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PROBLEMS IN w THIRTY-SIXTH THE FEDERAL ANNUAL RESERVE BANK 1950 REPORT OF PHILADELPHIA A Review of 1950 And of Some of the Economic Problems which Emerged FEDERAL RESERVE BANK OF PHILADELPHIA April The year 1950 was one of decision. 12,1951 Two choices were made by the people of the United critical States. By our action in Korea, we indicated our willingness to lead the free peoples of the world in efforts to stop the steady onset of totalitarianism. On the home front, we decided to budget, permanently if necessary, the goods and services required for thorough defense. A constantly mobilized economy will present grave new problems. The beginnings of these are discussed in this Annual Report for the year 1950. CONTENTS PAGE 1 Problems in a Mobilized Economy 19 50-A Case of Inflation Monetary Policy ........ 3 ................... 12 . .................. Problems Imposed by Defense ...... 15 . What Are the Alternatives? ............... . 31 Conclusions . ...... . .. 33 Reserve Bank Operations Directors Officers Appendix 22 36 . ... ........... ..... 37 ..... .... ... "". " ........ .... 38 PROBLEMS IN A MOBILIZED ECONOMY THE YEAR 1950 was of decision. It was important not only for the events it brought,one but for those it portended. The outbreak of fighting abroad, this time in Korea, once again posed a threat to our way of life. The reaction in the United States, and the rest of the free world, was not long in appearing. We resolved to defend our freedom against the threat of aggression, and to gear our economic system for national defense. Whether our economic system should be converted to an all-out war effort or to a partial effort for a prolonged period is uncertain. At present, national policies are pointed toward the latter objective. The basic task free enterof any economic system-whether prise or socialistic, whether in war or in peace-is to make full use of the limited amounts of labor, raw materials, and plant to produce the goods and services people want most. In a system of free enterprise such as we have in the United States, the free market mechanismplays an important role. Most of the goods and services produced are sold-in markets; most of the things we consume are bought-in marketplace. Goods and services produced flow from farm the factory and to the wholesaler, the retailer, and finally to the consumer. Consumer and business purchasesset up a return flow of money-money paid out in production-to the retailer, the wholesaler, and finally back to the producer. Goods are exchanged for money and money for goods at certain ratios or prices. The price mechanism records the interaction between the money flow and the few goods flow. Too much money and too goodsmean rising little inflation; too money results in prices and falling prices and depression. The flow of goods, both to kind and quantity, is determined mainly by the decisions as of millions of independent producers 1 In making deciwithin the limits of their capacity to produce. for factors but by numerous the outlook sions, they are guided the price of their product, the volume of sales, and the cost of producing it are especially important. The flow of money is determined by the amount we have to spend and our willingness to spend it. The major source of the money flow is production itself, the total being equal to the total value of goods amount of income paid out by The money stream is influenced also and services produced. loans bank banking Commercial and system. the operation of our investments add to the borrower's deposit account. They pour power new money into the spending stream. Total purchasing income available during a given period consists of both money and the amount of new funds created by loans and investments. In a partially mobilized economy, the basic task of using the limited supply of resourcesto produce the things people want most remains the same, but the character of our wants and needs changes. A larger part of the total output of goods and services must go for defenseand a smaller part for civilian use. This is the economic side of the defenseproblem in real terms. Defense production turns out money income but it does not put any goods in civilian markets for this income to buy. In addition, credit expansion which tends to accompany the high level of production and employment pours new money into the spending stream. The problem in financial terms is to prevent the money stream from becoming excessivein relation to the limited supply of civilian goods-in other words, to prevent inflation. The danger from foreign aggression is generally recognized, but not so many of us are aware of the threats created by economic mobilization itself. Success in preserving our essential freedoms requires not only a strong defense against foreign aggression but also against the inflation forces unleashed by the defense program. Likewise, effective action requires carefully planned strategy in meeting the economic problems at home as well as in meeting the military problems abroad. This report, in addition to reviewing briefly the significant business and financial developments in 19 5 0, examines some of the problems of a mobilized economy and alternative methods of dealing with them. 2 1950-A CASE OF INFLATION Economically speaking, 1950 wore two suits of clothes. For nearly six months, the country was treated to the spectacle of a high, unfaltering demand for goods which was met on even terms by a constantly growing production. The pattern by which the economic fabric was cut was a balance between rising civilian demandand the ability of the economy to meet that demand. Then camethe Korean War, and mufti was exchanged for Army khaki and Navy and Air Force blue. The fear of shortages put the whip to civilian demand, and it outraced production. The fabric was still of civilian texture, but it was cut to a pattern of inflation and semi-war. Toward balance In industrial America, for consumer the demand for houses, durable goods, such as automobiles, appliances, and furniture, and for businessplant and equipment, provides the touchstone of prosperity. When industries such as the construction and automobile industries are working to meet a high level of consumer demand, they carry with them to prosperity a large number of corollary industries. A building boom stimulates the production of basic raw materials such as lumber, steel, copper, glass, and building hardware. It also provides a substantial fillip for industries producing home furnishings like furniture, floor coverings, draperies and home appliances such as ranges, heating units, refrigerators, and other necessities for household operation. A large demand for automobiles is passed on to manufacturers of parts and supplies such as forgings, electrical installations, tires, batteries,upholstery and other items, and to producers of basic items such as steel, lead, copper, fiber, and glass.Expanding production in these industries adds to incomes which in turn react favorablyrelated on the construction and automobile industries. At the outset of 1950 and during the first four months of the year, the economy was delicately poised between a high level of demand for all sorts of goods and our ability to produce those 3 goods.The principal obstacle to a return of prosperous conditions had been removed in 1949 when the liquidation which reduced businessinventories about $5 billion was checked. This development, together with work stoppagesin that year, converted some areasof the economy from buyers' to sellers'markets. The recovery which became apparent with the revival of the building boom in the latter half of 1949 was carried over into 1950. In six months, approximately three-quarters of a million housing starts were recorded, the largest for any similar period on record. In many areas,new houseswere sold before completion. Numerous communities throughout the Philadelphia Federal Reserve District building permits participated in the building boom. In six months, for new residential construction in the Philadelphia-Camden metropolitan area were more than double those of the first half of 1949. Despite the volume of construction, most new houses built in this areawere sold before or during construction, according to a mid-year survey in which this Bank participated. Unlike the year before, there was no inventory of finished but unsold new houses.The demand for automobiles continued unabated during the first half of 1950. More than 3 million automobiles were sold at factories from January through June. The buoyancy in the construction and automobile industries was counteracted in part by the fact that Federal expenditures, while slightly larger than in the first half of 1949, were brought nearly into balance with receipts, the net deficit for the period amounting to only $315 million. Exports to June also fell 27 per cent below the similar period in 1949. Business expenditures for plant and equipment were 12 per cent smaller than in the previous period. There was nothing puny about the size of business expenditures for plant and equipment, or again of Government expenditures but, although large, they were not increasing and could not therefore be counted among the inflationary forces building up in the first half of the year. The flow of goods as measured in physical units of output rose during the first half of 1950. This almost without interruption was particularly true of durable goods in general and of such basic 4 items as iron and equipment. steel, machinery, and transportation In June, the volume of industrial production, according to the Federal Reserve Board's index, for the half was up 11 per cent year. The most spectacular rise was registered by producers of automobiles, production being half again as large in June nearly as in the preceding December. Virtually all industries participated in the expanding activity. By June, construction was activity 49 per cent above a year earlier, the production of durable goods was nearly one-fourth of both mingreater, and the production erals and nondurable goods was up about 14 per cent. The extent to which the flow of goods coming off the production line keeps pace with or lags behind the demand for goods is measured by the movement flow of goods of prices. When the equals the demand for them, If, however, prices tend to stabilize. demand four For outruns production, prices rise. months in 1950, prices were fairly level, the average of steady. At the wholesale all prices included in the Bureau index Labor Statistics advanced of only 1.1 per cent. The largest increase was registered by farm products, but even this rise was only 2.8 per cent. After April, demand the impact of the unrelenting pressure of upon the available to supply of goods caused the price structure give way a little. It difficult for probecoming increasingly was ducers to keep pace with the accelerating rate of demand, and wholesale prices in the next two months jumped nearly three times as much Food regisas in the first four months of the year. tered the greatest price increases, but the prices of manufactured beginning to articles also rose. The symptoms of inflation were appear. Sources L of buying power The income, the spending stream is fed by three tributaries: use of savings, 94 or 95 cents and credit. People normally spend of every dollar first half 1950 they in income; of the of their Spent about 94 cents. 