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MONTHLY REVIEW O f Credit and Business Conditions FEDERAL V o lu m e 31 RESERVE BANK APRIL OF NEW YORK 1949 No. 4 MONEY MARKET IN MARCH Member bank reserve positions were subject to increasing pressure in March, but borrowings from and sales of Govern ment securities to the Federal Reserve Banks were a ready off War Loan accounts in depositary banks (concentrated in the first half of the month), and payment of 400 million dollars reserves which came to the banks as a result of Treasury dis of interest on the public debt due on March 15. Because the bulk of taxes were not received until the second half of the month, Treasury disbursements in the first half were consider ably higher than income, and thus tended to provide the mem ber banks with additional reserves. The margin of Govern ment disbursements over receipts was particularly wide in the last days of February and the first days of March. At that time bursements in excess of receipts. The pressure on bank reserves money market conditions were especially easy, and immedi from security operations was felt most by the central reserve city banks in New York City and Chicago. Banks in other ately available "Federal funds” were quoted as low as Vs of set. During the first half of the month the member banks tended to lose reserves as nonbank investors purchased Treas ury bonds and other Government securities from the Reserve Banks (through the market). These transactions were suffi ciently large to offset a considerable part of the gains in parts of the country were able, for the most part, to retain the 1 per cent, even though the Treasury redeemed, on March 1, 400 million dollars of a maturing issue of certificates of increases in reserves gained from Government disbursements. indebtedness held by the Reserve Banks, and withdrew more In the second half of the month, pressure on the money market than that amount from War Loan accounts in depositary banks. increased markedly. All of the banks were subject to this pressure as income tax collections rose sharply after the March During the next two weeks, ended March 16, Government spending continued to exceed receipts, although the margin narrowed considerably. Other transactions contributed to the additions to member bank reserves. However, institutional investors, trust funds, and other nonbank investors were still purchasing long-term Treasury bonds (which were sold to the market by the Federal Reserve Banks) on a sizable scale, and industrial corporations and other nonbank investors were acquiring a considerable volume of Treasury bills (both direct from the Treasury on subscription and, through the market, 15 deadline. Consequently, the banks were in need of sub stantial amounts of Federal Reserve credit. Although the Treasury’s net receipts, during the first quarter of the year, have absorbed large amounts of funds from the money market, the drain on member bank reserves resulting from such transactions was much smaller than in the corre sponding quarter of 1948. In the early months of last year, however, conditions in the Government security market were such that the Reserve Banks were large buyers of Treasury bonds (although they were sellers of short-term Treasury securities). This year conditions in the Government security market had so changed that the Reserve Banks were steady sellers of Treasury bonds; their assistance to the money market took the form of advances to banks secured by Government obligations and substantial purchases of short-term Govern ment securities. Treasury transactions during the past month included cash tax receipts amounting to approximately 4 billion dollars, the cash redemption of 1.1 billion dollars of maturing Treasury bills and certificates, withdrawals of 923 million dollars from from the Reserve Banks), thus offsetting a large part of the CONTENTS Money Market in March...................................... 37 Banking Developments in the Second District.. 39 Canada’s Improved Exchange Position.............. 40 Survey of Ownership of Business and Personal Demand Deposits .............................................. 41 Member Bank Earnings in 1948.......................... 43 Retail Credit Survey for 1948.............................. 44 Department Store Trade...................................... 44 MONTHLY REVIEW, APRIL 1949 38 gain in member bank reserves. Many of the purchases of Treasury bonds by institutional investors were offset by sales of shorter-term "bank-eligible” Government securities, but the greater part of the latter was absorbed by banks, dealers, and others, and relatively few were sold to the Reserve Banks in this period. Some part of the accumulation of short-term securities by nonbank investors was temporary, representing bills were also timed to return to the money market some of the funds taken from it through tax collections. Part of the redeemed bills were held by the Reserve Banks, but these bills were replaced by Reserve Bank purchases of bills in the market. The pressure on the reserve positions of the New York City banks was further increased by large-scale transfers of com mercial funds to other parts of the country, as corporations and others paid taxes in the interior with New York funds, and increases in dealers’ holdings, as reflected in a 281 million dol lar rise in Government security dealer borrowings from the New York City weekly reporting banks in the week ended as correspondent banks made large withdrawals from their March 16. The Government security operations of nonbank investors continued large nonbank investor purchases of long-term ineligible Treasury bonds and, to a lesser extent, of other had their principal effect on the deposit and reserve positions of the New York City and Chicago banks, which were com Government securities, which came out of the portfolio of the Federal Reserve Banks, but many purchases involved sales of pelled to sell substantial amounts of Government securities in other securities and a series of switching operations, the end the market and to borrow from the Reserve Banks, and from result of which was offerings of short-term securities to the Reserve System. other banks that had excess reserves. The rate on Federal funds consequently rose to 1 7 /1 6 per cent, just short of the Federal Reserve Banks’ discount rate. While excess reserves of the central reserve city banks rose moderately in the two weeks ended March 16, the increase reflected principally the need for temporary acquisition of excess reserves to overcome prior deficiencies in their reserves. Banks outside the two central reserve cities were able to retain their net gains of funds from Treasury operations and from other sources. They used these funds partly to reduce their borrowings; but they also added considerably to their holdings of Government securities and deposits with the City banks. At the same time there were T r e a s u r y O p e r a t io n s Although the operations of the Treasury imposed a heavy drain on member bank reserves during the past quarter, the impact on the money market was much less pronounced than in the corresponding months of 1948, as illustrated in the accompanying chart. The impact this year, measured in dollar Impact of Treasury Operations on the Money Market (N et changes in the major factors cumulated monthly from Dec. 31, 1947 and from Dec. 31, 1948) increased their excess reserves. Over the two-week period, Federal Reserve