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MONTHLY REVIEW Of Credit and Business Conditions FEDERAL V o lu m e 34 RESERVE BANK OF NEW YORK APRIL1952 No. 4 M O N E Y M A R K E T IN M A R C H Money market conditions ranged from moderate tightness to extreme ease during the tax-payment month of March. The heavy demands on the market that some observers had expected to result from preparations for corporation tax pay ments on March 15 failed to materialize, although Federal Reserve discount facilities were used rather extensively by member banks on several days during the first half of the month to obtain needed reserves. Reserve positions of member banks in New York City and throughout the country eased sharply around the middle of the month as the result of a large increase in float and of Treasury cash outlays substantially in excess of cash receipts (financed in part by special short-term certificates of indebtedness sold directly to the Federal Reserve Banks). The excess reserves of the banks rose to unusually high levels, but collections of tax checks, supplemented by large Treasury withdrawals from its deposit accounts in the banks, along with the usual month-end contraction of float, reduced member bank reserves to near customary levels by the end of the month. After ten days of movement in a narrow range around the February closing levels, the Government security market re sponded to a change in investors’ anticipations, and to the developing ease in the money market, and firmed markedly over most of the remainder of the month. Prices on all inter mediate and long-term securities at the close of March were above the end-of-February quotations. Short-term yields tended to increase in the closing days of the month as gradu ally tightening bank reserve positions reduced commercial bank activity in the market. Commercial bank business loans, after increasing slowly in February, expanded somewhat more rapidly through March 19. As in the first two months of the year, loan increases were largely for defense and defense-supporting activities, although nondefense borrowing in March recovered somewhat after the substantial declines in January and February. There was little evidence of large-scale borrowing by corporations to meet their March 15 tax liabilities. M ember Ba n k R eserves The tightness in the availability of funds that had developed in late February continued to characterize bank reserve posi tions in the first two statement weeks of March. Although not shown by the week-to-week changes in the following table, relatively large changes in the amount of borrowing from the Federal Reserve Banks occurred on several days during this period. The Federal Reserve Bank of New York provided a small amount of funds to the market in the second statement week, mainly through repurchase agreements negotiated with Government security dealers, but over the month as a whole Federal Reserve open market operations were nominal in volume. Reserves available to the banking system increased sharply in the third statement week, primarily as the result of Treasury operations. Cash outlays for interest payments, for redemption of unexchanged bonds maturing on the 15 th, and for redemption of tax anticipation bills not presented in pay ment of taxes were substantially greater than the flow into Treasury balances at the Reserve Banks from cash tax pay ments and calls on Tax and Loan Accounts held by member banks. A tendency for cash tax collections to lag behind previous rates of collection and the Treasury procedure of crediting large tax checks to special Treasury " X ” balances in the commercial banks, along with the very high Treasury cash outlays, account for the magnitude of the spread between CONTENTS Money Market in March ....... *......................................... 45 Earnings and Expenses of the Second District Member Banks...................................... 48 Survey of Ownership of Business and Personal Demand Deposits ........................................... 50 Life Insurance Companies and the Security Markets.... 52 Preliminary Retail Credit Survey Results ....................... 56 Department Store Trade ..................................................... 57 46 M ONTHLY REVIEW, APRIL 1952 W e e k ly Changes in F actors Tending to Increase or D ecrease M em ber B ank R eserves, M arch 1 952 (In m illions of d o lla rs; ( + ) denotes increase, (— ) decrease in excess reserves) Statement weeks ended Factor March 26 Four weeks ended March 26 + 4 -5 5 0 + 32 + 1 + 3 + 740 - 58 + 61 + 159 - 53 + 1,193 -5 0 9 + 845 +16 -2 6 + - 295 231 -2 9 7 + 44 - 27 —252 March 5 March 12 Operating transactions Treasury operations*................. Federal Reserve float................. Currency in circulation............. Gold and foreign a ccou n t......... Other deposits, e t c ..................... + 58 +213 - 74 +103 -1 4 0 +31 -9 5 + 12 +35 + 22 + + + + + T ota l............................. + 157 + 4 - 41 39 - 80 Direct Federal Reserve credit trans actions Government securities............... Discounts and advances........... T ota l............................. March 19 617 374 91 20 62 -1 0 + 64 -2 5 3 -2 7 9 Total reserves................... Effect of change in required reserves + 77 + 29 - 6 + 18 + 1 ,2 5 7 376 -7 6 2 +101 + 566 -2 2 8 Excess reserves.................................. +106 +12 + -6 6 1 + 338 881 N ote: Because of rounding, figures do not necessarily add to totals. * Includes changes in Treasury currency and cash. cash outlays and cash receipts around the middle of March. Part of the funds for the net Treasury outlays was provided by the sale of special short-term certificates of indebtedness to the Federal Reserve System in anticipation of tax receipts; this appears in the accompanying table as a System purchase of Government securities. In all, Treasury operations provided close to one billion dollars to the banking system in the week ended March 19. The net Treasury outlays, in turn, were primarily responsible for the expansion of deposits at member banks and the resulting increase in required reserves. A large increase in float during that week almost exactly offset the increase in required reserves, and reserves acquired from other operating sources offset the larger part of the reserves used in the reduction of borrowings from the Federal Reserve Banks, so that member bank excess reserves increased by almost 900 million dollars for the week. Net Treasury receipts from cash tax collections and large calls on Treasury balances with depositary banks in the week ended March 26 were utilized to redeem most of the special certificates of indebtedness still outstanding with the Federal Reserve Banks and to meet regular Treasury disbursements. The net drain on banking reserves was supplemented by a large reduction in float and only partially offset by gains from other factors, so that member bank excess reserves were re duced substantially in this week. Lower required reserves, as Treasury deposits in the banks were reduced, were the most important offset to the reduction in bank reserves. Over the remaining days of the month, Treasury operations (including full repayment of the special certificates) continued to absorb funds, and member bank borrowing from the Federal Reserve Banks increased moderately as reserve positions tightened. The New York money market reflected the effects of the large March 15 Treasury disbursements for most of the two following weeks. Excess reserves of New York City banks at the close of the statement week ended March 19 were above 400 million dollars, the highest level since January 1943. Rates on Federal funds, which had remained close to the Federal Reserve discount rate prior to the middle of the month, fell to low levels for most of the two weeks ended March 26, and even at these lower rates very little demand developed. Many of the Federal funds transactions completed during March involved out-of-town borrowers, since New York City banks, except for a brief period in the second statement week, were generally in possession of more than adequate reserve balances. The developing tightness in the rest of the country toward the close of the month was not immediately trans mitted to the New York City banks despite relatively large transfers of funds out of the City through regular channels and large Treasury calls on ‘'X ” balances. Since a dispropor tionately large part of the bigger tax checks are received in New York, the City banks tend to hold a substantial share of the "X ” balances to which the Treasury credits single checks of over 10,000 dollars, and they subsequently suffer the greatest loss of funds when pro rata calls are made on such balances. Federal funds returned to well above 1 per cent by the end of the month, a reflection of the reduced availability of bank reserves, and short-term Government security yields rose. T he G overnment Security M arket The Government security market in March was more notable for what did not happen than for what actually occurred. Late in February there was some belief that the large tax payments due on March 15 would create very tight money market conditions, accompanied by generally higher yields on Government securities. There also was some concern as to the effects of the heavy volume of private financing scheduled for March. Thus, through the first ten days of March a tone of general uncertainty prevailed in the Govern ment security market as investors waited for the expected appearance of corporation selling for tax purposes. Most inter mediate and longer-term prices remained approximately con stant in an inactive market during this period, while yields on bills and the shorter certificates tended to edge upward. The average discount on the Treasury bill dated March 6 (1.656 per cent) was somewhat above expectations and tended to confirm the belief that the market was tightening. However, the anticipated corporate selling failed to develop in volume, and a re-evaluation of market prospects for the month was indicated. The turning point in the market seems to have been reached on March 10 with announcement of the results of the bidding on the Treasury bill dated March 13. Tenders received for this offering were in larger volume than the market had anticipated, and the average issue rate of 1.784 per cent, while the highest since the January 3 issue, was well below what many investors