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THE BUSINESS REVIEW FEDERAL RESERVE BANK OF PHILADELPHIA SEPTEMBER, 1948 Credit Legislation . . . recently passed/ helps solve some problems, but not all. It is only a part of the coordinated program needed to fight inflation. F. O. B. . . . versus basing point pricing has become a burning issue for industry and Government. Many of the real problems are obscured. CREDIT LEGISLATION Congress, in its special session, passed legislation dealing with credit and housing. Bv giving the Federal Reserve System additional powers it has taken a step in the di rection of combating inflationary pressures. But it would be a mistake for the public to expect too much from the legislation; inflation can be checked effectively only by a coor dinated attack on all fronts. Power to raise reserve requirements further will help the Federal Reserve System ab sorb increases in bank reserves which may arise from its operations in supporting the Govern ment security market and from other sources. To the extent that the growth m bank re serves can be restrained, the System can restrict credit expansion and a further increase in the money supply. Regulation of instalment credit will help somewhat to correct one of the potent forces in our present inflation—the huge demand for durable consumers goods. Stricter credit terms will tend to curb the growth of consumer credit and relieve somewhat the upward pressure on the prices of consumers’ durables still in short supply. The housing and mortgage legislation may have inflationary implications. If lenders respond to the new provisions, the flow of mortgage credit is likely to increase But the building industry already is operating close to capacity, and without additional labor and materials there can be little increase in construction. If an easier flow of credit would per mit builders to bid scarce resources away from other producers, it might increase the vol ume of construction. The principal result, however, is likely to be higher prices for homes. HIGHLIGHTS of CREDIT LEGISLATION BANK RESERVES Board of Governors given authority to raise reserve requirements against demand deposits of member banks by 4 additional percentage points; for member banks: —in central reserve cities to 30%. —in reserve cities to 24% —outside of central reserve or reserve cities to 18% and to raise requirements against time deposits of all member banks by W2 per centage points to 7%%. Expiration of authority: June 30, 1949. Page 96 CONSUMER CREDIT MORTGAGE CREDIT Board of Governors given authority to ex ercise controls over consumer instalment credit. . Expiration of authority: June 30, 1949. * * * * The Board’s regulation, effective Septem ber 20, includes: -—one-third down payment on automo biles —one-fifth down payment on 11 other items —15 months to pay off credit of $1,000 and less _ —18 months to pay off credit from $1,000 to $5,000. Enlargement of secondary mort gage market facilities. Restoration of part of, and addi tions to, FHA guarantee program under Title VI. Establishment of a system of yield insurance for investments in new rental housing. Liberalization of Title II loans and loans for repair and mod ernization under Title I. / THE BACKGROUND CONSUMER CREDIT now totals more than $14 billion. This is $4 billion more than the pre-war record established almost seven years ago when, under temporary wartime authority, the Federal Reserve System was given the re sponsibility of regulating consumer credit. The purpose of those controls was to help prevent a diversion of resources to the production of consumer goods at a time when resources were needed for defense, and to help prevent infla tion by dampening consumer demand. For almost two and a half years after controls were established consumer credit declined. By early 1944 the total outstanding had decreased by about one-half to somewhat less than $5 billion. Of course the establishment of con sumer credit controls was by no means the only reason for the reduction. Automobiles, wash ing machines, radios, and other consumer dur ables became increasingly hard to get. And most consumers exercised good judgment, re fraining from bidding up prices of scarce items and preferring instead to build up their bank accounts and War Bond holdings for the future. Nevertheless, credit controls played an im portant part. During 1942 they were strength ened to include most durable and semi-durable consumers’ goods, to cover charge account sales and single payment loans, to reduce further the maximum payment period, and to raise minimum down payments. These regulations continued for the rest of the war. Shortly after V-J Day, the terms were re laxed somewhat. The maximum payment period was increased from twelve to fifteen months except for durable goods which were still in exceedingly short supply. And again in De cember 1946 the regulation was changed, termi nating all controls except on instalment credit for a selected list of durable goods. By that time, total consumer credit was back to the 1941 level, but because durables were still scarce, instalment sales credit had not yet risen substan tially. Eleven months later, when consumer credit was $2 billion more than in 1941, the System’s authority was discontinued and Congress de clined to grant further authority. Since controls were terminated last fall, consumer credit has continued to mount. The growth has been espe cially marked in instalment sale credit, par ticularly for automobiles, as the supply of con sumers’ durables has increased. Some consum ers have used up their accumulated holdings of liquid assets, are currently saving less, and are buying increasingly on the instalment plan. The abolition of controls has been another factor in the growing volume of outstanding credit. A hypothetical example will show the substantial effect of easier terms: assuming a given volume of instalment sales, a reduction of down payments from one-third to one-tenth can increase outstanding credit by 35 per cent; an extension of repayment time from 15 to 24 months can increase credit balances by 56 per cent. The actual extent of the relaxation in credit terms has varied among goods and among lenders. New automobiles now generally can be paid for over a period up to 24 months, but down payments still remain substantial. On the other hand, major appliances are being bought at some stores with 10 per cent down and 12 to 18 months to pay. Banks, in