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THE BUSINESS REVIEW ^aasnfei: FEDERAL RESERVE BANK OF PHILADELPHIA JUNE, 1948 PROGRESS REPORT ON EUROPE Europe’s economy is convalescing. The rate of progress and the level of ultimate recovery depend on two things: the ability of the patient to help himself, and the aid he receives. The European Recovery Program embraces both lines of treatment. A piecemeal approach to Western Europe’s difficulties will not do. The roots of the problems spread out in many directions and run deep beneath the surface. Lack of energy, low production, dislocated trade relations, and financial disequilib rium are all related. Poor industrial production hinders farm output, lack of food keeps productivity low, low productivity restricts manufacturing output, thereby cur tailing exports and aggravating inflation, which in turn destroys incentives and dis rupts business organisation.. Without substantial aid from the outside to break through this vicious tangle of cause and effect, Europe’s recovery would be exceed ingly slow and painful. The United States has undertaken to provide such aid., Its effective adminis tration requires constant watching and reappraisal in order to assure its most efficient use and a minimum disturbance to our own economy. The following articles are in the nature of a progress report. The first indicates that a good start has been made toward the recovery of production and trade. ERP will provide continuing support according to an integrated plan. ERP assistance is no greater than other aid we have extended in the recent past but, as the second ar ticle points out, its cost to the United States must be measured not only in goods, but also in terms of its inflationary effect upon our economy. ERP is a calculated risk. It has been undertaken in the belief that its benefits will outweigh the costs. - I. Production and Trade What Europe needs most is energy. Energy in the form of food for her people. Energy in the form of fuel for her industries. Energy in the form of fertilizer for her soil. It is not so much the lack of energy resources that is retarding re covery in Europe, as the insufficient utilization of her energy potential. Europe’s productive ca pacity is at its best when all the nations of the world freely exchange with each other the spe cialized products which each can produce most advantageously. Europe, and particularly West ern Europe, is a heavily-populated and highlyindustrialized area whose people can live only by importing raw materials from all over the world to be manufactured into goods and services for export. The very life of the people of Western Europe rests upon international trade — trade with each other and trade with overseas nations. In 1938 this area, with less than 10 per cent of the world’s population, had nearly one-half of the world’s international trade, owned nearly twothirds of the world’s shipping tonnage, and de rived an income from foreign investments and invisible exports sufficient to provide nearly onequarter of the imports needed by industrial plants and the food required to sustain its population. But the picture is different now. The mutual cooperation so vital to the welbeing of European nations began to disintegrate long before the second world war because of poli cies based upon the idea of economic nationalism, that nations can live alone. The devastation of World War II—displaced people, property de struction, lost markets, shortages of raw material supplies, financial disequilibrium, and especially inflation—multiplied the difficulties of restoring the international cooperation which economic interdependence makes an essential condition of European prosperity. Instead of consolidating their strength, the nations of Europe have drifted still further apart since the end of war. Bulgaria, Czechoslovakia, Finland, Hungary, Poland, Rumania, and Yugo slavia have fallen under Russian influence, with the result that the predominantly agricultural resources of this area are largely shut off from Western European countries. Futhermore, Ger many—one of the Continent’s most highly in dustrialized countries—is split, with one part under the administration of Eastern European Note: Much of the material in this and the following section was drawn from “A Survey of the Economic Situation and Prospects of Europe” published by the United Nations Economic and Social Council. Page 60 interests and the other under the control of the West. Partition of Europe is especially unfortu nate at a time when recovery demands union. Since the end of the war, greater progress to ward recovery in Europe has been made in in dustry than in agriculture, and those industries producing capital goods have recovered more rapidly than the industries producing consumer goods. Transportation is considerably above pre war levels; trade is still substantially below. In most countries, except Germany and Italy, the labor force is more fully employed than before the war, but productivity is generally low. The problems that beset the European nations are interrelated. They cannot be solved one by one. Lack of trade hinders production; but the reverse is also true. Poor industrial production hinders farm output, lack of food keeps worker productivity low, low productivity hampers pro duction. For a while it seemed that Europe was caught in a downward spiral of mutually depend ent causes and effects. With outside aid and coordinated internal effort, the trend is being reversed. Progress in Production Despite the many obstacles in their way, most European countries have made unexpected pro gress in industrial output since the end of the war. The fifteen countries, shown in the chart which accounted for over three-quarters of the pre-war industrial output of Europe, exclusive of the U.S.S.R., raised total physical production from 60 per cent of the pre-war level in the latter half of 1945 to 83 per cent in the fourth quarter of 1946. Progress was irregular in 1947, due in part to an unusually severe winter in 1946 1947 and subnormal rainfall in the following spring which seriously curtailed the output of agricultural raw materials. Industrial recovery in the various countries was quite unequal both in rate of progress and in the respective levels from which they started. The greatest recovery has been made by the United Kindgom, Ireland, and Sweden. Industrial out put in these countries was considerably above the pre-war level by the end of 1946. Another group of countries, consisting of Belgium, Bul garia, Czechoslovakia, Denmark, France, Nor way, and Poland, likewise succeeded in raising * Man-power Problems INDUSTRIAL OUTPUT BY GROUPS OF COUNTRIES (THIS IS A SEMI-LOGARITHMIC CHART WHICH FACILITATES COMPARISON OF RATES OF GROWTH) 1938=100 ____ ^ / A= IRELAND, SWEDEN, / UNITED KINGDOM. / B= BELGIUM, BULGARIA, V \ / CZECHOSLOVAKIA, \/ DENMARK, FRANCE, V NORWAY, POLAND. C*F INLAND, GREECE, ITALY, NETHERLANDS D“WESTERN GERMANY _________1_________ 1_________ 1_________ ________ 1_________ 1_________ 1_________ 1946 1947 SOURCE- UNITED NATIONS