had expected. With this indication that no serious oversupply of securities was in prospect, a firmer tone developed at all maturities and some investors who had 47 FEDERAL RESERVE BAN K OF NEW YO R K withheld funds in expectation of market stringency were encouraged to move back into the market. Further buoyancy was imparted to the market after the middle of the month as bank reserve positions eased, releasing a substantial volume of bank funds for short-period investment, and short-term yields settled steadily to lower levels through the third and fourth statement weeks. The bill issues dated March 20 and 27 were allotted at average discounts of 1.601 and 1.592 per cent, respectively. In the last few days of the month, a mild tighten ing in the New York money market resulted in some increase in market yields on the shortest-maturity instruments, along with a generally higher level of short-term yields, and at the close of March yields in this area were approximately in line with the pattern that has prevailed over the past several months. Price changes in intermediate and long-term Treasury bonds were moderately to sharply upward over the last half of March. The longer-term, bank-eligible issues and the bonds that become eligible for bank purchase in 1952 displayed particular strength, registering gains of Y s to 1 1/ a of a point from their February closing bid prices. Lengthening of bank portfolio maturities and the generally improved anticipations of a variety of investors were responsible for the activity in this sector of the market. Many banks had maintained liquid portfolios in expectation of heavy demands for bank credit over the March 15 tax date, and when this demand did not materialize in expected volume, bank funds became available for security investment. The buying interest in the eligible and soon-to-be eligible bonds, moreover, may indicate that banks and other investors believe that part of the funds currently available to banks will not be needed to meet other demands for credit in the immediate future. The longer, partially tax-exempt bonds were generally up as much as Vi of a point, and the extension of buying interest to the later-maturity, bankrestricted issues toward the close of the month resulted in price increases of V a of a point in this sector of the market. M e m b e r B a n k C r e d it Business loan totals reported by member banks in 94 lead ing cities increased by 312 million dollars in the three state ment weeks ended March 19, in contrast with a decline of 3 million dollars over the four weeks in February and a decline of 432 million dollars for the five weeks ended January 30. Part of the increase in March may represent borrowing to pay taxes. However, whatever volume of tax borrowing might be included would appear to be small, and such loans certainly did not reach the volume in March that had been expected in some quarters. The pattern for the country as a whole thus far in 1952 (as indicated by the special reports on larger loans of the weekly reporting member banks, inaugurated last year under the Voluntary Credit Restraint Program) has been one of continuing increases in commercial loans to defense and defense-supporting industries and moderate contraction of nondefense loans. Borrowing by nondefense industries, accord ing to these special reports, showed a tendency to recover in Chart I Commercial and Industrial Loans in the Second District by Purpose, June 1951-March 1952 (Cumulative weekly changes since May 30, 1951) March after a total decline of about 670 million dollars in January and February, and loans in this category for the three weeks ended March 19 increased by 106 million dollars, while defense and defense-supporting loans increased by 182 million dollars. Business lending by New York City banks also recorded a net increase during March, and the 7,967 million dollars of such loans on March 19 represents the highest level on record. Nevertheless, the net increase to that date since the beginning of the year amounted to only 34 million dollars, and this increase was wiped out by a decline of 39 million dollars in the week ended March 26. This compares with an increase of 531 million in the corresponding period last year. Chart I illustrates the course of business lending by member banks in the Second District, as reported by those banks which submit weekly data on changes in their commercial and industrial loan totals by purpose of the loan and business of the bor rower.1 In general outline, the Second District experience cor responds closely with that for the entire country. Defenserelated loans increased steadily during the last half of 1951 and through the first quarter of 1952. Nondefense borrow ing, after a seasonal lull in the summer of 1951, increased during the fall and winter months, reaching a peak in late December. It then contracted through January 1952, and leveled off in February and March. The pattern of lending by Second District banks to those industries that have displayed the most marked changes in credit needs is illustrated in Chart II. Loans to the metal and metal products industries have expanded steadily through 1951 1 It should be noted that these data contain an upward bias since they include only individual loans and repayments larger than a certain minimum size, with the result that a loan repaid in instalments might be included when it is made but not deducted when it is repaid. 48 MONTHLY REVIEW, APRIL 1952 Chart II Commercial and Industrial Loans in the Second District by Type of Borrower, June 1951-March 1952 (Cumulative weekly changes since May 30, 1951) and thus far in 1952, largely reflecting the steady expansion of defense-related credit. Loans to public utilities which, to a lesser degree, also fall in the defense-related category, indi- cate a smaller magnitude of change with a slight downward drift since December. Among the loans primarily for non defense purposes, on the other hand, those to food-processing industries and commodity dealers expanded rapidly in the latter part of 1951 in conformity with the usual seasonal pattern and then receded unevenly in the early months of 1952. Other busi ness categories that have reduced bank credit in the first quarter of 1952, not shown on the chart, are the wholesale and retail distributors and the sales finance companies. In both instances, the reductions were related to lagging consumer sales and attempts of businessmen to bring inventories into line with the level of sales. Loans by Second District reporting banks to borrowers in the textile and apparel industry have followed the national pattern for this category. They declined at a decreasing rate from the middle of 1951 through January of this year and, in February and March, displayed a tendency to level off or recover slightly. The loan record for the first quarter of 1952, both for the Second District and for the country as a whole, is in sharp contrast with that for the same quarter of 1951 when a very sharp loan expansion occurred. If the second quarter of this year follows the usual seasonal pattern, still further reductions in total business lending by banks may take place despite expanding bank credit to satisfy defense needs. 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 declined 10.0 million dollars, or 5.0 per cent, in 1951 to 191.2 million dollars.1 In the aggregate, larger allowances for income taxes, increased reserves for loan losses, and a reduced level of security profits and recoveries drew down net profits more than they were increased by higher net current operating earnings. Among the different size-groups of banks, however, the influence of the various factors affecting net profits was very uneven. In the central reserve New York City banks, the impact of heavier taxation was especially severe but net profits declined the least of any group (3.3 per cent) because these banks realized the largest increase in net current operating earnings. In the banks outside the City, on the other hand, the principal factor draw ing down net profits was the transition from net security profits and recoveries in 1950 to net security losses in 1951, and the reductions in net profits ranged from 3.6 per cent in the smallest-sized banks to 14.1 per cent in the largest banks. Among these groups, increased net current operating income partially offset security losses in the largest-sized institutions, 1 Earnings and expense ratios and the ratios of net profits to capital for the member banks in this District have been summarized in Cir cular No. 3832, entitled "Operating Ratios of Member Banks in the Second Federal Reserve District for the Year 1951”. Copies of this circular are available upon request from the Financial Statistics Divi sion, Federal Reserve Bank of New York, New York 45, N. Y. whereas in the smaller banks net operating income declined and accentuated the drop in net profits. Total current operating earnings of the Second District member banks increased 121.1 million dollars, or 15.4 per cent, to a record peak of 908.8 million dollars. The bulk of the rise stemmed from an increase of 116.0 million dollars, or 32.5 per cent, in interest and discount earned on loans. All groups of banks showed an increase in income from loans, but the greatest gain (43.4 per cent) was recorded by the central reserve New York City banks in which the effect of an above average expansion in commercial loan volume was accentuated by higher rates of interest and the reduced proportion of rela tively low-rate security loans. In the banks outside New York, the rates of interest on loans are customarily higher than in the City banks, to a considerable extent because of differences in the types of loan business. Except to a minor extent, there fore, these banks were unable to follow the upward trend of rates in the City. Consequently, the increases in their loan income, which ranged from 15.2 per cent in the largest banks to only 2.6 per cent in the smallest institutions, principally reflected increases in loan volumes. Interest received on United States Government obligations declined by 9.2 per cent in the District as a whole, as the member banks reduced their holdings to provide funds for loan expansion and for the higher reserve requirements that 49 FEDERAL RESERVE B AN K OF NEW YO R K payments were smaller and averaged between 4.3 per cent and 5.5 per cent in the various size-groups of