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Thirty-sixth Annual Report
Federal Reserve Bank
of New York
For the Year Ended December 31, 1950
Second Federal Reserve District
FEDERAL RESERVE BANK
OF NEW YO R K
March 9, 1951
To the Stockholders of the
Federal Reserve Bank of New York:
I am pleased to transmit herewith the thirtysixth annual report of the Federal Reserve Bank
of New York reviewing the year 1950.
A l l a n S pr o u l ,
President.
Contents
PAGE
T r a n s it io n t o R e a r m a m e n t
.................................................................
5
Foreign Economic Problems .........................................................
Sources of Domestic Inflationary Pressures.....................
8
10
..............................................
12
E c o n o m i c T r e n d s i n t h e S e c o n d D i s t r i c t ................................
18
F e d e r a l R e s e r v e C r e d i t P o l i c y ......................................................
21
Consumer and Mortgage Credit Regulation............................
27
C o r p o r a t e F i n a n c i n g a n d t h e C a p i t a l M a r k e t s ................
31
T h e N e w Y o r k F o r e i g n E x c h a n g e M a r k e t ...........................
35
I n t e r n a t io n a l F in a n c ia l a n d E c o n o m ic D e v e l o p m e n t s . .
37
N a t io n a l E c o n o m ic T re n d s in 1 9 5 0
The Changing Dollar Problem ...................................................
Changes in Monetary Policies Abroad......................................
Foreign Economic and Military Assistance Programs . . .
Integration of Foreign Economic and Military Assistance
Programs.........................................................................................
38
41
43
46
V o l u m e a n d T r e n d o f t h e B a n k ’ s O p e r a t i o n s ........................
48
Domestic Operations............................................................................
Foreign and International Operations...........................
48
52
F i n a n c i a l S t a t e m e n t s ..............................................................................
54
Statement of Condition.......................................................................
Earnings and Expenses ....................................................................
54
C h a n g e s i n M e m b e r s h i p .........................................................................
59
C h a n g e s i n D ir e c t o r s a n d O f f i c e r s ...............................................
60
Changes in Directors .........................................................................
Changes in Officers........................................................
Member of Federal Advisory Council......................................
60
62
L is t o f D i r e c t o r s a n d O f f i c e r s .........................................................
63
3
57
61
Charts
PAGE
P r o d u c t i o n o f D u r a b l e a n d N o n d u r a b l e G o od s . .
13
M o v e m e n t o f P r i c e I n d ic a t o r s , 1 9 4 9 a n d 1 9 5 0
. .
16
....................................
28
I n s t a l m e n t C r e d it O u t s t a n d in g
Se c u r it y
H o l d in g s
M em ber
B anks
and
in
O u t s t a n d in g
L e a d in g
L oans
C i t ie s
of
D u r in g
1 9 5 0 ...............................................................................................
30
F o r e i g n G o l d R e s e r v e s a n d D o l l a r A s s e t s ..............
39
Sa l i e n t O p e r a t i o n a l T r e n d s a t
serve
Ban k
N ew
Y ork
R e
............................................................................
4
49
Federal Reserve Bank of New York
Thirty-Sixth Annual Report
outbreak of overt Communist aggression in Korea, on June 25,
THE
1950,
transformed the tone and the tempo of American economic life.
The first half of 1950 had been a period of energetic recovery from the mild
recession of 1949. By midyear, the production of goods and services had
reached a new peacetime high, and employment was nearing a record
peak — a convincing demonstration of the recuperative vitality of a com
petitive enterprise economy. This recovery, like the recession preceding it,
also had its counterpart abroad, particularly in Western Europe. But
“after Korea”, there was a complete change in setting. This country, and
its allies, faced a clear necessity to rearm. For the indefinite future, it
appeared, the “Western” nations must be prepared at the least for sporadic
hostilities, and at worst for a speedy mobilization to meet the challenge
of total war. Thus from July onward, the dominant economic problem in
the United States became that of wedging an expanded military program
into a productive machine already operating at close to full capacity; the
dominant economic danger became that of inflation; and the dominant
emphasis in economic thinking began to shift from freedom to controls.
The immediate repercussions of the changed situation were sharpest
in the nondefense sectors of the economy. Consumers, fearing price
increases or actual shortages of goods, rushed to buy, and the gross national
product (measured in dollar terms) rose swiftly in the third quarter.
Practically all of the rise was concentrated in consumption expenditures,
and more than half of the additional expenditures were for durable goods.
The rise was also accompanied by a continuation of the unprecedented
boom in construction activity that had been underway throughout the
year. As a result, the number of new dwelling units started in 1950
reached a total one-third greater than the record set in the previous year;
in value terms, residential building increased more than one half over 1949.
All other types of private and public construction shared in this remark
able expansion.
The consumer buying boom settled down somewhat in September,
however, to be followed by an acceleration in business expenditures,
chiefly for replacing and enlarging inventories. And toward the end of the
6
THIRTY-SIXTH
ANNUAL
REPORT
year, after a lull for planning and the placing of contracts, Government
expenditures for goods and services rose above the relatively constant
levels of the first three quarters, although the Government budget, on a
current cash basis (including transfer payments), remained approxi
mately in balance. In the final quarter, business and Government expendi
tures together produced a record rise in the dollar volume of gross
national product.
Yet these increases in dollar volume during the second half of the
year were in large measure illusory; it is doubtful whether as much as
one half, perhaps little more than one third, of the over-all dollar gain was
matched by additions to physical output. Wholesale prices (the “all
commodities” index), which had risen 6 per cent in the first six months,
rose 12 per cent further; the less sensitive consumers’ price index, follow
ing with the customary lag, was up by 5 per cent. Inflationary pressures
were strong; and the expansion of military procurement had scarcely
begun. At the year end, the rate of defense spending had risen about
7 billion dollars above pre-Korean levels, to an annual rate of 20 billion
dollars, in a gross national product that had reached a rate of 300 billion.
The rapid acceleration of inflationary pressures, in the earliest
*stages of transition to rearmament, emphasized the contrast with conditions
prevailing from 1939 to 1942, when underemployed resources and man
power were drawn upon to provide an annual expansion of 10 to IS per
cent in the real volume of gross national product. In the last half of 1950,
added employment, a slight lengthening of working hours, and some gains
in productivity combined to raise the real gross national product at an
estimated annual rate of about 7 per cent. There were still possibilities
for further increases, to be sure, but it appeared very unlikely that all of
the projected build-up in military requirements could be provided out of
expanded total production. Should the international situation permit a
later stabilization of armament spending at the higher levels to be reached
by 1952, the total capacity of the economy might catch up in the following
years, and permit resumption of the rise in civilian consumption that had
been enjoyed for the past decade. But as of the end of 1950, it appeared
that private consumption and investment would, in some measure, have
to give way, at least for the transition period.
Confronting this prospect at its earliest stages, the President, in his
message of July 19, 1950, called for primary reliance upon strong fiscal
and credit measures to reduce the volume of private purchasing power
competing with the Government for available output. In this approach,
FEDERAL
RESERVE
BANK
O F NEW Y O R K
7
the President found support from those who feared that direct controls
would hamper, not induce, greater production, particularly if they were
imposed at the very beginning of an enlarged defense program, the scope
and duration of which no one could venture to estimate. Support also
came from those who feared that such controls would shortly become
unworkable. Without the intense patriotic fervor which accompanies
actual war, it was felt, they might become discredited or be made ineffec
tive for later use in a greater emergency. However, in the Defense
Production Act, which became law on September 8, Congress made pro
vision for a wider range of eventualities, giving the President power, until
June 30, 1951, not only to allocate scarce materials and to impose selective
controls over real estate and consumer credit, but also to intervene in
labor disputes, and to control most prices (provided a parallel control
should be established over wages). An average increase of about one
fifth in personal income taxes was voted by the Congress, effective
October 1; and at the beginning of January 1951, a retroactive tax was
imposed on “excess” corporate profits earned after July 1, 1950.
The steps taken by the Federal Reserve System to strengthen general
credit controls, and to impose selective restrictions upon consumer instal
ment credit and real estate mortgages, are described in a later section of
this report.
In September 1950 a National Production Authority was created
in the Department of Commerce. On October 7, the President appointed
an Economic Stabilization Administrator to study the possible need for
price and wage controls, and to provide for the administration of such
controls should they be imposed. On December 15, these authorities were
tied together when the President appointed a Director of Defense Mobili
zation, who was assigned responsibility over the Economic Stabilization
Administration and the National Production Authority. (Shortly there
after the NPA was in turn subordinated to a Defense Production Ad
ministration responsible to the Director of Defense Mobilization.) On
December 16, the President declared the existence of a state of national
emergency. Shortly after the end of the year, an initial general “freeze”
on wages and prices was announced.
Thus the year presented a paradoxical record of economic change.
Up to the middle of 1950 the economy of the United States had given a
striking demonstration of the recuperative powers, and capacity for
growth, of an enterprise system largely free of detailed Government intru
sion. But by the end of the year the United States found itself (partly
8
THIRTY-SIXTH
ANNUAL
REPORT
because of its success in maintaining a high-consumption economy at
virtual full employment) applying direct controls in order to make room
for what was, as yet, a very moderate expansion in military production.
The turnaround did not, however, imply abandonment of the more gen
eral and impersonal controls embraced in fiscal and monetary policy.
Foreign Economic Problems
These same general controls received even greater emphasis abroad,
as inflationary pressures returned to most of the other democratic
countries which had experienced extensive planning and the detailed regu
lation of markets during World War II. Pay-as-you-go taxation, and
balanced or overbalanced budgets, were, almost universally, the prime
objective. Stiffened restraint upon the availability of credit, resulting
unavoidably in higher rates of interest both for Government and for
private borrowing, appeared in countries as widely divergent in their
recent reliance upon detailed governmental planning as the United King
dom, or Sweden, at one extreme, and Belgium or Canada, at the other. It
was noteworthy that of all major countries in the “democratic bloc” , only
the United States and Australia had not yet, by the end of 1950, exerted
sufficient effective restraint upon credit to result in significant increases
in long-term rates of interest — although the United States, like most
others, had experienced rising short-term interest rates (with some
repercussions on long rates) as a result of efforts to check the expansion
of credit in the face of unprecedentedly large demands.
Most of these other countries made surprising gains over their prewar
performance in production, employment, and external trade during 1950.
On the basis of preliminary estimates, industrial production among the
seventeen countries included in the Organization for European Economic
Cooperation, for example, generally rose 7 to 15 per cent (with a few
exceptions where the gains were smaller); their employment in most
cases was well above prewar; and a majority restored over-all balance
in their international current accounts. By the end of 1950, it appeared
quite probable that many of the objectives of the European Recovery
Program would be fulfilled in advance of the original target date — mid1952 — and that the “dollar shortage” had been banished, at least tempo
rarily. Intimately related to this achievement, which rested on the
vigorous internal efforts of the countries concerned and on the currency
devaluations of September 1949, as well as on American aid and the
FEDERAL
RESERVE
BANK
OF
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9
transmitted effects of economic recovery and expansion here, were the
steps taken to widen the area of multilateral clearings, the creation of
the European Payments Union, the extended use of “open general
licenses” (which eliminate licensing requirements for specified commodity
imports from designated countries), and the further reduction of quantita
tive quotas on imports among the OEEC countries.
It was not yet possible, however, to conclude that the so-called
“dollar shortage” had been permanently eliminated. Until the outbreak
of the Korean conflict, a very large share of the postwar improvement in
the United States trade balance had come from a shrinkage of United
States exports, largely induced by trade and exchange restrictions abroad,
rather than from an enlargement of our imports. And a large proportion
of the subsequent rise in United States imports was associated with the
increase in our Government and business stockpiling. Nonetheless, even
though some part of the improvement should prove temporary, the con
tinuation of large-scale Government economic assistance enabled many
foreign central banks during 19S0 to begin accumulating hard currency
and gold reserves as a backlog of strength — a highly desirable develop
ment in the interest of freer international trade and eventual currency
convertibility.
The United States lost about 1.7 billion dollars of its gold reserves
during the year, or about 7 per cent of the peak volume of 24.7 billion
dollars reached in 1949, when United States holdings accounted for more
than two thirds of all known monetary gold reserves. At the end of 19S0
the country’s gold stock, at 22.7 billion dollars, still remained about
billion dollars greater than in the latter part of 1945, however, after making
allowance for the gold subscription of the United States to the International
Monetary Fund. The loss of gold to foreign countries may well diminish
in coming months when these countries have to meet the requirements of
their own expanded military programs, and when United States stockpiles
reach adequate levels and imports of stockpile materials revert to a
replacement basis. It should be remembered, also, that many of the coun
tries accumulating gold were doing so at the expense of drastic restrictions
on their purchases in the United States, and that these restrictions might be
relaxed as their reserves approached more adequate working levels and
their import needs increased. In fact, some countries — notably in Latin
America — were already relaxing their import restrictions and endeavoring
to obtain more goods from this country toward the end of 1950. It now
seems likely that in the immediate future our exports will be limited only
10
THIRTY-SIXTH
ANNUAL
REPORT
by our ability to supply the goods and by the ability of other countries to
pay for them. One other factor which could cause us to lose gold would
be an outflow of capital. While there have been some movements of
speculative capital or “hot money” to other countries, partly in attempts
(largely unsuccessful) to profit by rumored appreciation of certain cur
rencies that were devalued in 1949, only a fundamental failure in our
domestic policies for control of inflation could provide a basis for a sus
tained capital outflow.
Sources of Domestic Inflationary Pressures
The principal sources of inflationary distortion in the American econ
omy were already sharply revealed before the end of 19S0. Some expressed
themselves by limiting the expansion of production, others by increasing
production costs, and still others by contributing to an excessive aggregate
demand. None presented insoluble problems. But the great challenge
to public policy was to find and accept those techniques of control which
would not only provide temporary relief, but would also be effective during
a period of rearmament and mobilization that might last for a period of
years. The ultimate solution, of course, would be increased production
arising from increased use of capital and increased productivity.
The limitations on immediate expansion of production were the
characteristic bottlenecks of “full employment” , principally a shortage of
manpower in the labor force, and a scarcity of certain critical materials,
particularly metals. There were difficulties, too, arising from inherent
delays and shifts in the precise scheduling of military requirements. And
the extensive rearrangement of productive capacity and manpower
inevitable in the present transition period may be expected temporarily to
interfere with the needed growth in productivity. Real output per man
hour apparently fell off for these reasons in 1941 and 1942, and a com
parable decline would probably have to be expected through much of
1951. But the relatively smaller scope of the new defense tasks, the
speedier adaptation made possible by experience so recently acquired in
World War II, and the great expansion in plant capacity over the past
decade should combine, within another year, to begin to bring about the
rise in productivity upon which hopes for combating inflation by “ more
production” must principally depend.
Inflationary influences within the cost structure posed problems of a
more stubborn character. There was the danger that undue reliance upon
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
11
taxation of “excess” profits might remove essential incentives for vigorous
cost control, although it was not evident, by the end of 19S0, that this
danger point had been reached. There were also two important factors
which, whatever their advantages might be under other conditions,
were already at work as “built-in” sources of cost inflation during
1950 — wage rates tied to the “cost-of-living” index, and agricultural
prices geared to parity formulas based on the prices paid by farmers.
