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BUSINESS
REVIEW
FEDERAL
RESERVE
BANK
OF
PHILADELPHIA
THE FEDERAL BUDGET
The new budget sent to Congress
last month calls for expenditures
of $72 billion and receipts of $55 billion
in fiscal year 1952.
Once adopted, the Federal budget
becomes our financial program.
We should study it carefully.
Fiscal policy is our main weapon
for combating inflation.
Defense production adds to incomes
but not to the supply of civilian
goods for these incomes to buy.
Taxation is the best means
of siphoning off this excess income,
and of closing the inflation gap.
Economies in non-defense spending would
help reduce total demand and
free resources for defense production.
CURRENT TRENDS
Greater business activity in December
reflected vigorous consumer buying
and expanding production for defense.
THE BUSINESS REVIEW
THE FEDERAL BUDGET
Seventy-two billion dollars is big money. That is the
estimated cost of running the Federal Government in
fiscal year 1952 beginning next July, according to the
budget message the President sent to Congress last month.
Seventy-two billion dollars would pay for over 7 million
houses costing $10,000 each; it is more than twice the
amount of money all of the farmers of the country re
ceived last year.
The Federal budget, as finally adopted, will be our
financial plan for the coming year because in a democ
racy, government is the instrument of the people. The
budget shows how much we are planning to pay into the
Federal Government and how much via government we
are planning to spend for a variety of services and ac
tivities. The primary purpose of this article is to present
an analysis of the new budget and to take up briefly some
of its economic implications.
A few words about the development of our budget sys
tem and the purposes it was designed to accomplish may
be helpful. The present system was developed as a device
to give Congress more effective control over the financial
operations of the Government. What the budget is ex
pected to do can be made clear by an illustration. At one
of the Cabinet meetings when James Monroe was Presi
dent, over one hundred years ago, the Attorney General
asked for a raise in salary, an office, and a clerk. He
suggested that the President make such a recommenda
tion to Congress. To make a wise decision, the Piesident
felt that it would be necessary to first appraise the situ
ation in other departments so that he could make a
recommendation that would cover all departments in an
adequate manner. This informal method of weighing de
partmental needs individually and in relation to each
other was feasible a century ago when the Government s
financial transactions totaled only a few million dollars
a year. It would not be at all suitable today, however,
with Federal Government activities totaling many billions
of dollars annually.
Before the present budget procedure was put into effect
each department of the Government made its own esti
mates and submitted them to a Congressional committee
Page 2
which had supervision over the financial operations of
a particular department. Because of the confusion and
lack of control which resulted from several disconnected
and uncoordinated budgets being submitted to different
committees of Congress, the procedure was finally re
vamped in 1921 and the President was given the re
sponsibility of preparing annually a single budget of
estimated revenues and expenditures covering all of the
agencies and activities of the Federal Government.
The Federal Government makes up its budget for a
fiscal year beginning July 1 and ending June 30, instead
of for the calendar year. Fiscal year 1952, for example,
begins July 1, 1951 and ends June 30, 1952. Many corpo
rations also use a fiscal year which does not coincide
with the calendar year. To avoid needless repetition in
this article, the term “year” will refer to fiscal year un
less otherwise stated.
Preparation of the budget involves several steps. First,
the Bureau of the Budget asks each department and
agency to submit an estimate of the amount of funds it
will need for the coming year. Usually, these requests
go out in June for the fiscal year beginning over twelve
months later. Second, the budget officer in each depart
ment gets estimates from those in charge of the various
subdivisions, of their needs for that year. After numer
ous consultations, these estimates are reviewed, revised,
and whipped into a budget for the department or agency,
which is then submitted to the Bureau of the Budget.
Departmental estimates are usually sent to the Bureau
some time in September. Third, the Bureau of the Budget
then begins an intensive analysis and review of the esti
mates for each department and agency. One important
job is to see whether the requests are consistent with
Congressional intentions, reflected in existing laws. For
example, once legislation is passed setting up a new serv
ice or adding new functions, it becomes a mandate which
must be translated into financial terms. Fourth, the
Bureau of the Budget combines the departmental and
agency estimates into a national budget which is submit
ted to the President for his consideration and review.
Fifth, the President submits his budget recommendations
THE BUSINESS REVIEW
to the Congress at the beginning of the calendar year.
Sixth, Congressional committees and subcommittees re
view the budget carefully, conduct hearings, and the vari
ous bills which emerge are analyzed and debated on the
floor of both the House and the Senate. Both appro
priation and revenue bills must be passed by Congress,
and approved by the President or passed over his veto
before becoming our adopted financial program.
In this brief description of the preparation of the
budget, two things stand out clearly. One is that the ex
penditure estimates of all of the Government departments
and agencies are analyzed and reviewed carefully within
the department, by the Bureau of the Budget, by the Presi
dent, by the appropriation committees in Congress, and
finally on the floor of the House and the Senate before
final adoption. The second is that although the President
has the responsibility for initiating and recommending a
sound financial program, final responsibility for both tax
and other revenue measures and appropriation bills rests
with the Congress.
ANALYSIS OF THE NEW BUDGET
The budget submitted by the President gave actual re
ceipts and expenses for fiscal year 1950, revised estimates
for 1951, and recommendations for 1952. This informa
tion makes it possible not only to analyze the recom
mendations for 1952 but also to compare them with
actual receipts and expenditures in 1950. We shall first
consider budget receipts and expenditures, and then some
of the economic implications of the new recommenda
tions.
Budget Expenditures
Authority to spend must be granted by Congress before
funds can be paid out. Total authorizations give the
amount the Government has permission to spend, and
NEW OBLIGATIONAL AUTHORITY
(Fiscal years—in billions of dollars)
1951
1952
Function
Enacted
Recommended
ind proposed and proposed
Military services ..............
