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FEB 2 : REVIEW FEDERAL RESERVE BANK OF PHILADELPHIA ' MONEY UN EASILY GET OUT OF HAND Many years of experience show that money, while indispensable to modern society, has been the root of some evils. Chaotic currency was an early problem which was corrected by legislation. Bank notes and deposits could not always be converted into cash, so laws were passed requiring banks to keep minimum reserves. The Federal Reserve System was established to provide an elastic currency and, by influencing the money supply, to help smooth out business fluctuations. This article, the first of a series of four dealing with monetary policy, traces the development of monetary problems and the steps taken to solve them. THE MONTH’S STATISTICS Recovery in the heavy goods industries gained momentum. Considering the unseasonable weather, sales in department stores held up well. THE BUSINESS REVIEW MONEY CAN EASILY GET OUT OF HAND The hearings and report of the Subcommittee on Monetary, Credit, and Fiscal Policies of the Joint Committee on the Economic Report, of which Sen ator Douglas is Chairman, point up once again how important the operation of our money and bank ing system is to our economic welfare. The prob lems analyzed by the Committee are only the more recent of a long series we have encountered. Money as the means of payment and as the common measure of value of our economic activity has long played a strategic role in the economy. But the functions of money have not always been per formed as well as they should have been. Experi ence has taught us that the size of the flow of money payments has an important bearing on whether we have good times or bad times, progress or stagna tion. In order that the important role of money in the economy may be fulfilled more effectively, attempts have been made to develop a system which will provide not only a convenient and uniform medium of exchange but a flow of money payments relative to the flow of goods that will help maintain business activity stable at high levels of production and employment. This is the first of a series of four articles dealing with some of the major problems of our monetary and banking system—past and present—and the attempts which have been made to solve them. This article attempts to show why money has not man aged itself, and traces some of the steps taken to deal with the major problems. The second will deal with the objectives of Federal Reserve poli cies and their development. The instruments avail able to the Federal Reserve System and their use in “managing” the money supply will be the subject of the third article. The fourth will analyze some of the current problems in the light of our experi ence and indicate the choices confronting us. *•**#* The statement that “money will not manage itself,” was made by Walter Bagehot, a noted English writer, about three-fourths of a century ago. That the statement is cor rect has been demonstrated by experience. For many years there was a great variety of currency and coins in circula tion, differing in size, appearance, and value. Financial crises were usually accompanied by a general suspension of payments by the banks; in the early days, the problem was inability to convert bank notes into specie (coins) and later it was that of converting deposits into currency. There have been wide fluctuations in business activity and prices which emphasized the need for a mechanism for better adjusting the supply of money to the production of goods available for exchange. 1 hese and other defects revealed by experience convinced the public that banking differed from other types of busi ness and that regulatory legislation was needed to have it operate in the public interest. Laws were passed to estab lish a uniform currency. Legal reserve requirements were enacted to prevent the suspension of payments which usu ally resulted from an over-issue of notes and an over expansion of bank deposits. The Federal Reserve System was established not only to provide an elastic currency, but to set up a central mechanism which could adjust the supply of money to the supply of goods so that the monetary system would not contribute to the wide swings in employ ment and business activity. That money will not manage itself in the best interests of the economy has been demonstrated with practically all kinds of money and in many countries. In the days when gold and silver coins were the principal medium of exchange, the supply of money depended more upon the discovery and exhaustion of gold and silver mines than upon the needs of trade. Moreover, many abuses devel oped, such as debasing the coinage, “clipping” and counter feiting. The development of bank notes and deposits as the chief parts of the money supply added to the evidence that money will not manage itself. Difficulties arose in western Europe, for example, long before the United States became a nation. In 1716, John Law was given a charter to incorporate a bank in France and for a while it appeared that it might add materially to the enrichment of the country. But before long the enrichment was too much in the form of a production of bank notes and too little in the production of goods, and the inflationary boom collapsed in May 1720. Law made strong efforts to stem the tide, attempting to reduce the outstanding circulation by public bonfires of bank notes; but he was unsuccessful and the bank was abolished by edict in October 1720. A speculative bubble fed in part by an excessive issue of bank notes also developed in England Page 1 THE BUSINESS REVIEW about this time, but the results were not as disastrous as in France. These early incidents are cited only as frag mentary evidence that difficulties arose in other countries as well as in the United States. Space, however, makes it necessary to limit this analysis to the development of a few major problems in the United States and to the attempts which were made to solve them. LACK OF A UNIFORM CURRENCY One of the requirements of an efficient money system is a generally acceptable, uniform currency which obviates the delay, expense, and inconvenience of using a great variety of coins and paper money