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T L— I v—' i v aa r\ Y • - THE BUSINESS REVIEW FEDERAL RESERVE BANK OF PHILADELPHIA OCTOBER 1,1946 Deposit Trends and Ownership in 1946 Bank deposits are reflecting the basic re adjustments involved in the termination of war and the resumption of peacetime activity. The Government has been reducing its working balance to a level consistent with the smaller volume of expenditures, and in doing so has effected a reduction in total bank deposits. On the other hand, where the Treasury’s debt re tirement program has involved holdings of non bank investors, it has caused a shift of funds from inactive War Loan Accounts to active private accounts. Deposits of individuals and businesses continue to expand. Trends The most significant development in the field of bank deposits during 1946 has been a de cline of 6 per cent in total deposits of member banks between the last half of December 1945 and the last half of August 1946. The expan sion in deposits which was practically con tinuous for eight years has been halted. During the war and for months after its close, the dom inant factor in deposit expansion was the growth of public credit extended by banks__ that is, bank purchases of Government securities and bank loans to individuals for the purchase of such securities. Private credit extended by banks declined during the war and thus ex erted a dampening effect on the growth of de posits. For the past several months the exact op posite has been the case. The volume of public bank credit has been shrinking as a result of Treasury retirement of maturing obligations and repayment by individuals of their loans on Government securities. This decline in public bank credit has been partially offset by an ex pansion of private bank credit—business loans, mortgages, consumer credit and non-Govern ment securities. Further indications of the influence of these factors on the trend of total deposits is provided by changes in the various types of deposits. These are shown for a number of years in the chart and for 1946 to date in Table 1. The drop in War Loan Accounts occasioned princi pally by the Treasury’s redemption operations has been the outstanding factor contributing to a decline in total deposits. From the in auguration of the redemption program in March through the recent operation on Oc tober 1, the Treasury will have retired $17.5 billion of its maturing obligations in cash, and a large proportion of the funds needed for these transactions has come from bank War Loan Accounts. Time deposits and demand deposits Page 99 It other than War Loan Accounts, on the other hand, have continued to rise but at a slower rate than in the past. Although the trend in total deposits has changed and although the various influences affecting deposit trends are now the reverse of what they were during the war, one major war time deposit trend has continued during 1946. Throughout the war, deposits of the smaller outlying banks grew more rapidly than those of the larger city banks. In recent months de posits of country banks have continued to ex pand somewhat while deposits of reserve and central reserve city banks declined. One reason is that War Loan Accounts represent a smal ler segment of deposits at small banks than at large banks so that their decline has had less effect on total deposits. Perhaps a more sig nificant contrast between the experiences of the larger and smaller banks, however, is that time deposits and demand deposits other than War Loan Accounts still tended to increase more rapidly at country banks than at central reserve and reserve city institutions. In the Third Federal Reserve District de posits during 1946 have dropped somewhat less DEPOSIT TRENDS ALL MEMBER BANKS-UNITED STATES BILLIONS 1 TOTAL DEPOSIT 100 60 ^DEMAf ID DEPOS TS* \ 1_\ _ _ _ T ME OEPC \ \ \ / 5ITS'\_ 9 t t 10 / _ _ _L i /' 5 -U S. G )V‘T DEPCKITS 1 1 1 1 1 1 • 1939 1940 1 I 1 1 1941 1942 1943 1944 1945 DEMAND DEPOSITS OP INDIVIDUALS, PARTNERSHIPS, AND CORPORATIONS. Page 100 1946 « Table 1 DEPOSIT CHANGES IN 1946 (Last half of December 1945 to last half of August 1946) (Member banks) United States Third District Billions $ % Change Billions $ % Change Type of deposit: War loan deposits.................... Other demand deposits......... Time deposits............................ -12.7 + 2.5 + 2.6 -58 + 3 +11 -.6 + .1 + .2 -58 + 3 +14 Total........................................... - 7.6 - 6 -.3 - 4 Reserve city............................... Country....................................... - 4.8 - 3.2 + .4 -13 - 7 -.4 +.i -12 + 2 Total........................................... - 7.6 - 6 -.3 - 4 Area: +1 sharply than for the nation as a whole. Although total deposits of member banks in Philadelphia have declined more than in other reserve city banks, they did not fall as much as was the case in central reserve city banks; at country member banks in this district deposits increased at a faster rate than at country banks in the United States as a whole. The net result of these changes has been that banks in this district now hold a slightly larger proportion of the nation’s deposits than at the end of 1945. Dur ing the war years the less rapid deposit ex pansion here compared to the rest of the coun try lowered the share of total deposits held by Third District banks and it was expected that a return to more normal peacetime conditions might bring about a flow of deposits to this area even if the over-all deposit level remained con stant. No substantial inflow has yet taken place, but the wartime trend has ceased and the district’s share of deposits has remained fairly constant. Over the coming months deposits in this dis trict will be affected by the same general in fluences which will be at work nationally. Any retirement in cash of some of the $10% billion of Government certificates and notes maturing during the remainder of the year will act to reduce total deposits both locally and nation ally, but will raise deposits other than War Loan Accounts. A further expansion of loans will tend to increase deposits. This district’s share of the nation’s deposits may rise during the rest of the year if loans expand at a faster rate here than in the rest of the country, as was the case during the first half of the year, and if the revival of more normal conditions of production and trade provide the district with a favorable balance of payments in its