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G u i d e s to M o n e t a r y P o lic y A p p l i a n c e s in a n E x p a n d in g M a r k e t GUIDES TO MONETARY POLICY The meetings of the Federal Open Market Com kets, Government finance, etc. In fact, prac mittee have become a forum for the discussion tically all available business and financial data and formulation of monetary policy, as well as are relevant in some respect. Among the types open which of information needed are data which will in meets once every three weeks, consists of the dicate the current availability of credit— how seven members of the Board of Governors and tight or how easy. Some notion as to existing market policy. This Committee, five of the presidents of the Reserve Banks. The credit tightness or ease is a prerequisite in mak presidents of the other seven Reserve Banks are ing a decision as to whether a change is desir also invited and attend the meetings. able. An important question confronting the Com This article deals with bank reserves, the mittee at these meetings is what degree of ease money supply, and market rates of interest. or restraint will best contribute to attainment The problem of guides in conducting day-to- of the three general objectives of monetary pol day open market operations— of deciding when icy. These objectives are: to keep the price level reserves should be put into or withdrawn from stable, to help maintain business stability at the market— is also considered briefly. high levels of production and employment, and to foster sustained economic growth. To achieve Free re se rv e s these objectives, monetary policy must be flexi One measure of the availability of credit is the ble. When business activity is rising and credit net reserve position of the member banks. Mem is expanding, restrictive action may be needed to ber banks are required by law to hold a certain prevent rising prices and the development of an percentage reserve against their deposits. An ex unsustainable boom. When business activity is pansion in loans and investments increases de declining the need is for a policy of easy credit posits. More deposits mean a larger amount of to bolster demand and to help promote recovery. reserves will be required. The capacity of a A great variety of information is needed in bank to extend credit is determined by its re making a policy decision as to ease or restraint serve position. If it has excess reserves the bank — current trends and the immediate prospects can make more loans and purchase securities; in production, employment, inventories, spend if not, the bank cannot increase its loans and ing, prices, credit, the money and capital mar investments without getting more reserves. The business review capacity of the banking system to expand credit seem desirable to offset them. Market factors, it depends on the combined reserve positions of should be noted, are so volatile that weekly the individual member banks. changes in reserve position may or may not be as This net position is called free or borrowed intended. reserves. Sometimes the latter is referred to as Even though the net reserve position of all negative free reserves. Free reserves are the member banks is a good indicator of the ease amount by which total excess reserves of mem or pressure being exerted on reserves by System ber banks are greater than total member bank actions and market factors, a given level of net borrowings from the Reserve Bank. It means free or net borrowed reserves does not always that member banks, as a whole, already have mean the same degree of ease or restraint. excess reserves to support additional credit ex There are other factors that need to be con pansion. When total borrowings sidered. are greater than total excess reserves, the difference is net The net reserve position of member banks borrowed reserves. On balance, member banks combines into one figure banks with markedly not only do not have excess reserves to support different reserve management policies. additional credit expansion, they are using some country banks try to maintain a cushion of ex borrowed reserves. cess reserves. Larger banks in financial centers Many The net reserve figure is a good indicator of strive to keep their funds fully invested. Their the ease or pressure on the combined reserve policy is not to hold excess reserves. Excess re positions of member banks. Net free reserves reflect a relatively easy reserve position. The serves, therefore, are concentrated in country banks. A flow of reserves from banks in finan higher the level of free reserves, the greater is cial centers usually results in tightness in the the capacity of the banking system to extend money market. Country banks often hold newly credit without the necessity of obtaining addi acquired reserves as excess for a time instead tional reserves. On the other hand, net bor of using them immediately to purchase secur rowed reserves indicate a relatively tight reserve ities or lending them in the federal funds mar position on balance. A higher level of net bor ket. On the other hand, a shift of reserves from rowed reserves usually reflects not only a larger country banks to the financial centers usually net indebtedness to the Reserve Banks, it prob results in easier credit conditions in the money