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MONTHLY REVIEW
O f Credit and Business Conditions

FEDERAL
V O L U M E 33

RESERVE

BANK

APRIL

OF

NEW

YORK

1951

No. 4

MONEY MARKET IN MARCH
Both the money market and the Government security market
were dominated throughout the past month by events growing
out of the joint announcement by the Secretary of the Treasury
and the Chairman of the Board of Governors, and of the Fed­
eral Open Market Committee, of the Federal Reserve System,
released for publication on March 4:
The Treasury and the Federal Reserve System have
reached full accord with respect to debt-management and
monetary policies to be pursued in furthering their com­
mon purpose to assure the successful financing of the
Governments requirements and, at the same time, to
minimize monetization of the public debt.
This announcement was accompanied by another, stating that
the Treasury would offer in late March and early April a 2%
per cent long-term nonmarketable bond in exchange for its
bank-restricted 2 Vi per cent issues of June and December 196772. The markets reflected initial uncertainty over the meaning
of the fundamental agreement that had been reached, as well as
varying anticipations concerning the detailed terms of the
exchange offering that were still to be revealed. But it soon
became clear through the action of the Government security
market that the Federal Reserve System had withdrawn its
former supports; and a well-ordered readjustment occurred,
with Government security prices moving to generally lower
levels in response to underlying supply and demand conditions.
During the first few days following the announcements,
holders of the restricted bonds affected by the conversion
offering were given an opportunity to sell these securities at
previously existing prices, and substantial amounts were pur­
chased by the Federal Reserve System and Treasury investment
accounts. The funds so released were used in part to purchase
short-term Government securities, and contributed both to a
slight firming in prices of those securities and also to easy
conditions in the money market through the middle of the
month. An unusually large increase in Federal Reserve "float”
and new procedures for the collection of corporate tax pay­
ments helped to continue the market ease until the final state­
ment week of the month, when the eventual tightening follow­
ing the March 15 tax date and a reduction of "float” sent the
rate on immediately available Federal funds close to the dis­




count rate and caused an increase in member bank borrowing
from the Reserve Banks.
With one exception, prices of all outstanding restricted
bonds had fallen below par by the 13th of the month, more
or less leveling off thereafter; by the month end, all ten of
the restricted bonds were relatively steady at prices ranging
between 99 and 100. The price changes represented a general
rise of about Vs of 1 per cent in yields. Changes in the prices
and yields of bonds eligible for bank ownership (including
the partially tax-exempt issues) were considerably smaller,
except for the one long-term taxable bond of September 196772, and none actually moved below par until late in the month.
Prices of four selected eligible and restricted bonds have been
plotted on the accompanying chart. Yields on the longer-term
Treasury notes rose gradually throughout the month, with an
over-all increase of roughly Va of 1 per cent in yield, as prices
declined to between 98 and 99. Reflecting a sudden tightening
of the money market and the flexibility appropriate to freer
market conditions, yields on Treasury bills and shorter-term
securities rose abruptly by about Vs of 1 per cent toward the
end of the month. A summary of changes in yields for a
selection of representative securities is presented in the table on
page 46. Throughout all of March, while the most comprehen­
sive price and yield adjustments of the postwar period were
taking place, reasonably active two-way trading continued in
the market for all principal classes of Government securities.

CONTENTS
Money Market in M a r c h ...................................................... ...45
Voluntary Credit R estrain t.................................................. ...47
Bank Reserves— Some Major Factors Affecting Them .. 47
Western Germany’s International Economic P osition ... 48
Survey of Ownership of Business and Personal
Demand Deposits .............................................................. ...51
Automatic Extension of Series E Bonds............................. ...52
Earnings and Expenses of the Second District
Member Banks .................................................................. ...53
Banking and Business Developments in the Second
District .............................................................. ................... ...55
The Consumers’ Price I n d e x ............................. ....................55
Department Store Trade .......................................... .............. 57

46

MONTHLY REVIEW, APRIL 1951

Closing Bid Prices of Selected Treasury Bonds, March 1951

G o v e r n m e n t Se c u r it y M a r k e t

The Treasury’s conversion offer introduced a new type of
debt instrument— a long-term bond that is to be nonmarketable and nonredeemable, although holders may at their own
option exchange the bond at any time for a marketable note.
At a 2% per cent yield for a term of 24 to 29 years, the
bond would presumably appeal to bona fide long-term
investors. In the event of unforeseen requirements, such
investors may exchange the new bond for a five-year IV 2 per
cent note, which can in turn be sold in the market at whatever
the prevailing prices for such securities may be. Instead of the
rigid schedules of future redemption values which have custom­
arily been incorporated in past offerings of nonmarketable
bonds, this bond can, in effect, be converted into a liquid asset
only on terms which will vary with changes in the market prices
of five-year Government securities; and instead of cash redemp­
tion by the Treasury on demand, holders will have to satisfy
their desire for liquidity through the market. Thus the uncer­
tain incidence upon the Treasury of cash redemptions on
the basis of predetermined price schedules, a characteristic
of previous types of nonmarketable bonds, will be eliminated.
The investor, on the other hand, is afforded an opportunity
to obtain a long-term Treasury obligation bearing a yield
to maturity considerably above that currently earned on the
2Vi per cent restricted bonds of June and December 1967-72
to which the exchange privilege has been extended.
Only the broad outlines of this innovation in debt manage­
ment techniques were presented in the original Treasury
announcement of March 4. While the Government security




market was beginning to digest the implications of the historic
policy announcement cited above in the opening paragraph,
purchases of the "exchange issues” of 1967-72 by the Federal
Reserve and Treasury accounts, and by others wishing to obtain
the bonds for conversion into the new issue, provided a steady­
ing influence in the market. On March 8, after immediate
market reactions had been assimilated, and general appraisals
of the nature of the conversion offering had been formed, the
Treasury announced the term of the nonmarketable bond, and
the term and coupon to be attached to the marketable note.
Simultaneously, support purchases of the 'exchange issues” at
previously existing prices ceased, and the market for these
issues quickly adjusted to prices in the neighborhood of par,
at which some trading then took place. It soon became
apparent, however, that the prevailing influences upon supply
and demand evidenced in other sectors of the long-term
market were moving toward an equilibrium at somewhat
lower prices. Consequently, on March 13, the prices of the
"exchange issues” worked their way to a new level at 99-2/32,
and an analogous realignment occurred among all of the
other restricted bonds, as well as the longer-term bank-eligible
issues. On March 18, final details of the exchange offering
were announced.
In the statement week ended March 21, Federal Reserve
bond purchases were small and were more than offset by
sales of Treasury bills and notes. System Account purchases
were increased in the final week of the month to serve the
dual purpose of relieving the intense pressure on member
bank reserves, which developed at that time, and of main­
taining orderly conditions in the Government security market.
The purchases included a variety of issues, and aggregated
roughly 260 million dollars. The Federal Reserve System,
however, determined its purchases or sales primarily in
accordance with general developments in the money market
and credit situation and with a view to maintenance of those
orderly market conditions that are essential for successful
debt management and effective credit policy.
Yields of Selected U . S. Government
Securities during March 1951*
Issue
Bonds
2 M’s
2 H ’s
2 M’s
2 M’s
2 M’s

December 1967-72#..........
September 1967-72...........
June 1959-62#...................
September 1956-59...........
March 1952-54..................

1 ^ ’s March 1954.......................
l M ’s October 1, 1951.................
Treasury bills
Nearest 3-month m aturity. . . .

Mar. 29

Mar. 13

Mar. 8

Mar. 5

Mar. 2

2 .5 6 t
2.44
2 .3 6 t
2 .2 0
2.01

2 .5 6 f
2.41
2.33$
2.06
1.80

2.49
2 .34
2 .22
1.95
1.72

2 .45
2.31
2 .2 0
1.89
1.67

2 .4 5
2.29
2 .18
1.85
1.61

2.01
1.64

1.93
1.48

1.78
1.49

1.74
1.54

1.66
1.48

1.53

1.40

1.39

1.39

1.39

* Percentage yields to nearest call or maturity date. Based on closing bid prices
for selected dates.
# Ownership restricted to nonbank investors.
t Yield to maturity; yield to call date, 2.57 per cent.
$ Yield to maturity; yield to call date, 2.36 per cent on March 13 and 2.40 per
cent on March 29.

FEDERAL RESERVE BANK OF NEW YORK

VOLUNTARY CREDIT RESTRAINT
On March 9, 1951, the Board of Governors of the Fed­
eral Reserve System announced the inauguration of a Pro­
gram for Voluntary Credit Restraint which had been devel­
oped by representatives of financing institutions and
approved by the appropriate Government officials. On
March 20, 1951, the Voluntary Credit Restraint Committee,
appointed by the Board of Governors, released its Bulletin
No. 1 under the program. Copies of the program and bul­
letin are available from this bank without charge. Requests
for reprints should be addressed to the Press and Circulars
Division, Federal Reserve Bank of New York, New York
45, N. Y.