banks. Interest pay ments on time and savings deposits increased 4.4 million dol lars, or 10.7 per cent, in the District as a whole, with the bulk of the rise occurring in the largest banks and reflecting both a larger volume of time deposits and higher effective rates of interest. The larger banks serving the larger centers have had to raise the effective rate of payment in order to meet the com petition of other depositary institutions; in the smaller com munities served by smaller commercial banks, competition with other institutions is less severe and the effective rates of payment have remained fairly steady. Other current expenses, consisting principally of the expense of occupancy and main tenance of banking quarters, increased moderately in all groups of banks, reflecting the higher prices for goods and services that prevailed during the year. The increases in aggregate current operating expenses were more than covered by larger operating income in the New York City banks and in the larg est banks outside the City, but in the remaining groups, the higher expenses were only partly met by larger income and their net current operating earnings before income taxes declined. For the first time in the past decade, net losses or write downs on security holdings were a major factor reducing net became effective in January and February 1951. However, the percentage decline in income was less than the reduction in average holdings, owing to the higher yields obtainable on the short-term refunding issues offered in 1951, and to a modest lengthening in the average maturity of the banks’ portfolios. Interest and dividends received from "other securities” in creased by a substantial 16.0 per cent, entirely as a result of larger investments in tax-exempt State and municipal obliga tions. Member bank purchases of such issues were undoubtedly influenced by the increased value of the tax-exemption feature during a period of rising income taxes and also by the higher yields available on municipal obligations after the second quarter of the year when the entire money rate structure had moved upward. Receipts from service charges on deposit accounts continued to increase in all groups of banks, rising 7.3 per cent in the District as a whole, but the District rise in trust department income (9.3 per cent) was confined to the central reserve New York City banks. Salaries and wages— the principal item of operating expenses — increased generally throughout the District. The rise of 15.5 per cent in the central reserve New York City banks, however, was by far the heaviest in the District and closely followed the record gain of 18.8 per cent in their total cur rent operating income. Outside the City, the increases in salary Earnings and Expenses of Second District Member Banks for the Year 1951 and the Percentage Change from the Year 1950 (Dollar amounts in thousands) Reserve city and country banks Deposit size Central reserve banks New York City (22 banks) $5,000,000 to $20 ,000,000 (264 banks) Over $20,000,000 (93 banks) $2 , 000,000 to $5,000,000 (225 banks) Item Dollar volume 1951 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............................................. 127,006 37,348 308,498 17,639 63,522 54,620 Dollar volume 1951 Percentage change* 1950 to 1951 Dollar volume 1951 Percentage change* 1950 to 1951 8.3 + 2.2 + 15.2 + 3.6 5.4 + 0.7 21,321 5,085 43,517 6,849 1,228 4,129 6.5 + 9.7 + 5.2 + 1.2 - 11.3 + 10.6 6,207 1,581 13,652 1,689 10.5 15.4 41,438 10,426 104,067 11,964 7,300 12,611 Percentage change 1950 to 1951 + + + + + 12.2 19.5 43.4 8.1 Dollar volume 1951 Percentage change* 1950 to 1951 Dollar volume 1951 1,482 401 3,571 367 Percentage change* 1950 to 1951 Dollar volume 1951 Pecentage change 1950 to 1951 197,455 54,840 473,305 38,508 72,160 72,514 - 9.2 + 16.0 +32.5 + 7.3 + 9.3 +13.8 + + + 5.5 2.9 4.8 1.4 - 2.3 181 - 5.0 +10.7 + 2.6 + 3.7 — + 7.7 110 973 All member banka in Second District (735 banks) Under $2,000,000 (131 banks) 1 — Total current operating earnings................ 608,633 + 18.8 187,806 + 5.8 82,129 + 1.8 24,212 + 1.3 6,003 + 1.3 908,782 +15.4 Salaries and wages—officers and employees.......... Interest on time and savings deposits.................... All other current expenses..................................... 196,126 12,024 126,427 + 15.5 + 24.1 + 6.7 61,528 18,795 48,062 + + + 5.5 4.9 25,372 10,835 20,281 + + + 4.5 1.5 1.9 7,523 3,394 5,608 + + 5.4 + 4.3 2.0 1.2 1,897 784 1,398 + 3.9 292,445 45,832 201,776 + 13.8 +10.7 + 6.7 Total current operating expenses................... Net current operating earnings, before income taxes........................................................ 334,577 + 12.3 128,385 + 3.9 56,488 + 2.9 16,525 + 2.4 4,079 + 3.3 540,053 + 10.8 274,056 + 27.9 59,421 + 10.0 25,641 - 0.7 7,687 - 0.9 1,924 - 368,729 + 22.8 5,221 6,845 5,159 -8 0 .9 (a) +17.7 Security profits and recoveries (+ ) or chargeo f f s e t ............................................................. Net recoveries(-f) or charge-offs(—) on loans........ All other net recoveries(+) or charge-offs(—) . . . . Net additions to(—) or deductions from(+) loan valuation reserves J............................................. 58.9 (a) 13.7 - 1,728 1,386 1,361 (a) +115.9 +175.5 - 1,181 726 424 33,435 +134.3 - 8,295 - 8.4 - Taxes on net income.............................................. 114,335 + 66.6 16,566 + 9.1 Net profits............................................................. Dividends paid............................................... Retained earnings........................................... 140,686 93,225 47,461 3.3 + 4.3 - 15.4 30,085 13,996 16,089 - 14.1 + 2.0 - 24.4 14,038 5,529 8,509 + + - 8,405 9,224 3,229 - - 1.6 - (a) + 200.0 - 20.0 - 2,171 - 27.4 - 7,101 + 3.1 - 12.6 + 1.0 - 19.7 4,958 1,685 3,273 266 218 142 (a) + 11.1 (a) - 295 - 45.9 - 1,808 + 5.3 - 10.6 + 1.4 - 15.2 1,391 465 926 0 2.6 9 49 3 (a) -5 0 .0 (a) + + - 73 + 20.0 - 44,268 +67.9 399 0 140,209 +52.7 - 3.6 + 2.9 - 6.6 191,204 114,900 76,258 - 5.0 + 4.8 -1 6 .8 Note: The plus or minus signs affixed to dollar amounts represent the effect of those amounts as net additions to( + ) or deductions from( —) net current operating earnings. The plus or minus signs attached to the yearly percentage changes indicate whether the 1951 item is a larger amount than( + ) or a smaller amount than( —) the 1950 item. * The percentage changes in these categories have not been computed directly from the aggregate dollar amounts but from averages obtained by dividing these aggregates by the number of banks within each category in the two^ years. The number of banks in each group pertains to the year 1951. t Also includes transfers to or from valuation reserves for losses on securities, j Includes transfers to or from both bad debt and other valuation reserves for loan losses. (a) Percentage changes have not been shown either because the dollar change occurred from a negligible base amount, or because the dollar amount shifted from a negative to a positive amount or vice versa. M ONTHLY REVIEW, APRIL 1952 50 profits of banks in this District. Each of the size-groups of banks outside New York City sustained such losses or chargeoffs. Although the City banks realized enough security profits and recoveries to outweigh the losses of the other member banks, net profits from this source were the smallest since 1942. The fall in this source of income arose from the decline in security prices following the Treasury-Federal Reserve accord of last March. Actual net losses and charge-offs on loans were confined in the aggregate to the groups of banks outside New York City. For these banks as a whole, loan losses increased to 2.4 million dollars from 1.1 million in 1950; relative to the record volume of loans outstanding, however, losses still were negligible, averaging one tenth of one per cent of the average annual loan volume. Net additions to valuation reserves for loan losses, which consist principally of tax-deductible reserves for bad debt losses on loans, were a factor reducing final net profits of all groups of banks. The increased normal and surtax rates that became effective April 1 made such deductions from current income more valuable, and wherever possible bankers availed them- selves of the opportunity of adding to such reserves in order to reduce taxable income. Taxes on net income in the New York City banks reached an all-time high of 114.3 million dollars, 45.7 million dollars or 67 per cent above the 1950 level. The severity of the increase arose principally from the combination of higher normal and surtax rates and a larger volume of taxable income. Outside the City, income taxes also increased to new high levels but the increases over 1950 were smaller because the effect of the higher corporate rates was offset in part by reductions in the amounts subject to taxation. Dividend payments continued the gradual uptrend that has been in effect continuously since 1944 and increased moder ately in all groups of banks. In this eight-year period, aggre gate dividend payments in the District have increased from 76 million dollars to 115 million dollars, annually, or by slightly more than 50 per cent. This steady growth in dividend pay ments, however, has had the effect of reducing the volume of earnings retained and added to capital funds. The 1951 reten tion of 76 million dollars was the smallest in the entire period, except for 63 million dollars in 1949 when the net profits of the member banks reached their postwar low. SURYEY OF OWNERSHIP OF BUSINESS AND PERSONAL DEMAND DEPOSITS The annual survey of the ownership of demand deposits of individuals, partnerships, and corporations in the Second Fed eral Reserve District reveals that most ownership groups in creased their demand deposit balances to new high levels in the year ended January 31, 1952. Based upon reports from 114 banks that submitted detailed summaries of their larger accounts, the past years expansion appears to have been the largest annual increase to occur since World War II. It totaled 1.5 billion dollars or 7.0 per cent, compared with 1.0 billion or 5.0 per cent in 1950, and brought the aggregate checking balances maintained in this District by businesses and indi viduals to an estimated volume of 23.5 billion dollars. Businesses needed an increased volume of cash on hand in 1951 for a number of reasons, among which the more impor tant were: (1) the necessity for heavier outlays for wages and materials to purchase and distribute a greater volume of goods and services at higher prices, while, at the same time, making substantial additions to plant facilities for meeting the needs of the national defense program; (2) enlarged pay ments for interest and amortization on the increased volume of bank loans and bond indebtedness outstanding; (3) and last, but possibly most important, the larger liabilities for pay ments to the Federal Government for income and excess profits tax levies at the higher rates in effect during 1951. Moreover, corporate accumulations of deposits or other liquid assets for use in making tax payments were also affected by the require ment that a higher proportion of the total tax due must be paid on March 15 and June 15 of this year than was payable in 1951. Last year, 30 per cent of the total tax bill for most cor- porations was due on each of these dates; in 1952, 35 per cent is due; next year it will be 40 per cent, and in 1955, 50 per cent. Thus some year-to-year growth in corporate cash balances held for tax purposes was to be expected. As in the preceding year, the need for funds by business concerns was greater than the amounts they derived from depre ciation and depletion reserves, from the retention of profits, or from the sale of new issues in the capital markets, and this deficiency was met by a further expansion of bank loans. This expansion, however, was about half of that occurring last year. The larger growth of deposits this year was due to the fact that the commercial banks in this District sold a relatively small amount of Government securities in comparison with the preceding year when such sales (considerable amounts of which were purchased by nonbank investors— chiefly corporations) were substantial and, in effect, offset a major part of the influence of the greater loan expansion on deposits. As the accompanying table indicates, all deposit-ownership classifications except foreign accounts and trust accounts of banks showed increases in demand deposits during the past year. The greatest relative gain was 11.5 per cent by non profit organizations. The large demand deposit accumulations by tax-free organizations of this sort may reflect partial defer ment of building programs and other expenditures because of the material scarcities for nondefense activities. Accounts of 'all other nonfinancial businesses” (which include most of the purely service industries such as theatres, amusements, laun dries, garages, etc.) in which business and personal funds are frequently intermingled, increased 10.0 per cent. Balances of 51 FEDERAL RESERVE BAN K OF NEW YO RK Estimated Ownership of Demand Deposits of Individuals, Partnerships, and Corporations in All Commercial Banks in the Second Federal Reserve District (D olla r am ounts in m illion s) Julj' 1945 to January 1952 January 1951 to January 1952 Type of owner Dollar balance J a n .1952 Dollar change Per cent change Dollar change + 3 .8 Manufacturing and mining, Public utilities, transporta tion, and communications Retail and wholesale trade and dealers in commodities All other nonfinancial busi ness, including construc tion and services........... 7,668 + 588 + 8 .3 + 1,446 + 44 + 3.1 - 3,546 + 300 + 9 .2 + 923 + 3 5 .2 1,556 + 141 +10.0 + 522 + 5 0 .5 Total nonfinancial... 14,216 + 1,692 + 1 3 .5 Insurance com panies. . . . Trust funds of banks. . . . All other financial business* 1,143 489 1,678 T otal financial. 3,310 Nonprofit organizations.. . . Personal (including farmers) Foreign accounts................... 640 4,777 583 T otal demand deposits of individuals, partnerships, 23,526 and corporations........... + 1 ,0 7 3 282 Per cent change 35 - 2 .4 + 324 122 -20.0 + 472 + 3 9 .1 + 1.2 + 674 + 2 5 .6 383 27 + 1 1 .5 + 8 .7 - 4 .4 + 203 + 1,292 138 + 4 6 .5 + 3 7 .1 -1 9 .1 + 1 ,5 3 3 + 7 .0 + 3 ,7 2 3 + 1 8 .8 + + 56 80 62 + 66 + - + 5 .2 -1 4 .1 + 3 .8 - + 3 9 .6 * Includes investment, finance, real estate concerns, insurance agencies, etc. retail and wholesale trade and dealers in commodities increased 9.2 per cent and were probably bolstered to some extent by the recent liquidation of inventories. Although trade inven tories remained moderately higher than a year ago, it is possi ble that a portion of the funds released by the recent reductions have resulted, at least temporarily, in additions to deposit bal ances. Personal accounts (including those of farmers) and manufacturing and mining accounts, the two most important ownership groups in absolute dollar terms, increased 8.7 and 8.3 per cent, respectively. Accounts of farmers, which are only reported separately by the smaller banks, increased 11.3 per cent. At the other extreme, trust funds of banks showed a rather sizable decline of 14.1 per cent, reflecting the rapid rate of investment of the increasing volume of available funds. Demand deposits of foreigners, which include all institutions and individuals domiciled outside the United States and cer tain possessions, were drawn down 4.4 per cent to meet their pressing need for dollars. Estimates of deposits owned by individuals, partnerships, and corporations in the different size-groups of banks indicate that, while banks of all sizes shared in the past year’s increase, the gains in the different groups varied substantially, ranging from a low of 2.5 per cent in banks with deposits of 10 to 100 million dollars to 13.5 per cent in banks with deposits of 1 to 10 million. Generally, the over-all deposit increase for each group varied directly with the relative gains in deposits of manufacturing and mining concerns, retail and wholesale trade, and personal accounts. accounts that are currently below record levels are those of public utilities, trust funds of banks, insurance companies, and foreign depositors. Public utility balances were temporarily at a substantially higher level in July 1946, as funds were accumulated at that time to resume the normal plant expan sion that was deferred during wartime. The lower levels of deposits for trust funds of banks and insurance companies merely indicate the greater availability of attractive investment outlets. Balances of foreigners in the postwar period have gradually been drawn down to meet the needs for dollars, the only upswing of any magnitude occurring in 1950 when dollar receipts increased substantially. During the period since World War II, that portion of this District’s money supply that is represented by business and personal demand deposits rose from 19.8 billion dollars to 23.5 billion, or by 18.8 per cent, a large part of the increase taking place since the outbreak of hostilities in Korea. Among the individual ownership groups, the greatest relative gains— rang ing from 50.5 per cent to 35.2 per cent— were shown by "all other nonfinancial business”, nonprofit organizations, insur ance companies, "all other financial business”, personal check ing balances (including farmers), and retail and wholesale trade. On the other hand, the ownership group with the larg est deposit balances, manufacturing and mining, gained only 3.8 per cent, while demand deposits of public utilities, trust funds of banks, and foreign accounts declined by proportions ranging from 2.4 to 20.0 per cent. Estimated Ownership of Business and Personal Demand Deposits at All Commercial Banks in the Second Federal Reserve District* Billions of dollars Billions of (dollars ~1 N O N FIN A N C IA L I BUSINESS ACCOUNTS > / Manufacturing & mining R e ta il & wholesale tra d e Personal (incl. farm ers) ■ Foreign accounts ■ N o nprofit o rgan izations ’47 ’48 *49 ’ 50 *51 ’ 52 The accompanying chart shows the fluctuations that have occurred in the balances of the various depositor groups since these surveys were first undertaken in July 1943. The only I F IN A N C IA L I I B U S IN E S S ACCOUNTS 1943 '44 ’45 '46 '47 ’48 *49 ’50 ’51 ’52 Figures are semiannual from July 1943 to February 1947 and annual as of each January thereafter. 52 M ONTHLY REVIEW, APRIL 1952 LIFE INSURANCE COMPANIES AND THE SECURITY MARKETS This is the second of two articles dealing with the impact of the growth of life insurance investments on the security markets. The first article, which appeared in the Monthly Review for March 1952, traced the effects of the growth of the life insurance companies’ investment operations on their own investment practices, treating specifically the marked increase in the companies’ holdings of corporate debt obligations over a long period of time and the growth and development of the direct placement of securities as a financing technique. This second article will deal with the impact of the growth of life insurance company investments on other investors and investing institutions, and on the functioning of the security markets and the traditional investment banking machinery. C o m p e t i t i o n B e t w e e n L if e I n s u r a n c e C o m p a n i e s a n d O t h e r In v e s t o r s The substantial growth of direct placements of corporate debt securities with the larger life insurance companies, prin cipally in obligations suitable for the investment of fiduciary or near-fiduciary funds, has tended over the years to limit increases in the supply of desirable industrial bond issues available to the smaller life insurance companies and other investors.1 Competition among investors for publicly offered corporate bonds of the higher grades, therefore, has been particularly keen, and has been an important influence con tributing to lower yields on such issues, wholly apart from the depressing effects upon interest rates of supply-demand relationships in the investment market during a large part of the past two decades. Moreover, the larger insurance companies have also been important competitors for the publicly offered securities that have been issued, which have consisted princi pally of public utility and to a lesser extent railroad obligations. Thus, available data show that a group of major companies acquired the equivalent of 36 per cent of all publicly offered corporate bonds in 1948 and that purchases of the 22 largest companies amounted to 38 per cent of total new corporate debt issues offered in the public market in 1949. Other investors may, therefore, find somewhat greater diffi culty in achieving the broad diversification of industries and risks which is considered desirable in the management of investment