ably means also that more banks are finding it market. Restraint or ease is influenced by the necessary to borrow. distribution as well as the level of net borrowed Another advantage of the net reserve position or net free reserves. as a guide is that it reflects the combined effects Bank lending policies are affected by banker of Federal Reserve actions and market factors attitudes as to the availability of more reserves on member bank reserves. Market factors— such as well as by the current reserve position. A as float, Treasury operations, and currency in banker is unlikely to be concerned over a re circulation— are often predominant in daily and serve deficiency so long as reserves can be even week-to-week changes in reserve positions. readily obtained on favorable terms. Attitudes The Federal Reserve has no control over these toward reserve availability are influenced by factors; it can only take such action as may such factors as the source of reserves, the state 3 business review of the securities market, and a bank’s asset MEMBER BANK RESERVES structure. The influence of these factors is well illus trated in the two periods March to August 1957 and March to August 1958. The net reserve po sition was considerably tighter in the former, borrowed reserves averaging $438 million. On balance, member banks were using a margin of reserves that had to be repaid shortly. In the period March to August 1958, net free reserves averaged $491 million. Member banks had a cushion of excess reserves to support credit ex pansion. sufficient to offset substantial reserve drains from Maintaining a certain level of net borrowed an outflow of gold and an increase in currency or net free reserves over a period of time means, in circulation and, in addition, to enable mem in effect, that the System is supplying reserves as ber banks to repay most of their indebtedness to rapidly as they are used to support deposit ex the Reserve Banks and provide a substantial pansion and as they are drained away by market cushion of excess reserves. Member bank bor factors. It is like maintaining water in a reser rowing was at a very low level, ranging within voir at a fixed level— the inflow must equal the a daily average of $150— 250 million. outflow. Another reason credit was considerably tighter in the March to August 1957 period was A policy of supplying reserves primarily through the discount window diminished sig that a combination of factors tended to reduce nificantly the availability the availability of additional reserves. member banks are reluctant to borrow from a of reserves. Many In the period March to August 1957, reserves Reserve Bank. With a net borrowed reserve po were made available by the Federal Reserve sition and the Federal Reserve not supplying primarily through the discount window. Loans reserves through open market operations, the and advances to member banks increased $345 sale of securities by some banks to acquire re million, and daily average borrowing from the serves is likely to shift reserve deficiencies to Reserve Banks during the period ranged from other banks. As reserve pressure continues an about $800 million to slightly over $1 billion. increasing number of banks are compelled to Only $35 million of reserves were supplied by borrow from the Reserve Banks. Furthermore, System open market operations. From March borrowed to August 1958, when the Federal Reserve was capacity only temporarily. They must be repaid. reserves enlarge a bank’s lending pursuing an easy-money policy, the System sup Reserves supplied through open market opera plied reserves at its own initiative. It increased its holdings of Government securities by over tions or released by a reduction in reserve re $2 billion, and $1^2 billion of required reserves owned, not borrowed reserves. quirements do not have to be repaid— they are were released by reductions in reserve require The state of the securities market was another ments. The quantity of reserves supplied was reason for the diminished availability of re 4 business review serves in the March— August 1957 period. The The effects of reserve availability and willing sale of securities was a source of reserves for ness to use reserves on bank credit expansion the individual bank but not for the banking are well illustrated in the two periods. From system because the Federal Reserve added very March to August 1957 the demand for credit little to its holdings of Government securities. was strong, and member bank loans rose S3 Business expansion and a strong demand for billion. But banks liquidated securities to ob credit along with the restrictive credit policy tain part of the funds needed for loans. Total resulted in a rise in interest rates. Banks are member bank deposits increased only $2 billion. reluctant to sell securities at a loss; hence the In the period March to August 1958 the demand market became a less attractive source of re for bank credit was somewhat weaker because serves as the prices of Government and other of the recession. Loans increased only Si billion, fixed-income securities declined. but banks used reserves being supplied by the A certain level of net free or borrowed re Federal Reserve to add over S9 billion to their serves may result in varying degrees of ease or holdings of securities. The increase