Toward the close of the month, partly as a reaction to
the sharp tightening of the money market that had brought
Treasury bill yields to a peak of 1.53 per cent (bid) on the
26th, prices of several of the bank-eligible bonds (all of which
had thus far remained above par) sagged to around the par
level. This development led some dealers and others to
review their pricing practices, which have customarily been
based upon the call dates of individual bonds without much
concern for the date of ultimate maturity. Apparently it
was in part because of a shift of thinking to prices based
upon maturity dates that the taxable 2 per cent bonds of
December 1951-55 were the first of the bank-eligible bonds
to drop below par. This type of adjustment was another evi­
dence of the greater responsiveness to appraisals developed
within the market itself that might well be expected as a
consequence of greater flexibility and freedom of the market.

47

supplied by these purchases, together with a net increase
in member bank borrowing of about 75 million dollars and
a moderate return flow of currency from circulation, approxi­
mately balanced the drains on bank reserves from pther
sources. These drains included net Treasury receipts, a net
reduction in Federal Reserve float, and a further outflow of
gold.
Treasury balances at the Federal Reserve Banks rose nearly
600 million dollars, net, during the month with a concentra­
tion in the final statement week. The greater tightening influ­
ence on the reserve position of the banks that might have been
expected, in view of the substantial increase in tax receipts
over last year, was modified in part by the introduction of new
collection procedures, effective March 5-31, which permitted
the larger checks drawn in payment of corporation taxes to be
credited to an account established for the Treasury at the
banks on which these checks were drawn. Subsequent Treasury
calls on these accounts, as in the case of the customary Tax
and Loan Accounts, could be spaced out over some time in
order to avoid the extreme stringency which otherwise would
have been created by a convergence of large drains upon bank
reserves shortly following the March 15 tax date. Two sub­
stantial withdrawals from these accounts were made by the
Treasury before the end of the month, but large amounts
(estimated at about 2 % billion dollars) still remained in the
banks at the end of March.
In addition to the Treasury drain upon bank reserves, a
reduction of more than 125 million dollars resulted from
an over-all decline in Federal Reserve “float” (credits to
member bank reserve accounts for checks not yet actually
collected). The "float” had, however, been a substantial source
of reserve funds through much of the last half of the month,

M e m b e r B a n k R eserve P o s it io n s

Member bank reserve positions were relatively easy during
most of the first three weeks of March, but were under
heavy pressure in the latter part of the month. Excess reserves
for the country as a whole were at the moderately low level
of about 650 million dollars at the end of February and
rose above 1 billion dollars around the middle of March;
by the end of the month they were running around 450
million dollars. Along with the net reduction in excess reserves,
member bank borrowing from the Reserve Banks became
increasingly important. Total borrowings by member banks
fell from 398 million dollars on February 28 to 132 million
on March 14, and then increased to 471 million on March 28.
As noted above, net Federal Reserve purchases of Govern­
ment securities were a principal source of reserves, except
for the third week; the aggregate increase for the month
as a whole was 725 million dollars. The reserve funds




BANK RESERVES— SOME MAJOR FACTORS
AFFECTING THEM
In recent years, the Monthly Review has contained
various special articles discussing the reserve require­
ments and reserve balances of commercial banks and the
factors affecting reserve balances. Several of these articles
have now been revised, brought up to date, and republished
in the form of a booklet, entitled Bank Reserves— Some
Major Vactors Affecting Them. The reprinted articles deal
with specific topics which normally are given relatively
little attention in general textbooks on money and banking.
This booklet will be sent free of charge to anyone who
is interested in receiving it. Requests should be addressed
to the Domestic Research Division, Federal Reserve Bank
of New York, New York 45, N. Y.

48

MONTHLY REVIEW, APRIL 1951

reaching a peak volume in excess of 1.5 billion dollars on one
date; by the month end, it had fallen back to about 750
million dollars. Continuation of the gold outflow, and increases
in dollar balances held at the Reserve Banks by foreign govern­
ments and central banks, accounted for a further drain of
about 300 million dollars. Thus gross reductions of member
bank reserves approximately balanced the gross increase of
roughly one billion dollars. The reduction in excess reserves,
noted above, was accounted for by the increase in reserve
requirements associated with a moderate expansion of deposits.
Actually, private demand deposits declined, while Treasury
deposits at the member banks increased. The accompanying
increase in member bank earning assets, judging from incom­
plete data for the weekly reporting banks, was apparently
concentrated in increased holdings of Treasury bills by some

of the banks, although business loans also rose substantially.
The reserve positions of member banks in New York City
reflected the general nationwide fluctuations in magnified
form. At the beginning of the month, with substantial trans­
fers of funds to other parts of the country occurring, the
money market was tight and Federal funds exchanged at rates
from 1V4 to 1% per cent. After March 5 the market eased
considerably, and with the exception of one day remained
easy until the 22 nd, when the Federal funds rate moved up
close to the discount rate, where it remained for the rest
of the month. The change in Treasury tax procedures, and
the midmonth rise in float, were particularly advantageous to
the New York City banks, reducing the outward drain upon
city funds as well as reducing the direct drain arising from
tax checks drawn on their own deposits.

WESTERN GERMANY’S INTERNATIONAL ECONOMIC POSITION
Late in February the Government of Western Germany
temporarily suspended the issuance of licenses for those im­
ports from the European Payments Union area which had
been liberalized under the program of the Organization for
European Economic Cooperation. A few days later, the gov­
ernment decided in principle not to issue additional licenses
nor to "confirm” foreign exchange allocations for nearly all
quota (i. e., non-liberalized) imports from European Payments
Union participants. These developments drew attention to
the basic imbalance of Western Germany’s international eco­
nomic position.
Under the liberalization program of the OEEC, member
countries had to lift quantitative restrictions first on one half
and subsequently on a further 10 per cent of their imports
on private account from other members. Efforts are now
being made by the OEEC to increase the total reduction in
quantitative restrictions to 75 per cent. The import liberali­
zation policy had greatly benefited Western Germany’s
exports, and had found staunch support in that country. How­
ever, stringent restrictions on the issue of import licenses
became unavoidable because of the steady growth in the
country’s deficit vis-a-vis the EPU1 and because of the depletion
by the end of February of more than three quarters of the
special 120 million dollar credit granted to Germany by the
EPU last December. Unless soon relaxed, the new import
controls may well deal a heavy blow to intra-European trade
and cause a severe setback to the multilateral payments system
sponsored by the OEEC.
The lack of balance in Western Germany’s external accounts
1 The European Payments Union was described in an article in the
September 1950 issue of this Review. Reprints of the article are avail­
able upon request from the Press and Circulars Division, Federal
Reserve Bank of New York, New York 45, N. Y.




was accompanied by a steady improvement in that country’s
internal economic position during most of 1950. By November,
the industrial production index had reached a new peak of
130 (193 6 = 10 0), against 97 a year earlier. There was a
sharp though largely seasonal decline to 117 in January 1951,
but the index nevertheless stood 31 per cent higher in that
month than in January 1950, and about 10 per cent above
its level at the time of the outbreak of the Korean conflict.
The number of employed wage and salary earners rose by
4.5 per cent during 1950 despite increasing shortages of coal
and coke, and notwithstanding a decline toward the end of
the year in the production of iron, steel, and electric power
in consequence of these shortages.
This very encouraging over-all expansion of economic activ­
ity was in turn accompanied by a substantial increase in the
country’s foreign trade. Imports into Western Germany, as
brought out in Table I, rose from 2.2 billion dollars in 1949
T a b le I
W e ste rn G erm a n y’s F o re ig n T rade
(In m illions o f d o lla rs ; in clu d in g W e st B erlin )
Imports
Year and
quarter

Total

“ Commer­
cial” only

Balance
GARIOA*
and ERP

Total
exports

179.1
361.4
342.5
397.9

268.2
233.5
216.6
237.5

254.8
283.9
300.5
283.8

1,280.9

955.8

1,123.0

593.9
526.7
669.9
913.4

465.3
422.3
550.2
785.7

128.6
104.4
119.7
127.7

2,703.9

1950-1..............
II..............
I l l ..............
IV..............

447.3
594.9
559.1
635.4
2,236.7

1949-1..............
II..............
I l l ..............
IV..............

2,223.5

480.4

Total
-

“ Commer­
cial” only

192.5
311.0
258.6
351.6

+ 75.7
- 77.5
- 42.0
-1 14 .1

-1 ,1 1 3.7

-1 57 .9

356.4
421.9
514.0
688.3

-

237.5
104.8
155.9
225.1

-1 08 .9
0.4
- 36.2
- 97.4

1,980.6

-

723.3

-242.9

* Government and relief in occupied areas.
Note: -J- indicates export surplus; — indicates import surplus.
Source: Monthly Report of the Bank Deutscher Laender, December 1950, page 38

FEDERAL RESERVE BANK OF NEW YORK

49

to 2.7 billion in 1950. Exports, increasing even faster than
imports, last year almost reached 2 billion dollars, resulting
in a sharp contraction in the over-all import surplus. This
contraction, however, was more than offset by a reduction
in United States Government financing of Western German
imports, and the country’s "commercial” import surplus (the
excess of "commercial” imports over exports) consequently
rose from 158 million dollars in 1949 to 243 million in 1950.

their associated monetary areas, and since a large proportion
of these commodities were on the liberalized lists that had
been set up under the OEEC’s program, the Western German
Government was committed to issuing licenses automatically
for their importation. German importers, moreover, made
some purchases in EPU countries of goods that were not
actually produced there and that therefore should not have
come under the liberalization procedure.

