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Thirty-seventh

Annual Report
of the

Federal Reserve Bank
of New York

Second Federal Reserve District

FEDERAL RESERVE BANK
OF NEW YORK

March 14, 1952

To the Stockholders of the
Federal Reserve Bank of New York:
I am pleased to transmit herewith the thirtyseventh annual report of the Federal Reserve Bank
of New York reviewing the year 1951.

A llan Sprou l,

President.

Contents
PAGE
R

earm am en t and

a t io n a l

c o n o m ic

ederal

c o n o m ic

r e n d s in

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

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

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

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

a b il it y

1951

Second D

r en d s in t h e

eserve

c o n o m ic

C r e d it P

o l ic y

is t r ic t

The Return to Flexibility..............................
Bank Reserves and the Money Supply ................
Developments in the First Quarter of the Y ear .......
The Second Quarter...................................
The hast Half of the Y ea r ............................
Changes in Interest Yields .............................
The Expansion of Private Credit .......................
C

orporate

in a n c in g a n d

I n t e r n a t io n a l F

C a p it a l M

the

in a n c ia l a n d

c o n o m ic

a r k e t s

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

evelopm ents.

The Changing Dollar Problem ........................
Inflationary Developments Around the W orld .........
Monetary Policy Abroad ..............................
The Mutual Security Program ........................
The International Financial Institutions...............
Developments in the New York Foreign Exchange Market
V

o lu m e and

rend

of t h e

B a n k ’s O

p e r a t io n s

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

Domestic Operations ..................................
Foreign and International Operations.................
F

in a n c ia l

a tem en ts

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

Statement of Condition.................................
Earnings and Expenses ................................
C

h a n g e s in

e m b e r s h ip

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

h a n g e s in

ir e c t o r s a n d

f f ic e r s

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

Changes in Directors ..................................
Changes in Officers....................................
Member of Federal Advisory Council..................
L

is t o f

ir e c t o r s a n d

f f ic e r s ,

January

5, 1952

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

22
24
25
28
29
33
34
36
39
39
41
42
45
46
47
48
48
51
52
52
55
57
59
59
59
60
61

Charts
PAGE

G r o s s N a t i o n a l P r o d u c t , 1 9 4 9 -5 1

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

C o n s u m e r B u y in g a n d I n c o m e , 1 9 4 9 -5 1
N o n a g r ic u l t u r a l

E m ploym ent

D i s t r i c t , 1 9 5 0 -5 1

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

th e

13
16

Second

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

M e m b e r B a n k R e s e r v e s a n d R e la t e d I t e m s , 1951

M e m b e r B a n k E x c ess R e s e r v e s a n d M e m b e r B a n k
B o r r o w in g f r o m t h e F e d e r a l R e se r v e Sy s t e m ,
1951

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

Y ie l d s o n S e l e c t e d T r e a s u r y S e c u r i t i e s ...................

C o m m e r c ia l, I n d u s tr ia l, an d A g r i c u l t u r a l L oa n s
o f t h e W e e k l y R e p o r t i n g M e m b e r B a n k s in
9 4 C i t i e s , 1 9 5 0 - 5 1 ...................................................................

Thirty-Seventh Annual Report

Federal Reserve Bank of New York
Rearmament and Economic Stability

GAINST the background of 1950, the year 1951 was in many ways

remarkable. In sharp contrast to the conditions preceding World
War II, the outbreak of the Korean war in June 1950 came when our
economy had already fully recovered from the minor recession of 1949 and
was operating close to capacity. This fact, combined with the dramatic
suddenness of events, led to a panicky scramble for goods, by individuals,
business concerns, and government, first at the outset of the war and
again after the Chinese Communists intervened.
The country faced not only an already tight economic situation but
also a most uncertain prospect as to what the dimensions of the new
military program would be.

Estimates of military expenditure came

forward in rapid succession, and though it was not until April 1951 that
they were broken down with any precision, they were on a steadily rising
scale. Besides our domestic program, we faced a new problem abroad.
At a time when Marshall Plan aid to Western Europe was tapering off—
with substantial progress shown but still no definite assurance that Europe
could balance its international accounts on a tolerable living standard—
the threat of war opened up a wholly new prospect as to the character and
dimensions of our foreign aid program.
It is thus not to be wondered at that the Korean war produced an
upsurge of inflation which swept through the entire free world. In this
country it reduced estimated personal saving to 2 per cent of spendable
income after taxes in the third quarter of 1950, and stimulated an expan
sion of business inventories, which mounted rapidly until in the second
quarter of 1951 it was running at the wholly unprecedented yearly rate of
16 billion dollars. To these facts must be added government stockpiling
here and in Western Europe, which, combined with business buying,
created acute scarcities in raw materials and ran up their prices, in some
cases severalfold.
So far as this country was concerned, however, the inflationary
outbursts had a psychological rather than an economic basis.

They were

anticipatory of economic pressures to come rather than any already

THIRTY-SEVENTH ANNUAL REPORT

existing. This fact played a large part in the behavior of our economy in
1951.

As the public realized that total war was not so imminent as at

first feared, and that the threatened shortages of goods were not de
veloping, the buying panic subsided.

Personal saving rose in the last

three quarters of 1951 to approximately 9 per cent of income after
taxes — the highest rate since early 1946, and almost twice the pre-Korea
postwar average.

Business inventories continued to rise.

In the first

half of 1951, the rapid rise of total inventories represented the over
anticipation of consumer demand.
major divergence in trend:

After midyear there developed a

Retail inventories turned down and, by the

end of the year, were at about the same level as at the beginning. Some
civilian industries — including textiles, shoes, furniture, household appli
ances, radios, and television sets — faced a serious problem of adjusting
inventories and current output to a lower level of demand.

The fact that

manufacturers’ inventories as a whole continued to rise in the second
half of the year, though at a much slower rate, was due largely to the
expansion of the defense industries.
The behavior of these two factors— savings and inventories— was
largely responsible for the subsidence of inflationary pressures after
the first quarter of 1951.

In addition, government stockpiling here and

abroad slackened off, and som$ progress was made with the international
allocation of scarce raw materials. Another factor was that the defense
program began not only to take more definite form but also to give clear
indications that it would be spread over more time than had earlier been
thought. Whereas a year ago the target for our national security pro
grams— both domestic and international— had been an annual rate of
50 billion dollars by the end of 1951, the rate actually reached was 44
billion, and whereas a target of 65 billion (annual rate) had been set for
the middle of 1952, that target has now been moved to the first quarter of
1953. Toward the end of 1951, the rate of expansion of the defense program
slackened. During the last quarter, expenditures increased only 2 billion
dollars, at an annual rate, compared with an average increase of 6 billion
in each of the previous four quarters. For the year as a whole, over-all
defense expenditures increased by approximately 20 billion — to 13 y2 per
cent of gross national product, compared with 8 per cent at the end of 1950.
The slackening of inflationary pressures in 1951 was shown by
the behavior of prices and of production.

Basic commodity prices, which

had risen by mid-February to 47 per cent above the June 1950 level,
declined through July and then stabilized at about one-fourth above the

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

pre-Korea level. General wholesale prices rose through March, when they
were 16 per cent higher than in June 19S0, declined slightly until Septem
ber, and then remained stable. The cost of living, however, continued
to rise, by 6 per cent during 1951 and by 11 per cent over June 1950.
Much of this rise came in the first quarter, representing the continuance
of the sharp increase in consumer prices that began in 1950. From
March through August, consumer prices stabilized, but thereafter again
rose, though more moderately. The course of wholesale prices was roughly
paralleled by the movement of industrial production. The index reached
its high for 1951 at 223 in April and after a slight decline has since moved
sidewise, with the December index at 218. Inside the aggregate there
was the dual movement already described, with defense production rising
and civilian production undergoing a decline.
In the year 1951 as a whole, our economy was in better balance than
in any previous postwar year. Indeed, we would have to go back a long
way to find a year revealing such stability. Yet, taken as a whole, it
was also a year of economic growth. Industrial production was 10 per
cent above 1950, 25 per cent above 1949, and 120 per cent above the
1935-39 average. In real terms, after allowing for price changes, gross
national product (representing total output of goods and services) was
about 9 per cent above 1950, 21 per cent above 1947, 83 per cent above
1939, and more than 90 per cent above 1929. The most striking fact is
that gross national product in 1951, in real terms at constant prices
(1951 price level), exceeded even that of the peak war year of 1944 by
nearly 8 billion dollars.
These figures present a most impressive demonstration of the growth
of our economy. We had remarkable proof in World War II of our
productive expansibility, but it seems no less significant that in 1947,
which could be taken as a year fully reflecting postwar demobilization,
gross national product, at constant (1951) prices, was 51.4 per cent
above 1939; that thereafter up to Korea there was further expansion,
despite the 1949 recession, and that since Korea—with a defense program
far short of total war, and still in its early stages—we have reached a
new all-time high in national production of goods and services. Clearly
this country has greatly grown since prewar days in economic size and
strength, and we must learn to think in bigger terms. The fears of stagna
tion so prevalent in the thirties now seem remote. For 1952, and probably
also 1953, while the defense program continues to expand, there seems
little prospect of serious over-all recession. But the fear, so widespread a

THIRTY-SEVENTH ANNUAL REPORT

year ago, that inflation may undermine our efforts cannot yet be dismissed.
The traditional American attitude toward mounting economic pressure
is to rely mainly on expansion of output and increased productivity—to
meet rising demand with increased supply. Such a formula is over
simplified. We did in World War II have considerable success in staving
off inflation through a growth of output so phenomenal that, though we
were devoting 45 per cent of total production to war purposes, we
enjoyed high and even rising consumer real income. But two important
facts should be remembered: first, that the rise in consumer income was
accompanied by an extraordinary rise in saving, amounting to 24 per cent
of spendable income in 1944; and, second, that we did not prevent but
merely postponed inflation, which, with controls removed, liquid resources
large, and saving reduced to more normal levels, broke out violently in the
early postwar years.
It should be recognized that, though less severe than ail inflation
caused by acute or widespread shortages, inflation can also be fostered
by expansion of output, since money incomes are paid out before goods
become available to consumers. This is even more true when expansion
of output takes the form of capital rather than consumer goods, and
when expenditures are for military purposes. In the latter case, no
goods become available to match the consumers’ dollars earned in the
process, while in the case of capital expenditures a considerable lag is
involved. While the defense program continues to expand, there will be
an ever-present risk of inflation, the main counterweight being the
behavior of consumer saving, than which nothing is less predictable.
Another question is whether we shall continue to have the dual movement
in production, with defense output rising and civilian output falling,
which played such an important role in the over-all stability achieved in
1951. A further inflationary force may well be a continued rise of
wages. The attitude of organized labor toward wage stabilization and
the current demands for higher wages in the steel industry, which if
granted would probably spread throughout industry, suggest that, while
growing defense expenditure is increasing demand, the push-up of costs
through increased wages (in a period when profits are not likely to rise
and price control is so largely on a cost-plus basis) may combine with it
to produce again the familiar wage-price spiral.
One other large question will be the adequacy of fiscal and monetary
controls. Thus far, owing mainly to the increased yield of taxes at the
present high level of production and to the imposition of 15 billion dollars

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

in new taxes since Korea, we have managed to escape a budgetary deficit.
Even the fiscal 1952 budget, which the Government estimates will show
a deficit of over 8 billion on an accounting basis, will probably come out
close to even on a cash basis. But it seems certain that the budget for
the fiscal year 1953 will show a substantial deficit. As given in the Budget
Message in January, total expenditures are estimated as 85.4 billion
dollars (as against 70.9 billion in fiscal 1952) with receipts (under existing
tax laws and current levels of income) of 71 billion (as against 62.7
billion in fiscal 1952), leaving an accounting deficit of 14.4 billion dollars.
Reduced to a cash basis, this budget deficit would amount to about 10
billion dollars. There is apparently little expectation that new taxes will
be levied this year, and the outcome as to the deficit will depend upon
the size of the expenditures, military and other, and the income from
present taxes. To get perspective on the figures of revenue and expendi
ture, we may compare with the figures of fiscal 1950 (the last pre-Korea
year). Expenditures for fiscal 1953 are estimated as 45.3 billion dollars
over fiscal 1950 when expenditures totaled 40.1 billion, and revenue as
34 billion over fiscal 1950 when revenue was 37 billion dollars. One
further interesting comparison is that total expenditures in fiscal 1953
will be only about 13 billion dollars under those of the peak war years,
though of course, at the now much higher price level, the percentage
relation to gross national product is much lower (estimated at around
25 per cent, compared with 45 per cent).
How accurate these estimates will turn out to be is difficult, if not
impossible, to foresee. Since the end of the war, we have not made
a good record in reducing nonessential or wasteful expenditures. We
believe in economy in the abstract but show little evidence of it in the
concrete. As to the defense expenditures, it may be argued, on the one
hand, that any military program of such magnitude builds up slowly,
yielding only a trickle of deliveries in its early phase which mounts
to a flood later on; but, on the other hand, it may be argued that in
present circumstances, where we are concerned not with war but with
defense, once we have got beyond the acute stages of unpreparedness, there
may be increasing emphasis on design and on caution against waste
through obsolescence; the emphasis might turn increasingly toward
readiness to produce military end-products as against actual production.
But barring such changes or substantial cuts in nondefense expenditures,
it does seem certain that we shall in the second half of 1952 be entering
upon a period of substantial deficit financing, which may greatly increase

THIRTY.SEVENTH ANNUAL REPORT

the problems of debt management and monetary control.
Since the end of the war, the Reserve System has been endeavoring to
regain control over bank reserves by unfreezing the pattern of rates
set up in the war period, and the Treasury has been trying to place as
large a part of the debt as possible in the hands of nonbank investors.
Progress has been made toward these dual objectives. In 1951, follow
ing earlier progress in unfreezing short-term rates, we achieved some
thing in the nature of a renaissance of monetary policy. In March
1951, this process was carried to its logical conclusion through the
unpegging of the long-term rate following the Treasury-Federal Reserve
accord; and in December 1951, the Government security market staged a
demonstration of its ability to stand pretty much on its own feet — with a
minimum of support through open market operations — and to stage a
revival of rediscounting up to nearly a billion dollars, for the first time
in 18 years, and with no visible signs of panic. Thus, some freedom to
exercise monetary restraint has been regained. But despite this fact,
and the further support given to the policy of restraint by the Voluntary
Credit Restraint Program, the money supply did increase substantially in
1951 as well as in 1950. Moreover, we still face a dilemma (which is far
from being merely a jurisdictional dispute) as how best to combine debt
management and monetary policy. Even when the budget is balanced,
monetary control has to step aside temporarily when the Treasury is
engaged in refunding operations, and the main emphasis has to be placed
upon providing an adequate security market. This problem—of how
best to combine debt management and an effective monetary policy
under conditions of substantial deficit financing and frequent Treasury
refundings—will represent a new chapter of postwar experience, and
will of course require the closest cooperation. To the extent that deficits
are unavoidable, there will be the important question of how to direct the
debt into the hands of nonbank investors, and thus avoid a new inflationary
increase of bank credit.
Conditions abroad present even more serious problems than those
at home. As indicated earlier, the rearmament program in Western Europe,
and the many uncertainties in the Near and Far East, have greatly changed
the character and dimensions of our foreign aid program. Economic de
velopments in Western Europe have, since 1945, pursued a highly uneven
course. Since the ECA program was begun in April 1948, there has been
a marked gain in industrial production. This expansion has been fairly
continuous and is now most marked in Germany, which had previously