circulating at different values. This condition was not met during a major part of the history of this country. In Colonial days the medium of exchange consisted mainly of paper bills of credit issued by the Colonies and some foreign coins. Over-issue of the paper currency, depreciation and default were common. With the development of banking, about the beginning of the nineteenth century, bank notes became the major part of the currency. Except for the periods 1791 to 1811 and 1816 to 1836, when the First and Second Banks of the United States were in operation, state bank notes made up the bulk of the currency in circulation until the Civil War. The number of state banks increased from less than 100 in 1811 to about 1,600 in 1861. The growth in the number of banks was accompanied by an increase in the number and variety of note issues. In some states, bank note issues were not regulated and in the others regulation varied greatly. These state bank notes were printed on a variety of paper, they differed in size, and circulated at different values. In 1861 there were 1,600 banks in 34 states and it was estimated that they were issuing altogether about 10,000 kinds of notes. Some of these notes were good and circulated at par; some were redeemable in coin at the issuing bank but because of slow transportation and the problem involved in pre senting them, circulated at a discount a few miles away; some were heavily over-issued and circulated at a large discount; and still others became worthless. The great variety of state bank note issues led to widespread counter feiting, and the currency situation was complicated still further by a variety of counterfeit notes in circulation. The outbreak of the Civil War brought a flood of “green backs” in the North and Confederate paper money in the southern states. The chaotic currency situation imposed a heavy burden Page 2 on trade and business. It has been estimated that bank failures prior to the Civil War resulted in losses of $100 million to holders of state bank notes. The dislike of the people for bank note issues in this period is reflected in the names given them, such as “wildcats,” “red dogs,” and “stumptails.” The need for establishing a stable and uniform currency was very great. A first step in this direction was taken with the passage of the National Banking Act in 1863. All national banks had to meet uniform regulations. They had to back their note issues by Government bonds, limit the total amount issued to their paid-in capital, and main tain a fund of lawful money in the Treasury for their redemption. The result was a safe and uniform national bank note issue, but it did not solve the problem of lack of uniformity among the other forms of currency. Another step toward complete uniformity was taken in 1865 when a law was passed placing a 10 per cent tax on state bank notes. This made it unprofitable for state banks to issue notes and this form of currency passed out of existence. After 1865, all types of currency were under Federal control and regulation. However, there continued to be several different kinds of currency in circulation. United States notes or “greenbacks” became the basic currency for several years following the Civil War but usually cir culated at a discount relative to gold. Parity was restored in 1879, however, when the Treasury began to redeem “greenbacks” in gold. Silver certificates, gold certificates and Treasury notes of 1890 were other types of currency which made their appearance. The principle of uniformity was firmly established in 1900. The Gold Standard Act not only placed the United States on the gold standard but also declared it to be the duty of the Secretary of the Treasury to maintain all forms of money at parity with gold and with one another. This solved the problem of uniformity despite the fact that different kinds of currency continued in circulation. Today we still have more than one kind of currency in circulation, the bulk of it being Federal Reserve notes issued by the Federal Reserve Banks, but all kinds are uniform in size, general appearance, and value. CONVERTIBILITY OF NOTES AND DEPOSITS The Problem An early defect of the banking system was the inability of the bank to meet its liabilities on demand. The problem appeared first with respect to bank notes, which exceeded bank deposits in volume until just before the Civil War. THE BUSINESS REVIEW The difficulties holders experienced in exchanging bank notes for specie stemmed from two different types of situ ations. One arose from the physical problem of actually presenting the notes to the issuing bank where they were payable. The holder might be many miles from the issuing bank, so that it was very difficult to present the notes for payment. It was cumbersome and expensive to mail the notes to the bank and have the specie shipped back. As a result, bank notes often remained in circulation for a considerable period and circulated at a discount in dis tant places. The very fact that bank notes were not returned promptly for payment removed an important restraint and aggravated the problem of over-expansion. A more serious problem, however, was the bank’s in ability to pay when notes were presented. This happened all too frequently both for individual banks and the bank ing system. It was to be expected that incompetent and in experienced management would get some banks—as well as any other business—into difficulty. Some managements made so many loans and issued so many notes that they were unable to convert their notes into specie on demand. But this was only a part of the problem. There were periods when all of the banks were forced to suspend specie payments. Periods of economic expansion and speculation were usually accompanied by an over-expansion in bank loans and note issues. The failure or inability of some banks to pay their notes on demand tended to undermine confidence in other banks. Once started, fear tended to spread, resulting in a general run of noteholders on the banks. Since a larger amount of coins could not be made available promptly, banks in general were soon forced to suspend the redemption of their notes until the fear sub sided. Before the Civil War, banks began