Together with the price effects of the September 1949
currency devaluations and the increased availability of supplies
in Europe and its dependent areas, this cut in American aid
led to a significant and impressive shift of Western Germany’s
supply sources from the dollar area to countries participating
in the European Payments Union. As indicated in Table II,
Germany reduced her imports from the Western Hemisphere
from 993 million dollars in 1949 to 626 million in 1950, and
increased her imports from EPU countries and their monetary
areas from 1,014 million dollars to 1,861 million. Since Ger­
many’s exports to EPU countries expanded much less than
its imports from those countries, there was a very heavy rise
in the deficit with the EPU participants, from a mere 65
million dollars in 1949 to 366 million dollars in 1950. Even
with considerable EPU aid, an imbalance of such proportions
was bound to result in payment difficulties. It is true, how­
ever, that Germany at the same time succeeded in sharply
stepping up its exports to the United States and other Western
Hemisphere countries, as well as to some other parts of the
world.

Apart from the import boom and the deterioration in the
terms of trade, Germany’s foreign exchange position was
further impaired, at least temporarily, by rumors last summer
and fall of an impending upward revaluation of sterling; in
consequence, many exporters delayed collection of their ster­
ling bills, while importers made every effort to expedite pay­
ment of their liabilities to suppliers in the sterling area.
Moreover, now that a sellers’ market had returned, many
foreign exporters who had previously been satisfied to ship
to Germany on "cash against documents” terms began to
demand payment by letter of credit from their German
customers; this meant, in effect, that the latter had to pay
for their imports long before arrival. German exports, it
is true, also increased rapidly in the second part of 1950,
but since they consisted largely of machinery and other
industrial goods sold on credit, the proceeds were slow to
appear in Germany’s foreign exchange accounts. These various
changes in the settlement of foreign trade transactions were
of major importance in the rapid deterioration which took
place in Germany’s external accounts last year.

To a considerable extent, the payment difficulties with the
EPU were caused by special factors primarily attributable to
the outbreak of the Korean conflict last summer. At that time,
German importers, who because of softness in some raw ma­
terial prices during the second quarter of 1950 had been slow
in covering their needs, became fearful of falling behind in
the incipient scramble for raw materials and foodstuffs, and
rushed into the market as prices were rapidly rising. Since
the prices of German exports were increasing only slowly,
the terms of trade turned sharply against Germany. Most of
the raw materials and foodstuffs needed by Germany were
readily available in the countries participating in the EPU or

The German Government’s indebtedness to the EPU in­
creased by leaps and bounds, and by the end of November
the cumulative deficit with the EPU had reached 324.2 million
dollars, or 4.2 million in excess of Germany’s quota under the
EPU agreement. Linder the quota arrangements, Germany was
permitted to make use of EPU credit facilities only to the
extent of 60 per cent (192 million dollars) of its quota, while
the remainder had to be settled by means of gold or dollar
transfers. By the time that the November deficit was settled,
Germany had paid to the EPU 132.2 million dollars out of
its foreign exchange reserves.

T able II
W estern G erm a n y's F oreig n Trade b y A rea s
(In m illions o f d olla rs ; in clu d in g W e s t B erlin )
Imports
Area

Exports

Balance

1949

1950

EPU countries............. 1,861.2
626.0
Western Hemisphere. .
216.7
Other countries......... ..

1,0 1 4.0
993.5
229.2

1,495.3
266.3
219.0

949.4
8 4.4
89.2

-3 6 5 .9
- 3 5 9 .7
+
2 .3

-

Grand total.......... 2 ,7 0 3.9

2 ,2 3 6.7

1,980.6

1 ,1 2 3.0

-7 2 3 .3

- 1 ,1 1 3 . 7

1950

1949

1950

1949
64.6
909.1
140.0

Note: + indicates export surplus; — indicates import surplus.
Source: Monthly Report of the Bank Dcutscher Laender, December 1950, page 39.




Confronted with this rapid drain of foreign exchange re­
serves and the approaching exhaustion of credit facilities with
the EPU, the German Government had the problem of deciding
whether it should redress the balance by abandoning or limiting
the liberalization of imports and employing quantitative import
restrictions, or whether it should curtail the demand for imports
indirectly by tightening credit and increasing tax rates. View­
ing direct economic controls with great distaste and believing
that the balance-of-payments difficulties were essentially of a
temporary nature, the government decided to rely primarily
on financial measures. In this the government was also
motivated by the consideration that, if it should resort to

50

MONTHLY REVIEW, APRIL 1951

quantitative import restrictions, foreign countries were likely
to retaliate by setting up higher barriers against German
exports, with the result that it would soon be confronted with
a new and equally large deficit at a lower level of total trade.
As a first step toward tighter credit conditions, Germany’s
central bank late in September increased the legal reserve
requirements for commercial banks by 50 per cent for demand
deposits and 100 per cent for time deposits. Since the com­
mercial banks’ portfolios were replete with rediscountable
paper, however, this measure failed to reduce the credit volume.
In October, the monetary authorities therefore decided to go
one step further and restrict the credit facilities of the central
banking system itself. This they did by refusing either to
rediscount acceptances or to permit their use as collateral for
credit extensions, unless the banks concerned agreed to restrict
the volume of their acceptance credits, other than export
credits, to specified levels. Finally, at the end of October,
the central bank discount rate was increased from 4 per cent
to 6 per cent in the hope that this would not only curtail the
demand for credit but also lead to the liquidation of excessive
credit-financed inventories. Credit volume continued to in­
crease thereafter, but at a slower rate than during September
and October.
In addition to reducing the availability and increasing the
cost of central bank credit, the German authorities took a
number of measures bearing directly upon the volume of
imports. Early in October all outstanding licenses for liberal­
ized imports that were not covered by contractual commitments
were canceled. Subsequently, importers when applying for
licenses were required to put up a cash deposit equivalent to
50 per cent (later reduced to 25 per cent) of the deutsche
mark value of the underlying import orders. In addition, the
authorities began to restrict somewhat the granting of licenses
for nonliberalized imports and strengthened the controls over
the use of export proceeds. None of these remedial measures,
however, were expected by either the EPU or the German
Government to bring Germany’s external accounts immediately
into equilibrium.
By early November, it had become obvious that unless
Germany was granted additional credit facilities, direct con­
trols of the most drastic nature, involving Germany’s default
on her liberalization commitments, would be required to rectify
the deficit. The OEEC Council therefore decided to give help,
and at its November 14 meeting it agreed in principle that
the EPU should grant Germany a special 120 million dollar
credit. Final approval of this credit was given in December,
after the Council had been persuaded that the exhaustion of
Germany’s EPU quota was due to temporary causes that could
be remedied with the aid of additional monetary and fiscal
policy measures and without resort to quantitative import
restrictions. The Council’s conclusion was arrived at on the
basis of two reports, one by the German Government and the




other by two independent experts, Professor Alec Cairncross,
Economic Adviser to the OEEC, and Dr. Per Jacobsson,
Economic Adviser to the Bank for International Settlements,
following an on-the-spot study of Germany’s payments posi­
tion. The German Government’s report contained a detailed
program for improving the country’s balance of payments.
Under the OEEC’s special credit plan, any indebtedness of
Germany toward the EPU in excess of the German quota was
to be met to the extent of two thirds out of the 120 million
dollar credit, and to the extent of one third (i. e., up to 60
million dollars) by the payment of dollars out of German
funds. The credit was to cover the period from November
1, 1950 to October 31, 1951, but it was to be reduced to
100 million dollars by the end of May 1951, and by 20 million
each month thereafter. The German Government committed
itself to keeping the OEEC informed of the measures it took
to achieve the objectives of its economic program. The OEEC
Council in turn recommended that all member countries adopt
foreign trade policies conducive to the expansion of imports
from Germany.
Contrary to the hopes entertained in the OEEC, Germany’s
accounts with the EPU continued to show substantial and
increasing deficits, which necessitated utilization of the special
credit at an alarming rate. In December, the deficit was 32.5
million dollars, in January it increased to 42.1 million, and in
February it reached approximately 58 million. During the
entire December-February period, the deficit thus averaged
approximately 44 million dollars, monthly, against 65 million
dollars during July to November. By the end of February,
according to preliminary figures, Germany had already used up
91.4 million dollars of the 120 million dollar credit, and had
lost an additional 45.7 million dollars to the EPU over and
above the 128 million previously paid under the quota regula­
tions. In consequence, Germany’s credit facilities for March
and April aggregated no more than 28.6 million dollars, an
amount which, in the light of the extraordinarily large total
of licenses issued during February for imports from the EPU
area, appeared entirely inadequate.
Germany was thus rapidly approaching the day when it
would have to pay its entire EPU deficit in dollars. In addi­
tion, it would soon have to begin repayment of the special
120 million dollar credit. If, moreover, one takes into account
that ECA aid to Germany is likely to be cut sharply by next
summer, the drastic nature of the limitations clamped on
German imports in February need not evoke surprise. These
restrictive measures may well have harmful effects not only on
Germany’s own economy but also on those of neighboring
countries, especially Denmark, the Netherlands, and Switzer­
land. The German payments crisis thus transcends the com­
paratively narrow limits of an internal German problem and
justifiably arouses concern as to its repercussions in the field
of intra-European trade and payments.