ECONOMIC AND SOCIAL COUNCIL. their industrial production above their pre-war output by the second quarter of 1947 and after a brief set-back they made further gains. Fin land, Greece, Italy, and The Netherlands are representative of countries that have not attained pre-war output but have stepped up their produc tion to a point almost double the low level from which they started after the war. The least progress has been made by Western Germany, whose industrial production is still less than half the pre-war output. This is all the more serious in view of the fact that the western portion of pre-war Germany accounted for about one-fifth of the industrial production of Western Europe. Industries manufacturing capital goods have made faster progress than the consumer goods industries during the first two post-war years. Better than pre-war rates of production have been attained by the steel, chemical, and machin ery industries of Western Europe, excluding Ger many. Output of consumer goods, such as tex tiles, however, is still below pre-war levels. Lag ging output of consumer goods imposes many hardships and fosters “black market” trade, which is especially serious in Germany where it adds to the disorganization of the productive sys tem. The inadequacy of industrial manpower is one of the deterrents to production. The popula tion of the Marshall Plan nations of Western Europe increased by about 10 per cent during the war to approximately 270 million, and the pro portion of the population of working age has not changed materially; but several millions of skilled workers never returned from the war and the efficiency of urban workers is low because of under-nourishment. An acute situation is illus trated by Germany’s plight. The United States and British zones produce food equivalent to 975 calories per person daily—less than two-thirds the present basic consumer ration of 1,550 calor ies. The gravity of this situation is apparent in view of the fact that about 2,500 calories a day is considered the minimum for a healthful diet and more is required for coal miners and other in dustrial workers engaged in similarly “heavy” occupations. Compared with the pre-war years, there is a considerable increase in employment in the ser vice industries, especially in commerce and public administration. There has also been some shift from the “heavy” to the “light” occupations. The principal man-power problem, however, is to supply enough food to improve health and effi ciency of workers. And food must come from Europe’s tired soil. Progress in Agriculture Progress toward recovery in European agricul ture has been disappointing. In more than a score of European countries, which together ac counted for 90 per cent of Europe’s pre-war agri cultural output, exclusive of the U.S.S.R., 1947 agricultural production was only about threequarters of pre-war levels. The relatively poor showing in agriculture is accounted for by unusu ally bad weather, insufficient fertilizer, scarcity of farm labor, worn-out equipment, and some re- * duction in livestock numbers. Farm output is particularly low in Hungary, Poland, Rumania, and Yugoslavia—the nations which have been the historic food surplus areas. In the 1946-1947 crop year, output in these countries was less than 60 per cent of pre-war. Production of wheat and other bread grains generally fell less than 20 per cent throughout Europe, but with more people to feed, rations have had to be reduced—in some countries they had to be cut seriously. Production of animal products, such as meat, lard, milk, butter, and eggs, is far below pre-war levels and below minimum requirements of the Page 61 population. When total food output is low, wheat and other bread grains are in especially great demand for human consumption. Little is left for animals. Moreover, productivity of existing dairy herds is low because of the scarcity of animal feed crops. Tobacco is about the only major agricultural product whose production is up to pre-war standards. EUROPEAN INDUSTRIAL PRODUCTION AND EXPORTS INDEX (EXCLUDING GERMANY AND U.S.S.R.) PRODUCTION Progress in Transport Transportation facilities and railway trans portation in particular have made an unusually rapid—if precarious—recovery. In the third quar ter of 1947, railway traffic was 25 per cent above pre-war volume. Traffic on inland waterways, such as the Rhine and the Danube, has not made comparable progress; in fact, the good showing of railway transportation may be due in part to the shifting of some traffic from water to rail transportation. Despite the impressive perform ance of the railways, many facilities, such as freight cars and locomotives, have been kept in service only by repeated repairs. Substantial losses in rolling stock were suffered during the war, and scarcity of steel and timber has hamp ered replacement. EXPORTS 1946 _____________ SOURCE: UNITED NATIONS ECONOMIC AND Progress in International Trade The gravity of post-war readjustments in Eu rope is clearly revealed by changes in the volume, direction, and composition of international trade. As the chart shows, the war curtailed exports even more sharply than production. Although export volume appears to have gained somewhat more rapidly than industrial production since the end of the war, little progress in one of these key factors can be made at this time without cor responding gains in the other. Dollar-wise, international trade, both within Europe and with non-European countries, was higher in the post-war period than before the war, but this was due primarily to wartime infla tion from which virtually none of the countries escaped. In terms of 1938 prices, it is perfectly clear that (1) Europe’s total trade in 1947 was well below that of 1938; (2) exports of goods and services were relatively much lower than im ports; (3) trade with non-European countries was at a relatively higher level than intraEuropean trade—exports were more than threefourths of the 1938 value and imports were somewhat larger than in 1938. The extent of trade recovery from pre-war levels differs very greatly from one country to Page 62 1947 SOCIAL COUNCIL.