition

Most foreign countries had another prosperous year in 1954, despite the eco­
nomic readjustment in the United States. Western Europe showed a particu­
larly marked economic advance, and a more general one than in 1953. In many
countries, the growth of industrial production was faster than in the preced­
ing year; the rise in steel output, following a slackening in 1953, was especially
striking. Increased demand for consumer durable goods was a major factor
underlying the industrial upsurge, but building and industrial investment out­
lays also increased. Inventory accumulation apparently stayed within reason­
able bounds, and defense expenditures were, as a rule, about the same as in
1953. Although the grain harvest was below the exceptionally high level of
1953, domestic supplies were for the most part satisfactory. Rising indus­
trial output was accompanied almost everywhere by declining unemployment,
which in several countries fell to new postwar lows. Toward the year end, how­
ever, scattered indications of incipient strains appeared in the economies of
certain of these countries.
In Canada, business activity slowed down a little, but an upturn took
place before the end of the year. Because of unfavorable weather, however, the
harvest was much smaller than during recent years. In Japan, industrial output
dipped in the middle of the year, but for 1954 as a whole it was still above
1953. Among the primary-producing countries, trends were more diverse, but
aggregate output was generally higher, and the output of certain raw materials
40




in a number of countries reached new peaks; food production was generally
well sustained. Development expenditures increased noticeably in many coun­
tries, especially in Southeast Asia.
Domestic prices remained reasonably stable in the industrial countries of
Western Europe, in Canada, in Japan, and in many of the primary-producing
countries— especially in the sterling area and the Philippines. However, in
a number of South American countries, notably Bolivia and Chile, domestic
prices rose sharply under the impact of continuing inflationary pressures.
World primary commodity prices averaged somewhat higher, while certain
individual prices, notably coffee and cocoa, fluctuated widely.
Economic growth and reasonable price stability were accompanied by
more active competition both within the domestic economies of many coun­
tries and in the world markets for food, industrial raw materials, and manu­
factures. This increased competition reflected the continuing rise in primary
production, as well as the growing productivity and enlarged industrial capac­
ity of the industrial countries. It was also the outcome, in considerable meas­
ure, of the continued progress in relaxing direct governmental restrictions,
both internal and external, and of the increased reliance upon monetary and
fiscal controls.

Flexible Monetary Policy
The rise in output and trade was generally associated with increases in the
money supply. In most Western European countries and in the overseas coun­
tries of the British Commonwealth, this expansion was confined to less than
10 per cent; it likewise was below 10 per cent in many of the other primaryproducing countries, but in others, particularly Bolivia, Brazil, Chile, and In­
donesia, it was 20 per cent or more.
In Western Europe, the expansion in the money supply resulted chiefly
from increased gold and foreign exchange earnings and from enlarged de­
mands for private credit. Government deficits were financed to a large extent
through genuine private savings, which grew distinctly faster than in any
previous postwar year. In many primary-producing countries, on the other
hand, the main factors behind the monetary expansion were governmental
economic development and other programs and relatively easy credit con­
ditions.
Monetary ease prevailed in many countries, but it was no longer so
pervasive as in 1953, and toward the year end there were indications of tighter
monetary conditions in important financial centers abroad. Interest rates in
Western Europe, which had generally declined in 1953, continued to fall dur­
ing 1954 in only a few countries, as, for instance, in Belgium. Elsewhere,




41

interest rates either changed but little or increased in the latter part of the
year, as in Denmark, Switzerland, and Sweden; in the United Kingdom,
where they had tended downward during most of the year, they moved up
noticeably toward the year end. In Canada, the previous downward movement
of interest rates continued. The trends were diverse in the primary-producing
countries, with declines in Ceylon and South Africa, among others, and with
increases, in the latter part of the year, in Australia, Brazil, and New Zealand.
During the year, monetary authorities had recourse to flexible, but moder­
ate, adjustments of monetary policy in response to changing conditions. Varia­
tions in central bank discount rates were more frequent in 1954 than during
other recent years. The discount rate was increased in four countries (Brazil,
Denmark, Guatemala, and New Zealand) ; and, although it was lowered in
eight countries (Austria, Ceylon, Germany, Greece, the Philippines, Spain, and
the United Kingdom, and twice in France), all of these reductions except the
second one in France occurred during the first half of the year.
In those countries where the existence of a money market of some breadth
makes possible the use of open market operations as a means of credit control,
there was little resort to this method of expanding commercial bank reserves.
A noteworthy development was the abandonment in Sweden of the policy of
supporting government bonds at fixed prices. In the Netherlands, along with
the establishment of variable bank reserve requirements, a special funding
government-bond issue was floated to reduce bank liquidity, thereby helping
to provide a base for a more effective use of monetary controls, including more
flexible open market operations. In Canada, new legislation provided for vari­
able reserve requirements and for increasing the potential effectiveness of cen­
tral bank open market operations.
There was no significant relaxation of monetary restraints by the lower­
ing of commercial bank reserve requirements or the easing of selective credit
controls, apart from the easing of consumer credit regulations in the United
Kingdom; indeed, commercial bank reserve requirements were raised in the
Netherlands and New Zealand. Selective credit controls and direct controls
over loans, investments, or interest rates were tightened in Japan and in
Brazil, Chile, Colombia, and other Latin American countries.
Last year’s experience suggests that, in countries with developed money
markets, monetary policies—accompanied by appropriate fiscal and exchange
policies—can be flexibly and promptly adapted to changing conditions. In
countries with less developed money markets, efforts are being made to en­
large the usefulness and effectiveness of monetary measures, which increas­
ingly have come to be regarded as an essential accompaniment of balanced
economic expansion. Altogether, therefore, there was in 1954 increased reli­
ance on monetary policy in the mature economies and enlarged scope for its
42




more effective employment in the less developed ones. The effective use of
monetary policy may, in turn, be expected to encourage further progress in
relaxing domestic and external direct controls.
Continued Growth of Monetary Reserves

