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Twenty-seventh Annual Report

Federal Reserve Bank
of New York
For the Year Ended December 31, 1941

Second Federal Reserve District

CONTENTS
PAGE

Monetary and Credit Developments and Policies........................
Shrinkage in Excess Reserves and Credit Expansion.........
Monetary and Credit Policies.............................................
Reserve Position of New York City Banks;
Fluidity of Funds............................................................
Firmer Tendency in Money Rates.......................................
Year-end Tendencies in Bank Credit...................................

8
8
11
14
17
19

Fiscal Policy................................................................................. 22
Coordination of Credit Policy with Fiscal Policy and Other
Government Policies............................................................ 25
New Security Issues.................................................................... 28
Capital and Gold Movements and the Foreign Exchanges........... 31
Capital and Gold Movements..............................,.................. 31
Foreign Exchanges.............................................................. 37
Foreign Relations........................................................................ 40
Operations of the Bank during 1941............................................
Growth of Fiscal Agency Operations...................................
Other Operations.................................................................
Financial Statement............................................................
Income and Disbursements..................................................

41
41
43
44
46

Membership Changes in 1941..................................................... 47
Changes in Directors and Officers...............................................
Changes in Directors............................................................
Changes in Officers...............................................................
Member of the Federal Advisory Council...........................

49
49
50
50

List of Directors and Officers....................................................... 51

F ederal Reserve Bank
O F N E W YO R K

March 9,1942.

To the Stockholders of the
Federal Reserve Bank of New York:

I am pleased to transmit herewith the twentyseventh annual report of the Federal Reserve Bank
of New York reviewing the year 1941.

A lla n S prou l,

President.

Federal Reserve Bank of New York
Twenty-Seventh Annual Report
The most important event of 1941 lies mainly beyond the scope
of this report. Our entry into the World War last December will have
its effects in 1942 and afterwards.

Yet it seems best to begin this

review with some reference to that momentous event, for it marks the
termination of one phase of our experience as well as the beginning
of another and establishes the plane of comparison between what has
thus far happened and what is yet to come.
Military expenditures in 1941, including the Lend-Lease program,
were about $12,500,000,000 or about one seventh of the National income.
But in the fiscal year beginning July 1, 1942, estimated military ex
penditures, according to the President’s budget message to the Congress
on January 7, 1942, will be $53,000,000,000 and total Federal expendi
tures about $60,000,000,000.
nitude.

These

expenditures

It is hard to grasp figures of this mag
will

result,

according to

the

budget

estimates, in a deficit of about $33,000,000,000 in the fiscal year 1942-43
as compared with $10,000,000,000 in the calendar year 1941, even if
tax revenues, including social security taxes, are raised to $27,000,000,000
compared with $9,500,000,000 in the past year.
One effect of our entry into the war has been to terminate the
debate about “ guns and butter” , the debate as to whether the desired
military production could be achieved in addition to, or must involve
a general and substantial curtailment of, ordinary peacetime pro
duction. As matters previously stood it was not easy to resolve this
argument. Much depended upon the projected scope of the defense
program and upon the speed with which it was to be carried out.
Our entry into the war has greatly clarified the problem.

W e now

know beyond question that our military effort will tax our capacity
to its utmost and can be accomplished only by drastic curtailment of
peacetime production and a lowering of living standards.
In 1941 the main emphasis was still on general expansion, and we
departed from “ business as usual” only to a limited degree and in
special situations.

Under the stimulus of the defense expenditures,

which rose from about $600,000,000 in January to three times that
amount in December, the National income paid out increased to the

TWENTY-SEVENTH ANNUAL REPORT

MILLIO N S
OF D OLLARS

record-breakijng total of $89,000,000,000, compared with $76,000,000,000
in 1940, $71,000,000,000 in 1939, and $82,000,000,000 in 1929. The ex
pansion was Very broad, embracing both durable and nondurable goods,
for both military and civilian uses. But as the year went on and the
defense program became larger it became increasingly apparent that
civilian production and consumption were beginning to compete danger
ously with ijiilitary expenditures.

Retail sales in 1941 are estimated

at $53,600,00j),000, the increase of 17 per cent over 1940 matching almost
precisely the percentage increase in National income payments to in
dividuals.

IjX the first half of the year there was a tremendous wave

of durable goods buying by consumers, which was due partly to in
creased consiimer incomes and partly to anticipations of curtailment
of output.

For the year as a whole sales of durable consumer goods

were up 22 per cent over 1940 and nondurable goods 15 per cent.
The rapid expansion of consumer expenditures, together with the
prospect of curtailment of the production of a number of kinds of
consumers’ d'oods, created, for the first time since the war began in
1939, a definite threat of inflationary developments. The rise of prices
apparently accounted for about one third of the expansion of National

FEDERAL RESERVE BANK OF NEW YORK

income in 1941 and nearly one half of the increase in retail sales. The
level of wholesale prices, which after the initial spurt on the outbreak of
war had sagged gradually until August, 1940, rose 17 per cent in 1941
and at the end of the year was 25 per cent higher than in August,
1939.

This rise was reflected increasingly during the year in the cost

of living.

After remaining virtually stationary from the beginning

of the war through the first quarter of 1941, the cost of living index
rose from 101 in March to 110 in November.
Predominant in the advance of wholesale prices was the rise in
prices of food and other farm products.

These rose 23 per cent and

36 per cent, respectively, in 1941, to levels 35 per cent and 55 per cent
above those of August, 1939. The rise in prices of these products con
stituted the most important cause of increased urban living costs and,
in so far as it related to industrial raw materials, contributed to higher
costs of producing finished goods. Another important cost and price
increasing factor was the advance in wage rates. Average hourly wage
earnings in industry increased more than the cost of living. Strikes, many
over wage rates, were unusually prevalent. One of our chief inflationary
dangers is that of a vicious spiral developing between these two im
portant elements of the price level.

A rise in either creates strong

pressure for a rise in the other, both exert a powerful influence upon
cost of production, including the cost to Government of the war program,
and both greatly affect the cost of living of the community in general.
Unless means can be found to prevent an indiscriminate rise in industrial
wage costs and agricultural prices, as well as in business profits and non^
agricultural prices, there is little hope that prices and costs in general
can be controlled and inflation prevented.
Our main hope of avoiding inflationary developments which will
obstruct the war program and plague us in the postwar period, lies
in coordination of all policies which can help to limit costs and close
the gap between consumer incomes and the available supplies of con
sumers ’ goods. Apart from controls over production, prices, and the
distribution of scarce goods, this will require restraint upon the re
muneration of groups whose incomes are tending to increase dispropor
tionately, avoidance of credit expansion that would contribute unneces
sarily to incomes, and the transfer of much of the community’s income
from consumption expenditure to the financing of the war. Much more
drastic taxation than we have thus far experienced will be required,
and the amounts which the Treasury must borrow should be obtained

TWENTY-SEVENTH ANNUAL REPORT

as largely as possible from nonbank sources. A t best, however, bank pur
chases of Treasury securities on a large scale appear to be inevitable
during the war period. In view of these considerations the monetary and
fiscal developments of the past year are significant.

Monetary and Credit Developments and Policies
Despite a rapid shrinkage during 1941 in the huge volume of
excess reserves with which the commercial banking system entered the
year, money conditions remained very easy and credit expansion was
at a rate that had not been witnessed since the first World War. While
a considerable part of the expansion in bank credit was accounted for
by bank investments in Government securities, and a smaller part by
financing of defense contracts, a further considerable element, ap
parently, was the financing of inventory expansion and consumer
credit, which tended to intensify the demand for goods and thus to
accentuate the problem of avoiding inflation. Under these circumstances,
a Federal Reserve policy of moderate restraint on credit expansion ap
peared to be in order and steps were taken, first, to limit extensions
of consumer instalment credit, and then to reduce the potential ex
pansion of bank credit generally.
With our entry into the war reconsideration of earlier policies be
came necessary, but excess reserves of the banks were still abnormally
large and short term interest rates relatively low. In fact the entrance
of this country into the war had remarkably little effect upon the
security markets and money rates, although it did make more im
mediate the problem of large scale war production and its financing,
and also the problem of restraining inflationary tendencies.
The change in the trend of excess reserves during the year bore
most heavily on the New York money market.

A t $6,900,000,000 on

January 15, excess reserves of all member banks were close to the
previous peak.

From that level there was a shrinkage of nearly

$2,000,000,000 within a period of eight months, and almost all of the
shrinkage was at New York City banks. This was due to the combined
effects of a heavy outflow of business funds to other parts of the country,
net withdrawals of funds from New York through Treasury operations,
and a continued upward trend in the volume of currency in circulation.
In 1941 these movements were not offset, as in previous years, by a
persistent and heavy inflow of foreign gold at New York, although
some gold continued to be imported.

FEDERAL RESERVE BANK OF NEW YORK
B ILLIO N S
OF DOLLARS

JA N

FEB

MAR

APR

MAY

JU N

JU L

*94<

AUG

SEP

OCT

NOV

DEC

Excess Reserves Held by Member Banks

The decline in the gold inflow reflected the exhaustion of the major
part of the existing British gold stocks, the enactment of Lend-Lease
legislation which enabled Great Britain and other countries to obtain
supplies from the United States without paying cash “ on the barrel
head^, and the elimination of France and the Low Countries from the
war. For the year as a whole the increase in this country’s gold stock
was about $740,000,000, as compared with an increase of approximately
$4,350,000,000 in 1940.

(Two thirds of the 1941 increase occurred in

the first four months of the year.) Contrariwise, the increase in the
volume of currency outstanding was even greater during 1941 than in
preceding years, amounting to more than $2,400,000,000. Another factor
in the reduction in excess bank reserves was a further increase in the
reserve requirements of banks as a consequence of the continued ex
pansion in the volume of deposits.
Despite the reduction in excess reserves, expansion in the volume
of bank credit proceeded at a rapid rate in this District and elsewhere.
Commercial and industrial loans of weekly reporting member banks
showed the most rapid increase in a number of years, and near the
end of 1941 appeared to be at the highest level since the early part of

TWENTY-SEVENTH ANNUAL REPORT

1931 or the end of 1930.

(Precise comparisons are not possible as

reports for earlier years were not closely comparable with those col
lected in recent years.) Among the factors to which the growth in bank
loans was attributed were the financing of holders of National defense
contracts, requirements for working capital from other industries which
are usual in periods of expanding business activity, including borrow
ing for the purpose of carrying larger inventories, and finally direct
or indirect extensions of bank credit for the purpose of extending in
stalment credit to consumers.

Contrary to the usual experience in

earlier periods of rapidly expanding business activity, however, there
was little change in the volume of bank loans extended for the purpose
of financing security speculation and distribution.

About one third

of the increase in total loans of all weekly reporting member banks,
and nearly 40 per cent of the increase in commercial, industrial, and
agricultural loans, were reported by New York City banks.
The increase in the loans of the reporting banks for the past year
amounted to approximately $2,000,000,000 or more than 20 per cent.
An even larger factor in the expansion of bank credit was a rapid
growth in bank investments in Government securities. While steps were
taken (discussed in the following section of this report) to raise a
larger part of the funds required by the Treasury through taxation
and through investment of savings in Government securities, holdings
of direct and guaranteed Government obligations by the reporting
banks increased by more than $2,500,000,000 in 1941. This increase
reflected in part subscriptions to new issues of Treasury securities, and
in part purchases in the market of securities sold by other investors
when presumably they were able to obtain new securities which they
considered more suitable for their needs.

