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Twenty-sixth Annual Report

Federal Reserve Bank
of New York
For the Year Ended December 3 1 ,1 9 4 0

Second Federal Reserve District

CONTENTS
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F ed er a l Reser ve Ba n k
O F N E W YO R K

April 8,1941.
To the Stockholders of the
Federal Reserve Bank, of New York:

I am pleased to transmit herewith the twenty-sixth annual
report of the Federal Reserve Bank of New York reviewing the
year 1940.

A l l a n S protjl ,

President.

Federal Reserve Bank of New York
Twenty-Sixth Annual Report
The progress of the war in Europe and the development of
the defense program in the United States completely altered
business and credit conditions and prospects during the year
1940.
It is true that in the early part of the year, there was little
evidence of those changes which were quite generally anticipated
at the outbreak of the war in September, 1939. Commodity
prices, instead of showing the expected inflationary rise, pursued
an irregular, downward course. Business activity, which had
expanded rapidly in the autumn of 1939, was curtailed in the first
quarter of 1940, despite the stimulus of war orders and a larger
export trade with Latin American countries. The demand for
bank credit was relatively small, and the supply of funds in
creased more rapidly than the demand. Consequently, money
rates tended to decline further.
The more active phase of the war starting with the German
occupation of Denmark and Norway in April and continuing
with the invasion of Holland, Belgium, and France in May, and
the subsequent attacks on Great Britain and on British shipping,
gave purpose and impetus to a greatly expanded program of
National defense in the United States, which directly affected
the domestic business situation and outlook. A revival in busi
ness started in May and gained momentum during the autumn
months. The hiring and training of additional employees in many
industries proceeded rapidly and pointed toward a rapid diminu
tion of the problem of unemployment. Commodity prices became
firmer. Demands for bank credit increased.
The development of the National defense program gave
rise to many problems in which this bank had a direct or col
lateral interest and responsibility. Aside from the primary
problem of expanding production of defense equipment and
materials as rapidly as possible, the program raised a number
of financial questions. In addition to the general question of
how rapidly increasing Government expenditures were to be

TWENTY-SIXTH ANNUAL REPORT

financed, there was also the question of how best to finance the
requirements of industry for new plants, equipment, and working
capital. It was readily apparent that careful consideration must
be given to methods of financing Government expenditures, hav
ing in mind not only their effect upon the size and composition
of the public debt, but also their effect upon consumer spending,
employment, prices, and other aspects of our economy. The
prospect of a rapid expansion of purchasing power and of an
increased use of credit arising from the defense program also
raised important questions as to appropriate monetary and
credit policies to be pursued when the program was further
developed.

The Money Market
It was apparent from the beginning of the year that, in its
early stages, the war was having a much greater effect upon the
supply of funds available in the money market than upon the
demand for bank credit. In the early months of 1940, the gold
stock of this country was increasing at the rate of about
$250,000,000 a month, chiefly as a result of a rapid inflow of
gold from abroad. After the invasion of Denmark and Norway
the inflow was greatly accelerated, reaching its maximum
MILLIONS
OF DOLLARS

800

700
600

■

4 hi J
1 llllllml
lii
i
i imrnnii
i

500

400
300
200
100

1
.1 ..i

-1 0
0

1937

■i
L_

........

’ 11

■

1938

ii.
1939

Monthly Changes in United States Gold Stock

14
90

FEDERAL RESERVE BANK OF NEW YORK

monthly figure in June when gold imports totaled $1,164,000,000.
Although a considerable amount of this gold was earmarked on
arrival, the increase in the United States gold stock in that
month was more than $750,000,000. After the military collapse
of France, the gold inflow receded gradually, reaching its mini
mum for the year in December, when total imports were slightly
less than $140,000,000, and the increase in the gold stock was
less than $200,000,000.
For the year as a whole, gold imports aggregated nearly
$4,750,000,000. The amount of gold held under earmark for
foreign accounts increased by $645,000,000, or about 55 per
cent, to $1,808,000,000, and the increase in the United States gold
stock for the year was approximately $4,350,000,000, a substan
tially larger increase than in the previous record year, 1939.
The gold stock of this country at the end of December was almost
$22,000,000,000, or about seven times the amount held at the
beginning of the last war, in 1914, and about three times the
amount held at the time of the advance in the United States gold
price on January 31, 1934.
The unprecedented volume of the gold movement to this
country during 1940 was attributable largely to (1) heavy ship
ments for British account to provide dollar assets for the pur
chase of war materials and for the construction and equipment
of plants with which to produce such materials, (2) large ship
ments from France for similar purposes during the first half
of the year, (3) the transfer of monetary reserves from a num
ber of European countries to the United States for safekeeping,
and (4) gold shipments from other countries for the settlement
of adverse balances of payments in the international accounts
of such countries.
Not all of this incoming gold added to the reserves of
banks in this country during the year, however. Some of the gold
shipped here in the early part of the year was placed under
earmark at this bank for the accounts of invaded countries; and
these accounts subsequently were ‘ ‘ blocked ’ ’ by executive order.
Other gold placed under earmark during the year represented
monetary reserves transferred to this country for safekeeping
by countries not subject to blocking orders. In other cases some
of the proceeds of foreign gold sales to the Treasury were de
posited in foreign accounts in the Reserve Banks and remained
unexpended at the end of the year, either because the accounts

TWENTY-SIXTH ANNUAL REPORT

were blocked, or because disbursement of the funds was not
required.
Nevertheless, total disbursements of the proceeds of foreign
sales of gold to the Treasury during 1940 may be estimated at
approximately $3,400,000,000. In the absence of other offsetting
transactions, these expenditures would have increased member
bank reserves by a like amount. They were offset to the extent
of more than $1,000,000,000, however, by an increase in the
amount of currency outstanding. The causes of this large in
crease in currency outstanding are not entirely clear, but it is
probable that the increase in small denomination bills was re
lated largely to rising industrial payrolls and consumer expendi
tures, and that a considerable part of the increase in large
denomination bills was attributable to the conversion of foreign
funds into United States currency. Despite these large demands
for currency, the actual increase in member bank reserves dur
ing the year was close to $2,500,000,000.
Meanwhile, demands for additional bank credit were slow in
developing during the first half of the year. The volume of
commercial and industrial loans at New York City banks re
ceded slightly in January and February, and thereafter showed
only a small increase until September. The experience of report
ing member banks in other principal cities appears to have been
similar. Loans to security brokers and dealers by New York
City banks declined, during the first six months of the year, to
approximately the lowest levels ever reached in the years for
which data are available. Treasury financing was limited to
refunding offerings in that period, and flotations of securities
to provide new business capital were small. The reporting
New York City banks increased their investments by about
$750,000,000, but other banks throughout the country reduced
their investment holdings during that period. On the whole,
therefore, it may be said that while the available supply of funds
was increasing rapidly, there was little new demand for bank
credit during the first half of 1940.
Following the initiation of the National defense program
and accompanying the rapid expansion in business activity dur
ing the latter half of the year, however, there was an appreciable
increase in the demand for bank credit. Commercial and indus
trial loans in the reporting New York City banks increased by
more than $200,000,000, and in reporting banks in other parts

FEDERAL RESERVE BANK OF NEW YORK

of the country there was an increase of about $400,000,000 dur
ing this period. Loans for the purpose of financing security
transactions increased by approximately $200,000,000, chiefly
at New York City banks. Actual expenditures under the Na
tional defense program developed slowly, but gained momentum
rapidly toward the close of the year, and it became necessary
for the Treasury to sell Government securities to obtain new
funds, as well as for refunding purposes. Partly as a result of
such financing, holdings of direct obligations of the Government
increased approximately $300,000,000 in weekly reporting New
York City banks during the second half of the year, and more
than $200,000,000 in other reporting banks. Holdings of Govern
ment guaranteed securities rose nearly $340,000,000, almost en
tirely in the reporting New York City banks.
BILLIONS
OF DOLLARS

BILLIONS

J _ I I _ 1 _ I _ L_J_ I
_ __ ___I _ _ _
_

1937

Loans and Investments

1938

1939

1940

W eekly Reporting Banks

Demand deposits in member banks rose substantially during
1940 to new high levels. The rise was largely due to increases
in loans and investments and to the disbursement of the pro
ceeds of gold sales through foreign accounts in the Federal
Eeserve Banks, and it occurred despite total withdrawals in cur

TWENTY-SIXTH ANNUAL REPORT

rency of more than $1,000,000,000 of deposits. The increase in
demand deposits from $30,000,000,000 to $35,000,000,000 caused
an increase in reserve requirements, which for the year as a
whole aggregated nearly $1,000,000,000. This was a partial offset
to the concurrent rapid expansion of member bank reserves, but,
nevertheless, excess reserves of member banks increased during
1940 by well over $1,500,000,000.
The accumulation of additional reserves in member banks at
a more rapid rate than they were absorbed by currency with
drawals and demands for bank credit was accompanied by
further decline in long term interest rates during the year. Not
only because of the further accumulation of idle funds, but also
because of security refunding operations which reduced yields
on investment portfolios still further, banks were under con
tinued pressure to add to their investment holdings to maintain
their income, and an irregular rise in prices of Government and
other high grade bonds occurred. The banks had previously
become accustomed to holding such large amounts of excess
reserves, however, that the further large increase in excess re
serves, which resulted from the enormous gold inflow, had less
PER C E N T
YIELD

A verage Yields on Long Term Treasury Bonds and on High Grade Corporate
Bonds (Scale inverted to indicate price tendencies; M oody’ s
Investors Service data on corporate bonds)

FEDERAL RESERVE BANK OF NEW YORK

effect on bank investment policies and on money rates than would
otherwise have been the case. The upward trend in bond
prices and the further decline in their yields were subject to
recurrent interruptions, largely caused by war developments,
but as the year progressed there was evidence of increasing
immunity in the market for high grade securities to these dis
turbing influences.
There had been a rapid recovery in prices of high grade
securities during the last quarter of 1939, following an abrupt
decline at the outbreak of the war, and during the first two
months of 1940 bond prices remained fairly steady. But in
March, especially after the Treasury announced that its financ
ing operations of March 15 would be limited to a refunding issue
of Treasury notes and that no bonds would then be issued, either
for new money or for refunding, a further rise in bond prices
occurred. By the first week of April prices of long term Treasury
bonds were close to the highest levels reached at the middle of
1939.
The invasion of Denmark and Norway on April 9 had an
unsettling effect on the security markets, but price declines
in high grade bonds were moderate. In the following month the
invasion of the Low Countries had a further depressing effect
on bond prices. The total decline in average prices of long term
Treasury bonds from the early April peak to the lowest levels
early in June, however, was only about 4% points, as compared
with a decline of nearly 9 points in 1939 from early in August to
the latter part of September, accompanying the outbreak of the
war. The volume of selling of Government and other high grade
bonds was far less than in the earlier period, and no extensive
purchases by the Federal Reserve Banks were required to main
tain orderly market conditions. Despite the military collapse of
France in June, bond prices rose sharply in that month, recover
ing more than half of the preceding decline.
During the latter half of the year, in the face of threats of
further adverse war developments, the general course of prices
of high grade bonds was upward. This movement was accelerated
following the National election in November, and in the early
part of December prices not only of Treasury bonds, but also
of State and municipal issues and high grade corporation bonds,
reached higher levels than ever before, and bond yields declined
to new low levels.