making advances to borrowers by crediting their deposit accounts instead of by issuing them notes. Bank deposits, or checking accounts, grew rapidly and in the latter part of the century, deposits became the major part of the money supply. The problem of convertibility shifted from bank notes to deposits. Again this was a difficulty of both the individual bank and the banking system. Over-expansion and unwise management sometimes resulted in individual banks being unable to get enough currency to meet the demands of their deposi tors, even though banks in general were experiencing no difficulty. The more serious problem, however, was that in certain periods—usually resulting from an excessive expansion of credit—there was a general breakdown of ability to convert deposits into cash. This was the same old money panic in a new form—a scramble to convert deposits into cash instead of bank notes into specie. This problem could not be solved by a bank getting currency from some other bank. It required a larger supply of cur rency so that banks in general would be able to meet the enlarged withdrawals by depositors. The solution called for a currency which would expand and contract in re sponse to changes in the public’s demand for cash. Legal Reserves Steps were soon taken to make bank notes and deposits convertible on demand. In 1824 the Suffolk Bank of Bos ton agreed to redeem the notes of outlying banks at par if they would maintain balances with it for that purpose. This plan functioned successfully for many years, and the notes of New England banks generally circulated at par or face value. In 1829 New York passed the Safety Fund Act which required each bank to contribute a certain amount to a guarantee fund to be used in meeting the liabilities of banks that failed. The fund continued in exist ence for many years, and in a sense was a forerunner of the Federal Deposit Insurance Corporation, established in 1933. In 1838 New York state passed the Free Banking Act. This law enabled banks to be chartered without a special act from the legislature provided they met certain requirements, one of which was the deposit of specified types of securities with the state comptroller which could be sold to redeem notes in case a bank failed. It permitted “free” entry into banking, but regulations were imposed to make note issues safe. The major action taken, however, to make bank notes safe and always payable on demand was the enactment of legal reserve requirements. It appeared quite logical that if banks were unable to redeem their notes on demand, the remedy was to require them to keep a certain reserve of specie on hand for that purpose. Prescribing a minimum reserve would also help prevent the over-issue of bank notes. Enactment of reserve legislation was stimulated by the panic of 1837 which resulted in many bank failures and large losses to noteholders. In 1838 New York passed a law requiring its banks to maintain a specie reserve equal to at least 12% per cent of outstanding notes. This was one of the first laws requiring privately owned, chartered banks to maintain a specific reserve back of note issues. It marked the beginning of a long line of legislation by the states setting up legal reserve requirements. Louisiana Page 3 THE BUSINESS REVIEW passed a law in 1842 requiring banks to maintain a reserve equal to 33^ per cent of “cash responsibilities.” This had the effect of including deposits but without specifically naming them. The first specific mention of a required reserve against deposits was contained in the Massachu setts law of 1858. This Act required banks to maintain a reserve in specie equal to 15 per cent of their aggregate liability for notes and deposits. However, except for Louisi ana and Massachusetts, banks prior to 1858 were required by law to maintain minimum reserves against bank notes only. Notes issued by country banks tended to accumulate in the cities through the normal course of trade. For this reason, country banks began keeping deposits in banks in key cities for the redemption of their notes. Banks in key or “redemption” cities thus came to hold increasing amounts of out-of-town bank balances left with them for redemption purposes. Originally, legal reserves included only specie in the bank’s own vaults, but country banks particularly protested that their balances in the city banks should count as a part of their specie reserve because most of their notes were redeemed in these “redemption” cities instead of over their own counters. As a result of these protests the composition of legal reserves was broadened to include deposits in other banks, and the principle of redemption cities began to be recognized in reserve legis lation. In Massachusetts, banks were permitted to count balances in other banks as a part of their specie reserve although the state’s banking commissioners were strongly opposed. The National Banking Act was passed originally in 1863 but was almost completely revised in 1864. Reserve re quirements applied to both bank notes and deposits until 1874, when the law was amended to exclude notes. The Act incorporated the principle of “redemption cities,” and banks were classified into three groups for reserve pur poses according to their location. Banks in central reserve cities were to maintain reserves of 25 per cent of lawful money held in their own vaults; banks in reserve cities were to maintain reserves of 25 per cent, one-half in the form of cash in their own vaults, and one-half might be deposited in national banks in central reserve cities; and all other—the so-called country—banks were to maintain reserves of 15 per cent, two-fifths in their own vaults, and three-fifths might be deposited in national banks in reserve and central reserve cities. In the 60-year interval from the passage of the National Digitized forPage FRASER 4 Banking Act to the Federal Reserve Act, 40 states passed legislation establishing or making major revisions in bank reserve requirements. Certain innovations in this legisla tion are worthy of mention. An important one was the distinction made between time and demand deposits. The New Hampshire Act of 1874 was the first to definitely dis tinguish between demand and