System loans and discounts rose 188 million dollars, while holdings of Treasury bonds and bills fell 280 and 107 million dollars, respectively, and certificate holdings increased 55 million. Excess reserves of all member banks rose 280 million, of which the central reserve city banks accounted for 130 million. In the second half of the month the money market felt the full impact of Federal income tax payments by both individuals and corporations. These included final payments of taxes on 1948 personal incomes as well as first quarter payments on 1949 personal incomes and first quarter payments on 1948 cor porate incomes. The tax receipts enabled the Treasury to sus pend withdrawals from War Loan accounts in depositary banks and to retire substantial amounts of Treasury bills. Despite the bill redemptions and other disbursements, Treasury deposits with the commercial banks and the Federal Reserve Banks rose by about 400 million and 1.1 billion dollars respec tively, between March 16 and 30. Tax receipts overshadowed all other transactions in the money market during the second half of the month and placed the reserve positions of the member banks under severe pres sure. To offset this pressure the Federal Reserve Banks were ready lenders of funds and ready purchasers of substantial amounts of short-term securities. Redemptions of Treasury * Includes funds used to redeem Government securities held by Federal Reserve Banks as well as net increase in Treasury deposits in Reserve Banks. March 1949 estimated. # February 1949 preliminary, March 1949 estimated. S ource: U. S. Treasury Department, Board of Governors o f the Federal Reserve System, and estimates by the Federal Reserve Bank of N ew York. 39 FEDERAL RESERVE BANK OF NEW YORK terms by the sum of Treasury cash redemptions of Federal Reserve-held Government securities and the increase in the Treasury’s deposits with the Federal Reserve Banks, is esti mated at under one-fourth the burden on bank reserves in the and credit conditions in their local areas. The following article summarizes some of the information obtained by our Bank Relations representatives during the quarter ended February 28, 1949, in the course of their visits to banks in 30 counties— first quarter of last year (1.1 billion against 4.8 billion dollars). 20 in New York State, 9 in New Jersey, and one (Fairfield The Treasury’s withdrawal of a much smaller volume of funds from the money market, this year, was a reflection of County) in Connecticut. This is a field report on the views of bankers in certain areas and does not necessarily describe the change in its cash position, as determined chiefly by the reduction in personal income tax rates voted by Congress in conditions throughout the Second District. 1948, and by increased disbursements for defense, foreign aid, and other purposes. Cash operating income of the Treasury in the loan totals of the banks visited. The bankers stated that in the first three months of 1949, amounting to roughly 13 billion dollars, was l lA to 2 billion dollars less than in the same period last year, while the cash operating outgo in the first quarter of 1949, at 10 billion dollars, was 1 to 1 Vi billion larger than in the corresponding quarter of 1948. Thus, the net cash operating income was about 3 billion dollars, or about half that of the first quarter of 1948. And, instead of There have been only moderate changes in recent months there was a steady demand for most types of credit, but that applications were being carefully screened, with the result that the number of applications rejected was running well in excess of the number approved. There was a somewhat diminished activity in consumer credit loans early in the year. This was attributed to the restrictions imposed under Regulation W and to anticipation on the part of the public that prices would decline. a large surplus of income over expenditures (as in 1948), The demand for mortgage loans has declined somewhat the Treasury can now look forward only to an approximate balance between cash income and outgo for the calendar year since the turn of the year because of the seasonal slackening in home building construction. Mortgage loan accounts, how 1949 as a whole. Out of its smaller net receipts during the first quarter of ever, have held close to the high levels prevailing at the year 1949, the Treasury built up its accounts in depositary commer cial banks by about 1 billion dollars, approximately the same amount as in the first quarter of 1948. In proportion to net income, the funds available for debt retirement in the first quarter of this year were considerably smaller than a year ago. Net cash repayment of debt in the first three months of 1949 was 13A billion dollars, or 42 per cent of the amount (4.2 bil lion) retired in the first quarter of 1948. In retiring public debt, a portion of the Treasury’s net receipts was returned to the money market, inasmuch as 1.1 billion dollars of the re deemed securities were held by the public ( including the com mercial banks). About 600 million dollars of the net flow of taxes to the Treasury was used in the cash retirement of Gov ernment obligations held by the Reserve Banks and conse quently was not returned to the money market. However, repayment of Federal Reserve-owned debt during the past quarter was 3.1 billion dollars less than in January-March of last year. Likewise the absorption of bank reserves resulting from an increase in the Treasury’s balances with the Reserve end and in some banks new loans have equaled or exceeded amortization and satisfaction payments. Most banks now require the borrower, as a condition of favorable consideration of his application, to make a substantial down payment on the property purchased, whether or not the loan is to be Govern ment insured. Prospects for an increased demand for mortgage financing in the coming months are considered good. The bankers interviewed by our representatives reported that loan collections had not so far presented any serious prob lem, but that they were having to devote more time to servicing their loans in order to keep the size and number of delinquen cies down to a minimum. Investment accounts of the banks visited have been relatively inactive during the past few months and short and mediumterm U. S. Government issues still make up the bulk of their securities portfolios. Deposits in the three-month period ended February 28 showed mixed trends but moved in a narrow range and the slight changes up or down applied in many instances to only Banks was much smaller— 550 million dollars in the first one class of deposits, demand or -time. In sections where com quarter of 1949 compared with 1.1 billion in the first quarter mercial banks were in competition with savings institutions of 1948. paying a higher rate of interest, some loss of time deposits was reported. The trend of deposits in the savings institutions in BANKING DEVELOPMENTS IN THE SECOND DISTRICT The Bank Relations Department of this bank maintains a staff of special representatives who are constantly traveling through the Second Federal Reserve District, calling upon the banks and discussing with them, among other things, business the same areas has continued steadily upward in recent months, although not so rapidly as previously. Concern was expressed by some bankers whose time deposits have been adversely affected by the transfer of some of this business to savings institutions offering a higher rate