The gold and dollar holdings of foreign countries continued to increase in
1954, though at a more moderate rate than in the previous year, as a result
both of transactions with the United States and of a substantial flow of newly
produced gold into official monetary reserves. At the year end, total foreign
gold and dollar holdings1 stood at 25.0 billion dollars, or about 1.9 billion
higher than in December 1953; they thus were about one-third above the postKorea low of March 1952.
The reserve accumulation in 1954 was confined to Continental Western
Europe, the sterling area, and Canada, as shown in Chart 7. The growth in
gold and dollar holdings in Continental Western Europe, which had been
under way since mid-1948, continued at a rapid pace in 1954; at the end of
the year, these holdings stood at 11.4 billion dollars, 1.6 billion higher than a
year earlier. The central gold and dollar reserves of the sterling area rose less
rapidly than in 1953 and, by the end of 1954, totaled 2,762 million dollars,
an increase of 244 million from December 1953. Canada’s holdings of gold
and United States dollars rose substantially, in contrast to a moderate decline
during 1953, while Latin American countries added but little to their reserves
and, in some cases, incurred sizable short-term obligations abroad. Nonsterl­
ing Asia suffered a moderate reserve loss, largely concentrated in Japan, the
Philippines, and Thailand.
The continued growth of monetary reserves in foreign countries as a
whole was the more remarkable as it occurred despite the somewhat lower
level of United States economic activity, which curtailed foreign dollar earn­
ings from trade with this country. Furthermore, a number of countries,
notably the United Kingdom, the Netherlands, and France, made sizable re­
payments in advance of maturity on dollar obligations to the United States
and international financial organizations. Finally, some countries—especially
those that had had substantial reserve gains in 1953—reduced or eliminated
direct discriminatory restrictions against dollar imports. On the other hand,
the growth of reserves abroad was sustained by continued foreign receipts of
dollars from United States aid programs, as well as from our military spending
1Foreign gold and dollar holdings, as used here, exclude the gold holdings of the
USSR and both the gold and the dollar holdings of international institutions other than
the European Payments Union and the Bank for International Settlements. Dollar holdings
comprise both official and private holdings, and consist primarily of sight and time de­
posits, short-term United States Government securities, and bankers9 acceptances, as re­
ported by United States banks.




43

GO LD AND D O LLA R H O LD IN G S O F SELECTED F O R IIi

12
BtLLIONS

y

OF U .S .
DOLLARS

CONTINENTAL WESTERN EUROPE* /

/

8

\

V

\

___________

4

2

0

1 I I I 1 I I I I 1 ' ! l f I !.I II .!, t ■.I. |ttI IIi *I1I |Ii 1!1I !iI t1Im II lI1Ii trSIIl ii M111
I II hiMI iKI mtII Ii

: I ■IMJi. I1||
I I
1946

1947

1948

1949

1950

1951

19.52

1953

5954

* Continental members of fhe O EEC i.e ., including Turkey, but excluding Spain and Finland; holdings of the Bank for
International Settlements for the European Payments Union, as w ell as for its own account, are included.
f Excluding sterling , French-franc, and Dutch-guilder areas. N ote: Holdings include official g old reserves
(reported or estimated), and official and p rivate d ollar holdings as reported by banks in the United States.

overseas; in addition, net outflows of United States private capital expanded
greatly, as noted earlier.
With a few exceptions, the further growth of gold and dollar holdings also
reflected the increased strength of foreign economies. Particularly noteworthy
was the high and rising level of production at reasonably stable prices in West­
ern Europe, already commented upon. Continued output increases not only re­
duced still further Europe’s dependence on the United States for essential im­
ports, but also helped to offset the decline in the United States demand for raw
materials. Most primary-producing countries consequently experienced no

44




serious worsening in their balance-of-payments position. In a few countries of
Latin America and Asia, there were, however, continued or accentuated export
difficulties, partly due to inflationary pressures, which led to a loss of reserves.
A striking feature of the reserve increases abroad in 1954 was the fact
that almost one third represented accruals from new gold production. In con­
trast to earlier years, about three fifths of newly mined gold appears to have
found its way into the reserves of foreign central banks and governments, as
against only one third in 1952 and 1953.

Relaxation of Exchange and Trade Controls
The further rise in foreign gold and dollar holdings in 1954 was accompanied
by major moves toward freer trade and payments. Relaxations of import
controls proceeded hand in hand with moves toward greater convertibility of
major currencies in a pattern of liberalization which avoided the sterile con­
cept of a purely “formal” convertibility, accompanied by little or no easing
of trade restrictions. Altogether, the easing of exchange and trade controls
was probably more substantial than in any other year since World War II.
although it was largely confined to Western Europe and the sterling area.
In Western Europe, there was a substantial reduction in restrictions
against dollar imports. In May, the Netherlands virtually ended all dollar dis­
crimination imposed for currency reasons, thus bringing its policy into line
with that of Belgium-Luxembourg. Other countries, notably West Germany.
Sweden, and Italy, also relaxed their restrictions against dollar goods. In
addition, West Germany greatly extended the free use of the mark and per­
mitted conversion of blocked mark balances into all nondollar currencies.
Within Europe, import liberalization was strengthened by the French decisions
during the year to increase quota-free imports from its OEEC partners.
In the sterling area, also, restrictions on dollar spending were reduced.
The United Kingdom ended or eased quantitative import controls on a number
of dollar goods. South Africa ended all discrimination against dollar goods,
and other sterling area countries, such as New Zealand, India, and Pakistan,
reduced their discriminatory import restrictions. During the year, further
progress was made in reactivating the international commodity markets in the
United Kingdom and in enabling nonresidents to obtain certain dollar commo­
dities against payment in sterling. The London gold market was reopened, on
a restricted basis, after an interval of fifteen years. In addition, the United
Kingdom greatly reduced the restrictions on the international use of sterling;
virtually all nondollar countries are now able to transfer sterling freely among
themselves.