in total de restraint because of changes in the willingness posits exceeded S9 billion. of banks to use reserves. The liquidity position of banks has an important influence on their M oney su p p ly and velo city willingness to extend credit. Most bankers like Altering reserve positions expands or contracts to maintain certain minimum liquidity stand the capacity of banks to extend credit. But re ards. Some think in terms of a minimum ratio between liquid assets and deposits; others may serve data do not show how banks respond. The real test of actions to alter reserve positions is put more emphasis on a maximum loan-to-de- their net effect on the amount of money that posit ratio. Although liquidity standards are banks put at the disposal of the public. The somewhat flexible, bankers become more care ful about expanding loans the closer these stand ards are approached. A rise in loan-to-deposit ratios and reduced holdings of Government se MONTHLY CHANGES IN MONEY SUPPLY* (Annual Rate—Seasonally Adjusted) PER CENT curities and other liquid assets in periods of expansion may cause banks to be more reluc tant lenders, even though there is no change in their over-all reserve position. Conversely, de clining loan-to-deposit ratios and a rise in li quidity probably result in greater availability of credit even though there is no change in net borrowed or net free reserves. Economic con ditions may also influence bank willingness to use reserves. In the thirties, for example, an exceptional desire for liquidity together with little loan demand and limited investment out lets caused bankers to hold large excess reserves. J J A S O N D J 1958 F M A M J 1959 * Demand Deposits Adjusted Plus Currency. 5 business review money supply, which consists mainly of demand turnover deposits, reflects the combined effect of changes justed, for 337 reporting centers other than of demand deposits, seasonally ad in bank loans and investments.* It is the best in New York City and six other leading financial dicator of the extent to which actions to affect centers reveal two types of fluctuations. One is reserves have influenced the amount of money pronounced available for expenditure. changes. The other is cyclical— an upward trend and somewhat erratic short-term The money supply is not an unerring guide during periods of rising business activity and a as to the impact of restrictive or easing actions. Short-run changes are sometimes erratic. Allow downward trend during periods of declining ing for seasonal factors, monthly changes in rates activate idle balances and, in general, currency plus demand deposits adjusted during money is used more intensively. When business activity. In periods of expansion, rising interest the past year ranged from expansion at an is slack, people spend less freely, and lower mar annual rate of nearly 20 per cent in July 1958 ket rates offer less inducement to keep cash to contraction of 7 per cent in January 1959. balances at a minimum. Hence the rate of de The July increase was exceptionally large; how posit turnover declines during a recession. ever, considerable short-term— even daily— In considering the impact of System actions, variation in the total volume of demand de one should take into account changes in velocity posits is not unusual. Float (the amount which as well as changes in the money supply. Typ has been credited to the account of those de ically, changes in velocity tend to counteract positing checks but not yet deducted from the rather than reinforce System actions. In periods deposits of those writing the checks) results in of rising business activity an increase in velocity daily, intra-monthly, and seasonal changes in de means that expansion in the quantity of money posits. Other factors such as System open mar needs to be restricted more than if velocity ket operations, Treasury operations, gold im were constant. In recession, velocity usually de ports and exports, and an inflow or outflow of clines so that a larger increase in the money currency, also cause fluctuations in the volume supply is required to provide a given stimulus of deposits. The effect of some of these factors to total spending. on deposits is frequently temporary and tends TURNOVER OF DEMAND DEPOSITS (Seasonally Adjusted—337 Centers) to cancel out in a relatively short period of time. Monthly averages of daily figures show ANNUAL RATE somewhat smaller fluctuations than data for the last Wednesday of the month. Data on the money supply need to be supple mented by information on velocity. Spending is influenced by the rate of turnover as well as by the quantity of money. A $5 bill spent twice during a month supports as much expenditure as a $10 bill spent once. Data on the rate of * The money supply as used here includes demand deposits ad justed plus currency and coin outside banks. The question of how the money supply should be defined is not considered. 