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O f Credit and Business Conditions
V o l u m e 30







No. 8

During the past month the ebb and flow of funds in the
money market were not as pronounced as usual. In each of the
four weeks ended July 28, transactions tending to contract
member bank reserves and those increasing reserve funds
tended to offset each other to such an extent that the net effect
on reserve positions was comparatively small. Consequently,
week-to-week fluctuations in reserve balances were much nar­
rower than in many past months.
Reserve positions were subject during this period to mild
pressure from Treasury operations, which included the redemp­
tion with funds withdrawn from depositary banks of 400 mil­
lion dollars of Treasury bills held by the Federal Reserve
System, and the sale of more than one billion dollars of Series
F and G Savings bonds in a special offering (July 1-15) to in­
stitutional investors and banks holding savings deposits. The
pressure on bank reserves was heaviest, however, during the
early part of the month, when the holiday demand for currency
was at its peak. During subsequent weeks a substantial post­
holiday return flow of currency from circulation and the re­
sumption of Federal Reserve System purchases of Treasury
bonds in fairly sizable volume eased this pressure. Federal
Reserve credit, which was in relatively large demand in the
week ended July 7, was subsequently reduced as the banks
gained funds. Over the four weeks as a whole, Federal Reserve
holdings of Government securities declined moderately; pur­
chases of bonds and certificates were more than offset by re­
demptions and sales of Treasury bills.
One of the principal factors contributing to the smoothness of
money market adjustments during the past month was the close
balance which the Treasury maintained between its cash receipts
and disbursements. War Loan deposit withdrawals, amounting
to about \Vl billion dollars during the month, were limited
to the excess of current disbursements, including bill redemp­
tions, over "direct” Treasury receipts (receipts other than that
portion of withheld income taxes which is now credited to
War Loan accounts in depositary banks). Consequently, changes
in the Treasury’s balances with the Reserve Banks were not
substantial in any week except the first. Over the four weeks
ended July 28, Treasury expenditures exceeded receipts by a

small margin. However, since approximately 400 million dol­
lars of these disbursements were used to redeem maturing
Treasury bills held by the Federal Reserve System and thus
did not reach the money market, Treasury operations tended
to absorb a moderate amount of reserves.
Redemption of a portion o f the Treasury bill issue matur­
ing July 1 was effected largely out of funds held with the
Reserve Banks; thus Treasury operations were designed to add
as little as possible to the pressure on bank reserves resulting
from a 242 million dollar increase in currency in circulation
in the holiday week ended July 7. This increase over the Inde­
pendence Day week end was larger than that of a year previous
and, although there was a rapid return flow in subsequent
weeks, it appears that the volume of currency in circulation in
recent weeks has been running less than 300 million dollars
below the level of the corresponding period of 1947, whereas
for several weeks in the spring of this year, currency outstand­
ing had been more than 400 million dollars lower than a year
previous. The relative increase in currency outstanding may
reflect the effects o f higher wages, prices, and retail sales.
As a result of the drain on bank reserves during the first
week of the month, caused mainly by public demands for
currency, member bank demands on Federal Reserve credit
facilities were concentrated in that week. The banks’ needs for
funds were met in large part by the sale to the System of large
amounts of certificates of indebtedness and by a substantial
increase in borrowings from the Reserve Banks. A large part
of the certificate sales and of the new borrowing originated
among New York City institutions which were in need of
reserves to meet an outflow of funds from New York to other
parts of the country and to offset reserve deficiencies in the
early part of the week. In making up for such deficiencies,
central reserve New York City member banks acquired a siz­
able amount of excess reserves on July 7, which accounted for
more than two thirds of the temporary 280 million dollar
increase in excess reserves of all member banks during the
week. Inasmuch as the increase in Federal Reserve System cer­
tificate holdings during the first week in July was larger than
the decline in the holdings of the weekly reporting member



banks, it appears that some of the certificates absorbed by the
System in that period were sold by nonbank investors (and
the nonreporting banks), probably to obtain funds with which
to pay for subscriptions to F and G bonds.
In the three weeks ended July 28, the drain on member bank
reserves resulting from Treasury operations and other trans­
actions was alleviated by the return flow of currency, by sub­
stantial Federal Reserve purchases of Treasury bonds, largely
from nonbank investors, and by continued purchases on a much
smaller scale of Treasury certificates from commercial banks and
others. The commercial banks were thus provided with funds
which enabled them to pay off earlier borrowings from the
Reserve Banks and to acquire substantial amounts of outstand­
ing bills in the open market (supplied mostly by the Reserve
System). The banks were likewise enabled to acquire new
bills directly from the Treasury, thus reducing allotments to
the System of new issues in exchange for its holdings of
maturing bills. The reduction in the System’s holdings of
Treasury bills, through redemptions and sales, exceeded pur­
chases of Treasury bonds and certificates by about 320 million
Toward the close of the period for subscriptions to Series F
and G bonds, nonbank investors, particularly insurance com­
panies, made preparations to pay for the new securities on
July 15. To some limited extent this involved sales of their
longest-term restricted Treasury bonds. These offerings in­
creased in volume after the closing of the books of the special
sale of Savings bonds, as insurance companies continued to sell
Treasury bonds in order to buy new corporate and other
securities bearing higher rates of interest. As prices of the
longest-term restricted Treasury bonds had fallen to their
support levels toward the close of June, sales of these securities
were not accompanied by any further price changes. Shorterterm, restricted IVz per cent issues, which have a shorter time
to run before they become eligible for bank investment, re­
mained above their "pegs” until the closing days of the month,
when all but one issue fell to the support prices. Bank eligible
bonds were also offered by some insurance companies, but the
offerings were light and taken principally by out-of-town banks.
Prices receded, but in most cases remained above support levels.
The volume o f trading in these issues was small. Near the close
of the month, uncertainty in the Government market was in­
creased by discussion of possible further steps to discourage
credit expansion as an anti-inflationary measure.