4f>

There was thus in 1954 a significant trend toward a simultaneous relaxa­
tion of import restrictions and of exchange controls. The sustained growth in
the gold and dollar holdings of Western Europe and the sterling area provided
the confidence and furnished the reserves needed for the new easing of restric­
tions. In effect, by reducing dollar discrimination, the countries in these areas
were able to test the strength of their international position as part of a stepby-step advance toward convertibility of their currencies. Further progress
will depend upon the close cooperation of major trading nations in reducing
existing trade-and-payments restrictions, as well as upon the growth of output
and the maintenance of reasonable monetary stability, both in the United
States and abroad.
Developments in the New York Foreign Exchange Market

Activity in the New York foreign exchange market was about on the scale of
1953, with the pound sterling and the Canadian dollar continuing to be the
most actively traded currencies.
From January through July, sterling was in good demand and the rate
in the New York market was consistently quoted at better than the $2.81 level
which it had reached by the end of 1953. On a few occasions the rate reached
$2.82, at which price the Bank of England stands ready to supply sterling
against dollars. One of these occasions came at the end of April when rumors
prevailed in the market that the British authorities would widen the range in
which the sterling-dollar exchange rate might move. A heavy demand for
sterling for both spot and forward delivery ensued and, before the rumors
were proved to be false, substantial amounts of sterling had to be supplied to
the market by the British exchange authorities at or slightly below the $2.82
level.
The large purchases of forward sterling by commercial interests at this
time anticipated a substantial proportion of normal sterling requirements for
months to come and, consequently, tended to reduce the usual commercial de­
mand for sterling in the latter part of the year. In addition to this advance
covering of sterling requirements, a seasonal rise in the demand for dollars in
London which was somewhat more pronounced than in 1953, together with
some weakening in expectations of an early convertibility of the pound, led to
a decline in the sterling rate in the second half of the year. As a result, the rate
closed the year at approximately $2.78^2? the lowest year-end rate since De­
cember 1951.
Pound sterling futures had a rather wide movement during the year.
In mid-April, the quotations for three and six months’ deliveries were % cent
and 1%6 cent discount, respectively. Thereafter, the discounts narrowed
46




and, in the last quarter of the year, forward sterling was at a premium over
the spot quotation. In mid-October and later in December, three and six
months’ sterling were at % cent and % 6 cent premium, respectively.
In March 1954, the United Kingdom incorporated many types of sterling
accounts into the transferable-account area, which now embraces practically
all countries except the United States, Canada, and certain Latin American
countries. At about this time, the banks in the New York market began to deal
in transferable sterling, but subsequent activity was on a relatively small
scale. The rate for transferable sterling reached a high of $2.79^ in the early
part of April, thereafter declining to a low of $2.71 in November and ending
the year at $2.72*4.
The Canadian dollar continued at a premium over the United States
dollar during the entire year, ranging between a premium of 1%6 cents and
31%6 cents. The rate continued to be influenced by the inflow into Canada
of capital from the United States. At the year end, the Canadian dollar was
quoted at $1.031%2 with a firm undertone.
The blocked Deutsche mark (sperrmark) was traded in the New York
market to a limited extent during the year, and the quotation moved from
$0.2015 at the beginning of February to a high of $0.2355 in the latter part
of April, which brought the quotation to within ^2 cent of the official rate of
$0.2383 for the Deutsche mark. Various regulations affecting the use of the
sperrmark were introduced by the German authorities during the year, and
the sperrmark as such ceased to exist in the middle of September, at which
time the quotation was $0.2347^2* After September 17, 1954, the Liberalized
Capital Mark was actively traded and the quotation for the most part remained
above $0.2300, closing the year at $0.2315.

VOLUME AND TREND OF THE BANK’S OPERATIONS

Domestic Operations

The volume of work performed by the Bank in 1954 was influenced by the
easier credit policy, by the continued high levels of trade and financial trans­
actions (despite the moderate contraction in production), and by the heavy
debt refunding program of the Treasury. The easier credit policy was reflected
in a sharp decrease in both the number and dollar volume of discounts and
advances made to member banks, and in the moderately smaller number of
banks that made use of this Bank’s credit facilities. On the other hand, how­
ever, those parts of the Bank’s activities that are directly and mechanically




47

concerned with facilitating settlements of private business and financial trans­
actions, and with assisting in the Government’s financial operations, expanded
somewhat in 1954.
United States Government checks processed by the Bank increased by 7.1
per cent in number, but decreased by 10.2 per cent in dollar volume. The
smaller average size of checks appears to have resulted from an increased pro­
portion of checks covering social security payments in the total volume of
Government checks handled by the Bank. All other checks handled, which were
about eight times more numerous and seventeen times greater in dollar volume
than the Government checks, increased 3.5 per cent in number in 1954 to a new
peak of 468 million, slightly more than double the 231 million non-Government
checks processed at the Bank ten years earlier. In dollar value, these checks
also reached a new peak of nearly 340 billion dollars, 7.0 per cent more
than in 1953. Because of greater employee efficiency, this year’s record check
volume was processed more quickly and with less personnel and equipment
than in 1953. The gain in efficiency arose from a decline in the rate of person­
nel turnover, and from the training of Check Department personnel in meth­
ods of improving speed and accuracy and reducing fatigue.
Continued heavy public demand for currency was reflected in a further
slight increase, to a new peak, in the volume of currency received and counted
at the Bank; the dollar value, however, showed little change. Both the physical
and dollar volume of coin handled rose moderately, for the fourth successive
year, although the volume and value of coin received and counted remained
well below the levels reached in the early postwar years.
The Bank’s operations as fiscal agent for the United States Treasury in­
cluded a sizable increase in both the number and dollar volume of Savings
bonds processed, because of larger amounts of both sales and redemptions.
However, the work of handling these securities decreased substantially, with
the transfer to the New York Regional Office of the Register of the Treasury,
in June 1954, of all the machine accounting work previously performed in
the Savings Bond Department of this Bank. “All other United States obli­
gations” handled by the Bank in 1954 also rose considerably both in number
and dollar value, principally as a result of the heavy refunding operations con­
ducted by the Treasury. The Treasury’s refunding operations in February and
in December 1954 were the largest that had ever been undertaken, and involved
20.5 billion dollars and 17.3 billion dollars, respectively. This Bank also
assisted the Treasury in the issuance of new securities, and handled 64 per
cent of the entire 220 billion dollars of marketable securities issued, redeemed,
or exchanged by the Treasury in 1954.
Wire transfers of funds between Federal Reserve Districts reached a
record high in 1954. At the year end, additional improvements were being
48