54.2
61.0
International security and
foreign relations............
9.0
11.0
All other..............
24.2
22.4
Total new obligational
authority..............
87.4
94.4
budget expenditures show the amounts actually spent or
to be spent in a given year.
Some appropriations are permanent and do not re
quire action by Congress each year; some are available
for two or more years; and some are available without
time limit. The sum of all authorizations less amounts
earmarked for the liquidation of previous contract au
thorizations is the new authority of the Treasury to incur
financial obligations.
New authorizations in the budget amount to $87.4
billion for 1951 and $94.4 billion for 1952—a two-year
total of $182.8 billion. Of this total, $77 billion has been
authorized for 1951, the remainder being only a budget
recommendation. The major part of the new authoriza
tions is for primary defense—$115 billion being for mili
tary services and $20 billion for international security
and foreign relations.
There is usually a considerable time lag between au
thorization and expenditures. In part, this time lag reflects
authorizations covering a period of more than one year;
in part, it reflects the time consumed in making plans,
letting contracts, and in the actual production of the
materials and equipment to be purchased. Estimated ex
penses for 1951 and 1952 total $119 billion, as compared
to new authorizations of $182 billion.
BUDGET EXPENDITURES BY MAJOR PURPOSES
_______(Fiscal years—in billions of dollars)
Function
20.0
46.6
181.8
1951
(estimated)
1952
(estimated)
•
Military services..............
International security and
foreign relations........
Finance, commerce, and
industry....................
Transportation and communication ................
Natural resources ........
Agriculture and agricultural resources..........
Social security, welfare,
and health ..................
Veterans’ services and
benefits ..............
Interest on debt........
All other................
Total
115.2
1950
(actual)
Total budget expenditures..............
Change
1950 to
1952
+29.1
12.3
21.0
4.8
4.7
7.5
+ 2.7
0.2
0.4
1.0
+ 1.3
1.8
1.6
2.0
2.1
z.o
- 0.1
+ 0.9
2.8
1.0
1.4
-
1.4
2.2
2.5
z.o
+
0.4
6.6
5.8
2.1
5.7
5.7
+
+
1.7
0.1
0.1
40.2
47.2
z.z
+31.4
According to the budget, the cost of running the Govern
ment will rise from $40 billion in 1950 to nearly $72
billion in 1952. The increase is almost entirely for cur
Page 3
THE BUSINESS REVIEW
rent defense purposes—an increase of $29 billion for
military services, $2.7 billion for international security and
foreign relations, over $700 million for atomic energy,
and $1.7 billion for promotion of defense production,
civil defense, and price, wage, and similar controls. The
estimates for military services are designated as tentative,
with more detailed estimates to be sent to Congress later.
However, the large increase in this category is to go pri
marily for three purposes. The major part will be used
to supply the armed services with modern equipment such
as planes, tanks, electronic equipment, and rockets.
Funds are requested also to build up reserves of equip
ment and strategic materials should larger forces become
necessary. Second, more funds will be required to feed,
clothe, house, and train the growing numbers in the armed
forces. Third, additional funds are requested for devel
oping our productive capacity so that we can move rap
idly into full mobilization if necessary. For example,
current plans call for developing industrial capacity suf
ficient to turn out 50,000 planes and 35,000 tanks a year.
DEFENSE AND NON-DEFENSE EXPENDITURES
TOTAL EXPENDITURES
CURRENT DEFENSE'
PAST DEFENSE
NON-DEFENSE
46
1947
1948
1949
1950
1951
195c
C fiscal years)
mi it&ry SFRVICES. INTERNATIONAL SECURITY AND FOREIGN RELATIONS, ATOMIC
"-INCLUDES.
BBODUCTION AND ECONOMIC STABILIZATION.
INCLUDES-. INTEREST AND VETERANS’ SERVICES AND BENEFITS.
International security and foreign relations will take $7.5
billion in 1952 as compared to $4.8 billion actually spent
in 1950, most of the increase being for military and eco
nomic aid to build up mutual defense forces. It is esti
mated that more than one-half of the total will go for
military equipment to be shipped from this country to
our allies. Also included is a request for an increase of
$1 billion in the lending ceiling of the Export-Import
Bank, in part to help expand the output of defense ma
terials in foreign countries.
Page 4
Promoting an expansion in defense production and the
cost of administering controls to guard against infla
tion will take about 90 per cent of the funds requested
for finance, commerce, and industry. To help increase
defense production, the Government is making direct
loans, participating in loans made by private lenders, and
purchasing and installing Government-owned equipment
in defense plants. The cost of the stabilization program,
including allocations, price, wage, rent, and export con
trols, is estimated at about $300 million for 1952. The
cost of natural resource development in 1952 is about
$1 billion greater than in 1950, primarily because of
increases of over $700 million for atomic energy and
over $200 million for the Tennessee Valley Authority.
The cost of past wars is still reflected in substantial pay
ments to veterans and in interest on the Federal debt.
The cost of veterans’ services and benefits is gradually
declining as the number taking advantage of educational
benefits decreases. The drop from 1950 to 1952 is about
$1.7 billion. Interest on the debt is expected to show only
a slight increase.