6 1953 1954 1955 1956 1957 1958 1959 business review M ark e t ra te s standing. Market rates of interest, just as any other price, companies and a relatively small number of Other borrowers perform important functions in a free-market business economy. They reflect the interplay of the sup paper in the market. The principal suppliers of ply of and demand for credit in the money and funds in the short-term market are large busi capital markets. Changes in rates are a signifi ness corporations, commercial banks, and other cant force in bringing supply and demand into financial institutions. corporations are sales finance which sell short-term balance. For example, an increase, by making it The money market is also a source of funds more expensive to borrow and more attractive for holders of short-term paper and securities. to lend or invest, tends to reduce demand and Holders in need of funds may sell short-term increase supply. The spread between rates also securities to those with temporary surpluses to influences the flow of funds into different seg invest. The money market is a medium for ments of the market. The effect of rising rates on shifting funds from institutions with temporary the supply of funds available for mortgages is a excesses to those with temporary deficiencies. good illustration. The maximum rate on Gov The principal borrowers in the capital market ernment-guaranteed mortgages is fixed, and the are corporations, state and local governments, rate on conventional mortgages typically rises and at times the Federal Government. State and more slowly than market rates. As market rates local governments issue bonds to finance roads, rise, other investments become more attractive schools, and other public improvements. Cor and reduce the supply of funds going into mort porations issue securities, principally bonds, to help finance plant and equipment expenditures. gages, especially Government-guaranteed mort gages. Market rates play an important role in Savings institutions, such as savings banks, in allocating the available supply of credit among surance companies, and pension and retirement competing borrowers. Market rates are useful indicators because they reflect supply-demand relationships in a funds, are important purchasers of these longerterm securities and hence suppliers of long-term credit. market that is related to but differs consider Credit instruments traded in the money and ably from that served by commercial banks. capital markets differ in many respects— ma The money market is an important source of turity, credit rating, etc. As a result there is a funds for a variety of institutions. Member complex structure of market rates. A common banks, primarily the larger banks in financial classification is based on maturity— short-term, centers, borrow and lend excess reserves. This intermediate, and long-term rates. The level of segment of the market is commonly referred to market rates rises in a period of business ex as the federal funds market. The bulk of these pansion and credit stringency. The supply of transactions— referred to in the market as pur funds in all segments of the market becomes chases and sales of federal funds— are for a less plentiful relative to demand. The reverse is maturity of one day. The major borrower in true in a period of recession, and rates decline. the short-term securities market is the Federal Changes in supply-demand relationships are not Government. Treasury bills account for a large uniform throughout the rate structure. Typically, part of short- and intermediate-term rates are more vol total money-market instruments out 7 business review atile— increasing more sharply in a period of plentiful relative to demand, not necessarily be rising market rates and declining more in a cause of a larger supply. period of falling rates. Market rates have limitations as indicators Among short-term rates, the federal funds and of the intensity of credit restraint or ease. They Treasury bill rates are especially significant. The reflect the interplay of demand-supply forces in federal funds rate is an indicator of the supply only a part of the total credit market— princi of excess reserves relative to the demand for pally among large institutional borrowers and them among the banks which participate in the federal funds market. Tightening or easing of markets are not alternative sources of credit reserve positions among these banks is reflected to many who borrow directly from commercial promptly by a rise or decline in the federal banks and other lenders, market rates afford funds rate. Once the federal funds rate rises to little indication of the availability of credit to the discount rate it fails to register any further or the demand for credit from such borrowers. investors. Inasmuch as the money and capital reserve pressures. The dis Market rates, especially short-term rates, are count rate acts as a ceiling on the federal funds influenced by purely temporary and sometimes intensification of rate because few member banks will pay more erratic shifts in demand and supply. These short for federal funds than the cost of borrowing term fluctuations obscure the trend in market from a Reserve Bank. Market rates on Treasury rates, and it is the trend rather than daily bills reflect the ebb and flow of temporary funds fluctuations that is significant as an indicator of among institutional holders. the more basic changes in market supply-demand Market rates on long-term securities are indi relationships. cators mainly of the flow of savings in relation G uides for d a ily decisions to the demand for funds by corporations for Guides or indicators of restraint or ease are capital expenditures, state and