trans actions with other sections of the country. Ownership The latest survey of the ownership of de mand deposits,*** made as of July 31, 1946, indi cates that personal deposits in all commercial banks of the Third Federal Reserve District are still expanding at a rate faster than business deposits. The fact that personal accounts grew almost three times as rapidly as business bal ances in the two and one-half years between July 1943 and January 1946 was largely at tributable to the high wartime incomes of in dividuals and the dearth of consumers’ durable goods. Individuals were forced to save. The rate of accumulation in personal deposits in the six months from January to July 1946 was slower than in the past. Incomes continue at high levels and spending, while heavier, has not reached the point of cutting into accumu lated deposits. The supply of durable goods in the market, purchases of which might be ex pected to entail drafts upon accumulated funds, has not yet reached large proportions, and credit is being used in considerable measure to finance the purchase of such goods as are avail able. Business deposits as a whole exhibited no particularly new trends between January and July. As during the war period, they expanded less rapidly than personal deposits and demand * In the discussion of deposit ownership the term “demand deposits*’ refers to demand deposits of individuals, partnerships, and corporations. deposits as a whole. But among the various types of business accounts there were several significant developments. Deposits of manufac turing and mining concerns were unchanged, in contrast with a substantial decline in the pre vious six-month period, when output and in come declined and industrial outlays were be ing made to effect the change-over to peace time production. During the latest period most of the expenditures for reconversion appar ently had been completed and production, de spite a lapse in the first quarter of the year, reached new peacetime peak levels. Moreover, deposits continued to be sustained by increased bank borrowings to finance inventories and cur rent operations. Another significant change took place in de posits of wholesale and retail trade enterprises. In each survey of deposit ownership, from July 1943 to January 1946, these deposits con sistently grew faster than total deposits. Be tween January and July 1946, however, they expanded less rapidly. Trade concerns may have been drawing upon their bank balances to finance larger inventories as goods gradually became more plentiful. The fact that they ac cumulated deposits more rapidly than most other types of businesses during the war sug gests that many concerns may prefer to make use of these funds before resorting to bank borrowing, although undoubtedly some of the recent expansion of business loans is accounted for by trade enterprises. Table 2 OWNERSHIP OF DEMAND DEPOSITS OF INDIVIDUALS, PARTNERSHIPS, AND CORPORATIONS THIRD FEDERAL RESERVE DISTRICT Dollar Amounts (millions) Percentage Distribution July 31, 1943 Jan. 31, 1946 July 31, 1946 875 231 578 210 27.1 8.4 11.8 4.9 22.0 5.8 14.1 4.7 21.2 5.6 14.0 5.1 4- 8.3 - 7.6 +59.8 +29.0 + 0.4 + 3 0 +12.3 1,853 1,894 52.2 46.6 45.9 +19.3 + 2.2 93 235 90 236 2.7 4.6 2.3 5.9 2.2 5.7 +14.8 +71.5 - 3.2 + 0.4 1,771 207 82 912 2 2,181 226 137 1,430 3 2,220 257 145 1,497 3 59.5 7.0 2.8 30.7 54.8 5.7 3.4 36.0 .1 53.9 6.2 3.5 36.3 .1 +23.2 + 9.2 +67.1 +56.8 ** + 1.8 +13.7 + 5.8 + 4.7 ** 2,974 3,977 4,122 100.0 100.0 100.0 +33.7 + 3.6 July 31, 1943 Jan. 31, 1946 July 31. 1946 808 249 351 145 875 230 561 187 Total nonfinancial business Financial: Insurance companies.............. Other financial.......................... 1,553 81 137 Total domestic business___ Trust funds.............................. ,.... Nonprofit associations................ Personal, inch farmers................ Foreign............................................. Grand total............................ Domestic business: Nonfinancial: Manufacturing and mining.. Public utilities........................... Trade............................................ Other nonfinancial business. Percentage Change July 1943 to Jan.1946 * Jan. 1946 to July 1946 * Less than 0.1 per cent. ** Because of rounding small totals, percentage changes are meaningless. Page 101 The data on deposit ownership also serve to explain disparate deposit trends as between large and small banks. The types of deposits which increased most rapidly—personal and trade accounts—are also those which are rela tively more important at small than large banks; the deposits which remained practically unchanged or which declined—manufacturing and mining, public utility, and insurance com pany accounts—tend to be more important at large banks. Added to this fact, deposits in almost all categories of ownership tended to expand more rapidlv the smaller the bank (Table 3). OWNERSHIP OF DEMAND DEPOSITS THIRD FEDERAL RESERVE DISTRICT MILLIONS 1400 PERSONAL 1200 1000 MANUFACTURING AND MINING Table 3 CHANGES IN DEPOSIT OWNERSHIP BY SIZE OF BANK Percentage Changes from January 31, 1946 to July 31, 1946 Banks with Demand Deposits of Individuals and Businesses Under $1 million Domestic business: Nonfinancial: Mfg. and mining........... Public utilities............... Trade................................ Other nonfin. business. 400 $1 million $10 million Over $100 million to to $10 million $100 million ■FINANCIAL BUSINESS - 5.4 +57.6 +13.9 +56.1 + 6.3 +14.7 + 5.3 +13.1 + 1.7 + 3.3 + 1.2 +17.5 - 3.2 - 4.7 - 1.9 - .1 +15.2 + 7.2 + 3.5 - 3.0 +18.2 +27.9 + 8.5 + 2.7 +16.7 + 7.7 -13.1 - 7.2 +15 8 ' +78.3 ft- 1-4 «+11.7j + 6.9 +20.1 - 2.4 + 8.5 + 4.6 +14.9 + 2.0 + 4.9 - 6.3 - 4.1 +10.9 +17.4 - 4.9 + 2.7 +12.6 + 7.9 + 5.2 - 2.5 Total nonfin. business Financial: Insurance companies. . Other financial............... Total domestic bus... Trust funds.......................... Nonprofit associations.. . Personal, inch farmers.. . TRADE- Grand total................... What are the possibilities for further shifts in deposit ownership over the coming months? A recent survey of liquid assets indicated that individuals expected to meet one-fourth of their expected expenditures for consumers’ durables during 1946 by drawing upon accumulated liquid assets. And most individuals indicated they would be more willing to draw down their bank balances than to cash their war bonds. It is possible, therefore, that personal deposits will shrink