general, have “held the line” more successfully than mail order houses, department stores, and others. How ever, sales transactions probably are generally on a more conservative basis than advertise ments and other surface conditions may indicate. This was the background of the problem fac ing Congress. Three facts stood out: consumer credit was at an all-time high, credit terms were more liberal, and prospects were for more of the same. Consumers apparently expect to con tinue buying in large volume over the rest of the year and in doing so seem willing to spend beyond their income. Heavy incurrence of debt on easy terms in a period of high prices, high incomes, and full employment tends to intensify the boom and is dangerous both to the individual and to the economy as a whole. Congress, ac cordingly, authorized restoration of controls on instalment credit until next July. BANK RESERVES are the instrument which the monetary authorities have been using to at tack the excessive supply of money to spend compared with a limited supply of goods to be bought. Page 97 The money supply—privately owned currency and bank deposits—now amounts to $166 bil lion. It was increased tremendously during the war as the Treasury found it necessary to finance part of the war costs by selling securities to commercial banks. And it has risen further since the war as banks made loans to businesses and individuals. Bank reserves provide a limit to this process of expanding earning assets and creating de posits. The traditional method of attacking in flation through the monetary mechanism, there fore, has been to restrict the total amount of reserves or to require banks to hold a larger volume of reserves against their deposits. But the effectiveness of both these methods has be come limited by the System’s policy of support ing the Government security market. For if the supply of reserves were drastically curtailed or reserve requirements raised sharply, banks would be forced to sell Government securities. In the absence of support, such sales could cause a serious drop in Government security prices. On the other hand, the System’s re sponsibility for supporting the market means that banks can obtain reserves easily by selling Governments, and can use these reserves as the basis for expanding their earning assets and the money supply. The Federal Reserve System thus has been faced with a dilemma arising from two conflict ing objectives: restricting expansion of the money supply and supporting the Government security market. Yet, despite this fundamental difficulty, the System and the Treasury have been able to exercise a considerable degree of restraint. The main device has been the Treas ury’s cash surplus. For when the Treasury col lects more than it spends, it reduces bank de posits and bank reserves; and when it uses the surplus to pay off Government securities held by the Reserve Banks, it makes this reduction per manent. A second method has been to raise rates on short-term Government securities, making these issues more attractive to banks and other in vestors. The Reserve Banks thus have been able to sell short-terms, thereby tending to reduce bank reserves. As short-term rates rose, the discount rate has been increased to discourage banks from making a profit by borrowing on short-term Governments. Inasmuch as few banks are borrowing from the Reserve Banks, Page 98 however, this move has been primarily of psy chological value. Finally, reserve requirements of member banks in the central reserve cities have been raised from 20 to 24 per cent. But while these efforts were reasonably suc cessful during the first half of this year, the prospects were not so bright for the second half. Strong forces are likely to be pushing bank credit and the money supply to even higher lev els. On the other hand, the most potent weapon in combating monetary expansion—a Treasury surplus—will not be available. Before the new legislation was passed, reserve requirements were at their legal limits—with the exception of two percentage points for central reserve city banks. And as banks and other lenders need funds to meet private credit demands, they are likely to sell Governments. The Federal Re serve, in turn, probably will be called on to supply most of these funds by buying the Gov ernments in support of the market. So additional measures were needed to pre vent the further growth of the money supply. The bill presented to Congress called for addi tional authority to raise reserve requirements against demand deposits of member banks by as much as ten percentage points and against time deposits by a maximum of four percentage points. Congress granted the Board of Gover nors the temporary authority to raise maximum reserve requirements against demand deposits by as much as four additional percentage points, and against time deposits by one and a half ad ditional percentage points. MORTGAGE CREDIT has been one of the most inflationary parts of the whole credit pic ture. Yet many people have felt that a shortage of mortgage credit on easy terms has been hin dering efforts to meet our huge needs for hous ing. Despite record construction many needs, particularly for rental units and low-price homes, still remain unfilled. There is no doubt that some potential home buyers have been forced out of the market, not only by astronomical prices but also by inability to obtain credit on easy terms. Some commer cial banks have reached their limit of mortgage loans. Banks and other lenders have become more discriminating; they have been asking larger down payments and shorter maturities, and they have become increasingly dissatisfied with a 4 per cent rate. Legislation also contributed to a tightening of mortgage money. As far back as June 1947 the R.F.C. Mortgage Company, which had been supplying a secondary market for G.I. mort gages, was abolished. Last April, Congress re quired the Federal Housing Administration to base its guarantees of one-to-four-family home mortgages under Title VI on appraised value in stead of current construction costs; then it later allowed Title VI to expire completely. Title II loans were still available, but the terms were not as easy as those on Title VI loans. In June, Con gress restored authority to maintain a secondary market for G. I. mortgages by allowing the Fed eral National Mortgage Association to buy both FHA and G.I. mortgages to a limited extent. The combination of greater caution exercised by