So long as all other methods were successful in stabilizing prices, the
automatic acceleration of costs through rising wage rates and agricultural
prices could be held in check; but any unavoidable slippage in the other
controls, or even time lags in their becoming effective, would set off a
further upward spiral of costs through wage and farm-price adjustments.
Both implied, moreover, that any necessary shrinkage of civilian consump
tion, even if only temporary, would not be borne by the particular labor
groups covered by adjustable wage contracts, nor by the farmers included
in the parity program. By the end of 1950, attention had properly begun
to focus on this range of problems.
A third group of inflationary factors was already in motion during
1950, and overlapped, in part, those already mentioned. These were the
forces contributing to a general excess of demand for goods, beyond
existing supply capabilities. Over-all physical restriction upon expansion
of civilian consumption, inevitable though it may be in terms of national
needs, seldom can be expressed in a clear-cut guide to action for the
individual. Consequently it had to be expected that, even in the face of
increased military demands for goods and services, current incomes might
be drawn upon more heavily to maintain individual civilian consumption,
that existing holdings of liquid assets might be activated, and that con
sumers and businesses might attempt to obtain additional credit in order
to sustain or increase their purchasing power. That is why direct control
over prices, and even consumer rationing if that were attempted, must fall
short of providing a real solution of the inflation problem. The pressure
of excess demand will eventually break out somewhere, defeating the objec
tives of direct controls, unless disposable income is reduced through heavy
taxation, unless saving out of income can be increased, unless methods are
found to restrain or offset the spending of existing liquid assets (a much
greater problem than ever before because of the huge Government debt
created in World War II), and unless curbs are placed upon the creation
of credit.
Some of those who were strongly urging imposition of direct controls
12
THIRTY-SIXTH
ANNUAL
REPORT
during the last half of 1950 did not recognize the essential interdependence
between such measures and general fiscal and credit controls. There
seemed to be a hope that, with prices frozen, inflation would be at an end;
that there would be plenty of goods to go around; and that the distasteful
and “old-fashioned” medicine of higher taxes and tighter credit could be
avoided. This was wishful thinking. Although there was no need to
despair of bringing the inflation under control, its sources were too many
and too varied to permit reliance upon a single corrective, or to expect
the process of correction to be wholly painless.
National Economic Trends in 1950
The year 1950 was characterized by two distinct phases. During
the first half of the year, the economy was in the process of recovering
from the mild recession of 1949. By June, industrial production had
surpassed the previous peacetime record set in 1948. Consumers spent
more for housing and durable goods during these months than in any
previous similar period. In the latter half of the year, after the United
States became involved in the Korean conflict, there was a wave of scare
buying, based on the prospective imposition of a greatly expanded defense
program on an economy operating at near-capacity levels. Prices and
wages rose sharply, while supplies of many raw materials became tight.
At the beginning of the Korean war, however, it was a common
belief among businessmen and Government officials that only selected
direct controls, in addition to general fiscal and monetary measures, would
be necessary to prevent the rearmament effort, at least in its initial stages,
from exerting an unbalancing influence on the economy. While provision
was made in the Defense Production Act for the setting up of full-scale
direct controls as they might become necessary, resort to these provisions
was slow and gradual. By the end of the year, the production of military
goods and the conversion of facilities were getting under way, but had
not yet involved appreciable restriction of other production. Civilian
goods still accounted for the bulk of the increase in output during the
second half of the year. In fact, nonmilitary production at the end of
1950 was at a* new high. The lag in the flow of finished munitions is
indicated by the fact that defense expenditures accounted for only 7 per
cent of the gross national product at the end of 1950, very little more
than a year earlier, when the gross national product was considerably
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
13
lower. However, the prospective magnitude of the defense effort was
progressively enlarged.
The total value of goods and services produced reached an all-time
peak in 1950, and so did incomes. The gross national product amounted
to 280 billion dollars, 9 per cent more than in 1949 and 8 per cent above
the previous record set in 1948. Even after adjusting for the effects of
rising prices, output of goods and services in 1950 was approximately
7 per cent higher than in either of the two preceding years. For the year
as a whole, the entire increase resulted from higher levels of consumer
and business spending; actually, despite rising military spending late in
the year, there was a slight over-all decline in government expenditures
for goods and services. In the fourth quarter, the gross national product
was at an estimated rate of 300 billion dollars per annum.
The physical volume of goods produced in 1950 is estimated to have
been about 11 per cent higher than in 1949. Output of manufactures and
minerals was up 14 per cent, new construction rose 17 per cent, and
PRODUCTION OF DURABLE AND NONDURABLE GOODS*
(1935-39 average = 100 per cent)
PER CENT
400
| D U R A B LE
[g o o d s
400
Xrm N O N D U R A B L E
I //A GOODS
300—
300
200
2 00
NOND UR A BL £
GOODS
100
I 00
1940
(944
1946
JJJJLLL
1949
m i l i \ mi t
1950
♦Figures for 1940,1 944, and 1948 ore annual average*; figure* far 1949 ami 1950 are seasonally adju*»ed
monthly indexes.
14
THIRTY-SIXTH
ANNUAL
REPORT
electric and gas utilities produced 12 per cent more than in 1949. Agri
cultural output declined about 2 per cent, but nevertheless was the third
largest in the nation’s history.
The physical volume of industrial production (as measured by the
Federal Reserve index) had reached the highest peacetime rate on record
just before the Korean hostilities started in June, and was virtually double
the 1935-39 rate. In the first four months after this country became
involved in the Korean fighting, output expanded 9 per cent further, but
no additional advance occurred in the last two months of the year.
Shortages of materials and their diversion to military production ham
pered output toward the close of 1950, but shutdowns because of severe
storms and because of the usual model changes in the automobile industry
were also factors in the lag in production. The supply situation for many
basic materials tightened rapidly, particularly in the case of rubber and
most metals. Demand increased not only because of actual production
needs, but because business firms tended to accumulate inventories which
they deemed commensurate with their high level of operations and
prospective needs, and in specific instances also because of strategic
stockpiling by the Government.
Increased production, wages, and prices raised personal income in
1950 to 223 billion dollars, 8 per cent above the 1949 level. Personal
income, particularly in the early months of the year, was stimulated by
the payment of the National Service Life Insurance dividend, amounting
to 2.7 billion dollars. Disposable income (personal income minus taxes)
also rose in 1950, but not so rapidly as total personal income, because
of the progressive tax structure and also because of higher tax rates in
the last quarter. By far the largest part of the rise in income — nearly
three fifths — was in wages and salaries. Nonagricultural employment
in the second half of 1950 was a record-breaking 45.5 million; there were
widespread increases in wage rates; and wage-earners generally worked
longer hours than in 1949. Higher dividend payments and larger
business and professional income also contributed to the increase in total
income. Agricultural income, on the other hand, was not quite so large
as in 1949 and was the lowest since 1945. However, the Korean crisis,
which turned prospective agricultural surpluses into valuable stockpiles,
contributed to a marked rise in farm prices and incomes in the latter
part of the year.
An outstanding feature of 1950 was the increase of expenditures for
consumers’ goods and housing beyond all expectations. Although such
FEDERAL
RESERVE
BANK
OF
NEW
YORK
15
spending had already been at a record-breaking rate in the first half of
1950, it rose sharply after the outbreak of war in Korea. The surge of
buying in midsummer — some of it illogical and panicky — was motivated
primarily by the anticipation of shortages and higher prices. Consumers
repeatedly demonstrated their willingness to dip into savings or to go into
debt in order to obtain the goods they desired. The surge of demand for
nondurable goods like sugar, soap, and nylon hosiery quickly abated, but
heavy buying of durable goods, particularly automobiles, persisted. During
1950, sales of new automobiles reached record levels, even though the pre
vious four years of peacetime production had virtually eliminated the back
log of demand from World War II. New passenger cars produced in 1950
numbered 6.7 million, over 30 per cent above the previous record, yet
many dealers had sizable waiting lists at the end of the year. The
rapidly developing television industry achieved a 1950 sales volume
two and one-half times that of 1949. Sales of furniture, appliances, and
other consumers’ durable goods were stimulated by the exceptionally
high number of homes being built and sold. A total of 1,396,000 new
dwelling units, over one-third more than during the previous record
year, were started in 1950.
As this country became more deeply involved in the Korean fighting
and the immediate goals of our domestic defense effort took larger and
more definitive shape, it became apparent that raw materials and man
power needed to achieve these goals would have to be partly diverted
from civilian production. In such circumstances, it was certain that output
of most consumers’ durable goods and housing would be curtailed, either
by direct limitation of production or by restrictions on the use of materials.
In the meantime, with consumers eager to buy and willing to dip into
savings or to borrow in order to do so, a highly inflationary situation
was developing.
The measures taken to bring demand more closely into line with
the civilian supply which would be left after military needs had been
met were first limited to the fiscal-monetary field. Higher individual
and corporate income taxes which became effective on October 1 began
to siphon off some purchasing power. Regulation of consumer credit by
the Federal Reserve System was reimposed in September and strengthened
in October. Residential real estate credit terms were tightened somewhat
in July by Federal agencies insuring and guaranteeing mortgages, and
in October the Housing and Home Finance Agency and the Federal
Reserve System cooperated in issuing sharper restrictions on the financing
16
THIRTY-SIXTH
ANNUAL
REPORT
of new homes. However, the existence of a large volume of commitments
to finance housing under the old terms largely postponed the effects of
the steps taken.
Business spending, both for inventories and for new plant and
equipment, accelerated sharply in the course of 1950. For the year as a
whole, nonfarm businesses added about 4 billion dollars’ worth of goods
to their stocks, whereas in 1949 an inventory liquidation of approximately
3 billion dollars had taken place. (These figures exclude the effects
of price changes, which during 1950 added more than 5 billion dollars
to the value of existing and new inventories.) The high rate of consumer
buying drew down stocks somewhat during the third quarter, but by the
fourth quarter nonfarm businesses were adding to their inventories at
the rate of 11 billion dollars a year. At the start of 1950, plant and
equipment expenditures had generally been expected to decline sharply
during the year. But during the first half of the year better business than
anticipated revived the expansion plans of many firms. During the second
MOVEMENT OF PRICE INDICATORS, 1949 AND 1950
(Monthly indexes, June 1950 = 100 per cent)
PER CEN T
PER CEN T
Source: U. S. BureawoUoborSfotfstte, converted to Jon* J950 bote by the Federal Reserve Bank of N «* York,
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
17
half, the need for increased war production facilities and the assurance
of a continued high level of consumer demand added to the demand for
capital equipment. Unfilled orders of machine tool companies tripled
between June and November. Thus, despite the earlier expectations,
expenditures for plant and equipment in 19S0 now appear to have
exceeded those in 1949. Businessmen are reported planning to increase
their capital expenditures in 1951 by a further 20 per cent; if these
plans are realized, such expenditures will total more than in any other year.
The high rate of consumer and business spending during 1950 was
reflected in rising prices. The price level advanced during the spring, but
the rise was gradual prior to the invasion of South Korea. As shown
in the accompanying chart, a rapid rise followed the overnight deteriora
tion in the international situation. Basic commodities generally showed
the sharpest increases; the Bureau of Labor Statistics index of spot prices
of 28 basic commodities increased roughly 40 per cent between the
outbreak of hostilities and the end of the year. The general level of
wholesale prices advanced about 12 per cent in the same period. Con
sumers’ prices showed an over-all rise of 5 per cent, indicating that
many of the increases in raw material prices and labor costs had not
yet been felt at the retail level. All three price indexes set new records,
surpassing the peaks reached in 1947 and 1948.
General wage increases during the first half of 1950 were relatively
small, although many new contracts provided for pensions, insurance, or
other “fringe” benefits. In August, however, “voluntary” wage increases
granted by the automobile industry touched off a new round of upward
wage adjustments, amounting generally to around 10 to 15 cents per hour.
Rising living costs and a tightening labor market resulted in agreements
on wage increases in a number of key industries, despite the fact that
existing contracts generally did not provide for reopening of wage negotia
tions until later. Many of these wage raises were accompanied by price
increases, the steel industry being a notable example. A particularly
outstanding development in the latter half of 1950 was the increasing
use made in wage contracts of cost-of-living escalator clauses and the
inclusion in a growing number of contracts of a provision for an annual
“productivity” increase in wages.
The developments of recent months point to an increase in consumer
income during 1951, which will be only partly offset by a rise in tax
payments at current rates. The supply of civilian durable goods, on the
other hand, is certain to diminish when defense production gains momen-
18
THIRTY-SIXTH
ANNUAL
REPORT
turn. A shift in consumer spending from durable goods to nondurable
goods and services may be expected as production of the former is
curtailed. One of the major problems confronting mobilization authorities
is that of reconciling consumers to a somewhat lower standard of living
in a period when their money income is increasing. Even with further
increases in taxes, credit restrictions need to play an increasingly important
role in adjusting demand to the available supply.
Economic Trends in the Second District
During 19S0, the Second Federal Reserve District shared in the
general national prosperity. To date, the effects of the defense program
have been minor, but this District has aircraft, electronics, ordnance,
and chemical plants which are expected to participate increasingly in the
rearmament effort. The consumers’ goods industries, which are so
important in this area, benefited from the high rate of consumer spending
in the latter half of 1950, but as the year ended they were facing problems
of increasing shortages and rising prices of raw materials. Private con
struction activity, particularly housing, set new records during 1950.
Substantially increased sales of retail establishments in this District in
the last six months of 1950 more than made up for the moderate lag
during the first six months.
The dollar volume of income payments in this District during 1950
was the highest in history. According to preliminary estimates made at
this bank, income payments in the Second District totaled approximately
35 billion dollars in 1950, compared with 32.8 billion in 1949 and the
previous record of 33.1 billion in 1948. Percentagewise, the increase from
1949 to 1950 was about the same in this District as it was in the country
as a whole, although the year-to-year percentage rise in manufacturing
payrolls appeared to be somewhat less here than in the rest of the
United States.
The lag in manufacturing activity in this District occurred chiefly
in the first half of 1950. Whereas factory employment in the country
as a whole rose steadily, in this District there was no appreciable re
covery from the 1949 level until August. For the year as a whole,
factory employment averaged 3 per cent above 1949 in the Second
District, compared with 5 per cent in the entire United States. In the
dominant industry of this area, apparel manufacturing, employment was
hit by the lag in retail sales of soft goods during the first half of the
FEDERAL
RESERVE
BANK
OF
NEW
YORK
19
year, but during the second half the increase in employment in this
industry made up for the earlier decline. Chemical production was the
only major Second District manufacturing industry in which average
employment was lower in 19S0 than in 1949. In the nondurable goods
industries, the year-to-year gains in employment were relatively small,
although industries manufacturing paper, leather, and petroleum products
each employed about 4 per cent more than in the previous year. The
outstanding gains, as might be expected, occurred in the durable goods
group; the primary and fabricated metals, electrical machinery, and
transportation equipment industries in particular showed average gains
of approximately 10 per cent. By the end of 1950, however, some durable
goods firms, which had been expecting to receive defense contracts, were
becoming concerned at the slow flow of orders, while at the same time
materials for the manufacture of civilian goods were becoming scarce
or restricted. Nevertheless, most employers were reluctant to release
skilled workers whom they expected to need soon.