funds. For example, as of October 31, 1951 the business security holdings of 17 life insurance companies with assets of less than 200 million dollars consisted of one sixth each of railroad and industrial holdings and two thirds of public utility obligations. In contrast, almost half the cor porate security holdings of the 13 life insurance companies with assets of one billion dollars or more were industrial corporation obligations, while public utility and railroad issues comprised 40 and 10 per cent of total assets, respectively. The corporate bond holdings of the New York State mutual savings banks at the end of 1951 were almost entirely devoted to railroad and public utility issues (50 and 45 per cent, respectively) with less than 5 per cent in industrial issues. It should be noted, however, that the savings banks have charac teristically been relatively moderate investors in corporate bonds. Data on the industrial composition and method of sale of new corporate obligations issued during the past four years are shown in the accompanying table. These figures shed further light on the problem of obtaining diversification through purchase of the corporate debt securities available to the public market. Publicly offered issues sold between 1948 and 1951 (inclusive) amounted to slightly less than half the total of private and public offerings. The proportion of ‘ pub lic” issues represented less than 20 per cent of total offerings, however, for manufacturing, real estate and financial, com mercial and miscellaneous, and transportation (other than railroad) enterprises. On the other hand, approximately 65 and 90 per cent of the new bond issues of electric, gas, and water companies and communications corporations, respec tively, were floated in the public market. A very large part of the railroad debt issues (consisting principally of equip ment trust obligations) were likewise publicly sold. A large part of the utility issues and most of the railroad issues, of course, are required by regulatory authorities to be offered through competitive bidding, and for that reason only a limited amount of financing in these fields can be done through direct negotiations with large lenders. Direct and Public Offerings of New Corporate Bond Issues (T ota ls fo r years 1 9 4 8 -1 9 5 1 ; in m illions o f d olla rs) Total di 1 See Wilde, Frazar B., "The Pros and Cons of Direct Placement”, rect and Industry public a speech before the American Life Convention, October 6, 1950. The argument has also been made that one of the factors keeping Manufacturing.................................. 6 ,1 1 2 1,419 smaller life insurance companies out of the direct-placement field Commercial and miscellaneous. . . 1,747 has been the fact that the number of participants in a new offering Real estate and financial................ 1,960 must be limited in order to keep an issue in the private-placement Electric, gas, and w ater................. 7,128 2,282 Comm unications............................... category and thereby exempt it from registration with the Securities and Exchange Commission. The evidence requires further analysis, Transportation (other than 850 however, to determine whether the provisions of the Securities Act 21,498 T o ta l....................................... are entirely responsible for the infrequency of participations by smaller companies in the larger placements, or whether the convenience of the borrowing principal (and perhaps that of the originating lender) N ote: Figures may not add to totals because of Source: Securities and Exchange Commission. may be partly responsible. Direct Public 5,028 1,314 1,458 23 2,429 232 1,084 105 289 1,937 4,699 2,050 Public as a per cent of total 17.7 7 .4 16.5 9 8.8 65.9 89.8 769 81 9 .5 11,253 10,245 47.7 rounding. 53 FEDERAL RESERVE B AN K OF NEW YO R K Nevertheless, the larger life insurance companies have been large purchasers, in the market, of utility and other publicly offered securities. In 1948, for example, a group of major companies purchased the equivalent of over two fifths of the publicly offered utility debt securities (including issues of electric, gas, water, and communications corporations), one fifth of the publicly offered railroad obligations, and 30 per cent of the market flotations of industrial debt issues (includ ing those of manufacturing, real estate and financial, and commercial and miscellaneous enterprises). Corresponding proportions for the 1949 public acquisitions of the 22 largest life insurance companies came to two fifths, one fifth, and over three fifths, respectively, of new publicly offered utility, railroad, and industrial and miscellaneous debt security flotations. developed, including long-term loans secured by oil and gas leases in proved and producing fields, the purchase of sub ordinated debentures (securities subordinate to bank loans) of sales and personal finance companies, and the financing of natural gas and oil pipe lines. Most of these have involved an extension of the private-placement technique involving direct negotiation of loans between life insurance companies and borrowers. In addition, new outlets for funds have, to a limited extent, taken the form of "ownership” investments, involving institutional and fiduciary types of investors in the ownership of urban real estate (including housing projects and other income-producing properties), railroad cars and locomotives, and fleets of automobiles and trucks leased to rail roads and industrial corporations, respectively. There has also been a limited growth in the ownership of common stocks.2 Thus, the large life insurance companies have come to acquire a very large part (although not all) of the direct placements of corporate bond issues, and a sizable proportion of those offered in the public market as well. The volume of new corporate debt securities taken by the smaller life insur ance companies and other institutional investors has been relatively smaller and has to some extent lacked as balanced a representation of borrowing industries. The effects of these latter developments on the earning power and the composi tion of the investment portfolios of the smaller life insurance companies and other institutions are not clear-cut in view of the substantial volume of new higher-yielding mortgage loans (including those secured by commercial and industrial prop erties) that became available in the postwar years. Thus, the mortgage holdings of 17 life insurance companies with assets of 200 million dollars or less came to over 40 per cent of their total assets at the end of October 1951; the proportion for those companies with assets of one billion dollars or more was less than 25 per cent. To the extent that competitive pressures among institutional investors to invest funds have resulted in investment in owner ship assets, concepts formerly governing the investment prac tices of public savings institutions have been altered. More and more, the prudent-man rule of investment of the public’s funds has been enacted into State laws, and in 1951, New York passed a law permitting limited investment in common stocks by life insurance companies in that State.3 ( It is reported that the latter law has as yet resulted in only small purchases of common stock by New York life insurance companies.) It should be noted, however, that many of the investments made by the life insurance companies and some others involving ownership have been very conservative transactions and that the change from creditor to owner status has been principally a change in the form of asset acquired rather than in substance and risk; and as far as life insurance companies are concerned, the aggregate amounts placed in such assets have been small in relation to total assets. The particularly large volume of privately placed bond issues in the past few years, furthermore, may be attributable to an acceleration of the commitment practice, which is pecu liarly suitable to the private-placement technique, and which cannot practicably be provided for in the case of corporate borrowing in the public market. Should there be any sub sidence of this trend toward advance commitments, some expansion in the relative proportion of public corporation bond flotations could result. The competition among investors for corporate obligations was particularly keen during the thirties when the supply of new corporate bond issues as well as new mortgage loans fell below the potential demand, and led investors to seek new outlets for funds. During the war, most investors’ funds were placed in Government securities. However, the search for new investment media has been resumed in the postwar years in spite of the fact that since 1946 new corporate bond offer ings and other types of long-term financing have been very heavy. In part, new forms of corporate financing have been C h a n g i n g St r u c t u r e of the C o r p o r a te Bo n d M a r k e t The fact that corporate debt instruments have come to be held principally by life insurance companies and other institu tional investors has apparently narrowed the breadth of the corporate bond market over the years. Turnover in the market for outstanding bonds, particularly industrial bonds, has been reduced not only as a consequence of the decline in the number of important buyers (including those who, being subject to heavy taxation, have shifted into "municipals”), but also as a result of the growing volume of private placements of bonds which initially by-pass the market altogether and rarely are traded after issuance. Except for a spurt during the war years, the volume of trading has declined sharply, as indicated by 2 Another factor in the purchase of common stock has been the desire of some institutions to acquire equities in order to share in industry’s growth and as a partial hedge against inflation. 