as more and more consumers’ dura bles come on the market. The fact that indi viduals intended to meet one-third of their ex penditures for durable consumers’ goods by bor rowing, however, will act as a stimulus to de posits generally, depending on how extensively banks participate directly or indirectly in such consumer lending. When individuals draw upon their balances, Page 102 JULY 31 FEB. 29 JULY 31 JAN. 31 JULY 31 JAN. 31 JULY 31 1943 1944 1944 1945 1945 1946 1946 ♦demand deposits of individuals, partnerships, and corporations. the deposits generally are not extinguished but are passed on to other owners. Businesses will receive some of these funds and will use them to meet various expenditures. Under condi tions of prosperity, deposit funds will flow throughout the economy, among businesses and individuals, in a manner which facilitates high levels of productive activity. If production and incomes fall off materially, it is possible that funds might tend to accumulate in the hands of business; individuals would be forced to fall back on their accumulated bank balances to meet current expenses, and a part of the funds would pass to businesses which, see ing few opportunities for profit, might allow the funds to remain idle or reduce indebtedness. The current situation, however, is quite dif ferent. The immediate danger is that deposit funds will become greater and will circulate at an increasing rate. One way to avoid such a development is for businesses to use their funds with restraint, abstaining from a scramble for inventories, and for consumers to refrain from excessive spending. Inventories and the Business Outlook In an era of economic record breaking it may be no surprise to find that business inventories reached an all-time high in July. Yet, inven tories occupy such a strategic position in the structure of our economy that changes in their size and composition merit close attention. There appear to be two opposite views of cur rent developments: one, that the present rate of inventory accumulation indicates an inflation ary movement which may have the same un favorable consequences as tne boom of 1920; another, that the inventory bulge is merely part of the transition to higher levels of pro duction and sales. and housewares. Basement store inventories have risen sharply, but radios, men’s clothing, and hosiery have decreased in quantity. It is surprising to find the dollar volume of major household appliances larger at the present time than in 1941. The gain has occurred entirely within the past year. It does not mean that refrigerators and carpet sweepers are easy to obtain. Probably, increased inventories in this line reflect changes in merchandising prac tices on the part of some stores, which shift a larger share of the inventory from the manu facturer or distributor to the department store itself. The Current Invertory Situation While the ratio of stocks to sales—that is, the number of months’ supply on hand—in July was below the 1941 level for all goods combined, The persistence of irritating shortages of many goods has to some extent obscured the huge expansion in supplies available for con sumer purchase during recent months. Within the past year, stocks of wholesalers and re tailers have increased nearly $2 billion—almost 20 per cent—with most of the increase coming within the last six months. The value of de partment store stocks has risen over 30 per cent since January, and in July stood 122 per cent above the 1935-1939 average. Such stocks in the Philadelphia Federal Reserve District are higher than at any previous time. A more significant measure, however, is the relation ship of inventory supply to consumer demand. As in the case of total retail trade, the ratio of stocks to sales in department stores is still below pre-war levels. For all types of goods combined, Philadelphia district stores had 3.5 months’ supply on hand in July 1946 compared to 3.7 in July 1941, which was also a period of great activity. A comparison of the dollar volume of depart ment store inventories in July 1941 with stocks in July 1946 by lines, reveals that the increases in supplies have not been even. The accom panying charts show a significant picture. In creases in women’s and children’s clothing have been large, as have gains in jewelry, books, CHANGES IN DEPARTMENT STORE STOCKS BY LINES JULY I94I-JULY 1946 THIRD FEDERAL RESERVE DISTRICT HtK CENT 300 JULY .941*100 39T , i WOMEN'S BLOUSES, SKIRTS, SPORTSWEAR 280 260 infants' wear (Including infants' furnitureT WOMEN’S AND MISSES' SUITS 240 HOUSEWARES ruRs 180 BOYS' CLOTHING ANO FURNISHINGS eASEMENT STORE TOILET ARTICLES, DRUGS, ETC. BOOKS AND MAGAZINES JEWELRY AND SILVERWARE MEN'S FURNISHINGS, HATS AND CAPS LINENS, OOMESTIC5, BLANKETS ANO TOWELS 140 120 MAJOR HOUSEHOLD APPLIANCES WOMEN'S AND CHILDREN’S SHOES MEN'S ANO BOYS* SHOES 100 00 MEN'S CLOTHING WOMEN’S HOSIERY RADIOS 60 Page 103 MONTHS’ SUPPLY OF DEPARTMENT STORE STOCKS THIRD FEDERAL RESERVE DISTRICT WOMEN'S BLOUSES, 3WKT5, 3RORTSWEAA '»«' JUNIORS' AND GIRLS' WEAR TOILET ARTICLES, ORUGS, ETC INFANTS' WEAR BASEMENT STORE FURS MEN'S FURNISHINGS, HATS ANO CARS SOTS' CLOTHING ANO FURNISHINGS WOMENS GOATS ANO SUITS FURNITURE, BEOS LINENS, DOMESTICS,BLANKETS Al« TOWELS MEN'S ANO BOYS' SHOES WOMEN'S ANO CHILDREN'S SHOES Mtl/S CLOTHING mm'n of productive resources from one to the other may be practicable. As time goes on and stocks are replenished in one industry after another, more shifts may be expected to take place, but with increasing difficulty. T77X During the war there was a seemingly insati able demand for all types and grades of goods; but the day is approaching when the return of a buyers’ market will again force producers to seek out profitable ventures carefully and will penalize misguided production. Increases in sales in certain lines may not continue without interruption. In fact, for some goods present sales may not be sustained. As automobiles, refrigerators, and appliances come into the market in increasing volume the sale of soft goods may suffer. Inventory plans which merely project the trends of the immediate past and do not take such factors into account, may lead to over-expansion. MAJOR H0U5EH0L0 APPLIANCES The situation with regard to manufacturing inventories is different and somewhat more 0 I 23456789 10 II complicated than that for trade. The basic difference is that while the dollar value of wholesale and retail inventories