lenders and the more restrictive measures imposed by Congress led some people to fear that tight mortgage credit would kill the con struction boom. Yet, non-farm mortgage debt continued to rise rapidly during the first half of the year, establishing a new record high in June. Nevertheless, Congress passed new hous ing legislation, tending to ease the supply of credit. Title VI, section 608, insurance on loans for large rental projects was restored and extended until March 31, 1949 with an additional amount of $800 million for insurance authorization. But whereas the 90 per cent guarantee was formerly based on necessary costs of construction, it is now based on FHA’s estimate of replacement costs as of December 31, 1947. Renewed author ity of the FHA to guarantee loans under Title VI, section 603, however, was not included in the legislation. To compensate partly for not restoring Title VI, section 603 guarantees, Congress liberalized many of the provisions of Title II loans. Max imum loan values were raised and matui’ities in some cases were lengthened. A new section was added to Title VI, providing 80 per cent guar antees on the total value or $6000 for each sin gle-family unit for loans to large-scale builders of low-cost, single family units. The new device of yield insurance provides that FHA may pay investors in rental housing for families of mod erate income 2%, per cent on the investment, plus 2 per cent a year for amortization. And the Federal National Mortgage Association’s au thority to maintain a secondary market for FHA and G.I. loans was further strengthened. It may now buy 50 per cent instead of 25 per cent of the mortgages made by a lending institution since April. THE OUTLOOK What is the new legislation likely to accomplish? CONSUMER CREDIT CONTROLS will help somewhat to hold down the demand for con sumers’ goods. The unprecedented volume of spending by consumers, at the expense of their past and current saving and of their future in come, has been a strong inflationary force. While output of most consumers’ durables is at an all-time high, the supply of some is still far short of demand. Automobile production is merely filling replacement needs, making little progress in meeting accumulated demands. lower. It is better both for the individual and the economy to save when incomes are high, and to use some of the savings to supplement in comes when they are low. Of course, controls will force consumers to rely more on their current income and past sav ings in attempting to satisfy their demand for durable goods. But this is exactly what they should do. Consumers, and especially those in a precarious financial position, are not helped by incurring at high prices debts which may have to be paid off when prices and incomes are much The new regulations are not as stringent as those previously in effect, but are stricter than the terms generally prevailing just before con trols were restored. Automobile purchases re quire one-third down, while purchases of eleven other articles require 20 per cent down. The maximum payment period depends on the size of the credit extended—fifteen months for Some merchants may not sell as much. But again, the controls serve to protect sellers and lenders as well as consumers. Easy credit terms in times of boom, when almost any business can thrive, leave nothing for a slump when relaxa tion of terms might help to stimulate sales. Page 99 amounts of $1,000 and less, eighteen months for amounts between $1,000 and $5,000. Consumer credit controls thus will help to prevent further inflation and will place con sumers, sellers, and the general economy in better position to meet any ensuing readjust ment. Even with controls, however, total con sumer credit may continue to increase. The regulation applies only to instalment credit on a selected list of durable goods, covering less than one-half of total consumer credit. And as more and more consumers’ durables come on the market, even instalment credit may still increase. The important point is that if it does increase, it is not likely to rise as rapidly as in the absence of controls. Yet, consumer credit is only one part of the credit picture. Consumer credit regulations will help to combat inflation, but it would be a mistake to expect too much from them. BANK RESERVE REQUIREMENTS attack a much broader aspect of the problem. They in fluence the total amount of money people have available to spend. The Board of Governors is now authorized to raise reserve requirements on demand de posits of central reserve city member banks to 30 per cent, of reserve city banks to 24 per cent, of country banks to 18 per cent. All member banks can be required to maintain reserves equal to 7y2 per cent of their time deposits. If the new authority were fully utilized, such in creases would involve about $4 billion of addi tional required reserves. As Chairman McCabe stated before the Sen ate Banking and Currency Committee, “The basic purpose of increasing the authority over reserve requirements would be to enable the System to acquire more—if necessary many more—long-term Government securities to maintain the long-term yield level. New re serves created by such System purchases—or in other ways—could be absorbed through in creases in reserve requirements and thus be made unavailable for multiple credit ex pansion.” Higher reserve requirements would have two other restraining effects. To the extent that banks sold Governments to meet the new re Page 100 quirements, they would be disposing of some of their soundest and most liquid assets. The resulting decline in their liquidity would tend to make them even more cautious toward doubt ful credit risks. Moreover, the decline in earn ing assets might cause them to raise their rates to customers, thus tending to cut off some of the demands for credit. The second effect is the purely arithmetical one of reducing the credit expansion ratio. If reserve requirements, for example, are 20 per cent, $1 of reserves supports $5 of deposits; but with a requirement of 25 per cent, $1 of reserves supports only $4 of deposits. As with consumer credit, we should not over estimate the importance of raising reserve re quirements as a method of combating inflation. It is only one part of a broad anti-inflationary financial program which would include Govern ment lending and guaranteeing, budgetary, debt management, and Federal Reserve policies. Just as higher reserve requirements cannot do the