FEDERAL RESERVE BANK OF NEW YORK

A basic question is whether Western Germany can afford to
return to the previously attained degree of import liberaliza­
tion so long as the prevailing pressures toward an imbalance
in its external accounts persist. Aside from the recent deteri­
oration of Germany’s terms of trade and the prospective taper­
ing off of EGA aid, these pressures stem essentially from the
still heavy needs for reconstruction and modernization of plant
and equipment, and from the necessity to absorb millions of
refugees and at the same time maintain living standards at a
politically and economically tolerable level. Whatever the

51

answer to this question, there is urgent need for additional
German measures to mop up excessive purchasing power
wherever it exists, and for a determined concentration of all
available resources on the export drive. Even though the
recent restrictive moves of the government are likely to go
far toward checking the drain on the country’s dollar reserves,
more fundamental correctives than the present emergency
measures would seem imperative if Germany is to achieve
the needed basic readjustment in its international economic
position.

SURVEY OF OWNERSHIP OF BUSINESS AND PERSONAL DEMAND DEPOSITS

Demand deposits of individuals, partnerships, and corpora­
tions in all commercial banks in the Second Federal Reserve
District at the end of January 1951 are estimated to have
increased to a record total of 21,985 million dollars, a figure
1,047 million dollars, or 5.0 per cent, above that of January
1950. The past year’s expansion in this District compares
with a rise of only 182 million dollars, or 0.9 per cent, in
the previous year and is almost as large as the heaviest postwar
increase, which occurred in 1947. Estimates of changes of
ownership of deposits in this District during the past year
have been made on the basis of reports from 117 banks that
analyzed their larger accounts, and are part of the annual study
conducted on a national scale by the Board of Governors of
the Federal Reserve System.
The dominant cause of the increase in business and personal
demand deposits during the year under review was the expan­
sion of bank credit in the form of loans and bank holdings
of securities other than those of the United States Govern­
ment. The increase in loans occurred largely subsequent to
the outbreak of hostilities in Korea and reflected advances
to business concerns for building up inventories and enlarging
productive capacity, and also advances to individuals for the
purchase of residential real estate and consumers’ durable
goods. The expansion in loans and "other securities” and
the accompanying rise in deposits represented a multiple
expansion of commercial bank credit based upon reserves
created through the sale of Government securities indirectly
to the Federal Reserve System. It represented "deficit” spend­
ing by private groups as contrasted with the wartime deposit
increases, which reflected "deficit” spending by the Govern­
ment. The prospect of heavy Government expenditures for
rearmament was, however, an important element in activating
business and personal spending, even though in themselves
Government fiscal operations were not instrumental in aug­
menting the money supply.
As the accompanying table indicates, all deposit ownership
groups shared in the over-all rise in business and personal
demand deposits in this District during the year ended January
31, 1951 (except in the case of nonprofit organizations, which




declined 0.9 per cent). The largest relative gain (11 per
cent) was shown by the "all other financial” group of accounts,
which consists of investment, finance, real estate, and insurance
agency firms, most of which were operating at relatively high
levels during the past year. Cash balances in trust funds of
banks increased by 10 per cent during the year and may have
reflected, among a number of possibilities, uninvested accumu­
lations in pension plan funds.
Among the nonfinancial business accounts, the increases
ranged from 2.5 per cent in the accounts of retail and whole­
sale trade concerns and of dealers in commodities to 6.3 per
cent in the accounts of manufacturing and mining concerns.
The rise in balances in these accounts presumably reflected the
increased working funds required for the production and
distribution of a larger volume of goods and services at higher
prices. Business firms tend to keep larger balances under these
circumstances to meet higher payrolls, material costs, and taxes
and also to carry any increase in the dollar volume of invenEstimated Ownership o f Demand Deposits of Individuals, Partnerships,
and Corporations in All Commercial Banks in the
Second Federal Reserve District
( D o l la r a m o u n t s in m il lio n s )

January 1950 to
January 1951
Type of owner

Manufacturing and mining..........
Public utilities, transportation,
and communications.................
Retail and wholesale trade and
dealers in commodities.............
All other nonfinancial business, in­
cluding construction and ser-

July 1945 to
January 1951

Dollar
balance Dollar Per cent Dollar Per cent
Jan.1951 change change change change
7,069

+

417

-f 6.3

-

317

-

4.3

1,399

+

41

+ 3.0

-

82

-

5.5

3,251

+

80

+ 2.5

+

628

+23.9

1,416

+

44

+ 3.2

+

382

+36.9

Total nonfinancial.............

13,135

+

582

+ 4.6

+

611

+ 4.9

Insurance companies....................
Trust funds of banks...................
All other financial business*........

1,087
567
1,616

+
+
+

16
52
161

+ 1.5
+ 10 .1
+ 11 .1

+
+

268
44
410

+32.7
- 7.2
+34.0

Total financial...................

3,270

+

229

+ 7.5

+

634

+24.1

575 4,402 +
603 +

5
224
17

- 0.9
+ 5.4
+ 2.9

+
+
-

138
917
118

+31.6
+26.3
- 1 9 .6

+1,047

+ 5.0

+2,182

+ 1 1 .0

Nonprofit organizations...............
Personal (including farmers).......
Foreign accounts...........................
Total demand deposits of indi­
viduals, partnerships, and corp-

21,985

* Includes investment, finance, real estate concerns, insurance agencies, etc.

52

MONTHLY REVIEW, APRIL 1951

tories or receivables. The funds to accomplish this in the
past year have been derived principally from depreciation and
depletion reserves, by ploughing back a sizable portion of
net profits, and by loans from banks.
Accumulations of funds in personal balances increased 5.4
per cent, with the rise confined to nonfarm accounts. Deposits
of farmers, which are reported by the two smallest size groups
of banks, moved irregularly but showed an aggregate decline
of 9 per cent. Foreign balances recorded a modest rise of
2.9 per cent, the first to occur since 1946.
Estimates of deposit ownership in the different size groups
of banks show that banks of all sizes shared in the past years
deposit gain, except that the group with total deposits of 1
to 10 million dollars sustained a minor over-all decline of
Yl of 1 per cent. Personal accounts expanded in the banks
of all size groups and, generally, the banks in which such
accounts showed the largest relative gains had the largest over­
all deposit increases. The financial group of accounts showed
increases in the aggregate balances for each size bank, but
the component elements (insurance company accounts, trust
funds of banks, and 'all other financial” accounts) moved
irregularly within the various size groups. Among the nonfinancial business accounts, gains were shown in all ownership
classifications in three size groups: the smallest banks (those
with total deposits of less than 1 million dollars), the largest
banks (those with total deposits in excess of 500 million
dollars), and banks with deposits of between 10 and 100
million dollars. In the remaining groups of banks, irregular
changes occurred in the nonfinancial business accounts. Banks
with total deposits of 1 to 10 million showed an over-all net
loss in nonfinancial business deposits of 2.8 per cent, while
banks whose deposits totaled between 100 and 500 million
showed a 2.4 per cent over-all gain in this type of account.
The accompanying chart shows the movements that have
occurred in the balances of the various depositor groups since
the surveys were first undertaken in July 1943. It is particu­
larly noteworthy that, although the total volume of business
and personal demand deposits attained a new high level by
January 31, 1951, only three of the ten ownership groups
also reached new peaks, namely, personal accounts, "all other
nonfinancial” accounts, and "all other financial” accounts. The
last two groups, although they are business accounts, are
closely allied to personal checking balances in their behavior.
They consist of the accounts of a variety of financial and non-

Estimated Ownership of Business and Personal Demand
Deposits at All Commercial Banks in the Second
Federal Reserve District*
Billions
of dollars

Billions
o f dollars

* Figures are semiannual from July 1943 to February 1947 and annual as of
each January thereafter.

financial service groups, whose personal and business funds
are to a certain extent intermixed. They include, for example,
the accounts of construction contractors, theatres and other
places of amusement, laundries, automobile repair shops,
brokers and dealers in securities, insurance agencies, real estate
brokers, doctors, dentists, and lawyers. Deposit balances of
retail and wholesale trade have also closely followed the trend
in personal accounts over the years, but the upswing during
the year under review was not sufficient to surpass the previous
peak of January 1948. Balances held by manufacturing and
mining and public utility concerns are determined principally
by the amounts necessary to transact business, and uninvested
idle balances are seldom accumulated in large amounts. The
cash balances of insurance companies, and the trust funds of
banks, also, are seldom left idle, and fluctuations are largely
determined by the growth of the funds versus the availability
of attractive investment outlets.

AUTOMATIC EXTENSION OF SERIES E BONDS
Automatic extension of United States Series E Savings bonds, which begin maturing on May 1, for another ten-year
period became possible under a law signed by the President on March 26. Investors who choose to hold their maturing
Series E bonds will receive accrued simple interest of 2.5 per cent, annually, for the first seven and one-half years of
extended ownership, following which the interest rate will be stepped up to provide a yield of 2.9 per cent, compounded
semiannually, if the Series E bonds are held for the remainder of the second ten-year period. The extended E bonds may
be redeemed for cash at any time, as at present. No action is required of owners desiring to take advantage of the extension.
Investors who prefer to receive current income semiannually are given the option of exchanging their maturing E bonds
in amounts of $500, or multiples thereof, for 2.5 per cent 12-year Series G bonds bearing a special privilege of redemption
at par (at any time beginning six months after issue date upon one calendar month’s notice). A circular covering the exchange
options is available at the Savings Bond Department, Federal Reserve Bank of New York, New York 45, New York.