__________ another. According to figures for the first nine months of 1947, in terms of real goods and ser vices, the United Kingdom and Switzerland were the only countries whose exports were above those of 1938. By heroic efforts, the United King dom succeeded in attaining the most favorable relationship of exports to imports. Most of the nations which have relatively low post-war im ports are in Eastern Europe. Germany’s post war trade virtually collapsed. Her imports were only 18 per cent and her exports only 9 per cent of pre-war levels. The German trade collapse exerted an especially depressing influence upon all European trade. The origin and destination of European trade have changed materially during the post-war re construction period. The trade of European countries with each other has declined. IntraEuropean exports of commodities have decreased from 65 per cent of total exports in the pre-war period to 57 per cent in 1947, and intra-European imports of commodities have declined from 55 per cent of total imports to 39 per cent. Ger many is, of course, the major area of contrac tion. The role of the United Kingdom has changed from that of net importer to that of an exporter to other European countries. Great changes have also taken place in the physical volume of Europe’s overseas trade. Ex ports have shrunk and imports have increased. The marked contraction in Europe’s overseas exports is due in large part to the virtual elimina tion of Germany as a supplier. Because Europe’s overseas exports are very much reduced, the United Kingdom accounted for about 45 per cent of total European overseas exports in 1947, as a result of her strenuous efforts to restore her foreign trade. Exports of European goods and services to the United States have declined sharply, but European imports from the United States are about twice as large as in 1938. The low level of production in European countries and booming output in the United States are reflected in the volume of trade of these two areas. Since Western Europe has long been a highly industrialized area pre-war imports consisted largely of food for her people and raw materials for her industries. Exports consisted chiefly of manufactured goods. The basic composition of Western Europe’s trade was much the same as this during 1947; nevertheless, it is significent that food was not quite so important a part of total imports, and that the relative importance of manufactured imports was doubled. Bread grains have replaced many of the more expensive food imports. These changes are symptomatic of the great effort that is being made to put in dustry back on its feet, even at the expense of a poorer diet. To what extent that effort has been successful may be measured by exports. Western Europe’s shipments to outside nations were one-fourth be low the 1938 total last year, but manufactured goods — which ultimately constitute Europe’s buying power—had evidently made a much better recovery than other products. Exports of ma chinery are close to pre-war levels, despite Ger many’s disappearance as a supplier. Germany’s pre-war machinery markets are now being sup plied by England and Switzerland. Trade among the European nations themselves has been sharply reduced, notably in raw mater ials such as coal and timber and in semi-manu factured products, particularly iron and steel. An important factor here, of course, is Germany’s low level of production in steel products. Germany: the Weakest Link It is quite apparent that European recovery has been seriously retarded by the economic par alysis of Germany. Pre-war Germany had 69 million highly industrious people, occupying 181, 000 square miles in the heart of Europe. The importance of the three Western zones in the in dustrial structure of Western Europe is indicated by the fact that in 1938 they produced about onethird of the coal, about two-fifths of the basic steel, and about one-fifth of the total industrial production of that area. Germany supplied other European countries with substantial quantities of manufactured products from her steel, chemical, and machinery industries. Never producing more than 80 per cent of her own food supplies, she made up the deficit by exporting manufactured products in the production of which she excelled by reason of her rich coal deposits, skilled labor, and scientific knowledge. As a result of the war, Germany lost 24 per cent of her territory, chiefly agricultural land and the industrial area of Silesia, and 2 million able bodied men from her labor force. Political ad ministration is complicated by the occupation of four powers supervising demilitarization and remobilization of industrial resources toward peaceful pursuits. In Germany today, produc tion of coal, so important to the economy of Western Europe, has been restored to about 55 per cent of the pre-war level; but production of steel, of equal importance to the restoration of Germany and of Europe, was only one-sixth of the pre-war tonnage in 1947. As a result of the extremely low level of output, foreign trade has almost disappeared. Need for Continued Assistance of the United States Such recovery as Western Europe has already made was not accomplished without generous assistance from the United States. Between July 1, 1945 and December 31, 1947, the United States made available $11.7 billion of aid, consisting of grants, loans, and property credits. By the end of that period about 84 per cent of the amount made available had already been utilized. While this amount may seem generous, it represents a smaller amount of goods than it had been in tended to send. Increasing prices during the per iod reduced the buying power of the dollars that were made available. By mid-1947 it became in creasingly clear that Western Europe needed still more help in order to break out of the vicious circle of mutually aggravating problems, and put her economy on a self-supporting basis. In response to Secretary Marshall’s request of the Western European countries to budget their minimum recovery requirements, sixteen West ern European countries met in Paris and pre pared a specific list of most urgently needed ma terials. For the sixteen cooperating countries Page 63 and Western Germany, recovery requirements were scheduled on an annual basis through 1951. The entire program contemplates raising output of European agricultural products by 1951-1952 to a level a little below that prevailing in the pre war period, but the sights for output of industrial products have been raised substantially above pre-war levels. The goal for coal output has been set at 6 per cent above pre-war levels, crude steel at 15 per cent above, and electric generat ing capacity at 68 per cent in excess of pre-war output. The entire program calls for a large amount of assistance from Western Hemisphere countries, and in particular from the United States. On this side of the Atlantic, the schedule was carefully screened, pared, and evaluated in terms of its impact on our economy and its drain on our resources. On April 3, 1948, President Tru man signed the Foreign Assistance Act of 1948, which authorized the expenditure of $5.3 billion for European recovery during the first year, to gether with $275 million for Greek-Turkish mili tary aid, and $463 million for economic and mili tary aid to China. This sum is roughly onethird of the amount estimated to be required for European recovery through June 1952. II. Finance and Inflation The basic international economic problem has always been essentially a physical one—that of exchanging goods and services. If financial prob lems ever obscured this fact, they certainly do not now. It has become painfully clear to all countries, and particularly those devastated by the war, that their basic difficulty today is a shortage of goods and services. The so-called dollar shortage is merely a reflection of the tre mendous foreign demand for United States goods —goods which must be paid for in dollars. Yet, financial considerations are very import ant, for they