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ANOTHER YEAR OF WAR Thirtieth Annual 'keport of the FEDERAL RESERVE BANK OF PHILADELPHIA 1944 Third Federal Reserve District CONTENTS Page I Introduction .............................. War finance in 1944: Treasury borrowing .2 ............................. Bank credit and war financing ................... .. 4 Economy of the Third District in 1944: Developments in business Developments in banking 7 ........................... 13 ........... Prospects of the Third District: Business prospects Banking 22 ................................ 26 prospects ................................ Federal Reserve Bank: Fiscal Agency .................................... departments .......................... Credit policy .................................... Membership ..................................... Directors and officers . ...................... ..... Other Appendix .... .......... .............. 32 .. 34 35 36 36 .... (Contains following tables: Statement of condition; profit and loss account; volume of operations; applicaloans; member bank reserves; tions for industrial bank in changes member reserves and related items; banks in Third Federal Reserve District. ) 40 FEDERAL RESERVE BANK OF PHILADELPHIA April 30,1945. To the Member Banks in the Third Federal Reserve District: Developments in business and banking in the Third Federal Reserve District over another year of war are presented in the accompanying Thirtieth Annual Report of the Federal Reserve Bank of Philadelphia. ALFRED H. WILLIAMS President. ANOTHER YEAR OF WAR The mobilization in 1944 of our human and material resources reacheda height and intensity never before known in our recorded experience. Our armed forces have broadened the attack on our enemieson all fronts. Those at home virtually maintained for the whole year the very high rate of output reached late in 1943. The year's record shows the economy almost completely transformed to the waging of the greatest war in history. Total output of goods and services, or the gross national product, reached an unprecedented record of almost $200 billion, about 6 per cent higher than in 1943. It was about equally divided between largely for war, expenditures by Government, This and output available for private use. output met the needs on the fighting fronts and afforded civilians a greater dollar volume of consumption than in any previous year. The achievements of our war economy are revealed by the fact that over one-half of the munitions schedules were no longer rising and some were declining. Never before was labor in this district as in the country employed so extensively and intensively as at present. About 64 million people, or 61 per cent of the population over fourteen years of age, were in the labor force. Of these, 12 million were in the armed forces, and 52 million were engaged in various occupations. Nine million were employed in munitions production, 7 million in other manufacturing industries, 9 million in agriculture, and 27 million in transportation, trade, and related service occupations. Further expansion of the armed services caused a shrinkage in the civilian labor force, but average employment did not decline as much as the labor force, since unemployment dropped to Manan unprecedented low of less than one million. Power shortage has become an acute problem, particularly in certain industrial areas such as Philadelphia. 1 I Thirtieth Annual Report, Federal Reserve Bank of Philadelphia The peopleof the United States, as individuals, received $157 billion income in 1944. They paid $19 billion in personal taxes, Over three-fifths of the saved $40 billion, and spent $98 billion. for nondurable billion-were goods, $31 expenditures-$60 billion for services, and $7 billion for durable goods. The dollar amount of goods and servicespurchased by civilians has increasedsteadily since 1939. The increasein dollar volume is due in part, of course, to higher prices, even though quality has deteriorated. Many services, customary in peacetime, have been greatly reduced or virtually disappeared during the war. The significant fact is that our industry has been able both to produce and deliver a staggering volume of war goods and to meet increasing demandsof civilian consumers. This is a record of exceptional achievement. War Finance in 1944 T reasrrr) borrowing When the war has run its course, the period since 1943 may well prove to have been the costliest in men, materials, and money. Disbursements by the Treasury and Government corporations were in excessof $96 billion, including $91 billion for war. Taxes and other revenues applicable to this huge total were $44 billion, leaving a deficit of $52 billion to be met by borrowing. The Federal Government actually borrowed well over $60 billion, as financing toward the close of the year also resulted in a sharp increase in the Treasury's cash balance. Borrowing operations during 1944 followed closely the plans developed earlier in the war. Loan drives-the Fourth, Fifth, and Sixth of the war-were the principal means of obtaining new In each, a "basket of securities" suitable for diverse money. investment requirements was offered to the public. In addition to savings bonds and savings notes, the basket included a variety of marketable issues. Shortest among these were the 7/ per cent cer_ tificatcs of indebtedness maturing in one year, and longest were the 2 /2 per cent bonds having more than twenty years to run. Within these extremes were 2 or 2 %4per cent bonds and, in the last two ý Thirtieth Annual Report, Federal Reserve Bank. of Philadelphia drives, 1 %4per cent notes. These offerings fitted into the general pattern of rates which had prevailed since early in the war period. Offerings in all three drives were restricted to investors other than commercial banks, although commercial banks were given certain opportunities for limited investment of their time deposits, concurrently with the drives but not as a part of them. During the three war loans $59 billion of new securities were sold to nonbank investors, of which $2.9 billion, or 5 per cent, were credited The to the sixty counties of the Third Federal Reserve District. district and national results of the war loan drives are shown in Sales also are summarized to indithe table by class of investor. importance in each of the six cate the relative of the District drives. Loan Drive sales in 1944 Uollar amounts in millions) Investor class: Individuals, partnerships, and per sunal trusts Savings hanks ................... .................. Insurance companies ............ Brokers and dealers .............. State and local governments and their agencies ................. All ( nonfinancial other corporations, associati lis, etc. ) ........ Total ]? bonds ...................... ( inclu(lcd aliocc individual, ) Total sales to First I)ri Second I)riv( 'T'hird Drive I'nurth I)rivc Filth I )rive Sixth I)rivc To al-all Third Fed. Res. Dist. United States $1,024 200 283 12 $17,542 5,101 8,106 1,283 5.9 5.1 3.5 0.9 3,348 8.2 1,072 23.610 4.5 $2,925* $58,990 5.0 9,091 5.5 1.003* 1,0G5* $ 7.860 13,476 18.944 16,730 20,639 21,621 4,3 4.9 4.9 i. 1 4.9 4.9 $4,852* $99,270 4.9 274* in sales to 497 ................... nonbank investors: ..................... . ................... .................... ................... ..................... .................... drives ',, Third District of U. S. ............ ý 33i 65 9 934 fi5(i * Including proportionate share of purchases hr Conunonwcalth of Peunsylt"ania, which in the last two drives were not allocated by counties. Apart from the drives, substantial sales of savings bonds and funds to support savings notes contributed the war effort. Increased weekly offerings of Treasury bills, largely taken by the banking Total system, also were part of the financing plan. 3 Thirtieth Animal Report, Federal Reserve Bank of Philadelphia credits to the Treasury by this Bank, covering cash sales of all classesof securities, were nearly $5 billion in 1944. With many short term securities outstanding, and with maturities coming at frequent intervals, refunding operations also During 1944 were an important aspect of Treasury financing. holders of a number of issues guaranteed by the Treasury likewise were given the opportunity to exchange them for direct issues of Government. the Ballk. credit and war financing From the outbreak of the war the Treasury has kept four objectives in mind: (1) to secure all needed funds, (2) to raise a maximum from nonbank sources, (3) to keep banks liquid, and (4) to keep the cost of financing down. Initially, when the rate of war expenditures was rising very rapidly, primary attention was necessarily directed to securing sufficient funds; but as the economy became absorbed into the war effort, emphasis was shifted to securing funds from least inflationary sources. This shift in emphasis is reflected in the decrease from 41 per cent of the increase in public debt absorbed by commercial banks in 1942 to 29 per cent in 1944. If Federal Reserve Bank holdings are included, the reduction was from 50 per cent in 1942 to 40 Per cent in 1944. Calendar years 1943 1942 Rank credit and war financing l'er lulls C Billions $ int I'cr oni 1944 Itilliuus ý Per ý cý"nt Uses of funds: Iispcnditurc, ............... Increase in working balance..... Total .................... Source of funds: Receipts from taxes, etc......... R. rrrnwing .................... Increase in nonhank holdings.. Increase in Federal Reserve flank holdings ............ hank Inrrca. e in c. nnnxereial h.. ldinc. ..... ............ 