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MONTHLY REVIEW
O f Credit and Business Conditions
FEDERAL
RESERVE
BANK
AUGUST
V o lum e 32
OF
NEW
YORK
No. 8
1950
MONEY MARKET IN JULY
In July, the balance of demand and supply forces in the
Treasury security and money markets was radically changed
tures would have to be increased substantially. Investors were
convinced that, because of differences in the timing of receipts
by the American participation in the hostilities in Korea.
and expenditures, the Treasury would have to increase its bor
Investors interpreted international events as tending to freeze
rowing in the market even if taxes were raised, but they also
the existing money rate structure. Demand for Treasury issues
felt that the necessary financing would be carried out without
of the intermediate and longer maturities consequently broad
ened materially, and offerings contracted. Prices rose, and
issued Treasury notes, and commercial banks with idle funds
yields fell correspondingly. The Federal Reserve System, which
made substantial purchases of short-term Treasury issues,
in June and the first days of July engaged in extensive open
mainly bills, in the first half of the month. Large sales of short-
a rise in interest rates. They therefore ceased selling newly
market operations in support of the Treasury’s July 1 re
term securities by the Federal Reserve System were substituted
financing, had no occasion to continue such operations.
In fact, to meet the increased demand for Government securi
for purchases of newly issued Treasury notes in support of the
Treasury’s financing rate. As a result of the increased demand,
ties, the System sold Treasury bonds on a rapidly rising scale
prices of short-term Government securities rose slightly. In
and also sold short-term Treasury securities in periods of
the latter part of the month, however, the Reserve Banks made
large purchases.
money market ease.
Although the return flow of currency to the banks after the
Fourth of July and other money market transactions provided
Treasury bond prices moved irregularly higher following
the uncertainty of the first days of the invasion of South Korea.
the banks with a sizable amount of additional reserves, the
By the middle of July, most issues had more than recovered
quickening demand for Treasury issues tended to tighten
their early losses and risen above the previous levels. Part of
member bank reserve positions, as a large part of this demand
the increased demand for bonds came from '’professional” and
speculative sources, and investment buying by pension funds
could be satisfied only through Reserve System sales. Tight
money market conditions in New York City resulted. They
were related principally to substantial purchases of Treasury
securities in New York by nonbank investors and correspond
ent banks in other parts of the country, indirectly from the
System, which caused recurrent shortages in the reserves of the
New York City banks.
and institutional investors proceeded on a sizable scale.
In anticipation of the recommendations for higher corporate
and individual taxes which were made by the President in a
special tax message to Congress late in the month, partially
tax-exempt issues showed the largest price advances. By July
27, partially tax-exempt issues showed gains since the end of
June ranging from a little less than Va of a point for the issue
G o v e r n m e n t Se c u r it y M a r k e t
The turn of events in the Far East was at first taken calmly
by investors in U. S. Government securities without any ma
terial effects on prices or stimulating influences on trading
volume. The initial response was one of caution as investors
paused to appraise the longer-term implications of Korean
developments, and dealers reduced their quotations temporarily.
CONTENTS
Money Market in July.................................................85
Commodity Prices since the Korean Crisis......... ..86
However, as investors grew more confident that the present
Turnover in Bank Deposits.................................... ..90
money rate structure rather than a higher one would prevail,
Direct Security Purchases from the Treasury
by the Federal Reserve Banks........................... ..90
demand for Government obligations broadened with respect
both to classes of investors and to types and maturities of issues.
Treasury Financing in the Fiscal Year 1 9 5 0 ... 92
With the commitment of United States forces in Korea, it
Department Store Trade........................................... ..95
became obvious that the amount and speed of defense expendi
86
MONTHLY REVIEW, AUGUST 1950
callable in 1953 to more than one full point for the issue hav
ing the longest maturity.
member bank reserve positions were subject to pressure
through the rest of the month. The principal drain on reserves
Bank-eligible issues also registered sizable increases in price,
had its source in nonbank investor purchases of Treasury
although the gains were generally much smaller than in the
case of partially tax-exempt issues. Demand for these issues
securities indirectly from the Reserve System and in the mem
ber banks’ own security operations. Ordinary money market
came principally from the commercial banks and reflected
transactions resulted in only a moderate absorption of reserve
the view that the banks would not be afforded an opportunity
funds. Most of the pressure occurred in the week ended July
to participate to any great extent in any new intermediate or
19, in the course of which System holdings of Treasury securi
long-term Treasury financing. Defense financing, it was be
ties declined 425 million dollars, member bank excess reserves
fell 250 million, and member bank borrowing from the Re
lieved, would most likely be effected through the issuance of
long-term restricted bonds. Thus, existing bank-eligible bonds,
serve Banks rose 135 million dollars. The strain on reserve
particularly the intermediate and longer-term issues, assumed
positions resulted not only from nonbank purchases of Treas
an increased scarcity value.
ury securities, partly financed with the proceeds of bank loans,
The demand for restricted bond issues also increased sharply,
but also from extensive purchases by the banks themselves.
and the supply seemed to fade away just as rapidly. Profes
The latter apparently drew down their excess reserves in order
sionals and speculators apparently increased their holdings.
ito make large net purchases of Treasury issues in anticipation
Considerable buying by customers of stock brokerage houses
of gains of funds which failed to materialize.
was reported. The Federal Reserve System, therefore, stepped
Money market strain persisted in the remaining days of the
up its (net) sales of long-term bonds from 6 million dollars
in the week ended June 28 to an average of well over 100
month because of continued large nonbank investor purchases
of Government bonds and because of the need for funds to
million dollars weekly in the following three weeks and to
repay borrowings from the Reserve Banks.
289 million in the week ended July 26; changes in prices
Since the brunt of the demand for Treasury securities focused
on the New York market and the Federal Reserve System was
of such issues consequently were small.
the major supplier, the New York City banks bore a large part
M
em ber
B a n k R e serve P o s it io n s
of the resultant pressure on reserve positions. Substantial losses
Money market conditions were tight during a large part of
of reserve funds early in the month (during the week ended
the past month, reflecting the Government security operations
July 5 ) due to a transfer of funds to other parts of the country,
of both banks and nonbank investors rather than ordinary
an outflow of currency into circulation, and net receipts into
money market transactions.
Early in the month, the pressure on reserve positions was
Bank, as well as nonbank purchases of restricted Treasury
related in part to the adjustments necessary to bring excess
reserves to more normal working levels. On June 28, excess
reserves stood at the unusually low level of 520 million dollars.
In the following week, the member banks were able to raise
them by 250 million dollars, despite moderate losses of reserve
funds due to a large holiday outflow of currency into circula
foreign government accounts with the New York Reserve
bonds, set the tone for the New York money market for prac
tically the entire month. In fact, the New York City institu
tions did not experience the easing of reserve positions that
the banking system as a whole enjoyed during the week ended
July 12. Although the City banks received large transfers of
funds from other parts of the country in that week and the
tion and other transactions, which together more than offset
the effects of substantial net Treasury disbursements. The in
crease in excess reserves was effected through large member
these funds since out-of-town banks and others reinvested them
bank sales of short-term Treasury securities, indirectly to the
part by the Reserve System.
following week, they were unable to benefit from the use of
rather rapidly in Treasury issues which were supplied in large
Reserve System. The securities sold consisted chiefly of the
Thus, the New York City banks were compelled to borrow
newly issued 13-month notes due on July 1 and August 1,1951.
substantial amounts of funds from the Reserve Bank for short
The money market turned easy in the week ended July 12,
periods of time and to sell (net) large amounts of Treasury
when continued large net Treasury disbursements, together
securities. Part of these net sales were made to Government
with a heavy return flow of currency and a sizable expansion
security dealers, who financed their purchases with the pro
of Federal Reserve "float”, provided the member banks with
ceeds of loans from the New York banks, thus affording little
a substantial volume of additional funds.
relief to the banks’ reserve positions.
Sizable nonbank
investor purchases of Government bonds from the Reserve
System absorbed only a portion of these gains. Member banks
added about 150 million dollars to their excess reserves and
made sizable purchases of Treasury bills, largely from the
Reserve System.