savings deposits and pre scribe a different reserve ratio for each—15 per cent against demand deposits and 5 per cent against savings deposits. Prior to the passage of the Federal Reserve Act, 11 states had made this distinction and fixed lower re quirements against savings deposits. Another important innovation was the establishment of a higher reserve requirement for banks acting as reserve agents than for other banks. In 1889 the state of Nebraska passed a law which required banks acting as reserve agents to hold a 20 per cent reserve against demand deposits as compared to a 15 per cent reserve against demand deposits of other banks. A similar distinction was made in laws enacted in Wisconsin in 1903, Rhode Island in 1908, Ne vada and South Dakota in 1909, and Colorado in 1913. This legislation is noteworthy in the evolution of reserve requirements in that it placed a higher requirement against deposits of banks acting as reserve agents instead of against deposits of all banks in “redemption” cities. It achieved through classification according to character of business what had been attempted through classification according to mere location. In 1913, the Federal Reserve System was established and one of the purposes was to prevent the money panics which had characterized financial crises in this country. Two provisions particularly were designed to solve this problem. Federal Reserve notes against which the Federal Reserve Banks were required to maintain a gold reserve of at least 40 per cent and collateral of eligible short-term commerical paper of 100 per cent, were expected to be elas tic—to expand and contract as needed. A second provision mobilized the legal reserves of all member banks in the Federal Reserve Banks and permitted them to obtain addi tional funds by discounting eligible commercial paper. A few years later the Act was amended to permit member banks to borrow on their own notes secured by eligible collateral. Thus the Federal Reserve System was designed to supply an elastic currency—one which would expand and contract in response to changes in the public’s demand for cash—and to give member banks access to centralized reserves in time of need. THE BUSINESS REVIEW These provisions were inadequate, however, to assure full convertibility of deposits into cash in the severe depres sion of the early ’thirties. It was not possible to expand the issue of Federal Reserve notes sufficiently to meet the wave of withdrawals by depositors because of a limited supply of eligible commercial paper. Runs on the banks increased during the depression when member banks held a relatively small quantity of eligible paper. To meet this difficulty, the Act was amended so that Government securi ties could also be used as collateral against Federal Re serve notes. The small amount of eligible paper and securi ties also limited the ability of member banks to obtain additional funds from the Federal Reserve Banks by dis counting or borrowing. To correct this defect, the Act was amended so that banks could borrow on their own notes secured by any sound asset, but the rate of interest was y2 of 1 per cent higher than if secured by eligible commercial paper or Government securities. ECONOMIC INSTABILITY Wide swings in business activity, employment, and prices have presented a major problem to be solved. Another requirement of an efficient money system is that it should mitigate instead of aggravate business fluctuations. This means that an increase in the money supply should not be allowed to become excessive so that it helps to generate over-expansion, rising prices, and inflation. Neither should contraction in the money supply continue until it tends to intensify and prolong periods of depression. The solution requires action on a broad front, but the efficient operation of our monetary system can be helpful. Changes in Purchasing Power of Dollar Business fluctuations are usually accompanied by changes in prices. The “basket” of goods a dollar would buy has varied widely and each change brought a redistribution of income which worked a hardship on some groups. The chart shows wholesale prices from 1808 to 1949. The fact which stands out most clearly is the price peaks which accompany wars. Fluctuations in the purchasing power of the dollar are not limited to war periods, however. From 1808 to 1814, in part because of the War of 1812, the amount of goods a dollar would buy dropped 39 per cent. From 1815 to 1834, prices dropped sharply and the purchasing power of the dollar more than doubled. The Civil War, which was financed partly by the issue of paper money, brought another sharp rise in prices, and the amount of goods that a dollar would buy dropped 70 per WHOLESALE PRICES 1808-1949 Index: 1926 = 100 SOURCE- US BUREAU OF LABOR STATISTICS cent. Following the Civil War, prices dropped and the buying power of the dollar nearly doubled by 1879. World War I brought another sharp decrease in the buying power of the dollar, but during the depressions of 1921-1922 and 1930-1933 the value of the dollar increased substantially. Again, during and following World War II, prices rose sharply and the buying power of the dollar declined. Some of the more important changes in the purchasing power of money are given in the accompanying table. CHANGES IN THE PURCHASING POWER OF THE DOLLAR - SELECTED PERIODS, 1808-1949* Period Per cent change 1808-1814 1815-1834 1835-1836 1840-1843 1861-1865 — 39 +134 — 23 + 32 — 70 Period Per cent change 1866-1879 1397-1910 1915-1920 1921-1922 1929-1932 1940-1948 + at — 40 — 73 + 58 + 43 — 71 ’"Raged on wholesale price index, Bureau of Labor Statistics. Why has the buying power of the dollar been so unstable? A short, simple answer to this question is not possible; but the various forces work through the flow of spending in relation to the flow of goods. If the money flow expands, demand increases and the tendency is to increase produc tion and the flow of goods available for purchase. But as full employment is reached production cannot increase, prices rise, and a dollar buys less. Conversely, if the money flow becomes too small in relation to the flow of goods, prices fall and the dollar buys more. If money is to have Page 