57 11" 11 100 64 16 48 a; 7; 38 24 6 4 20 r,4 lun 4 90 2 98 2 96 11) 91 9 92 100 106 100 35 57 38 o? 44 62 33 36 37 42 58 35 5 5 7 6 19 21 ix 17 92 100 iur, l00 Thirlielh Annual Report, Federal Reserve Bank. of Philadelphia In the early period of war financing, before the machinery for selling securities to nonbank investors was developed, banks were encouraged to invest in Government securities and war loan This accounts were made exempt from reserve requirements. during loan drives because the relief war was considered necessary rate of war expenditures was increasing very rapidly and banks seemed hesitant to buy a sufficient volume of Government Securities. As war expenditures reached a peak and sales organizations were developed, larger proportions of securities could be sold to nonbank investors. It was no longer necessary to rely so heavily OWNERSHIP OF INTEREST-BEARINGPUBLICDEBT 5 Thirtieth Ainlnal Retort, Federal Reserve Bank of Philadelphia Fourth Drive in January on bank purchases. Beginning with the 1944 commercial bank subscriptions to new issues were limited to bought secura proportion of their time deposits. As customers deposits-which ities, their required reserves-were shifted to war loan account, which did not require reserves. Thus, the exemption of war loan accounts from reserve requirements, designed to direct bank subscriptions, prevent deficits in reserves as a result of large during Such war loan drives. produced excess reserves banks increase investments. to their excess reserves stimulated Rank credit, largely excluded from direct participation in war bond drives, thus entered war financing indirectly as banks PurSome cuschased outstanding issues during and after drives. have banks tomers sold to at a premium securities acquired at par in war loan drives and have reinvested the proceeds in new issues of succeeding drives. This has facilitated the meeting of quotas, but has increased the expansion of bank credit. It has been necessary to scrutinize subscriptions in order to restrict development of such undesirable practices as indirect acquisition of securities by banks for their own account through customers and acquisitio118 of outstanding Government securities with the understanding that sellers would use the proceeds to pay for subscriptions entered through the institution during drives. Commercial banks also supplied credit by extending loans to customers for the purchase of Government securities. Along with other Reserve Banks, this Bank issued circulars urging banks to discourage borrowing for speculative purchases of Government securities and to confine security loans to those which can be repaid out of anticipated income within six months. The System continued to supply reserves, primarily to meet increased demands for currency and reserves against enlarged deposits as well as reductions in gold stock. In so doing it acquired $7 billion of additional Government securities. Generally speaking, the Reserve Banks acquired securities between drives as reserve positions tightened and reduced their holdings during drives when reserve positions eased. In continuation of the Treasury bill policy, initiated in 1942, the System increased its holdings of Treasury bills, which expanded from 52 to 68 per cent of those 6 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia outstanding. To an increasing extent banks resorted to borrowing from the Reserve Banks when they needed reserve funds. During most of 1944 the System maintained the pattern of interest rates with little significant alteration. At the close of the however, in 1945, a marked preferyear and the early months of issues raised ence of banks and other investors for longer-term market prices of certain Government securities sharply and lowBetween December and the middle ered yields correspondingly. full February point or more were registered by some of gains of a bonds, 2 the taxable of per cent and substantial gains also occurred in quotations on other intermediate and long-term bonds. On February 19,1945 the 2's of December 1952-54 issued at par in the Sixth Drive yielded 1.77 per cent to call date. Banks and others who may have bought in the desire to safeguard against possible future offerings of lower-rate securities have in effect tended to bring about the very situation they sought to avoid. The activities of member banks in the Third Federal. Reserve District have formed a part of the general picture of bank participation in war financing and have conformed closely to the average for the country as a whole. During 1942,1943, and 1944 member banks in this district increased their holdings of Government securities by $2,579 million, or 250 per cent. This percentage increase corresponded closely to that for all member banks. At the end of 1944 member banks in the district held 5.3 per cent of the Government securities owned by all member banksapproximately the same proportion that they held at the end of 1941. Economy of the Third I' District in 1944 DCVCIDJ1111C11ts 117 b11s111C'ss Industrial ý.,.,..ý........ -- T. vanctr: ý.......,.... L/13Ll ILL ýl ý... t.. was vuuý, LivIi iruainiaineu .., III '-1,,, Llll, -J _]___.: _- uuring l llllll F.. AL 1 k. lAl, iai virtually 1R ncnrvn i. wfl,.... Lice CIILILe year at just under the all-time peak reached in the middle of 1943. At the close of 1944 output was still 75 per cent Similarly, the index of industrial greater than before the war. production in the United States, which rose to a peak of 247 in October 1943, was still at 232 by the end of 1944, or more than 7 Thirtieth Annual Report, Federal Reserve Bark of Philadelphia twice the pre-war level. These indexes indicate the comparatively milder stimulus of the war in this district. Although it is impossible to calculate future requirements of war materials, it appearsthat the peak of war production hasbeen passed. Since 1939 durable goods accounted for the greater part of the increase in industrial production in this district. The output of durable goods rose from a pre-war base of 100 to a peak of 368 in July 1943 and then declined; but at the end of 1944 the flow of output was still more than three times that of pre-war. The decline reflects cut-backs in production schedules of some classesof munitions. A great variety of war materials is produced in this district, but the outstanding contributions are transportation equipment Production of the former and fabricated metal products. by expanded several. times reason of the Delaware River shipbuilding facilities, and the output of metal products more than doubled. Activity in the manufacture of transportation equip ment has declined substantially since the peak attained in Sep tember 1943, and production of metal products has leveled Of slightly from the peak output in January 1944. Output of consumer goods, except tobacco, shoes, and textile products, was slightly above that of 1943. Since 1939, production of consumer goods has been irregular and wartime controls have limited expansion to very modest proportions. At no time has the expansion been in excess of 14 per cent of pre-war levels. Although the war stimulus greatly increased industrial activity' in this district, it was on the whole somewhat less than in other areas. Primarily a manufacturing region, this district might have been expected to share in major war contracts in about the sane proportion as its pre-war contribution to manufacturing outpur; But it received a somewhat smaller share of the dollar volume of contracts owing to considerations of strategic- location, utilization of available labor, and other factors. Thirtieth Annual Report, Federal Reserve Bank of Philadelphia BUSINESSCONDITIONS THIRD INDEX 1915-59"*. RESERVE DISTRICT FEDERAL ý iI 350 I ' "_^ ._ `ý'"' rý 300 PRODUCTION ý",. ý J 250 DURABLEý .ý rýr. INCOME 250 1ý t ---1 1\1\ 1ý 200 FARMINCOME (PA M. J. 150 ; I DEL.) \\ ýv \` 1 r", `ý I ý ý I'`ý 100 zoo NON-AGRICULTURAL PAYROLLS -PA** 15 ,I 10 ýr 15 > -TRADE DEPARTMENT STORE SALES* 1 AND PRICES 10 ýý ----- ----Mý I COSTOf LIVING IN PHILADELPHIA 5ý 1939 1940 *AOJUSTCD 1011SCASDMAL VAIIIATCIM I= LIMCS OT T14DC AND 1... 194 1 1942 R. ýMDUSTIIf 9 1943 194" Thirtieth Aurrrral Report, Federal Reserve Bank, of Philadelphia Through December 1944 only 6 per cent of the major war district, which in 1939 supply contracts were awarded in this 9.0 manufacturing workers per cent of the country's employed by manufacture. and produced 8.1 per cent of the value added The proportion in contracts for aircraft (2.6 per cent) was espeless than cially small, and in ordnance (6.9 per cent) somewhat for ships (8.0 per cent) have been Placements might expected. were in line with the specialized capacity of this area, and those for miscellaneous items (8.6 per cent) apparently took cognizance of the diversified facilities of local industry. Similarly, by reason of its established industrial facilities, this district did not receiveas many new facility projects as other areas. Through November 1944 only about 434 per cent of all new industrial facilities were assignedto the 60 counties of the district. Data on military installations, though incomplete, indicate that the proportion of military facilities was still smaller. This is quite natural in view of the strategic need for dispersal of forces and requirements for maneuvers away from centers of population. Employment level, though and earnings Employment in Pennsylvania remained at a very hig11 lower in the preceding year, trifle than a As the armed forces continued to draw upon the labor supply, employers encountered more and more difficulty in replacing workers. In Philadelphia, for example, the labor situa_ .ion became increasingly acute throughout the year. In Septern_ per it became necessaryto make the 48-hour week mandatory for -ssential industries, and war procurement agencies were directed :o divert new contracts to other areas where labor was more 'lentiful. Advance preparation for national defense is revealed in the At the time of Pearl Harbor, Pennsylearly rise of employment. vania employment in manufacturing and nonmanufacturing was about 25 per cent above the 1935-39 level. The process of building the armed forces to full fighting strength depleted manpower reserves so that the working force at home is now smaller than at the outset of war. The industries of this area turned out put despite wartime shortages of labor. increases by substantial increases in in working worKing partly by suustanuai partly in to maintain output at tms way possible in this I 10 10 a huge volume of out_ ou, This was accomplishedThat time. I hat it has been been time. it has levels near all-time peak level, Thirtieth Annual Report, Federal Reserve Bank of Philadelphia for a long period is a tribute to the stamina of the working population. The average workweek of all Pennsylvania industries was stepped up nine hours above the 1939 level. Most of the increased In iron and steel effort was concentrated in the war industries. and transportation equipment the average number of hours hours to worked was expanded from a pre-war level of about 37 47 hours in 1944. This is in marked contrast to the 37-hour week that prevailed in consumer goods industries such as clothing. Payroll disbursements of manufacturing establishments in Pennsylvania reached about $3 billion in 1944. This was considerably over twice the amount paid out in 1939. A combination of substantially full employment, longer hours, and higher rates of pay accounts for the huge expansion in total earnings. Workers averaged better than a dollar an hour in contrast to the 69-cent pre-war level. Construction All except the most essential building and construction had to be sidetracked as a result of more pressing for In this area contracts were needs materials and manpower. awarded in only about one-fourth of the 1942 volume when expansion of wartime facilities was at its peak. Half of the local contracts awarded last year were for urgently needed industrial structures, utilities, and public works. the war, the mineral industries have been under steadily increasing pressure for greater output and at the same time handicapped by continued loss Since 1939 anthracite output has been increased of manpower. This was 25 per cent despite a 21 per cent decline in employment. accomplished by improved operating practices and increased working time. The peak output of 64 million tons last year is considerably below the 100 million-ton peak attained during the last World War, because in the meantime many consumers have shifted to oil for domestic heating. Mineral Production Throughout The war imposed sharply increased demand upon industrial fuels. Bituminous tonnage in Pennsylvania was stepped up about 60 per cent. As in the case of anthracite, increased production was attained with a smaller labor force by extending the working time and by greater use of machinery. 