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MONTHLY REVIEW O f Credit and Business Conditions FEDERAL RESERVE V o l u m e 29 BANK AUGUST OF NEW 1947 YORK No. 8 MONEY MARKET IN JULY The outstanding development in the money market during the past month was the ‘ unpegging” of the Treasury bill rate. the larger banks that had been holding Treasury bills previ ously indicated a preference for retaining the older issues, This action, representing a further step in the direction of which could still be sold to the Federal Reserve Banks at any eliminating special measures adopted during the war to facili tate war financing, was taken by the Federal Open Market repurchase option. time to obtain additional reserves and which retained the Committee, which announced on July 3 that it had directed The unpegging of the Treasury bill rate had the effect of the Federal Reserve Banks to terminate the policy of buying stimulating uncertainty as to the outlook for short term inter all Treasury bills offered to them at a fixed rate of Ys per cent est rates, an uncertainty which was heightened by the announce per annum and to terminate the option given the sellers to ment later in the month that an issue of 11-month Treasury repurchase bills of the same issues at the same rate. The new policy was made applicable to new bills issued on or after certificates bearing interest at % of 1 per cent per annum ( the same rate as had previously been offered on 12-month certifi July 10, but not to bills issued prior to that date. cates) would be offered in exchange for the certificates matur As the announcement pointed out, the fixed rate on Treasury bills was a wartime measure adopted in 1942 to facilitate war cate to be issued on August 1 represents a move in the direction ing August 1. This slight shortening of the term of the certifi financing and to stabilize the market for Government securities. of reducing the number of maturity dates for outstanding Under current peacetime conditions, these arrangements no longer serve their original purpose, as the greater part of the Treasury securities; it also gave rise to questions in the market as to whether it might not have greater significance in indicat outstanding bills have been acquired by the Federal Reserve Banks and bills have gradually ceased to be a market instru might be offered at a higher rate. ing the possibility that future certificates of longer maturity ment. The elimination of the fixed rate on Treasury bills is As a result, there developed a rather common tendency on the expected to serve a useful purpose in restoring the bill as a market instrument and giving added flexibility to the Treas part of banks, security dealers, and other investors to under take to place themselves in the most favorable position in ury’s debt management program. The announcement stated, however, that the Federal Reserve System would continue to purchase and hold Treasury bills as well as other Government securities in amounts deemed necessary to the maintenance of an orderly Goverment security market and the discharge of the System’s responsibility with regard to the general credit situation of the country. which to take advantage of any higher rates that might be offered in subsequent financing. This took the form of selling on a substantial scale of the longer term Treasury certificates and investing the proceeds largely in shorter term issues. Furthermore, banks in need of additional reserves tended to In response to the new policy, the average interest rate on A reduction in the Government security dealers’ portfolios the next two weekly issues of Treasury bills rose rapidly. sell the longer-dated certificates, while banks with funds avail able for investment tended to purchase the nearby maturities. The (presumably of securities which might be vulnerable to any issue dated July 10 was sold at an average discount of 0.59 per further change in short term interest rates) was indicated by cent, with the range of accepted tenders running from 0.39 to a decline of about 225 million dollars in their borrowings from 0.75 per cent. New York City banks in the two weeks ended July 16. This issue was soon quoted in the market at close to % of 1 per cent, and subsequent new issues were sold at an average discount of about the same figure. As a result of these shifts in holdings, the Federal Reserve System Interest in made substantial market purchases of the longer term certifi the new bills on the part of investors broadened with each new cates, but sold shorter term issues during most of the month offering and resulted in an increasing number of bids from as an aid to the maintenance of orderly conditions in the banks and business organizations. Government security market. For the most part, however, MONTHLY REVIEW, AUGUST 1947 Yields on Treasury Bills and Certificates of Indebtedness, April-July 1947* PE P C E N T from circulation and further large disbursements from foreign accounts. Treasury net expenditures added moderate amounts of funds to bank reserves for a short time after the holiday and again toward the close of the month, but during the intervening two-week period (ended July 2 3 ), Treasury re ceipts far exceeded disbursements, partly offsetting the effects of the other transactions. Some tightening of the money market in the last week of the month was related to the payment of 250 million dollars by investors for World Bank bonds. Changes in Federal Reserve credit consequently were moder ate during most of the month. Substantial purchases of the longer maturities of certificates were made, especially in the first half of the month, but these purchases were partly offset by sales of Treasury bills and short term certificates. Toward the close of July the Reserve Banks absorbed substantial offer ings from banks of the older issues of bills, partly as a result of * Bill yields are discounts on three months’ maturities based on dealers’ b prices as quoted in the open market. Certificate yields are based on id composite market bid quotations. Wednesday dates; latest figures are for July 23, 1947. losses of reserves caused by payments for World Bank bonds. As the accompanying chart indicates, yields on the longer term certificates remained close to the % per cent coupon in part rather wide swings in the reserve position of New York City banks. rate, while the demand for the shorter maturities caused a The Treasury’s cash receipts from taxes and other revenues and from the sale of securities to the public during July were not large enough to equal its disbursements, which were aug mented by payments of 700 million dollars to Great Britain under the loan agreement with that country. The Treasury, decline in the yield on certificates maturing in about 3 months to approximately 34 of 1 per cent, at which point the yield on these securities was practically the same as for the new Treasury bills of similar maturity. The uncertainty as to the outlook for short term interest rates also had some repercussions on the operations of com mercial banks in Government bonds. During the four weeks ended July 23, the major “money market” banks in New York City invested chiefly in bonds due or callable in less than 1 year ( which would enable them to reinvest their funds to advantage if short term securities offering higher interest rates should become available), and in longer term bonds (which offer higher current yields). The maturity distribution of the bond holdings of other weekly reporting member banks is not cur rently available except in the case of the Chicago banks, which showed little change during July. Excess reserves fluctuated widely from week to week, reflecting therefore, withdrew about 580 million dollars from its War Loan accounts with depositary banks to make up the difference. The initial call payable on the first of the month amounted to more than 300 million dollars and was used largely to pay off the unexchanged portion of an issue of certificates of indebtedness maturing July 1, and to advance 150 million dollars to Great Britain. Additional advances of 100 and 150 million dollars on the British credit, made on July 10 and 14, respectively, were the occasion for further War Loan withdrawals of about 120 and 155 million dollars on the same dates. Treasury receipts from all sources exceeded disburse ments in that statement week (ended July 16) and in the next one, however, so that Treasury balances with the Reserve M e m b e r B a n k R eserves Money market conditions were easy during most of July, although some strain on reserve positions was evident in the first and last few days of the month. Sizable preholiday demand for currency, a substantial increase in member bank reserve Banks rose almost 375 million dollars to about 940 million on July 23. Thus, in making a further payment of 300 million dollars to the British in the following week, the Treasury was able to draw on its balances in the Reserve Banks and to avoid further pressure on bank reserve positions. requirements on the first of July following the elimination of the exemption of Government War Loan deposits from C u r r e n c y O u t s t a n d in g legal reserve requirements, and some absorption of funds Public demand for currency prior to the Fourth of July through Treasury transactions were only partly offset by con holiday was smaller this year than