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

1
1

been lagging. For Western Europe as a whole, industrial production is now
30 to 40 per cent above prewar, a much greater and a more rapid recovery
than after World War I. But there have been some important gaps, no
tably in coal, which still has to be imported from this country, at a cost
equivalent to about two thirds of the 1 billion dollars of economic aid
that had been originally appropriated for this fiscal year under the Mutual
Security Program.
Meanwhile, inflation has been a recurrent problem, and reserve crises
have recurred in every odd year since 194S. That of 1949 forced a wave
of devaluations of currencies. But the devaluations, though temporarily
improving the trade balance, greatly worsened the terms of trade, which
were later made still more adverse by the rise in prices of raw material and
food imports. Though the international position temporarily improved in
1950, and European reserves were substantially increased, there has since
been another adverse swing of the pendulum, resulting in a severe reserve
crisis in England and France. In the second half of 1951, the decline
in British gold and dollar reserves amounted to 1,532 million dollars from a
peak of 3,867 million in June to 2,335 million at the end of December, and
Britain is once again back to what since the end of the war she has re
garded as her “prudence minimum” reserve position. From June 1950 to
the end of 1951 the wholesale price level rose 28 per cent in Britain and
47 per cent in France.
The problems raised by rearmament are more acute for the Western
European countries than for the United States. Except possibly in Britain,
those countries are in an earlier phase of the process than this country,
and, though prices of raw materials have eased somewhat and some short
ages have been lessened, the main inflationary pressures may be yet to
come as the defense program expands. It must be borne in mind that
Western Europe’s rearmament program differs in one important respect
from ours. Owing to the much greater dependence on foreign trade, the
needs for defense compete much more sharply for the resources needed to
maintain exports, while the high price of imports constitutes a much
heavier drain on national income and affects much more seriously the
foreign trade position. It has been officially stated in Britain that the
adverse terms of trade (rise of import prices relative to export prices) cost
Britain as much in 1951 as the entire increase in her military expenditures
during that year.
Thus, besides our problems at home we face many uncertainties
abroad. One of our greatest problems is how to strike the proper balance

THIRTY-SEVENTH ANNUAL REPORT

between the domestic and the international parts of our security program.
One of the most difficult tasks will be to safeguard against inflation abroad
as well as here. In these circumstances it is interesting to observe that the
renaissance of monetary policy mentioned earlier as a feature of 1951 was
by no means confined to the United States. Britain (and other European
countries even earlier) took important steps toward reviving general mone
tary controls to fight inflation.
National Economic Trends in 1951

In general, 1951 was a year of prosperity. It was a year of progress
and adjustment. It was also a year of paradox — increased military and
capital goods output brought no shortage of civilian goods (in fact, many
surpluses), while consumers had larger incomes but spent less aggressively.
For the nation as a whole, 1951 was one of the most prosperous years
— possibly the most prosperous — in the history of this country. The total
output of goods and services is estimated at approximately 328 billion
dollars, a rise of 45 billion dollars, or 16 per cent over 1950, which was
itself a prosperous period. Possibly as much as half of the year-to-year rise
reflected price increases, but the other half represented expansion in
physical production to a new record, exceeding the previous peak in 1944
at the height of the war effort. The fact that the new record was achieved
without widespread overtime work and with several industries undergoing
temporary setbacks emphasizes the great expansion in plant and equipment
and the improvement in industrial productivity which has occurred since
World War II.
Almost half of the dollar volume of the increase in output between
1950 and 1951 was absorbed by increased government spending, primarily
for national defense. Nearly one third of the year-to-year increase in
output went into new plant and equipment, business inventories, and
investment abroad. The dollar volume of consumers’ purchases of goods,
services, and new homes increased relatively little from 1950 to 1951.
Personal income rose to a new record amount, estimated at 251 billion
dollars compared with 225 billion in 1950. Approximately three tenths of
the 1951 increase was absorbed by higher personal taxes. Another one
fourth is estimated to have gone into personal saving, bringing such saving
to the highest level in over five years. The remaining additional income
was more than offset by the higher prices of consumers’ goods and services.
Thus, despite a 12 per cent increase in personal income, the physical
volume of consumer purchases declined slightly. Nevertheless, it is note-

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

worthy that the nation was able to double its defense expenditures and
raise its capital expenditures to new record levels without lowering living
standards.
The past year was one of progress in organizing defense production
and expanding our productive capacity. By the end of 1951, 63 billion
dollars had been obligated for procurement and construction of defense
items, compared with 18 billion dollars a year earlier. By the fourth
quarter, deliveries of military items and construction had reached a
monthly rate of approximately 2 billion dollars, triple the rate at the
end of 1950. Deliveries of defense material and construction during
1951 totaled 16 billion dollars.
The main achievement of the defense program in 1951 was not in
actual deliveries obtained, however, but in the tremendous task of organiz
ing the nation for defense. Basic decisions had to be made on military
goods required and their design, contracts had to be let, tools obtained,
G R O S S N A TIO N A L PRODUCT, 1949-51*
BEFORE AND AFTER CHANGE IN BUSINESS INVENTORIES
B IL L IO N S
OF D O L L A R S

B IL L IO N S
OF D O L L A R S

1949

15
90

^Quarterly data at seasonally adjusted annual rates.
Source: U. S. Department of Commerce.

15
91

THIRTY-SEVENTH ANNUAL REPORT

assembly lines set up, materials allocated, and additional productive
capacity planned and its construction undertaken.
Many of the same bottlenecks and uncertainties that were encountered
in World War II appeared again, notably the shortage of machine tools,
the scarcity of most metals, and the reluctance of military authorities to
freeze designs. For these and other reasons, some phases of the program lagged
behind original schedules, and in some cases schedules were changed to call
for a longer build-up and greater emphasis on new designs. Thus, the
prospective impact of the defense effort on the economy was lessened in
1951. While some of the major military items are reported to have already
reached their scheduled peak production rates, it now appears that the
over-all defense production peak will not be reached until 1953.
Considerable progress was made during 1951 in expanding the nation’s
productive capacity. The initial objective of the present defense effort
was the development and expansion of facilities for military production,
accompanied or followed by sufficient output of munitions to meet the
needs of our expanding armed forces and those of our allies. The aim
has not centered on building up a large stockpile of munitions, which
might soon become obsolete, but rather on providing additional productive
capacity beyond current military and civilian needs in order to permit
rapid expansion of munitions output in case of an all-out war. The
enlargement of basic industrial capacity has been an essential element
of this program. Steel mills added 4 million tons of ingot capacity
in 1951, and the aluminum and electric power industries each increased
their capacity by 10 per cent. Further expansion is planned in 1952.
Industrial construction was twice as active in 1951 as in 1950, and
business expenditures on new plant and equipment reached a record total
of 23 billion dollars, one-third above 1950. Temporarily, these expansion
programs have cut into the supply of scarce materials available for other
uses. As the facilities for production of basic metals and other materials
are completed, however, they will begin to add to, rather than diminish,
supplies available for the current production of end items.
Nondefense construction began to contract in the latter part of 1951
as the result of controls on materials and credit. Construction of stores,
restaurants, and recreational buildings was cut back as materials were
allocated to more essential projects. In spite of restrictive credit measures
and limited supplies of some materials, however, approximately 1,090,000
new dwelling units were started — more than in any other year except 1950.
Progress was also made in controlling the inflationary forces which

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

were very strong at the start of the year. The part played by general
and selective credit measures in this economic battle is discussed in other
sections of this Report. Much of the success of the anti-inflationary
measures, however, can be attributed to the remarkable productivity of
the nation’s factories and farms. A significant contribution was also made
by consumers who reduced their spending from the high level at the
beginning of the year and saved considerably more than in 1950. In
addition, a general price and wage freeze was instituted late in January —
a step which was deemed necessary at the time to check the wage-price
spiral. Gradually, during the year, the freeze was replaced by a series of
price regulations, tailored to individual industries, and by formulas for
limiting wage and salary increases. The difficulties encountered in adapting
the stabilization program to a wide variety of circumstances in different
industries have raised questions concerning the possibility of continuing
such controls over a prolonged period in the absence of the compulsions
of all-out war, which tend to submerge the political and economic pressures
generated by strongly organized and powerful groups.
In the latter half of 1951, the overburdened priorities system was
replaced by the Controlled Materials Plan, under which available supplies
of steel, copper, and aluminum are allocated between defense, defensesupporting, and civilian uses. Additional direct controls were instituted
covering inventories and uses of scarce metals and other materials, and
the stockpiling program was modified to avoid bidding up the prices of
scarce materials, for which it had been competing with the rest of the
economy.
Despite the progress achieved in a number of respects, 1951 was also
a year of paradox. Production was greatly stimulated by the sharp rise
in defense expenditures and by the record-breaking volume of business
investment in new capital equipment, yet the over-all level of industrial
production was little, if any, higher at the end of 1951 than at the begin
ning. Some firms had to cut production because competing demands for
materials were so great they could not obtain the balanced supplies needed
for full-scale operation. At the same time, other firms were reducing
output because demand for their products had fallen off and inventories
had accumulated. Prices also behaved at variance with expectations at
the beginning of the year. Although personal income and the total money
supply rose to new highs, the general level of wholesale prices was actually
no higher in December than in January.
This softening in wholesale prices in general, and especially in basic
materials prices, developed as consumers changed their spending patterns

THIRTY-SEVENTH ANNUAL REPORT

and business buying was cut back to reduce top-heavy inventories. At
the start of 1951, consumers bought heavily in fear of shortages, although
accelerated production was filling store shelves and warehouses faster
than they could be emptied. Subsequently, consumers tended to hold
back, although reduced production of durable goods was in prospect,
and retailers’ stocks, after building up in the first few months of the year,
were drawn down gradually. This shift in consumer behavior from a
record rate of spending to a high rate of saving was of utmost importance
in relieving inflationary pressures. It supported, and at the same time
was stimulated by, the pervasive influence of the various kinds of controls
— fiscal, credit, price, wage, and other — which were utilized in the effort
to check the inflation of the latter half of 1950.
Retail sales (seasonally adjusted) stabilized during the last three
quarters of the year at a level close to 10 per cent below the January 1951
peak, and 1 per cent below the latter half of 1950, despite a steady rise
in personal income. The continued gradual rise in the index of consumers’

PER CE N T

PE R CENT

1401-----

------ 140

R T IL
EA

130

120 ■

120

110

I 10

100

90
1949

19 5 0

1951

Source: Basic data from the U. S. Department of Commerce monthly interpolations of disposable income and
index numbers computed by the Federal Reserve Bonk of New York.

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

prices concealed an even greater reduction in the physical volume of retail
sales. The decline from the peak was most noticeable in durable goods;
total nondurable goods expenditures were sustained by heavier spending
on food, chiefly as the result of higher prices.
Retail sales levels, however, have been low only in comparison with
the abnormal periods of scare buying and in relation to the level of
consumer incomes. Both dollar volume and physical volume of sales have
compared favorably with the most prosperous periods prior to the war in
Korea. Moreover, the price indexes used to estimate physical volume from
dollar sales may not fully reflect the large volume of goods purchased in
promotional sales at reduced prices. The response to these special promo
tions, notably New York City’s “price war”, indicates that for many items
the market widens appreciably when consumers feel that prices are
attractive.
The high level of sales at the start of 1951 and the prospect of
shortages caused heavy ordering at all levels of business, and production
schedules were stepped up accordingly. As retail sales dropped back to
more normal levels and production was less hampered by limitation of
materials than had been expected, stocks began to pile up in many lines.
New orders by distributors were cut drastically, and, as manufacturers’
order backlogs shrank and their inventories of finished goods piled up,
output was reduced. Production of many consumers’ durable goods was
cut back even more sharply than was required by materials restrictions.
The new Federal Reserve index of output of household durable goods
dropped 44 per cent between February and July, while passenger car
production declined 29 per cent in the same period. Textiles also under
went an inventory recession as processors and apparel manufacturers
became heavily stocked with goods. The net effect of this slackening in
consumer goods production was to offset the stimulus of expansion in
defense and capital goods production.
With stocks high and demand lower in consumer goods lines, the
prices of many basic materials leveled off or declined in primary markets.
Prospects of a near-record volume of farm marketings helped bring
wholesale prices of farm products down from their March peak, but
in the fourth quarter prices rose moderately, as demand improved and
some crops yielded less than the earlier forecasts indicated. Wholesale
food prices stabilized close to an all-time high. Industrial prices, except for
most metals, tapered off during the last nine months of 1951. The Bureau
of Labor Statistics index of selected basic commodity prices dropped

1
8

THIRTY-SEVENTH ANNUAL REPORT

17 per cent between its February peak and mid-August and recovered
only a little by the end of the year. The comprehensive index of wholesale
prices had declined 4 per cent from its peak by September; during the
last five months of the year, the index moved sidewise within an extremely
narrow range, as noted earlier in this Report.
Consumers’ prices, rose gradually throughout the year, although they
tended to level off during the summer months. In December, the index
of consumers’ prices was 4 per cent above January 1951, although whole
sale prices decreased 1 per cent in the same period. In the preceding
twelve months, however, consumers’ prices had lagged considerably behind
the general wholesale price rise.
The rise in consumers’ prices had periodically brought wage increases
to several million workers whose pay rates are linked to the cost of living.
In a tight labor market, such increases gradually spread to industries and
plants not covered by escalator formulas. During the. year the wage
stabilization formulas were stretched to allow wage increases not only to
offset higher living costs but also for contract provisions based on the
increase in productivity, and to allow some additional fringe benefits. In
general, the 1951 wage settlements were obtained without major strikes;
the amount of time lost through work stoppages in 1951 was the lowest
since World War II. An over-all rise of about 16 per cent in total wage
and salary payments during 1951 was the combined result of increased
employment, the gradual rise in wage rates, and the shift of workers to
better-paying defense jobs. The hours of work have been relatively stable
and overtime has been minor except in certain lines, such as machine tools.
Two of the most important facts that have been demonstrated by the
experience of the past year are the tremendous productive capacity of
this country and the variability of consumer spending in relation to
consumer income. The nation has demonstrated that it is capable of
rapid expansion to meet the needs of both defense and capital goods
production on an impressive scale, while still delivering enough goods to
meet high levels of consumer demand. At the same time, we have seen
how greatly the task of controlling inflationary pressures can be eased
when consumers show restraint in their spending and voluntarily increase
their savings.
Economic Trends in the Second District