3 A bill permitting New York mutual savings banks to purchase limited amounts of common stock was approved by the State legisla ture in March of this year. 54 M ONTHLY REVIEW, APRIL 1952 the figures for all corporate bond transactions on the New York Stock Exchange, which fell from a prewar peak amount of about 3 billion dollars in 1936 to a low of 725 million in 1949. While far more corporate bonds are traded over the counter than on the Exchange, the declining activity on the latter may, in absence of other comprehensive data, serve as an indicator of what has happened in the over-all market. Lower trading volume has markedly reduced the frequency of transactions in outstanding bonds, and amounts bid for or offered have, more frequently than not, been small. The num ber of buyers and sellers has declined significantly since the twenties. With smaller numbers of investors in the market in recent years, sizable blocks of bonds have often had to be exchanged at prices substantially different from the quoted prices in order to effect transfers of ownership. However, the growing importance of pension funds as investors, the impetus which the new liability for income taxes and the higher interest-dividend rates to depositors have given the savings banks to increase their earnings, and a gradual return by the commercial banks to the interest in marketable corporate bonds which they had before 1933 may, in combination with the high level of corporate demand for long-term funds, be cur rently producing some revival in the activity and diversity of participation in the market for publicly offered corporate bond issues. To a large extent, of course, whatever reduction in liquidity (marketability) has occurred mainly reflects the lesser needs for liquidity in the corporate security holdings of some of the institutional investors. Life insurance companies are long-term holders of securities, as long as the rates of return are satis factory, since their liabilities consist principally of long-term contractual obligations to policyholders. Therefore, liquidity or ready marketability may not be vitally important. Moreover, the current flow of income from premium receipts and from amortization, sinking fund redemptions, retirements, and pre payments of past investments is large enough that the life insurance companies can usually meet any sudden demands for cash from their policyholders (seeking loans or surrendering their policies) merely by reducing temporarily the rate of purchasing new investments. In addition, their Government security holdings afford a measure of liquidity, although not as large a measure as they did prior to the unpegging of Government bond prices in the spring of 1951. The com bined effect of all these factors has apparently been to lessen the liquidity needed in corporate bonds and other assets. Similarly, the need of most other institutional investors for assured marketability is probably much less pressing than for individuals.4 R e p e r c u s s io n s on I n v e s t m e n t Se c u r it y M a c h i n e r y The evolution of life insurance companies to the position of the largest single group investor in corporate bonds has had marked effects upon the arrangements for financing corporate long-term capital needs that existed in the twenties and prior years. Of course, the most pronounced decline in the invest ment security machinery came as a result of the 1929 stock market crash and the subsequent sharp decline in common stock trading and in all other phases of the securities business. In the revival of security prices and trading beginning in 1932-33, however, the recovery in corporate long-term financing through investment bankers and security dealers (principally for re funding purposes) was retarded by the growth of direct nego tiation of new issues between industrial corporations and life insurance companies and other large investors. Thus, the scope of the "public” market for corporate bonds has been greatly reduced with the result that over the years the income and numbers of investment banking houses and of security dealers in that market has likewise been reduced. However, the neces sary adjustments have probably been softened somewhat through a shifting of emphasis by brokers and dealers to other types of securities, including tax-exempt securities, common stocks, and issues of mutual funds, and to expanding their services as investment counselors. Furthermore, the decline in the marketing of new corporate bond issues caused liquidation and consolidation of investment underwriting firms and substantial reductions in sales forces. These developments reflect partly the fact that, because of the increasingly institutional character of the market, widespread distribution of new publicly offered securities is no longer called for in order to sell a new issue. In connection with privately placed securities, the investment banker has in a large number of transactions become an inter mediary between corporate borrower and life insurance com pany lender, or a consultant to the borrower concerning his general financial problems as well as the terms of any particular private issue under negotiation. At times, of course, investment bankers assume more active roles in the negotiations, and they perform the strategic function of advising their clients whether better terms are available through a public or a private offering, thus acting as a balance wheel between the public and private market. In this latter connection, the investment banker’s intimate knowledge of the markets for both public and private issues serves to maintain a healthy competition between the direct placement of new issues and public offerings. This knowledge, of course, is obtained from actual experience with public flo tations and with direct placements. With respect to the latter, investment bankers are constantly in contact with lending 4 It has been claimed that the change in the composition of the purchasers of corporate bonds has had the further result of curtailing available by the National Bureau of Economic Research from its the volume of corporate financing with risk-type, high-yielding bonds extensive records of corporate bond issues, it has been estimated that rated below Baa or Ba. Comprehensive information is lacking but the volume of corporate risk bond issues (Ba or lesser grades) floated whatever figures do exist indicate that the volume of this type of since the turn of the century amounted roughly to one-half billion financing could not have been large. Thus, on the basis of data made dollars. 55 FEDERAL RESERVE BAN K OF NEW YO R K officials and are thus well posted on the current investment policy and current availability of funds of life insurance com panies and other large investors. This fund of information is of great value to a corporation seeking to approach the insur ance companies for long-term funds. As a result, the corporate issuer’s choice of financing outlets is widened, and its bargain ing power strengthened. Fees of bankers for these services are usually considerably below those earned on publicly offered issues which under writers usually purchase outright from the issuers. However, all the fees earned on a direct placement are frequently earned by the one firm instead of being shared with many firms parti cipating in the larger aggregate commission of a public issue. In addition, operating expenses are considerably lower. Investment bankers have in many instances enabled borrow ing corporations to obtain more favorable terms from direct lenders than they might otherwise have been able to secure. They have also on occasion advised private placement when for one reason or another conditions in the public market were less favorable. In performing their function as corporate agents in private-placement negotiations, furthermore, invest ment bankers have often been instrumental in closing the gap between a borrowers needs and the investment requirements of the lender ( as determined by legal and policy considerations). In other words, much of the "tailoring” of individual directplacement transactions to borrower’s and lenders needs is facilitated if not effected by investment bankers. Private placements have also produced another development in the investment banking field. They have been instrumental in reducing the borrowers cost for distribution of publicly offered new issues by contributing to a narrowing of invest ment banking "spreads” (the difference between the price at which bankers acquire an issue and the offering price to the public). Because of the limited supply of public issues, the competition for them is keen; it would undoubtedly be some what less aggressive were it not for the large volume of finan cing which by-passes the market. This, of course, has been a further factor in the contraction of the security distribution machinery. Investment bankers retain the full range of their former functions only in such areas as the marketing of Business Indicators 1952 Item Percentage change 1951 Unit February January December February Latest month Latest month from previous from year month earlier U N IT E D STATES Production and trade Industrial production*...................................................................... Electric power output*..................................................................... Ton-miles of railway freight*.......................................................... Manufacturers’ sales*........................................................................ Manufacturers’ inventories*............................................................ Manufacturers’ new orders, to ta l................................................... Manufacturers’ new orders, durable good s.................................. Retail s a le s * tf.................................................................................... Residential construction contracts*.............................................. Nonresidential construction contracts*........................................ Prices, wages, and employment Basic com m odity p ricesf.................................................................. Wholesale prices!**........................................................................... Consumers’ p ricesf............................................................................ Personal income* (annual rate)...................................................... Composite index of wages and salaries*....................................... Nonagricultural em ploym ent*........................................................ Manufacturing em ploym ent*.......................................................... Average hours worked per week, m anufacturingf..................... 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 B an k s*.. Bank debits* (U. S. outside New York C ity )............................. Velocity of demand deposits* (U. S. outside New York C it y ). Consumer instalment credit outstandingf................................... United States Government finance (other than borrowing) Cash incom e........................................................................................ Cash ou tg o........................................................................................... National defense expenditures........................................................ 1935-39= 1935-39= 1935-39= billions of billions of billions of billions of billions of 1923-25= 1923-25 = 100 100 100 $ $ $ $ $ 100 100 222p 220 346 346 — — — — — 1 2 . 9p — — 200p 23. Op 42. Op 2 2 .6p 1 1 . 3p 1 2 .6 226p 364p 219r 342 20 0 2 1.2 4 2.0 2 0 .8 10.3 12.3 240 367 221 322 189 22.3 34.7 2 5.8 13.5 13.3 311 334 Aug. 1939 = 10 0 1947-49= 100 1935-39= 100 billions of $ 1939= 100 thousands thousands hours thousands 313.9 1 1 2 .6p 187.9 — — 46,528p 15,840p 4 0 .8p 2,086 323.8 113.0 189.1 2 5 7 .3p 232p 46,459 15,830 40.9 2,054 328.1 113.5 189.1 258.6 231 4 6 ,548r 15,811r 4 1.2 1,674 46,078r 1 6,009r 40.9 2,407 millions of $ millions of $ millions of $ millions of $ billions of $ 1935-39= 100 millions of $ 74,680p 5 7 ,560p 95,530p 28,406 93.1 75,290p 5 7 ,480p 97,760p 28,551 96.3 13,313p 75,070p 5 8 ,300p 9 8 ,120p 28,850 80.9 9 8.6 13,506 71,470 53,540 90,620 27,145 8 4 .5r 100.5 13,073 5,183 5,473 3,843 5,642 5,621 3 , 440r 4,877 3,522 1 ,920r 235 89 160 184.0 7 ,3 9 2 .5 2 , 6 4 9 .9r 44.2 3 .4 117.0 228 189 229 180.8 7 ,3 6 5 .5 r 2 ,6 6 3 . 2 r 4 3.4 3 .8 111. 97- millions of $ millions of $ millions of $ 1 0 0 .0 — 6,2 7 6 p 5 ,327p 3,556 8 8 .0 389.2 116.5 183.8 2 4 3 .3r + 1 # # + 8 # + 9 + 10 + 2 - 6 - 1 - 3 # - 1 1 220 # # # # + 2 - 1 + + - 2 1 6 # # + 8 - 4 + 2 +23 -2 0 -2 5 - 3 -2 8 + 4 -1 9 - 3 + 2 + 6 + 6 + 1 - 1 # -1 3 + + + + + 4 8 5 5 10 # # 4 1 +21 + 29 +51 + 85 # + 26 + 33 # # + 9 + 7 + 4 -4 7 - 8 + 1 + 2 4 + 16 + 11 +11 + - 3 7 SECON D FE D E R A L R E S E R V E D IS T R IC T Electric power output* (New York and New Jersey)................. Residential construction contracts*................................................... Nonresidential construction contracts*............................................ Consumers’ pricesf (New York C ity )............................................... Nonagricultural em ploym ent* ............................................................................................... Manufacturing em ploym ent* .................................................................................................. Bank debits* (New York C ity ).......................................................... Bank debits* (Second District excluding N. Y . C. and A lb a n y ). . Velocity of demand deposits* (New York C it y )............................ 1935-39= 1923-25= 1923-25= 1935-39 = thousands thousands billions of billions of 1935-39= 100 100 100 100 236 — — 183.0 — $ $ 100 2 ,6 7 0 .Op 50.4 4 .2 118.4 235 112 p 2 12 p 184.2 7,4 0 8 .4 p 2,662.1 4 6.3 3 .9 106.5 - 1 p Preliminary. r Revised. # Change of less than 0.5 per cent. * Adjusted for seasonal variation. ** Revised series. Back data available from the U. S. Bureau of Labor Statistics, t Seasonal variations believed to be minor; no adjustment made. t t Series revised from 1940 to date. Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request. 6 56 M ONTHLY REVIEW, APRIL 1952 "municipal” bonds and of stocks, where individual investors remain important purchasers of securities. Conclusions The very substantial growth of life insurance investment funds, as part of the growth in institutionalized forms of savings over the past 30 years or more, has brought significant changes in the methods of financing business and other capital needs and has added many elements of financial stability in the economy. Perhaps the most significant aspect is that more than ever before in American economic history the functions of lending and investing are being carried out by experts and specialists. The further implication has been suggested that such specialization should keep losses and defaults to a mini mum and so minimize their tendency to aggravate business recessions. The development and growth of the private-placement technique of financing is a further source of financial and economic stability, at least on the downside of the business cycle, in that flexible loan agreements arranged through this technique permit appropriate changes which, in periods of business decline, can help stave off defaults and reduce losses. Equally important as a stabilizing element is the fact that cor porations, as part of the private-placement arrangement, may obtain advance commitments for funds— a practice which may encourage the tendency on the part of corporate management to engage in long-range investment planning. The knowledge, too, that changes in loan agreements— such as the temporary waiver of sinking fund payments— may be made in periods of adversity without forcing a borrower into bankruptcy may also lead to greater willingness to borrow on long term, in order to plan business capital expenditures ahead. On the other hand, borrowers may face the risk that adversity will subject them to greater pressure from lending institutions for a voice in the management. The great financial strength of the life insurance companies and other major institutions and the fact that they are long term investors enables them, however, to "ride” with and see through a debtor’s situation which temporarily turns unsatis factory. A further factor of stability during future recessions may come from the fact that such investors are likely to be less influenced by those market price tendencies which in the past have led to "fear” liquidation, often without regard to the fun damental strength of the securities or other investments liqui dated. Moreover, along with the growth of life insurance company funds there has developed a choice of alternative methods of debt financing (as contrasted with equity finan cing). Where a borrowing corporation had only one major source of capital financing in the twenties— flotations of new bond issues in the market through investment underwriters— it now has, in many cases, the possibility of direct financing as well. The competition between the two, furthermore, has tended to favor the borrowers in that it enables them to obtain the most advantageous terms and rates, and has actually (as new lending techniques have been developed) made "loanable” transactions that might formerly have been difficult to finance. The direct-placement technique, permitting tailor-made loan agreements attuned to borrower’s and lender’s requirements and financial positions, has frequently made possible financing by life insurance companies in such cases. Thus, by channel ing a growing volume of the public’s savings to corporate borrowers, the life insurance companies have helped contribute to the growth in industrial capacity, employment, and incomes, and the improvement of living standards, that have occurred in recent years. P R E L IM IN A R Y R E T A IL C R E D IT S U R V E Y R E SULTS Preliminary tabulations of the data gathered in the Retail Credit Survey recently conducted by this bank are now avail able. Statistics on sales, receivables, and inventories for nine principal types of credit-granting retail stores in the Second Changes in sales volume between 1950 and 1951 were generally moderate in the Second District, except for stores Changes in Sales, Receivables, and Inventories of Credit-Granting Retail Stores in the Second Federal Reserve District, 1950 to 1951* Federal Reserve District were collected as part of a nation-wide Percentage change, 1950 to 1951 survey (which has been made annually by the Federal Reserve Retail sales System since 1942, except in 1951 when data from Regulation W registration forms were available). The response to the T ype of creditgranting store Total latest survey was exceptionally large; over 2,300 Second District firms cooperated by submitting reports, more than triple the number in previous years. Total annual sales of the stores co operating in this survey were more than 2 billion dollars. The accompanying table shows some preliminary results of the current Retail Credit Survey; a more thorough analysis, includ ing the data for various localities in this District, will appear in the May issue of this Review. Auto tire and accessory. W om en’s apparel........... M en’s clothing............... Automobile dealers. . . . Furniture......................... Household appliances, radio, and television. + + + + + + - 5 4 4 4 1 1 2 2 -1 2 Cash + + + + + 4 4 5 3 6 1 5 4 -1 3 Charge account Instal ment + + + + + + + 7 7 9 7 3 9 4 - - 4 -1 3 2 + 2 - 9 - 7 +14 - 2 +12 # 5 Total Inven accounts tories (at receiv retail able prices) + 5 - 5 -1 7 + 6 - 8 + 3 + 1 + 6 - 7 # +12 +10 - 2 + 11 +18 - 7 - - 5 2 * Sales are based on annual totals; accounts receivable and inventories on end-ofyear data. All figures are preliminary. # Change of less than one half of one per cent. 57 FEDERAL RESERVE BAN K OF NEW YO RK in the household appliance, radio, and television group, where sales dropped nearly one eighth. The important automobile and furniture groups also reported slight sales declines in 1951. The majority of the lines surveyed, however, increased their dollar volume of sales somewhat. Thus, aggregate retail sales in the Second District probably showed very little change in 1951 from the 1950 total. However, when the rise in the average level of retail prices from 1950 to 1951 is taken into account, the major types of credit-granting stores generally appear to have experienced a decreased physical volume of sales in 1951. Most of the different types of stores surveyed reported an increased proportion of credit sales in 1951. In department, hardware, and household appliance stores the shifts from cash to credit sales were minor, but women’s apparel and men’s clothing stores and automobile dealers reported increases in credit sales which wholly or partially offset a decline in cash sales. The reverse situation prevailed at furniture and jewelry stores, where cash sales rose but credit sales dropped. Charge account sales consistently accounted for a greater share of total sales in 1951 than in 1950, the sole exception being jewelry stores. In particular, charge account sales made a better showing than cash or instalment sales at automobile dealers and accessory shops and in household appliance