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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.