During 1951, employment, income, and sales in the Second Federal
Reserve District were at high levels. Nevertheless, business activity in

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

general fell behind expectations, because the stimulus of the defense
program barely offset the cutbacks in production and employment in many
consumer goods lines. The Second District did not show gains as great
as some major defense areas, but neither were the problems of conversion
or inventory adjustment as great as in some other parts of the country.
At the end of 1951, large backlogs of defense orders, extensive programs
of plant construction and expansion, and signs of revival in consumer
goods lines promised continued high levels of business during the months
ahead.
The income of the Second District was higher in 1951 than ever
before. Tentative estimates made at this bank indicate that income
payments of all types in this District totaled approximately 39 billion
dollars, a gain of roughly 10 per cent over the previous record set in
1950. Wage earners, farmers, businessmen, and investors shared in the
increase. The over-all percentage gain was not quite so great in this
District as in the country as a whole, however, because farm income,
which rose substantially, contributes relatively less to total income in this
District than in most others, while the reduced production of consumer
goods was fully reflected in Second District incomes.
At the start of 1951, only a relatively modest amount of defense
contracts had been placed in this District; the volume of actual military
production was even smaller. By the end of December, however, the
Second District had received approximately 10 billion dollars in Govern
ment procurement and construction contracts, or about 23 per cent of the
national total. Some plants were actually in mass production; in others,
the job of tooling up or expanding facilities was well under way. In this
region, producers of aircraft, engines, instruments, and electronic equip
ment received the greatest direct stimulus. Basic steel and aluminum
production was at virtual capacity. Large contracts for chemicals, photo
graphic equipment, and tanks also were awarded in this District, but
military orders for textiles, apparel, and leather goods were only a partial
offset to the cutbacks in production of similar goods for nonmilitary
demand.
Consumer goods industries, heavily concentrated in this District,
got off to an auspicious start during the buying spree in the opening
months of 1951. It was widely expected that durable goods would become
relatively scarce as 1951 progressed, and that increased buying of non
durable goods would result. Stimulated by the heavy buying of the first
weeks of 1951, manufacturers and distributors placed large orders and

THIRTY-SEVENTH ANNUAL REPORT

stocked up for an expanded demand which never materialized. Heavy
buying in anticipation of shortages and price increases occurred in
particular in the textile industry. When sales began to fall off in the
spring, textile converters and processors tried to unload part of their
excess inventories on the spot market, and prices dropped sharply.
Throughout the remainder of the year, heavy inventories and an
uncertain price situation plagued the textile and apparel industries, which
are so important to this area’s economy. The leather goods, fur, and
carpet industries had much the same experience. As a result, there was
curtailment of production in the soft goods industries throughout the
District accompanied by layoffs and part-time employment.
Consumer durable goods, too, were not immune to overstocking and
reduced consumer interest. Television receiver production slumped
sharply and recovered only partially toward the end of the year, while
stocks of household appliances rose substantially. Workers in the auto
mobile assembly plants of this District were laid off when materials
NONAGRICULTURAL EMPLOYMENT IN THE SECOND DISTRICT, 1950-51
(Monthly index numbers; 1 9 4 7 -4 9 average * 100 per cent)
PER C E N T

PER CEN T

Source: Computed by the Federal Reserve Bonk of New York from data of the Depcrtmer.fs of Labor of
the States of New York, New Jersey, ond Connecticut.

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

restrictions cut production. Manufacturing employment in the Second
District for the year as a whole averaged about 6 per cent higher than
in 19S0, but at the end of the year, the number of factory workers
employed was still somewhat below the peak reached in February 1951.
Construction activity in the Second District was generally but not
uniformly lower than in 1950. The dollar volume of residential con
struction contract awards in the Second District was 14 per cent below
the 1950 record, a greater decline than in the United States as a whole.
Physical volume, however, as indicated by number of dwelling units or
floor space, dropped about one fourth in this District. The decline was
attributable to reduced availability of mortgage credit arising from general
credit measures, restrictions on real estate credit under Regulation X
and allied regulations, sporadic materials shortages, and — in some areas
— saturation of local markets.
Nonresidential construction contracts in this District remained about
unchanged from 1950 to 1951, against an increase of 23 per cent in the
rest of the country. A large part of this divergent movement is traceable
to the sizable contracts for atomic energy plants and industrial facilities
awarded in other parts of the nation during 1951. Industrial building in
the Second District rose by nearly half in 1951, and institutional con
struction was also higher. Commercial building and public works and
utilities construction, however, were lower than in 1950, largely because
of the restrictions placed on the use of strategic materials.
The over-all volume of retail trade in this District during 1951
appeared to have been maintained close to 1950 levels. Department store
sales in the Second District were about 5 per cent greater during 1951,
a slightly better showing than that of the rest of the country. Large
inventories of slow-moving goods piled up in the stores during the spring,
and sharp reductions in new orders and extensive promotions were neces
sary to adjust inventory positions. The most notable promotional effort
during 1951 was the “price war” among leading New York City depart
ment stores in early June, in which previously price-fixed items figured
prominently. By the end of the year, most stores in this area had brought
their stocks down into a more nearly normal relationship to current levels
of consumer demand.
Gross income from farm marketings in the Second District was nearly
one-fifth greater than in 1950 because of higher prices. Rising costs,
however, absorbed much of the gain. Milk prices averaged 14 per cent
higher, while the volume of milk received at New York State dairy plants

THIRTY-SEVENTH ANNUAL

REPORT

was only slightly lower than the 1950 record. Costs of dairy farming have,
however, risen to the highest levels yet recorded; an index compiled by
Cornell University shows a rise of 11 per cent in New York State dairy
farming costs from 1950 to 1951. Poultry farmers marketed a slightly
greater quantity of eggs than in 1950 at markedly higher prices. The value
of field crops harvested in New York State in 1951 was about 8 per cent
greater than in 1950, and truck crops were 23 per cent higher, but the
value of fruit harvested was about one-fifth lower. Although a much
smaller acreage of potatoes was planted this year, and the yield per
acre was also smaller, higher prices resulted in an over-all crop value
which was greater than in 1950.
Federal Reserve Credit Policy
The Return to Flexibility

In March of 1951 the Federal Reserve System, acting in accord with
the Treasury, made a decisive break away from the pattern of support for
Government security prices that had limited the effectiveness of policies
of credit restraint during the postwar period. This was the culmination of
a series of steps, beginning in 1946, which had brought about a gradual
unfreezing of the wartime pattern of supported prices and interest rates
on Government securities. By restoring flexibility to the market for
Government securities, as the large wartime public debt became better
digested, the Federal Reserve System has been able to regain a real
measure of initiative in controlling the volume of member bank reserves
and in inducing member banks to borrow to obtain needed reserves. So
long as rigid support for Government securities had continued, the
initiative for reserve creation rested almost wholly with holders of Govern
ment securities who chose to sell. In the face of intensifying demands
for credit in the private sector of the economy, this meant that sellers of
Government securities to the Federal Reserve could obtain funds prac
tically without limit for use in satisfying other borrowing demands. The
resulting monetization of the Government debt also provided new bank
reserves, which served as a base for a further possible multiple-credit
expansion.
The conflict between the System’s responsibility for maintaining recep
tive and orderly markets for Treasury security offerings, on the one hand,
and the System’s responsibility for limiting the release of its own credit (to
check undue inflationary credit expansion within the economy), on the

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

other, will continue to pose difficult problems. This past year will stand in
the record, however, as the beginning of a new phase in the attempt to
reconcile these conflicting objectives. The return to flexibility in Federal
Reserve System operations in the market for Government securities, long
term as well as short term, dominated the course of credit policy over the
year, and had widespread repercussions in the banking and investment
fields generally.
In the preceding postwar years, the long-term sector of the Govern
ment securities market had been supported whenever it was under pres
sure, while some limited degree of flexibility was gradually reintroduced
throughout the shorter range. The Federal Reserve System had achieved
some measure of success in reabsorbing through its, sales and redemptions
in one sector of the market the reserve funds released through its purchases
in another sector, but had been unable to offset fully the additions to bank
reserves from gold inflows and other factors. The mounting pressure of
credit demand in the months following the outbreak of hostilities in Korea
had made it impossible by the latter part of 1950 to retain even this modest
measure of control over bank reserves so long as any sector of the Govern
ment security market was given firm support.
The most serious selling problem which the System was forced to meet
was in long-term bonds, and it became necessary for the System to be able
to back away from these sales. But there were serious obstacles to such a
course. Investors in Government securities had become conditioned over
the past decade to markets for Treasury obligations which were main
tained at prices of par or higher. While maintenance of par prices on
securities issued at the lowest ebb of cheap money presented an anomaly
in a period of intense credit demand, there was some reason for concern
over the shock to the market, and the consequences that would ensue, if
the prices of the longer-term Government securities were to fall below par
as the System drew back from further offerings. Consequently, the transi
tion to freer markets had to be made cautiously. On March 4, the Secretary
of the Treasury and the Chairman of the Board of Governors, and of the
Federal Open Market Committee, of the Federal Reserve System released
for publication the following announcement:
The Treasury and the Federal Reserve System have reached
full accord with respect to debt-management and monetary
policies to be pursued in furthering their common purpose to as
sure the successful financing of the Government’s requirements
and, at the same time, to minimize monetization of the public
debt.

THIRTY-SEVENTH ANNUAL REPORT

Simultaneously, the Treasury announced that it would offer holders of
the two longest outstanding restricted bonds ( 2 per cent bonds of June
and December 1967-72) an opportunity to convert at par into a new offer
ing of nonmarketable bonds at a higher yield (2J4 per cent bonds of April
1975-80). While nonmarketable, these bonds could be converted at the
holders’ option into five-year marketable notes carrying a coupon of
per cent. By providing this new type of security for holders of the largest
block of outstanding marketable bonds, the Treasury cushioned the initial
impact of the new policy upon the market. In addition, for a transition
period continuing over the next six weeks, the System Open Market
Account and some of the Treasury investment accounts made substantial
market purchases of these and other outstanding bonds at declining
prices in order to ease the adjustment in the market to the changed
policy. By April 12, the initial price adjustments were completed and the
market subsequently “bottomed out”. Purchases of Government bonds
for the Federal Open Market Account tapered off, and on balance no
significant purchases of bonds were made by the System Account through
out the last half of 1951.
The record of credit developments and of credit policy over the year
must be read against this background.
Bank Reserves and the Money Supply

The figures in the accompanying table give some indication of the
major changes in bank credit and the money supply for the year as a
F ac t o r s I n f l u e n c in g C h a n g e s in D e m a n d D e p o s it s
in t h e U n it e d S t a t e s

for

A ll B an k s

(In millions of dollars, ( + ) or (—) reflects effect on volume of demand deposits*)
Year
1948
1949
1950

Treasury
Bank
net cash
holdings of
Bank
income
other
or outgo loansf securities
-8,076 + 5,318 + 699
+1,287 + 1,263 +1,199
- 486 +10,762 +2,120

-1,304 + 7,334
1951
1st half
-6,839 + 8455
2nd halfo +5,585 + 8,879

Nonbank
Currency Time and
holdings Gold and Bank
foreign
capital
of U.S.
outside
savings
securities accounts accounts banks
deposits
+1,100 +1,240 - 531
+397
-1,109
-2,500 + 58 - 609
+664
-1,096
-3,300
-1,850
- 749
- 631
+ 17

Total
change in
demand
Other depositst
— 639 -1,601
— 36 + 230
+ 639 +6,522

+1,059 +1,800 + 358 - 783
-902
-1,953
+ 219 +5,828
- 925 - 399
-878
- 701 + 740 - 8,312
+ 435 +1,300
+ 500 +1,288
- 384
- 1,252 - 521 + 9,140
-524
+ m
p Preliminary as o f December 26, 1951.
♦ F o r example, the increase o f 1,953 million dollars in time and savings deposits in 1951
has the effect o f lowering demand deposits by that amount and thus is shown here
with a minus sign,
t Excludes interbank loans.
t Excludes interbank deposits, Government deposits, and items in process o f collection.
Sources: Treasury net cash income or outgo and nonbank Government security holdings
derived from Treasury Bulletin; all other data, Board of Governors o f the Federal
Reserve System.

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

whole. As in the preceding year, the Treasury was more than able to
finance Government expenditures out of current income. But there was
extensive private deficit spending financed by expanded bank credit, also as
in the preceding year, and a reduction in nonbank holdings of Government
securities. Approximately 85 per cent of the reduction in nonbank security
holdings in 1951 represented redemptions of Savings bonds and Savings
notes, the remainder being represented by market sales and redemptions
of maturing marketable issues. The reversal of the outflow of funds on
foreign account after the midyear added further to the domestic money
supply. At the same time, however, there was a reduction in the rate of
money turnover, which partly offset the pressure on prices of the indicated
increase in the money supply. Of much greater importance was the fact
that the annual rate of personal saving out of income in the latter part
of 1951 was nearly double the rate for 1950, and savings and time deposits
of individuals grew at an impressive rate over the year as a whole.
Developments in the First Quarter o f the Year

Changes in the factors shown in the table did not develop evenly
over the year, mainly because of the decisive change in credit policy that
began in March and became more fully effective in April and thereafter.
January through March were the months of most rapid increase in the
factors making for credit inflation. This period influences dispropor
tionately the annual totals and obscures the degree of stability that was
achieved during the balance of the year. Over the nine months from
the outbreak of hostilities in Korea in June 1950 through March 1951,
total bank loans increased by almost 11 billion dollars, residential mort
gage credit expanded by about 6.0 billion, and consumer credit by 1.7
billion dollars. Despite the fact that credit outstanding is normally stable
or declining in the early part of the year, 2.6 billion dollars of the bank
loan expansion in 1951 occurred in the first quarter, along with an increase
of more than 1.5 billion dollars in residential mortgage credit. Partly as
the result of the reimposition of Regulation W in September 1950, con
sumer credit outstanding fell by some 700 million dollars in this threemonth period. Reflecting in part the rate of private deficit spending in
the first quarter of 1951, consumer prices in this period increased another
3.2 per cent and wholesale prices went up by 5.0 per cent.
There were, of course, some developments tending to restrain credit
creation during the early months of last year. The Board of Governors
of the Federal Reserve System raised reserve requirements for all member