SOME MEASURESOF THE VOLUME OF OPERATIONS
OF THE FEDERAL RESERVE BANK OF NEW YORK

(Including Buffalo Branch)
Number of pieces handled*
1954
Discounts and advances ............................................................... 1,939
Currency received and counted..................................
1,152,582,000
Coin received and counted ......................................
1,658,239,000
Gold bars and bags of gold coin handled ................ ................ 86,000
Checks handled:
United States Government checks ....................
60,576,000
All other ...............................................................
468,477,000
Postal money orders handled ....................................
54,151,000
Collection items handled:
United States Government coupons paid .........
4,134,000
Credits for direct sendings of collection items
314,000
All other ...............................................................
7,470,000
Issues, redemptions, and exchanges by fiscal agency
departments:
United States Savings bonds ............................
28,771,000
All other United States obligations ..................
3,725,000
Obligations of the International Bank for
Reconstruction and Development .................. ...............165,000
Safekeeping of securities:
Pieces received and delivered ............................
4,173,000
2,248,000
Coupons detached .............................................
Transfers of fu n d s f.....................................................
369,000
Amounts handled
Discounts and advances .............................................
Currency received and counted ..................................
Coin received and counted ..........................................
Gold bars and bags of gold coin handled ................
Checks handled:
United States Government checks ....................
All other ...............................................................
Postal money orders handled ......................................
Collection items handled:
United States Government coupons paid .........
Credits for direct sendings of collection items
All other ...............................................................
Issues, redemptions, and exchanges by fiscal agency
departments:
United States Savings bonds ..............................
All other United States obligations ..................
Obligations of the International Bank for
Reconstruction and Development ..................
Safekeeping of securities:
Pieces received and delivered (par value).......
Transfers of fundsf .....................................................

1953
4,262
1,143,142,000
1,499,464,000
121,000
56,572,000
452,447,000
56,918,000
4,611,000
321,000
6,998,000

26,051,000
3,400,000
233,000
5,450,000
2,723,000
335,000

$ 5,312,067,000
7,583,535,000
158,575,000
1,198,069,000

$ 21,723,381,000
7,584,736,000
148,619,000
1,676,730,000

20,679,497,000
339,861,532,000
868,177,000

23,016,234,000
318,481,355,000
886,630,000

1,205,039,000
839,166,000
1,078,793,000

2,708,945,000
359,561,607,000
340,083,000
437,626,510,000
377,580,330,000

1,356,738,000
755,112,000
894,006,000

2,198,335,000
303,273,130,000
415,228,000
360,464,951,000
295,501,530,000

*Two or more checks , coupons , etc., handled as a single item are counted as one “piece”.
f Includes wire and mail transfers; excludes Treasury transfers and Reserve Bank inter­
district settlements.




49

contemplated in the leased wire system, linking the Federal Reserve Banks and
their branches, the Board of Governors, and the Treasury. A test operation
was successfully conducted between the New York and Boston Reserve Banks
during the year, involving the use of regular language for messages instead of
code, and using new receiving mechanisms that prepare all the necessary ad­
vices and tickets formerly typed by hand.
Preparations for constructing a new building for the Bank’s Buffalo
Branch continued throughout the year. Preliminary designs and specifications
for the building were completed by the architects and approved by the Branch
and the Bank boards of directors and by the Board of Governors of the Federal
Reserve System. Currently, detailed plans are nearing completion and specifi­
cations are also expected to be completed shortly.
The average number of employees on the staff was 3 per cent fewer than
in 1953, though many of the Bank’s operations continued to grow in volume.
This reduction in staff in the face of a greater work load reflected higher em­
ployee efficiency, brought about in the main by a reduction in turnover. At
the end of 1954, total employment (exclusive of officers) at the head office and
at the Buffalo Branch was 3,724 as compared with 3,974 on December 31,
1953.

Foreign and International Operations
Total assets in the foreign accounts maintained at the Bank on behalf of the
Federal Reserve System registered another substantial increase during the
year and reached an all-time peak of 9.2 billion dollars in October. The rise
was, however, not so sharp as that of 1953. Of total assets of 9.1 billion dol­
lars at the year end, 5.6 billion was in the form of earmarked gold, 2.9 billion
in United States Government securities, and about 600 million in other securi­
ties and dollar deposits. The demand for gold tapered off as compared with the
previous year, the net increase amounting to only 177 million. Investments in
Government securities were up by 322 million and dollar deposits increased
by 67 million.
Gold and dollar assets of the International Bank and International Mone­
tary Fund, not included in the foreign figures, likewise showed a substantial
gain of over 300 million dollars.
Loans were made by the Federal Reserve Bank of New York on the se­
curity of gold to four foreign banks. The maximum amounts borrowed by
these banks totaled 212 million dollars; however, only one loan was outstand­
ing, in the amount of 133 million, at the year end. As in the past, the Bank
continued to make gold loans to assist foreign monetary authorities in meet­
ing their dollar requirements for temporary periods.
50




The Bank of Korea during the year opened a new account with the Bank,
as principal, and closed the account which in 1950 it had opened with the
Bank, as fiscal agent of the United States.
The Bank continued to operate the United States Stabilization Fund upon
authorization and instructions of the Treasury Department.
As fiscal agent of the United States, the Bank continued to administer
for the Treasury Department the blocking regulations affecting assets in the
United States of Communist China and North Korea and their nationals, and
transactions with those countries. The Foreign Assets Control Department re­
ceived 6,700 applications for licenses during the year, which brought the total
since the blocking regulations were put into effect in December 1950 to 27,400.