job alone, so financial policies cannot be con sidered in isolation. They must be part of a comprehensive anti-inflationary policy on all fronts. MORTGAGE CREDIT in greater amounts and on easier terms may counteract much of the anti inflationary effects of other credit legislation. Building today, like most other activities, is about at capacity levels. The recent legislation, therefore, may stimulate the flow of mortgage credit without materially increasing the volume of construction. How much the new provisions will increase the supply of credit will depend largely on the response of lenders. One big question mark is whether, despite the easier terms provided by the legislation, lenders will find the returns on mortgages attractive enough. If the FHA were to raise interest rates, this factor might be over come. But here is a case where an increase in interest rates instead of being deflationary, as usually believed, could be inflationary. This would be true because the demand for credit is so strong that it would be little affected by a moderate increase in the cost of credit, while the supply probably would be increased. It serves to emphasize the fact that the attack on inflationary mortgage credit must be largely through its supply. F. O. B THE BASING POINT SYSTEM is currently the subject of a controversy in which many of the real issues have been obscured in a partisan debate of many years’ standing. The controversy and confusion are illustrated by recent headlines in the press, such as “Local Monopolies in Steel Charged,” “Steel Costs Rising $2 to $4 in Detroit,” “Prices at St. Louis Mills Are $4 to $15 per Ton Higher Than at Chicago,” and “Higher Costs Ahead for Many Consumers.” In time, after careful investigation, it will be easier to see the ground we have covered and the direction in which w e are headed. Perhaps it will become clear that the loss of the basing point system to industry is much less serious than some now believe, and that one of the greatest real gains resulting from the abolition of the system is an opportunity for a re-examination of fundamental economic policies. The Supreme Court’s decision in April, sus taining the Federal Trade Commission’s cease and desist order against the use of the basing point pricing system in the cement industry, promises to have far-reaching effects. The bas ing point system has been in use in perhaps a score of important industries, including build ers’ supplies, farm equipment, lead, iron and steel, and others, many of which now face a serious change in established practice. Steel producers already have shifted from delivered price quotations to f.o.b. mill prices, which re quire the consumer to pay the freight. Their action has unleashed a storm of argument, mainly directed against the abolition of pre viously existing pricing methods. In the months to come, the basing point de cision will be the subject of Congressional in quiry. Its possible consequences for industrial organization and location will be carefully studied by many groups. It is not the purpose of this article to anticipate the conclusions of those studies or to make predictions of future developments. All that can be done at this time is to suggest some of the problems that are in volved and help clear the air for further study. Most of the arguments on the basing point system have been stated in terms of steel. The steel industry is by far the most important group using the system and it has been in the center of the controversy from the beginning. A cease and desist order was issued against steel’s “Pittsburgh plus” single basing point system in 1924. The multiple base point method in use until recently was gradually developed after that time. The order was made final (subject to appeal) by the Wheeler-Lea Act in 1938, one year after proceedings had been instituted against the cement industry’s multiple basing point system. A cease and desist order was is sued in that case in 1943, and it is the Supreme Court’s decision on that order which has re sulted in the present action by steel and has brought the issue to the attention of the public. The Basing Point Pricing System The Federal Trade Commission gives the fol lowing skeleton outline of the basing point sys tem’s operation: “For each particular steel product a number of points have been selected at which ‘base prices’ are quoted. The delivery price at any other point is computed by adding to the base price at each basing point the railway freight charged from that point to point of delivery and adopting the smallest of these totals. The steel may actually be shipped from a great distance or from next door to the customer’s plant, but the delivered price is the same in all cases, that is, the customer pays as if the steel were always shipped from the ‘govern ing’ basing point, i.e., that giving the lowest delivered cost according to formula.” Page 101 The following diagram is one illustration of the system (prices and rates are fictitious, of course): NET MILL \PRICE S60 BASE POINT+A, BASE PRICE B 60 RAIL FREIGHT NET MILL *5 SPRICE B63 / FREIGHT CONSUMING PLANT FT" DELIVERED PRICE ^ J65 identity of price is predetermined. This is the crux of the F.T.C. objection. It is the Federal Trade Commission’s conten tion that the basing point system constitutes in dustry-wide price-setting in violation of the anti trust laws and that it results in systematic price discrimination by individual producers. Articles and editorials appearing in the press in recent weeks have reported four main lines of argu ment in opposition to the F.T.C. ruling: (1) Abolition of the system will upset an established and necessary practice which is a natural out growth of economic conditions peculiar to the steel industry. (2) The outlawing of freight absorption will diminish competition in the in dustry. (3) Abolition of the basing point sys tem will increase the price of steel to consumers. (4) A new pricing system will disrupt industry and trade by creating new competitive relation ships and will ultimately force relocation of producers and consumers. It will also work some hardship on the railroads. FREIGHT Argument 1 "The basing point system is a natural development” NET MILL PRICE B56 BASE POINT+0 BASE PRICE J 60 The delivered price at the consuming plant is calculated from the price at the nearest base point (A) and rail freight from A to the consum ing plant. Net selling price of the mill located at the basing point (if it