5 in Personal income rose during the first part of 1950, reflecting brief labor force. After in the civilian a part more people employed laborers at work in in the number of non-agricultural reduction the first quarter of the year, the number of persons employed, ex2 %2 in June-about cept in agriculture, rose to more than 52 million lengthened, The work-week was million more than a year earlier. in June, women averaged about 4 per cent more time men and and hourly earnings rose job earlier, and average than a year on the developments about 5 cents. The combined effect of these three in personal income after and mounting profits was an increase billion, about $9 billion higher than taxes to an annual rate of $196 in the last quarter of 1949. This tributary of the spending stream before. A fatter was considerably larger than it had ever been by the payment of a G. I. insurance pay envelope was augmented billion in dividend of nearly $3 the first quarter. People also borrowed against future earnings to purchase homes, automobiles, and consumer durable goods at an increasingly rapid rate. Recordings of non-farm, residential mortgages of $20,000 or less, were 35 per cent higher than in the first half of 1949. Member banks participated in the expansion of real estate credit, their residential property loans rising about $700 million. In contrast with a decline in the first half of 1949, the volume of consumer credit outstanding rose steadily throughout the first six months of 1950. Instalment credit for the purchase of autobut every category mobiles displayed the greatest vitality, of instalment credit either advanced more rapidly or declined to a smaller extent than from January to June 1949. Member banks added about $850 million to "other loans to individuals, " consisting chiefly of consumer loans, and total loans of this class outstanding on June 30,1950 were one-fourth larger than a year earlier. The expansionary trend in real estate and consumer was counteracted, in part, by a decline of $324 million, or 2 per cent, in commercial, industrial, and agricultural loans. ever, on June 30,19 50, business loans were $560 million than a year earlier. Total loans of member banks rose $1.5 in the first six months of 1950 and at mid-year were $3.3 6 credit nearly Howlarger billion billion ý above the level of June 30,1949. Member banks in the Third Federal Reserve District reported an increase of $71 million in businessloans during the same period. The aggregate money supply displayed little change from December 31,1949 to June 30,1950. Deposits, however, were used more actively than during the first half of 1949. The turnover of demand deposits, seasonally adjusted, was 4 per cent greater in New York City and 2 per cent greater in other leading cities. Korea brings more inflation June brought shocking news. The North Korean Communists crossedthe 38th parallel, and the United States, although reluctantly, determined to defense of resist Communist aggression. The our freedom involved for that total war war-not preparation was inevitable, but rather becausethere seemedlittle hope of preserving both peace and freedom while unarmed. The problem posed by the Korean War was two-fold. In the first place, deterdecision the to resist aggressionalso involved the mination to produce less"butter" have the in order that we might requisite guns. How much of a sacrifice of civilian goods would be required was not clear, even at the end of the year, but a substantial diversion to defense pointed toward of civilian shortagesin many items. In production the second place, changing our course from a peacetime to a defense economy also posed the problem of growing inflation. Under the circumstances, there was a strong tendency for by the the supply of civilian goods to be outrun income This for available problem the purchase of those goods. wasintensified by the fact that the economy was already operating closeto capacity, and production lines were finding it increasingly hemem. t to pour goods into the market at the rate people demanded t them. Some symptoms before the of inflation had appeared even enlargeddefense burdens. brought program added People did for an answer to the question how much of a sacrifice not wait in living standards was to be required of them as the 7 defense effort progressed.With the news that the United States had decided to opposeaggressionwith armed force, a tidal wave of "caution buying" covered the retail market. Overnight, retail housestores experienced an abnormal rise in sales.People bought hold appliances,television sets, furniture and bedding, floor coverings, hosiery, shoes,towels, sheets,and even foodstuff s-anything that might become scarce.The department stores did a huge volume of businessas salesjumped 21 per cent in one month. Homefurnishings led the list of items most commonly sought. But the caution buying did not last long. In three months it was nearly over and the volume of retail sales,seasonally adjusted, declined steadilyuntil November. Merchants, anticipating a good Christmas season,placed heavy replenishment orders; and then just before Christmas, caution buying surged upward again as the Chinese Communists swept down from Manchuria. December retail sales were 16 per cent larger than the previous Christmas season. The major part of this rise was due to price increases. The purchase of automobiles, new homes, and other consumers' goods, and business investment in inventory, plant, and equipment added impetus to the boom. Factory sales of automobiles in the domestic market from July through December were almost onethird larger than a year earlier. Housing starts were 20 per cent larger than in the second half of 1949, bringing the total number of housing starts for the year to a record of about 1,400,000. These two basic industries carried many corollary industries to higher levels of prosperity. The upsurge of consumer spending was accompanied by rising business expenditures for inventory and increased outlays for plant expansion and modernization of equipment. Business inventories, seasonally adjusted, grew about 14 per cent between June and December, but a major part of this increase reflected the rise in prices. Businessmen not only stepped up their expenditures for inventories, but also their long-run plans for plant expansion and new equipment. Expenditures on new plant and equipment were 8 increasedfrom $8 billion in the first half of the year to $10 billion in the secondhalf, according to the joint estimates of the Department of Commerce and the Securities and Exchange Commission. Of the segments of the economy demanding goods after June, Federal only the Government failed to increase its demands until thelatter part of the year. The preparednessprogram of the Federal Government remained largely in the planning stage until the closing weeks of the year, and Federal cash expenditures were $1 billion smaller than in the last half of 1949. With increased tax rates and higher incomes, Government cash receipts actually exceededexpenditures by more than three-quarters of a billion dollars.War had come suddenly, but conversion from a peacetime economy to a defense economy is not accomplished overnight. The supplies needed to equip a military force of 3 %zmillion men are necessarily huge, and obtaining them from the economy requires careful planning. The balance of 1950 was devoted to planning, and only a small trickle of these orders found its way into the economy before the close of the year. The rising demand for goods after the outbreak of the Korean War was primarily civilian in origin. Industry its shoulder to the wheel to meet the enlarged demandfor put The level of production was pushed up another goods. 9 Per cent, according to the seasonally adjusted Federal Reserve index industrial of production. Producers of machinery expanded production more than 17 per cent. The majority of industries manufacturing durable items achieved moderate to substantial increasesin Many manufacturers of nondurable items production. 3alsoexpanded production. But these renewed efforts were insufficient to stem the tide of inflation, and prices climbed faster than ever. Prices of raw materials imported from the Eastern Hemisphere took wings; in the half year, wool tops were jumped up 70 per cent, the price of tin over 90 per cent, and rubber 160 per cent. Industrial metals were in great demand, and the price of lead rose 55 per cent, steel scrap rose more than 25 per cent, accompanied by smaller price increases for zinc and copper. Price increasesoccurred in all major classes index of commodities. At the close of the year, the all-commodity Foods had of the Bureau of Labor Statistics was up 11 per cent. farm and food gone up 10 per cent, and commodities other than largest The increases had occurred in risen 12 per cent. products hides, and housetextiles and textile products, chemical products, hold furnishings. In general, raw materials were up 12 per cent and manufactured commodities, 10 per cent from June. Consumer prices rose steadily but more moderately in the wake of sharply rising wholesale prices. At the end of the year, the index of consumer prices, prepared by the Bureau of Labor Statistics, was up nearly 5 per cent above the June level. Prices of items than classified as housefurnishings showed the greatest rise-more 10 per cent-and retail prices of apparel advanced 6 per cent and food prices rose 5 per cent. Rents inched up steadily about 1 %2 per cent. At the end of the year, it was clear that the tempo of inflation was quickening, and it was apparent that the battle of the price bulge would be equally as tough as the military struggle. The swollen spending stream The spending stream rose higher on its banks as the second half of the year progressed.Record production and employment, and a longer work-week at rising wage rates, produced record levels of personal and businessincome. The number of persons employed in non-agricultural industries jumped more than 1 Y2 million by December, and unemployment amounted to less than 4 per cent of the total civilian labor force. Accordingly, weekly earnings in many industries rose. Some of this increment was diverted through increased