last. But the subsequent tinued heavy payments from foreign deposit accounts with return flow of money from circulation was larger in 1947 and the Reserve Banks. Relaxation of the strain on reserve posi brought the volume of currency outstanding slightly below the tions came with the heavy post-holiday return flow of currency 1946 level, as illustrated in the accompanying chart. This FEDERAL RESERVE BANK OF NEW YORK Currency in Circulation in the United States, 1945-47* 79 ties. The latter were mainly sold to trust funds, but some (1.8 billion net) were issued to veterans in payment for terminal leave and some (2.1 billion net of noninterest-bearing demand notes) to the International Monetary Fund and Inter national Bank in payment of part of the United States sub scriptions to these organizations. The Government’s ability to retire such a substantial volume of publicly-held securities was due to the use of about 8.4 billion dollars net2 of funds withdrawn from the public in taxes and other receipts during the fiscal year and 11.7 billion of funds already on hand, accu mulated mainly during the Victory Loan drive. About 6 billion dollars of the debt redeemed for cash was held by the nonbanking public3 (that is, investors other than commercial banks and Federal Reserve Banks, and Gov ernment agencies) and to this extent the funds withdrawn by the Government in taxes and other receipts were, in effect, * Wednesday dates; latest figure is for July 23, 1947. was the first instance since the start of the war in which there was a year-to-year decrease in outstanding currency. While minor in amount, the decrease in circulation is the more significant since it has occurred in the face of a sharply higher price level, increased wages and national income, and a higher dollar volume of retail trade. The decline in circula tion, furthermore, has been in the lower denominations— 20 dollars and less— which are more commonly used in current trade, while the demand for the larger denominations has continued to grow, although at a much slower pace than in previous years. The falling off in the use of currency probably indicates the return of more normal, peacetime practices in regard to making payments. The following developments may have had some effect upon the use of currency and the volume outstanding: (1 ) some reduction in the proportion of cash sales and increase in the proportion of credit sales in retail trade; (2 ) greater use of check payments resulting from the successful promotion by the banks of special checking accounts for persons of moderate income and from the peacetime decline of the transient population; (3 ) the spending of wartime savings in the form of currency; and (4 ) the decline in new savings in that form as consumer spending has assumed a more normal relationship to income with the greater availability of goods. RESULTS OF T R E A S U R Y F IN A N C IN G , FISCAL 1947 For the first time in seventeen years, the Federal Government at the end of the 1946-47 fiscal year showed a reduction in the public debt for the year as a whole. Nearly 11.5 billion dollars net of Government securities were retired, leaving 258.4 billion outstanding on June 30. Cash retirement of debt held by the public1 amounting to 20 billion dollars was partly offset by the issuance of certain nonmarketable securi returned to the public. Over the course of the fiscal year, the net flow of funds between the public and the Treasury was reversed several times. From July to September 1946 the nonbanking public received 100 million more from Treasury debt retirement and cash expenditures than it paid to the Treasury and in the next quarter it received nearly 1.5 billion dollars more. In the three months, January-March 1947, how ever, it lost through net payments to the Government almost 4.9 billion dollars. In the last three months of the fiscal year (April-June) the public received over 900 million net from the Treasury. Thus, while only about 2.5 billion dollars net was withdrawn by the Government from the nonbanking public in the fiscal year as a whole, withdrawals were con centrated in the first quarter of this calendar year. In the other three quarters, on balance, the public received funds from the Government— through debt retirement operations, if not through other expenditures. In addition to the retirement of debt held by the nonbanking public, almost 14.1 billion dollars of the commercial banks’ and Federal Reserve Banks’ portfolios were paid off. The money for these repayments came principally from the General Fund, a large part of which was on deposit in War Loan accounts at commercial banks. By the end of June, the General Fund had dropped to 3.3 billion, from 14.2 billion at the beginning of July 1946. The additional funds were provided by the net 2.4 billion withdrawal from the nonbanking public and by 1 Includes chiefly Treasury bills, certificates, notes, and bonds, but also relatively small amounts of Savings stamps, notes, and bonds, Postal Savings notes and special issues to Postal Savings, depository bonds, National and Federal Reserve Bank notes, marketable guar anteed Government corporation debt held outside the Treasury, and demand notes redeemed by the International Monetary Fund. 2 Based on cash expenditures exclusive of the billion dollar payment to the International Monetary Fund which was made with funds obtained from the Stabilization Fund. 3 Includes nonbank holdings of retired Treasury certificates, notes, and bonds; net changes in Savings stamps, notes, and bonds; and redemptions of demand notes held by the International Monetary Fund, less market sales by Postal Savings. 80 MONTHLY REVIEW, AUGUST 1947 over 800 million from the Stabilization Fund. Retirement of 1946, despite the lower rates on 1946 calendar year income, but they were not high enough to offset a falling off in excess the debt held by the Reserve Banks tended to restrain further credit expansion, as it deprived commercial banks of part of profits tax receipts, which for all practical purposes had been their reserves and forced them to take action to restore their reserves to the required amounts. however, more than offset the 1.6 billion decline in income The preceding discussion centers around debt retirement collected by the end of last December. and profits taxes. Increases elsewhere, Employment tax receipts rose, reflecting and the cash surplus. The difference between the cash surplus and the budgetary surplus is largely a matter of accounting. higher wage payments, while miscellaneous internal revenue In keeping a record of its operations the Treasury groups them under three main headings: first, "budgetary” receipts and were 50 per cent higher owing to larger sales. Miscellaneous increased as manufacturers’ payments of excise tax collections receipts jumped as surplus property sales soared, but they expenditures, which are covered by Congressional appropria included a larger amount of noncash earnings and transfers. tions; second, operations of trust accounts, which are semi- As a result, the "budgetary” cash receipts at 42.4 billion dollars autonomous, partly self-supporting agencies; and third, changes in the public debt, which generally reflect deficiencies or receipts were lower for both noncash and cash items, mainly surpluses in the two preceding accounts combined. "Budgetary” figures for recent years have included a small amount of noncash receipts and larger amounts of noncash were half a billion lower than in fiscal 1946. Trust account because of the shrinkage in the National Service Life Insurance Fund and in miscellaneous trust funds. Total cash receipts thus amounted to 46.3 billion. The latter items requiring no immedate cash The 23 billion decline in total Treasury expenditures reflects payments from or to the public cover transactions such as the drastic reduction in military costs. Partly offsetting the accrued interest on Savings bonds, Treasury payments to the drop were increased spendings for veterans, including terminal trust accounts, and issuance of terminal leave bonds. The trust accounts, on the other hand, in addition to noncash receipts from the Treasury, receive deposits from State unemployment leave payments, larger drawings against the British credit, part of the large noncash subscriptions to the Bretton Woods international organizations, and higher payments for such expenditures. trust funds and the Railroad Retirement Board, and also cash peacetime activities as social security, public works, and aid premiums from veterans. They invest some of these funds in Government securities, but also disburse cash benefits, make to agriculture. Cash expenditures alone, including the one billion paid out of the Stabilization Fund to the International refunds, and meet cash withdrawals by State trust accounts.4 Monetary Fund, amounted to 38.9 billion dollars, compared with budgetary expenditures of 42.5 billion. In order to estimate the impact of current Treasury opera tions on the private economy, it is necessary to adjust the figures (including "budgetary” and trust account transactions) to a cash basis. In such an analysis, transactions in both accounts are combined and the noncash expenditures, which are, in effect, accruals to be paid to the public in cash at a later date, are eliminated. Also removed is a small amount of receipts from Government