G o v e r n m e n t Se c u r it y P o r t f o l io s
C o m m e r c ia l B a n k s

of the

Apparently the commercial banks have not participated to
any great extent in the recent selling of Treasury bonds. If the
trend of bond holdings of the weekly reporting member banks
reflects that of all commercial banks, little change in bank
holdings of Government bonds has taken place since the pre­
vious wave of liquidation was completed earlier in the year.

Amount, Average Maturity, and Average Coupon Rate of
Government Securities Held by Commercial
Banks, Dec. 1943-Apr. 1948*






* Public marketable securities at par values.
t Rate o f discount on Treasury bills and rate o f interest paid on face value
o f other securities.
Source: Treasury Bulletin. Average maturity and coupon rate computed
by Federal Reserve Bank o f New York.

Changes since the end of 1943, in the public marketable
bond and other marketable Government security holdings of
the commercial banks that report monthly to the Treasury
(comprising institutions owning 95 per cent of all commercial
bank-held Government obligations), are shown in the upper
panel of the accompanying chart. Government security hold­
ings of the commercial banks, particularly bonds, rose markedly
during the war years and in the early postwar period even
though, after the Third War Loan drive (which ended early
in October 1943), the Treasury strictly limited the amount
and types of public marketable securities available to the banks.
Despite these restrictions, the banks, through open market
purchases, added nearly 19 billion dollars net to their Govern­
ment bond portfolios between the end of 1943 and the end of
February 1946, compared with an increase of 10 billion for all
other types of Government marketable obligations. This was
a period, therefore, in which the commercial banks reached
out into the open market for the longer-term, higher yielding,
Government bonds. The banks also acquired large amounts of
certificates and other short-term securities just preceding and
during War Loan drives, but had to dispose of substantial
amounts of such securities in subsequent periods in order to
maintain their reserves at required levels. In addition, there
occurred some switching from short-term securities into bonds.
As a result of these extensive bond purchases, a general im­
pression arose that the average maturity of bank portfolios of
Government obligations had lengthened considerably. Actually,
in spite of the increase in the proportion of bonds held and
the substantial reduction of bank holdings of Treasury bills in


this period, there was no lengthening of the average maturity
of the Government security portfolios of the banks. On the
average, between the end of 1943 and the end of February
1946, marketable Government obligations held by the banks
had about four years to run, as shown in the lower panel of the
chart. Apparently market purchases of medium and longerterm bank eligible Treasury bonds only made up for the gradual
decline in the average period to maturity of previous holdings
brought about by the passage of time.
After February 1946, the average maturity of Government
marketable obligations held by the commercial banks began to
lengthen, but this was chiefly the result of Treasury debt
retirement operations rather than the result of continued largescale bank purchases of medium and long-term bonds in the
market. The end of February 1946 marked the peak of bank
holdings of marketable Government securities. After that date,
the Treasury began to retire maturing or called issues, first
with some of the funds raised in the Victory Loan which were
not needed to meet current expenses, and then from surplus
tax receipts. Since at first entire issues and large parts o f matur­
ing short-dated securities which were held mainly by the bank­
ing system were redeemed, commercial bank holdings of such
obligations, particularly certificates, declined markedly, but in
spite of some retirement of maturing bond issues, the banks’
holdings of bonds continued to rise. Between February 28,
1946 and September 30,1947, bond holdings o f the commercial
banks increased 2 billion dollars, while holdings of all other
Treasury marketable obligations fell 24 billion dollars. As a
result, the average maturity of bank portfolios of Government
obligations increased from about 3 years and 11 months at the
end of February 1946 to about AVi years in December of the
same year, where it held through March 1947 before declining
gradually to 4 years and 4 months at the end of September.
Thus, in the 19 months that elapsed between the end o f Febru­
ary 1946 and the end of September 1947 the average period
to maturity of commercial bank portfolios of Government se­
curities showed a net increase of 5 months.
The peak of Government bond holdings o f the banks report­
ing to the Treasury was reached on September 30, 1947. Small
net decreases were reported for October (largely because o f the
cash redemption of a called issue) and November. The largescale selling o f Government bonds that developed in the latter
part of November did not show up in the banking figures until
December, in which month bond holdings declined 1.8 billion
dollars ( including an exchange of a maturing bond for a note
issue). In the first four months of 1948, bank bond portfolios
decreased another 3.3 billion dollars, o f which a considerable
amount was due to an exchange o f bonds for certificates, and
on April 30 were 5.3 billion dollars lower than at the peak
seven months previous. During the period of large-scale selling
of Treasury bonds, the banks reinvested a portion of the pro­
ceeds in short-term Government obligations. But heavy pres­
sure on bank reserves, due to a change in Treasury debt retire­
ment policy restricting redemptions to Reserve System holdings