THIRTY-SEVENTH ANNUAL REPORT

banks in three steps during January and early February. This action
brought reserve requirements on deposits to the statutory limit for
all save central reserve city banks and added 1.9 billion dollars to
the total of member bank required reserves. Also in January, the Board
of Governors announced that margin requirements on loans to carry
securities were to be raised from SO to 75 per cent; this action was intended
to retard the expansion of this type of credit that had occurred in the last
quarter of 1950. The substantial excess of Treasury receipts over outgo,
which amounted to 6.9 billion dollars in the first quarter of 1951, was of
great significance in combating inflationary pressures by reducing the
volume of cash funds available for private spending. Other restraining
factors were the restrictions on real estate and consumer credit that had
been invoked by the Board of Governors in the last half of 1950, and
the continuing drain of bank reserves resulting from large payments to
foreign accounts on international transactions.
These limiting forces, which were at work during the first quarter of
the year, were not equal to the expansionary forces they encountered. An
ticipatory buying by consumers and business caused inflationary pressures
to build up through January and early February. The impact of the 1.9
billion dollar increase in reserve requirements was weakened by the fact
that the Federal Reserve System supplied 1.1 billion dollars of reserves
to the banks through security purchases at supported prices between
January 3 and February 7, as well as 0.6 billion dollars in discounts and
advances, to help ease the adjustment problems of some member banks.
(Subsequent security purchases by the System enabled member banks to
repay their borrowings.) The reserves made available to the banking sys
tem from all sources were adequate to meet the higher reserve requirements
and, in addition, to support a substantial expansion of business and real
estate loans. The largest share of this new credit was for nondefense uses,
primarily for carrying increased business inventories. Large institutional
investors entered 1951 with heavy mortgage and security commitments,
and to meet these commitments they also sold Government securities,
mainly those of longer term. The Federal Reserve System, because of
its support program, was the residual purchaser of a major portion of the
securities thus thrown on the market during January and February.
The month of March appears to have been the turning point. Con
sumer scare buying had slackened perceptibly as, with the passage of
time, the much publicized shortages of goods failed to materialize. Busi
nesses responded by adopting more conservative inventory policies. Large

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

Treasury receipts after the March IS tax date contributed to a slowing of
the inflationary process. And in March the Board of Governors of the
Federal Reserve System, under the authority of the Defense Production
Act of 1950, launched a Voluntary Credit Restraint Program intended to
encourage banks and other financing institutions to conduct their credit
operations so as to limit the use of credit for nonessential purposes, while
providing adequate credit to meet defense and other essential needs. The
success of the Program depended upon the degree of cooperation received
from lenders, as well as from borrowers. Governor Oliver S. Powell, the
chairman of the National Voluntary Credit Restraint Committee, offered
the following evaluation of the program after it had been operating for
several months:
. . . the purpose of credit policy in general, and of the Voluntary
Credit Restraint Program in particular, has not been to prevent
the use of private credit. The objectives of credit measures are
rather to attempt to stop the use of credit for speculative pur
poses, to channel credit into defense and defense-supporting ac
tivities, to reduce the credit made available for postponable and
less essential civilian purposes, and to engender a more cautious
and careful lending policy on the part of lending officers. The
Voluntary Credit Restraint Program is making an important con
tribution to the attainment of these objectives.
The most important step in the effort to check credit inflation was
the accord with the Treasury announced on March 4, as already indicated
above. In cushioning the initial impact of the withdrawal of fixed support,
the Treasury offered a new 24 to 29-year 2?4 per cent nonmarketable
investment bond in exchange for the 2 per cent restricted Treasury bonds
of June and December 1967-72 (which had been subject to the most ag
gressive selling at the pre-accord support levels). By April 6, when the
Treasury books closed on the offering, 13.6 billion dollars of the 19.7
billion originally outstanding in these two issues had been exchanged.
Roughly 5.6 billion dollars of the exchanges were made by the Federal
Reserve and Treasury investment accounts; the remaining 8 billion came
from ofcher investors. Of the 5.6 billion which the System and Treasury
accounts converted, 1.6 billion had been acquired in the month following
announcement of the accord, as the Treasury and the Federal Reserve
System acted jointly to ease the readjustment in the market. Despite
this relatively substantial release of funds to the market during the initial
transition period, most of the related increase in member bank reserves
had been reabsorbed by the end of May — partly through offsetting sales
and redemptions of other securities by the Federal Open Market Account,

2
8

THIRTY-SEVENTH ANNUAL REPORT

and partly through the restrictive influence of other money market factors.
The Second Quarter

In the second quarter of 1951, the influence of several factors tended
to inhibit further credit expansion. Total Federal Reserve credit remained
practically unchanged from the beginning of April through the end of June
in sharp contrast to its rapid growth over the preceding year. Treasury
cash operating income and outgo was approximately in balance and neither
private incomes nor bank credit received any net stimulation from this
source. The domestic banking system continued to lose funds, though at
a reduced rate, to foreign accounts, exerting a deflationary influence on
American markets. The outflow of gold to the rest of the world and
rising foreign balances on deposit at the Reserve Banks brought the total
outflow of banking funds from the market to some 3.4 billion dollars
between September 1949 and June 1951, when the reversal of the move
ment set in.
In April, an additional source of pressure on bank reserves was
MEMBER BANK RESERVES AND RELATED ITEMS, 1951
(Monthly changes cumulated from December 31
B IL L IO N S
OF D O L L A R S

♦Figures ore for the second Wednesday of eoch month.

195 0*)
B IL L IO N S
OF D O L L A R S

F E D E R A L R E S E R V E B A N K O F NEW Y O R K

exerted when the volume of currency in circulation began an expansion
that continued almost without interruption through the remainder of the
year. This factor, along with other factors influencing the level of bank
reserves, is illustrated in the chart on page 28. It is difficult to ascribe
reasons for the more than 2.1 billion dollar increase in currency circula
tion in the last nine months of 1951. Part of it was seasonal, and part
may be accounted for by the rising dollar volume of business transactions,
part by the job-shifting and uncertainty characteristic of an economy in a
period of conversion, and part by a reaccumulation of cash holdings that
had been depleted by the consumer spending waves in the summer of 1950
and early 1951. It also has been suggested that it may have been indica
tive, to some extent, of a growth of “black market” and tax evasion trans
actions.
Commercial bank loan credit showed a decided tendency to level off
in the second quarter of 1951 following the rapid expansion over the first
three months. Total loans of all commercial banks increased by roughly
400 million dollars between March 28 and June 30, 1951, compared with
an increase of more than 2 billion dollars in the first quarter of the year
and an increase of 1.3 billion in the second quarter of 1950. Detailed
data for member banks suggest that most of the increase that did occur
in this quarter was accounted for by loans on real estate and loans to Gov
ernment security dealers during the June refunding period. The volume of
business loans was virtually the same at the end of the quarter as it had
been at the beginning, with increases for defense and defense-supporting
activities offsetting the seasonal contraction in many areas of nondefense
borrowing. The Voluntary Credit Restraint Program which began during
the second quarter may, as a result of the publicity surrounding its inaugu
ration, have had an important impact on lending decisions, thereby con
tributing to the noticeable tightening of credit availability. The under
pinning of the changed attitudes of lending institutions lay in the fact that
member bank reserve balances, in sharp contrast with the immediately
preceding period, remained substantially unchanged through the second
quarter, consequently limiting the volume of funds available for bank
credit extension.
The Last Half o f the Year

Monetary and credit conditions in the last half of 1951, as Federal
Reserve policies of restraint increased in effectiveness, ranged from
moderate to extreme tightness. At no time were bank funds in what was

THIRTY-SEVENTH ANNUAL REPORT

considered excessive supply for more than short periods, and borrowing
from the Federal Reserve Banks was used more and more frequently to
meet reserve requirements during periods of stringency. It was indicative
of the tight reserve situation over the last six months of 1951 that the
rate on Federal funds in the New York money market, aside from a
brief period in October (when the System took action to facilitate
Treasury financing), seldom fell below 1 per cent. Frequently it remained
for protracted periods at levels just short of the 1% Per cent Federal
Reserve discount rate. The New York money market was especially
sensitive to changes in the general availability of funds as out-of-town
banks adjusted their reserve positions by increasing or drawing down
their balances with the New York City banks. Following a pattern that
had prevailed in the first half of the year, New York City banks in the
last half of 1951 lost funds steadily through a transfer of balances out
of New York, but these losses were largely offset by an inflow of funds
on foreign account and occasional Federal Reserve security operations.
Treasury operations also supplied funds to the New York market in this
period.
Treasury cash deficits and redemptions of other Treasury issues in
the last half of calendar 1951 were financed through the use of part of
the Treasury balances accumulated in the banks during the first half of
the year, through the sale of 2.0 billion dollars in 91-day Treasury bills
in excess of maturing issues, and through the sale of 2.5 billion dollars
of new tax anticipation bills to mature at the March and June 1952 tax
dates. Net of redemptions, marketable Treasury debt increased by 3.3
billion dollars between the end of June and the end of December 1951,
while Federal Reserve and commercial bank holdings of Government
securities increased by 4.1 billion dollars. Holdings of Government securi
ties by nonfinancial corporations tended to increase as they invested funds
set aside to meet the higher tax payments scheduled for March and June
1952, while holdings of insurance companies, savings banks, and other
investors declined. The expansion of bank holdings of Government
securities was partly temporary, since a substantial part of the increase
represented purchases made late in the year which, in the case of the
Reserve Banks, were more than reversed by large sales and redemptions in
January 1952, and which, in the case of the commercial banks, largely
represented tax anticipation bills absorbed against book credit subject
to subsequent redistribution to corporations.
The steady loss of banking funds through increased currency circula-

3
1

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

tion absorbed a large part of the new reserves obtained from other sources,
so that total member bank reserve balances increased only moderately in
the last half of the year. Excess reserves remained practically unchanged,
apart from the usual intramonth variations, because the net reserves
acquired were utilized in supporting the expansion of demand deposits
which grew out of Treasury deficits and the usual seasonal bank loan
expansion. The principal sources of reserve funds during this period were
gold and foreign account transactions and the Federal Reserve credit
released through member bank borrowing and some net purchases of
Government securities. However, no single source of funds was readily and
continuously available to provide the reserve foundation for the type of
unrestrained credit expansion that had taken place in 1950 and early 1951.
With access to Federal Reserve credit through the security market
severely limited, member bank recourse to borrowing from the System
to adjust reserve positions assumed greater importance than at any time
MEMBER B A N K EXCESS RESERVES AN D MEMBER BA N K B O R R O W IN G
FROM THE FEDERAL RESERVE SYSTEM , 1951*
M IL L IO N S
OF D O L L A R S

M IL L IO N S
OF DOLLARS

1000

MEMBER BANK BORROWING
FROM THE RESERVE SYSTEM

50
0

500

Hll)iil)lliillllM)H

‘ a d o ' u a v
ni
'
t t
JA N 'F E B * MAR ' APR 1 MAY * JUN] '' JUtL * Ai U :G * s EpP 'Of CrT
' ink
' A i r 'S r

•Wednesday d a tes.'

1NOV '
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wnv

DEC

THIRTY-SEVENTH ANNUAL REPORT

since the early 1930’s. A high degree of inverse correlation between
bank borrowing and levels of bank excess reserves developed (as illus
trated in the preceding chart). Federal Reserve credit released through
discounts and advances to member banks is much less likely to constitute
a permanent base for credit expansion than funds released through security
purchases. Since borrowings represent contractual obligations of the
member banks, a bank which is in debt is less inclined to increase loans
and will be likely to use funds at its disposal to retire indebtedness before
seeking new loans or investments. An important development of 1951
was the restoration of this instrument of credit policy to a place of greater
significance.
Another interesting and somewhat disturbing feature of 1951 was the
wide fluctuation in Federal Reserve float (credits to member bank reserve
accounts by the Reserve Banks for checks not yet actually collected). An
all-time high of more than 2 billion dollars was reached in December.
The instability and generally higher level of float in 1951 was traceable,
at least in part, to the increased volume of collection items and to the
shortening of the System’s availability schedule in January to a maxi
mum of two days. This shortening of the time interval between the
receipt of checks for collection and the crediting of member bank
reserve accounts tended to magnify the influence on float of any un
usual increases in check usage or delays in transportation. Any delay
in physical collection would, of course, increase the number of checks
for which the System had already given credit (under the deferred avail
ability schedule) without having actually completed collection.
Making use of its new freedom for discretionary open market action,
the Federal Reserve System, although it played, on balance, a largely
neutral role in the Government securities market during the last half of
the calendar year, was nevertheless able when necessary to take the initia
tive in that market. While not supporting the market at any given level,
the System recognized a responsibility for orderly market conditions and,
upon occasion, took action to prevent relatively small offerings or purchases
from having a disproportionate effect on prices in a thin market. In some
periods of money market stringency, temporary relief was provided to
Government security dealers, to aid them in carrying portfolios, through
repurchase agreements arranged by the Federal Reserve Bank of New
York, a procedure somewhat analogous to borrowing by member banks
at the Federal Reserve Banks. The Federal Reserve System also accepted
responsibility during periods of Treasury financing operations for main

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

taining market conditions which would facilitate such operations. Some
assurance of relative price stability in related segments of the market is
ordinarily essential while the Treasury’s subscription books are open in
order to minimize the possibility of an unsuccessful operation, even wrhen
the terms of the offering are attractive.
Such Federal Reserve assistance to Treasury refunding operations
was undertaken around the June-July and October refunding dates. The
condition of the market at the time of these refundings and the volume
or nature of the offerings required relatively heavy stabilization purchases.
Offsetting sales in the market following these Treasury operations did,
however, reabsorb a major portion of the funds released. Thus, de
spite stabilizing purchases, System Account security holdings increased
by less than 200 million dollars between April 6 (when the Treasury’s
books closed on its bond conversion) and the beginning of December. A
further increase of 560 million dollars occurred late in December to relieve
an extreme year-end shortage of money market funds. All of the funds
released in December, and more, were subsequently recovered by sales
and redemptions of Government securities in January 1952. By the end
of January, the volume of System security holdings was again approxi
mately at the level of mid-1951. During the last half of 1951, moreover,
the market had displayed an ability to function smoothly without more or
less continuous Federal Reserve participation.
Changes in Interest Yields

The general credit tightness prevailing from May through the re
mainder of the year was reflected from time to time in rising interest
rates. New York City bank rates on prime commercial loans, which at
the beginning of 1951 were at 2j4 per cent, were raised in three steps
to 3 per cent at the end of the year, the highest rate for loans of this
type since 1934. Most other bank and market rates, in New York
City and over the country, moved somewhat in relation to the prime
commercial loan rates. Movements in the pattern of rates on Treasury
securities over 1951 and the two preceding years are shown in the chart
on the next page. Short-term rates moved to new, higher levels during the
spring and summer months and, for the year as a whole, fluctuated in
response to developments of ease or tightness in the money market.
Yields on intermediate and longer-term securities rose rather steadily
over the year, except for a period of ease during the summer. At the end
of the year the longest-term Victory bonds sold to yield 2J4 per cent. A

THIRTY-SEVENTH ANNUAL REPORT

YIELDS ON SELECTED TREASURY SECURITIES*
P ER C E N T
PER A N N U M

PER C E N T
PER A N N U M

•The figures for the two bond issues ore for Wednesdoy dates; the figures for Treasury bills are the average
yield on new issues.
Source: U. S. Treasury Department.

corollary of the rising yields was a settling below par of prices of most
taxable Government bonds, both bank eligible and restricted.
The effect of higher yield patterns was to make many investors less
willing to dispose of Government securities and, after prices became fairly
well stabilized at the new levels, some investors more willing to purchase
them. The prospect of absorbing a capital loss when selling below par
created a rather general reluctance to liquidate. Large investors, in par
ticular, were aware that their sales might further depress prices and were
consequently deterred from attempting to sell large amounts, as they
had done previously when Federal Reserve support protected them. Also,,
a general desire of lenders to cooperate with the Voluntary Credit Re
straint Program may have tended to lower the need for funds for private
lending, thus reducing the amount of disinvestment in Government
securities.
The Expansion of Private Credit

An important result of the general tightness in the money market, of

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

the Voluntary Credit Restraint Program, and of the lessening consumer
buying interest was a slowing down of the rate of bank loan expansion
in the last half of 1951 to more or less normal, seasonal proportions. A
comparison with 1950 for the commercial, industrial, and agricultural
loans of weekly reporting member banks is shown in the chart below.
After increasing at an average monthly rate of 4.52 per cent in the six
months from July through December 1950, these loans increased at an
average rate of 1.82 per cent in the corresponding months of 1951. This
is hardly more than the customary seasonal rate of expansion for the
last half of the year, and available data indicate that the greatest part of
the moderate total loan increase was for financing the marketing and
processing of crops and for defense and defense-related purposes. Credit
for defense purposes played an insignificant role in the 1950 loan expan
sion. Real estate credit increased throughout 1951, though at a dimin
ishing rate, while consumer credit remained relatively constant and security
loans declined.
COM M ERCIAL, INDUSTRIAL, AND AGRICULTURAL LO A N S O F THE
W EEK LY REPORTING MEMBER B A N K S IN 9 4 CITIES, 1950-51*
B IL L IO N S
OF D O L L A R S

♦The figures are for Wednesday dates.