agencies which are offset by equivalent expenditures. The contrast between the cash flow through the Treasury and Maintenance of the high volume of Federal cash receipts depends on a continuation of a high level of business activity and on the maintenance of tax rates at about the current levels. With the General Fund amounting to only 3.3 billion on June 30, further reduction of the debt held by the public will be possible only to the extent that cash income of the Government continues to exceed cash expenditures. Total debt, however, will be reduced by a smaller amount, as investments by trust funds in special issues will continue. the budget figures was especially marked during the past year. When the Treasury closed its budget accounts, surplus receipts amounted to 754 million. On a cash basis, however, the "budgetary” accounts netted close to 6.7 billion and the trust accounts 1.7 billion, giving a cash surplus of 8.4 billion. This cash surplus, which was in marked contrast to a cash deficit of nearly 18 billion in fiscal 1946, arose as a result of a continued high level of receipts and a sharp drop in expendi tures. Receipts from withholding taxes were almost the same as in 1946. Corporate tax revenue (other than excess profits taxes) and individual income taxes were higher than in fiscal T R A N S F E R A B IL IT Y OF STERLIN G On July 15, 1947, in keeping with commitments undertaken by the British Government under the terms of the AngloAmerican Financial Agreement which had become effective a year earlier, sterling accruing to foreign countries as a result of current transactions formally became freely transferable for purposes of current expenditures in any monetary area of the world.1 On that date, moreover, the British Government 1 The' term "current” , for purposes of this commitment, refers to all payments in connection with trade and service transactions, interest 4 For a more detailed analysis of trust account activities, see "Finan and dividend payments, moderate payments for amortization of loans and for depreciation of direct investments, and moderate remittances cial Operations of Federal Trust Funds,” Monthly Review, August for family living expenses. 1946. FEDERAL RESERVE BANK OF NEW YORK became obligated to permit free transferability thereafter of any previously accumulated foreign-owned sterling balances that might be released for use by the owners. The assumption of these obligations has the effect of removing certain restric 81 Czechoslovakia, Finland, Egypt and Anglo-Egyptian Sudan2, Ethiopia, Iran, Uruguay, and Sweden. Sterling arising out of current transactions between the countries concerned and the sterling area can be credited to these accounts, and sterling tive and discriminatory features of Britain’s wartime financial in these accounts can be transferred freely to any other trans arrangements, and, given that country’s strategic position in ferable account, to American accounts, to accounts of residents world trade and finance, should significantly contribute to the in the sterling area, and under special conditions to accounts restoration of a multilateral world trading system. Misgivings held by residents of territories which have no transferable have been expressed in some quarters, however, to the effect accounts. Transfers can also be made in the reverse direction. that these commitments will impose serious burdens upon Britain’s already weakened balance-of-payments position. Although multilateral transferability (or convertibility) of An essential feature of this new exchange machinery is that the countries holding transferable accounts agree to accept sterling in payment from other countries; the sterling can current sterling did not have to come into full effect until always be ultimately converted, in effect, into dollars by July 15, 1947, it had for some time already been an established transfer to an American account. fact over a relatively wide area. As far back as July 1945, for then, sterling acquired by foreign countries as a result of cur example, the British had set up a system of so-called American rent transactions can, in keeping with the commitment of the accounts in British banks on behalf of residents of the United Anglo-American Financial Agreement, be freely transferred States and its dependencies, and of the Philippine Islands, for current expenditures in any currency area of the world. Under these arrangements, Colombia, Costa Rica, Cuba, the Dominican Republic, Ecuador, These arrangements, it might be noted, should tend to El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, strengthen the position of sterling as an international currency Panama, and Venezuela. by widening its use in multilateral settlements, and should Sterling could be credited to any of these accounts as a result of current transactions by the thereby increase the willingness of foreign countries to hold countries concerned with the sterling area; and such sterling working balances in London. could be freely transferred to any other American account in for transferable accounts the monetary authorities of the the group and to accounts of residents in the sterling area, or countries concerned agreed to supervise their respective could be freely converted into dollars. On July 15, 1947 Bolivia, Chile, and Peru were added to the list of countries In the agreements providing accounts so as to insure that transfers would be made only in respect of current, and not capital, transactions. Although by July 15, 1947 sterling transferability had, in for which American accounts are operated. For many years before July 15, 1947, moreover, sterling general, become an established fact, it had proved impossible area countries were able to utilize their sterling acquisitions by that date, because of a variety of technical reasons, to con freely for expenditures anywhere within that area or for clude formal arrangements providing for transferability in the current transactions in countries with which Britain had case of fourteen specific countries. bilateral special account arrangements, i.e., in countries which had agreed to accumulate sterling balances. Theoretically, United States, the July 15 deadline was extended in these cases until September 15, 1947. The countries concerned are: Austria, Bulgaria, China, Denmark, France, Greece, Hungary, sterling area countries were also free to convert their sterling With the consent of the into dollars or other hard currencies to meet any net current requirements in such currencies, but in actual practice these Paraguay, Poland, Rumania, Siam, Soviet Union, Turkey, and countries cooperated to keep their net demands for hard cur however, relieve Britain of the obligation freely to permit transfer, once the arrangements are concluded, of any sterling rencies to a minimum by restrictive import licensing; they also sold to the British authorities any hard currency surpluses which they might have acquired. In anticipation of the July 15 deadline on which sterling was to become generally convertible, the British Government as early as October 1946 began to make the necessary arrange ments with countries for which no transferability privileges as yet existed. These arrangements have taken the form of the establishment on behalf of the monetary authorities of these countries of so-called transferable accounts. By July 15 such accounts had been set up in the case of Argentina, Canada and Newfoundland, the Belgian, Dutch and Portuguese monetary areas, Italy and the Vatican City, Brazil, Norway, Spain, Yugoslavia. The postponement of the deadline does not, currently acquired by these countries between July 15 and September 15. It might also be noted that Switzerland has, by its own choice, remained outside the scope of these arrange ments. According to an agreement in March 1946, however, the Swiss had consented to accumulate sterling up to £15 million, beyond which payment was to be made in gold. It was noted above that on July 15,1947, the United Kingdom became obligated to permit free transferability thereafter with regard to any previously accumulated foreign sterling balances that might be released. These accumulated balances, in view 2 area. Effective July 14, 1947, these two countries had left the sterling 82 MONTHLY REVIEW, AUGUST 1947 of their sheer magnitude (amounting to about £3.5 billion), obviously cannot be made fully transferable at once, and the been made, presumably because it is understood that these countries will continue to exercise the same restraint they Anglo-American Financial Agreement merely commits the have shown in the past with regard to the utilization of their accumulated balances. British Government to make agreements with the countries concerned for an "early” settlement covering these balances. While the establishment of multilateral transferability of In the main, to the extent that the balances are not scaled current sterling constitutes an important factor in the eventual down, they will undoubtedly have to be paid off in instalments restoration of nondiscriminatory world trade, some fears have over a period of years. In view of the opposition of many been expressed that the action may have been premature and of the leading creditors, notably India and Egypt, to the sugges that a substantial addition to the present rapid rate of drain tion of a scaling down of