The cost of non-defense activities is expected to drop
about $1 billion from 1950 to 1951 and continue at
about the same levels for 1952. Additional funds will
be required for social security, welfare and health serv
ices. Practically all of the increase results from amend
ments to the Social Security Act last year, which extended
the coverage to about 10 million additional workers,
raised benefit payments, relaxed eligibility requirements
for older people, and provided more liberal public assis
tance. A request of $164 million for new buildings and
accommodations to facilitate the dispersal of Government
offices in the Washington area is the chief reason for
a rise in general Government expenses. The cost of the
Government’s farm program is expected to decline pri
marily because the general rise in prices automatically
reduces the cost of supporting the price of agricultural
products. The cost of the agricultural price and income
stabilization program is expected to drop from $1.6 bil
lion actually spent in 1950 to $238 million in 1952.
The trend in non-defense spending has been upward in
the post-war period, rising from $4.7 billion in 1946 to
$10 billion in 1950. Agriculture and agricultural resource
expenditures rose about $2 billion from 1946 to 1950,
due primarily to the cost of the farm price stabilization
program. Expenditures for the development of other nat
ural resources, excluding atomic energy, have also risen
THE BUSINESS REVIEW
sharply, the largest increase being for the conservation and
development of land and water resources. The cost of
the social security, welfare and health programs has more
than doubled, mainly because of the rise in public assis
tance payments. In the field of transportation and com
munication, aid to navigation, to aviation, for highways,
and a subsidy for the postal service have lifted expendi
tures to more than double the level of 1946. The sharp
rise in non-defense expenditures during the post-war
period reflects both rising prices and costs, and an ex
tension of Government services.
Budget Receipts
So much for what we plan to spend. The next question
is, where is the money coming from—a question which
will be of growing concern as the tax bills come in.
The Treasury prepares estimates of receipts for the
coming fiscal year usually in December. The budget esti
mates prepared this year are based on existing rather
than proposed legislation. They also assume continued
high levels of production, employment, and income.
BUDGET RECEIPTS BY MAJOR SOURCES
(Fiscal years—in billions of dollars)
Source
1950
(actual
Income tax
Individuals............................
Corporations ............................
Excise taxes ........................
Employment taxes..................
Miscellaneous receipts............
Total budget receipts................
Appropriations to Federal Old-Age
and Survivors Insurance Trust
Fund..............................
Refunds of receipts....................
Net budget receipts................
17.4
10.9
1951
(est.)
Change
1952 1950 to
(est.)
1952
billion, in corporate income taxes to yield $3 billion,
and in excise taxes to yield $3 billion. Later in the year
legislation should be enacted to yield whatever additional
revenue is needed to balance the budget.
The $18 billion jump in receipts from 1950 to 1952
reflects primarily a rising level of income and employ
ment, and tax increases levied last year. The major part
of the additional income is derived from income taxes.
Receipts from the personal income tax are expected to
rise over $4 billion each in 1951 and in 1952. Both ris
ing wage rates and employment have resulted in larger
salary and wage payments, thus enlarging the income
tax base. A second reason for the additional revenue is
the higher tax rates imposed on personal incomes by
the Revenue Act of 1950, which take a larger bite out of
a given income. These higher rates which applied to only
a part of 1951 incomes will be effective for all of 1952.
The tax on corporate income, also raised, is expected to
yield about $9 billion more than in 1950.
Employment tax receipts from Federal Old-Age Insur
ance, unemployment, and similar social security taxes
are expected to increase nearly $2 billion. Rising wage
rates, expanding employment, and amendments to the
Social Security Act swell this source of income. The tax
rates on both employer and employee rose from 1 per
BUDGET RECEIPTS -1946-1952
2.9
2.6
21.6
13.6
8.2
3.8
2.6
26.0
20.0
8.2
4.7
2.8
+ 0.6
+ 1.8
+ 0.2
41.3
49.8
61.7
+20.4
2.1
2.2
3.0
2.3
3.8
2.7
+ 1-7
+ 0.5
37.0
44.5
55.1
+ 18.1
7.6
-h 8.6
+ 9.1
ALL OTHER
EXCISE TAXES
CORPORATE
INCOME TAX
Note: Detailed figures do not necessarily add to totals because of
rounding.
Budget receipts of $37 billion in 1950 are expected to
rise to $55 billion in 1952. This increase, however, falls
short of bringing receipts up to estimated expenditures
by $16.5 billion. The President has recommended, how
ever, that new taxes be levied to eliminate the deficit thus
putting the Government on a pay-as-we-go basis. In a sup
plemental message to Congress, the President proposed
a prompt increase in personal income taxes to yield $4
PERSONAL
INCOME TAX
1946
1947
,94®_.J949 {950
Cfiscal years)
1951
1952
cent to iy2 per cent on January 1, 1950. The maximum
tax base was raised from $3,000 of income to $3,600,
effective January 1, 1951, and coverage was extended
to include a larger number of employees. Both of these
changes will enlarge the proceeds of employment taxes;
Page 5
THE BUSINESS REVIEW
however, only a small part of this income, that not ap
propriated to the Federal Old-Age and Survivors Insur
ance Fund, can be used for general expenses. As a
result, only a small part of the enlarged income from
employment taxes will go into net budget receipts avail
able for general expenses.
ECONOMIC IMPLICATIONS OF THE BUDGET
A Federal budget of $50-75 billion exerts a tremendous
influence on both the flow of income and the flow of
goods and services. Treasury operations influence buy
ing power because receipts take funds out of the income
stream and payments put them back. In addition to their
influence on total buying power, Treasury operations
affect the distribution of income and therefore the pat
tern of demand for goods and services.
In view of the influence of Treasury operations on
economic activity, the new budget should also be an
alyzed in relation to the economic goals we are striv
ing to achieve. These goals for the prolonged period of
rearmament and military readiness which lies ahead are:
(1) to supply a much larger quantity of goods and
services for national defense; (2) to maintain economic
stability by restraining the excessive demand which en
larged defense production tends to create; and (3) to
distribute the defense burden as equitably as possible.