Conditions again tightened in the week ended July 19, and
C O M M O D IT Y PRICES SINCE
T H E K O R E A N CRISIS
The outbreak of hostilities in Korea precipitated price in
creases for numerous products, particularly for basic com
modities, at the wholesale level, and— to a more limited ex
FEDERAL RESERVE BANK OF NEW YORK
tent— in the retail stores. Many manufacturers, merchants, and
consumers, anticipating that the crisis originated by the inva
sion of South Korea will create shortages and bring on further
price increases, are apparently attempting to build up their
stocks or to replace some types of goods before they normally
would do so.
This upward pressure on prices comes at a time when the
markets are already under pressure from a high rate of indus
trial and construction activity. Wholesale prices had started
co move upward in April after having remained stable for
nearly six months (from October through March). Between
87
During the first month of fighting, the weekly index of whole
sale prices advanced 4 per cent. An average increase of about
7 per cent in prices of farm products and foods accounts for
the greater part of the increase occurring in the wholesale
price index since the current crisis began. The recent increases,
however, return the level of primary prices only to about where
it stood in November 1948 and it is still considerably (16 per
cent) below the postwar peak reached in late 1947. The
general wholesale price index, which had declined less from
its postwar peak, is also back to its November 1948 level, but is
only 4 per cent below the postwar peak, attained in mid-1948.
the beginning of April and the first week in June, the weekly
As shown in the accompanying chart, the current wave of
index of wholesale prices had advanced 3.6 per cent. It then
appeared for a while that the upward price trend was leveling
price rises has been paced by the basic commodities, which
off. Between June 1 and the start of hostilities in Korea, the
net declines among the primary commodity prices reported
fluctuations. On July 28, all major groups in the daily basic
daily by the Bureau of Labor Statistics were about as numer
ous as the net advances, and throughout June the weekly
reached new highs for this year. These increases came at a time
wholesale price index remained relatively unchanged. But
with the beginning of hostilities, prices began to rise again.
Price Indexes, 1949 and l!950
(1935-39 averagei=100 per cent)
are the most sensitive and traditionally experience the widest
commodity price index of the U. S. Bureau of Labor Statistics
when most of the basic commodities had already made signifi
cant advances earlier this year. Between their lows for 1950,
which were reached in the first quarter, and June 23 (just be
fore the Korean invasion) their advances ranged from 7 per
cent to 10 per cent, but within the first month after fighting
began in Korea they advanced from 9 to 17 per cent further.
The combined index for the basic commodities rose 8 per
P e rc e n t
P e rc e n t
cent from its low of 1950 to June 23, and its subsequent ad
vance was 15 per cent. Domestic farm products, however, had
advanced further prior to the North Korean attack than they
have in the period that has elapsed since June 23. From its
1950 low to June 23 'this group advanced 10 per cent whereas
its subsequent increase was 9 per cent. The largest gain for
the period following the outbreak of hostilities was experi
enced by the group of imported commodities. Its index ad
vanced 17 per cent during this period, after an increase of
only 7 per cent from its 1950 low to June 23. This undoubtedly
reflects the fear that such commodities as tin, rubber, coffee,
cocoa, wool, and sugar might be in short supply if hostilities
are prolonged or intensified. For the domestic group the com
parable advances were 8 per cent in the earlier period and 13
per cent since the Korean conflict began.
Of the 29 spot primary market prices of basic commodities
that make up these "sensitive” indexes,1 only three (flaxseed,
barley, and steel scrap at Philadelphia) are lower than they
were on June 23. The prices of 3 commodities— coffee, rubber,
and wool tops— have reached new postwar peaks. So far 18
commodities have risen 5 per cent or more since June 23 and,
of these, 8 have advanced more than 20 per cent. The extent
to which these commodities had risen prior to the North
Korean aggression can be seen from the fact that nearly half
* Monthly indexes through May 1950 ; thereafter weekly for wholesale prices
(through July 18), Tuesday dates for 28 basic commodities (through July 25).
# Monthly indexes throughout; latest figure is for June 1950.
Source: U. S. Bureau of Labor Statistics; 28 basic commodities and
wholesale prices converted to a 1935-39 base by the Federal Reserve Bank
of New York.
1 The B.L.S. has officially titled its index "Daily Index of Spot
Primary Market Prices of 28 Commodities.” The index, however, is
composed of 29 price quotations for 27 commodities. Steel scrap,
priced at both Philadelphia and Chicago, is considered two com
modities, whereas winter wheat at Kansas City and spring wheat at
Minneapolis are considered as one commodity, in order not to give
undue weight to farm products.
88
MONTHLY REVIEW, AUGUST 1950
Recent Changes in Spot Prices of Selected Basic Commodities
foodstuffs. Price increases for the major grains, of which large
surpluses are held in storage, have been relatively small. Winter
Percentage change
wheat has risen 5 per cent since June 23, corn and rye have
Unit
Price in
dollars,
July 28,
1950
Domestic farm products
Hogs.................................
Cotton..............................
Steers................................
Wheat, winter.................
Corn.................................
cwt.
lb.
cwt.
bu.
bu.
24.875
.390
31.125
2.215
1.560
-2 5
-3 2
-5 4
+18
Foodstuffs
Cocoa...............................
Coffee...............................
Sugar................................
Butter...............................
lb.
lb.
lb.
lb.
.382
.550
.062
.601
—59
*
-1 3
-3 3
+48
+ 6
+ 6
+ 1
+18
+13
+ 7
mated to be from 225 million to 250 million bushels. Rye
Metals
Tin....................................
Lead.................................
Zinc...................................
Copper.............................
Steel scrap (Philadelphia)
lb.
lb.
lb.
lb.
ton
.948
-2 8
-5 1
-4 2
+ 3
-21
+50
+24
+ 4
now appears) is expected to exceed 3 billion bushels, which
.157
.224
33.000
-5 0
+53
-
Other industrial materials
Rubber.............................
Print cloth.......................
Wool tops.........................
lb.
yd.
lb.
.490
.195
2.280
*
-5 2
*
+57
+13
+15
+74
+28
+ 14
Commodity
Postwar
peak to 1950 low June 23 to
1950 low to June 23 July 28
-5 0
-22
+29
+ 10
+ 6
0
+23
+15
+ 6
+ 5
+ 3
each advanced 3 per cent, while barley and oats are down 1
per cent and 8 per cent, respectively. This years harvest of
wheat, plus the amount available from previous crops (a third
above the 1949 carryover), are about twice the annual domestic
consumption of 700 million bushels and will be more than
enough to meet export demands for the present season, esti
.120
+10
+22
0
0
0
4
* Postwar peak reached subsequent to 1950 low.
Source: Computed by the Federal Reserve Bank of New York from data of the
U. S. Bureau of Labor Statistics.
supplies are greater this year than last and appear sufficient to
meet both domestic and export needs. The corn crop (as it
is about 21 per cent larger than the amount recommended by
the Department of Agriculture prior to the current emergency,
under an acreage allotment program aimed at cutting down the
existing surplus. This will probably be the sixth largest corn
crop of record and, taken in conjunction with the already large
carryover (10 per cent more than last year’s record high),
would indicate that adequate supplies will be available as feed
for the projected high level of livestock population. This year’s
experienced larger increases from their respective lows for
1950 to June 23 than in the subsequent period. Furthermore,
there were 19 increases of 5 per cent or more in the period
prior to the North Korean attack, and of these 19 increases
7 were greater than 20 per cent.