TWENTY-SIXTH ANNUAL REPORT

Stock prices, however, were severely affected by war de
velopments and dropped rapidly in May to the lowest level since
the first half of 1938. A gradual recovery followed, accompany
ing rapid expansion of business activity, but the rise was re
strained by fears as to the outcome of the war and as to the
heavy reliance of American business on a war created demand
which might conceivably be abruptly changed. There was the
expectation also that further increases in taxes to help finance
the National defense program would prevent net profits of busi
ness organizations, after payment of taxes, from reflecting to
any great extent the increase in business activity. Consequently
stock prices at the close of the year were well below prices a
year ago, and substantially lower than at other periods of active
business, such as the early part of 1937.
The strength in prices of high grade bonds and the relative
weakness in stock prices during 1940 were in sharp contrast to
the tendencies that prevailed at the outbreak of the war in Sep
tember, 1939, when bond prices declined rapidly and stock prices
rose strongly for a short period, apparently reflecting expecta
tions of a war boom which would greatly increase business
profits, but would result in an upward trend in money rates
that would depress bond prices.
At the close of the year 1940, however, some of the antici
pated effects of the situation created by the war began to appear.
The rapid progress of the National defense program led to
discussions of possible inflationary dangers, either because of a
multiplication of specific shortages of materials and men, or be
cause of a full utilization of all of our productive facilities, which
might call for a policy of restraint on further credit expansion.
Aside from such future possibilities, there was the fact that the
inflow of gold was diminishing, that withdrawals of currency
from the banks were continuing in large volume, and that reserve
requirements of member banks were continuing to rise. It ap
peared that these trends would at least prevent a further
accumulation of excess reserves in the banks, and, together with
the more active demand for credit, might check the downward
trend in interest rates, particularly of short term. Nevertheless
the volume of member bank excess reserves at the beginning
of 1941, far from having been reduced by war developments,
was more than double that of two years ago, and there was no
apparent basis for expecting a substantial early change in credit
conditions or a substantial rise in long term money rates.

FEDERAL RESERVE BANK OF NEW YORK

Federal Reserve Policy
The general credit policy followed in recent years was main
tained during 1940. There was no change in the principal
discount rates of this bank during the year and System open
market operations in which the bank participated were neither
extensive nor important when viewed as an instrument of credit
policy. Particularly during the latter half of the year, however,
consideration was given to the inflationary potentialities of the
existing and then increasing volume of bank reserves, and to
possible ways of meeting the situation if, under conditions of
rapidly expanding demands for goods of many kinds, and accom
panying strain on the productive facilities of the country, a
policy of restraint on credit expansion should eventually become
desirable.
Open market operations conducted by this bank for all
Federal Reserve Banks under the direction of the Federal Open
Market Committee continued to be directed toward the main
tenance of orderly conditions in the Government securities mar
ket. These operations during 1940, excluding exchanges and
switches from one issue to another, are listed below.
Net Sales
Week ended
Jan.
3 ...........................
Jan. 10...........................
Mar 20...........................
Apr. 3 ...........................

Net Purchases

Amount in millions
$

5
7
2
8

Week ended

Amount in millions

•

May 15.........................
May 22..........................
19...........................
3 ...........................
31...........................
7 ...........................
28...........................
4 ...........................
2 ...........................
9 ...........................
16...........................
23...........................
30............................
6 ...........................
13...........................
20...........................
27...........................
4 ...........................
11............................

$315

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

$10

4
23
2
2
4
8
10
25
15
32
19
6
73
23
27
9
11

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

$ 7
3

June
July
July
Aug.
Aug.
Sept.
Oct.
Oct.
Oct.
Oct.
Oct.
Nov.
Nov.
Nov.
Nov.
Dec.
Dec.

TWENTY-SIXTH ANNUAL REPORT

As these figures indicate, there were a number of weeks
during the year in which there was active demand for Govern
ment securities, but such a scarcity of offerings that sales from
the Federal Open Market Account seemed desirable. On the
other hand, while the Government security market was subject
from time to time to depressing influences, largely though not
entirely related to war developments, selling orders in most
such instances were not for large amounts, and at such times
there were usually buying orders in the market at a moderate
“ scale-down” of prices.
It was only for a short time following the invasion of the
Low Countries that market conditions appeared to warrant in
tervention by the Federal Open Market Account on the buying
side. And, as the above list of transactions indicates, purchases
for the Account at that time amounted to only $10,000,000—a
great contrast to the situation at the outbreak of the war, when
a total of $474,000,000 of Government securities was bought for
the Account in five weeks. As further indication of the diminish
ing vulnerability of the Government security market to foreign
developments, the situation in June may be cited, when, despite
the military collapse of France, there was renewed demand for
Government securities of such vigor as to warrant a resumption
of sales by the Federal Open Market Account.
By the end of the year, the total volume of securities in the
Account had been reduced to $2,184,000,000, a reduction of
$642,000,000 from the peak reached on September 20, 1939, fol
lowing the heavy purchases made during the slump in the bond
market that accompanied the outbreak of the war. Part of this
reduction was accounted for by the elimination of Treasury
bills from the Account as they matured during the latter part
of 1939. The remainder represented sales in the market for the
purpose of maintaining orderly market conditions. Although
the securities sold were largely Treasury bonds, the volume of
Treasury bonds in the portfolio showed a net reduction of only
$24,000,000, while holdings of Treasury notes were reduced by
$346,000,000, largely because of refunding operations by the
Treasury which involved the exchange of maturing Treasury
notes for new issues of Treasury bonds. The total amount of
securities in the Account at the end of 1940 was only one
third of the excess reserves held by all member banks, and it
was evident, therefore, that the reserve position of member banks

FEDERAL RESERVE BANK OF NEW YORK

was far beyond the control of the Federal Reserve System
through open market operations.
Demands on the industries of this country for their output,
not only for National defense but also for civilian consumption,
increased rapidly during the latter half of the year, and com
modity prices tended to strengthen somewhat. The money sup
ply in the form of demand deposits and currency outstanding
was far larger than in any previous year, and the reserve posi
tion of the banks was such as to make possible a very large
further increase in the money supply through credit expansion.
It was apparent, therefore, that there were present in the busi
ness and monetary position of this country potentialities of
wartime inflation, and that the Federal Reserve System lacked
adequate powers to deal with the monetary and credit aspects
of the situation if and when such action might become desirable.
This condition was a matter of concern to all parts of the Federal
Reserve System, and led to the drafting of a special report to
the Congress, presented jointly on December 31, 1940, by the
Board of Governors, the presidents of the Federal Reserve
Banks, and the Federal Advisory Council. This report drew
attention to the existing situation. It recognized that monetary
measures are probably of secondary importance in controlling
the situation with which we may be faced, and are for future
rather than for present application. It went on to suggest for
consideration of the Congress, however, a precautionary pro
gram, the most important element in which was provision for
increased Federal Reserve powers to absorb excess reserves if
and when such action should be required.(1)
Interbank Deposits and Excess Reserves
One aspect of the situation which must be considered in dis
cussing the excess reserve problem, because it has tended greatly
to confuse the situation as to the actual ownership of member
bank excess reserves, is the unprecedented volume of deposits
held by large city banks for correspondent banks. Published data
on excess reserves held by the three principal classes of member
banks in December, 1940, indicate fairly uniform distribution of
excess reserves, although Central Reserve City banks appeared

U) The text of this statement is contained in circular No. 2160 of this bank,
which is available on request.

TWENTY-SIXTH ANNUAL REPORT

to have slightly larger proportions of excess reserves relative
to their reserve requirements than did Reserve City and “ coun
try” banks. Indicated excess reserves at that time were 93
per cent of reserve requirements for Central Reserve City banks,
85 per cent for Reserve City banks, and 86 per cent for “ coun
try” banks.
The fact of the matter, however, is that Central Reserve
City banks had claims against them, in the form of deposits of
other banks, which were larger in total amount than their excess
reserves. Some of these deposits represented normal working
balances maintained by other member banks with the city banks,
BILLIONS
OF DOLLARS

Balances Due to Other Dom estic Banks and Excess Reserves of New Y ork City
Member Banks

and some represented reserves of nonmember banks. A substan
tial part, however, represented idle funds of other member banks
that had been deposited with city correspondents rather than
with Federal Reserve Banks. “ Country” member banks had net
amounts due them by city banks well in excess of their reserves
with Federal Reserve Banks. A considerable part of these de
posits with city correspondents undoubtedly were regarded by

FEDERAL RESERVE BANK OF NEW YORK

country banks as the equivalent of excess reserves. In fact, a
study made by this bank in December, 1940, indicated that there
were many country banks in this District that followed the prac
tice of maintaining reserve balances with this bank only slightly
in excess of their reserve requirements, and of depositing with
city correspondents most of their surplus funds. It appears,
therefore, that the actual proportion of idle funds of “ country”
banks as a group relative to their required reserves was con
siderably understated by the published data on excess reserves
referred to above, and that the actual amount of surplus funds
of Central Reserve City banks, after allowance for claims
against them in the form of deposits by other banks in excess
of normal working balances, was greatly overstated by the pub
lished figures on excess reserves.
There are disadvantages or dangers inherent in this situa
tion, as was evident after reserve requirements were successively
increased in the latter part of 1936 and the spring of 1937
to double the basic requirements. The many “ country” member
banks that carry most of their surplus funds with their city
correspondent banks, rather than with their respective Federal
Reserve Banks, withdrew funds from the city banks and de
posited them in the Reserve Banks to cover the increases in
their required reserves. Thus the large city banks sustained
withdrawals of funds, as well as increases in their own reserve
requirements. In the case of the New York City banks this
pincer action absorbed practically all of their excess reserves,
and caused them to liquidate some of their assets. The result
was an abrupt tightening of money market conditions and an
exaggerated influence upon the Government security market,
even though aggregate reserve funds of all member banks con
tinued ample.
This situation suggests the caution with which overall con
trol measures, such as increases in reserve requirements, must
be applied. It also suggests that the reserve position of the
various classes of member banks would be clarified if the country
member banks carried their surplus funds more largely in their
reserve accounts in the Federal Reserve Banks. This need not,
of course, disturb long established correspondent relations be
tween city and country banks, since the present abnormally large
interbank deposits are not essential to the maintenance of such
relations.