local govern also needed in conducting day-to-day open mar ments for public improvements, and sometimes ket operations. The management of the Open by the Federal Government to finance a deficit Market Account is confronted every day with or to refund maturing securities. the problem of deciding whether funds should Market rates also have the advantage of re be put into or withdrawn from the market to flecting changes in both supply and demand. prevent market factors from creating stringency Credit tightness or ease is not determined by or ease that is inconsistent with System objec changes in supply alone. A larger market sup tives. Several types of information are useful ply does not necessarily result in easier credit; as guides for these day-to-day operations. it does so only if the increase in supply is not Statistical indicators. Reserve positions, espe offset by an increase in demand. Neither does a cially of the money-market banks in financial decrease in supply always result in tighter credit; centers, reflect the ebb and flow of business and that is the result only when supply decreases financial transactions. The tightening or easing more than demand. Rising market rates indicate in net reserve positions is a significant indi greater scarcity of supply relative to demand— cator of whether System action is needed to not necessarily a reduced supply in an absolute supply or to withdraw funds. The usefulness of sense. Rates decline when supply becomes more reserve positions is diminished by the time lag 8 business review before actual data are available. Reserve posi and fluctuations in Treasury balances in the tions yesterday do not provide a satisfactory Reserve Banks which usually cancel out in a answer to the question of whether funds should relatively short period of time. “ Feel” of the market. Men with extended ex be supplied or withdrawn today. To overcome this difficulty, daily estimates of perience in the money market often say that reserve positions are prepared, including the statistical indicators do not tell the whole story. principal factors affecting reserves such as float, Available statistics often belie the real avail Treasury operations, gold flows and foreign ability of funds in the market. They may show operations, and changes in currency in circula that funds should he there when the market tion. Even though these estimates are carefully “ feels” tight, or they may indicate that funds prepared, transportation delays and other un are scarce when the market “ feels” easy. foreseeable factors sometimes result in substan What is this feel that experienced participants tial errors. The distribution of reserves and the in the money market talk about? Actually, it availability of excess reserves in the federal reflects the combined effects of bits of informa funds market are other factors to he considered. tion and impressions picked up in a variety of As previously mentioned, the federal funds money-market contacts. Feel is based, in part, rate promptly reflects changes in reserve pres on what statistics show. It is also based on what sure or ease among the large banks in financial available statistics do not show. To illustrate: centers. day-to-day- Are dealers experiencing difficulty in finding changes in supply-demand relationships in the funds to finance their position? What are the money market, but these changes are often the result of temporary factors— such as corporate managers of the money positions of the money- sales and redemptions of Treasury bills and other short-term Government securities in prep funds? Is there a good supply of funds being offered in the federal funds market? What about aration for dividend and tax payments, and in the market for Treasury bills and other short vestment of the proceeds of a large bond issue term securities? Is it active or sluggish, broad in bills pending more permanent use of the or thin? Is the spread between bid and asked funds. It is extremely difficult to distinguish quotations wide or narrow? Is most of the in Market rates indicate market hanks saying as to the availability of rate changes which reflect mostly such transitory terest on the buy or sell side of the market? shifts in supply-demand relationships from those These are some of the factors that help to create of a more basic nature. And it would be con a “ feel” as to the availability of funds in the fusing to put funds into the market one day and market— a feel that is sometimes at variance withdraw them in a day or so to prevent these with the statistics. For an experienced operator, short-term fluctuations in rates. a feel of the market, based on both available The money supply is not a satisfactory guide statistical information and impressions gained for day-to-day operations. The time lag before from numerous market contacts, is undoubtedly satisfactory data are available is too great and, a valuable supplement to the statistics. as already mentioned, daily changes in demand Conclusions deposits are sometimes quite large. Moreover, Monetary authorities are confronted with diffi daily changes often reflect such factors as float cult decisions in implementing monetary policy. 