Farm products, which are generally very responsive to
changes in supply and demand conditions, undoubtedly would
oat crop should also prove to be a better-than-average crop and
will further supplement feed supplies. The amount of barley
on hand is only four fifths of the 1949 stocks but this carryover
is larger than in most years. Butter offers another example of
the dampening of price increases by the existence of large
surpluses. The price of butter did not advance at all until the
fourth week of hostilities and then it was up by only 0.3 per
have risen further had it not been for the large stocks of most
basic farm products, which preclude the development of any
cent. The Commodity Credit Corporation has about 185 million
shortages in the near future. This is true despite the fact that
the outlook generally is for smaller production this year in
wheat and in cotton, because of reductions in acreage
the CCC may sell at any price it sees fit, but only when there
is danger that these products will deteriorate. The threat of
competition from oleomargarine, however, may also be a con
tributing factor in restraining price increases for butter.
pounds of butter in storage. In the case of perishable products
ordered by the Department of Agriculture and because of
unfavorable weather conditions. Carryovers from previous
crops will help provide more than ample supplies of most
commodities to meet this years domestic consumption and
exports. However, substantial quantities of these stocks are
Price increases have been generally more pronounced in the
case of those foodstuffs of which large surpluses are not avail
able. However, since adequate supplies even of these food
stuffs are available, at least part of the price increases may be
held by the Commodity Credit Corporation in its price-support
attributed to anticipatory buying. Hog prices on July 28 were
inventories, and there is still room for further price increases,
23 per cent above their June 23 level, but steers were up only
especially for wheat and corn, before these CCC-held com
6 per cent. Seasonal increases in livestock prices had been
modities can be made available to the market unless legal
under way, even before the Korean crisis, on the basis of
restrictions on sales are changed by Congress. The CCC can
supply and demand factors. By June 23, hog prices were 29
not now "sell any basic agricultural commodity or storable
per cent above their 1950 low and steers 6 per cent. The
nonbasic commodity at less than 5 per cent above the current
smaller advance for steers can be attributed to the fact that
support price for such a commodity plus a reasonable carry
their prices have been maintained at relatively high levels.
ing charge.” The market prices for most of the commodities
Increased military purchases and sustained high-level con
owned by the Government, except cotton, are still below the
sumer demand indicate that seasonal declines in meat prices
minimum levels at which they can be sold under the present
will be smaller than usual this fall. Fats and oils, which experi
law.
enced larger declines from postwar peaks than other foodstuffs,
The restraining influence that the large farm surpluses are
have rebounded sharply. In the month that has elapsed since
having on price rises can more readily be seen in the varia
the North Korean invasion, cottonseed oil has jumped 27
tions in price increases that have taken place for individual
per cent and lard 47 per cent.
FED ER AL R ESER VE B A N K OF N E W Y O R K
Of the four principal imported farm products— cocoa,
coffee, wool tops, and sugar— the first three have advanced
very significantly, whereas for sugar the increase has not been
so pronounced. Cocoa was up 18 per cent, wool tops 14 per
cent, and coffee 13 per cent, while sugar rose only 7 per cent.
Here again the variations in the availability of supplies appar
ently explain the differences in price increases. Supplies of
sugar are more than ample, especially since the Department of
Agriculture has contracted to purchase 600,000 extra tons of
raw sugar from Cuba. This will provide the United States with
the largest supply ever available in any single calendar year.
The advance in cotton prices has been one of the most strik
ing for domestic commodities, and it is affecting the entire
textile market. This rise began in early June and was acceler
ated by the developments in Korea, but the main impetus came
when the Department of Agriculture announced that a smaller
cotton crop was in prospect for 1950-51 than had previously
been expected. The report of the Department of Agriculture
indicates that acreage this year is 31 per cent below that of
last year. As a result of the reduced acreage and crop damage,
private sources estimate that the new crop will yield only
some 10 million bales compared with more than 16 million
bales last year. Consumption ("disappearance” ) in the 194950 crop year was about 14 million bales, and, if consumption
in the crop year beginning August 1 is of the same magnitude,
stocks on hand (7.3 million bales) will be substantially re
duced. When the announcement of the Department of Agri
culture was first made, many sellers of gray goods, yarns, knit
goods, and other finished goods withdrew from the market
entirely, in order to await further price developments or to
prepare price increases. Some manufacturers have since re
turned to the market but with substantially higher prices.
There are reports of eager buying even at these higher prices,
but the volume of sales has been below the recent high pace.
The mills are said to be solidly booked through the third
quarter of 1950. Many have substantial fourth-quarter book
ings and a few have small amounts of business into the second
quarter of 1951. To date (July 28) on the spot market, the
price of cotton has increased 15 per cent since June 23 and
print cloth prices 28 per cent.
Although nonferrous metal prices for future delivery have
advanced sharply, spot prices of the major nonferrous metals,
other than tin, have remained rather steady, consistent with
their past tendency to lag behind other commodity prices.
Tin, for which the United States is dependent exclusively
on overseas sources, has moved upward rapidly since the war
scare. On July 28 its spot price was 94.8 cents per pound,
which was 24 per cent above its quotation on June 23. Smelters
raised the price of lead 1 cent to 12 cents a pound on July 12
and 13, thus canceling out the reduction made in late June.
Supplies of lead have been very plentiful despite fairly high
consumption. Prices of magnesium, quicksilver, and plati
num have also increased in recent weeks. Aluminum, copper,
89
and zinc still remain in tight supply and are being allocated
by most producers, and the supply may become even tighter
if the Government speeds up its stockpiling of these metals.
Since July 1, imports of copper have been largely held up or
placed under bond, pending Congressional approval of the
proposed suspension of the 2 cents per pound tariff which was
reimposed on that date.
Although the steel industry achieved the greatest six months’
output in its history during the first half of 1950, demand for
steel continues in excess of supply. Of course, demand will
become even greater should the economy convert to war pro
duction to any large extent. There has not been any official
increase in basic prices, but prices for some "extras” have
been raised. Even over a month ago there were many reports
that the "gray market” in steel and costly "conversion” deals
had been revived. At the present time individual steel com
panies are maintaining informal and voluntary allocation pro
grams, but this may soon give way to mandatory controls as
requested by President Truman.
So far, the advances in retail prices have been scattered and
not nearly so widespread as in primary markets. Many of the
increases are attributable, for the greater part, to the rise in
raw material prices and in other costs which took place prior
to the war scare. Prices to consumers generally lag behind
wholesale prices (see the accompanying chart), and the cur
rent increases in the primary markets will not be fully reflected
in sales to consumers for some time. In some cases, however,
retailers have marked up their inventories immediately as a
result of unusual increases in consumer demand.
Even before the Korean war, consumers’ prices were rising.
Between May 15 and June 15, the Bureau of Labor Statistics
index of consumers’ prices showed the largest increase (0.9
per cent) of any month in almost two years and came within
2.5 per cent of its postwar peak. A 2.1 per cent increase in
food prices between May and June was largely responsible
for this advance. Rent and utility costs were up only slightly,
the miscellaneous group remained unchanged, and house fur
nishings and apparel prices declined fractionally. The Bureau
of Labor Statistics expects that the index for July 15 will show
a further rise.
Further price increases for most commodities, especially
agricultural products, will depend to a very large degree on
the extent to which consumers engage in "scare” buying and
distributors take advantage of the temporary scarcities thus
created. The Bureau of Agricultural Economics has issued a
report in support of President Truman’s statement that the
nation’s food supply is adequate to meet the increased demands
of the armed forces as well as civilian requirements. The
report states that with the continued high production of food
expected this year, the availability of large stocks of storable
foods, and declining food exports, the supplies of food avail
able for civilians in this country should continue to run at the
same high level as in the past two years. As employment and
90
M O N T H L Y R E V I E W , A U G U S T 1950
consumer incomes rise with the impact of an accelerated
defense program, consumer demand will increase and cause
an upward pressure on prices if not offset by increased savings
or taxes. The Bureau of Agricultural Economics, however, esti
mates that in the next five months food prices are not likely
to go more than 3 or 4 per cent above the July level which
already reflects some increases.
Turnover of Demand Deposits at Member Banks
in Leading Cities*
(Adjusted for seasonal variation; monthly, 1945-June 1950)
Annua! rate
of turnover
A n n ua l ra te
o f turnover
TU R N O V E R IN B A N K DEPOSITS
In the past year of expanding national income, the rate at
which demand deposits subject to check circulated through the
economy reached new high levels since the middle thirties.