TWENTY-SIXTH ANNUAL REPORT

National Defense Program and Government Financing
Another major problem, which was the subject of much con
sideration in the latter part of 1940, is the financing of the Na
tional defense program. There are two principal aspects of the
problem: (1) provision of funds for Government purchases of
military and naval equipment and supplies for a greatly ex
panded military training program and for the maintenance of
substantially enlarged armed forces; and (2) financing of expen
ditures by industries for new plants, equipment, and supplies
required for the production of materials needed for the defense
program.
Limited provision for the financing of direct Government
expenditures for National defense was made in the first Revenue
Act of 1940 in June, which authorized the Treasury to sell up to
$4,000,000,000 of special National defense securities with maxi
mum maturity of five years, in addition to the existing authority
to issue Government obligations within the statutory debt limit
of $45,000,000,000. It also provided for special taxes, such as a 10
per cent increase in taxes on individual incomes, and higher
amusement taxes, the proceeds of which were to be set aside by
the Treasury for the retirement of National defense obligations.
The Second Revenue Act of 1940 in October provided new excess
profits taxes applicable to corporation profits beginning with
the year 1940.
As the program developed, however, and authorized expendi
tures were greatly enlarged, it became apparent that much great
er provision for the financing of the defense program would be
required, but action with respect to additional measures was left
to the Seventy-seventh Congress which was to convene early in
1941.
Meanwhile, the Treasury was limited in the types of financ
ing which it could undertake. After selling a total of about
$680,000,000 of Treasury bonds in July, and making provision
for sales of United States savings bonds and for issues of special
Treasury securities for the employment of funds deposited with
the Treasury for various accounts, such as old age retirement,
unemployment insurance, and the civil service and railroad re
tirement funds, the Treasury had little borrowing power remain
ing under the $45,000,000,000 debt limit. It was therefore unable
to offer further issues of Treasury bonds in any considerable
amount, and was largely limited to offerings of National defense

FEDERAL RESERVE BANK OF NEW YORK

series of securities with maximum maturity of five years for the
remainder of 1940. Furthermore, the Secretary of the Treasury
indicated his desire to avoid further issues of long term securi
ties with tax exemption privileges pending Congressional action
on his proposal to terminate tax exemption of future Government
security issues. The Treasury, therefore, drew upon its existing
balances to finance the rapidly growing defense expenditures,
and except for weekly issues of Treasury bills to replace matur
ing bills, did no new financing until December 15, when $531,000,000 of National defense series of Treasury notes were sold.
The resulting lack of additional supplies of Treasury bonds,
and the prospect that no further issues of tax exempt securities
might be offered, together with the additions to bank reserves
resulting from Treasury disbursements out of its balances with
Federal Reserve Banks, no doubt were factors in the strong rise
in prices of outstanding Treasury bonds during the autumn, de
spite the realization that a large amount of Treasury borrowing
was in prospect for the financing of the defense program.
In the latter part of the year there was much discussion of
various possible ways of financing the expenditures for National
defense. The general aim was to devise ways that would be suc
cessful in raising the required funds, but would be least likely
to have adverse effects upon the National economy—on the one
hand by promoting inflationary tendencies, or on the other hand
by exerting an unnecessarily depressing influence upon non
defense industries, thus restricting the production and consump
tion of consumer goods and employment in industries producing
such goods.
As indicated above, the second aspect of financing the de
fense program is that of providing industries receiving Govern
ment contracts with funds required for new plant construction
and the purchase of new equipment and for additional working
capital. The Reconstruction Finance Corporation early indi
cated its willingness to finance such industries. In view of the
large amount of financing which the Government will have to do to
raise the funds needed to cover its direct expenditures, however,
and in view of the huge volume of idle funds held by the banks,
it seemed highly desirable that holders of Government contracts
be financed so far as possible through the banks. On June 13 the
president of this bank, after a meeting with representatives of
the principal New York City banks, sent a letter to each member
of the National Defense Advisory Commission assuring them

TWENTY-SIXTH ANNUAL REPORT

that the banks were prepared to participate, to the limits of their
powers, in the financing of the defense program by making loans
to industries whose expansion was deemed necessary for the
promotion of the defense program.(1)
It appeared, however, that certain obstacles would have to
be removed before the financing of holders of National defense
contracts could properly be done by the banks in some cases.
Ordinarily the financing of fixed capital investments (that is,
investments in plants and equipment) is not considered proper
for commercial banks unless the financing of such investments
can be done through the issuance of senior securities of the bor
rowers that would properly qualify as investment securities, and
thus be eligible for purchase by the banks. In a number of in
stances, however, the new plants and equipment required for the
fulfillment of Government contracts may be of questionable util
ity after the completion of the defense program, so that financing
through bond issues of the industries would not be appropriate.
Furthermore, in some cases the contracts awarded to industries
and the volume of funds required for their financing were large
relative to the net worth of the contractors, so that, without
assignment of claims on the Government for payments under
such contracts, there would be inadequate protection for lenders.
Assignment of such claims on the Government, however, was
then prohibited.
The first difficulty was met in part by arrangements under
which the Government would make payments to cover the cost
of plants and equipment in installments extending over not more
than five years. In this way it became possible to finance such
expenditures by term loans from banks. To meet the further
problem of proper amortization of such expenditures, the Second
Revenue Act of 1940 provided that for income tax purposes
holders of Government contracts that started construction work
within a specified period could amortize the cost of new plants
and equipment over a five year period, a much more rapid amor
tization than is ordinarily permitted.
The second difficulty was met by the enactment on October 9,
1940, of the “ Assignment of Claims Act of 1940.” This Act per
mitted the assignment of claims on the Government as security
for loans with certain specified restrictions.

O) The text of this letter was published in the July 1, 1940, issue of the Month
ly Review of Credit and Business Conditions of this bank.

FEDERAL RESERVE BANK OF NEW YORK

In these ways the financing of many National defense con
tracts was made “ bankable.” There still remained, however, the
difficulty that in some instances the loans required by holders of
National defense contracts would probably be unduly large for
the local banking institutions. The possibility of dividing the
business with correspondent banks, of course, exists. Further to
help meet this difficulty, however, this bank and other Federal
Reserve Banks indicated their willingness, where adequate credit
could not be supplied by the local banks, to review such cases
and to render such assistance as they properly could.
While bank loans secured by the assignment of claims on
the Government under National defense contracts apparently
did not account for a major part of the expansion of commercial
and industrial loans reported by member banks during the latter
half of 1940, some such loans were specifically reported, and in
many instances loans apparently were made, without such
specific security, to borrowers of good credit standing to provide
the additional working capital required for the expansion of
industrial activities.
Reserve Bank Activities
Connected with the Defense Program
In addition to services rendered as fiscal agents of the Gov
ernment, this and other Federal Reserve Banks were called upon
during the past year to perform certain services directly related
to the National defense program. Beginning in August, the
Board of Governors of the Federal Reserve System in behalf of
the National Defense Advisory Commission, asked the Reserve
Banks to make quick surveys of available productive facilities
in their respective districts for the production of a great variety
of articles for which Government contracts were to be placed.
These surveys did not duplicate previous surveys of the overall
capacity of industries to produce such supplies, but were aimed
rather at ascertaining the extent of industrial capacity then idle
which might be utilized in the production of such articles, and
the availability of labor in the respective communities to man the
idle equipment or to operate the plants for additional shifts.
This industry survey work was supplanted in the autumn of
1940 by a new organization designed to assist in making avail
able information concerning small enterprises which might par
ticipate in the defense program as subcontractors, and by mak

TWENTY-SIXTH ANNUAL REPORT

ing available to local industries information relating to the plac
ing of primary contracts. For this purpose a committee of the
National Defense Advisory Commission designated one of its
members as Director of Small Business Activities and asked the
Board of Governors of the Federal Reserve System to act as
its operating agent. The Board of Governors designated one of
its members to supervise these activities and to serve as liaison
officer with the Director of Small Business Activities, and re
quested each Federal Reserve Bank and branch to designate one
of its officers as field representative.
Through circulars distributed among all banking institutions
in the respective districts, information relating to National de
fense contracts was widely disseminated, and the commercial
banks were asked to cooperate by reporting to the Federal Re
serve Bank information concerning industries in their respective
localities that might be able to participate in the production of
goods for the National defense program.

FEDERAL RESERVE BANK OF NEW YORK

New Security Issues
The flotation of new securities was hampered during the past
year by the depressing influence on the security markets of re
curring war crises. In periods of market strength, however, the
volume of security issues expanded considerably, and for the
year as a whole was larger than in the three preceding years.
In addition to financing done through public offering of securi
ties, a fairly sizable amount again was done through private
placements of securities. As in most other recent years, the
greater part of the new corporate financing represented refund
ing operations, although the volume of securities sold to provide
new capital for business organizations increased gradually dur
ing the course of the year.

YEAR

QUARTER

1939

QUARTER

1940

M onthly Average Volume o f Dom estic Corporate Security Issues for Refunding
and for New Capital (In millions o f dollars)

A further decline in interest rates on long term bonds again
permitted corporations in strong financial position to lower in
terest charges on their funded debt by selling securities at low
coupon rates to replace outstanding securities on which higher
rates of interest were being paid. In some instances the securities
sold during 1940 replaced securities previously issued in refund
ing operations only a few years ago at interest rates which then
seemed low. The total volume of refunding issues by corpora
tions during 1940, while substantially less than in 1936, was with
that exception the largest on record. Eefunding of State and

TWENTY-SIXTH ANNUAL REPORT

municipal issues was larger than in any preceding year for which
records are available.
As the accompanying diagram indicates, security flotations
to provide new corporation capital increased gradually during
the year; in the final quarter of the year they were the largest
since the third quarter of 1938. However, the total volume for the
year, while nearly double the amount in 1939, was less than in
1938 and considerably less than in 1936 and 1937, and was only
a small fraction of the volume in the years preceding the depres
sion. Investors continued to exhibit a disinclination to employ
their funds in stocks and lower grade bonds, apparently re
flecting continued lack of confidence as to the prospect for profits
from such investments commensurate with the risk. While busi
ness activity expanded rapidly after the first four months of the
year, fears as to the outcome of the war and as to the effects of
further increases in taxation apparently accounted for investors ’
low appraisal of the prospects for such investments, which was
reflected in the depressed levels of stock prices during much of
the year. Some corporations, particularly those in rapidly ex
panding industries, were able to raise some additional capital
through public offerings of common stocks, but as in most of
the preceding years since 1929, such issues represented only a
small part of the total volume of corporation financing.
Nevertheless, there was evidence of large corporation ex
penditures on new plants and equipment during 1940. Commer
cial and industrial building construction was larger than in any
year since 1929, and manufacturers of machinery were subject
to such heavy demands that they had difficulty in filling orders
without considerable delay. In the latter part of the year an
increasing portion of these expenditures on industrial plants and
equipment was related to the National defense program. Some
were financed directly by the Government and some by the Re
construction Finance Corporation; some, especially in the early
part of the year, were financed by foreign governments to ex
pedite deliveries of war materials ordered in this country. For
the rest, the expenditures appear to have been financed largely
by corporations out of accumulated funds or with the proceeds
of term loans of the sort described in the preceding section of this
report. Only a relatively small part was financed by new security
issues. A considerable volume of expenditures on plants and
equipment for the production of defense materials remained to
be done at the close of the year.