53

FEDERAL RESERVE BANK OF NEW YORK

EARNINGS AND EXPENSES OF THE SECOND DISTRICT MEMBER BANKS

Net profits of the Second District member banks, after all
charges but before payment of dividends, amounted in the
aggregate to 201 million dollars in 1950, compared with 165
million dollars in 1949, and were the highest since 1946,
when 221 million was earned.1 The bulk of the increase was/
concentrated in the central reserve New York City banks and
in the largest-sized "reserve city” and 'country” banks. In
the remaining banks of the District, fluctuations in net profits
from the 1949 level were small and irregular.
The rise in the net profits of the central reserve New
York City banks—34 million dollars, or 30 per cent—was
occasioned principally by higher net current operating earn­
ings and reduced transfers to valuation reserves, offset in
part by heavier income tax payments. Outside New York
City, the amounts added to valuation reserves differed but
little from those of the previous year, and in the final net
profits of all groups of banks taken together, the fluctuations
were determined by the movement of net current operating
earnings in combination with higher taxes and reduced losses
and charge-offs on loans.
1 Net profits for the member banks in this District have been sum­
marized in ratio form in Circular No. 3667, entitled "Operating Ratios
of Member Banks in the Second Federal Reserve District for the Year
1950”. Copies of this circular are available upon request from the
Financial Statistics Division, Federal Reserve Bank of New York,
New York 45, N. Y.

Total current operating earnings increased 7.9 per cent in
the District as a whole, attaining a new high of 786 million
dollars. In New York City the increase was 7.3 per cent,
and in the remainder of the District it ranged from an average
of 9.0 per cent in the largest banks to 2.8 per cent in the
group of banks having total deposits of 2 to 5 million. The
principal factor contributing to the higher gross income in
all groups of banks was the enlarged loan income. This
reflected the heavy expansion in the volume of loans which
took place, mostly in the second half of 1950 following the
outbreak of hostilities in Korea, and also the small rate
increases later in the year which were part of the general
hardening of the short-term money rate structure. Interest
received on United States Government securities declined
moderately in all groups of banks, as holdings were reduced
in order to provide funds for loan expansion and for the
additional reserves required against the enlarged deposit vol­
ume. Interest and dividends on "other securities”, which con­
sists largely of the tax-exempt obligations of State and local
governments, increased considerably in the New York City
banks and the largest out-of-town banks, but only to a minor
extent in the other groups of banks. In the larger institutions
—those with a capitalization in excess of $5,000,000—taxable
incomes of a number of banks are either close to or in excess

Earnings and Expenses of Second District Member Banks for the Year 1950 and the Percentage Change from 1949
(Dollar amounts in thousands)
Reserve city and country banks
Deposit size
Central reserve banks
New York City
(23 banks)

$2,000,000 to
$5,000,000
(227 banks)

$5,000,000 to
$20,000,000
(271 banks)

Over $20,000,000
(84 banks)

All member
banks in
Second
District
(750 banks)

Under $2,000,000
(145 banks)

Item
Dollar
volume
1950

Percentage
change
1949 to
1950

Interest on United States Government obligations...
Interest and dividends on other securities..................
Interest and discount on loans......................................
Service charges on deposit accounts............................
Trust department income..............................................
Other current income.....................................................

144,644
31,251
215,111
16,315
57,484
47,347

- 2.3
+ 2 0 .7
+ 1 3 .5
+ 8.4
+ 1 0 .8
+ 0.7

Total current operating earnings..............................

512,152

+

7.3

Salaries and wages— officers and employees................
Interest on time and savings deposits..........................
All other current expenses.............................................

169,735
9,686
118,440

Total current operating expenses.............................
Net current operating earnings, before income taxes

Dollar
volume
1950

Dollar
volume
1950

Percentage
change#
1949 to
1950

Dollar
volume
1950

Percentage
Percentage
change#
Dollar
change#
volume
1949 to
1949 to
1950
1950
1950

Dollar
volume
1950

Percentage
change
1949 to
1950

217,225
47,197
356,178
35,744
66,009
63,668

- 2.3
+ 1 7 .0
+ 1 4 .4
+ 9.1
+ 1 1 .2
+ 2.2

_
+
+
+
+
—

3.9
1.6
9.6
5.1
4.8
1.6

6,625
1,553
13,152
1,674
113
1,001

+
+
+
+
+

5.9
0.1
8.0
3.2
3.7
2.5

1,723
412
3,837
386
2
194

+
+
+

82,837

+

4.0

24,118

+ 2.8

6,554

+ 3.5

786,021

+

8.1
0.8
8.5

24,923
10,974
20,446

+
—
+

4.1
0.6
4.4

7,187
3,505
5,586

+ 4.5
- 1.3
+ 4.3

1,996
874
1,493

+ 7.7
+ 0.4
+ 6.1

256,521
41,226
188,678

+ 5.0
+ 6.2
+ 8.0

+
+

7.1
13.7

56,343
26,494

+
+

3.3
5.6

16,278
7,840

+ 3.1
+ 2.1

4,363
2,191

+ 5.6
- 0.5

486,425
299,596

+ 6.3
+ 1 0 .7

-

11.2

+

887

-

30.3

+

243

- 2 8 .3

+

50

+ 27,407

+ 3 7 .9

2.8
- 76.9
+ 273.5
+ 50.4

-

3,049
234
532
7,070

3.7
63.5
+186.4
+ 16.2

-

550
211
23
1,725

- 6.7
- 1 5 .6
- 7 4 .9
+ 8.0

-

74
123
13
429

+ 3 9 .6
- 2 2 .5
- 3 4 .8
+ 7.1

-

26,212
2,609
4,585
92,886

- 3 7 .3
-7 2 .1
+ 2 7 .4
+ 2 8 .6

5,574
1,690
3,884

+
+

1,602
491
1,111

- 1.3
+ 1 0 .6
- 5.8

200,711
109,575
91,136

+ 2 2 .8
+ 8.2
+ 4 6 .7

3.9
+ 13.8
+ 16.6
+ 10.0
+
9.9
+ 5.7

23,417
4,766
42,461
6,936
1,442
3,815

160,360

+

9.0

+ 3.0
+ 2 3 .4
+ 7.1

52,680
16,187
42,713

+
+
+

297,861
214,291

+ 5.2
+ 1 0 .3

111,580
48,780

Security profits and recoveries ( + ) or charge-offs (—)*
Net additions to (—) or deductions from ( + ) loan
valuation reserves t ......................................................
Net recoveries ( + ) or charge-offs (—) on loans..........
All other net recoveries ( + ) or charge-offs ( —) ..........
Taxes on net income.......................................................

+ 20,468

+ 7 0 .3

+

5,759

14,360
1.463
3,569
69,953

- 5 2 .4
- 7 5 .2
+ 12.2
: + 2 6 .3

-

8,179
578
448
13,709

Net profits........................................................................
Dividends paid............................................................
Retained earnings.......................................................

145,414
89,354
56,060

+ 3 0 .2
+ 8.5
+ 9 1 .5

31,625
12,401
19,224

+
+
+

-

40,816
9,215
81,617
10,433
6,968
11,311

Percentage
change#
1949 to
1950

8.1
1.8
12.7

-

16,496
5,639
10,857

+

_
+

0.1
8.5
4.0

1.7
6.0
0

-

-

6.2
2.5
9.4
2.6
(a)
5.7

8.0

7.9

# Since many banks shifted to a higher deposit size class in 1950. the percentage changes have been based on annual arithmetic averages per item for banks in each size classification The
number of banks shown in each column heading pertains to the year 1950.
* Also includes transfers to or from valuation reserves for losses on securities.
t Includes transfers to or from both bad debt and other valuation reserves for loan losses.
(a) Percentage change not shown— the dollar change being from a negligible amount.




54

MONTHLY REVIEW, APRIL 1951

of their excess profits tax base because they are not allowed so
high a rate of return upon equity capital as the smaller banks.
Consequently, the larger banks are more interested in taxexempt securities. This interest is currently heightened by
the additional tax increases under consideration by Congress.
Receipts from service charges on deposit accounts and income
from trust departments showed gains in the District as a
whole of 9.1 per cent and 11.2 per cent, respectively, and
in both instances the larger banks recorded the larger relative
gains.
Total current operating expenses increased in all groups of
banks. In the smallest institutions, those with deposits of
less than 2 million dollars, the rise in expenses exceeded
the rise in gross income, but elsewhere it was considerably
less and a substantial margin was carried forward as increased
net current operating earnings. Salary and wage payments
were higher in all groups of banks, with the central reserve
New York City banks showing a rise of 3.0 per cent com­
pared with increases ranging from 4.1 per cent to 8.1 per
cent in the reserve city and country groups of banks. Interest
paid on time deposits rose substantially in New York City but
showed only small and irregular fluctuations in the remaining
Second District banks. In the City banks the increased interest
payments were concentrated to a large extent in one of the
largest institutions, which had established higher rates on
compound interest accounts early in 1950. "Other current
expenses”, an item not much below salaries and wages in
importance, rose 8.0 per cent in the District as a whole,
and undoubtedly reflected in large part the rising costs of
materials and supplies. One of the sizable components of
this item, FDIC assessments, is expected to decline in 1951,
as an amendment to the Federal Deposit Insurance Act on
September 21, 1950 provided for substantial credits against
future assessments.
Government security prices showed a generally declining
tendency during 1950, and the volume of security profits,
as well as recoveries on previously charged-off securities,
tended to be lower. In the City banks this item was sub­
stantially higher than in 1949, but the increase arose entirely
from the inclusion of substantial recoveries from valuation
reserves for security losses by one of the largest banks, rather
than from greater security profits or recoveries. Net additions