9 business review How tight or how easy is credit; and is existing to supply or withdraw funds to avoid undue tightness or ease about right from the stand restraint or ease. point of achieving the ultimate objectives of All such data, however, have a serious short monetary policy? Moreover, changing business coming. At best they can serve only as a reason and financial conditions alter the degree of re ably accurate measure of the existing degree of straint or ease that is appropriate. In addition to restraint or ease. They cannot reveal the amount periodic decisions as to how much restraint or of restraint or ease that under existing economic ease, daily decisions are required as to whether conditions would best contribute to price sta open market operations should be used to sup bility and business stability with a reasonably ply or absorb reserves in order to prevent tight full use of resources. ness or ease that is inconsistent with System ob It is the inherent inadequacies as well as the imperfections in data that make central banking jectives. Statistical indicators are useful but inade an art rather than a science. The forces relevant quate guides in making such decisions. Data on to decisions in formulating and implementing net free or borrowed reserves, the money supply, monetary policy are too numerous and too di and market rates of interest, along with other relevant information, are indeed helpful in de verse to be encompassed in some mechanical formula or in a few statistical series. Informa ciding whether a given degree of restraint or tion on how to drive an automobile is essential, ease continues to be appropriate. Data on daily but skillful driving requires in addition the feel reserve positions, including estimates for the that can be gained only by experience at the immediate future, and short-term market rates wheel. are useful in making the daily decision translating it into appropriate monetary actions of whether open market operations should be used 10 Interpreting factual information and also require the skill derived from experience. APPLIANCES IN A P P L I A vICCS WASH RS D R YER S RCFRK : r a t o « S T V H I-FI STEM? 1 AN EXPANDING MARKET The term “ consumer durable” means just what At midsummer, this was the over-all picture at it says— consumer goods that last a long time. the national level. For a look at appliance mer Though bread and biscuits are consumed in a chandising trends in the Philadelphia Federal day, refrigerators, washing machines, and tele Reserve District we have talked with department store executives and representative dealers in vision sets last for years. And this durable qual ity means that replacement may be put off if some of our larger metropolitan areas. What more pressing needs for funds arise. follows is a composite of their appraisal of the Last year more pressing needs did arise. We were in a recession. People were out of work. district situation based on selling experiences in recent months. Others who were not out of work still were un sure of the future. They preferred to add their Business volum e is up sh a rp ly in ap p lian ces dollars to the old savings account rather than Many more consumers are said to have become invest in a shiny new washer-dryer combination. “ appliance minded” in recent months and with Result? Appliance sales declined. But what is few exceptions merchants report that business deferred in the present must some day be reck volume is running well ahead of year-ago levels. oned with. In 1959 we have had a vigorous Most retailers also say that the improvement recovery. Employment has picked up and con noted since last winter has been pretty much fidence has returned. Consumers are in a better across the board. Nevertheless, some items for buying mood. In addition to goods they would seasonal or other reasons have been better per normally purchase this year, they are buying formers than others. many of the things they put off in 1958. Almost everywhere, washers and washer- Result: this looks like a banner year for hard dryer combinations are said to be leaders in the goods in general and appliances and entertain white goods field. Refrigeration, too, is moving ment devices in particular. at a fast clip, although the demand for boxes 11 business review appears more active than for deep freezers. To Consum er p re fe re n ce s fa vo r be sure, hot weather always is a factor in sales lu x u ry m odels of cooling devices because it brings so many A majority of merchants say more breakdowns in units that have begun to that the luxury models in both age. Speaking of summertime temperatures, the appliances and entertainment lines hold some month of June with its two severe heat waves what of an edge over stripped-down units offering appears to have done for room air conditioner mainly utility. They point to this preference as sales what the whole of last summer failed to do. Most merchants say that ranges, water to spend more freely than at this time last year. heaters, and vacuum cleaners are moving satis You hear most frequently expressions such as factorily as the “ bread and butter” items of “ quality minded” today’s appliance business. reference to the characteristics of people making additional evidence that consumers are inclined and “ feature-conscious” in up the bulk of store traffic these days. Entertainm ent equipm ent m oves at a slo w er pace Brand nam es also a re v e ry im portant Considerable improvement