their balances3, the negotiation of on Britain’s gold and dollar reserves would thereby result at definitive settlements is likely to prove difficult and protracted. a time when it could hardly be countenanced. Although it is Any sterling released under the terms of these settlements, obviously impossible, among other things because of inability whether in the near future or at a later date, however, must to project Britain’s over-all balance-of-payments pattern and be freely transferable for current expenditures in any currency area. its geographical distribution, to estimate what the prospective Although no deadline was specified for the conclusion of settlements regarding accumulated sterling balances, it was that the additional drain in the crucial months immediately nevertheless necessary for the British authorities, pending the negotiation of final settlements, to draw a sharp line of demar cation by July 15, 1947 between accumulated balances and those which foreigners might currently acquire thereafter. For if the former continued to be freely available for expendi ture within the sterling area, there was the danger that the various foreign creditors would utilize them to finance their gross expenditures in Britain and would demand transferability privileges for their gross current sterling receipts. This would have greatly increased Britain’s potential dollar drain as a result of the transferability commitments. From Britain’s point of view it was essential that only the net surpluses of sterling dollar costs of transferability will be, it is generally believed ahead will not be very great. For one thing, Britain’s major individual balance-of-payments deficits are being currently in curred with hard-currency countries, notably the United States and Canada, and these deficits are already being paid for largely out of the proceeds of American and Canadian credits. The new transferability arrangements should not add, there fore, to the dollar drain resulting from the deficits with these countries.4 Other individual net deficits are now being in curred with only a relatively few countries, notably Australia, New Zealand, and the British colonies, and on a relatively small scale; these countries, as a gesture of help to Britain, will probably be willing, for a while at least, to keep to a minimum their requests for transfer of their current sterling acquired by foreign countries from current transactions should acquisitions. The fact that sterling, under the present exchange be freely transferable. machinery, is now being used over a wide area for multilateral settlements, moreover, should tend to strengthen the demand for sterling and may thereby to some extent enable Britain to pay in sterling for supplies which had previously cost her dollars. Even in the absence of any transferability commitment under the Anglo-American Financial Agreement, it may be questioned how long Britain would in any case have been able to postpone the multilateral transferability of currently In order to insure this result, it would have been necessary to make arrangements whereby accumulated sterling balances, except for such amounts as might periodically be released (and made freely transferable), would be completely blocked after July 15. In a few cases, notably Egypt, formal arrange ments providing for the maintenance of minimum balances and partial releases were actually made before that date, but the Egyptian arrangement was only of a provisional character earned sterling in view of the growing reluctance of many pending the negotiation of a definitive settlement. In the case countries to sell goods to Britain for untransferable currency. of India, by far the largest holder of sterling balances, no such arrangement, even of an interim character, has as yet been negotiated. Where the accumulated balances were small, the British Government took no steps to freeze them by July 15, and in some of these cases the balances were, at least in part, made freely available for transfer anywhere. In other 4 The drain on the American relative to the Canadian credit will tend, however, to be increased to the extent that Canada acquires transferable account sterling and converts it into American dollars. WORLD DISTRIBUTION OF GOLD AND DOLLAR ASSETS cases, notably with regard to the British Dominions and There has been much discussion as to the existence or threat colonies, which hold a substantial fraction of the balances, no of a world shortage of dollars, or of assets easily convertible blocking arrangements, formal or otherwise, appear to have into dollars, which could be used for the payment of the enormous volume of goods and services which foreign countries 3 Two of the creditors, however, namely Australia and New Zealand, are buying in the United States. This question is intimately have voluntarily “ scaled down” their balances by gifts of £20 million and £10 million, respectively. linked with that of the volume of foreign lending which the 83 FEDERAL RESERVE BANK OF NEW YORK United States Government, as well as private investors, may be called upon to do in the near future. Of basic importance, how ever, are the size and distribution of the gold and dollar assets of foreign countries and the extent to which foreign countries, by using such assets, may be able to meet their needs for the now amount to 2.5 billion dollars and are about 1 billion higher than before the war. This increase is largely due to the accumulation of gold by Switzerland and to a small extent by Portugal and Spain. Sweden, the remaining European "neutral,” which in August 1945 possessed almost 700 million presents and analyzes the known facts concerning the world dollars of gold and dollar balances and maintained this reserve practically unchanged until after the revaluation of the Swedish distribution of gold and short term dollar assets and the krona in July 1946, lost some 250 million dollars of its reserves changes which have taken place in this respect since 1939. between August 1946 and March 1947. goods and services which this country can supply. This article The gold and short term dollar assets now available to for No British figures are available later than December 1946, eign countries as a whole ( excluding the U.S.S.R.) 1 amount to at which time official gold and dollar balances amounted to some 18 billion dollars. About two thirds of this consists of gold held by governments and central banks. The rest is made 2.6 billion dollars. In August 1939, they had amounted to 2.1 billion dollars. However, British private dollar holdings are up of balances held in foreign official and private accounts with believed to be lower now than before the war. American banks, and of foreigners* holdings of short term Latin America, which during the war increased its gold and dollar securities. The present total of 18 billion dollars com pares with 14 billion at the outbreak of the war and 20 billion dollars from 1.1 billion to 3.9 billion dollars, further expanded its holdings by some 300 million dollars in the first year after V-J Day, but used up 700 million dollars in the first at the end of hostilities in August 1945. In the first postwar year foreign countries’ drafts on their gold and dollar assets were approximately offset, in the aggregate, by new acquisi tions of gold from their own current production; in August 1946, a year after V-J Day, foreign gold reserves were if seven months of the second postwar year. Thus, on the whole, Foreign Gold and Short Term Dollar Assets U .S .D O L L A R S |sX<v4 G O LD anything somewhat higher that at the close of the war, and dollar balances and short term securities had declined by only 200 million dollars. In contrast, during the seven months of the second postwar year for which statistics are available, foreign countries not only utilized their current gold output, estimated at 700 million dollars a year, but also drew on their monetary gold stock to the probable extent of 800 million dollars ( apart from transfers of gold to the International Monetary Fund). In addition, they spent 1 billion dollars of their short term dollar holdings. The picture can be seen more clearly, however, if, instead of looking merely at the aggregate size of the foreign gold and dollar holdings, one considers the distribution of such holdings by areas. The liberated countries of Western Europe, which held 5.4 billion dollars of gold and dollar balances just before the war, and some 3.7 billion dollars in August 1945, had 3.2 billion left in August 1946 and only 2.5 billion in March 1947. In this Western European area, the official French gold and "hard” currency holdings were reduced from the equivalent of 2.6 billion dollars at the liberation to about 1 billion at the end of 1946. Dutch gold and dollars declined by one third, amounting last March to 400 million dollars. Belgium is the only country in the area whose reported gold and dollars were higher at the end of 1946 than at the time of liberation; they increased by 40 million to some 900 million dollars, largely because of the goods and services furnished to American troops in the final phase of the European war. In the "neutral” countries of Europe, gold and dollar holdings 1 Because of the absence of official Russian statistics in this field, it is not practicable to include the U.S.S.R. in the survey. * Belgium, Denmark, France, Netherlands, Norway. ** Portugal, Spain, Sweden, Switzerland. *** Australia, British Malaya, Egypt, India, New Zealand, Union of South Africa. t Canadian gold data not available. Source: Gold holdings are those of foreign governments and central banks, as computed by the Federal Reserve Bank of New York. Data for all foreign countries (excl. U. S. S. R.) are tentative. Dollar assets consist of short term official and private balances as published in the Federal Reserve Bulletin. Data for United Kingdom for Dec. 1944, 1945, and 1946 are from the white paper on national income. 