can greatly facilitate or greatly hinder the solution of the physical problems. It is extremely significant, for example, that world wide inflation has shown once again how serious the consequences of an excessive money supply can be. International finance is simply the process of paying for goods and services exchanged among countries. Basically, international trade is an exchange of goods for goods; foreign exchange serves merely as a convenient means of actual payment. As in domestic trade, deposit balances are built up through the sale of goods and serv ices and by borrowing. For example, foreigners build up dollar balances when they export goods and services to the United States. They draw down these dollar balances as they purchase our goods and services. If foreigners buy more goods here than they sell, they must in some way ob tain enough dollars to pay the difference. Bor rowing is one method of building up dollar bal ances in this country. Another is through a fav orable trade balance with a third country which, in turn, has available dollar balances. Dollars may be acquired also by selling gold to the United States. Page 64 This is the problem confronting Europe. Its exports have been held down for a number of reasons: (1) production is at relatively low levels, mainly because of war devastation and inflation; (2) most of its productive facilities must be used to sustain the home population; and (3) receipts from investments, shipping, travel expenditures, and other services no longer offset a surplus of goods imported over goods exported. At the same time, Europe has imported more in order to restore production and to make up for the grave deficiencies in the standards of living of its people. Europe’s physical problem is that of reducing this deficit by importing less and exporting more. Yet, without raw materials, plant, and equipment, it can not increase production sufficiently to do either. Thus, imports must remain large for some time. What are the alternatives? Exports cannot be increased sufficiently to balance the necessary imports. Imports could be reduced— by controls, by drastically lowering the price levels of European countries, or by revaluing their currencies—to balance exports. But this would mean throwing those countries nearly en tirely on their own resources. It would mean reducing living standards which, in many cases, are already at a minimum subsistence level, and would delay for many years the recovery of Eur ope to its pre-war status. Europe must continue to import substantially more than she exports if recovery is to be achieved in any reasonable length of time. The deficit, then, will continue. The financial prob lem is how to pay for it. Since the United States is the only major nation able to supply Europe with the necessary goods, it shares with the European countries the problem of financing the deficit. The dollar is the currency most in de mand. What are the alternative methods of sup plying dollars? Post-war Financial Aid Foreign countries own a considerable amount of gold, bank deposits in this country, and other assets which conceivably they could use to pay for their imports. In 1946 and 1947 they re duced their gold and dollar holdings and liquid ated other assets to the extent of $6.7 billion, thus financing 27 per cent of the deficit in 1946 and 40 per cent in 1947. This method has been virtu ally exhausted. For although these total hold ings may still seem fairly large, they are not dis tributed among the countries according to needs. A sizable part represents reserves held against the money supply to meet legal requirements and to help assure confidence in the currency, and part must be maintained as working balances for a large volume of international transactions at higher prices. FINANCING UNITED STATES FOREIGN TRADE Millions $ Exports of goods and services . Imports of goods and services. . . Surplus ..................................... Method of financing: U. S. loans and investments. . . . Liquidation of long-and short term foreign assets (including gold) .............................................. Gifts and other unilateral transfers ................................................ Liquidation of dollar assets by Monetary Fund ......................... Loans by the International Bank Total ......................................... Percent distribution 1946 1947 1946 1947 15,300 7,100 19,603 8,327 — — 8,200 11,276 — — 3,000 4,655 36% 41% 2,200 4,494 27 40 3,100 2,448 38 22 — 464 297 _ . —- 4 3 11,276 100% 100% — 8,200 Note: Columns will not add to totals because of unavoidable errors and omissions in published data. Source: U. S. Department of Commerce. Foreign countries have borrowed extensively to help fill the gap between their imports and exports. Borrowing of one sort or another from the United States financed 36 per cent of the 1946 deficit and 41 per cent of the 1947 deficit with us. Although lend-lease credits gradually declined throughout 1946, substantial credits were received on sales of surplus property. Loans made by the Export-Import Bank also rose sub stantially during 1946. The British loan of $3-3/4 billion was authorized in the middle of the year. During 1947 these sources of borrowing had been practically exhausted. The surplus property pro gram had been virtually completed, the British loan had been used up, credits of the ExportImport Bank declined. Several countries made use of the facilities of the International Bank for Reconstruction and Development and the In ternational Monetary Fund, but only limited as sistance could come from these institutions. The Bank can make only higher-quality loans for specific purposes, and the Fund was organized primarily to assist in overcoming temporary bal ance of payment difficulties and to help main tain more stable foreign exchange rates. Some countries obtained funds from private investors by floating securities in this country, but the risk involved and the terms required by the borrowers are such that only a very limited amount of private credit is available. The remainder of the deficit—38 per cent in 1946 and 22 per cent in 1947—was financed by gifts and other unilateral transfers. Lend-lease was rapidly being terminated but was followed by UNRRA. As shipments under UNRRA virtually ceased there was a considerable increase in con tributions under the United States Foreign Relief Program. Civilian supplies for occupied coun tries continued to be furnished, and substantial private payments and contributions were made. However, these were essentially temporary relief measures, and what was needed was a form of financial assistance directed to promoting re covery. The European Recovery Program goes straight to the heart of the problem. About half of the post-war deficit of all foreign countries with this country has been accounted for by the ERP countries, and most of this country’s foreign aid has gone to them. The total amount of aid involv ed in the ERP is substantially equal to what the United States has been doing in the recent past. Of the $5.3 billion authorized