Employment in nonmanufacturing industries as a whole was main
tained at about the same level in 1950 as in the two preceding years,
both in the Second District and in the United States generally. In the
latter part of the year, however, this District failed to make gains similar
to those made in the rest of the country. Employment in trade, finance,
service industries, mining, and transportation registered slight declines
for the year as a whole. However, the construction industry and govern
ment added relatively more to their staffs here than in the rest of the
nation.
In general, the labor market situation in this District tightened
decidedly during the past year. Perhaps the most striking example is the
Bridgeport area, which in the early months of 1950, when nearly one sixth
of its labor force was unemployed, was officially classed as an area of
critically heavy unemployment. By the end of the year, the number of
unemployed in the Bridgeport area was little more than one fifth the
January 1950 figure, and was the lowest in three years, while shortages
had developed for several types of skilled and semiskilled workers. The
other center of heavy unemployment in this District early in 1950 — the
Utica-Rome area — was removed from this category in July, and by the
end of 1950 unemployment in that area had been reduced by more than
half. In fact, every industrial area in this District reported sizable declines
in unemployment during 1950, while shortages of certain skilled workers
became increasingly widespread.
20
THIRTY-SIXTH
ANNUAL
REPORT
Residential construction in the Second District continued to set new
records in 1950. In terms of the value of construction contracts awarded,
it rose 43 per cent between 1949 and 1950, while nonresidential construc
tion contracts were 17 per cent higher. In the New York City metro
politan area alone, private builders started about 119,000 dwelling units
in 1950 compared with about 85,000 units in 1949, a gain of 40 per cent.
However, only 8,426 units in public housing projects, mostly located in
New York City, were started in 1950 compared with nearly 20,000 in 1949.
Single-family homes were the major factor in the 1950 housing boom,
accounting for two thirds of all units in the metropolitan area, compared
with less than half in 1949. In 1950, seven eighths of the new single
family homes in this area were started on Long Island and in Northern
New Jersey, while in New York City itself builders concentrated on
apartment buildings. The high rate of building of both types of dwellings
was encouraged by liberal Federal mortgage insurance and guarantee
provisions. The large amount of work in progress and the existence of
numerous commitments to finance projects under the old terms retarded
the effect of residential real estate credit controls, imposed in the latter
part of the year.
The dollar volume of retail trade in this District showed a distinct
gain over 1949, and in many lines it was above the 1948 peak. Much of
the gain was, of course, due to price rises. On the whole, sales did not
advance as rapidly in this area as in other sections of the country. In
particular, the midsummer rush of scare buying was less pronounced in
this District than in most of the others. The outstanding gains for the
year as a whole were made by the automobile dealers and the radio
household appliance stores; in both instances, sales were up about one
fourth from 1949. Year-to-year declines were reported in New York City
by food stores, eating and drinking places, and variety stores, while
apparel shops and drug stores showed no change from 1949. Department
store sales in the Second District were only 3 per cent above 1949, com
pared with a gain of 5 per cent in the country as a whole. In most
Upstate areas, department stores made better gains than in New York
City. Accompanying and following the midsummer buying rush, the
stores of this District increased their own outstanding orders, and by
November they had built up heavy inventories. But the best Christmas
selling season on record, plus the heavy consumer buying following the
Chinese Communists’ intervention in Korea, served to draw stocks down
to more normal proportions.
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
21
Agricultural production in the Second District benefited from gener
ally favorable growing conditions during 19S0. The value of field crops,
other than potatoes and hay, produced in New York State was approxi
mately one-fourth greater than in 1949, reflecting both greater yields
and somewhat higher prices. Acreage in potato crops was sharply reduced
both Upstate and on Long Island, but record-breaking yields per acre
resulted in a 12 per cent increase in the New York State crop. Potato
prices, however, were substantially lower than in 1949, partly because
farmers had chosen not to participate in the price-support program in
19S0. Although apples, peaches, and pears were produced in smaller
quantities than in 1949, the aggregate value of fruit crops was 21 per
cent higher. The vegetable crops harvested for market in 1950 were
nearly one-fourth greater than in 1949, a dry year in some areas, but
lower prices caused a reduction of 18 per cent in their over-all value.
There was a slight rise, however, in the quantity and value of vegetable
crops raised for processing. Milk receipts at New York State dairy
plants during 1950 were about 3 per cent above the record 1949 volume,
but milk prices averaged 3 per cent lower than in 1949 despite a rapid
rise in the closing months of the year. Egg production in New York
rose 8 per cent, somewhat more than in the country as a whole.
Federal Reserve Credit Policy
During 1950, Federal Reserve credit policy was directed toward
restraining inflationary tendencies which were relatively mild in the early
part of the year, but which gained momentum after the outbreak of the
conflict in Korea. The inflationary pressures were generated largely by
demands of the private sector of the economy, stimulated not so much
and so directly by the fighting in Korea as by fears of the future economic
impact of the American rearmament program. Treasury expenditures in
1950, in fact, were a little below those of 1949, despite the program for
expansion of the military establishment, while Government receipts were
somewhat greater. As a result, the Treasury received from the public
about half a billion dollars more than it disbursed during the calendar
year 1950, whereas in 1949 it had had a cash deficit of about 1J4 billion
dollars.
Although the Federal Government financed its needs out of its income
during the year, private “deficit financing” increased. As is shown in
Table I, there was a substantial increase in bank loans to business and
22
THIRTY-SIXTH
ANNUAL
REPORT
TABLE I
C auses
of
C hanges
in
D
e p o s it s
and
C urrency*
(In millions of dollars; (+ ) or (—) indicates
effect on volume of deposits and currency)
Year
Treasury
net cash
income
or outgo t
1945
1946
1947
1948
1949
1950
+35,751
989
- 6,797f
- 8,012
+ M13
230p
Bank
loans
Nonbank
holdings
of U. S.
securities
+ 4,347 -20,400
4- 5,286 + 7,000
500
+ 7,354 + 5,172 + 1,000
+ 1,370 - 2,400
+ll,436p - 3,400p
Bank
holdings
of other
securities
Gold
and
foreign
accounts
+
+
+
+
+
+
214 + 817 + 3,029f + 1,240 +
58 - 1,850 -
1,016
914
1,232
699
1,199
2,039p
Bank
capital
accounts
899
818
588
531
609
792p
Other
+ 967
+ 1,001
+ 2,274
457
369
+ 197p
Total
+20,568
+13,211
+ 6,004
889
+ 662
+ 7,400p
* Includes: demand and time deposits adjusted (other than U .S . Government) and
currency outside banks.
t Adjusted for activities of the Postal Savings System.
t Adjusted for payment of United States quota in International Monetary Fund,
p Preliminary.
Source: Treasury cash income or outgo and nonbank Government security holdings
derived from Treasury Bulletin; all other data, Board of Governors of the
Federal Reserve System.
individuals for use in building homes, expanding productive capacity,
and enlarging inventories of goods. At the same time, the public’s re
demptions of Series E Savings bonds (issue price) about equaled cash
sales, and the growth in time deposits of banks was less than at any time
since 1942.
Despite the smallness of the net purchases of Series E bonds and
despite net sales of Treasury securities by some savings institutions,
however, aggregate holdings of Government securities by nonbank in
vestors increased during the year. Nonfinancial corporations, attracted by
higher short-term interest rates, invested large amounts of funds set aside
out of high profits to cover enlarged tax liabilities and to meet other
commitments in the future. The investment of funds by foreign holders
of dollars also added to the nonbank demand for Government securities.
The dollar position of foreign countries improved a good deal during the
year (for reasons discussed on pages 38-40), and some countries bought
not only U. S. Government securities, but also gold.
These offsets to the effect of the increase in loans on the aggregate
of deposits were by no means complete, and total deposits in the hands
of the public increased. The increase in public holdings of demand
deposits, at 7.5 billion dollars, was the largest of any postwar year.
Currency outside the banking system decreased by about 100 million
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
23
TABLE II
R
a t io o f
D
G
ross
em and
D
N
a t io n a l
e p o s it s
A
P roduct
d ju ste d
to
and
Y
early
A
verages
of
T
otal
C u r r e n c y O u t s id e B a n k s
(Dollar amounts in billions)
Year
1939
1942
1944
1945
1946
1947
1948
1949
1950p
Total demand
deposits
adjusted and
currency
outside banks
$ 33.8
54.8
85.1
98.9
106.0
109.3
109.6
108.5
111.7
Gross
national
product
(GNP)
Ratio of GNP
to total demand
deposits adjusted
and currency
outside banks
$ 91.3
161.6
213.7
215.2
211.1
233.3
259.1
255.6
279.8
2.70
2.95
2.51
2.18
1.99
2.13
2.36
2.36
2.50
p Preliminary.
dollars. At the same time, money turnover became more rapid. As
shown in Table II, the ratio of gross national product to publicly-held
demand deposits (adjusted) and currency in 1950 was 2.5, the highest
since 1944.
The Federal Reserve System took several steps during the year to
restrain inflationary expansion of credit. The most important of these
steps were taken after the Korean war began. The measures adopted,
which were within the framework of the Federal Government’s policy of
combating inflation by general fiscal and monetary means, were:
1. Directing the System’s open market activities toward dis
couraging holders of Government securities, particularly the banks,
from selling such securities in order to obtain funds for the exten
sion of credit. (A moderate rise in interest rates, especially in the
short-term sector, was a necessary consequence of that policy.)
2. Raising the discount rate at all Federal Reserve Banks to
discourage unnecessary borrowing by member banks and to indi
cate, by use of this traditional instrument of central bank policy,
that restraint in the extension of credit was necessary.
3. Through the powers assigned to the Board of Governors
under the Defense Production Act, promulgating Regulations W
and X to restrain consumer instalment credit and home construc
tion credit.
4. Asking voluntary restraint in credit extension by banks
and other lenders.
5. Announcing an increase in member bank reserve require
ments (to take effect in January and early February 1951).
24
THIRTY-SIXTH
ANNUAL
REPORT
In pursuing this course, the Federal Reserve System further clarified
the meaning of its pronouncement of June 28, 1949 to the effect that its
Government security operations would be directed “with primary regard
to the general business and credit situation” (see the Annual Report of
this bank for 1949, page 23). At that time the economic situation called
for an easing of credit terms. The inflationary trends during 19S0
demanded measures of restraint.
Tendencies toward a creeping inflation were, in fact, the concern of
the System before the year began. Late in 1949 production, employment,
and incomes were rising, in some cases rapidly, from the low points
of that year and it was expected that disbursement of the National
Service Life Insurance dividend would counteract the normal, restrictive
influence of tax collections in the first quarter of 19S0. In the early part
of the year, bank loans failed to show a normal seasonal decline, and in
June they began to rise rapidly. Prices moved up more rapidly in late
April and the System became increasingly aware of the danger that the
forces which had generated and grown out of the business recovery might
be developing an inflationary situation.
Federal Reserve policy during the first half of the year was directed
toward restraint of these tendencies. Resistance to supplying additional
Federal Reserve credit to the banking system, accompanied by some
hardening of interest rates, seemed to be called for, but the necessity of
supporting Treasury refunding operations limited the possibility of moving
quickly or very far in that direction. Sales of long-term bonds out of the
System’s portfolio were made, however, in order to absorb bank reserves
as well as the investment funds of nonbank investors. As a result, System
holdings of Government securities declined.
Toward the middle of the year there were signs that the expansionary
tendencies in business and the upward movement of prices were losing
momentum. With the outbreak of war in Korea, however, the situation
changed radically. Prices of some sensitive commodities, under the
impact of accelerated business buying and Government stockpiling, shot
up 25 per cent in a few weeks. Consumers, in the aggregate, reduced their
current rate of saving appreciably, and in many cases they drew upon
accumulated liquid assets — Savings bonds and savings deposits — in
order to make abnormally large purchases. Business made greater use
of bank credit. The expansion in bank lending gained momentum, the
money supply increased rapidly, and the rate of turnover of bank balances
increased.
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
25
It was apparent that, with the rising rate of use of money, an expan
sion in the money supply would fortify the already swollen demands for
the available supply of goods and services. Early in August the System,
therefore, joined with other bank supervisory agencies in asking for a
restriction of lending by banks and others. While recognizing the problem
of the individual banker in restricting loans in a competitive market, the
System and the other supervisory agencies considered such a warning
necessary in order to call attention to the national implications of the
actions and policies of individual credit-granting institutions.
This step and the various measures taken later conformed to the
announced policy of the Government as outlined in the Midyear Economic
Report of the President. In that document, general fiscal and monetary
measures were advocated as the main defense against the inflationary
impact of the Korean war and of the rearmament program. The Presi
dent’s Economic Report made no request for the imposition of compre
hensive, direct controls characteristic of a war economy, such as rationing
and the regulation of prices and wages.
In line with the Government’s general policy, and in the belief that
full advantage should be taken of the ability of the System to move
quickly in the monetary field, the discount rate at the Federal Reserve
Bank of New York was raised, effective August 21, from 1 per cent to
1 per cent, and this move was followed within a few days by similar
increases at the other Federal Reserve Banks. At the time when this
increase was announced, the Board of Governors of the Federal Reserve
System and the Federal Open Market Committee stated:
“Within the past six weeks loans and holdings of corpo
rate and municipal securities have expanded by $lj4 billion
at banks in leading cities alone. Such an expansion under
present conditions is clearly excessive. In view of this
development and to support the Government’s decision to
rely in major degree for the immediate future upon fiscal
and credit measures to curb inflation, the Board of Gover
nors of the Federal Reserve System and the Federal Open
Market Committee are prepared to use all the means at
their command to restrain further expansion of bank credit
consistent with the policy of maintaining orderly conditions
in the Government securities market.
“The Board is also prepared to request the Congress
for additional authority should that prove necessary.
“Effective restraint of inflation must depend ultimately
on the willingness of the American people to tax themselves
26
THIRTY-SIXTH
ANNUAL
REPORT
adequately to meet the Government’s needs on a pay-asyou-go basis. Taxation alone, however, will not do the job.
Parallel and prompt restraint in the area of monetary and
credit policy is essential.”
At the same time, the open market operations of the System were
oriented toward a more restrictive policy. Reserve Bank buying prices
for Government securities were reduced moderately and there was a
resulting rise in short-term interest rates.
These moves had the effect of raising the cost of Federal Reserve
credit to the banks. Borrowing from the Reserve Banks by the member
banks, while only a short-run expedient in balancing reserve positions,
became more costly. The sale of short-term securities, a longer-run device
used by the banks to replenish their reserves, also became more costly
because the rise in short-term interest rates had the effect of putting the
prices of almost all Treasury certificates and notes somewhat below par.
Sellers of these issues were thus forced to take at least a small loss, which
provided some deterrent to sales. At the same time, the lower prices and
higher yields made Government securities more attractive to corporations
and other investors.
The effect of the steps taken by the System to increase the cost
and to reduce the availability of Federal Reserve credit (and member
bank reserves) was offset, for a time, by the necessity of supporting
the Treasury refunding offerings of September 15 and October 1.