84 MONTHLY REVIEW, AUGUST 1947 Latin American gold and dollar resources are still very large in comparison with the prewar years, but the shrinkage has privately hoarded outside the United States may amount to several billion dollars, but nothing can be said as to its dis been considerable in a number of countries in the area. tribution by countries. Argentina’s gold and dollar reserves declined from 1,411 million of no present use to the monetary authorities of the countries Moreover, gold held in this way is dollars at the end of September 1946 to less than 900 million where it is held. Hoarders who have already declined to turn dollars in June 1947; Brazil’s holdings from 613 million dollars in their gold to the authorities are unlikely to do so until in August 1946 to around 500 million dollars in February monetary and economic stability is restored in their respective 1947; and Mexico’s gold and dollar assets from 350 million dollars on V-J Day to about 200 million dollars at present. countries or until clear-cut and comprehensive plans for the restoration of such stability are being effectively carried out. Canadian gold and dollar resources, official and private, which amounted to only 400 million dollars in December 1938, the reported holdings of gold and dollars is actually available It is necessary also to keep in mind that only a portion of increased to 1,883 million dollars at the end of 1945, but for meeting balance of payment deficits. they declined last year to 1,475 million dollars at the year end sents legal currency reserves which foreign central banks are and subsequently are reported to have been reduced further, although more recent figures of gold holdings have not yet customary practice. A large part repre required to maintain under existing monetary legislation or While the legal reserve requirements been made public. The resources of the leading sterling-area (where they have not already been suspended or substantially countries (excluding the United Kingdom) increased from reduced) could of course be altered, it may be doubted whether some 600 million dollars in August 1939 to 1.4 billion in in the present circumstances such a procedure would be con March 1947, owing primarly to the accumulation of gold by ducive to restoration of confidence and to orderly reconstruc the South African Union. To sum up: foreign gold and dollar balances in the aggre gate are still considerably higher than they were in 1939, but the over-all increase covers widely divergent changes in the tion. Secondly, more than half of the 5 billion dollars of American balances and short term securities held by foreigners are owned privately, and their utilization therefore depends on distribution by areas. Liberated Western Europe, which had the willingness of the foreign owners to repatriate these funds or on the ability of foreign governments to requisition them 5.4 billion dollars in August 1939, had only 2.5 billion dollars left in March 1947. On the other hand, the gold and dollar under their exchange control powers. In any event, a sizable part of the dollar funds of the foreign countries are working holdings of “neutral” Europe, which amounted to 1.5 billion balances that have to be kept above a certain minimum in dollars in August 1939, are at present 1 billion dollars higher. order to insure an uninterrupted flow of international trade. The United Kingdom’s gold and official dollar holdings, Owing to the rise in the American price level, these minimum which were about 2.1 billion dollars in August 1939 had risen working balances tend to be higher than before the war. to 2.6 billion dollars at the end of 1946, but this increase in official holdings may have been partly offset by some decline in British private dollar holdings. The gold and dollar assets There are various reasons for the rapid exhaustion of some foreign countries’ gold and dollars. In Latin America the flow of imports suddenly increased in 1946, partly because of a large backlog of demand for American consumption goods, partly as a result of high levels of employment and income, and partly because of loose handling of exchange controls. In Argentina the depletion of the gold and dollar reserves was largely due to the repatriation of the Argentine debt from the of Latin America were at 3.5 billion dollars in March 1947, compared to 1.1 billion dollars in August 1939, but some countries were rapidly depleting their holdings; and those of the principal sterling area countries (excluding the United Kingdom), which were at 0.6 billion dollars at the outbreak of the war, had risen to 1.4 billion dollars in March 1947. United States. There has been no over-all decline in Latin Canada, which had only some 400 million dollars in Decem American exports. ber 1938, had nearly 1.5 billion dollars in December 1946, The rapid rate of utilization of gold and dollar resources but undoubtedly has considerably less than that amount now. held by liberated Europe is the result of three factors: the post In judging the significance of the wartime and postwar war rise in American prices, a succession of natural disasters changes in foreign gold and dollar holdings, several facts since the war, and the slowness of European recovery. The must be kept in mind. First, it must be noted that these are impact of the substantial rise in American prices has been only the changes in the official gold monetary stocks and particularly detrimental to Europe because the latter currently official and private dollar balances; they take no account of depends on imports of food and other essential products from the quantities of gold which have been hoarded by the public America. Last year’s crop failures in many Continental coun in many countries. While it is impossible to give an accurate tries and the exceptionally severe winter, which not only figure for gold hoarded abroad before the war and now, it is delayed spring planting and adversely affected this year’s agri known that a very substantial increase in hoarding has cultural output but also interrupted the regular supply of coal occurred since 1939. and retarded industrial production, aggravated Europe’s balance There is reason to believe that gold 85 FEDERAL RESERVE BANK OF NEW YORK A large part of the 167 per cent by which the value of gross national product during the first half of 1947 exceeds of payments position by increasing the import requirements and by retarding exports. But the crucial problem is the slow ness with which Europe is achieving the degree of recovery which would enable it to increase the domestic production of goods that now have to be imported, as well as of export goods the 1935-39 average represents price increases. Indexes of physical production, however, show considerable increases over the same base period. During the first half of this year indus the sale of which would contribute to the payment of essential trial production fluctuated around a level 87 per cent above imports. the 1935-39 average, whereas farm marketings were nearly 60 per cent larger. GROSS N A T IO N A L PR ODU CT REACHES NEW PEAK In his Midyear Economic Report transmitted to the Con gress on July 21, the President estimated that during the first half of the current year the value of this country’s output of goods and services had exceeded the wartime peak reached two years earlier. It appears that the expansion of the physical volume of production, which began after the reconversion decline had reached its lowest point during the first quarter of 1946, has about reached the limits of available manpower and of other resources. In general, the small gains in value of total output registered during the last six months or so reflect price increases more than gains in physical volume. While during the first half of 1947 gross national product, estimated at a seasonally adjusted annual rate of 225 billion dollars, exceeded the wartime peak reached in the first quarter of 1945, its composition has changed in a way which indicates the full extent of the reconversion of our economy from total war effort to high levels of peacetime output. Whereas during the first quarter of 1945 goods and services available to con sumers amounted to only little more than half of the total gross national product, during the first half of 1947 they amounted to over two thirds. Conversely, Federal Govern ment expenditures for goods and services declined during the same period to less than one fifth of their peak volume. During the first half of this year the total government ( includ With unemployment at a level close to its irreducible mini ing State and local) share declined to an annual rate of 27.5 mum, any further increase in physical output would have to billion compared with a peak rate of 100 billion