B I L L IO N S
OF D O L L A R S

THIRTY-SEVENTH ANNUAL REPORT

While the operation of the System’s instruments for selective credit
control played an important part in limiting real estate and consumer
credit, the broad impact of the change in System open market operations
was probably of even greater importance. Not only banks, but all groups
of lending institutions, found it necessary to confine their aggregate volume
of new loans and investments largely within the limits of funds arising
through their current operations. It was no longer possible to undertake
commitments in excess of regularly arising investable funds with the
assurance that additional funds would always be obtainable on call, merely
by selling Government securities at supported prices. The effect of the
new restraint upon all classes of lenders was a decisive factor in curtailing
real estate credit, and (as the next section of this Report. indicates) in
limiting the availability of nonbank funds for other classes of borrowers,
from April through the remainder of 1951.
Corporate Financing and the Capital Markets

The capital markets were greatly affected during the past year by
the various monetary and other measures taken to combat inflationary
tendencies and to guide investable funds toward the defense program.
Demands for long-term capital continued large during the year and tended
to exceed the volume of available savings, as in 1950. The excess of
demand was again financed through an expansion of bank credit, but
the latter diminished sharply after the Treasury-System accord.
The corporate bond market was under considerable pressure at times
during the year. After the withdrawal by the Federal Reserve System
of its rigid support of Treasury securities, liquidation of Treasury bonds
by financial institutions became more difficult and diminished markedly
in volume. As a result of the change in market conditions and the large
volume of commitments made previously, those institutions had less money
available for current investment. Issuers and underwriters experienced
a temporary, sharp drop in demand for new securities offered in the
public market. Some of the “impact” effect of the shift in Federal Reserve
open market policy wore off with time, but new securities could be sold
only at higher yields, and over the year an increase of % to of 1 per
cent occurred in the cost of long-term money.
In spite of record-breaking corporate outlays for improvements and
additions to plant and equipment in 1951 (22 out of a total of 23 billion
dollars for corporate and unincorporated business) and for additions

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

to inventories (9 billion), the corporate demand for new funds fell
slightly in comparison with 1950. Although business capital expendi
tures and inventory accumulation, respectively, were 5 billion and 1 billion
dollars larger than in 1950, the greater needs for funds for these purposes
were more than offset by a decline in the use of new funds to finance
credit sales and for the accumulation of liquid assets. The expansion of
customer receivables and holdings of cash and Government securities was
6 and 2 billion dollars, respectively, smaller than in 1950.
Business corporations had to raise more from external sources than
in 1950 (57 per cent against 50 per cent), since corporate profits after
taxes dropped sharply, while aggregate dividend payments showed a small
increase. Retained earnings, therefore, fell from 13 billion dollars in
1950 to 8 billion in 1951. Depreciation allowances, however, provided
8^2 billion dollars toward meeting corporate needs for funds, fully one
billion dollars more than in 1950. Heavier depreciation charges in 1951
reflected the effects of accelerated amortization of defense facilities and
the fact that depreciation charges are increasingly based on plant and
equipment acquired by corporations at the higher postwar costs.
Additional funds obtained from external sources, including borrowings
from banks and credit extended by suppliers and the increase in tax
accruals (funds accumulated in 1951 for payment in 1952), amounted
to about 22 billion dollars, approximately 2 billion dollars larger than
in 1950. Of this total, it is estimated that the higher tax accruals alone
provided 8 billion dollars. Inasmuch as cash and Government security
holdings set aside to meet such liabilities rose only 3 billion, the funds
made available through an increase in tax accruals were apparently used
largely for other working capital — to finance inventories and credit to
customers — suggesting decreased liquidity in corporate financial positions.
The resulting strain is likely to show itself in individual situations as
corporations confront the first two quarterly tax payment dates in 1952
(March 15 and June 15), when 35 per cent of corporate tax liabilities for
1951 (a total of 70 per cent) will become payable under the so-called Mills
plan adopted by the Congress in 1950.
A substantial increase in new corporate security issues was equal to
the entire 2 billion dollar increase in external financing. Gross security
issues (before corporation cash redemptions of maturing or called securi
ties) for new capital purposes reached more than 7.2 billion dollars, an
increase over the previous year’s total of almost 50 per cent. Refunding of
securities fell sharply as interest rates rose. Over two thirds of the dollar

THIRTY-SEVENTH ANNUAL REPORT

amount of all corporate security offerings were bonds. Aggregate sales of
almost 2 billion dollars of preferred and common stocks (exclusive of
investment company issues) were, however, the largest since 1929. A
large part of the gain in stock offerings came in common stock, sales of
which increased 40 per cent during the year to a total of over 1.1 billion
dollars, the highest since 1930.
Total offerings of new long-term “municipal” securities (excluding
refunding issues) fell 400 million dollars during the year, reflecting a
decline of almost 600 million dollars in veterans’ bonus issues. To finance
an extraordinarily large volume of construction for schools, institutions,
and other public buildings and facilities (aggregating a record total of
6 billion dollars), however, State and local governments borrowed 200
million more than in 1950. Included in the 3.2 billion dollars borrowed
for such purposes was more than 330 million dollars of local public housing
authority bonds guaranteed by the Public Housing Administration.
Although difficulties in placing new municipal issues also were en
countered during the period of bond market unsettlement following the
decline of Treasury bond prices, demand for new municipal issues was
well maintained during most of the year, as the higher Federal corporate
and personal income taxes imposed by the Revenue Act of 1951 made the
tax exemption feature of State and local government obligations more
valuable. Yields on “municipal” issues rose moderately over the year,
however, along with the increase in Treasury and corporate bond yields.
Residential construction and home mortgage financing were well
sustained and showed only small declines from the 1950 record. To a
considerable extent, these results reflected the large carry-over of mort
gages arranged for prior to the effective date of the more restrictive credit
terms required by Regulation X of the Board of Governors and of the
related regulations of the Federal Housing and Veterans’ Administrations.
Substantial year-to-year declines beginning in June 1951 in monthly
data for both home building and mortgage recordings indicated, however,
that this backlog was being worked off rather rapidly.
After the “unpegging” of Treasury bond prices, the supply of new
inoney for Government-guaranteed and insured mortgages became tight.
Rates charged on conventional mortgage loans rose, and the general
increase in interest rates and bond yields made the 4 and 4J4 per cent
returns on Veterans’ Administration and Federal Housing Administration
mortgages less attractive to investors than alternative outlets for funds.
Prices bid for VA and FHA mortgages were reduced by many institutional

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

investors, with VA mortgages selling at a discount and FHA mortgages
falling to par.
The bull market in common stocks continued into 1951, but the
upward movement of prices, which began in the middle of 1949, was
slower and more irregular. The advance in quotations carried Standard
& Poor’s index of 416 issues on September 12,1951 to 188.6 (1935-39=100),
the highest point since 1930. This advance represented a 70 per cent
gain from June 15, 1949. Prices thereafter receded and then made a
partial recovery in the remaining months of 1951, and near the end of the
year the index stood at 182.4, a net gain of 20 points for the year.
Margin requirements on loans for purchasing and carrying securities
were increased from 50 to 75 per cent in January, while interest rates on
collateral loans were raised in the spring and toward the close of the year.
The volume of customers’ debit balances showed little change over the
year, however, since the volume of stock market credit in recent years
has been small in relation to the value of shares traded.
The restrictive open market policy may also have indirectly influenced
investors’ and speculators’ valuations of share prices by helping to reduce
the vigor of inflationary forces, which had constituted one of the most
important stimulants to stock prices.
International Financial and Economic Developments
The Changing Dollar Problem

The balance of international payments of the United States expe
rienced a spectacular shift during 1951. In the early months of the year
foreign countries continued to accumulate gold and dollar assets at an
extremely rapid pace. In the second half of 1951, following a marked
reduction in the rate of accumulation during the second quarter, foreign
countries as a whole experienced a heavy loss of gold and dollars (taken
together) as a result of their transactions with the United States.
The sharp reversal of the gold and dollar drain from the United
States was mainly the result of a substantial increase in our export surplus
of goods and services. This country’s surplus on merchandise account
jumped sharply between the first and second quarters of the year, almost
entirely because of larger exports, rising from 197 million dollars to 958
million; it continued to increase during the rest of the year, reaching a
total of 1,444 million dollars in the fourth quarter. Rising international
monetary reserves and higher levels of dollar earnings had apparently led
most foreign governments to relax their exchange and import controls —

THIRTY-SEVENTH ANNUAL REPORT

a step which permitted foreign importers to increase purchases in the
United States in anticipation of future price increases and shortages of
manufactured goods. The beginning of rearmament programs in Western
Europe also contributed to the rise in our exports.
During the second half of the year the growth in our export surplus
was, in part, the result of a decline in merchandise imports. This decline
was primarily a consequence of the price recession in world commodity
markets during the first half of the year and of our increasing utilization
of inventories built up after the middle of 19S0. However, it also reflected
the influence of certain anti-inflationary policies, particularly price controls
and credit restraints, as well as the decision to curtail purchases of rubber
and tin for the strategic stockpile.
Primarily because of an increase in income on foreign investments,
the over-all rise in the United States balance on goods and services
was greater than indicated by the merchandise figures alone; our
export surplus of goods and services amounted to 3,224 million dollars
in the second half of the year, as contrasted with 1,805 million in the
first half. Despite a substantial increase in military aid, moreover, the
average quarterly rate of Government grants and net loan disbursements
to foreign countries during the last nine months of 1951 was only 163
million dollars greater than in the nine months immediately following
the invasion of Korea. As a result, the share of total exports that was
Government financed declined noticeably, and toward the end of the first
half of the year our export surplus of goods and services for the first time
since 1949 began to exceed United States grants and loans to foreign
countries.
This dramatic change in the relation between our export surplus and
total net Government financing of foreign transactions, in conjunction
with a smaller outflow of United States private capital in the second half
of the year, was reflected in an equally spectacular reversal of the gold
drain. In the first half of 1951, foreign countries as a group acquired 937
million dollars’ worth of gold from the United States Treasury, but during
the second half they sold 1,005 million. By contrast, the dollar holdings
of foreign countries increased throughout the year. Foreign gold and
dollar assets taken together rose by about 440 million dollars as a result
of transactions with the United States over the year as a whole. This
rise was not shared by all countries, and by the end of the year the
gold and dollar assets of the sterling area pool and of some ERP countries
were falling rapidly.

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

Inflationary Developments Around the World

In the first nine months after the outbreak of hostilities in Korea,
that is from July 1950 through March 1951, the general increase in
demand caused a great rise in world commodity prices. Higher prices
for primary commodity exports, while increasing the producing countries’
foreign exchange earnings, aggravated at the same time any inflationary
tendencies already present in those countries. In most industrial countries
of Western Europe, there was a marked increase in import costs as world
commodity prices rose. Even more important, however, was the persistent
pressure for higher consumption standards and the continued high level of
investment, including inventory accumulation. Enlarged buying of domes
tic and imported goods was possible largely because consumers, manu
facturers, and traders drew on cash assets and reserves and obtained
additional credit. Increased rearmament expenditures, on the other hand,
began only gradually to be translated into effective demand. It was the
scramble for inventories and continuation of capital development programs,
rather than the actual absorption of additional resources in the rearma
ment effort, which, despite the continued rise in agricultural and industrial
production, led to a resurgence of strong and general inflationary pressures.
Although world primary commodity prices, after a steep climb
following the outbreak in Korea, began to fall in April 1951, wholesale
prices in the latter part of the year* generally either remained stationary
or continued to rise in most countries. Retail prices moved generally
upward, and wages followed. In many countries, especially in Western
Europe, these price movements seemed to indicate that internal factors —
particularly wage and farm price rises and monetary expansion — were
more powerful forces of inflation than increased import costs. As com
pared with the pre-Korea levels, wholesale and retail prices at the 1951
year end were higher in most foreign countries than in the United States;
the rise in retail price levels during 1951 was less in the United States
than in any other major country. To the extent that costs responded to
rising prices but remained rigid with falling prices (and this varied greatly
among the different countries) serious distortions developed in international
price and cost relationships.
Although there was a considerable rise in European prices generally,
export prices lagged behind import prices. In some European countries
this deterioration in the terms of trade was particularly serious in the

THIRTY-SEVENTH ANNUAL REPORT

first half of the year and was not entirely made good by the year end,,
thus adding considerably to their balance-of-payments difficulties. In
certain of these countries, the difficulties were further aggravated by other
factors. In France, for example, a sudden decline of confidence in mone
tary stability led in the fall of 1951 to speculation in gold, foreign exchange,,
and commodities, which was reminiscent of the early postwar years. In
the United Kingdom, with the reappearance of a large deficit in Britain’s
over-all balance of payments, the dollar gap increased. Britain’s position
as the banker of the sterling area was considerably affected by a decline
in the volume of exports from the overseas sterling area to the dollar
area, by the fall in the prices of raw materials such as rubber, wool, and
tin exported from the overseas sterling area, by an increase in expenditures
on imports from the dollar area by the sterling area generally, and by
the loss of Iranian oil. The area’s dollar drain since midsummer 1951
was also partly attributed to an acceleration of import payments and
a slowing down in the repatriation of export proceeds. Nevertheless, at
the year end the United Kingdom made the first scheduled payment of
interest and principal on the United States and Canadian loans obtained
in 1946. This payment, together with Britain’s adverse balance of pay
ments, brought the loss of British gold and dollar reserves to a total of
934 million dollars in the fourth quarter of 1951. At the end of the year,
British monetary reserves were 1,532 million below the peak reached at
the end of June 1951, and were 995 million above the low point in midSeptember 1949.
Monetary Policy Abroad