FEDERAL RESERVE BANK OF NEW YORK

The Foreign Exchanges and Capital and Gold Movements

Among the various financial markets, the foreign exchange
market was perhaps most directly affected and disrupted by the
European war. The many and diversified developments in this
field during the past year included the application of additional
restrictions to international capital movements as well as the
difficulties resulting from the general dislocation of international
trade and finance. All contributed to a continuation of the gen
eral trend toward governmental control of exchanges, so that
by the end of the year some form of exchange regulation was
in force in most of the leading countries of the world. Although
this governmental surveillance was motivated in most countries
by a desire to conserve foreign exchange, either for the prosecu
tion of the war or to combat a deterioration in the terms of
foreign trade or in other items in the balance of payments as
a result of the war, the desire to safeguard the financial inter
ests of invaded nations was also a factor in some cases. The
“ blocking” by the United States and certain other countries of
assets belonging to those European countries that have been
forced under German or Russian control during 1940 falls, of
course, into this latter category.
Specifically, one of the chief matters of interest to the for
eign exchange market here during the past year was the series
of steps taken by the British authorities to close the loopholes
in the system of exchange control introduced by the British
Government in September, 1939. These measures, as well as
the developments in the war, were largely responsible for the
erratic course pursued by the unofficial rate for sterling during
most of the first half of 1940. While they tended progressively
to limit both the supply of and demand for so-called unofficial
sterling, the fact that they did not always affect both sides of
the market simultaneously largely explains the wide rate fluctua
tions that ensued.
It will be recalled that, despite the restrictions introduced
at the outbreak of the war, trading at rates distinct from the
official buying and selling quotations in the London market con
tinued in the “ outside” markets. During the early months of
control the outside market was supplied primarily by the liqui
dation of existing foreign owned sterling balances and securities
and by the sterling proceeds of exports to the sterling area
which could not be converted into foreign currencies at the

TWENTY-SIXTH ANNUAL REPORT

official quotations. Offerings from these sources, however, were
fairly well absorbed by a demand on the part of importers of
sterling area products, who could well avail themselves of the
lower, unofficial rates. According to data furnished by the British
Treasury and released by the Secretary of the Treasury of the
United States in connection with his statement on the LendLease bill, American importers acquired the equivalent of
$300,000,000 in sterling through the outside market during the
first sixteen months of the war.
The first of the series of measures taken by the British
Government during 1940 to bring foreign currency assets of
British subjects and the sterling assets of foreigners more fully
under official control was the adoption on January 8 of closer
supervision over sterling transfers from resident to nonresident
accounts. This action tending to limit the supply of unofficial
sterling was followed on March 9 by announcement that, effec
tive March 25, payment for certain important Empire products
—rubber, tin, jute, whisky, and furs—exported to specified
countries, including the United States, must be made either in
one of five designated “ hard” currencies, including the United
States dollar, or in sterling acquired at the official rate with one
of these five exchanges. The effect of this measure was to limit
materially the permitted uses of unofficial sterling, and the New
York quotation for such sterling, after a temporary rise in Jan
uary to levels not far below the official rate, showed a persistent
decline. This decline was accelerated following the Allied re
verses in Norway and the British Cabinet crisis, and culminated
in a severe depreciation immediately after the sudden German
attack on the Low Countries. The opening trade on May 10
was made at a record low of $3.00. This rate, which was 35 cents
below the previous closing quotation and 14% cents below the
previous all-time low touched in 1932, represented about a 25
per cent depreciation of the unofficial rate in terms of the official
London quotation. This proved to be the year’s low, however.
Subsequently, additional restrictions, which by the end of
the summer resulted in the virtual disappearance of trading in
unofficial sterling in New York, were instrumental in effecting
a gradual rise in the unofficial quotations to the level of the
official rates. On June 7 it was announced that the prohibition
against the use of unofficial sterling in payment for key British
exports would be extended to all exports to the United States
and Switzerland. Simultaneously, the potential supply of un

FEDERAL RESERVE BANK OF NEW YORK

official sterling was reduced by the prohibition, at least for the
time being, of security sales in the United Kingdom by non
residents of the sterling-franc area, and by the granting of
dollars or Swiss francs at the official rate for current financial
and commercial payments to the United States and Switzerland.
Furthermore, it was indicated that supplies of unofficial sterling
would eventually be reduced further by the extension of bilateral
payment agreements involving the use of “ special” sterling ac
counts in dealings with other countries outside the sterling and
Allied areas. Negotiations to this end progressed in the sub
sequent months and by the end of the year such “ special” ac
counts had been set up for Sweden, Argentina, Rumania, Brazil,
Hungary, Portugal (and Empire), Greece, Peru, Uruguay,
Bolivia, Chile, Turkey, Spain, and Paraguay.
Much of what remained of the unofficial sterling market
in New York after the June 7 regulations was eliminated by
further restrictions which became effective on July 18. These
new measures placed further limitations on the purposes for
which existing unofficial sterling balances could be used, and
further accumulations of such sterling for American or Swiss
account were prohibited. Provision was also made for the open
ing by United States and Swiss banks of “ registered” sterling
accounts with British authorized banks, in order to facilitate
transactions in sterling at the official rates. It was provided
that payments to these accounts could be made only (1) by
sterling payments approved by the control; (2) by the sale of
United States dollars or Swiss francs, as the case might be, at
the official rate; and (3) by transfers from other “ registered”
accounts of the same country. On the other hand, balances
standing to the credit of these accounts, which are repurchasable
by the British authorities at $4.02%, could be used for all pay
ments to the sterling area, including those for Empire exports.
Although immediately after the imposition of the July 18
regulations the unofficial rate for sterling continued to fluctuate
widely at levels considerably below the official rates, the ulti
mate effectiveness of these measures was demonstrated by the
fact that by the middle of August the New York quotation had
risen to the rate at which sterling is made available by the
British authorities. The rate held within the relatively narrow
range of $4.02%-$4.05 in an extremely thin market during the
remainder of the year.

TWENTY-SIXTH ANNUAL REPORT

Because of the link between French and British exchange in
the official markets, the unofficial quotation for the French franc
moved approximately in line with that of sterling until trading in
the franc was suspended last June, when all French property
situated in the United States was placed under the control of the
United States Treasury. The low point was reached on the day
following the German invasion of the Netherlands and Belgium,
when, accompanying the break in the pound, the French franc
declined to an all-time low of $0.0170%.
Inasmuch as the Canadian exchange control, as originally
imposed in September, 1939, was more rigid than the initial
British restrictions, the numerous major adjustments in the
latter which so greatly affected the unofficial rate for sterling
were not required in the case of Canada. As a result, the unoffi
cial rate for Canadian dollars displayed considerably more sta
bility than that for either sterling or the French franc. The dis
count on the Canadian dollar in this market opened the year at
11*4 per cent, closely corresponding to the official Canadian pre
miums of 10 and 11 per cent on American exchange. However,
accompanying a seasonal decline in the tourist demand—one of
the few purposes for which unofficial Canadian dollars could be
used—the discount soon began to widen. By March 12 it had
reached 20 per cent, partly because of the above-mentioned factor
and partly in sympathy with the depreciation of sterling. Aside
from a temporary recovery in April, the unofficial quotation con
tinued considerably below the official rate, the discount reaching
22% per cent after the German military successes in May. With
an increase in tourist trade, however, the discount returned to
11% per cent in July. Subsequently, the only sizable fluctuation
occurred in mid-September, when the discount widened tempor
arily to 17% per cent, reflecting the repatriation through the out
side market of American funds derived from the redemption of
Canadian bond issues on September 1.
The record of the currencies of those small European coun
tries which previously had been havens for refugee capital was
one of increasing adverse pressure during the critical months
before some of these nations were themselves drawn into the war.
However, with the exception of the belga, which fluctuated within
a considerable range because of the widened gold points, spot
quotations for these currencies were held fairly stable by means
of official supporting operations. After appreciating to as high
as $0.1710 on the first of April, the spot rate for the belga turned

FEDERAL RESERVE BANK OF NEW YORK

downward, accompanying fears of invasion, and by May 9, the
day before trading was suspended as a result of the “ blocking”
here of Belgium property, the rate had receded to $0.1656. Spot
guilders, on the other hand, were rigorously maintained at
$0.5309 through May 9. In both of these currencies, however, a
sharp widening of forward discounts prior to the actual invasion
gave ample evidence of the severe strain.
Despite considerable pressure against the Swiss franc as
a result of the spreading of the war, the Swiss monetary author
ities were successful in holding the spot rate for Swiss exchange
at about $0.2242 until early May. Immediately after the viola
tion of Dutch and Belgian neutrality, however, the Swiss franc
depreciated temporarily in the New York market to as low as
$0.2113, or somewhat below the statutory minimum. This re
action was only of short duration and by May 20 the rate had
returned to $0.2242. At about the same time the Swiss Equaliza
tion Fund, which was established in the autumn of 1936, was
liquidated and the gold reserve of the Swiss National Bank was
revalued upward, lowering the theoretical dollar equivalent of
the Swiss franc from $0.2426 to about $0.2311. As long as
French resistance to the German drive continued there was con
stant fear that Germany or Italy might attempt to force a
passage through Switzerland. With the conclusion of the French
armistice, however, this fear subsided and the flight of capital
from Switzerland to which this fear had given rise gave way to
a substantial return flow of funds. The resulting demand for
Swiss exchange was met to a large extent by the Swiss authori
ties, who thus added to their foreign assets, but the rate was
allowed to appreciate in a series of steps, which by the middle
of July had brought it up to about $0.2270. In the fall, the re
patriation of funds held in Swiss names in the United States was
accelerated by fears of the “ blocking” of Swiss accounts in the
United States. As a result, the demand for Swiss francs against
dollars increased in late September and by the end of October
the rate had risen to $0.2323, a level about 81 points above that
prevailing in mid-June and the highest since March, 1938, prior
to the German absorption of Austria. The rate held at about
this level during the remainder of 1940.
Sweden, like most of the small European countries, experi
enced considerable pressure against its currency during the early
months of the year. This led to the introduction of official ex
change control in Sweden toward the end of February. The new