(Total exchanges for these offerings — 13-month notes bearing 1J4%
interest — amounted to 11.2 billion dollars.) The interest rate on the new
securities offered by the Treasury was the same as that offered in the
June and July refundings which had involved large System support pur
chases; it was below the market rates which prevailed after the midAugust changes in System policy. In order to prevent failure of accept
ance of a large part of the Treasury offerings of new securities, and redemp
tions of the maturing issues in excess of available cash resources of the
Treasury, the System made a strong effort to buy up at par or a little
better as many of the “ rights” to the exchange (the maturing securities)
as possible, while holding down the net rise in the System’s portfolio of
Treasury issues by selling other issues at attractive prices. Nevertheless,
the necessity of supporting the refunding operation resulted in an increase
in Federal Reserve credit and thus prevented the System’s policy of credit
restraint from having a chance to become effective until early October.
In fact, the need to support the Treasury’s exchange operation carried a
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
27
more lasting disadvantage to the extent that investors were able to sell
the “rights” to the System at par or above and use the proceeds to buy
Government securities below par, since in this way they were placed in a
position to sell the newly-acquired securities at a later date without loss
(unless, of course, interest rates were to rise further). The System’s
task of restraining credit expansion was thus made potentially more dif
ficult. To meet this situation Reserve Bank buying prices for short-term
securities were lowered somewhat further during October, and the yield
on securities maturing in about one year rose to slightly under 1J4
per cent.
Consumer and Mortgage Credit Regulation
While the System was struggling with the problems connected with the
Treasury refunding operations, the Defense Production Act became law
(on September 8). Although in its final form the Act bestowed on the
President powers to control prices and wages, it was understood at the
time of its passage that such powers were to be used only as a last
resort. Rather, fiscal measures and general and selective limitations on
credit extension were emphasized as the main weapons in the fight against
inflation. Provision was made for a coordinated policy of restraint of
private lending for home and commercial construction purposes, whether
with or without Government guarantees; this policy was to be executed by
the President or by such agencies as he might delegate. Also, the Board
of Governors of the Federal Reserve System was again given the author
ity to restrict consumer instalment credit.
The Board of Governors’ first exercise of the powers given under the
Act to limit consumer instalment credit was the issuance of Regulation
W on September 18. The new Regulation W prescribed the following
terms for automobile loans of $5,000 or less and other instalment loans of
$2,500 or less:
Instalment credits for
Automobiles
^
Major household appliances
Furniture and rugs
Home improvements
Unclassified
Minimum
Down Payment
33J^ per cent
15 per cent
10 per cent
10 per cent
No requirement
Maximum
Maturity
21
18
18
30
18
months
months
months
months
months
A month later, the terms of the regulation were tightened considerably.
The new terms lowered the maximum maturity on all instalment loans
28
THIRTY-SIXTH
ANNUAL
REPORT
INSTALMENT CREDIT OUTSTANDING*
{December 1947-December 1950)
BfLUONS
OF POLL A&S
ora*tu<m
&QLL*m
14
Iz
fO
<
J
F
M
A
M
J
*
J
A
5
0
N
D
oufstoRtfing«r«b<Iofmoftth.
except for home improvements to IS months and raised down payments
on appliances to 25 per cent and on furniture and rugs to 15 per cent.
Lending terms applicable to the construction, purchase, and financing
of new houses were put under control on October 12 by the agencies to
which the President had delegated his powers in this field. At that time,
the Board of Governors issued its Regulation X, regulating the “con
ventional” financing of new one and two-family homes, and the Federal
Housing Authority and the Veterans’ Administration issued parallel regu
lations for mortgage credit insured, guaranteed, or extended by the
Government.
Backlogs of commitments prevented the real estate credit regulations
from becoming immediately and fully effective in reducing the volume
of construction and the rate of mortgage credit expansion. Consumer
credit expansion slackened, but real estate lending continued to grow
rapidly.
Meanwhile, business loans increased even more rapidly than in
the first two months after the outbreak of the Korean war, possibly be
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
29
cause a subsidence of consumer spending, together with fears of later
shortages of supply, led to the piling up of inventories at various stages
of production and distribution. This upsurge of bank lending prompted
Chairman McCabe of the Board of Governors, in a letter to each member
bank, to renew the System’s request for the exercise of restraint in the
granting of credit. Moreover, as authorized in the Defense Production
Act, efforts were begun to secure voluntary agreements of financing in
stitutions to achieve the needed restraint.
Measures were also being taken in the fiscal field to meet the new
demands imposed on the economy by the rearmament program. Plans
to cut excise taxes were abandoned and taxes on individuals and corpora
tions were raised in keeping with the Government’s aim of putting rearm
ament on a pay-as-you-go basis. Because of the added receipts, and
because expenditures for nondefense purposes (especially for agricultural
commodity price support) were less than a year earlier, the Treasury’s
cash income exceeded its cash outgo in the latter part of the year.
Despite the measures taken by the Federal Reserve System, bank
lending expanded greatly in the last half of the year. Over the six months,
the money supply grew at a rate of about 1 billion dollars a month. Not
withstanding the System’s desire to limit the growth of bank reserves, its
holdings of Government securities increased, partly because of a need to
support Treasury refundings in September and October and again in
December and January. The Treasury’s exchange offering in December
was in line with prevailing rates in the market, but the new security —
a five-year note bearing 1^ per cent interest — while attractive to many
investors, did not meet the needs of others, notably corporations which
had been holding the maturing issues as short-term investments. Some
success in enlarging nonbank investors’ Government security portfolios,
however, was achieved by the improved yields on outstanding short-term
securities, despite continued selling of longer-term Treasury bonds by
insurance companies and others to meet mortgage and other commitments.
Bank holdings of Treasury issues (including System holdings) declined
because of the demand of nonbank investors, so that the rise in the money
supply in the last half of the year was considerably less than the expan
sion of loans.
Toward the close of the year the pace of the loan expansion was
still rapid, although at that season a noticeable slackening in the rate of
increase normally occurs. Reflecting the deep concern of the System over
this development and other evidences of continued inflationary pressures,
30
THIRTY-SIXTH
ANNUAL
REPORT
SECURITY HOLDINGS AND OUTSTANDING LOANS OF MEMBER
BANKS IN LEADING CITIES DURING 1950*
S IL L J O N S
of
B ltU O N S
o r
d o l l a r s
d o l l a r s
1950
*Figures are for the last W ednesday o f each n
the Board of Governors announced an increase in percentage reserve re
quirements against deposits of member banks to take effect by steps
during January and on the first day of February 1951. Against demand
deposits, the increase was 2 percentage points, thus bringing the require
ment for reserve city and “country” member banks to their legal maxima
— 20 and 14 per cent, respectively — and for central reserve cities to
24 per cent. The reserve requirement against time deposits for all classes
of member banks was raised from 5 per cent to the legal maximum of
6 per cent.
The concern of the Reserve System and of the Federal Government
over inflationary developments continued to grow, particularly after the
intervention of the Chinese Communists in the war in Korea. On De
cember 16 a national emergency was declared, and at the end of the
year, institution of full-scale direct controls over prices and wages ap
peared to be only a matter of time.1 New “excess” profits taxes were
voted shortly after the close of the year.
1 Such controls were announced on January 26, 1951.
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
31
Before the intervention of the Chinese Communists in the Korean
war, offsetting the inflationary impact of the rearmament effort on the
national economy seemed a difficult task. As the magnitude of the re
armament effort was stepped up to meet the implications of this new
threat, the task became even more difficult. When greatly enlarged
rearmament demands are imposed on an economy operating almost at
full capacity, the Government’s share in the national product is likely to
rise faster, at least for a time, than total output. To meet rearmament
goals, both nondefense capital expenditures and consumption — private and
public — must be limited. Savings must be encouraged. But consumer
spending tends to be stimulated by fears of later shortages and still higher
prices, business spending tends to be accelerated in anticipation of restric
tions on supplies, wage demands increase, and the rise in prices and costs
is accentuated. In these circumstances, it is difficult to avoid the applica
tion of direct controls if the inflationary spiral is to be checked.
Price and wage controls, however, merely repress the evidences of
underlying inflationary forces, and must have the support of measures to
reduce private spending power or divert it to Goverment use, if demand
and supply are to be balanced at stable prices and the controls are not
to break down. Specifically, this means increased taxation, not only in
the amounts needed to meet Government expenditures, but of the types
that are effective in reducing private spending — not saving. It also
means timely and vigorous action to check credit expansion which adds
to consumer or business spending power, and thus to inflationary pres
sures. Consequently the Federal Reserve System has had, and will
have, no alternative but to exert its best effort to restrict the use of credit
to essential purposes, as long as expansion of the defense program strains
the productive capacity of the country. Credit restraint alone cannot be
expected to stop inflation, but it must play its part.
Corporate Financing and the Capital Markets
During 19S0 the nation’s capital markets were called upon to pro
vide a record-breaking volume of long-term funds. New records were
made in urban mortgage and State and local government financing. Cor
porate demands upon the capital market declined, however, for the sec
ond successive year, despite the fact that corporate needs for funds were
higher than ever. The further decline in corporate financing reflected an
32
THIRTY-SIXTH
ANNUAL
REPORT
increasing reliance on the use of internal funds in a year of highly profit
able operations.
The estimated use of additional funds by all nonfinancial business
corporations (all incorporated business concerns other than commercial
banks and life insurance companies) expanded sharply to a new all-time
high of about 38 billion dollars, from the level of 14 billion dollars to
which it had declined in 1949. This expansion was most marked in the
second half of 1950, following the acceleration of the rise in commodity
prices and of the tempo of business activity induced by the participation
of this country’s armed forces in the Korean fighting.
Corporate outlays for permanent improvements and additions to fixed
plant and equipment (17 billion dollars, or not quite half the above total)
increased somewhat less than a billion dollars, and were slightly smaller
than in the peak year 1948. By the last quarter of 1950, however, they
had reached an annual rate exceeding that for any previous full year.
More than half the additional funds were used by corporations for
short-term working capital purposes, mainly to finance expansions of
inventories, credit extensions to customers, and additions to liquid asset
holdings; approximately equal dollar amounts (6Yi billion each) were
devoted to these three purposes. The 13 billion dollar increase in inven
tories and receivables in 1950 was in contrast to the liquidation of five
billion dollars of such assets in 1949. Well over half the additions to
inventories represented the effects of commodity price increases. Price
increases were also reflected, of course, in the rise in receivables. Sub
stantially higher corporate sales of goods at rising prices, furthermore,
increased the need for additional working balances. At the same time,
corporations increased their holdings of short-term Government securi
ties, partly to meet anticipated increases in tax obligations.
More than half the additional funds used by corporations were
provided from internal sources. In spite of higher income taxes and
higher dividend payments (the latter amounting to 40 per cent of net
income after taxes), undistributed profits rose more than 45 per cent
during 1950 to 12J4 billion dollars, and supplied about a third of the new
funds. Depreciation allowances added another seven billion.
Among the external sources of funds, an expansion of short-term
liabilities financed most of the remaining needs for funds (or a little
less than two fifths of the total), in keeping with the large increase in
working capital requirements. Short-term borrowings from commercial
'banks accounted for 3 billion dollars, while suppliers of goods furnished
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
33
another 3^2 billion of credit. In addition, an accumulation of reserves to
meet increased tax liabilities (resulting from a combination of higher profits
and increased Federal income tax rates) provided 7 billion dollars of
temporarily available funds. The over-all growth of short-term liabilities
in 1950 amounted to roughly 14J4 billion dollars, while in 1949 corpo
rations had been able to reduce their short-term liabilities by 5^4 billion
dollars.
Inasmuch as the expansion of retained earnings, depreciation allow
ances, and short-term liabilities met a greater proportion of the total needs
for funds, business corporations in the aggregate sought less long-term
capital from the market in 1950 than in 1949. However, smaller corpo
rations, which more frequently finance their needs for long-term capital
through mortgage borrowing, apparently increased their long-term financ
ing during the year, since the volume of corporate mortgage borrowing
rose by about one billion dollars, twice as much as a year earlier. On
the other hand, the larger corporations, which account for the bulk of
longer-term borrowings from the banks and which regularly tap the
security markets, reduced their use of long-term capital. They borrowed
one half billion dollars less on term loans and floated hardly more than
4 billion dollars of new security issues (net after all cash retirements),
as against almost 5Y* billion in 1949.
The decline in new capital security flotations of business corpo
rations came entirely in new bond issues.1 The substantial drop in
the sale of new debt securities was partly offset by an increase of 225
million dollars (20 per cent) in offerings of new capital stock issues, which
rose to a total of 1.2 billion dollars. In spite of the buoyancy in the
prices of common stocks, the volume of common share flotations rose only
slightly, and practically all of the increase in share flotations came in
preferred issues.
Refunding securities offered in the market in 1950 were valued at
three times the total of such flotations in 1949. Despite some upward
tendencies in the closing months of 1950, bond yields for the year averaged
lower than in 1949 or in 1948 (the postwar peak year). During most
of the year, therefore, corporations had opportunities to save interest
charges by refunding outstanding bonds with issues bearing lower
coupons. Improved earnings positions enabled the railroads to tap
1 Data on new capital corporate security flotations relate to new issues before deducting
the retirement of outstanding securities out of corporate cash balances, in contrast to
the figures in the preceding paragraphs, which are after such deductions.
34
THIRTY-SIXTH
ANNUAL
REPORT
the refunding market in considerable volume for the first year since
1946. Most of the increase in refunding issues came in the first six months
of the year, when corporate bond yields were lower than in the last half
of the year.
“Municipal” (State and local government) financing scored a new
high mark in 1950, with the volume of long-term new capital issues
reaching 3.6 billion dollars as compared with the previous (1949) peak
of 2.9 billion. One large State veterans’ bonus bond issue amounting to
375 million dollars accounted for more than half the increase. Revenue
and other bond issues (exclusive of veterans’ issues), chiefly to finance
State and local government outlays for schools, hospitals, housing, roads,
street paving, and sanitary facilities, brought 2.9 billion dollars (about
300 million dollars more than in 1949) into State and municipal treasuries.
Although there was some shortage of investor demand for the large
volume of new “municipal” offerings in the first half of the year, this
situation was soon reversed by the war in the Far East and the accom
panying (and prospective) increases in income taxes. Corporate bond
offerings were well received by investors, although yields on outstanding
bonds rose gradually during the year as a result of the pressure of heavy
demands for mortgage funds and the large volume of new State and local
government issues.
Financing of a 50 per cent increase in private housing required as
much long-term capital in 1950 as was raised in the market by corpora
tions and State and local governments combined. Total urban mortgage
financing (including nonresidential construction), according to preliminary
estimates, rose about 9-10 billion dollars during the year, a gain of
one-half to two-thirds over the already large volume of real estate
borrowing of 1949.
As measured by Standard and Poor’s comprehensive index of 416
issues, stock prices rose about 20 per cent during 1950. By the end
of December the bull market had lasted a year and a half and had
brought prices some 50 per cent above mid-1949 levels to the highest
point since May 1930. As prices rose, the volume of share trading gained
momentum. Turnover on the New York Stock Exchange totaled close
to 525 million shares, almost double the 1949 volume and the highest
since 1933. Also indicative of increased public participation in the market,
customers’ debit balances rose more than a half billion dollars to 1.4
billion, the highest total since 1937. The Board of Governors of the
Federal Reserve System raised margin requirements early in 1951 from
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
35
SO per cent to 75 per cent of the market value of listed securities.