ships by rail) is $60. For Mill 2, the net selling price is $65 less $2 freight costs. For Mill 3, the selling price at the mill is $56. In every case the delivered price at the consuming plant is the same. There are two elements in the price determi nation : the “base price” and the transportation charge. Net selling price of the producing mill depends upon its geographical relationship to the base and the relationship of the base to the consumer. The mill’s net selling price varies with the location of customers, but—and this point is crucial—regardless of varying relation ships, regardless of the location of the produc ing mill, under the basing point system the price quoted to an individual consumer by any steel company will always be the same. And that Page 102 The first argument raises basic issues concern ing the relationship of Government and busi ness and the kind of economy we wish to have. It is really an argument against existing laws and attitudes, rather than against the specific action of the F.T.C. It is frequently maintained that the character of the steel industry made the basing point sys tem a “natural” development. High transporta tion costs, the peculiar location of markets and raw material sources, expensive and immobile equipment, and large fixed costs are such that “a knowledge of the level at which competition must be met in quoting prices at a definite loca tion is valuable in preventing completely dis organized markets that might prove disastrous to the industry.” Hn other words, it was the opinion of the industry that predetermined prices were necessary to the industry’s well being; and the decisions of the steel companies with respect to price policy, from the begin nings of “Pittsburgh-plus” in 1880 to the mul tiple basing point system of the present day, 1 U. S. Steel Corporation: Some Factors in the Pricing of Steel. TNEC Exhibit 1416, 1941. were to a large extent based on that assump tion. It is the opinion of the Government, however, expressed in legislation, that price competition is necessary for the proper functioning of the industry and the economy. Perceiving the po tential evils inherent in price-setting, the Gov ernment “naturally” took steps to eliminate the basing point system. To the Federal Trade Commission, that system was a contravention of the otherwise “natural” course of events. Obviously, it is useless to try to determine whether Nature is on the side of the industry or the Government in this matter. The outcome would depend upon one’s opinion as to what should be the basic character of the economy, and that opinion, of course, is the subject of a much larger controversy. By the same token, it is not helpful to argue that the basing point system should be retained because it is a “nat ural” development; for without supporting the implicit assumptions, such an argument resolves into a mere assertion of opinion. It is true that a one-price system is character istic of competitive markets, but the existence of uniform prices in a given locality does not prove the presence of competition. Predeter mined uniformity of prices is just as likely to signify collusion. Freight absorption may have enabled distant firms to “compete” only because the nearby firm agreed to abide by the formula. Competition in all areas is still possible under f.o.b. mill pricing. All that is necessary is that the mills quote prices at the origin equal to the former net mill price after “freight absorption.” Price discrimination is unlawful as part of a mutual arrangement for the elimination of price competition, but the Commission’s order and the Supreme Court decision did not prohibit freight absorption to meet “individual competi tive situations.” In those cases where the dis advantage is so great that a firm cannot profit ably serve a particular area, competition will force it out of the race for customers in that locality. But it is extremely doubtful that such business would have been sought after even under a system of delivered prices. In fact, if its proponents could see some of the implications of the argument, they might abandon it very quickly. For, if it were granted that the characteristics of the steel industry necessitate predetermined, uniform pricing, that the steel industry is (as some imply) akin to a “natural monopoly,” a good case could be made for the regulation of the industry as a public utility. This, of course, is a far cry from what industry or the Government would recommend. It is possible that in isolated cases f.o.b. pric ing may encourage a “local monopoly” on the part of one advantageously located mill. Such cases have been reported recently. Naturally, consumers will prefer to buy from the mill whose delivered price is lowest. The “local monopoly,” however, cannot raise its prices above the level warranted by its freight advantage. Moreover, especially when steel supplies become larger, the “monopoly” will be under constant pressure from lower-cost mills which may reduce their prices to compensate for poor location. Argument 2 The basing point system at times made for the payment of “phantom freight” by the con sumer, a charge calculated but not paid by ad vantageously located non-basing point mills. F.o.b. pricing will eliminate this charge and give such mills a real competitive advantage. "The outlawing of freight absorption will diminish competition.” The second argument rests upon the presump tion that the basing point system made competi tion possible by allowing every mill to sell to a customer at the same price, regardless of its location. It implies that with the abandonment of the system, mills located far from a particular consumer will no longer be able to meet the price of nearby competitors because it will not be possible to “absorb” the freight to the distant basing point. The fact that all prices are uni form (when the system is working perfectly) is cited as evidence of a highly competitive situation. Argument 3 "Abolition of the system will raise the price to the consumer.” The third argument seems to imply that with the end of the basing point system, transporta tion charges had to be added to previously exist ing delivered prices. Theoretically, there were several other possibilities. Competition might Page 103 have forced the seller to lower his f.o.b. mill price to the level of his old net selling price, leaving the cost to the buyer unchanged. Or, the buyer might patronize a nearby mill, thus re ducing transportation