Thus, in May 1950 the annual rate at which deposits were
used at weekly reporting member banks in New York City
(almost 31 times after seasonal adjustment) reached a new
peak since March 1937.1 The June turnover was also at the
highest rate for any June since 1936. Among the member
banks in the 93 other weekly reporting cities, demand deposits
turned over at the rate of 20 times a year, the highest June
figure since 1937 with the exception of June 1941, when the
rate was also 20. As compared with June 1949, utilization of
demand accounts in June 1950 by depositors of the weekly
reporting member banks was 3 per cent more frequent in New
York City and 8 per cent more frequent in the 93 other cities.
As is evident from the accompanying chart, demand deposits
are more active in New York than in other cities owing to the
larger proportion of financial deposit accounts in the City.
Such accounts, which reflect the transactions of the national
security markets, are more active than commercial and other
types of accounts.
The gain in deposit activity during the past year has been
more rapid than the increase in the volume of demand de
posits subject to check, reflecting the increase in business
activity. The upturn in deposit velocity probably is partly the
result of a shift of relatively idle or low-velocity deposits into
more active hands. As shown in this Review last month, there
has been during the year a sizable shift in the ownership of
Government securities from the commercial and Federal Re
serve Banks to nonbank investors. On the other hand, the
commercial banks have used reserve funds, released through
this shift, to extend additional loans to builders, home owners,
consumers, and security traders, and the funds thus have prob
ably become more active than they were in the hands of their
previous owners.
Toward the close of the war in 1945 it was feared that an
inflationary expansion of the velocity of money would take
place with the return of peace as consumers and business men
bid for scarce goods. Actually, however, the subsequent expan
sion of deposit turnover, in 1946-48, was held within moderate
proportions.
While the increasing turnover of demand deposits in
1 Turnover is measured by the ratio of bank debits to demand
deposits subject to check, exclusive of Government and interbank
deposits.
* Based on the ratio between debits to demand deposit accounts and demand
deposits (except interbank and Government), of the weekly reporting member
banks. Beginning July 1946, data are based on a revised list of weekly report
ing banks.
Source: Board of Governors of the Federal Reserve System; adjusted for
seasonal variation by the Federal Reserve Bank of New York.
1946-48 and in the first half of 1950 was in part the result
of a growing volume of goods available for consumption, any
further increase in deposit velocity is likely to be indicative
of inflationary conditions, in view of the facts that the economy
is now operating at close to capacity and that a rearmament
program is about to be undertaken.
D IR E C T SE C U R ITY PURCHASES FR O M TH E
TR E A SU R Y B Y TH E FE D E R A L R E SER V E BANKS
On June 30,1950, the Reserve Systems temporary authoriza
tion to purchase directly from the Treasury up to 5 billion
dollars of direct or fully guaranteed Government securities was
extended by Congress for another two years. The renewal of
this authority, the use of which is exercised under arrangements
between the Reserve System and the Treasury, will enable the
Treasury, until July 1, 1952, to sell special certificates of in
debtedness directly to the Federal Reserve Banks for the pur
pose of smoothing out the impact of large Treasury transactions
on the banking system at quarterly tax dates. This type of
operation was resorted to quite regularly during the twenties
and during the Second World W ar; in fact, from June 1942 to
December 1945, special certificates were employed 53 times,
with an average daily amount of 377 million dollars. The
maximum amount outstanding at any one time was 1.3 billion
dollars. Since the end of the war, however, special certificates
have been used on only four occasions, as the Treasury’s debt
retirement program from 1946 to 1949 made such operations
F E D E R A L R ESER VE B A N K OF N E W Y O R K
unnecessary and the System’s task of money market manage
ment was handled more conveniently without their use.
The occasional use of special certificates to finance Treasury
expenditures for very short periods has proved beneficial to
both the Federal Reserve System and the Treasury in carrying
out their respective functions. It has helped to minimize shortrun fluctuations in member bank reserve positions, as well as
to maintain an orderly market for Government securities. The
Treasury, for its part, has been able to maintain a somewhat
smaller average working balance with a consequent saving in
interest cost.
Primarily, the special certificate of indebtedness has been
used to offset the effects of short-term fluctuations in receipts
and expenditures on the Treasury’s total cash needs. During the
year these fluctuations result, at times, in a net accumulation
of funds and, at other times, in a net drain of funds. There
is a wide seasonal divergence between receipts and expendi
tures, since the larger part of tax revenues is collected dur
ing the first half of the year. Strong intramonthly fluctua
tions are superimposed on these seasonal movements of
longer duration, especially in quarterly tax months. In quarterly
months, large disbursements for interest on the public debt,
and to some extent for the cash redemption of maturing securi
ties, are made during the first half of the month; often the
concentration is actually on the fifteenth. Revenues from taxes
are due on the fifteenth, but do not start to become available in
large volume until a few days after the middle of the month
because of the time consumed in processing and collection.
The Treasurer’s balance, therefore, tends to be drawn down
during the first half of a month; in the second half, as tax
checks are collected, the balance tends to increase rapidly.
Without the alternative of special certificate financing with the
Reserve Banks, the Treasury would have to maintain large
enough balances with the commercial banks and the Federal
Reserve Banks during the first half of the month to cover its
disbursements on the fifteenth with an ample margin. These
balances would then increase (temporarily) in the second half.
A succession of these developments over the year would result
in the carrying of higher average balances than necessary. The
temporary financing by the Reserve Banks permits the Treasury
to anticipate tax receipts so that the effect of seasonal shortterm fluctuations in receipts and expenditures on its balance is
minimized.
Many of the seasonal fluctuations in Treasury receipts and
expenditures are reflected directly in the Treasury’s balance with
the Reserve Banks and, therefore, directly affect the size and
fluctuation of member bank reserves. So long as expenditures
in any given period exceed receipts, the Treasury can withdraw
funds from its Tax and Loan Accounts with commercial banks1
to stabilize its balances with the Reserve Banks and thus neu
tralize the effect of its operations on aggregate bank reserves.
However, in periods when ordinary receipts exceed expenditures
91
bank reserves are drained away. In the second half of income
tax months, the drain on bank reserves is often considerable.
The sale of a special certificate to the Reserve Banks at the
middle of the month (and the simultaneous disbursement of
these funds by the Treasury) provides the banks with a cushion
of extra reserves which the banks have learned to hold against
their prospective losses in the latter half. Without temporary
borrowing from the Reserve Banks, the reserves of the banking
system could not so readily be prepared for the tax drain and
the pressure on the banks would not be alleviated until Gov
ernment expenditures again exceeded receipts after the tax
period.
Supplying the banks with reserve funds before a tax collec
tion period is often preferable to returning funds to them after
tax collections are over. Reserve gains received during the first
half of a quarterly tax month are generally assumed by the
banks to be temporary. As such, these gains are held in the
most liquid forms, to a large extent in excess reserves, and are
used to cover losses in the second half of the month. Reserve
gains received after the losses from tax collections have been
met, on the other hand, are more likely to be invested in a
more permanent type of asset, including loans and longer-term
Government securities. After the gains have been invested in
either of these forms, it is more difficult for the System to
offset them should it wish to do so.
The System’s present authority to purchase securities directly
from the Treasury was first obtained under special wartime
legislation enacted in 1942. At the time, the authority was
intended to be granted only for the duration of the war, but
since the Treasury’s financial needs continued to be large dur
ing the postwar period, the legislation has been extended sev
eral times. In earlier years the Federal Reserve Banks made
direct purchases of special certificates, usually of one-day
maturity, under section 14b of the original Federal Reserve
Act. This section authorized the purchase of Government
securities by the Reserve Banks, but failed to specify how they
should be made; consequently it was construed as permitting
direct purchases from the Treasury. Between 1935 and 1942
no special certificates were purchased because the Banking Act
of 1935 stipulated that all Government security purchases and
sales by the Reserve Banks must be made in the open market.2
The restoration of the direct purchase authority under Title IV
of the Second War Powers Act in 1942 was designed to meet
any transitory difficulties that might be experienced in Treas
ury financing during the war period.
