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APRIL 1950
T H E
BUSINESS
REVIEW
FEDERAL
RESERVE
BANK
OF
PHILADELPHIA
TOOLS OF FEDERAL RESERVE POLICY
The Federal Reserve System
must approach its goal of economic stability
through influencing the flow of money
in relation to the flow of goods.
Too much money makes for inflation,
too little produces deflation.
The Federal Reserve can influence spending
only via the quantity of money,
not how fast people use it.
It can influence the quantity of money
through the supply and cost of bank reserves.
The major tools of policy are
the discount rate, open market operations,
and changes in reserve requirements.
This article, the third in a series of four,
describes these tools and how they are used.
DEPOSIT SURVEY
Small increase in dollar volume,
slight shift in ownership during 1949.
CURRENT TRENDS
Stability is the keynote of recent weeks.
THE BUSINESS REVIEW
TOOLS OF FEDERAL RESERVE POLICY
If we are to maintain stable economic progress, we must base our actions on judgment with
respect to the variety of economic factors which register the state of our financial and business
health. We cannot rely on mechanical rules and guides. These conclusions were drawn in the
second article, “Quest for Stability,” which appeared last month.
The Federal Reserve System can help promote economic stability by influencing the flow
of expenditures relative to the flow of goods and services. This article, the third in a series of
four, deals with the instruments the Federal Reserve has available in its tool kit. The System, of
course, has no direct control over expenditures. It exerts its influence indirectly through bank
reserves. Because of legal requirements, the volume of commercial bank deposits—the major part
of the money supply—is closely related to the quantity of bank reserves. The major tools which
may be used to influence the cost and availability of bank reserves are the discount rate, open
market operations, and changes in reserve requirements.
The primary objective of the Federal Reserve is to try to
keep the flow of money in proper relation to the flow of
goods. The decisions of millions of independent producers
as to how fully available productive resources—raw ma
terials, labor, plant and equipment—will be utilized, deter
mine the flow of goods entering our markets. On the other
hand, the amount of money available for spending, together
with the decisions of millions of consumers as to what and
how much they are willing to buy, determine the volume of
money flowing into these markets for goods and services.
If the money flow gets out of line with the flow of goods,
trouble develops. An increase in money expenditures
means more demand, more purchases, and a larger output
as long as business firms can increase production. How
ever, as labor and plants become fully employed, a further
rise in the money flow tends to increase prices rather than
production. Rising prices and costs increase the demand
for credit. More bank credit means more money to spend.
Unless checked, a rising spiral of inflation may be gen
erated. Conversely, if the money flow becomes too small
in relation to the flow of goods, some merchandise is unsold,
prices fall, profits decrease, and production slows down.
Less employment means less income, less demand, lower
prices, and so on through a downward spiral of falling
prices, production, and employment. Economic stability
at high levels of production and employment, then, requires
a flow of money which is neither excessive nor deficient
relative to the flow of goods.
The Federal Reserve cannot directly influence the will
ingness of people to spend the money they have. Its ability
to adjust the money flow is limited mainly to its influence
over the quantity of money—primarily the quantity of
commercial bank deposits. Influence over the quantity of
money stems from the fact that banks are required by law
to hold specified minimum reserves back of their deposits.
RESERVES AND THE MONEY SUPPLY
The money supply used in making payments includes cur
rency, coin, and commercial bank deposits. At the end of
1949 the money supply totaled about $112 billion, includ
ing $25 billion of currency and coin outside of the banks
and $87 billion of demand deposits subject to check. If time
deposits are included, the total money supply was approxi
mately $170 billion. Public preference determines the pro
portions of the total money supply held in the form of cur
rency and deposits.
Both commercial banks and the Federal Reserve Banks
are required to maintain certain minimum reserves. The
Federal Reserve Banks must maintain a reserve of gold
certificates equal to at least 25 per cent of both their Federal
Reserve note and their deposit liabilities. Member banks
of the Federal Reserve System are required to hold a mini
mum reserve in the form of a deposit in the Reserve Bank
equal to specified percentages of their demand and of their
time deposits. The volume of deposits is influenced both
by the supply of reserves and the percentage that banks
are required to maintain.
The role of reserves in the process of deposit expansion
and contraction can be made clear by an illustration, sim
plified to show only the essential steps. Suppose (1) that
the Federal Reserve, which is the primary source of reserve
Page 1
THE BUSINESS REVIEW
funds, purchases Government securities in the open mar
ket from a nonbank holder, the result being that a com
mercial bank gains $100 of reserves and deposits; and (2)
that the average reserve required back of demand deposits
is 20 per cent. This $100 of new reserves created by the
Federal Reserve serves as the basis for a several-fold in
crease in commercial bank deposits. The bank receiving
the $100 would put $20 on reserve and would have $80
available for new loans and investments. Suppose, next,
that this bank makes an $80 loan to a customer, crediting
his deposit account. This transaction increases the bank’s
loans and its deposits by $80 each. The borrower now
spends the $80. When his check is collected the bank loses
$80 of deposits and $80 of reserves. The net effect of these
operations on the balance sheet of this first bank is an in
crease of $20 in reserves, an increase of $80 in loans, and
an increase of $100 in deposits. Let us suppose that the
$80 checked out of Bank A is deposited in Bank B. When
the checks are sent in for collection the result will be an
increase of $80 in Bank B’s reserve deposit at the Federal
Reserve. Bank B will need to keep 20 per cent of its new
$80 deposit, or $16, on reserve and will have $64 left for
loans and investments. Assuming that Bank B makes a $64
loan and that the proceeds are credited to the borrower’s
account, the result of this step is a $64 increase in both
loans and deposits. When the borrower draws out the $64
and the checks are collected by another bank, Bank B loses
$64 of deposits and reserves. The net effect on the balance
sheet of Bank B is a $16 increase in reserves, a $64 increase
in loans, and an $80 increase in deposits.
•
The waves of expansion which may take place on the
basis of this initial $100 increase in reserve funds are
illustrated in the following table:
Liabilities
Assets
Reserves -{Bank
A .................................................................. ..................
B ..................................................................
C ..................................................................
AI1 other bank transactions.................. ..................
Totali....................................................................
*20
+
51.20 +
*100
+
Loans and
= Deposits
investments
$80
64
51.20
204.80
*400
=
$100
—
=
=
80
64
256
=
*500
Total deposits of $500 can be and usually are created on
the basis of a $100 net increase in reserves, assuming re
serve requirements are 20 per cent. In the illustration, it is
assumed that banks make loans on the basis of new reserves
acquired. If instead, securities are purchased, the increase
in deposits is the same. A net decrease in reserves would
set in operation the reverse process of multiple contrac
tion of deposits throughout the banking system.
FACTORS INFLUENCING RESERVES
The three maj or factors influencing the supply of member
bank reserves are: (1) gold imports and exports; (2) an
increase or decrease of money in circulation; and (3) an
increase or decrease in Federal Reserve credit outstanding.