remained at 1941 levels until the upturn at the beginning of this year, manufacturing inventories rose the chart shows that there were some lines in steadily until 1944. Early in 1946, after the which supplies were more plentiful. Many of liquidation of war-goods inventories had been the plentiful items are those which showed completed, manufacturers held a substantially large inventory gains from 1941 to 1946. Some greater value of stocks than they had in the women’s apparel and basement store items are middle of 1941. The ratio of inventories to sales in just as good supply now as they were in the in manufacturing declined during the war, as it summer of 1941, even considering what in some did in trade, but there is a significant difference in the composition of the inventories of durable cases has been a doubling of sales. and nondurable goods industries. The value Increases in receipts of relatively plentiful of finished goods stocks showed little change in goods have not been so marked as those for both industry groups since 1941 and is now low durable goods since the beginning of the year, in relation to current production. But while but receipts of all goods at department stores inventories of raw materials and goods in have been increasing. Outstanding orders process of manufacture at the end of June bore have been at unprecedented levels. There are a normal relationship to the output of non indications that receipts of goods from suppliers durable goods, such inventories in the durable goods industries were considerably above pre may soon be rising more rapidly than sales. war proportions. It is clear that as goods continue to flow in In part, this difference may be easily ex increasing volume there must be an adjustment in inventory levels, and that these adjustments plained. In order to increase the flow of fin will be reflected in orders and output. The most ished goods it is necessary, first, to build up a obvious shift required is that from women’s to sufficient stock of raw materials. Once this is men’s apparel. Labor and materials used in the done, goods partially processed are moved on manufacture of men’s and women’s clothing are ward through successive stages of refinement interchangeable to some extent, and some shift and “goods in process” inventories fill up. PIECE GOODS V7ZZZ sjzm NUMBER OF MONTH5* SUPPLY Page 104 Finally, stocks of finished goods are built up from which wholesalers and retailers receive their supplies. In many of the nondurable goods industries this process went on fairly smoothly even during the war. After V-J Day it was not necessary for “soft” goods industries, as it was in the case of durable goods, to liquidate sup plies of war materials and solve other knotty reconversion problems before civilian goods could be restocked. As indicated above, non durable goods are already reaching consumers’ hands in large volume. Part of the in-process inventory bulge in the durable lines, therefore, represents the preliminary stock-building proc ess required before goods can be shipped to users. Another part reflects inventory un balance—the filling of warehouses with nearlyfinished goods which lack some unobtainable part, or the pile-up of materials awaiting proc essing by unobtainable men and machines. This unbalance is abnormal only in the sense that it is a result of great and sudden change. Actually it appears to be characteristic of periods of rapid business expansion. Persistently unbal anced inventories are liable to degenerate into excessive inventories. During pre-war years nearly half of all manu facturers’ inventories was finished goods. Such inventories are little more than a fourth today and, since they are so close to the consumer, they will be the last to fill up. The $480 million rise in nondurable manufacturing inventories during July, after a slight decrease in the first six months of the year, may indicate the begin ning of the process. Prior to that month the rise in nondurable stocks appeared to be leveling off, while durables were growing. The increase of $1.3 billion in business in ventories reported by the Department of Com merce for the month of July was unprecedented. It is doubtful that that rate of growth will be sustained. Preliminary estimates of manufac turing inventories for August show a $325 million increase for the month—less than half the increase in July. However, manufacturers’ stocks, which were less than $14 billion in July 1941 and are about $18.3 billion now, still were growing at a rapid rate. There is undoubtedly a substantial price rise hidden in the dollar figures. Physical expansion is somewhat smaller than indicated. But it is in terms of dollar value that the goods will be bought and sold, and it is the level of demand at current prices which will determine their marketability. Are inven tories increasing too rapidly? Is our economy faced with another 1920, when excessive inven tories toppled into the markets, causing gluts and stoppages in the flow of trade and produc tion? The Role of Inventories in Our Economy In considering these questions it is well to review some of the basic factors which must be considered in determining the adequacy of the inventory level. Our industrial system can not be likened to a well-regulated assembly line where component parts feed smoothly into the finished article according to engineers’ plans. Buying and selling in competitive markets is a distinguishing characteristic of our business or ganization; and the exigencies of the market place, stimulating and, in the long run, efficient though they may be, preclude an “engineered” flow of trade. In a dynamic economy of rapid fluctuations and frequent shifts, it is necessary to anticipate sales and to accumulate stocks to meet demands whose volume is uncertain. While the basic short-term consideration in determining the appropriate size of inventories for a business unit or for an entire industry may be the actual and expected rate of sales, there are certain long-run factors concerned with the physical and organizational aspects of the productive system which are also influential. First and most obvious of these is the technique of manufacture. If, through the introduction of new machinery, the length of the production process is decreased, the need for inventories of finished goods will be diminished—additional goods can be produced on shorter notice. Goods-in-process inventories can be