FINANCIAL. S T A T E M E N T S

Statement of Condition
Total assets of this Bank decreased 554 million dollars further in 1954, from
13,442 million to 12,888 million dollars. A decline of 714 million dollars in
holdings of United States Government securities was only partly offset by an
increase of 152 million dollars in “total cash” and a net increase of 8 million
dollars in the remaining asset items.
The decline of 714 million dollars in United States Government security
holdings mainly resulted from a drop of 554 million in United States Govern­
ment securities held under repurchase agreements with security dealers. This
decrease occurred in the early weeks of 1954, when a seasonal easing of the
money market permitted dealers to repurchase securities they had sold to this
Bank late in 1953. Through the remainder of the year, repurchase agreement
operations were in smaller volume, and sales to the Reserve Bank and repur­
chases from the Bank by dealers were about in balance. The Bank’s outright
holdings of United States Government securities declined by 160 million
dollars, most of the decline representing the Bank’s share of the net sales and
redemptions of Treasury bills made by the System Open Market Account dur­
ing the year.
The rise in “total cash” of 152 million dollars was accounted for almost
entirely by an increase of 125 million dollars in gold certificates, despite a
reduction of 321 million dollars in the gold certificate reserves of all Federal
Reserve Banks, and by an increase of 21 million dollars in Federal Reserve
notes of other Banks. The increase in the gold certificate reserves of this Bank
arose from a favorable Second District balance in the Interdistrict Settlement




51

ASSETS OF THE FEDERAL RESERVE BANK OF NEW YORK

(In thousands of dollars)

Dec. 31,1954

Dec . 31,1953

Gold certificates ...............................................

5,322,811

5,197,851

Redemption fund for Federal Reserve notes

184,192

183,706

Federal Reserve notes of other Banks ..........

47,323

26,488

Other ca sh ........................................................

80,497

75,303

Total cash .........................................

5,634,823

5,483,348

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

39,117

7,050

United States Government securities...........

6,401,284

7,115,378

Total loans and securities .............

6,440,401

7,122,428

ASSETS

Other assets:
Due from foreign banks*

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

6

6

Uncollected items .............................................................

771,896

790,661

Bank premises ...................................................................

7,149

7,390

All other .............................................................................

33,262

38,514

Total other assets .....................................................

812,313

836,571

TOTAL ASSETS.......................................................

12,887,537

13,442,347

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

16

16

52




LIABILITIES OF THE FEDERAL RESERVE BANK OF NEW YORK

(In thousands of dollars)

LIABILITIES

Dec. 31,1954

Dec. 31,1953

Federal Reserve notes...............................................................

5,950,858

5,924,481

Deposits:
Member bank—reserve accounts ....................................
United States Treasurer—general account ....................
Foreign* ............................................................................
Other ..................................................................................

5,482,319
95,808
147,721
322,038

6,049,923
70,675
134,793
361,474

Total deposits .............................................................

6,047,886

6,616,865

Other liabilities:
Deferred availability cash items ......................................
All other .............................................................................

575,375
5,456

605,851
6,787

Total other liabilities ...............................................

580,831

612,638

TOTAL LIABILITIES..............................................

12,579,575

13,153,984

89,949
188,070
7,319
22,624

81,852
176,633
7,319
22,559

CAPITAL ACCOUNTS:
Capital paid i n ...................................................................
Surplus (Section 7) .........................................................
Surplus (Section 13b) .......................................................
Other capital accounts .....................................................

307,962

288,363

TOTAL LIABILITIES AND CAPITAL
ACCOUNTS.............................................................

12,887,537

13,442,347

Contingent liability on acceptances purchased for foreign
correspondents! .....................................................................

5,420

7,068

Ratio of gold certificate reserves to deposit and Federal
Reserve note liabilities combined ......................................

45.9%

42.9%

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

342.220

288,486

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

13,632

16.872

TOTAL CAPITAL ACCOUNTS




53

Fund, mainly owing to net credits arising out of private domestic business
transactions. The increase in Federal Reserve notes of other Banks followed
an amendment to the Federal Reserve Act, effective July 19, 1954. Under this
amendment, notes of other Reserve Banks fit for further circulation no longer
have to be returned to the issuing Reserve Bank, but may be paid out without
penalty.1 As a corollary to this change, these notes are now included among
“cash assets” in the accompanying balance sheet rather than among “other
assets”, as in previous years.
Discounts and advances increased by 32 million dollars between the end
of 1953 and the end of 1954; this did not indicate more extensive member
bank use of Reserve Bank borrowing facilities during 1954, however. On the
contrary, the use of the “discount window” fell off considerably during the
year as a result of easier credit conditions, as shown in the preceding section,
“Volume and Trend of the Bank’s Operations” .
Total liabilities of this Bank declined by 574 million dollars, reflecting
primarily a 563 million dollar reduction in member bank reserve balances that
resulted largely from the June and July 1954 reductions in reserve require­
ments. “Other deposits” also declined by 39 million dollars, but there was a
net increase of 13 million dollars in this Bank’s participation in deposits of
foreign central banks and governments.
Federal Reserve notes of this Bank outstanding in the hands of the public
(including banks) rose by an additional 26 million dollars, or about 0.5 per
cent, to a new high of 5,951 million dollars at the end of 1954. The expansion
of this Bank’s outstanding notes contrasted with a decline of 305 million dol­
lars, or 1.1 per cent, in the total outstanding notes of all twelve Reserve Banks.
Reflecting the combined effect of larger gold certificate reserves and
smaller deposit liabilities, the reserve ratio of this Bank stood at 45.9 per cent
at the end of 1954, compared with 42.9 per cent at the end of 1953.
Earnings and Expenses
Total current earnings in 1954— 112.5 million dollars—were down 7.2 million
dollars from the record high of 119.7 million dollars earned in 1953. Earnings
of the System Open Market Account, in which this Bank shares, were lower
in 1954 than in 1953, largely because of the lower average yield obtained by
the Open Market Account on its holdings of United States Government securi­
ties; and the Bank made a smaller volume of advances to member banks at
lower rates (the rate on discounts for and advances to member banks was re­
duced ^4 per cent on February 5 and again on April 16, 1954). These two
1Prior to this revision of the A ct , a Federal Reserve Bank paying out the notes of any
other Federal Reserve Bank became subject to a penalty of 10 per cent of the face value
of the notes so paid out .
54




STATEMENT OF EARNINGS AND EXPENSES
FOR THE CALENDAR YEARS 1954 AND 1953

(In thousands of dollars)
1954
Total current earnings ...........................................................................
Net expenses ................................................................................. ........
Current net earnings...............................................................

1953

112,467

119,734

22,463*

23,235*

90,004

96,499

Additions to current net earnings:
Profit on sales of United States Government securities (net) ....

I ll

448

All other .......................................................................................... ............. —

5

Total additions...................................................................................... I l l

453

Deductions from current net earnings:
Retirement System (adjustment for revised benefits) ..............