The Treasury adds to the supply of bank reserves when
it purchases newly mined or imported gold. In payment
for the gold the Treasury draws a check on the Federal
Reserve and restores its deposit by issuing gold certificates
to the Reserve Banks. When this check is deposited by the
seller some bank receives an increase in deposits; and
when this bank sends the check to a Reserve Bank for collec
tion its reserve is increased. The net result of a Treasury
purchase of gold, therefore, is a corresponding increase in
bank deposits arid bank reserves. The Treasury also adds to
the potential supply of bank reserves when it issues
Treasury currency such as silver certificates.
The Federal Reserve Banks increase the available supply
of reserve funds when they make loans and investments.
If member banks borrow or discount commercial paper,
the proceeds are credited to their reserve accounts. When
the Federal Reserve buys eligible paper or Government
securities in the open market the seller receives a check
drawn on a Reserve Bank. The seller, if a nonbank holder,
will deposit the check in his bank, increasing total bank
deposits. When the bank sends the check to a Reserve
Bank for collection, its reserve account is increased by a
like amount.
Not all funds supplied in these ways necessarily go into
member bank reserves. There are competing uses. Addi
tional funds may go to increase money in circulation, this
being one of the most important uses. The new funds might
go into Treasury cash holdings, Treasury deposits in the
Federal Reserve Banks, and non-member bank deposits in
the Federal Reserve Banks. Changes in member bank
reserves reflect the net effects of these various sources and
uses.
The major factors affecting the supply of member bank
reserves may be summarized as follows:
Tending to Increase
Tending to Decrease
Increase in monetary gold
stock
Decrease in monetary gold
stock
Increase in Federal Reserve
credit
Decrease in Federal Reserve
credit
Decrease of money in circu
lation
Increase of money in circu
lation
THE BUSINESS REVIEW
QUANTITATIVE INSTRUMENTS
Federal Reserve instruments fall into two major categories
—those which affect the volume of reserves and the money
supply and those which affect the use of credit for certain
purposes. Quantitative tools are the discount rate, open
market operations, and changes in reserve requirements.
There are other ways in which the Federal Reserve may
exert some influence, such as moral suasion and changes in
the eligibility requirements for commercial paper, but
they are of minor importance and are not considered here.
The Discount Rate
Member banks may replenish their reserves in the Federal
Reserve Banks either by discounting some of their cus
tomers’ notes or by borrowing on their own notes, using
Government securities or other satisfactory assets as col
lateral. In either case, the proceeds are credited to the
member banks, increasing their reserves. The rate of inter
est charged for these extensions of credit by the Federal
Reserve Banks is called the discount rate. By raising or
lowering the discount rate, the Reserve Banks can make it
more or less expensive for member banks to get additional
reserves by discounting commercial paper or by borrowing.
Such changes affect the general credit situation in a num
ber of ways. Directly, changing the discount rate merely
alters the cost of getting additional reserves by these meth
ods. An indirect effect is the tendency to bring about cor
responding changes in the rates member banks charge their
customers, especially on short-term loans by banks in
money market centers. Changes in the discount rate, as a
symbol of Federal Reserve policy, may have important psy
chological effects. They reflect the recognition by a group
of well-informed and responsible officials of a change in the
credit situation. An increase in the rate indicates official
concern over credit expansion and points toward a tighter
credit policy. A decrease may be regarded as an indication
of an easier credit policy and possibly lower interest rates.
The role of the discount rate has varied considerably over
the years. In the early history of the Federal Reserve Sys
tem, when banks acquired reserves primarily by discount
ing, the rate was regarded as the principal tool for making
Reserve policy effective. The tradition against being con
tinually in debt to the Reserve Banks also tended to limit
member bank borrowing. However, borrowing and dis
counting have not been major means of getting additional
reserves for some time, and consequently the discount rate
has played a relatively minor role. A large inflow of gold
during much of the ’thirties built up substantial excess
reserves. The growth of Government security holdings in
the late ’thirties and especially during the war resulted in
member banks adjusting their reserve positions by buying
and selling Government securities instead of by borrowing
or discounting commercial paper. For this reason, the dis
count rate has become largely a symbol of Federal Reserve
policy and a supplement to other instruments.
Open Market Operations
The Federal Reserve Banks may influence the volume of
reserves by buying or selling securities and eligible paper
in the open market. The bulk of such purchases and sales
is in United States Government securities, although the
Reserve Banks are also permitted to deal in other paper
such as bankers’ acceptances and bills of exchange.
Open market purchases tend to build up and sales tend
to reduce bank reserves. If the transactions are with non
bank holders, commercial bank deposits are increased and
decreased also. If the Federal Reserve buys $10 million of
Treasury obligations from Government security dealers,
the sellers receive checks drawn on the Reserve Bank in
payment. When the sellers deposit these checks, total com
mercial bank deposits are increased. The checks are then
sent to the Reserve Bank for collection and the sending
banks’ reserve accounts are credited. The net result of an
open market purchase is an increase in bank deposits and
an increase in bank reserves. The reverse is true in the
case of open market sales. Sales by the Federal Reserve are
likewise made through Government security dealers, and
the purchasers make payment by drawing checks on their
banks. As these checks are collected the reserves and the
deposits of the banks on which they are drawn are reduced.
The net result for the banking system is a decrease in total
reserves and in total deposits.
The initial impact of open market operations usually is
felt in New York where most purchases and sales are made.
The effects may then be transmitted to the rest of the coun
try through Treasury operations and business and com
mercial transactions. Directly, open market purchases tend
to increase reserves and deposits. Indirectly by providing
excess reserves, they make possible further deposit expan
sion. The use banks make of their excess reserves depends
upon conditions prevailing at the time. If member banks
are in debt to the Reserve Banks, they are likely to use the
new funds to reduce their indebtedness. If not, as is gen
erally the case today, they usually increase their loans and
investments, since idle funds earn no income. A second
effect on the money market is via interest rates. System
Page 3
THE BUSINESS REVIEW
purchases of Government securities tend to bid up their
price and lower the yield. Since Treasury obligations are
now the major segment of the securities market, a lower
yield on them tends to spread to private securities, resulting
in a general rise in security prices and a decline in yields.
Moreover, excess reserves may cause member banks, es
pecially in the money market centers, to lower their interest
rates somewhat as a means of encouraging borrowing and
putting idle funds to work. A change in the pattern of in
terest rates tends to influence the loan and investment poli
cies of both banks and other financial institutions.
The reverse effects tend to follow System sales in the
open market. The immediate effect is a decrease in deposits
and a decrease in member bank reserves. The pressure on
member bank reserves may cause them to raise their inter
est rates. Security prices tend to fall and the yields to rise,
thus exerting a restraining effect on the demand for credit.
Open market operations were not an important tool dur
ing the first decade or so of the System’s history. They
were first used to bolster the earnings of the Reserve Banks
and to build up a discount market for bankers’ acceptances.
It was through these operations that officials became aware
of the effects on reserve positions and their value as a tool of
monetary policy. Open market operations were used to
offset temporary disturbances in the money market such
as those arising from quarterly tax payments and the sea
sonal flow of currency. They were also used to influence
member bank lending policies. To encourage lending,
purchases were made in the open market, giving member
banks additional reserves which they used frequently to
reduce their indebtedness to the Reserve Banks. Because
of the tradition against continued borrowing from the Re
serve Banks, a decrease in their indebtedness made them
more willing to make additional loans and investments.