of interest, usually IV2 or 2 per cent, as compared with rates of Vz or 1 per cent paid 40 MONTHLY REVIEW, APRIL 1949 by the commercial banks. The drift of time deposits from com account deficit with the United States fell by 65 per cent, from mercial banks, however, has not yet caused serious considera 1,135 million dollars in 1947 to 401 million in 1948. tion to be given by most banks to an increase in the rates cur rently paid. On the other hand, there is a decided trend toward offset by a surplus of 854 million with the rest of the world. a 2 per cent rate among those savings institutions which have been paying a lower rate. Indeed, the favorable balance of 453 million dollars with the world as a whole was the largest ever achieved by Canada in a The 1948 deficit with the United States was more than peacetime year. Under conditions of full exchange converti C A N A D A ’S IM PR O VE D E X C H A N G E PO SITION bility Canada would therefore now have few grounds for worry. Canada’s international economic position, which a year or Under the circumstances that prevailed prior to the enact so ago was regarded with serious concern,1 has markedly im proved as a result of two major developments since November ment of the European Recovery Program, however, the bulk of 1947, when the drain on Canada’s gold and United States the nondollar foreign exchange receipts of Canada could not be converted into the required United States dollars, and the dollar reserves assumed dangerous proportions. The first of export surplus therefore could be used in only relatively small these two developments was the restoration by Canada of various direct controls; the second was the commencement of ECA offshore purchases. part to cover the deficit with the United States. Consequently, Canada was losing its hard currency reserves at the same time Immediately after the war, the Canadian Government had that it was augmenting its claims on soft currency countries. instead of building up gold and United States dollar balances, rescinded most of its direct controls over foreign trade. When, It was in regard to this triangular trade problem that the however, the foreign exchange crisis developed in the autumn ECA "offshore” purchases supplied the decisive remedy. By of 1947, Canada restored certain price controls and adopted a providing the European participants in the ERP with United series of emergency measures to curb imports from the United States dollars for offshore purchases, the Economic Cooperation States and stimulate exports to hard currency countries. These Administration enabled them to pay for their imports from steps achieved prompt and important results. Not only did Canada with United States dollars to the extent of 454 million Canada’s imports from the United States decline by 8 per cent dollars.2 The rest of the Canadian trade surplus in 1948 was financed by Canadian credits (although on a much smaller from 1,951 million (Canadian) dollars in 1947 to 1,797 mil lion in 1948, but— more important and striking— Canada’s scale than in 1947) and, to a relatively minor extent, by the exports to the United States increased by 42 per cent from 1,061 million dollars to 1,508 million. As a consequence, gold or foreign exchange reserves of the deficit countries. The accompanying table shows how Canada s deficit with the United Canada’s U. S. dollar deficit on trade account dropped sharply, States and its surplus with other countries were financed in from 890 million dollars in 1947 to 289 million in 1948. The position with respect to invisible balance-of-payments items also improved, with the result that Canada’s total current- 1947 and 1948. Primarily as a result of the reimposition of direct controls and the ECA offshore purchases, Canada was able not merely to halt the decline of its gold and United States dollar reserves 1 For an analysis of Canada's difficult U. S. dollar position at that time, see "Canada’s International Economic Position” in the April 1948 2 According to the Seventh Report for the Public Advisory Board of the ECA. number of this Review. Canada’s International Transactions (In millions of Canadian dollars) All countries United States 1947 1948 Current account balance of payments, including relief.......................................................................... 85 472 Financed b y: Official contributions of Canadian Government 38 19 Net postwar loans of Canadian G overnm ent... 563 126 Other capital m ovem ents!................................... 227 -1 6 9 Receipts of convertible exchange....................... — Change in official reserves................................... -7 4 3 +496 1947 United Kingdom and sterling area 1948 1947 1948 - 1 ,1 3 5 -4 0 1 874 617 — __ __ _ - — 423 52 Other E R P countries* 1947 1948 281 1947 1948 242 65 14 7 13 31 6 116 51 24 23 246 -1 2 7 32 44 2 - 638 -7 7 0 505 597 114 176 - 743 +496 — — — _ - 54 - Other countries - 9 19 _ -1 2 - 3 — * Austria, Belgium-Luxembourg, Denmark, France, Greece, Italy, Netherlands, Norway, Portugal, Sweden, Switzerland, Trieste, Turkey, the Western German Zones, and the dependent overseas territories of certain of these countries, t Including balancing item of errors and omissions. Note: 1948 figures are provisional. Source: Dominion Bureau of Statistics; The Canadian Balance o f International P a y m e n ts: Preliminary Statement 1947 and Preliminary Statement 1948. FEDERAL RESERVE BANK OF NEW YORK 41 but actually to increase them from 502 million dollars on any foreign exchange difficulties, since the balance-of-payments December 31, 1947 to 998 million a year later.3 It would thus appear that Canada has overcome, for the time being at least, its balance-of-payments difficulties. The surplus with the United Kingdom would suffice to cover the deficit with the United States. It is far from certain, however, that dollar convertibility of sterling can be counted on within Canadian Government has, in fact, already reoriented its policy the next few years. in the direction of "normalcy” by relaxing many import re strictions. Since, however, the structure of Canadas foreign trade is essentially the same as before the war and during the SU R V E Y OF O W N E R SH IP OF BUSINESS first postwar years, it is all the more evident that the strengthen A N D PE RSONAL D E M A N D DEPOSITS ing of the balance-of-payments position has been due not to The distribution by ownership groups of the demand de any basic realignment of the country’s international accounts, posits of individuals, partnerships, and corporations (except but primarily to transient emergency measures. Even the re States dollar reserves would actually have declined during 1948 banks) held by all commercial banks in the Second Federal Reserve District was resurveyed as of January 1949, as part of the annual study conducted nationally by the Federal Reserve System. Based upon reports from 120 member banks in the Second District that analyzed their larger accounts, the total volume of business and personal demand deposits as of by about 100 million dollars. Cessation of ECA offshore pur January 1949 is estimated at 20.8 billion dollars, a decrease of chases in Canada would confront Canada once more with 0.9 billion dollars, or 4.3 per cent, since January 1948. The past year’s decline, which is the first annual drop to occur since imposed direct controls, effective though they were, could not by themselves solve the problem; in the absence of the dollar receipts