During the First W orld War and afterward until 1933, this
bank, and occasionally the other Reserve Banks, often made
purchases of Treasury special certificates of indebtedness to
reduce the frequency of withdrawals from War Loan deposit
accounts in the commercial banks. After the war this type of
financing was limited largely to tax period arrangements of
2 During these years Treasury bills maturing in the tax collection
See “ Banking of Federal Taxes” in the January 1950 issue of this period were issued. The redemption of these securities was useful in
offsetting the banks’ losses from tax revenues.
Review.
l
92
M O N T H L Y R E V I E W , A U G U S T 1950
the sort described above. At the same time, in order to absorb
the excess member bank reserves resulting from Treasury
disbursements of the proceeds of the special certificate and
to provide the banks with a means of employing the funds
temporarily, the Reserve Banks sold other Government securi
ties to member banks under repurchase agreements. By the
terms of these agreements, the Government securities sold
from the Reserve Banks’ portfolios just before the middle of
a month in which tax payments were due were repurchased as
the banks lost reserves through income tax collections. The
use of repurchase agreements was ended in 1926, however,
since several Reserve Banks felt that sales of high-yield Gov
ernment securities against the purchase of low-yield special
certificates resulted in a loss of earnings.
Beginning in 1927, participations in the special one-day
certificates were sold to member banks in the New York money
market in lieu of sales of other securities under repurchase
agreements. The entire transaction in each instance was han
dled by the Federal Reserve Bank of New York. Although the
Reserve Banks continued to hold part of each issue, the major
portion was placed with member banks. Special certificates
continued to be sold to member banks on a participation basis
until 1933, when the Treasury suspended the use of this form
of temporary borrowing. The practice of selling participations
in the issues was not resumed by the System when its authority
to make direct purchases was reinstated at the beginning of
the Second World War.
Aside from its use in income tax periods, the principal pur
pose of the Reserve Banks’ authority to purchase Government
securities directly from the Treasury up to some specified
maximum amount has been to provide an arrangement whereby
the Reserve Banks could assist the Treasury temporarily in
meeting some unforeseeable and urgent need for funds, pend
ing the financing of the expenditures through Treasury sales
of securities in the market. So far, this emergency "stand-by”
function has not been used and actual use of the authority
has been confined to that of a money market instrument. The
amount of direct Treasury borrowing has seldom been more
than a small fraction of the 5 billion dollar maximum
authorized.
the National Service Life Insurance Fund and from an increase
in unemployment compensation payments. To a lesser extent,
it reflected a decline in cash receipts in the budget accounts,
resulting from lower levels of corporate profits and personal
income payments. The increase in net cash outlays from these
operations amounted to 4.6 billion dollars, but this rise was
partly offset by a decline in cash expenditures in the budget
accounts and by an increase in trust account cash receipts.
Budget cash expenditures declined because substantial reduc
tions in international aid and veterans’ benefits under the
"GI bill” were only partly offset by increased spending on
other accounts, largely for normal peacetime activities. The
higher trust account receipts reflected mainly the increase
on January 1, 1950 in the tax rate for old-age insurance from
1 to lV i per cent on both employers and employees.
The special dividend to veterans, amounting to 2.6 billion
dollars within the fiscal year, was largely a nonrecurring
expenditure in that it covered accumulations for eight years,
whereas later payments are to be made on an annual basis.
Other highly variable activities included the so-called "auto
matic adjusters” to economic conditions, the combined effect
of which was to add some 5.3 billion to net cash outgo.
This amount included a 1.2 billion reduction in income and
profits taxes, over 2.0 billion in payments of unemployment
compensation, more than 1.7 billion in outlays for farm price
supports, and some 350 million dollars in net home mortgage
purchases by Government agencies.
The impact of the cash deficit on the Treasury’s financial
position varied considerably in the course of the fiscal year.
In the first half (July-December 1949), the deficit amounted
to 1.9 billion dollars. The Treasury was able to finance this
Federal Cash Receipts and Expenditures
TR E A SU R Y FIN A N C IN G IN T H E
FISCAL Y E A R 1950
After showing a cash surplus for three years, the Treasury
recorded during the fiscal year ended June 30, 1950 a cash
operating deficit of about 2.2 billion dollars. Since in the
fiscal year ended June 30, 1949 the Treasury had had a cash
surplus of 1.1 billion dollars, the deterioration in the net
balance of cash receipts and outlays in fiscal 1950 amounted
to some 3.3 billion dollars.
The change from a cash surplus to a cash deficit reflected
mainly larger cash disbursements by the trust accounts, aris
ing from the payment of the special dividend to veterans by
Source: U. S. Treasury Department; June 1950 estimated by the Federal
Reserve Bank of New York.
F E D E R A L R E SE R V E B A N K OF N E W Y O R K
cash deficit and also to build up its balance in the General
Fund by 1.2 billion with funds raised mainly from net sales
of some 2.8 billion dollars of Savings notes. In addition, for
the first time since the fall of 1945, funds were raised in the
market through new Treasury bill sales. Such sales were,
however, only slightly greater than the amount paid out to
investors for the unexchanged portion of maturing securities.
Additional money came from small net sales (270 million)
of Savings bonds. Other small debt transactions about offset
one another. The bulk of the Savings notes were sold in July
and August, following the easing of market rates and the
release of funds to the money market through a reduction in
member bank reserve requirements. After November, interest
rates tended to rise and the relative attractiveness of Savings
notes declined.
In the third quarter of the fiscal year (January-March),
normally the peak period for tax collections, cash receipts
exceeded cash payments to the public by nearly 1.5 billion
dollars. Net sales of Savings notes and bonds almost covered
the attrition (the unexchanged portion) on maturing or
called marketable issues and other minor debt transactions.
Thus the balance in the General Fund increased another
1.4 billion dollars to reach some 6.1 billion dollars, which
was the highest month-end level since March 1947.
In the last (April-June) quarter of the fiscal year 1950,
disbursements exceeded receipts by some 1.8 billion dollars.
In order to replenish its balance in anticipation of large net
outlays in July and August, the Treasury again borrowed in the
market on new bill issues. Beginning with the April 13
issue, 100 million more than the maturing issue of bills was
sold each week. By the end of June a total of 1.2 billion of
new money had thus been raised. Net sales of Savings notes
and bonds again provided enough funds to offset the attrition
on exchanged marketable issues and other minor debt opera
tions. Consequently, by the end of the year, the Treasury
had a balance of some 5.5 billion dollars in the General Fund.
The net cash outlay of 2.2 billion dollars in fiscal 1950 was
less than half of the 4.8 billion expected in January when the
President submitted his Budget Message for Fiscal 1931. Cash
expenditures, at 43.2 billion, were some 3.4 billion dollars
lower than anticipated, a decline which much more than offset
the drop in receipts to a level 700 million below the expected
income. It was mainly in the items of national defense (down
1.1 billion dollars) and international aid and finance (down
1.1 billion dollars) that expenditures were less than antici
pated. Government corporations and the Veterans’ Adminis
tration each spent around 300 million less than had been
expected, while other activities were some 600 million less.
Defense spending was held close to the level of such outlays in
fiscal 1949, whereas expenditures for international aid declined
substantially, and more than had been anticipated, from the
preceding year’s level. Expenditures by Government corpora
tions were lower than had been expected in January, owing to
93
increased sales of mortgages by both the Federal National
Mortgage Association and the Home Owners’ Loan Corporation.
The decline of about 700 million dollars in cash receipts
occurred almost entirely in income tax receipts, reflecting
mainly lower individual income tax revenue and to a lesser
extent lower corporate tax revenue than could be anticipated
from the existing estimates of personal income and corporate
profits. In the first nine months of the fiscal year, receipts
from individuals were substantially lower than had been ex
pected. In the last quarter of the year, however, receipts from
withheld taxes increased above expectations in line with the
rise in total wage and salary payments, and this increase
partly offset the earlier decline.