TWENTY-SIXTH ANNUAL REPORT

regulations, which supplanted the informal control over capital
transfers applied by Swedish banks since December, 1939, were
strengthened further at the time of the German drive into Nor
way. Despite the pressure, however, the Swedish krona was
maintained at about $0.2380 until April 9. Immediately after the
invasion of Norway the rate receded to about $0.2340, but by the
early part of May it had returned to about $0.2380, and held
near this level during the remainder of the year.
Concerning the rigidly controlled currencies of the Axis
powers, the official rate for the reichsmark and the Italian lira
were maintained at about $0.4005 and $0.0505, respectively,
throughout the year. The dollar value of the “ registered” mark,
however, which is usable only for certain limited purposes, rose
from a low of $0.0720 on March 1 to a high of $0.1255 in Novem
ber, and the Handelssperrmark, available for certain transac
tions in Germany, appreciated from about $0.0200 in April to as
high as $0.0975 in December. This appreciation, no doubt, re
flected primarily the psychological effect of the German military
successes on the Continent. New York trading in both these cur
rencies was, of course, extremely thin. The Japanese yen con
tinued at $0.2345, the rate at which it was pegged to the dollar
in October, 1939, following the depreciation of sterling.
Considerably more interest was shown in the Latin Ameri
can exchanges during the past year, as a result not only of the
suspension of active trading in one European currency after an
other, but also of the Congressional authorization last September
of an increase of $500,000,000 in the lending power of the ExportImport Bank largely to permit further financial aid to LatinAmerican countries.
After moving irregularly lower to $0.2120 during the first
half of the year, the free rate for the Argentine peso appeared
to have received considerable stimulus from the granting of a
$20,000,000 Export-Import Bank loan in June. Further strength
was caused in the late autumn by a movement of European capi
tal from New York to Argentina apparently as a result of appre
hension lest such capital become more generally immobilized
here. The peso rose to a high of $0.2385 in mid-October and
closed the year only slightly lower, at a level indicating a net ap
preciation of 4 per cent for the year as a whole. The dollar rate
for the Mexican peso, which had declined sharply during Decem
ber, 1939, following the withdrawal of the Bank of Mexico from
the market, continued to recede early in January, 1940,

FEDERAL RESERVE BANK OF NEW YORK

reaching about $0.1670, or 19 per cent below the early December
level. This rate was maintained through about the middle of
June. Subsequently, the improvement in the economic situation,
primarily due to curtailment of imports following stringent in
ternal credit restrictions, together with an improved outlook for
political stability in Mexico, lent considerable strength to the
peso and by the middle of October the dollar rate had recovered
to $0.2062, or about the level prevailing before the break in De
cember, 1939. The Cuban peso fluctuated considerably during the
year, its discount against the dollar moving within a range of
12% per cent, reached in March, and 7% per cent, to which it
recovered in October following reports that negotiations were
under way for an Export-Import Bank loan to the Cuban Re
public. At the end of 1940 the Cuban peso was quoted at a dis
count of 8% per cent, compared with 11% a year earlier.
The only significant fluctuation among the Far Eastern ex
changes occurred in the currency of the National Government
of the Republic of China. Through the efforts of the AngloChinese exchange fund, this currency was maintained above 6
cents until the first of May, when, accompanying rumors that
the fund’s resources were nearing the point of exhaustion, the
control withdrew its support. The rate dropped to 4% cents, but
quickly recovered, touching 6 cents again in early June. Sub
sequently, the dollar value fluctuated irregularly between 5 and
6% cents.
Capital Movements
The past year of war witnessed further disturbance in the
balance of payments between the United States and foreign coun
tries. The reported net gain of gold from abroad—the usual
symptom of dislocation—reached during 1940 the unprecedented
amount of $4,100,000,000, or more than $1,000,000,000 above the
record breaking total of 1939. This heavy movement of gold was
not, however, primarily the result of an uncontrolled flight
of private capital to this country, as had been the case in the
large gold inflow of previous years. The underlying cause was
to a great extent to be found in other items in the balance
of payments—mainly in our rapidly expanding merchandise
export surplus. Although the trade balance has been “ favor
able” for many years, heavy foreign purchases of war materials
and other products needed for manufacture of the implements
of war, especially by the British, raised the export surplus for
1940 to $1,400,000,000, the largest since 1921. An additional

TWENTY-SIXTH ANNUAL REPORT

factor contributing to the disturbance in the balance of pay
ments during 1940 was the reduction in American tourist ex
penditures abroad, which in the past had provided foreigners
with the means of paying for a good many of their net commodity
purchases in this country. Foreigners were thus faced with an
increasing need for dollars at a time when their receipts of
dollars had diminished.
With the extension of some form of governmental foreign
exchange control to many of those countries from which the
capital inflow had originated before the war, reported interna
tional capital movements have come to be confined largely to
those for foreign official accounts, or other transactions having
the approval of the monetary authorities. Published data on
transfers of capital between this country and abroad during the
period from January 4 to December 31, 1940, indicated a net
inward movement of $804,000,000, or considerably less than the
previous year’s reported net inflow of $1,196,000,000.
The past year’s influx of capital had two significant aspects.
The first and most important was that $658,000,000, or about 80
per cent, of this net inflow represented a movement of funds to
this market on the part of foreign central banks and govern
ments. The second is that most of this inflow for account of
foreign central banks and governments remained in idle bank
balances. In this latter respect the inflow was similar to that
of 1939, except that in that year a much greater percentage was
for private account. In both years the movement was in con
trast to previous inflows, particularly in the three years ended
with 1937, when foreign purchases of American securities, to
gether with the repatriation of foreign obligations, accounted
for about half of the $3,400,000,000 capital inflow during the
period. The changing character of the international movement
of capital during recent years may be readily seen from the
table on page 33, showing the movement of various types of capi
tal between the United States and abroad during the past six
years.
The past year’s increase in the funds held in New York by
foreign central banks and governments was due to a number of
factors, the most important of which was the liquidation of
European gold reserves. The most striking example of this was
the $323,000,000 net increase in “ official” funds in New York
last June, accompanying a net gain of $726,000,000 of gold from
abroad.

FEDERAL RESERVE BANK OF NEW YORK

One of the heaviest sellers of gold since the war began was,
of course, the British control. However, since the proceeds of
this liquidation of British gold reserves were used to finance
large wartime purchases, no increase in official British balances
here resulted. According to data released by Secretary Morgenthau, the heavy outlays during the sixteen months ended in
December, 1940, required the expenditure not only of current
receipts of dollars and of the proceeds of the liquidation of a
large part of United Kingdom gold reserves, but also of dollar
assets requisitioned from private holdings. (This subject is
discussed more fully in a subsequent section of this report.)
Although the gold inflow was the principal factor, other
important influences contributed to the building up of other
foreign “ official” funds during 1940. One of these was some
repatriation of capital held here for private foreign account—
a movement which began with the shift of the center of the war
from France and the Low Countries to England and was later
reinforced by fears that the “ freezing” here of property of
the invaded countries might be extended to cover property of
other countries. As a result, certain foreign monetary authori
ties, particularly the Swiss who previously had supported their
currency against any depreciation, undoubtedly were in a posiMovement of Capital between the United States and Foreign Countries (a)

(In millions of dollars; capital inflow -f* or outflow —)
Banking funds

Total
capital
m
ovement

Total

1935.......................
1936.......................
1937.......................
1938.......................
1939.......................

+ 1,413 + 965
+ 1,196 + 397
+ 802 + 256
+ 415 + 331
+ 1,196 + 1,132

1940
First quarter............
Second quarter..........
Third quarter...........
Fourth quarter.........

+
+
+
+

Total, 1940............ +

112
357
315
20

+
+
+
+

804 +

89
344
352
61

Central
bank
funds in
N.Y.
Other
(b)
+ 10 + 955
+ 71 + 326
+ 163 + 93
+ io + 321
+ 288 + 844

Security transactions
Dom
es
Broker
tic
Foreign age bal
Total securities securities ances
-f
-I+
+
+

448
799
546
84
64

3 + 92 +
+ 383 - 39 +
+ 190 + 162 + 88 - 27 -

23
13
37
41

846 + 658 + 188 -

+ 317 + 125 +
+ 601 + 191 +
+ 245 + 267 +
+ 57 + 27
- 85 + 116 +

6
7
34
—
33

+
+
+
+

36 +
24 +
7 +
11

8
10
3
—

42 - 141 +

78 +

(a) Source: United States Treasury.
(b) Including funds transferred from central bank to governm accounts.
ent

21
21
47
52

TWENTY-SIXTH ANNUAL REPORT

tion to acquire a considerable amount of dollar exchange offered
by private holders, Swiss and others, anxious to withdraw their
capital from the United States. Another factor in the increase
in foreign “ official” funds during the latter part of 1940 was
the requisitioning of private holdings of dollar exchange.
The international movement of capital for so-called private
account, which, as mentioned above, on balance was relatively
insignificant for the year as a whole, was inward through April,
but gave way to an outward movement following the German
occupation of Denmark, Norway, and the Low Countries. Dur
ing 1940, the net inflow of “ private” banking funds amounted to
$188,000,000.
This accumulation of banking funds in the United States
for so-called private foreign account, however, was partially
offset by a $42,000,000 net outflow of capital on security account.
According to the reported data, foreigners disposed on balance
of $141,000,000 of American securities. The principal selling of
stocks, of course, came from British holders—especially the
British control, which requisitioned private holdings of 233 dol
lar security issues during the year. Although the reported figures
indicate that British net sales of American stocks and bonds
amounted to $67,000,000 during this period, there is reason
to believe that the total amount liquidated was considerably
larger, particularly since it has been officially announced that the
total liquidation for the first sixteen months of the war amounted
to $334,000,000. Aside from certain technicalities, such as foreign
buying through London in the early months, the incompleteness
of the reported figures can in large part be ascribed to sales
effected by direct negotiations which did not go through report
ing channels.
The remainder of the reported foreign liquidation of Ameri
can securities was largely for Asiatic accounts, net sales for
such accounts amounting to $70,000,000. Although Swiss inves
tors were reported to have acquired $36,000,000 (net) of Ameri
can securities through the end of May, rather substantial selling
developed after the French capitulation. As a result, net pur
chases of only $3,000,000 were recorded for Switzerland for the
entire year 1940. Italian interests also were rather active in our
security markets during the year, acquiring a net amount of
$31,000,000 of American securities through September. Subse
quently, however, a steady liquidation occurred, possibly induced

FEDERAL RESERVE BANK OF NEW YORK

by fears that our Government might take measures to “ freeze”
additional foreign assets in this country. By the end of the year
a large part of the previous acquisitions had been sold.
The repurchase by foreigners of their own securities either
through redemption or purchase before maturity continued dur
ing 1940, when a net amount of $78,000,000 of foreign securities
was taken back by foreigners.
Movement of Capital between the United States and
Specified Foreign Countries or Areas
January 4 to December 31, 1940 (a)
(In millions of dollars; capital inflow + or outflow — )
Banking
funds

Security
transactions (b)

Total

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

— 66
+203
+ 11
— 11
— 26
+136
+155

—66(c)
— 1
— 1
+ 8
+11
+ 3
+15

—132
+202
+ io
— 3
— 15
+139
+170

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

+402

—31

+371

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

+163
+102
+175
+ 4
+846

+19
+21
—50
— 1

+182
+123
+125
+ 3
+804

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

—42

(a) Source: United States Treasury Department, (b) Including the movement in
brokerage balances, (c) Excludes unreported foreign sales of American securities.