Also, member banks could usually acquire reserves more
cheaply by selling securities than by borrowing or discount
ing commercial paper. Open market operations gradually
came to be used more aggressively. Purchases were made
not only to permit member banks to reduce their indebted
ness to the Federal Reserve Banks; they were used to build
up excess reserves and stimulate loans and investments.
System sales, on the other hand, by forcing member banks
to borrow from the Reserve Banks, tended to make the dis
count rate more effective.
In the late ’thirties, open market operations were directed
toward maintaining a stable market for Government securi
ties. Purchases were made, for example, in 1939 to cushion
the decline in Government security prices precipitated by
http://fraser.stlouisfed.org/
Page 4
Federal Reserve Bank of St. Louis
the outbreak of the war in Europe. In the post-war period,
as pointed out in the second article, the policy of maintain
ing a stable market for Government securities was con
tinued because of the dangers of a disorderly market.
Change in Reserve Requirements
The third major tool which the Federal Reserve may use
to influence the total quantity of credit and the money
supply is authority to change reserve requirements. The
Board of Governors of the Federal Reserve System has
authority to vary member bank reserve requirements within
certain maximum and minimum limits. The maximum and
minimum limits for demand deposits are 26 and 13 per
cent for member banks in central reserve cities, 20 and 10
per cent for those in reserve cities, and 14 and 7 per cent
for all other member banks. For time deposits the limits
are 6 and 3 per cent for all member banks. The Board has
no authority over the requirements of non-member
banks, which comprise about one-half of the total number
of commercial banks, but have only about 15 per cent of
their total deposits.
This instrument does not directly affect the quantity of
member bank reserves but, instead, the amount of deposits
the existing volume of reserves will support. For example,
if member banks are required to maintain a reserve equal
to 20 per cent of demand deposits, $100 of reserve funds
will support a maximum of $500 of deposits; if the require
ment is increased to 25 per cent, the maximum is reduced
to $400. If, however, the requirement should be reduced
from 20 per cent to 10 per cent, the maximum amount of
deposits which could be built up on the basis of $100 of
reserves would be increased from $500 to $1,000.
An increase in reserve requirements tends to limit mem
ber bank loans and investments, and a decrease tends to
encourage them. The direct and immediate effect of rais
ing requirements is to increase the amount of reserves
member banks must hold. It does not affect their deposits.
Initially, at least, banks with excess reserves are likely to
apply them toward the new and higher requirements. To
the extent, however, that member banks meet deficiencies
or restore excess reserves by borrowing from the Reserve
Banks or by selling Government securities ultimately pur
chased by the System, an increase in the amount of re
serves tends to offset the increase in requirements. The
restraining effects of an increase, therefore, are determined
in part by the terms on which member banks are per
mitted to get additional reserves from the Reserve Banks.
THE BUSINESS REVIEW
An increase will be more effective if accompanied by a rise
in the discount rate and a decrease in the System’s buying
price for Government securities. A second way in which
an increase in reserve requirements tends to limit member
bank loans and investments is through its effect on their
financial position. As banks are forced to borrow from
the Reserve Banks or to sell Government securities to meet
higher reserve requirements, there is a growing hesitancy
to increase loans and investments. Such actions would
force the banks further into debt at the Federal Reserve, or
force them to sell from their diminishing portfolios of
Government securities. A third effect of an increase in
reserve requirements is a decrease in the deposit expansion
which can take place on the basis of a dollar of reserve
funds. Finally, as a symbol of a stricter credit policy, an
increase in reserve requirements may cause member banks
to adopt more conservative lending and investing policies.
A decrease in reserve requirements has the immediate
effect of creating excess reserves. The final effect, how
ever, depends upon the policies of the member banks with
respect to their excess reserves. If held idle, as often hap
pened in the latter part of the ’thirties, there is no effect
except as banks may adopt more liberal lending policies
to encourage borrowing. Usually, however, the desire for
income prevents banks from holding funds idle. For this
reason member banks are more likely to use their excess
reserves for loans or to purchase securities. In either case
the result is an increase in deposits and in the buying power
available for the purchase of goods and services.
SELECTIVE INSTRUMENTS
The quantitative methods discussed above operate pri
marily through influencing the cost, the volume, and the
availability of bank reserves. They cannot be used effec
tively to divert the flow of credit into or from particular
segments or areas of the credit market. The use of credit
in certain fields may become excessive at times when gen
eral restraint is undesirable. To cope with such conditions,
the Federal Reserve has been given authority to regulate
the terms on which credit is granted for the purpose of
purchasing or carrying securities other than Treasury obli
gations and other exempted issues.
The Board of Governors has authority to establish mar
gin requirements, that is, to fix the maximum amount which
the purchaser of stocks, for example, may borrow against
his securities. If the margin is fixed at 50 per cent, the
buyer of stocks with a current market value of $1,000 would
have to pay $500 in cash, and the securities could be used
as collateral for a loan not to exceed $500; if the margin
were 25 per cent, the minimum cash payment would be
$250 and the amount borrowed could be as much as $750.
Margin requirements do not apply to a loan for commercial
purposes even though secured by stocks. By varying mar
gin requirements, the Board can influence the amount of
credit extended for the purpose of purchasing or carrying
non-exempt securities. Increasing the margin decreases
the maximum amount which can be borrowed, while lower
ing the margin increases it.
The excessive flow of credit into the stock market in the
late ’twenties was the primary reason for legislation giving
the Board authority to exercise some control over the use of
credit in this particular area. The collapse of the specula
tive boom in the stock market in late 1929 was followed
by a tremendous decline in security prices. This decline
undoubtedly contributed to the severity of the depression
in the early ’thirties. At that time the Federal Reserve
could restrict the flow of credit into speculative uses only
by quantitative controls which affected the total volume of
credit. Since there was little, if any, excessive use of credit
for business purposes, the Board hesitated to use its quan
titative tools to make credit more expensive for all purposes
because of the detrimental effect it might have on business.
However, these tools were finally used as a last resort.
What was needed was a tool which would enable the Board
to regulate the use of credit for this particular purpose.
The Board of Governors was given another selective in
strument during the war and early post-war period—
that of regulating the terms on which credit was granted to
consumers. The purpose was to curb the use of credit for
the purchase of automobiles, electric refrigerators, radios,
and other durable goods which were in short supply. An
increase in consumer instalment credit, by adding to con
sumer buying power which was already excessive in rela
tion to the available supply of consumers’ goods, would
have made the problem of effective price control much more
difficult.
The restraints imposed under Regulation W on instal
ment credit were of two types. The amount of credit that
might be granted for the purchase of any listed article could
be limited by increasing the amount of the down payment
required. It could be restricted also by shortening the
period of time during which the loan was to be repaid. The
authority to regulate consumer credit expired in June 1949,
leaving margin requirements as the only selective instru
ment still available.