taxation in the last quarter to the defense effort, but disposablepersonal income rose to a record annual rate of about $212 billion in the fourth quarter. On the average, people spent 95 cents out of every dollar earned in the last half of the year. 10 People saved a little less after June; they dipped into their savingsmore freely to purchase goods. Fewer E Bonds were sold and redemptions during the last half exceeded purchases by more than $500 million. Withdrawals of savings and loan shares increased.There was a moderate liquidation of security holdings. Time deposits in all banks declined moderately but steadily, and at the year's end were $570 million smaller than on June 3 0. The spending stream was fed by a growing volume of loans. The volume of businessloans of all member banks rose nearly $5 billion, or 28 per cent, during the half year. Following the national trend, but at a slower rate, businessloans of member banks in the Third Federal Reserve District rose 21 per cent to a total of $931 million at the year's end. Partly as the result of the reimposition of Regulation W in the third quarter of the year the rate of growth in the volume of outstanding consumer credit slowed up somewhat. However, there was a net addition of nearly $2Y2 billion to the total volume of consumer credit outstanding from June to December, a smaller increase than for the same period a year earlier. Nearly all types of consumer credit grew at a slower rate than in the previous year but charge accounts, reflecting in part the increasein the price of goods at retail, expanded faster than in 1949. Real estate credit climbed higher than ever as the housing boom continued. The volume of non-farm mortgages of $20,000 or less recorded from July through December reached almost $9 billion, an increase of 38 per cent over the previous year. Fed by growing incomes and the greater use of credit, the supply of dollars pouring into the spending stream grew and each dollar was used more often. At the year's end, the aggregate of demand and time deposits and currency outside the banks was more than $7 billion greater than at the end of June. The turnover of demand deposits in banks in leading cities other than New York rose substantially in the third quarter and declined only slightly in the fourth quarter. It averaged more than 21 times a year-a rate greater than in any comparable period since 1937. 11 MONETARY POLICY The job of the Federal Reserve System is to regulate the volume help keep the amount of spending in of credit in such a way as to balance with the available supply of goods at current prices. For the over-all this purpose, the System has tools for influencing supply of credit, mainly by influencing the volume of member bank reserves. The System also has authority to regulate the use of credit for certain purposes. Both types of tools were put to use in 1950. Economic stability characterized much of the first half of 19 50. The recovery which appeared in the fall of 1949 continued, with production increasing and prices moving up only slowly. No sizable defense program had been planned. Accordingly, the easy-money policy pursued in the latter part of 1949 was modified only slightly in the early part of 1950. Some Government securities were sold by the System to satisfy the investment demand for them, and at the end of June the volume of Government securities in System portfolios was about $5 50 million smaller than at the outset. This development, together with the loss of nearly $200 million in gold, more than offset seasonal factors such as the return of money from circulation, and by the middle of the year member bank reserve balances had declined over $600 million. With the emergence of strong inflationary tendencies in the second half of the year, the problem was clearly to combat the developing inflation. The first tool employed by the System was "moral suasion." On August 4, the Board of Governors joined with other Federal and state supervisory agencies in requesting voluntary cooperation by banks and other lenders in restricting their lending and investment activities. This appeal was repeated on November 17 in a letter by the Chairman of the Board of Governors to all member banks. In the latter part of August, the discount rates of all Federal ReserveBanks were raised from 1/2 per cent to 13/4per cent; and there was an increasein interest rates on short-term Government 12 securities. Raising the rediscount rate makes the acquisition of additional reservesby member banks more expensive and tends to discouragean expansion banks have large of credit. However, as quantities of Government securities in their portfolios which they can sell in order to acquire additional reserves,the use of the rediscount rate has become less effective. Open market operations constitute potentially one of the most effective anti-inflationary weapons in the Federal Reserve tool chest.The saleof Government securities from the portfolio of the FederalReserve System reduces member bank reservesand shrinks the baseupon which new credit can be extended. The use of open market operations, however, has been restricted by the policy of maintaining a stable market for Government securities. Factors Influencing the Volume of Member Bank Reserve Balances, June 30 to December 31,1950 (In millions of dollars) Additions to reserves Federal ReserveBank Credit U. S. Government securities ..................... Loans, discounts, and advances .................... Float, industrial loans, and acceptances............ Total Decline in TreasuryReserveBank Credit .................... deposits with Federal Reserve.......... . Other additions ....... ............................ Total additions Deductionsfrom .. ... ....................... reserves Net gold Increaseinexports .................................... money in circulation ...................... Total deductions ............................ increasein member bank reserve balances .................. $2,447 24 1,042 $3,513 282 62 $3,857 1,525 585 $2,110 1,747 Banks and other lending agencies were selling substantial amountsof Government for loans and securities to obtain funds other forms Treasury investments. Moreover, terms new the on of issues offered in exchange for maturing securities were not attractive enough and the Federal Reserve added substantial amounts 13 through its support purchases.At the year's end, the volume of Government securities held by the System was $2.4 billion larger than at mid-year. The increasein System holdings of Governments during this period, was the major factor adding to bank reserves float and by other by increase in lesseramounts being supplied an drain on reserves resources.These additions more than offset the billion from $1.5 of gold and from the seasulting the outflow of in At in the year's end, member circulation. sonal increase money bank reserve balances were about $1.7 billion larger than at the end of June. To offset this development and as a further step toward arresting the progress of inflation, an increase in the reserve requirements of member banks was announced December 28. By raising the percentage of their deposits which member banks are required to keep on reserve, the amount of funds available for lending or investment is reduced. However, the presence of a large volume of U. S. Government securities in member bank portfolios, which can be converted readily into reserves, also reduces the effectivenessof this instrument. The Federal Reserve System was also given the responsibility for regulating the use of credit for the purchase of consumer goods for these regulations was granted by and real estate. Authority Congress in the Defense Production Act of September 1950. Regulation W was issued to restrict consumer credit, and Regulation X restricts loans, not insured or guaranteed by the GovernSimilar restrictions ment, for most types of new construction. were imposed on Government insured and guaranteed real estate loans. These regulations have a dual objective: to reduce the size of the spending stream, and to divert men and materials from civilian to defense production. The restriction of credit is but one phaseof the battle against inflation, and the activities of the Federal Reserve System tell only part of the story. In the latter half of 1950, the spending stream was swollen not only by a greater use of credit but also by rising incomes and by the greater use of savings. Fiscal policies should 14 ý supplement monetary policies in draining off excess purchasing power. If the Government takes in more than it spends, it reduces the money supply demand for goods. and thereby moderates the Tax rates were raised in the last quarter of the year to put fiscal policy into the inflation battle, Governwith the result that the ment's cash receipts have in balanced spite of inpayments about creased military Debt expenditures. management can also be a very helpful tool in the battle against inflation. Under present conditions, vigorous Governefforts should be made to place new ment securities whether for for maturing refunding new money or issues, outside of the banking system. This means that the terms on new issues must be buyers. made attractive to non-bank PROBLEMS IMPOSED BY DEFENSE The major began problems a partially mobilized economy to emerge in 1950. In of latter industry was the part of the year, feeling the pressureof a peak level of civilian demand and facing a sharp rise in Government purchases for defense. Backlogs were increasing, The were developing, and prices were rising. defense shortages defense in for in problem real terms is to get more goods the face of the demand for civilian goods and services. vast The financial is that of problem posed by the defense program checking inflation. The for the volume of spending to tendency exceed the supply of goods and services at current prices stems Primarily from two sources. The sharp rise in bank loans and investments into has been pouring a large amount of new money the spending stream time when money incomes are already at record levels. The at a factor which is of increasing imporsecond tance is that defense but production is adding to money incomes not to the supply buy. Unless for incomes to these the Government of civilian goods its siphons off enough income to pay all of expenses,Government borrowing further to an already will add excessive supply of purchasing power. These are the basic problems confronting us in a partially mobilized economy. In this section, we are concerned with how 15 we can best solve these problems becausea vigorous and growing economic system is the very foundation of a strong national defense.Can we rely on the free market mechanism, or is it neceslead us into sary to supplement it in some ways? These questions an analysisof how the free market