to valuation reserves for loan losses receded sharply in New
York City because many banks at the end of the previous year
had already accumulated the maximum reserves for bad debt
losses on loans allowable under the Treasury ruling of Decem­
ber 1947 (namely, three times the average loss experience of
the past twenty years). The banks outside New York City,
however, had not established tax-deductible reserves for bad
debt losses on loans as quickly as the large City banks; thus
the aggregate charges for this purpose showed only minor
fluctuations in the three largest-sized groups of banks outside
New York City and expanded sharply (40 per cent) in the
smallest banks.
The improvement in business conditions between 1949 and
1950 was reflected in a substantial reduction in actual net
losses and charge-offs on loans. Such charge-offs amounted to
only 2.6 million dollars in the District as a whole, and relative
to average outstanding loans they represented but a negligible
fraction—less than one tenth of one per cent. The low loss
ratio on bank loans leaves the reserves for bad debt losses on
loans for many out-of-town banks at or near their ceiling, and
for many banks the charges for additional accumulations in
1951 will probably decline from current levels.
Dividend payments, continuing the rise which has been
going on steadily since 1943, increased 8 per cent over the
1949 level to a total of 110 million dollars. The bulk of the
year’s rise in net profits was added to capital funds, retained
earnings rising from 63 million in 1949 to 91 million in 1950.
In the past decade, net profits of the Second District member
banks have amounted to 1,900 million dollars, of which 900
million, or 47 per cent, has been paid out as dividends while
the remaining one billion has been added to capital funds,
which have thus risen to three billion dollars. This capital
addition compares with a capital reduction of 700 million
during the decade of the thirties, when dividend payments
were maintained at a reduced level despite deficit operation
in a number of years and despite very low earnings in other
years. The efforts of most bankers since 1941 to build up
capital funds by the retention of earnings have been governed
not only by the desire to restore the capital decline of the
thirties but also to increase the margin of depositor protec­
tion, which the wartime expansion of deposits had reduced
to record low levels.

SUBSCRIPTIONS TO MONTHLY REVIEW

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it. If you are not already on the mailing list and wish to receive the Review regularly, please write to the Domestic Research
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FEDERAL RESERVE BANK OF NEW YORK

55

BANKING AND BUSINESS DEVELOPMENTS IN THE SECOND DISTRICT

A high degree of general business activity continues to pre­
vail in those parts of the Second Federal Reserve District
where calls were made by this bank’s representatives during
the past three months, according to the bankers interviewed.
(Large New York City banks were not covered by this survey.)
Industrial operations are active, with a growing shift to the
production of defense goods as the volume of Government
orders increases. This trend has resulted in expanded employ­
ment throughout all industrial areas visited. Retail trade in
most areas has been more active than during the same period
a year ago. Aside from the usual seasonal demands, there was
some scare buying in January, because of the fear that short­
ages of consumer goods might appear as the year advanced.
In this connection, bankers in some sections indicated that
retail inventories had been built up in anticipation of such a'
development.
Home building in most sections has been in somewhat
reduced volume during the past few months, as is usual dur­
ing the winter season. In certain areas, activity was reported
to be less than a year ago, but in other areas home building
continued at high levels under financing commitments made
prior to the October regulations. The outlook for the balance
of the year is said to be somewhat confused because of uncer­
tainties with respect to the availability of building materials
and supplies (in view of Government defense needs) and
because of the effect Regulation X and allied regulations may
have on the future market.
In the Western New York fruit belt, bankers reported that
many farmers are gradually shifting to dairying as a means of
stabilizing income. For the last several years income from
fruit has been unsatisfactory, since high yields have been neu­
tralized by low prices. The stiffening of milk prices is reported
to have done much to improve farm incomes.
Loan totals of the banks visited showed an upward trend.
The largest gains were in mortgage accounts and in business
loans for production and inventory purposes. Some of the
bankers pointed out that among the factors influencing the

increased demand for business loans were the rise in prices
for raw and finished products, increased industrial activity,
and prompter billings and deliveries than anticipated. Bankers
said that, while there had been some seasonal slowing down
in the demand for mortgage money, the substantial amount of
commitments made prior to the effective date of Regulation X,
plus expected new spring business, would tend to hold mort­
gage demand up until well along in the summer. The demand
for consumer loans is easing slowly as the restraints under
Regulation W take hold. This development is gradually being
reflected in a stabilization or decline of instalment loan totals
in many of the banks.
Deposit trends vary. Many banks reported increases in their
demand deposits, but others indicated no appreciable change
or some decline. Time deposits of the commercial banks in
general are slowly decreasing, especially in areas where there
are other types of financial institutions offering higher rates
of interest. There is, however, little inclination on the part of
commercial bankers to increase interest rates paid on savings
deposits, in the light of present economic conditions and of
the uncertainty of future earning power. Most of these banks
seem content to retain their present rate (generally 1 per cent)
regardless of the trend of their time deposits.
The investment positions of the banks visited showed little
or no change in recent months. Although total holdings of
Government securities have declined, there has been a tend­
ency to stick closely to the same relative composition of the
portfolio. Some banks have shown increasing interest in taxexempt municipal securities.
One of the newer developments in banking is the establish­
ment of drive-in windows for depositors’ convenience, espe­
cially in some of the larger cities. Such facilities have become
increasingly popular, especially where traffic congestion and
parking problems prevent easy access to regular banking facili­
ties. A desire to render better service over a wider area, as
well as competition for business, appears to foster continued
interest in branch banking within the limited areas where it
is permitted by law.

THE CONSUMERS’ PRICE INDEX1

fifteenth of each month, in the cost of a fixed "market basket”
of goods and services representative of the expenditures of
moderate-income families in large cities. It does not measure
changes in the actual amount spent for all living expenses.
Originally the index was computed on the basis of the expen­
diture pattern of moderate-income families in 1917-19. In
1940, however, the series was revised, and the selection of
goods for the sample to be priced each month and the relative
weights given to these goods in compiling the index were
determined on the basis of a detailed study of actual expendi­
1
This is the second in a series of articles describing various items in
tures made by moderate-income families in the period 1934-36.
the table of Business Indicators.
The sharp rise in prices resulting from the Korean conflict
and from the sudden enlargement of this country’s defense
program, together with the increased use of the consumers’
price index as a basis for determining wage adjustments, has
heightened public interest in the index in recent months. In
order to improve this important price indicator, the U. S.
Bureau of Labor Statistics recently published an interim revi­
sion of it, pending a more thorough overhaul.
The consumers’ price index measures changes, as of the




MONTHLY REVIEW, APRIL 1951

56

Consumers* Price Index for Moderate-Income Families
(1935-39 average = 100 per cent)
United States

Month
1950

January.........................
February.......................
March............................
April...............................
M ay................................
June................................
July.................................
August...........................
September.....................
October..........................
November.....................
December......................

New York City

Old
series

Adjusted
series*

Old
series

Adjusted
series*

166.9
166.5
167.0
167.3
168.6
170.2
172.5
173.0
173.8
174.8
175.6
178.4

168.2
167.9
168.4
168.5
169.3
170.2
172.0
173.4
174.6
175.6
176.4
178.8

163.7
163.7
164.0
164.5
165.4
167.0
170.0
168.0
170.3
171.0
172.1
175.1

164.8
165.1
165.5
165.9
166.1
167.0
169.8
169.7
171.7
172.4
173.2
175.4

Average.........................
1951

171.2

171.9

167.9

168.9

January.........................
February.......................

181.6
184.2

181.5
183.8

177.7
180.8

177.8
180.8

* Adjusted for “ new unit bias” in rents and based on expanded coverage and
revised weights.
Source: U. S. Bureau of Labor Statistics.

Currently around 200 items are priced each month. They
have been chosen not only because of their own importance
in the family budget, but also because they are considered
representative of a larger group of related items. The actual
prices paid by consumers for the goods included in the sample
are obtained from month to month as long as such items are
available in retail stores. Whenever a selected item disappears
from the market, it is replaced by one as nearly comparable
as possible; for instance, in 1946 nylon stockings were substi­
tuted for rayons, which had previously replaced silk stockings.
The consumers’ price index for the United States is the
average of the indexes of selected large cities (including New
York City). Indexes are determined for each of 34 major
cities from the change in the cost of a "market basket” of
goods representative of the city’s own particular expenditure
pattern. The city indexes are combined into a national average
by weights based on the population of each city and of other
cities in the same region of the same size class.
The index is prepared by the Bureau of Labor Statistics of
the United States Department of Labor, and runs back to
1913.2 Both the composite index and the figures for its major
components—food; apparel; rent; fuel, electricity, and refrig­
eration; housefurnishings; and miscellaneous3—are published
for the most recent thirteen or more months in each issue of
the Monthly Labor Review of the Department of Labor and
the Federal Reserve Bulletin of the Board of Governors of the
Federal Reserve System.
In computing these index numbers, the Bureau of Labor
2 The index has been computed monthly since September 1940.
Prior to that time it was computed, in general, on a quarterly, semi­
annual, or (in the case of the earliest years) annual basis. The Federal
Reserve Bank of New York has compiled a continuous monthly com­
posite index, beginning January 1913, by estimating monthly indexes
between BLS survey dates on the basis of cost-of-living data from other
sources. Tabulations are available from the Domestic Research Division
on request.
3 The miscellaneous group includes medical care, drugs, household
operation, recreation, tobacco, personal care, transportation, etc.