Page 5
THE BUSINESS REVIEW
COORDINATION OF INSTRUMENTS
The effectiveness of System policy, as of any other policy,
depends in part upon the tools the authorities have to work
with and, in part, upon the timeliness and the deftness with
which they are used. The processes through which the
impact of the various instruments may work themselves
out has been described in the preceding section. An im
portant problem is that of determining which instruments,
either singly or in combination, will best meet the needs of
a particular situation. Such decisions must be made with
respect to the important characteristics, the advantages and
disadvantages of each instrument, and the needs of a par
ticular situation. Essential criteria to be considered when
such decisions must be made, however, are the nature and
certainty of the effects, the ability of the authorities to
direct the impact into particular areas, and flexibility of
application.
Qualities of Instruments
The purpose of any of the quantitative instruments is to
influence directly or indirectly the volume of member bank
reserves, particularly the amount of free reserves available
for further deposit expansion.
One important feature of the various instruments is the.
nature of their direct and indirect effects. The discount
rate does not affect directly either the total amount of
reserves or the amount of excess reserves. It merely lowers
or raises the price of obtaining funds from the Reserve
Banks via loans and discounts. Just as with any other price,
an increase or decrease in the discount rate tends to restrict
or stimulate the demand for additional reserve funds.
Open market operations affect directly both the volume of
member bank reserves and deposits, purchases increasing
them and sales decreasing them. The direct effect on mem
ber bank deposits is unique to this particular instrument.
The amount of excess reserves is altered by changes in the
total volume of reserve funds. System purchases and sales
also tend to raise or depress Government security prices.
Changes in reserve requirements alter the amount of re
quired reserves but do not affect directly the total volume of
member bank reserves. This tool has the unique feature
of increasing or decreasing the amount of deposits which
can be created on the basis of a dollar of reserves, e.g., a
ratio of 4:1 if the reserve requirement is 25 per cent, and
5:1 if it is reduced to 20 per cent.
The certainty and the degree of the impact on member
banks depend not only on the nature of the direct effects
Page 6
but also on the secondary repercussions set up. Raising the
discount rate, for example, may be regarded as a signal
of tighter credit, and member banks may raise their inter
est rates and scrutinize loan applications more carefully.
Other tools, especially changes in reserve requirements,
may have similar psychological effects. It is impossible to
estimate this type of effect for any of the instruments. In
fact, the extent of such reactions will be influenced by busi
ness conditions and the general attitude prevailing at the
time.
Open market operations, which directly affect the volume
of reserves and deposits and the price and yield of Gov
ernment securities, may also have significant secondary
effects. System sales, for example, not only tend to depress
Government security prices directly but, by creating re
serve deficiencies, cause banks to sell Governments to
replenish their reserves. Moreover, by affecting the interest
rate structure on securities, open market operations may
influence the investment policies of institutions other than
commercial banks. Changes in reserve requirements, by
altering the excess reserves of member banks, may indi
rectly influence the price of securities and interest rates.
An increase may force some member banks to borrow or
sell Government securities to meet the new requirements.
The tendency therefore is to depress security prices and
raise yields. Member banks may also raise the interest rates
charged their borrowers.
Both open market operations and changes in reserve
requirements alter excess reserves of member banks. With
either of these tools, the degree of restraint applied depends
upon how easy and expensive it is to obtain additional
reserves. If banks can replenish reserves at a low cost either
through the discount window or by selling securities, the
restrictive effects of both instruments are seriously dimin
ished. Moreover, both an increase in reserve requirements
and System sales of Government securities tend to put pres
sure on the prices of Government securities, the latter
directly and both indirectly by forcing member banks to sell
Governments to remove reserve deficiencies.
A second important feature of the various instruments
is the extent to which their impact can be directed into cer
tain channels. The impact of changing the discount rate,
by altering the cost of obtaining additional reserves, hits
only those member banks which need to adjust their reserve
position. An increase in the discount rate to check credit
expansion, for example, would tend to affect only those
banks needing additional reserves, presumably those ex
panding their loans and investments.
THE BUSINESS REVIEW
It is very difficult to determine how the effects of open
market operations are likely to be distributed among the
banks. The initial impact is felt mainly in the New York
market because most System purchases and sales are made
there. However, which banks gain or lose reserve funds
depends not alone upon the decisions of the banks them
selves. It depends also on the decisions of nonbank inves
tors who may be the ultimate purchasers or sellers of the
securities the Federal Reserve is selling or buying. If the
customer of Bank A buys from a dealer Government secur
ities sold by the Federal Reserve, his check drains an equiv
alent amount of reserve funds from the bank on which it is
drawn. All that can be said about the distribution of the
impact, therefore, is that it is determined by the market.
The initial impact of changes in reserve requirements
can be determined with a little more accuracy. This tool
may be applied to all member banks at once or to each of
the three classifications—central reserve city, reserve city,
and all other member banks—separately. The impact is
felt by all member banks to which it applies, but is not
necessarily distributed according to the degree of restraint
or stimulus needed. Again, banks with excess reserves
will not feel the effect as much as banks having to
call loans or sell Government securities. The fact that a
change in requirements is felt at once by each member
bank makes this tool an effective symbol of the intention of
the authorities as to credit policy.
A third important feature of the tools of credit regula
tion is their flexibility. Can they be applied so that the
effects will be mild or drastic, as the occasion requires?
In this respect, changes in the discount rate and open mar
ket operations seem to have some advantages over changes
in reserve requirements. The discount rate can be a mild
instrument, both because the changes made can be small
and because it affects only those banks needing additional
reserves. Open market operations are flexible in the sense
that the volume of purchases and sales can be made in any
amount according to the needs of a given situation. They
are not so flexible in other respects, however. The amount
of restraint which can be applied By sales is limited by the
size of System holdings. At present, holdings appear large
enough to meet any foreseeable need for restraint. In a
period of inflation, when restraint should be applied, the
securities market is usually weak. The depressing effect of
System sales on Government security prices tends to limit
the use of this method of applying restraint.
Changes in reserve requirements have been criticized
especially as being inflexible and clumsy. It is a clumsy
instrument if changes are always made in full percentages
so that relatively large amounts of reserve funds are in
volved. If, however, changes are made in fractions of 1 per
cent, the amounts involved could be varied according to
the needs of a particular situation. Frequent small changes
would probably have a bad psychological effect, particu
larly because this relatively new instrument is little known
and understood. The impact of changes can also be
cushioned by giving notice of changes considerably in
advance of the effective date so that member banks have
plenty of time to adjust their reserve positions.
Selective instruments have both important advantages
and disadvantages. They differ from the more general
quantitative instruments primarily in that their chief im
pact is on a particular segment of the credit market instead
of on the total amount. They are unique also in that, in
addition to bearing on the operations of lenders, they limit
directly the amount which can be borrowed. Margin re
quirements and Regulation W, when it was in effect, in
fluenced the amount of credit borrowers could obtain for
these purposes rather than the amount lenders were in a
position to supply. By holding down the demand for credit
without limiting the available supply, selective instruments
do not tend to raise interest rates. They have some disad
vantages, however. They affect the terms of the credit
agreement and hence enforcement involves dealing with
many institutions and a very large number of credit con
tracts. They also tend to be discriminatory in the sense
that restrictions are placed on some uses of credit and not
on others. Selective instruments are, however, impersonal
in the sense that the same rules apply throughout the
regulated sector. Neither does any central official pass
upon how much business a given lender does, nor to whom
credit is granted.