In the first five months of

the year the investments of the New York City banks accounted for
nearly three fourths of the increase in holdings of Government direct
and guaranteed obligations by all reporting banks.

During the re

mainder of the year, however, the position of the New York banks with
respect to excess reserves was reflected in a leveling off in their invest
ments, while member banks in other principal cities, where excess
reserves were larger, continued to add substantially to their holdings of
Government securities.
Altogether, the increase in the total volume of loans and invest
ments of the reporting banks amounted to approximately $4,600,000,000
during 1941, the most rapid growth of earning assets since the first

FEDERAL RESERVE BANK OF NEW YORK
"World War period.

Accompanying this large increase in the volume

of bank credit, there was also a very substantial increase in the volume
of bank deposits, although in this case the increase was smaller than
in loans and investments because of the heavy withdrawals of currency
from the banks.

Combining the increase in bank deposits with the

increase in currency outstanding, the growth in the money supply was
also the most rapid since the first World War.
The heavy demand for currency and an increase in member bank
reserve requirements (due to the growth in bank deposits as well as
to an increase in reserve percentages), caused a substantial shrinkage
in member bank excess reserves during the year, especially at New York.
The volume of excess reserves remained large nevertheless and credit
conditions remained easy. In fact, until August there was a further
decline in money rates, both short term and long term. Yields on long
term Government and municipal bonds reached new low levels in July,
and yields on high grade corporation bonds were not far above the
record lows reached in December, 1940. Short term interest rates like
wise were, in most cases, at approximately the lowest levels ever
recorded. In the latter part of the year, however, there was some rise
in short term rates, principally in the Government security market.
M

onetary and

C r e d it P o l ic ie s

In view of these tendencies— rapid expansion of credit and con
tinued decline in money rates— and in view of rapidly rising commodity
prices, it appeared in the spring and summer of 1941 that some measure
of restraint upon credit expansion would be desirable as one form of
attack upon the problem of inflation.
Attention was directed first to restraint upon extensions of instal
ment credit. The growth in the volume of such credit was tending to
accentuate the growth in consumer purchasing power at a time when
it was becoming increasingly apparent that consumer demands for some
classes of durable goods were conflicting with the National defense pro
gram. Production of such goods was rapidly increasing the consumption
of raw materials needed for the production of defense materials, the
supplies of which were inadequate to cover both defense production
and an increasing volume of consumers ’ goods.

The Federal Eeserve

System was authorized to undertake control of consumer instalment
credit by an Executive Order issued by the President of the United
States on August 9, under the Trading with the Enemy Act of October

TWENTY-SEVENTH ANNUAL REPORT

6, 1917, as amended.

After extended consideration and hearings at

which all interested parties were invited to be represented, the Board
of Governors of the Federal Reserve System adopted on August 21,
1941, Regulation “ W ” to regulate extensions of consumer credit, the
regulation to become effective September 1, 1941. The stated purposes
of the regulation were as follows:
(a) To facilitate the transfer of productive resources to defense
industries,
(b) To assist in curbing unwarranted price advances and profiteer
ing which tend to result when the supply of such goods is
curtailed without corresponding curtailment of demand,
(c) To assist in restraining general inflationary tendencies, to sup
port or supplement taxation imposed to restrain such tenden
cies, and to promote the accumulation of savings available for
financing the defense program,
(d) To aid in creating a backlog of demand for consumers’ dur
able goods, and
(e) To restrain the development of a consumer debt structure that
would repress effective demand for goods and services in the
post-defense period.
A supplement to the regulation listed a number of types of con
sumers’ durable goods, to which the regulation initially would apply.
In all cases the maximum maturity of instalment payments on such
goods was limited to eighteen months, and required down payments in
percentages of sales prices were specified, ranging for the various articles
from 10 per cent in the case of furniture and pianos, to 3 3 ^ per cent
in the case of automobiles, motorcycles, aircraft, and power driven boats.
In the case of instalment loans made by cash lenders also, the maximum
period for the repayment of the loans was fixed at eighteen months.
In most cases the regulation was received by those extending instal
ment credit in various fields as a sound measure, and an appropriate
one under the existing conditions. While the effect of the regulation
was obscured in the remaining months of 1941 by curtailment of pro
duction of durable consumers ’ goods and by other factors, such as
the levying of substantially higher income taxes, it appeared that the
regulation had appreciable effects in preventing further expansion in
the volume of instalment credit. It was estimated near the end of the
year that repayments of outstanding consumer credit were exceeding
extensions of new credit at a rate of something like $2,000,000,000 a
year, whereas in the earlier months of 1941 the expansion of instalment

FEDERAL RESERVE BANK OF NEW YORK

credit was adding to consumer purchasing power at the rate of about
$1,200,000,000 a year.
In addition to this measure, it was considered desirable to take
action to lessen the pressure of the still large volume of idle funds in
the banking system, which, both directly, and indirectly (through its
effect on interest rates), was tending to promote expansion of bank
credit. After extended discussions within the Federal Reserve System
and between representatives of the System and the United States
Treasury, the Board of Governors announced on September 24 that the
percentages which member banks were required to maintain against their
deposits would be increased, effective November 1, 1941, to the limits
permitted under the Federal Reserve Act, as amended by the Banking
Act of 1935. In addition to placing the effective date of the increase
more than five weeks ahead, the Board allowed individual banks still
more time in which to adjust themselves to the higher reserve require
ments by including in its announcement a statement that
“ The Board determined that penalties for deficient reserves
prior to December 1, 1941 shall be based upon reserve requirements
in effect October 31, 1941.”
The following table indicates the increase in percentage reserve re
quirements that became effective on November 1.
Percentage
required prior
to Nov. 1, 1941*

Percentage
required on and
after Nov. 1, 1941

On net demand deposits:
Central Reserve City banks............
Reserve City banks ........................
“ Country” banks ...........................

22^
17J*
12

26
20
14

On time deposits:
All member banks ..........................

*In effect since April 16, 1938.
At the time of this announcement total excess reserves of all member
banks were about $5,200,000,000, and it was estimated that the increase
in requirements would result in a decline of approximately $1,200,000,000
in excess reserves, leaving approximately $4,000,000,000. For New York
City member banks it was estimated that excess reserves would be re
duced from about $1,800,000,000 to approximately $1,300,000,000.
In view of the fact that this increase in member bank reserve
requirements exhausted the existing statutory power of the Board of
Governors over reserve requirements, consideration was given to the

TWENTY-SEVENTH ANNUAL REPORT

question of what further action might be necessary to bring credit
expansion under effective restraint,

and what further powers the

Federal Reserve System would require to enable it to take such action.
In this connection the Secretary of the Treasury and the Chairman of
the Board of Governors issued the following joint statement.
“ The Treasury and the Board of Governors will continue to
watch the economic situation and to cooperate with other agencies
of the Government in their efforts, through priorities, allocations,
price regulation, and otherwise, to fight inflation. Recommendations
on the question of what additional powers, if any, over bank
reserves the Board should have during the present emergency and
what form these powers should take will be made whenever the
Treasury and the Board, after further consultation, determine that
such action is necessary to help in combating inflationary develop
ments. ’ ’
During the remainder of the year, however, it became increasingly
doubtful whether further action to reduce excess reserves of member
banks would be necessary.

The actual volume of excess reserves held

by member banks on November 1 was substantially less than that in
dicated at the time of the Board’s announcement of the increase in per
centage reserve requirements. New York City banks especially sustained
a large reduction in excess reserves, and on November 5, the first state
ment date following the increase in required reserves, held $775,000,000
of excess reserves as compared with the earlier estimate of $1,300,000,000,
while all member banks held $3,410,000,000, or $590,000,000 less than
was estimated in September. For the country as a whole the greater
than estimated shrinkage in excess reserves was due chiefly to continued
large demands for currency and to a temporary increase in Treasury
balances in the Reserve Banks which resulted from the sale of a large
issue of Treasury bonds on October 20. In addition, the New York City
banks were affected also by substantial withdrawals of funds from
them by correspondent banks, and by a continued outflow of business
funds to other parts of the country.
R e s e r v e P o s it io n

New Y

ork

C it y B a n k s ; F

l u i d i t y of

unds

The continued rapid shrinkage in excess reserves of New York City
banks gave rise to concern over the future reserve position of those
banks, and, consequently, over the outlook in the New York money
market— a matter of considerable importance with respect to the most
effective use of the banking funds of the country and, therefore, to
Treasury financing. It appeared that if influences affecting the reserves

FEDERAL RESERVE BANK OF NEW YORK

of the New York banks continued to operate as they had during the
first ten months of the year, total excess reserves in New York might
be reduced to around $500,000,000 by Christmas, and during the early
part of 1942 might disappear entirely. Inasmuch as an important part
of the losses of reserves sustained by the New York banks was at
tributable to an outflow of funds to other parts of the country, however,
it appeared that member banks in other parts of the country would
continue to hold substantial excess reserves for some time ahead.
In earlier years situations of this kind were readily adjusted by
a return flow of funds from other parts of the country to New York.
When a tight situation developed in New York, short term open market
money rates rose and the higher rates attracted idle money of banks
and other potential lenders outside New York. The mechanism by which
this equalization of the supply of funds was effected was principally
the Stock Exchange call loan market, and, to a lesser extent, the bankers
acceptance market. The fact that both of these markets are now largely
dormant, however, raised question as to whether the New York money
market any longer possessed elements which could insure the former
fluidity of funds.

The only apparent channel through which such

fluidity could be effected was the market for short term Government
securities, and it was not considered at all certain to what extent this
market could take the place of the call loan and bankers acceptance
markets.
Evidence tending to indicate an affirmative answer to this question
was not long in appearing. The reduced volume of excess funds in
New York, together with larger weekly offerings of Treasury bills,
resulted in a rise in yields on such bills from negligible figures to
per cent, or slightly higher. It then appeared that there was a very
substantial potential market in all parts of the country for Treasury
bills when yields rose to, or above that level, and foreign central banks
with available deposits in this country also participated in the bidding
for the weekly issues.

The result was to shift Treasury short term

financing away from the New York City banks to a considerable ex
tent and thus to lessen the drain on their reserves.
Partly because of this development in the Treasury bill market
the downward trend in the excess reserves of New York City banks,
which had persisted from the middle of January to early November,
was broken, and the volume of excess reserves in New York, instead

TWENTY-SEVENTH ANNUAL REPORT

of continuing to decline, actually showed a net gain after November 5
and was close to $1,000,000,000 at the year end.

Another important

factor in this gain of funds by the New York market was an increase
in the rate of Government expenditures in the New York area. In the
last few months of the year it appeared that the rate of Government
disbursements in this District, especially payments on defense contracts,
was rising rapidly, so that during the weeks between large Treasury
bond issues, total Treasury disbursements in New York substantially
exceeded current payments from the market to the Treasury and the net
disbursement of Treasury funds added to the reserves of the New York
banks.

A third factor was purchases of Government securities for

Federal Reserve account and for Treasury trust accounts in the period
of market unsettlement that followed the Japanese attack upon Pearl
Harbor.