for the first year, approximately one-fourth was originally schedu led to go to the United Kingdom and its de pendencies, somewhat less to France and its dependencies, one-sixth to the “Benelux” coun tries and their dependencies, and approximately one-eighth to Italy. The form of aid to be given—whether as loans or grants—will depend basically on the capacity of the recipient country to repay and will also depend on the types of goods the European coun tries need. Generally speaking, consumer goods and certain raw materials will take the form of grants, and capital equipment and certain other raw materials will be financed by loans. Inflationary Effects of ERP The methods by which the United States raises the funds to finance the program will have an im portant influence on the level of prices in this Page 65 country. ERP gives to the participating Euro pean countries the ability to demand goods in the United States. If, therefore, the Treasury obtains sufficient funds for the program by taxa tion or the sale of securities to nonbank inves tors, demand for United States goods is merely transferred from citizens of this country to for eign purchasers. But if the Treasury should ob tain the funds by borrowing from the banking system, the money supply would be increased, and foreigners would be given power to purchase our goods, without any diminution of our own de mand. If foreign countries used their gold and dollar holdings to buy American goods, the result would be the same. Both methods would tend to force prices up in this country. It now appears, however, that the $5.3 billion of financial aid authorized by the United States in the next year will be financed out of tax receipts. The principal direct effect will be diversion of demand from our taxpayers to foreign buyers. It may also direct a larger por tion of this demand toward goods which are al ready in short supply. But this is not the whole story. The program will mean a substantial re duction in the cash surplus available to the Treasury for debt retirement, and this has been our most potent weapon for combating inflation. Need for Currency Stabilization Inflation in varying degrees has been one of the heritages of war in practically all of the European countries. Efforts to combat inflation have met with varying degrees of success, but in many countries inflation, or the threat of it, continues as a major obstacle to economic recovery. Inflation, whether of the suppressed or open variety, has seriously diminished the effectiveness of recovery efforts. Under suppressed inflation, controls have limited expenditure and resulted in the building up of liquid assets. But the posses sion of money has lost some of its importance because of the limited ability to exchange it for scarce goods. The incentive to work is therefore diminished. Where controls are ineffective “black markets” flourish, parasitic activities multiply, and, in extreme inflation, goods and foreign ex change are hoarded and monetary transactions are largely displaced by barter. Firms producing barterable consumers’ goods can bid raw mater ials away from companies supplying products more urgently needed for reconstruction. In countries where there is open inflation, prices have soared to fill the gap between money in comes which are excessive in relation to the available supply of goods. Money continues to afford an incentive for work, except in extreme inflation, but real income tends to be redistributed in favor of profits and at the expense of wages, salaries, and other relatively fixed incomes. The rise in profits tends to divert resources toward the production of luxury goods and away from re construction and more essential consumers’ goods. The squeeze on labor incomes causes laborers to demand higher wages, which in turn may lead to higher prices and further inflation. These are all factors operating on the side of demand for our goods. The program will have little effect on the total supply of our goods but will, of course, divert more of it from domestic to foreign use. This diversion, however, does not enhance the inflationary effect because any pur chaser, whether foreign or domestic, takes goods out of the market and reduces the supply avail able to others. The value of goods to be provided constitutes a very small portion of our total out put, but in many cases they are goods already in short supply and the prices of which have a Inflation, then, regardless of the type, has strong influence on our general price level. tended to divert production from more urgently needed goods into less essential channels. It has On balance, then, the impact of ERP on this encouraged wasteful types of economic activity country is apt to be inflationary, but probably and inefficient methods of production, and has no more so than the aid already given. The effect weakened the incentive to work. Moreover, the on the participating European countries, on the currencies of most of the countries are over other hand, will be deflationary. The recovery valued in relation to foreign currencies, especially program should tend to decrease the ratio of in terms of the dollar. The relatively low price their money supply to available goods. The im of foreign currencies stimulates imports but mediate effect is to increase the supply of goods makes it more difficult to expand exports. On without generating a corresponding increase in balance, these terms of trade are probably favor incomes and the money supply. Furthermore, able in the early stages of recovery for those the deflationary impact may be enhanced to the countries in urgent need of essential imports. extent that the provision which permits the ECA However, some revision of the foreign value administrator to require the deposit of local of their currencies more in line with their pur currencies commensurate with the grants-in- chasing power will be an essential step in ex aid received results in such local funds being panding exports to meet the deficit in their withheld from use. balance of payments on trade account. Page 66 In order that monetary stability may be rees tablished it will be necessary to remove the basic causes of the inflationary pressures. In general, these are an excess of public expenditures over receipts, and a higher level of private investment than can be supported out of savings. In coun tries with severe inflation, the problem is intensi fied by the hoarding of commodities and foreign exchange. Thus, effecting a balanced budget and an increase in saving—perhaps even some form of enforced saving in some countries—are es sential steps to currency stabilization. Solving the Dollar Shortage The accompanying chart shows the dollars used by foreigners to buy United States exports, the dollars supplied through imports, and the deficit of foreign countries in their balance of payments on trade account with the United States. The deficit was especially large during the two war periods when the United States was sending large amounts of war supplies to its allies. During the period 1914-1947, imports supplied about 62 