Faced with increased demands on their economic resources and with
renew'ed inflationary pressures, several Western European countries re
sorted to restrictive monetary measures during 1951 for the first time
since the war, while others strengthened existing monetary restraints. In
these countries, lending to business for the purpose of financing the
greatly enlarged purchases of materials had been increasing, and in some
countries consumer credit also appeared to have been rising noticeably.
The bank credit expansion was thus closely associated with the increase
in inventory accumulation, the growth in consumer buying, and an aggra
vation of balance-of-payment deficits resulting from larger imports.
Monetary restriction of a general character was thus particularly indicated.
A somewhat similar situation developed in Canada, and it also tightened
monetary restraints. In the primary-producing countries, including most

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

of the overseas sterling area countries, monetary controls played a dis
tinctly lesser role.
During 1951, central bank discount rates were raised in several
Western European countries, and also in India and Japan. The rise,
toward the end of the year, in the United Kingdom was the first in 19
years, except for a very temporary increase at the beginning of the
Second World War. Since in many countries commercial banks had to
rely more heavily upon the rediscounting facilities of the central bank,
the discount rate rises became a fairly effective policy instrument. In
the United Kingdom, the monetary authorities, besides raising the discount
rate, abandoned the per cent market rate for Treasury bills, which had
been pegged at that level since 1945; this rate subsequently rose to almost
1 per cent. Long-term interest rates also rose markedly in most of the
Western European countries, as well as in Canada, Australia, and India.
Other restrictions were also placed on the availability of money.
Particularly severe measures were taken in Germany; in the Netherlands,
quantitative credit control replaced the previous selective screening of
loans; in France, the existing credit controls were tightened with new
ceilings imposed on the volume of rediscounts; and in the United Kingdom,
a considerable portion of the outstanding Treasury bills was funded in
November 1951 and commercial bank liquidity was thus reduced. In
Canada, the chartered banks agreed to refrain from making loans for
capital purposes and to restrict their loans for other purposes.
The year’s developments in the field of credit control abroad, together
with the earlier experience of countries such as Belgium, France, Italy,
and Sweden, indicate a growing awareness that effective monetary re
straint, designed to combat inflationary pressures, requires general or
quantitative credit restriction and interest rate flexibility. Selective or
qualitative credit controls did not work effectively alone; they could
become effective only within a framework of restraint imposed by meas
ures of general quantitative credit control. With the measures adopted
by the United Kingdom in November 1951, the monetary policies of
Western European countries showed greater similarity than at any time
in the postwar period.
While the conditions of inflation that induced the resort to generally
restrictive monetary policies were broadly similar, the post-Korea balanceof-payment difficulties came to a head at different times in the individual
countries of Western Europe. This fact, as well as differences in the
speed and resoluteness with which countermeasures were taken, exerted

THIRTY-SEVENTH ANNUAL REPORT

a very considerable strain on the European Payments Union. Some of
the creditor countries were confronted with a difficult problem in attempt
ing to devise a policy helpful to the debtor countries without endangering
their own internal monetary stability, and without introducing vexatious
controls that might decrease the existing degree of convertibility of their
currencies.
While increasing reliance was being placed by the Western European
countries on monetary measures to limit inflation during the year, some
of them also reduced their nonmilitary government expenditures. In the
Netherlands, for example, consumption subsidies were cut without allowing
wages to move upward to compensate fully for the rise in the cost of
living. Taxes were increased in several countries, although by no means
sufficiently to finance entirely the additional defense expenditures. Some
raw-material-producing countries of Northern Europe and Asia sought
to limit the expansion of producers’ money incomes by export duties and
other taxes, the proceeds being either transferred to the government or
set aside as compulsory savings. In a few countries, particularly the
United Kingdom and France, import and exchange controls were strength
ened. On the whole, however, foreign countries appeared reluctant to
return to comprehensive direct controls. There seemed to be a wide
measure of agreement that under prevailing circumstances extensive re
course to direct controls, unless taken in conjunction with monetary and
fiscal restraints, would generate suppressed inflation and increase the
hazards for effective national economic policies in the future as well as
create new balance-of-payments difficulties.
The present inescapable necessity of reconciling both internal mone
tary stability and reasonable external balance with the requirements of
defense raises difficult political, economic, and social problems for Western
Europe. The competing claims on economic resources of personal con
sumption, government, private investment, and exports cannot all be met
at once, even though agricultural and industrial production are far in
excess of the early postwar years. Nor can the primary-producing
countries which are now in process of rapid development easily reconcile
the exigencies of intensive investment with the desire for swift improve
ment in standards of living. The further increase in output that may be
reasonably expected in both the industrialized and the primary-producing
countries will constitute an important offset to the pressure of excessive
aggregate demand. Yet, even if output should continue to increase at
the rates realized in recent years, there will nevertheless remain a serious

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

problem of keeping aggregate demand within the limits of available supply.
Developments during 1951 suggest that most countries will depend,
perhaps in increasing degree, upon monetary controls as an essential part
of their programs for meeting this problem.
The Mutual Security Program

In our foreign economic policy, the strengthening of the defenses of
the free world, in particular those of Western Europe, has emerged as
the major immediate objective, and our foreign assistance programs were
increasingly adapted to this purpose during the past year. The major
step in this direction occurred early last fall when Congress adopted the
Mutual Security Act of 1951, which coordinates, under a Director for
Mutual Security, the various aspects of our foreign aid — economic,
military, and technical — hitherto administered separately under the
European Recovery Program, the Mutual Defense Assistance Program,
and the Point Four program.
The appropriations under the Act for the fiscal year 1951-52,
amounting to 5.8 billion dollars for military aid and 1.4 billion for
economic and technical aid (a difficult distinction), reflect the shift in
emphasis from economic to military assistance that has characterized our
foreign aid since Korea. In 1951, however, economic aid, representing
disbursements from previous appropriations, still predominated because
of the greater time lag involved for military shipments. Furthermore,
as the year drew to a close, the worsening economic conditions of the
major rearming countries increased the need for economic aid. As a
result, it is not only fairly certain that current economic aid appropria
tions will be fully utilized, but also that such additional dollar funds
will be drawn upon as can be made available, in one form or another, for
economic assistance to these countries.
The difference between the new program and earlier foreign aid
undertakings is one of scope and direction. This change is exempli
fied by the provision terminating the Economic Cooperation Adminis
tration and creating in its stead a successor organization, the Mutual
Security Agency, which assumes ECA’s functions through June 30, 1952,
when the powers given to ECA will formally lapse.
While the Mutual Security Program is designed in the main to support
the rearmament now under way in Western Europe, to which area approxi
mately 80 per cent of the appropriated funds are allotted, the Near East
and Africa, Asia and the Pacific, and the American Republics have been

THIRTY-SEVENTH ANNUAL REPORT

granted funds for both military aid and economic and technical assistance,
the latter to deal, in the words of Secretary of State Acheson, “with some
of the fundamental problems of weakness where weapons alone are no
defense”. The nearly world-wide character of the program is further
emphasized by certain other provisions, such as the permission to transfer
a designated portion of either the military aid or the economic aid funds
from one area to any other, and by the extension to all areas benefiting
from the new legislation of the ECA’s investment guaranty program,
previously limited to Marshall Plan countries and their dependencies.
The activities of the Export-Import Bank during 1951 did not equal
the previous year’s volume. New authorizations reached only 244 million
dollars as against 566 million in 1950, the largest single credit being a
50 million dollar cotton loan to Western Germany. A major develop
ment was the increase from 3.5 billion to 4.5 billion dollars in the Bank’s
lending authority, approved by Congress in September.
The International Financial Institutions

The International Monetary Fund engaged in very few new exchange
transactions in 1951. Under a new schedule of charges the cost of the
short-term use of the Fund’s resources was reduced for some transactions
to a level no higher than the cost of the sale and purchase of gold; on
longer-term transactions, the cost was increased in line with the almost
universal rise in interest rates. Simultaneously, the Fund made a con
siderable reduction in the period for which it will hold a member’s
currency before obligatory consultations begin on plans for reducing the
Fund’s holdings. In a new statement of gold policy, the Fund. declared
that it had been found impracticable to require all member countries to
apply uniform controls over nonmonetary gold movements. Accordingly,
while the Fund urged the members to support its established gold policy,
it left to them, subject to the limitations imposed by the Articles of
Agreement, the practical operating measures to ensure that gold, to the
maximum extent practicable, should be held in official reserves rather
than go into private hoards.
The International Bank for Reconstruction and Development ex
tended a considerable volume of credit last year. Loans were authorized
to ten countries in an aggregate amount of 193 million dollars. Dis
bursements in 1951 amounted to 129 million dollars, as against 75
million in 1950. For the first time since 1947, new bonds were sold in
the United States. The first public offerings were also made in the

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

United Kingdom and Switzerland, although on two previous occasions
the Bank had effected private sales of its bonds in the Swiss market. For
the first time the Bank last year also sold bonds out of its loan portfolio
to private investors without its guarantee.
Developments in the New York Foreign Exchange Market

The volume of trading on the New York foreign exchange market
fluctuated considerably in 1951, but on the whole continued relatively
large. The principal currencies traded were the pound sterling, the
Canadian dollar, and the Swiss franc, with the sterling turnover being
by far the most important.
The pound sterling, both spot and forward delivery, continued in
demand in New York until July. The spot rate remained at or close to
the Bank of England’s then current spot buying price for U. S. dollars
of #2.80%, while forward deliveries of sterling were at a premium over
spot delivery; three-month futures were quoted at a premium as wide
as 1% cents in June. By early August, however, the demand for the
pound had fallen off considerably and offers of spot pounds pushed the
rate down to the Bank of England’s lower support level of $2.79%. The
decline in the demand for the pound was attributed primarily to the cur
tailment of large purchases and falling prices of raw materials from the
sterling area. Subsequently, the pressure on sterling became stronger.
On December 17 the Bank of England announced that the spread
between its buying and selling rates for U. S. dollars was being widened
from % of a cent to 4 cents (which is within the 1 per cent differential
from parity permitted by the Articles of Agreement of the International
Monetary Fund). At the same time, the Bank of England announced
that it had withdrawn all official quotations for forward exchange and
further that henceforth authorized British banks could trade freely,
under conditions prescribed by the Bank, with each other and with
the New York market at or between the official spot rates, as well
as in the forward market. Subsequently, the Bank of England permitted
the interchange of American account and Canadian account sterling, thus
widening the scope of transactions among Canadian centers, London, and
New York. The New York spot rate for sterling closed the year at
$2.78%, while three-month deliveries were quoted at a discount of 1%
cents.
The Canadian dollar rate fluctuated considerably during the year,
reaching $0.93^ in June, the lowest point since its unpegging in 1950.

THIRTY-SEVENTH ANNUAL REPORT

Activity in the New York market, however, was not substantial, as the
exchange resulting from trade transactions had to be handled in Canada
until December 14, when the Canadian Government freed the Canadian
dollar from all control. As the year ended there were signs of an increased
volume of Canadian dollar transactions in New York, with the rate
reaching a high of #0.9824 on December 31. Quotations reached par
with the U. S. dollar during January trading in 1952.
Volume and Trend of the Bank’s Operations
Domestic Operations

The steady progress of the Government’s rearmament program, the
resulting rise in the over-all output of goods and services, and the higher
levels of commodity prices, all contributed to a further expansion in the
physical volume of the bank’s operations during 1951.
Member banks made greater use of this bank’s discount facilities,
especially after the Treasury-Federal Reserve System accord of last
March. As Reserve Bank credit through the securities market became
less freely available, there were many more occasions for the member
banks to use the Reserve Bank borrowing facilities to meet temporary
shortages of reserves.
All segments of the economy required a heavier volume of funds to
handle the enlarged output at higher prices and, as the accompanying
table shows, currency received and counted at the bank attained a new
high in 1951. An opposite development for coin is shown by the opera
tional statistics (the number of pieces received and counted declined 18
per cent, while the dollar volume decreased 7 per cent) as more coin,
particularly pennies, remained continuously in circulation and did not flow
back to the Reserve Bank. Users of coin, aware of the Treasury’s tempo
rary inability to meet the growing demand, tended to retain their supply,
and this bank’s work of counting and wrapping declined even though there
was no lack of demand. In fact, during a large part of the year member
bank orders for coin were filled only in part. In order to distribute the
available supply equitably, coin shipments were limited to a portion of
the amounts used in previous periods.
During the war and postwar period, the aggregate volume of checks
handled by the bank has risen steadily to new peaks. The volume of
Government checks has fluctuated with the volume and composition of
Treasury expenditures, while non-Government checks, the most important

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

S ome M easures of t h e V o lum e of O perations of t h e
F ederal R eserve B a n k of N e w Y ork
(In cluding B uffalo B ranch )

Number of pieces handled*

1951

1950

Discounts and advances ......................................
Currency received and cou nted...........................
Coin received and cou nted...................................
Gold bars and bags of gold coin handled.........
Checks handled:
United States Government checks..............
All other ........................................................
Collection items handled:
United States Government coupons paid .. .
All other ........................................................
Disbursements as fiscal agent for Reconstruction
Finance Corporation, its subsidiaries, and
Commodity Credit Corporation ......................
Issues, redemptions, and exchanges by fiscal
agency departments:
United States Savings b on d s........................
All other United States obligations.............
Obligations of the International Bank for
Reconstruction and Development.............
Safekeeping of securities:
Pieces received and delivered......................
Coupons detached..........................................
Transfers of fundsf ............................................
Incoming and outgoing mail:
Registered.......................................................
Ordinary ........................................................