smaller be cause of shorter production time. Improvements in methods of transportation and communica tion also tend to reduce the required level of inventories. Orders may be transmitted and delivered more rapidly and there is a saving on the amount of goods in transit. Another group of influences which contributes to the determination of the inventory level is composed of so-called institutional factors— conventional policies, practices, and organiza tions by which trade is carried on. Industrial integration and large-scale organization gen erally tend to decrease the need for stand-by stocks. Close scheduling of production from one stage of processing to another, centralized purchasing and control of stocks, and geograph Page 105 ical dispersion of distribution outlets spread inventories thinner for a given level of output or sales. In fact, wherever scientific manage ment—the engineering approach—is introduced, advance planning is likely to make for more efficient use of inventories. The structure of the market for the product of a particular business or industry is significant in appraising inventory needs. Many buyers, with many different needs and desires, require a supplier to keep larger stocks on hand than few buyers. During the war years, for instance, the fact that the Government was for many firms the sole purchaser of standardized equip ment on advance orders enabled the manufac turing industries to cut the proportion of fin ished goods inventories held by nearly one-half. The shift from Government to private markets will doubtless necessitate a sharp increase in manufacturers’ stocks of finished goods. The Inventory Cycle By far the most decisive factors, and the most difficult to appraise in determining inventory requirements, are the continual fluctuations in the demand for goods and the ups and downs of the price level. The problem of cyclical movements is of primary importance in answer ing the question—are we going too far, too fast? Increased sales, or the expectation of them, prompt businessmen to increase inventories. Merchants and manufacturers, anticipating profits, may borrow from banks—or sell invest ments that banks buy—to obtain some of the necessary funds. The process of increasing inventories through the creation of funds by the banking system enlarges the money supply, generates additional income and greater pur chasing power. During a period of rising busi ness activity, therefore, the attempt to accu mulate larger stocks increases the flow of income faster than the flow of finished goods. Compe tition among buyers forces prices up. Because increasing sales again make inventories inade quate, merchants and manufacturers again borrow from banks—but at a higher price level. More money is thereby created, there is still greater demand for goods at rising prices, producers place advance orders with their sup pliers and borrow additional funds from banks. Once started, the expansion of credit and accu Page 106 mulation of inventories feed on each other. The industrial mechanism rolls along with powerful momentum. Even after stocks are more than sufficient there is a tendency for out put to continue at high levels. Producers have new and efficient equipment, new firms com pete for business, and the process of filling advance orders continues. Merchants who had placed duplicate orders with several suppliers when goods were scarce are swamped by deliveries. Orders are cancelled, prices fall, bank credit contracts, unemployment develops and a cumulative downward movement begins in which businessmen buy only “from hand-tomouth” and seek to unload inventories. For many years banking was strongly influ enced by the belief that credit arising solely from “productive” activities was non-inflationary. Such credit would increase when trade and production expanded and would be extinguished when activity fell off. Short-term, self-liqui dating bank loans constituted the essence of this theory. But the “productive credit” concept overlooked the self-inflammatory nature of bank credit. Regardless of how “sound” bank loans may be, they can aggravate inflation. For credit which is created for productive purposes is used many times over—perhaps for speculative purposes—before it is extinguished. In prac tice, many loans are only nominally short-term and are renewed several times before being eventually liquidated. The “boom and bust” period after World War I demonstrated that loans ostensibly for produc tive activity could be as inflationary as specula tive loans. Moreover, it was discovered that even though loans were short-term, a sudden large-scale liquidation had serious repercussions on the economy. Short-term, self-liquidating loans now constitute a small part of bank busi ness, and the “productive credit” concept has been proved an unreliable fetish for preventing booms and depressions. Yet the current situa tion shows some evidences of a hang-over of such thinking. The Outlook The general business situation has many parallels with the 1919-1920 period. Yet it is dangerous to attempt to fit present-day condi tions to the previous pattern and expect events to follow in order. There are too many differ ences between this post-war period and the last. Prices have thus far behaved differently; labor is in a stronger bargaining position; our place in international affairs has changed. The bank ing system now deals mainly with Government investments rather than self-liquidating “pro ductive” credit. Through the Civilian Produc tion Administration, the Government maintains controls designed to mitigate shortages and prevent deliberate hoarding of scarce goods. Inventories themselves have shown different trends. While the value of manufacturers’ stocks increased steadily during and after the first world war, there was a decline in inven tories in 1944 and 1945. The increase in department store stocks during 1919 is al most matched by the increase during the past year. Inventory accumulation leveled off before the 1920 crash due to price declines, but in the present period, price weaknesses have not appeared. However, business inventories are now accumulating rapidly. How far can they go before a danger point is reached? As after the first world war, commercial and industrial loans have been expanding. At reporting member banks in the Third District, the rise has amounted to 75 per cent since the low point in mid-1945. In order to fill the gaps in