Budget A cco u n ts
The budgetary deficit, representing the difference between
budget receipts and budget expenditures, amounted in the
fiscal year 1950 to 3.1 billion dollars. This was some 1.3
billion dollars larger than the deficit in the preceding year.
The increase arose largely from a decline in receipts, reflecting
lower levels of profits and personal income. Expenditures
increased only some 100 million dollars.
Budgetary receipts in fiscal 1950, at 37.0 billion dollars,
were some 1.2 billion smaller than in fiscal 1949. Receipts
from income and profits taxes, at 28.3 billion, declined 1.2
billion dollars, with corporate tax receipts accounting for
nearly three fifths of this drop. Corporate taxes in fiscal 1950
were collected partly on the peak profits of calendar 1948
and partly on the substantially lower 1949 profits. Lower farm
income probably accounts for much of the decline in in
dividual tax receipts, which took place largely in the receipts
from non-withheld taxes. Miscellaneous receipts, at 1.4 billion
dollars, also declined some 700 million dollars, reflecting
mainly smaller sales of surplus property, the disposal of which
has been about completed.
These declines in receipts were partly offset by a reduction
in the amount of refunds paid in fiscal 1950 as compared with
the preceding year, when refunds had been swollen by pay
ments arising out of the Revenue Act of 1948. Miscellaneous
internal revenue and customs, at 8.7 billion dollars, yielded
the Treasury the same amount as in fiscal 1949. A 400 million
dollar increase in employment tax receipts to 2.9 billion
dollars reflected higher contributions for old-age insurance
under the increased tax rate in effect since January 1, 1950,
but these contributions are deducted from budget receipts
and transferred to trust accounts, and thus the increase did
not reduce the budgetary deficit.
While total budget expenditures, at 40.2 billion dollars,
increased only slightly over those of fiscal 1949, substantial
changes' occurred in the various expenditure programs. Spend
ing for national defense, the largest single category, at nearly
12.4 billion dollars, was slightly higher than in fiscal 1949.
International aid and finance, at nearly 4.6 billion dollars, was
M O N T H L Y R E V I E W , A U G U S T 1950
94
about 1.5 billion dollars lower than in the preceding year.
Also, the various veterans’ benefits and pensions, requiring
6.5 billion dollars, were some 400 million less than in fiscal 1949
as a decline in benefits under the "GI bill” more than offset an
increase in transfers to cover the Government’s share of the
costs of the National Service Life Insurance Fund. On the other
hand, the Treasury’s interest payments, at nearly 5.8 billion,
rose some 400 million dollars, owing partly to the increase in
debt and partly to the inclusion of uncollected interest as a
result of a shift in the method of reporting interest to a checksissued basis. (In previous years interest payments had been
reported only as the checks were cashed.) Outlays by Govern
ment corporations were some 300 million higher than in fiscal
1949. The Commodity Credit Corporation spent for the sup
port of farm prices some 1.7 billion dollars, net, or about 100
million more than was spent in fiscal 1949. The Export-Import
Bank increased its loan outlays by some 40 million, whereas
in fiscal 1949 it had received net repayments of 60 million
dollars. The Reconstruction Finance Corporation spent nearly
600 million dollars, or about 275 million more than in fiscal
1949, as secondary purchases of guaranteed mortgages were
stepped up (although less than expected) by its subsidiary,
the Federal National Mortgage Association; however, much of
this net rise in RFC spending was offset by larger mortgage
resales by the Home Owners’ Loan Corporation. Other budget
ary activities increased some 1.1 billion dollars, reaching a
total of around 8.9 billion.
Budget expenditures included some 3.2 billion in noncash
payments to trust funds and Government agencies and in net
accruals on Savings bonds. This was nearly 700 million dollars
more than in fiscal 1949. A large nonrecurring transfer (400
million) was made to the National Service Life Insurance
trust fund to cover an increase in the estimate of the costs of
war casualties which are paid by the Federal Government. On
the whole, cash outlays for veterans’ benefits and pensions
were around 800 million dollars lower than in fiscal 1949. In
addition, larger transfers and employee contributions (both
noncash) than in fiscal 1949 were made to the Civil Service
Retirement Fund, while redemptions of noncash securities
(mainly Armed Forces Leave Bonds and noninterest-bearing
notes previously issued to the International Monetary Fund
and Bank) were about 100 million lower in fiscal 1950. The
cash outlays for these redemptions are offset against noncash
items. Thus, cash outlays in the budget accounts, at nearly
37 billion, were over 500 million dollars lower than in
fiscal 1949.
Also, during the year the International Monetary Fund re
turned 262 million of the United States’ cash subscription in
exchange for U. S. Government noninterest-bearing notes.
This transaction had no effect on total budgetary expenditures,
but it was absorbed into Treasury accounts by increasing non
cash expenditures and correspondingly reducing cash outlays
for international aid.
Government Financing, Fiscal Years 1949 and 1950
(In billions of dollars)
1949
Source of funds and change in debt
Cash income..........................................................................
Cash outgo.............................................................................
1950
41.6
40.6
41.0
43.2
1.1
1.5
+ 2 .2
+ 2 .0
Net cash income ( —) or outgo ( “I- ) * ..............................
Changes in General Fund*................................................
-
Cash redemptions ( —) or borrowings (-}-)....................
-
2 .5
+ 4 .2
Government corporation debt#....................................
Direct public debt...........................................................
-
0 .2
2 .3
t
+ 4 .2
+ 2 .9
- 5.2
+ 4 .0
+ 0 .2
-
2 .0
3 .2
- 1.8
+ 2 .0
Direct noncash borrowing..................................................
Direct cash borrowing.........................................................
+ 2 .9
- 2 .3
+ 0 .3
+ 4 .2
Direct public debt...............................................................
+ 0 .5
+ 4 .6
Balance in the General Fund, June 30...........................
3 .5
5 .5
N onmarke table.............................................................
Marketable....................................................................
Attrition.....................................................................
Scheduled borrowing ( + ) or repayment ( —). .
* The minus signs indicate the use of a surplus or current balance for retiring
debt; the plus signs show the use of borrowed funds to cover a deficit or in
crease the balance.
# Includes a small amount of market purchases of Treasury securities by Govern
ment corporations and trust funds.
t Less than 50 million dollars.
Note: Because of rounding, figures do not necessarily add to totals.
Source: Daily Statement of the United States Treasury and Treasury Bulletin.
Partly estimated by the Federal Reserve Bank of New York.
C h a n g e in P u b lic D e b t
The direct public debt increased nearly 4.6 billion dollars
in fiscal 1950, as against only 500 million dollars in fiscal
1949. Some 4.0 billion dollars was raised by net sales of non
marketable issues to the public, while only 200 million was
borrowed, net, in the market. Noncash borrowing, mainly
from the net accrual of interest on Savings bonds, added some
300 million to the public debt.
Net sales of Savings bonds (at issue prices) during the
past fiscal year provided the Treasury with only 730 million
dollars. This was considerably less than had been received
in the preceding year, even after eliminating the funds raised
in the special sale of Series F and G bonds in July 1948. In
that year, net sales amounted to 2.4 billion, about half of which
consisted of the special sale. Another 3.6 billion was raised
in fiscal 1950 through the net sale of Savings notes. Sales of
these issues soared in the first two months of the fiscal year
and, while sales fell off in the subsequent months, they never
theless remained at fairly high levels. Also, redemptions were
somewhat lower than in previous postwar years. Other non
marketable issues were redeemed, net, >to the extent of nearly
300 million dollars; the Postal Savings System alone redeemed
150 million of the special issues it holds in order to meet net
withdrawals by depositors, while another 100 million was ac
counted for by the redemption of the Second Series Depositary
Bonds, which the Treasury called when it changed the system
for collecting withheld income taxes and old-age insurance
contributions at the beginning of January.1
For the first time since the Victory Loan, the Treasury re
entered the market for new money in fiscal 1950. Various
1
For a description of the new system, see "Banking of Federal
Taxes” in this bank’s Monthly Review for January 1950.