—

659

Reserves for contingencies.............................................................

66

94

All other ..........................................................................................

7

10

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

73

763

38

— 310

Net earnings before payments to
United States Treasury .....................................................

90,042

96,189

Paid United States Treasury (interest on Federal Reserve
notes).....................................................................................................

73,549

82,180

Dividends paid.........................................................................................

5,056

4,879

Transferred to surplus (Section 7 ) .....................................................

11,437

9,130

Surplus— beginning of y ear...........................................................

176,633

167,503

Transferred from net earnings for year........................................

11,437

9,130

Surplus—end of year.......................................................................

188,070

176,633

Net additions or deductions (— ) ...................................................

SURPLUS ACCOUNT (Section 7) :

* Excludes reimbursed expenses and recoveries amounting to $3,901,978 in 1954 and
$4,348,623 in 1953.




55

factors together were mainly responsible for the decline in earnings in 1954.
Net expenses decreased by 0.7 million dollars, to 22.5 million dollars,
chiefly because of reductions in the cost of printing Federal Reserve notes and
in the cost of postage for mailing new currency to New York City from the
Bureau of Engraving and Printing in Washington, as a result of the comple­
tion early in 1954 of the program of accumulating a two-year supply of un­
issued notes as an emergency measure. These reductions more than offset
increased outlays for salaries and wages, the largest component of total ex­
penses.
Additions to current net earnings were smaller than in 1953, reflecting
reduced profits on sales of United States Government securities. Deductions
from net earnings were also smaller, being reduced by 0.7 million dollars be­
cause of the nonrecurrence of payments made into the Retirement System in
1953 to provide for supplemental allowances to employees who had retired in
1953 before qualifying for social security benefits.
Net earnings after all adjustments amounted to 90.0 million dollars, of
which 5.1 million dollars, the statutory dividend of 6 per cent, was paid on the
outstanding stock of the Federal Reserve Bank. Of the remaining 84.9 million
dollars, 3.3 million was transferred to surplus (Section 7) to bring the balance
in that account to a figure equal to the Bank’s subscribed capital, which had
been enlarged during the year as a result of subscriptions to additional stock
by member banks that had increased their own capital and surplus during
1954.2 As a general rule of long standing, each Federal Reserve Bank tries to
maintain its surplus account at an amount not less than its subscribed capital
(or twice its paid-in capital).
Ten per cent of the rest of the year’s earnings, or 8.1 million dollars, was
also added to regular surplus (Section 7), after payment of 90 per cent—73.5
million—to the United States Treasury as an interest charge levied by the
Board of Governors under Section 16 of the Federal Reserve Act on Federal
Reserve notes not covered by gold certificates.3
2M ember banks are required to subscribe to stock of the Federal Reserve Bank in an
amount equal to 6 per cent of their capital and surplus; they are required to pay only half
of these subscriptions , however , so that a Reserve Bank’s paid-in capital equals one half
its subscribed capital .

3Prior to amendment of the Federal Reserve A ct in 1933, each Federal Reserve Bank
was required to pay , after it had accumulated a surplus equal to its subscribed capital , a
franchise tax to the Government equal to 90 per cent of its net earnings. Since 1947 , the
interest charge levied by the Board of Governors on Federal Reserve notes not covered by
gold certificates has had the same purpose— to require each Federal Reserve Bank to pay
to the Treasury 90 per cent of its net earnings after accumulation of a surplus equal to its
subscribed capital.

56




C H ANGES

IN

M E M B E R S H IP

During 1954 the total number
of commercial banks in this District that are members of the Federal Reserve
System declined from 696 to 678. The net decrease of 18 banks was the
result of mergers of 21 member banks with other banks, the admission of two
State banks to membership, and the organization of a new national bank. The
678 member banks constitute 87 per cent of all national banks, State banks,
and trust companies in this District and hold 95 per cent of the total assets of
all such institutions.
NUMBER OF OPERATING MEMBER AND NONMEMBER BANKS
IN SECOND FEDERAL RESERVE DISTRICT AT END OF YEAR
(Exclusive of savings banks, private bankers, and industrial banks)
DECEMBER 31, 1953
!
■|
PER CENT!
PER CENT
NON­
MEMBERS
MEMBERS
MEMBERS
MEMBERS

DECEMBER 31, 1954
TYPE OF BANK

National banks
State banks and
trust companies
Total

MEMBERS
470

NON­
MEMBERS
0

100

484

0

100

208

100

68

212

106

67

678

100

87

696

106

87

CHANGES IN FEDERAL RESERVE MEMBERSHIP
IN SECOND DISTRICT DURING 1954 ___
696

Total membership beginning of year
Increases:
State banks admitted
New national bank
Decreases:
Member banks combined with other members
Member banks combined with nonmembers

18
3

Total membership end of year

678

CH A N G ES

IN D IR E C T O R S

AND O F F IC E R S

Changes in Directors
In November 1954, member banks in Group 3 elected Ferd. I. Collins, Presi­
dent and Trust Officer of the Bound Brook Trust Company, Bound Brook,
N. J., as a Class A director of this Bank for a term of three years beginning
January 1, 1955. Mr. Collins succeeded F. Palmer Armstrong, President of
The Keyport Banking Company, Keyport, N. J., whose term expired Decem­
ber 31, 1954.