3,118
1,054,382,000
1,382,011,000
259,000

2,114
996,792,000
1,690,248,000
202,000

51,168,000
411,951,000

45,781,000
376,872,000

4,895,000
6,393,000

5,524,000
5,857,000

12,000

22,000

23,709,000
3,132,000

24,736,000
2,975,000

259,000

147,000

4,592,000
1,905,000
294,000

4,382,000
1,729,000
260,000

392,000
11,044,000

400,000
10,169,000

Discounts and advances ...................................... $ 13,521,593,000
Currency received and counted .........................
6,769,646,000
Coin received and counted...................................
126,156,000
Gold bars and bags of gold coin handled.........
3,581,392,000
Checks handled:
United States Government ch eck s...............
19,074,453,000
All other ........................................................ 267,749,478,000
Collection items handled:
United States Government coupons paid ...
1,161,784,000
All other .........................................................
1,034,657,000
Disbursements as fiscal agent for Reconstruction
Finance Corporation, its subsidiaries, and
Commodity Credit Corporation ......................
291,390,000
Issues, redemptions, and exchanges by fiscal
agency departments:
United States Savings bonds ......................
2,113,806,000
All other United States obligations............. 271,679,053,000
Obligations of the International Bank for
Reconstruction and Development ...........
366,076,000
Safekeeping of securities:
Pieces received and delivered (par value) 349,940,698,000
Transfers of fundsf ............................................ 219,197,584,000

$ 7,652,847,000
6,341,436,000
136,243,000
2,806,212,000

Amounts handled

13,554,172,000
242,480,374,000
1,351,395,000
908,009,000
264,044,000
2,546,155,000
259,223,494,000
205,707,000
407,441,510,000
167,665,297,000

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

THIRTY-SEVENTH ANNU AL REPORT

component of the total volume, has risen persistently. The number of
processed U. S. Government checks increased 12 per cent during 1951 to
a total of 51 million pieces, while their value rose 41 per cent to 19 billion
dollars. The number of non-Government checks handled in 1951 increased
9 per cent, and their value (268 billion dollars) was 10 per cent greater.
Last year’s volume of 412 million non-Government checks was almost
double that processed by the bank a decade ago.
In 1951, the bank’s collection function was widened by the assumption
of duties formerly handled by the Postal authorities, namely, the clearance
of postal money orders that are now issued collectible through any Federal
Reserve Bank. As of July 1, 1951 a new Money Order Division of the
Government Check Department was organized to handle these operations.
The new money orders are in punchcard form and are processed by means
of electrically operated proof machines specifically designed and manu
factured for the purpose. Between July 1 and December 31, the Division’s
staff of about 100 people processed approximately 26 million money orders
aggregating 366 million dollars.
The aggregate volume of work involved in the fiscal agency functions
performed by the bank changed very little during the past year. The
falling off in sales of Savings bonds, particularly the larger denominations,
was reflected in declines of 4 per cent and 17 per cent, respectively, in the
physical quantity and value of the items processed. On the other hand,
refunding operations involving other types of Treasury obligations were
on a moderately larger scale in 1951. Both the number and the value of
such securities issued, redeemed, or exchanged by the bank increased 5 per
cent. In addition, the work performed on a fiscal agency basis for the
International Bank for Reconstruction and Development expanded
sharply. There was an increase in new issues and a sizable volume of
exchanges of permanent bonds for the temporary serial issues of the
previous year. The number of disbursements made as fiscal agent for
the RFC, its subsidiaries, and the Commodity Credit Corporation con
tinued to decline, but the dollar volume rose slightly.
Among the collection items, a continuing decline in the number of
U. S. Government coupons handled was partially offset by a further rise
in all other types of collection items. The volume of Government coupons
has decreased for the past five years as the Treasury has been refunding
a large portion of maturing coupon issues into noncoupon issues. On
the other hand, “All other collection items” (principally acceptances,
notes, drafts, and coupons credited upon collection rather than imme

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

diately or in accordance with a time schedule) have risen for the past
two years to the 1951 peak of 6,400,000 items, in large part because of
expansion in the volume of municipal coupons collected.
The bank’s safekeeping facilities were utilized more fully as measured
by the receipt and delivery of securities and by the number of coupons
detached. Wire and mail transfers of funds reflected the high level of
economic activity and reached record highs, the number of transfers
increasing 13 per cent and the dollar volume 31 per cent in 1951, as
compared with 1950.
The total number of employees on the staff (exclusive of officers) at
New York and at the Buffalo Branch increased from 3,565 on December
31, 1950 to 3,983 on December 31, 1951. Most departments of the bank
required additional employees to handle the heavier volume of work in
1951 (and to offset decreased productivity resulting from higher turnover
and “green” help), but the bulk of the additional personnel, which con
sisted mostly of women, was assigned to the Check Department and the
new Money Order Division of the Government Check Department.
Foreign and International Operations

The total amount of earmarked gold, dollar deposits, U. S. Govern
ment securities, and other miscellaneous assets held at the Federal Reserve
Bank of New York for foreign account reached an all-time high of
7.5 billion dollars in March, exceeding the previous peak (September
1945) by 560 million dollars, and remained at about this level through
July. This represented the continuation of a rise which had been in evi
dence since the latter part of 1947, when such assets amounted to only 3.3
billion dollars. During the last half of 1951, however, there was a steady
decline and by the end of the year the assets held for foreign account were
nearly 1.5 billion dollars below the peak and 1.2 billion below the level
of a year earlier.
The net decline in total holdings for foreign account during 1951 con
sisted of a decrease of 685 million dollars in gold held under earmark,
369 million in dollar deposits, and 188 million in U. S. Government
securities, offset only slightly by a rise of 20 million in miscellaneous
dollar assets.
Gold and dollar assets held for the International Bank and Inter
national Monetary Fund showed a slight rise, but the combined assets in
both foreign and international accounts decreased 1 billion dollars net
over the twelve-month period.

THIRTY-SEVENTH ANNUAL REPORT

During the year, this bank, as principal, opened new accounts for
the Union Bank of Burma, the Central Bank of Ceylon, the National
Bank of Iraq, and for Statni Banka Ceskoslovenska, the central bank of
Czechoslovakia and successor to Narodni Banka Ceskoslovenska, whose
account with us was closed simultaneously. The account which Bank
Polski had maintained was closed during the year.
Loans on gold to foreign central banks, which had reached a peak of
nearly 260 million dollars in 1948, were of minor importance in 1951.
Arrangements were in effect providing for advances to two central banks
up to an aggregate of 15 million dollars outstanding at any one time.
Advances totaling 11 million were actually made under one arrangement,
while the other was not used. The bank’s policy on gold loans remained
unchanged.
The Federal Reserve Bank of New York, as fiscal agent of the United
States, continued to act for the Treasury Department in the administration
of regulations pertaining to assets and financial transactions in which
nationals of Communist China and North Korea have an interest. Last
year this bank received and processed somewhat over 7,500 applications.
The bank also continued to operate the United States Stabilization Fund
pursuant to authorization and instructions from the Treasury Department.
Financial Statements
Statement of Condition

Total assets of this bank increased 834 million dollars during 1951,
and at the year end totaled 13,276 million dollars — a higher level than
in any previous year except 1948. The past year’s increase in total assets
was occasioned principally by a moderate expansion in gold certificate
reserves and in the portfolio of U. S. Government securities.
Gold certificate reserves expanded 283 million dollars, as contrasted
with a reduction of 716 million dollars during 1950. This sharp reversal
reflected (1) a turnaround from the previous year’s heavy gold export
drain to a moderate inflow during 1951, and (2) the continuance, on a
smaller scale, of the preceding year’s favorable balance for the New York
District in the regional clearing operations through the Interdistrict
Settlement Fund. The domestic clearing operations continued to involve
heavy transfers of Treasury funds to New York from other sections of
the country in connection with public Uebt operations, as well as payments
by other Reserve Banks for their share of Government securities pur

F E D E R A L R E S E R V E B A N K O F NEW Y O R K

chased in the New York market by the System Open Market Account.
Together, these reserve gains and other relatively minor sources of reserves
exceeded large transfers of funds to other Federal Reserve Districts for
private business account.
Discounts and advances at the year end were reduced to the nominal
total of 2.6 million dollars. This reflects the usual “window-dressing”
operations of the member banks and conceals a 77 per cent increase in the
use of the bank’s discount facilities for the year as a whole, with member
bank borrowing averaging higher than for any year since 1945. Holdings
of U. S. Government securities increased 625 million dollars during 1951,
including this bank’s share of the net purchases made by the System
Open Market Account, together with a moderate volume of purchases
made directly by the bank from dealers under sales-contract agreements.
Holdings of Treasury bills were reduced 76 million dollars, as net market
A

sse t s of t h e

F ed er al R es er ve B a n k

ork

(In thousands o f dollars)

Assets

Dec. 31,
1951

Dec. 31,
1950

Gold certificates .......................................................................
Redemption fund fo r Federal Reserve n o t e s ....................

6,788,866
78,065

6,532,687
50,912

Total gold certificate reserves ..............................

6,866,931

6,583,599

Other cash ................................................................................

69,693

47,615

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

2,595

61,960

Industrial lo a n s .........................................................................

U. S. Government securities:
Bills ....................................................................................
Certificates .........................................................................
Notes ...................................................................................
Bonds ...................................................................................

265,677
2,914,088
1,133,490
1,195,230

342,060
544,082
2,920,763
1,076,903

Total U. S. Government securities ......................

5,508,485

4,883,808

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

5,511,103

4,945,795

Due from foreign b a n k s.........................................................
Federal Reserve notes o f other b a n k s ................................
- Uncollected cash items ...........................................................
Bank premises ...........................................................................
Other a s s e ts ...............................................................................

9*
22,622
769,587
7,464
28,933

8*
23,337
806,762
7,657
27,838

Total assets ...............................................................

13,276,342

12,442,611

♦ A fter deducting participation o f other Federal Reserve
Banks amounting t o .........................................................

THIRTY-SEVENTH ANNUAL REPORT

purchases were more than counterbalanced by net cash redemptions. The
balance-sheet changes in each of the other types of Government securities
were dominated by the Treasury’s refunding operations, in which a large
volume of certificates of indebtedness was acquired in exchange for
Treasury bonds and notes. Initially, net market purchases of all these
types of obligations were made, but the aggregate increase of 701 million
dollars consisted principally of Treasury bonds and notes.
Circulation of Federal Reserve notes of this bank increased 245
million dollars, or 4.6 per cent, in 1951, reversing the declines of the
preceding three years. This expansion compares with a rise of 6.3 per
cent for the country as a whole.
L ia b il it ie s

of t h e

F e d er al R e s e r v e B a n k

ork

(In thousands o f dollars)
Liabilities

Dec. 31,
1951

D ec. 31,
1950

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

5,588,434

5,342,940

D eposits:
Member bank—reserve accounts .................................
U. S. Treasurer—general account ...............................
Foreign ..............................................................................
Other ..................................................................................

6,368,672
202,462
165,651*
220,194

5,665,077
115,722
286,467*
256,008

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

6,956,979

6,323,274

Deferred availability cash ite m s ...........................................
Other liabilities ........................................................................

461,363
4,642

518,346
1,733

Total liabilities .........................................................

13,011,418

12,186,293

Capital accounts:
Capital paid in .................................................................
Surplus (Section 7) .........................................................
Surplus (Section 13b) ...................................................
Other capital accounts ...................................................

75,472
159,743
7,319
22,390

73,383
153,289
7,319
22,327

Total capital accounts .............................................

264,924

256,318

Total liabilities and capital accou n ts....................

13,276,342

12,442,611

Contingent liability on acceptances purchased fo r foreign
correspondents .....................................................................

6,095f

6,580f

Ratio o f gold certificate reserves to deposit and
Federal Reserve note liabilities co m b in e d ......................

54,7%

56.4%

* A fter deducting participation o f other Federal Reserve
Banks amounting to .........................................................

360,707

608,962

t A fter deducting participation o f other Federal Reserve
Banks amounting to .......................................................

14,818

14,850

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

The member bank reserve account increased 704 million dollars in
1951, more than doubling the 1950 rise. The bulk of the increase occurred
to meet the higher reserve requirements that became effective in January
and February 1951. The expansion of member bank loans and the
accompanying expansion of deposits — which caused required reserves of
member banks to rise substantially in 1950 — continued at a slower pace,
and augmented the member banks’ need for additional reserves.
The general account of the United States Treasurer at this bank
was 87 million dollars higher than a year earlier. Deposits of foreign
central banks declined 369 million dollars, as foreign countries drew upon
their balances to meet their pressing need for dollars. The New York
Reserve Bank’s share of these accounts (in which all Reserve Banks
participated), together with certain foreign accounts which this bank holds
as fiscal agent of the United States, decreased by 121 million dollars.
“Other deposits” decreased 36 million dollars, principally because of a
reduction in the accounts carried for certain nonmember institutions.
Capital accounts in the aggregate increased 8.6 million dollars during
the year. Approximately 6.5 million dollars of net earnings was added
to the regular surplus (Section 7). “Capital paid in”, reflecting payments
for additional shares by member banks which increased their own capitali
zation (either by the reinvestment of earnings or by the sale of new
capital stock), rose by 2.1 million dollars.
The percentage growth in gold certificate reserves failed by a narrow
margin to keep pace with the increase in deposit and note liabilities, and,
consequently, the reserve ratio of this bank declined slightly from 56.4
per cent at the end of 1950 to 54.7 per cent at the end of 1951.
Earnings and Expenses

Gross earnings of the Federal Reserve Bank of New York increased
25.4 million dollars in 1951 to a record amount of 90.0 million dollars.
Of the year’s increase, 24.0 million dollars, or 94 per cent, resulted from
a rise in income from U. S. Government securities, and this in turn
reflected both a larger average volume of holdings and higher average
yields. Income from discounts and advances increased from 0.7 million
in 1950 to 1.7 million in 1951, principally because of the substantial
increase in the volume of member bank borrowing. However, the slightly
higher discount rate in effect throughout the year was also a contributory
influence. The income received from sales-contract agreements with
dealers involving temporary purchases of Government securities by the

THIRTY-SEVENTH ANN UAL REPORT

Reserve Bank showed a relatively sizable increase to #700,000 as the
volume of such accommodations increased.
Net expenses increased 2.9 million dollars to a total of 20.6 million
dollars. The greatest part of the increase was occasioned by larger outlays
for salaries and wages, although the increased cost of supplying Federal
Reserve currency was sizable and most other costs also increased. As
earnings rose much more than expenses, net earnings before additions and
deductions increased 22.S million dollars to a record level of 69.4 million
dollars.
Among the additions to or deductions from net earnings, the principal
change was a modest loss in 1951 on security sales whereas in 1950 a net
St a t e m e n t
F or

the

I ncom e

C alendar Y

and

ears

E xpenses

1951

and

1950

(In thousands of dollars)

1951

1950

Earnings ....................................................................................
Expenses* .................................................................................

90,019
20,599

64,666
17,703

Net earnings before additions and deductions ..

69,420

46,963

Additions to net earnings:
Profit on U. S. Government securities sold (net) . . .
All oth er............................................................................

__
21

8,880

Total additions .........................................................

8,886

Deductions from net earnings:
Loss on U. S. Government securities sold (net) ___ 371
Reserves for contingencies...... ....................................
All oth er.............................................................................

___________
65
2

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

438

Net earnings .............................................................................

69,003

55,789

Distribution of net earnings:
Dividends paid .................................................................
Paid United States Treasury (Interest on Federal
Reserve notes) .............................................................
Transferred to surplus (Section 7) ............................

4,465

4,332

58,084
6,454

46,267
5,140

Surplus (Section 7) beginning of y e a r..............................