Selective instruments raise important questions in the
administration of credit policy. They have the great ad
vantage of permitting Federal Reserve authorities to regu
late the flow of credit into specific fields. Experience
demonstrates that selective tools are necessary to deal
adequately with certain credit situations. They are not a
substitute for but they may be a valuable supplement to
quantitative instruments. They have the disadvantage,
however, of being less impersonal than quantitative meth
ods which influence only the cost, availability, and volume
of reserves, leaving lenders free to decide as to both the
uses and terms on which credit is granted.
Page 7
THE BUSINESS REVIEW
Need for Coordination
Because of the differences in the ways the instruments oper
ate, the most effective results can usually be obtained by
using them in combination rather than singly. The desir
ability of coordinating the use of these tools in achieving
certain objectives can best be made clear by drawing on
experience.
Federal Reserve officials soon realized the advantages
which could be derived from coordinating the discount rate
and open market operations. In the 1920’s, for example,
they were regarded as the twin instruments of credit regu
lation. In 1923, 1925, and 1928 the System sold Govern
ment securities, with the result that some member banks
had to borrow from the Reserve Banks. In order that the
restraint induced by such sales would be more effective, the
discount rate was increased to make borrowing from the
Reserve Banks more expensive. On the other hand, when
the System desired to ease credit somewhat in 1924 and
1927, securities were purchased in the open market thus
supplying additional reserve funds. At the same time the
discount rate was lowered, making it less expensive for
banks to borrow and decreasing the inducement for them
to use the new funds obtained to pay off their indebtedness
to the Reserve Banks. These actions illustrate the use of
two instruments to move in the same direction—both to
apply restraint and both to encourage expansion.
Another type of coordination is the use of two instru
ments to move in opposite directions—one to cushion or
partly neutralize the effects of the other. Open market
operations and changes in reserve requirements illustrate
this point. In 1937 the System increased reserve require
ments to prevent excess reserves built up largely by gold
imports from being used as the basis for excessive credit
expansion. Even though member banks, as a whole, still
had excess reserves after the increase took effect, some
were forced to sell Government securities to make up re
serve deficiencies. Since the purpose of the increase in
reserve requirements was to eliminate the basis for a huge
potential credit expansion and not to change from an easy
money policy, there was no reason to penalize banks hav
ing to make up reserve deficiencies. To prevent a sharp
decline in Government security prices during the transition
to higher reserve requirements, the System stood ready to
make such purchases as were necessary to maintain a stable
market. Thus open market operations were used to cushion
the effects of an increase in reserve requirements on the
Government security market.
Page H
The recent post-war period provides still another illus
tration of coordination of these two instruments. As
pointed out in last month’s Business Review, the System’s
two major operating objectives during the post-war period
were to check inflation and to maintain a stable market
for Government securities. The strong demand for credit
during much of this period induced lending agencies to
shift out of Government securities into loans and other
investments. In carrying out the objective of supporting
the price of Government bonds, the System made large
purchases which added substantial amounts to bank re
serves and bank deposits. To achieve the other objective of
checking inflation, the System attempted to offset the
effects of these additions to bank reserves and deposits.
System sales of short-term Governments and the Treasury’s
policy of using a large part of the cash surplus to retire
short-term issues held mainly by the Federal Reserve Banks
absorbed a substantial amount of reserve funds. These
methods were inadequate, however, and the System in
creased reserve requirements to help counteract the infla
tionary effects of purchases made in stabilizing the Govern
ment security market.
Selective and general instruments provide another illus
tration of effective coordination. In 1936, business activity
was moving upward and considerable progress had been
made toward recovery from the severe depression of the
early ’thirties. Improvement in the business situation and
growing confidence led to an increase in speculation in
securities. Most factories, however, were still not operating
at capacity and millions were still unemployed. The situa
tion did not call for restraint on the total quantity of credit,
but rather on the growing use of credit for purchasing or
carrying securities. Margin requirements were increased,
limiting the amount which could be borrowed on securities
as collateral, but credit continued to be available on easy
terms for other purposes.
The.recent war illustrates the use of a selective instru
ment as a partial substitute for a generally restrictive credit
policy. The financing required to meet the heavy expendi
tures of the war was carried out partly through the sale of
securities to the banking system, adding to the total money
supply and the demand for goods and services. At the
same time, it was necessary to convert some factories from
the production of consumers’ goods to the production of
war supplies, tending to reduce the supply of consumers’
goods available for purchase. The flow of money expendi
tures was increasing faster than the flow of goods. Rigid
restrictions on the total quantity of credit were not consid
THE BUSINESS REVIEW
ered desirable, however, because of the large amount of
Treasury borrowing needed in financing the war. Limiting
the use of credit for the purchase of consumers’ durable
goods which were in short supply would not interfere with
financing the war, however. In fact, the regulation of con
sumer credit facilitated financing the war by limiting the
amount consumers could borrow without affecting the
available supply.
CONCLUSIONS
The primary task of the Federal Reserve is to adjust the
flow of money so that it will contribute to stable economic
progress. The volume of bank reserves is the chief avenue
by which the Reserve System can influence the money
supply and the money flow. Each of the instruments avail
able to the System—open market operations, changes in
reserve requirements, the discount rate, and changes in
margin requirements—has certain advantages and disad
vantages. In general, it seems that open market operations
should be the major tool for achieving the objectives of
credit policy. The discount rate is not very effective as
long as the banks obtain reserves by selling Government
securities. Changes in reserve requirements, unless made
by fractions so as to involve small amounts, are more
suitable for unusual situations when more drastic action
is needed. Frequently more effective results can be ob
tained by coordinating the use of two or more of the tools
than from the use of any single instrument. Pressure on
bank reserves, whether by open market operations, an in
crease in reserve requirements, or an increase in the dis
count rate, is relatively ineffective if the Federal Reserve
allows replenishment of reserves on liberal terms. Effective
restraint depends not so much on the particular type of
instrument used as on coordinated action which results in
making reserves less readily available from any source.
The Federal Reserve is limited in what it can accomplish
through influencing the money flow. In the first place, the
System can influence only one of the two determinants of
the flow of money expenditures—the quantity of money but
not its velocity of circulation. Second, the instruments
available to the System are more effective in checking a
boom than in promoting recovery from a depression. In
flation can be checked by limiting the money supply, but
expansion can only be encouraged during depression by
making more reserves available. It is more effective to
pull on a string than to push.
SURVEY SHOWS STABILITY OF DEPOSIT OWNERSHIP PATTERN
The annual survey of the ownership of demand deposits of
individuals, partnerships, and corporations conducted by
this Bank reveals comparative stability in the Third District
ownership pattern between January 31 and a year ago. The
proportionate distribution of deposits among the several
bank-size groups also was almost identical with that of the
1949 survey. However, there was a small increase in the
dollar volume of deposits and slight shifts dollar-wise
among the various deposit categories.