57

At the same time, member banks in Group 3 re-elected John E. Bierwirth,
President of the National Distillers Products Corporation, New York, N. Y.,
as a Class B director for a term of three years beginning January 1, 1955.
In December 1954, the Board of Governors of the Federal Reserve System
redesignated Jay E. Crane, Vice President of the Standard Oil Company (New
Jersey), New York, N. Y., as Chairman of the board of directors and Federal
Reserve Agent for the year 1955. Simultaneously, the Board of Governors
appointed Forrest F. Hill, Provost of Cornell University, Ithaca, N. Y., as a
Class C director for a term of three years beginning January 1, 1955, to suc­
ceed William I. Myers, Dean of the New York State College of Agriculture,
Cornell University, Ithaca, N. Y., who had served as a Class C director and
Deputy Chairman since 1943. Mr. Hill was also appointed by the Board of
Governors as Deputy Chairman for the year 1955.
At the Buffalo Branch of the Federal Reserve Bank of New York, in
November 1954, Edgar F. Wendt, President of the Buffalo Forge Company,
Buffalo, N. Y., was designated by the board of directors of this Bank as Chair­
man of the board of directors of the Buffalo Branch for the year 1955. In
December 1954, the board of directors of this Bank appointed Charles H.
Diefendorf, President of The Marine Trust Company of Western New York,
Buffalo, N. Y., as a director of the Buffalo Branch for the three-year term be­
ginning January 1,1955. Mr. Diefendorf succeeded Lewis G. Harriman, Chair­
man of the Board of the Manufacturers and Traders Trust Company, Buffalo,
N. Y., whose term expired December 31, 1954. Also in December 1954, the
Board of Governors of the Federal Reserve System reappointed Clayton G.
White, dairy farmer of Stow, N. Y., as a director of the Buffalo Branch for the
three-year term beginning January 1, 1955.

Changes in Officers
Roy E. Wendell, Manager of the Safekeeping Department, who had completed
thirty-five years of service with this Bank in February 1954, died on March 7,
1954. Mr. Wendell had been an officer since April 1944.
Ralph W. Scheffer, Manager of the Government Bond Department, who
was assigned also as Manager of the Safekeeping Department, effective April
9,1954, died on August 9,1954. Mr. Scheffer had completed twenty-seven years
of service with the Bank in February 1954 and had been an officer since
January 1945.
Kenneth E. Small, formerly Manager of the Personnel Department, was
assigned as Manager of the Government Bond, and the Safekeeping Depart­
ments, effective August 12, 1954.
58




Curtis R. Bowman, General Auditor, who had been with the Bank since
August 1932, died on May 5, 1954. Mr. Bowman had been an officer since
January 1945.
Donald J. Cameron, formerly an Assistant Vice President, was appointed
General Auditor, effective May 24, 1954.
William A. Heinl, Manager of the Savings Bond Department, was assigned
also as Manager of the Currency Destruction Department, effective May 24,
1954. With the abolition of the Currency Destruction Department effective
January 7, 1955, Mr. Heinl’s assignment as Manager of that department termi­
nated, his assignment as Manager of the Savings Bond Department being
continued.
Paul R. Fitchen, Assistant Vice President, whose assignment to the Cash
and Collections Function was continued, assumed supervisory responsibilities
for the Cash, and the Cash Custody Departments, instead of the Check, Collec­
tion, and Government Check Departments, effective May 24, 1954.
Silas A. Miller, Assistant Vice President, who had been with the Bank
since September 1918 and an officer since January 1936, retired effective
June 1, 1954.
Robert V. Roosa, Assistant Vice President, formerly assigned to Research
and Statistical, was assigned to Open Market Operations in Government Se­
curities and Acceptances, and Treasury Issues, effective June 1, 1954.
John J. Larkin, formerly a Special Assistant in the Securities Department,
was appointed a Manager and assigned to the Securities Department, effective
June 1, 1954. The assignment of Spencer S. Marsh, Jr., as Manager of the
Securities Department was continued.
Harry M. Boyd, Manager of the Cash Custody Department, who had been
with the Bank since October 1917 and an officer since September 1942, retired
effective July 1, 1954.
Michael J. McLaughlin, formerly Manager of the Government Check De­
partment, was assigned as Manager of the Cash Custody Department, effective
July 1, 1954.
George C. Smith, Manager of the Collection Department, was assigned
also as Manager of the Government Check Department, effective July 1, 1954.
L. Werner Knoke, Vice President, who had been an officer since he joined
the Bank as Assistant Deputy Governor in January 1932, retired effective
September 1, 1954. Since 1937, Mr. Knoke had been a Vice President and the
senior officer in charge of International Banking, Gold and Silver Operations,
and Foreign Assets Control.
John Exter, formerly associated with the International Bank for Recon­
struction and Development, as chief of division, Department of Operations—
Asia and Middle East, and the first Governor of the Central Bank of Ceylon




59

(1950-53), was appointed an officer of the Bank with the title of Vice Presi­
dent, effective September 1, 1954. Mr. Exter was assigned to International
Banking, Gold and Silver Operations, and Foreign Assets Control.
Gerald H. Greene, formerly an Assistant Cashier at the Buffalo Branch,
was temporarily transferred to the head office, effective October 4, 1954. He
was appointed an officer of the Bank with the title of Acting Manager and
assigned to the Personnel Department. Mr. Greene was subsequently assigned
as Acting Manager, Service Department, effective January 7, 1955. The assign­
ment of Arthur H. Noa as Manager of the Service Department was continued.
John P. Jensen, formerly Chief of the Planning Division, Planning De­
partment, was appointed a Manager and assigned to the Security Custody De­
partment, effective January 7, 1955.
Walter S. Rushmore, formerly Manager of the Security Custody Depart­
ment, was assigned as Manager of the Personnel Department, effective January
7, 1955. The assignment of Frederick L. Smedley as Manager of the Personnel
Department was continued.

Member of Federal Advisory Council— 1955
The board of directors of this Bank selected Henry C. Alexander, President
of J. P. Morgan & Co. Incorporated, New York, N. Y., to serve in 1955, for a
third successive year, as the member of the Federal Advisory Council from the
Second Federal Reserve District.

60




D IR E C T O R S

OF

THE

FED ERAL

R ES ER V E

BANK

OF

NEW

YORK

Term
Class Group

D IR E C T O R S

A

1

N.

A

2

Joh n R. Evans

A

3

F erd.

B

1

C la r e n c e

B

2

L a n sin g

B

3

John

e * p i r * sw

............................................................................................................
Chairman of the Board, Chemical Corn Exchange Bank, New York, N. Y.
B a x ter Jack son

Dec . 31
1955

...................................................................................................................
President, The First National Bank of Poughkeepsie, Poughkeepsie, N. Y.

1956

I. C o l l i n s .................................................................................................................
President and Trust Officer, Bound Brook Trust Company, Bound Brook, N. J.

1957

F r a n c i s ..............................................................................................................
Director, and member of Executive Committee, General Foods Corporation,
New York, N. Y.