Prices of common stocks rose steadily during the year with but minor
reactions, except around the midyear, when the Korean war set off a
sizable decline. But this decline was more than wiped out by the subse
quent advance in the second half of the year, when the industrial and
railroad stocks scored new highs since October 1929 and August 1946,
respectively. Prices of utility shares, however, recovered only a portion
of their midyear losses.
Although inflationary pressures constituted perhaps the most import
ant stimulant to share prices during the year, the sharp expansion in
corporate sales and in net profits after taxes undoubtedly was a factor.
It enabled corporations to increase their dividends by about 15 per cent
during the year, with especially large increases in the final quarter. Thus,
despite the substantial rise in prices, yields on common stocks in December
19S0, averaging more than
per cent, were higher than in the corre
sponding month of the previous year.
The New York Foreign Exchange Market
Activity in the New York foreign exchange market during 1950,
although still far below that of the years preceding World War II, was
considerable in volume and variety. Among the more important factors
influencing the market were the heavy demand for some foreign cur
rencies because of large United States purchases of goods abroad for
stockpiling and consumption; speculation on upward revaluations of
various currencies because of the improved dollar and gold reserves of the
countries involved; the suspension of official exchange rates by the
Canadian monetary authorities; and some international movements
of funds seeking a safe haven in the face of the deteriorating world
situation. The impact of some of these factors on the market here was,
however, not fully reflected in rate fluctuations, since the New York
rates for many currencies continued merely to reflect fixed or supported
rates abroad.
Among the developments traceable to the factors mentioned above
were an unusually heavy demand for the pound sterling and a rise
throughout the autumn in forward quotations for sterling. The demand for
sterling was primarily the result of heavy purchases of Far Eastern
(sterling area) commodities and of rumors, prevalent during September
and October, that an upward revaluation of the pound was imminent.
36
THIRTY-SIXTH
ANNUAL
REPORT
Premiums of as much as three cents were paid for three-month sterling
contracts during that period, whereas quotations close to the spot rate
generally prevailed throughout the rest of the year. The spot rate for
the pound fluctuated between the officially fixed buying and selling rates
of the Bank of England ($2.80Y% and $2.79%).
Some shifts of funds from the United States were induced by the
international situation and, in particular, by the fear of the reinstatement
of wartime controls over foreign assets in this country. Such influences
were reflected in a rise from about $0.2300 to about $0.2330 in the rate
for the Swiss franc during December, in an appreciation from about $0.35
to close to $0.50 in the free rate for the Uruguayan peso in the latter half
of the year, and in considerable demand for the Mexican peso throughout
the fall and winter. The demand for the latter currency was apparently
also stimulated by rumors (since denied) of an upward revaluation of
the Mexican currency. While the spot rate for the peso (reflecting the
official rate in Mexico) was held at about $0.1158, three-month futures
were at a considerable premium during the latter months of the year.
Accompanying rumors of an upward revaluation of the Australian
pound, the rate for that currency in New York exceeded its official rate
at various times during the year. Three distinct waves of strength occurred
in the rate, each of which was followed by a decline to below the official
rate when revaluation did not transpire or when the conversion of
speculative balances into United States dollars encountered some difficulty.
Prior to the suspension by Canada of official exchange rates in the
fall, trading in Canadian dollars at the New York unofficial rate, for
both spot and future deliveries, had been exceptionally heavy at gradually
rising rates because of the movement of United States funds to Canada
for long-term investment and in connection with speculation on an upward
revaluation. Following the unpegging of the Canadian dollar, the market
rate rose abruptly to about $0.95, or about four cents above the former
official rate. During the remainder of the year, the rate fluctuated moder
ately between about $0.94 and $0.97.
Various adjustments in other foreign official rates vis-a-vis the United
States dollar were made during the year. Argentina simplified its multiple
exchange rate system in a manner which resulted at the same time in a
general devaluation of its currency. Minor adjustments were made in the
multiple rate systems of Austria, Bolivia, Chile, Ecuador, Iran, and
Nicaragua. Iceland and Indonesia devalued their currencies substantially.
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
37
International Financial and Economic Developments
In the course of 1950 the balance of international payments of the
United States underwent a notable change. This country’s previously
large export surplus of goods and services declined very substantially.
Indeed, in the third quarter of the year it almost reached the vanishing
point, and in the final quarter it reappeared on only a modest scale. The
problem of the foreign “dollar shortage”, which had been widely dis
cussed for years, tended to recede into the background, and increasing
attention began to be directed to the problems and requirements of the
defense of the Western World. Throughout the year, United States ex
ports of goods and services financed by means other than Government
grants and loans actually fell short of imports of goods and services,
with the result that foreign countries as a group were able to increase
their holdings of dollars and gold substantially. The sharp improvement
in the dollar position of foreign countries was highlighted at the end of
the year by the announcement that aid to the United Kingdom under the
European Recovery Program was being suspended, one and a half years
before the terminal date of that program.
The striking decline in our export surplus (of goods and services)
during 1950 was produced by a succession of circumstances. In the first
half of the year, the reduction of the export surplus, which resulted from
both a decline of exports and an expansion of imports, reflected the
influence of tighter import controls abroad, the currency devaluations of the
preceding September, the continuing rise of foreign (especially European)
output, and the recovery of domestic industrial activity from the 1949
recession. In the second half of the year, however, these factors were
overshadowed by the expansionist effects of the Korean developments
on the prices and volume of United States imports; imports of goods and
services rose by about twice as much as exports, resulting in a further
decline in our export surplus. It is still too early to judge to what extent
this decline reflects merely a temporary adaptation to a unique set of
circumstances, and to what extent it represents a permanent improve
ment in the structure of international trade, but it seems probable that the
“dollar problem” will continue to exist in some form or other, particularly
after the Western European countries embark on their own accelerated
rearmament programs. In fact, the proper coordination of economic aid
with military assistance is at present one of the central problems of United
States foreign economic policy.
38
THIRTY-SIXTH
ANNUAL
REPORT
The Changing Dollar Problem
The United States export surplus of goods and services, which had
amounted to 1,105 million dollars in the fourth quarter of 1949, fell to
704 million in the first quarter of 1950, and to 91 million in the third
quarter, and amounted to 603 million in the fourth quarter of the year;
for the year as a whole it totaled only, 2,209 million dollars, compared
with 6,241 million in 1949. This remarkable shift was mainly attributable
to an increase in imports of goods and services, which rose to 12,142
million dollars in 1950, from 9,715 million in 1949. By far the greater part
of the increase occurred after the invasion of South Korea and reflected a
rapid rise in import prices as well as an increase in import volume.
The postwar decline in our exports of goods and services, which had
been resumed in the third quarter of 1949, was reversed in the second
quarter of 1950, and exports rose to 4,067 million dollars in the fourth
quarter, or to 796 million more than in the first quarter. For the year
as a whole, however, exports were well below those of the preceding year,
amounting to 14,351 million dollars compared with 15,956 million in 1949.
Since United States Government grants and loans amounted to 4,292
million dollars (as against 5,947 million in 1949), privately-financed
exports fell short of total imports by 2,083 million dollars during the year.
The net outflow of private United States capital (including remittances)
contributed a further 1,529 million dollars to foreign countries.
There were striking increases in the value of United States merchan
dise imports during 1950. In the export field, declining trade with ERP
countries, their dependencies, and the overseas sterling area during the
first nine months of the year was offset by rising exports to Latin America
and Canada, and there was a general upturn in exports to all areas in
the fourth quarter. Our previous sizable export surplus of goods and
services with the sterling area as a whole was converted into a large
import surplus in the course of 1950, while our surplus with other areas
was reduced or turned into small deficits. Increased outlays of American
tourists played a noticeable part in the decline of our surplus with ERP
countries and Canada, while Canada also received a large net inflow of
private United States capital in the second half of the year.
The above mentioned shifts in the balance of payments of the United
States were accompanied by a marked reversal in the direction of the
net movement of gold and by a sharp rise in the gold and dollar assets
of foreign countries as a group. The net inflow of gold into the United
FEDERAL
RESERVE
BANK
OF
NEW
YORK
39
States in 1949, which had amounted to 190.7 million dollars, was converted
in 1950 into a net outflow of 1,708.6 million dollars.1 In the twelve
months from September 1949, immediately following the devaluation
of foreign currencies, through September 1950, the gold and dollar
assets of foreign countries increased from 14.7 to 18.2 billion dollars.
Slightly more than one half of that increase took place in the nine months
prior to the outbreak of the Korean war, while the remainder occurred
during the following three months. As is apparent from the accompanying
chart, however, foreign gold and dollar assets were still 12 per cent less
in 1950 than at the end of 1945, although they were 25 per cent above
the postwar low of June 1948.
The rise in foreign gold and dollar assets was very unevenly dis
tributed. Almost 45 per cent of the total increase accrued to the sterling
1 Actually, the net gold outflow had commenced in the fourth quarter of 1949, when it
amounted to 150.1 million dollars.
FOREIGN GOLD RESERVES AND DOLLAR ASSETS
BILLIONS
B IL L IO N S
OF D O L L A R S
or d o l l a r s
25
25
1946
^Excluding gold holdings, but including doflar assets, o f the U.S.S.R.
fExcepf the United Kingdom and Switzerland.
^including the United Kingdom but excluding Eire and Iceland
^Excluding sterling, French*franc, and Dutch-guilder areas.
1949
1950
International institutions ore excluded.
40
THIRTY-SIXTH
ANNUAL
REPORT
area, the gold and dollar assets of which rose by more than one billion
dollars during the nine months ended June 1950, and by over 500 million
dollars during the three months ended September 1950. The gold and
dollar assets of the United Kingdom alone2 stood at 2,756 million dollars
at the end of September 1950, as against 1,425 million one year earlier,
while those of the other countries that participate in the European
Recovery Program increased by about 570 million dollars during this same
period. Latin America gained 422 million dollars of gold and dollar
assets between September 1949 and September 1950, thus continuing the
replenishment of its reserves that had begun early in 1949, while Canadian
gold and dollar assets rose by 860 million.
For a number of reasons, caution is necessary in appraising the
growing dollar affluence of foreign countries. Prior to the invasion of
South Korea, the gradual decline in the United States export surplus rested
on the sound basis of a rise in productivity and output and a subsidence
of inflation in a large number of foreign countries; the achievement of a
closer trade balance was also facilitated by the application of tighter
import and exchange controls by foreign nations, by the currency realign
ments of 1949, and by a rise in the United States’ imports following
recovery from the 1949 recession. Since the middle of 1950, however,
the major causal factor has been the upsurge of United States imports,
stimulated largely by domestic rearmament demand and private inventory
accumulation. Import prices, in particular those of primary commodities,
have risen considerably more than export prices, thereby involving a
deterioration of this country’s terms of trade. Since primary commodity
prices are known to be particularly sensitive to changes in demand, they
could conceivably decline almost as spectacularly as they have risen —
once the planned expansion of defense potential has been built up and
emphasis placed on the maintenance rather than the expansion of this
potential.
Even during the period of accelerated rearmament, however, the
dollar outlook, for the Western European industrial countries at least,
may not be too favorable. The expansion of United States imports from
these nations has been followed by a rise in our exports to them. In
addition, the rise in primary commodity.prices has increased the cost
of imports to Western European industrial countries, and has greatly
2 As is generally known, however, the gold and dollars held by the United Kingdom
serve as a common pool for all of the countries in the sterling area.
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
41
accentuated the deterioration of their terms of trade that had already been
noticeable before the Korean war; a number of these nations may thus
be forced to divert sales from dollar to nondollar areas, thereby worsening
their dollar position. Finally, once the expanded rearmament programs
of the European countries get underway, resources may be increasingly
diverted from export industries and additional pressure on exports may
develop.
Changes in Monetary Policies Abroad
In the second half of 1950 inflationary pressures were reappearing
in many parts of the world. In primary producing countries, buoyant
export prices, which in some cases attained new all-time highs, aggravated
the inflationary tendencies brought about by monetary expansion for the
financing of economic development. At the same time, the industrial
countries of Western Europe, where inflation generally had been brought
under control or subsided by the middle of 1950, experienced a marked
increase in their import costs; by the end of 1950, although they had
not yet felt the impact of their own accelerated rearmament, they were
already confronted with the prospect of an over-all shortage of resources
and its counterpart, inflation.
As the first line of defense, a large number of countries resorted
to monetary and credit controls. Central bank discount rates were raised
in Canada, Denmark, the Netherlands, and Sweden, as well as in Belgium,
Finland, and Germany; the first four had not resorted to this instrument
of monetary policy since the war, but Belgium, Finland, and Germany
had already used it extensively.* Discount rate increases were in turn
reflected in higher commercial bank loan rates. By early 1950 long-term
interest rates had been allowed to rise in several countries, including the
United Kingdom; and in the middle of 1950 even such countries as Sweden
and Norway, which had previously pegged their rates, broke away from
an inflexible cheap money policy. In Canada the inflow of foreign funds
was prevented, through open market sales by the Bank of Canada, from
expanding the cash reserves of the commercial banks and thus facilitating
credit expansion.
Simultaneously with this use of the discount rate, a number of foreign
central banks imposed other stringent credit controls. The statutory
*In France and Italy, where there had been extensive resort to discount rate changes
in recent years, the rates were reduced prior to the outbreak of the war in Korea, and
were kept unchanged subsequently. In both countries, however, the interest rate level
remained high.
42
THIRTY-SIXTH
ANNUAL
REPORT
provisions and the techniques varied greatly as between countries. In
Germany, credit policy relied chiefly on changes in cash reserve require
ments. Elsewhere, recourse was had to the establishment of special
reserve requirements under which commercial banks were obliged to hold
certain balances in cash and government securities, the central bank
being empowered as a rule to change the requirements when necessary.
The primary purpose was to prevent the commercial banks from increasing
their loanable funds by selling government securities to the central bank.
The Netherlands and Sweden last year imposed such credit restrictions,
and Norway had them under consideration; prior to 1950, they had been
established in Belgium, France, and Italy. Similar restrictions, moreover,
had been enforced before 1950 in some non-European countries (Australia
and Mexico, for example). In all of these countries, the tighter credit
controls were established by special legislation. Qualitative controls
accompanied quantitative restrictions in several countries, particularly
France and the Netherlands prior to 1950 and Sweden in 1950. The
control of capital issues in Australia, which had been abandoned early
in 1950, was reinstated in December. Consumer credit controls were
established during the year in Belgium and Canada.
Greater interest-rate flexibility and the enforcement of credit restric
tions were accompanied, in most of the countries concerned, by higher
taxation, efforts to reduce nondefense government expenditures, and
programs to promote savings. The widespread recourse to these indirect
controls, both monetary and fiscal, reflected in part a natural reluctance
of governments and public opinion to return to all-inclusive physical
controls. In addition, it was widely realized that monetary restraints
would be an essential prerequisite and accompaniment of successful direct
controls, should these become necessary to ensure the proper distribution
of scarce materials according to the needs of defense, exports, and civilian
investment and consumption.