works, whether it can solve the if problems facing us in a mobilized economy, and in what ways, any, it may need to be supplemented. How the free market works The free market mechanism runs so smoothly that we often fail to recognize the work it does.In brief, the market mechanism: (1) measuresour wants and determines which goods people want most; (2) gets labor, raw material, and plant into the production of these goods and services; (3) regulates the distribution of the income produced among those who participate in its production; (4) rations the limited supply of goods produced among consumers; and (5) protects individuals against the selfish exploitation of others. Sinceit is impossible to produce as many goods and services as people want, there must be some device for measuring the things we want most. In a totalitarian country, the State determines what people "want"; what is good for them-or at any rate what they shall have. The free market mechanism, however, registers the choices of each consumer. The consumer indicates his preference when he spendshis money. If a man buys a white shirt, he casts dollar votes for the production of white instead of colored shirts. If he buys orange juice, he votes for the production of oranges instead of grapefruit. The total amount spent for different goods and services measurestheir importance to consumers as a whole. The market is a very sensitive barometer of human wants, as any businessmancan testify. The next job is to get labor, materials, and plant into the production of those products and services people want most. In a totalitarian State, this would be done to the extent necessary by force, moving men and plant about like checkers on a checker 16 board. In free enterprise such as ours, however, people have the a system of right to choose what they do. Manpower and facilities can be shifted from the production of one good to another only by providing incentives for the change. This incentive is provided through the workings of the price-cost-profit mechanism. If consumers want more of a certain product and have the money to pay for it, saleswill rise. The increase in demand is quickly transmitted through the markets to the producer. If the increase in demand is prices tend to rise and profits increase. A decreasein sufficient, demand, on the other hand, results in smaller sales, lower prices, and lower profits or losses.Thus, profits act as a governor calling forth more production as they rise and shutting off production as profits decreaseor as lossesoccur. In addition to acting as an incentive, the market mechanism affects the ability of producers to bid for scarce materials. Producers engaged in the more profitable lines of production can bid labor, materials, and plant away from those engaged in the less profitable lines. A third job the free market does for us is to distribute the income is created in production. In a totalitarian system, income divided up primarily according to the will of the State. Under our system,however, the wage going to the laborer, the profit going to the businessman, investor and the amount of interest going to the who makes some of his funds available for production, are the result mainly of market forces. It is the value of services rendered as determined in the market that establishesrates of pay which vary widely among laborers, businessmen, and investors. Basically, the principle underlying this method of distributing income is that each participant in production shall be rewarded according to the market less his value of contribution. If someone receives than the value his contribution, competition for his services tends to raise hisofincome. If he receives more, competition would force a reduction. To be sure, there are many qualifications to the operation of this principle in the real world. With the high degree of specialization exists today, the work of many individuals and machines which goesinto a finished product. It is impossible to mcas17 Group ure the exact dollar and cents contribution of each person. rather than individual bargaining by workers and employers for each his reduces the competition which is supposed to get free rightful reward. Despite the numerous interferences with the market mechanism, it is still generally true that those making the more valuable contributions as measured by market forces are rewarded with the larger incomes.This principle of gauging one's money income according to the value of his contribution provides the maximum incentive for efficiency and extra effort. It is one of the real advantagesof a free enterprise economy. A fourth task is to ration the limited supply of finished goods among consumers. Under totalitarianism, the State, in fixing prices and wages, makes most of the decisions. In a free enterprise system the price mechanism, which registers the choices of the people, does most of the job. As we have seen, prices such as wages and interest determine the money rates-established in the market-largely income received. In turn, prices established in the market determine the amount of goods and services this money income will buy. Within the limits of their purchasing power, people are free to make their own decisions as to what and how much they will buy. Price is the governor, tending to keep demand and supply in balance. If there is not enough of a product to meet demand at the current price, the price tends to rise. The higher price tends to restore balance by cutting off some purchases and stimulating an increase in production. If too much of a product is put on the market, prices fall, stimulating purchases and discouraging production. Scarcity is a relative term and not one of absolute amounts. Goods become scarcewhen the available supply is not sufficient to meet demand. This situation may arise either from limitations on the supply sideor an increasein purchasing power. In the last few months, for example, we have had numerous shortages, with production running at all-time peaks, primarily becauseof a tremendous increasein demand and buying power. Normally, scarcity is reflected in higher prices. If for some reason, prices do not rise enough to restore balance, scarcity manifests itself in shortages or 18 backlogs-evidence that people would buy more at the current price if they could get the goods. Finally, the free market helps to protect us against the selfish exploitation of others. Buyers are free to buy or not to buy, and to choose among sellers. Sellers compete against each other for the consumer's dollar. Buyers are inclined to go to the seller who gives the most for the which it money. Freedom and the competition fosters help to prevent the sale of goods and services at exorbitant prices. Competition does not provide complete protection because buyers do not have sufficient information about the quality of the many products they buy, and for numerous other reasons. Nevertheless, competition is still basically a vital force helping to guarantee the consumer a good quality product at a reasonable price. It is obvious that numerous conditions have developed which modify the workings of the free market as outlined above. The dominance of a few large producers and combinations among businessfirms has modified competition in many industries. The growth of labor organizations and collective bargaining has greatly modified competition among laborers in bargaining over wages. Numerous factors interfere with the free movement of workers, employers, and equipment from one kind of production to another. We have called upon the Government to intervene many timesbecausewe dissatisfied are with the cards which a free market deals us. Despite the many modifications which exist, however, we still rely on the free market mechanism normally to perform the basic functions summarized above. The free market in a mobilized economy Can we rely on the to guide us to the objectives of a semi-wareconomy? The market free market can continue to perform most of thesefunctions in But it will be necessary to supplement it in a satisfactory manner. some respects. Market forces alone cannot bring about the necessary increase in defense production, unless 19 BUSINESS AND FINANCIAL UNITE FEDERAL SURPLUS DEFICIT HOUSING STARTS ATTAINED NEW RECORDS A SMALL NET SURPLUS WITH LAGGING EXPENDITURES }.-I RETAIL SALES CASH AND INDEX 220 1950-j 49 INDUSTRIAL PRODUCTION uaaoo"wo i. ww, üv "wwTm ncwwuAur SHOWED THE EFFECT OF SCARE BUYINC^ CLIMBED 193 CF. 195C r 200 ýý,, 180 , ff_j1049 BUSINESS INVENTORIES `ff ýfýii, j f EXPANDED AND 180LI-t BILLIONS 220 SJ . 1 DISPOSABLE INCOME ! LASONALLYýADJJZTW INCREASED SHARPLY BILLIONS 210 $ Hwýý "ýru EXPENDITURES FOR NEW PLANT AND EQUIPMENT 1950 200 INCREASED too ieo I 20 -ý. )I i11 DEVELOPMENTS IN 1950 STATES BILLIONS TIME AND SAVINGS DEPOSITS I REAL ESTATE LOANS MADE 2.0 RO$E THEN DECLINED AFTER AND DROPPED MID-YEAR 1.5 ý -, -_r-- 1.0 `, fi,,. .5 ~ý 1949 ý, MONEY SUPPLY INCREASED AND INDEX WHOLESALE PRICES iao r SOAPED TO NEW PEAK 170 1050 1ao ýý ..... ý. 150 21 ýoýa ý . ýýt ýý`ý. A for all of the the Government siphons off enough income to pay buying power goods and services it buys. Otherwise the excessive for an for constant pressure goods will exert civilian available increase in their production. It pins down manpower, materials, and plant which should be shifted to defense production. A second difficulty is that the free market does not automatically adjust the total money flow to the flow of goods. Consequently, it does not keep over-all demand and the total supply of goods and services in balance at a stable level of prices. When there is too much money, prices rise and we have inflation; when there is too little, demand declines, production slows down, and we have depression. forces. A semi-war economy spawns two strong inflationary Defense production, by adding to money income without adding to the supply of civilian goods, tends to create a gap between demand and supply at existing prices. The banking system in meeting the large credit demands of consumers, businessmen, and government, pours new money into the spending stream. As a result, there is a persistent tendency for the money flow or demand to exceed the supply of civilian goods available for purchase. In a free market, this excess purchasing power would continue to push prices higher and higher. WHAT I ARE THE ALTERNATIVES? In a garrison state, we face the problem of providing more goods and services for defense and of checking inflation. The enlarged defenseneedscan be met in part by increasing total output, and in part by diverting labor, materials, and plant from civilian to defense production. The Government has already taken steps to solve the production problem by providing credit and, where necessary, Government-owned plant and equipment to promote defense production. Priorities