These purchases took place in the interval between the date

(December 4), on which two large issues of Government bonds were
subscribed and the date (December 15) on which the bonds were to be
issued. The primary purpose of these purchases was to ease the effect on
the security markets of the entrance of the United States into the war
and to aid in the “ digestion’ ’ of the new issues by the market, but they
had the incidental effect of contributing to bank reserves in New York.
M IL L IO N S
OF DO LLARS

1941

Principal Factors A ccounting for M ovements o f Funds Into and Out of Reserve Balances
o f Member Banks in Second Federal Reserve District (Cumulative since January 1, 1941;
( 4 * ) = gain to reserve balances, ( — ) = loss to reserve balances)

FEDERAL RESERVE BANK OF NEW YORK

Still another factor which contributed to the maintenance of a
substantial volume of excess reserves in New York City banks was an
increase in the balances maintained by Chicago banks with their New
York City correspondents. It was reported that in the closing weeks
of the year the Chicago banks increased their deposits with New York
City banks by at least $100,000,000. While the total amount of inter
bank balances in the New York City banks showed some further de
cline, the transfers of funds to New York by the Chicago banks had
the effect of offsetting a considerable amount of withdrawals by other
banks. At the year end it was reported that some of the deposits of
Chicago banks with New York banks were withdrawn, but other incoming
funds served to maintain the excess reserves of New York City banks at
that time.
F ik m e r T e n d e n c y

oney

R ates

Notwithstanding the relatively comfortable reserve position that
was maintained by the New York banks even during the closing months
of the year, the shrinkage in the total volume of excess reserves and the
prospect of a greatly increased volume of Treasury borrowing produced
a somewhat firmer tendency in short term money rates.

In addition

to the rise in Treasury bill yields previously mentioned, the yields on
Treasury notes also rose by about

%. of 1 per cent, and yields on

Treasury bonds of short and intermediate maturities rose somewhat.
Long term money rates, however, continued to decline through
October, average yields on long term Treasury bonds reaching new
low levels in that month. A $1,500,000,000 issue of 2
per cent Treasury
bonds allotted on October 20, rose promptly to a premium of 3 points
or better, despite the fact that the maturity and earliest redemption
dates were 14 and 11 years, respectively, beyond those of the last pre
ceding issue on June 2.

Following the reduction in excess reserves

at the beginning of November, however, the long term security market
also showed a somewhat easier tendency and yields increased slightly.
This tendency was temporarily accentuated by this country’s declara
tion of war on December 8.
A few days prior to that date the Treasury had announced an offer
ing of approximately $1,500,000,000 of new securities, including an addi
tional $1,000,000,000 of the

V/2. per cent bonds offered in October and

$500,000,000 of 2 per cent bonds maturing in 10 to 14 years. Immediately
after the closing of the subscription books for these issues, a premium

TWENTY-SEVENTH ANNUAL REPORT

of approximately 1^4 points was quoted on both issues, but this premium
disappeared rapidly in the days following the Japanese attack on
Pearl Harbor.
Early on the morning of Monday, December 8, before the open
ing of the security markets, two meetings were held at the Federal
Reserve Bank of New York in response to calls issued Sunday night
after receipt of news of the Japanese attack.

One was a meeting of

the principal Government bond dealers, and the other was a meeting
of the general consultative committee which was organized just prior
to the outbreak of war in Europe in 1939. Following the meeting of
the general committee, which includes representatives of commercial
and savings banks, investment banking firms, and insurance companies,
the following statement was issued.
“ It was the consensus of the General Committee that the
two years since it was established have so conditioned the money
and security markets to war developments that no repetition of
the difficulties of the earlier period need be expected at this time,
and that no serious disturbances in our markets are to be an
ticipated as a result of the Japanese attack upon the United States.
“ The government security market was the subject of special
consideration in view of its importance to the national interests
and to the credit and banking position. There was general accept
ance of the view that responsible factors in the market, as holders
of government securities and as subscribers to the new issues now
being allotted, would not contribute to any nervous selling which
might develop and would, in fact, proceed with their normal in
vestment programs. It was further understood that if any situations
of special difficulty should develop, the monetary and credit
authorities were able and ready to take care of them, so as to
prevent disorderly trading or unwarranted declines in prices. ’ 9
On the same day the Board of Governors of the Federal Reserve
System issued the following statement.
“ The financial and banking mechanism of the country is today
in a stronger position to meet any emergency than ever before.
“ The existing supply of funds and of bank reserves is fully
adequate to meet all present and prospective needs of the Govern
ment and of private activity. The Federal Reserve System has
powers to add to these resources to whatever extent may be re
quired in the future.
“ The System is prepared to use its powers to assure that an
ample supply of funds is available at all times for financing the
war effort and to exert its influence toward maintaining conditions
in the United States Government security market that are satis
factory from the standpoint of the Government’s requirements.

FEDERAL RESERVE BANK OF NEW YORK

“ Continuing the policy which was announced following the
outbreak of war in Europe, Federal Reserve Banks stand ready to
advance funds on United States Government securities at par to
all banks.”
The large New York City banks and insurance companies not only
did not contribute to selling of Government securities on that day, but
absorbed a substantial amount of sales by other investors in all parts of
the country. Selling, especially of the new securities to be issued on
December 15 (they were sold on a “ when issued” basis), became some
what more widespread on the two or three following days, and the Fed
eral Reserve System and the Treasury jointly intervened through pur
chases executed by the Federal Reserve Bank of New York. These pur
chases facilitated the ‘ ‘ digestion ’ ’ of the new issues, and the market soon
steadied. Smaller buying for Federal Reserve and Treasury trust accounts
again was necessary on a few days later in the month, when unfavorable
war news coincided with year-end “ tax-selling” but, on the whole, the
performance of the market for Government and other high grade securi
ties was most reassuring in the face of war developments. Selling pressure
in the market and “ official” support were far less than at the time of the
outbreak of the war in Europe in September, 1939. The net increase in
the Federal Open Market Account in the four weeks ended December 31
was only $70,000,000, as compared with an increase of $400,000,000 in the
three weeks ended September 20, 1939.
Y

e a r -e n d

T e n d e n c ie s

B a n k C r e d it

The somewhat firmer money conditions which prevailed during the
latter part of the year, were not the only signs of a change in the
credit situation. The substantial decline in the volume of excess
reserves of New York City banks affected their attitude toward a
further expansion of bank credit, and emphasized the need for a change
in the abnormal psychology which had developed during the preceding
decade of excessive excess reserves, a decade in which the ordinary
means of money market adjustment (call loans, bankers acceptances, etc.)
had almost disappeared.

Notwithstanding assurances that the Federal

Reserve System would use its powers to maintain an ample supply of
funds at all times for financing the war effort, there was an apparent
reluctance to expand credit without a large cushion of excess reserves.
Total loans and investments of the weekly reporting New York City
banks tended to become stabilized.

Commercial and industrial loans

continued to rise fairly rapidly until the middle of October, but showed

TWENTY-SEVENTH ANNUAL REPORT

only a small net increase thereafter. Total investments of these banks
reached their maximum at the end of August. Their holdings of
Treasury bonds showed a further rise of approximately $260,000,000
in the last four months of the year, the principal increases occurring at
the time of the large Treasury bond issues on October 20 and Decem
ber 15, but the aggregate amount of their investments in other Govern
ment direct and guaranteed obligations declined about $400,000,000 in
the same period.

Holdings of Government guaranteed securities were

reduced about $230,000,000, partly as a result of the conversion of such
securities into Treasury notes through a refunding operation near the end
of October and partly as a result of the retirement on November 1 of
$100,000,000 of United States Housing Authority notes, most of which
were held by the New York banks.

Treasury note holdings increased

by approximately $110,000,000, or less than the amount received in
exchange for Government guaranteed securities. One of the most signifi
cant and encouraging changes in the investments of New York City
banks, however, was a reduction in Treasury bill holdings which, after
reaching a maximum of $630,000,000 on July 16, declined to $309,000,000
at the end of the year. This reduction reflected a desirable change in the
B ILLIO N S
OF DOLLARS

1939

1940

1941

Loans and Investments and A djusted Demand and Time Deposits of W eekly Reporting Banks
(A djusted demand deposits exclude interbank and U . S. Government deposits
and cash items in process o f collection.)

FEDERAL RESERVE BANK OF NEW YORK

direction of much wider participation in Treasury bill financing by banks
in other parts of the country, and by foreign central banks, when rates
rose to remunerative levels. At the high point for the year, Treasury
bill holdings of New York City banks accounted for nearly 40 per cent
of the total volume outstanding, but by the end of the year their holdings
had declined to about 16 per cent of the total then outstanding.
As a result of the outflow of funds to other parts of the country
during the first ten months of the year, the persistent, heavy demand
for currency, and the cessation of expansion in total loans and invest
ments during the year’s later months, demand deposits of the New
York City banks (adjusted to exclude interbank deposits, Government
deposits, and certain other items) after reaching their peak at the end
of May, showed a net decline of more than $1,250,000,000 during the
remainder of the year.
In contrast to these tendencies in New York City banks, the total
loans and investments of all other weekly reporting member banks in
100 other principal cities throughout the country showed a continued
rise during the latter part of the year at approximately the same rate
as in the earlier months. Commercial and industrial loan volumes con
tinued to expand, and there were fairly substantial increases in holdings
of Treasury bills as well as Treasury bonds. For these banks the peak
in “ adjusted” demand deposits was reached on December 10, just before
the December 15 income tax and Treasury financing date.
A t the end of 1941, the outlook for further expansion of bank credit
appeared to depend chiefly on the volume of Treasury financing to be
done in the months ahead, and the extent to which that financing could
be done outside the banking system, although some further increase in
bank loans seemed not unlikely. The acceleration of production of
military and naval equipment and supplies which followed the entry
of this country into the war was certain to require a very much larger
volume of Treasury financing than in 1941, and it did not seem likely
that even very large increases in the amount of funds derived from
taxation and savings could avert the necessity of calling upon the banks
to purchase further substantial amounts of Government securities. The
outlook for further expansion of bank loans was less clear. On the one
hand, it appeared unlikely, because of the restrictions on the availability
of raw materials for nondefense industries and on the availability of
some types of goods for the retail trade, that there could be as much

TWENTY-SEVENTH ANNUAL REPORT

demand for the financing of inventory expansion as in 1941, and the
volume of consumer credit outstanding appeared to be diminishing. On
the other hand, defense industries were still expanding their operations,
so that it appeared quite possible that their needs for working capital
would increase further, and there was also an expectation that some
defense industries, whose current funds had been largely absorbed by
increased working capital requirements, might find it necessary to borrow
from the banks to obtain funds with which to pay their taxes.

Fiscal Policy
In its efforts to restrain bank credit expansion, and thus to limit
the potentially inflationary influence of a rapidly growing volume of
bank deposits and currency, Federal Reserve System policy during the
past year has supplemented Treasury fiscal policies. The Treasury has
consistently advocated financing the greatly increased Government ex
penditures of the defense program in ways that would limit the volume
of Government securities to be absorbed by the commercial banks, and
would also tend to reduce the gap between consumer incomes and avail
able supplies of consumers’ goods.
The principal step taken by the Treasury toward this end was the
issuance of three new series of Defense Savings bonds (as well as
Defense Savings stamps), which were designed to meet the requirements
of all types of savers, and also to fill, in part, the investment needs of
savings institutions and trust funds. Between May 1, when these se
curities first went on sale, and the end of December, a total of more
than $2,500,000,000 of these securities (cost price) was issued, thus
reducing substantially the amount of open market financing to be done
by the Treasury. Following the Japanese attack on Pearl Harbor on
December 7, there was a sudden spurt in public subscriptions to these
securities, especially the “ Series E ” bonds which are designed particu
larly for those with relatively small amounts of funds to invest, that is,
for the great majority of people. During the remainder of December,
the daily rate of sales of these bonds was several times the previous
average rate of sales. Total sales of all series of Savings bonds for the
month amounted to about $530,000,000, an annual rate of more than
$6,000,000,000. (This figure was doubled in January, 1942.) Sales of
Postal Savings stamps also increased to several times the previous rate,
totaling more than $25,000,000 in December.