The total volume of demand deposits of individuals
and businesses held by all commercial banks in this district
is estimated to have increased almost 4 per cent since
January 1949. The current estimate of $4.4 billion is based
upon reports from approximately 300 member and non
member banks. Despite an economic downturn during the
first part of 1949, general indicators of business show
averages for the year not much below the 1948 levels. The
dollar value of the nation’s output of goods and services
dipped only about 2 per cent.
All of the ownership groups registered dollar increases
in deposits during the period January 31, 1949 to January
OWNERSHIP OF DEMAND DEPOSITS, 1943-50
All Commercial Banks —Third District
MILLIONS
MILLIONS
PERSONAL
(INCLUDING FARMERS)
1400
ALL OTHER
1200
1000
MANUFACTURING
AND MINING
TRADE'
1943
1944
1946
Page 9
THE BUSINESS REVIEW
31, 1950 with the exception of public utilities, which were
undertaking vast expansion programs. In the case of nonfinancial business, deposits of manufacturing and mining
OWNERSHIP OF DEMAND DEPOSITS
All Commercial Banks—Third District
Type of Owner
Percent
Jan. 31
Distribution
1950
Jan.31
Jan.31
Millions $
1949
1950
Change from
Jan. 31,1949
Millions $ Per cent
Domestic business:
Nonfinancial—
Manufacturing and
mining ..........................
Public utilities..................
Trade ................................
Other nonfinancial..........
Total nonfinancial....
945
234
616
241
2,036
21.4
5.3
13.9
5.5
46.1
20.9
5.6
14.2
5.4
46.1
Financial business—
Insurance companies....
Other financial................
124
278
2.8
6.3
2.6
5.7
+ 1*
-f 35
-f 12.7
4- 14.4
Total domestic business........
Trust funds..............................
Nonprofit associations..........
Personal (incl. farmers)....
Foreign ....................................
2.438
200
176
1,602
2
55.2
4.5
4.0
36.3
0.0
54.4
4.7
4.1
36.7
0.1
4- 5.5
Grand total..................
4,418
100.0
100.0
+ 127
+ i
+ 3
+ 42
—
-f 173
+
—
+
+
-j-
56
2
12
12
78
+
—
44+
6.3
0.8
2.0
5.2
4.0
+ 0.5
+ 1.7
+ 2-7
—
+ 4.1
companies showed the largest gain. Their increase of $56
million probably reflects the liquidation of inventories and
a reduced rate of expenditure for plant and equipment. A
similar inventory policy may be responsible in part for the
$12 million upswing in the deposits of wholesale and retail
trade firms.
Personal deposits, including those of farmers, increased
$42 million during the past year. A year earlier they had
declined for the first time since 1943. The current upswing
probably reflects the fact that many consumers have satis
fied their deferred demands.
The 14 per cent increase in the deposits of financial busi
ness, the largest percentage change in district deposit own
ership during the past year, continues the upward trend
shown by this group since the surveys began in 1943.
Included in the financial business category are the deposits
of insurance companies and agencies, investment, finance,
and real estate concerns.
The 1950 survey reveals that commercial banks with
demand deposits in excess of $100 million experienced the
greatest dollar gain. Their 6 per cent increase, which
also exceeds the 3 and 4 per cent upswing at banks
with deposits of $1 million to $10 million and $10 million
to $100 million, respectively, is due in part to the concen
tration of deposits of manufacturing and mining concerns
in large banks. Banks with demand deposits of less than
$1 million showed a decline of 2 per cent.
THE BUSINESS REVIEW
CURRENT TRENDS
Stability was the keynote for the month of February, despite the impact of the coal strike. Prices were firm; industrial
activity showed little change; employment, pay rolls, and production showed slight increases. Department store sales im
proved and construction contract awards continued above those of last year.
Although physical output, employment, and income remained below the levels of 1949, they showed some improvement
for the month. In nondurable goods industries, pay rolls and earnings were above those of 1949, and employment and
output were only slightly below. Activity in the industries producing durable goods remained steady. Nonferrous metals
recovered from their January dip, but transportation equipment continued downward. Reports from durable goods in
dustries in this area indicate a high level of new orders in recent weeks, a development which may be expected to sustain
activity for some months.
Department store sales showed gains over the previous month and year. The year-ago increases for the district and for Phila
delphia, however, reflect the effects of the transportation strike in the city from February 11 to February 20, 1949. The
other five cities for which data are available showed no gain. In the housefurnishings lines, sales of major household
appliances and television sets were especially high. The amount of instalment sale credit granted by department stores
was more than 50 per cent greater than in February 1949.
Deposits and investments of reporting banks in this district reached their highest points of 1950 shortly after the middle of
March, reflecting, in part at least, Pennsylvania bonus financing. The trend of business loans has been mostly upward this
year, with the result that on March 22 they were only 6x/2 per cent under a year earlier as against 9% per cent on the first
report date of 1950.
In general, the improved tone of business activity seen in this district was evident throughout the nation. However, the prob
lem of persistent unemployment, as a result of failure to absorb a growing labor force, has been of increasing concern.
SUMMARY
Third Federal
Reserve District
United States
Per cent change
Per cent change
Feb. 1950
from
Feb. 1950
from
mo.
ago
year
ago
2
mos.
1950
from
year
ago
+ i* -10* -11* - 1
- 3
+ 10 + 6
-11 -28 -28 -53
- 3
+ 44
-67
- 3
+ 42
-49
mo.
ago
OUTPUT
Manufacturing production. .
Construction contracts..........
Coal mining................................
EMPLOYMENT AND
INCOME
Factory employment..............
TRADE**
Department store sales..........
Department store stocks....
BANKING
(All member banks)
Deposits.......................................
Loans.............................................
Investments................................
U S. Govt, securities..........
Other...........................................
2
mos.
1950
from
year
ago
Factory*
year
ago
+ i* _ 9* - 9*
+ 1* _ 8* _ 9*
+ 3
+ 2
+
-
0
1
1
1
1
+ 4
0
+ 3
+ +
+ 8
+ ^
+ 11
- 1
+ 3
+ 4
+ 8
+ 7
+ 12
0
- 1
+ 3
- 1
0
- 1
- 2
+ i
- 5
- 1
+ i
+ 3
+ 2
+ ii
+ 10
+ 16
Consumers...................................
OTHER
Check payments.......................
Of - 2f - 2f
-13
+ 4
+ 7
+ 4
+ 8
+ 1
+ l
0
— 3
- 1
— 5
- 2
-10
+ 7
+ 4
•Pennsylvania. ‘‘Adjusted for seasonal variation. fPhiladelphia.
Payrolls
Sales
Stocks
Per cent
change
Feb.1950
from
Per cent
change
Feb. 1950
from
Per cent
change
Feb. 1950
from
Per cent
change
Feb.1950
from
Per cent
change
Feb. 1950
from
mo.
ago
year
ago
mo.
ago
year
ago
mo.
ago
mo.
ago
mo.
ago
Allentown.. . .