and allocations are being imposed to channel more of the scarce raw materials into the defense program. Successon the production front will not be too 22 difficult to inflation. achieve, particularly if we can avoid the ravages of The most difficult problem facing us in a partially mobilized economy for an unlimited duration is that of checking inflation. That we must goods we could have otherwise is obvious. The real burdengive up defense The of the program cannot be postponed. only question is how shall we distribute the sacrifice. Who gets the long straw dealing with and who gets the short one? In the problem of inflation there are three basic courses open to us: (1) remove excesspurchasing power through indirect controls; (2) suppressits use with direct controls on prices and wages; and (3) let prices continue to rise and inflation gather more momentum. Which of these courses is followed is not a matter of indifference because the choice will affect the economic well-being of every individual. Indirect controls-fiscal-monetary measures The ideal defense solution of the inflation threat created by the program and credit expansion is to adjust the supply of money to the supply of goods. This would remove the source of inflation, reestablish balance between money and goods, and permit the price mechanism to continue to perform its function of rationing the limited supply of civilian goods. Over-all prices would be held steady by reducing the flow but the prices of purchasing power, of individual products is the way be left free This to move. would of so-called indirect controls. The objective is to remove the excess purchasing power, leaving businessmen and consumers free to make their own decisions as to what and how much to buy within the limits of the funds they have available. Fiscal and monetary measures hit directly at the source of inflation. Fiscal policy is the major weapon for closing the inflation gap which defense production tends to create. It cannot be done by increasing total production because all production creates income, but only a part of the total is available for civilians. The gap can be dipping as much our closed only by siphoning off income-by 23 Since Treasury of the income stream as out of the goods stream. incomes, and cash expenditures cashreceipts reduce private money enlarge them, receipts should at least be sufficient to meet all expenditures. A balanced budget, however, means only that the Government is not adding to the spending stream. Actually, a cash from surplus is neededto help offset the enlarged spending coming idle balances and newly created money. The first step in getting this cash surplus is for the GovernWaste, if ment to enforce rigid economies in its own expenditures. budget and non-defense any, should be pared from the defense bone. Having done this, taxes should be to the cut spending should be increased enough to provide a surplus which would effectively curb excessive spending. Since consumer spending is the major part of the total, the new taxes should bite into the incomes of all consumers, except the lowest income groups. The tax program should also be designed to distribute the defense burden as equitably as possible. Management of the Federal debt also has an important influenceon the money supply and spending. Federal Reserve purchases of Government securities createbank reservesand commercial bank purchasescreatenew deposit dollars, thus adding to the total supply of purchasing power. New Treasury borrowing and the refinancing of maturing Treasury securities should be carried out in such a way as not to result in a further addition to the money supply. The terms, including maturities and interest rates, offered on new Treasury issues,should be attractive to non-bank buyers as a means of siphoning off current income to help pay for defense. Restrictions on the creation of new money through bank credit expansion are another major part of this method of checking inflation. We cannot hold down total spending by siphoning off current income aslong asnew money is being created to replace it. A record amount of borrowing by consumers and businessmen since the outbreak of the war in Korea has been pouring a large stream of new money into an already excessivereservoir of purchasing power. Successin checking inflation requires that we curb 24 the stream of spending from rent income. future income as well as from cur- The use of fiscal-monetary measures to check inflation has great advantages. Most important, perhaps, is that this method cures inflation. The source is removed. If effectively applied, it would maintain a balance between the flow of money and the flow of civilian goods at stable prices. A second advantage is that it gives the maximum amount of freedom for individual decision which is consistent with achieving our defense goals. Consumers and businessmenare still free to make their own decisions within the limits of the reduced amount of purchasing power available to them. Flexibility is a third advantage of this approach, especially for a prolonged period of rearmament and mobilization. Unless a good measureof flexibility is retained, our economy cannot adjust to changing conditions and it cannot grow, as it must, if we are to have constantly increasing economic strength. A fourth advantage is that much of the work of allocating manpower, materials, and plant; of distributing the income produced; and of rationing the output of finished goods is left to the market mechanism. This method is much less expensive both in money and in manpower than the administration of a maze of regulations by the Federal Government. Finally, by legislation, careful planning of new tax the burden of the defense program can be distributed much more equitably than under inflation. A weaknessof this approach is that it does not directly check the upward pressure exerted by demands for more income on the part of laborers, farmers, businessmen, and other groups. Rising money incomes exert strong pressure for an increase in the money supply and higher prices. Price and wage ceilings clamp a lid on these pressuresand in this way help check the rising price-wage spiral. It should be recognized, however, that effective fiscal-monetary actions remove the condition which makes it easyto passon higher wagesand higher costs in the form of higher prices. With substantially lesspurchasing power lying around, consumers are both less willing and lessable to pay just any price that sellersmay ask. The 25 elimination of excesspurchasing power and the resulting stabilizafor tion of the cost of living removes one of the strong arguments high wages. They also strengthen the employer's will to resist demands for wage increases. The major reason the wage-price buying spiral can continue upward is that there is already enough it. power available, or at least readily obtainable, to sustain Flexible interest rates Flexible interest rates are an essentialpart of an effective fiscalmonetary approach to the inflation problem. The paramount question here is what interest rate is best for maintaining economic stability. The increased cost of higher interest rates, both to the Government and to the public generally, would be repaid severalfold, if higher rates were effective in keeping prices from rising. In considering the anti-inflationary effects of a rise in interest be distinguished. The one of pararates, two types of results must mount importance is that higher rates would make possible an effective limitation of the supply of credit. The Federal Reserve System would be free to direct its purchases and sales of Government securities primarily with respect to the supply of reserves which should be made available to commercial banks. With only a limited supply of reserves available to them, commercial banks would be compelled to restrict the amount of credit extended to their borrowers. Within the limits of the funds available to them, however, the banks would be free to decide to whom they would 1 make loans and on what terms. The only way the prices of Government securities can be kept higher (interest rates lower) than would exist in an unsupfor the Federal Reserve, or some ported market is other agency. buy whatever quantity holders want to to to stand ready sell and which other buyers are unwilling to take, at the support prices. Purchases made in supporting the Government security market add to bank reserves and pour additional money into the spending System purchases Government securities, stream. When the checks If the seller is a non-bank holder, are paid out to the sellers. the 26 check will be deposited in a commercial bank, thus increasing deposits.When bank sends the check to a Federal the ReserveBank for commercial its collection, reserve account will be increased by a corresponding If the seller is a commercial bank, amount. only bank reserves are directly increased, but these reserves provide the basis for about a six-fold expansion of deposits. Thus, Federal Reserve purchases pour out high-powered reserve dollars which serve as the basis for a multiple expansion in bank deposits. More money, unless matched by more goods, merely adds fuel to fires the of inflation. The Federal Reserve can use its purchases of Government securities either to regulate the supply of bank reserves or to maintain low interest rates (high prices) on Government securities. It cannot do both effectively in a period of strong inflation, especially with a Federal debt of nearly $260 billion. In periods of inflation, lending agencies sell Government securities and shift to higher_yielding loans and other investments. Some holders sell Govbuy stocks ernment securities and other fixed income obligations to and other investments in increase value as which they expect to prices rise. Under Federal Reserve must make these conditions, the substantial purchases if it is Government keep seto the prices of dollars curities from falling. Such however, new pour purchases, into the spending stream to compete for the limited supply of civilian goods. On limits its the other hand, if the Federal Reserve purchases so as not to supply more reserves, Government security prices will fall and interest rates rise. A result of secondary importance of a rise in interest rates, as in any other price, is the tendency to reduce demand. As explained previously, we normally rely on prices to ration the supply of If the supply of any good or service becomes goods and services. short relative to the demand, a rise in price, which cuts out some would-be buyers, is bringing the free market method of the two back into balance. A likewise would rise in interest rates tend to reduce the demand for credit-how much the reduction would be for any given rise in the interest rate, of course, no one can tell. The important point