also has been noted Going hand in hand with the increased interest in the field of home entertainment devices such in models offering greater convenience and, in as television, high fidelity sound, and radio. But the case of some appliances, larger capacity, is in this area of the market gains have not kept a growing preference expressed for brand names. pace with appliance trends. Costly stereophonic Naturally enough, a well-known manufacturer’s reproduction equipment is said to be catching name engenders more confidence in the perform on slowly because of confusion in consumers’ ance of a given piece of equipment than the trade minds regarding the proper use of these instru mark of one whose products are less widely dis ments. This is particularly true of stereo compo tributed. Today’s buyers rate service and lasting nents used in connection with high fidelity units. qualities very high on the list of “ must” charac As merchants are quick to teristics of whatever item they select. point out, summertime is not the season to look for great strength Hom ebuilding is helping m an u factu rers in m ore than re ta ile rs entertainment equipment other than portable radios. Too Until the advent of so many built-in or appli many people are preoccupied with vacations and ance-equipped kitchens, a high rate of home- a wide range of other out-of-door activities. Pros building meant considerably more business for pects for good fall business, however, seem much the retail merchant. His new and replacement brighter this year than last. And, as might be ex markets both seemed to benefit. The newlyweds pected, a more stable employment situation fig were the first-time customers and frequently ures strongly in these calculations. The one “ fly in those who were not so newly wed preferred to the ointment” is the duration of the nationwide make their occupancy of a new home an occa steel strike. A long shutdown might have espe sion for replacing one or more pieces of old cially severe repercussions in the entertainment kitchen equipment. But today too many new field. houses come equipped with basic appliances 12 business review purchased by the builder directly from the than a competitor. But most of them hasten to manufacturer or a wholesale distributor at prices add that this sometimes can be risky business, the average retailer could not hope to meet. On particularly if a dealer is not properly set up to this business most retail merchants, large or do a reconditioning job that will make the small, are by-passed. As one dealer chose to put trade-in a salable article. This all adds up to it, “ the best I can hope for is a larger replace one thing in the opinion of a great majority of ment market, and that is some years away.” retailers: much more dependence on volume and less reliance on profit margins than was the ac Price com petition is just as keen as ever cepted practice only a few years ago. To say that the consumer is price conscious in almost the same breath that you describe him Instalm ent volum e continues h e a v y as being “ quality minded” and “ luxury bent” in Opinions seem to differ somewhat as to the part his shopping habits sounds inconsistent. But played by instalment buying this year. Retailers merchants say that is not the case. Price-wise, in most of our metropolitan areas, including today’s consumer is a very well-informed indi Philadelphia, think that the popularity of time- vidual. He has learned to recognize values and payment plans still is increasing. At the same is out to get quality merchandise, with all time, however, they mention a surprising num the wanted features and a ber of cash transactions in recent months. In brand name thrown in. All cluded in these are sales made on a 30-, 60-, or this is expected at an at 90-day basis, some of which are later re-written tractive price. The re tailer who does not meet as instalment transactions. A comment made by all these requirements stands an excellent chance one merchant appears typical: “ More people have cash to lay on the barrel, but they still like of seeing a prospective customer take his business to see good balances in their bank statements.” somewhere else. Pressure for easy terms on time payments is not nearly so pronounced as it was over most of . . . and profit m argin s a re under last year, according to a majority of the retailers p re ssu re e v e ry w h e re with whom we talked. Some of them even note a Experiences with the operations of the now well- tendency to put out more cash at the time of established discount houses have made it im purchase and to complete payments on the bal perative for all merchants selling appliances, ance a little ahead of schedule. Collections gen television, and similar big-ticket items to cut erally are said to have improved since the early their costs wherever they can. Most of them seem months of this year and very few merchants to have found ways of doing just that. More mentioned delinquencies or repossessions as cur over, in today’s highly competitive market a rent problems. smaller mark-up is almost a necessity if the re tailer is to stay in the running. That is the con In ven to ries a re in good shap e sensus of those with whom we have talked. Some Local merchants say they have “ licked” the in merchants say they get around the