153,289

148,149

Addition as above ...................................................................

6,454

5,140

Surplus (Section 7) end of year .......................................

159,743

153,289

* After deducting reimbursement for certain fiscal agency and other expenses.

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

profit was made. This loss was sustained after the Treasury-Reserve
System accord of last March and reflected a decline in the market value
of some of the securities sold during the year.
Net earnings after all adjustments but before dividends totaled 69.0
million dollars, or 13.2 million dollars more than in 1950. The usual
statutory dividend of 6 per cent, amounting to 4.S million dollars, was
paid to the member banks. Of the remaining net earnings, 58.1 million
dollars, or 90 per cent, was transferred to the United States Treasury
in payment of an interest charge on Federal Reserve notes levied by the
Board of Governors of the Federal Reserve System under Section 16 of
the Federal Reserve Act. The balance of the year’s earnings, 6.5 million
dollars, or 10 per cent of net earnings after dividends, was transferred to
the bank’s regular (Section 7) surplus account.
Changes in Membership

On December 31, 1951, a total of 737 banks in this District were
members of the Federal Reserve System, compared with 751 at the
N u m b e r o f M e m b e r and N o n m e m b e r B a n k s in
Second F e d e r a l R e se r v e D is t r i c t a t E n d o f Y e a r

(Exclusive of savings banks, private bankers, and industrial banks)
December 31,1951
Type of bank

December 31, 1950

Non
Per cent
Non
Per cent
Members members members Members members members

National banks............
State banks and
trust companies ..

510
227

Total .....................

737

100

516

111

235

112

111

751

112

100

C h a n g e s in F e d e r a l R e s e r v e M e m b e r s h ip in
S e c o n d D i s t r i c t d u r in g

1951

Total membership beginning of y e a r...................................................

751

Increases:
State banks and trust companies admitted....................................
New national bank ........................................................................
Decreases:
Member banks combined with other members...............................
Member banks combined with nonmembers..................................
Withdrawals from membership .....................................................

11
2
4

Total membership end of ye a r..............................................................

737

THIRTY-SEVENTH ANNUAL REPORT

beginning of the year. During the year, 13 member banks merged with
other banks and four State banks withdrew from membership. Two State
banks were admitted to membership and one new national bank was
chartered. The 737 member banks constitute 87 per cent of all national
banks, State banks, and trust companies in the District, and hold 96 per
cent of the total assets of all such institutions.
During the three years, 1949, 1950, and 1951, eight State member
banks withdrew from membership because in each case the bank wanted
to establish a branch outside the city, town, or village in which it was
located, and did not have the $500,000 minimum capital stock required
under Federal law for the establishment of an out-of-town branch, al
though each of these banks could meet the more moderate capital require
ments under State law for establishment of out-of-town branches. Three
of these withdrawals took place in 1949, one in 1950, and four in 1951.
For the same reason, one national bank converted into a State member
bank in 1950 and another on January 1, 1952. The Federal Reserve
System has recommended to Congress legislation to remedy this situation,
but no action has been taken.

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

Changes in Directors and Officers
Changes in Directors

In May 1951, member banks in Group 1 elected Clarence Francis,
Chairman of the Board, General Foods Corporation, New York, N. Y., as
a Class B director for the unexpired term ending December 31, 1952, to
fill the vacancy caused by the death of Lewis H. Brown.
The Board of Governors of the Federal Reserve System redesignated
Robert T. Stevens, Chairman of the Board, J. P. Stevens & Co., Inc.,
New York, N. Y., as Chairman of the Board and Federal Reserve Agent
for the year 1952, and reappointed William I. Myers, Dean, New York
State College of Agriculture, Cornell University, Ithaca, N. Y., as a Class C
director for a term of three years beginning January 1, 1952, reappointing
him as Deputy Chairman for the year 1952.
In November 1951, F. Palmer Armstrong, President, The Keyport
Banking Company, Keyport, N. J., was elected by member banks in
Group 3 as a Class A director for a term of three years, beginning January
1, 1952, to succeed Roger B. Prescott, President, The Keeseville National
Bank, Keeseville, N. Y., whose term expired December 31, 1951. At the
same time, Jay E. Crane, Vice President, Standard Oil Company (New
Jersey), New York, N. Y., was reelected by member banks in Group 3
as a Class B director for a term of three years beginning January 1, 1952.
The Board of Governors of the Federal Reserve System appointed
Clayton G. White, dairy farmer of Stow, N. Y., a director of the Buffalo
Branch for a term of three years beginning January 1, 1952. Mr. White
succeeded Carl G. Wooster, President, Wooster Fruit Farms, Inc., Union
Hill, N. Y., whose term expired December 31, 1951.
The board of directors of the bank appointed Lewis G. Harriman,
President, Manufacturers and Traders Trust Company, Buffalo, N. Y., a
director of the Buffalo Branch for a term of three years beginning January
1, 1952. Mr. Harriman succeeded George G. Kleindinst, President, Liberty
Bank of Buffalo, Buffalo, N. Y., whose term expired December 31, 1951.
The board of directors also designated Edgar F. Wendt, President, Buffalo
Forge Company, Buffalo, N. Y., as Chairman of the Board of Directors
of the Buffalo Branch for the year 1952.
Changes in Officers

0 . Ernest Moore, Manager of the Research Department, was granted
a leave of absence for a period of about one year, effective April 1, 1951,

THI RTY- SEVENTH A N N U A L REPORT

to act as a United Nations financial adviser to the Government of Haiti.
Robert V. Rosa, formerly Chief of the Monetary Research Division,
Research Department, was appointed Acting Manager and assigned to
that department, effective April 1, 1951. On January 4, 1952, Mr. Rosa
was appointed a Manager, his assignment to the Research Department
being continued.
Thomas 0 . Waage, formerly Director of Public Information, was
appointed a Manager and assigned to the newly established Public
Information Department, Secretary’s Office, effective April 1, 1951.
Harding Cowan, Assistant Counsel, was appointed Acting Assistant
Secretary, effective June 15, 1951, in addition to his duties as Assistant
Counsel.
Kenneth E. Small, formerly Chief of the Check Division, Check
Department,' was appointed a Manager and assigned to the Personnel
Department, effective July 11, 1951.
Paul R. Fitchen, Manager of the Cash Department, was granted a
leave of absence for a period of about one year, effective July 25, 1951,
to act as financial adviser to the Union Bank of Burma.
Donald J. Cameron, formerly Acting Assistant Manager of the Buffalo
Branch, was appointed an Assistant Vice President at the head office,
effective September 24, 1951.
Clifton R. Gordon and Alfred L. Pitts, formerly Attorneys in the
Legal Department, were appointed Assistant Counsel, effective January 4,
1952.
Member o f Federal Advisory Council

On January 3, 1952, the board of directors of this bank selected
N. Baxter Jackson, Chairman of the Board of Directors of the Chemical
Bank & Trust Company, New York, N. Y., to serve for another year as
the member of the Federal Advisory Council from the Second Federal
Reserve District.

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

Directors and Officers, January 5,1952
Class Group

D ir e c to r s

Term
expires
Dec. 31

A
B
B
B
C
C
C

1952

D ir e c to r s — B u f f a l o B r a n c h

1 John C. T raphagen .............................................................................
Chairman o f the Board, Bank o f New York and Fifth Avenue
Bank, New York, N. Y.
2 B urr P. Cleveland...........................................................................
President, First National Bank of Cortland, Cortland, N. Y.
3 F. P almer A rmstrong ....................................................................
President, The Keyport Banking Company, Keyport, N. J.
1 Clarence F rancis ............................................................ ..............
Chairman of the Board, General Foods Corporation, New
York, N. Y.
2 M arion B. Folsom .........................................................................
Treasurer and Director, Eastman Kodak Company, Rochester,
N. Y.
3 Jay E. Cr a n e ....................................................................................
Vice President, Standard Oil Company (New Jersey), New
York, N. Y.
Robert T. Stevens, Chairman, and Federal Reserve A g e n t ........
Chairman of the Board, J. P. Stevens & Co., Inc., New York,
N. Y.
W illiam I. Myers, Deputy Chairman............................................
Dean, New York State College of Agriculture, Cornell
University, Ithaca, N. Y.
♦Robert P. P atterson ......................................................................
Patterson, Belknap & Webb, New York, N. Y.

Dec'tl

1953
1954
1952
1953
1954
1953
1954
1952
Term

Edgar F. Wendt, Chairman.................................................................................
President, Buffalo Forge Company, Buffalo, N. Y.
George F. B a t e s .....................................................................................................
Vice President, The Marine Trust Company of Western New York,
Niagara Falls, N. Y.
B ernard E. F in u c a n e ..........................................................................................
President, Security Trust Company o f Rochester, Rochester, N. Y.
C. E lmer O l s o n .....................................................................................................
President, The First National Bank o f Falconer, Falconer, N. Y.
Robert C. T a i t .......................................................................................................
President, Stromberg-Carlson Company, Rochester, N. Y.
L ewis G. H arrtm an .............................................................................................
President, Manufacturers and Traders Trust Company, Buffalo, N. Y.
Clayton G. W h i t e ...............................................................................................
Dairy fanner, Stow, N. Y.
M

e m b e r of

F e der al A d v is o r y C o u n c il

N . B axter Jackson ,

Chairman of the Board o f Directors, Chemical Bank & Trust Company,
New York, N. Y.
♦ Mr. Patterson died January 22, 1952.

1952
1952

1952
1953
1953
1954
1954

THIRTY-SEVENTH ANNUAL REPORT

O f f ic e r s *
L e s lie

A l l a n S p r o u l , President
R . R o u n d s , First Vice President

H a r o l d A . B i l b y , Vice President
H e r b e r t H . K i m b a l l , Vice President
L . W e r n e r K n o k e , Vice President
W a l t e r S . L o g a n , Vice President and

General Counsel
A r th u r P h e la n ,

J o h n H . W illia m s ,

H a r o l d V . R o e l s e , Vice President
R o b e r t G. R o u s e , Vice President
W i l l i a m F . T r e i b e r , Vice President
V a l e n t i n e W i l l i s , Vice President
R e g i n a l d B. W i l t s e , Vice President

Vice President

T odd G . T i e b o u t ,

R u f u s J. T r i m b l e ,

Assistant General Counsel

Assistant General Counsel
S i l a s A . M il l e r ,

D o n a l d J. C a m e r o n ,

Assistant Vice President
J a m e s J. C a r r o l l ,

Assistant Vice President

Assistant Vice President
H o r a c e L . S a n fo rd ,

Assistant Vice President

H o w a rd D . C rosse,

Assistant Vice President

O tto W . T e n E y ck ,

Assistant Vice President

F e li x T . D a v is ,

Assistant Vice President
N o r m a n P . D a v is ,

C h a r le s N . V a n H o u te n ,

Assistant Vice President

John H . W u rts,

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

Assistant Vice President

A rthur H . N oa,

W il l ia m F . A b r a h a m s ,

Manager, Security Custody Department
H a r r y M . B oyd,

Manager, Service Department
G u sta v O s te rh u s,

Manager, Cash Custody Department

Manager, Bank Examinations
Department

W e s le y W . B u rt,

ManagerjSavings Bond Department

F r a n k lin

J o h n J. C la r k e ,

Secretary, and Assistant Counsel
H a r d in g C o w a n ,

Assistant Counsel, and
Acting Assistant Secretary
P aul

A lfr e d L . P itts ,

Assistant Counsel
R ob ert V . R osa,

Manager, Research Department
W a l t e r H . R o z e l l , J r .,

Manager, Foreign Department

R. G o r d o n ,

Assistant Counsel

R a lp h W . S c h e ffe r ,

Manager, Real Estate and Consumer
Credit Department

E d w ard G. G u y ,

Assistant Counsel, and
Assistant Secretary

K en n eth

W illia m A . H e in l,

Manager, Safekeeping Department
P e te r P . L a n g ,
A n g u s A . M a c I n n e s , J r .,

Manager, Check Department

Manager, Public Information
Department
A . C h e ste r W a lto n ,

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

Manager, Government Check Department

Manager, Bank Relations Department
W a lt e r C. W a rn e r,

Manager, Credit Department, and
Manager, Discount Department
R oy

O . E r n e s t M oore,

Manager ( On leave of absence)

E. W

e n d e ll,

Manager, Government Bond Department
H a r o ld M . W e s s e l,

M u e th e r,

Manager, Building Operating
Department
C u rtis R . B ow m a n ,

* See footn ote on the follow in g page.

S m a ll,

Thom as O. W aage,

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

Manager, Personnel Department

Manager, Collection Department

H erbert

E. P e t e r s o n ,

Manager, Cash Department

R. F i t c h e n ,

Manager (On leave of absence)
C lift o n

Economic Adviser

Manager, Accounting Department, and
Manager, Planning Department
General Auditor

F E D E R A L R E S E R V E B A N K OF NEW Y O R K

O f f ic e r s — B u f f a l o B r a n c h *
In s le y

S m ith ,

G eorge

General Manager

D o ll,

Cashier

M . M onroe M y e r s,

G erald H . G ree n e ,

Assistant Cashier

I n d u s t r i a l A d v is o r y C o m m i t t e e
W illia m

H. Pouch, Chairman,

President, Concrete Steel Company,
New York, N. Y.
A r t h u r G. N e ls o n ,

Vice Chairman,

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

E d w a r d J. N o b le ,

Chairman of the Board,
American Broadcasting Company, Inc.,
New York, N. Y.

R e a l E s t a t e C r e d i t A d v is o r y C o m m it t e e
A r t h u r P h e la n , Chairman,

Vice President, Federal Reserve Bank of New York,
New York, N. Y.
C. J o h n s o n ,
President and Trustee,
The Dime Savings Bank of Brooklyn,
Brooklyn, N. Y.

H a r r y H e ld ,

G eorge

Vice President,
Bowery Savings Bank,
New York, N. Y.

A. V i e s e r ,
Vice President,
Mutual Benefit Life Insurance Company,
Newark, N. J.

M ilfo r d

*
The following changes occurred after January 5, 1952 and have not been reflected
in the List of Directors and Officers as of that date:
Mr. Rounds, who had been with the bank since 1917, and had been its First
Vice President since 1941, resigned effective February 29, 1952, after reaching
retirement age.
Mr. Treiber, Vice President, was appointed First Vice President, effective
March 1, 1952, for the unexpired portion of the five-year term, ending February
29, 1956.
Mr. Smith, General Manager of the Buffalo Branch, was appointed a Vice
President, effective March 1, 1952, continuing as the officer in charge of the
Branch.
Mr. Wurts, Assistant Vice President, was appointed a Vice President, effective
March 1, 1952.
Mr. Cowan’s appointment as Acting Assistant Secretary was terminated
effective March 1, 1952.

Full text of Annual Report of the Federal Reserve Bank of New York : Thirty-Seventh Annual Report of the Federal Reserve Bank of New York : 1951

FRASER