from ECA offshore purchases and the 150 million dollar loan from the United States, Canada’s gold and United difficulties almost as complex as those which it faced toward the end of 1947. While a complete suspension of offshore purchases by ECA in the near future is most unlikely, an early curtailment of such purchases is quite possible. So far as industrial finished products and raw materials are concerned, much will depend 1936-37, erased almost half of the postwar rise in business and personal demand deposits. It left the January 1949 level 1.0 billion dollars, or 5.1 per cent, higher than the level of July 1945, which roughly coincides with the end of the war. The cause of the decline in deposits during the year ended other ERP supply sources. With respect to foodstuffs, the January 1949 was the utilization by the Treasury of its cash surplus to retire Government debt held by the banking system. Specifically, the excess of Treasury collections from depositors (in payment of taxes and for purchases of nonmarketable securities), over the return flow of funds to depositors through normal Treasury expenditures, was used chiefly to redeem prospects are even more uncertain. It will be recalled that the Economic Cooperation Act contains an explicit injunction Government securities owned by the Reserve Banks and the commercial banks, and was thus permanently removed from that if any agricultural commodity is declared surplus in the United States, appropriations for the European Recovery Program may not be used for purchases of that commodity outside the United States. Should the present favorable prospects for the 1949 wheat crop in the United States material ize and wheat be declared surplus, the effect obviously would be detrimental to the Canadian dollar position, since over one half of the dollars that accrued to Canada in 1948 under the the outstanding money supply. The effect of this Treasury policy upon deposits was counterbalanced, to a great extent, by deposit increases arising from commercial bank loans to businesses and individuals, nonbank sales of marketable Gov ernment securities to the Reserve System, and the continued inflow of gold from abroad. In 1946 and 1947 these commer cial bank loans and the inflow of gold from abroad had been large enough in conjunction with lesser Treasury cash sur offshore purchases program were spent on Canadian bread pluses to cause the deposit balances to increase. on business conditions in the United States. Should United States supplies significantly exceed domestic demand and cur rent exports, the ECA may feel compelled to direct all ERP dollars for these products to United States producers, thus in creasing this country’s exports at the expense of Canada and grains. It is probable that a way will be found to meet this particular As can readily be seen in the accompanying table, all of the various classes of depositors showed declines in balances be problem if it should actually arise, but the long-run outlook tween January 1948 and January 1949, except for trust funds for the Canadian balance of payments remains somewhat of banks, which rose moderately. The largest percentage de obscure. That outlook depends essentially on the international cline (12.0 per cent) was in the deposits of insurance com economic position of the United Kingdom. Clearly, if sterling panies, and this decline occurred despite large additions to the were made fully convertible, Canada would no longer face deposits of such concerns from sales of Government securi ties during the year. Business and personal demand deposits of foreigners also were drawn down substantially (8.4 per 3 This 496 million dollar increase includes 150 million dollars borrowed in the United States in 1948. cent), probably as a partial reflection of the continued need MONTHLY REVIEW, APRIL 1949 42 Estimated Ownership of Demand Deposits of Individuals, Partnerships, and Corporations in All Commercial Banks in the Second Federal Reserve District (Dollar amounts in millions) Estimated Ownership of Business and Personal Demand Deposits at All Commercial Banks in the Second Federal Reserve District* July 1945 to January 1949 January 1948 to January 1949 Type of owner Dollar Dollar balance J a n .1949 change Per cent change Dollar change Per cent change Manufacturing and mining......... Public utilities, transportation, and communications................ Retail and wholesale trade and dealers in commodities............ All other nonfinancial business, including construction and ser vices ............................................. 6,425 -3 0 0 - 4 .5 - 887 - 12 .1 1,345 - 79 - 5 .5 - 125 - 3,245 -1 1 3 - 3 .4 + 625 + 2 3 .9 Total nonfinancial............ 12,331 1,316 8 .5 38 - 2.8 + 280 + 2 7 .0 -5 3 0 - 4 .1 - 107 - - 0 .9 Insurance companies.................... Trust funds of banks................... All other financial business*... . 1,034 552 1,471 -1 4 1 4- 39 - 32 - 12.0 + 7 .6 - 2 .1 + + 221 56 267 + 2 7 .2 - 8 .2 + 2 2 .2 Total financial................... 3,057 -1 3 4 - 4 .2 + 432 + 16.5 Nonprofit organizations............... Personal (including farmers). . . . Foreign accounts........................... 574 4,171 623 - 57 - 2 .7 4 .6 8 .4 + -f - 138 647 98 + 3 1 .7 + 1 8 .4 -1 3 .6 Total demand deposits of indi v id u a ls , p a r tn e rs h ip s, and corporations................................ 20,756 -9 3 8 - 4 .3 + 1,0 12 + 5.1 16 -20 1 - * Includes investment, finance, real estate concerns, insurance agencies, etc. by foreigners for dollar balances to make payments against their excess of imports from the United States. All other deposit groups showed declines ranging from 2.1 per cent in the case of financial concerns other than insurance com panies and trust funds of banks, to 5.5 per cent in the case of balances owned by public utilities. The latter, because of their current expansion of facilities, are apparently finding it neces sary to draw to some extent upon available cash resources, in addition to using a record volume of funds from the capital markets. * Figures are semiannual from July 1943 to February 1947 and annual as of each January thereafter. The accompanying chart shows the fluctuations in deposit balances of the various ownership groups since the surveys were first undertaken in July 1943. It is noteworthy that the The smallest banks in the District— both those with total two types of accounts (personal accounts, and wholesale and deposits of less than one million dollars, and those with de posits between 1 and 10 million dollars— had small over-all deposit increases, amounting to 0.8 per cent and 3.0 per cent, respectively. The larger size groups of banks, on the other hand, all sustained deposit declines. The decline amounted to retail trade accounts) in which two thirds of the war and post 5.3 per cent in the group of banks with deposits of 10 to 100 million dollars, to 7.4 per cent in the 100 to 500 million group, and to 4.7 per cent in the banks with deposits in excess of 500 million. The deposit gains in the smaller banks reflect the proportionately greater growth in the loans of those banks than in the loans of the larger banks of this District. In the two smallest groups of banks, deposits of retail and wholesale trade, nonprofit institutions, and insurance firms continued war increases in deposits accumulated have turned downward. In the year ended January 1949, personal accounts definitely reversed their persistent rise and the accounts of wholesale