and hardware stores. Instalment sales were generally lower in 1951; such sales showed year-to-year declines in all lines surveyed except men’s clothing and women’s apparel, where instalment sales are of very minor importance, and department stores, where the gain was less than the rise in either cash or charge account sales. Inventories were a pressing problem for most types of stores during 1951, and by the end of the year some lines had not yet succeeded in adjusting the level of their stocks to desired relationships with current sales. The sharpest rise in inventories between the end of 1950 and 1951 occurred in men’s clothing stores, jewelry stores, and at automobile dealers. For new car dealers, at least, this rise probably was more apparent than real, and reflected the low level of stocks at the end of 1950. Reports from jewelry stores, however, indicated that aggregate stocks had grown to the point where they equaled more than one full year’s sales. Household appliance, radio, and television stores reported a 12 per cent drop in sales, but stocks on hand were nearly as great at the end of the year as at the beginning. Inventories were lower than a year ago or showed smaller increases than sales in auto tire and accessory shops, furniture stores, and department stores, but in some cases inventories had been rather high at the end of 1950. D E P A R T M E N T STO RE T R A D E March marked the fourth consecutive month in which con sumer expenditures at Second District department stores were well below year-earlier levels. Although the year-to-year com parison in total sales during March was affected by calendar irregularities (one shopping day less this year and the occur rence of Easter on March 25 last year), it is estimated, from incomplete data, that average daily sales, after adjustment for seasonal variation and the shifting date of Easter, had declined 4 per cent from the February level and about 6 per cent from March 1951. Weather conditions during the greater part of March were generally unfavorable and hardly conducive to any sustained increase in consumer buying of spring apparel. As Easter is not until April 13, consumers apparently saw little need to Indexes of Department Store Sales and Stocks Second Federal Reserve District (1947-49 average=100 per cent) 1952 Feb. Jan. Dec. Feb. 82 80 179 103 90 100 100 104 107 101 114 106 115 Net sales Locality F e b .1952 Department stores, Second D istrict.. . . New York C ity ...................................... Nassau C ou n ty ...................................... Northern New Jersey........................... Westchester C ounty.............................. Fairfield C ou n ty.................................... B ridgeport........................................... Lower Hudson River V alley............... Poughkeepsie...................................... Upper Hudson River V alley............... Syracuse.............................................. Northern New York State.................. Southern New Y ork State................... Item Stocks, unadjusted........................................... Stocks, seasonally adjusted............................ Department and Apparel Store Sales and Stocks, Second Federal Reserve District, Percentage Change from the Preceding Year Schenectady........................................ Central New York S tate..................... Mohawk River V alley..................... 1951 Sales (average daily), unadjusted................. Sales (average daily), seasonally a d ju sted .. hurry their purchases with the result that apparel sales during March were not particularly encouraging to retailers. However, the trade expects sales of spring ready-to-wear to increase sharply after April 1. 110 Binghamton..................................... Western New York State.................... Niagara Falls...................................... Rochester............................................ Jan. and Feb. 1952 5 - 11 - 6 - 11 9 9 + 5 2 2 4 8 1 8 + - 13 14 13 13 — — + - - + + + + + + + - 7 3 1 6 3 2 2 0 3 1 6 2 1 4 4 10 12 6 14 4 11 8 1 12 24 5 6 5 5 2 Apparel stores (chiefly New York C it y ) . - - 13 15 12 15 15 3 10 — 10 11 10 13 11 7 - 11 5 14 17 4 2 3 4 3 8 — 5 - 10 - 2 2 - - 9 120 124 Stocks on hand Feb. 29, 1952 6 MONTHLY REVIEW, MARCH 1952 58 N A T IO N A L S U M M A R Y OF BUSINESS C O N D IT IO N S (Summarized by the Board of Governors of the Federal Reserve System, March 31, 1952) Industrial production rose slightly in February and early March and was at about the high level reached in the second quarter of 1951. Wholesale prices decreased further over this period, and consumer prices also declined. Total retail sales increased in February, while sales at department stores declined somewhat. Bank credit outstanding has changed little since early February. Industrial Production The Boards preliminary seasonally adjusted index of indus trial production in February was 222 per cent of the 1935-39 average, as compared with 220 in January and 221 a year ago. Durable goods output increased in February to a new post war record level, and production of nondurable goods was up slightly from the level reached at the end of 1951. Passenger auto assembly increased substantially in February and March; total output for the first quarter will be close to the authorized limit of about one million units. Production of household goods was maintained in February at about the January rate— one-fourth above last summer’s low but 30 per cent under the exceptional rate of a year ago. Over-all activity in machinery lines showed a small increase, reflecting partly further gains in military equipment. Steel production, which reached an annual rate of 108.7 million tons in February, con tinued to expand in March. Refinery output of nonferrous metals also rose further in February, and lumber production showed a strong seasonal rise. peak rates in February, and stocks of gasoline rose to a new high. A decline in chemicals output reflected mainly a sharp further curtailment in rayon output. Em plo ym en t Seasonally adjusted employment in nonagricultural estab lishments in February was 46.5 million, about the same num ber as in other recent months. The average work week at manufacturing plants at 40.8 hours was little changed from January or from the level of a year ago; average hourly earnings remained at $1.64. Unemployment was unchanged at 2.1 million, the lowest for February since 1945. Construction Value of construction contract awards showed little change in February as increases for most types of public construction partly offset declines in private nonresidential awards. The number of nonfarm housing units started rose to 77,000 from 68,000 in January and compares with 81,000 in February 1951. Expenditures for construction work put in place, allow ing for seasonal influences, continued unchanged from January at 2.5 billion dollars and were as large as a year earlier. D istribution The slight increase in nondurable goods output in February reflected mainly a 4 per cent rise in cotton consumption and an unusually large volume of meat production for this seasoa Pork production in March continued to exceed substantially the year-ago amount. Petroleum refining was maintained at Department store sales declined somewhat in February and early March, after allowance for the usual seasonal change. In the first three weeks of March, sales were 12 per cent below the corresponding period a year ago, owing in part to the later date of Easter this year. Preliminary estimates indicate a moderate decline in February in value of department store stocks after seasonal adjustment. Seasonally adjusted sales at INDUSTRIAL PRODUCTION CONSTRUCTION CONTRACTS AWARDED Federal Reserve index. M onthly figures; latest figure shown is for February. F. W . D odge Corporation data for 37 Eastern States. M onthly figures; latest shown are for February. 59 FEDERAL RESERVE BAN K OF NEW YO RK retail stores selling automotive goods and building materials increased substantially in February. Comm odity Prices The average level of wholesale commodity prices declined slightly further from mid-February to the fourth week of March, reflecting chiefly decreases in industrial commodities. Wholesale food prices changed little. While some farm prod ucts strengthened, hog prices decreased further. The consumers’ price index, which had advanced 11 per cent from June 1950 to last December, was unchanged in January and then declined 0.6 per cent in February. The February decline reflected chiefly decreases in retail food prices. Since mid-February, there have been reductions in prices of television sets, appliances, and textile products. Ba n k Credit an d the M oney Supply Total credit outstanding at banks in leading cities has shown little change since early February. Bank holdings of United States Government securities have declined somewhat, while loans and other securities have increased moderately. The vol CONSUMERS* PRICES ume of new bank loans to finance defense and defense-related activity in such manufacturing lines as metal and metal prod ucts, petroleum, and chemicals has continued its steady upward movement and exceeded further seasonal repayments of loans by commodity dealers and food, liquor, and tobacco processors. The total money supply has also changed only slightly since early February, reflecting in large part the stability in out standing bank credit. The deposit and currency holdings of businesses and individuals, however, declined sharply as a result of a large seasonal transfer of funds from private to Government accounts. Demand deposit turnover outside New York City rose in February following a decline from Novem ber to January. Security M arkets Common stock prices rose moderately during the first three weeks of March. Yields on short and intermediate-term Gov ernment securities which had risen somewhat during the early part of March subsequently declined sharply as money market conditions eased. Yields on long-term Treasury issues were little changed, while yields on high-grade corporate bonds rose slightly. MEMBER BANKS IN LEADING CITIES * CHANGE IN SERIES. Bureau of L abor Statistics indexes. “ A ll items” includes fuel and housefurnishings groups not shown separately. Midm onth figures, latest shown are for February. W ednesday figures; latest shown are for March 12 . V
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