Cash Income and Outgo
Budget receipts and expenditures do not show the
real impact of Treasury operations on the economy. This
impact is determined by the flow of cash in and out of the
Treasury. Cash receipts drain funds away from the public.
Both bank deposits and bank reserves are reduced when
the checks received by the Treasury are collected. Cash
payments, on the other hand, put funds back into the
income stream. They add to deposit balances and bank
reserves. If the Treasury pays out more than it takes in,
the tendency is to add to incomes and the effect is infla
tionary. If the Treasury takes in more than it pays out,
total buying power is reduced and the effect is deflation
ary. When cash receipts and payments are in balance,
total buying power is unaffected because Treasury pay
ments return as much to the income stream as receipts
take out.
In the last few years, the budget has contained esti
mates of cash receipts from and payments to the public.
Page 6
The term public as used here includes individuals, com
mercial banks, Federal Reserve Banks, business firms,
private corporations, state, local, and foreign govern
ments, and international organizations.
There are several reasons why cash receipts and ex
penditures differ from budget receipts and expenditures.
One important reason is that transactions of the trust
funds, which are managed by the Government, are not
included in budget receipts and expenditures. Cash trans
actions of the trust funds must be added to get total cash
received from and paid to the public. In 1950, for ex
ample, trust fund cash receipts totaled about $4 billion
and payments about $7 billion, the latter including the
national life insurance dividend paid in that year. A
second type of adjustment must be made for transactions
among Government agencies and between these agencies
and the trust funds to get cash receipts from and pay
ments to the public. Examples of these transactions are
payments from one Government account to another, such
as interest paid to the Treasury on Government funds
invested in wholly owned Government corporations; pay-
FEDERAL CASH AND BUDGET TRANSACTIONS
(Fiscal year 1950—In billions of dollars)
Budget
accounts
37.0
Receipts ................................................
Deduct:
0.1
Intragovemmental transactions ..
(a)
Non-cash transactions..................
Income from exercise of monetary
(a)
authority....................................
.1
Total deductions..................
36.9
Cash received from public..................
Transaction
Expenditures ........................................
Deduct:
Intragovemmental transactions .
Non-cash transactions ................
Total deductions..................
Cash payments to the public..............
Trust
Total
accounts
43.7
6.7
2.6
2.6
4.0
(a)
2.8
40.9
40.2
6.9
46.6*
2.7
.6
3.3
36.8
(a)
(a)
,i
6.8
2.7
.7
3.4
43.2
Changes in cash balance and bor
rowing :
Excess of cash payments over receipts..........................................
Increase in Treasury cash balance
Net cash borrowing from the publie................................................
Total cash receipts from the public,
including net borrowing..................
Total cash payments to the public..
2.7
(a)
2.2
2.0
4.2
(40.9 + 4.2)
45.1
43.2
(a) Amounts less than $100 million.
* Includes a deduction of $483 million for checks outstanding but
not yet paid.
THE BUSINESS REVIEW
ments from the Government to the trust funds, such as
the contribution to the Civil Service Retirement Fund;
payments from the trust funds to the Government; and
payments from one trust fund to another.
Non-cash items are a third category of budget trans
actions which must be eliminated in converting to a cash
basis. For example, interest which accrues on Savings
Bonds during the fiscal year is an expense of that year
but it will not result in a cash payment until the bonds
are redeemed. Treasury securities are sometimes issued
in payment of obligations. They represent a budget ex
pense in the year they were issued but do not become a
cash expenditure until later when they are redeemed.
The Armed Forces Leave Bonds issued in 1947 and the
non-interest bearing notes issued to pay the subscription
of the United States to the International Bank for Re
construction and Development are illustrations of this
type of non-cash expenditure. Finally, expenditures bud
geted for a given year may exceed actual cash payments
because production progressed more slowly than had
been expected.
Cash receipts and payments, as estimated from the
budget and trust accounts, do not cover the entire cash
flow between the public and the Federal Government.
If the Government pays out more cash than it takes in,
the Treasury must obtain the difference either by draw
ing on its cash balance or by borrowing from the public
or both. If, on the other hand, the Treasury takes in more
than it pays out, the surplus may be permitted to increase
the cash balance or it may be used to repay some of the
Federal debt. To obtain the total flow of money from
and to the public, net cash borrowing or net repayment
of the debt must be included. The preceding table shows
in addition to Treasury cash receipts and payments, net
cash borrowing or repayment for 1950.
Net cash borrowing or net repayment of the debt is
unlikely to correspond with the actual change in Federal
debt outstanding during the fiscal year. For example,
the increase in the Federal debt during 1950 was greater
than net cash borrowing from the public, primarily be
cause accrued interest added to the total value of Savings
Bonds outstanding.
Fiscal year 1946 was a year of transition from a war to
a peacetime basis and the Treasury’s cash payments ex
ceeded receipts by nearly $18 billion. During the next
three years, fiscal policy was an anti-inflationary force
as the Treasury took in more cash than it paid out. The
cash surplus reached a peak of nearly $9 billion in 1948.
Thereafter, the excess of cash income over outgo de
clined and in 1950 there was a deficit of over $2 billion.
Revised estimates show cash income and outgo approxi
mately in balance for the current fiscal year. For 1952,
TREASURY CASH INCOME AND OUTGO
1946-1952
BILLIONS
BILLIONS
DEFICIT
CASH RECEIPTS
SURPLUS
CASH PAYMENTS
1946
1947
1948
1949
(FISCAL YEARS)
1950
however, a deficit of nearly $13 billion is estimated on
the basis of existing legislation. Unless this excess of
cash payments is made up by new taxes, as recommended
by the President, the result will be a substantial addition
to money incomes. This increase in demand coming at
a time when shortages of civilian goods are increasing
would be a strong inflationary force.