11 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia Agricultural income in Pennsylvania, New Jersey, douDelaware and was over $800 million, more than ble that of 1939. Higher prices are primarily respon_ larger flow of income. Farmers are utilizing their sible for the increased returns to much better advantage in this war than they did in the first World War. They came out of the last war with a heavier mortgage burden, because of land speculation, but in the farmers are using their wartime gains to reduce their present war debts. mortgage Agricultural income Total income The tremendously increased tempo of wartime activ_ ity on the farms, in the mines, and in the factories has payments boosted income payments in Pennsylvania to well over This was the highest ever attained and was consider$10 billion. ably above the record peace time year of 1929. The swollen stream of income would have brought retail merchants still greater volume of business had they been able to obtain the merchandise. Department store sales were two-thirds above pre-war volume and still rising, though some of the expansion was due to higher prices. Dollar saleswere higher in all major lines of merchandise, with greatest gains in women's apparel. Last year's sales volume in practically all individual lines also surpassed that of the preceding year. The few exceptions were electrical household appliances, floor coverings, and furs. Trade Prices Execution and administration of the President's order to "hold the line" have kept prices well under control, especially in view of the large buying power in the hands of the The cost of living at the turn of the year was 29 per cent public. 1939, and only two points above December 1943 above August Prices of clothing, which rose 9 per cent in 1944, and housefur nishings, which rose 13 per cent, were the principal exceptions to during Shortages 1944. the generally stable price structure of items in both clothing low-priced forced and housefurnishings higher priced products, buy in to some customers cases of better This situation quality and in others of poorer quality. also applied to many other items so that the index understates the effective rise Nevertheless, in contrast to the last war, in the cost of living. a 12 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia in much better job has been done in "holding the line, " especially have been fact inflationary much that ever so view of the pressures stronger. Developments in banking Member banks in the Third District continue to reflect the The most important impact of war financing. change was an increase of $846 million, or 31 per cent, in United States obligations accompanied by an almost equal increase of $837 million, or Major changes are shown 17 per cent, in total deposit liabilities. in the accompanying table. Assets The outstanding development in bank assets, of course, hasbeen the continuous and enormous increase in United States Government securities. Acquisition of the major portion of these securities has resulted in creation of additional deposits. To the extent necessary reserves have been provided by the Reserve Banks to enable member banks to meet the resulting increase in requirements. When the war broke out in Europe, banks had large excess reserves. Since that time they have moved to a much more fully invested position so that the relative increase in cash assetshas been small compared with that in deposits. As the table shows, banks also have disposed of other assets as they have acquired Government securities. The trend of loans has continued downward, although at a declining rate. At Philadelphia banks the declines have not wiped out the substantial increase that occurred prior to Pearl Harbor, and the volume remains above 1939 levels. At members outside Philadelphia, however, loans lower in were almost one-fourth December 1944 than in June 1939. Banks also liquidated substantial portions of other securities and miscellaneous assetspartly real estate-as they acquired Governments. The net result of these several factors has been to change asset distributions completely in four and one-half years. The proportion of Government securities to total assets is almost three times as great as in 1939. Offsetting this change, loans are only half as important, other securities and miscellaneous assets only one-third as important, and cash two-thirds as important as in 1939. 13 Annual Thirtieth Federal Reserve Bank of Philadelphia Report, The continued expansion in deposits in 1944 provides an even clearer picture of the wartime movement of funds. Total deposits of member banks in this district increased only 17 per cent, although deposits of all member banks in the United States increased 20 per cent. Philadelphia member banks showed an increase of only 13 per cent during the past year, as compared with an increase of 22 per cent for other member banks in the district. Deposits Per cent change Ucc. 30, 1944 Resources of member banks Third Federal Reserve District (Million S) Dec. 31, 1943 ])cc. 31, 1941 Per cent (listributioii from June 30, 1939 I)cc. 30, 1944 Inne 30 1939 All member hanky: Cash as, ct5* .............. Loans J. S. (; ..................... uccrnmcnt nbIigatüm, Other securities ............ O(her assets ............... T, dal resonircc; Philadelphia Country + 27.8 - 12.2 -F382.r, - 36.5 - 46.6 20.6 13.0 583 6.4 1.8 2ä. G 2G. 3 21.4 17.9 f 16.1 47.4 } 77.3 100.0 100.0 - 19.2 - 22.8 +221.7 - 43.2 -26.2 + 4.3 + 7.0 +329.1 - 42.5 - 49.5 21.6 13.1 59.9 4.8 1.6 3, ý. 21.06 +37.7 + 71.8 1 100.0 100.0 + 17.1 - 31.G +280.4 - 199 - 35.1 + G3.3 - 24? t4 43.4 32.7 - 44.0 5. S member banks: resnurccs member ........ h3i 381) 1.71)8 138 48 3.1 6.2 -F 2(i. 1 13.8 17.2 3,901 1+ F 12.2 23,6 14.2 5. ý hanks: Cash assets* .............. Loans ........ . U. S. (; ocernment obligations Other securities ........... Other assets .............. Total 4.1 - 27.7 +249.8 29.8 - 31.4 ......... securitles assets ............... 'I'utal + 9.4 5.3 +30.6 6.0 -16.9 G.'U3 Cash assets* .............. Imall U. S. Government obligation, Wier Other 1.257 till} 3 (, 11) 399 109 resources ........ 450 428 1!902 2ýi1 61 + 16.1 4.3 + 35.0 2.2 - 15.3 - 3,302 1 +]9.9 * Includes reciprocal bank balances prior to 1942. 14 1+ 57.2 1+ 83..7 1 19.7 13.0 57.6 7.9 1.8 31, ý 19 100.0 100.0 2.0 ý =1. q fi. n Thlrileih Annual Report, Federal Reserve Bank of Philadelphia The past two years have seen a significant change in the devel- opment of time deposits at the member banks. From the end of 1937 to the end of 1942 time deposits remained relatively stable. In the years following 1939 banks ceased to solicit and in many cases discouraged growth of time accounts by reducing or eliminating interest payments, by limiting amounts, and by recomfor investment in mending that such accounts be withdrawn Government securities or placement with specialized savings insti- Liabilities accounts "I'hirl All and capital of member banks Ic(lcril Reserve I)istrict Dec. 30, 1944 Per cent distribution Per cent change from Dec. 31, 1943 Dec. 31, 1941 June 30, 1939 4,384 1,284 + 17.1 + 18.3 + 66.4 + 20.1 +135.7 + 13.9 70.7 20.7 53.1 32.2 5,668 + 91.4 85.3 .4 .2 .6 14.1 (M iuian $) I)ec. 30, 1944 June 30, 1939 member banks: )eiuand dcpusits* .......... Time deposits .............. + 53.0 + 89.8 24 511 + 26.3 + 4.1 + + + + 6,203 + 16.1 + 47.4 + 77.3 100.0 100.0 I)cmand dc1s sits* .......... Time dcpusits .............. Total deposits .......... 2,519 155 + 12.8 + 13.1 + 48.1 - 22.5 +104.1 - 37? ßiß.8 5.4 73.0 14.6 2,674 + 12.8 + 40.7 + 80.7 92? 87.6 )thcr liabilities Capital accounts ............ ........... 18 209 + 28.6 + 4.5 + 12.5 + 10.0 + 28.6 7.2 .6 72 .8 11.6 2,901 + 12.2 + 37.7 + 71.8 100.0 100.0 I )cnland dcposits* .......... Time deposits .............. 1,865 1,129 23.4 -1+ 19.0 + 99.7 + 29.8 +197.9 + 28.3 56.5 34.2 34.6 48.6 Total deposits .......... Other liabilities Capital accounts ............ ........... "total liabilities and capital accounts ...... 2,994 + 21.7 + 66.0 + 98.8 90.7 83.2 6 302 4-20.0 + 3.8 + -14.3 + 1.7 .2 9.1 .4 16.4 3,302 + 19.9 + 57.2 + 82.4 100.0 100.0 Total deposits Other liabilities Capital accounts .......... ............ ........... Total liabilities and capit; d accounts ...... Philadelphia member hanks Total liabilities and capital accounts Country 17.3 9.1 6.2 14.3 3.9 + member banks: 15 3.8 Tl, irlhelh Annual Rehort, Federal Krscrvc' RmIz. of PLºilaJrllºLºict MEMBER BANKS UNITED mil I low, STATES BILLIONS SELECTED ASSETS ý i00 90 0 70 G". 4, I, . V; 0 ,, -------------ý-- 10 riIýIIIý 1131 11)4 11)1 : 14ý IND , 142 iN3 19,11 iY44 1938 19P1 ', IýýIIII111', ý 1940 1941 II 1942 1943 1944 0 THIRD FEDERAL RESERVEDISTRICT DCPO$ITS. 4.5 . ýCLCGTED ý. __ A5 ITS !! II 1 4,0 4.5 4.0 i, ý I ' y: ,, - ----------- tºn rf7! nof n. u INý IN? M7 muru SLCURITICST_ ii I 1937 193E 1939 1940 1941 1942 1943 1944 I nu . _._ .ý_. __.._., _.. 16 0 Thirtieth Annual Report, Federal Reserve Bark of Philadelphia tut tons. A very large reduction Philadelphia in 1942. in time deposits occurred in The sudden change in trend occurred both nationally and within the district beginning with 1943. In the past two years time deposits of member banks increased 51 per cent in the district. This growth country as a whole and 32 per cent in this increase 4 per cent nationally and a compares with an of only decrease of 11 per cent locally in the preceding two years. The differences in the rates of total deposit expansion in the country as a whole and in this district in the last two years are explained primarily by the behavior of time deposits. Time (IeI/11NiIM of member banks I'.tuf of year :I 1937....... 193K....... 1939...... 194(1....... 1941...... 1942... . 1943...... .. 1944...... Third United States Millions $I challr( $Ic District Phila. banks %I llions Niillions '%% 11.52' 1 11,510 11,K52 + 12,319 + 12,497 + 12,841 -}15,330 419117 I- I Total lcuiy c$ 1.107 1 .11,10t. 3.0 1,115 + 0.8 3.9 1,099 1.4 1.4 1,069 2.7 2.8 974 8.9 19.4 1,1185 + 11.4 2h.