dollars (first come mainly from increased productivity. quarter of 1945). Most of this decline was achieved in the The discussion which follows is based on the revised estimates of national product and income of the Department of Commerce which have just been released. The new esti short period of a year. about half of the resources set free by the reduction in Federal mates of gross national product (the market value of all goods and services produced) include the imputed rental value The gradual but continuous expansion of the outlay of indi of owner-occupied dwellings. This and other, less important, vidual consumers for goods and services to a level more than Investment and consumers’ expenditures have each absorbed (mainly war) expenditures since the first quarter of 1945. changes have resulted in an increase in the estimates of personal one-third above the first quarter of 1945 has been justly consumption expenditures, compared with the old estimates. regarded as one of the major factors which made the transition The valuation of the government contribution to the gross from war to a fully employed peacetime economy unexpectedly national product (G N P ) has undergone more radical changes, which have resulted in a considerable increase in the valuation of war expenditures, partly offset by a reduction in nonwar expenditures. The value placed on the services of members of smooth and successful. Many reasons have been cited to explain this achievement, including the rapid rate of demobili zation, the considerable backlogs of demand for various types of goods, and large purchases by veterans. The other important factor which has been contributing to the maintenance of a high level of production and employ ment has been the rapid expansion of both domestic and foreign investment. During the first quarter of 1945 we were still, on balance, drawing on our inventories and receiving the armed forces has been increased to include, in addition to pay, the value of food and clothing furnished and also payments to dependents. On the other hand, interest payments on the public debt, previously included with nonwar expenditures, are now considered to be transfer payments and not part of GNP. The net result of these and of other less sweeping changes in concepts and of numerous statistical revisions was to increase more goods and services from abroad than we were able to supply to the rest of the world on a commercial basis (i.e., GNP particularly during the war years (by nearly 7 per cent excluding lend-lease). in 1944 and 1945). The current revisions considerably increase the usefulness New private construction was still close to the lowest level reached during the preceding two years. Expenditures for producers’ equipment were the only of the official national product and income statistics, which form of private investment that had been growing, after have become an indispensable tool in much business planning. having reached a low point at the beginning of 1943. Moreover, the new concepts adopted will make these estimates investment (domestic and foreign) during the first quarter of Total more easily comparable with those of other countries, in par 1945 still amounted to less than two per cent of total gross ticular Great Britain and Canada. national output. During the first half of 1947, however, close 86 MONTHLY REVIEW, AUGUST 1947 Main Components of Gross National Product (Seasonally adjusted annual rates, in billions of dollars) First quarter 1945 Personal consumption expenditures....................... Gross private domestic investment........................ New construction............................................... Producers' durable equipment........................... Changes in business inventories........................ Net foreign investment........................................... Government purchases of goods and services......... Gross national product............................................ 1946 of 1947 our net foreign investment ran at the annual rate of 10 billion dollars, nearly double the rate achieved in the First half 1947 118.2 5.5 134.3 18.6 158.0 29.5 2. 4 7 .2 9.1 2.S 9 .8 17.0 2 .7 100.0 3.3 35.4 10.0 27.5 221.8 191.7 225.0 5 .9 — 2 .8 — 2.0 Details do not necessarily add to totals because of rounding. Disinvestment i s indicated by negative signs. Source: U. S. Department of Commerce for 1945 and 1946; Midyear Economic Report of the President for 1947 (preliminary). preceding quarter, while the rate of gross private domestic investment showed a small decline. This drop was due entirely to a considerable slackening in the rate of inventory accumu lation. All other major components of domestic investment continued to expand during the first half of this year. The question is frequently asked whether the present high level of private investment can be maintained in the imme diate future. In a dynamic economy it is not likely that the services. current pattern of investment will be maintained for any length of time. Some of its components are likely to decline, others to increase. The crucial point is whether total invest ment, domestic and foreign, will add up to a total sufficiently large to support the present high level of consumers’ expendi tures and of total gross national product. The various types of investment expenditures are the critical factors responsible for the present high level of economic activity, since they support activities that produce Among the components of private capital formation, inven tory accumulation may soon cease altogether to absorb addi tional resources; but it has played only a relatively minor to one fifth of our resources were directed toward various forms of investment, including net exports of goods and goods and services which are not consumed immediately (at role in the last few months. least not in this country). Income payments to all individuals Commerce estimates, inventories remained practically un changed during May (the latest month for which data are available), thus halting the expansion which had started after V-J Day. There are few signs to indicate that producers’ engaged in the production of such goods are available for expenditure in other segments of the national economy and thus increase the demand for consumers’ goods and services. Businessmen, economic analysts, and Government officials have come to pay particular attention to relative changes in these sustaining factors, since it is generally believed that a decline in aggregate expenditures for these categories would be followed by an even sharper drop in total gross national product because of the accompanying effect on consumer incomes and the demand for consumers’ goods and services. Changes in the individual components of investment (seasonally adjusted annual rates) between the first quarter of 1945 and the first half of this year are summarized in the table above. The table also includes the first quarter of 1946, in which quarter GNP reached its reconversion low point. From the first quarter of 1945 to the first half of 1947 total capital formation (domestic and foreign) increased from According to Department of expenditures for business equipment are likely to decline materially from present high levels in the near future, although a shift in their distribution among the various industries may be expected. The joint estimates of the Department of Com merce and of the S.E.C. place anticipated expenditures for new plant and equipment by all industrial groups for the third quarter of the current year at 3.8 billion dollars, an amount greater than the anticipated expenditures for the second quar ter and 0.6 billion more than was actually spent during the first quarter. Increases in investment in pro The greatest potential expansion in private investment is in the field of residential and commercial construction. Because of high costs construction activity has leveled off, although demand for all types of building has never been more pressing. As the physical limitations which have inter ducers’ durable equipment and in net exports of goods and fered with efficient building operations during the first post services account for more than 10 billion dollars each; con war years are now for the most part overcome, any considerable 3.5 to 39.5 billion dollars. struction, including residential construction, and increases in increase in construction activity hinges on a downward business inventories also accounted for sizable amounts. The adjustment of costs. expansion in these last two categories, however, took place becoming available to start the long delayed school, hospital, Building materials are increasingly mainly during the first year and a half following V-E Day. and public road construction programs and to reduce the The share of construction and of additions to inventories in considerable backlog of deferred maintenance, and any decline total investment has been decreasing since the fourth quarter in private construction may be at least partly offset by an of 1946. increase in Government construction. Net foreign investment, accruing as the balance The large volume of from “current account” transactions with foreign countries, State and municipal issues which was earmarked during the has increased rapidly since the third quarter of 1945, as unilat first half of 1947 for housing, highway, and