The volume of unidentified transactions in the balance of
payments increased further during the past year, even sur
passing the previous year’s large total of $1,037,000,000. As
against the net foreign sales of $4,100,000,000 of gold here dur
ing 1940, only $804,000,000 can be accounted for by the reported
net inflow of capital, and even when the export surplus of
$1,400,000,000 and other items in the balance of payments, in
cluding advance and capital assistance payments to American
concerns by the British and French, are taken into account, the
“ residual” item will approach $1,500,000,000. In the past the
transfer of foreign funds in this country to accounts which ap
pear to be domestic, together with the immigration of refugees
with dollar holdings which cease to be classified as “ foreign”

TWENTY-SIXTH ANNUAL REPORT

assets upon the arrival of the refugees, had, no doubt, been
largely responsible for the increasing volume of unaccounted
for items. While the movement of private funds to this country
through methods which escape the reporting system may have
diminished with the tightening of exchange control abroad dur
ing the past year, nevertheless, it probably continued to con
tribute to the large “ residual.”
British Gold and Dollar Operations
Although it is impossible to determine, from published data
alone, the extent and character of British dollar and gold opera
tions for the calendar year 1940, the figures presented by Secre
tary Morgenthau to the Congress at its hearings on the LendLease bill give a detailed picture of the operations for the first
sixteen months of war (September 1,1939 to December 31,1940).
Since this information supplied many data which previously
could be estimated only by indirect methods, it is now possible
to assemble a more or less complete balance of payments for the
sterling area’s gold and dollar transactions, and a summary is
given in the accompanying table.
As these data indicate, the British Empire, excluding
Canada and Newfoundland, expended $4,346,000,000 in gold and
dollars during the first sixteen war months. Of this amount,
$1,800,000,000 was used for imports from the United States,
including $660,000,000 for British Government purchases, de
livered by the end of 1940. A large loss of dollar exchange also
occurred through the withdrawal of $735,000,000 of capital from
Great Britain, of which $300,000,000 represented the use by
American importers of foreign-owned unofficial sterling balances
for payment of British Empire merchandise, and an additional
$235,000,000 represented the liquidation of a short forward posi
tion in dollars, incurred before the war. Another item of im
portance is the $720,000,000 which the British authorities placed
at the disposal of American concerns, either as advance pay
ments against orders, or as capital assistance for the purpose
of expanding productive capacities and thus speeding deliveries.
Nearly one half of the total outlays during the sixteen month
period was financed by current receipts of gold and dollars, the
largest sources of exchange being the sale of $965,000,000 of
newly mined and privately dishoarded gold and receipts
from merchandise exports and various services, of which

FEDERAL RESERVE BANK OF NEW YORK
Estimated Balance of Gold and Dollar Payments of the British Empire,
Exclusive of Canada and Newfoundland (a)

(I m n o dllas
n illios f o r)

September 1, 1939 - December 31, 1940

Receipts

Net
receipts ( + )
or expendi
Expenditures tures (—)

Trade and Service Items
Merchandise

845
50(d)

1,800 (b)
550(d)

— 955
— 500

895

2,350

—1,455

Shipping .................................................
Interest and dividends ...........................
Other ......................................................

35
85
50

133
88
24

—
—
+

98
3
26

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

170

245

—

With U. S.................................................
With other areas (c) .............................
Total ................................................
Services

Gold

Liquidation of United Kingdom reserves ...
Sale of newly mined and dishoarded gold ...
Gold payments by Empire countries to Canada
and Newfoundland, net (e) ......................
Total ................................................

1,746
965

+1,746
+ 965
225

2,711

— 225

225

+2,486

Capital

Liquidation of American securities..............
Liquidation of dollar balances ....................
Withdrawal of capital from sterling area ...
“ Capital Assistance” and advance payments
to American concerns .............................
Total ................................................

334
236(f)
735(g)
720
570

1,455

4,346

Residual ........................................................

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

— 885
—

71
0

(a) All figures used in this table are based on data furnished by the British
Treasury and released by the U. S. Treasury.
(b) Includes only payments for those purchases against which delivery was made.
Advance and “capital assistance” payments are excluded.
(c) Excludes Canada and Newfoundland.
(d) In addition to trade and services, this figure reflects to some extent certain
other transactions requiring gold and dollars.
(e) Represents the settlement of the net balance due to Canada and Newfoundland
on all transactions with the Empire, after allowance is made for $330,000,000 of “ Canadian
assistance” to the United Kingdom. This assistance took the form of repatriation of
British-held Canadian securities and an increase in sterling balances held by Canada. It
should be noted that the figures in this table exclude Canada’s trade and other trans
actions with the United States.
(f) Composed of a $240,000,000 reduction in private British balances, partially
offset by a $4,000,000 increase in official balances.
(g) Includes $300,000,000 of foreign-owned “free” sterling sold to American im
porters of British Empire goods.

TWENTY-SIXTH ANNUAL REPORT

$1,015,000,000 came from the United States alone. The re
mainder of the expenditures was covered by the liquidation of
assets held before the war began, including the disposal of
$1,746,000,000 of gold reserves and $570,000,000 of short and long
term dollar assets.
G

Total net imports of gold from abroad were $4,744,500,000
during 1940. After allowance is made for an increase of $644,700,000 in the total amount of gold held under earmark for
foreign accounts at the Federal Reserve Banks, the reported net
gain of gold from abroad amounted to $4,099,800,000, by far the
largest amount for any year on record. Reported imports from
Canada (a large part of which obviously came originally from
other countries) amounted to $2,622,500,000 and from England
Gold Movements by Countries

(In thousands of dollars)
Country

Exports to

Imports from

Mexico......................
Netherlands ..............
Netherlands Indies ...
Norway .....................
Philippines ...............
Portugal ...................
South Africa ............
Sweden ....................
Switzerland ..............
U.S.S.R. (Russia) ...
Yugoslavia ...............
All Other .................

59,072
103,777
67
2,622,501
25,999
633,100
241,778
26,176
49,989
43,935
111,739
29,886
63,260
20,583
33,405
38,630
75,087
183,739
161,489
90,320
30,851
16,310
89,774

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

$4,995

$4,749,467

Argentina .................
Australia...................
Bolivia......................
Colombia...................
England ...................
France ......................
Hong K ong...............
India ........................
Italy ..........................

* Net export.

Net imports

$
....
$4,781
171
17

$4,744,472

59,072
103,777
4,714*
2,622,330
23,999
633,083
241,778
26,176
49,989
43,935
111,739
29,880
63,260
20,583
33,405
38,627
75,087
183,739
161,489
90,320
30,851
16,310
89,757

FEDERAL RESERVE BANK OF NEW YORK

$633,100,000, which together accounted for about three quarters
of the total from all countries. Sizable amounts were received
also from France, South Africa, Sweden, Japan, and Australia.
Gold movements during 1940, by countries of shipment or desti
nation, are summarized in the accompanying table. Some of the
gold imports shown in the table were earmarked for foreign
account upon arrival, but such operations are not reported by
countries.
Foreign Property Control

On April 10, 1940, following the invasion of Denmark and
Norway by German military forces, an Executive Order No. 8389
was issued by the President, amending Executive Order No. 6560
dated January 15, 1934, regulating transactions in foreign ex
change, transfers of credit, and the export of coin and currency.
The effect of this executive order was to “ freeze” all property
in the United States of Denmark and Norway and their nationals,
except as transactions involving such assets were permitted by
regulations or licenses issued by the Secretary of the Treasury,
and to require reports on such property in this country. By
subsequent executive orders and amendments up to the end of
1940, the “ freezing” of foreign assets in the United States was
extended successively to Belgium, the Netherlands, Luxembourg,
France, Latvia, Estonia, Lithuania, and Rumania.
Regulations issued under these executive orders required
that an application be filed for a license to execute any transac
tion affecting the property of these countries and their nationals.
General licenses were issued by the Treasury Department from
time to time, however, which permitted the execution of certain
specified types of transactions without the filing of applications,
but with the requirement, in many cases, that reports of transac
tions under such general licenses be made to the Federal Reserve
Bank in the respective districts. The Federal Reserve Banks, as
fiscal agents of the United States, were assigned the task of
receiving, reviewing, and transmitting to the Treasury Depart
ment such applications with recommendations as to the granting
or declination of licenses, and of issuing licenses in cases ap
proved by the Treasury. The Treasury adopted a policy of issu
ing general authorizations to the Federal Reserve Banks to dis
pose of certain classes of applications without reference to the
Treasury Department, which resulted during the year in an
increasing number of applications being acted upon by the Fed
eral Reserve Banks. At the end of the year almost 50 per cent

TWENTY-SIXTH ANNUAL REPORT

of the cases handled at this bank were being disposed of without
reference of the applications to the Treasury Department.
In this bank a special department was organized to handle
this work. As finally set up the department was placed under the
immediate direction of an assistant vice president and a depart
ment manager with approximately 120 employees.
Practically from the beginning, applications for licenses
were received by this bank at the rate of several hundred a day.
The number of applications reached a maximum of nearly 800
a day near the end of June. While the list of countries to which
the “ freezing” orders were made applicable was gradually en
larged, the completion of transactions which were in progress at
the time when the “ freezing” orders were first applied tended
to offset the expansion of the volume of assets involved, and
thus to limit the number of applications filed. Nevertheless, the
work continued in large volume to the end of the year, and by
that time more than 90,000 applications had been received at this
bank.
Foreign Relations

There was considerable activity during the whole year in
foreign accounts maintained at this bank and the balances in
these accounts increased substantially, standing at the end of
the year at $1,130,945,000 as compared with $397,380,000 at the
end of 1939 and $199,211,000 at the close of 1938. These deposits
reached a record high level of $1,166,232,000 on November 28,
1940. Gold held under earmark for foreign accounts also at
tained a new high level on December 10, 1940 at $1,831,346,000.
At the end of the year the total of earmarked gold amounted to
$1,807,673,000 as compared with $1,163,004,000 a year previous.
Of the four short term loans, secured by gold earmarked at
this bank, which had been extended to a foreign central bank in
1939 to meet its seasonal requirements, two loans totaling
$5,020,000 were outstanding at the end of that year; these were
fully repaid early in 1940. An additional loan of the same nature,
in the amount of $1,000,000, was made to the same bank in Febru
ary, 1940 and repaid in May. Beginning in August, a series of
short term loans totaling $1,357,000 (including $410,000 of re
newals), likewise for seasonal requirements and secured by gold
earmarked at this bank, was granted to a Latin American central
bank; the aggregate of these loans outstanding at the end of the

FEDERAL RESERVE BANK OF NEW YORK

BILLIONS
OF DOLLARS

Gold Held under Earmark for Foreign Accounts and Foreign Deposits at
Federal Reserve Banks
i

year was $947,000. All of these loan operations were effected by
this bank with the approval of the Board of Governors of the
Federal Reserve System, in behalf of itself and other Reserve
Banks.
The year under review witnessed the complete repayment
of the remaining participation of the Federal Reserve Banks in
the credit originally extended to the National Bank of Hungary
in 1931 jointly by a group of central banks and the Bank for
International Settlements. The Federal Reserve Banks ’ original
participation in this credit had amounted to $5,000,000, but had
been reduced to $1,830,000 by the end of 1939.
Balances held abroad at the end of 1940 by this bank, in
its own behalf and in behalf of other Reserve Banks, were sub
stantially! unchanged from the 1939 year-end level, namely, the
equivalent of $46,700; of this amount, $25,800 is repayable in
United States dollars and the remainder in foreign currencies.
No commercial bills denominated in foreign currencies were
held at any time during the year; as mentioned in this bank’s
previous annual report, the small amount of such bills formerly
held had been liquidated by October, 1939.