By the year end, foreign countries thus were facing the problem
of reconciling both internal monetary stability and external viability
with the requirements of rearmament. In fully-extended economies no
general and immediate reliance could be placed upon an increase in
output; moreover, the frictions that necessarily accompany a conversion
from a peace economy to war preparedness were certain to result in
productivity losses. Cutbacks of varying proportions in investment,
consumption, and exports therefore appeared unavoidable. It was in
the effort to set aside resources for rearmament while preserving, so far
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
43
as possible, domestic economic efficiency and the postwar achievements
on the difficult road toward external viability, that a growing number of
foreign countries sought to restore the regulatory power of money.
Foreign Economic and Military Assistance Programs
United States foreign aid policy was characterized during the year
by the reshaping of various foreign assistance programs to meet the
exigencies of the changed international situation. Until the outbreak of
the conflict in Korea, economic recovery and development were given
clear-cut priority in our foreign aid program, but the emphasis has since
been shifted from economic to military assistance, and from the European
Recovery Program (ERP) to the Mutual Defense Assistance Program
(MDAP). This reorientation of policy was undoubtedly influenced, not
only by international political developments, but also by the fact that
some foreign countries were accumulating dollars and gold at a fairly
rapid pace.
With the continuing expansion of production in Western Europe,
ERP aid extended in 19S0 amounted to 2.8 billion dollars as compared
with 3.7 billion in 1949. Although Western European exports to the
dollar area increased only moderately during the year, intra-European
trade continued to grow rapidly. Trade among the ERP countries reached
a postwar peak in the fourth quarter of 1950, and, taking price changes
into account, was more than 45 per cent higher than in 1938 and almost
one-half larger than in 1949. In order to facilitate further expansion in
intra-European trade, the Organization for European Economic Coopera
tion (OEEC) established the European Payments Union (EPU) during
the year. The new payments union, which was made retroactive to July
1, marks an improvement over previous intra-European payments ar
rangements in several respects. A member country may now spend its
current earnings from another member in any country belonging to the
union. In addition, the union, by placing reliance on credits and gold
payments rather than grants as a method of financing surpluses and
deficits among the members, provides incentives for the correction of
deficits. Finally, while the payments arrangements are still partially
dependent on ECA funds, the latter will serve primarily as a reserve for
the union (in contrast to the ECA dollars provided for in the earlier
plans, under which the dollars had been used directly to compensate
the creditors in intra-ERP payments). The new payments union is thus
44
THIRTY-SIXTH
ANNUAL
REPORT
capable of functioning after the termination of American aid, provided
that its reserve is not exhausted.
The OEEC countries also reached an important agreement relating
to commercial policy. Members undertook to end by January 1, 1951
any discriminatory restrictions against imports from other members. The
freeing of intra-ERP trade on private account from quantitative restric
tions, already achieved to the extent of 50 per cent, was to be extended
by a further 10 per cent; quantitative restrictions may be reimposed by
a member that finds its reserves seriously threatened, but this must
ordinarily be done on a nondiscriminatory basis.
The successful functioning of the EPU requires that members remain
roughly in balance in their payments and receipts with other members
taken as a group, or that members with persistent deficits be able to
finance such deficits with gold or acceptable currencies. Although these
conditions were more nearly met during the first half of 1950 than during
previous periods, the experience in the second half of the year seems
to indicate that the union is being subjected to strains greater than those
anticipated at its birth. Stockpiling and high commodity prices have
accentuated the imbalance in the trade of certain member nations, and
Germany, the Netherlands, and Switzerland have already made net
gold or dollar payments to the union. In addition, the post-Korean
influences to which European trade is being exposed threaten to introduce
an increased element of restriction into intra-European trade; Germany,
for example, has already been forced to tighten its import controls.
The increased emphasis on military assistance has been reflected in
a large-scale expansion of the Mutual Defense Assistance Program, which
had originally been passed by Congress in October 1949. For the fiscal
years 1950 and 1951, 6.5 billion dollars were appropriated for this pro
gram; 5.5 billion were destined for the European signatories of the North
Atlantic Treaty, and one billion for other nations, including Greece,
Turkey, Korea, the Philippines, and the “General Area of China” . Of the
funds made available for the Treaty nations, approximately 5 billion
dollars were allocated to direct military assistance, while the remainder
was to be used to finance additional military production in Western
Europe. Considerable time lags are expected in the unfolding of the
program, since much of the equipment will not come off production lines
for one or two years after the signing of procurement contracts. Because
of certain legal requirements, moreover, actual assistance did not start
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
45
until February 19S0, and by the end of the year only 517 million dollars
of MDAP aid had been extended.
A number of special economic aid programs were instituted in 1950
to assist several areas in Europe and Asia which had gained in strategic
importance during the present period of world tension. Congress made
114 million dollars available for economic aid and technical assistance to
Southeast Asia (Burma, Indo-China, Indonesia, and Thailand), and 70
million dollars were provided for food shipments to Yugoslavia to combat
famine conditions there. Both programs, however, were financed by
shifting funds which had previously been authorized under other aid
programs. Congress also authorized loans to Spain totaling 62.5 million
dollars, which were to be approved by ECA and negotiated and executed
by the Export-Import Bank. In November, an agreement was signed
with the Philippines, providing for implementation of some of the recom
mendations of the Bell Mission and subsequent consideration by the
United States of dollar aid (which according to the Bell Mission recom
mendations, might amount to some 250 million dollars over a period of
years).
In June, the technical assistance portion of President Truman’s
“Point Four” program (economic assistance to underdeveloped countries)
was implemented. In accordance with the International Development
Act, the State Department established the Technical Cooperation Adminis
tration to coordinate all United States technical assistance efforts, and
to administer new funds specifically appropriated for these purposes. For
the fiscal year ending June 30, 1951, Congress appropriated Point Four
funds aggregating 34.5 million dollars and consisting of 26.9 million to
implement the new Act, 5 million for the Institute of Inter-American
Affairs, and 2.6 million for the Department of State’s international infor
mation and educational activities. By the end of the year, technical
assistance projects had been started for Brazil, Ceylon, Iran, Liberia,
and Paraguay. Similar projects for many other countries were inaugurated
shortly after the turn of the year.
The Export-Import Bank more than doubled its loans in 1950; new
credits of 566 million dollars were authorized, as compared with 241
million in 1949. About two thirds of these authorizations consisted of
large loans to Argentina (125 million dollars), Indonesia (100 million),
and Mexico (151 million), while the remainder represented small credits
to Brazil, Chile, Colombia, Ecuador, Iran, Israel, Saudi Arabia, and
Yugoslavia. The gross disbursements of the bank during the year
46
THIRTY-SIXTH
ANNUAL
REPORT
amounted to 200 million dollars, but because of repayments of 160 million,
net disbursements were only 40 million.
The International Bank increased its lending activities moderately,
authorizing loans of 279 million dollars as compared with 219 million in
1949; the borrowing countries were Australia, Brazil, Colombia, Ethiopia,
India, Iraq, Mexico, Thailand, Turkey, and Uruguay. Disbursements
in 1950 amounted to 75 million dollars, compared with 68 million in
1949. The International Monetary Fund made no sales of exchange
during the year, but Belgium, Egypt, and Ethiopia repurchased 29.4
million dollars of their respective currencies from that agency.
Integration o f Foreign Economic and Military
Assistance Programs
In anticipation of the approach of the terminal date of the Marshall
Plan (June 1952), President Truman, early in the year, requested former
Secretary of the Army Gordon Gray to review the long-run objectives
of United States foreign economic policies and to reexamine methods of
attaining them. The report of the Gray Committee was delayed until
November so that the repercussions of the invasion of Korea could be
taken into account. According to the report, the principal long-run objec
tives of our foreign economic policy are: (1) to make possible a rapid
build-up of Western European defense capabilities; (2) to assist the
development of additional sources of critical materials; (3) to aid other
free nations to strengthen their economic and political structures; and (4)
to continue laying the foundations for those international trade and
financial relations which are conducive to economic progress on a selfsupporting basis.
To implement these objectives, the following major recommendations
were made by the Committee: (1) An agency should be established to
administer all United States foreign economic (as distinguished from
military) assistance programs. (2) Assistance to European nations, apart
from military equipment, should be continued for another three or four
years. (3) In rearming, the Western European countries should utilize
their own resources to the largest possible degree, with United States
foreign aid serving to maximize their own contributions. (4) As part
of the program to assist underdeveloped areas, the lending authority of
the Export-Import Bank should be raised; a general policy should be
adopted of permitting the expenditure of the bank’s loans outside the
United States; and the bank should be authorized to guarantee private
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
47
foreign investments against certain risks. (S) To check the current
scramble for raw materials, with its inevitable effect on prices, methods
for international collaboration should be promptly devised for allocating
supplies of scarce materials among the free nations. (6) Since exports
of manufactured goods are unlikely to meet all demands of foreign nations,
United States export controls should be employed to assure the delivery
of goods to other countries for purposes that support United States
interests. (7) A rapid expansion in the output of scarce materials abroad
should be stimulated, both by supplying capital funds and equipment,
and by concluding long-term delivery contracts. (8) The long-run objec
tives of our international trade and financial policies, including converti
bility of currencies, should continue to be pursued.
The President has since recommended that Congress appropriate a
lump sum of 9.7 billion dollars for military and economic aid in 1951-52,
thus exceeding appropriations for such programs in 1950-51 by about
1.7 billion dollars; the bulk of these funds is reportedly to be allocated to
military assistance, economic recovery in the ERP nations having pre
sumably progressed at even a faster rate than was anticipated in the Gray
Report. The President has also suggested that the life span of the Eco
nomic Cooperation Administration be extended beyond mid-1952, and
has vigorously endorsed nearly all the recommendations of the Gray
Committee.
Since the end of World War II, the United States has become increas
ingly aware of the need for a world-wide concept in its foreign economic
policy; the many facets of this policy must follow a single broad stream
of direction and purpose, and must be continuously adapted to changing
circumstances at home and abroad. Considerable progress was achieved
during 1950 in reshaping our policies to the changed political and economic
situations which followed the invasion of South Korea, but in view of
the rapid changes occasioned by this crisis, the shifts in policy have tended
to be of an ad hoc nature and have not as yet been fully coordinated.
The problem facing the United States at the close of the year was how
to preserve the progress which had already been made in restoring the
viability and building up the economic, moral, and political strength of
other free nations, while at the same time achieving a rapid expansion of
the defense potential of this country and its allies. This implies the attain
ment of a proper degree of balance between our economic and military
assistance and the coordination of our rearmament effort with those of
the other signatories of the North Atlantic Treaty.
48
THIRTY-SIXTH
ANNUAL
REPORT
Volume and Trend of the Bank’s Operations
Domestic Operations
The events in Korea, the Government’s rearmament program, the
rise in production and trade, and the upward pressures on prices, all
tended either to extend the scope of the bank’s duties and responsibilities
or to enlarge the physical volume of its operations during 1950. Under
the authority of the Defense Production Act, the Board of Governors of
the Federal Reserve System, with the aim of lessening inflationary pres
sures and making labor and material available for the needs of the defense
program, issued Regulations W and X, to reduce the availability of
credit to consumers for the purchase of durable goods and for the con
struction of residential real estate. The Board also issued Regulation V,
setting forth the procedures that financing institutions must follow in
obtaining Government guarantees on loans to defense contractors. Most
of the work of administering these regulations devolved upon the indi
vidual Reserve Banks and upon their branches.
The responsibility of a Reserve Bank in the V Loan program is to
act for the various Governmental guaranteeing agencies in the arrange
ment of contracts of guarantee with financing institutions on their loans
to defense contractors and subcontractors, with the aim of affording the
guarantors the best available protection against possible financial loss
consistent with obtaining defense production expeditiously. There has,
however, been no delegation of power to the Federal Reserve Banks to
issue guarantees without specific authorization of the guaranteeing agency
concerned. The bank’s work with respect to V loans was assigned to
the Credit Department, which reviews the credit aspects of each case,
prepares a report and recommendations for transmittal to the respective
guarantor, issues the authorized guarantees, and services the outstanding
guarantee commitments. Between the reactivation of the V Loan pro
gram on September 27 and the end of 1950 its use was relatively small,
in view of the moderate scale of the Armed Forces defense procurement
program in this period. By December 31, 1950, 42 applications had been
received for guarantees covering 34.4 millon dollars of proposed loans. As
a result of these applications, which individually ranged between $20,000
and 15 million dollars, 8 guarantees involving a loan total of 4.5 million
dollars were authorized and issued. Two applications were declined by
FEDERAL
RESERVE
BANK
OF
49
NEW Y O R K
the respective guarantors, and the remaining applications were still in
various stages of completion or processing at the end of the year.
The administration of Regulation W was also placed under the juris
diction of the Credit Department. This work included the registration of
lenders and dealers, the enforcement of the provisions of the regulation,
and informing the registrants and the general public concerning the objec
tives of the regulation. As of December 31, 1950 the bank had received and
processed approximately 15,000 registration statements. Enforcement
SALIENT OPERATIONAL TRENDS AT NEW YORK RESERVE BANK*
81LU 0N S
OF PIECES
VOLUME OF
CURRENCY HANDLED
VOLUME OF NONGOVERNMENT
CHECKS PROCESSED
^ IL U 0 N |
OF CHECKS
400
320
240
>60
80
0
I940J41 ’42*43 **4>45 >46'47 >48 W 5 0 1940’4 1 *42 *43'44 ’45 *46 *47 '48 ’4 9 >50
include* Buffalo Branch.
50
THIRTY-SIXTH
ANNUAL
REPORT
activities began in mid-October and by the year end 777 registrants had
been examined, uncovering IS significant violations. Initially, disciplinary
action has taken the form of a warning and the exaction of an assurance
of future compliance with the regulation, followed by reexamination
after a short interval. Cases involving persistent and significant violations
are referred to the Board of Governors, which may either suspend the
violator’s license or institute court proceedings to insure compliance.
Arrangements are being made with various Federal and State supervisory
agencies in this District under which they will determine Regulation W
compliance in the course of the regular examinations they conduct of
lenders under their jurisdiction.
To handle Regulation X, a completely new function for the Reserve
Bank, a Real Estate Credit Department was created on October 16.
During the remainder of the year, this department was concerned pri
marily with the dissemination of information concerning Regulation X in
order to increase public knowledge and acceptance of its purpose. A corps
of investigators has since been established to enforce the regulation in
respeqt to hitherto unsupervised lenders and to work in close liaison with
the already existing supervisory agencies in this field. On February 1,
1951, the new department absorbed that part of the staff of the Credit
Department which had been concerned with the administration of Regu
lation W and became known as the Real Estate and Consumer Credit
Department.
As shown in the accompanying chart and table, one of the most
important regular functions of the bank — that of clearing and collecting
the checks of individuals and businesses — attained a new peak in both
physical and dollar volume during 1950, necessitating a very intensive
use of the available facilities and personnel. Reflecting the impact of
higher prices, the dollar volume of checks handled increased relatively
more than did the number. United States Government checks processed
also increased slightly in number during 1950, but, in contrast to the
trend of privately drawn checks, the dollar volume, and thus the average
check size, showed a minor decline.