FEDERAL RESERVE BANK OF NEW YORK

Salary deduction plans under which individual employees instruct
their employers to deduct specific amounts from their pay, each pay-day,
to accumulate funds for the purchase of Defense Savings bonds, were
adopted by a growing number of industrial, commercial, and financial
concerns and their employees as the year progressed. The further de
velopment of salary deduction plans promises to contribute increasingly
to the amount of funds obtained regularly by the Treasury from indi
vidual savings.

Such salary deductions also have the advantage of

absorbing, at the source, some part of current wage and salary incomes
which otherwise might be spent and which, in the absence of sufficient
production of consumers’ goods to meet all demands, would tend to
exert an inflationary influence upon prices of consumers’ goods.
Shortly after the announcement of the savings bond program, the
Treasury recommended to Congress an increase in Federal taxes suffi
cient to bring tax revenues up to an amount equal to two thirds of the
then estimated volume of Government expenditures during the fiscal year
1941-42. After extended consideration in Congress, the Revenue Act of
1941 was drafted and approved on September 20, 1941. This Revenue
Act, which included substantial increases in taxes on individual and
corporate incomes, new or higher excise taxes on a considerable list of
commodities and services, and higher estate and gift taxes, was estimated
to produce an increase in Government revenues of at least $3,500,000,000
in the first full year of its application.
Under this Act personal exemptions were lowered and income tax
rates were raised to such an extent that the taxes payable on 1941 income
by many individuals in the middle income groups would be three
or more times the taxes paid in 1941 on 1940 income. Thus this measure
also will have the effect of reducing materially the spending power of a
considerable number of individuals. However, it will not affect the
much larger number of wage earners and salaried employees whose
incomes are not in excess of personal exemptions, credits for dependents,
and the earned income credit, even though the income of many such
individuals may be much larger than in preceding years, and their
spending power increased accordingly.

For such individuals (unless

their status is changed by tax legislation during 1942), contributions
to the financing of the National defense program must take the form,
largely, of voluntary participation in the Defense Savings bond program
and such abstention from increased spending as this entails.

TWENTY-SEVENTH ANNUAL REPORT
A third measure, which was adopted by the Treasury and announced

in July, was the offering of two series of tax anticipation notes— one
designed primarily for the smaller taxpayers, the other for corporation
and other large taxpayers. These securities which will yield an income
only if presented in payment of income taxes, provided taxpayers with
a facility and an incentive for the accumulation of funds for the pay
ment of their taxes, in advance of the dates on which the payments are
due. Sales of these tax notes from August 1 to December 31 totaled
nearly $2,500,000,000, and thus provided the Treasury with a substantial
amount of funds well in advance of the dates on which the taxes on
1941 income would normally be collected.
Altogether these three measures— the sale of Defense Savings bonds,
the increase in Federal taxes, and the sale of tax anticipation notes— pro
vided the Treasury with more than $5,000,000,000 of funds between
May 1 and December 31, 1941, although only a small part of the taxes
levied under the Eevenue Act of 1941 was payable during the calendar
year 1941. The amounts to be raised by the Treasury through the sale
of securities in the open market were thus reduced by a corresponding
amount, and, to the extent that a larger volume of open market borrowing
would otherwise have been necessary, the expansion of bank credit and
B ILLIO N S
OF DOLLARS

-i14 r

EXPENDITURES
B A N K CREDIT

SAVING S

TAX NOTE
SA L E S

A L L O TH ER
TAXES
N A T IO N A L
DEFENSE
1ST

2N D

1ST

2N D

1ST

2N l>

-1ST

2ND

HALF

1940

1941

1940

1941

U. S. Government Expenditures and Sources of the Financing of Such Expenditures

FEDERAL RESERVE BANK OF NEW YORK

bank deposits was restricted.
The first part of the accompanying chart indicates the growth of
expenditures for National defense during 1940 and 1941, and the second
part of the chart shows the approximate amounts of Government ex
penditures financed through taxes, through savings, and through exten
sions of commercial bank credit. The figures for savings include not only
the amounts received by the Treasury from the sale of United States
Savings bonds, but also receipts from the sale of other Government
obligations to insurance companies, savings banks, trust funds, and
individuals, including social security and other trust funds administered
by the Treasury. Differences between aggregate expenditures and ag
gregate receipts, indicated in the chart, reflect changes in the working
balance of the Treasury, which was reduced in the first half of 1940,
but was increased considerably during 1941.

Coordination of Credit Policy with Fiscal Policy
and Other Government Policies
Ordinarily in a period of rapidly expanding business, especially
when there are accompanying indications of a tendency toward a rise
in prices, it would be considered appropriate to adopt a strong policy
of restraint on expansion of bank credit. Under war conditions, how
ever, those who are responsible for credit policy are faced with a
dilemma. Strong action to check credit expansion, by absorbing all sur
plus bank funds and forcing the banks to borrow from the Reserve
Banks to meet further demands on them for credit or currency, would
almost inevitably interfere with the war financing which must be done
by the Treasury. There is little prospect that the Treasury can avoid
reliance upon the commercial banks to provide substantial amounts of
the funds required to finance the war effort, and hence that credit
expansion can be avoided entirely. Furthermore, a substantial volume of
bank loans may be required to finance war contracts. Consequently, the
sort of credit policy that would normally be appropriate at a time when
inflation is threatened, can hardly be adopted in a war economy.
A possible alternative to quantitative measures of control (measures
designed to absorb bank reserves and thus to curtail the lending power
of the banks), is the use of qualitative or selective controls over credit. The
control of consumer instalment credit previously commented upon is an
illustration of this type of credit control. The qualitative or selective type
of control does not restrict severely the over-all lending power of the
banks, and therefore does not create money market conditions which inter

TWENTY-SEVENTH ANNUAL REPORT

fere with necessary financing. It does carry with it, however, other
difficulties and dangers which must make its extension a matter of
careful study.
In any case, under present circumstances, sole reliance on either
quantitative or qualitative credit controls for restraint of inflationary
tendencies is not feasible. The total volume of bank deposits and cur
rency in the United States is now so large that, even if it were not added
to by further extensions of credit, inflationary developments in prices
might be promoted by more active use of the existing money supply.
So long as there is a material disparity between consumer income and
the available supplies of consumers’ goods, there is likely to be infla
tionary pressure upon prices.
The gap between consumer income and supplies of consumers’ goods
is beyond the reach of credit policy, but is particularly within the range
of fiscal policy. That is to say, the gap may be narrowed by taxation or
by the stimulation of savings and their diversion to Government finan
cing. However, fiscal policy also has its limitations. A drastic and in
discriminate increase in taxes, for example, may so reduce the income
of groups whose incomes are relatively fixed as to exert a deflationary
influence upon industries and services that do not compete with the war
effort, while at the same time the net income of other groups, even after
provision for taxes, may continue to rise and may continue to exert an
inflationary influence on prices of consumers’ goods the supplies of
which must be limited during the war period. Furthermore, tax policies
and efforts to finance war expenditures as largely as possible out of
savings, must be considered together, as they will necessarily overlap
and conflict to the extent that they draw upon the same sources of funds.
Similarly, it does not seem feasible in this country to place sole
reliance for restraint on inflationary tendencies upon price control. Price
controls applied to limited groups of prices may retard, but can hardly
stop, the rise in prices generally in a war period. On the other hand, an
attempt to apply price ceilings to all types of goods and services would
involve a tremendous problem of enforcement, especially if the gap
between consumer purchasing power and supplies of consumers’ goods
continues to widen. Price controls may be supplemented by priorities,
allocations, or rationing of the available suppHes of goods, but even
under such circumstances there is great danger of the development of
“ black markets” , which apparently have not been entirely eradicated.

FEDERAL RESERVE BANK OF NEW YORK

in Europe even where the most drastic efforts to police the distribution
of goods have been made.
Furthermore, a policy of relying upon the imposition of arbitrary
price ceilings to prevent inflation also involves the difficulty of requir
ing special action to meet the problem of the high cost producer. It is
clearly desirable as one part of an anti-inflationary program, to obtain
maximum production, yet the fixing of price ceilings at levels which
do not permit operations by high cost producers tends to accentuate the
problem, to some extent, by keeping production below the maximum,
unless special measures for compensating high cost producers can be
devised and made effective.
Thus it appears that there is great need for coordination of all types
of possible action that may be effective in restraining inflationary tend
encies without interfering with the war effort or with the development
of maximum production.

Credit policies cannot be adopted without

reference to fiscal policies. Fiscal policies cannot be satisfactorily exe
cuted without reference to credit policies. And price control and ration
ing policies must depend heavily upon both credit and fiscal policies.
There is need, therefore, in the consideration of any particular line of
policy, for adequate consideration of the interrelationships and rami
fications of all other types of policy actions.

TWENTY-SEVENTH ANNUAL REPORT

New Security Issues
Despite the rapid expansion of business activity during 1941, the
market for new security issues continued to be only moderately active.
A probable explanation lies in the fact that much of the financing of the
construction of new plants for production of war materials was done
by the Government. Another possible factor may have been the early
development of indications that, despite the high level of consumer in
comes and consumer spending, especially on durable goods, a number of
consumers ’ goods industries would be forced to curtail, rather than
expand, their operations as the defense program progressed. Further
more, State and municipal governments made less use of the capital
market during the latter part of the year than in other recent years.
In the case of corporation security financing, there was evidence of
a downward trend in the volume of refunding operations despite
strength in the high grade bond market during most of the year. On
the other hand, the trend of borrowing to raise new money was upward
until December, when there was a sharp falling off in such issues,
accompanying the unsettlement of the security markets that resulted
from the Japanese attack on Pearl Harbor, and the entrance of this
country into the war.

For the year as a whole, the volume of “ new

capital’ 9 corporation issues was the largest since 1937, but still was
quite moderate compared with some earlier years.
As the following table indicates, the two largest groups of borrowers
in the corporate security market during the past year were public utili
ties and railroads, which together accounted for 63 per cent of the total
volume of new capital issues. These two industries also showed the
largest increase in borrowing compared with 1940, undoubtedly reflect
ing the heavy demands for power and transportation growing out of the
development of the National defense program. Railroad borrowing con
sisted largely of equipment trust issues to finance purchases of new
rolling stock needed to handle the rapidly growing volume of freight
and passenger traffic. Prominent among the remaining borrowers of new
capital during 1941 were other industries that also were subject to
greatly increased demands for their products, largely as a result of the
defense program.

These included especially the electrical equipment,

oil, and chemical industries, but also the paper, machinery, iron, steel,
coal, and copper, aircraft, and rubber industries. Together, such indus
tries accounted for about 22 per cent of the total volume of new capital
raised through security flotations during the year. All other industries,

FEDERAL RESERVE BANK OF NEW YORK

including most of those engaged primarily in producing or distributing
consumers9 goods, accounted for only 15 per cent of the new business
capital raised through security flotations during the year. A summary of
new capital issues during 1941 follows.
(In millions of dollars)
Public utilities .............................................................
Railroads ......................................................................
Electrical equipment .....................................................
Oil ................................................................................
Chemicals and drugs .....................................................
Paper and pulp ...........................................................
Machinery ....................................................................
Iron, steel, coal, and copper .........................................
Rubber .........................................................................
Aircraft .........................................................................