of maturing issues, held the increase in bank holdings of all
other types o f marketable Treasury obligations to 1.6 billion
dollars between September 30, 1947 and April 30, 1948, an
amount less than was acquired through exchanges of bonds for
certificates and notes.
The very large drop in bond holdings in this period resulted
in shortening the average maturity of bank holdings of market­
able Treasury issues by six months (from 4 years and 4 months
at the beginning o f the period to 3 years and 10 months). Dur­
ing the entire 4 ^ years under review, therefore, little net
change occurred in the average maturity o f Government security
portfolios of the commercial banks reporting monthly to the
Treasury, despite changes o f large magnitude in the holdings
of Treasury bonds and other types o f obligations. The maxi­
mum range has been from a low of 3 years and 10 months to a
high of 4 years and 6 months. Over the period as a whole, the
banks have just about succeeded in preventing the lapse of
time from shortening the average maturity of their holdings.
Not only has there been little change in the average maturity
of bank holdings of public marketable securities, but the aver­
age rate of interest (and discount in the case of Treasury
bills) on the face or par value of such holdings likewise has
not shown much change. Between the end of 1943 and the
end of February 1946 (as indicated in the lower panel of the
chart), the average rate paid on bank-held Government securi­
ties fluctuated in a narrow range from a high of 1.68 per cent
to a low of 1.60 per cent. Apparently shifts from bills (yield­
ing % of 1 per cent at that time) into 7
/ s per cent certificates,
together with purchases o f bonds, just about offset the effects
of exchanges of maturing or called, higher coupon issues for
low interest-bearing obligations. Consequently the net cost
to the Treasury per dollar of bank-held debt remained un­
changed in this period. Thereafter, however, it began to rise
and reached a peak o f 1.95 per cent in September 1947. This
advance in the average rate reflects a combination of develop­
ments: a large reduction of bank holdings of short-term obli­
gations chiefly as a result of Treasury redemptions, continued
but moderate purchases o f bonds, and beginning in July 1947
an increase in the rates paid by the Treasury on new bill and
certificate issues. After September 1947, the average rate on
bank holdings o f Government debt declined slightly to 1.91
per cent (April 1948), reflecting substantial sales of bonds and
an increase in short-term security holdings.
While, therefore, the average interest rate on bank-held debt
began to rise in March 1946, there was no important change
until July 1947 and subsequent months, when rates on new
issues of bills and certificates were gradually raised. However,
total interest payments o f the Treasury to the banks have de­
clined substantially because of the sharp reduction in bank
portfolios and the change in the composition of the banks’
Government security holdings. The average yield to the banks
is, of course, lower than the average coupon (or discount) rate,
since large amounts o f Government obligations, principally
bonds, have been acquired by the banks in the open market at
prices well above par.



The rate of inflow of gold into the United States, which had
begun to show signs of tapering off earlier this year, increased
again in May and June. Despite the slowing down in Febru­
ary, March, and April, the gold stock of this country increased
778 million dollars in the six months ended June 30. Imports
were over one billion dollars, but some of the incoming gold
was placed under earmark for foreign accounts for later use.
Cumulated Net Gold Imports and Net Releases from
Earmarked Stocks, 1939-48*
(Cumulated monthly from January 1, 1939)










* Decline denotes net export or increase in earmarked gold.
June 1948 preliminary.


M ay and

Since increases in the gold stock have been the main source
of gains in member bank reserves during the postwar period,
an analysis of the causes and origins of gold movements to this
country is of interest with respect, not only to the international
situation, but also to domestic monetary developments.
The main cause of the postwar movement of gold to the
United States has been the widespread shortages of goods which
the war left in its wake almost everywhere. Some of these
shortages were the direct result of wholesale destruction of
production facilities and of the shifting of men and machines
from peacetime production to war production. Other scarcities
of goods arose from the cutting off during the war of certain
countries outside the battle area from their normal sources of
supply. After the end of the hostilities both groups of countries
turned to the United States for their peacetime needs.
In addition to using the dollar proceeds of their own exports,
the substantial amounts of dollars obtained from the U. S.
Treasury, either directly — through the various credits and for­
eign aid programs of our Government — or indirectly through
the International Bank and the Monetary Fund, and (in some
cases) dollars which they had accumulated before or during
the war or which they derived from the sale of dollar securities

Foreign Account Expenditures Affecting Member Bank Reserves by
Sources, Six-month Periods January 1946-June 1948
(In millions of dollars; increase or decrease (—) in member bank reserves)


Six months


December 1946........................


December 1947........................