The number of pieces of currency received and counted also attained
a new high level in 1950, although the dollar volume remained slightly
below the previous high of two years earlier. While the number and dollar
volume of coin handled were sharply lower than in 1949, this decline
reflected the adoption of a more efficient handling procedure (which did
FEDERAL
Som e M e a s u r e s
RESERVE
of
th e
BANK
V o lu m e
F ed era l R eserve
OF
of
NEW
YORK
O p e r a tio n s
B a n k o f «N ew
51
of
th e
Y ork
(Including Buffalo Branch)
Number of pieces handled*
Discounts and advances...............................................
Currency received and counted.................................
Coin received and counted.........................................
Gold bars and bags of gold coin handled................
Checks handled:
United States Government checks....................
All other.................................................................
Collection items handled:
United States Government coupons p a id ........
All other.................................................................
Disbursements as fiscal agent for
Reconstruction Finance Corporation, its subsid
iaries, and Commodity Credit Corporation
Issues, redemptions, and exchanges by fiscal agency
departments:
United States Savings bonds ..............................
All other United States obligations ..............
Obligations of the International Bank for Re
construction and Development....................
Safekeeping of securities:
Pieces received and delivered.............................
Coupons detached.................................................
Transfers of fu n d s f..................................................
Incoming and outgoing mail:
Registered .............................................................
Ordinary .................................................................
1950
1949
2,114
996,792,000
1,690,248,000
202,000
2,257
967,773,000
2,182,874,000
168,000
45,781,000
376,872,000
44,392,000
356,095,000
5.524.000
5.857.000
5.729.000
5.570.000
22,000
28,000
24,736,000
2,975,000
22,907,000
2,732,000r
147,000
16,000
4.382.000
1.729.000
260,000
4.471.000
1.711.000
235,000
400,000
10,169,000
407,000
9,211,000
Amounts handled
$ 7,652,847,000 $ 12,563,787,000
Discounts and advances...........................................
6.101.253.000
Currency received and counted.............................
6.341.436.000
175,281,000
Coin received and counted . . . .#.............................
136,243,000
2.806.212.000
2.353.838.000
Gold bars and bags of gold coin handled..........
Checks handled:
14,854,411,000
13,554,172,000
United States Government checks................
242,480,374,000 209,388,256,000
All other.............................................................
Collection items handled:
1,428,259,000
1,351,395,000
United States Government coupons paid . . .
866,267,000
908,009,000
All other.............................................................
Disbursements as fiscal agent for
Reconstruction Finance Corporation, its subsid
441,120,000
264,044,000
iaries, and Commodity Credit Corporation
Issues, redemptions, and exchanges by fiscal agency
departments:
2,218,828,000
2,546,155,000
United States Savings bonds..........................
259,223,494,000
All other United States obligations ........
221,516,844,OOOr
Obligations of the International Bank for Re
30,636,000
205,707,000
construction and Development................
Safekeeping of securities:
390.454.757.000
Pieces received and delivered (par value) .
407.441.510.000
132.063.441.000
167.665.297.000
Transfers of fu n dsf.................................................
* Two or more checks, coupons, etc., handled as a single item are counted as one “piece”,
tIncludes wire and mail transfers; excludes Treasury transfers and Reserve Bank
interdistrict settlements,
r Revised.
52
THIRTY-SIXTH
ANNUAL
REPORT
away with certain counting operations), rather than any reduction in the
member banks’ utilization of coin.
Discounts and advances in 1950 declined moderately in number, but
rather sharply in dollar volume. Advances to member banks secured
by the pledge of United States Government securities averaged about
two-fifths less in 1950 than in 1949, with the bulk of the decline occurring
in the latter part of the year following the rise in the discount rate from
1/^2 to \Y\ per cent on August 21.
The bank’s fiscal agency operations increased during the year. The
volume of transactions in United States Government Savings bonds rose
moderately as a result of a larger volume of both new issues and redemp
tions. The issue, redemption, exchange, and transfer of “ all other” United
States Government securities expanded 9 per cent in number of items
and 17 per cent in dollar volume, owing to heavier refunding operations
by the Treasury and an increase in the use of Reserve Bank facilities for
the telegraphic transfer of Government securities between certain cities
in the twelve Federal Reserve Districts. The number and dollar volume
of issues, redemptions, and exchanges handled on a fiscal agency basis
for the International Bank for Reconstruction and Development expanded
sharply from the relatively low 1949 level. Disbursements for the Recon
struction Finance Corporation, its subsidiaries, and the Commodity Credit
Corporation continued the downward trend of recent years.
The volume of collection items handled and the work involved in the
safekeeping function of the bank showed little net change between 1949
and 1950. Wire and mail transfers of funds, however, continued to rise
to new record highs, the number of transfers increasing 11 per cent and
the dollar volume 27 per cent. As shown in the accompanying chart, the
total number of employees on the staff (exclusive of officers) declined
slightly further during the year. On December 31, 1950, the staff num
bered 3,565, as compared with 3,611 on December 31, 1949.
Foreign and international Operations
Continuing at an accelerated rate the increase which has been occur
ring since the latter part of 1947, the total amount of earmarked gold,
deposits, United States Government securities, and other assets held by
the Federal Reserve Banks for foreign account increased during 1950 by
about 2.3 billion dollars to a new peak of approximately 7.3 billion. This
was about 300 million dollars above the previous peak of September
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
53
1945. At the same time, such assets held for the International Bank and
the International Monetary Fund rose somewhat, bringing the combined
assets held for foreign and international account to well over 10 billion
dollars.
The rise in total holdings for foreign account occurred principally in
earmarked gold and in United States Government securities, which
increased by 1,306 million dollars and 902 million, respectively.
During the year accounts were opened by this bank as principal for
the National Bank of Egypt, the Caisse Centrale de la France d’OutreMer (located at Paris), and the newly established central banks of Costa
Rica, Cuba, and Honduras. In addition, an account was opened in behalf
of the Instituto Espanol de Moneda Extranjera, an agency of the Spanish
Government. The opening of a regular account for the Caisse Centrale
occasioned the closing of an account which this bank, as fiscal agent of
the United States, had maintained for the Caisse Centrale since July
1944. Similarly, the establishment of an account for the new Banco
Central de Costa Rica coincided with the closing of an account which
this bank had previously maintained in the name of the Issue Department
of the Banco Nacional de Costa Rica. The opening of an account in
the name of the Banco Nacional de Cuba was followed by the closing
of an account which this bank, as fiscal agent of the United States, had
maintained for the Government of the Republic of Cuba. The Federal
Reserve Bank of New York also established a sub-account for the Bank
for International Settlements in the latter’s capacity as agent for the
Organization for European Economic Cooperation. Periodic settle
ments among the members of the European Payments Union (EPU)
are made through this sub-account. In August, as fiscal agent of the
United States, this bank opened an account in the name of the Bank
of Korea.
Loans on gold to foreign central banks, which had reached a record
high of nearly 260 million dollars outstanding in August 1948 and had
receded to 69.5 million dollars at the end of 1949, decreased further
during 1950, until in August the last such loan was paid off. No new
loan on gold was made during the remainder of the year. There was
no change in the policy of the bank with respect to making such loans.
In December, the Federal Reserve Bank of New York was designated
fiscal agent of the United States, to act on behalf of the Treasury Depart
ment in the administration of the newly imposed regulations concern
54
THIRTY-SIXTH
ANNUAL
REPORT
ing assets and financial transactions in which nationals of Communist
China and North Korea have an interest.
The bank, as fiscal agent of the United States, continued to operate
the United States Stabilization Fund pursuant to authorization and
instructions from the Treasury Department.
Financial Statements
Statement o f Condition
At the end of 1950, this bank’s total assets, at 12,443 million dollars,
were virtually unchanged from the total a year earlier, although sizable
fluctuations occurred during 1950 in some of the individual asset items.
Continuing the trend initiated in 1949, gold certificate reserves showed a
decline of a little over 700 million dollars, but the effect upon total assets
was offset by an increase in holdings of U. S. Government securities and
by a heavier volume of “uncollected items” .
Gold certificate holdings of this bank were drawn down during 1950
to the extent of 1,620 million dollars by the retirement of gold certificates
to release gold for export, but they were replenished to the extent of 900
million as a result of domestic settlements through the Interdistrict Settle
ment Fund. Heavy Treasury transfers of funds to New York from other
sections of the country, together with payments by the other Reserve
Banks for their share of the Government securities purchased in the
New York market by the System Open Market Account, exceeded sub
stantial transfers of funds to the other Federal Reserve Districts for
private business account.
Among this bank’s earning assets, the volume of discounts and
advances at the year end amounted to 62 million dollars as compared with
23 million a year earlier. The balance sheet figure on discounts and
advances, however, is affected by the year-end policy of many banks to
clear up outstanding indebtedness and thus is not a good measure of the
use of the borrowing facilities of the Reserve Bank. During 1950 the
average volume of loans to member banks was considerably below the
previous year’s level, while loans to foreign banks secured by gold
averaged 80 per cent less for the year as a whole than in 1949.
Total holdings of U. S. Government securities showed a net increase
of 408 million dollars, an increase of 2,787 million dollars in Treasury
notes being only partly offset by declines of 943 million in certificates of
indebtedness, 802 million in Treasury bills, and 634 million in Treasury
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
55
bonds. The decline in certificates of indebtedness was occasioned by the
conversion into Treasury notes of all but one of the outstanding issues
of certificates, while practically the entire rise in note holdings reflected
the same factor, as well as the conversion into notes of four issues of
Treasury bonds. The decline in Treasury bonds reflected net market
sales in the first seven months of the year in excess of subsequent pur
chases of those issues which did not carry “exchange rights” for Treasury
notes. The drop in Treasury bills occurred mostly in the August-October
period and reflected System Account sales and cash redemptions.
Accompanying a record growth in check clearing activity, the two
components of Federal Reserve float — “uncollected items” on the asset
side of the statement and “deferred availability items” on the liability
side — increased 261 and 72 million dollars, respectively, to new high
levels.
Federal Reserve notes of this bank outstanding in the hands of
A
ssets of t h e
F
ederal
R
eserve
Bank
of
N
ew
Y
ork
(In thousands o f dollars)
Assets
Dec. 31,1950
Dec. 31,1949
Gold certificates ...................................................
Redemption fund for Federal Reserve notes ..
$ 6,532,687
50,912
$ 7,250,198
49,736
Total gold certificate reserves..........
$ 6,583,599
$ 7,299,934
Other cash .............................................................
$
47,615
$
41,720
Discounts and advances .....................................
$
61,960
$
23,377
Industrial loans ...................................................
$
27
$
-
$
342,060
544,082
2,920,763
1,076,903
U. S. Government securities:
B ills .................................................................
Certificates.....................................................
N o tes...............................................................
Bonds .............................................................
$ 1,144,483
1,487,219
133,236
1,710,523
Total U. S. Government securities ..
$ 4,883,808
$ 4,475,461
Total loans and securities..................
$ 4,945,795
$ 4,498,838
$
$
Due from foreign banks.....................................
Federal Reserve notes of other banks............
Uncollected item s.................................................
Bank premises .....................................................
Other assets...........................................................
Total assets...........................................
♦After deducting participation of other Fed
eral Reserve Banks amounting t o ..............
8*
23,337
806,762
7,657
27,838
12*
24,251
546,227
7,872
23,584
$12,442,611
$12,442,438
$
$
16
26
56
THIRTY-SIXTH
ANNUAL
REPORT
the public have shown a progressively smaller contraction each year since
the peak was established in 1947. The decline in 1950 amounted to 87
million dollars (1.6 per cent) as compared with 152 million dollars (2.7
per cent) in 1949, and 184 million (3.2 per cent) in 1948. The continued
but smaller contraction in this District’s Federal Reserve notes during
1950 compares with a small rise in the remainder of the United States.
The member bank reserve account rose 318 million dollars in 1950,
whereas in 1949 a reduction of 1,354 million dollars had occurred. The
1950 rise reflected primarily the fact that the member banks had to main
tain a greater volume of reserves because of the increased volume of
deposits they had created by means of loan expansion. The 1949 decline,
on the other hand, had reflected the lessened need for reserves resulting
from the reductions in reserve requirements made during that year by the
L
ia b il it ie s
of t h e
F
ederal
R
eserve
B ank
of
N
Y
ew
ork
(In thousands of dollars)
Dec. 31,1950
Dec. 31,1949
Federal Reserve notes .......................................
$ 5,342,940
$ 5,430,281
Deposits:
Member bank—reserve account................
U. S. Treasurer—general account ..........
Foreign .........................................................
Other .............................................................
$ 5,665,077
115,722
286,467’“
256,008
$ 5,347,438
255,479
246,250*
464,380
$ 6,323,274
$ 6,313,547
$
$
Liabilities
Total deposits.......................................
Deferred availability items ...............................
Other liabilities.....................................................
518,346
1,733
446,139
2,303
$12,186,293
$12,192,270
$
73,383
153,289
7,319
22,327
$
72,425
148,149
7,319
22,275
Total capital accounts.........................
$
256,318
$
250,168
Total liabilities and capital accounts
$12,442,611
$12,442,438
$
$
Total liabilities.....................................
Capital accounts:
Capital paid in .............................................
Surplus (Section 7) ...................................
Surplus (Section 13b) ...............................
Other capital accounts ...............................
Contingent liability on acceptances purchased
for foreign correspondents ........................
Ratio of gold certificate reserves to deposit and
Federal Reserve note liabilities combined
♦After deducting participation of other Fed
eral Reserve Banks amounting t o ............
f After deducting participation of other Fed
eral Reserve Banks amounting t o ............
6,580f
56.4%
$
608,962
14,850
3,319f
62.2%
$
520,250
7,188
FEDERAL
RESERVE
BANK
OF
NEW Y O R K
57
Board of Governors in pursuance of the easy money policy then in effect.
Deposits of foreign central banks held at the New York Reserve Bank
increased 129 million dollars in 1950, despite the conversion of large
amounts of deposits into gold during the year. The New York Bank’s
share of these accounts (which are participated among the 12 Reserve
Banks), together with certain accounts which this bank holds as fiscal
agent of the United States, increased by 40 million dollars. The general
account of the U. S. Treasurer decreased 140 million dollars during the
year, and “Other deposits” decreased 208 million dollars, primarily because
of a reduction in the account of the International Monetary Fund.
Capital accounts in the aggregate increased 6 million dollars during
the year. Approximately 5.1 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 capital
ization (either by the reinvestment of earnings or by the sale of new
capital stock), rose 1 million dollars.
As a result of the proportionately greater decline in gold certificate
reserves than in the total of deposit and note liabilities combined, the
reserve ratio of this bank declined from 62.2 per cent at the end of 1949
to 56.4 per cent on December 31, 1950. The latter percentage is more
than double the legal requirement, which is 25 per cent against deposits
and notes combined.
Earnings and Expenses
Gross earnings of the Federal Reserve Bank of New York of 64.7
million during 1950 were 10.9 million dollars less than the previous year’s
peak. The decline resulted almost entirely from a reduction in income
from U. S. Government securities, and reflected not only the lower average
volume of Government security holdings, but also the lower yield which
accompanied a shortening in the average maturity. Income received from
discounts and advances, which represents a relatively minor fraction of
gross earnings, declined sharply in 1950 accompanying a substantially
lower volume of advances to member banks secured by U. S. Government
securities, and to foreign banks secured by gold.