397.0
252.1
59.3
56.3
48.0
16.6
16.0
14.9
10.4
9.4

Total ......................................................................
Trade, finance, and miscellaneous industries.................

880.0
157.3

Total new corporate financing................................

1,037.3

Source: Commercial and Financial Chronicle.
Thus it would appear that most of the new capital obtained through
security issues during the past year has been for the purpose of expand
ing plants and other essential facilities in response to the greater de
mands arising out of the National defense program, or for working
capital required by essential industries to handle their greater volume
of business. In some instances, the proceeds of new security issues were
used to retire bank loans which had been used temporarily to finance
capital expenditures.
State and municipal financing in the security markets continued in
about the same volume during the first half of 1941 as in the correspond
ing period of 1940, but fell off considerably in the latter half of the
year. The reduction was especially pronounced in the case of security
issues to raise new money, which are reported to have been the
smallest, in proportion to the total volume of State and municipal
financing in any year for which records are available (since 1919).
A

Department of

Commerce report indicated that the

aggregate

amount of State and local government indebtedness was reduced
in the year ended June 30, 1941, reversing the trend of previous
years.

Presumably this reduction was accomplished by retirements

of outstanding debt in excess of new borrowings.

In view of the

TWENTY-SEVENTH ANNUAL REPORT

shrinkage in flotations of “ new money” security issues in the latter part
of the year, it seems likely that the net reduction in State and local
debt was accelerated. The decline in the total debt of State and local
governments was attributed to heavier tax collections, accompanying the
rise in the National income, and to reduced expenditures on relief, and
may also be attributable in some part to a tendency toward greater
economy in local governmental affairs, in view of the great expansion
in Federal expenditures and taxation.
On the whole, it does not seem that the amount of borrowing through
the security markets for purposes that may be regarded as nonessential
in a war period has been large enough to interfere with the marketing
of Government securities, or to divert important amounts of funds from
more essential uses. In fact corporation financing, where it is for essen
tial expenditures on plant and equipment, may in many cases be re
garded as an alternative to Government financing.

It would appear,

therefore, that there is not the same need, at this time, for control over
new capital issues such as there was during the first World War.
More important than the financial aspects of corporation borrowing
is the question of whether the expenditures contemplated when new
securities are floated are such as to involve a diversion of scarce mate
rials from more important uses. This aspect of the problem— that of
scrutinizing the purposes of new security issues and determining whether
or not capital investments in plants and equipment should be made— is
closely related to questions of supplies and priorities which are involved
in the whole war effort.

FEDERAL RESERVE BANK OF NEW YORK

Capital and Gold Movements and the Foreign Exchanges
Developments arising largely from the war resulted in profound
changes in the balance of international payments of the United States
during 1941. With international capital and gold movements, and also
foreign trade, now under Government control in most parts of the world,
the interplay of factors arising from private enterprise has been re
placed by the requirements of National policy as the motivating force
in international financial and commercial intercourse. This change,
together with certain other war developments, had its manifestation in
an abrupt reversal of the inflow of capital from abroad, which had been
in evidence for the past seven years—particularly since the Munich
crisis in September, 1938. It will be recalled that at that time the ten
sion in Europe gave rise to a general exodus of funds from those Euro
pean money centers which had been havens for refugee capital.
The reversal of the movement of foreign capital was followed, first
by a rapid diminution in, and finally by a moderate reversal of, the ac
cumulation of gold in the United States. In the thirteen months leading
up to the outbreak of war, the net gain of gold from abroad amounted to
about $3,500,000,000, and the recorded inflow of capital aggregated
nearly $2,000,000,000. Even after the start of hostilities this movement
B ILLIO N S
OF D O LL A R S

U . S. Monetary Gold Stock

TWENTY-SEVENTH ANNUAL REPORT

continued, not only as a result of the flight of private capital from what
were then neutral European countries, but also as a result of the desire
of the Allies to accumulate dollar reserves for the purchase of war
materiel in this country. However, as one after another of the neutral
countries was overrun by the Germans, their gold and other means of
foreign payment became immobilized. Furthermore, the American
“ freezing’ ’ of certain foreign funds already in this country discouraged
further transfers from abroad. As a result, the movement of gold and
capital from those countries, from which the bulk of the previous inflow
had come, was brought to a halt.
Meanwhile, however, the British Empire was obliged to undertake
a large scale liquidation of its gold reserves in order to finance the
heavy buying program abroad, which was inaugurated after the fall of
France. Therefore, despite the suspension of the gold shipments from
the erstwhile neutrals, the gold movement to this country continued,
even surpassing the previous rate. Since the proceeds of these gold
sales were largely used for the purchase of war materials, however, there
was no corresponding accumulation of foreign capital here. Between
the end of May, 1940 and the end of January, 1941, the net gain of gold
from abroad was at a monthly rate of $350,000,000, as compared with
$275,000,000 a month during the relatively inactive phase of the war,
when the smaller European countries were liquidating their gold re
serves. By January, 1941, however, the British gold holdings, which
had amounted to about $2,000,000,000 at the outbreak of the war in
1939, had been reduced to less than $300,000,000. Consequently, with
the remaining European gold reserves immobilized and the British hold
ings seriously depleted, the movement of gold to this country after
January became limited largely to the new production of the British
Empire and Latin America. The only principal exception to this was
the series of gold shipments from Russia, which began following the
German attack on Russia in June. These shipments, however, were
relatively small, receipts in this country up to the end of November
amounting to about $20,000,000.
Concurrent with the curtailment of imports of gold from abroad
during 1941, there was some accumulation of dollar balances to the
credit of certain foreign countries and a growing tendency on the part of
some of these countries, as well as of countries which already had dollar
balances here, to convert these idle dollars into gold. As a result, during
the last two months of 1941, our monetary gold stock was actually

FEDERAL RESERVE BANK OF NEW YORK

reduced slightly for the first time since January, 1938.
The reversal in the international movement of capital during the
year, represented largely a direct conversion of dollar balances into goods
and gold, and not a conversion of such balances into foreign currencies
which would accompany an actual transfer of funds abroad. The sus
pension of the gold and capital inflow from the continental European
countries in 1940 resulted only in a slowing down of the accumulation
of foreign holdings of dollar assets. It was not until around the end of
1940 when the British gold reserves were becoming depleted and the
British authorities began to rely more heavily on a liquidation of their
holdings of American investments to cover their huge dollar require
ments, that the actual reversal in the capital flow and an actual reduc
tion in the aggregate amount of foreign capital in this country began.
During the first ten months of 1941, reported net sales of British-owned
American securities amounted to $223,700,000. This selling, which
raised to $373,000,000 the liquidation since February, 1940, when the
first bloc of private British holdings of American securities was req
uisitioned by the British Government, was, of course, heaviest prior
to the time Lend-Lease shipments began. The peak was reached in
March, when $68,900,000 of American securities were sold by the British.
As a result of the liquidation, British holdings of marketable American
securities, which had an estimated value of $950,000,000 at the outbreak
of the war, amounted to only an estimated $372,000,000 on September 1,
1941, according to data released in the hearings on the second appropria
tion bill under the Lend-Lease Act. Of this amount only about
$75,000,000 was considered available for liquidation. The need for
dollar exchange also resulted in the sale during 1941 of British interests
in the American Viscose Corporation and of a substantial part of their
interest in the Brown and Williamson Tobacco Company, which to
gether provided about $80,000,000. By the end of last August the gold
and dollar resources of the United Kingdom, excluding securities which
had been lodged up to that time against an advance by the Reconstruc
tion Finance Corporation, amounted to $1,527,000,000 as compared with
a total of $4,483,000,000 at the start of the war. Furthermore, only
$372,000,000 of the amount still held at the end of last August was con
sidered as “ available.” The remainder consisted of privately held dol
lar balances believed to be at a minimum necessary for the conduct of
business, reserves of British insurance companies against their liability
to American policy holders, and securities and direct investments still

TWENTY-SEVENTH ANNUAL REPORT

to be pledged, either as to principal or income, against further advances
by the Reconstruction Finance Corporation.
Although the shrinkage in the amount of foreign capital in this
country resulting from the liquidation of British dollar assets dwindled
to small proportions just after Lend-Lease operations got under way,
the movement continued and actually increased during the remainder
of the year as a result of the previously mentioned conversion of dollar
holdings of other countries into gold. It should be noted, however, that
in this case also the resulting reduction in foreign dollar funds repre
sented an ‘ 4outflow ’ 9of funds only in the sense that foreigners held fewer
dollars as a result of these conversions.
The past year also witnessed many shifts in the ownership of foreign
capital in this country, primarily because the gradual extension of the
American 4‘ freezing’ ’ regulations led to fears of their further exten
sion. This was exemplified in the repatriation of private Swiss capital,
which began after the fall of France and continued during the first half
of 1941, or prior to the Executive Order of June 14, 1941, blocking all
continental European accounts. For the period from January 1 to
October 29, 1941, the last date for which published data are available,
the reported “ outflow” of all types of Swiss-owned or Swiss-held capital,
including the net liquidation of $17,100,000 of Swiss-held American
securities, amounted to $95,400,000. In this connection, however, it
should be noted that, in order to stabilize the Swiss franc vis-a-vis the
dollar, the Swiss National Bank absorbed a considerable part of the
dollars offered by private Swiss holders anxious to bring home their
funds. Since this led merely to a shift of dollars from private
Swiss to official Swiss accounts, the reported movement of all Swiss funds
understates the actual amount of dollars which left private Swiss hands.
In addition to the repatriation of private foreign funds, there were
also transfers of foreign capital to the ownership of third countries or
their nationals during the early months of 1941, in anticipation of the
4‘ freezing” in this country of additional foreign property. However, to
the extent that these dollar assets were taken up by other foreigners,
whose accounts were considered less likely to be blocked, there was no net
movement of capital between the United States and abroad. Latin
America was probably the chief recipient of the dollars offered by those
seeking to avoid a blocking of their accounts.

FEDERAL RESERVE BANK OF NEW YORK

The reported figures on the movement of capital between the United
States and all foreign countries during the first ten months of 1941
indicated a net 4‘ outflow’ ’ of $224,400,000, the components of which are
summarized in the accompanying table below. Since this movement
continued during the remainder of the year, the reported “ outflow”
for 1941 as a whole was considerably larger. Furthermore, there were
other factors—not entirely reflected in reported data—which contributed
toward an outward movement of capital comparable only with the huge
lending operations of the Government during the last war. Chief among
these factors has been the operation of our Lend-Lease program which
has resulted in a special type of capital export. Obligations assumed
under this program largely have taken the place of previous, heavy gold
imports as an offset to our merchandise export surplus in the balance of
payments. In addition, the extensive financial assistance given foreign
countries by the American Stabilization Fund, the Eeconstruction
Finance Corporation, and the Export-Import Bank, has given rise to a
large actual or potential export of capital. In 1941, the Export-Import
Bank made $183,000,000 of new commitments, mainly to Latin America.
Movement of Capital between the United States and
Certain Foreign Countries or Areas
January 2 to October 29, 1941 (a)
(In millions of dollars; capital inflow + or outflow— )
Banking
funds

Security
transactions (b)

Total

United Kingdom ........................
France .........................................
Germany .....................................
Italy .............................................
Netherlands ...............................
Switzerland .................................
Other Europe .............................