Vigorous steps to restrain demand will be necessary if
we are to hold down the inflationary pressures created by
the defense program. Defense production adds to incomes
without adding to the supply of civilian goods for these
incomes to buy. In addition, the defense program has
created an atmosphere wrhich has been conducive to bor
rowing and buying in anticipation of shortages and
higher prices. Expanding production cannot close this
inflation gap because all production generates income but
only a part of the output is available for civilian pur
chase. Balance between money and goods can be main
tained only by diverting income as well as goods to de
fense.
Taxation is the major fiscal weapon for attacking the
inflationary pressures created by the defense program.
It goes right to the source of the trouble by drawing
excess purchasing power away from civilian markets.
Page 7
THE BUSINESS REVIEW
The sale of Government securities to non-bank holders
also siphons off purchasing power; but it leaves the buy
ers with securities which can easily be converted into
cash. Borrowing, even from non-bank buyers, builds up
potential purchasing power in the form of Government
securities which may create an inflation problem later.
Tax receipts, on the other hand, cannot be used to buy
goods; neither do they represent a debt which must be
paid off later by taxation.
The real burden of the defense program is in the larger
quantity of goods and services which must be turned
over to the Government. The inevitable result is less
goods for civilians regardless of whether we turn enough
of our income over to the Government to pay for them.
The real burden cannot be postponed. There is no ques
tion but that we can afford to pay as we go, especially
for a partial mobilization effort. The new taxes do not
create the burden; they merely reflect the amount of
goods foreign aggression forces us to give up anyway.
Taxation, in addition to being a good tool for holding
down total demand, is a suitable instrument for reduc
ing the pressure in selected areas. Since consumers usu
ally take about 80 per cent of the total output of goods
and services remaining after Government purchases, taxes
must bite into the incomes of practically all consumers
to bring an effective reduction in the demand for civil
ian goods. The job cannot be done by levying more taxes
on a small proportion of the population. Excise taxes
could be used to reduce the demand for scarce goods,
helping to balance demand and supply in these areas.
Purchases of Goods and Services
The impact of the budget in real terms is best indicated
by actual Government purchases of goods and services.
The major part of the funds siphoned out of the income
stream by the Treasury is returned in payment for the
goods and services the Government needs.
The budget does not estimate total purchases of goods
and services for the fiscal year, but such purchases are
nearly always less than the Treasury’s cash outgo. In
calendar year 1950, for example, cash payments ex
ceeded $41 billion but purchases of goods and services
totaled only $25 billion. The Treasury pays out substan
tial sums which do not go directly for commodities or
services. For example, considerable cash is paid out for
a variety of social welfare activities, such as public as
sistance and grants-in-aid. These payments merely result
Page 8
in a transfer of funds from the taxpayer to those who
receive the aid. They are not a direct drain on the output
of our farms and factories as are Government purchases
of goods and services. The payment of interest on the
Federal debt, a cash payment of $4.3 billion in 1950,
and the direct lending activities of the Federal Govern
ment and Government-owned corporations are other types
of transfer payments. Treasury cash outlays must be
adjusted for transactions such as these to get an esti
mate of the amount of goods and services the Federal
Government will buy.
Estimates of Federal purchases of goods and services
in 1951 and 1952 are not yet available. However, the
major part of the increase in expenditures recommended
for 1952 is for military purposes. It will go for such
items as food, clothing, guns, tanks, planes, electronic
equipment, and pay for the services of growing numbers
in the military services. A large part of the purchases will
be channeled into the hard goods industries.
The production problem facing us is to turn out more
goods for defense, preferably by increasing total output,
but to the extent necessary by diverting manpower, plant,
and raw materials from civilian to defense production.
The Government’s financial policies can help or hinder
meeting these production goals.
There is danger, of course, that a heavy tax burden
will impair production incentives. Higher taxes tend to
reduce the net reward for production. But we must recog
nize also that other alternatives involve equal if not
greater danger of impairing work incentives. If we should
rely more on price controls and rationing and less on
taxation, money incomes would continue to rise and
workers and businessmen would accumulate large quan
tities of liquid assets, such as deposits and Savings Bonds.
Experience has demonstrated that backed-up purchasing
power which cannot be used to buy goods results in
absenteeism and other forms of reduced effort. Getting
inflation take its course also carries perhaps an even
greater threat to work incentives. Why work for dollars
that will buy constantly decreasing quantities of goods?
Fiscal policies can also help meet the production goals
by facilitating the shifting of labor, materials, and plant
from civilian to defense production. One important step
would be to reduce non-defense spending to a minimum.
This would reduce Government demand for such goods
and services and release men and material for defense
production. Moreover, cutting non-essential Government
THE BUSINESS REVIEW
spending would set an example and encourage the people
to make more sacrifices. Excise taxes which would re
duce demand for non-essential items is a second step
that would help shift production facilities from less essen
tial to more essential uses.
CONCLUSIONS
The Federal budget is necessarily a large and complicated
document. It summarizes the financial transactions of the
biggest business in the world—our Federal Government.
New authorizations and appropriations passed by Con
gress set up the amount the Government has permission
to spend; budget receipts and expenditures show income
due and expenses incurred in the fiscal year; and Treas
ury cash receipts and expenditures show the money flow
to and from the public. The budget is really our financial
program. We should study it carefully.