Net expenses showed only a slight increase during the year, due
entirely to a rise in the cost of supplying Federal Reserve currency. Net
earnings before additions and deductions, therefore, reflected principally
the decline in gross earnings and receded 11.3 million dollars to 47.0
THIRTY-SIXTH
58
ANNUAL
REPORT
million dollars. Additions to net earnings in the form of profit on U. S.
Government securities sold (net) amounted to 8.9 million dollars, or
1.2 million more than a year ago. Deductions from net earnings, on the
other hand, were reduced to a negligible amount, compared with the
10.4 million dollars charged off last year, principally because of a sharp
drop in the amounts set aside as reserves for contingencies and the
nonrecurrence of special payments to the retirement system.
Net earnings after all adjustments but before dividends totaled 55.8
million dollars, or 300,000 dollars more than in 1949. The usual statutory
dividend of 6 per cent, amounting to 4.4 million dollars, was paid to the
member banks. Of the remaining net earnings, 46.3 million dollars, or
90 per cent, was transferred to the United States Treasury in payment of
P r o fit and L oss A c c o u n t
F o r t h e C a le n d a r Y e a r s
1950 a n d 1949
(In thousands of dollars)
1950
Earnings ...............................................................
Expenses* .............................................................
Net earnings before additions and
deductions .........................................
1949
$
64,666
17,703
$
75,640
17,350
$
46,963
$
58,290
$
8,880
6
$
7,653
7
$
8,886
$
7,660
$
55
$
9,765
Additions to net earnings:
Profit on U. S. Government securities sold
(net) ...................................................
All other .......................................................
Total additions .....................................
Deductions from net earnings:
Reserves for contingencies .......................
Retirement System (Adjustment for re
vised benefits) .........................................
All other .......................................................
667
3
5
Total deductions .................................
$
60
$
10,435
Net earnings .........................................................
$
55,789
$
55,515
$
4,382
$
4,220
Distribution of net earnings:
Dividends paid ...........................................
Paid United States Treasury (Interest on
Federal Reserve notes) ..........................
Transferred to surplus (Section 7) .......
46,267
5,140
46,165
5,130
Surplus (Section 7) beginning of y ea r..........
Addition as above ...............................................
$
148,149
5,140
$
143,019
5,130
Surplus (Section 7) end of y ear......................
$
153,289
$
148,149
* After deducting reimbursement for certain fiscal agency and other expenses.
FEDERAL
RESERVE
BANK
OF
NEW
59
YORK
an interest charge on Federal Reserve notes levied by the Board of Gover
nors of the Federal Reserve System under Section 16 of the Federal
Reserve Act. The balance of the year’s earnings, S.l 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
Owing to mergers of 17 member banks with other banks, the con
version of one national bank into a nonmember State bank, and the with
drawal from membership of one State bank, a net decline of 19 banks
occurred this year in the District membership.
At the end of the year,
there were 751 member banks in the Second District, constituting 87
per cent of all national banks, State banks, and trust companies in the
District and holding 96 per cent of the total assets of all such institutions.
All national banks and 68 per cent of the State banks and trust companies
in the District are members.
A trend toward an extension of branch banking, through mergers,
has been apparent in this District during the past few years.
In connec
tion with this trend, there have been several cases of mergers which
involved reluctant withdrawals from membership in the Federal Reserve
N u m b e r of M e m b e r a n d N o n m e m b e r B a n k s in
S eco n d F ed er al R eser ve D is t r ic t a t E n d of Y ear
(Exclusive of savings banks, private bankers, and industrial banks)
December 31, 1950
Type o f bank
December 31,1949
Non
Non
Per cent
Per cent
Members members members Members members members
National b a n k s................
516
0
100
526
0
100
State banks and
trust companies . . . .
235
112
68
244
116
68
T o t a l.........................
751
112
87
770
116
87
C hanges
i n F e d er al R ese r v e M
S e c o n d D i s t r ic t d u r in g
e m b e r s h i p in
1950
Total membership beginning o f y e a r .........................................................
770
Decreases:
Member banks combined with other banks .....................................
National bank converted into nonmember State b a n k ..................
State bank withdrawal from membership .......................................
17
1
1
Total membership end o f y e a r ...................................................................
751
THIRTY-SIXTH
60
System.
ANNUAL
REPORT
The principal reason for such withdrawals (including, in one
case during 19S0, the conversion of a national bank into a nonmember
State bank) is that capital requirements for member banks operating
branches are much higher than for nonmember State banks in similar
circumstances.
years.
There have been five cases of this kind in the past two
The Federal Reserve System has recommended to Congress an
amendment to the Federal Reserve Act to remedy this situation, but no
action has, as yet, been taken.
Changes in Directors and Officers
In April 1950, the Board of Governors of the Federal Reserve System
appointed Robert P. Patterson, a member of the firm of Patterson, Bel
knap & Webb, New York, N. Y ., as a Class C director for the unexpired
portion of the term ending December 31, 1952.
At a regular election in the autumn of 1950, Burr P. Cleveland,
President, First National Bank of Cortland, Cortland, N. Y ., was elected
by member banks in Group 2 as a Class A director for a term of three
years beginning January 1, 1951, to succeed Frederic E. Worden, Chair
man of the Board and President, The National Bank of Auburn, Auburn,
N. Y ., whose term expired December 31, 1950. At the same time, Marion
B. Folsom, Treasurer and Director, Eastman Kodak Company, Rochester,
N. Y ., was reelected by member banks in Group 2 as a Class B director
for a term of three years beginning January 1, 1951.
In December 1950, the Board of Governors of the Federal Reserve
System reappointed Robert T. Stevens, Chairman of the Board, J. P.
Stevens & Co., Inc., New York, N. Y ., as a Class C director for a term
of three years beginning January 1, 1951, and redesignated him as Chair
man of the Board and Federal Reserve Agent for the year 1951.
William
I. Myers, Dean of the New York State College of Agriculture, Cornell
University, Ithaca, N. Y ., was reappointed Deputy Chairman for the year
1951.
In November 1950, the directors of the bank appointed C. Elmer
Olson, President, The First National Bank of Falconer, Falconer, N. Y .,
a director of the Buffalo Branch for a term of three years beginning
January 1, 1951.
Mr. Olson succeeded Clyde C. Brown, President, The
Cuba National Bank, Cuba, N. Y ., whose term expired December 31, 1950.
The Board of Governors of the Federal Reserve System appointed Robert
C. Tait, President, Stromberg-Carlson Company, Rochester, N . Y ., as a
FEDERAL
RESERVE
BANK
OF
61
NEW Y O R K
director of the Buffalo Branch for a term of three years beginning
January 1, 1951.
The directors of this bank designated Carl G. Wooster, President,
Wooster Fruit Farms, Inc., Union Hill, N. Y ., as Chairman of the Board
of Directors of the Buffalo Branch for the year 1951.
Changes in Officers
Robert H. Brome, Assistant Counsel, resigned effective April 30, 1950,
to become an officer of the Bankers Trust Company, New York, N . Y .
William F. Treiber, formerly Assistant Vice President, was appointed
Vice President, effective May 1, 1950.
Edward G. Guy, formerly an Attorney in the Legal Department, was
appointed Assistant Counsel, effective May 1, 1950.
Mr. Guy was
appointed Assistant Secretary of this bank effective January 4, 1951, con
tinuing as Assistant Counsel.
Charles N. Van Houten, formerly Manager of the Government Bond
Department and Manager of the R. F. C. Custody Department, was
appointed Assistant Vice President, effective June 1, 1950.
William H. Dillistin, General Auditor, who had been with this bank
for nearly thirty years, retired from active service with the bank, effective
October 31, 1950.
Curtis R. Bowman, formerly Assistant General Auditor, was ap
pointed General Auditor, effective November 1, 1950.
Howard D. Crosse, formerly Manager of the Bank Relations Depart
ment, was appointed an Assistant Vice President, effective December 1,
1950.
William F. Sheehan, Chief Examiner since 1934, retired from active
service with this bank, effective December 31, 1950.
Halsey W . Snow, Cashier of the Buffalo Branch, who had been with
the Branch since it opened in 1919, retired from active service with this
bank, effective December 31, 1950.
Donald J. Cameron, formerly Assistant Vice President at the head
office, was appointed Acting Assistant Manager of the Buffalo Branch,
effective January 1, 1951.
George J. Doll, formerly Assistant Cashier of the Buffalo Branch,
was appointed Cashier of the Branch, effective January 1, 1951.
Gerald H. Greene, formerly Chief of the Credit and Discount Division
of the Buffalo Branch, was appointed an Assistant Cashier of the Branch,
effective January 1, 1951.
62
THIRTY-SIXTH
ANNUAL
REPORT
James J. Carroll, formerly Manager of the Planning Department
and Assistant Secretary of this bank, was appointed an Assistant Vice
President, effective January 4, 1951.
Harding Cowan, formerly an Attorney in the Legal Department,
was appointed an Assistant Counsel, effective January 4, 1951.
Angus A. Maclnnes, Jr., formerly a Special Assistant in the Cash and
Collections Function, was appointed a Manager and assigned to the
Check Department, effective January 4, 1951.
Herbert A. Muether, formerly Superintendent of the building oper
ations, was appointed a Manager and assigned to the newly created
Building Operating Department, effective January 4, 1951.
Arthur H. Noa, formerly a Staffing Control Consultant in the Plan
ning Department, was appointed a Manager and assigned to the Service
Department, effective January 4, 1951.
Gustav Osterhus, formerly Trust Examiner in the Bank Examina
tions Department, was appointed a Manager and assigned to that depart
ment, effective January 4, 1951.
A. Chester Walton, formerly a Special Representative in the Bank
Relations Department, was appointed a Manager and assigned to that
department, effective January 4, 1951.
Member o f Federal Advisory Council
At its meeting on January 4, 1951, 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.
FEDERAL
RESERVE
BANK
OF
NEW
YORK
63
Directors and Officers
Class
Group
T erm
expires
D e c . 31
D ir e c to r s
A
1 John C. T raphagen ................................................... ...................
Chairman of the Board, Bank of New York and Fifth Avenue
Bank, New York, N. Y.
1952
A
2
1953
A
3
B
1
B
2
B
3
C
C
C
Burr P. Cleveland .........................................................................
President, First National Bank of Cortland, Cortland, N. Y.
R oger B. P rescott...........................................................................
President, The Keeseville National Bank, Keeseville, N. Y.
*L ewis H. Brown .............................................................................
Chairman of the Board, Johns-Manville Corporation, New
York, N. Y.
M arion B. F olsom ...........................................................................
Treasurer and Director, Eastman Kodak Company, Rochester,
N. Y.
Jay E. Cr a n e ....................................................................................
Vice President, Standard Oil Company (New Jersey), New
York, N. Y.
Robert T. Stevens, Chairman, and Federal R eserve A g e n t .......
Chairman of the Board, J. P. Stevens & Co., Inc., New York,
N. Y.
W illiam I. Myers, D eputy C h a irm a n ..........................................
Dean, New York State College of Agriculture, Cornell
University, Ithaca, N. Y.
R obert P. P atterson .....................................................................
Patterson, Belknap & Webb, New York, N. Y.
1951
1952
1953
1951
1953
1951
1952
T erm
D ire cto rs — B u ffa lo
B ran ch
Dec*31
C arl G. Wooster, C h a irm a n ................................................................................
President, Wooster Fruit Farms, Inc., Union Hill, N. Y.
George G. K leindinst .........................................................................................
President, Liberty Bank of Buffalo, Buffalo, N. Y.
George F. Bates ...................................................................................................
President, Power City Trust Company, Niagara Falls, N. Y.
Bernard E. F in u c a n e .........................................................................................
President, Security Trust Company of Rochester, Rochester, N. Y.
E dgar F. W endt ...................................................................................................
President, Buffalo Forge Company, Buffalo, N. Y.
1951
C. E lmer O l s o n ....................................................................................................
President, The First National Bank of Falconer, Falconer, N. Y.
1953
Robert C. T a i t ......................................................................................................
President, Stromberg-Carlson Company, Rochester, N. Y.
1953
M em ber of F ederal A dvisory C ouncil
N. Baxter Jackson,
Chairman of the Board of Directors, Chemical Bank & Trust Company,
New York, N. Y.
* Mr. Brown died February 26, 1951.
1951
1952
1952
1952
THIRTY-SIXTH
64
ANNUAL
REPORT
O fficers
A llan Sproul, President
L eslie R. R ounds, First Vice President
H arold A. Bilby, Vice President
H erbert H. K imball, Vice President
L. W erner K noke, Vice President
W alter S. L ogan, Vice President and
General Counsel
John H. W illiams, Economic Adviser
H arold V. R oelse, Vice President
R obert G. R ouse, Vice President
W illiam F. T reiber, Vice President
V alentine W illis, Vice President
R eginald B. W iltse, Vice President
A rthur P helan, Vice President
R ufus J.
T odd G. T iebout,
T r im b le ,
Assistant General Counsel
Assistant General Counsel
James J. Carroll,
Silas A. M iller,
H oward D. Crosse,
H orace L. Sanford,
F elix T. D avis,
O tto W. T enEyck,
N orman P. D avts,
Charles N. V an H outen,
M arcus A. H arris,
John H. W urts,
W illiam F. A brahams,
0 . Ernest M oore,
H arry M. Boyd,
H erbert A. M uether,
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Assistant Vice President
Manager, Security Custody Department
Manager, Research Department
Manager, Building Operating
Department
Manager, Safekeeping Department
W esley W. B urt,
Manager, Savings Bond Department
John J. Clarke,
A rthur
H.
N oa,
Manager, Service Department
G ustav O sterhus,
Secretary, and Assistant Counsel
Manager, Bank Examinations
Department
H arding Cowan,
Assistant Counsel
Franklin E. P eterson,
Manager, Cash Custody Department
P aul R. F itchen,
W alter H. R ozell, Jr.,
Manager, Cash Department
Manager, Foreign Department
E dward G. Guy ,
R alph W. Scheffer,
Assistant Counsel, and
Assistant Secretary
Manager, Real Estate and Consumer
Credit Department
W illiam A. H einl,
A. Chester W alton,
Manager, Personnel Department
Manager, Bank Relations Department
P eter P. L ang,
Manager, Government Bond Department
W alter C. W arner,
Manager, Credit Department, and
Manager, Discount Department
A ngus A. M acI nnes, Jr.,
Manager, Check Department
R oy
E.
W endell,
Manager, Collection Department
S pencer S. M arsh, Jr.,
Manager, Securities Department
H arold M. W essel,
M ichael J. M cL aughlin ,
Manager, Government Check Department
Manager, Accounting Department, and
Manager, Planning Department
Curtis R. Bowman , General Auditor
I nsley B. S mith ,
O fficers — B uffalo B ranch
D onald J. Cameron,
General Manager
M. M onroe M yers,
Assistant Cashier
George J. D oll,
Cashier
Acting Assistant Manager
G erald
H.
G reene,
Assistant Cashier
@FedFRASER