5 THE BUSINESS REVIEW a stable value and contribute to economic stability, one requirement is that the money flow and the goods flow be kept in proper relation to each other. The flow of goods is determined basically by the amount and quality of pro ductive resources and the use millions of independent producers decide to make of them in view of market con ditions. The flow of money represents the combined effects of the volume of money in the hands of the public and how rapidly it is spent. Despite the fact that the supply of money has an impor tant influence on prices and the volume of production, there was no central agency before the Federal Reserve System which could exert any influence over total deposit expansion and contraction. Periods of business expansion were accompanied by an increase in bank loans and the money supply, and also by a rise in prices. The boom usually continued with increased momentum until some thing like inability to get more credit or loss of confidence brought it to a halt. Then there usually followed a period of contraction—in production, prices, and bank credit. Although not the only factor, an excessive expansion and contraction of bank credit and the money supply con tributed to these wide fluctuations in prices and the vol ume of business activity. Inherent Instability of Money Supply In the operation of the banking system there has been an inherent tendency for the total money supply to fluctuate widely. The price-cost-profit mechanism which tends to adjust the supply of individual commodities to the market demand for them does not work successfully in the case of money. If the producers of any commodity expand their output too much, the price will fall, profits will decrease, and lower profits or losses will force them to curtail pro duction. On the other hand, if the production of any commodity is low in relation to demand, the price will rise, profits will increase, and the above-average profit is an incentive to increase production. The price-cost-profit mechanism thus acts as a governor tending to regulate the supply of a single commodity in accordance with the amount demanded by the people. The profit and loss mechanism does not prevent as effectively excessive expansion and contraction in the money supply. Banks, as other private businesses, are in business to make a profit, and their chief source of income is from loans and investments. The incentive, therefore, is to keep loans and investments at the highest level con sistent with safety. The demand for bank credit depends Page 6 largely on the volume of business activity, rising and fall ing with production and trade. A rise in business activity tends to be accompanied by an increase in total commer cial bank loans and purchases of securities (investments). The result is a corresponding rise in deposits and the money supply. The increase in deposits gives the borrowers more money to spend, and the total demand for goods and services expands. As long as there are unused resources, the enlarged demand tends to increase the total production of goods and services. But the expansion process does not check itself when full employment is reached. Instead, an increase in demand tends to raise prices. Either a larger physical volume 6f business or a rise in prices results in a larger dollar volume of business. Thus more money is needed to carry on this enlarged volume and the demand for bank credit tends to rise still further, each increase tending to generate another. As bank credit expands it does not become unprofitable to make additional loans and investments. The only restraining force is that the banker may screen his loans more carefully as the expansion con tinues and his reserves become low. The tendency, there fore, is for expansion to continue until checked by some external force. A contraction in the money supply also tends to be cumulative. Borrowers usually pay off their loans and corporations retire their securities by writing checks on their deposit accounts. A general repayment of loans and securities, therefore, results in a decrease in both total deposits and total loans and investments. Thus a decline in business activity is usually accompanied by a decrease in the total volume of bank loans and investments and the money supply. Less money available for buying tends to decrease the demand for goods and services, resulting in a further decrease in business activity. Each decrease, whether in the volume of business activity or in the money supply, tends to generate a further decrease. As excess reserves pile up in the banks there is an added incentive to expand loans and investments through more liberal credit terms. Such efforts, however, are not likely to be sufficient as long as business firms find it unprofitable to borrow. DEVELOPMENT OF CENTRAL BANKING Recapitulating, experience has revealed three important problems with respect to the functioning of our monetary system. First, mainly because of too many issuing agencies, the currency consisted of a great variety of notes, differing in size and value. Second, bank note holders and depositors suffered heavy losses and inconvenience during those pe THE BUSINESS REVIEW riods when they were unable to redeem their notes or con vert their deposits into cash. Third, the purchasing power of a dollar has fluctuated widely and the flow of money all too frequently has been such that it has intensified instead of mitigated business fluctuations. State and national legislation prior to the Federal Re serve Act of 1913 remedied some of the major defects. The different types of currency were made uniform in size, and all types of currency and coin were maintained at parity with one another. Financial crises, however, usually were accompanied by a temporary suspension of payments by the banks and little progress had been made in smoothing out business fluctuations and in stabilizing the purchasing power of money. The panic of 1907 convinced the people that further ac tion was necessary. A National Monetary Commission was appointed in 1908 to make a thorough study of our mone tary and banking system and to make recommendations for remedying the defects which were revealed. In 1913 an Act