TWENTY-SIXTH ANNUAL REPORT

Membership Changes in 1940

During 1940 there was a revival of interest in membership
in the Federal Reserve System on the part of State chartered
banks and Trust companies, a class of institutions with which
membership is voluntary. In the Second Federal Reserve Dis
trict eight such institutions became members, and a number of
others submitted applications which were under consideration
at the end of the year. The percentage of member banks, both
National and State chartered, to all commercial banks in the
District rose slightly, notwithstanding the fact that eleven mem
bers were combined with other banks.
The tables below show the classification of banks in this
District according to their charters, and the record of changes
in membership during 1940.
Number of Member and Nonmember Banks in Second Federal Reserve
District at End of Year

(Exclusive of Mutual Savings banks and Industrial banks)
December 31,1940

December 31,1939

Members

Non
members

Per cent
members

Non
Per cent
Members members members

National banks .........
State banks...............
Trust companies.......

587
46
132

0
100
131

100
32
50

596
43
129

0
107
138

100
29
48

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

765

231

768

245

T ype

of bank

Changes in Federal Reserve Membership in Second District During 1940

Total membership beginning of year ........................................................
Increases:
State banks admitted...........................................................................
Trust companies admitted....................................................................
Newly chartered member State bank organized to succeed a National
bank ............................................................................................

768
3
5
1

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

Decreases:
Member banks combined with other members....................................
Member banks combined with nonmembers.........................................
National bank succeeded by newly chartered member State bank.........

9
2
1

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

Net decrease ..............................................................................................

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

765

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

FEDERAL RESERVE BANK OF NEW YORK

Operations of the Bank During 1940

T
n
w
o

h
u

e
m

f
b

o
r

w
n

i
d

g
d

t
o

r
e
t h
e
w
o
r
k
c
f
t r
a
n
s
a
c
t
i o
n
s
.
The volume of operations in most departments of the bank,
particularly in services rendered to business and the public
generally, were somewhat larger in 1940 than in the previous
year. This increase in volume accompanied expanded indus1940
Number of Pieces Handled
Bills discounted:
Applications ........................................................
Notes discounted .................................................
Industrial advances:
Notes discounted .................................................
Commitments to make industrial advances............
Bills purchased in open marketf ................................
Currency received and counted....................................
Coin received and counted...........................................
Checks handled ..........................................................
Collection items handled:
United States Government coupons paid* ............
All other...............................................................
Issues, redemptions, and exchanges by fiscal agency
department:
United States Government direct obligations.........
All other...............................................................

1939

506
569

773
933

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

76
5
119
657,400,000
931,986,000
208,359,000

4,709,000
1,909,000

5,018,000
1,970,000

1,144,000
236,000
180,000

1,281,000
427,000
194,000

Amounts Handled
$35,431,000
Bills discounted ..........................................................
Industrial advances:
35,000
Notes discounted .................................................
10,000
Commitments to make industrial advances ..........
Bills purchased in open market for own account.........
Currency received and counted.................................... 3,114,447,000
100,830,000
Coin received and counted...........................................
Checks handled............................................................ 79,649,341,000
Collection items handled:
United States Government coupons paid* ............
571,898,000
All other .............................................................. 1,595,295,000
Issues, redemptions, and exchanges by fiscal agency
department:
United States Government direct obligations ---- 12,324,357,000
1,457,309,000
Wire transfers of funds................................................ 29,770,676,000
t Includes number purchased by this bank for System Account.
* Includes coupons from obligations guaranteed by the United States.
$ Revised.

$38,853,000
275,000
231,000
828,000
3,096,368,000:
94,785,000
76,502,457,000
545,532,000
1,783,187,000
16,845,724,000
3,255,959,000
29,077,778,000

a
a

r
n

TWENTY-SIXTH ANNUAL REPORT

trial activity in the latter half of the year induced chiefly by
the National defense program. On the other hand, the lending
operations of the bank in 1940 were again smaller than in the
previous year, reflecting a reduction in the number of member
bank applications for rediscounts and advances, and a reduction
in the number of inquiries for loans for working capital from
business organizations that were unable to obtain funds from
other sources.
Financial Statement
A decrease of $128,000,000 (from $776,000,000 to $648,000,000) during 1940 in “ Total bills and securities” held by the
New York Reserve Bank is shown in the following year-end
condition statement. This reduction in earning assets consisted
almost wholly of a net decline in the security holdings of the
System Open Market Account, which was occasioned to a con
siderable extent by the operations discussed under “ Federal
(In thousands of dollars)
A sse ts

Dec. 31,1940

Dec. 31,1939

Gold certificates on hand and due from U. S.
Treasury .....................................................
Redemption Fund—Federal Reserve notes.........
Other cash ........................................................

$ 9,757,527
972
51,324

$ 7,225,434
1,619
71,716

$ 9,809,823

$ 7,298,769

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

90
2,258

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

245
491
736

2,348

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

1,756

2,035

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

379,573
265,782

419,593
351,944

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

645,355

771,537

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

647,847

775,920

Due from foreign banks ....................................
Federal Reserve notes of other banks...............
Uncollected items ..............................................
Bank premises .................................................
Other assets ......................................................

17
4,773
234,525
9,701
13,229

18
4,336
245,508
9,895
17,226

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

$10,719,915

$ 8,351,672

FEDERAL RESERVE BANK OF NEW YORK

Reserve Policy” on preceding pages, and to some extent by a
smaller participation of this bank, in favor of other Reserve
Banks, in the security holdings of the System Open Market Ac
count through the quarterly reallocations of the System Account
portfolio. With respect to other items in the “ Total bills and
securities ’ ’ group, discounts for member banks held to very low
levels, other bills discounted were reduced chiefly through repay
ment of foreign loans on gold discussed in the “ Foreign Rela
tions” section on a preceding page, and industrial advances—
as well as commitments to make such advances—decreased some
what further during 1940.
The expansion in ‘ ‘ Total reserves ’ ’ and in ‘ ‘ Total deposits ’ ’
of this bank reflected the continued large inflow of gold from
other countries. As a preceding section of the report has in
dicated, the increase in foreign deposits reflected chiefly undis
bursed proceeds of foreign official sales of gold to the Treasury,
some of which was held under “ foreign property control” by
Executive Order. The increase in “ Other deposits” reflected
larger balances for nonmember clearing accounts and the addi
tion of one sizable nonmember account opened during the year.
(In thousands of dollars)
L ia b iu t ie s

Dec. 31,1940

Dec. 31,1939

Federal Reserve notes in actual circulation.......

$ 1,576,404

$ 1,269,922

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

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

$ 6,319,837
139,593
136,108
165,323

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

$ 8,814,760

$ 6,760,861

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

201,083
175

199,137
873

$10,592,422

$ 8,230,793

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

50,972
53,326
7,109
9,472

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

127,493

120,879

Total liabilities and capital accounts ...

$10,719,915

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........

94.4%
700

$ 8,351,672

90.9%
1,803

TWENTY-SIXTH ANNUAL REPORT

Income and Disbursements
In 1940, earnings of this bank showed an increase over the
preceding year because of increased income from holdings of
United States Government securities, which was attributable to
a lengthening in the average maturity and a resulting increase
in the average yield. As a consequence of larger earnings and
no appreciable change in net expenses of operation, current net
earnings in 1940 were $5,644,000 compared with $3,899,000 in
1939. The addition of $3,408,000 of profits derived from the sale
of United States Government securities, together with other
receipts and smaller deductions than in 1939, brought net earn
ings to $9,555,000, compared with $4,831,000 in 1939.
Net earnings provided for the usual 6 per cent dividends to
member banks, amounting in 1940 to $3,065,000, and for a trans
fer of $6,529,000 to ordinary surplus (Section 7). As in the
previous year, however, ordinary surplus then was reduced by
the transfer of the profit from the sale of United States Govern
ment securities ($3,408,000) to reserves for contingencies in
“ Other capital accounts.”
Profit and Loss Account
For the calendar years 1940 and 1939

(In thousands of dollars)
1940

1939

Earnings ............................................................
Net expenses .....................................................

12,985
7,341

11,211
7,312

Current net earnings ...........................
Additions to current net earnings:
Profits on sales of U. S. Government securities
All other.....................................................

5,644

3,899

3,408
638

1,262
94

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

4,046

1,356

103
32

405
19

Deductions from current net earnings:
Losses and reserves for losses on industrial
advances ..............................................
All other.......... .........................................

135

424

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

9,555

4,831

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

3,065
6,529
—39

3,055
2,125
—349

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

53,326
6,529

52,463
2,125

59,855
3,408

54,588
1,262

56,447

53,326

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

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

FEDERAL RESERVE BANK OF NEW YORK

Changes in Directors and Officers

On December 31, 1940 Owen D. Young, Chairman of the
Board of Directors, relinquished that office. The following
resolution concerning Mr. Young was adopted by the Board of
Directors of the Federal Reserve Bank of New York at its
meeting on January 2, 1941:
On December 31, 1940, Owen D. Young, Chairman of the
Board of Directors of the Federal Reserve Bank of New York,
completed nearly eighteen years of service to this institution.
Mr. Young was first elected as a Class B director of the bank for
a term beginning in January 1923. He was appointed a Class C
director on January 13, 1927, and was Deputy Chairman from
January 1927 through 1935, and from June 1936 to January
1938. He was then appointed Chairman of the Board for the
three year term which he has now completed, and to our great
regret he has decided to relinquish this office.
Mr. Young’s service to the bank has been longer than that
of any other director. But his contribution to the bank’s devel
opment can not be measured in years. Its measure is found in
his devotion to the public interest, in his ability to discern broad
economic and social trends and in his wisdom which caused him
always to seek and to give weight to the human factor in mone
tary and credit problems. For him to become a director of a
central bank was to become a central banker by the study and
practice of that profession. Through the most trying periods in
the life of the Federal Reserve System he has been a dominant
figure in the councils of the Federal Reserve Bank of New York,
and he has contributed largely to the development of domestic
and international banking and credit policy.
The Federal Reserve Bank of New York feels deeply its
debt to Owen D. Young, a great American, who found in this
institution an opportunity for long continued public service.
The Board of Directors of the bank, by this minute, records and
acknowledges this debt.