(1 1 2K4 + 18.3 , I Country banks ^/0 change 235 241 245 222 200 121 137 155 2.6 1.7 9.4 9.9 39.5 + 13.2 + 13.1 + + Ni illions $ 872 865 870 877 870 853 949 1,129 1/0 change 0.8 0.6 0.8 0.8 2.0 + 11.3 + 19.0 + + The rapid changes in the volume of time deposits indicate the importance of analyzing their Such deposits are but ownership. one way in which idle balances may be held. Although the rate of expansion has been increasing and the over-all peak appears not to have been reached, individual bankers may find time accounts more volatile than they once supposed, particularly those that are being accumulated against post-war purchases. Deposit ownership The broad trends in ownership of deposits that have been evident since surveys were initiated in July 1943 continue. Personal deposits still grow more rapidly than business deposits, and hence increase gradually in Among business balances, those of trade relative importance. 17 ThirNelh Annual Report, Federal Reserve Bark of Philadelphia increase in relative imporenterprises show the most consistent those the most consistent decline. tance and of public utilities i Someof these trends may be expected to continue as long as conditions of all-out war prevail, but changes in ownership are not likely to be of sufficient size to alter the general pattern very greatly. Conflicting opinions are current as to the effects of transfers of ownership among groups of depositors in the post-war period. The importance of the issue arises, of course, from the fact that a change in ownership affects the behavior of deposits and therefore the investment policies of banks. Periodic surveys will be continued in order to ascertain any evidences of changes in trend as soon as possible after they arise. Ownership of demand deposits of individuals, partnerships, and corporations 't'hird Fed. ltc,. District Ionic Amount $) (\lillions Percentage distribution I cb. 29, July 31, Jan. 31, 1944 1944 1945 let). 29, July 31, jail. 31, 1944 1944 1945 tic business : Nonfinancial- 823 224 376 140 -Manufacturing and mining I'uhlic utilities ........... I'r; ule ................... Uthcr nonfinancial ........ 8; 1 209 392 146 929 788 463 157 1,563 ý 1,598 1 1,737 1 Pinan 27.2 6.7 12.5 4.7 26.5 5.4 13,2 4.5 51.0 j 51.1 1 49. G 2.6 4.5 2 .2 5"1 ial--- Insurance connl,ruiics ...... .. Other financial Total 2G.8 7.3 12.3 4.6 domestic business....... 't'rust funds ................. Nonprofit associations Personal (incl. farmers) ........ ....... Foreign ..................... Grand total .......... 69 156 82 141 77 178 2.2 5.1 1,788 1,821 1,992 58.3 58.2 202 87 1,017 223 114 1,172 6.2 3.2 32.2 6.5 2.8 32.5 5G .9 6-4 3"2 33.5 100.0 1 00. () 191 98 987 222 I 3,066 I 3,129 I 3,503 11 00.0 I * Less than 0.1 per cent. One of the effects of war financing hasbeen to induce banks to move closer to fully invested positions. Since banks entered the war with substantial excessreserves,they were Reser: yes 18 Thirtieth Annual Report, Federal Reserve Bank of MiladeIpbia able to expand their deposits without substantial changes in total reserves. Country member banks in this district experienced considerable increases, but these were more than offset by decreases at Philadelphia members. By the end of 1943, however, excess Philadelphia reserves, especially at members, had been reduced to During 1944 an operating minimum. total reserves increased sigfor the first time since 1940. Further expansion in nificantly deposits will call for additional reserves. Analysis of reserves is complicated by the war loan drives because they result in shifts from deposits against which reserves are required to reserve-free But such increases in excess reserves-or war loan accounts. reductions in total reserves-are only temporary. Member banks in this district have maintained a substantially stronger capital position than those in the In addition, they have improved entire country. their relative position since 1939. It is generally conceded that the traditional ratio of capital to deposits is an inappropriate measure of capital adequacy and that the basic elements are nature and quality of assets relative to liabilities-contingent as well as actual. The accompanying table presents three different measures of capital adequacy. Capital position Capital positions continue to be influenced more by changes in deposits and resources than by The changes in capital accounts. from during 1944 came chief additions to capital. retained earnings. Instead of increasing dividends banks are retaining enlarged earnings to be in position to resume their traditional function of calculated, well-considered, efficiently administered risk taking. funds to The traditional measure of capital adequacy-capital deposits-has been influenced by 1939 primarily a 90 per since cent increase in deposits as compared with a4 per cent increase in capital. At the end of 1944 the ratio for members in this district was half again as high as for all member banks in the country. Adequacy of capital may also be measured in relation to the risks that capital must cover. One such measure is the ratio of I capital to risk assets, which are usually assumed to be all assets other than cash and Government securities. Such a definition of 19 Thirtieth Annual Report, FederalReserveBank of Philadelphia Capital Capital ratios of member banks funds to deposits Third District: Philadelphia banks Country banks All member banks ......................... .......................... United States: All member banks .......................... funds to "risk assets" Capital Third District: Philadelphia banks ......................... Country banks ............................. All member banks .......................... United States : All member banks .......................... "Net capital" to deposits less cash and Government securities 28.2 28.0 28.1 26.8 28.6 27.7 35.1 25.7 25.5 40.0 45.0 42.8 53.4 35.2 34.7 Third District: Philadelphia banks ......................... Country banks ............................. All member banks .......................... United States : All member banks .......................... 28.4 ; 54." risk assetsis necessarilysomewhat arbitrary, but it provides a more realistic measure of capital adequacy than the traditional ratjO' On this basis, member banks in this district have shown marked and continuous improvement, primarily through reduction risk assets. A third measure of capital adequacy was developed troll' demonstrates experience which that capital invested in real estate bN cannot be realized readily and that some deposits are covered { riskless assets. In view of theseconsiderations a ratio is comput` between capital. less real estate, called "net capital, " and depo' less cash and Governments. For distr`` member banks in this this ratio shows a remarkable improvement in the last year '3 especially since 1939. 20 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia Eir, z;, i s Net profits of member banks in this district increased an additional 19 per cent to $36 million and were the since 1929. Banks are using the increase in profits to build up capital accounts rather than to pay them out as dividends, which changed little. In this way they are preparing to resume risk taking in by inference Furthermore, the post-war period. one may conclude has improved in that capital more the past five years than from increase. At an appears the mere quantitative earlier period banks substantial part of net earnings to charge off doubtful utilized a Net charge-offs last year were only one-sixth those in assets. 1939, suggesting that weak assets are at a minimum. largest Growth of 8 per cent in total earnings to $120 million was offset in part by somewhat higher expenses. Most of the increase shown below in current expenses, however, is accounted for by higher taxes on income. Earnings Third Districtand expenses member banks (Millions $) Total 1929 1939 1943 1944 earnings. Ott On securities loans Other 45.; 106.6* 18.1 .......................... ................. Total ......................... Current expenses: Salaries Interest and wages ................. Other on deposits........ (including taxes)........... Total ,.. ýTet currents: earnings charýý_,. _ ,. I *Eýc1ud"ýý 110.6 119.8 30.8 52.7 33.4 27.6 16.6 27.8 30.9 9.7 34.7 32.2 10.2 38.6 116.9 ý 72.0 75.3 81.0 53.3 36.6 ......... 64.2 32.5 23.1 107.9 .............. ..... declared. 53.3 33.2 22.1 170.2 et Profits ý "it diridends 44.8 " 42.1" 21.0 ... service charges and fees on loans. 333.1 21.2 ; 35.3 i 38.8 4.8 ?.4 30.5 36.4 17.4 1 15.8 1 35.9 -14.7 - 16.-1 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia Problemsof Commercial banking shareswith industry the problems of carrying on an increasedvolume of operations bank operation in the face of much greater difficulties in maintaining in wartime personnel. Routine operations, such as maintenance of deposit records, cashing and collection of checks, and provision The of currency, have increased with the growth of business. small bank of 1939 is medium-sized today; the erstwhile mediumsized bank hasblossomedinto a moderately large one. In addition, banks have taken on many war services, such as ration banking, sale and redemption of war savings bonds, and tax withholding. Commercial banking is not classedas an "essential industry", and many experienced employees have been lost to the armed forces or have been attracted to war industries by higher wagesAs a result, banks have had to perform the enlarged operations with lessexperienced help and are being confronted with a much higher rate of turnover than customary. Prospects of the Third District This district was affected very little by the large movement of boom centers on the Pacific Coast to wartime people and in other its areas, and civilian population was about the same in March 1943 as it had been in April. 1940. But substantial population The expansion of industrial shifts occurred within the district. brought about 160,000 people into Philadelphia an, activity Chester' other counties of the Delaware River Valley-Bucks, Delaware, and Montgomery. Whether they will stay after the war depends, of course, primarily upon employment oppor, tunities. Business prospects Although the general level of post-war businessactivity district will depend largely upon general business condit101 throughout the country, it will be influenced by the character 0 the region and its residents. The area has two material ad-,v311 tages: its pre-war pattern of industrial divers` was well fled, and the new facilities built during activity have the war not seriotlsh distorted the pattern of its economy. 