and retail trade experienced their first year-to-year decline. Of interest also is the fact that balances of manufacturing and mining concerns, public utilities, and foreign accounts are lower today than when the series began. In the manufacturing, mining, and public utility accounts, balances are generally con fined to their function as a necessary part of working capital. Consequently, except for increases to meet the needs of a rising price level, accumulations occur only when the conversion of to increase, whereas in the larger banks such accounts declined. income to plant, equipment, inventories, or temporary invest Personal accounts of farmers showed declines in the banks ments is slowed down or interrupted. Reductions in these bal having deposits of less than 1 million dollars, but rose in the ances, on the other hand, may reflect temporary withdrawals banks with total deposits of 1 to 10 million dollars. Personal from working capital or an economy in the holding of deposit accounts other than those of farmers declined in all groups of banks, but to a lesser extent in the smaller banks. balances, efficiency. stimulated by higher interest rates or greater FEDERAL RESERVE BANK OF NEW YORK MEMBER BANK EARNINGS IN 1948 43 the creation or enlargement of reserves for bad debt losses on earnings, and actually realized loan losses were only 0.6 per cent. Relative to total outstanding loans, actually realized loan losses represented only a negligible fraction, while reserves for bad debt losses accumulated through December 31, 1948, averaged 0.9 per cent of outstanding loans, and other valuation reserves against loan losses accounted for an additional 0.4 per cent. The analysis of individual banks by size indicated that the proportionate number of banks setting up reserves loans, as permitted by a Treasury ruling in December 1947. While the initial effect of accumulating such reserves is to reduce net profits, their use over a period of years will tend to smooth out the cyclical fluctuations arising from loan losses, by raising the level of net profits in lean years and lowering for bad debt losses on loans increased with the size of the banks, probably because of the greater risk of loss accompany ing a larger loan portfolio. An additional factor which appears to have entered into the decision whether or not to set up bad debt reserves, especially in the smaller banks of the District, Net profits after all charges but before dividend payments averaged 7.0 per cent of total capital accounts in 1948 for all member banks in the Second Federal Reserve District com pared with 8.1 per cent in 1947 and the all-time peak of 11.6 per cent in the closing year of the war.1 The reduction in 1948 net profits resulted entirely from charges against earnings for was the ratio of the loan portfolio to total assets. Banks with it in prosperous times. Analysis of the reports for individual member banks shows that 434 banks, or 56 per cent of all member banks in the District, had set up reserves for bad debt losses on loans at the end of 1948. On the average (for all member banks), transfers to reserves for bad debt losses on loans in 1948 were 4.5 per cent of total earnings, recoveries and transfers from other valuation reserves on loans were 0.3 per cent of total 1 These rates of return, as well as the other ratios in the accompany ing table, are arithmetical averages of ratios for individual banks. They are part of a more detailed analysis (Circular No. 3427 entitled, "Operating Ratios of Member Banks in the Second Federal Reserve District” ), which is available upon request from the Research Depart ment, Financial Statistics Division. a small ratio of loans to total assets were less apt to set up bad debt reserves than were banks with a larger ratio. The dollar volume of total (gross) earnings increased to record levels in 1948. The ratio of total earnings to total assets rose to 2.66 per cent from 2.46 per cent in 1947, but remained substantially below the 3.3 per cent return achieved in 1941. The rise over 1947 reflected the increased volume of loans, which for most banks are high income assets, and the reduced holdings of lower income-producing United States Govern ment securities. Generally, the smaller banks recorded the widest gains in total earnings during 1948, because their loans expanded more, proportionately, than the loans of the larger banks. The divergence in trend between loans and Govern ment security holdings has been in progress since the close of the war but the ratio of loans to total assets still remains Selected Average Operating Ratios of All Member Banks Second Federal Reserve District about one-seventh lower than in 1941. Although actual loan 1941 1945 1947 1948 772 805 792 779 7 .1 t 5 .5 1.9 9 .4 14.0 10.9 11.4 11.2 11.6 2 .1 8 .1 2.2 Interest on U. S. Government securities. . Interest and dividends on other securities. Earnings on loans......................................... Service charges on deposit accounts........ Other current earnings................................ 1 31.1 49.2 4 0.5 52.7 7 .2 9 .0 2 8.8 6 .4 7 .6 40.3 6 .5 6 .4 Number of banks.............................................. Percentage o f total capital accounts Net current earnings before income taxes . Profits before income taxes........................ Net profits...................................................... Cash dividends declared.............................. 9 .3 * 7 .0 * 2.2 Percentage of total earnings 8 .0 3 4.5 6 .5 46.0 6 .6 6 .1 6.6 Total earnings................................... 10 0.0 10 0.0 100.0 100.0 Salaries and wages........................................ Interest on time deposits............................ Other current expenses................................ 30.5 16.2 24.2 2 8.4 16.4 24.8 29.2 15.8 23.6 30.0 14.7 23.9 Total expenses.................................. Net current earnings before income taxes. 70.9 29.1 69.6 30.4 68.6 68.6 5.1 3 .5 15.5 7 .8 1.8 9 .4 4 .6 * 6 .5 * 2 0.5 38.1 23.8 20.3* }3 6 .5 3 3.0 2 7.2 61.3 53.2 6 .7 47.6 7 .6 25.7 18.1 Net recoveries and profits (or losses —) . .. Taxes on net incom e.................................... Net profits.......................................... 31.4 31.4 - Percentage o f total assets U. S. Government securities...................... Other securities............................................. Loans............................................................. Cash assets..................................................... Total earnings............................................... 