costs. Granted that some customers might be so situated with respect to all mills that their costs did rise, is it not likely that some other buyers would benefit by the elimination of “phantom freight” previously added to their cost? A recent announcement by one large steel company, in fact, stated that de livered prices to some consumers would be rela tively lower after the change. Transportation costs, of course, are but one element of the basing point system. To argue, as some do, that abandonment of delivered price quotations will give a fillip to inflation is to ig nore the base price itself. F.o.b. pricing certainly will redistribute transportation costs but it can not, in itself, increase the total steel bill. The evidence strongly suggests that base prices were set without regard to the production costs of in dividual plants, but high enough so that every firm could make a reasonable profit. Abolition of the system also means abolition of base prices; but if net mill prices had remained the same, the total cost of steel to the consumer need not have risen. Recent increases in the prices of steel products were the result of considerations other than those attending the end of the basing point system. In 1936, as a matter of fact, a change in price-making policy was opposed on the ground that removal of the basing point formu las would lead to ruinous price-cutting and a downward deflation spiral. The basing point system as a mere formula has little to do with the level of steel prices. However, it would not be fair to conclude the argument there. To the extent that it is a ve hicle for price administration, the basing point system has a great deal to do with price. Dur ing the depression, price-setting formulas tend ed to keep prices up, offsetting in some degree the severe financial pressures which caused a partial breakdown of the system through “chis eling” and “price cutting.” In recent months, although upward pressures have driven some steel into “grey markets,” the price policies of the steel companies probably tended to keep steel from rising as much as the prices of most other goods. Several weeks ago it was announced that steel Page 104 prices at the mills would rise to meet increased costs. If this indicates that the surrender of the steel companies on the basing point issue also means the end of all uniform pricing policies and all price leadership, it is probable that de mand will soon pull steel prices up beyond the in creases which have been put into effect thus far. This could have been allowed to happen with the basing point system intact; by no twist of logic can the abolition of the system be said to have caused generally higher prices. But those who expected the return of competition to help the consumer are destined to be sadly disap pointed—for the time being at least. In the light of this probability, it might be asked why the Government chose this particular time to force the issue. The answer is that the Government did not choose this time. The Fed eral Trade Commission started the fight on the basing point system some twenty-five years ago. That the Supreme Court would pick an inflation ary period to uphold the cease and desist order is unfortunate, but it obviously could not be foreseen. Besides, there was nothing to prevent industry from abandoning the system at any time. The decision of the steel industry to aban don it now is voluntary—a reversal of its pre vious policy. Argument 4 "Adoption of a new pricing system will disrupt industry and trade.” The fourth argument contends that the aboli tion of uniform pricing will upset historical competitive relationships and lead to wholesale relocation of industry. Undoubtedly, f.o.b. mill pricing in steel will benefit steel consumers who are near their source of supply and steel pro ducers who are near their markets. How great this benefit will be and to what extent it will en courage relocation of plants depend on many factors. For a steel consumer it will depend on: (1) the differential (if any) between rail trans portation rates from the old basing point and transportation costs from the mill, and his com petitors’ differentials; (2) the importance of steel costs in the total cost of his product; (3) transportation rates on his product; (4) the rel ative importance of other location factors, in cluding labor force, other raw material sup plies, and many others. For a steel producer, the possibility of relocation is limited by the need for access to raw materials and tremendous immobile plant facilities. Large surplus-steel areas, like Pittsburgh, may attract new steel using industries or, when maintenance of vol ume becomes a problem, may be forced to make price concessions. The location of new steel-making facilities, of course, will be pro foundly influenced by pricing policy. It is clear that no general statement concern ing changes in the structure of industry can be made without a painstaking study of many in dividual situations. Some costs and some prices will change. New relationships will develop against the backdrop of technological innova tions. How different they will be from those in existence only time and investigation can tell. It is possible, however, that although the change may be discomforting it will result in a more efficient industrial organization. An example of this may be found in transpor tation. It has been said that the railroads will suffer some loss of revenue because of f.o.b. mill pricing. This is possible. Although ade quate facilities are still lacking, truck and barge transportation will be encouraged. Moreover, under the basing point system, since it is a mat ter of price indifference to a consumer where he buys his steel, situations arise in which Chi cago consumers buy steel in Pittsburgh at the same time that Pittsburgh consumers buy the same specification steel in Chicago. Thus freight is “cross-hauled”—with good results for the rail roads but at considerable cost, especially when transportation facilities already carry a heavy burden. The elimination of “cross-hauling” may create some problems of freight rate revision, but it cannot be denied that the nation’s indus trial machine will be the better for it. * * * The difficulty of the change-over to f.o.b. mill pricing is aggravated by a tight steel supply and increased transportation costs. Many will feel injured by the new system, but it would be well to remember that many may be benefited as well. The full