price-tag ventory problem posed largely by so much dis problem by offering larger trade-in allowances tress merchandise resulting from failures and 13 business review They look for volume to slow sales in 1958. The clean-up of old models in both appliance and entertainment lines is said hold up and even increase to be proceeding in orderly fashion. Promo through the fall when the tional events designed to accomplish this seem demand for all entertain to be going off very well and in some cases the ment equipment is expected consumer response has gone well beyond earlier to move out of the dol expectations. An outstanding example of old- drums. All merchants seem to realize that heavier model liquidation is room air conditioners, which moved out in a hurry during the June spending for houses and automobiles could easily heat waves. Merchants this year all appear thankful that the use of color in the traditional detract from their sales of appliances, television, and similar items. But they have seen no evidence of this so far. white goods lines is no longer a factor to com As mentioned earlier, retailers think there is plicate whatever inventory difficulties they may a distinct threat to future business in the steel have had earlier. strike, particularly if it should become a long drawn-out affair. In that case even Christmas 1 9 5 9 has all the e a rm a rk s of being a good holiday demand might be seriously affected. And y e a r throughout On the basis of operations, tions, because right now retailers say they are scarcely a merchant contacted hesitated to say counting on the 1959 holiday season being one that would call for a drastic revision of expecta their first-half that 1959 may very well turn out to be one of of the best in a long time for these big-ticket the best years experienced for quite a while. items. Additional copies of this issue are available upon request to the Department of Research, Federal Reserve Bank of Philadelphia, Philadelphia 1, Pa. 14 NEW PUBLICATIONS Treasury-Federal Reserve Study of the Government Securities Market is the result of a joint inquiry into the functioning of the Government securities market. Part I, now available for distribution, consists of two papers; the first summarizes informal consultations with individuals associated with or informed about the market, and the second is a special technical study concerned with the question whether an organized exchange might better serve the public in effectuating the purchase and sale of Government securities. Part II will be a factual and analytical report on the performance of the Government securities market in 1958, and Part III will deal with specialized and technical subjects suggested by informal consultations and factual records. The price of each part is $1.00, or $2.50 for the set when all are ordered at the same time, and may be ob tained from the Division of Administrative Services, Board of Governors of the Federal Reserve System, Washington 25, D. C. Individual parts will be forwarded as they be come available. FOR THE R E C OR D BILLIONS $ AGO AGO Jun e 1959 from year ago 6 mos. 1959 from year ago AGO Employ ment Per cent change June 1959 from mo. ago year ago 6 mos. 1959 from year ago LO C A L CH AN G ES mo. ago OUTPUT Manufacturing production. Construction contracts . . . Coal mining ..................... + 2 + 3 + 1 + 9 - 6 + 2 + 5 + 1 6 TRADE* Department store sales . . . Department store stocks .. + 5 + 9 + 7 + 1 6 + 1 2 + b Per cent Per cent Per cent Per cent change change change change Jun e 1959 Jun e 1959 Jun e 1959 June 1959 from from from from year mo. ago ago year mo. ago ago year mo. ago ago year mo. ago ago year ago + 10 + 7 + 1 + 8 — i + 2 — i + 1 4 + 5 — ? 9 + 2 + 8 + 4 + 1 + 7 + 5 + 2 + 8 + + 4 — + — — — + 1 + 2 + 5 2 +10 + 7 4 — 5 + b 5 - 5 + b 1 — 4 + 4 4f + I2f + !2 f + 1 + 3 + 9 + 5 + 8 Reading ....... 0 + 8 + 3 +21 + — — — + 0 2 3 3 1 6 + + — — + + 1 9 6 8 2 4 + + + + + + 5 7 5 4 8 8 Trenton ......... 0 - H + it + It f20 Cities 0 0 + 0 1 + 0 1 tPhiladelphia 1 + 0 + 7 2 + 3 + 5 + 7 + 0 1 + 1 0 + H 4 1 + 1 0 + 4 + 1 + 2 + 2 + 1 + b + 3 + 4 + 1 1 1 + 2 — 4 + 3 + 2 + 8 + 5 + 2 9 + 2 + 7 + 3 + 1 + Wilkes-Barre . 2 1 + 4 + 1 + 5 + 9 — 1 0 + 1 + 3 3 + 10 + 3 - 6 1 + 5 + 4 + 1 - 3 + 9 + 8 + + 1 + W ilm ington .. + York .............. + 6 1 + 1 - Philadelphia . + 2 + 4 + 3 + 1 3 Scranton ....... *Adjusted for seasonal variation. + 1 9 — 4 + 1 Check Payments Stocks Lancaster . . . . + 1 + 2 PR IC ES Wholesale ......................... Consumer ........................... + i + 3 + 1 Sales Harrisburg .. . EM PLOYM ENT AND IN C O M E Factory employment (Total) .............................. Factory wage incom e....... B A N K IN G (A ll member banks) Deposits ............................ Loans ................................. Investments ....................... U.S. Govt, securities....... Other ................................ Check payments .............. + 5 + M + 10 Pay rolls Per cent change June 1959 from 1959 Department Storef Factory* United States Per cent change SUM M ARY mo. ago AGO 1959 Third Federal Reserve District M EM BER B A N K S 3RD F.R.D. + 2 0 5 + H b + 3 + 2 + 8 + 7 7 +36 + 1 3 + + 1 2 7 +24 *Not restricted to corporate limits of cities but covers areas of one or more counties. fAdjusted for .seasonal variation.
@FedFRASER