was passed establishing the Federal Reserve System. There was a general move during the first part of this cen tury to establish central banks, and today practically all of the major countries have one. The primary function which has been given these institutions is to “manage” the total money supply in the interest of maintaining general eco nomic stability. It represents a widespread recognition of the statement made long ago that “money will not manage itself.” The Federal Reserve System was established, in the words of the preamble, “to furnish an elastic currency, to afford means of rediscounting commercial paper, to estab lish a more effective supervision of banking in the United States, and for other purposes.” A currency which would expand and contract in response to the demand for cash and a method whereby member banks could obtain addi tional cash when needed were expected to assure the con vertibility of bank deposits into cash at all times. This aspect of System operations and the amendments to the Act which became necessary in the severe depression of the early ’thirties, have been explained above. It was also intended that the Federal Reserve System should deal with the broader problem of helping stabilize business activity. One type of evidence of this broader purpose is that Federal Reserve authorities were given certain tools for influencing the volume of member bank reserves and the money supply. Another type of evidence is statements made when the bill establishing the Federal Reserve System was being considered. These statements, being couched in the language of that period, emphasize mainly the prevention of “excessive expansion” of currency and credit, financial “stringency,” and “panics.” The pre vention of excessive expansion and inflation and financial stringency is an important part of any program for achiev ing economic stability. One of the best statements of the broader objectives the Federal Reserve System was expected to accomplish was that of Senator Robert L. Owen, Chairman of the Senate Committee on Banking and Currency. He stated: “Senate bill number 2639 is intended to establish an auxiliary system of banking, upon principles well understood and approved by the banking community, in its broad essen tials, and which, it is confidently believed, will tend to stabilize commerce and finance, to prevent future panics, and place the nation upon an era of enduring prosperity.” (Senate Document No. 117, 63rd Congress, First Session, p. 1. Italics supplied.) Another statement which was in cluded in a report on the bill adopted at a conference attended by members of the Currency Commission of the American Bankers Association, the presidents of fortyseven state bankers’ associations, and representatives of the 191 clearing houses indicates the opinion of bankers. The report states: “we recognize the imperative necessity of in corporating into the banking and currency system of this country those proven principles which will provide the most ample credit facilities with greatest safety and a cur rency based on gold which automatically adjusts its volume to trade requirements, in order that the highest stability may be attained for our commerce, thereby assuring con tinuity of employment for the laborer and favorable mar kets for the producer—the fundamental basis of general prosperity. . . .” (Senate Document No. 232, 63rd Con gress, First Session, p. 5. Italics supplied.) Thus it is clear that one of the objectives was the achieve ment of greater economic stability. This was one of the major tasks of the Federal Reserve System. The methods by which stability could best be accomplished and the guides that should be followed in determining its actions, have not always been so clear. They have been influenced, naturally, both by knowledge gained from experience and the great development in our general knowledge and under standing of the business cycle since 1913. The development of objectives and guides to Federal Reserve policies will be considered in the next article. Page 7 THE BUSINESS REVIEW THE MONTH’S STATISTICS Industrial recovery in November, as operations were resumed in the coal and steel industries, continued into December. Employment, production, income, and trade again rose to levels above those of the previous month. While increases in employment, pay rolls, and output occurred in the automobile, machinery, and nonferrous metal indus tries, the greatest gains were made in the iron and steel industries. Improved operations in these basic lines contributed to the substantial advance in the durable goods industries as a group. Output of durable goods industries rose 20 per cent while nondurable output declined slightly. Employment in December was below year-ago levels in all major categories except apparel. While contract awards for building and construction declined from November, they remained above those of December 1948. Although department store sales did not duplicate the all-time peak attained in December 1948, they nevertheless made a good showing. Dollar volume in December 1949 was 3 per cent below the corresponding month of the previous year, and total sales for the year were 5 per cent lower due primarily to lower prices. Because of unseasonable weather, the December decline in women’s apparel store sales, compared to a year ago, was considerably greater than the decline at department stores. Purchases of Government securities by the banking system during December and an increase in loans were reflected in an expansion in the privately owned money supply to a level approximating the record high point first reached two years earlier. In the Third Federal Reserve District the increase in private deposits at reporting banks in leading cities in December was followed by some decline in January. Business loans also decreased somewhat in the opening month of the year, and con tinued smaller than a year ago. SUMMARY Third Federal Reserve District United States Per cent change Per cent change Dec. 1949 from mo. ago OUTPUT Manufacturing production. Construction contracts. . . . Coal mining............................. EMPLOYMENT AND INCOME Factory employment. . . Factory wage income.. . year ago 12 mos. 1949 from year ago Dec. 1949 from mo. ago + 10* -16* -14* + 3 - 2 -10 -20 -42 -38 -26 -27 + 2 6* -14* + 12* -15* -11* -11* + 2 TRADE** Department store sales.......... + 3 Department store stocks. . .. + 4 BANKING (All member banks) Deposits....................................... Loans............................................ Investments........... .. ................. U. S. Govt, securities.......... Other........................................... PRICES Wholesale. . Consumers. OTHER Check payments......... Output of electricity. year ago - 6 + 50 -31 2 LOCAL CONDITIONS + 11 Employ ment Check Payments Payrolls Sales Stocks Per cent change Dec. 1949 from Per cent change Dec. 1949 from Per cent change Dec. 1949 from Per cent change Dec. 1949 from Per cent change Dec. 1949 from mo. ago mo. ago year ago mo. ago mo. ago + 2 - 9 + 7 - 3 + 14 -18 + 56 -31 + 101 -38 + 11 -10 + i — 8 + 4 -14 + 13 0 + 2 -11 + 9 -11 + 21 -14 year ago mo. ago year ago year ago year ago -26 - 9 - 3 - 6 Lancaster............................ + 3 + 3 + 2 -27 - 1 +n 0 4 -20 - 4 +22 + 3 + i -20 - 5 + 5 + 3 + 10 + 2 - 2 - 9 + 2 -13 + 44 Philadelphia....................... + i -11 + 3 -10 +23 - Reading................................ - 1 -11 + 1 -13 + 34 — 2 — 1 — 8 Wilkes-Barre...................... -11 + 42 + 3 -19 + 1 + 8 - 9 + 42 - 2 -22 - 9 If - 2f + 20 + 1 + 2 - 3 - 3 - 3 - 2 + 19 - 2 York.................................. 5 0 -14 + 5 -14 +n - 0 - 8 + 1 — 7 + 15 - 1 + 7 - 7 + 13 - 9 + 47 + 4 + 4 -10 + + 4 -20 - 7 - It ‘Pennsylvania. ‘‘Adjusted for seasonal variation. tPhiladelphia. Page 8 12 mos. 1949 from year ago 0 + 2 + 2 + 4 + 1 100 + 1 + 1 + 88 0 + 1 + 0 +10 0 + 01 + + 13 + 5 + 1 + 14 + Department Store Factory* 9 -12 + 57 - 2 -25 + 5 *Not restricted to corporate limits of cities but covers areas of one or more counties. THE BUSINESS REVIEW MEASURES OF OUTPUT EMPLOYMENT AND INCOME Per cent change December 1949 12 mos. from 1949 from month year year ago ago ago MANUFACTURING (Pa.)*................... Nondurable goods industries.............. + 10 + 20 - 1 — 16 -14 -18 -14 -16 + 7 Paper.................................................................. Petroleum and coal products. . . Transportation equipment (excl. auto). 9 5 3 1 2 4 7 3 + 39 + 9 + 18 + 6 + 4 + 16 — 2 — 2 - 3 + 1 — 15 - 2 1 4 -17 -24 -38 -10 -16 -11 — 5 -14 -20 -21 -34 — 5 -16 -12 - 9 — 23 — 15 COAL MINING (3rd F. R. Dist.)f. . -42 46 -10 -38 -39 -35 -26 -25 -33 CRUDE OIL (3rd F. R. Di»t.)ft.... + 1 -12 -12 CONSTRUCTION — CONTRACT AWARDS (3rd F. R. Dist.)**......... -20 — 24 — 8 -29 + 2 - 2 + 22 — 9 15 -24 ♦Temporary series—not comparable with former production indexes. ♦♦Source: F. W. Dodge Corporation. Changes computed from 3-month moving averages, centered on 3rd month. fU.S. Bureau of Mines, ft American Petroleum Inst. Bradford field. Employment Per cent change from Dec. 1949 (In dex) mo. ago year ago All manufacturing. . . . Durable goods industries................... Nondurable goods industries................... 111 + 6 124 + 12 98 Foods............................ Iobacco....................... 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 122 81 78 90 87 Indexes (1939 avg. =100) - 6 — 12 0 + + + + + + + + Pennsylvania Manufacturing Industries* Average Weekly Earnings Payrolls Per cent change from Average Hourly Earnings % chg. % chg. from year ago Dec. 1949 findex) mo. ago year ago 1949 year ago -14 260 + 12 -15 $52.64 - 1 $1,342 0 -20 279 +22 -22 58.28 - 2 1.476 +i — 1 - 5 237 0 - 3 46.29 + 2 1.188 +i _ 3 — 9 — 1 0 + 4 - 6 -23 - 7 + 4 - 5 253 181 203 229 196 - 3 -11 0 + i + 9 - 4 -23 - 8 + 7 - 9 46.41 + 2 29.46 - 1 46.63 0 35.99 + 3 41.80 - 4 1.133 .790 1.198 .942 1.097 +2 +2 —1 -1 +i 93 119 + 3 + 1 - 4 - 2 234 281 + 6 + 2 - 3 + 3 46.53 + 1 51.29 + S 1.042 1.209 -1 +7 131 108 — 1 + 1 - 1 -16 289 241 + 1 + 1 + 4 -12 62.20 53.21 + 5 + 4 1.644 1.323 +5 +4 149 122 87 + 3 — 1 0 - 3 -12 - 1 319 254 189 + 4 + 5 + 3 - 1 - 3 - 1 64.87 51.76 37.16 + 2 + 10 0 1.653 1.413 1.038 +1 +2 +i 115 111 89 0 -f-23 + 4 -15 -22 -37 256 249 200 + 1 + 41 +10 -17 -23 -40 51.22 60.55 58.45 - 2 - 2 - 4 1.272 1.558 1.413 0 +1 -3 160 + 9 -23 349 + 13 -24 55.21 - 1 1.432 +3 209 + 4 -10 455 + 6 -13 60.69 - 3 1.515 -2 167 5 -33 346 + 4 -33 63.25 0 1.590 +i 119 120 + 10 6 - 6 -12 271 245 + 20 - 3 + i -14 62.68 42.71 + 8 - 2 1.561 1.157 +6 +i Dec. 1949 ♦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.............. Dec. Dec. 1949 from 1949 (Index) month year ago ago 276 230 + 3 - 3 + 31* - 3 - 9 + 10* 240p + 4 + 9 -11* - 3 - 3 -14* 213 Recent Changes in Department Store Sales in Central Philadelphia Week ended Jan. 21.......................................................................... ♦Not adjusted for seasonal variation, Sales 12 mos. 1949 from year ago - 5 - 7 0* Per cent change from year ago -30 - 7 - 1 0 Departmental Sales and Stocks of Independent Department Stores Third F. R. District Stocks (end of month) % chg. % chg. %chg. Dec. 12 mos. Dec. 1949 1949 1949 from from from year year year ago ago ago Ratio to sales (months’ supply) December 1949 1948 Total — All departments............................................... - 5 -6 - 6 1.3 1.3 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.............................................................. - 4 -10 - 6 - 5 - 7 - 2 0 - 4 -6 -8 -4 -5 -6 -3 -8 -7 - 6 0 0 + 1 + 1 0 -14 -15 1.4 2.8 1.2 1.1 1.3 1.1 2.2 0.5 1.4 2.6 1.1 1.1 1.2 1.1 2.6 0.6 Basement store total........................................................ Domestics and blankets............................................... Small wares................................................... Women’s and misses’ wear.......................................... Men’s and boys’ wear........................................ Housefurnishings............................................................. Shoes..................................................................................... -10 - 8 - 6 -13 - 3 - 5 -15 -6 -4 -4 -7 -5 -6 -7 - 7 - 4 - 1 - 4 - 8 -15 - 8 0.9 2.0 0.6 0.8 0.8 1.3 1.4 09 1.9 0.5 0.7 0.8 1.5 1.3 Nonmerchandise total........................................ - 6 -3 p-preliminary. Page 9 THE BUSINESS REVIEW BANKING CONSUMER CREDIT Receiv ables (end of month) Sales Sale Credit % chg. % chg. % chg. Dec. 12 mos. Dec. 1949 1949 1949 from from from yearago yearago yearago Third F. R. District MONEY SUPPLY AND RELATED ITEMS United States (Billions $) Changes in— Dec. 28. 1949 four weeks year Money supply, privately owned............................................. 170.1 + 1.5 + 1.0 Demand deposits, adjusted.................................................... Time deposits................................................................................ Currency outside banks............................................................ 86.7 58.4 25.0 + 1.2 + .4 - .1 + .9 20.0* + 4.7* -4.8* + 1.2 -1.1 Department stores - 9 0 + 18 -8 -2 +1 -13 + 3 + 11 -3 -9 -5 + 2 + 15 Turnover of demand deposits.................................................. Commercial bank earning assets............................................. 120.8 + -i + 6.5 U.S. Government securities.................................................... Other securities............................................................................ 43.3 67.3 10.2 + .4 + .2 + .1 + 8 + 4.6 +1.1 Member bank reserves held...................................................... 16.3 + .3 -3.9 Required reserves (estimated)............................................... Excess reserves (estimated).................................................... 15.4 .9 + -I + .2 -3.7 - .2 Furniture stores Loans made Loan Credit + 8 Loan bal ances out standing (end of month) Changes in reserves during 4 weeks ended December 28, reflected the following: Third F. R. District % chg. % chg. % chg. Dec. Dec. 12 mos. 1949 1949 1949 from from from year ago year ago year ago Effect on reserves Increase in Reserve Bank holdings of Governments. Net payments to Treasury................................................. Decrease in Reserve Bank loans...................................... Increase of currency in circulation................................... +1.1 — .4 — .2 — .2 Change in reserves............................................................. + .3 Consumer instalment loans Industrial banks and loan companies.......................... + 46 -23 + 22 - 4 + 16 - 8 + 11 + 12 + 18 - 1 + 12 + 20 ♦Annual rate for the month and per cent changes from month and year ago at leading cities outside N. Y. City. PRICES Per cent change from Dec. 1949 (Index) Index: 1935-39 average =100 Wholesale prices — United States..................................... Farm products....................................................................... Foods........................................................................................ Other......................................................................................... Consumer prices United States......................................................................... Philadelphia............................................................................ Clothing................................................................................. Housefurnishings................................................................ month ago year ago 188 204 197 179 0 -1 -2 0 - 7 -12 - 8 - 5 168 167 194 184 121 146 192 152 -1 -1 -2 0 0 -1 0 0 - 2 2 3 6 + 2 - 5 0 _______________________ / A . --------------------------------------- 03A!.': ,... ' * / i Weekly Wholesale Prices—U.S. All com modi (Index: 1935-39 average =100) Cn ties SJ 6/ f) Week Week Week Week Week ended ended ended ended ended Jan. 3..................................Wi Jan. 10........................................ Jan. 17........................................ Jan. 24...................................... jaq/^L^... .............. 187 188 187 187 187 + Source: U.S. Bureau of Labor Statistics. Page 10 -/Q3j Oa prod ucts 202 + 204 302 202 205 Foods Other 195 197 196 195 196 179 179 179 179 179 OTHER BANKING DATA Jan. 25, 1950 Weekly reporting banks—leading cities United States (billions $): Loans— Commercial, industrial and agricultural.................... Security.................................................................................... Real estate.............................................................................. To banks................................................................................. All other................................................................................... 13.9 1.9 4.4 .3 4.4 Total loans—gross............................................................. Investments............................................................................ Deposits................................................................................... 24.9 43.2 76.6 Third Federal Reserve District (millions $): Loans— Commercial, industrial and agricultural.................... Security.................................................................................... Real estate.............................................................................. To banks.................................................................................. All other................................................................................... Changes in— four weeks year 0 .3 0 0 0 - 1.5 0 + .3 + .1 + .5 .3 .7 .4 - .6 + 5.7 + 2.4 466 32 113 7 315 _ — 6 4 0 — 11 + 4 - 46 + 4 + 17 - 6 + 38 Total loans—gross............................................................. 933 Investments............................................................................ 1,857 Deposits................................................................................... 3,095 _ 17 + 8 10 + 7 + 241 + 159 + .1 1.0 0 — .9 .4 — + - 100 — 47 + 4 — 5 + 1-4% -330 - 32 -172 + 106 + 8.295 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........................... 16.4 17.8 24.4 26.9 .5 Federal Reserve Bank of Phila. (millions $) Loans and securities............................................................ 1,189 Federal Reserve notes........................................................ 1,596 Member bank reserve deposits....................................... 769 Gold certificate reserves.................................................... 1,278 Reserve ratio (%)................................................................ 51.7% — _ + + 3.6 4.3 .2 .6 .6
@FedFRASER