impact of the change on our economy will not be apparent for some time, and investigators should not be misled by pat arguments which seem to furnish easy answers to complex problems. Page 10's BUSINESS STATISTICS Production Workers in Pennsylvania Factories Production Philadelphia Federal Reserve District Not adjusted Adjusted for seasonal variation July June July 1948 1948 1947 Indexes: 1923-5 = 100 114 85 241 111 100 r 123 r 102 91 106 116 239 172 71 66 115 280 514 518 354 106 143 244 106 97 127 87 104 r 106 114 236 r 163 62 58 93 289 472 454 303 + + + + + + — — + + + + — + 1 + +10 + -26 -42 — - 4 +u — 0 — + 2 + - 8 + - 3 + - 2 + + 3 — + 2 + +14 + +19 + + 2 + + 1 — -11 0* + -13 - 8 — +1 - 3 + - 1 + + 2 — - 5 + +ii — + 9 + +12 + - 3 — - 3 + - 7 + - 5 + -17 + + 4 + - 4 + - 5 + - 7 + 252 145 319 417 177 76 175 458 +15 + 4 + 9 +17 112p 112 115p 114 119p 119 108 140 138 r 80p 78 Transportation equipment.. . . H9p 124 135p 137 110 Tobacco and products............. 106 49p 50 Chemicals and products.......... 178p 177 97 Leather and products............... 99 Paper and printing.................... 121 119 INDUSTRIAL PRODUCTION MANUFACTURING.................. Electrical apparatus.................. Automobile parts and bodies. Locomotives and cars.............. Lumber and products.............. 111 125 69 54 194 30 110 58 llOr 115r 93 93 201 r 27 110 57 109 112 117 103 r 139 70 r 133 r 139 105 47 r 173 r 96 r 122 109 r 121 82 68 194 r 46 r 139 r 56 96 83 94 68 r 82p 84 38p 37 40 114p 112 90 r 81 95 83 152 128 146 79p 77 70r 56 r 61 57 29 26 26 Slaughtering, meat packing.. . 99 79 Canning and preserving.......... 243p 107 Paper and wood pulp............... 99 Printing and publishing........... 125 97 101 116 Paints and varnishes................ 129 Petroleum products.................. 232p 168p 67 COAL MINING........................... 63 96p CRUDE OIL................................. 290 ELECTRIC POWER—Output 493 493 Sales, to industries.................... 328 BUILDING CONTRACTS TOTA L AWARDSt.................. 290 151 347 Public works and utilitiest. . . 489 0 +1 0 + 1 +1 + 3 - 3 - 2 - 3 - 2 + i + 3 + 2 108p 110 110p 112 105 107 136 73p 116p 123p 115 53p 175p 90 117 140 r 75 125 121 119 55 177 95 118 r 135 65 r 130 r 0 + 4 - 3 - 2 - 1 —33 - 8 - 4 +19 + 7 +13 -15 +26 +15 + 7 +21 + 1 + 5 - 2* + 6 — 16 - 5 + 2 + 7 - 2 + 7 +10 +21 + 8 + 6 + 1 0 + 3 -11 0 + 9 +10 + 9 102 114 66 49 204 31 105 58 104 r 117 r 92 97 201 r 33 110 59 101 r 110 78 60 204 47 133 r 56 92 77p 33p 106p 78 126 93p 55 29 116 90 80 192p 116 95 121 90 89 114 120 233p 164p 65 63 84 290 458 463 335 92 r 80 35 108 81 128 93 59 30 116 109 91 173 120 99 r 121 97 92 106 118 239 172 70 66 101 291 489 503 358 81 64 r 35 84 r 66 121 82 r 58 29 113 97 146 192 114 93 123 81 92 r 104 106 237 r 160 61 58 82 289 439 427 309 +60 +36 +80 +52 267 171 319 420 257 154 325 397 163 85 161 394 3 + 3 3 + 3 1 6 + 2 1 +1 14 + 9 0 10 3 — 3 1 0 4 +10 3 + 7 3 + 8 1 - 1 2 3 15 20 0 33 21 4 3 14 21 5 26 18 4 14 6 0 2* 7 45 0 2 2 1 11 3 9 13 2 3 8 9 3 1 4 8 8 + 63 +100 + 98 + 7 * Unadjusted for seasonal variation. t 3-month moving daily average centered at 3rd month. 114 51 r 171 r 86 118 p—Preliminary, r—Revised. Local Business Conditions* Percentage change— July 1948 from month and year ago Scranton............. Wilkes-Barre.... Y ork..................... Factory employment Factory payrolls Building permits value Retail sales Debits June 1948 July 1947 June 1948 July 1947 June 1948 July 1947 June 1948 July 1947 June 1948 July 1947 0 - 1 - 1 0 +1 - 1 - 1 - 1 - 4 - 1 + 2 + 1 +37 0 + 2 0 + 1 - 1 0 + 5 - 1 - 1 - 4 0 + 9 +12 +15 +21 +60 + 6 +14 +10 0 - 2 - 2 - 2 + + + - + + - +19 + 13 +15 +11 + 10 + 83 +150 +169 +968 - 36 - 45 - 9 +123 + 79 - 14 - 15 0 - 60 + 5 + 31 - 78 + 15 - 42 - 41 - 24 +748 - 8 + 26 + 52 - 22 - 7 -10 -14 -16 -11 -33 -15 -22 -14 -22 +58 +24 +16 +18 +15 + 4 +14 + 4 +22 +14 -15 -10 +17 +21 + 3 + 5 — 4 + 2 — 1 — 6 — 1 — 6 -15 + 3 + 6 -22 +1 +26 +15 + 9 +19 +11 +11 + * +23 + 3 +29 +19 +19 +27 5 7 6 1 1 3 i 3 * Area not restricted to the corporate limits of cities given here. Page 106 Svmmary Estimates—July 1948 Per cent change 1948 July 1948 from July June July from 1948 1948 1947 7 Mo. Year mos. ago ago 1947 Employ ment Durable goods industries. Nondurable goods Weekly Payrolls Weekly Man-Hours Worked 1,085,000 $54,600,000 616,800 33.751.000 42.657.000 24.325.000 20.850.000 18.332.000 468,100 Changes in Major Industry Groups Payrolls Employment Per cent July change July from 1948 1948 In In dex June July dex June July 1948 1947 1948 1947 Per cent change from Indexes (1939 average = 100) 126 152 -1 -1 0 0 284 321 103 126 94 85 Textiles..................................... 90 Apparel..................................... 94 Furniture and lumber prods. 94 119 Printing and publishing.... 137 Chemicals................................. 120 Petroleum and coal products 153 140 86 Stone, clay and glass............. 132 Iron and steel.......................... 138 Nonferrous metals................. 135 Machinery (excl. electrical). 210 Electrical machinery............. 225 Transportation equip. (excl. auto).......................... 217 Automobiles and equipment. 146 Other manufacturing............ 129 -1 +2 -4 -2 -5 -1 -2 -1 + i 239 260 204 214 223 207 224 264 271 254 318 281 175 280 288 270 439 480 All manufacturing.................. Durable goods industries. . Nondurable goods +i +i -1 -4 -3 -2 -1 -4 0 0 0 -1 -2 0 - 4 +n - 3 + 4 0 + 4 0 + 2 + 3 -13 - 9 - 1 0 -12 + s 0 +n -20 - 7 400 304 252 -1 —1 + 8 + 6 -1 +3 +12 +10 - 2 +29 -6 -4 + 5 -2 + 9 -2 0 +3 +1 +1 -4 +16 + 6 +10 +21 + 3 - 8 -5 -3 -4 -1 -6 0 +4 -2 -3 -5 +18 + 7 + 8 — 6 +10 + 4 +14 -21 0 Average Earnings and Working Time July 1948 Per cent change from year ago Weekly Earnings Hourly Earnings Weekly Hours Aver Aver Aver age Ch’ge age Ch’ge age Ch’ge All manufacturing.... $50.32 Durable goods indus. 54.71 Nondurable goods industries................... 44.54 46.14 28.52 Textiles........................... 45.26 35.22 Lumber.......................... 41.11 Furniture and lumber products..................... 44.10 Paper................. .. . :. . . 47.76 Printing & publishing. 55.86 Chemicals...................... 50.23 Petrol. & coal prods.. . 63.15 49.85 Leather.......................... 34.78 Stone, clay and glass.. 48.35 Iron and steel............... 56.19 Nonferrous metals. . . . 52.16 Machinery (excl. elec.) 53.07 Electrical machinery.. 59.74 Transportation equip, (excl. auto)................ 