information on current lending, a number of Philadelphia bankers were interviewed con cerning their recent experiences in lending for inventory purposes and their appraisal of the present situation and future prospects. In gen eral, the feeling prevails that the expansion of loans for inventory purposes has not been dis proportionately large. Indeed, some bankers indicate that the rise has not been so great as they had expected. One reason given is that scarcities still persist. Another is that business is in a fairly good cash position and has not felt the need to borrow heavily. Most of the bor rowing for inventory apparently has been by manufacturers and to some extent by whole salers. Although some retail stores may be starting to borrow, most establishments have not been able to get sufficient supplies to require bank funds. All of the bankers interviewed agree that business men are not conscious of being inven tory speculators. Business men who build up supplies in excess of need to avoid running the risk of buying later at a higher price, or per haps getting no delivery at all, feel that they are merely protecting themselves in a tight situation. But it is important to recognize that, despite the absence of conscious speculation, an inventory “boom and bust” can arise from just such policies. The usual measure of inventory adequacy is the relationship of stocks to sales. Use of this measure alone may be misleading at the present time. It has been pointed out above that it may overestimate stock needs in cases where demand is the result of temporary abnormalities. It may also underestimate requirements. The present ratio of inventories to sales in manufacturing industries, for instance, is close to that of pre war years. But inventories are not wholly ade quate for full production. The fact is that lack of parts and vital materials is keeping large quantities of nearly-completed goods off the market. Sales are limited and inventories grow. If durable goods could be finished and offered for sale in a steady flow, sales volume in many lines would probably expand to a point where present inventories would still be relatively low. Some bankers feel that further interruptions of production which would aggravate the prob lem of unbalance might require that banks supply the necessary funds to carry customers over the shortage period. A rough measure of the over-all adequacy of business inventories might be their relationship to gross national product—the total of all goods and services produced. On this basis, 1941 pro portions would call for manufacturing inven tories of $21 billion instead of $18 billion in July, retail inventories of $10 billion instead of $7.5 billion. The differences are not large, but no forecast of early excesses can be made on this basis alone. Although inventories are accumu lating rapidly now, the rate may decline. Gross national product is increasing. Demands for producers’ goods and construction may accele rate its growth. Incomes and purchasing power may continue to increase. The long-range factors previously mentioned are still operative and will assume great importance in the rapidly advancing technology which is in prospect. With so many variables to consider, it is not possible to find a formula which will tell precisely when there are enough goods in our warehouses. If, for any reason, national income declines and purchasing power falls off, inventories may Page 107 become excessive within a short time. While Some stipulate that borrowers may not buy far most of the bankers interviewed feel that inven ahead. In cases where inventories appear likely tories are not yet excessive, several believe that to remain unbalanced for some time, banks are they are becoming so. All agree that it is one encouraging firms to get rid of surplus stocks. of the most important things for banks to watch. For, if excessive credit pours in to inflate prices, No banker knowingly grants credit which inventory appreciation may continue for a while enables prices to be bid out of reach of the con but will result in readjustment which may be painful. In 1920 the overstocking of goods at sumer, no businessman deliberately overstocks rising prices prolonged the boom after con his shelves. But in the past it has not been sumer purchases leveled off. Such a develop possible to tell when inventories were too high until it was too late. An appraisal of the ment must be guarded against now. soundness of inventory positions requires not As a solution to this problem, interviews with only statistical tools, like a ratio of stocks to bankers indicated that they are pursuing pre sales, but also psychological tools which meas cautionary policies. One is to make no loans for ure the temper of the business community. A the acquisition of inventories in anticipation composite judgment of informed business people of price rises. Another is to impress borrowers responsible for making day-to-day decisions with the possibility of a future decline in sales, would be such a measure. In the absence of emphasizing that a large part of the accumu such a yardstick, each businessman must exer lated demand may represent padding and cise conservative judgment in the appraisal of duplication of orders. They are advising cus his own needs, and, similarly, each banker must tomers to buy limited amounts of supplies in discriminate between reality and illusion so as stead of acquiring inventories in excess of need. not to pour fuel on the fires of inflation. * J > Page 108 A BUSINESS STATISTICS Production Employment and Income Philadelphia Federal Reserve District Adjusted for seasonal variation in Pennsylvania Not adjusted Industry, Trade and Service Per cent ch ange Indexes: 1923-5 -100 Aug 1946 fr Dm Aug. July Aug. 1946 1946 1945 Mo. ago INDUSTRIALFRODUCTION MANUFACTURING............. Durable goods...................... . Consumers’ poods............. . 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 and bodies Locomotives and cars............ Shipbuilding............................... Silk manufactures.................... Woolen and worsteds............. Cotton products....................... Carpets and rugs..................... Hosiery......................................... Underwear.................................. Cement......................................... Brick............................................. Lumber and products............ Bread and bakery products. Slaughtering, meat packing. 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 POWER................ Sales, total.................................. Sales to industries.................... BUILDING CONTRACTS TOTAL AWARDS+.................. Residential!................................ Nonresidentialf...... .................. Public works and utilities!.. Year ago 1946 from 8 mos. 1945 107p 108p 112p 102p 122 76p 168p 127p 117 43 p 142 p 74p 120 109 109 115 102 127 r 76 161 136 99 45 147 74 121 117r 120r 167r 86 r 134 r 63 403 111 89 34 167 r 66 105 - 2 - 1 - 3 - 1 - 4 +1 + 4 - 6 +18 - 4 - 4 0 - 1 + + + + + + + 9 10 33 18 9 21 58 14 32 26 15 13 15 105 103 82 99 171 23 139 62 97 r 110r 78 101 175r 22 127 58 106 113r 66 155 189 r 52 119 76 + 9 - 7 + 5 - 2 - 2 + 8 + 10 + 6 + + - 1 9 24 36 9 54 18 19 91 88 83 68p 74 55 56 56 46 86 p 79 53 89 90 68 153 170r 131 61 p 62 37 58 60 r 45 23 26 26 + 3 - 8 +1 + 8 - 1 -10 - 1 - 2 -11 + + + + + + + + - 10 25 22 61 81 17 68 28 10 + + + + + + + + 102 75 22 lp 117 90 126 103 47 p 80 97 l84p 166 p 79 75 116 313 444 441 301 135 102 223 99 92 127 98 52 79 103 191 162 86 81 125r 293 439 429 294 87 127 142 r 87 82 109 83 49 193 89 210r 154 68 64 97 331 423 431 300 -24 -27 - 1 +18 - 2 0 + 6 -10 + 1 - 5 - 5 + 2 - 7 - 7 - 7 + 7 + 1 + 3 + 2 + 4+ + + + + + + + + + + 18 41 56 34 10 16 24 5 58 9 12 7 17 17 19 6 5 2 0 + 13 15 + 16 + 29 + 7 + 21 + 6 13 — 65 4- 1 3 — 23 + 7 4- 10 12 7 __ 3 __ 4 — - 13 156 132 163 185 218 182 204 243 70 8 120 164 Aug. July 1946 1946 -28 -27 -20 -24 _ — __ 4+ + + + — + _ — + — — __ — Aug. 1945 22 24 46 9 38 10 60 5 27 19 16 1 19 107p 104 107p 104 141 r 60 394 114r 95 38 167 r 68 102 14 32 8 55 46 45 19 44 92 105 79 95 190 20 131 62 3 17 16 32 16 6 91 5 16 93 89 r 100 r 115r 75 64 90 149 184 r 210r 22 43 122 112 58 77 ' 88‘ ’ 86 r si 70p 70 56 51 48 41 80p 74 50 77 74 59 143 141 r 122 77 p 73 46 61 57 r 47 26 29 28 90 121 64 104 188p 176 125 107 90 88 122 123 110 91 46 80 78 99 96 185p 195 162p 159 79 84 75 81 109 llOr 313 293 422 408 419 404 310 300 +122 4148 152 ** ** 148 + 36 4- 90 150 + 13 — 27 161 * Unadjusted for seasonal variation. p__Preliminary t^-mouth moving daily average centered at 3rd month. r—Revised ** Increase of 1000% or more from the low level of a year ago. 201 206 188 209 78 109 157 r 93 82 106 89 47 193 91 21lr 151 67 64 91 331 402 410 309 Fac tory emplo yment month and year ago July 1946 Aug. 1945 July 1946 + 2 + 5 + 4 0 + 2 0 0 — 2 -12 — 6 0 +13 — 4 - 7 + 6 -15 + 4 +12 + 6 + 5 + 5 + 2 + 5 + + + + -10 + 2 -21 + 6 + + + Philadelphia.... Trenton................ Wilkes-Barre___ Williamsport.... Wilmington......... York... .............. 3 1 1 2 Fac tory pay rolls 6 4 2 5 Aug. 1945 Bui ding per mits va lue Retail sales Debits Aug. 1945 July 1946 Aug. 1945 July 1946 Aug. 1945 + 9 +45 +23 +23 +24 +29 +16 +32 +26 +20 +25 +38 + 7 +12 - 26 - 76 +416 + 16 - 53 +332 +216 +18 +19 + 13 +17 +19 +42 +52 +38 +41 +45 + 85 +184 + 96 +335 +16 +20 +55 +52 0 +17 -13 +14 ** ** - 11 +339 +105 ** - 48 - 26 +18 +49 +28 +20 +55 +46 * Area not restricted to the corporate limits of cities given here. •* Increase of 1000% or more from the low level of a year ago. * Per cent Per cent Aug. change from Aug. change from 1946 1946 index July Aug. index July Aug. 1946 1945 1946 1945 GENERAL INDEX . .. Manufacturing....................... Bituminous coal mining.... Building and construction.. Quar. and nonmet. mining.. Crude petroleum prod.... Public utilities........................ Retail trade....................... Wholesale trade...................... Hotels......................................... Laundries.................... Dyeing and cleaning............. 130 163 100 68 102 149 116 125 120 127 103 105 +1 +1 0 + 3 + 2 + 1 + 1 0 + 1 - 1 - 4 0 + 6 - 1 +43 +38 +32 +13 +18 + 8 +16 +19 + 6 + 9 326 430 557 162 381 268 190 205 193 248 220 224 + 5 + 5 +22 + 7 + 11 0 + 1 - 1 0 - 1 - 6 - 8 +16 + 6 +80 +53 +57 + 3 +24 +32 +27 +32 +31 +27 Manufacturing Employment* Payrolls* Per cent Aug. change from Aug. change from 1946 1946 index July Aug. index July Aug. 1946 1945 1946 1945 Indexes: 1923-5 —100 TOTAL........................................ Iron, steel and products... . Nonferrous metal products. Transportation equipment. Textiles and clothing............ Textiles................................... Clothing................................... Food products......................... Stone, clay and glass............. Lumber products................... Chemicals and products. .. Leather and products........... Paper and printing................ Printing................................... Others: Cigars and tobacco.............. Rubber tires, goods............ Musical instruments.......... 105 109 193 92 83 77 105 118 106 55 113 84 122 119 + + + + 1 1 1 4 0 1 1 1 4 0 2 1 1 1 - 1 - 2 - 4 -29 +n +12 + 8 - 1 +29 +14 +1 +17 +18 +19 175 219 429 164 150 141 192 202 183 100 201 142 214 200 + + + + + + + 6 5 5 8 3 2 6 0 +10 + 6 + 1 + 1 + 4 + 4 + 6 + 2 + 8 -26 +37 +37 +38 +12 +47 +40 - 3 +28 +32 +34 54 105 112 0 + 1 + 1 +20 -23 +34 89 240 198 0 + 3 + 4 +34 -17 +81 + + + + - * Figures from 2748 plants. Hours and Wages July 1946 +10 +10 +25 + 5 7 +29 -11 Payrolls 68 9 110 143 Local Business Conditions* Percentage change— August Indexes: 1932—100 118r 120r 128 123 r 72p 70 162 p 157 118p 124 125 107 49 p 48 143p 145 77 p 68 117 117 Employment — 4 — 1 + 1 -12 0 + 2 - 1 +10 - 9 + 2 Factory workers Averages August 1946 and per cent change from year ago Wee kly work ing tim e* Hourly earnings* Weekly earnings! Aver age Ch’ge Aver Ch’ge Aver Ch’ge hours age age TOTAL.......................... Iron, steel and products Nonfer. metal prods... Transportation equip.. Textiles and clothing.. 1 extiles....................... Clothing........ ............... I*ood products............... Stone, clay and glass.. Lumber products......... Chemicals and prods... Leather and products.. Paper and Printing... . Printing....................... 39.4 38.9 39.2 40.5 39.0 39.9 36.8 41.4 39.1 42.1 39.8 37.8 42.2 41.2 - 5 - 7 - 6 - 7 + 7 + 4 + 14 + 1 - 1 + 9 -11 - 4 - 3 - 3 Cigars and tobacco... Rubber tires, goods.. Musical instruments.. 38.1 41.1 43.6 - 5 - 6 +14 * Figures from 2604 plants. $1 .152 1.238 1.126 1.294 .933 .953 .863 .950 1.093 .915 1.231 .885 1.119 1.287 + 8 $45 22 + 9 48.02 +13 44.11 + 4 52.44 +15 36.38 +18 38.22 +10 32.37 +15 39 80 +14 42.70 +20 38.19 +12 48.99 +14 33.57 +17 47.28 +15 53.09 .789 +18 1.242 +15 1.058 +19 30.05 51.00 46.06 t Figures from 2748 plants. + 3 + 1 + 6 +23 +22 +26 +16 +14 4-28 4-12 +12 +12 4- 8 4-36 Page 109 Distribution and Prices Wholesale trade Unadjusted for seasonal variation Percent change Aug. 1946 1946 from from 8 Month Year Sales Total of all lines..., Boots and shoes.. . Drugs......................... Dry goods................ Electrical supplies. Groceries................ . Hardware................ Jewelry..................... Paper......................... Adjusted for seasonal variation Indexes: 1933-1939 =100 1946 from 8 mo*. 1945 Aug. July Aug. 1946 1946 1945 + 13 RETAIL TRADE Sales Department stores—District.......................... Philadelphia................ Women’s apparel................................................. Men s apparel....................................................... Shoe............................ ............................................. Furniture................................................................. 4- 46 250p 208 293 256 237p 254 231 302 221 205 176 r 157 197 141 180 _ 1 — 10 — 3 + 16 + 16 + 2* + + + + + + + + + + + 195p 175 156 148 232 169 188 147 194p 158 28 25 34 36 37 137 r 118 156 103 147 207 p 42 32 49 81 32 58* 192 182 r 165 162 63 60 +104 Inventories 199p 203 159 195 198r 154 282 293 220 80p 73 61 Source: U. S. Department of Commerce. Furniture................................................................ 2 1 Aug. 1946 Month Year ago ago 241 Aug. 1939 0 +31 +141 129 161 149 112 + + + + 4 3 6 3 +22 +27 +40 +12 + 72 +164 +122 + 39 144 144 169 156 107 120 160 127 + 2 + 3 +11 +12 +22 + 6 0 + 6 +n + 4 + + + + + + + + 0 0 0 + 1 + X 46 46 82 58 4 24 59 25 Source: U. S. Bureau of Labor Statistics. FREIGHT-CAR LOADINGS Total.......................................................................... Merchandise and miscellaneous.................... Merchandise—l.c.l................................... Coal........................................................................... Ore...................................................................... Coke.......................................................................... Forest products.................................................... Grain and products............................................ Livestock................................................................ 79p + + + + + + + + + + + 143 129 94 171 186 191 117 115 196 131 114 81 159 173 176 93 169 122 224 Check payments.................................................... 215 126 r + 213 227 4 2 1 6 1 + 7 24 + 9 34 4 13 16 16 14 8 16 4 26 7 12 11 7 6 35 34 4 12 6 149 136 95 164 279 190 108 121 125 146 129 94 162 278 176 131 154 169 1.33 118 81 145 258 164 113 164 117 + 67 188 205 106r + + + 78 60* +300* +106* 93* + 16* +630* — 6 + 17 + 8 182 p—Preliminary. 2oir 8* + 31* 148 132 95 181 187 204 89 125 130 MISCELLANEOUS Life insurance sales............................................... Business liquidations * Computed from unadjusted data. + 25 + 27 + Per cent change from Basic commodities (Aug. 1939=100). . . . Wholesale (1926 =100)................. Farm............................... Food............................... Other.............................. Living costs (1935-1939 *100) United States.............. Philadelphia................ Food............................. Clothing...................... Rent............................. Fuels............................. Housefurnishings. .. Other............................ Aug. 1946 fro m Aug. July Aug. 1946 1946 1945 Month Year ago ago Inventories Total of all lines___ Dry goods.............. Electrical supplies. Groceries................ Hardware............... Paper....................... Prices Not adjusted Per cent ch mge 15 189 2 162 216 r—Revised. BANKING STATISTICS MEMBER BANK RESERVES AND RELATED FACTORS Changes in weeks ended— +$131 3 - 16 + 15 — - 2 4 + 38 Sept. 11 Sources of funds: Reserve Bank credit extended in district............. Commercial transfers (chiefly interdistrict).... Treasury operations..................................................... -19 +18 + 4 +44 +27 -58 -47 +29 +13 + 3 +13 - 5 + 1 + 2 + 3 + 9 - 4 - 1 +$23 +$165 Member bank reserve deposits................................ “Other deposits’’ at Reserve Bank......................... Other Federal Reserve accounts.............................. Government securities.......... $1552 —*66 -*385 Total................................................................................ Other securities........................ + + 6 —160 -$365 Total loans & investments. $2392 Reserve with F.R. Bank.... 432 32 Balances with other banks.. 94 Other assets—net.................... 43 —$37 + 9 -*200 4 + - + - Liabilities Demand deposits, adjusted. . $1805 Time deposits............................ 273 U. S. Government deposits. . 255 Interbank deposits.................. 363 Borrowings................................. 9 Other liabilities......................... 26 Capital account........................ 262 Page 110 +* 2 + 5 - 44 + t + 7 + 1 + 1 +19 + 6 -28 - 24 +103 - 72 - 3 + 8 + + 3 - 3 + 3 - 3 + 10 + 1 + 1 - 3 i +13 - 5 - 3 + 8 20 Total investments................. *1754 9 5 Changes in five weeks Uses of funds: Total loans.............................. $ 638 202 Sept. 18 Sept. 25 1 +*35 - 3 - 3 Sept. 4 tO One year Aug. 28 + Assets Commercial loans.................... $ 349 Loans to brokers, etc............. 41 Other loans to carry secur... 38 47 1 Other loans................................ 162 Five weeks Third Federal Reserve District (Millions $) 1 Chang es in— Sept. 25, 1946 Wit*H Reporting member hanks (Millions $) i2 3 -$ 52 + 55 - 212 3 1 + 5 + 13 Member bank reserves (Daily averages; dollar figures in millions) Re Held quired Phila. hanks 1945: Sept. 1-15. . 1946: Aug. 1-15. . Aug. 16-31. . Sept. 1-15.. Country hanks 1945: Sept. 1-15. 1946: Aug. 1-15. Aug. 16-31. Sept. 1-15. . . . . Ex cess Ratio of excess to re quired Federal Reserve Bank of Phila. (Dollar figures in millions) Disc, and advances.. * $420 416 412 417 $346 384 386 394 $413 409 405 410 $283 328 329 333 *7 7 7 7 $63 56 57 61 2% 2 2 2 22% 17 17 18 U.S. securities.......... Chailges in— Sept. 25, 1946 18 1 1664 Total........................... $1683 1650 806 58 52 3 Gold certificate res. 892 Reserve ratio............. 34.7% Member bk. deposits U. S. general account Foreign deposits.. . . Five weeks One year +* 2 4 1 35 + 26 + +$28 + 7 + H + 24 - 3 +* 38 + 68 + 25 + - — _ 7 + 0.3% + 36 1 22 0.1%
@FedFRASER