is that any gain from this result is a just 27 is a reduction windfall tending to support the major effect which in the supply of credit. The policy of maintaining a stable pattern of interest rates on Government securities was agreed upon at the beginning of World War II. To facilitate financing the war, the Federal Reserve used its open market operations to maintain a pattern of interest rates from /8 of 1 per cent on bills to 2Y2 per cent on long-term for Govmarketable bonds. As a result, a rigid structure of prices ernment securities was maintained throughout the war and early post-war period. Beginning in 1947, the Reserve System shifted toward a policy of more flexible short-term interest rates. In June 1949, the Open Market Committee stated that its purchases and sales of Government securities would be made with "primary regard to the general business and credit situation. " The policy of "maintaining orderly conditions in the Government security market" was continued. Recently, still further steps have been taken to gain more freedom in using open market operations to regulate the money supply in the interest of maintaining stable prices and stable levels of production and employment. Ever since 1947, the System has gradually moved toward removing the shackles on its ability to regulate credit, imposed by the support program. In arriving at a decision as to whether a low level of interest rates on Government securities should be maintained, two points should be given careful consideration. The first is that the primary objective of letting the rates rise is a restriction in the supply of credit. The real anti-inflation force is the reduced supply of credit dollars which would be available. Higher interest rates are only a result. If there were no effective anti-inflationary effect, there would be no rise in interest rates. Let us be sure to keep the horse in front of the cart and not vice versa. The second point to be considered is which do we want to stabilize more-the prices of Government securities or the prices of goods and services? A stable level of prices for goods and services benefits all of us. We avoid the hardships of rising prices and inflation. The bondholder benefits from a stable price level too. The interest he receives and the real value of his bond are not being reduced by depreciation of the dollar in which they are payable. a 28 birect controls-wage and price ceilings Two types of direct controls should be distinguished. One type, suchas Government priorities and allocations, is designed to channel scarce materials into defense and essential civilian uses. Some controls of this type may be needed in a semi-war economy to supplement the work of the price-cost-profit mechanism. The other type, such as price and wage ceilings, is directed toward holding prices down. These controls represent another approach to the problem of preventing inflation. Government controls, such as ceilings on prices and wages, and rationing suppress the do not, in use of purchasing power. They themselves, reduce it. Ceilings on a few selected products are not likely beto be very effective if inflationary pressures are strong cause of the tendency to divert buying power to other products, thus forcing their prices up. Once started, such controls tend to spread until there is a general system of price and wage ceilings. Price ceilings and rationing are the twins of the direct-control approach. If purchasing power does not exceed the supply of civilian goods available for price at current prices, there is no need ceilings. If, on the other hand, price ceilings are below the prices which would be established in a free market, the inevitable result is some form of rationing. Rationing may take the form of first come, first served, with latecomers not getting any of the scarce goodsat all. This form of rationing would not result in an equitable distribution of the sacrifice imposed by the defense program. The alternative is to limit buying through ration coupons such as were issued during World War H. Under this plan, buying goods requiresboth money and ration coupons. But the amount of ration cardsissuedrather than the holdsupply of money is the meansof ing buying down to the available supply of goods. As a tool for checking inflation, direct controls have the advantageof cutting in and checking the rising wage-price spiral. BYholding down the pressurefor larger incomes, one of the important forces tending to bring about a further increase in the money supply and demand is curbed. In the caseof indirect con29 trols, the condition which makes possible a continued removed. and prices-excess purchasing power-is rise in wages The pathway of direct controls is beset with important diffiduration. culties, especially in a semi-war economy of prolonged do if Price and wage ceilings, even effectively enforced, not cure inflation. Experience has demonstrated that as purchasing power backs up the pressure tends to break through the ceilings in the form of black markets, poorer quality goods, and the disappearance of low-priced lines from the market; moreover, once controls are removed, pent-up buying power is released and the problem of inflation eventually must be faced. A second disadvantage is that direct controls tend to put the economic machine in a straightjacket, making it less adaptable to change. This is particularly seriousfor a prolonged period of mobilization. The incentive for efficiency is impaired becausethere is lessinducement to acquire money as unused buying power accumulates. One's ability to get goods depends on the number of ration points rather than the amount of money he has.In addition, ceilings tend to clamp prices and the use of productive resourcesinto a fixed pattern, keeping from starting and old onesfrom growing. A harness new businesses of direct controls stifles a growing economy, which is the very foundation of prolonged military strength. A third weakness is that controls shackle freedom of decision, which is one of the basic principles we are trying to protect. We must be careful to maintain those essential freedoms which we are spending billions of dollars to defend. Finally, it is more difficult to enforce direct controls in a partial or semi-war economy than in an all-out war I effort. During war, the threat to our national existence and the patriotic fervor which is generated is a strong force for compliance. Inflation To the extent that excess purchasing power is not mopped up or its use effectively suppressed,prices will be forced higher and higher. As a result, it will take a larger amount of money to buy 30 the same quantity inflation. of goods and services. This is the road of Rising prices and inflation are not a satisfactory means of handling the financial first side of the defense problem. In the place, the cost of defense would rise substantially as Government purchaseswere made at higher and higher prices. A second disadvantage is that inflation results in an inefficient and wasteful useof economic resources. The incentive for efficiency is undermined becauseincreasesin costs can readily be passedon to the consumer in the form of higher prices. A strong demand and high profits tend to keep manpower, materials, and plant pinned down in the production of non-essential goods and services. Third, inflation would result in a very inequitable distribution of the defense burden. Most of the sacrifice would be placed on those with fixed incomes Finally, incomes and which rise more slowly than prices. inflation is likely for a hand if to rise continue to get out of prices prolonged period. A persistent rise tends to undermine confidence in the value of the dollar and eventually eager buying turns into panicky buying and a flight from the currency. A strong, prolonged defense effort cannot be built on the sands of inflation. CONCLUSIONS Our basic economic problem is the same in war and in peace-that of making the best use of limited resourcesto satisfy our wants. However, a semi-war economy does require the allocation of more resourcesto the production of defense goods. It also posesa serious threat of inflation because defense production adds to money incomes but not to the supply of civilian goods for these incomes to buy. Normally, the free-market mechanism measures which wants are most important, allocates manpower and materials to the production of the goods people want most, distributes the income produced, rations the limited supply of finished goods, and protects the individual against the selfish exploitation of the few. 31 In a semi-war economy, there is a need for measures to supplement the workings of the free market and to maintain conditions in which the market can continue to perform its usual functions effectively. The Government should take steps to promote the inflation. Priorities and production of defense goods and to check into defense help allocations channel manpower and materials help Price temporarily to halt and wage ceilings may production. for is to mop up but inflation the only cure the wage-price spiral, This Federal Governrequires that the excess purchasing power. debt its fiscal and management operations, siphon off ment, through income its to pay all of expenses. A cash surplus to help enough inflation check the already under way would be better. It also requires effective action by the Federal Reserve to check the large flow of new money into an already excessive reservoir of purchasing power. The important problem facing us is not whether we should forego the use of the instrument of government to help achieve the economic task facing us; rather it is that we use government wisely. The people of the United States have not hesitated in the past to modify the workings of the free market, nor should they do so now in those caseswhere it is the most effective means of achieving our objectives.Departures from the so-called free market are not a new thing. They have been made throughout our history to achieve results the majority of the people considered desirable. Today, the tariff, for example, is an integral part of a system of "free enterprise" to the manufacturer, as are agricultural price supports to the farmer, fair trade laws to the retailer, and Social Security to the laborer. Actually, our economic system is a combination of free individual enterprise and planned collective action. The use made of government must continue to change, as in the past, if it is to help meet our changing needs.The vital issue confronting us is not whether more or lessuse is made of government, but whether our economic system measuresup to the tasks confronting it in a semi-war economy. Unless it does, we shall lose the fight; and unlesswe preserve our essentialfreedoms, we shall lose the things we are fighting for. 32 RESERVE BANK OPERATIONS Operations