1 ,058p

Reduction in
with Federal

T otal

Reduction in
amount held
with Federal









-2 6 2





p Preliminary.
* Excludes gold held for international account and gold pledged as collateral
for loans.
Source: Board of Governors of the Federal Reserve System and Department o f
Commerce release United States Gold and Silver Movements in June, 1948.

requisitioned from their nationals, foreign countries have
drawn on their gold reserves in order to help finance the large
volume of their postwar imports. To the extent that the dollar
balances o f foreign countries had been accumulated at the
Federal Reserve Banks, reductions o f those balances have had
an immediate effect on the reserve position of American com­
mercial banks. Balances held by foreign central banks and
governments with the Federal Reserve Banks at the end of 1945
amounted to about 900 million dollars. In the first half of
1946 a sizable decline in these balances was more impor­
tant than gold sales as a source of additional bank reserves.
To the extent that foreign countries’ dollar balances were al­
ready held with commercial banks at the end of the war, they
of course did not represent a potential source of additional
member bank reserves.
Aggregate foreign spending affecting bank reserves (from
gold and dollars held with the Reserve Banks) slackened in
the second half of 1946. The Treasury spent about half a
billion dollars more on international account than in the pre­
ceding six months, while our net exports declined somewhat.
In the first six months of 1947, however, net exports o f this
country rose sharply in quantity and even more so in value,
partly as a result of price increases. Substantially enlarged pay­
ments to foreign countries by our Government failed to close
the financial gap. As a result foreign countries drew heavily
on their reserves through gold sales to this country and through
further reductions in their dollar balances with the Reserve
Some contraction in foreign purchases of goods from the
United States was effected in the last half of 1947. Since, how­
ever, Treasury payments to foreign countries decreased some­
what, sales o f gold to this country remained close to the high
rate of the preceding period. A further reduction in the quan­
tity and value of United States net exports occurred in the first
half of 1948. The slackening of gold sales to this country dur­
ing the period reflected this development and occurred despite
a further reduction in international payments by the Treasury.

So u r c e s


G o l d Sa l e s

In the early postwar period some of the liberated countries
of Western Europe, notably France, were the heaviest sellers
of gold to the United States, but in 1946 and the first half of
1947 large amounts of gold were sold by other countries. A
large part of the sales were from gold held under earmark at
this bank for foreign countries. At the end of 1945 total un­
pledged earmarked gold for foreign accounts amounted to
nearly 4.2 billion dollars, but at the end of 1946 the amount
had been reduced to about 3.8 billion, and at the end of 1947
to less than 2.8 billion.
An important factor in the 1946 reduction in earmarked
gold, however, was the repatriation of Argentine holdings.
Gold exports to that country largely offset imports from other
countries in the latter half of 1946 and account in part for
the low rate of net imports in that period. Sales of gold in the
United States by other countries were nearly as great as in the
first half, including South African gold which began to reach
this country in fairly sizable volume.
Gold was imported from South Africa and Canada at a
greatly accelerated rate in the first half of 1947; as in the pre­
vious period, most of the gold imports came from these two
countries (although not necessarily for their accounts exclu­
sively). Exports of gold to Argentina dwindled to a negligible
amount in the first half of 1947 and were later reversed, as
that country found it necessary to draw heavily on gold reserves
for the payment of its imports from this country. Western
European countries also drew heavily on their gold reserves
to meet their commitments.
To pay for their heavy purchases of goods in the United
States in the second half of 1947, our former allies, as well as
the ex-neutrals, exported gold to this country in substantial
volume. Chief among the exporting countries were the United
Kingdom and Argentina, with amounts of nearly 490 million
dollars and 350 million dollars, respectively. France, Canada,
and South Africa each exported amounts of between 115 and
165 million. Some of these shipments, however, were made
Gold Movements to and from the United States
Six-month Periods January 1 946-June 1948
(In millions of dollars)

Net import or net export ( —)
Six months ended



-1 3 4










Other Latin American countries.......






Canada................. .............................





South Africa.......................................







United Kingdom.................................
Other Western European countries*.

All other countries.............................
Total imports from all countries........















p Preliminary.
* Belgium, Netherlands, and Sweden.
Source: Board of Governors of the Federal Reserve System and Department of
Commerce release United States Gold and Silver Movements in June, 1948.


to rebuild holdings of earmarked gold here. (Exports of the
respective countries were greater than the decline in their gold
reserves.) Other countries continued to draw upon their ear­
marked accounts, which declined further.
During the first six months of this year the United Kingdom
was the largest source of our gold imports; its gold shipments
to the United States jumped to 810 million dollars. Other
Western European countries also shipped a fairly sizable
amount of gold to this country during the period. Some of
these shipments were used to enlarge unpledged earmarked
accounts, which increased about 260 million dollars.
It seems likely that the importance of gold shipments and
sales of earmarked gold as a source of bank reserves here will
again tend to diminish, in part as a result of import restric­
tions which several countries have imposed recently. The suc­
cessful efforts of various countries to cut down their purchases
of American goods have already resulted in a diminished rate
of use of gold to settle accounts in the United States in a
number of cases. Furthermore, as the European Recovery Pro­
gram gets under way and a greater share of this country’s net
exports are financed through funds supplied by the Treasury, a
further decline, perhaps to the level of gold production in the
Western world outside the United States, may well occur,
especially since the gold holdings of certain individual countries
have already been reduced to minimum levels.