+85.8
—26.7
+ 3.9
— 2.1
— 9.9
— 74.3
— 1.6

—225.0
+ 8.3
— 1.2
— 3.0
+ 5.7
— 21.1
+ 5.9

— 139.2
— 18.4
+ 2.7
— 5.1
— 4.2
— 95.4
+ 4.3

Total Europe ......................

— 24.9

—230.4

— 255.3

Canada .........................................
Latin America ............................
Asia .............................................
All other .....................................

— 7.1
— 14.9
+15.6
+33.2

— 14.4
+ 8.7
+ 9.1
+ 0.7

— 21.5
— 6.2
+ 24.7
+ 33.9

Grand total ........................

+ 1.9

—226.3

—224.4

(a) Source: United States Treasury Department; published figures available
through October 29.
(b) Including changes in foreigners’ brokerage balances.

TWENTY-SEVENTH ANNUAL REPORT

The principal recipients of this financial aid were Mexico (which was
granted $30,000,000 in connection with the far-reaching AmericanMexican economic and financial agreements reached last November),
Cuba, and Colombia.
The Reconstruction Finance Corporation also made a number of
sizable loans and advances to anti-Axis nations, including a $425,000,000
credit extended in July, 1941 to the British Government, secured by
British holdings of American securities and direct investments in this
country. Operations of our Stabilization Fund included the signing of
an agreement with China, announced on April 25, providing for the
purchase by the Stabilization Fund of Chinese yuan against dollars
to the amount of $50,000,000. These funds, together with a $20,000,000
contribution from the Chinese Government banks and £5,000,000 ad
vanced by the British authorities, will be used to stabilize the yuan
vis-a-vis both the dollar and the pound sterling. Under the November
agreements $40,000,000 was also made available by the Stabilization Fund
to Mexico for the stabilization of the Mexican peso.
By the end of the year, only a part of the credits extended had
been drawn upon. Even in cases where the funds had been actually
advanced, they had not been fully utilized. When these funds are spent,
a capital “ outflow” will result. It should be emphasized, however,
that, like the conversion of dollars mentioned above, this will largely
represent an “ outflow” only in the sense that the funds will leave
foreign hands. Since the funds which are being made available will be
Reported Movement of Capital between the United States and Foreign Countries (a)
(In millions of dollars; capital inflow + or outflow — )
Security transactions

Banking funds

Total
capital
movement
1935...........................
1936...........................
1937..........................
1938..........................
1939..........................
1940..........................
1941 through Oct. 29...

+
+
+
+
+
+
-

1,413
1,196
802
434
1,177
706
224

Total
+
+
+
+
+
+
+

965
397
256
318
1,146
853
2

Central
bank
funds in
N.Y.
(b)

Other

+
+
+
+
+
+

+
+
+
+
-f
+
-

10
71
163
5
304
658
133

955
326
93
323
842
195
131

Total
+
+
+
+
+
-

448
799
546
116
31
147
226

Domes
Broker
tic
Foreign age bal
securities securities ances
+
+
+
-f-

317
601
245
58
86
245
267

+ 125
+ 191
+ 267
+ 58
+ 84
+ 78
+ 41

+
+
+
+
+

6
7
34
—
33
20
—

(a) Source: United States Treasury Department; published figures available through October 29.
(b) Including funds in accounts transferred from central bank to government names.

FEDERAL RESERVE BANK OF NEW YORK

used largely for purchases in this country, the “ outflow” will, in effect,
be primarily in the form of exports of goods rather than the exchange
of dollars into foreign currencies. As a result there is not likely to be
any pressure on the external value of the dollar or any deflationary
effect on our domestic economy, such as a large repatriation of foreign
capital and a large outflow of gold might have.
F

o r e ig n

xchanges

Wartime economic and financial restrictions had further paralyzing
effects on the foreign exchange market daring 1941. The principal factor
in this development, at least as far as the New York market was con
cerned, was the gradual extension of “ freezing” regulations issued by the
United States Treasury, which eliminated one currency after another
from the list of actively traded foreign exchanges until, by June 14, even
trading in the currencies of the neutral European countries—Switzer
land, Sweden, Portugal, and Spain—became subject to license. There
after, such unrestricted trading as still existed in this market was con
fined largely to a few leading Latin American currencies. Even in the
case of these, foreign exchange controls in most of Latin America
canalized a large part of the transactions through the official markets.
The disappearance from the New York market of active dealings
in other foreign currencies naturally resulted in added interest here in
Latin American exchanges, but this was by no means the only factor
in this development. Perhaps of more importance was the strengthening
of ties between the Latin American currencies and the dollar, resulting
from the lending operations of American Government agencies and
from the shift in Latin American trade from continental Europe to the
United States. Shipping difficulties and the blockades had effectively cut
off these countries from important European markets, which before the
war had absorbed a large part of their exports. By the end of 1941,
however, American buying of strategic raw materials from Latin
America, together with our lending operations, had gone far to com
pensate for the loss of the European markets. The exchange position
of certain Latin American countries was also strengthened to some ex
tent during the past year by an inflow of foreign, funds, withdrawn
from the United States in anticipation of extensions of “ freezing” regu
lations here to the funds of additional countries. All of these factors
combined to bring about a recovery in the Latin American exchanges
from the initial disruptions caused by the outbreak of war in Europe.

TWENTY-SEVENTH ANNUAL REPORT

The Cuban peso—one of the few Latin American currencies not
subject to rigid foreign exchange control at home and therefore usually
more sensitive to changing conditions—showed a substantial apprecia
tion vis-a-vis the United States dollar during 1941. This improvement
started early in the year, and by the latter part of March the discount
on the Cuban exchange, which amounted to 8^ per cent on January
2, had narrowed to 3}^ per cent, accompanying expectations of an
Export-Import Bank credit and an improving trade position, due largely
to the wartime demand for sugar. In late December the peso actually
went to a slight premium in terms of the dollar for the first time in a
number of years.
Argentina’s exchange position also appears to have been materially
strengthened during the year. Evidence of this improvement was found
in steps which were taken in the latter part of the year by the Argentine
authorities to liberalize the granting of exchange for imports. In the
free market, the dollar rate for the Argentine peso was firm during most
of the year. The Chilean peso and the Brazilian milreis also held steady
to firm in terms of the dollar during the year. The most pronounced
appreciation in Latin American currencies during the year occurred in
the free rate for the Venezuelan bolivar and the noncontrolled rate for
the Uruguayan peso. The former showed a net gain of 15 per cent for
the year as a whole, and the latter rose 34 per cent during the year.
The position of the Mexican peso was further fortified substantially
by the November American-Mexican accords, including the above men
tioned stabilization agreement. Following this agreement it was re
portedly announced by the Mexican Finance Minister that Mexican
exchange would be stabilized at 4.85 pesos to the dollar, or equivalent
to $0.2062, virtually the same as the level which had been maintained
throughout the year.
The unofficial rate for the Canadian dollar fluctuated within a
rather wide range in 1941. The low for the year was reached in
January, when the rate declined, in a thin market, from $0.8600 to
$0.8275. The winter tourist demand, however, soon brought about some
improvement, which was greatly accelerated in April by market rumors
—subsequently denied—that the Canadian dollar would be brought to
par with the United States dollar. By mid-April the unofficial rate for
the Canadian dollar had risen to $0.8888. First, the economic agreement
between the United States and Canada, announced on April 20, and

FEDERAL RESERVE BANK OF NEW YORK

then the development of the summer tourist demand, helped to hold the
unofficial quotation fairly close to the official rate until the latter part
of 1941. In December the unseasonal slack in the tourist trade due
to the entrance of the United States into the war, together with yearend liquidation of American-held Canadian investments and balances,
appears to have been largely responsible for some depreciation which
brought the unofficial rate back to $0.8600 at the end of December, the
same rate at which this exchange closed 1940.
Probably the most significant foreign exchange development in
the Far East was the series of steps taken to stabilize the currency of
the Chinese National Government at Chungking. This began with the
conclusion in April, 1941 of the agreement among the American, British,
and Chinese Governments, under which, as mentioned above, the
American Stabilization Fund undertook to make $50,000,000 avail
able for the stabilization of the yuan; the four Chinese Government
banks, $20,000,000; and the British Treasury, £5,000,000. The Stabili
zation Board, set up to manage the new fund, on August 18 fixed a rate
of 511/32 cents and 3 3/16 pence for exchange cover for legitimate
imports from the United States and from the sterling area, but a “ black
market’ ’ developed in Shanghai and the Chinese yuan continued to
depreciate in that market, reportedly declining to below 3 cents.
However, as a result of the cooperation of American and other antiAxis banks in China and of a tightening of the control over Chinese
accounts in this country, which was designed to supplement and
strengthen Chungking’s control over the yuan, Shanghai “ black
market” dealings in the yuan had been greatly reduced by the time
of the entrance of the United States into the war.

TWENTY-SEVENTH ANNUAL REPORT

Foreign Relations
After reaching a new high level of $1,280,737,000 on April 22,
1941, the total of foreign deposits with this bank fell to $771,625,000
at the end of the year, compared with $1,130,945,000 at the close of
1940 and $397,380,000 at the close of 1939. Gold held under earmark
for foreign accounts rose fairly steadily and attained a new high record
at the end of the year, amounting to $2,215,351,000 on December 31,
1941, compared with $1,807,673,000 a year previous and $1,163,004,000
at the close of 1939.
There was no change during 1941 in the balances which this bank
holds abroad for its own and other Federal Reserve Banks’ accounts;
the total of such balances remained at approximately $46,700. No com
mercial bills denominated in foreign currencies have been held abroad
since October, 1939.
The short term loans, secured by gold earmarked at this bank,
which had been made to a Latin American central bank in 1940 and
which were outstanding at the end of that year in an amount of
$947,000, were fully repaid early in 1941. Only one small loan—of
$200,000 to the same central bank—was made in 1941, and this loan
was repaid before the close of the year.
BILLIONS
O F DOLLARS

FEDERAL RESERVE BANK OF NEW YORK

Operations of the Bank During 1941
Growth

F is c a l A

gency

O p e r a t io n s

The war situation and the development of the National defense
program caused a great expansion in the work performed by this bank
as fiscal agent of the United States during the past year. The personnel
of the Government Bond Department was expanded between three
and four times during the year, in order to handle the great increase
in the volume of Treasury financing and the introduction of new types
of Government securities. In the case of the Foreign Property Control
Department (the organization of which was reported in the Annual
Report of this bank for 1940) the number of employees increased at the
end of 1941 to nearly three times the number at the end of 1940. In
addition there has been a great expansion in the work of the Recon
struction Finance Corporation Division and a considerable growth in
the volume of work in other departments, which was related in part
to the extended activities of the departments just mentioned.
As the table on page 43 shows, the total number of United States
Government securities issued, redeemed, and exchanged at this bank was
more than three times as great in 1941 as in 1940. The major part,
but not all, of the increase was accounted for by issues of Defense
Savings bonds. Nearly 1,686,000 of Series E Savings Bonds were issued
through commercial and savings banks, savings and loan associations,
and other organizations that qualified as issuing agents. In addition
660,000 of Series E, F, and G Defense Savings Bonds, and Series D
Savings Bonds (which they supplanted) were issued directly by the
Government Bond Department of this bank during the year, making
a total of 2,346,000 bonds. The total purchase price of these bonds
was approximately $832,000,000, as compared with $73,500,000 of savings
bonds issued by this bank in 1940.
In order to keep abreast of the demand for Defense Savings bonds
after the sudden spurt in sales that followed the Japanese attack on
Pearl Harbor and the entrance of the United States into the war, it
became necessary to add a partial night shift to handle the work of the
Government Bond Department at the end of the year. This spurt in
the demand for Savings bonds was of such magnitude as to exhaust
in rapid succession the supply of bonds in the hands of issuing agents,
the Federal Reserve Banks, and finally the Treasury itself. In order
to overtake the demand, the Government Printing Office increased its