At a regular election in the autumn of 1940, Leon Fraser,
President, The First National Bank of the City of New York,
was elected by member banks in Group 1 as a Class A director
for a term of three years beginning January 1, 1941, to succeed
William C. Potter, New York, N. Y., whose term expired De
cember 31, 1940. At the same time, Donaldson Brown, Vice
Chairman of the Board and Vice President of General Motors
Corporation, New York, N. Y., was elected by member banks in

TWENTY-SIXTH ANNUAL REPORT

Group 1 as a Class B director for a term of three years begin
ning January 1, 1941, to succeed Thomas J. Watson, New York,
N. Y., whose term expired on December 31, 1940.
In December, 1940, the Board of Governors of the Federal
Reserve System designated Beardsley Ruml, Treasurer, R. H.
Macy & Co., Inc., New York, N. Y., Chairman and Federal Re
serve Agent of this bank for the year 1941, to succeed Owen D.
Young, whose term as director expired December 31, 1940,
and appointed Edmund E. Day, President, Cornell University,
Ithaca, N. Y., Deputy Chairman for the year 1941. In Decem
ber, also, the Board of Governors of the Federal Reserve System
reappointed Howard Kellogg, Buffalo, N. Y., as a director of
the Buffalo Branch for a term of three years beginning
January 1, 1941.
The directors of this bank appointed Raymond N. Ball,
President, Lincoln-Alliance Bank and Trust Company, Roches
ter, N. Y., as a director of the Buffalo Branch for a term of
three years beginning January 1, 1941, to succeed William A.
Dusenbury, Olean, N. Y., whose term expired December 31,1940.
The directors of this bank reappointed Robert M. O’Hara,
Managing Director of the Buffalo Branch for the year 1941.
Changes in Officers
On April 11, 1940, it was announced that George L. Har
rison, President of this bank, would resign that office to become
President and Chief Executive Officer of the New York Life
Insurance Company, New York, N. Y., as of July 1,1940; a later
announcement on June 24, 1940, stated that because of extra
ordinary conditions which had developed since the earlier an
nouncement, the Board of Directors of the Federal Reserve
Bank of New York, with the concurrence of the Board of Gov
ernors of the Federal Reserve System and with the consent of
the Board of Directors of the New York Life Insurance Com
pany, had requested Mr. Harrison to defer his resignation from
the Presidency of the Federal Reserve Bank of New York until
December 31, 1940; in December, it was announced that Mr.
Harrison’s resignation had been accepted effective December
31,1940 and that he would assume office as President and Chief
Executive Officer of the New York Life Insurance Company on
January 1, 1941.

FEDERAL RESERVE BANK OF NEW YORK

The following resolution was adopted by the Board of Di
rectors of the Federal Reserve Bank of New York at its meeting
on January 2, 1941:
The resignation of George L. Harrison as President of the
Federal Reserve Bank of New York on December 31, 1940,
brings to an end a notable career of public service in the Federal
Reserve System.
Mr. Harrison joined the legal staff of the Federal Reserve
Board before the opening of the Federal Reserve Banks in
November 1914. He has been an official of the System continu
ously since that time, except for a brief period during the war
of 1914-18. In June 1920, Mr. Harrison came to the Federal
Reserve Bank of New York as a Deputy Governor, and in
November 1928, following the death of Benjamin Strong, he
was elected Governor of the bank. For the past twelve years,
he has been this bank’s chief executive officer, and a leading
member of the System committees which contribute to the for
mulation of banking and credit policy.
The period of his leadership has been one of extraordinary
difficulties. It has encompassed the collapse of the speculative
boom in the United States in 1929, the credit and financial
debacle in Europe in 1931, the banking crisis in this country in
1933, the long period of recovery from the deep depression of
those years, and the outbreak of the present European war.
Through these critical times Mr. Harrison has brought this in
stitution to higher standards of performance in its banking
operations and has developed within it a growing capacity to
meet and cope with the difficult problems of central banking
policy. His own contribution, however, has gone beyond what he
has built into the Federal Reserve Bank of New York and is
recorded high in the annals of the banking and credit crises
of the period, within the nation and among the nations.
The Board of Directors of the Federal Reserve Bank of
New York in this minute records its thanks to George L. Har
rison for his devotion to the work of the bank through more
than twenty years, its recognition of those qualities of leader
ship which have made his services to the bank and to the nation
outstanding, and its appreciation of those qualities of friendli
ness and tolerance which have made association with him a con
tinuing pleasure. The best wishes of the Board go with him
in his new work.

On December 19, the Board of Directors of the bank an
nounced the appointment of Allan Sproul, formerly First Vice
President, as President to succeed Mr. Harrison, and the ap
pointment of Leslie R. Rounds, formerly a Vice President, as

TWENTY-SIXTH ANNUAL REPORT

First Vice President to succeed Mr. Sproul, both appointments
to become effective January 1, 1941.
On June 28,1940, it was announced that Herbert H. Kimball,
Assistant Vice President and Secretary, had resigned as Secre
tary of the bank in order that he might devote his entire time
to the work of the newly created Foreign Property Control De
partment, and Horace L. Sanford, formerly Assistant Secretary,
was appointed Secretary. At the same time, William F. Treiber,
Assistant Counsel, was appointed Assistant Secretary. Mr.
Sanford and Mr. Treiber continued to hold, respectively, the
positions of Manager of the Research Department and Assistant
Counsel.
William A. Scott, Manager of the Government Bond Depart
ment and a member of the staff of the bank since 1919, died on
August 28, 1940.
Effective January 3, 1941, the Board of Directors of this
bank appointed James M. Rice, formerly an Assistant Vice
President, a Vice President; William H. Dillistin, formerly
Assistant Vice President, was appointed General Auditor of the
bank; George W. Ferguson, formerly General Auditor, was ap
pointed Assistant Vice President; Robert H. Brome and John
H. Wurts, of the Legal Department, were appointed officers with
the title of Assistant Counsel.
Member of Federal Advisory Council
At its meeting on January 2, 1941, the Board of Directors
of this bank, selected George L. Harrison, President and Chief
Executive Officer of the New York Life Insurance Company,
New York, N. Y., formerly President of the Federal Reserve
Bank of New York, to serve as a member of the Federal Ad
visory Council for the Second District during the year 1941.

FEDERAL RESERVE BANK OF NEW YORK

Directors and Officers
DIRECTORS
Class

Group

Term
Expires
Dec. 31

L e o n F r a s e r ..................................................................................................................

1943

President, The First National Bank of the City of New York,
New York, N. Y.
A

2 Otis A. Thompson ......................................................................
President, The National Bank and Trust Company of Norwich,
Norwich, N. Y.

1941

N e il

H. D o r r a n c e ......................................................................
President, The First National Bank and Trust Company of
Camden, Camden, N. Y.

1942

D o n a ld s o n

B r o w n ......................................................................
Vice Chairman of the Board and Vice President, General
Motors Corporation, New York, N. Y.

1943

W a lte r

C. T e a g l e ......................................................................
Chairman, Board of Directors, Standard Oil Company (New
Jersey), New York, N. Y.

1941

R o b e r t T . S t e v e n s ....................................................................................................

1942

President, J. P. Stevens & Co., Inc., New York, N. Y.
C

B e a r d s le y R u m l,

Chairman

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

1941

Treasurer, R. H. Macy & Co., Inc., New York, N. Y.
C

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

DIRECTORS-BUFFALO BRANCH

1942

Term
Expires
Dec. 31

B. F o l s o m ..........................................................................................
Treasurer, Eastman Kodak Company, Rochester, N. Y.

1941

G ilb e r t

A. P r o l e .....................................................................................................................................
Genesee Farm Supply Company, Batavia, N. Y.

1942

H o w a r d K e l l o g g .....................................................................................................................................

1943

M a r io n

President, Spencer Kellogg and Sons, Inc., Buffalo, N. Y.
F r a n k F. H enry

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

1941

Director, General Mills, Inc., Buffalo, N. Y.
George F. Rand ...............................................................................................
President, The Marine Trust Company of Buffalo, Buffalo, N. Y.

1942

R aym ond

N. B a l l ............................................................................................
President, The Lincoln-Alliance Bank and Trust Company, Rochester, N. Y.

1943

Robert M. O’Hara, Managing Director............................................................

1941

MEMBER OF FEDERAL ADVISORY COUNCIL
G e o r g e L. H a r r i s o n
President and Chief Executive Officer, New York Life Insurance Company,
New York, N. Y.

TWENTY-SIXTH ANNUAL REPORT

OFFICERS
A l l a n S p r o u l,
L e s lie R . R o u n d s ,

S. L o g a n , Vice President and
General Counsel
J a m e s M. R ic e , Vice President

First Vice President

W a lte r

_
R ay

G id n e y ,

Vice President

L. W ern er K n ok e,

President

Vice President

R obert

Assistant Vice President

J. W i ls o n J o n e s ,

A rth u r

Assistant Vice President

P h e la n ,

Assistant Vice President

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

H a r o ld V . R o e ls e ,

Assistant Vice President

Vice President

S il a s A . M il l e r ,

Assistant Vice President

John

R ouse,

Vice President

J o h n H . W illia m s ,

G e org e W . F ergu son ,

Assistant Vice President

M cK eon,

V a le n tin e W illis ,

Assistant Vice President

D udley H . B a r r o w s,

R o b e r t F. M c M

urray,

Manager, Safekeeping Department
H o r a c e L . S a n f o r d , Manager, Research
Department, and Secretary

Manager, Cash Department
R o b e r t H . B rom e,

Assistant Counsel
W e s le y W . B u rt,

W illia m F. S h e e h a n ,

Manager, Bank Examinations Department, and Chief Examiner

Manager, Government Bond Department
D o n a l d J. C a m e r o n ,

Manager, Foreign Department

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

Manager, Bank Relations Department

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

Manager, Check Department

F r e d e r ic k S to c k e r ,

Manager, Cash Custody Department

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

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

T odd

T ie b o u t,

W i ll i a m F. T r e ib e r ,

Assistant Counsel and
Assistant Secretary

E d w a rd O. D o u g la s ,

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

Assistant Counsel

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

Manager, Collection Department
M a r c u s A . H a r r is ,

Assistant Counsel
C h a r le s

Manager, Securities Department
M y le s C. M c C a h ill,

V an H ou ten ,

Manager, Security Custody Department
J o h n H . W u rts,

Manager, Service Department

Assistant Counsel

General Auditor
Assistant General Auditor

W illia m H . D illis t in ,
H a r o l d A . B ilb y ,

OFFICERS—BUFFALO BRANCH
R o b e r t M . O ’H a r a ,

R e g in a ld

Managing Director

W ilt s e ,

Assistant Manager
H alsey W . S n o w ,

Cashier

Full text of Annual Report of the Federal Reserve Bank of New York : Twenty-Sixth Annual Report of the Federal Reserve Bank of New York for the Year Ended December 31, 1940

FRASER