During the fiscal year ended June 30, the Treasury was able
for the second year since the end of the war to effect a sub­
stantial reduction in the public debt. Nearly 6 billion dollars
of Government securities were retired, leaving 252.3 billion
outstanding on June 30. At its peak on February 28, 1946,
the direct Federal debt had amounted to 279.2 billion dollars.
As in the preceding fiscal year, the retirement of public
marketable issues exceeded the net reduction in debt. The
Treasury was able to pay off more than 8 billion of marketable
issues by using over 7 billion dollars of its net cash income and
some 900 million dollars of funds borrowed from the public
through the sale of nonmarketable issues, mainly the invest­
ment series Treasury bonds. The net sales of Savings bonds,
amounting to 1.4 billion dollars, were largely offset by net
redemptions of Savings notes and certain minor nonmarketable
issues and by a small amount of net market purchases of Gov­
ernment securities by trust funds and other agencies. During
November 1947, when the commercial banks and other private
investors became net sellers of Government securities, several
of the Government agencies began to buy marketable issues.
In the preceding months of the fiscal year they had sold about
1 billion dollars of Government securities; subsequent pur­
chases were somewhat larger. The funds for these purchases
were obtained from the Treasury through the redemption of
special issues held by the agencies involved. (Conversely, re-



Government Financing, Fiscal Years 1947 and 1948
(In billions of dollars)

Source of funds and change in debt



Cash income....................................................
Cash outgo.......................................................



Net cash income*............................................
Change in General Fund*..............................

- 7.6#
-1 0 .9

- 9.0
+ 1.6

Cash repayment of debt*...............................
Government corporation debt.....................
Direct cash borrowing...............................
N onmarketable...................................

-1 8 .6
- 0 .4

- 7.3
+ 0.1

Direct noncash borrowing..............................
Direct cash borrowing (above)......................

+ 7.1
-1 8 .2

+ 1.4
- 7.4

Direct public debt...........................................

-1 1 .1


-1 8 .2

+ 2 .9
- 2 1 .1



+ 0 .9
- 8 .3


Note: Because of rounding, figures do not necessarily add to totals.
* The minus signs indicate the use of funds for debt repayment.
# Does not include a cash payment of nearly 1 billion dollars to the International
Monetary Fund made from the Stabilization Fund.
Source: Daily Statement of the United States Treasury and Treasury Bulletin.
Partly estimated by the Federal Reserve Bank of New York.

ceipts from market sales are invested in special issues and thus
automatically become available to the Treasury.) Public bor­
rowing by Government corporations also provided a small
amount for the retirement of Treasury marketable debt.
The retirement of marketable issues during the past year
was considerably less than the 21 billion dollars retired in the
fiscal year 1947, when nearly 11 billion dollars of surplus funds
(raised during the Victory Loan drive in the fiscal year 1946)
was available in the General Fund. The net cash income of the
Treasury was greater than in fiscal 1947. This increase was,
however, about offset by a lower level of receipts from net
sales of Savings bonds and notes, and also by the absence of
sizable net receipts from market sales of Government securi­
ties by trust funds and other Government agencies such as
occurred in the previous year. The latter transactions were
made to meet the strong demand for Government securities
in the market at that time. An amount almost equivalent to
the sum that became available to the Treasury in fiscal year
1947 through the transfer of funds from the Stabilization Fund,
for which noninterest-bearing notes were issued to the Inter­
national Monetary Fund, was raised in the past fiscal year by
the public sale of the investment series bonds last fall. The
major part of the decline in Savings bonds net sales during the
past year reflected a substantial drop in net sales of Series G
bonds. Whereas net sales of Series E bonds were negligible in
fiscal 1947, last year they provided some 350 million dollars, as
the decline in redemptions was greater than the slight decline
in sales.
Nearly 5 billion of the market issues retired during fiscal
1948 were held by the Federal Reserve Banks. Commercial
banks held more than 600 million and other investors nearly
2.8 billion. In the preceding fiscal year, Federal Reserve hold­
ings redeemed had been only slightly higher; retirements of
Government securities held by commercial banks and by other
investors had been considerably larger, however, amounting to
8.4 billion and 7.2 billion, respectively.