per cent of the dollars foreigners needed to pay for United States exports. Over $25 bill ion was made available by loans and investments abroad (net outflow of short-and long-term cap ital) and about $55 billion, mostly in World War II, was supplied through lend-lease, relief, and other forms of financial aid. Foreigners secured approximately $18 billion from net sales of gold to the United States. A shortage of dollars is not a new problem. For several decades the United States has sold more goods and services abroad than it has pur chased from foreign countries. This means that foreign countries have long been in the position of having to find ways of financing their trade Why this persistent shortage of dollar ex deficit with the United States. In other words, change? It reflects two things. Dollars now are the United States has not been supplying enough made to appear scarce, in part, because prices dollars by its imports to enable foreign purchas of the dollar are low in terms of foreign curren ers to pay for exports. The balance has been cies. If rates of foreign exchange were free to supplied by loans, by unilateral transfers (those move in accordance with changes in demand and not requiring repayment), and by an inflow of supply, a rising price of dollars in terms of fore gold. ign currencies would ration out the available OUR EXPORT SURPLUS... ...AND HOW IT WAS FINANCED BILLIONS ( BILLIONS S NET OUTFLOW OF GIFTS AND OTHER TRANSFERS U. S. EXPORTS NET CAPITAL OUTFLOW NET CAPITAL INFLOW. NET GOLD ( INFLOW A NET GOLD OUTFLOW —^ I ' ' " ' I ' ‘ '20 '25 ' I ' '30 SOURCE U S. DEIWRTMENT OF ‘ ' I ' ' ‘ 1 I ' ' 1 ' '35 'AO COMMERCE I '45 i 1 1 1 1 r ^ PRIOR TO 1923, SHORT-TERM CAPITAL MOVEMENTS EXCLUDED Page 67 supply of dollars to the highest bidders. The al ternative—the one chosen—is to peg rates of exchange and ration out the scarce dollars for only the most essential imports. However, the mere persistence of the dollar shortage indicates a more basic and deep-rooted cause. Prior to World War I, the United States had been a debtor nation for many years. It had to export enough goods and services not only to pay for its imports, but also to meet interest and principal payments on its foreign debts. Since World War I, as previously shown, the United States has become a creditor nation. It has been exporting goods to meet the demand coming from dollars supplied by imports plus the dollars sup plied by new loans and investments abroad. As long as new loans and investments exceed the returning interest and principal payments which are building up, United States exports will tend to exceed imports. The causes of the apparent shortage of dollars indicate possible approaches to a solution. One would be to free foreign exchange rates and per mit the price of dollar exchange to rise until de mand would be reduced to the available supply. This would practically throw these countries back on their own resources because the high price of dollars would nearly shut off imports from the United States, and without imports they could produce very little for export even though the dollar proceeds would be high. A more promising and humanitarian approach is to provide financial assistance in supplying the participating countries with materials and equip ment essential for their economic recovery. It must be recognized, however, that this is only a temporary remedy. A real solution requires that these countries expand their exports sufficiently to pay for their imports and to meet the pay ments on their foreign indebtedness. This will require not only a substantial increase in pro duction and currency stabilization, but also the removal of controls and opening of international trade channels. Debtor countries must expand their exports to the creditors if international debts are to be serviced and loans repaid. This means that the United States, as the world’s greatest creditor nation, must adopt a foreign trade policy consistent with its creditor status. It must be willing to import more than it exports, otherwise its foreign loans never will be serviced or repaid. III. ERP: A Joint Responsibility solution to the balance of payments of the par ticipating countries. The European Recovery Program is an un precedented gesture of good will on the part of the United States toward poverty-stricken Eur ope. Although the risks have been weighed care fully, we know very well that many are incalcul able. They embrace such unknowns as possibil ities of crop failures, political friction, and social unrest. We shall encounter political opposition from Eastern Europe. Further delays, disturb ances, and imbalance in Western Europe are in evitable. The chances that all will go well are nil. That is why it is important to survey and rechart the course as conditions may require. The success of the program will require the sincere, whole-hearted cooperation of the par ticipating countries to put through the necessary reforms and to put forth all of their efforts to increase production. More than this, the United States must be willing to accept the responsibility that goes with its creditor status. The number of dollars the United States supplies through its imports will determine largely whether our for eign loans turn out to be loans or donations. The fundamental objective of ERP is to make Western Europe self-supporting. It is designed only as temporary aid in the form of goods—food, raw materials, machinery, equipment — so that production can be increased much more quickly than would be possible without outside aid. At best, the recovery program is only a temporary The problem of artificial trade barriers, so closely related to ERP, has already been faced by the participants in the International Trade Organization and the Bogota conferences. It is to be hoped that our own foreign trade policy will demonstrate that the United States fully recog nizes its responsibilities and opportunities. Page 68 BUSINESS STATISTICS Production Philadelphia Federal Reserve District Adjusted for Seasonal Variation Not Adjusted Production Workers in Pennsylvania Factories Per cent chringe Indexes: 1923-25 = 100 ►‘INDUSTRIAL PRODUCTION MANUFACTURING.............. Durable Goods....................... Consumers’ Goods................ Metal products..................... Textile products.................. Transportation equipment Food products....................... Tobacco and products.... Building materials.............. Chemicals and products. . Leather and products......... Paper and printing............. Individual Lines Pig Iron.................................. Steel....................................... Iron castings......................... -* Steel castings....................... Electrical apparatus........... Motor vehicles..................... Automobile parts & bodies Locomotives and cars.... Shipbuilding......................... Silk and rayon..................... Woolens and worsteds.... Cotton products.................. Carpets and rugs................ Hosiery.................................. Underwear........................... Cement.................................. Brick....................................... Lumber and products... Bread & bakery products. Slaughtering, meat pack.. . y Sugar refining..................... Canning and preserving. . Cigars.................................... Paper and wood pulp......... Printing and publishing. . Shoes....................................... Leather, goat and kid.... Explosives.............................. Paints and varnishes......... Petroleum products........... Coke, by-product................ COAL MINING Anthracite............................. Bituminous........................... CRUDE OIL................................ ELECTRIC P’W’R—OUTPUT Sales, total........................... _ Sales, to industries.............. BUILDING CONTRACTS TOTAL AWARDS+............ Residential-!-....................... Nonresidential+................ Public works & utilities-)-. Apr. Mar. Apr. 1948 1948 1947 lllp' Apr. 1948 from 1948 from Apr. Mar. Apr. 1948 1948 1947 4 Month Year mos. 1947 ago ago 110 112 123 101 144r 75 125 119 117 56 167 94 115 106r 108r 116 100 144 70 lllr 126 109 48r 147r 89 118 +1 + 2 0 + 4 0 + 5 — 2 +1 + 8 — 1 + 2 0 + 2 + 2 + 3 + 6 + 1 + 2 + 6 +11 + 5 — 5 — 5 +10 0 +16 + 5 +16 + 9 + 6 +11 — 1 0 137 79 178p 128 98 121 88p 99p 108 110 233p 156p 66 66 67 288 501 499 349 86r 113r 91 97 226 30 118 57 ...... 88 80 38 109 82 138 94 61 31r .— 121 72 178 118 98r 119 93r 95 103 114 222 162 67 68 61 284 488 516 359 89 108 97 106 234 43r 117r 55 _ 84 72 43 88 69 132 74r 54 29 ...... 112 94 198r 109 91 124 90 87 45 104 205r 159 67 64 90 283 446 450 318 0 — 6 ~ 1 + 18 + 5 —14 — 9 — 2 + 5 + 4 + 4 — 3 + 3 4- i + 7 + 3 — 8 + 2 — 5 + 13 + 10 0 + 8 0 + 2 — 6 + 5 + 5 — 4 + 5 — 4 — 2 — 3 +10 + 2 + 3 — 3 — 3 — 4 — 2 — 7 + 8 + 1 —41 — 8 + i +49 +10 + 15 —15 +27 +20 +12 +30 + 3 + 8 — 7 +22 —16 —10 + 17 + 7 — 2 — 2 +14 + 142 + 6 +14 — 2 — 1 + 3 —25 210 142 227 364 198 169 169 333 145 142 137 166 + 6 +45 +63 —16 — 1 +24 +34 +66 +58 + 9 1+120! +201 114p 124p 105p 143 79p 123p 120p 127 56p 170p 94p 117 88 106 90 115 237 25 108 55 92 84p 37p 112p 82 147 97p 56 31 + + + + 5 5 7 4 0 — 1 + 5 — 3 — 5 + i —31 — 1 — 8 +25 + 3 + 8 —18 +29 + 11 + 8 + 1 + 3 + 7 — 5 + 7 —13 — 6 + 2 + 8 — 2 + 5 +20 +37 + 7 + 9 + 2 — 3 + 2 —21 +1 + 12 + 9 + 11 + 10 +10 + 7 • Unadjusted for seasonal variation. + 3-month moving daily average centered at 3rd month. Increase of 1000% or more. 108p 110 HOp 112 104 106 138 76p 130p 114p 115 50p 173p 92p 120 1 97 111 94 117 206 32 117 59 145r 77 133 114 108 49 167 96 117r 139 68 120r 119 99 48r 149r 87 120 99r 120r 96 109 210 32 129 61r 101 113 101 108 203r 90 76p 38p 107p 82 144 76p 59 29 104 133 102 149p 116 99 124 88p 96p 109 116 233p 162p 65 66 61 297 491 514 352 91 77 40 109 85 150 73 60 29 109r 114 111 159 109 lOOr 121 99r 94 103 117r 220 168 67 68 62 289 498 511 342 82 66 45 84 69 129 74r 57 28 112r 109 122 166 99 92 126 90 84 45 109 205r 166 66 64 82 292 437 463 322 202 132 231 335 172 128 169 303 139 132 139 153 128r 59 p Preliminary r Revised Local Business Conditions* Percentage change— April 1948 from month and year ago Allentown......... Altoona.............. Harrisburg......... Johnstown......... Lancaster......... . Philadelphia. . . Reading.............. Scranton........... Trenton.............. Wilkes-Barre. . Williamsport. . . Wilmington. . . . York.................. Factory employment Mar. 1948 — 1 +1 — 1 — 3 — 1 — 1 — 1 — 3 — +1 — 1 — 1 — 1 Factory pay rolls Apr. Mar. 1947 1948 — 3 — 5 — 5 + 4 — 3 — 3 + 2 —15 + 3 — 1 0 0 + 2 — 2 + 3 — 5 —._7 + __3 — 8 — 3 + 6 0 0 — 2 Apr. 1947 + 3 +11 + 7 — 4 +16 + 12 + 16 +24 _ +14 + 5 +18 + 8 Building permits value Retail sales Mar. Apr. Mar. 1948 1947 1948 + 32 + 51 + 1 + 47 — 84 —29 +209 +150 + 2 — 6 — 60 — 8 +109 + 139 —11 — 35 + 22 —15 — 37 — 29 + 2 +148 +250 —13 +382 + 120 — 9 — 99 — 51 —10 — 28 + 4 + 28 + 78 — 3 4- 7 — 63 —11 Apr. 1947 +58 — ~7 + 17 + 15 + 5 0 + 10 + 5 + 8 + 6 +21 + 4 * Area not restricted to the corporate limits of cities given here•* Increase of 1000% or more. Debits Mar. Apr. 1948 1947 — 4 +34 — 1 + 8 — 6 +21 — 6 +13 + 18 +26 — 4 + 15 + 4 + 11 0 +11 +12 + 6 — 6 +u + 4 + 18 — 9 + 11 + 1 + 7 Summary Estimate—April 1948 Weekly Employ Weekly man-hours ment pay rolls worked All manufacturing ......... 1,099,800 $54,509,000 43.445.000 Durable goods industries 624.400 33.658.000 24.751.000 Nondurable goods industries ....................... 475.400 20.850.000 18.694.000 Changes in Major Industry Groups Employment Indexes (1939 average = 100) Apr. 1948 In dex All manufacturing............ Durable goods industries. Nondurable goods industries........................... Food......................................... Tobacco.................................. Textiles.................................. Apparel.................................. Lumber.................................. Furniture and lumber products.............................. Paper....................................... Printing and publishing. . . Chemicals.............................. Petroleum and coal products.............................. Rubber.................................... Leather.................................. Stone, clay and glass......... Iron and steel....................... Nonferrous metals.............. Machinery (excl. elect.). . Electrical machinery......... Transportation equip. (excl. auto)....................... Automobiles and equipment......................... Other manufacturing......... 128 154 105 Per cent change from Mar.i Apr. 19481 1947 —1 — 1 —1 — 2 —1 0 Pay rolls Per cent Apr. change 1948 from In Apr. dex Mari 1948] 1947 283 —2 +u 320 —2 + 10 118 100 88 95 93 —2 —1 0 —1 —2 — + + + + 5 4 5 2 1 239 227 221 221 247 198 —i —2 —1 —2 —2 —1 + 12 + 5 + 11 +26 +18 +18 101 119 137 120 —3 —1 +i —1 — 1 0 + 1 — 1 227 261 281 246 —6 0 +6 0 + 7 +13 + 9 + 8 149 146 91 135 138 149 211 225 —1 —9 —5 0 —i 0 —1 —i + 5 —20 — 6 — 3 — i —11 + 7 — 2 290 265 177 290 281 295 439 473 0 —7 —8 +i —3 0 —1 —1 + 17 —27 — 7 + 9 + 9 — 2 + 19 + 13 215 —2 — 6 415 —2 + 15 159 133 —7 —1 —18 321 —10 261 —7 —2 —12 — 4 Average Earnings and Working Time April 1948 Per cent change from year ago Weekly earnings Hourly earnings Weekly hours Aver-|ch.ge Aver Aver-L Jh’ge Ch’ge age 1 age age All manufacturing.... $49.56 + 12 $1,255 +13 39.5 + 1 Durable goods indus.. 53.90 + 12 1.360 + 11 39.6 0 Nondurable goods industries.................... 43.86 + 12 1.115 +13 39.3 + 1 Food.................................. 43.06 + 10 1.051 + 11 41.0 0 .757 + 2 38.3 + 5 Tobacco........................... 29.01 + 7 Textiles........................... 44.89 + 19 1.143 +13 39.3 + 5 Apparel........................... 36.81 + 16 .946 + 11 38.9 + 5 .964 +10 41.3 + 6 Lumber........................... 39.81 + 17 Furniture and lumber .997 + 8 41.7 products....................... 41.52 + 8 0 Paper................................ 47.44 + 13 1.078 + 12 44.0 + 1 Printing and pub........... 57.95 + 8 1.502 + 11 38.6 — 3 Chemicals....................... 48.99 +10 1.188 + 8 41.2 + 2 Petroleum and coal products....................... 