irrigation projects eral Government transfers (such as lend-lease and UN R R A ) points in this direction. were replaced by commercial exports. During the first half The greatest uncertainty which exists with respect to the 87 FEDERAL RESERVE BANK OF NEW YORK trend of investment lies in the size of our net export surplus, which normally represents only a minor component of total investment. In view of the desperate need for food and industrial goods in many parts of the world, a drastic drop in our net export balance would have serious implications concerning economic and political conditions in many coun tries. The critical problem is how continued net exports close to their present size can be financed. Nevertheless, it is likely that in the immediate future net exports at high levels will be supported by a combination of several sources of financing. D E P A R T M E N T STORE T R AD E The dollar volume of department store sales in the Second Federal Reserve District during July is estimated to have been 10 per cent larger than during the same month of last year, causing the seasonally adjusted index of sales to rise for the fifth consecutive month. Again clearances of seasonal merchandise were an important factor causing sales to rise. In addition merchants have resumed the prewar practice of promoting furniture sales in midsummer. The pressure of the high cost of living has caused consumers increasingly to patronize basement stores. The charts shown below present a comparison of basement store sales with those in comparable main store departments for the period 1940 to date.1 During the first year of the war, basement store sales as a whole increased more rapidly than main store sales, but in 1943 they declined while main store sales continued to increase. Basement stores were particularly affected in 1943 1 Indexes of department store sales and stocks for departmental groups in the basement, monthly from 1940 to date, together with supplemental tabulations of: (1 ) annual rate of stock turnover; ( 2) annual receipts of merchandise; ( 3) distribution by departmental groups of sales and stocks; and (4 ) estimated dollar volume of sales and stocks in the base period may be obtained upon request from the Research Department, Federal Reserve Bank of New York. Department Store Sales and Stocks for Departmental Groups in Main Store and in Basement, Second Federal Reserve District* Percentage distribution of 1946 sales# Ratio of June stocks to sales\ Percentage change, 1946-47 Departm ental groupf Main store Total ^ Main store................................... 100.0 Basement.................................... Women’s coats and suits 6.1 Main store................................... Basement.................................... Women’s dresses 5.6 Main store................................... Basem ent..................................... O ther w en’s w om ear Main store................................... 9.5 Basement.................................... Women’s accessories Main store................................... 13.6 Basement.................................... Men’s w ear Main store................................... 9.0 Basement.................................... Men’s and w en’s shoes om Main store................................... 3.6 Basement.................................... Blankets, linens, sheets, tow els 5.2 Main store................................... Basement.................................... Hom efurnishings Main store................................... 25.2 Basement.................................... Base m ent June June 30 sales stocks 1941 1946 1947 100.0 + 2 +16 + 7 — 6 3.0 2.1 2.5 2.2 2.5 1.8 9.4 + 5 +11 —32 —40 4.8 2.7 4.2 2.9 2.7 1.6 9.1 —6 +10 — 7 + 1 0.9 0.6 1.0 0.8 1.0 0.8 17.8 —2 + 1 —25 —16 1.7 1.5 2.4 2.4 1.8 2.0 17.6 — 1 + 6 —7 —12 2.3 1.6 2.0 1.8 1.9 1.5 14.5 +10 +47 +34 —3 3.2 2.2 1.9 2.3 2.3 1.5 7.2 + 2 +25 +38 +15 3.7 2.4 2.1 2.7 2.9 2.5 7.0 + 7 +25 +32 +15 3.8 2.8 2.3 2.6 2.9 2.4 13.2 + 5 + 8 +24 + 1 3.9 2.8 2.9 2.7 3.4 2.6 * June 1947 prelim inary. , . , , , t Data for w en’s apparel include m om isses’ and juniors’; m en’s w includes boys . ear # Fiscal year ended January 31,1947. Total m store and basem figures include depart ain ent m ents not show separately. n t Num of m ber onths’ supply at the June rate of sales. by rationing and the growth of the armed forces, since a larger proportion of their total receipts than in the case of main stores is derived from the sale of shoes and mens clothing. Moreover, main store sales were less affected by these factors because good quality shoes were in greater demand than cheaper lines and because the decline in sales of civilian clothing in the main store was somewhat offset by sales of service uniforms and accessories. Indexes of Department Store Sales for Departmental Groups in Main Store and in Basement, Second Federal Reserve District* (1940 averages= 1 0 0 per cent) • M A IN PER C E N T 35 Or STORE — — W EN S DRESSES OM ’ W EN S COATS & SUITS OM ’ 300 s W EN’S ACCESSORIES OM ✓ / ✓j ✓ 250 BASEMENT OTHER W EN W OM ’S EAR s 2 00 * 150 100 50 ^ 1 1 1 1 1 1 1 ! ! 1 1 1 1 1 _ ...1 1 J ...... ...„L .....I_.... J _____ ... 1 1 ! .1 1 1 MONTHLY REVIEW, AUGUST 1947 88 The imposition of higher luxury taxes on April 1, 1944 stimulated main store sales of accessories and fur coats in the latter part of 1943, as customers bought ahead to "beat the tax". Consequently, in 1944 fur coat sales declined, offset ting a rise in sales of cloth coats and suits, whereas basement sales of coats and suits were little affected by the tax, and showed a sharp gain. In 1944 and the first half of 1945, basement store sales as a whole increased at a slightly faster rate than main store sales, but thereafter, through the first half of 1946, the rate of increase of basement store sales again trailed the gains made by the main store. Price controls had increasingly caused materials and labor to be diverted into the production of higher priced goods with the result that many kinds of low cost, staple merchandise formerly sold in basement stores virtu ally disappeared from the market. The acute shortage of cotton textiles affected the basement store more than the upstairs store. Clothing, blankets, linens, sheets, and towels contribute more to total sales in the basement store, and more of the merchandise in these departments is made of cotton than in the upstairs store. Basement store departments of such cotton products as mens work clothes, housedresses, and uniforms are often not fully duplicated in the upstairs store. By the fall of 1946 the period of most acute shortages was over. The dollar volume of merchandise receipts by the basement stores increased about 40 per cent during the last 6 months of 1946 compared with the corresponding 1945 period, although after allowance for price increases the gain Department and Apparel Store Sales and Stocks, Second Federal Reserve District, Percentage Change from the Preceding Year would be somewhat less. Also, most of the Government surplus goods sold by department stores was handled in the down stairs departments. After July 1, 1946, increased purchases of consumer durables and rising food prices left a smaller propor tion of the consumers’ incomes available for the purchase of clothing and shoes, and encouraged shopping for bargains. Consequently, in the second half of 1946 basement store sales began to rise more rapidly than main store sales, the margin of difference widening in 1947. In department stores that operate basement stores the proportion of basement store sales was 18 per cent of total sales for the first half of this year, compared with 16 per cent in the same period of 1946. The seasonally adjusted index of department store stocks at the end of June was the lowest since October 1946 and the dollar value of stocks was only 8 per cent greater than a year earlier. Since department store prices have risen con siderably more than 8 per cent in the past year, it is evident that either substantial mark-downs have been taken, or there have been shifts to lower priced lines, or the physical volume of stocks is below year-ago levels. Actually reductions in both price and volume have occurred in differing degrees in many individual departments, while in some other departments (e.g., major appliances), both price and quantity of stock on hand have increased. The June ratio of stocks to sales, at 2.4, was about the same as in 1946 and in 1941. Outstanding orders of Second District stores rose about 30 per cent from May 31 to June 30. The major part of this increase was seasonal, but trade sources indicate that many orders normally placed in May had been held over until June in the hope of obtaining better values from suppliers. Indexes of Business N et; sales Locality June 1947 Department stores, Second District---- + 5 Stocks on Jan. through hand June 1947 June 30, 1947 + 9 + 8 New York City................................... Northern New Jersey......................... Newark............................................ Westchester County........................... Fairfield County................................. Bridgeport....................................... Lower Hudson River Valley.............. Poughkeepsie................................... Upper Hudson River Valley.............. Albany............................................. Schenectady..................................... Central New York State.................... Mohawk River Valley.................... Utica............................................. Syracuse........................................... Northern New York State................. Southern New York State................. Binghamton..................................... Elmira.............................................. Western New York State................... Buffalo............................................. Niagara Falls................................... Rochester......................................... + 4 — 1 — 4 +12 + 3 + 2 +12 +11 + 9 + 9 + 6 + 9 + 12 +14 + 8 +30 + 3 + 1 + 1 +10 +13 + 3 + 5 + 8 + 6 + 4 +11 +10 +10 +15 +10 +11 +11 + 9 +13 +10 +10 +15 +21 +14 + 9 +14 +11 +10 +11 + 12 + 6 — 2 — 2 +11 + 9 + 7 +15 +13 +14 +15 + 13 +14 +14 + 6 +14 Apparel stores (chiefly New York City). — 9 — 4 + 3 +28 +24 +24 +20 +18 + 9 +24 1947 1946 Index Industrial production*, 1935-39 *= 100........ (.Board of Governors, Federal Reserve June April May June 170 187r 185 183p 195r 224 224 222p 195 197 20 lp 239 274 274p 142 153 151 151p 125 130 127 125p 263 311r 312p System) Electric power output*, 1935-39 — 100....... (Federal Reserve Bank of New York) Ton-miles of railway freight*, 1935-39 = 100 (Federal Reserve Bank of New York) Sales of all retail stores*, 1935-39 = 100....... (Department of Commerce) Factory employment United States, 1939 = 100......................... (Bureau of Labor Statistics) New York State, 1935-39 = 100............... (New York State Department of Labor) Factory payrolls United States, 1939 = 100........................ (Bureau of Labor Statistics) New York State, 1935-39 = 100............... 271 269 263 265p 160 171 173p 133 156 156 157p 86 75 82 88 80 88 88 88 (Department of Commerce) Composite index of wages and salaries*# 1939= 100.................................................. (Federal Reserve Bank of New York) Consumers’ prices, 1935-39= 100................ Indexes of Department Store Sales and Stocks Second Federal Reserve District (1935-39 average--100 per cent) 1946 (Bureau of Labor Statistics) Velocity of demand deposits*, 1935-39 = 100 (Federal Reserve Bank of New York) New York City.......................................... Outside New York City........................... 1947 Item June April May June Sales (average daily), unadjusted................ Sales (average daily), seasonally adjusted.. 221 243 223 235 237 253 231 254 Stocks, unadjusted........................................ Stocks, seasonally adjusted.......................... 192 199 233 230 224 221 206 215 270p 249 241 (New York State Department of Labor) Income payments*, 1935-39 = 100.............. * Adjusted for seasonal variation. p Preliminary. r Revised. # A special monthly release tabulating the complete set of 15 indexes of hourly and weekly earnings computed by this bank will be sent upon request. A gen eral discussion of the new indexes appeared in the November 1946 issue of this Review. Tabulations of the monthly indexes, 1938 to date, and descriution of component series, sources, and weights may be procured from the Research De partment, Federal Reserve Bank of New York. A mimeographed article dis cussing some of the technical problems involved is also available on request. FEDERAL RESERVE BANK OF NEW YORK MONTHLY REVIEW, AUGUST 1947 INDUSTRIAL PRODUCTION National Summary of Business Conditions (Summarized by the Board of Governors of the Federal Reserve System, July 30, 1947) production declined somewhat further in of July. INDUSTRIALtrade continued to show little change, after June and the early part changes. of retail allowance for seasonal Value Prices of commodities traded in the organized markets generally advanced and prices of coal and iron and steel were increased. In d u s t r ia l Pr o d u c t io n Federal Reserve index. Monthly figures; latest figure shown is for June. CONSTRUCTION CONTRACTS AWARDED Total output of manufactures and minerals, as measured by the Board’s seasonally adjusted index, which reached a postwar peak of 190 per cent of the 1935-39 average in March, had declined to 183 by June and a further reduction is indicated in July. Durable goods production continued to decline slightly in June, reflecting mainly further small reductions in demand for various metals and metal products and building materials. Auto mobile passenger car production, however, which has been limited by the available supply of steel sheets, increased in June. In July the rate of automobile production was reduced again, reflecting partly a temporary curtailment in supplies of steel. Production of steel was curtailed in the early part of July as a result partly of uncertainties surrounding the signing of a new wage contract in the bituminous coal industry, but at the end of July steel operations again were scheduled at a rate of 94 per cent of capacity. Contraction in nondurable goods production continued in June, reflecting chiefly earlier declines in domestic demands for these goods as well as some slackening in export demands. Further reductions in output in the textile industry accounted for most of the decline in June, but there were also decreases in activity in most other nondurable goods lines except meat packing, petroleum refining, and newsprint consumption. Production of minerals decreased somewhat in June as a decline in production of bituminous coal more than offset gains in output of anthracite and crude petroleum. Em p l o y m e n t Employment in most types of nonagricultural establishments continued to show little change in June, after allowance for seasonal changes. Further reductions in employment in the textile and rubber industries were offset by increased employment in automobile plants and in some nonmanufacturing lines. C o n s t r u c t io n F. W. Dodge Corporation data for 37 Eastern States. Nonresidential includes awards for buildings and public works and utilities. Monthly figures; latest shown are for June. CONSUMERS* PRICES Value of construction contracts awarded, as reported by the F. W . Dodge Corporation, declined 10 per cent from May to June, reflecting chiefly a further decrease in awards for most types of private construction. Awards for public construction, following increases in earlier months of the year, showed little change. New dwelling units started, according to preliminary estimates of the Bureau of Labor Statistics, continued to increase in June and amounted to 75,000 units as compared with 65,000 in June 1946. D is t r ib u t io n Department store sales in June and the first three weeks of July showed about the usual seasonal decline and were 6 per cent greater than in the same period last year. The Board’s seasonally adjusted index of sales was about 290 per cent of the 1935-39 average in May and June as compared with 270 during the first four months of the year. Value of sales at most other retail stores, after allowance for seasonal changes, has been slightly lower in recent months than during the first quarter of the year. Despite a marked expansion in grain shipments in June and the early part of July, total loadings of railroad revenue freight declined considerably, reflecting the temporary curtailment in coal shipments in this period and a further decline in shipments of manufactured goods. C o m m o d it y Prices Bureau of Labor Statistics* indexes. “All items” includes housefurnishings, fuel, and miscellaneous groups not shown separately. Midmonth figures; latest shown are for June. MEMBER BANK RESERVES AND RELATED ITEMS Prices of commodities traded in the organized markets generally advanced somewhat in June and the early part of July. Prices of coal, pig iron, and various steel products were also increased in this period. Wholesale prices of chemicals and some other products were reduced. Toward the end of the month prices of wheat and cotton declined considerably. Retail prices of foods increased somewhat in June and the consumers’ price index of the Bureau of Labor Statistics, at 157 per cent of the 1935-39 average, was slightly above the March peak. T r easu ry Fin a n c e a n d Ba n k Credit Wednesday figures; latest shown are for July 23. On July 2, the Federal Open Market Committee of the Federal Reserve System directed the Federal Reserve Banks to terminate the policy of buying all bills offered at the fixed rate of y$ per cent and to terminate the repurchase option privilege on Treasury bills; the new policy applied to bills issued on or after July 10. The average rates bid on the weekly bill offerings rose to .74 per cent for the issue of July 24. Additions to monetary gold stock during June and the first three weeks of July, together with a return flow of currency from circulation during July following a seasonal increase prior to July 4, resulted in a growth in member bank reserve balances. Required reserves increased, reflecting a further growth in deposits at member banks. Commercial and industrial loans at banks in leading cities outside New York increased somewhat between early June and mid-July, following a decline which had been in progress since early April. Real estate and consumer loans continued to increase. Government security holdings at banks in leading cities increased by over 600 million dollars between June 4 and July 16 with most of the additions at New York City banks.