Since the middle of the fiscal year 1947 practically all of the
redemptions of securities held by the Reserve system and the
commercial banks have been made with funds withdrawn from
the nonbanking public.
The net decline in the public debt, amounting to 6 billion
dollars, was less than the net cash repayment of debt during
the fiscal year. The new special securities issued to the trust
funds, together with the increase in the redemption value of
Savings bonds arising from the addition of accrued interest,
more than offset the redemption of Armed Forces Leave Bonds
and of noninterest-bearing notes held by both the International
Bank and Monetary Fund. At the end of June, the gross public
debt amounted to 252.3 billion dollars, while the guaranteed
debt not held by the Treasury was less than 100 million. The
balance in the General Fund exceeded 4.9 billion dollars, an
increase of 1.6 billion over a year previous.
The Treasury’s ability to retire marketable issues and to exert
pressure on the reserves of the banking system thus arose
mainly from the cash surplus, which amounted to 9.0 billion
dollars (compared with a nominal budget surplus of 5.4 bil­
lion). Net cash receipts from sales of nonmarketable debt
were relatively minor and showed a sizable reduction from
the previous year (even after excluding the one-time receipt of
funds from the Stabilization Fund in that year).
The cash surplus indicates directly the impact of the Treas­
ury’s current operations on the private sector of our economy.
The difference between the cash surplus and the more com­
monly quoted budget surplus is largely a matter of accounting.
The budget figures include certain intra-Governmental items
(mainly receipts of interest and earnings and repayments of
capital stock from partially-owned Government corporations,
and noncash expenditures such as transfers and payments of
interest to trust accounts), and noncash payments to the public
made in the form of securities, such as the Armed Forces Leave
Bonds. On the other hand, they omit trust account receipts from
and payments to the public as well as cash outlays for the redemp­
tion of the securities issued previously to cover an expenditure
made by the Government. The transfer of 3 billion dollars to
the Foreign Economic Cooperation Trust Fund1 affected the
budget surplus, but it will not affect the cash surplus until the
funds are actually paid out. The budget surplus this past year
reached a record of 5.4 billion dollars, even after allowing for
this 3 billion dollar transfer. In the fiscal year 1947 the budget
surplus amounted to less than 800 million dollars (although
the cash surplus was 7.6 billion).
The rise in net cash income in the fiscal year 1948 was due
almost entirely to a 1 billion dollar rise in total cash receipts.
Withheld and other individual income taxes at 21.0 billion
dollars were 1.4 billion higher than in 1947, while corporation
1 This fund was established on June 28 to give effect to section
114 ( f ) (the Millikin amendment) of the Economic Cooperation
Act of 1948, which required that the sum of 3 billion dollars be trans­
ferred to a trust fund and "considered as expended during the fiscal
year 1948, for the purpose of reporting governmental expenditures.”


taxes amounted to 10.1 billion, an increase of nearly 450 mil­
lion dollars. Employment taxes and miscellaneous internal
revenue increased 350 million and 250 million, respectively.
Part of these increases was offset by a decline in miscellaneous
receipts, reflecting a falling off in sales of surplus property.
Customs collections also showed a slight decline. Trust account
cash receipts were practically unchanged.
Cash expenditures, at 38.6 billion dollars, were only 400
million less than in the fiscal year 1947. Expenditures for
national defense, at 11.3 billion dollars, were some 3.6 billion
lower than in the previous year, but this reduction was partly
offset by cash payments of nearly 1.5 billion for the redemption
of Armed Forces Leave Bonds. Refunds, amounting to 2.3
billion, were also lower (750 million) than in fiscal 1947,
when substantial corporate income and profits tax refunds
arising out of the adjustment of wartime tax liabilities were
made. Cash spending for Veterans’ services and benefits, at
6.3 billion, was only slightly lower. Interest payments remained
practically unchanged at 3.9 billion. Expenditures for inter­
national affairs and finance amounting to 4.9 billion, however,
were some 1.8 billion higher than in fiscal 1947. Other cash
budget items rose slightly to 5.1 billion. Trust account expen­
ditures declined some 400 million dollars to nearly 2.9 bil­
lion. The 'clearing account” involved an addition to expen­
ditures, whereas in the preceding year the adjustment in the
account had reduced them. Thus the reductions in expenditures
shown in the individual categories were almost offset by the
redemption of Armed Forces Leave Bonds, the rise in the
clearing account, and the increase in spending for foreign aid.
The recent reduction in taxes resulted in an estimated loss
of revenue of only around 600 million dollars in fiscal 1948.
The real impact of the tax reduction will be felt during the
current fiscal year, but if personal income continues to rise
some of the estimated 4.8 billion annual loss will be offset.
The anticipated reduction in receipts, combined with an ex­
pected increase in cash expenditures, indicates that a consider­
able reduction in the cash surplus will occur in the current
fiscal year. As a result, the Treasury’s power to withdraw funds
from the public (and the banks) for debt retirement, and
thereby to impose further restraint on bank reserves and bank
lending, will be considerably curtailed.
According to preliminary estimates, daily average sales at
Second District department stores during July declined some­
what more than seasonally, following a slight decline during
the previous month as well. However, seasonally adjusted July
sales were apparently still within 3 per cent of the record vol­
ume of May. Daily average sales during July probably did not
show so large an increase over last year as had been shown
during the previous three months.
The seasonally adjusted retail value of Second District depart­
ment store inventories declined further during June. Stores
apparently adjusted their inventories in view of the relative


easiness of soft goods lines generally and of most durable lines
handled by department stores. This bank’s seasonally adjusted
index of department store stocks (1935-39 average equals 100
per cent) stood at 237 at the end of June 1948; the seasonally
adjusted index of daily average sales, however, was 265 for
June (and 268 for May). The fact that stocks at the end of
June were 10 per cent greater in value than they were a year
ago results mainly from comparison with an exceptionally low
level of stocks (relative to sales).
Outstanding orders of a group of the larger stores at the end
of June were, dollarwise, 2 per cent lower than a year ago. It
may be noted that in every month since January 1948, the ratio
of outstanding orders to sales1 for the group of stores which
report comparable data has been below that of the same period
of 1947. The ratio was 1.08 for June of this year, against 1.21
last year. However, the dollar volume of new orders placed
by these same stores during June was 5 per cent greater than in
June 1947, in line with the increase in sales between the two
periods, and outstanding orders at the end of the month
showed a sharp seasonal increase.
R e c e n t T rends