0
- 8
-3
- 9
-11
+ 7
Altoona...........
-3
-13
+9
-12
- 5
+ 3
Harrisburg. . .
-1
- 6
+1
- 7
— 9
0
Johnstown. . .
-1
-15
-9
-24
- 7
- 9
Lancaster. . . .
+2
- 6
+3
- 8
+ 4
- 2
+ 20
+4
- 3
+24
Philadelphia. .
-1
- 9
0
- 6
+ 6
+n
+ 14
-2
-14
+ 7
Reading...........
+1
- 7
+5
- 6
+ 13
-10
+ 16
-5
-12
+ 2
Scranton.........
+3
+ 4
+6
+10
-13
+ 10
+ 4
0
+25
+ 8
- 6
+ 4
+ 6
- 1
+n
-2
-10
- 8
- 6
+ 7
-18
+ 15
-13
- 5
LOCAL
CONDITIONS
- 3
PRICES
Check
Payments
Employ
ment
- 6
+ 3
+ 1
+ 11
+ 10
+ 16
Department Store
Trenton...........
Wilkes-Barre.
0
-14
+1
-14
Williamsport.
+1
0
+1
+ 5
Wilmington. .
+3
- 5
+6
York.................
-2
+ 2
- 2
year
ago
year
ago
0
+ 3
+ 2
- 4
+ 15
+4
year
ago
♦Not restricted to corporate limits of cities but covers areas of one or more counties.
Page 11
THE BUSINESS REVIEW
MEASURES OF OUTPUT
EMPLOYMENT AND INCOME
Per cent change
February 1950
from
month
ago
year
ago
2 mos.
1950
from
year
ago
MANUFACTURING (Pa.)*...................
Durable goods industries..........................
Nondurable goods industries...................
+ 1
+ 1
0
-10
-14
- 3
-11
-16
- 3
Foods................................................................
Tobacco............................................................
Textiles.......................................
Apparel............................................................
Lumber............................................................
Furniture and lumber products.............
Paper................................................................
Printing and publishing............................
Chemicals........................................................
Petroleum and coal products..................
Rubber.............................................................
Leather.............................................................
Stone, clay and glass..................................
Iron and Steel................................................
Nonferrous metals.......................................
Machinery (excl. electrical).....................
Electrical machinery...................................
Transportation equipment (excl. auto).
Automobiles and equipment.....................
Other manufacturing..................................
+
+
+
+
+
+
+
+
- 1
-13
- 1
+ l
+ 10
+ -i
+ 1
- 7
- 5
0
- 1
- 9
+ 1
+ 6
-13
+ 15
- 1
- 2
-12
- 9
- 2
0
-12
-13
-15
-21
- 8
-41
+ 4
-12
+ 1
- 1
-12
-14
-20
-24
-10
-39
+ 4
-14
COAL MINING (3rd F. R. Dist.)f..
Anthracite.......................................................
Bituminous.....................................................
-11
- 6
-72
-28
-12
-88
-28
-17
-74
CRUDE OIL (3rd F. R. Dist.)tt-...
- 2
-10
-10
CONSTRUCTION — CONTRACT
AWARDS (3rd F. R. Dist.)**.........
Residential.....................................................
Nonresidential...............................................
Public works and utilities.........................
+
+ 4
+ 12
+ 23
-22
+ 10
+11
+ 25
- 9
3
1
3
5
5
2
1
I
1
5
3
i
3
7
4
6
Pennsylvania
Manufacturing
Industries*
Indexes
(1939 avg. = 100)
All manufacturing. ...
Durable goods
- 7
♦Temporary series—not comparable with former production indexes.
♦♦Source: F. W. Dodge Corporation. Changes computed from 3-month
moving averages, centered on 3rd month.
tU.S. Bureau of Mines. ffAmerican Petroleum Inst. Bradford held.
Average
Weekly
Earnings
Payrolls
Per cent
change
from
Feb.
1950
(Index)
mo.
ago
year
ago
Feb.
1950
(Index)
Per cent
change
from
mo.
ago
Tobacco.......................
Textiles.........................
Apparel........................
Lumber.........................
Furniture and
lumber products. . .
Paper............................
Printing and
publishing.................
Chemicals....................
Petroleum and coal
products.....................
Rubber.........................
Leather.........................
Stone, clay and
Iron and Steel...........
Nonferrous metals..
Machinery (excl.
electrical)..................
Electrical
machinery.................
Transportation
equipment
Automobiles and
equipment..................
Other manufacturing
Average
Hourly
Earnings
cS.
Feb.
1950
year
ago
year
ago
%
Feb.
1950
year
ago
113
+ i
- 9
268
+ i - 8
$53.02
0
$1,354
+i
131
+ i
-13
294
0 -14
58.23
0
1.478
+i
98
0
- 2
237
+ 2 + 1
46.79
+4
1 204
+3
Nondurable goods
+ 9
-12
+ 10
- 2
- 1
-12
Employment
116
84
78
91
84
—
+
+
+
-
3
2
1
3
2
— 2
-13
- 3
+ 3
- 6
245
192
204
248
181
—
+
+
+
-
+ 2
- 6
+ 2
+ 10
-12
47 09
30.06
47.07
38.41
40.06
+4
+9
+5
+7
-7
l 165
.794
1.210
.978
1.092
+4
+3
+1
+3
0
96
116
+ i
- 1
+ 10
0
244
269
+ 3 + 19
~ 1 + 5
46.82
50.05
+9
+5
1.063
1.219
+4
+6
131
111
+ i
+ 1
- 1
288
246
+ 2 + 3
+ 1 -11
62.15
52.83
+4
+1
1.679
1.313
+7
+2
140
126
87
- 3
- 6
+ 2
287
267
197
- 6 -10
+ 4 + 2
+ 5 + 6
62.20
52.66
38.58
-4
+ 5
+ 1
+2
+4
1.640
1.411
1.079
+5
113
123
115
+ 1
+ 1
+ 11
- 11
-12
-13
257
276
254
- 1 -1l
0 -13
52.00
60.52
57.45
0
-1
-2
1.282
1.554
1.446
+1
+1
+ 10 -15
163
+ 1
-20
354
+ 4 -19
55.25
+i
1.430
+2
208
+ 1
- 7
441
+ 1 - 9
59.34
-2
1.507
-2
141
- 7
-41
293
- 8 -41
63.37
0
1.570
-2
119
115
- 3
- 1
- 7 + 9
- 1 - 8
63.03
43.24
+ 9
+ 2
1.561
1.179
+5
+3
- 12
0
0
- 9
273
237
2
2
4
7
5
0
-2
0
♦Production workers only.
TRADE
Per cent change
Third F. R. District
Indexes: 1935-39 Avg. =100
Adjusted for seasonal variation
SALES
Department stores.......................
Women’s apparel stores.............
STOCKS
Department stores.......................
Women’s apparel stores.............
Feb.