22 Thirtieth Auurral Report, Federal Reserve Bank of Philadelphia Formerly, manufacturing, which employed one-third of all j employed here, was so diversified that no major industr al tri group accounted for more than one-sixth of the total em},ment. In contrast with other areas, a larger proportion of the new Government-financed facilities built in the district during the war could be converted to produce durable peacetime Products. Increased productive capacity in metals and machinery may enable this area to participate more favorably in the post-war program of "catching up" on durable goods production. Manufacturing employment in Pennsylvania rose from almost 1,200 thousand in 1940 to a wartime peak of 1,600 thousand in 1943. In the service industries-trade, transportation, and others -the number from 1,400 thousand to 1,424 increased of workers thousand, but in the extractive industries-agriculture, forestry, fishing, and decline from mining-there 417 372 thousand. was a thousand to Although Pennsylvania is primarily an industrial state, manufacturing be counted upon to take cannot War labor up the sack in the postmarket. Service industries than manufacturing consistently employ more and for many years the service industries lave grown more rapidly. If long-time trends are continued to 1911,it fearer appearsthat manufacturing would employ about 200,000 workers than at the wartime peak, whereas the service industries would offer prospective more than employment for about 250,000 at the wartime peak. Post-war the available prospects in this region may be indicated partly by evidence with respect to Philadelphia, its industrial center. Through active cooperation Philadelphia Committee for Economic Development, with the tt°.ä Posite judgment this Bank has obtained a of a majority of Philadelphia's leading indusr as to the volume of business and employment they expect the first post-war year. The dollar volume of which manufactured in Philadelphia, rosefrom $1 400 products is in million 1939 to $2,700 million in 1943, estimated for 60 Per the first post-war year at $2,300 million, or about cent above the Total employment pre-war volume. in 23 Thirtieth Annual Report, Federal Reserve Bark of Philadelphia Philadelphia, which rose from 700 thousand in 1939 to 880 thousand in 1943, is expected to be 824 thousand in the first post-war year. Manufacturing activities, which afforded jobs for about 400 thousand workers at the wartime peak, are expected to employ 330 thousand workers in the first post-war year. Nonmanufac' turing activities have been estimated to require 495 thousand workers in Philadelphia in the first year after the war. This is 11 per cent more than the pre-war employment and 4 per cent more than the wartime peak. In manufacturing, most of the declines will doubtless be iII iron and steel, machinery, and transportation equipment-espe' cially shipbuilding. Declines in these industries may be offset III part by gains in the food, textile, leather, and printing and publishing industries. In nonmanufacturing activities a substantial decline antics' pated in Government service is expected to be more than compen' sated for by increased employment opportunities in trade and other services. On the basis of reports and estimates from leading industrial concerns it appears that about 900 thousand workers will be in the post-war labor market of Philadelphia competing for the 324 thou' sand jobs. With a reasonable allowance for workers in the course of changing from one job to another, seasonality of occupation" in the first post-war ye;'r sickness, and the like, unemployment be in the neighborhood of 36 thousand. While this is not' might it is the most reliable appraisal of the task for whicl' prediction, advance preparation must be made. Concerted efforts by industry and labor are being made provide jobs for all who seek work. The Federal Reserve Bank of Philadelphia cooperated with the Committee for Economic DeVel' opment in stimulating individual firms to devise programs ts' expand post-war activity. In 1944 joint labor-industry forun'; were held with twenty of the leading manufacturing industries of Philadelphia. Members of the Bank's research staff prepared economic analyses of each industry's development, the imp0r1 tance of Philadelphia's position in the industry, and an appra's'' 24 Thirtieth Animal Report, Federal Reserve Ballk of Philadelphia of the post-war outlook. Representatives of labor and industry participated in discussions the problems of each industry. of It was brought out at these forums that in some industries the major post-war problem will be shortages of raw materials, particularly imported. In be the need for other instances it will lines, modernization of equipment or simplification of product or, shortages of fforuagasin, to deal with its problems. industry appointed alspecial committee The purpose of the forums has been to encourage industry to seeknew ways of employing more people productively -to provide the additional jobs that would prevent or minimize serious unemployment. The preliminary estimates of possible unemployment were made to serve as a challenge rather than as a prediction of things to come. Reconversion of industrial facilities to peace time production apparently can be accomplished in a short time and at moderate cost. Two-thirds the reporting Philadelphia concerns indicate no reconversion of 95 per cent reported that reconversionproblem whatsoever, and wou''d require three months or less. Retooling may require only several months, but it may take a year or more before industry can attain sufficient volume to meet peacetime requirements of civilian goods. A recent survey of Philadelphia manufacturing concerns indicates that they are to spend about $ 100 million on new constructionat present planning and equipment alone as soon as the war ends. Nearly two-thirds of this amount is to be expended for machinery and the These contemplated remainder for new construction. expenditures may appear small, but it should be noted that they do not include any amounts for replenishment of inventories, trade credit, or other working capital requirements. Our economy must continue to operate under great strain until the greatest war of all times is brought to a successful conclusion. The over-all job of reshaping the economy for peace will be a monumental task. However, an early termination of the war in Europe would make possible an easier transition to a peacetirne basis. 25 Thirtieth Banking Annual Report, Federal Reserve Bark of Philadel phi Prospects Two interrelated problems of concern to bankers are t" demand for bank credit and changes in bank deposits. Answe to other problems of banking depend largely upon these factors From the standpoint of the banking system as a whole, changes 1 the volume of bank loans and investments are one side of the shiel and changes in the level of deposits are the other side, but from th standpoint of individual bankers this condition does not neces sarily hold. Regardless of the levels of business activity and enl" Total depositsof ployment which may prevail in the post-war period' the banking total bank deposits are not likely to decreasebelow the system figure which will be reached by the end of the warI financing Deficit will probably continue for a time after the fighting stops, and commercial bank holdings of Government securities are almost certain to increase. New budgetary deficits' however, may provide less of a problem to the Treasury than refinancing run-offs and redemptions, along with support of the market against possible liquidation through sale of market issues. These problems can hardly be met successfully by the Treasur)' without considerable help from the commercial banking systen1- Indeed it is difficult to visualize possible conditions in the first few years after the war in which bank deposits will not increase; Such a complete change in the character of commercial banks earning assetshasoccurred over the last fifteen years that contras tion of businessborrowing in time of liquidation and depression` no longer capable of reducing commercial bank deposits by arl) appreciable amount, whereas Government deficit financing' return flow of currency from circulation, or an increase in either long-term or short-term financing of individuals or business increase bank deposits. enterprises may In our present domestic economy there 'I are only three potenti, developments that might cause substantial reduction in depos'''e The first would be a desire on the part of the public to use currency and less deposit credit. The second would be a repa, " ment by the Federal Government of debt now in bank portfoli05 in excessof expansion in other types of banking assets. The tbir 26 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia possibility would be a movement of Government securities from banks to nonbank investors, without an offsetting increase in other loans or investments. None of these developments is likely for some time after the war. Withdrawals of deposits in cash in amounts sufficient to affect the volume deposits substantially are unlikely. A reduction in Governmentof debt be deflationof sufficient magnitude to ary is highly improbable unless preceded by several years of boom prosperity. The prospect of banks voluntarily holdings reducing their of Governments, except to acquire other securities or obligations which carry more attractive yields, would seem remote. Pr'iz'ate There is little doubt that the end of the war will find credit both business organizations and consumers with a de"ta;id filled during considerable accumulation of needsthat could not be the war. A heavy potential demand for consumers' durable goods is generally conceded. Greater differences of opinion exist as to the magnitude of businessneedsfor plant expansion, additional equipment, and acquisition of inventory. The enormous expansion in productive capacity during the war has led many to assume that existing facilities will exceed the quirements of a peacetime economy and that industrial con- struction and equipment needs will be below normal for some Yearsafter the war. This assumption overlooks the fact substantial that a part of our war plant is specialized and not peacetime adapted to needs. Furthermore, a mere return to pre-war levels of production will not support the level of national income neces`°ary for a high level of employment. In modernizing our peacetime industry, management must cope with obsolescence and cumulated wear and tear and in many cases must correct of balance in a lack equipment which has been the outgrowth ized of specialwar production. The prospect for increased tures thus capital expendimay be considerably greater than is suppo_ed in some quarters. The difficult reconversion problem is not just to ian produce civilgoods; it is to adapt our productive facilities to turning types and out quantities of products desired by the post-war world 27 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia and to utilize effectively the cumulative improvement in technology and in materials which has been one of the useful byproducts of an otherwise destructive war. Expansion