59.06 + 12 1.515 + 14 39.0 — 2 45.17 — 9 1.287 + 3 35.1 —11 Rubber........................... Leather........................... 33.37 — 1 .980 + 11 34.1 —11 Stone, clay and glass. . 49.34 + 12 1.190 + 10 41.4 + 2 Iron and steel................ 54.73 + 11 1.420 +12 38.5 — 2 Nonferrous metals. .. . 51.66 + 10 1.323 + 12 39.0 — 2 Machinery (excl. 52.80 + 12 1.301 +10 40.6 + 2 electrical).................. Electrical machinery. . 58.75 + 15 1.455 +12 40.4 + 3 Transportation equip. (excl. auto)................ 58.80 +22 1.476 + 1C 39.8 +11 Automobiles and equip 55.66 + 7 1.359 + 1C 41.0 — 3 Other manufacturing. . 41.17 + 7 1.082 + 9 38.0 — 2 Page 69 Distribution and Prices Wholesale trade unadjusted for seasonal variation Sales Total of all lines.................. Dry goods ........................... Electrical supplies ........... Groceries .............................. Hardware .............................. Jewelry ................................ Paper .................................... Inventories Total of all lines ................ Dry goods.............................. Electrical supplies ........... Groceries .............................. Hardware ........................... Jewelry ................................ Paper .................................. Per cent change April 1948 1948 from from 4 Month Year mos. ago ago 1947 + 7 +10 +22 +15 +11 + 9 + 7 + 5 — 6 +25 +26 —12 +15 + 5 + 2 + 6 0 — 6 + 5 + 1 + 5 + 11 + 9 + 3 — 7 +33 —19 +65 ... Per cent change from Apr. Year Aug. 1948 Month! ago 1 ago 1939 Basic commodities (Aug. 1939 = 100) 321 Wholesale (1926 = 100) ......................... 163 Farm .................... 187 Food .................... 177 Other .................. 149 Living costs (1935 1939 = 100) United States .... 169 Philadelphia ......... 169 Food .................. 203 Clothing ............. 191 Fuels .................. 135 Housefumishings 198 Other .................. 148 +1 0 +221 +1 0 + 2 + 1 + 10 + 5 + 9 +13 + 117 +206 +163 + 85 + 72 + 73 +118 -u - 6 + 93 - 8 + 40 - -10 + 97 H- 7 + 47 Source: U. S. Bureau of Labor Statistics. + 1 + 2 + 3 0 0 + 1 + 4 -- 8 b 9 Not adjusted Per cent chLange April 1948 1948 Apr. Mar. Apr. from from Apr. Mar. Apr. 1948 1948 1947 1948 1948 1947 4 Month Year mos. ago ago 1947 *•43 Indexes: 1935-1939 = 100 + 2 — 8 0 + 7 — 2 + 6 + 4 Source: U. S. Department of Commerce. Prices Adjusted for seasonal variation RETAIL TRADE Sales Department stores—District**.... Philadelphia** Women’s apparel—District........... Philadelphia Furniture ........................................... Inventories Department stores—District......... Philadelphia . Women's apparel—District........... Philadelphia Furniture ........................................... FREIGHT-CAR LOADINGS Total .................................. Merchandise and miscellaneous. . Merchandise—lc.l................................ Coal ...................................................... Ore .................................................... . Coke .................................................. Forest products ................................ Grain and products ......................... Livestock ............................................. MISCELLANEOUS Life insurance sales ....................... Business liquidations Number ........................................... Amount of liabilities.................. 1 Check payments ............................. 1 278p 238 267 283 — 263 239 213 222 — 257 235 259 273 — + 6 + 8 + 10 0 + 1 + 8 +25 + 3 + 3 +28 + 4 + 3 + 7* +11* _ 260p 233 253 291 — 261 226 246 285 — 221 211 246 283 — + + + + 129 122 79 148 361 159 90 105 87 129 133 83 107 191 173 93 114 80 145 137 96 178 301 211 97 136 210 182 246 _ 251 261p 229 240 254 284 258 290 297 247r 228 249 262 266p 235 228 256 261 228 241 274 225 213 222 249 121 128 83 110 84 163 81 108 74 138 135 96 143 156 171 82 127 95 189 207 18 17 249 219 0 3 3 2 4* +18 + 11 + 3 + 3 +11* 0 104 — 8 — 5 +38 +89 — 9 — 3 — 8 + 9 —11 —11 —18 —17 +20 —25 — 7 —23 —16 — 7 — 5 —15 —14 + 16 — 6 — 9 —20 —23 122 121 79 118 188 128 76 98 80 207 + 16 + 1 0 210 — +75* +31* +37* +228* +175* +33* — 2 +10 +ii 224 31 54 241 | i 24 20 • Computed from unadjusted data. p Preliminary. r Revised. ** Indexes adjusted for seasonal variation have been revised: earlier data may be obtained upon request. • BANKING STATISTICS MEMBER BANK RESERVES AND RELATED FACTORS Reporting member banks (Millions $) May 26 1948 four wks. Assets Commercial loans ......... Loans to brokers, etc. . Other loans to carry secur. Loans on real estate.... Loans to banks .............. Other loans ..................... Total Changes in — 496 17 15 76 8 252 One year + 54 + + + + i 4 6 1 — 6 + 2 + i + 47 .............................. 864 + 12 + 98 Government securities . Other securities.............. 1372 —20 —104 270 +14 + 26 Total investments . .. 1642 — 6 — 78 Total loans & invest. Reserve with F. R. Bank Cash In vault ................ Balances with other bks.. Other assets—net............. Liabilities Demand dep. adjusted. . Time deposits.................. U.S. Gov. Deposits ......... Interbank deposits . ... Borrowings ..................... Other liabilities ................ Capital account ................ Page 70 2506 496 44 98 58 2040 446 57 323 7 27 302 + 6 +23 + 2 — 8 +29 + 10 — 3 —18 + 5 — 1 + 1 + + 4— + 20 34 4 1 4 + 36 + 9 + 6 + 4 + 2 + 2 + 2 Changes In weeks ended Third Federal Reserve District (Millions of dollars) Sources of funds: Reserve Bank credit extended in district........... Commercial transfers (chiefly interdistrict).... Treasury operations ................................................ Total May 5 May 12 May 19 May 26 Ch’ges in four weeks + 2 + 18 + 17 + 3 — 6 —43 — 1 +25 —44 — 4 +63 —11 +100 —81 +37 —46 —20 +48 + 19 + 2 +35 + 3 —49 -6 —14 + 2 +46 “b 1 + 18 +37 —46 —20 ............................................................................. Uses of funds: Currency demand ....................................................... Member bank reserve deposits.................................. “Other deposits’’ at Reserve Bank......................... Other Federal Reserve accounts.............................. Total .............................. Member bank reserves (Daily averages; dollar figures In millions) Held Re Ex quir’d cess Ratio of excess to re quired Phila. banks 1947 May 1-15 1948 Apr. 1-15. Apr. 16-30 May 1-15. $414 414 410 419 $408 405 404 412 $ 6 9 6 7 i% 2 2 2 Country banks 1947 May 1-15. 1948 Apr. 1-15. Apr. 16-30 May 1-15. $377 391 391 392 $332 348 348 350 $ 45 43 43 42 13% 12 12 12 | +48 | +19 Changes in— 1 Federal Reserve Bank of Phila. May 26 Four One (Dollar figures in 1948 weeks year millions) .9 $+ 8.3 Discounts & advances $ 19.0 $+ *i — 1.0 Industrial loans . .. .6 4* 1470.9 + 10.9 —193.6 U.S. securities......... Total .................... $1490.5 $+ 11.9 $—186.3 Fed. Res. notes . ... $1617.3 $— 3.4 $— 27.1 Member bank dep.. 822.5 + 18.7 + 35.7 U. S. general acct.. 168.3 + 73.8 +122.4 28.6 — Foreign deposits . .. .7 — 2.5 Other deposits ......... 1.6 — .4 Gold cert, reserves. . 1152.8 + 77.1 +306.9 Reserve ratio ........... 43.7% +1.5% +10.0%
@FedFRASER