The financial program adopted by Congress can help
or hinder the achievement of our defense goals. Fiscal
policy is our main defense against inflation because de
fense production creates a gap between money income
and the supply of civilian goods. This gap can be closed
by a pay-as-we-go policy—by taking as much out of the
income stream via taxes as is put into it by expenditures.
In fact, a cash surplus would be better so that fiscal
policy would help check the inflation which is already
under way. To be effective in reducing the general de
mand for civilian goods, the new taxes must hit all but
the lowest income groups. The fact that price and wage
controls have recently been introduced does not diminish
the need for a vigorous use of fiscal policy to combat
inflation. Unless the inflationary pressure is removed,
it will soon break through price and wage ceilings or
spew out in such forms as black markets, poorer quality
goods, and the disappearance of low-price lines.
Production goals will be more easily achieved if the
Government’s demands for non-defense goods and serv
ices are reduced, thus freeing resources for defense pro
duction, and if the new tax program is designed so as
not to impair work incentives.
THE BUSINESS REVIEW
CURRENT TRENDS
Economic activity in the Third Federal Reserve District continued at a high pitch in December. Most business indicators
such as department stores sales, bank loans and deposits, factory payrolls, crude oil output, and check payments registered
increases for the month. The outstanding exceptions were manufacturing production, factory employment and construc
tion, which showed no change.
.
,.
. .
While manufacturing employment and production in Pennsylvania factories were steady in Decern er, t is was main^y
the result of curtailment of operations in non-durable goods plants. However, durable goods industries continued the
expansion begun last summer, with increases of 1 per cent in employment and working time, and 5 per cent in total wages,
the gains being in plants producing metals and metal products, machinery, and transportation equipment.
By rising 13 per cent from November, seasonally adjusted department store sales in December exceeded those of t e
preceding month for the first time since last July. Dollar volume for the month also was 11 per cent above that of a year
ago and total sales for the year topped those of 1949 by 6 per cent. Department store managers, with the increased sales
activity in mind, continued to maintain their inventories at levels considerably above those of a year ago Stocks of
items such as furniture, floor coverings, television sets and radios, and household appliances were substantial.
Fast rising food prices helped to push the index of consumer prices up 2 per cent during the month. While the con
sumer was paying 7 per cent more for cost-of-living items than in December of last year, the general level of all whole
sale prices had advanced to 16 per cent above that of 1949.
Business loans of reporting member banks in the Third District and in the nation as a whole continued to increase
during the first four weeks of January—a period when they usually decline. Investments dropped considerably, reflect
ing in part sales of Governments to build up reserves to meet the increase in reserve requirements.
The Nation’s money supply rose substantially in December with demand deposits climbing for the ninth consecutive
month and time deposits advancing for the first time since the Korean crisis.
Third Federal
Reserve District
Per cent change
SUMMARY
United States
Per cent change
December
1950 from
mo.
ago
year
ago
12
mos.
1950
from
year
ago
year
ago
12
mos.
1950
from
year
ago
+21
0 + 20
7
+37
+14
+ 40
+ 16
December
1950 from
mo.
ago
+4
TRADE**
Department store sales..........
Department store stocks.. ..
+13
+ 2
+13
0*
+ 11 + 6
+24
Per cent
change
Dec. 1950
from
Per cent
change
Dec. 1950
from
Per cent
change
Dec. 1950
from
Per cent
change
Dec. 1950
from
Per sent
cha nge
Dec. 1950
frc rn
mo.
ago
year
ago
+ 7 + 37
+ 8
+23
+ 7
+25
+ 30
- 4
+ 9
+12
+11
+
- 1
mo.
ago
year
ago
mo.
ago
+16
+ 6
+ 2
+ 5
+ 21
Lancaster............................
0
+ 7
mo.
ago
year
ago
year
ago
mo.
ago
year
ago
+ 3
+ 3
+ 7
+23
+ 1
+ 1
0
-
2
- 4
+10
+ 2f + 7t
+
+4
+ 3
+ 4 + 1
1
+2 + 2
+13
+
6
+14
+ It
+ 7
+24
- 4
-
8
+23
+5
+12
+4
+1
+20
+ 13
+21
+12
+11
+ 2
+1#
+ 6
+2
+ 2
+16
+ 7
+ 4
+ 13
+18
+ 8
+ 2 + 31 +33
+ 8
-22
Reading................................
-1
+ 7
- 1
+ 23 +49
+ 9
-24
+21
— 4 + 18
0
+ 14
+ 1
0
+ 10
+4
+12
+13
+17
+ 9
- 5 +
6 +
+63
-1
York......................................
+16
-1
+17
- 2
+
+ 2 +
+ 5 +
0 +
+16
-25
+i
Wilkes-Barre......................
+20
+ 1
+ 3 + 26 +55
+22
-2
2
+ 2
Philadelphia.......................
•Pennsylvania
"
7 .
. . ,.
••Adjusted for seasonal variation, fl‘niladelpnia.
Page 10
Sales
0
+ 2
+ 11* + 3*
+ 3* +28* +11*
OTHER
Check payments.... .
Output of electricity .
Payrolls
Stocks
+ 29
+16* + 6*
+37 +35
+25
EMPLOYMENT AND
INCOME
Factory employment..............
Factory wage income.............
PRICES
Wholesale. .
Consumers.
LOCAL
CONDITIONS
Check
Payments
Employ
ment
+ 14 + 126
OUTPUT
Manufacturing production. .
Construction contracts..........
Coal mining................................
BANKING
(All member banks)
Deposits..............................
Loans...................................
Investments........... . ; • • •
U. S. Govt, securities .
Other.................................