3 .3 6 .1 13.0 18.4 2.09 2 1.1 17.9 2.46 2.66 t Not available. * These ratios were affected in 1948 b y transfers to reserves for bad debt losses on loans. volumes and loan incomes were at all-time record levels in 1948, they did not completely reattain the prewar relationship to other bank assets and income, owing to the vast wartime expansion in total assets. Service charges on deposit accounts rose from 6.1 per cent of total earnings in 1947 to 6.6 per cent in 1948. Despite the almost continuous yearly rise in the dollar volume of such charges during the past decade, they were still slightly less in 1948 relative to total earnings than they had been in 1941. Among the expense items, the amounts paid for salaries and wages increased at most banks and, except at the larger New York City banks, rose proportionately more than total earnings. For all member banks in the District, salary and wage payments increased from 29.2 per cent of total earnings in 1947 to 30.0 per cent in 1948, but still represented a slightly smaller proportion of total earnings than they did in 1941. The growth in interest payments on time deposits in 1948 lagged behind the increase in total earnings, and the share of total earnings paid out in this form was not only moderately less than in 1947 but also less than in either 1941 or 1945. Largely reflecting the effect of deductions from tax able income for setting up bad debt reserves on loans, the 44 MONTHLY REVIEW, APRIL 1949 average rate of income tax to total earnings declined by nearly one third from 9-4 per cent of total earnings in 1947 to 6.5 per cent in 1948. Net current earnings before income taxes showed a slight dollar increase over 1947 in about two thirds of the member banks in the District. Relative to total earnings, however, net current earnings before taxes remained unchanged at 31.4 per cent, indicating that the average growth in expenses was equal to the average growth in total earnings. Relative to capital accounts, net current earnings before income taxes increased slightly. Dividend payments were maintained at the conservative levels of recent years at most of the member banks of the District, and averaged about one third of the amount available for distribution. In relation to capital accounts, dividend pay ments remained unchanged at 2.2 per cent. Retained earnings, while substantial, showed a further diminution, and the growth in capital accounts was at a lower rate than in any of the previous three years. sizable. The data reflect not only the greater availability of consumers’ goods, but also the increasing tendency for cus tomers to resort to credit, in some cases merely for the sake of convenience, but more generally because of the pressure of high living costs and the drawing down of liquid assets. In two major types of outlets, furniture stores and automobile tire and accessory shops, the rise in total sales between 1947 and 1948 was made possible by an increase in credit sales which more than offset a decline in cash transactions; furniture stores, in particular, showed a drop of 11 per cent in cash sales, a rise of 8 per cent in credit sales, and a 4 per cent increase in total dollar volume. Despite the continued increase in the relative importance of credit sales during the past two years, however, all of the vari ous types of stores surveyed, except jewelry, sold proportion ately more for cash than in 1941. A larger proportion of total sales (in comparison with 1941 ratios) was made on instal ment terms in the women’s apparel, hardware, and jewelry stores, but in the major consumers’ durable goods lines, instal ment sales still had not regained their 1941 proportion of total sales. R E T A IL CR ED IT S U R V E Y FOR 1948 The results of a preliminary tabulation of the returns from this bank’s annual retail credit survey are shown in an accom panying table. Over 800 Second District stores with annual sales of approximately IV2 billion dollars have so far cooper ated in this survey, which covers the nine principal types of credit-granting stores. In general, sales of stores in consumers’ durable goods lines other than jewelry showed over-all increases in 1948, while men’s and womens apparel stores and jewelry stores registered declines from 1947. In nearly every type of store, cash sales lagged behind credit sales during 1948, hardware stores being the sole exception. All types of stores showed gains in instal ment sales, and in many instances the increases were quite Changes in Sales and Receivables of Credit-Granting Retail Stores in the Second Federal Reserve District, 1947 to 1948* Percentage change, 1947 to 1948 Retail sales Number of stores Total Cash Automobile...................... Household appliance. . . . Department...................... Furniture.......................... Automobile tire and accessory ...................... Hardware......................... Women’s apparel............ Men’s clothing................. Jewelry.............................. 129 108 89 153 + 17 + 9 + 5 + 4 + 13 + 4 + 1 -1 1 All types................... 819 Type of credit-granting store 82 26 85 54 93 Accounts receivable Charge Instal account ment + 28 + 5 + 9 + 6 + 37 + 17 + 27 + 9 Total +28 +40 + 6 + 22 ! Charge Instal account ment +27 + 9 + 5 + 4 a + 51 + 7 +23 4- 2 4 -1 - i - 3 - 5 - 4 + 4 — 5 -1 3 -1 1 + + + - 2 3 3 10 6 + 35 +26 + 4 +74 + 1 + 24 + 18 + 1 + 7 + 7 + 9 + 18 + 1 + 2 0 +81 + 16 + 2 +80 + 10 + + + 8 +18 + 9| + 41- +16 f 6 2 * Sales figures are based on annual totals; accounts receivable on end-of-year data. All data are preliminary. # Figure omitted because of smallness of reporting sample, f Unweighted average. D E P A R T M E N T STORE T R AD E According to preliminary information, March sales of Second District department stores this year, measured in dol lars, appear to have been more than 10 per cent below those of March 1948. Seasonally adjusted, they may actually have been less in value than in March 1946, and were certainly less in physical volume. Only about half of the decline in dollar volume compared with March 1948 can be attributed to the lateness of Easter this year. Although sales had also shown some lag in January and February, retailers were able during those months to avoid inventory accumulations. Seasonally adjusted stocks at the end of February, as valued at retail prices, were 5 per cent smaller than at the beginning of the year. Outstanding orders changed little during February, but were more than one-third below the amount reported a year ago. D e p a r t m e n t St o r e C r ed it The rise in the value of total department store sales in this District during 1948 reflected almost exclusively an expansion of credit sales. Whereas cash sales were about the same as in 1947 (and in 1946 as well), instalment sales were fully onefourth greater than in 1947 and charge account sales were about one-tenth greater. Gains for both types of credit sales were smaller than in the year before, however, particularly in the last quarter of 1948, when retail sales in general were slowing down. Instalment sales in the fourth quarter of 1948 made about one fifth of the year-to-year increase they had made during the same quarter a year earlier. The rate of gain 45 FED ER AL RESERVE B A N K OF N E W Y O R K for charge sales in the same interval was about one-third that of a year earlier. The conspicuous slackening in the rise of instalment sales during the fall and winter months of 1948 reflected at first a narrowed year-to-year percentage increase in housefurnishings growth of revolving credit plans— for financing soft goods purchases on an instalment basis that is not subject to Regula tion W in its present form— tends to reduce the importance in aggregate department store instalment sales of the "big- sales and later, in December, an actual year-to-year decline in sales of appliances, floor coverings, bedding, and radios. These ticket” durable items. Although total sales fell behind those of the preceding year in both January and February of 1949, instalment sales, as the accompanying chart shows, neverthe are, however, comparisons with a period of exceptionally large less made some year-to-year increase. In February, instalment sales in the hard lines. During the intervening year, consumers who could afford the current prices, or whose needs were and charge account sales lagged by 8 and 2 per cent, respectively. urgent, purchased