D e p a r t m e n t St o r e C r e d it

Credit sales at Second District department stores since early
1947 have expanded more rapidly than total sales of these
1 Outstanding orders at end of month divided by sales during month.
Department and Apparel Store Sales and Stocks, Second Federal Reserve
___________ District, Percentage Change from the Preceding Year______

Net sales
June 1948

Stocks on
Jan. through
June 1948 June 30, 194:

Department stores, Second District___


+ 6


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

+ 5
+ 7
+ 6
+ 4
- 1
- 3
+ 9
+ 7
+ 4
+ 9
+ 6
+ 9
+ 8
+ 5
+ 12
+ 9
+ 9
+ 6

+ 8
+ 9
+ 3
+ 14
+ 8

Niagara Falls...................................

+ 10
+ 1
- 1
+ 7
+ 8
+ 6
+ 7

Apparel stores (chiefly New York City).

+ 6


+ 2

Westchester County...........................
Fairfield County.................................
Lower Hudson River Valley..............
Upper Hudson River Valley..............
Central New York State....................
Mohawk River Valley....................
Northern New York State.................
Southern New York State.........
Western New York State...................

+ 11
+ 9
+ 5

Indexes of Department Store Sales and Stocks
Second Federal Reserve District
________ (1 9 3 5 -3 9 average=100 per cent)________







Sales (average daily), unadjusted................
Sales (average daily), seasonally adjusted*.





Stocks, unadjusted........................................
Stocks, seasonally adjusted..........................





* Seasonal adjustment factors for 1945-48 revised; available upon request from
Research Department, Domestic Research Division.


Indexes of Department Store Sales by Type of Transaction, Second Federal Reserve District, 1*941 and 1946-48*
(1941 average daily sales = 100 per cent)







Data only for stores reporting sales by type of transaction; their total sales in 1947 accounted for about 70 per cent of estimated total District department
store sales. June 1948 preliminary.

stores. As the accompanying chart shows, cash sales during the
18-month period ended June 1948 were about the same as
during the corresponding months of 1946, in sharp contrast
to the continued rise of credit sales. Nevertheless, toward the
end of the period shown, cash sales continued to represent a
somewhat larger proportion of total sales than they did in 1941,
a year of marked increase of consumer credit sales. If the cur­
rent pattern of changes in sales by type of transaction persists,
cash sales may soon account for a proportion of total sales no
larger than in 1941.
Of the two types of credit sales, instalment sales have con­
sistently made the greater advances in the last year and a half.
However, charge account sales began to show regular gains
from the preceding year as early as in the second quarter of
1944, whereas instalment sales began to mark such advances
only a year and a half later. The recent growth of instalment
sales has accompanied — and in all likelihood has aided — the
more than average sales gains made by durable household goods
(noted in previous issues of this Review ). Consumers’ durable
goods are normally among the higher priced commodities sold
by department stores. Their sales, and hence instalment sales,
usually advance sharply when incomes are increasing and credit

is more easily obtained. Charge account sales also tend to rise
somewhat more rapidly than cash sales in a period of growing
consumer income. To some extent, the recent rapid growth of
both categories of credit sales toward their prewar proportions
of total sales has been stimulated by the active promotion of
credit facilities by the stores.
Indexes of Business

Industrial production*, 1935-39 = 100........
(Board of Governors, Federal Reserve
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 Statesf, 1939 = 100......................
(Bureau of Labor Statistics)

New York State, 1935-39 = 100...............
(N. Y.S. Div. of Place, and Unemp. Ins.)
Factory payrolls
United Statesf, 1939 = 100......................
(Bureau of Labor Statistics)

New York State, 1935-39 = 100..............


(N. Y. S. Div. of Place, and Unemp. Ins.)

Personal income*#, 1935-39 = 100...............
(Department of Commerce)

Composite index of wages and salaries*J,
1939 = 100..................................................

Department Store Sales by Type of Transaction
Second Federal Reserve District
(Percentage change from corresponding quarter of
preceding year, daily average basis)


(Federal Reserve Bank of New York)

Consumers’ prices, 1935-39 = 100................
(Bureau of Labor Statistics)

Velocity of demand deposits*, 1935-39 = 100
(Federal Reserve Bank of New York)





I ..........................
I l l .....................................
IV .....................................

+ 4
- 1
+ 4

+ 7


+ 4
+ 4
+ 9

I ..........................

- 1
+ i

+ 9


+ 5
+ 6



New York City..........................................
Outside New York City...........................

* Adjusted for seasonal variation.
p Preliminary.
r Revised,
t Revised beginning January 1946.
# Revised beginning January 1944.
% A monthly release showing the 15 component indexes of hourly and weekly
earnings computed by this bank will be sent upon request. Tabulations of the
monthly indexes, 1938 to date, together with information on component series,
sources, and weights, and reprints of articles describing the indexes may also
be procured from the Research Department, Domestic Research Division.