Statistics takes the average for the years 1935 through 1939
as 100 per cent. That is to say, the consumers’ price index in
any given month is equal to the ratio of the cost of the
specified "market basket” in that month to the cost of the
same "market basket” in the 1935-39 period. No adjustments
for seasonal variations are made.
Since the index is designed as a measure of price changes
for a fixed quantity of goods, rather than of changes in the
standard of living, its name was changed in 1945 to "Con­
sumers’ Price Index” from the original name, "Cost-of-Living
Index”. For one thing, it does not reflect the effect of income
taxes on the standard of living. Moreover, the index cannot
take full account of the fact that over extended periods the
expenditure patterns of families change as some goods go
out of fashion or disappear from common use, as others
assume new importance in the family budget, and as new
items gain popular acceptance. Also, the long-term growth
in real income causes the relative importance of necessities
and luxury items in the family budget to change. To correct
for changes in expenditure patterns since the 1934-36 survey,
the Bureau of Labor Statistics has undertaken a complete
revision of the index, which it expects to complete late in
1952. As a result of the study, the content of the "market
basket” and the weights of the selected items will be revised
and modernized. A greater number and variety of cities will
be covered, and methods of collecting price information will
be improved.
The defense program, however, has caused an immediate
need for the best available measure of consumers’ prices for
use in wage and price stabilization. Therefore, an interim
revision of the index, based upon the work completed to date,
has been made, eliminating some of the more obvious distor­
tions of the old index without changing its basic scope and
concept. The new index is available for the months beginning
with January 1950. The unrevised index will be computed
concurrently with the new one throughout 1951. In this issue
of the Monthly Review, the new index is reported in the table
of Business Indicators for the first time. The old and new
series for the United States and for New York City are com­
pared in the accompanying table.
A long-recognized shortcoming of the old index was its
understatement of the increase in rents as a result of its failure
to reflect the effect of the higher rents charged for new dwell­
ings when these are first rented. The new index allows for the
higher than average initial rentals of the increasing number of
new dwellings. The coverage of the adjusted consumers’ price
index has also been expanded to include some 30 new items,
such as frozen foods, gas for househeating, television, and
group hospitalization, which have become important in the
family budget since the mid-1930’s. The weighting of the com­
ponents has been adjusted in the new index in accordance
with the results of studies of expenditures conducted by the

57

FEDERAL RESERVE BANK OF NEW YORK
Consumers’ Price Index
(1935-39 average =

100 per cent)

Source: U. S. Bureau of Labor Statistics.

DEPARTMENT STORE TRADE

Matters which have recently become of major concern to
department store executives are the plentiful supply of mer­
chandise which the stores have in stock and on order, and what
appears to be a decided slackening of consumer demand.
At the end of February, more than eight months after the
start of the Korean war, the department stores of this District
had more stock on hand (after allowance for seasonal varia­
tion) than at any other time on record. On the other hand,
the dollar volume of average daily sales, while almost 20 per
cent greater than during February 1950, was markedly below
the extraordinarily high level of the previous month. Further­
more, according to preliminary information, department store
sales in this District during March did not come up to seasonal
expectations. Average daily sales in March are estimated to
have been only about 4 per cent above the February level and
8 per cent higher than those of March 1950, despite the fact
that Easter occurred two weeks earlier this year.
The major reasons for the general inventory buildup that
has taken place since last summer were the expectation of a
general rise in prices and the anticipated further expansion of
retail activity. On the other hand, production of consumer
goods, particularly durables, was expected to be progressively
curtailed as the rearmament program gained momentum. So
far, however, the transition to a defense economy has not made
serious inroads into the production of consumer goods, whether
durables or nondurables. In fact, manufacturers and suppliers
have been able to deliver goods to the stores at an even faster
rate than the public purchased them. An additional factor in
the inventory buildup is the time lag between the placing of
orders and the actual delivery of the goods, which frequently




Bureau of Labor Statistics in seven cities since 1947. For
example, the relative importance of expenditures for food as
of January 1950 was lowered to 33 per cent of the family
budget, compared with 42 per cent in the old index. The
weight given to shelter was also lowered. As incomes of wage
earners have risen, expenditures for items other than necessi­
ties have tended to be relatively greater than formerly. The
population weights used to combine the individual city indexes
have been brought up to date by use of the 1950 Census of
Population. Since the various adjustments tended to offset
one another, changes in the composite index were small. A
detailed discussion of this interim revision is scheduled to
appear in the April 1951 issue of the Monthly Labor Review.
The accompanying chart shows the changes in consumers’
prices since January 1939. Since the beginning of 1950, the
index has been rising, and since last July the month-to-month
increases have been sharp. By February of this year, con­
sumers’ prices as measured by the index had reached a record
high of 183.8 per cent of the 1935-39 average, and were 8 per
cent greater than in June 1950.
results in the stores’ achieving their greatest inventory accumu­
lation some weeks after the highest relative level of consumer
demand has been reached.
As the chart shows, in February the stores took an initial
step toward keeping inventories more closely geared to sales
by reducing contraseasonally the value of new orders well
below the level of the preceding month. More extensive adver­
tising or an increase in promotions may follow, depending, of
Dollar Volume of New and Outstanding Orders at
Second District Department Stores,
1948-February 1951*
(W ithout adjustment for seasonal variation)
M illio n s

M illio n s

* For a group of stores whose 1950 sales were more than half of the estimated
Second District total. Outstanding orders are end-of-month data, new orders
are monthly totals.

58

MONTHLY REVIEW, APRIL 1951
Indexes of Department Store Sales and Stocks
Second Federal Reserve District
(1935-39 average=100 per cent)

Department and Apparel Store Sales and Stocks, Second Federal Reserve
District, Percentage Change from the Preceding Year

1951

Net sales

1950

Locality

Item
Feb.
Sales (average daily), unadjusted.............
Sales (average daily), seasonally adjusted
Stocks, unadjusted......................................
Stocks, seasonally adjusted.......................

Jan.

Dec.

218
263

233
291

450
266

184r
222 r

Feb.1951

Feb.

273
281

240
273

218r
225r

239
263

r Revised.

Jan.and
Feb. 1951

Stocks on
hand
Feb. 28, 1951

Department stores, Second District___

+19

+25

+26

New York City...................................
Northern New Jersey.........................

+19

+24
+29
+29
+27
+28
+29

+29

+21
+21
+21

Westchester County...........................
Fairfield County.................................
Bridgeport.......................................
Lower Hudson River Valley..............
Poughkeepsie...................................
Upper Hudson River Valley.............

+15
+16

+ 12
+ 12
+21

+20
+20

+21
+20
+ 8

+27
+29

+20

+ 22
+31
+22
course, on how well the sales volume holds up later in the
f-30
+39
+24
Schenectady.....................................
-12
+23
+23
spring.
Central New York State....................
[-16
+25
+26
Mohawk River Valley....................
-18
+25
+27
The fact that outstanding orders at the end of February were
- 9
+16
+30
-16
+25
+25
virtually unchanged (there was actually a very slight increase), Northern New York State.................
K14
+24
+17
+22
+32
+ 12
after a sharp cutback in new orders during the month, is Southern New York State................. +17
Binghamton.....................................
+28
+ 6
+39
+47
+29
partially explained by the composition of the orders still to Western New York State................... +14
+ 22
+26
+20
+33
+ 11
be filled. The bulk of the orders outstanding, in terms of dol­
Niagara Falls...................................
+25
+28
+23
Rochester.........................................
+17
+23
+14
lar value, are for major household durables (which are not
+19
+ 19
greatly affected by seasonal demand patterns ) and are, in many Apparel stores (chiefly New York City). + 15
cases, relatively long-term commitments. The wide divergence
of movement between new orders and outstanding orders 1950 was also indicative of a large carry-over of orders for
which prevailed during most of 1948 and the latter half of durable goods, due principally to extended delivery schedules.
Business Indicators
Percentage change
Item

1951
Unit

February

1950
January

December

February

Latest month Latest month
from previous from year
month
earlier

UNITED STATES
Production and trade

Industrial production*................................................................
Electric power output*................................................................
Ton-miles of railway freight*.....................................................
Manufacturers’ sales*..................................................................
Manufacturers’ inventories*.......................................................
Manufacturers’ new orders, total...............................................
Manufacturers’ new orders, durable goods...............................
Retail sales*.................................................................................
Residential construction contracts*...........................................
Nonresidential construction contracts*.....................................
Prices, wages, and employment
Basic commodity pricesf............................................................
Wholesale pricesf.........................................................................
Consumers’ pricesf**..................................................................
Personal income* (annual rate)..................................................
Composite index of wages and salaries*....................................
Nonagricultural employment*....................................................
Manufacturing employment*.....................................................
Average hours worked per week, manufacturingf...................
Unemployment.............................................................................
Banking and finance

Total investments of all commercial banks..............................
Total loans of all commercial banks..........................................
Total demand deposits adjusted................................................
Currency outside the Treasury and Federal Reserve Banks*..
Bank debits* (U. S. outside New York City)..........................
Velocity of demand deposits* (U. S. outside New York City).
Consumer instalment credit outstandingf................................
United States Government finance (other than borrowing)
Cash income.................................................................................
Cash outgo...................................................................................
National defense expenditures....................................................