and modernization will be necessaryif our economy is to be efficient and is to maintain high levels of productivity beyond that interim period when accumulated consumers' demand for goods will provide a temporary stimulus to employment. Termination of war contracts will leave some concerns with large amounts of working capital tied up in inventories which are not well adapted to peacetime needs. Furthermore, concerns at present engaged in civilian activities may end the war with large amounts of substitute or inferior grade products that may pro\'e unsalable or salable only at less than cost. In both cases working capital will shrink and the need for new inventory will be urgent. American industry and trade may emerge from the war witl' Sucl' appropriate inventories at the lowest level in recent history. heavy by business if ouf a situation will require expenditures is forward into heavy to economy move and not slump unen" ployment. Opinions differ even more widely as to the amount of bank credit which will be required by individuals and business enter" prises in meeting their post-war expenditures. American business' generally, will face reconversion with more liquid funds than " any previous time in its history, and the same is true of consunlL 1 as a class. It has been estimated that deposits, currency, a1" Government securities held by nonfinancial business in the United States at the end of 1944 would total between S65 and $70 billion. and that the value of such liquid assets held by individuals on the Comparable estimate` same date was approximately $130 billion. of liquid assets for the Third District would indicate holdings of between $3 and $3.5 billion by nonfinancial business and beo%'een $7 and $8 billion by individuals. The tendency has been stroll' in some quarters to interpret these figures as indicating that the" will be little demand for consumer credit after the war and t11'ß' since liquid resources of business in the aggregate exceed probat' reconversion costs, business enterprise will have little need tO funds from outside sources. Thirtieth Annual Report, Federal Reserve Bank of Philadelphia Such are based on inadequate data and analysis. Aggregateconclusions figures averages are not representative of individual cases, and liquid and funds are not distributed in proportion to expenditure The fact has accumulated needs. John Smith that $5,000 in savings bonds and cash will not enable William Jones to buy a badly needed when new cars again become available. Similarly, automobile fact the five times that one business concern possesses more liquid funds than it will need to spend on post-war changes will not help another concern with slim cash resources and heavy reconversion costs. These principles are illustrated concretely by a recent survey of manufacturing concerns in the City of Philadelphia, in which this Bank cooperated with the Philadelphia Committee for Economic Development. The survey indicated that one-quarter of post-war expenditures now planned by Philadelphia manufacturers for financing. new construction and equipment would require bank This was true despite Government the fact that total holdings of securities and demand deposits by Philadelphia ufacturers manat the three-quarters end of 1944 were conservatively estimated to be of a billion dollars. Marge part of business ho'dings of Governments direA can be } offset against present huge tax liabilities; and, judging by pre-war conditions at least two-thirds of existing demand deposits will be required as normal operating balances. Termination war contracts of undoubtedly will tie up large amounts of working capital pending interim financial eventual settlement, unless replaced through such as those afforded by T loans or other access arrangements to bank credit. The for bankgreater danger is not that there will be insufficient demand liquidation credit, but that too much expansion may occur. If individual and business holdings of Government securities of after the war requires additional bank purchasesof such securities, and if at the same time there is a tendency for expansion of private borrowing from banks, may develop. It widespread price inflation is this danger that suggests a continuation of controls on consumer credit and toward expansion effective checks on any tendency of credit for speculative usesin modities, or securities, comreal estate. 29 Thirtieth Annual Report, Federal Reserve Bonk of Philadelphia Even if total deposits for the country remain unchanged in the post-war period, deposits of individual banks may alter considerably. Funds will move in considerable volume between sections of the country and between banks within an area. What effects are such shifts likely to have on the volume of deposits in this district? Deposit prospects The table indicates the unequal expansion of member bank deposits in different parts of the country during the past five years. It is apparent that the northeastern section of the United States and Chicago have not expanded as rapidly as other parts of Philadelphia member banks expanded least of all; the country. These differences in rates of growth have been incidental results of wartime activity and financing. Heavy Government expenditures in excess of receipts from taxes and sales of securities-were -far in made southern and western districts as part of strategic decent Of tralization of specialized war industries and concentration military personnel in areas favored by climate and possessed of ample space for maneuvers. In addition, agricultural regions ill have increases in income the general experienced greatest so that have smaller communities and agricultural areas expanded more than large centers of population. ý Wartime deposit shifts Member banks Gains in deposits Dec. 1939 to Dec. 1944 Billions S Philadelphia Reserve City Banks.... Philadelphia District .............. Large New York City banks Philadelphia Country Banks ......... ........ Large Chicago city banks ............ Boston district Other New York ..................... district............ All member banks ............. 1.0 2.4 12.3 1.4 3.1 Si) . 3.9 Per cent 64.2 76.7 'Z4.i 89.6 92.2 109.1 122.4 61.0 124.0 4.7 2.4 1.7 2.9 3.2 8.7 2.8 3.1 6.8 124.1 138.4 147.i 1 50.6 , 161.3 178.6 179:2 183.2 190.1 Cleveland district St. Louis district .................... Minneapolis district..................... Kansas City district .................. .................. Richmond district .................. San Francisco district ................ Dallas district Atlanta district ....................... ..................... Other Chicago district ................ 30 Changes necessary to equalize rates of expansion Per cC' Billions + + 1.0 1.5 + + + 5.7 + + 31i.4 1.0 jt.. 1 .J+ 1 .4-,. Thirtieth Annual Report, Federal Reserve Bank of Philadelphia It seems reasonableto expect most of these factors to operate in reverse after the war, even though total deposits for the country as a whole reach a plateau. For example, it is unlikely that urban dwellers will then increase purchases of agricultural products by as much as farmers increase will their purchases of manufactured products, many of which have been unavailable during the war. Similarly, after troops are demobilized and war contracts are terminated, the Government will no longer spend such huge sums at cantonments in and areas Doubtless with specialized munitions plants. some unemployed war workers will leave areas where Population increases have been greatest during the war. The last two columns have been included in the table to indicate the shifts that would be necessary to equalize rates of deposit expansion. They should not be interpreted as predictions. Rather they would appear to set a limit in one direction of the amount of that may occur. The other limit would be no post-war change Change at all. Thus, on analytical grounds, it would appear that even if we had no further expansion in total deposits the Third District might expect to gain up to perhaps $1.5 billion or onefourth of its present holdings of deposits. Individual localities deposits, or banks, of course, may gain or lose depending upon the net result of many factors. Deposits are likely to shift from purely urban centers. agricultural communities toward Accounts of customers production engaged in specialized war adaptable may well decline, if their facilities are not readily deposits, to turning out desired civilian products. Individuals' during which have been built up to abnormally high levels the war, may decline when funds can again be used to acquire homes, consumers' durable goods, to repair, remodel, or build and to meet other deferred demands. general tendency in gainsbeY analyzing potential deposit lossesand an individual bank is be to stress the accounts which may expected to decline. But when deposits declining, as a whole are not funds banking nds lost from deposit do not disappear from one the system. No matter how fast deposits are spent they Adbank ep up in other deposits, perhaps A even in the same bank. lose funds only lmay expect to when its community, or its group of depositors, has a net outflow of cash funds. It 31 Thirtieth Annual Report, Federal Reserve Baiik of Philadelphia is more difficult to identify factors which will increase customers' accounts in the future, but the best approach is to survey the relative demand for products and services which the community is equipped to supply, as compared with community needs which must be supplied from outside. Federal Reserve Bank The importance of the Reserve Banks in the war effort was recognized when they were declared an essential industry. And, indeed, their operations illustrate in miniature the adjustments that war industry has had to make to meet the increased responsibilities under the impact of war. I Fiscal Agency Take for example the Fiscal Agency Department of this Bank which issues, exchanges, transfers, redeems, and performs othef services incident to the enormous volume of United States Goy" There was no way of knowing ernment securities in this district. in 1939 or 1941, what problems would be encountered in finanC' ing the war; consequently, there was no way of knowing what the The ultimate task of the Fiscal Agency Department might be. immediate problem was an insistent need to increase the capacity for handling an avalanche of work. The organization had to be knowledge as to its ultimate size' expanded rapidly without Urgency of the task allowed little time for over-all planning 31'ý Even the newest and most inexperienced employees 1111d training. immediately to work on operations which normally would ha"e required months of experience. In addition, requirements fluctuated greatly. Periodic n"t loan drives increased volume suddenly and enormously, while between drives the manhours required might fall off at times much as 50 per