Department Store
Factory*
+ 13
-21
+16
8 +52
+ 7
-19
+26 +
3
+ 4
36
+ 11
-30
+19
+14
+35
34
32 +68
6
+ 18
+ 18
+35
*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
Dec. 1950
12 mos.
from
1950
month
ago
MANUFACTURING (l>a )
Durable goods industries
Nondurable goods industries
year
ago
()
year
ago
Pennsylvania
Manufacturing
Industries*
Indexes
(1939 avg. =100)
+16
+ 5
Foods.........
1 obacco...........
1 ex tiles..........
Apparel..............
Lumber............
Furniture.........
Paper............
Printing and publishing. .
< .hemicals..........
Petroleum and coal products
Rubber.........
...................
Leather.........
Stone, clay and glass. ..
Primary metal industries
Fabricated metal products
Machinery (except electrical)
Kleetriea 1 machinery.
T ransportation equipment
Instruments and related products
Misc. manufacturing industries
COAL MINING (3rd F. R. Hist.)*
Bituminous.........
+ 6
+ 5 .
Foods..........
+ 2
+ 1
0
+ 1
+ 10
+ 1
+24
+ 1
+ 3
+ 19
+ 2
+33
+ 7
— 1
+ 11
+31
+25
+11
- 5
+25
+ 4
CONSTRUCTION — CONTRACT
AWARDS (3rd F. R. Diet)t
Residential. .
Nonresidential. .
Public works and utilities
+ 11
+ 1
+ 6
0
+37
-20
+ 2
+68
+34
|
Dec.
1950
(In
dex)
Per cent
change
from
mo.
ago
year
ago
- 7
*U.S. Bureau of Mines.
♦♦American Petroleum Inst. Bradford field.
-V DodK« Corporation. Changes computed from
3-month moving averages, centered on 3rd month.
Lumber..........
Furniture............
Paper...................
Printing and
publishing.................
Chemicals....................
Petroleum and coal
products..............
Rubber................
Stone, clay and
glass ...................
Primary metal
industries................
Fabricated metal
products................
Machinery (except
electrical).........
Electrical
machinery.............
Transportation
equipment...............
Instruments and
related products. . .
Misc. Manufacturing
I ndustries..................
Average
Weekly
Earnings
Payrolls
Per cent
change
from
Dec.
1950
(In
dex)
mo.
ago
year
ago
Average
Hourly
Earnings
%
chg.
from
year
ago
1950
Dec.
1950
%
chg.
from
year
ago
140
0
+n
388
+ 3
+28
$62.21
+ 15
$1,524
+ 10
165
+i
+ 18
437
+ 5
+36
68.47
+15
1.639
+ 9
116
-1
+ 3
324
0
+14
53.54
+11
1.355
+ 9
129
-2
+ 2
+ 1
+ 1
303
0
— 3
— 2
170
150
152
-1
-2
0
+ 4
+ 14
+ 10
437
425
446
+
5
+ 1
+11
+ 16
+ 12
+ 13
+ 15
+ 17
+23
52.64 + 8
34.75 + 14
54.10 + 10
40.32 + 13
44.80 + 10
52.19 + 3
63.41 +12
1.275
.900
1.362
1.122
1.071
1.214
1.417
+ 8
+ 9
+ 9
+ 12
+ 7
+ 7
+ 8
121
146
+i
+i
+ 2
+ 12
308
396
+ 3
+ 2
+ 8
+26
72.09
64.69
+ 6
+ 12
1.816
1.554
+ 6
+ 9
155
244
0
+4
0
+30
409
703
245
+ 1
+ 5
1
+n
+53
+ 12
79.56 + 11
71.59 + 18
45.48 + 12
1.914
1.734
1.163
+ o
+ 12
+n
+10
+ 5
+ 5
- 1
CRUDE OIL (3rd F. R. Dist.)**___
All manufacturing. . ..
Durable goods
industries.........
Nondurable goods
industries......... .
Enlployment
1
1
143
-2
+ 12
385
- 3
+26
61.74
+13
1.547
136
+i
+20
375
+10
+42
76.95
+ 19
1.850
+ 9
180
+2
+27
486
+ 6
+ 18
62.24
+ 17
1.535
+10
+ 9
234
+1
+22
643
+ 2
+45
69.71
+ 19
1.589
265
+1
+20
593
0
+26
62.57
+ 5
1.528
+ 5
144
+2
+ i
371
+ 4
+12
72.94
+11
1.811
+ 7
179
+1
+24
499
- 4
+41
63.80
+13
1.542
+ 8
153
-1
+21
401
0
+35
53.60
+ 11
1.237
+ 8
^Production workers only.
TRADE
Per cent change
Third F. R. District
Iudexes: 1935-39 Avg. =100
Adjusted for seasonal variation
Dec.
1950
Dec. 19 >0 from
(Index)
month
year
ago
ago
SALES
Department stores . . .
Women’s apparel stores. .
Furniture stores..........
.307
253
+ 13
+11
+40*
+ii
+ 10
+ 1*
STOCKS
Department, stores . . .
Women’s apparel stores..............
Furniture stores. . .
2881*
240
+ 2
+ 2
- 8*
12 mos.
1950
from
year
ago
+24
+ 13
+37*
ended
ended
ended
ended
Third F. R. District
January 6
January 13. . .
January 20
January 27. .
ago
+6
-5
+5*
Per
cent
change
from
year
ago
+33
+26
+25
+29
e-preliminary.
Stocks (end of month)
% chg. %chg.
12 mos.
Dec.
1950
1950
from
from
year
ago
ago
Ratio to sales
(months’
supply)
December
+ 4
+ 1
+ 5
+14
- 1
Basement store total. . .
Domestics and blankets___
Small wares.........