of the Federal Reserve Bank of Philadelphia reflected the general expansion in business activity during 1950, and the steps taken after the outbreak of war in Korea to cope for the with inflationary developments and lay the groundwork coming diversion of men, machines, and materials to the requirements of a greatly expanded defense program. Growth in the physical volume of work occurred in many departments of the Bank and increasesin dollar volume were even more pronounced asindustry and trade gained headway and prices advanced.More than 157 million checks, other than Government checks, were handled in 1950, for a total amount of more than $42 billion. Currency and coin counted reached record volumes, transfers of funds were more numerous and for larger amounts than in 1949, and the volume of securities handled increased considerably, reflecting in part an unusual volume of sales and refinancing by holders of Treasury issues which matured or were called for payment in the latter part of the year. Advances to further member banks, on the other hand, declined in 1950, and the number of banks accommodated decreased from 126 to 103, since banks continue to adjust their reserve positions chiefly through transactions in Government securities. Interest in loans under the provisions of Section 13b increased, due in part to the growing loans for a volume of defense contracts. Twenty total of $6.1 million were approved under this Section, half of them in participation with local banks. Among the steps taken during the year to improve the service rendered to member banks the extension of door-to-door were delivery for service currency and coin, arrangements for the direct shipment of fit 3-C notes from the Pittsburgh branch of the Federal ReserveBank of Cleveland to banks in the Johnstown-Altoona area of this district, and a reduction from $500 to $300 in the large-item limit for special deposits of checks on Saturday. The number of full-time employes of the Bank continued to approximate 1,000 persons, despite the over-all increase in opera33 tions. This was made possible by continuing efforts to streamline by the use the work, without sacrifice of accuracy or safety, and to of new or improved mechanical equipment and procedures development further Employe of training, promote efficiency. be for major succession continued to supervision, and provision objectives in the field of personnel. New tasks had to be taken on following the passage of the Defense Production Act of 1950 early in September. Regulation W, dealing with consumer credit, was reinstated and nearly 9,000 V, lenders and sellers in this district were registered. Regulation loans finance to and pertaining to the guarantee of contractors subcontractors engaged in the production of defense supplies, was reactivated. A new Regulation X was promulgated to control the financing of real estate construction not covered by Government insurance or guarantee. The administration of Regulations W and X was merged early in 1951 into a new department-the Department of Selective Credit Regulation. Every effort was made, in many through interviews, special conferences, and participation meetings, to explain the workings of these controls and create a sympathetic understanding of the objectives. At bank relations field meetings held in the latter part of the year and at the fall meeting of the Federal Reserve Relations Committee, the new regulations received much attention and emphasis was placed on the steps taken by the System to restrain inflationary pressures. In the course of the year, field meetings covered every county of the district, the fifth consecutive year in which this has been done. Representatives of the Bank Relations Department also covered much of the district in their visits to individual banks. A film setting forth the place of the Federal Reserve in the banking system was used widely at meetings and was made available upon request; approximately 20,000 persons saw it. Traveling currency and coin exhibits, loaned to many banks for lobby displays, were much sought after and by the close of the year a lengthy waiting list had accumulated. Members of the staff of the Department of Research participated actively in field meetings of bankers and in other gatherings. The demand for the monthly BusinessReview was exceptionally 34 heavy, a reflection of informative articles dealing with industries important to the district and the inclusion of a series of articles dealing with the evolution of the money supply and the development of fiscal and monetary policies. This series was reprinted in a pamphlet under the general title of "The Quest for Stability" and was in such demand as to necessitate further printings. The Department continued to serve the district through periodic releasesof statistical material on banking and business and special surveys affording information useful in their operations. Directors and officers In the fall, Archie D. Swift A director was reelected a Class by banks in Janubeginning Group 1 for a term of three years ary 1,1951. Warren C. Newton, Group 2 as a chosen by banks in Class B director for H. Lippincott, a like term, succeeds Walter who was not a candidate for reelection. The Board of Governors of the Federal Reserve System reappointed Warren F. Whittier and C. Canby Balderston-Chairman and Deputy Chairman, respectively, of the Board of Directorsto serve during 1951. Mr. Balderston C also was designated a Class director for additional term of three years. In the summer of 1950, Philip an T. Sharples resigned as a Class C director but the resulting vacancy had not been filled by the close of the year. The district's representative on the Federal Advisory Council during 1950 Frederic A. Potts, President of the Philadelphia was National Bank. He was reappointed by the Board of Directors of this Bank to serve during 19 51. Changes in the official staff during 1950 included the resignat1O11of Robert R. Williams as Assistant Vice President and Assistant Secretary February 28; the designation of Richard G. on Wilgus as Assistant Secretary on May 1, in addition to his duties as Assistant Vice President; appointment on the same date of Wallace M. Catanach, Assistant Cashier, to the position of Assistant Vice President-, an Henry and of Edward A. Aff, Ralph E. Haas, and J" Nelson Lavin George J. as Assistant Cashiers. On November 15, also was made an Assistant Cashier. 35 Directors as of April 1,1951 CLASS Group Term Expires Decembcr 31 1 1953 2 1951 3 1952 A: ARCHIE D. SWIFT .................................. Chairman of the Board, Central-Penn Philadelphia, Pennsylvania GEORGE W. REILY .................................. Bank, Harrisburg National President, Harrisburg, 1. NYCE Pennsylvania PATCERSON President, The Watsontown, CLASS National Bank, ................................ Watsontown National Bank, Pennsylvania B: WILLIAM J. MEINEL ................................ Presidcnt and Gencral Manager, Heintz Manufacturing Philadelphia, Pennsylvania WARREN C. President, 1952 Company, NEWTON 0. 2 1953 ............................... A. Newton and Son Company, Bridgeville, Delaware ALBERT G. FROST 3 .................................. 1951 Chairman of the Board, The Estcrbrook Pcn Company, Camden, New Jersey CLASS C: WARREN F. WHITTIER, Agricultural Chairman .................... Consultant, Chester Springs, Pennsylvania C. CANBY BALDERSTON, Deputy Chairman ............. Dean, Wharton School of Finance and Commerce, University of Pennsylvania, Philadelphia, Pennsylvania Vacancy 1952 1953 1951 ......................................... 36 Officers as of April ALFRED H. 1,1951 WILLIAMS, W. J. DAVIS, RICHARD First Vice President KARL WALLACE Vice President N. HILKERT, Assistant Cashier ERNEST C. HILL, Vice President ROY GEORGE J. LAVIN, Assistant and Secretary M. POORMAN, HENRY Vice President and Cashier NORMAN and Assistant Secretary 5,1951 37 Cashier J. NELSON, Assistant JAMES V. VERGARI, Died April HETHERINGTON, Assistant Cashier G. MCCREEDY, Counsel E. HAAS, RALPH Vice President PHILIP CATANACH, EDWARD A. AFr, Assistant Cashier Vice President Vice-President M. Assistant Vice President *L" E. DONALDSON, WILLIAM G. WILGUS, Assistant Vice President and Assistant Secretary R. BOPP, ROBERT President Cashier G. DASH, General Auditor APPENDIX Statistical Tables PAGE Federal ReserveBank: Statement of condition ................... 39 Earnings and expenses ................... 40 Volume of operations .................... 41 Member banks-Third Federal Reserve District: Combined statement .................... Earnings, expenses, and profits Employment and earnings ............. .................... 42 42 43 Income and prices ........................... 43 Department 44 store salesand inventories ........... 38 Statement of Condition Federal Reserve Bank of Philadelphia End of Ycar (000's omittcd in dollar figures) RESOURCES Gold certificates ............................... Redemption fund-Fed. Res. notes ............... Total gold certificate reserves Other cash.................................................... Discounts and advances Industrial loans ......................... United States ................................ Government securities ............. $1,208,508 $1,130,280 48,915 50,563 $1,180,843 19,125 3,640 2,204 1,378,198 Total loans and securities ................... Due from foreign banks Fed" Res. ......................... notes of other Fed. Res. Banks......... Uncollected items Bank premises .............................. ................................. All other resources ............................. $1,384,042 $1,257,423 14,489 7,255 1,885 1,286,381 $1,295,521 2 3 11,352 268,2}2 2,920 10,369 172,456 $1,011,054 60,212 $1,071,266 17,967 17,495 767 1,666,658 $1,684,920 4 10,935 173,597 3,053 10,279 2,986 6,493 7,759 Total resources ............................. 1948 1949 1950 $2,874,305 $2,759,740 $2,972,021 $1,665,849 $1, G32,188 $1,662,531 LIABILITIES Federal Reserve notes Deposits: ........................... Member bank reserve accounts United States Government ................. Foreign .................... ........................ Other deposits ............................... Total deposits Deferred ............................. availability items All other liabilities ...................... ................. . .......... Total liabilities ............................ CAPITAL ACCOUNTS Capital paid in Surplus-Section ................................. 7 Surplus-Section ............................. 13b Reserves for ........................... contingencies ....................... 822,286 58,227 75,0142 788,335 63,750 60,848 956,671 183,799 239 $ 918,064 143,300 951,233 104,176 51,492 6,060 5,131 $ 674 $2,694,109 $2,911,116 $ $ $ 15,675 4,489 7,873 39 557 $2,806,558 39,710 Total liabilities and capital accounts......... Ratio of gold certificate reservesto deposit and FederalReserve note liabilities combined....... ents to snake industrial advances........ $1,112,961 134,950 $2,874,305 45.0% $593 15,084 38,205 4,489 7,852 $2,759,740 49.3% $689 14,681 36,704 4,489 5,031 $2,972,021 38.6% $46 Earnings and Expenses Federal Reserve Bank of Philadelphia 1 1950 (000's omitted) 1949 1948 $21,270 $21,349 Earnings from: United States Government $18,142 securities........... Total 241 184 Other sources ................................ $18,326 earnings ............................. 343 $21,692 $21,511 Expenses: Operating expenses' .......................... Cost of Federal Reservecurrency ............... Assessmentsfor expensesof Board of Governors ................................. Total net expenses .......................... Current net earnings ............................ Additions to current net earnings: Profit on salesof U. S. Government securities (net) ............................. 4,252 4,159 4,131 439 458 385 272 260 262 $ 4,963 $ 4,877 $ 4,778 13,363 16,634 16,914 2,630 2,272 All other .................................... Total additions ............................ Deductions from current net earnings 456 123 $ 2,631 $ 2,274 to current net earnings ............. Transferred to reserves for contingencies.......... 459 179 - ............. Net additions $ 1 $ 2,631 $ 2,095 23 2,821 $ 2,960 13,539 13,511 12,184 $ 2,432 $ 2,397 $ 2,228 458 Paid to U. S. Treasury: Interest on Federal Reservenotes .............. Net earnings after reservesand payments to U. S. Treasury ............................... Dividends paid ................................ 927 Transferred to surplus (Section 7) ................ $ 1,505 896 I$ 11501 874 $ 1,354 *After deducting reimbursementsreceived for certain fiscal agency and other expenses. 40 Volume of Operations Federal Reserve Bank of Philadelphia 1950 1949 1948 Number of pieces (000's omittcd) Collections: Ordinary checks ............................. Government checks (paper and card).......... Non-cashitems.. . s .............................. Currency counted Coins ..................... ' counted ................................. Discounts and advancesto member banks........ Transfers funds . of Fiscal .............................. agency activities: Marketable securities delivered or redeemed.... Savingsbond . transactions (Federal ReserveBank and agents) Issues(including re-issues) Redemptions ................ ............................. Coupons redeemed(Government and agencies). . 157,300 23,300 700 277,900 541,000 1 53 160,600 22,500 700 270,300 431,600 1 46 147,500 20,800 700 270,500 391,800 1 44 148 148 5,964 1,106 5,336 6,050 1,250 5,151 6,464 1,151 $42,416 2,950 $37,186 2,771 163 1,708 52 195 21,157 140 1,671 42 254 17,706 9,613 7,215 200 5,428 Dollar amounts (000,000's omittcd) Collections: Ordinary checks ............................. Government checks (paper and card)........... Non-cashitems Currency .............................. counted Coins .............................. counted Discounts ................................. and advancesto member banks........ Transfers . funds Fiscal of .............................. agency activities: Marketable securities delivered or redeemed..... Savings bond transactions (Federal Reserve Bank and agents) Issues(including re-issues)................ Redemptions.......... Coupons redeemed(Government and agencies).. 'l'-Ir values. 41 522" 396" 113 483' 366" 122 $39,221 2,890 169 1,734 40 623 17,543 6,730 533" 369" 120 Member Banks Third Federal Reserve District Statement of Condition Change during (000,000's omitted) I Dec. 30, I 1950t 1 Assets Loans and discounts... ....... .. U. S. Government securities......... Other securities .................... Cash assets Fixed assets........................ ....................... Other assets ....................... Total ....................... Liabilities and capital accounts Deposits: Individuals, partnerships, and CorporationsDemand Time... ..................... ..................... U. S. Government ................ Bank Other........................... ........................... Total deposits ............... Other liabilities Capital accounts.................... ................... Total ....................... $2,208 3,027 752 1,740 68 27 $7,822 $4,228 1,835 1 1950 +$ + +$ +$ + 165 477 399 + +7 $7,104 51 667 $7,822 +$ +8 + +$ 414 131 72 163 j Percent distribution 1 1949 ++ +$ 52 163 74 68 ... +2 +1 518 -{-$ 224 418 18 11 53 485 25 518 Dec. 30, 1950 Dcc. 31, 1949 28.2% 38.7 9.6 22.2 24.6% 43.2 9.3 21.6 .9 .4 100.4 .9 .4 100.4 {$ 96 26 + 61 + 43 + 29 +$ 203 45 { 16 54.0% 23.5 2.1 6.1 5.1 90.8% 52.1% 24.9 2.4 5.8 5.4 90.6% .7 8.5 .6 8.8 +ý 224 1 100.0% 1 100.0% Earnings, Expenses, and Profits (Millions of dollars) 1950t Earnings On U. S. Government securities ................ On other securities ............................ On loans ..................................... Other earnings ............................... Total earnings .......................... 53.6 16.3 88.0 33.8 191.7 1 1949 54.1 15.0 76.3 31.1 176.5 1 1948 54.3 14.6 68.5 29.8 167.2 1947 57.8 14.4 54.4 27.1 153.7 Current expenses Salaries and wages Interest on deposits ............................ ........................... Other expenses ............................... Total current expenses ................... before income Net current earnings 56.5 16.6 46.1 51.7 16.4 43.6 111.7 64.8 119.2 72.5 taxes Net recoveries and profits on sales ( -}- ) or ) charge-offs (........................... Talcs on net income .......................... - 3.8* 20.1 - 74* 15.5 49.0 16.2 41.4 106.6 60.6 - 9.1" 13.9 I 41.9 Net profits .................................. 48.7 37.6 Cash dividends declared 23.0 21.5 20.3 ....................... Preliminary, Charge-offs include substantial transfers to reservesfor bad dcbt losseson loans. 42 44.4 15.9 38.2 98.5 55.2 .2 - 1.3 16.9 37.0 19.4 Employment and Earnings-Pennsylvania an rvianutacturmg EmployWeckly mcnt * earnings Average: 1939. 1940. " """"""" 1941. 1942. """""".... 1943. 1944. ...... "".. 1945. """"""". ". 1946. """"'""". 1947. """. """""" " 1946 . """"""". 1949 """".. """. """"""""". 1950 1950: Janis """""""""" iry........ Fcbrxary..... "" Marc h """"""" Vy 1""'""'. " . y Junc ...... I. . July, ........... """... "" Aug ist........ Scpu"mber octc ber ..... ....... Noviember Dcccmbc ..... r '19ýö 939 v1 _____...... 100 110 134 156 153 Goods Employ- Weekly mcntl` $22.42 24.27 29.25 147 Factory Workers Durable earnings Nondurable Goods Emplo l Weekly ment earnings $25.76 28.19 34.31 100 119 158 100 101 111 $19.16 19.77 22.23 25.58 35.45 184 41.57 111 41.48 203 47.82 110 44.57 198 51.14 108 32.80 48.89 106 34.47 30.03 138 43.29 171 133 42.21 151 45.63 115 37.66 48.04 52.84 52.94 57.01 54.31 166 166 143 150 139 52.18 57.59 57.63 62.15 59.42 120 120 112 114 112 42.47 46.42 47.12 50.29 48.12 54.85 53.73 54.35 55.71 56.39 139 139 142 145 147 59.70 57.71 59.94 61.12 61.66 113 112 111 110 111 48.98 48.90 47.38 48.77 49.55 143 143 127 131 125 126 125 126 127 129 128 56.64 134 145 61.79 110 50.00 138 57.47 153 62.24 115 51.27 58.26 158 63.68 118 51.15 139, 140 140 59.54 60.55 61.87 161 163 165 64.77 65.91 67.82 117 117 116 52.50 53.21 53.70 Income and Prices Pactory Payr< 3115: 1939 Farm Income- =100 (1) Prices: 1I935-39 = 100 Durable Total Averag 1939.. 1940.. ................. 1941.. .. '... """ """.... 1942.. ........ """"""... 1943.. ........ "I....... 1944.. ................. 1945.. .............. """ 1946.. ........ """"".. ". 1947.. ....... I".. .... 1948.. ................. 1949.. ............... "" 1950.. ............ """""" 1950: Januat ..... 'Y Pcbru: ................ ary ............... March .................. r1Pril. ............... "" ay. June. .................. ................ "" July.. ................. Augu,;t................. Septetnber Octob,cr .............. ................ Novelnber Deccnfiber .............. .............. . v. Income from farm Factory Payrolls Pennsylvania Consumer prices in Phila. t goods goods 100 119 175 232 288 303 100 131 210 297 377 394 100 104 129 148 172 185 99 104 122 155 197 199 99 99 104 115 123 124 266 250 306 336 324 267 336 372 191 228 267 290 231 268 299 320 127 138 158 171 300 320 275 299 169 334 362 298 286 170 303 308 300 306 316 323 322 343 358 319 323 312 330 343 352 349 370 391 280 288 286 274 281 286 288 308 314 235 210 256 276 270 306 365 351 324 166 165 166 166 167 170 172 172 174 406 418 322 325 286 277 174 174 369 378 387 J. Consumer markcrings N. J., Pa., r anDel. IIPt. VI 325 1 AgrlCultUIC. 43 Tv. J. UurCau 178 280 01 LabOr JtatlS[tC3. Department Store Sales 1935-39 = 100 (Adjusted for seasonalvariation) Third District 1939.......... 1940.......... 1941.......... 1942.......... 1943 .......... 1944.......... 1945.......... 1946.......... 1947.......... 1948.......... 1949.......... 1950.......... 1950: January....... February...... March........ April......... May.......... June.......... July.......... August....... September..... October....... November..... December..... Phila. Lancastor 101 108 124 140 104 111 129 143 151 167 184 235 261 284 271 288 267 277 262 281 270 285 331 319 310 279 273 307 i Rcading Trcnton 103 111 133 152 104 107 129 151 147 165 165 158 172 214 238 253 241 254 233 254 228 248 241 254 280 294 270 242 251 263 178 190 248 276 295 285 308 282 288 311 292 307 301 336 322 313 295 284 342 177 185 249 274 296 282 288 256 267 280 283 261 292 314 291 307 287 272 332 \VilkcsBarre 110 120 140 153 177 192 223 294 324 370 375 407 377 360 365 422 369 441 483 448 458 398 359 422 101 101 118 129 145 174 206 277 304 330 309 318 281 294 271 317 323 315 409 340 331 301 302 335 York 107 114 133 1157 77 200 220 281 311 296 313 293 281 279 325 278 331 355 329 345 299 281 341 Department Store Inventories 1939.......... 1940.......... 1941.......... 1942.......... 1943.......... 1944.......... 1945.......... 1946.......... 1947.......... 1948.......... 1949.......... 1950.......... 1950: January....... Fcbruary...... March........ April......... May.......... June.......... July.......... August....... Scprcmbcr... Octobcr....... Novcmbcr..... Dcccmbcr..... 96 99 119 167 141 147 150 191 220 252 233 257 234 234 239 249 244 244 241 259 275 283 282 286 92 92 110 165 138 143 146 184 207 221 205 226 203 206 213 214 213 210 208 236 247 254 248 251 101 105 120 148 127 132 129 177 218 238 225 245 227 248 241 244 248 233 230 237 241 260 260 265 44 106 112 141 190 158 181 191 229 255 297 275 294 269 268 272 307 304 299 283 291 293 300 320 313 97 101 141 184 162 166 167 205 246 328 314 322 289 314 314 318 310 309 313 311 353 348 337 343 93 91 113 143 134 144 154 210 249 349 299 328 291 296 294 313 306 323 321 333 351 361 370 373 108 113 137 177 161 165 159 212 228 269 252 280 251 253 259 263 264 271 260 287 300 305 321 312