cent. Especially the early drives could be handle only because of the loyal cooperation of personnel of the enure Bank. All departments worked harder and longer to releasesonj members for aid to "Fiscal. " Many employees simply rema11 at their posts until the work of the day was completed. During the Third Drive 12,500 hours of overtime were worked by nlen" bers of the department, and in some casesindividual empl0` e` worked double the usual number of hours in a single week. 32 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia But even the fullest cooperation of other departments was not enough, and help had to be obtained from more a labor market which was already demands straining under the Women of war industry. previously unemployed, high school and college students °n vacation and part-time employees who were working regular hours in other employment were a few help of the sources from which was drawn. This introduced 0Aerations serious problems of training. were subdivided into segments which could be perby inexperienced workers after a few days' training, but fformed greater strain for was placed on supervisors and others responsible coordinating the results. Mechanical devices, such as card punching and recording machines, were introduced as rapidly as they new operations could be secured and be standardized. This could problems because also raised additional and maintenance of the shortage of trained supervisors, operators, further men. Installation of a new system was itself a temporary strain on current accomplishment. rapid growth of the threat organization provided a constant ret to efficiency through overcrowding. Space was acquired of the Bank but prove moving to new quarters without interg current performance and the resulting decentralization da additional burden. Early in the summer of 1944 all savingsserious bond functions ments and about 94 per cent of the departpersonnel were moved to new and more squarters concentrate iinvolved But operations at one place. ie move itself transferring equipment some 500 employees and many tons of without interrupting current operations. he staff, which 0 577 during numbered only 28 in 1941, expanded twentythe Fifth War Loan Drive in July 1944. This efhciehe peak. Thereafter the continuing efforts to increase ceduresy through planning, training, introduction of new proand labor bas saving devices, and various short cuts began to reflected in increases in It output per roan-hour. possible, significant emplOYees by the end of December, to reduce the number of add'tion to 478 and simultaneously to reduce overtime despite fs dep irtmen several operations formerly performed by other fold 33 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia The department experienced what in some respects resembled for a manufacturing concern, a partial cancellation of contract bonds banks when qualified were authorized to redeem savings on October 1. The purpose of this move was to relieve the load on Federal Reserve Banks and to provide a convenient service to the public. Agents, of course, have not relieved the Reserve Banks of all operations in connection with redemptions. In the last three months of the year 32,000 transmittal letters, listing paid bonds, were received from redeeming banks. r ý, The great volume of work, its exacting nature, and its urgency, presented a task that could not have been well performed without a deep sense of patriotism and close cooperation on the part of everyone throughout the Bank. This record adds to the total district. war efforts on the financial front in this Other depart merits Changes in the life of the region also are reflected promptly in other departments of the Bank. The great expansion in recent years has put burdens on them similar to those encountered jr, To illustrate: Fiscal Agency, though in less extreme form. the number of Treasury checks handled by the Transit Department increased from 3 million in 1939 to 23 million in 1943 and to S-) million last year. Most of these were allotment and allowance checks for families of our rapidly expanding armed forces. The number of ordinary checks also increased as the dollar total almost doubled that of 1939. Both larger incomes and changing methods of payment moreover are reflected in operations of the Currency Departme17t It sorted which supplies hand-to-hand money to the district. anä 167 in 1939 counted million pieces of currency and nearly 21 p last million year. In addition, it counted 273 million coins in 1939 and 437 million in 1944. Acting as agents for the War and Navy Departments and the Maritime Commission, the Bank continued to assist commerc. j banks to extend loans to war industry by making guarantees u"cier dollar Regulation V. Although the volume of loans approved and on which guarantees were executed, was 36 per cent less tI'aiZ in 1943, the total volume of loans outstanding was substantially 34 l I Thirtieth Annual Report, Federal Reserve Bank. of Philadelphia The work of servicing loans expanded cumulatively greater. with the total volume outstanding, and the growing complexity of contracts and regulations relating both to V-loans and the newer T-loans has further increased the responsibilities of the Credit Department. in connection Administration of the examination function forbanks, with member and of the regulations pertaining to facets funds important eign and consumer credit were other of Research along industrial and banking the Bank's operations. lines has been part of extended considerably as an important effective preparation for meeting current and post-war problems by the Federal Reserve System, the banking institutions, business, Government. This broadened and the scope of cooprequired a eration with public and private agencies, organizations, and establishments. To meet this responsibility as well. as opportunity, representatives of the Bank participated in a great many activities throughout the district, sparing no effort in making their contribution on the home front. Credit Policy Credit policy of the Reserve System continued to be directed toward assuring success of war finance with a minimum extension of bank credit and maintenance of reasonable stability in the Government All member banks of the System securities market. were supplied with about $7Vz billion of additional Federal Reserve credit primarily to offset almost $S billion of additional currency and approximately $1 billion each for loss of gold and increased Acquisitions reserve requirements. of Treasury bills funds to the be continued to the largest means of supplying market, although purchases of certificates and notes were much more important than in earlier years. in this district, as elsewhere, there was a small shift from use of bills to direct borrowing from means of adjusting reserve positions. The number institutions increased from 50 in 1943 to 69 in largest amount under discount at any one time was million. 35 but significant this Bank as a of borrowing 1944, but the less than $17 V2 Thir/ieth Annual Rejbort, Federal Reserve Bank of Philadelphia This bank assistedthe War Finance Committees of the region It in selling as many securities as possible to nonbank investors. also adopted measures to curtail excessive purchases of outstandby banks, especially during and following war loan ing issues drives. To obtain as large an amount of funds as possible from sources has been the principal objective toward noninflationary directed. which the efforts of the Bank were vigorously Menibersbi/) During the year the number of member banks increased front 646 to 647. Three state banks were admitted to membership and bank. During one state member consolidated with a national the bank was organized and two others sane period one new national were absorbed by a third national bank. Summary figures showing the principal assetsand liabilities of member and other barlk_ ing institutions in this district are given in the appendix. Directors and officers The regular elections for directors of this Bank were held in the fall of the year. They resulted in the unanimous reelection of Howard A. Loeb, Chairman of the Tradesmens National Banlc and Trust Company of Philadelphia to represent Group 1 barks as a Class A director, and of Harry L. Cannon as the represent, tive of Group 2 banks among directors of Class B. It was a great shock to all when Mr. Cannon suddenly died November 9,1944. This was a great loss to the Bank and OI1 district which be had served most effectively for nearly twel1tthe years as a director of the Bank. His death, of course, necessitated a special election of his successor. Early in 1945 Charles A. Higgins, Chairman and President a Delaware, the Hercules Powder Company of Wilmington, is banks for by Group 2 beginning January the the term selected 1945. C. Canby Balderston, Dean of the Wharton School of Finance and Commerce of the University of Pennsylvania, Was Class C director by Board Governors the of reappointed as a of the Federal Reserve System, beginning his new term on January 1945. 36 ýp Thirtieth Annnal Report, Federal Reserve Barak of Philadelphia Appointments by the Board of Governors for the year 1944 included Thomas B. McCabe as Chairman of the Board and Federal Reserve Agent, and Warren F. Whittier as Deputy Chairman. The Board of Directors of this Bank again designated William Fulton Kurtz, President of the Pennsylvania Company for Insurances on Lives and Granting Annuities, to represent the Third Federal Reserve District on the Federal Advisory Council during 1944. A number of changes occurred in the official staff of the Bank. In May Wallace M. Catanach was made an Assistant Cashier, and in August Karl R. Bopp, Director of Research, was made an William D. Cobb became officer. also an Assistant Cashier, effective January 1,1945, succeeding James M. Toy, who retired at the end of 1944 following more than twenty-seven years of effective service. Philip F. Coleman, an Assistant Vice President, resigned as of the close of the year to become a Vice President of the First National Bank of Philadelphia. The appendix, beginning on page 40, contains the following tables: Statement Profit of condition and loss account Volume of operations Applications for industrial loans Member bank reserves Changes in member bank reserves and related items Banks in Third Federal Reserve District 37 Thirtieth Annual Report, Federal Reserve Bank of Philadeljihia Directors as 1,1945 of January Group Class A: A. I loaard Lnch Chairman, .................................... Tradc. mcns National 1 Bank Term E-rpiz-es lleccniber 31 1947 and Trust Company, Philadelphia, Pennsylvania. \V. George Reily President, Harrisburg, ..................................... Harrisburg National Pennsylvania. 