large quantities of housefurnishings. The more expensive durable goods, which came on the market the middle of 1946, cash sales have continued to represent an slowly because of greater difficulties in reconversion, have abnormally large proportion of total sales in relation to prewar apparently entered a period of adjustment comparable to that experience. In 1948 they accounted for 64 per cent of the sales were 1 per cent larger than one year previous, while cash Despite the relatively better showing of credit sales since which many of the smaller, more easily produced durable items total, as compared with 60 per cent in 1941. Thus, the rise (nonautomatic toasters, table model radios, etc.) experienced in the use of department store credit over the past two and one-half years represents a trend toward the return of prewar as early as 1947. Prices of the heavier durable commodities are now apparently being scaled down in order to reach the relationships. normal demand arising from replacement needs, the develop ment of new housing, and the increase in the number of new families. D e p a r tm e n t a l D is tr ib u tio n o f 1948 S a le s Thus, it would appear that normal market readjustments, The alterations in the pattern of sales by type of merchan coinciding in many lines with the reimposition of Regulation dise which accompanied the relatively modest rise of total W , produced changes in the sales volume of department stores department store sales in calendar 1948 were less pronounced which considerably exceed any direct restraint upon sales trace able to the Regulation itself. It may be also noted that the than the shifts observed in 1947, and variations in year-to-year percentage changes in sales among the different departments Indexes of Department Store Sales by T ype of Transaction, Second Federal Reserve District, 1941 and 1947-49* (1941 average daily sales=100 per cent) * Data only for stores reporting sales by type of transaction; their total sales in 1948 accounted for about 70 per cent of estimated total District department store sales. February 1949 preliminary. 46 MONTHLY REVIEW, APRIL 1949 were correspondingly reduced.1 Basement store sales again Department and Apparel Store Sales and Stocks, Second Federal Reserve District, Percentage Change from the Preceding Year registered a larger increase than main store sales, as the table shows, and hence accounted for a somewhat larger proportion Net :sales Locality of the total sales than in 1947. The most significant gains in Feb. 1949 the basement store were made in women’s lines, particularly in dresses and intimate apparel. All major men’s lines showed Department stores, Second D istrict___ some gain in the basement, whereas both clothing and furnish ings registered declines in the larger volume upstairs store. New York C ity ...................................... Northern New Jersey........................... Newark................................................ Westchester C ounty............................. Fairfield C o u n ty .................................... B ridgeport........................................... Lower Hudson River V alley............... Poughkeepsie...................................... Upper Hudson River V alley............... A lbany................................................. Schenectady........................................ Central New Y ork S tate..................... M ohawk River V alley..................... In the main store, housefurnishings generally made the best improvement, but gains of 15 per cent for furniture and bedding, 12 per cent for domestic floor coverings, and 10 per cent for the television, radio, and phonograph department may be contrasted with a decline of 12 per cent for appliances. Among women’s ready-to-wear lines, coats and suits showed the most substantial improvement. The fur department was the only major apparel line in which sales in 1948 were less than in 1947. Sales of accessories as a whole were on the same level as during the preceding year, as gains in hosiery, mil linery, and other departments about offset the declines in such departments as neckwear and scarfs, and gloves. Northern New York State.................. Southern New York State................... B ingham ton........................................ Western New York State.................... B uffalo................................................. Niagara Falls...................................... R ochester............................................. Apparel stores (chiefly New Y ork C ity ). 1 A detailed distribution on a fiscal year basis will be available in the near future, upon request to the Research Department, Domestic Research Division. 1948 Total store...................................... M a in store ....................................... W omen's wear............................ M en’s wear................................. Housefurnishings....................... A ll other...................................... 100.0 10 0.0 8 7 .6 8 7 .2 21.6 2 4.9 2 0.9 Basem ent store ................................ 1 0 .1 1 0 .4 5.3 1.7 3 .1 5 .6 1.7 3 .1 W om en’s wear............................ M en’s wear................................. All other...................................... N onm erchandise ............................. 3 3.4 8 .5 24.1 - 4 - 7 6 - 6 - 3 - 6 +17 - 3 - 5 + 5 + 9 + 8 + 12 + 5 - 7 5 7 12 9 -10 + 8 +15 + 7 + 9 + 7 -1 6 - 3 - 2 -10 -12 - 1 - 8 -10 - 9 9 -10 -1 3 - 5 - 1 - 6 - 2 + 2 -10 _ 2 + 1 7 5 3 9 -1 3 - 9 - 2 + 1 - 7 0 0 + 3 + 5 - 5 + 3 + 4 - 4 - 1 1 -1 2 - - -2 1 - _ 4 - 3 4 7 -1 8 + 4 8 1948 Percentage change in sales 1947 to 1948 + + + + 33.2 8 .2 4 s 3 1 * 7 + 7 +10 + 2 2 .4 2 .3 5 + - 9 1949 Index Percentage distribution of sales 1947 - Indexes of Business Sales at Second District Department Stores by Major Departmental Groups, 1947-48 Group Stocks on Jan. through hand Feb. 1949 Feb. 28, 1949 Industrial production*, 1935-39 = 1 0 0 ......... (Board o f Governors, Federal Reserve Feb. Dec. Jan. Feb. 194 192 191 189p 247 257 262 262p 209 186 177p 325r 343r 328 328 v 160 159 155 153p 131 124 120 120 p System ) Electric power output*, 1935-39 = 1 0 0 ......... (Federal Reserve B ank o f N ew York) Ton-miles of railway freight*, 1935-39 = 1 0 0 (Federal Reserve B ank o f N ew York) Sales of all retail stores*, 1935-39 = 100........ (Department o f Commerce) Factory employment United States, 1939 = 100........................... (Bureau o f Labor Statistics) New York State, 1935-39 = 100................ + 3 ( N . Y . S . D iv. o f Place, and U n em p. In s.) + 8 Factory payrolls United States, 1939 = 1 0 0 .......................... 354 378 363p 301 298 288 301r 322 322 p (Bureau o f Labor Statistics) New Y ork State, 1935-39 = 1 0 0 ................. * Decrease of less than 1 per cent. 286p (N . Y . S . D iv. o f Place, and U n em p . In s.) Personal income*, 1935-39 = 100.................. (Department o f Commerce) Indexes of Department Store Sales and Stocks Second Federal Reserve District (1935-39 averages 100 per cent) Composite index of wages and salaries*f, 1939 = 100....................................................... 1949 1948 196 197p 171 171 169 92 87 95 87 99 89 98 87 (Bureau o f Labor Statistics) Item Velocity of demand deposits*#, 1935-39 = 100 Feb. Dec. Jan. Feb. Sales (average daily), unadjusted................. Sales (average daily), seasonally a d ju sted *.. 203r 242r 414 247 194 243 192 229 Stocks, unadjusted............................................ Stocks, seasonally adjusted............................ 234r 241r 215 236 201 228 218 224 r Revised. * Seasonal adjustment factors for 1942-48 revised; available upon request from the Research Department, Domestic Research Division. 185r 168 (Federal Reserve B ank o f N e w York) Consumers’ prices, 1935-39 = 1 0 0 ................. (Federal Reserve B ank o f N e w York) New York C ity .............................................. Outside New York C it y .............................. * Adjusted for seasonal variation. p Preliminary. r Revised. t A monthly release showing the 15 component indexes of hourly and weekly earnings in nonagricultural industries computed by this bank will be sent upon request. Tabulations of the monthly indexes, 1938 to date, may also be pro cured from the Research Department, Domestic Research Division. # Seasonal adjustment factors for 1942-48 revised; available upon request from the Research Department, Financial Statistics Division. (WWWWVWVWWWWV 47 FEDERAL RESERVE BANK OF NEW YORK National Summary of Business Conditions INDUSTRIAL PRODUCTION (Summarized by the Board of Governors of the Federal Reserve System, March 25, 1949) UTPUT and employment in industry declined somewhat further in February and were slightly below the levels of a year ago. Value of department store sales in February and the early part O of March continued substantially below earlier advanced levels. Wholesale prices of meats and livestock advanced moderately from mid-February to mid-March, while prices of numerous other commodities declined somewhat further. I n d u s t r i a l Pr o d u c t i o n Federal Reserve indexes. Monthly figures; latest shown are for February. CONSTRUCTION CONTRACTS AWARDED Industrial production, according to preliminary figures for the Board’s seasonally adjusted index, was 189 per cent of the 1935-39 average in February, down 2 points from January and 6 points from the peak last autumn. A further decline is indicated for March, reflecting sharp curtailment in the output of coal, and also reductions in output of some other products including petroleum and rayon. In February output of durable goods was down slightly, reflecting further declines in output of machinery— mainly electrical machinery— and of lumber, furniture, and stone, clay and glass products. Steel production, however, advanced further to a record rate of 101.2 per cent of capacity and was maintained at about this rate in March. In the automotive industry, activity declined slightly in February, but with the completion of model changeovers showed a small gain during the first three weeks in March. Nondurable goods production also declined somewhat in February, petroleum refining opera tions were reduced, and small declines occurred in activity in the rayon textiles, chemicals, rubber products, and paper industries. Output at cotton textile mills and most other nondurable goods industries showed little change from January levels. Minerals production declined moderately in February and was sharply reduced in March. Crude petroleum output was lowered further in February to a rate approximately equal to that in the same month a year ago, and was reduced substantially in March. Coal production continued to decline in February and the early part of March, reflecting large accumulation of stocks and reduced demand, and was sharply curtailed beginning March 14 as the result of a work stoppage affecting most mines east of the Mississippi. Output at copper mines increased substantially in February following a settlement of a prolonged strike at the mines of a leading producer. Em p l o y m e n t 7. W . Dodge Corporation data for 37 Eastern States. Monthly figures; latest shown are for February. DEPARTMENT STORE SALES AND STOCKS Employment in nonagricultural establishments, as reported by the Bureau of Labor Statistics, declined more than seasonally in February and was 300,000 or one per cent less than in February 1948. The decline from January reflected mainly further reductions in manufacturing, construction, and railroad transportation. The number of persons unemployed increased by 550,000 to 3,200,000 according to Census Bureau estimates. Co n s t r u c t io n Value of contract awards in February, according to the F. W . Dodge Corporation, was about one-sixth larger than in January, reflecting increases in publicly-financed construction. Awards for privately-financed activity showed little change from the sharply reduced level reached in January. Total awards in January and February were 19 per cent smaller than in the same months last year. D is t r ib u t io n Department store sales declined further in February after allowance for usual seasonal changes. The Board’s adjusted index was 273 per cent of the 1935-39 average as compared with 287 in January and 286 a year ago. Sales during the first three weeks in March were 11 per cent below the corresponding period of 1948, owing in part to the later date of Easter this year. Shipments of railroad revenue freight in February and the first half of March declined some what further and were 10 per cent below the level of a year ago. Loadings of coal, forest products, and merchandise in less than carload lots were sharply reduced, as compared with a year ago, and there were less marked declines in miscellaneous freight and livestock shipments. Loadings of grain, coke, and ore were above year ago levels. C o m m o d i t y P r ic e s figure for sales is February; latest for stocks is January. MEMBER BANKS IN LEADING CITIES The average level of wholesale prices, as measured by the all-commodity index of the Bureau of Labor Statistics, was unchanged from mid-February to mid-March. Reflecting in part a seasonal reduction in supplies, prices of meats and livestock rose somewhat, but prices of a wide range of industrial commodities declined. Prices of steel scrap and nonferrous metals scrap showed further marked decreases. Refined lead and zinc prices were lowered and there were reductions also in prices of various metal products, such as storage batteries and household appliances. The consumers' price index declined 1 per cent in February reflecting further decreases in retail prices of food, apparel, and housefurnishings. The February level was 169 per cent of the 1935-39 average, as compared with the high point of 174.5 reached last summer. Ba n k Wednesday figures; latest shown are for March 16. C r e d it Federal Reserve holdings of Government securities declined sharply during the first half of March, reflecting principally sales of Treasury bonds and retirement of certificates held by the Reserve Banks. The effect of these sales in absorbing bank reserves was largely offset by a sub stantial decline in Treasury deposits at the Reserve Banks. After the middle of March, seasonally large income tax payments caused the shift of a substantial volume of funds from private deposit accounts at commercial banks to Treasury balances at the Reserve Banks. Federal Reserve sales of bonds continued and, although the System purchased large amounts of short-term securities, bank reserves declined. Business loans were reduced somewhat further at reporting banks in leading cities during February and the first half of March. Demand deposits of businesses and individuals declined sub stantially, reflecting tax payments, repayment of bank loans, and net purchases by nonbank investors of Government securities from the banking system.
@FedFRASER