Feb. 1950 from
1950
(Index)
month
year
ago
ago
276
214
+ 3
- 4
+ 10*
+ 4
-10
+ 2*
237p
+ 2
214
- 7
+ 6*
0
0
- 2*
Recent Changes in Department Store Sales
in Central Philadelphia
Week ended March
4...............................................................
2 mos.
1950
from
year
ago
- 1
-12
- 3*
Per
cent
change
from
year
ago
+ 6
+ 12
-14
- 1
♦Not adjusted for seasonal variation,
Page 12
p—preliminary.
Sales
Departmental Sales and Stocks of
Independent Department Stores
Third F. R. District
% chg. % chg.
Feb. 2 mos.
1950
1950
from
from
year
year
ago
ago
Stocks (end of month)
1950
from
year
ago
Ratio to sales
(months’
supply)
February
1950
1949
Total — All departments...............................................
+ 7
- 1
- 3
3.4
3.8
Main store total.................................................................
Piece goods and household textiles..........................
Small wares.......................................................................
Women’s and misses’ accessories..............................
Women’s and misses’ apparel....................................
Men’s and boys’ wear...................................................
Housefurnishings............................................................
Other main store.............................................................
+ 8
-15
+ 5
+ 1
- 5
+ 7
+ 29
- 3
+ i
-10
+ 2
- 3
-10
- 1
+ 16
- 6
- 3
+ 2
+ 2
+ 8
+ 2
+ 6
-14
-14
3.7
4.3
3.8
4.2
3.3
5.1
3.1
3.6
4.1
3.6
3.9
3.9
3.1
5.1
4.6
4.0
Basement store total........................................................
Domestics and blankets..............................................
Small wares.......................................................................
Women’s and misses’ wear.........................................
Men’s and boys’ wear...................................................
Housefurnishings............................................................
Shoes....................................................................................
+ i
- 1
+22
- 2
+ 6
+ 5
+ 4
- 7
- 3
+ 10
-12
- 4
- 2
- 7
- 1
-12
0
+ 7
+ 1
-19
0
2.4
2.3
2.3
2.2
2.9
2.1
3.6
2.5
2.6
2.8
2.0
3.1
2.7
3.7
+ 9
+ i
THE BUSINESS REVIEW
CONSUMER CREDIT
BANKING
Receiv
ables
(end of
month)
Sales
Sale Credit
% chg. ++
2 mos.
1950
1950
1950
from
from
from
yearago yearago year ago
I4hg-
Third F. R. District
MONEY SUPPLY AND RELATED ITEMS
United States (Billions $)
Feb.
22
1950
Money supply, privately owned............................................
Demand deposits, adjusted....................................................
Time deposits...............................................................................
Currency outside banks...........................................................
Changes in—
four
weeks
year
168.5
-1.5
+ 2.2
84.9
58.9
24.7
-1.9
+ .3
+ .i
+ 1.5
+i.i
- .4
Department stores
- 4
+ 5
+57
- 9
0
+ 35
-18
+ 14
+ 12
-18
+ 7
+ 7
+ 3
+ 25
Furniture stores
Loans made
Loan Credit
Third F. R. District
+ 13
Loan
bal
ances
out
standing
(end of
month)
% chg. % chg.
2 mos.
Feb.
1950
1950
1950
from
from
from
year ago year ago year ago
Turnover of demand deposits.................................................
18.9*
Commercial bank earning assets............................................
121.0
- .6
+7.6
Loans......................................................................
U.S. Government securities...................................................
Other securities.........................................................................
43 3
67.2
10.5
+ 2
- .9
+ .i
+ 5.0
+ 1.3
Member bank reserves held.....................................................
16.2
- .2
-3.3
Required reserves (estimated)..............................................
Excess reserves (estimated)...................................................
15.4
.8
- .1
- .1
-3.4
+ .i
Changes in reserves during 4 weeks ended February 22,
reflected the following:
Effect on
reserves
\tg-
Consumer instalment loans
+85
+
10
-38
+ 35
+ 67
+
2
-35
+ 41
+ 22
+ 2
+ 13
+ 27
+ 1.6*
0*
Net payments by the Treasury..........................................
Decline in Reserve Bank holdings of Governments. .
Increase of currency in circulation...................................
Decrease in monetary gold stock......................................
Other transactions....................................................................
-f-.2
—.1
—.1
— .1
—.1
Change in reserves...............................................................
— .2
♦Annual rate for the month and per cent changes from month and year ago
at leading cities outside N. Y. City.
PRICES
OTHER BANKING DATA
Per cent change
from
Feb.
1950
(Index)
Index: 1935-39 average =100
month
ago
Wholesale prices—United States................
Farm products......................
Foods.................................
Other...............................
Consumer prices
United States...............................
Philadelphia.......................................
Food...................................................
Clothing.......................................
Rent.....................................
Fuel....................................................
Housefurnishings...........................................
Other.....................................................
Weekly Wholesale Prices—U.S.
(Index: 1935-39 average = 100)
Week
Week
Week
Week
ended
ended
ended
ended
March 7................
March 14... .
March 21.....................
March 28.......................
Source: U.S. Bureau of Labor Statistics.
All commodities
189
189
188
189
year
ago
189
209
+1
+3
180
0
167
165
0
-2
181
-1
-5
190
152
0
0
—4
0
products
208
209
207
209
Foods
197
197
196
197
—3
-5
Weekly reporting banks—leading cities
United States (billions $):
Loans—
Commercial, industrial and agricultural....................
Security.................................................................
Real estate..................................................................
To banks.....................................................
All other.......................................................
Total loans—gross................................
Investments.............................
Deposits.........................................................
Other
179
179
179
Third Federal Reserve District (millions $):
I ,oa ns—
Commercial, industrial and agricultural....................
Security............................................................
Real estate................................................
I'o banks..........................................................
All other......................................................
Mar.
22,
1950
13.9
2.0
4.5
.3
4.5
25.2
42.2
74.9
Changes in—
four
weeks
+
+
+
-
year
0
0
.1
0
.1
+
+
+
+
1.1
.1
-4
.1
.2
.2
.5
+ -2
+ 5.2
+ 2.8
.7
495
39
108
34
319
+ 11
+ 2
+ 1
+ 24
1
+
+
+
+
Total loans—gross.....................................................
Investments...........................................
Deposits..................................................................
995
1,897
3,182
+ 37
+ 76
+ 122
+ 59
+ 287
+ 267
Member bank reserves and related items
United States (billions $):
Member bank reserves held............................................
Reserve Bank holdings of Governments..........
Gold stock...................................................................
Money in circulation.......................................
Treasury deposits at Reserve Banks...........................
16.0
17.6
24.3
27.0
.8
.2
.1
.1
- 3.4
- 4.1
_
_
_
+
0
-
.4
Federal Reserve Bank of Phila. (millions $)
Loans and securities......................................
1,175
5
_ 8
Federal Reserve notes.......................................
1,596
_ 23
Member bank reserve deposits......................................
+
766
Gold certificate reserves............................
+ 24
1,321
Reserve ratio (%)..........................................................
53.2% + .3%
34
9
18
19
47
0
.5
.7
-320
- 20
-153
+ 130
+ 8.8%
Page 13
@FedFRASER