1945 Bank, Juhe B. lienniny;..................................... President. Wyoming National Bank, 'I'mikh: umuck, Pennsylvania. ('Ias 3 1946 {i: Jams, T. I; ucklc .................................... Chairman. II. Itivr ('ununittcc. Philadelphia, Pcnnsyl aria. hark, Ward A. Higgins ................................... Chairman and President, Ilercules Company, Wilmington, 1)clawarc. ( I?lected February R, 1945. ) I). Kerlin Secretarv c": nndrn. 1 1946 2 1947 11hilcu Corporation, ...................................... Camden and Trcuurer, \e%% Jersey. Powder 1945 Forge Company, CInrH C: Thoma, B. \IcCahe, President, Chairman Scutt and Federal Paper Company, Reserve \geh t 1945 Chester, Pennsylvania. Warren Ucputy Chairman F. Whittier, Pennsylvania. Chcstcr Spring, C. Canby llaldcrston ................................. I an, \Chart, m Scholl of Finance I iiiversity ania, of I'ennsyi I'hilaficlphia, ................ and Commerce, Pennsylvania. 38 »4G 1947 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia Officers as of January 1,1945 ALFRED PRANK J. H. President WILLIAMS, DRINNEN, L. E. First Vice President C. A. MCILHENNY, Assistant ROBERT Vice President and Cashier W. J. DAVIS, A. WALLACE M. SIENKIEWICZ, MCCREEDY, CATANACH, Assistant Cashier D. WILLIAM Vice President COBB, Assistant Cashier PHILIP Assistant Vice President lJlJd HILKERT, llircctor of Research Presirle, tt WILLIAMG. N. KARL R. Bopr, ERNEST C. HILL, C. Vice President Assistant Vice President Vice President Vice DONALDSON, M. POORMAN, General Auditor Secretary 39 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia Statement of Condition Federal Reserve (000's omitted December 31 Philadelphia ,. of ,,, in dollar figures) Bank 1 1942 1 1943 1944 RESOURCES Gold certificates Redemption fund-Federal Other cash Total reserve Reserve notes.... ....................... Discounts and advances ..................... Industrial loans United States Government securities......... Total loans and securities ............. $1,147,114 5,666 21,190 $1,029,794 24,120 24,499 $ 945,229 42,799 17,815 $1,173,970 $1,078,413 $1,005,844 2,380 4,710 440,168 700 4,046 861,738 $ 447,258 $ 866,484 5 2,541,4,620 114,047 4,755 6,925 Due from foreign banks ..................... Federal Reserve notes of other F. R. banks.. Uncollected items .......................... flank premises ............................ All other resources ......................... Total resources 1 $1,749,501 1 ...................... 13 117,062 3,600 4,815 505 2,570 1,252,245 $1,255,320 12 4,042 153,977 3,457 3,278 $2,075,007 1 $2,425,930 I. IABILITIES $ 848,682 Federal Reserve notes ...................... Deposits: \Ieinher hank reserve account United States Treasurer-general............. account.. Foreign ................................ Other deposits .......................... "Total deposits 651,566 52,643 67,100 4,672 $ 775,981 ....................... I)cicrred items availability .................. Other liabilities ........................... 'I'utal liabilities $1,149,726 645,809 31,375 120,273 5,351 $ 802,808 89,503 524 ...................... 84,031 875 $1,714,691 $2,037,441 $ $ $1,427,510 710,778 28,722 106,353 4,578 $ 850,431 105,809 613 $2,384,363 CAPITAL. ACCOUNTS Capital paid in Surplus-Section ............................. 7 Surplus-Section 136 ...................... kcscrt"cs for contingencies .................. Total liabilities and capital accotntts... 11,747 15,670 4,393 3,000 $1,749,501 11,686 $ 12,227 17.859 19,872 4,421 4,468 3.600 5,000 $2,075,007 $2,425,930 Ratio of total reserves to deposit and Federal Reserve note liabilities combined........... 72.3% 55.2% 44.2 % Commitments to make industrial advances.... $1,346 $1,930 $3.048 40 I Thirtieth Annual Report, Federal Reserve Bank of Philadelphia Profit and Loss account Federal Reserve Bank of Philadelphia (000's omitted) 1942 1943 1944 $3,947 227 $5,122 217 $7,275 165 $4,174 $5,339 $7,440 $2,455 $2,498 409 $2,827 334 167 229 211 $2,956 $3,136 $3,563 $1.218 $2,203 $3,877 $ 277 $2,928 $ 263 150 100 86 13 41 Earnings from: United States Government securities....... Other sources .......... ................. Total earnings ...................... Expenses: Operating expenses* ..................... Cost of Federal Reserve currency .......... Assessment for expenses of Board of Governors .............................. Total Current Additions Profit ities net expenses ................... net earnings to current 524 ....................... net earnings: on sales of U. S. Government secur- ............................. of reserves in excess of requirements ... ........................... Other additions n.. s Transfers $ 435 ýCdllctlrtnc 1 $3,041 1$ 390 t'____ 11-11 current Net additions Net carvings to current net earnings........ 1,642** 414 net earnings......... $1,399 $ 386 $1,239 $3,602 $4,263 $ $ $ available for distribution....... 4 21 Distribution of net Paid to Treasury earnings of United Sec. iso 13b hividends ýýý States, "" sec. Paid to member banks........... l'ransferred to surplus (Sec. 13b)......... i'r ausferred to surplus (Sec. 7)........... *After 32 Ss 708 84 a4 701 0 28 499 2,789 I aw 719 47 3,4131 deducting reimbursements for received fiscal expenses. certain agency and other ** PrinciPally 1 $1,400,000 charge_off on basilk premises and payments to Retirement System. transferred to Reserves for Contingencies. 41 Thirtieth Annual Re(jort, Federal Reserve Bank of Philadelphia Volume of operations l e(leral l: eserv (lank 1943 1939 u4 Philadelphia 1944 1 Pieces or transactions handled ((100's omitted) Discounts and advances ..................... Currency counted .......................... Coins counted ............................. Ordinary checks ...... .... in packages by......... Checks handled automobile run service .............................. U. S. Government checks (including first handled i 1 200,093 433,502 110,713 1 209,594 437,431 112-036 16,370 17,608 L(i,32O 3,117 5,613 (1 23,389 52,426 0 5.275 1,230 337 56 1,214 212 02 166,629 273,429 97,232 Treas- in 1943)..... ury card checks Work relief checks ......................... Ration checks ............................. item, : Collection Coupons of U. S. Government and agencies. MI other (notes, drafts and coupons)...... Transfer of funds .......................... Issues, redemptions, and exchanges by Fiscal Agency Department : U. S. Covernmmnt direct obligations........ All other ............................... 94 144 0 4,993 1,299 12i5 63 19,717** 4 25,479** 36 $ $ Dollar amounts (000,000's innittcd) Discounts and advances ..................... Currency counted .......................... Coins counted ............................. Ordinary checks U. S. (; overnntent ........................... (including Treaschecks ury card checks first handled in 1943)..... Work relief checks ......................... Collection items : Coupons of U. S. Government and agencies. All other (notes, drafts, and coupons)..... Transfers of funds ......................... Issues, redemptions, and exchanges by Fiscal Agency Department : direct obligations........ U. S. Government All other ............................... $ 11 677 26 23,467 509 1,077 41 45,54ý 669 160 6,723 (1 K, IRH 0 S(1 197 3.197 78 224 7,158 lp3 243 8,4? 4 8,014** 17 9,7HK* * 110 396 122 Securities held in cust4xly for member batiks at end of year ... Savings bonds in .............. safekeeping at end of year (number of pieces) ..................... 327 1,015 40 43,593 Average $640 mil. $1,651 mil. 133,000 $1}J? 1 »>il. 2-'yAQp *Less than 500. **Includes savings bonds sold through other issuing agents Eid redemptions through commercial banks qualified during the last direr months o[ 1944 42 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia Applications for industrial loans Federal Reserve Bank of Philadelphia 1944 June 30,1934December 31,1944 6 0 0 1 353 457 68 1 7 879 $3,185,000 $59,641,426 17,126,350 3,991,700 500,001) Number Approved Rejected ............................... Withdrawlt .......... ' ...... Under considerat. . . ion ..................... Total number ....................... A mount Approved Rejected ............................... withdrawn .., ....................... Under consideration ........... ..................... Total amount ........ ............... Member bank reserves Third hederal Reserve District (I)oIlar figures in millions) Philadelphia banks: 1942: Jan. 1-15 1943: Jan. ................... 1944: Jan. 1-15..... 1-15 1945: Ja1.1-15 ................... ................... Country banks: 1942: Jan. 1943. Jan. 1-15...... ............. 1_ 1944: Jau. 1945: tan. 1-15 ................ 1-15 ................... All members: 1942: Jan. 1943: Ian. 1-15 .................. 1944: Jan. 1-15................... 1945: Jan. 1-15...... 1-15 ................... ' 500,000 $3,685,000 Actually held Required $81,359,476 Excess $449 418 370 388 $294 358 357 374 $155 GO 13 15 224 256 272 316 145 184 215 247 79 72 57 69 673 674 642 704 439 542 572 621 234 13_' 70 84 43 Ratio of excess to required 531/, ., 17 4 4 1j 39 26 28 53 24 12 14 Thirtieth Annual Report, Federal Reserve Bank of Philadelphia Changes in member bank reserves and related items Third Federal Reserve District (Millions of dollars) 1942 Sources of funds: Reserve Bank credit extended in district........ Interdistrict transfers commercial .............. Dint gold purchases, net ...................... Treasury operations .......................... 1 ................................... Uses of funds: Total 31 +1,053 -659 -755 676 Banks in Third Fed. Res. District $) ( tlillons (Partly dcrivcd) December 30,1944 + 346 +305 + 281 65 +301 Member banks Total +301 -6+ +258 ................................... 1944 +210 +846 +280 10 -8+1-1 -4+1-0 Currency demand ............................ Member hank reserve deposits ................. "Other deposits" at Reserve Bank ............. Reserve Other Federal accounts ............... 1 + 39 +876 +20-0 +258 Total 1943 + I Mutual savings banks 346 Other non_ members Assets Loans and discounts .................. U. S. Goverment obligations......... Other securities ..................... Cash assets Fixed assets ......................... ......................... Other assets ......................... Total ......................... Liabilities and capital Deposits: ln(liViduals, ps'rations- 1,067 4,808 783 1,491 137 36 808 3,610 400 1,277 84 24 83 506 272 28 15 4 176 692 111 186 38 8,322 6,203 908 1,211 3,457 2,415 1,001 404 299 2,956 1,243 861 397 210 837 7,576 5,667 837 32 714 25 511 8,322 6,203 908 647 10 accounts partnerships, and cor- I)cmimd ......... Time ........................... U. S. Government .................. ]lank Other ............................. ............................ Total deposits ................. Other liabilities Capital accounts ...................... ..................... Total ......................... umher of hanks ..................... I 885 44 1 -7 - 16 70 501 335 140 99 1,012 133 1,211 ? -'S