Women s and misses’ wear. .
Men s and boys’ wear. . .
Housefurnishings
Shoes..............
+ 1
0
19.50
1949
+23
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.
Nonmerchandise total. .
* Not, adjusted for seasonal variations.
Sales
% chg
Dec.
1950
from
Total — All departments..........
Recent Changes in Department Store Sales
in Central Philadelphia
Week
Week
Week
Week
Departmental Sales and Stocks of
/ ndependeni Department Stores
1.5
1.3
+23
+29
+ 13
+16
+12
+17
+37
+ 14
1.6
3.3
1.3
1.4
1.2
2.9
0.6
1.4
2.8
1.2
1.1
1.3
1.1
2.2
0.5
+21
+47
+21
+ 9
+27
+33
+12
1.1
2.4
0.7
0.8
0.9
1.9
1.5
0.9
2.0
0.6
0.8
0.8
1.3
1.4
+ 2
Page 11
THE BUSINESS REVIEW
BANKING
CONSUMER CREDIT
Receiv
ables
(end of
month)
MONEY SUPPLY AND RELATED ITEMS
Dec. 27
1950
Changes in—
Third F. R. District
Department stores
+ 5
+ 7
- 7
................ .. '
4 ,
0
l i
+1
+12
+12
Furniture stores
+ 10
+ 13
- 4
0
+ 14
+ «
Loan Credit
Third F. R. District
Loan
bal
ances
out
standing
(end of
month)
% dig. % chg. % chg.
Dec.
Dec. 12 mos.
1950
1950
1950
from
from
from
year ago yearago yearago
Consumer instalment loans
-13
- 6
-41
+22
-1.9*
+14.5*
+2.0
+ 7.4
+1.2
+ .6
+ .2
+ 9.9
— 4.6
+ 2.1
+ .4
+
+ .3
+ .1
+ 1.0
- .1
+ 14
Required reserves (estimated)...............................................
Loans made
+ 7.5
+ -4
- .4
16.4
.8
.
+2.6
+ .4
+ .1
127.5
•
+ 7.4
20.5*
j
+3.1
93.2
59.0
25.0
~
year
177.2
52.8
62.4
12.3
% chg. % chg. % chg.
Dec.
Dec.
2 mos.
1950
1950
1950
from
from
from
yearago yearago year ago
United States (Billions $)
four
weeks
17.2
Sales
+43
+ 5
-38
+26
9
Changes in reserves during 4 weeks ended December 27
reflected the following:
Effect on
(Billions $)
reserves
Increase in Reserve Bank holdings of Governments. .
Increase in loans to member banks..................................
Other Federal Reserve Bank credit.................................
Increase of money in circulation.......................................
Gold and foreign transactions............................................
Net payments to the Treasury..........................................
Changes in reserves........................................................
+ 3
+ 10
+ 9
+32
+.8
+
“
+
* Annual rate for the month and per cent changes from month and year ago
at leading cities outside N. Y. City.
PRICES
Changes in—
OTHER BANKING DATA
1951
Per cent change
from
Dec.
1950
(Index) month |
Index: 1935-39 average =100
year
ago
217
247
226
205
+2
+2
+2
+2
+16
+21
+ 15
+ 15
178
178
211
194
149
218
160
Consumer prices
+2
+2
+3
+1
+1
+2
+3
+ 7
+ 7
+ 9
+ 5
+ 2
+ 14
+ 5
Ijoans—
,
.
.
i
Commercial, industrial and agricultural.
Security.................................................................
Real estate...........................................................
To banks..............................................................
All other.............................................................
18.0
2.3
53
Total loans—gross.........
Investments........................
Deposits................................
31.9
| Week ended January 30...............................
Source: U.S. Bureau of Labor Statistics.
Page 12
A11 com
modi
ties
Farm
prod
ucts
Foods
Other
219
221
222
223
224
249
253
252
258
259
230
231
230
232
234
206
207
208
208
209
+ -2
- .2
+ 4.1
+ -4
+ .9
.1
+ 1.5
5.9
79.8
- 1
- 1.3
- .9
+ 6.9
- 4.3
+ 3.1
664
44
144
16
376
+ 16
- 2
- 1
- 5
- 5
+ 192
+ 12
+ 37
+ 9
+ 61
. 1,244
. 1,614
. 3,199
+ 3
-133
-109
+311
-243
+ 104
Member bank reserves and related items
United States (billions $):
Member bank reserves held............................
Reserve Bank holdings of Governments. .
Gold stock..............................................................
Money in circulation..........................................
Treasury dejiosits at Reserve Banks...........
.
.
.
.
.
18.3
20.5
22.4
27.0
.3
+
+
-
i.i
.2
.4
.9
.5
+ 1.8
+ 2.8
- 2.0
+ .i
- .3
Federal Reserve Bank of Phila. (millions $):
Loans and securities...........................................
Federal Reserve notes........... ...........................
Member bank reserve deposits......................
Gold certificate reserves...................................
Reserve ratio (%)...............................................
. 1.300
. 1,629
. 861
. 1,242
. 48.6%
+
+
+
+m
61
+ 33
55
+ 92
74
- 36
35
1.9% - 3.1%
Third Federal Reserve District (millions $):
Loans—
...
«
Commercial, industrial and agricultural...
Security.....................................................................
Real estate..............................................................
To banks...................................................................
All other..................................................................
Total loans—gross.
Investments...............
Deposits.......................
Weekly Wholesale Prices U.S.
(Index: 1935-39 average =100)
year
Weekly reporting banks—leading cities
United States (billions $):
ago
Foods.........................................................................................
four
weeks
.
.
.
@FedFRASER