National Summary of Business Conditions


(Summarized by the Board of Governors of the Federal Reserve System, July 24, 1948)
output at factories and mines showed little change in June and the early part of July after
for seasonal influences. Department store sales were at record levels for this season.

Prices of meats and steel increased sharply in July, while cotton and grains declined.
I n d u s t r i a l Pr o d u c t i o n

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



Industrial production in June continued close to the May level, and the Board’s seasonally
adjusted index was 192 per cent of the 1935-39 average as compared with 191 in May and 188 in
April, when output was reduced by a strike at bituminous coal mines.
Output of durable goods increased further in June, reflecting mainly larger production of
automobiles following settlement of an industrial dispute at the plants of a leading producer.
Activity in the automobile industry reached earlier postwar peak rates in the first half of July.
Steel production in June continued at the May rate. Ouput of open hearth steel was slightly
smaller, while electric steel production increased further by 5 per cent to a new record level,
exceeding the wartime peak. Output of nonferrous metals was reduced somewhat owing largely to a
curtailment of aluminum production during the Columbia River floods.
Production of nondurable goods in June continued at a seasonally adjusted level of 178 per
cent of the 1935-39 average. This level has prevailed, with slight variations, since the beginning
of the year. Cotton consumption and paperboard production declined somewhat in June. Meat
production, however, increased substantially following the end of a labor dispute which had curtailed
packing operations since the middle of March. Activity in most other nondurable goods industries
was maintained at the May rate or advanced slightly.
Minerals output declined 2 per cent from the exceptionally high May rate, as bituminous coal
output was reduced owing to the beginning of the miners’ 10-day holiday on June 28. Crude
petroleum production continued to advance.
Co n s t r u c t io n

About 93,500 dwelling units were started in June, according to preliminary estimates of the
Bureau of Labor Statistics. This number was somewhat smaller than the postwar high of 97,000 in
May, but still considerably larger than the 77,000 units started in June 1947. Dollar volume of all
new construction put in place, according to joint estimates of the Departments of Commerce and
Labor, continued to increase in June and reached a record amount of 1,600 million dollars.
F. W . Dodge Corporation data for 37 Eastern States.
Other includes nonresidential buildings and pub­
lic works and utilities. Monthly figures;
latest shown are for June.

D is t r ib u t io n

Value of department store sales showed about the usual seasonal decline in June and the first
half of July. The Board’s adjusted index remained around a record level of 310 per cent of the
1935-39 average, which was about 7 per cent higher than in the corresponding period a year ago.
Rail shipments of grain and forest products were in substantially larger volume in June, while
loadings of most other classes of freight declined somewhat from the May rate after allowance for
seasonal changes. Total loadings in the first half of July were above the same period a year ago,
reflecting mainly a larger volume of coal shipments.
A g r ic u l t u r e

Production of crops this year, as indicated by July 1 conditions, will be substantially larger than
in 1947 and in record volume. The most important increase is forecast for corn, output of which
is expected to be about 40 per cent larger than last year’s drought-damaged crop. Estimated wheat
production, although smaller than last year’s crop of 1.4 billion bushels, would still be the second
largest crop on record. Cotton acreage is officially estimated to be up 10 per cent from last year.
Marketings of livestock have expanded following the end of the packing strike but the volume has
remained 5 to 10 per cent below year-ago levels.
C o m m o d i t y P r ic e s
Bureau of Labor Statistics' indexes. “ All items” in­
cludes housefurnishings, fuel, and miscellaneous
groups not shown separately. Midmonth
figures; latest shown are for M ay.


The general wholesale price level rose further in July, reflecting sharp increases in prices of
meats and steel products. Meat and livestock prices in mid-July were about 25 per cent higher than
a year ago. Prices of most other farm products and foods continued to show little change or declined
in July. Cotton and grain prices were somewhat b^low year-ago levels.
Prices of most iron and steel products were raised by 10 per cent or more in July. Coal prices
were also advanced, while prices of petroleum products eased and prices of cotton goods declined
somewhat further.
B a n k C r e d it

Quarterly income tax payments by businesses and individuals during the last half of June
substantially increased Treasury deposits at Reserve Banks and reduced commercial bank reserves
and deposits. Banks met the drain on reserve funds largely through sales of Government securities
to the Reserve Banks and through reductions in their excess reserves. During the first three weeks
of July, reserves at banks increased somewhat. The Treasury drew down its balances to retire bills.
Federal Reserve Bank holdings of bills were thereby reduced, but the System made net market
purchases of Government securities in approximately equal volume and thereby supplied banks
with additional reserves.
Commercial and industrial loans increased moderately in banks in leading cities during June
and the first half of July. Consumer and real estate loans continued to expand. Banks reduced further
their holdings of Government securities.
S e c u r it y M a r k e t s
W eekly averages of daily figures compiled by
Federal Reserve from data reported by U. S.
Treasury Department; latest shown are
for week ended July 17.

Common stock prices declined sharply in the third week of July, following four weeks of
relatively little change. A substantial portion of the mid-March to mid-June gain in prices was lost.
Prices of Government bonds changed little in the first three weeks of July, following some
decline in June, but prices of corporate bonds declined further.