TWENTY-SEVENTH ANNUAL REPORT

operations in the printing of new bonds to a three-shift basis, and in
this bank the staff of the Government Bond Department was consider
ably enlarged to enable it to distribute bonds to issuing agents as fast
as they were received from the Treasury. Despite these efforts, there
were temporary shortages in the supply of Defense Savings bonds of
the smaller denominations, and it became necessary for issuing agents to
ask subscribers to wait a few days for delivery of their bonds. Shortly
after the close of the year, however, the shortage of bonds was eliminated,
despite a continued increase in the demand.
The work of the Government Bond Department was still increasing
at the end of the year, primarily because of a rapid increase in the
number of financial and business concerns that had arranged to make
regular deductions from the salaries and wages of their employees who
wished to accumulate funds for the purchase of Defense Savings bonds.
The successive extension of the “ freezing” regulations to additional
countries and their nationals was responsible for the great enlargement
in the work of the Foreign Property Control Department in 1941.
The number of applications for licenses to permit transactions involving
blocked accounts reached a maximum of about 2,000 a day in 1941, as
compared with a maximum of about 800 a day in 1940. The total num
ber of applications handled by the department during the past year
was close to 250,000. In addition, the department received and forwarded
to the Treasury, and filed copies of, approximately 360,000 reports (on
Form TFR-300) from banks, business organizations, and individuals,
listing the property of foreigners in this country.
Expansion in the work of the Reconstruction Finance Corporation
Division during the past year was accounted for largely by work per
formed for subsidiaries of that Corporation, such as the Metals Reserve
Corporation, the Rubber Reserve Corporation, the Defense Supplies Cor
poration, the Defense Plant Corporation, the Defense Homes Corporation,
and the Surplus Commodities Corporation. The work consisted of making
and receiving payments for these corporations, checking documents, and
maintaining records of transactions. In addition, the division made pay
ments and received collateral in connection with the Reconstruction
Finance Corporation loan to Great Britain against the security of
British investments in the United States. Most of these activities were
new in 1941, and were in addition to work previously performed in
connection with the lending operations of the Corporation.

FEDERAL RESERVE BANK OF NEW YORK

O t h e r O p e r a t io n s

There was also a moderate increase in the volume of transactions
in other departments of the bank, the work of which can be measured
readily by recording the number and amount of transactions. The
speeding up of industry because of the demands of the defense pro
gram had a decided effect upon the number and dollar amount of
checks, currency, and coin handled, and of wire transfers of funds.
Lending operations of the bank in 1941 for the first time in several
years showed an increase over the previous year, although the volume
of loans was still comparatively small. A new activity was the work
1941

1940

Number of Pieces Handledf
Bills discounted:
Notes discounted
Industrial advances:

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

Commitments to make industrial advances ..........
Currency received and counted .....................................
Coin received and cou n ted.................................................
Collection items handled:
United States Government coupons paid* ..........
Issues, redemptions, and exchanges by fiscal agency
department:
United States Government direct obligations........
All other ......................................................................
Wire transfers of funds .................................................

613
767

506
569

2
4
707,022,000
1,165,826,000
229,994,000

4
1
674,867,000
952,255,000
215,326,000

4,733,000
1,950,000

4,709,000
1,909,000

3,746,000
247,000
182,000

1,144,000
236,000
180,000

Amounts Handled
$82,249,000
Bills discounted .................................................................
Industrial advances:
25,000
Notes discounted .........................................................
1,205,000
Commitments to make industrial advances ..........
3,444,867,000
Currency received and counted .....................................
124,163,000
Coin received and counted .............................................
Checks handled ................................................................. 97,404,120,000
Collection items handled:
601,755,000
United States Government coupons paid* ..............
All other ......................................................................
1,760,296,000
Issues, redemptions, and exchanges by fiscal agency
department:
United States Government direct obligations ___ 19,567,068,000
All other ....................................................................
2,442,628,000
Wire transfers of funds ................................................. 37,340,974,000

$35,431,000
35,000
10,000
3,114,447,000
100,830,000
79,649,341,000
571,898,000
1,595,295,000

12,324,357,000
1,457,309,000
29,770,676,000

* Includes coupons from obligations guaranteed by the United States,
t Two or more checks, coupons, etc., handled as a single item are counted as
one “ piece.”

TWENTY-SEVENTH ANNUAL REPORT

in connection with the adoption of Regulation W by the Board of
Governors of the Federal Reserve System, governing extensions of con
sumer instalment credit. In addition to the actual work of administer
ing the regulation, a serious effort was made, through meetings held
in various parts of the District, and through correspondence and in
terviews, to assure an adequate understanding of the regulation by banks,
retailers, and other lenders of instalment credit.
F in a n c ia l S t a t e m e n t

Total earning assets (“ total bills and securities” ) of the New York
Reserve Bank showed a net reduction of $53,900,000 during 1941. This
decrease reflected mainly a further relinquishment of Government direct
and guaranteed obligations in favor of other Federal Reserve Banks
through the regular quarterly readjustments of participations in System
(In thousands of dollars)
A

ssets

Dec. 31,1941

Dec. 31,1940

Gold certificates on hand and due from U. S.
$ 8,164,207
1,047
46,842

Redemption Fund— Federal Reserve notes ........
Total reserves .........................................

$ 8,212,096

$ 9,809,823

Bills discounted:
Secured by U. S. Government obligations,
direct and guaranteed ............................
Other bills discounted ...................................

615
75

9,757,527
972
51,324

245
491

Total bills discounted.............................

690

736

Industrial advances .................................................

1.098

1,756

U. S. Government securities, direct and
guaranteed:
Bonds .................................................................
Notes ...............................................................
Bills ...................................................................

385,295
204,177
2,724

379,573
265,782

Total U. S. Government securities, direct
and guaranteed ...............................

592,196

645,355

Total bills and securities ......................

593,984

647,847

Due from foreign b a n k s.........................................
Federal Reserve notes of other b a n k s..................
Uncollected items ...................................................
Bank premises .................................................
Other assets .............................................................

18
4,493
316,326
10,507
11,148

18
4,773
234,525
9,701
13,228

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

$ 9,148,572

$10,719,915

FEDERAL RESERVE BANK OF NEW YORK

Open Market Account security holdings. Total security holdings of the
Federal Reserve System as a whole expanded slightly after the United
States became involved in the war in December, and at the end of 1941
were higher than at the end of 1940. The remaining part of the de
crease in this bank’s earning assets during 1941 was caused by a further
decline in industrial advances and in loans to member banks; while
lending activities increased slightly over 1940, the amount of loans
outstanding at the close of the year was somewhat smaller than a
year previous.
The further expansion in Federal Reserve notes in circulation—
the major component of total currency outside the Treasury and Reserve
Banks—apparently was caused mainly by increased business activity,
due to the rearmament program, and its related factors of enlarged pay
rolls, higher salaries and wages for individual workers, and higher com
modity prices. Accompanying this business activity and larger deposits,
banks in general were obliged to keep on hand more “ till money” for
customers’ use, and, as usual in wartime, hoarding by foreigners and
others was also a factor of some importance.
(In thousands of dollars)
L ia b il it ie s

Dec. 31,1941

Dec. 31,1940

Federal Reserve notes in actual circulation . . . .

$ 2,110,650

$ 1,576,404

Deposits:
Member bank—reserve account ..................
U. S. Treasurer— General Account ..............
Foreign ................................................. ..
Other deposits .................................................

$ 5,639,629
220,654
306,991
475,283

$ 7,556,979
131,605
633,979
492,197

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

$ 6,642,557

$ 8,814,760

Deferred availability items .................................
Other liabilities .....................................................

266,815
143

201,083
175

$ 9,020,165

$10,592,422

51,806
56,651
7,070
12,880

51,096
56,447
7,070
12,880

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

128,407

127,493

Total liabilities and capital accounts . . .

$ 9,148,572

Total liabilities

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

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

Ratio of total reserves to deposit and Federal
Reserve note liabilities combined ................
Commitments to make industrial advances........

93.8%
460

$10,719,915

94.4%
700

TWENTY-SEVENTH ANNUAL REPORT

The reserve account of member banks was drawn down nearly
$2,000,000,000 during 1941, chiefly because of the transfer of funds to
other Federal Reserve Districts through commercial and financial trans
actions (discussed in a preceding section of this report), and the heavy
demand for currency. This outflow of funds and a net reduction of
$327,000,000 in foreign deposits were the principal causes of a decrease
of $2,172,000,000 in total deposits.
Accompanying the reduction in member bank reserve balances, this
bank’s gold certificate holdings dropped $1,593,000,000, mainly through
settlements for funds transferred to other districts.
I n c o m e a n d D is b u r s e m e n t s

In 1941, current net earnings of $3,440,000 were considerably less
than in 1940, owing to reduced income and to increased expenses—total
earnings were $1,570,000 less than in 1940, and net expenses were
Profit and Loss Account
For the Calendar Years 1941 and 1940
(In thousands of dollars)
1941
Earnings ...................................................................
Net expenses ...........................................................
Current net earnings .............................
Additions to current net earnings:
Profits on sales of U.S. Government securities
All other ...........................................................
Total additions .........................................
Deductions from current net earnings:
Losses and reserves for losses on industrial
advances (net) .....................................
Special reserve on bank premises ................
All other ...........................................................

1940

11,415
7,975

12,985
7,341

3,440

5,644

386
9

3,408
638

395

4,046

50
480
3

103

135

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

533

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

3,302

9,555

Dividends paid .......................................................
Transferred to surplus (Section 7) ....................
Transferred from surplus (Section 13b) ............

3,098
204

3,065
6,529
—39

Surplus (Section 7) beginning of year ..............
Addition as above ...................................................

56,447
204

53,326
6,529

56,651

59,855
3,408

56,651

56,447

Transferred to other capital accounts ................
Surplus (Section 7) end of year ........................