FED ERAL RESERVE B A N K
types of securities were offered for maturing or called issues
during the fiscal year as the Treasury shifted its policy from
reliance mainly on new issues of 12-month certificates to
greater emphasis on note issues of varying maturities. In the
early part of the year interest rates eased, but a gradual rise
took place subsequently.
At the beginning of the fiscal year, the July 1, 1949, lVs
per cent certificate was refunded into a certificate bearing IVa
per cent, the rate which had been established in late summer of
the preceding year when a tightening of credit terms was deemed
desirable to stem the inflationary forces still prevailing at that
time. After this exchange, the rate on new bill issues dropped,
reflecting the progressive relaxation of reserve requirements
and the temporary curtailment of sales of Government securi
ties by the Federal Reserve System as part of its program to
retard the decline in economic activity by increasing the
availability of credit. The average yield on new issues of
Treasury bills declined as low as 0.923 per cent in July 1949
compared with 1.158 per cent for the issue of June 30, 1949,
and did not rise much above 1 per cent through August. It
was during these months that the Treasury reentered the mar
ket for new money by increasing its offerings of new bills and
also raised substantial sums from the sales of Savings notes
which were made on the initiative of investors. In line with
the lower bill rates, the Treasury announced on August 22
that it would lower the certificate rate to lYs per cent on the
new issue offered in exchange for the called 2 per cent bonds
due September 15. Another issue of lVs per cent certificates
was made on October 1 in exchange for the maturing IVa
per cent certificates. On November 30 the Treasury announced
a similar exchange for the IVa per cent certificates maturing
January 1 and at the same time offered an issue of 1Ys per
cent 4J4-year notes in exchange for nearly 4.9 billion dollars
of maturing and called issues due on December 15. The latter
offer appeared to be in line with the lower rates, since the
preceding 1Ys per cent notes (issued on September 15, 1948,
when the IV4 certificate rate was adopted) ran for only 18^2
months.
However, a moderate firming of the money market had been
permitted by the Reserve System in view of the pronounced
improvement in business and financial conditions in the
autumn months, and it soon became evident that a higher rate
would be necessary to maintain private interest in new Treas
ury issues on subsequent exchanges. The bill rate had risen
to 1.102, on the average, in December. On January 16, the
Treasury announced it would offer IV4 per cent 20-month
notes in exchange for the IVa per cent certificates maturing
on February 1. In March, 16-month IVa per cent notes were
issued in exchange for a certificate issue and IV2 per cent
5-year notes were offered in exchange for two other maturing
issues (o f 2 per cent bonds and 1Ys per cent 18 Vi-month
notes). A further slight firming of rates was evident in the
progressively shorter maturities for the IVa per cent notes
OF N E W Y O R K
95
issued on April 1 and June 1, which ran for 15 months and
13 months, respectively. The rate on new bills rose further,
and after the Treasury reentered the market for new money
in April it ranged from 1.160 per cent to as high as 1.179
per cent.
In all, nearly 2.0 billion dollars in new money was raised
by increasing the weekly bill issues. An initial 800 million
dollars was raised in August and September, while the re
mainder was borrowed on the weekly issues from April 13
to June 29. However, during the year the Treasury paid out
some 1.8 billion dollars to those investors who did not accept
the new issues offered in exchange for some 40.7 billion of
matured or called securities other than bills. Thus, the net
increase in marketable debt was less than 200 million, com
pared with a net reduction of 5.2 billion in fiscal 1949.
Noncash borrowing by the Government increased only
some 300 million dollars in fiscal 1950. The increase in the
redemption value of Savings bonds arising from the net ac
crual of interest amounted to nearly 570 million dollars and
the net increase in noninterest-bearing notes issued to the
International Monetary Fund added around 207 million dol
lars to the public debt. However, these increases were partly
offset by the net redemption of some 300 million dollars of
special issues by the trust funds and Government corporations
and of smaller amounts of Armed Forces Leave Bonds by
veterans and of noninterest-bearing notes by the International
Bank.
D E P A R T M E N T STORE T R A D E
Department store sales in the Second District in recent
weeks have surged upward on a wave of consumer buying
that is, for this time of the year, of unusual magnitude. The
unadjusted index of weekly department store sales for New
Indexes of Department Store Sales and Stocks
Second Federal Reserve District
e July 1950 estimated.
M O N T H L Y R E V I E W , A U G U S T 1950
96
York City, for example, reached a level of 193 on July 29,
1950, 31 percentage points higher than the index of 162
registered for the week ended August 3, 1946, the previous
all-time high for the last week in July.
N o doubt a goodly portion of the current increase in shop
ping is the direct result of the international crisis in the Far
East. There are, however, three other factors which must be
considered in any analysis of the present sales picture. First,
some of the department stores in this District, particularly in
New York City, were closed on July 3, and were not reopened
until July 5; many shoppers therefore postponed their buying
until later in the month. Second, July of last year was at the
trough of the general business recession and seasonally adjusted
department store sales in this District were at the lowest July
level in three years. Third, and most important, unusually
intensive store-wide promotions were launched during the
week ended July 15 and continued, in some instances, until
the end of the month.
So far as "scare” buying is concerned, such buying in the
department stores of this District (and of the Northeastern
United States as a whole) did not follow the pattern set by
the rest of the country and its timing and scope differed par
ticularly from those in the Southwest and the Far West. From
the start of the Korean conflict, on June 25, to July 8 depart
ment store sales in New York City, for example, were 1 per
cent behind those of the corresponding period a year ago, while
such cities as Houston, Texas, and Seattle, Washington, had
increases of about 24 and 13 per cent, respectively. The yearto-year increase of 14 per cent in dollar sales at New York
City stores during the following week (considerably less than
the 25 per cent increase for the United States as a whole) was
almost entirely due to promotions. It was not until the Presi
dent’s message to the Congress, on Wednesday, July 19,
requesting partial economic and military mobilization, that
consumers in this District reacted strongly to the potential
scope of developments growing out of the events in Korea.
For the week ended July 22, some stores reported year-to-year
sales increases of up to 500 per cent in such lines as domestics,
blankets, and hosiery. The durable goods ( furniture and major
household appliances, in particular) also received a major
share of the panicky shoppers’ interest. Some stores are
reported to be "rationing” sales of certain items (e.g., nylon
hosiery) for which an unreasonably heavy demand has devel
oped, by declining to fill individual orders for excessive
amounts.
As the chart shows, department store stocks in this District
have declined steadily since March of this year. In sharp conIndexes of Department Store Sales and Stocks
Second Federal Reserve District
(1935-39 average=100 p ercen t)
1949
1950
Item
June
April
May
June
Sales (average daily), unadjusted.................
Sales (average daily), seasonally adjusted..
228r
240r
225
235
221
226
230
242
Stocks, unadjusted............................................
Stocks, seasonally adjusted............................
208r
220r
237
230
231
228
209
222-
r Revised.
trast to the downward trend in inventories, which at the end
of June were 209 per cent of the 1935-39 average, the index
of seasonally adjusted sales in June 1950 reached 242, the high
est level in fourteen months, and the July index, according to
preliminary information, is likely to be about 276; this would
be the highest seasonally adjusted sales level ever recorded for
this District.
Department and Apparel Store Sales and Stocks, Second Federal Reserve
District, Percentage Change from the Preceding Year
Net sales
Locality
June 1950
Department stores, Second District----New York City......................................
Northern New Jersey...........................
Westchester County..............................
Fairfield County....................................
Bridgeport...........................................
Lower Hudson River Valley...............
Poughkeepsie......................................
Upper Hudson River Valley...............
Schenectady........................................
Central New York State.....................
Mohawk River Valley.....................
Northern New York State..................
Southern New York State...................
Binghamton........................................
Western New York State....................
+
1
-
3
+
1
-
1
4
2
5
0
1
4
4
2
1
1
6
5
2
7
2
7
5
13
1
1
3
2
-
+
+
+
-
-
4
1
2
1
1
0
3
4
5
7
7
0
1
0
1
2
3
4
1
3
5
1
1
+
+
+
1
3
4
1
4
4
4
2
1
6
2
1
0
8
1
5
4
4
4
5
4
2
9
+ 2
-
5
-
4
+
+
+
+
+
+
+
+
-
+
+
+
+
+
+
+
+
+
Niagara Falls......................................