1955

P. S h i e l d ..............................................................................................................
President, The Grand Union Company, East Paterson, N. J.

1956

E . B i e r w i r t h ............................................................................................................
President, National Distillers Products Corporation, New York, N. Y.

1957

Chairman , and Federal Reserve A gent...................................................
Vice President, Standard Oil Company (New Jersey), New York, N. Y.

1956

Deputy Chairman ................................................................................
Provost, Cornell University, Ithaca, N. Y.

1957

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

1955

C

Jay E. C ra n e,

C

F o rrest F. H ill,

C

Franz

S c h n e id e r

New York, N. Y.

D IR E C T O R S - B U FF A L O

BRANCH

Chairman ..............................................................................................
President, Buffalo Forge Company, Buffalo, N. Y.

1955

........................................................................................................
President, Security Trust Company of Rochester, Rochester, N. Y.

1955

P. V r e e l a n d ..........................................................................................................
President, Salamanca Trust Company, Salamanca, N. Y.

1955

L. D a v is .................................................................................................................
President, The First National Bank of Olean. Olean, N. Y.

1956

...................................................................................................................
President, Stromberg-Carlson Company, Rochester, N. Y.

1956

....................................................................................................
President, The Marine Trust Company of Western New York, Buffalo, N. Y.

1957

G . W h i t e ............................................................................................................
Dairy farmer, Stow, N. Y.

1957

Edgar F . W e n d t,

B e r n a r d E. F in u c a n e

E d w ard

R obert

R o b e rt C. T a it

C h a r le s H . D ie fe n d o r f

C la y to n

M EM B ER O F

FED ER A L

A DVISO RY

CO UN CIL - 1955

........................................................................................................
President, J. P. Morgan & Co. Incorporated, New York, N. Y.

H en ry




C.

A le x a n d e r

1955

61

O F F IC E R S

OF

THE

FED ER A L.

RESER VE

A lla n
W illia m

S p r o u l,

F . T r e ib e r ,

BANK

OF

NEW

President

First Vice President

Vice President
Vice President

H a r o ld A . B ilb y ,

R o b ert G. R ouse,

John

Todd G . T ie b o u t,

E x te r ,

YORK

Vice President
Vice P resident and

General Counsel
Vice P resident
P h e l a n , Vice P resident
V . R o e l s e , Vice President

Vice President
Vice President
Vice President

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

V a le n tin e W i ll i s ,

A r th u r

R e g in a ld B . W i l t s e ,

H a r o ld

J o h n J. C l a r k e ,

John

H. W u rts,

Assistant General Counsel

A ssistant Vice President
Assistant Vice President
D a v is , Assistant Vice P resident

H ow ard D . C rosse,

P a u l R . F itc h e n ,

F e l i x T . D a v is ,

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

N orm an P.

H orace L . S anford,

R obert V . R oosa,

Assistant Vice President

A r t h u r I . B l o o m f ie l d ,

H erbert A . M u e t h e r ,

Senior Economist

Manager, Building Operating Departm ent

C h a r le s A . C oom bs,

D o n a l d C . N il e s ,

Manager, Research Departm ent

Manager, Planning Departm ent

H a r d in g C o w a n ,

A rth ur H . N o a ,

Assistant Counsel

Manager, Service Departm ent

G eorge G arvy,

G r e g o r y O ’K e e f e , J r .,

Senior Economist
C lifto n

Assistant Counsel, and Assistant Secretary

R . G ordon ,

W il l ia m

Assistant Counsel
G e r a ld

H . G reen e,

A cting Manager , Service Departm ent
E d w ard G . G u y ,

Assistant Counsel
W illia m

A . H e in l,

Manager, Savings Bond Departm ent
J o h n P . Jen sen ,

Manager , Security Custody Departm ent
P e te r P . L ang,

Manager , Foreign Departm ent

Manager, Personnel Departm ent
E. S m a l l ,
Manager, Government Bond Departm ent,
and Manager, Safekeeping Departm ent

K e n n e th

G eorge C . S m it h ,

A n g u s A . M a c I n n e s , J r .,

Manager , Collection Departm ent,
and Manager , Government Check Departm ent

Manager , Check Departm ent
E . M a r p le ,

Manager , Credit Departm ent ,
and Manager , Discount Departm ent

T h o m a s 0 . W aage,

Manager, Public Information Departm ent
A . C h ester W a l t o n ,

S p e n c e r S . M a r s h , J r .,

Manager, Bank Relations Departm ent

Manager , Securities Departm ent

A r t h u r H . W il l is ,

M i c h a e l J. M c L a u g h l i n ,

Manager, Cash Custody Departm ent
D o n a l d J. C a m e r o n ,




W a l t e r S. R u s h m o r e ,

Manager, Personnel Department

Manager , Securities Departm ent

62

F. P alm er,

Manager , Accounting Departm ent
F r a n k l i n E. P e t e r s o n ,
Manager, Cash Departm ent
L a w r e n c e E. Q u a c k e n b u s h ,
Manager, Bank Examinations Departm ent

F r e d e r ic k L . S m e d l e y ,

J o h n J. L a r k i n ,

W illia m

Assistant Vice President
Assistant Vice President
Assistant Vice President

Secretary
General Auditor

O F FIC E R S - B U F F A LO
F n s le y

B.

H a r o ld

S m ith ,

BRANCH

Vice President

M . W e s s e l,

G eorge

Assistant Vice President

J.

D o ll,

M . M onroe

Cashier

M yers,

Assistant Cashier

* Gerald H. Greene , an Assistant Cashier at the Buffalo Branch , has been tem porarily assigned
to the head office as an Acting Manager.
IND USTRIAL AD V ISO RY

CO M M ITTEE

Vice Chairman
Chairman of the Board,
A. G. Nelson Paper Company, Inc.,
New York, N. Y.

H . P o u c h , Chairman
Chairman of the Board,
Concrete Steel Company,
New York, N. Y.

A r th u r G. N e ls o n ,

W illia m




E d w ard

J.

N o b le ,

Chairman of the Finance Committee,
American Broadcasting-Paramount Theatres, Inc.,
New York, N. Y.

63




THE SECOND FEDERAL RESERVE DISTRICT