FEDERAL RESERVE BANK OF NEW YORK

$634,000 more than in 1940. The reduction in gross earnings was due
to a smaller amount of earning assets held throughout the year. In
creased expenses were incurred because of the cost of printing more
Federal Reserve notes to meet the increase in circulation, and because
of additional expenditures for postage and expressage, printing and sup
plies, supplemental compensation to employees, larger assessments by
the Board of Governors of the Federal Reserve System, and many other
items of expense in connection with the greater volume of work in the
bank.
The additions to current net earnings, almost entirely profits of
$386,000 on sales of United States Government securities, were much
smaller than in 1940, and were somewhat exceeded by deductions from
current net earnings for losses and reserves, leaving net earnings of
$3,302,000 which compares with $9,555,000 in 1940. Notwithstanding
the fact that net earnings were substantially reduced during 1941, there
was a sum sufficient to provide for payment of the usual 6 per cent divi
dend to member banks, amounting to $3,098,000, and for the transfer
of $204,000 to ordinary surplus.
Membership Changes in 1941

The revival of interest in membership in the Federal Reserve Sys
tem on the part of State chartered banks and trust companies, which
began in 1940, continued throughout 1941, with the result that forty
such banks in the Second Federal Reserve District became members dur
ing the year. This was the largest annual increase in number of member
banks for any year since 1918. Including National banks, which are
required by the Federal Reserve Act to be members, the member banks
at the end of 1941 represented 81 per cent in number, and held about
92 per cent of the total assets, of all National banks, State banks, and
trust companies in the District.
It is particularly interesting to note that most of the new members
are located in the smaller cities and towns throughout the District. Most
of the large city banks have been members for many years, but the pro
portion of State banks and trust companies continuing to operate as
nonmember institutions has, until recently, been relatively high in the
smaller communities. The total assets of member State banks have ex
ceeded 80 per cent of the total assets of all State banks for a number of
years, but it was not until 1941 that more than half of all the State
banks in the District had joined the Federal Reserve System. Now 54

TWENTY-SEVENTH ANNUAL REPORT

per cent of all the State banks and trust companies in the Second Fed
eral Reserve District are members.
The tables below give further details with regard to the number of
member and nonmember banks and changes in membership during the
year.
Number of Member and Nonmember Banks in
Second Federal Reserve District at End of Year
(Exclusive of Savings banks and Industrial banks)
December 31,1940

December 31,1941
Type of bank
National banks.........
State banks and trust
companies .........
Total ...............

NonMembers members

NonPer cent
members Members members

Per cent
members

580

100

587

100

217

187

178

231

797

187

765

231

Changes in Federal Reserve Membership in Second District During 1941
Total membership beginning of year ........................................................

765

Increases:
State banks and trust companies admitted .......................................

Total increases .................................................................... .

Decreases:
Member banks combined with other members ..................................
Member bank'combined with nonmember .........................................
Insolvency ..........................................................................................
Voluntary liquidation ........................................................................

5
1
1
1

Total decreases ...........................................................................

Net increase ............................................................................................

Total membership end of year...................................................................

797

Nonmember banks combined with members..............................................

FEDERAL RESERVE BANK OF NEW YORK

Changes in Directors and Officers

On June 6, 1941, the Board of Governors of the Federal Reserve
System announced the appointment of Randolph E. Paul, a member of
the law firm of Lord, Day & Lord, New York, N. Y., as a Class C director
for the unexpired portion of the term ending December 31, 1943.
At a regular election in the autumn of 1941, William J. Field, Presi
dent, Commercial Trust Company of New Jersey, Jersey City, N. J.,
was elected by member banks in Group 2 as a Class A director, for a
term of three years beginning January 1, 1942, to succeed Otis A.
Thompson, Norwich, N. Y., whose term expired December 31, 1941. At
the same time member banks in Group 2 elected Frederick E. Williamson,
President, The New York Central Railroad Company, New York, N. Y.,
as a Class B director, for a term of three years beginning January 1,
1942, to succeed Walter C. Teagle, New York, N. Y., whose term also
expired December 31, 1941.
In December, 1941, the Board of Governors of the Federal Reserve
System reappointed Beardsley Ruml, Treasurer, R. H. Macy & Co., Inc.,
New York, N. Y., a Class C director of this bank for a term of three
years beginning January 1, 1942 and redesignated him Chairman and
Federal Reserve Agent of this bank for the year 1942. The Board of
Governors of the Federal Reserve System also redesignated Edmund E.
Day, President, Cornell University, Ithaca, N. Y., Deputy Chairman for
the year 1942.
On January 8, 1942, the resignation of Robert T. Stevens, a Class B
director since January 1, 1934, was accepted by this bank. Mr. Stevens
had been called into active service with the United States Army.
As the successor to Mr. Stevens, the member banks in Group 3 nomin
ated without opposition Carle C. Conway, Chairman of the Board, Con
tinental Can Company, New York, N. Y., as a Class B director for the
term ending December 31, 1942; the election took place on March 6, 1942.
In December, the Board of Governors of the Federal Reserve Sys
tem reappointed Marion B. Folsom, Treasurer, Eastman Kodak Com
pany, Rochester, N. Y., a director of the Buffalo Branch for a term of
three years beginning January 1, 1942. The directors of this bank ap
pointed Robert R. Dew, President, Dunkirk Trust Company, Dunkirk,
N. Y., a director of the Buffalo Branch for a term of three years begin

TWENTY-SEVENTH ANNUAL REPORT

ning January 1, 1942, to succeed Frank F. Henry, Director, General
Mills, Inc., Buffalo, N. Y., whose term expired December 31, 1941.
The directors of this bank appointed Reginald B. Wiltse as Manag
ing Director of the Buffalo Branch, effective January 9, 1942, to succeed
Robert M. O’Hara, who retired December 31, 1941, having reached the
retirement age. Mr. Wiltse was formerly Assistant Manager of the
Buffalo Branch.
Changes

O fficers

Effective April 1, 1941, the Board of Directors of this bank ap
pointed Todd G. Tiebout and Rufus J. Trimble, formerly Assistant
Counsel, as Assistant General Counsel.
Effective November 1, 1941, Loren B. Allen, formerly Chief, Credit
Division of the Credit Department, was appointed Manager of the Credit
Department.
On January 9, 1942, the appointment of Edward 0. Douglas, for
merly Manager of the Personnel Department, as Assistant Vice Presi
dent, effective immediately, was announced by the Board of Directors
of this bank; at the same time, William A. Heinl, formerly Chief, Per
sonnel Division of the Personnel Department, was appointed Manager
of the Personnel Department, also effective immediately.
In addition to the appointment of Reginald B. Wiltse as Managing
Director of the Buffalo Branch, the Board of Directors of this bank
appointed George J. Doll as Assistant Cashier of the Buffalo Branch,
effective January 9, 1942.
M em ber

F ederal A dvisory C o u n c il

At its meeting on January 8, 1942, the Board of Directors of this
bank reappointed George L. Harrison, President of the New York Life
Insurance Company, New York, N. Y., to serve during the year 1942
as the member of the Federal Advisory Council for the Second Federal
Reserve District.

FEDERAL RESERVE BANK OF NEW YORK

Directors and Officers
DIRECTORS

Term
Expires
Dec. 31

Class

Group

L eon F raser ......................................................................................................
President, The First National Bank of the City of New York,
New York, N. Y .

1943

W illiam J. F ield ...........................................................................................
President, Commercial Trust Company of New Jersey,
Jersey City, N. J.

1944

N e il H. D orrance ...........................................................................................
President, The First National Bank and Trust Company of
Camden, Camden, N. Y .

1942

D onaldson B rown ...........................................................................................
Vice Chairman of the Board and Vice President, General
Motors Corporation, New York, N. Y .

1943

F rederick E. W illiamson .........................................................................
President, The New York Central Railroad Company, New
York, N. Y .

1944

C arle C. Conway ..............................................................................................
Chairman of the Board, Continental Can Company, New
York, N. Y .

1942

Beardsley Rum l, Chairman .......................................................
Treasurer, R. H. Macy & Co., Inc., New York, N. Y.

1944

Edmund E. Day, Deputy Chairman ...........................................
President, Cornell University, Ithaca, N. Y .

1942

R andolph E. Paul .......................................................................................
Lord, Day & Lord, New York, N. Y .

1943

DIRECTORS— BUFFALO BRANCH

Term
Expires
Dec. 31

G ilbert A . P role ........................................................................................................................
Genesee Farm Supply Company, Batavia, N. Y .

1942

H oward K ellogg ..........................................................................................................................
President, Spencer Kellogg and Sons, Inc., Buffalo, N. Y .

1943

M arion B. F olsom ......................................................................................................................
Treasurer, Eastman Kodak Company, Rochester, N. Y .

1944

G eorge F. R and ..........................................................................................................................
President, The Marine Trust Company of Buffalo, Buffalo, N. Y.

1942

R aymond N. B all ......................................................................................................................
President, Lincoln-Alliance Bank and Trust Company, Rochester, N. Y .

1943

R obert R. D ew .............................................................................................................................
President, Dunkirk Trust Company, Dunkirk, N. Y .

1944

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

1942

Reginald B. W ilts e , Managing Director

MEMBER OF FEDERAL ADVISORY COUNCIL
G eorge L. H a r r iso n ,
President, New York Life Insurance Company,
New York, N. Y.

TWENTY-SEVENTH ANNUAL REPORT

OFFICERS
A l l a n S pr o u l ,
L e slie R . R o u n d s ,
Ray

L. W

erner

G id n e y ,

First Vice President

Vice President

Assistant Vice President
Assistant Vice President
H arold V . R o else ,

Jo n e s ,

Assistant Vice President

V a l e n t in e W

H erbert H . K im b a l l ,

T odd G .

il l is ,

Assistant Vice President

T ie b o u t ,

R u fu s J. T r im b l e ,

Assistant General Counsel
Assistant General Counsel

L oren B. A l l e n ,

M y l e s C. M cC a h il l ,

Manager, Credit Department

Manager, Service Department

D u d ley H . B a r r o w s ,

R obert F. M c M u r r a y ,

Manager, Cash Department

Manager, Safekeeping Department

R obert H . B r o m e ,

Manager, Research
Department, and Secretary

H orace L. S a n f o r d ,

Assistant Counsel
W . B u rt,

Manager, Government Bond Department

il l ia m

F. S h e e h a n ,

Manager, Bank Examinations Depart
ment, and Chief Examiner

D o n a ld J. C a m e r o n ,

Manager, Foreign Department
F e l ix T . D a v is ,

I n s l e y B. S m i t h ,

Manager, Check Department

Manager, Bank Relations Department

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

Manager, Foreign Property Control
Department, and Manager, Security
Loans Department

F rederick S to c k e r ,

Manager, Cash Custody Department
W

il l ia m

Manager, Collection Department

C h ar les

M arcus A . H arris ,

F. T reiber ,

Assistant Counsel and
Assistant Secretary

E d w in C. F r e n c h ,

A . H e in l ,

Jo h n H . W

Manager, Personnel Department

i l l ia m

V an H outen,

Manager, Security Custody Department

Manager, Securities Department
il l ia m

Vice President

A rthur P h e l a n ,

Assistant Vice President

R o u se ,

S il a s A . M iller ,

G eorge W . F e r g u so n ,

esl e y

Vice President and

Vice President

Assistant Vice President

R obert
il l ia m s ,

E dw ard 0 . D ou g la s ,

il s o n

L ogan,

General Counsel

Jo h n H . W

J. W

alter

James m Rice> yice President

Vice President

K noke,

President

u rts ,

Assistant Counsel

General Auditor
Assistant General Auditor

H . D il l is t in ,

H arold A . B i l b y ,

OFFICERS—BUFFALO BRANCH
R eginald

il t s e ,

H alsey W . Sn o w ,

Managing Director

Cashier
G eorge J. D o l l ,

Assistant Cashier

Full text of Annual Report of the Federal Reserve Bank of New York : Twenty-Seventh Annual Report of the Federal Reserve Bank of New York for the Year Ended December 31, 1941

FRASER