Rochester............................................
Apparel stores (chiefly New York City).
Stocks on
Jan.through
hand
June 1950 June 30, 1950
+
+
-
-
—
+
+
—
+
-
+
+
-
Indexes of Business
1949
1950
Index
June
April
May
June
Industrial production*, 1935-39 = 100........
(Board of Governors, Federal Reserve
System)
Electric power output*, 1935-39 = 100........
(Federal Reserve Bank of Nerd) York)
Ton-miles of railway freight*, 1935-39 = 100
(Federal Reserve Bank of New York)
Sales of all retail stores*, 1935-39 = 1 0 0 ....
(Department o f Commerce)
Factory employment
United States, 1939 = 100...........................
(Bureau of Labor Statistics)
New York State, 1935-39 = 100................
(N Y S Div. of Placement and Unemp. Ins.)
Factory payrolls
United States, 1939 = 100...........................
(Bureau of Labor Statistics)
New York State, 1935-39 = 100................
(N Y S Div. o f Placement and Unemp. Ins.)
Personal income*#, 1935-39 = 100................
(Department of Commerce)
Composite index of wages and salaries*t,
1939 = 100.......................................................
(Federal Reserve Bank of Neiv York)
Consumers’ prices, 1935-39 = 100.................
(Bureau of Labor Statistics)
Velocity of demand deposits*, 1935-39 = 100
(.Federal Reserve Bank of New York)
New York City..............................................
Outside New York C ity..............................
169
190
195
199 p
256
284
284
289
169
189
174p
331
344
351
362p
138
142
145
147p
108p
113p
112p
113p
316
337
349p
362e
248p
266p
269p
272p
300
312
311p
200
205
206p
170
167
169
170
103
86
111
92
112
93
105
93
* Adjusted for seasonal variation.
p Preliminary.
e Estimated by the Board of Governors of the Federal Reserve System.
# Revised beginning January 1946.
X A monthly release showing the 15 component indexes of hourly and weekly
earnings in nonagricultural industries computed by this bank will be sent upon
request. Tabulations of the monthly indexes, 1938 to date, may also be pro
cured from the Research Department, Domestic Research Division.
N A T IO N A L SU M M ARY OF BUSINESS CONDITIONS
(Summarized by the Board of Governors of the Federal Reserve System, July 25, 1950)
Industrial production and construction activity increased fur
ther in June to new peacetime peaks. Following the outbreak
demands.
Mine production of copper and iron ore also
expanded.
of hostilities in Korea near the end of the month, buying
Output of nondurable goods increased somewhat further in
showed a marked upsurge and commodity prices generally rose
June, reflecting mainly continued gains in rayon and woolen
considerably in both wholesale and retail markets. Common
textiles, paper, petroleum, rubber and chemical products. Tire
stock prices declined sharply for a time. Prices of U. S. Gov
production was at a new record, and a substantial expansion
ernment securities generally showed little change. Bank credit
in output of synthetic rubber was initiated. Activity at cotton
continued to expand. On July 19 a large-scale Federal program
mills declined somewhat.
was proposed for expanding defense production and curbing
C o n s t r u c t io n
inflationary developments.
Value of construction contracts awarded in June was main
I n d u s t r ia l P r o d u c t io n
tained at the spring peak level reflecting continued expansion
The Boards production index rose another 4 points in June
in awards for public work which offset further small declines
to 199. Although output of steel and some other basic mate
in private awards. The number of housing units started in June
rials had been at or close to capacity levels in May, continued
was maintained at the record May level and for the first half
strong demands resulted in further increases in production of
of the year totaled 687,000 units, as compared with 449,000
most major groups of manufactures and minerals in June. In
units started during the first half of 1949.
early July output declined temporarily owing to holiday and
Em p l o y m e n t
vacation influences.
Production of durable goods increased substantially further
Employment in nonagricultural establishments rose by about
in June, mainly because of gains in the automobile and
300 thousand persons in June, after allowance for seasonal
machinery industries. Automobile assembly, which had been
changes. About one half of this increase occurred in industries
at a new record rate in May, increased 23 per cent further in
producing durable manufactures; there were also gains in
June, and activity in machinery industries continued the
employment in construction and transportation activities.
marked rise which began in early spring. Steel production was
A g r ic u l t u r e
maintained in June at the capacity level reached in April.
Refinery output of nonferrous metals expanded considerably
Total crop production this year, according to July 1 esti
further, but supplies available, after increased takings for Gov
mates, is expected to be 6 per cent less than last year when
ernment stockpiles, continued substantially below industry
stocks increased and exports were somewhat larger. Consider
INDUSTRIAL
PRODUCTION
1946
Federal Reserve indexes.
Monthly figures; latest shown are for June.
1948
1950
1946
1948
1950
Bureau of Labor Statistics’ estimates adjusted for seasonal variation by
Federal Reserve. Proprietors and domestic servants are excluded. Midmonth
figures; latest shown are for June.
ably smaller cotton and wheat crops are in prospect, but feed
Prices of some additional finished industrial products have
crops may approach last year’s large harvest. Marketings of
been advanced during this period, and with retail food prices
meat animals recently have been in about the same seasonally
increasing sharply, a substantial further rise is indicated in
low volume as a year ago, while production of milk and eggs
the level of consumers’ prices.
has been larger.
B a n k C r e d it
D is t r ib u t io n
Loans to real estate owners and consumers and holdings of
Consumer buying increased considerably beginning in the
corporate and municipal securities showed further substantial
latter part of June, influenced largely by international develop
increases at banks in leading cities during June and the first
ments. Sales at department stores in mid-July were 24 per cent
half of July. Loans to businesses also expanded. Holdings of
larger than in the corresponding period a year ago; sales in the
U. S. Government securities fluctuated considerably but
preceding 2 weeks were 9 per cent larger. New automobile
declined somewhat over the period.
sales increased further and the volume was limited only by the
Treasury deposits at the Reserve Banks which had been built
supply available. Anticipatory buying was also evident for
up through tax payments in the latter part of June were drawn
various other durable and semidurable goods and such food
down during the first three reporting weeks of July, supplying
stuffs as coffee and sugar. Distributors’ stocks of most con
reserve funds to member banks. These funds were absorbed
sumer goods, except passenger cars, had previously been rising
by reduction in Federal Reserve holdings of U. S. Government
following the recovery in production last summer.
securities. The System continued to sell Treasury bonds and
also sold bills and certificates, and these sales were offset in
C o m m o d it y P rices
part by purchases of notes.
Wholesale prices have generally risen considerably during
the past 4 weeks, following earlier marked advances in April
Se c u r it y M a r k e t s
and May. The sharpest increases have been in prices of farm
Common stock prices fell 13 per cent from the latter part
and food products, particularly livestock, meats, imported food
of June to the middle of July, reflecting developments in
stuffs, and cotton. Cotton prices on July 21 were about one-
Korea, but recovered part of the decline during the third week.
fourth above the Federal loan level.
Demand for U. S. Government securities broadened through
Prices of most industrial materials have advanced further in
out this period. W ith virtually no change in prices of long
recent weeks, with especially marked increases in building
term Treasury bonds, a moderate decline in the prices of high-
materials, textiles, rubber, and tin. Prices of most metals have
grade corporate obligations resulted in some widening of the
been maintained at earlier advanced levels.
narrow spread between yields of these securities.
W HOLESALE COMMODITY PRICES
SECURITY MARKETS
1926*100
Bureau of Labor Statistics’ indexes.
for week ended July 18.
Weekly figures; latest shown are
Stock prices, Standard & Poor’ s Corporation; corporate bond yields,
Moody’s Investors Service; U. S. Government bond yields, U . S. Treasury
Department. Weekly figures; latest shown are for week ended July 22.
@FedFRASER