1935-39 = 100
1935-39 = 100
1935-39 = 100
billions of $
billions of $
billions of $
billions of $
billions of $
1923-25 = 100
1923-25 = 100
Aug. 1939 = 100
1926 = 100
1935-39 = 100
billions of $
1939 = 100
thousands
thousands
hours
thousands
millions of $
millions of $
millions of $
millions of $
billions of $
1935-39 = 100
millions of $
millions of $
millions of $
millions of $

221 p

322
186p
—
—

—
—
12.9 p
326p
344p
390.2
183.6p
183.8
—
—

45,980p
15,937p
41. O
p
2,407
71,4S0p
53,730p
91,200p
27,145
84.4
100.5
—

4,918p
3,563p
1 ,938p

221

318
208p
23.3p
34.9p
26.5 p
13.Ip
13.3
312
350

218r
316
205
21.3
34.0
23.1

180
277
141r
16.9
29.0
16.9
7.2

297r
360r

260
266

11 .1
12 .2

11 .1

383.9
180.1
181.5
239.2p
219p
45,810
15,836
41.0
2,503

358.9
175.3
178.8
241.0
216
45,607r
15,686r
41.4
2,229

247.8
152.7
167.9
215.4
204
42,283
14,023
39.7
4,684

72,360p
52,890p
9 2,lOOp
27,222
87.8
102 . 8r
13,255p

74,720p
52,830p
93,200p
27,531
77.1
98.6r
13,467

77,470
43,130
84,500
27,008

68.2

88.3
10,884

0
+ 1
-11

+ 9
+ 3
+15
+ 18
- 3
+ 4
- 2
+
+
+
+

2
2
1
1
1

#

+ 1

0

-

4

+
'
-

1
2
1

#
4

2
2

+23
+ 16
+32
+44

+20

+56
+75
+16
+25
+29
+57

+20

+ 9

+ 11

+ 7
+ 9
+14
+ 3
-4 9
- 8
+25
+ 8
+ 1
+24
+ 14

+22

4,696
3,438
1 ,869p

4,488
4,004
1,679

3,595
3,537
1,005

+ 5
+ 4
+ 4

+37
+ 1
+93

126
213p
232p
177.8
7,264.2p
2,635.6
46.4
3.9
115.2r

124
161
198
175.4
7,235.9
2,615.2
43.5
3.2
114.8r

113
166
187
165.1
6,898.9
2,398.0
39.7
2.9
105.8

+ 2
+33
+17
+ 2
#
+ 1
- 6
- 4
- 4

+13
+32

SECOND FEDERAL RESERVE DISTRICT
Electric pow output* (New York and New Jersey).............
der
Residential construction contracts*..........................................
Nonresidential construction contracts*.....................................
Consumers’ pricesf** (New York City)...................................
Nonagricultural employment*....................................................
Manufacturing employment*.....................................................
Bank debits* (New York City)..................................................
Bank debits* (Second District excluding N. Y. C. and Albany).
Velocity of demand deposits* (New York City)......................

1935-39 = 100
1923-25 = 100
1923-25 = 100
1935-39 = 100
thousands
thousands
billions of $
billions of $
1935-39 = 100

128
—
_

180.8
—
2,661,6p
43.4
3.8

110 .8

p Preliminary.
r Revised.
* Adjusted for seasonal variation.
f Seasonal variations believed to be minor; no adjustment made.
** Revised series; see accompanying article.
# Change of less than 0.5 per cent.
Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request.




+21
+ 10
+ 6
+ 11
+ 9
+28
+ 5

FEDERAL RESERVE BANK OF NEW YORK

59

NATIONAL SUMMARY OF BUSINESS CONDITIONS
(Summarized by the Board of Governors of the Federal Reserve System, March 29, 1951)

Industrial output and employment were maintained at
advanced levels in February and early March. Retail sales
declined from the record January rates and business inven­
tories rose further. Bank loans to business continued to expand
rapidly. Wholesale commodity prices showed little further
rise. Bond yields increased following announcement of a new
Treasury offering.
I n d u s t r ia l P r o d u c t io n

The Boards seasonally adjusted index of industrial produc­
tion was maintained in February at the advanced January level
of 221 per cent of the 1935-39 average. March output was
apparently at or slightly above this rate, which is about 20 per
cent above year-ago levels and 11 per cent higher than in
June 1950.
Output of durable manufactures rose somewhat further in
February and early March. Steel output, which was reduced
in early February as a result of the rail strike, subsequently
advanced to a new record rate. With capacity expanding,
aluminum production rose further in February to a rate 11
per cent higher than in mid-1950. Auto assembly since midFebruary has been not far below the highest 1950 rate. Activity
in other transportation equipment and in machinery industries
has continued to increase, as a result of the record rate of
orders for producers’ equipment and the rapidly growing vol­
ume of defense orders. Output of household durable goods and
building materials has continued in very large volume.
Production of nondurable goods has apparently declined
slightly from the new record level reached in January, reflect­
ing mainly the curtailment in wool textile output as a result
of work stoppages beginning February 16. Cotton textile mill
INDUSTRIAL

PRODUCTION

Federal Reserve indexes. Monthly figures; latest shown are for February.




activity rose considerably in February to about the earlier
record rate reached in 1942. Output of paper and paperboard
has reached new peak levels. Production of manufactured
foods and most other nondurable goods has been maintained
in large volume.
Minerals production declined in February owing largely to
the rail strike. In early March production of coal and crude
petroleum increased somewhat.
Em p l o y m e n t

Employment in nonagricultural establishments, seasonally
adjusted, has continued to expand moderately and in February
was at a new record of 46 million. Hours of work in manu­
facturing remained at the January average of 41 per week,
more than one hour above a year ago; average hourly earnings
rose moderately in February to a new high of $1.5 6. Unem­
ployment at 2.4 million was at the lowest level recorded for
this month in the past five years and a further decline is indi­
cated in March.
C o n s t r u c t io n

Value of construction contract awards increased by almost
10 per cent in February and has continued to rise seasonally
in March. The total value of work put in place in February
also increased further, after allowance for seasonal influences,
reflecting increases in all types of private construction activity.
The number of housing units started was 80,000 as compared
with 87,000 in January and 83,000 in February 1950.
D is t r ib u t io n

Retail sales of automobiles and most other goods have been
at high levels in February and March. Sales of apparel and of
CONSTRUCTION CONTRACTS AWARDED

F. W. Dodge Corporation data for 37 Eastern States.
latest shown are for February.

Monthly figures;

MONTHLY REVIEW, APRIL 1951

60

housefurnishings, however, have declined substantially from
the record January levels, after allowing for seasonal influ­
ences. The Board’s seasonally adjusted index of value of sales
at department stores decreased from 362 in January to 325 in
February and in March has declined further. At the end of
February, value of department store inventories was more than
one-fourth larger than on the same date in 1950, with stocks
of television sets and some other goods reported to be espe­
cially ample.
C o m m o d it y P rices

The wholesale price level has shown little further advance
since mid-February. Increases have been permitted in Federal
ceiling prices for automobiles and carpets, while prices of
some materials have receded from earlier peaks.
Consumer prices advanced 1.3 per cent further in February.
Retail food prices increased 2 per cent to a level 16 per cent
above a year ago.
B a n k C r ed it

Business loans continued to expand rapidly during February
and the first half of March. At this season of the year, busi­
ness loans usually decline. Real estate loans and bank holdings
of corporate and municipal securities also rose moderately.

The privately held money supply was about as large in midMarch as in early February. The continuing private credit
expansion tended to increase the supply but this effect was
about offset by tax payments and further gold outflow.
Bank reserves increased from early February through midMarch, reflecting in part substantial Federal Reserve purchases
of Government bonds.
M o n e y R a te s a n d S ecu rity M a r k e ts
Interest rates rose somewhat further in March. On March 8 ,
the Secretary of the Treasury offered holders of the 2 */2 per
cent bonds of June and December 1967-72 the privilege of
conversion into a new nonmarketable 234 per cent bond
maturing April 1, 1980 and callable on April 1 , 1975. The
new bond will be exchangeable at the option of the owner into
marketable 5 -year IV z per cent Treasury notes to be dated
April 1 and October 1 of each year. Following the announce­
ment yields increased on medium and long-term Treasury
securities and corporate and municipal bonds. Later in the
month yields on short-term Treasury issues rose somewhat.
Rates charged borrowers on prime commercial paper and on
bankers’ acceptances increased by Vs of a percentage point.

DEPARTMENT STORE SALES AND STOCKS

SECURITY MARKETS

1944

Federal Reserve indexes. Monthly figures; latest figure for sales is Febru­
ary; latest for stocks is January.




1945

1946

1947

1948

1949

1950

1951

Stock prices, Standard & Poor’s Corporation; corporate bond yields, Moody’s
Investors Service; U. S. Government bond yields, U. S. Treasury Department.
Weekly figures; latest shown are for week ended March 24.