56.23 Automobiles & equip.. 57.16 Other manufacturing.. 40.86 + 8 $1,280 + 6 1.387 + 8 + 6 39.3 39.4 +1 0 +11 +10 + 2 +16 + 9 +13 1.137 1 .081 .760 1.164 .947 1.038 +10 + 8 + 3 +14 +10 + 18 39.2 42.7 37.5 38.9 37.2 39.6 +1 + 2 - 1 + 2 - I - 4 + 9 + 11 + 6 + 8 +17 +19 + 1 + 8 + 8 + 7 + 5 + 4 1.020 1.121 1.476 1.209 1.583 1.376 .988 1.226 L.442 1.358 1.318 1.494 + 8 +12 + 8 + 6 +12 + 8 + 5 +11 + 6 + 8 + 5 + 4 43.2 42 6 37.8 41 .5 39.9 36.2 35.2 39.4 39.0 38.4 40.3 40.0 +1 0 - 2 +1 + 4 +10 - 4 - 2 + 2 - 1 0 0 + 2 - 1 + 7 1.473 1.429 1.108 + 6 + 8 + 6 38 2 40.0 36.9 - 4 - 8 +1 Distribution and Prices Per cent change Wholesale trade Unadjusted for seasonal variation July 1948 from Month ago Year ago mos. 1947 - 4 + 9 -10 + 3 -33 -19 - 9 + 3 - 6 +16 + 5 - 6 +27 -10 + 3 - 7 + 3 + « - 3 +10 + 1 - 2 +14 +11 - 3 +12 +30 - 2 +42 Sales Total of all lines................. Dry goods.......................... Electrical supplies........... Groceries............................ Hardware........................... Jewelry............................... Paper................................... Inventories - 3 - 6 - 4 - 3 +14 + 5 Adjusted for seasonal variation 1948 from Per cent change Indexes: 1935-1939 = 100 July June July 1948 1948 1947 RETAIL TRADE Sales Department stores—District..... Philadelphia. Women’s apparel — District..... Philadelphia. Furniture............................................. Inventories Department stores—District. .... Philadelphia. Women’s apparel— District......... Philadelphia. Furniture.............................................. Source: U. S. Department of Commerce. Prices Per cent change from July 1948 Month Year Aug. 1939 ago ago Basic commodities (Aug. 1939 =100) . . 326 Wholesale (1926=100)............. 169 Farm.......................... 195 Food.......................... 188 Other......................... 151 Living costs (1935-1939=100) United States.......... 174 Philadelphia............ 173 Food........................ 211 Clothing.................. 193 Fuels........................ 136 Housefurnishings.. 199 Other....................... 148 Not adjusted -1 + 7 +226 +i -1 +4 +1 +12 + 7 +13 +13 +125 +220 +180 + 89 +1 0 +1 0 0 +1 +1 +10 + 9 +12 + 6 + 9 + 9 + 7 + 76 + 76 +127 + 95 + 41 + 98 + 47 FREIGHT-CAR LOADINGS Total.......................... ....................... Merchandise and miscellaneous. Merchandise—l.c.l........................ Coal................................................... Ore.................................................... Coke.................................................. Forest products.............................. Grain and products...................... Livestock......................................... 283 250 258 276 257 230 239 241 r + 237p 209p 206 239 248 218 190 203 205 197 198 243 - 4 + 16 - 4 + 6 + 9 + 4 +18 - 2 - 1* + 7* 136 139 124 76 182 203 195 89 116 77 138 130 146 216 165 98 113 92 200 191 70 163 199 190 90 121 72 2 + 12 - 4 + 4 - 5 + 2 -13 -13* + 14* - 1 86 249 2 - 3 - 2 8 -10 - 2 - - 19 7 + - 12 8 +10 + 8 + + 2 2 207 161 157 148 143 126 76 164 299 181 141 130 101 100 1 101 162 61 - 4 +1 185 +26* +107* -21* + 73* + 3 + 12 +47* 43 +51* 48 +12 239 - 8 - 185 154 153 150r 195 181 178 204 8 + 15 - 9 + 6 - 22 266 235 219 226 225p 235 192p 205 186 181 201 191 -16 -23 - 3 + 1 + 5 - 5 - 5 -15 - 6 + 3 July June July 1948 1948 1947 138 121 70 155 298 175 - - 70 86 139 324 152 110 152 79 186 34 60 267 21 28 214 r—Revised. p—Preliminary. * Computed from unadjusted data. Source: U. S. Bureau of Labor Statistics. Month Year ago ago 288 240 245 239 121 MISCELLANEOUS Life insurance sales. . . . Business liquidations Number........................ Amount of liabilities. Check payments............. 1948 from 7 mos. 1947 July 1948 from BANKING STATISTICS MEMBER BANK RESERVES AND RELATED FACTORS Reporting member banks (Millions $) Aug. Changes in— 25, 1948 Four One weeks year Aug. 4 Changes in weeks ended Aug. 11 Aug. 18 Aug. 25 Changes in four weeks +5 + -6 1 +29 + 6 + 2 +101 - 25 6 - 83 3 + 2 +47 -28 -1 +36 + 78 - 92 +21 + 3 +33 - -1 3 - 20 +101 - 4 + 13 -101 - 4 +25 -1 +36 + 78 - 92 +21 Third Federal Reserve District (Millions of dollars) Sources of funds: Reserve Bank credit extended in district. .. . Assets Commercial loans..................... Ijoans to brokers, etc............... Other loans to carry secur. . . Loans on real estate................ Loans to banks.......................... Other loans................................. 530 19 13 85 + + 267 + Total gross............................... Total net................................... 916 909 Government securities............ Other securities......................... 1341 283 -12 -114 + 3+25 Total investments.................. 1624 89 Total loans & investments.. Reserve with F. R. Bank.. . . Cash in vault............................. Balances with other banks.. . Other assets—net..................... 2533 491 43 32 26 6 1 + 4 2 100 56 Liabilities Demand deposits, adjusted. . 2033 443 Time deposits............................ 61 U. S. Government deposits... 344 Interbank deposits................... 11 Borrowings................................. Other liabilities......................... 28 303 Capital account........................ 6 +17 +17 + 83 - 3 - 3 + - 7 11 + 52 Uses of funds: +125 +121 4 1 9 21 36 6 6 3 Total..................................................................... Federal Reserve Bank ot Phila. (Dollar figures in millions) Changes in— August 25, 1948 Four weeks One year Discounts and advances..................... $ 21.5 $- .1 $+ 12.1 - 1.3 .5 Industrial loans............. +17.9 -144.8 U. S. securities.............. 1532.9 Total.............................. $1554.9 $ + 17.8 $-134.0 $1635.8 $+ 8.0 $- 6.1 + 34.6 +25.0 Member bank deposits. 831.7 +108.7 + .2 167.3 U. S. general account. . - 12.0 - 1.5 Foreign deposits............ 28.0 + .7 + -8 Other deposits............... 2.8 +244.1 +11.1 Gold certificate reserves 1111.3 41.3% - .5% +7.2% Reserve ratio.................. Member bank reserves (Daily averages; dollar figures in millions) Re Held quired Ex cess Ratio of excess to re quired Phila. banks 1947: Aug. 1-15.. 1948: July 1-15. . July 16-31.. Aug. 1-15. . $419 395 396 396 $414 391 391 392 * 5 4 5 4 i% 1 1 1 Country banks 1947: Aug. 1-15.. 1948: July 1-15.. July 16-31.. Aug. 1-15.. $383 412 411 416 *339 367 370 370 $44 45 41 46 13% 12 11 12 Page 107 < lit” THE THIRD FEDERAL RESERVE DISTRICT
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